ACET - NASDAQ

Jody Burfening - Investor Relations Bill Kennally - President and Chief Executive Officer Becky Roof - Chief Financial Officer Frances Scally - Senior Vice President and Chief Accounting Officer Steven Siesser - Chief Legal Officer

Matt Hewitt - Craig-Hallum Capital Group Timothy Stabosz - Private Investor Bruce Berger - Private Investor Rich Thomson - VaRde Doug O’Bannon - Private Investor Oliver Butt - JPMorgan

Good morning, ladies and gentlemen and welcome to the ACETO Corporation First Quarter Fiscal 2019 Financial Results Conference Call. [Operator Instructions] Please note that this event is being recorded. At this time, I would like to turn the conference over to Jody Burfening. Please go ahead, ma’am.

Thank you, Denise and good morning everyone and welcome to ACETO Corporation’s first quarter fiscal 2019 earnings conference call. With me today and providing comments on this call are Bill Kennally, President and CEO and Becky Roof, Chief Financial Officer. Also with us to participate in the Q&A session are Frances Scally, Senior Vice President and Chief Accounting Officer; and Steven Siesser from Legal, who is filling in for Steve Rogers, the company’s Chief Legal Officer, who is unavailable due to a personal matter. The company issued its first quarter earnings press release yesterday after the market closed. 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 would 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 believe, expect, anticipate, plan, 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 2019 first quarter earnings press release. The company undertakes no obligation to publicly update or revise any forward-looking statements whether new information, future events or otherwise. As a reminder, last April, the Board 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 it will not comment on the process until and unless it has approved the transaction otherwise determined as further disclosure as appropriate or required by law. Therefore, it would be inappropriate for management to comment on or respond to questions about the process while it’s underway. Again, 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 and good morning everyone and thank you for joining us today for our first quarter earnings call. Our first quarter performance has given us a good start to the new fiscal year, having laid the foundation in fiscal 2018 for a reset and return to profitability in the future at Rising and owing to the durable strengths of our regulatory and sourcing capabilities in our Pharmaceutical Ingredients and Performance Chemicals segments. Pharmaceutical Ingredients and Performance Chemicals segments posted year-over-year growth in sales, gross profit and gross margin and continue to provide steady cash contributions to the company, while our Human Health segment saw a year-over-year declines in those financial measures for the quarter as Rising continued to weather the generic industry headwinds. Taking a closer look at the performance in each of our reporting segments and starting with Human Health, our nutritionals business continued to perform well, delivering an 11% increase in sales driven mostly by strong sales contributions from Europe. Rising sales were lower due to the loss of revenue from government entities and because of early decisions to prune the commercialized portfolio. In addition, ongoing average selling price erosion overshadowed a nice increase in volume for the quarter. Revenue and gross profit were also negatively impacted by failure to supply penalties of $6.5 million, a portion of which maybe recoverable on the next fiscal quarter from customers. We talked last quarter about the disciplines and procedures we instituted to improve our supply chain with our customers and partners and increased our inventory safety stock levels. And this quarter, we began to see the benefit of those operational improvements materialize. Failure to supply claims have decreased for the third consecutive quarter and our forward projections represent a healthy supply chain with minimal customer back orders. Our team has worked extremely hard in all areas of the supply chain and I am highly confident we now have this fully under control. Earlier in the year, 20% of our SKUs were on back order. We have since whittled that down to under 4% of our SKUs. And with the portfolio of our size, we do expect to have some level of back orders. However, the present state is a much more holistic snapshot of what we can expect to see in the future barring any unforeseen product challenges beyond today. I am proud of the progress we have made which show an immediate benefit to our top and bottom line in subsequent quarters. Turning to the Rising product portfolio. We continued to optimize our development pipeline focusing our efforts on strong market candidates, well differentiated product selections and high return opportunities. As a reminder, during fiscal 2018, we made this strategic decision to rationalize and cut the number of products in our pipeline down to 87 due to unfavorable market conditions and product development technical challenges. We have since added two products, one which we filed and the other which we plan to launch in our fiscal quarter two. We parked four molecules in our development pipeline due to API and technical challenges and we plan to restart these once those issues are resolved. We added five products back to our ANDA file, pending launch category pipeline due to feedback received from the FDA. Previously, these ANDAs were parked and in a greater than 36-month age category. We launched one recently approved product during the quarter bringing our current pipeline total to 89 molecules. We personally have 37 ANDAs on file and 13 products approved for launch. Since our last call, when we reported 29 ANDAs on file, we have filed an additional 6 molecules and added two products to our launch queue based on favorable feedback from the FDA. These two molecules were also in a greater than 36-month age category. You previously heard me discuss parked products and the ability to bring them back off the shelf. The 7 products I just discussed are good examples of this and we continue to monitor the environment for additional products we might bring back in the future. For fiscal 2019, we still plan to launch 15 to 20 generic products assuming there are some more diversified commercialized portfolio in terms of manufacturing partners and technical complexity. We also still plan to spend just under $8 million in R&D milestone payments for this fiscal year. Turning to Pharmaceutical Ingredients, we generated an 18.1% increase in gross profit on a 6.2% increase in sales, reflecting favorable mix. API sold abroad saw a strong demand and a lift from a new customer launch. Here in the U.S., sales decreased with one customer because of increased competition that created an excess of existing inventory, which we will sell off in our fiscal quarter two. In addition, three product ingredients ran into regulatory issues related to a compliance issue, an import alert notification and a DEA Class 4 reclassification issuance. In our Performance Chemicals segment, our agricultural protection products results were flat compared to last year, reflecting the normal puts and takes of this business. In our Specialty Chemicals business, our colleagues generated a 6.5% increase in gross profit on a 4.8% gain in sales driven primarily by an increase in demand, with one product used in the fuel industry, a new customer award and revenue resulting from a competitor’s supply shortage. I have previously discussed what we believe is a competitive advantage with our sourcing teams in India and China and this quarter’s market intelligence from China’s Blue Sky Protection Campaign is yet another great example that drove positive results for the business. We have successfully implemented plans to protect our business concerning the 10% tariffs that went into effect in September. And to-date, most of our customers are on board with our plans. As I mentioned on last quarter’s call, we are aware that an increase to 25% in tariffs on Chinese imports if enacted could give us some exposure. To be prepared for the possibility that the administration will in fact increase tariffs to 25% on January 1, we have conducted a rigorous analysis of the likely impact on our product portfolio customer by customers. Rebecca will take you through the details of this analysis. In summary, our Pharmaceutical Ingredients and Performance Chemicals has continued to demonstrate consistent and dependable value with customers and are relationship development allows them to focus on higher margin, lower volume products to maximize value. And with that, I will turn the call over to Becky Roof, our CFO, to provide more detailed review of the financial results for the first quarter. Becky?

Thank you, Bill and good morning everyone. I will start with the review of our consolidated results for the quarter. Consolidated net sales for the first quarter of fiscal 2018 were $164.4 million, a decrease of 11.3% from $185.3 million reported for the first quarter of fiscal 2017. Gross profit was $25.5 million compared to $40.0 million for the first quarter of fiscal 2018 and gross margin was 15.5% compared to 21.6% in the prior year period. On a reporting segment basis, Human Health segment sales were $80.8 million, a decrease of $25.2 million or 23.7% from the first quarter of fiscal 2018 due to lower sales at Rising that reflect ongoing adverse generic market conditions, delayed product launches and approximately $6.5 million in failure to supply charges. Partially offsetting this sales decline was a $1.2 million increase in nutritional sales. Gross profit was $8.5 million compared to gross profit of $24.6 million last year and gross margin was 10.5% compared to 23.2% last year. The declines in gross profit and gross margin reflect primarily an unfavorable product mix on certain Rising products, continued pricing pressure, intense competition and related consolidation of customers and the failure to supply charges. With respect to the failure to supply penalties, as reported for fiscal year 2018, Rising reported $27.8 million in FTS claims. Approximately $9 million of this amount was re-billed to Rising partners. In fiscal Q1 2019, Rising recorded $6.5 million in FTS claims, with $3 million of this amount re-billed to Rising partners. Rising has continued to go through a review and adjudication process to validate customer FTS claims and has disputed a number of these claims. Depending on the results of negotiations with customers Rising estimates that it could potentially reverse up to $13.3 million of these claims. If this happens, Rising expects to credit back to its Rising partners the amount the partner’s share of FTS claims originally billed to such partner, which typically is in the range of 50%. Pharmaceutical Ingredients segment sales were $38.8 million, an increase of $2.3 million or 6.2% compared to $36.6 million for the first quarter of 2018. The increase consists of $4.3 million increase in sales of APIs sold abroad primarily from our German subsidiaries partially offset by $2.1 million decline in domestic sales of APIs. Gross profit for the quarter was $6.9 million compared to $5.8 million last year, an increase of $1.1 million or 18%. Gross margin was 17.7% compared to 16% for the first quarter last year, reflecting the increase in sales volume of APIs sold abroad. Performance Chemicals segment sales were $44.7 million, an increase of $2 million or 4.8% compared to $42.7 million for the first quarter on higher sales of domestic specialty chemicals, primarily polymer additives and surface coatings. Sales of agricultural protection products were flat with last year. Gross profit for this segment was $10.1 million, an increase of 6.5% compared to $9.5 million for the first quarter of fiscal 2018 largely due to sales growth in domestic specialty chemical products. Gross margin was 22.6% compared to 22.3% for the prior year period. SG&A expenses were $36.9 million, an increase of $5.7 million or 18.5% compared to $31.1 million for the first quarter last year. The $5.7 million variance consists primarily of $8.5 million in fees paid to financial advisors, professional fees, costs for senior staff retention and stabilization of corporate operations and $2.2 million in additional legal fees, that was partially offset by the absence of approximately $5 million of expenses incurred last year related to the separation of our former CEO and an environmental remediation charge. Research and development expenses for the first quarter were $1.9 million compared to $1.6 million for the prior year period. The combination of lower gross profit and higher SG&A expenses resulted in an operating loss of $13.3 million for the first quarter of 2019 versus operating income of $7.2 million last year. Net loss for the first quarter was $21.1 million or $0.59 per share compared to net income of $0.5 million or $0.01 positive per share for the first quarter of last year. Turning to the balance sheet, as of September 30, 2018, cash, cash equivalents and short-term investments totaled $52.5 million. Our total debt stood at $315.4 million as of September 30, including $183.4 million under our senior credit facility. The $183.4 million I just mentioned includes $2.4 million of deferred financing costs. Working capital, including the current portion of long-term debt, was $182.6 million. Trade receivables were $292.4 million, an increase of $45.1 million compared to $247.2 million as of June 30, 2018 due primarily to an increase in Rising sales compared to the fourth quarter of fiscal 2018. Inventory was $156.5 million, an increase of $19.5 million from $137.1 million as of June 30, 2018. Accounts payable was $123.4 million, an increase of $16.6 million compared to $106.8 million as of June 30, 2018, largely due to the timing of payments processed at quarter end. The increase in inventory is largely attributable to increased safety stock levels at Rising, a ramp-up of inventory for our Pharmaceutical Ingredients segment in advance of shipments scheduled for the second and third quarters, and a buildup of inventory in our Performance Chemicals segment in advance of potential increases in Chinese tariffs. Accrued expenses and other liabilities increased $14.4 million, due primarily to a rise in rebates for our Rising business. As Bill mentioned, with respect to the Chinese tariffs, we’ve conducted an analysis of the impact of the tariff to date in fiscal 2019 and what the impact is expected to be if the increase to 25% goes through on January 1. For the first two quarters of fiscal 2019, we expect that the recently imposed tariffs related to goods imported from China will impact our consolidated gross margin in the range of $70,000 to $90,000. If the tariffs increased to 25% on January 1, we expect the impact on our consolidated gross margin to be in the range of $850,000 to $3.7 million for the balance of fiscal 2019. In making these estimates and calculating these ranges, we have made certain assumptions on a product-by-product basis regarding the level that our customers and manufacturers will share in the burden of these tariffs. Turning to our cash flow, for the first quarter of fiscal 2019, we used cash of $46.4 million for operating activities and repaid $3.8 million in bank loans. We believe that our cash, liquid assets and operating cash flows, together with the liquidity that we expect to be generated from our previously announced strategic alternative initiative, which is intended to retire our debt, will provide us with adequate resources to fund our working capital needs for the next 12 months. And I’d now like to turn this over to the operator for questions. Operator?

Thank you. [Operator Instructions] And your first question will be from Matt Hewitt of Craig-Hallum Capital Group. Please go ahead.

Good morning and thank you for taking my questions.

Hi, Matt.

Hi. First up, on the Nutritionals, obviously a fantastic performance there and you mentioned I think it was primarily in Europe, what’s driving that performance and how do you see that as being – is that sustainable? How long do you think it can last? And is there an opportunity beyond Europe for that business?

Well, so thanks for the question, Matt. And yes, it’s being driven by a number of products, but in particular, we have taken some pricing there and we have generated some new business. So I think it will carry over. It’s been a good performer within the nutritional business. So, I fully expect good things to continue from the European operation.

That’s great. And then shifting to the pipeline, thank you for all of the details that you are providing on your Rising pipeline. I have a couple of questions there. First of all, when you are talking about bringing products back, are these ANDAs or are these products that have previously been approved that you had discontinued and now bringing back or are these products that had been in your pipeline, you maybe had submitted the ANDA, but then had held off on responses or maybe even hadn’t submitted the ANDAs yet, just maybe if you could delineate between those buckets? And more importantly, I guess for me, what is the process to bring those back online as you say?

So it’s a little bit of both of those, Matt. We have products that are in both of those categories, but in a number of situations, as you know from the investor presentation that’s online, we have aged our ANDA filings and some of the aged filings, we just kind of parked indefinitely based on market conditions and/or potential technical challenges that we might have foreseen from the partners. But the FDA in an effort to catch up on their backlog just happen to ping us in a number of product categories that were in the greater than 36-month bucket. So, we have either moved them into a filed status or in potential launch status depending on where they are in the queue. So, that’s essentially what happened there. We have had situations also where we have parked products that have been launched and we have strategically made a decision to take some of those products out in fiscal 2019, but they are ready to go back in the event that there is opportunities and we see puts and takes relative to these product opportunities frequently in this market.

And when you – so a product that’s previously been approved that you essentially parked, what is the process to bring that back, do you need to provide new stability batches or what is that process?

No. So I can think of three products that we discontinued with a partner just based on the market volatility and the profitability of the products. As long as we keep the registrations alive we can re-up, if you will, so pulling the product off the market doesn’t necessarily mean we can’t get back in.

Got it, okay. I just wasn’t sure if there was – if that maybe difficult as far as creating stability batches and there was a length of time that was required to get back in, but thank you for that.

Yes. So Matt, just to follow up, only if there are no stability issues related to the reason for the discontinuation, if there are quality issues that impacted the discontinuation, then obviously we would have to solve for that in order to bring the products back in.

Yes, got it. Yes. And it doesn’t sound like that’s the case. This is purely a financial decision, so okay, understood. And then a question regarding the failure to deliver penalties, you had made the comment that it went from – and forgive me here, it is like 20%, it’s down to 4%, something along those lines. You had mentioned this year. Is that fiscal year or calendar year, I am just trying to get a sense, is it...

Yes, Matt. So, because the products – because the problem started earlier in last fiscal year, we took our first failure to supply charges in the second quarter – sorry in the third quarter of last fiscal year. So when I referenced earlier in the year, it was earlier in the third quarter where we had 20% of our SKUs were on back order and then due to the great work that the supply team has done working with our partners, we had whittled that down to under 4%, which is the present state now today.

Yes, perfect. And then obviously great work by your team to get that down, maybe one more for me and then I will hop back into queue. You had commented that given some of the headwinds that you are facing on the Human Health side, how much – can you breakout how much of the headwind is pricing related versus volume related?

I can if you give me one second. So specific to Rising, our volumes have gone up, but pricing has come down. So, we had one large product that we took a hit on due to an additional competitor that drove our price declines to a higher extent than what we have normally would have expected. So, if you look at our portfolio, we are slightly behind the market in terms of price declines and that’s an aberration of our product mix. So for example, if we had a heavier derm portfolio or injectable portfolio, then our price declines would be more representative of the market. But with the commodity-based products that we have, the price declines have been greater than market and it’s accelerated by this one product where we took a hit due to competitive entry. However, I will say that there has been a normal –- I won’t say normalization, but the price declines are beginning to soften and are representing what we would expect to see on a normal basis. I am not predicting the bottoms here yet, but it’s close.

That would be good news. If we could maybe not, just get back to the normalized 3% to 6% declines versus some of the headwinds that you have been facing would be a positive development. So, alright, hey, keep up the good work, I know it’s been a tough fight but you are doing a good job.

Thank you, Matt. Appreciate the interest and coverage.

And the next question will be from Timothy Stabosz, a Private Investor. Please go ahead.

Good morning, everyone.

Good morning, Timothy.

And as you know, I own 4% of the company it seems like the Street’s trend decide how to take this earnings release there’s only 12,000 shares before the market open or opening now, and it’s down about 20% and 10,000 to 12,000 shares I appreciate your disclosure in this conference call that the strategic alternatives process, which is intended to retire our debt, that gives me great reassurance that there’s a value in this company and I’m glad you emphasized the stability of the 2 non-generic drug divisions my question around this subject is, to the degree that the language in the press release said that liquidity will be good for 12 months, if adequately supplemented by money is generated from the previously announced strategic alternatives initiatives are the banks fully supportive at this point to seeing you through the strategic alternatives process?

Timothy, it’s A - Becky Roof let me take that question I think that as we have previously discussed and filed the waiver that we have recently executed with our banks the fact that we had a what we consider a very successful outcome to the negotiation of that waiver is the best indication of their support for the company during this process.

Is that a yes?

That’s a yes.

They’re fully supportive?

Let me just cite from my perspective, I would not pretend to speak for them. I can tell you that any time that we negotiate a waiver, that gives us the kind of runway and flexibility that was demonstrated, I think that’s a good indication of their support so from my perspective, it’s a yes, I’m not going to speak for them you would have to ask them that question directly but we are taking that as an indication of good support from our banks.

I appreciate that thank you the dividend, last quarter, we did a $0.01 dividend, which was kind of a sign perhaps of the underlying value of the assets that the bank said, yes, keep $0.01 dividend you have had a dividend for a long time what’s the status of that?

Well so the timing of this call is not consistent with when the board would approve the dividend, and we’ll be meeting as a board in December to decide that trade but historically, we have paid the dividend for many, many years, and the board votes on that and stay tuned so I expect to see consistent following there, but the board will have to make that decision in December.

Okay. And then finally, on failure to supply, Bill, do you anticipate that we’re going to keep I’m not asking for a projection, but are we going to keep trending lower going forward or at least in the current quarter?

Yes.

In the second quarter?

And what you’ve heard me say in the past or what I have said in the past in the event that you haven’t heard me is that the goal is to get this to a level where it’s nonmaterial and non-significant and we are not quite there yet but I anticipate that we’re going to get there shortly so I would expect next quarter’s failure to supply barring any major or unforeseen issue that we are not aware of, will be a fraction of what we’re paying today.

Okay and then finally, truly finally I know you’re not commenting on the strategic alternatives process or anything about what you’re looking at can you give any reassurance about the fact that it’s been, what, 7 months, May, June, July, August, September, October, that’s 7 months, that that’s not any indication that there is a lack of interest in these assets or that it’s just more about the process being involved say or whatever can you give just a very general timber or color to that question?

So sure look, you’re right, I can’t really comment on the strategic process that’s going on and I guess I’ll leave it at that so I wouldn’t read the length of time into any challenges related to the process, and let me leave it at that.

I’m sorry, I don’t understand what you said the length of time what?

So, we don’t generally we’re going to generally comment on the process, and I don’t think that you should read the length of time that since our initial announcement as a bad sign or a good sign I wouldn’t read anything into the timeline.

Okay thank you very much.

Timothy thank you appreciate your interest in the company.

The next question will be from Bruce Berger, a Private Investor. Please go ahead.

Yes, thanks I guess my question is regarding the cash balance and the covenants that you have with the bank I think the way I read it is, there is a minimum requirement to have $55 million of cash, and you’re now below that so I was wondering if you can address that covenant? That’s my first question.

Yes Bruce, thank you for the question the covenant is a liquidity covenant, not a cash covenant and so it takes into account the $38 million that is undrawn on the revolver, plus the cash balances when you are calculating the $55 million minimum.

So, then that means how close are we, or how much gap or availability do you have before you hit that covenant?

Let me I don’t have the last certificate in front of me but I think if you can take our cash balance at June 30, which was I’m sorry, September 30, which was $51.547 plus $38 million and compare that to the $55 million in the covenant, that would give you the calculation on how much room there is.

Okay could also give us an indication of how your working capital would turn so you’ll be generating cash? I mean there was a huge cash draw and I think that’s one of the reasons that stock is down so significantly people are concerned that you’re going to run all your cash so can you give us some assurances of how cash will be generated from receivables, inventory and using of payables over the next few quarters?

So, I think as we described, our working capital that we used in operations in Q1 is largely due to 2 factors one, an increase in accounts receivable, which is related to an increase in sales at our Rising business unit we also increased our inventories at Rising by approximately $10 million in order to get our inventory help better and to mitigate or hopefully largely avoid future FTS charges we also built inventory in our Performance Chemicals segment in hopes of landing the inventory in the U.S. prior to January 1 to mitigate the impact of increased tariffs so between those 2 builds, that’s what caused the drawdown on our cash.

So, do you have any projections of what the how that will be how the cash will come back to you over the next few quarters? Because the question is because the press release is very concerning when you say you basically have to settle a business to fund the liquidity of your operations so I’m just trying and I think that again, that’s why the stock is down significantly there’s a concern here that we’re looking at something very bad down the road so and of course, there is no disclosure from the company about what is going on with strategic process so that’s why I’m trying to, in a sense, let other investors understand whether there is a liquidity crisis or there is not a liquidity crisis coming forward?

So, I think, if I understand what the question was, you asked whether we had an idea I’m paraphrasing here because I didn’t take that of your exact words, but if you had an idea of when this turns around, am I correct or can you rephrase the question?

Yes, when the right, when you’ll become a generator of cash and not a consumer of cash? When that cash balance increases because receivables come down inventory, payables, etcetera. you must have modeled it out so you must have some idea?

Well and as we’ve previously said, we’re not providing guidance if you are asking whether we have cash forecasting in place that we model through, the answer to that is, yes so let me go ahead and add on to that, that the biggest impact on our cash is the gross-to-net cycle in our Rising business and in our 10-K, we provided information about how our gross sales are impacted by our chargebacks and so our working capital is impacted by the fact that our wholesalers take credit against our invoices for chargebacks well in advance of when the payment for the same goods is made and so anytime you have an increase in sales in the generic pharma business, you are subjected to the use of working capital until you get back into a flat cycle that’s probably way more than anybody wanted to know about this, but the short answer to your question is yes, we have this modeled out, and we monitor it closely.

That would be great. Just two more questions if you don’t mind so I think you specifically mentioned that whatever strategic transaction you’re going through, you said you want to retire all of the debt, is that what you said?

What I believe we said is that we believe that our cash liquid assets and operating cash flows, together with the liquidity that we expect to be generated from our previously announced strategic alternatives initiative, which is intended to retire our debt, will provide us with adequate resources to fund our working capital needs for the next 12 months so specifically, our strategic process is intended to generate sufficient liquidity to retire our debt that is our intent.

Okay and then the final question is, you delayed the Annual Meeting you did the tax rights plan and you also did a shelf offering and I was wondering if Bill can discuss to all share who’s going to understand the reasoning behind these initiatives because they are very, they effect shareholders dramatically in my opinion so I’m just trying to get the specific comments from Bill about this.

Yes sure, Bruce so regarding the rights plan, so that was basically put in place to protect tax assets and keep in mind that the money that we took previously against that was an accounting issue, not a tax issue so it’s expected that this plan will benefit our future cash flows and shield future tax liabilities by preserving some value and as you know, it’s very common with companies that have net operating losses, and we’re kind of deterring ownership changes that would break company’s abilities to utilize the tax asset, so we want to try to avoid that so the board spend some time thinking that through and decided that, that was the right outcome, and we think it’s in the best interest of our shareholders so the shelf filing was a renewal of expiring existing shelf registration statement so we have the ability to use it if needed, and there were no securities issued on that and then the board decided to well, I guess, let me step back so we filed in lieu of the proxy, we filed the 10-KA, which is required to file 120 days at the close of fiscal year and then the board decided that while we’re going through the strategic alternative process, that we will just simply delay the Annual Shareholders Meeting and then once that meeting is scheduled in the first and second quarter of 2019, then we’ll file the proxy as well so I think that addresses your questions.

Yes, I mean I was just concerned I was I did not want to see the shelf offering used for dilutive purposes to raise capital to pay off the debt, so that was a concern as a shareholder and I understand that you did the shelf offering that’s sort of customary to do it every 3 years, but I just wanted on this public forum to get your thought or your comments that you’re not going to dilute the shareholders by issuing stock.

Yes, so the shelf it was expired, so we just renewed it.

Okay thank you.

You are welcome thank you Bruce.

Okay.

The next question will be from Rich Thomson of VaRde. Please go ahead.

Thanks, a couple of quick things the commentary on the tariffs was helpful, but just to make sure I’m sure so the $850,000, if it does go to 25%, the 850K to the $3.7 million, is that like a full year run rate impact? Is it an impact assuming it just comes into effect for fiscal year or calendar year ‘19? What does that do with that number?

Rich, I don’t think we understood the question.

Okay you mentioned that if in the if the 25% tariff ultimately goes through, the impact to your gross margin could be $850,000 to $3.7 million and my question is just, is that on an annualized basis? Is that in your fiscal year ‘19, which only would show would incorporate a partial year impact from that? Or what is that number?

So, we estimate that, under the current 10% tariff, it’s impacting us in the range of $70,000 to $90,000 from July 1 through December 31 or the first half of fiscal 2019 depending on what happens on January 1, if the tariffs go from 10% to 25%, we could have an impact on the second half of 2019 that ranges from $850,000 to $3.7 million and the reason for the wide range there is that we don’t know yet how much of the burden of the tariffs will be shared by both customers and manufacturers.

Yes, okay. And then on the Performance Chemicals growth, how much of that you referenced the customer disruption or rather a competitor disruption, how much of that growth was due to that, so semi one-time or it’s more of organic or just ongoing growth?

Yes. Rich, I am sorry. We are having trouble understanding you. Can you – I don’t know if you are on a speakerphone, but could you either pickup or maybe try again and speak a little more slowly, we are just getting a bad echo.

Yes, sure. Sorry about that. For the – as it relates to the Performance Chemicals growth, I think you mentioned that one component of that was a competitor, the supply disruption and that you may be benefited from, just trying to understand how much of the growth was due to that or kind of a more normalized growth number?

Yes. So let me just give you a quick calculation here Rich, while I am talking to you. Hang on one second. So I would say that the increased demand resulting from that is probably about 25% of the growth.

Got it, okay, that’s helpful. And then on net working capital, I think it’s in the commentary so far I guess – but I saw the commentary around Rising being up, but if I look at the numbers, it looks like it was down like if you look at Human Health, which I know also includes some other small things, but it was $88 million to $80 million, so just trying to understand I guess just trying to triangulate what was in the press release first looking at the segment numbers kind of why that happened, as others have asked about, is that $45 million increase in receivable is something you expect to normalize throughout the year?

Let me get the table in front of me just to make sure I am understanding your question, are you talking about the tables that were attached to the press release or what…?

I was just talking about, in the press release itself I think the numbers I saw for Human Health was revenue was $80 million ish compared to $88 million last year in Q4, is that right, however, the language around the working capital usage was referenced, the increase being due to a boost in Rising sales, so I was just trying to bridge that?

Yes. So when you are talking about Rising sales, there is – there are two components that need to be considered. One is – one is the gross sales before the deductions for price concessions, which leads to net sales. Our gross sales at Rising, because of an increased volume have actually increased. And so that’s what’s leading to the – versus Q4, so this is Q1 over Q4, that’s the growth. So when the gross sales are – which is what actually gets recorded into your trade accounts receivable and then is reduced for the various price concessions, so those gross sales are what is increasing.

Okay. So the AR in the balance sheet is the gross number and then you have concessions in your other liabilities or is it I thought it was a net receivable, but maybe not?

So – and as we described in our 10-K and will again on the Q, our gross sales are recorded into our trade AR and then our trade AR is reduced for the price concessions, which are chargeback related. Price concessions which are rebate related are recorded down on accrued expenses.

Okay. So I guess just maybe at a higher level, do you expect to have some relief from working capital in the next couple of quarters or do you see this as normalized levels or I guess what’s your best sense?

Well, as we have mentioned, we are not providing guidance. That is dependent on how our sales come through, whether they are – if our sales are flat, then our working capital levels normalize. If our sales continue to increase, then we continue to use working capital because of the related increase in accounts receivable. If our sales – and if our sales decrease, which is not what we are hoping for, but when our sales decrease, then that results in a release of working capital.

Okay. So is it fair to say that if sales are flat from here, that there should be some release in AR or no?

That’s what the math would show.

Okay. And then maybe last if I could just appreciate you are not commenting on the strategic alts, but I didn’t see – I heard on the prior caller’s question, reference to language around hoping to have liquidity to take out the debt as opposed to just to fund the business, in the press release I think the language I saw was between operating cash flow, current liquidity and potential asset sales, that you are hoping to fund liquidity, so just trying to understand I guess which source is in use the standpoint do you need to do all of that just for basic operating liquidity or will that also be for a broader repayment of debt?

So the comments that we made are – that I made this morning were intended to provide additional details to what was in the press release that we issued last night. We are just trying to provide some additional clarity and transparency.

Okay, got it. And I think I – so apologies, I may have missed exactly what that comment is, do you mind just repeating what you had said earlier?

What I have said was we believe that our cash, liquid assets and operating cash flows together with the liquidity that we expect to be generated from our previously announced strategic alternatives initiative, which is intended to retire our debt will provide us with adequate resources to fund our working capital needs for the next 12 months.

Okay, alright. And then maybe lastly, just trying to get a sense, can you give any comments as to when you expect to have an update or even an interim, I mean it’s someone else that has been seven months and I don’t think we have even heard whether you decided if we are going to try and pace that as well or sell something and if you are going to sell something, whether you have reached out, it just seems like it’s been bit of a black box, but…?

So Rich, I appreciate you and everyone else that’s trying to get us to about something that we just can’t do, so I can’t really comment on that. Just stay tuned and we will keep you posted. We will keep everyone posted when we are ready to make some kind of an announcement.

Okay, alright. Thanks.

Thanks Doug.

And the next question will be from Oliver Butt of JPMorgan. Please go ahead. Hello, Mr. Oliver Butt your line is open for question.

Thank you. My apologies. Sorry I was on mute. Nice performance on API and performance can chime during the quarter. Congratulations. My question, my first question is related to the – this Human Health business, I was most interested in an update on the appeals process kind of regarding kind of the VA, maybe you could give kind of a timeline around that, that would be my first question?

Oliver, it’s Becky, we got some feedback and echoing, so could you repeat the question and perhaps speak more slowly.

Yes, sure, I am sorry. My first question relates to the Lucid business, specifically the VA appeal process, just wanted an update on that process, perhaps the timeline?

Okay. So can you be more specific, are you looking for a status of the lawsuit or…?

Exactly yes, like what would be the next kind of like big event date?

Well look, the government has appealed the decision that went in our favor. I can’t – I don’t know how long the appeals process will occur, how long it will take. We are currently working with the VA on specific bids. It’s kind of redoing the process that before we undid that process due to the ruling that was made against us. So we are kind of rebuilding. I do know that we won one product opportunity that we previously had. And we also have gained a couple of products. So it’s a process, not an event. And we fully expect the appeal decision to affirm the lower court decision and we are moving on with the VA and with our partners to try to get back as much business as we possibly can.

Fantastic. The next question relating to the Rising business, with the three new approved ANDAs in the first quarter, could you give us any details around kind of the opportunity set for those three new approvals since the end of the fourth quarter and when we should start to expect to see those hitting the revenue line?

So we have – we launched one product this quarter and I believe we have eight products planned to launch for the second quarter. But I don’t have the exact number in front of me. I do know that we plan to launch between 15 and 20. So the approvals that you saw, we hope to be able to generate some revenue from that shortly. And I apologize, but I can’t tell you whether it’s going to happen in the next quarter or in the third fiscal quarter.

And can you give us a bit of a sense for the kind of quantum of the impact of revenue, potential impact to revenue of the three new products?

Yes, sure. So historically, I have kind of talked about our product launches in using a baseball analogy singles, doubles, triples, home runs. These products are in the singles category.

Singles, very good. Thank you. Now I had a follow-up question to the questions that have been asked around working capital, this appears to be – my question I guess is, is this the new normal, these levels of inventory, the new normal to manage through potential tariff issues and failure to supplies or are there alternatives available to you rather than continuing to build inventory?

So let me take that in two parts if I may. The inventory build in Rising to get our inventory held back in shape is a permanent build, so that we can have enough safety stock on hand to avoid, to the largest extent possible, back order situations, which create potential failure to the supply risk. With regards to Performance Chemicals, we did do some buying ahead trying to get the inventory landed prior to January 1. So I would expect that we would see a – some decline in inventory in subsequent quarters, whether that’s Q3 and Q4 or whether that spills over into fiscal 2020, I don’t have that breakout, but I would expect…

Okay, very good, that’s helpful.

Yes. And look Oliver, I would just add on the Rising side that the build in inventory has already had an immediate impact on increase in sales by about 40% of that number, so it’s cash that’s being very well spent without any failure to supply and it’s also generating additional revenue for us. So we are kind of back in the game, so to speak.

Okay, great. And then my last question, because it’s been a long call, on the accrued expenses side, maybe when the kind of Q is released, we will see the number, I don’t know if you have it, but the latest reserve for price concessions in your accrued expenses would you be able to give us the most recent number?

Yes. That will be in the Q that will be filed here shortly.

Okay. But could you give us a sense perhaps when that should unwind?

When you say unwind, I am not sure what you are specifically referring to.

Perhaps is my kind of failure to properly understand the line item, my understanding is essentially, it’s rebates or it’s the at risk part of your revenues to your customers on price – future price concessions, so I would expect over a period of time it to be trued-up with the customer and therefore that number would decrease, perhaps I am misunderstanding?

No, that’s a fair question. And the way I would answer that is by saying, it depends on which category of price concession you are talking about. But most of these, the timing of when these price concessions are presented to us by our customers is due to when the inventory leaves their shelves, not when it leaves our shelves to go to the wholesaler. And so it’s impossible to predict because we don’t know what the wholesalers are holding in terms of safety stock and we don’t know what their forecasts are to the eventual end user of our product.

Got it. But presumably after a period of time, I mean I assume that the inventory doesn’t sit on the customers’ shelves for greater than one to two quarters, it should be understood that you should no longer face a price concession for that particular inventory and therefore it would unwind, that would be my sense, perhaps that’s a poor understanding?

That’s right. At some point, it will leave the shelves of our wholesaler customers. And at that point, then the liability will be released because we will be paying the customer for whatever the price concession is. I just don’t know – I don’t know how to tell you when that’s going to be because that’s not our responsibility or under our control. That’s under the control of the wholesaler.

Oliver, just to kind of build on that a bit. As a general rule and again it’s product specific, but with products with normal cycle times, the wholesalers keep about four weeks of inventory on hand and the customers might have another two weeks of inventory on hand. That’s going to move up or down depending on the history of supply and so on and so forth, but that’s probably a pretty good general rule of thumb on the inventory turns.

Okay, great. Thank you. I think that answers that, I think about that a little bit more, but I appreciate your talk. Thanks for the call guys.

Thank you, Oliver. I appreciate your interest.

And ladies and gentlemen, that will conclude our question-and-answer session. I would like to hand the conference back over to Bill Kennally for his closing remarks.

Thank you, Denise. Nice job today. And before I close the call, I just wanted to leave everyone with really three messages of importance. First, our Specialty Chemicals, Pharmaceutical Ingredients and Nutritional businesses all have experienced colleagues with well established relationships, which historically have resulted in steady cash contributions to the company and we certainly expect that to continue. Second, the failure to supply claims Rising has received over the last three quarters has significantly diminished Rising’s revenue and gross profit. I am highly confident that the improvements made to our supply chain have significantly reduced our forward exposure, which will immediately and favorable impact our revenue and gross profit going forward. And third, our Rising business has been rebuilt this past year with outstanding talented colleagues and we are really poised and ready to return to growth. So with that, I look forward to being with all of you in the second quarter conference call in early February. And I appreciate everyone’s time and attention and interest in our company. Have a great day and weekend. Thank you.