Fair value measurements

3 Months Ended

Mar. 31, 2016

5. Fair value measurements

The fair value of the Company’s financial assets and liabilities on a recurring basis were as follows:

(U.S. Dollars, in thousands)	March 31, 2016			Level 1		Level 2			Level 3
Assets
Collective trust funds	$	1,591		$	—	$	1,591		$	—
Treasury securities		513			513		—			—
Certificates of deposit		384			384		—			—
Derivative securities		2,033			—		2,033			—
Debt securities		12,150			—		—			12,150
Total	$	16,671		$	897	$	3,624		$	12,150
Liabilities
Deferred compensation plan	$	(1,459	)	$	—	$	(1,459	)	$	—
Total	$	(1,459	)	$	—	$	(1,459	)	$	—

(U.S. Dollars, in thousands)	December 31, 2015			Level 1		Level 2			Level 3
Assets
Collective trust funds	$	1,622		$	—	$	1,622		$	—
Treasury securities		495			495		—			—
Certificates of deposit		337			337		—			—
Derivative securities		2,485			—		2,485			—
Debt securities		12,658			—		—			12,658
Total	$	17,597		$	832	$	4,107		$	12,658
Liabilities
Deferred compensation plan	$	(1,503	)	$	—	$	(1,503	)	$	—
Total	$	(1,503	)	$	—	$	(1,503	)	$	—

Debt Securities

On March 4, 2015, the Company entered into an Option Agreement (the “Option Agreement”) with eNeura, Inc. (“eNeura”), a privately held medical technology company that is developing devices for the treatment of migraines. The Option Agreement provides the Company with an exclusive option to acquire eNeura (the “Option”) during the 18-month period following the grant of the Option. In consideration for the Option, (i) the Company paid a non-refundable $0.3 million fee to eNeura, and (ii) eNeura issued a Convertible Promissory Note (the “eNeura Note”) to the Company. The principal amount of the eNeura Note is $15.0 million and interest accrues at 8.0%. The eNeura Note will mature on the earlier of (i) March 4, 2019, or (ii) exercise of the Option. The interest is not due until the note matures and will be forgiven if the Company exercises the option. The investment is recorded in other long-term assets as an available for sale debt security and interest is recorded in interest income.

During the fourth quarter of 2015, the Company determined that the carrying value of the instrument exceeded its fair value, resulting in an impairment of $3.3 million, which the Company recorded in accumulated other comprehensive loss as an unrealized loss on debt securities. The fair value of the debt security is based upon significant unobservable inputs, including the use of a 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. During the first quarter of 2016, the Company revised the estimate based on current financial information and other assumptions. Revisions to current financial information had a significant negative impact on the valuation of the debt security while revisions to certain assumptions had a significant positive impact on the valuation of the debt security. The net impact of these revisions resulted in an additional impairment of $0.8 million, which the Company has recorded in accumulated other comprehensive loss as an unrealized loss on debt securities. The Company continues to classify the impairment as temporary in nature as the Company does not intend to sell the debt security nor does it believe that recoverability of the investment will not occur.

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

(U.S. Dollars, in thousands)
Balance at December 31, 2015	$	12,658
Accrued interest income		316
Unrealized loss on debt securities		(824	)
Balance at March 31, 2016	$	12,150

- 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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