Note 4 - Fair Value Measurements

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Fair Value Disclosures [Text Block]

4. Fair Value Measurements

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

The Company’s investments are all classified within Levels 1 of the fair value hierarchy and are valued based 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
			for Identical Assets		Observable Inputs		Unobservable Inputs
	December 31, 2021		(Level 1)		(Level 2)		(Level 3)		Amortized Cost
Cash equivalents:
Money Market Funds	$	67,046	$	67,046	$	-	$	-	$	67,046
Other current liabilities:
Contingent Consideration - Short Term	$	4,315	$	-	$	-	$	4,315	$	-

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

There were no transfers between fair value levels in 2021 or 2020.

Contingent Consideration

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

	Years Ended December 31
	2021			2020
Balance, beginning January 1	$	35,410		$	-
Additions		-			69,076
Payments		(10,000	)		(5,000	)
Change in fair value		(21,095	)		(28,666	)
Balance, ending December 31	$	4,315		$	35,410

Under the Parcus Medical Merger Agreement and Arthrosurface Merger Agreement, there are earn-out milestones totaling up to $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.

In order to determine the fair value of contingent consideration at each reporting date, the projected contingent payment amounts were 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 earn-out milestone ranged from 3.1% - 3.4%. The weighted average cost of capital for Parcus Medical decreased from 11.4% as of December 31, 2020 to 11.3% as of December 31, 2021. The weighted average cost of capital for Arthrosurface was 11.4% as of December 31, 2020. 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%. 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.

As of December 31, 2021, a net sales growth milestone with respect to the Parcus Merger Agreement was achieved, and a liability in the amount of $4.3 million was recorded in current liabilities. 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 was paid in July 2021. As of December 31, 2021, the remaining regulatory milestone and the net sales milestone under the Arthrosurface Merger Agreement were not achieved. The Company does not expect the remaining milestone under the Parcus Medical Merger Agreement to be achieved.

The overall fair value of the contingent consideration decreased by $21.1 million and $28.7 million during the years ended December 31, 2021 and 2020, respectively, due primarily to the decrease in the likelihood that certain contingent milestones would be achieved.