Revenue recognition and accounts receivable

9 Months Ended

Sep. 30, 2020

Revenue Recognition And Accounts Receivable [Abstract]

Revenue recognition and accounts receivable

11. Revenue recognition and accounts receivable

Revenue Recognition

The Company has two reporting segments, which consist of Global Spine and Global Extremities. Within the Global Spine reporting segment there are three product categories: Bone Growth Therapies, Spinal Implants and Biologics.

The tables below presents net sales by major product category by reporting segment:

	Three Months Ended September 30,
(U.S. Dollars, in thousands)	2020		2019		Change
Bone Growth Therapies	$	47,066	$	48,836		-3.6	%
Spinal Implants		25,505		22,947		11.1	%
Biologics		15,245		16,308		-6.5	%
Global Spine		87,816		88,091		-0.3	%
Global Extremities		23,169		25,408		-8.8	%
Net sales	$	110,985	$	113,499		-2.2	%

	Nine Months Ended September 30,
(U.S. Dollars, in thousands)	2020		2019		Change
Bone Growth Therapies	$	120,888	$	146,228		-17.3	%
Spinal Implants		67,025		69,076		-3.0	%
Biologics		40,319		48,784		-17.4	%
Global Spine		228,232		264,088		-13.6	%
Global Extremities		60,711		74,373		-18.4	%
Net sales	$	288,943	$	338,461		-14.6	%

Product Sales and Marketing Service Fees

The table below presents product sales and marketing service fees, which are both components of net sales:

	Three Months Ended September 30,				Nine Months Ended September 30,
(U.S. Dollars, in thousands)	2020		2019		2020		2019
Product sales	$	96,305	$	97,833	$	250,161	$	291,632
Marketing service fees		14,680		15,666		38,782		46,829
Net sales	$	110,985	$	113,499	$	288,943	$	338,461

Product sales primarily consist of the sale of bone growth therapies devices, motion preservation products, and internal and external fixation products. Marketing service fees are received from MTF Biologics based on total sales of biologics tissues and relate solely to the Global Spine reporting segment. Revenues exclude any value added or other local taxes, intercompany sales and trade discounts. Shipping and handling costs for products shipped to customers are included in cost of sales.

Adoption of ASU 2016-13

As discussed in Note 2, the Company adopted ASU No. 2016-13 - Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments, using a modified retrospective approach. Adoption of the new standard resulted in an increase to the Company’s allowance for expected credit losses of $1.1 million, an increase in deferred income tax assets of $0.2 million, and a decrease in retained earnings of $0.9 million as of January 1, 2020. The net impact of adoption to the Company’s balance sheet as of January 1, 2020 is presented in the table below. The standard did not have a material impact to the Company’s condensed consolidated statements of operations or cash flows. 

(U.S. Dollars, in thousands)	December 31, 2019			Impact of Adoption of ASC 326			January 1, 2020
Assets
Current assets
Cash, cash equivalents, and restricted cash	$	70,403		$	—		$	70,403
Accounts receivable, net		86,805			(1,120	)		85,685
Inventories		82,397			—			82,397
Prepaid expenses and other current assets		20,948			—			20,948
Total current assets		260,553			(1,120	)		259,433
Deferred income taxes		35,117			233			35,350
Other long-term assets		199,950			—			199,950
Total assets	$	495,620		$	(887	)	$	494,733
Liabilities and shareholders’ equity
Total liabilities	$	167,989		$	—		$	167,989
Shareholders’ equity
Common shares	$	1,902		$	—		$	1,902
Additional paid-in capital		271,019			—			271,019
Retained earnings		57,749			(887	)		56,862
Accumulated other comprehensive loss		(3,039	)		—			(3,039	)
Total shareholders’ equity		327,631			(887	)		326,744
Total liabilities and shareholders’ equity	$	495,620		$	(887	)	$	494,733

Accounts receivable and related allowances

Subsequent to the adoption of ASU 2016-13, the Company’s allowance for expected credit losses represents the portion of the receivable’s amortized cost basis that an entity does not expect to collect over the receivable’s contractual life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions.

The process for estimating the ultimate collection of accounts receivable involves significant assumptions and judgments. The determination of the contractual life of accounts receivable, the aging of outstanding receivables, as well as the historical collections, write-offs, and payor reimbursement experience over the estimated contractual lives of such receivables, are integral parts of the estimation process related to reserves for expected credit losses and the establishment of contractual allowances. Accounts receivable are analyzed on a quarterly basis to assess the adequacy of both reserves for expected credit losses and contractual allowances. Revisions in allowances for expected credit loss estimates are recorded as an adjustment to bad debt expense within sales and marketing expenses. Revisions to contractual allowances are recorded as an adjustment to net sales. These estimates are periodically tested against actual collection experience. In addition, the Company analyzes its receivables by geography and by customer type, where appropriate, in developing estimates for expected credit losses.

The following table provides a detail of changes in the Company’s allowance for expected credit losses for the three and nine months ended September 30, 2020:

(U.S. Dollars, in thousands)	Three Months Ended September 30, 2020			Nine Months Ended September 30, 2020
Allowance for expected credit losses beginning balance	$	6,364		$	3,987
Impact of adoption of ASU 2016-13		—			1,120
Current period provision (recovery) for expected credit losses		(619	)		945
Writeoffs charged against the allowance and other		(309	)		(647	)
Effect of changes in foreign exchange rates		88			119
Allowance for expected credit losses ending balance	$	5,524		$	5,524

Contract Liabilities

The Company’s contract liabilities largely relate to a prepayment of $13.9 million received in April 2020 from the CMS as part of the Accelerated and Advance Payment Program of the CARES Act intended to increase cash flow to providers of services and suppliers impacted by the COVID-19 pandemic.

On October 1, 2020, the President of the United States signed the “Continuing Appropriations Act, 2021 and Other Extensions Act,” which relaxed a number of the Medicare Accelerated and Advance Payment Programs recoupment terms for providers and suppliers that received funds from the program. Under these new terms, recoupment will be delayed until one year after payment was issued. After that first year, Medicare will automatically recoup 25% of Medicare payments otherwise owed to the provider or supplier for 11 months. At the end of the 11-month period, recoupment will increase to 50% for another 6 months. Thus, during these time periods, rather than receiving the full amount of payment for newly submitted claims, the Company’s outstanding accelerated / advance payment balance will be reduced by the recoupment amount until the full balance has been repaid.

As of September 30, 2020, the Company has classified $6.9 million of this contract liability within other current liabilities and $6.9 million within other long-term liabilities based upon the Company’s estimates of when such funds will be recouped. The Company did not recognize any net sales during the three and nine months ended September 30, 2020, respectively, attributable to the satisfaction of performance obligations related to the CMS prepayment.

Other Contract Assets

The Company’s contract assets, excluding trade accounts receivable (“Other Contract Assets”), largely consist of payments made to certain distributors to obtain contracts, gain access to customers in certain territories, and to provide the benefit of the exclusive distribution of Orthofix products. Other Contract Assets are included in other long-term assets or other current assets, dependent upon the original term of the related agreement, and totaled $2.3 million and $3.7 million as of September 30, 2020, and December 31, 2019, respectively.