Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Non-financial assets and liabilities of the Company measured at fair value include any long-lived assets that are impaired in a currently reported period or equity securities measured at observable prices in orderly transactions. The authoritative guidance also describes three levels of inputs that may be used to measure fair value:

The Company’s financial instruments include cash equivalents, accounts receivable, accounts payable, long-term secured debt, available for sale debt securities, equity securities, contingent consideration, and deferred compensation plan liabilities. The carrying value of cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term maturities of these instruments. The Company’s secured revolving credit facility carries a floating rate of interest; therefore, the carrying value of long-term debt is considered to approximate the fair value.

The Company’s available for sale debt securities, equity securities, contingent consideration, and deferred compensation plan liabilities are the only financial instruments recorded at fair value on a recurring basis as follows:


(U.S. Dollars, in thousands)	Balance December 31, 2022			Level 1		Level 2			Level 3
Assets
Neo Medical convertible loan agreement	$	7,140		$	—	$	—		$	7,140
Neo Medical preferred equity securities		6,084			—		6,084			—
Bone Biologics equity securities		—			—		—			—
Other investments		1,726			—		—			1,726
Total	$	14,950		$	—	$	6,084		$	8,866
Liabilities
Spinal Kinetics contingent consideration		—		$	—	$	—		$	—
Deferred compensation plan		(1,515	)		—		(1,515	)		—
Total	$	(1,515	)	$	—	$	(1,515	)	$	—


(U.S. Dollars, in thousands)	Balance December 31, 2021			Level 1		Level 2			Level 3
Assets
Neo Medical convertible loan agreements	$	7,148		$	—	$	—		$	7,148
Neo Medical preferred equity securities		5,413			—		5,413			—
Bone Biologics equity securities		309			309		—			—
Other Investments		1,505			—		—			1,505
Total	$	14,375		$	309	$	5,413		$	7,148
Liabilities
Spinal Kinetics contingent consideration	$	(17,200	)	$	—	$	—		$	(17,200	)
Deferred compensation plan		(1,314	)		—		(1,314	)		—
Total	$	(18,514	)	$	—	$	(1,314	)	$	(17,200	)

The fair value of the Company’s deferred compensation plan liabilities are determined based on inputs that are readily available in public markets or that can be derived from information available in publicly quoted markets; therefore, the Company has categorized this liability as a Level 2 financial instrument.

On October 1, 2020, the Company purchased shares of Neo Medical’s preferred stock for consideration of $5.0 million and entered into a Convertible Loan Agreement pursuant to which Orthofix loaned Neo Medical CHF 4.6 million, or $5.0 million at the date of issuance (the “Convertible Loan”). The loan bears interest at 8.0%, with interest due semi-annually. At each interest payment date, the borrower may elect to capitalize any interest due to the then outstanding principal balance of the loan. The Convertible Loan matures on October 1, 2024. If a change in control of Neo Medical occurs prior to the maturity date, the Convertible Loan shall become immediately due upon such event. The Convertible Loan may be convertible by either party into shares of Neo Medical’s preferred stock. The Company may convert the loan at its own election at any time prior to the full repayment or settlement of the Convertible Loan. Neo Medical may elect to convert the loan only in the event of a qualified financing event, as defined within the agreement. The price per share at which the loan converts is dependent upon i) the party electing conversion and ii) Neo Medical’s price per share in its most recent fundraising activities at the time of conversion, as specified within the agreement.

In October 2021, the Company entered into an additional Convertible Loan Agreement (the “Additional Convertible Loan”), pursuant to which the Company loaned Neo Medical an additional CHF 0.6 million ($0.7 million as of the issuance date). In January 2022, the Company elected to convert the Additional Convertible Loan into shares of Neo Medical’s preferred stock.

The equity securities are recorded in other long-term assets and are considered an investment that does not have a readily determinable fair value. As such, the Company measures this investment at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.

The table below presents a reconciliation of the carrying value of the Company’s investment in Neo Medical preferred equity securities for the years ended December 31, 2022, and 2021:


(U.S. Dollars, in thousands)	2022		2021
Fair value of Neo Medical preferred equity securities at January 1	$	5,413	$	5,000
Conversion of loan into preferred equity securities		671		—
Foreign currency remeasurement recognized in other income, net		—		77
Unrealized gain recognized in other income (expense), net		—		336
Fair value of Neo Medical preferred equity securities at December 31		6,084		5,413
Cumulative unrealized gain on Neo Medical preferred equity securities		413		413

The remaining Convertible Loan is recorded in other long-term assets as an available for sale debt security as of December 31, 2022. The Convertible Loan is recorded at fair value, with applicable interest recorded in interest income. The fair value of the Convertible Loan is based upon significant unobservable inputs, including the use of option-pricing models, Monte Carlo simulations for certain periods, and a probability-weighted discounted cash flows model, requiring the Company to develop its own assumptions. Therefore, the Company has categorized this asset as a Level 3 financial asset.

Some of the more significant unobservable inputs used in the fair value measurement of the Convertible Loan include applicable discount rates, implied volatility, the likelihood and projected timing of repayment or conversion, and projected cash flows in support of the estimated enterprise value of Neo Medical. Holding other inputs constant, changes in these assumptions could result in a significant change in the fair value of the Convertible Loan. If the amortized cost of the Convertible Loan exceeds its estimated fair value, the security is deemed to be impaired, and must be evaluated for the recognition of credit losses. Impairment resulting from credit losses is recognized within the statement of income, while impairment resulting from other factors is recognized within other comprehensive income (loss). As of December 31, 2022, the Company has not recognized any credit losses related to the Convertible Loan.

The following table provides a reconciliation of the beginning and ending balances of the Convertible Loan(s), measured at fair value using significant unobservable inputs (Level 3):


(U.S. Dollars, in thousands)	2022			2021
Fair value of Neo Medical Convertible Loans at January 1	$	7,148		$	7,160
Additions		—			671
Interest recognized in interest income, net		436			421
Foreign currency remeasurement recognized in other income (expense), net		(67	)		(162	)
Unrealized gain (loss) recognized in other comprehensive income (loss)		294			(942	)
Conversion of Additional Convertible Loan into preferred equity securities		(671	)		—
Fair value of Neo Medical Convertible Loan(s) at December 31		7,140			7,148
Amortized cost basis of Neo Medical Convertible Loan(s) at December 31		5,907			6,209

Until August of 2022, the Company held an investment in common stock of Bone Biologics Inc. (“Bone Biologics”), a developer of orthobiologic products. Prior to 2021, the equity securities were considered an investment that did not have a readily determinable fair value as Bone Biologics had very limited trading volumes. As such, the Company measured the investments at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.

In 2021, Bone Biologics completed a public offering of units, with each unit consisting of one share of common stock and one warrant to purchase common shares. As a result, Bone Biologics’ common stock became actively traded on the NASDAQ (ticker BBLG). The Company concluded the investment represented a Level 1 fair value measurement subsequent to the public offering as the common shares subsequently had quoted prices in active markets for identical assets. As such, the Company recorded the investment at fair value, with changes in fair value recorded within other income (expense), net, subsequent to the public offering.

Other investments represent other assets and investments recorded at fair value that are not deemed to be material for disclosure on an individual basis. The fair value of these assets is based upon significant unobservable inputs, such as probability-weighted discounted cash flows models, requiring the Company to develop its own assumptions. Therefore, the Company has categorized these assets as Level 3 financial assets. As of December 31, 2022, this balance was classified within other current assets, while as of December 31, 2021, this balance was classified within other long-term assets.

The Company recognized a contingent consideration obligation in connection with the acquisition of Spinal Kinetics in 2018. The Spinal Kinetics contingent consideration consists of potential future milestone payments of up to $60.0 million in cash. The milestone payments included (i) $15.0 million upon U.S. Food and Drug Administration (“FDA”) approval of the M6-C artificial cervical disc (the “FDA Milestone”) and (ii) revenue-based milestone payments of up to $45.0 million in connection with future sales of the acquired artificial discs. To trigger applicable payments, milestones must be achieved by April 30, 2023. The FDA Milestone was achieved and paid in 2019. A second milestone payment, totaling $15.0 million, was achieved and paid in 2021 upon meeting certain net sales targets.

The estimated fair value of the remaining Spinal Kinetics contingent consideration, attributable to a revenue-based milestone, was concluded to be zero as of December 31, 2022, as the Company does not expect to achieve the milestone by April 30, 2023. The estimated fair value reflects assumptions made by management as of December 31, 2022, such as the expected timing and volume of elective procedures and the impact of these procedures on future revenues. Any changes in fair value are recorded as an operating expense within acquisition-related amortization and remeasurement.

The following table provides a reconciliation of the beginning and ending balances for the contingent consideration measured at fair value using significant unobservable inputs (Level 3):