Note 10 - Fair Value Measurements

6 Months Ended

Jun. 30, 2017

10.	FAIR VALUE MEASUREMENTS

The carrying amounts of cash, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short-term nature of these items. As of

June 30, 2017,

the fair value of the Company’s variable rate long-term debt approximates its carrying value and is categorized in Level

of the fair value hierarchy.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Fair value measurement standards apply to certain financial assets and liabilities that are measured at fair value on a recurring basis (each reporting period).

The Company has categorized its warrants measured at fair value on a recurring basis in Level

of the fair value hierarchy. The fair value of the warrants classified as liability awards was determined by utilizing a Monte Carlo simulation model, which projects the value of Nuvectra stock versus its peer group under numerous scenarios, and determines the value of the award based upon the present value of these projected outcomes. The estimated fair value of the warrants as of the date of issuance was approximately

$0.5

million and was recorded as a long-term asset and a liability in the Consolidated Balance Sheet. The estimated fair value of the warrant liability will be revalued on a periodic basis and any resulting increases or decreases in the estimated fair value will be recorded as an adjustment to earnings. During the

six

months ended

June 30, 2017,

the Company recorded approximately

$0.3

million in fair value adjustments. The estimated fair value of the warrants as of

June 30, 2017

was approximately

$0.6

million.

The Company’s investments in marketable securities primarily consist of investments in debt securities, which are classified as available-for-sale and presented as current assets within Cash and Cash Equivalents on the balance sheet because of their original maturities of

three

months or less. Unrealized gains or losses for the periods presented are included in other comprehensive loss.

The fair values of marketable securities were estimated using the market approach using prices and other relevant information generated by market transactions involving identical or comparable assets. The Company uses quoted market prices in active markets or quoted market prices in markets that are

not

active to measure fair value. When developing fair value estimates, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs. As of

June 30, 2017,

the fair market value of marketable securities was approximately

$30.2

million, all of which had original maturities of

three

months or less.

Marketable securities, measured at fair value, by level within the fair value hierarchy were as follows (in thousands):

		June 30, 2017
	Fair Value Hierarchy	Cost		Unrealized Loss		Fair Value
Cash	Level 1	$	16,665	$	—	$	16,665
Agency	Level 1		4,495		—		4,495
Financial	Level 2		5,993		—		5,993
Industrial	Level 2		2,999		—		2,999
Total		$	30,152	$	—	$	30,152

		December 30, 2016
	Fair Value Hierarchy	Cost		Unrealized Loss			Fair Value
Cash	Level 1	$	33,821	$	—		$	33,821
Government	Level 1		2,005		—			2,005
Financial	Level 2		8,064		(1	)		8,063
Industrial	Level 2		11,125		(1	)		11,124
Total		$	55,015	$	(2	)	$	55,013

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Fair value standards also apply to certain assets and liabilities that are measured at fair value on a nonrecurring basis. A summary of the valuation methodologies for assets and liabilities measured on a nonrecurring basis is as follows:

Long-lived Assets

– The Company reviews the carrying amount of its long-lived assets to be held and used, other than goodwill, for potential impairment whenever certain indicators are present as described in Note

“Summary of Significant Accounting Policies.”

Goodwill

– Goodwill recorded is

not

amortized but is periodically tested for impairment. The Company assesses goodwill for impairment on the last day of each fiscal year, or more frequently if certain events occur as described in Note

“Summary of Significant Accounting Policies.” During the

second

quarter and

first

six

months of fiscal year

2017

and

2016,

impairment charges were recorded related to the Company’s Goodwill.

Warrants

– In order to determine the fair value of the warrants classified as equity awards, the Company used a Monte Carlo simulation model. The risk-free interest rate represents the

-Year U.S. Treasury rate as of

March 18, 2016.

The expected volatility assumption is based on historical volatilities for publicly traded stock of comparable companies.

The following table summarizes the assumptions as of

June 30, 2017

used for estimating the fair value of the warrants classified as liability awards:

Risk-free interest rate	2.16	%
Expected volatility	55.00	%
Contractual term (in years)	10
Dividend yield	—	%

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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