XML 22 R11.htm IDEA: XBRL DOCUMENT v3.10.0.1
Fair value measurements
9 Months Ended
Sep. 30, 2018
Fair Value Disclosures [Abstract]  
Fair value measurements

5. Fair value measurements

The fair value of the Company’s financial assets and liabilities measured on a recurring basis were as follows:

 

 

 

September 30,

2018

 

 

December 31,

2017

 

(U.S. Dollars, in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collective trust funds

 

$

 

 

$

 

 

$

 

 

$

 

 

$

100

 

Treasury securities

 

 

520

 

 

 

 

 

 

 

 

 

520

 

 

 

556

 

Equity warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

311

 

Equity securities

 

 

 

 

 

219

 

 

 

 

 

 

219

 

 

 

2,457

 

Debt security

 

 

 

 

 

 

 

 

19,250

 

 

 

19,250

 

 

 

16,050

 

Total

 

$

520

 

 

$

219

 

 

$

19,250

 

 

$

19,989

 

 

$

19,474

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

(28,180

)

 

$

(28,180

)

 

$

 

Deferred compensation plan

 

 

 

 

 

(1,291

)

 

 

 

 

 

(1,291

)

 

 

(1,379

)

Total

 

$

 

 

$

(1,291

)

 

$

(28,180

)

 

$

(29,471

)

 

$

(1,379

)

 

Equity Warrants and Securities

The Company holds investments in common stock and warrants to purchase shares of common stock of Bone Biologics. The Company’s common stock investments are recorded within other long-term assets while the warrants are recorded within other current assets or other long-term assets, dependent upon the expiration date. Prior to 2018, these instruments were accounted for at cost as the fair value of these instruments was not readily determinable. During the first quarter of 2018, the Company made an additional investment in Bone Biologics through the purchase of an additional 25,000 shares of common stock, after giving effect to a reverse stock split subsequent to the purchase, for $0.5 million.

Effective January 1, 2018, the Company is required to measure these equity investments at fair value and recognize any changes in fair value in net income as a result of adopting ASU 2016-01. However, for certain equity investments that do not have readily determinable fair values, the new guidance allows entities to choose to measure these investments using a new measurement alternative, which values the investments at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. The Company elected to use the new measurement alternative for these equity investments in Bone Biologics, which resulted in an increase in the previously recorded value of the equity investments of $1.6 million, or $0.09 per share before taxes, based on an observable price in an orderly transaction during the three months ended March 31, 2018. During the three months ended September 30, 2018, Bone Biologics executed a series of equity financing activities which significantly diluted the Company’s ownership interest in the outstanding stock. After considering the new observable prices in these equity financing activities, and after giving consideration to going concern issues disclosed by Bone Biologics, the Company determined this investment was impaired and recorded an impairment charge of $4.4 million relating to its investments in Bone Biologics. These changes are classified within other income and expense.

The changes in valuation of these securities for the three months and nine months ended September 30, 2018 and 2017 are shown below:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(U.S. Dollars, in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Equity securities and warrants beginning balance

 

$

4,668

 

 

$

2,768

 

 

$

2,768

 

 

$

2,768

 

Impact of adoption of ASU 2016-01 recognized in other income

 

 

 

 

 

 

 

 

1,629

 

 

 

 

Purchase of additional common stock

 

 

 

 

 

 

 

 

500

 

 

 

 

Fair value adjustments, expirations, and impairments recognized in other expense

 

 

(4,449

)

 

 

 

 

 

(4,678

)

 

 

 

Equity securities and warrants ending balance

 

$

219

 

 

$

2,768

 

 

$

219

 

 

$

2,768

 

 

 

Debt Security

The Company holds a debt security of eNeura, Inc., a privately held medical technology company that is developing devices for the treatment of migraines. The debt security matures on March 4, 2019. The fair value of the debt security, which is recorded within other current assets, is based upon significant unobservable inputs, including the use of a discounted cash flow model, requiring the Company to develop its own assumptions; therefore, the Company has categorized this asset as a Level 3 financial asset. As of September 30, 2018, the Company reassessed its estimate of fair value based on current financial information and other assumptions, resulting in a fair value of $19.3 million, an increase of $3.2 million when compared to the Company’s estimated fair value of the debt security as of December 31, 2017. This compares to an amortized cost basis in the debt security of $9.0 million.

The following table provides a reconciliation of the beginning and ending balances for debt securities measured at fair value using significant unobservable inputs (Level 3):

 

(U.S. Dollars, in thousands)

 

2018

 

 

2017

 

Debt security at January 1

 

$

16,050

 

 

$

12,220

 

Accrued interest income

 

 

 

 

 

 

Gains or losses recorded for the period

 

 

 

 

 

 

 

 

Recognized in net income

 

 

 

 

 

(5,585

)

Recognized in other comprehensive income

 

 

3,200

 

 

 

2,365

 

Debt security at September 30

 

$

19,250

 

 

$

9,000

 

 

Contingent Consideration

The contingent consideration consists of potential future milestone payments of up to $60.0 million in cash associated with the Spinal Kinetics acquisition. The milestone payments include (i) up to $15.0 million if the FDA grants approval of Spinal Kinetics’ M6-C artificial cervical disc (the “FDA Milestone”) and (ii) revenue-based milestone payments of up to $45.0 million in connection with future sales of the M6-C artificial cervical disc and the M6-L artificial lumbar disc. Milestones must be achieved within five years of April 30, 2018 to trigger applicable payments. The fair value of the contingent consideration arrangement at the acquisition date was $25.5 million and was $28.2 million as of September 30, 2018; however, the actual amount ultimately paid could be higher or lower than the fair value of the contingent consideration. The increase in fair value of $2.7 million was recorded as an operating expense labeled changes in fair value of contingent consideration. Approximately $13.6 million of this liability is included within other current liabilities and $14.6 million is included within other long-term liabilities.

The Company estimated the fair value of the contingent consideration attributable to the FDA Milestone using a probability-weighted discounted cash flow model. This fair value is based on significant inputs not observable in the market and thus represents a Level 3 measurement. The key assumptions in applying the probability-weighted discounted cash flow model include the Company’s estimation of the probability and timing of obtaining FDA approval for the M6-C artificial disc. The Company currently expects to obtain approval from the FDA mid-2019. Significant changes in these assumptions could result in a significantly higher or lower fair value.

The Company estimated the fair value of the potential future revenue-based milestone payments using a Monte Carlo simulation. This fair value measurement is based on significant inputs that are unobservable in the market, and thus represents a Level 3 measurement. The key assumptions in applying the Monte Carlo valuation model include the Company’s forecasted future revenues for Spinal Kinetics products, discount rate applied, and assumptions for potential volatility of the Company’s forecasted revenue. Significant changes in these assumptions could result in a significantly higher or lower fair value.

The following table provides a reconciliation of the beginning and ending balances for the contingent consideration measured at fair value using significant unobservable inputs (Level 3):

 

(U.S. Dollars, in thousands)

 

2018

 

Contingent consideration at January 1

 

$

 

Acquisition date fair value

 

 

25,491

 

Increase in fair value recognized in operating expenses

 

 

2,689

 

Contingent consideration at September 30

 

$

28,180