Note 4 - Fair Value Measurements

6 Months Ended

Jun. 30, 2024

Notes to Financial Statements

Fair Value Disclosures [Text Block]

4. Fair Value Measurements

As of June 30, 2024 and December 31, 2023, carrying amounts reported on the Company’s balance sheet for cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses, other current assets, accounts payable, employee-related liabilities, accrued expenses and other current liabilities, and deferred revenue approximate their respective fair value due to liquidity and short-term nature of these items.

The Company records certain assets and liabilities at fair value. ASC 820 – Fair Value Measurement states that fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. As such, the fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The three-tiered fair value hierarchy that prioritizes the inputs used in measuring fair value, is comprised of:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2 – Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable through correlation with market data; and

Level 3 – Unobservable inputs that are supported by little or no market data, which require the reporting entity to develop its own assumptions.

As of June 30, 2024 and December 31, 2023, the Company’s assets and liabilities measured at fair value on a recurring basis were as follows:

	June 30, 2024
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Cash and cash equivalents (1)	$	7,782	$	-	$	-		7,782
Restricted cash		1,517		-		-		1,517
Total assets	$	9,299	$	-	$	-	$	9,299
Liabilities:
Contingent consideration	$	-	$	-	$	14,400	$	14,400
Warrant liabilities		-		-	$	5,597	$	5,597
Total liabilities	$	-	$	-	$	19,997	$	19,997

	December 31, 2023
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Cash and cash equivalents (1)	$	17,096	$	-	$	-	$	17,096
Restricted cash		1,642		-		-		1,642
Short-term investments		-		3,971		-		3,971
Total assets	$	18,738	$	3,971	$	-	$	22,709
Liabilities:
Contingent consideration	$	-	$	-	$	2,220	$	2,220
Warrant liabilities		-		-		5,888		5,888
Total liabilities	$	-	$	-	$	8,108	$	8,108

(1) Includes investments that are readily convertible to cash with original maturities of 90 days or less.

Warrant Liabilities

Warrant liabilities was recorded at its initial estimated fair value. Adjustments associated with changes in fair value of warrant liabilities are included in the Company’s condensed consolidated statements of operations and comprehensive loss. The following table summarizes changes in estimated fair value of the warrant liabilities as of June 30, 2024:

	Fair value
	(in thousands)
Balance at December 31, 2023	$	5,888
Change in estimated fair value		(291	)
Balance at June 30, 2024	$	5,597

The fair value of the warrant liabilities was estimated using the Black-Scholes option pricing model, which is based on unobservable inputs and is designated as Level 3 in the fair value hierarchy. The following table summarizes the assumptions used in determining fair value of warrant liabilities:

	As of June 30, 2024		As of December 31, 2023
Expected volatility		108%		117%
Risk-free interest rate		4.4%		3.8%
Expected life (in years)		4.1		4.6
Expected dividend yield		0.0%		0.0%

Contingent Consideration

Contingent consideration represents a liability related to the Company’s 2015 acquisition of the Senhance System (the “Senhance Acquisition”). Adjustments associated with changes in fair value of contingent consideration are included in the Company’s condensed consolidated statements of operations and comprehensive loss. The fair value of contingent consideration is related to a milestone of €15.0 million which shall be payable upon achievement of trailing revenues from sales or services contracts of the Senhance System of at least €25.0 million over a calendar quarter or in the event that (i) the Company is acquired, (ii) the Company significantly reduces or suspends selling efforts of the Senhance System, or (iii) the Company acquires a business that offers alternative products that are directly competitive with the Senhance System.

On March 28, 2024, the Company entered into a non-binding letter of intent with KARL STORZ for a potential acquisition of the Company by KARL STORZ. On June 6, 2024, the Company entered into the Merger Agreement, with Parent and Merger Sub, to be acquired by way of a cash-out merger. If the Merger is consummated, the contingent consideration becomes immediately payable.

Our valuation of the contingent consideration is management’s best estimate of the probability-weighted fair value of the consideration under the Merger, assuming a 90% probability that the Merger would occur and the timing of achievement of trailing revenue of at least €25.0 million over a calendar quarter. If the facts or circumstances should change regarding the assumption of the probability of the Merger occurring, this could have a material impact on the fair value of the contingent consideration.

The following table summarizes changes in estimated fair value of the contingent consideration for the six months ended June 30, 2024 and 2023:

	Fair value
	(in thousands)
Balance at December 31, 2022	$	1,256
Change in estimated fair value		308
Balance at June 30, 2023	$	1,564
Balance at December 31, 2023	$	2,220
Change in estimated fair value		12,180
Balance at June 30, 2024	$	14,400

The following table presents quantitative information about the inputs and valuation methodologies used for fair value measurement of contingent consideration liability utilizing a probability of occurrence related to the proposed Merger and a Monte-Carlo simulation method as of June 30, 2024 and a Monte-Carlo simulation method as of December 31, 2023:

	Valuation Methodology	Significant Unobservable Inputs	June 30, 2024	December 31, 2023
Contingent consideration	Probability weighted income approach	Milestone date	2032	2032
		Revenue discount rate	10.5%	10.0%
		Revenue volatility	35.0%	35.0%
		EUR-to-USD exchange rate	1.07	1.10
		Probability of occurrence	90.0%	-

During the six months ended June 30, 2024, there were no transfers of assets or liabilities between Level 1, Level 2, or Level 3 of fair value categories.