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Revenue recognition and accounts receivable
 6 Months Ended
Jun. 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 June 30,

 

(U.S. Dollars, in thousands)

 

2020

 

 

2019

 

 

Change

 

Bone Growth Therapies

 

$

28,379

 

 

$

50,109

 

 

 

-43.4

%

Spinal Implants

 

 

18,594

 

 

 

23,226

 

 

 

-19.9

%

Biologics

 

 

11,125

 

 

 

16,744

 

 

 

-33.6

%

Global Spine

 

 

58,098

 

 

 

90,079

 

 

 

-35.5

%

Global Extremities

 

 

15,037

 

 

 

25,771

 

 

 

-41.7

%

Net sales

 

$

73,135

 

 

$

115,850

 

 

 

-36.9

%

 

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2020

 

 

2019

 

 

Change

 

Bone Growth Therapies

 

$

73,822

 

 

$

97,392

 

 

 

-24.2

%

Spinal Implants

 

 

41,520

 

 

 

46,129

 

 

 

-10.0

%

Biologics

 

 

25,074

 

 

 

32,476

 

 

 

-22.8

%

Global Spine

 

 

140,416

 

 

 

175,997

 

 

 

-20.2

%

Global Extremities

 

 

37,542

 

 

 

48,965

 

 

 

-23.3

%

Net sales

 

$

177,958

 

 

$

224,962

 

 

 

-20.9

%

 

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

June 30,

 

 

Six Months Ended

June 30,

 

(U.S. Dollars, in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Product sales

 

$

62,435

 

 

$

99,865

 

 

$

153,856

 

 

$

193,799

 

Marketing service fees

 

 

10,700

 

 

 

15,985

 

 

 

24,102

 

 

 

31,163

 

Net sales

 

$

73,135

 

 

$

115,850

 

 

$

177,958

 

 

$

224,962

 

 

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 receivables, 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 six months ended June 30, 2020:

(U.S. Dollars, in thousands)

 

Three Months Ended June 30, 2020

 

 

Six Months Ended June 30, 2020

 

Allowance for expected credit losses beginning balance

 

$

5,591

 

 

$

3,987

 

Impact of adoption of ASU 2016-13

 

 

—

 

 

 

1,120

 

Current period provision for expected credit losses

 

 

885

 

 

 

1,564

 

Writeoffs charged against the allowance and other

 

 

(224

)

 

 

(338

)

Effect of changes in foreign exchange rates

 

 

112

 

 

 

31

 

Allowance for expected credit losses ending balance

 

$

6,364

 

 

$

6,364

 

 

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. Repayment of this amount is required to begin 120 days after the issuance of the payment, or beginning in August 2020. After the 120 day period, every claim submitted by the Company will be offset against the accelerated / advanced payment. Thus, instead of receiving payment for newly submitted claims, the Company’s outstanding accelerated / advance payment balance will be reduced by the claim amount.

This contract liability is included within other current liabilities and totaled $13.9 million as of June 30, 2020. The Company did not recognize any net sales during the three and six months ended June 30, 2020, respectively, attributable to the satisfaction of performance obligations related to the CMS prepayment; however, the Company expects to recognize the full amount of the prepayment as net sales in fiscal year 2020.

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 $2.6 million and $3.7 million as of June 30, 2020, and December 31, 2019, respectively.