ACET - NASDAQ

Jody Burfening – Investor Relations Bill Kennally – President and Chief Executive Officer Becky Roof – Interim Chief Financial Officer Walt Kaczmarek – Chief Operating Officer Steve Rogers – Chief Legal Officer

Matt Hewitt – Craig-Hallum Capital Group Dewey Steadman – Canaccord David Wright – Henry Investment Trust Lenny Dunn – Mutual Trust of America Steve Schwartz – First Analysis Elliot Wilbur – Raymond James Lester Petruzzi – Private Investor

Good morning, and welcome to the ACETO Third Quarter Fiscal 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jody Burfening. Please go ahead.

Thank you, Amy, and good morning, everyone, and welcome to ACETO Corporation's third quarter fiscal 2018 conference call. With me today and providing comments on this call are Bill Kennally, President and CEO; and Becky Roof, Interim Chief Financial Officer. Walt Kaczmarek, ACETO's Chief Operating Officer; Frances Scally, Senior Vice President and Chief Accounting Officer; and Steve Rogers, Chief Legal Officer, are also with us today to participate in the Q&A session. The company issued its third quarter earnings press release yesterday after the market close. For those of you who have not yet seen the release, a copy is available in the Investor Relations section of the Company's website at www.aceto.com. Before starting the call, I'd like to remind you that today's call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, that can be identified by words such as believes, expects, anticipates, plans, projects, seeks and similar expressions that involve numerous risks and uncertainties. The Company's actual results could differ materially from those anticipated or implied by these forward-looking statements as a result of certain factors that are set forth in the Company's filings with the Securities and Exchange Commission and the factors outlined in the fiscal 2018 third quarter earnings press release. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise. Also on today's call, management will be referring to certain non-GAAP financial measures. These measures, ACETO's adjusted net income and ACETO's adjusted earnings per share, are defined as net income excluding amortization and impairment of goodwill and other identifiable intangible assets, separation costs, amortization of debt discounts, debt issuance costs and deferred financing costs, transaction costs related to acquisitions and the impact of the Tax Cuts and Jobs Act and the impact of Accounting Standards Update 2016-09. These non-GAAP measures allow investors and management to compare results of operations in the current period to prior period results based on the Company's fundamental performance and analyze operating trends of the business. Finally, before turning the call over to Bill, I'd like to remind everyone that the purpose of today's call is to review and discuss ACETO's financial and operating -- operational performance and results for the third quarter. As you are likely aware, the board has initiated a strategic alternative review process with the assistance of its financial and legal advisers, PJT Partners and Lowenstein Sandler, respectively. The board has indicated that we'll not comment on the process unless and until it has approved the transaction or otherwise determined that further disclosure is appropriate or required by law. Therefore, it would be inappropriate for management to comment on or respond to questions about the process while it is underway. We appreciate your understanding and patience. With those housekeeping items out of the way, I would now like to turn the call over to Bill. Good morning, Bill.

Thank you, Jody. Good morning, everyone. Since the second quarter call, I think it's an understatement to say that we've run into a number of difficulties. We've continued to deal with intense price erosion on Rising's mature products, new entrants into our markets and softer average selling prices on newly launched products, that's making it harder for us to overcome the obstacles we are facing. We were notified by the VA that we're not in compliance with the country-of-origin provisions contained in some of our supply contracts with this government agency. We disagree with their conclusion and have taken steps to appeal this outcome. And in connection with the supply chain challenges we've previously identified, we received notification of failure-to-supply penalties this quarter of $10.1 million. Because of these factors, we failed to meet our financial covenants for the third quarter. We also recorded pretax non-cash asset impairment charges totaling $256 million related to Rising. Despite these challenges, when I look at the business, I see a company that's generated $56 million in operating cash flow for the first nine months, more than covering the $39 million we've repaid in bank loans. And I want to point out that we paid down $29 million against our revolver loan in the first quarter, which we were not required to do. We ended the quarter with $65.1 million of available cash. I also see reliable, stable cash-generating businesses in our Pharmaceutical Ingredients and Performance Chemicals segments as well as in our nutritionals business unit. I see colleagues in all our businesses that are dedicated to delivering superior service to their customers and partners. In our core business, Rising Pharmaceuticals continues to be batted about by generic industry headwinds, and at the same time, our colleagues have worked hard in solving some important operational issues. We will get through this because the CEO has the right corporate management team in place and the right leadership team at Rising, with the fortitude and experience to navigate through the turbulent waters we have encountered, and because we're making the right portfolio decisions to improve the business' profitability over time, laying in more complex, higher-value opportunities. Finally, we're working collaboratively with our lenders to strengthen the balance sheet and have obtained a waiver on the financial covenants, which Becky will address in a few minutes. So let's take a look at the performance in each of our reporting segments. In Human Health, the declines in sales and gross profits reflect the challenges at Rising, including the $10.1 million in failure-to-supply penalties. Our nutritionals business turned in another quarter of stable results. While Rising financial results are challenged, operationally, we continue to execute on our plans. Since the second quarter, we have launched 8 products, bringing the total number of products launched this fiscal year to 15. In terms of our pipeline, we currently have 106 products versus 109 products as reported on the second quarter call. The difference between these two data points reflects the eight products launched and the addition of 5 new products in the pipeline. We currently have 37 ANDAs on file compared to 36 last quarter. We added two ANDAs to the filed status and moved one ANDA back into development. Of the eight products launched, six had been approved previously, and two additional ones were approved during the quarter. ANDAs under development increased to 54 from 52 in the prior period as we added three new products, moved two products up to filed status and returned one product from filed status. We also advanced two critical operational initiatives, installing a new unified ERP system and setting up a larger warehouse facility for Rising. I'm pleased to report that we are close to flipping the last switch on the ERP system, which means we're on track to achieve our objectives of having the system fully functional by the end of the fiscal year, including the critical point of sales -- critical point-of-sale gross-to--net application. The warehouse expansion is taking slightly longer to complete due to a decision we took to phase in our inventory, and we should be fully operational by fall of this year. At that point, we can start to realize the previously discussed $4 million in annualized savings from the acquisition of Citron and Lucid products. With respect to the supply chain challenges we've been talking about and the failure-to-supply penalties incurred this quarter, Walt and I, along with our supply chain team, traveled to meet with our key partners during the quarter to address the supply issues. Over the last few months, we've made significant progress at improving our overall inventory position. For example, with one key supplier in India that supplies most of our volume, a 50% improvement in terms of our inventory help has been realized, and we expect to improve that to 75% with the inventory rebuild by the end of May. This inventory improvement positively impacts our customer service levels, which in turn lowers our failure-to-supply exposure going forward. And I'm confident that the trajectory of these improvements in our supply position over the past quarter will continue, and we remain focused on our objective to deliver all our products on time to maximize the value of our portfolio. Turning to Pharmaceutical Ingredients. We posted stable revenue, gross profits and gross margin compared to the third quarter of last year. As expected, our API business rebounded from a soft second quarter, reflecting strength in our international business, most notably from our Hamburg location that was partially offset by continued softness in the U.S. market. In Performance Chemicals, we have one of our strongest quarters ever, with sales of more than $50 million and gross profits of more than $11 million. And while our ag protection business posted solid results in what's typically a seasonally strong period, our spec chemicals business put up some great numbers this quarter on stronger sales and excellent gross margin management. This segment also had quite a substantial boost relative to the second quarter when our ag protection product business encountered greater competition on one product where we previously had exclusivity. This quarter, ag is back to dealing with the normal puts and takes of its business. And while this market is always competitive, our strategy of focusing on niche products that are tough to source continue to bring value to this business. And as we enter the final quarter of our fiscal year, we remain focused on executing our game plan. I spent a good deal of my time this quarter visiting with customers across all businesses as well as partners that we rely on to grow on our business. We are focused on delivering to their expectations, and I'm confident that we either are or soon will be meeting critical endpoints we agree are necessary to good business partnerships. At Rising, we have launched 15 products thus far this year. And we have a number of product launches planned for the fourth quarter, keeping in line our 15 to 20 product launch commitment previously communicated. We remain on track to spend about $9 million in R&D and milestone payments related to developing pipeline products. We're also continuing to work on developing long-term plans to achieve our goals of balancing our asset-light business model with more ownership of intellectual property, which in turn will enhance the company's profitability. And now I'd like to turn the call over to Becky Roof, our new CFO, to provide a more detailed review of the third quarter financial results. Becky?

Thank you, Bill, and good morning, everyone. I'll start with a review of our consolidated results. For Q3, consolidated net sales were $186 million, a decrease of 2.2% from the $190.1 million reported in the third quarter of fiscal 2017. Gross profit was $27.7 million, a decrease of 34.6% compared to $42.3 million in the third quarter of fiscal 2017. Gross margin for the third quarter was 14.9% compared to 22.3% in the prior year period. On a reporting segment basis, Human Health segment sales were $91.9 million, a decrease of $7.9 million or 7.9% from the third quarter of fiscal 2017. In addition, Rising incurred approximately $10.1 million in failure-to-supply charges related to product supply from Citron and Lucid. Gross profit decreased to $9.5 million from $25.3 million last year. Human Health gross margin was 10.4% compared to 25.3%. The declines in gross profit and gross margin reflect an unfavorable product mix on certain Rising products, continued pricing pressure, intense competition and related consolidation of customers and the failure-to-supply charges. Pharmaceutical Ingredients segment sales were $43.2 million compared to $43.8 million for the third quarter of 2017, reflecting lower domestic sales of intermediates, partially offset by higher sales of APIs. Gross profit in the third quarter was $7 million compared to $7.3 million for the third quarter of 2017, largely in line with the sales decline. Gross margin was 16.3% compared to 16.6% last year. Performance Chemicals segment sales increased 9.4% to $50.9 million from $46.5 million in the third quarter of 2017 on higher sales of both specialty chemicals and agricultural protection products. Gross profit rose 13.9% to $11.1 million from $9.8 million in the prior year's sales period. Gross margin was 21.9% compared to 21% last year, with the rise largely due to more favorable product mix of specialty chemicals. SG&A expenses in our third quarter of fiscal 2018 increased 5.7% to $28 million from $26.5 million from the prior year's period. Included in the variance between the two periods is the $2.5 million increase in legal fees and a $1.8 million increase in payroll and related fringe benefits, offset somewhat by $2.5 million decline in the contingent consideration liability related to the acquisition of certain Citron assets. In connection with the strategic alternatives review process recently initiated by our board, we expect professional fees will be higher in the fourth quarter than in the third quarter. R&D expenses, which represent investments in our generic pharmaceutical product pipeline and are milestone based, decreased slightly to $2.5 million from $2.6 million in the prior year's period. During the quarter, owing to the prolonged adverse conditions in the generics market along with the Company's contract issues with the VA, management decided it was necessary to perform an interim goodwill impairment analysis at March 31, 2018. As a result, we recorded pretax non-cash impairment charges totaling $256.3 million, consisting of a $235.1 million goodwill impairment charge and impairment charges of other identifiable intangible assets totaling $21.2 million. Including these asset impairment charges, we reported an operating loss of $259.1 million for our third quarter of 2018 versus operating income of $13.2 million last year. The net loss in the third quarter was $196.6 million or $5.57 per share compared to net income of $5.6 million or $0.16 per share for the third quarter of last year. Non-GAAP net income was $0.2 million or $0.01 per share for the third quarter compared to $13.6 million or $0.39 per share last year. Turning to the balance sheet. As of March 31, 2017, cash, cash equivalents and short-term investments totaled $65.1 million. Working capital, excluding the current portion of long-term debt, was $243.2 million. Trade receivables were $260.2 million, essentially unchanged versus $260.9 million as of June 30, 2017. Our DSOs, or days sales outstanding, were 78 days for the third quarter, down from 99 days as of June 30 and versus 72 days as of December 31. Our DSOs at Rising as of March 31 were 76 days versus 82 days as of December 31, 2017. Inventory was $141.7 million, up $5.3 million from June 30, primarily reflecting the buildup of agricultural protection product inventory related to anticipated shipments in our fourth quarter. Our total debt stood at $319 million as of March 31, including $191 million under our senior credit facility. In accordance with applicable accounting rules and standards, the company classified all indebtedness outstanding under its credit facility as a current liability as of March 31, 2018. As of March 31, 2018, we were not in compliance with the maximum total net leverage ratio and the minimum debt service coverage ratio financial covenants. We have obtained a waiver from our lender for these covenants for the quarter ended March 31, 2018. We're including robust language about the waiver in our 10-Q, which we are filing with the SEC in the next few days. Also included in long-term liabilities is a $50 million unsecured deferred cash payment owed to the sellers of the Citron and Lucid products ACETO acquired in December 2016. Payment is due on December 21, 2021. Finally, the company continues to be a steady generator of cash. And in the third quarter, we generated $9.5 million in cash from operations, giving us ample resources to meet our obligations. For the first nine months of fiscal 2018, we have generated $56.4 million in operating cash flow and $50 million in free cash flow, which we define as operating cash flow less cash used in investing activities. During this same period, we have repaid $39.4 million of bank loans, including $20 million in prepayments. While the board has directed us to suspend guidance for at least the balance of fiscal 2018, we are comfortable we will continue to generate steady operating cash flow as we finalize our budget and operating plans for fiscal 2019. I would now like to turn this over to the operator for questions. Amy?

Thank you. [Operator Instructions] The first question is from Matt Hewitt at Craig-Hallum Capital Group.

Good morning. Thanks for providing the update and for taking their questions.

Good morning, Matt.

A few from me. First off, the -- on the failure-to-deliver penalty, maybe let's start it there. Was that a function of some price increases that you didn't match? Or is that all on the manufacturing side.

It's all on the manufacturing side.

Okay. And then as part of the transaction with Lucid/Citron to acquire those product portfolios, at the time, it was explained that this was going to strengthen the relationship on the manufacturing side and, as a result, would allow ACETO to have a better control over the supply. And it appears that's not the case. Is -- did something go astray over the past quarter? Or maybe a little bit more detail on what's going on with the manufacturing side.

Yes, sure, Matt. So I think previously, we have alluded to, and I mentioned on this call, that we've had some operational issues at our end. And candidly, we kind of rebuilt the entire supply chain team from what was first realized in the acquisition. So I think that was part and parcel of the problem. We've also run into some potential capacity challenges with our partners. And as a result of those two things, along with the customers that have really significantly tightened the reins on the failure-to-supply penalties, kind of results in what we've seen that began to really materialize in the -- probably the second quarter of this year, resulting in the failure-to-supply penalties that came later, which we continue to expect to see in the fourth quarter.

Okay. Can I dig in a little bit further? On the generic side, as you look at the portfolio, and it sounds like you've done some optimization there, but as you look at that portfolio of products that are currently in the market, especially ones where you've seen new competition enter, have you either already started to maybe discontinue some products? Or are you contemplating that to just help a little bit on the margin pressure?

Yes. So we're continually looking at our product portfolio for rationalization products. I mean, if it makes sense for us to rationalize it out, we're going do that. But we've also added additional product back into the queue when those market dynamics has changed and well. So there's puts and takes on both sides.

Okay, that's good. And given the VA decision, is there anything that ACETO can do to claw back some of the purchase price? Or how can you deal with that situation? That was -- that sounds like it's a new issue and maybe something where it should have been known in advance, but help me understand what you can do maybe on the VA side.

Sure, Matt. So look, it's kind of a complicated situation, but I'll try to kind of summarize it. In essence, what's happened is that the VA has declared that our products are non-TAA compliant. And this is the result of a border decision that was -- that they're relying on. And a good analogy there is -- and to tell you how ludicrous we feel the decision is, if you take coffee beans, and this is an actual example, if you take coffee beans from a non-TAA-compliant country and then roast the coffee here in the United States, that's considered to be transformational and thus far -- and thus allowed. However, if you have API sourced in India and then you transform that to finished products in the United States, that is not considered to be transformational. So that's the first issue that we're dealing with, and we really have -- well, first of all, we have appealed the decision to two courts. And although that process is lengthy, what we feel the next steps will probably be will that the VA will look at the competitive environment on the products that we had contracted with them on, and they will be looking for TAA-compliant substitutes. In many cases, we don't feel that there are TAA-compliant products based on their definition. So there'll be a rebid, and we'll have an opportunity under an exclusion criteria to rebid the products. However, that's no guarantee that we will secure the business. So this wasn't indeed a surprise to us. If there are clawback provisions that we can recover, we certainly will take a look down that path. But as of right now, we have taken out those sales and gross profits from our forward forecast.

Okay. Thank you very much for that detail. Maybe one more question, and I'll hop back in the queue. On the API side, you mentioned strength internationally, whereas the domestic market, it sounds like it's still soft. What's the key difference there between those two markets? And maybe what are some things that you could execute domestically to help improve the business here? Thank you.

Yes. Hi Matt, I think the difference on the U.S. market is, as we explained last quarter, we had a couple of products that the manufacturer has discontinued the product. Therefore, we aren't able to supply the API. As it relates to the strong showing this quarter out of our international team, particularly Hamburg and also our Singapore office, some of it is timing, and some of it is just orders that have popped. So it's just the general puts and takes of the business. As the team continues to get entrenched and move their strategies forward, they're just developing a good solid base of business. So the U.S. is -- the U.S. particular business was subject to the effects that we discussed last quarter.

Understood. All right, thank you very much.

Thanks, Matt.

The next question is from Dewey Steadman at Canaccord.

Hi, good morning. Following up on the VA question, is there any way you can frame the impact of that to us in terms of number of products and sort of a broad range of revenue?

I think so we have 11 – I think we have 21 contracts, Dewey, with the government. 11 of them are with the VA specifically, and then two of those involve products that have met the exclusion criteria. So we’ll maintain those two contracts going forward. We also have contracts with the DLA, which is the Defense Logistics Agency, in Philadelphia. And we anticipate that they will follow the VA initiative to discontinue our contracts. But at this point in time, that has not happened yet. And we have – I’d say the gross margins on the business is on the lower side. It’s about 10% of revenue. And the revenue is, I don’t know, 15% of Rising’s total revenue, give or take.

Okay, thanks. And then a similar question for the failure to supply product. Was it just one product or a limited basket of products? Or is it sort of wide-ranging in terms of the number of products that were involved in it?

Yes. We had a number of products that were impacted, and we’ve been focusing on the top five products to recover.

And do you have any remedies in place with your suppliers? Is it an issue that was sort of their fault? Or is it your supply chain team that you’ve now bolstered that was responsible for the failure to supply?

Well, as I mentioned earlier, Dewey, I think it’s probably a combination of factors that kind of contributed to it. What I can say is that we have rebuilt our entire supply chain team, put in a sales and S&OP process that I think is inclusive of all the necessary stakeholders. And the remediation plan that we have actually has demonstrated great progress in our overall ability to get supply from our partners. And we plan to expand what we’ve done in a couple of situations across our partner category, so that we can have state-of-the-art S&OP process that’ll help us to ensure that we can stay ahead of the curve as it comes to future failure to supplies.

Okay. And then on the agricultural business, obviously, fiscal 4Q is a big quarter for that business. Has the weather impacted distribution out of that business? And if so, can that be made up in the last half of the quarter?

So Dewey, this is Walt. Say your question again, please.

So for the ag business, fiscal 4Q is obviously a very big quarter for that business as plantings occur and things like that. Has the cold weather and potentially delayed plantings affected that business in any way? And can it be made up if it has been affected?

Yes. The business is performing – rebounding pretty nicely. We did have some opportunities where one of our competitors is having an issue supplying product, so we’re going to be able to capitalize on that. But overall, the weather is helping a little bit. We never liked to wish for biblical type of weather events, but to a certain extent, it helps us. So it’s been helping a little bit.

Okay. And then on the covenants and such, can you walk through what those covenants are and where they’ve been in terms of the waivers? Do you have to get a waiver each quarter? And is that something that we’ll know about in advance?

Well, as I mentioned, there’ll be a very detailed explanation of the waiver and the terms in our 10-Q. And the waiver is for the quarter ending March 31, 2018.

And so if you’re not able to meet those covenants in the fiscal fourth quarter or any other quarter, you’ll have to get those waivers in place again?

As I mentioned, we are in discussions with our lending group as to what a longer-term solution in strengthening our balance sheet might be. And we’ll keep everyone apprised as those discussions develop.

All right, great. Thanks for answering the question.

Thanks, Dewey.

The next question is from David Wright, Henry Investment Trust.

Good morning. Two questions. Do you anticipate any failure-to-supply penalties in the fourth quarter?

Hi, David. Thanks for the question. Nice to talk with you. Yes, we do anticipate continued failure-to-supply, and we have forecasted that in our numbers. However, we do believe that we are at the tail end of this situation. So yes, in answer to your question, we do anticipate to get some failure-to-supply in the fourth quarter. Keep in mind that our failure-to-supply penalties that we get from customers is based on past performance, so they run about a quarter behind.

And just a subquestion to my first question then. How is that actually – how is the penalty assessed? Do they withhold from you? Or how does it flow through?

Yes. So a couple of ways. First of all, if they can’t get our product, they’ll purchase another product that generally are higher priced, and then they’ll assess us the penalty on that. So we get a statement from them on – periodically when the supply challenges occur that they, in fact, have incurred, and then we get billed for that.

So the – it’s – the whole $10.1 million is in the third quarter, and it’s falling around somewhere on the balance sheet?

Yes.

Okay. And then the second question, the contingent consideration to the sellers of the Rising assets, what portion of that is at risk for, I’ll call it clawback based on subsequent performance of the products?

Yes. So are you referring to the deferred payment, David?

Yes.

Yes. So that’s…

Is all of it at risk or – potentially all of it at risk or just some of it?

David, I apologize. It’s Becky, and I am here only in my second week. And so I have not read the terms of that note closely enough to give you a definitive answer. It’s recorded as $50 million in the long-term liability section of our balance sheet. And then there also was a contingent amount based on a limited number of products that were purchased from Citron, and we actually reduced in this quarter the amount of payment due under that contingent consideration. It’s been reduced to $2,000,505.

All right, okay. So there is some mechanism, and just we have – just have to check the documents to see the extent to which the mechanism allows a reduction in the consideration?

That’s correct.

Okay. Thanks for taking my questions. Good luck.

Thanks, David.

The next question is from Lenny Dunn at Mutual Trust of America.

Good morning. Obviously, this is new management, and obviously, old management didn’t just drop a ball. It dropped a number of balls, and that’s why you’re there. But I always try to look at things as where are we and where we’re going to go. And clearly, the future could be very good if the balls aren’t ever dropped again. And it looks like you’re putting in place the right kind of, I would guess, guards to make sure that you don’t do this again. But can you give me some comfort level that we don’t need to worry going forward because really, where we are now, the stock looks tremendously undervalued. But there’s a discount here because people are obviously concerned that you could drop the ball again. So I guess I’m just looking for a little comfort level here.

Yes, sure, Lenny. And look, I appreciate the question, and nice to talk with you as well. I think there’s two things going on here. First of all, we have spent a lot of effort to build the team at the Rising business. And I’d focus primarily on Rising because it is the strategic intention of the company to move in this direction. It is the majority of our revenue and gross profit. The other two business segments have been pretty reliable in the past and fairly predictable. The Rising business leadership team and below have been essentially rebuilt. So we believe that we have learned from the past and have put some metrics in and leaders in place to avoid this from happening in the future. There’s never any guarantees, however. And the company, as you know, as we recorded in the press release, is into a strategic initiative as a result of some of the past problems that we’ve had that are bleeding into this fiscal year. So unfortunately, I can’t comment on that any further, and there’s never any guarantees that we won’t duplicate mistakes, but – from the past. However, I’m very confident in the team and what we’ve been able to accomplish despite the headwinds that we have faced in the generic business. So I hope that helps to address your question.

It does some. I guess the second part of my question would be the strategic alternatives. Clearly, the legacy ACETO business – and by the way, I was an ACETO shareholder or my clients were going back 50 years. And we did get out when it quadrupled in value from where we were in val. But as – and then we got back in again with the recent disaster. But I just – I’m not sure what the best directions are for ACETO. The legacy business is a safe cash-generating business that has been run well for decades. And the Rising is – got a lot of sizzle to it and potential and margins and growth. But I mean, it almost blew up the company. And again, I think everything should be looked at as to what’s the best pieces to keep and what’s the best pieces to maintain. But we certainly don’t – we can’t afford another mistake.

So Lenny, thanks for your comments, and thanks for your support as a shareholder. And we agree with you, and that’s why the board has taken the decision to go into strategic initiatives to decide what the best outcome is for the company going forward. And when we can make notification around that, we certainly will do so.

Okay. No, I understand. And I would not expect nor would I want you to make some kind of shoot-from-the-hip decision. I want it to be deliberate and thought out and in the long- term interest of everybody.

Thanks. I can assure you that, that will, in fact, be the case.

Okay. And now do you expect, other than the Q, which will obviously give us a little more information, to be able to keep us apprised in different ways as to what’s going on? Or will it just be an all-in-one release when you’ve made all your decisions? Or would we have to wait three months to see? Or I guess I’m just asking you, can we expect some more announcements other than the Q in the relative short-term?

Yes. I think outside the Q, that’ll be probably about it until we’re further along in the process and prepared to make some comments publicly.

Okay. And is the bank negotiation at a stage where it’s possible that you might be able to get more permanent waiver on the situation prior to the end of the June quarter?

It’s way too early to tell that.

Okay, okay. Well, I guess you’ve answered my questions, and I guess a lot of it is, as you say, stay tuned. But we’d like to be a little less nervous near term if possible. Thank you.

Thank you, Lenny.

The next question is from Steve Schwartz at First Analysis.

Good morning everybody.

Hi, Steve.

Bill, I was at CPhI in Philly last week and came across one or two domestic API suppliers who seemed eager to try to help you with your VA problem. Is there an option there? And if so, is it something you can give us any kind of progress report on?

Well, as I indicated earlier, Steve, it’s kind of a tenuous situation. So we have to kind of wait for the exception criteria process to kind of materialize. In some cases, it has with one or two products. And we – the VA was able to find a TAA-compliant product, so we were not able to bid in that situation. We’re always looking for alternatives to secure our business. And to the extent that we can explore that with either the partners that you met with or some other API folks, we’ll do that. However, as you know, that can be a time – that can be time constrained in terms of when we can bring it to the market based on the processes involved. But yes, our API team is definitely taking a look at any ways they can to improve the business, especially in situations like with the VA.

Yes. I think when you announced the problem publicly, your press release stated some March deadlines. And those were in pretty short order in terms of the horizon. Is that in this mix of trying to work things out where you’re able to get some of those dates extended?

Well, they were kind of extended due to just the back-and-forth occurrences that take place in a situation like this. But what their – the deadlines have come and gone, and we’re no longer issuing contracts to the VA for those products.

Okay, Okay. And then just with respect to the failure-to-supply issue, you’d mentioned in an earlier response that those charges are one quarter delayed. So the $10.1 million that you incurred in the third quarter was from a second quarter penalty? Do I understand that correctly?

Yes. Look, it kind of lapses and wanes. So when I use a quarter as an example, don’t hold me to the full 90 days. It’s just the delayed response from things that have happened in the past. So I can’t really tell you if everything was just from the second quarter or if some led into the first part of the third quarter. I think the key is that it’s just – it occurs in the past, and then they reconcile and then bill us for it at a period of time in the future.

Okay. I guess it’s my way of, I think, getting at maybe the question that was asked by some others, which is to say, if it’s winding down in the fourth, and that reflects the third quarter that’s past, then we can comfortably say that as of today, presuming you’re not going to see anything in the first quarter of fiscal 2019, that, that situation is officially resolved. If you understand kind of what I’m trying to confirm with you.

I do, I do, Steve. And look, it’s difficult to give you a yes or a no on that. So first of all, there’s quality issues, there’s API issues that may lead – there’s product recall issues that may lead to failure-to-supply. So there are a number of factors that can impact that. And unfortunately for us, we’ve actually experienced all of those. What we do believe is that we haven’t completely fixed the supply issues with some of our key partners, but we’ve made great strides. So we do think that we will have them going forward, but it won’t be of the magnitude that we’ve had them in the third quarter and in the past.

Got it, okay. Well, thank you for taking the question, Bill.

Yes, you’re welcome, Steve.

The next question is from Dewey Steadman at Canaccord.

Hey, thanks for the follow-up. I just wanted to focus on the bigger picture and the pipeline in the Human Health business. And I know that there’s 15 products approved, pending launch, 37 ANDAs filed. How should we look at launch flow for the fiscal fourth quarter and then into the first few quarters of fiscal 2019?

Sure, Dewey. Nice to have you back again. So I think you’ve heard me use the baseball analogy in the past, and the products that we plan to launch in the fourth quarter are probably in the singles area. We’re reviewing our budget for fiscal 2019 as we speak, and we’ll be able to be – we’ll be prepared to kind of make some announcements on what our launch plans are for 2019.

All right, great. Thanks, appreciate it.

You’re welcome.

The next question comes from Elliot Wilbur from Raymond James.

Hey, thanks. Good morning, Bill. Just quick question for you, going back to some of the commentary around the failure-to-supply contingencies in some of your contracts. How – just in general terms, how do those work in terms of any sort of capture or limitations to them? And thinking specifically about a situation where there may be a limited supply of a product on the market, you may see a dramatic increase in price. I mean, is the company theoretically on the hook for customers’ increased costs in going out and securing whatever supply they need? Or is there any sort of protection that you don’t have necessarily sort of an open-ended liability there.

Yes. Hi, Elliot. I’ll tackle that question. So generally, within the construct of most of our customer agreements, we have provisions that they give us a forecast of estimated supply. And if it goes above a specific – what we feel is a specific reasonable increase over what they have asked us for, then there is no liability. So it’s not open ended in that respect. If say, a competitor in the marketplace all of a sudden falls out, and they’re asking us to fill 100% of that volume, and we can’t, and they hit us for failure to supply, that is not a scenario that would occur. So as far as the mechanics of how it actually works, so I think Bill alluded to it earlier. What will happen is if we go completely dry out of the wholesaler’s supply chain and the wholesaler has to substitute a competitive product for our product, if that product is on contract, it’ll be a small difference. If there’s not a product on contract, it’ll be at the maximum, which would be the generic WAC price. So that is basically how the mechanics of it works.

Okay. So if – I guess what I’m getting at is in theory, whether – if you were to have short supply, I mean, you could be liable for a difference if there was a significant increase in WAC?

Short supply if the – I’m not correlating the question on WAC – high WAC.

If you’re unable to supply actual product and there’s a price increase on the part of competitors, I’m trying to figure out sort of what that – if that liability – if that portion of the potential liability is open ended or if there’s some sort of some capital limitation.

There – this is Steve Rogers. There – each contract is different and subject to negotiation. For the most part, we, as you can imagine, try to put in as many type of caps and restrictions as possible. For example, that there may have to be a generic alternate. It could be limited in terms of time where we say a 30 or 60-day supply. But that is a function of the market and getting the contract initially. And we negotiate it as best as possible, but the terms very much vary.

Okay. And just maybe a quick financial question for Becky. If you happen to have the depreciation and amortization figures for the quarter, can we get those?

I’m looking.

Yes. So while they are looking, I’m just going to take a stab at a question that was answered earlier on the $50 million note. So that note is guaranteed, and the reduction was – the reduction in the earnout also has a maximum payout of $50 million, but we don’t anticipate that’ll get to that level. So I hope that addresses the earlier question on that issue.

And we’re looking for the depreciation number for you.

Yes. Elliot, I think in the spirit of time, we’ll – how about if we get back to you specifically on that? Is that all right?

Yes, appreciate it. Thank you.

Okay, you’re welcome.

Our next question is from Lester Petruzzi at Private Investor.

Good morning. A specific question if you would. Based on statements in the recent and the prior press release over a couple of weeks ago, where it was disclosed the board’s decision to hire PJT consultancy, which you’ve discussed today, to assist you to explore strategic options. And in the interim, I would imagine, as a long-term shareholder following the story and the value that’s been created, I would imagine you’ve received many inquiries. My question is a binary one. Have you received any indications of the value from any interested parties for our company? Thank you.

Yes. Hi, Lester. Thanks for your question, and nice to talk with you as well. Unfortunately, I can’t really address that question for reasons that I hope are obvious to you and the audience. So I appreciate it, but I just can’t comment on that at this point in time.

Thank you.

This concludes the question-and-answer session. And I would like to turn the conference back over to Bill Kennally for our closing remarks.

Okay. So Elliot, before I make some closing comments, the depreciation, I’ve learned, is about $8 million per quarter. And if you require additional information on that, please tag me with an e-mail, and we’ll get the specific answers back to you. So I hope that helps there. And look, before I close the call, I wanted to kind of leave all of you with the following points. First, the company is generating a significant amount of cash. We’re working hard to stabilize our Rising business, and our Performance Chemicals and Pharmaceutical Ingredients business continues to deliver reliable cash flow. Second, we’re navigating through a very challenging period. And I wanted to say thank you to the colleagues at ACETO for your commitment and trust, and I appreciate your support. Third, I want all our customers, partners, creditors and shareholders to know that we’re doing everything we can to deliver value to all of our stakeholders. And last, this leadership team is seasoned and is poised to lead us through these challenges. Becky has had an immediate impact, has great respect from the banks, and we feel extremely fortunate to have her with us navigating our financial path forward. Walt and I accept the operational challenges the business faces, and I’m highly confident that the three of us will lead the company to the best path forward. I would like to thank you for joining us today. We appreciate your questions, comments and support and look forward to speaking with you in late August on our fourth quarter fiscal 2018 conference call. And I hope you all have a great weekend. Take care.