Note 4 - Fair Value Measurements

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Fair Value Disclosures [Text Block]

4. Fair Value Measurements

The Company held U.S. treasury bills of

$25.2

million and certificates of deposit of

$1.3

million at

March 31, 2020.

The Company held U.S. treasury bills of

$27.5

million at

December 31, 2019.

Unrealized losses and the associated tax impact on the Company’s available-for-sale securities were insignificant as of

March 31, 2020

and

December 31, 2019,

respectively.

The Company’s investments are all classified within Levels

1

and

2

of the fair value hierarchy. The Company’s investments classified within Level

1

of the fair value hierarchy are valued based on quoted prices in active markets. Level

2

investments are based on matrix pricing compiled by

third

party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk. For cash, current receivables, accounts payable, and interest accrual, the carrying amounts approximate fair value, because of the short maturity of these instruments, and therefore fair value information is

not

included in the table below. Contingent consideration related to the previously described business combinations are classified within Level

3

of the fair value hierarchy as the determination of fair value uses considerable judgement and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability.

The fair value hierarchy of the Company's cash equivalents, investments and liabilities at fair value was as follows:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical Assets		Observable Inputs		Unobservable Inputs
	March 31, 2020		(Level 1)		(Level 2)		(Level 3)		Amortized Cost
Cash equivalents:
Bank Certificates of Deposit	$	250	$	-	$	250	$	-	$	250
Money Market Funds		51,682		51,682						51,682
Total Cash equivalents	$	51,932	$	51,682	$	250	$	-	$	51,932
Investments:
Bank Certificates of Deposit	$	1,250	$	-	$	1,250	$	-	$	1,250
U.S. Treasury Bills		25,202		25,202		-		-		25,027
Total Investments	$	26,452	$	25,202	$	1,250	$	-	$	26,277
Other current and long-term liabilities:
Contingent Consideration - Short Term	$	4,303	$	-	$	-	$	4,303	$	4,303
Contingent Consideration - Long Term		40,251		-		-		40,251		40,251
Total Other current and long-term liabilities	$	44,554	$	-	$	-	$	44,554	$	44,554

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical Assets		Observable Inputs		Unobservable Inputs
	December 31, 2019		(Level 1)		(Level 2)		(Level 3)		Amortized Cost
Cash equivalents:
Money Market Funds	$	48,971	$	48,971	$	-	$	-	$	48,971
Investments:
U.S. Treasury Bills	$	27,480	$	27,480	$	-	$	-	$	27,479

During fiscal years 

2020

 and 

2019,

there were 

no

 transfers between fair value levels.

Contingent Consideration

The following table provides a rollforward of the contingent consideration related to business acquisitions discussed in Note

3.

	March 31,
	2020
Balance, beginning	$	-
Additions		69,076
Payments		-
Change in fair value		(24,522	)
Balance, ending	$	44,554

Under the Parcus Medical and Arthrosurface merger agreements, there are earn-out milestones totaling

$100

million payable from

2020

to

2022.

Parcus Medical and Arthrosurface each have net sales earn-out milestones annually from

2020

to

2022,

while Arthrosurface has regulatory earn-out milestones in

2020

and

2021.

Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model or a Monte Carlo simulation approach.

The unobservable inputs used in the fair value measurement of the Company’s contingent consideration are the probabilities of successful achievement, the weighted average cost of capital used for the Monte Carlo simulation, discount rate and the periods in which the milestones are expected to be achieved. The discount rate used for the net sales and regulatory earn-out milestones was

6.1%

for both Parcus Medical and Arthrosurface. The probability of successful achievement of the regulatory earn-out milestones range from

60%

-

90%

for Arthrosurface, which remained unchanged from the acquisition date to

March 31, 2020.

The key variables that lead to a decrease in contingent consideration versus the acquisition date are the decrease in in near term revenues due to the COVID pandemic and an increase in the weighted average cost of capital from

11.5%

to

13.5%

for Arthrosurface and

14.5%

to

16.0%

for Parcus Medical. Increases or decreases in any of the probabilities of

success in which milestones are expected to be achieved would result in a higher or lower fair value measurement, respectively. Increases or decreases in the discount rate would result in a lower or higher fair value measurement, respectively.

The fair value of contingent consideration is assessed on a quarterly basis. The

$24.5

million decrease in fair value of the contingent consideration as of

March 31, 2020

was due to a decrease in the near term projections of revenue due to the COVID-

19

pandemic.