Note 4 - Fair Value Measurements

6 Months Ended

Jun. 30, 2021

Notes to Financial Statements

Fair Value Disclosures [Text Block]

4. Fair Value Measurements

The Company held investments in U.S. treasury bills of $2.5 million as available-for-sale securities at December 31, 2020. Unrealized losses and the associated tax impact on the Company’s available-for-sale securities were insignificant at December 31, 2020. There were no available-for-sale securities as of June 30, 2021.

The Company’s investments are all classified within Level 1 of the fair value hierarchy and are valued based on 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
	June 30, 2021		for Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)		Amortized Cost
Cash equivalents:
Money Market Funds	$	67,038	$	67,038	$	-	$	-	$	67,038
Other current and long-term liabilities:
Contingent Consideration - Short Term	$	16,870	$	-	$	-	$	16,870	$	-
Contingent Consideration - Long Term		70		-		-		70		-
Total other current and long-term liabilities	$	16,940	$	-	$	-	$	16,940	$	-

			Active Markets		Significant Other		Significant
	December 31, 2020		for Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (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	$	-

Contingent Consideration

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

	Three Months Ended June 30, 2021			Six Months Ended June 30, 2021
Balance, beginning	$	30,590		$	35,410
Additions		-			-
Payments		-			-
Change in fair value		(13,650	)		(18,470	)
Balance, ending	$	16,940		$	16,940

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 annually 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 milestones ranged from 2.2% - 2.3%, and for the regulatory earn-out milestones the discount rate was 2.7%. The weighted average cost of capital for Arthrosurface and Parcus increased from 11.4% as of December 31, 2020 to 11.8% as of June 30, 2021. Increases or decreases in the discount rate would result in a lower or higher fair value measurement, respectively. As of December 31, 2020, the probability of successful achievement of the regulatory earn-out milestones was determined to be in a range of 60%-75%. As of June 30, 2021, the probability of successful achievement of one of the regulatory earn-out milestones was determined to be 100% as the Company achieved a regulatory milestone prior to June 30, 2021. The probability of successful achievement of the remaining regulatory milestone was determined to be 0% as of June 30, 2021.

The overall fair value of the contingent consideration decreased by $13.7 million and $18.5 million during the three- and six-month periods ended June 30, 2021, respectively, to $16.9 million, due primarily to the decrease in the likelihood that certain contingent milestones would be achieved and result in payment. The fair value of remaining contingent consideration is assessed on a quarterly basis.

In October 2020, the Company made a regulatory-based milestone payment of $5.0 million pursuant to the terms of the Arthrosurface Merger Agreement as a result of regulatory clearance for the WristMotion Total Arthroplasty System. In June 2021, the Company received regulatory clearance for a reverse shoulder implant system, which triggered a $10.0 million regulatory milestone payment per the terms of the Arthrosurface Merger Agreement. This amount is included as contingent consideration in current liabilities in the Company’s consolidated balance sheet as of June 30, 2021 and was paid in July 2021.