Accounts Receivable, Sales and Allowances

3 Months Ended

Mar. 31, 2020

Accounts Receivable, Sales and Allowances

The nature of the Company’s business inherently involves, in the ordinary course, significant amounts and substantial volumes of transactions and estimates relating to allowances for product returns, chargebacks, rebates, doubtful accounts and discounts given to customers. This is typical of the pharmaceutical industry and is not necessarily specific to the Company. Depending on the product, the end-user customer, the specific terms of national supply contracts and the particular arrangements with the Company’s wholesaler customers, certain rebates, chargebacks and other credits are deducted from the Company’s accounts receivable. The process of claiming these deductions depends on wholesalers reporting to the Company the amount of deductions that were earned under the terms of the respective agreement with the end-user customer (which in turn depends on the specific end-user customer, each having its own pricing arrangement that entitles it to a particular deduction). This process can lead to partial payments to the Company against outstanding invoices as the wholesalers take the claimed deductions at the time of payment.

With the exception of the provision for doubtful accounts, which is reflected as part of selling, general and administrative expense, the provisions for the following customer reserves are reflected as a reduction of revenues in the accompanying condensed consolidated statements of comprehensive (loss). Additionally, with the exception of administrative fees and others, which is included as a current liability, the ending reserve balances are included in trade accounts receivable, net in the Company’s condensed consolidated balance sheets.

During the three month period ended March 31, 2020, the Company exited the market for an unapproved product.  Prior to exiting, the Company sold its remaining inventory. Akorn applied the five step model in accordance with ASC 606 and determined that $35.9 million of revenue should be recognized which is significantly less than the contractual price of the contract. The Company determined that variable consideration included in the transaction price should be significantly constrained to reflect uncertainties related to the estimated implicit price concessions, product returns from the right to return products at any time, and product demand. Significant inputs used in determining these estimates include the number of units already in the channel, remaining shelf life of product, and competition from approved product. As a result of these uncertainties and possible outcomes, the Company used the expected value method and determined the revenue that should be recognized based on the sum of probability-weighted amounts. The Company has not reflected the total contractual price of this contract within gross revenue due to the significant uncertainty associated with collecting the full amount. The net amount recognized by the Company of $35.9 million represents an estimate of the amount that is probable that a significant reversal in the cumulative amount of revenue recognized will not occur when the uncertainties are resolved. The Company will continue to re-evaluate circumstances in future periods and adjust its estimate as required which may result in material changes to our financial statements in future periods.

Trade accounts receivable, net consists of the following (in thousands):


	March 31, 2020		December 31, 2019
Gross accounts receivable⁽¹⁾	$	310,007	$	258,173
Less reserves for:
Chargebacks	(43,642)		(40,498)
Rebates	(38,284)		(42,515)
Product returns	(31,588)		(33,127)
Discounts and allowances	(7,393)		(5,816)
Advertising and promotions	(1,335)		(1,508)
Doubtful accounts	(547)		(536)
Trade accounts receivable, net	$	187,218	$	134,173

(1) The increase in the Gross accounts receivable balance as of March 31, 2020, when compared to the December 31, 2019 balance, was primarily due to increase in sales as it relates to the sale of an unapproved product that has since been discontinued and timing of account receivables collections. As it relates to the market exit and sale of an unapproved product discussed above, gross accounts receivable reflects only the portion of the contractual price that is probable that a significant reversal in the cumulative amount of revenue recognized will not occur, less any amounts collected as of March 31, 2020.

For the three month periods ended March 31, 2020 and 2019, the Company recorded the following adjustments to gross sales (in thousands):


	Three Months Ended March 31,
	2020		2019
Gross sales ⁽¹⁾	$	429,376	$	458,641
Less adjustments for:
Chargebacks ⁽²⁾	(156,275)		(205,394)
Rebates, administrative and other fees ⁽³⁾	(52,844)		(64,264)
Product returns ⁽⁴⁾	(4,259)		(11,902)
Discounts and allowances	(9,278)		(9,050)
Advertising, promotions and others	(2,027)		(2,160)
Revenues, net	$	204,693	$	165,871

(1) As it relates to the market exit and sale of an unapproved product discussed above, gross sales reflect only the portion of the contractual price that is probable that a significant reversal in the cumulative amount of revenue recognized will not occur.

(2) The decrease in chargebacks for the three month period ended March 31, 2020, as compared to the same period in 2019 was due to product mix as well as decreases in wholesale acquisition cost of certain products.

(3) The decrease in rebates, administrative fees and other expenses for the three month period ended March 31, 2020, compared to the same period in 2019 was primarily due to lower failure to supply claims, decreases in contract prices and product mix.

(4) The decrease in product returns for the three month periods ended March 31, 2020, as compared to the same period in 2019, was primarily due to the unfavorable outcome on disputed returns claims processed in 2019 that were related 2018 sales.