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Revenue recognition and accounts receivable | 9 Months Ended
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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.

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