Note 4 - Fair Value Measurements

12 Months Ended

Dec. 31, 2020

Notes to Financial Statements

Fair Value Disclosures [Text Block]

4. Fair Value Measurements

The Company held U.S. treasury bills of $2.5 million and $27.5 million at December 31, 2020 and December 31, 2019, respectively. Unrealized losses and the associated tax impact on the Company’s available-for-sale securities were insignificant as of December 31, 2020 and December 31, 2019, respectively.

The Company’s investments are all classified within Levels 1 of the fair value hierarchy and are valued based quoted prices in active markets. 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 classification of the Company’s cash equivalents and investments within the fair value hierarchy is as follows:

			Active Markets		Significant Other		Significant
			for Identical Assets		Observable Inputs		Unobservable Inputs
	December 31, 2020		(Level 1)		(Level 2)		(Level 3)		Amortized Cost
Cash equivalents:
Money Market Funds	$	74,522	$	74,522	$	-	$	-	$	74,522
Investments:
U.S. Treasury Bills	$	2,501	$	2,501	$	-	$	-	$	2,524
Other current and long-term liabilities:
Contingent Consideration - Short Term	$	13,090	$	-	$	-	$	13,090	$	-
Contingent Consideration - Long Term		22,320		-		-		22,320		-
Total other current and long-term liabilities	$	35,410	$	-	$	-	$	35,410	$	-

			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

There were no transfers between fair value levels in 2020 or in 2019.

Contingent Consideration

The following table provides a rollforward of the contingent consideration related to business acquisitions discussed in Note 3, Business Combinations.

	Year Ended
	December 31, 2020
Balance, beginning January 1, 2020	$	-
Additions		69,076
Payments		(5,000	)
Change in fair value		(28,666	)
Balance, ending December 31, 2020	$	35,410

Under the Parcus Medical Merger Agreement and Arthrosurface Merger Agreement, there are earn-out milestones totaling $100 million payable from 2020 to 2022. Parcus Medical has net sales earn-out milestones annually from 2020 to 2022, while Arthrosurface has both regulatory and net sales 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 net sales estimates, 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 rates used for the net sales and regulatory earn-out milestones ranged from 2.0% - 2.5%. As of December 31, 2020, the probability of successful achievement of the Arthrosurface regulatory earn-out milestones range from 60%-75%, as compared to 60%-90% at the acquisition date. The weighted average cost of capital for Arthrosurface decreased from 11.5% on the acquisition date to 11.4% as of December 31, 2020, and for Parcus Medical decreased from 14.5% at the acquisition date to 11.4% as of December 31, 2020. 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. 

In October 2020, the Company made a regulatory-based milestone payment of $5 million pursuant to the terms of the Arthrosurface Merger Agreement as a result of regulatory clearance for the WristMotion Total Arthroplasty System. The fair value of remaining contingent consideration is assessed on a quarterly basis. The fair value of the contingent consideration decreased by $28.7 million during the year ended December 31, 2020 as a result of a decrease in near term revenues due primarily to the COVID-19 pandemic.