See accompanying notes to condensed consolidated financial statements
and accountants’ review report.
See accompanying notes to condensed consolidated financial statements
and accountants’ review report.
See accompanying notes to condensed consolidated financial statements
and accountants’ review report.
The Company had a non-cash item excluded from the Condensed
Consolidated Statement of Cash Flows during the three months ended September 30, 2018 of $306 related to dividends declared but
not paid.
See accompanying notes to condensed consolidated financial statements
and accountants’ review report.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited and in thousands, except per-share
amounts)
(1) Basis of Presentation
The condensed consolidated financial statements
of Aceto Corporation and subsidiaries (“Aceto” or the “Company”) included herein have been prepared by
the Company and reflect all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows for all periods presented. Interim results are not necessarily indicative of results
which may be achieved for the full year.
The preparation of financial statements
in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements and the disclosure
of contingent assets and liabilities at the date of the financial statements. These judgments can be subjective and complex, and
consequently actual results could differ from those estimates and assumptions. The Company’s most critical accounting policies
relate to revenue recognition; allowance for doubtful accounts; inventory; goodwill and other indefinite-life intangible assets;
long-lived assets; environmental matters and other contingencies; income taxes; stock-based compensation; and purchase price allocation.
These condensed consolidated financial
statements do not include all disclosures associated with consolidated financial statements prepared in accordance with GAAP. Accordingly,
these statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained
in the Company’s Form 10-K for the year ended June 30, 2018.
(2) Revenue Recognition
The Company adopted ASU 2014-09,
Revenue
from Contracts with Customers (Topic 606)
for all contracts in the first quarter of fiscal 2019 on a modified retrospective
basis. The adoption of Topic 606 had no cumulative impact on the Company’s results of operations, cash flows or financial
position. The amounts reported in these condensed consolidated financial statements were the same as the amounts would have been
if the previous accounting guidance was in effect. As part of the adoption of this ASU, the Company completed its comprehensive
evaluation of the amended guidance following the five-step model, including identification of revenue streams and determined that
the timing of recognition of revenue is unchanged under the amended guidance.
All revenue recognized in the accompanying
unaudited interim condensed consolidated financial statements of operations is considered to be revenue from contracts with customers.
The Company recognizes revenue from product sales at the time of shipment and upon the transfer of control of the Company’s
product. The Company has no acceptance or other post-shipment obligations and does not offer product warranties or services to
its customers. The Company generally does not have incremental costs to obtain contracts that would otherwise not have been incurred.
Payment terms can vary by the type and location of the customer. The term between invoicing and when payment is due is typically
30 to 90 days.
The following tables show the Company’s revenues disaggregated by business segment and product lines
offered to customers:
|
|
Three months ended September 30, 2018
|
|
|
|
Human Health
|
|
|
Pharmaceutical
Ingredients
|
|
|
Performance
Chemicals
|
|
|
Consolidated
Totals
|
|
Finished dosage form generic drugs
|
|
$
|
69,213
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
69,213
|
|
Nutraceutical products
|
|
|
11,633
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,633
|
|
Pharmaceutical intermediates
|
|
|
-
|
|
|
$
|
10,222
|
|
|
|
-
|
|
|
|
10,222
|
|
Active pharmaceutical ingredients (APIs)
|
|
|
-
|
|
|
|
28,626
|
|
|
|
-
|
|
|
|
28,626
|
|
Specialty chemicals
|
|
|
-
|
|
|
|
-
|
|
|
$
|
36,221
|
|
|
|
36,221
|
|
Agricultural protection products
|
|
|
-
|
|
|
|
-
|
|
|
|
8,490
|
|
|
|
8,490
|
|
|
|
$
|
80,846
|
|
|
$
|
38,848
|
|
|
$
|
44,711
|
|
|
$
|
164,405
|
|
|
|
Three months ended September 30, 2017
|
|
|
|
Human Health
|
|
|
Pharmaceutical
Ingredients
|
|
|
Performance
Chemicals
|
|
|
Consolidated
Totals
|
|
Finished dosage form generic drugs
|
|
$
|
95,561
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
95,561
|
|
Nutraceutical products
|
|
|
10,454
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,454
|
|
Pharmaceutical intermediates
|
|
|
-
|
|
|
$
|
10,136
|
|
|
|
-
|
|
|
|
10,136
|
|
Active pharmaceutical ingredients (API's)
|
|
|
-
|
|
|
|
26,440
|
|
|
|
-
|
|
|
|
26,440
|
|
Specialty chemicals
|
|
|
-
|
|
|
|
-
|
|
|
$
|
34,020
|
|
|
|
34,020
|
|
Agricultural protection products
|
|
|
-
|
|
|
|
-
|
|
|
|
8,644
|
|
|
|
8,644
|
|
|
|
$
|
106,015
|
|
|
$
|
36,576
|
|
|
$
|
42,664
|
|
|
$
|
185,255
|
|
Variable Consideration
The Company has arrangements with various
third parties, such as drug store chains and managed care organizations, establishing prices for its finished dosage form generics.
While these arrangements are made between Aceto and its customers, the customers independently select a wholesaler from which they
purchase the products. Alternatively, certain wholesalers may enter into agreements with the customers, with the Company’s
concurrence, which establishes the pricing for certain products which the wholesalers provide. Upon each sale of finished dosage
form generics, significant estimates of chargebacks, rebates, returns, government reimbursed rebates, sales discounts and other
adjustments are made. These estimates are accounted for as variable consideration and are recorded as reductions to gross revenues,
with corresponding adjustments either as a reduction of accounts receivable or as a liability for price concessions.
The Company estimates variable consideration
after considering applicable information that is reasonably available. These estimates are based on historical experience, future
expectations, contractual arrangements with wholesalers and indirect customers, and other factors known to management at the time
of accrual.
The consideration the Company receives in exchange
for its goods is only recognized when it is probable that a significant reversal will not occur.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited and in thousands, except per-share
amounts)
Chargebacks
Under certain arrangements, Rising will
issue a credit (referred to as a “chargeback”) to the wholesaler for the difference between the invoice price to the
wholesaler and the customer’s contract price. In order to calculate the chargeback allowance, prior period chargebacks claimed
by wholesalers are analyzed to determine the average chargeback amount for each product and wholesaler. These amounts are adjusted
for any information that will better reflect future average chargeback amounts. Management receives on-hand inventory reports from
wholesalers to which the average chargeback amount is applied. The provision for chargebacks varies in relation to changes in sales
volume, product and customer mix, terms with customers, pricing, changes in Wholesale Acquisition Cost (“WAC”), the
level of inventory at the wholesalers, and changes in the volume of off-contract purchases. As sales to the large wholesale customers
increase or decrease, the reserve for chargebacks will also generally increase or decrease. The Company continually monitors the
reserve for chargebacks and makes adjustments when management believes that expected chargebacks may differ from the actual chargeback
reserve.
Returns
The Company maintains a policy that allows
customers to return product within a specified period prior to and subsequent to the product expiration date. Product returns are
settled through a credit issued to the customer. The Company estimates its provision for returns of finished dosage generics based
on historical experience, product expiration dates, changes to business practices, credit terms, new competition, shortages in
the market and any extenuating circumstances known to management. While historical experience has allowed for reasonable estimations
in the past, future returns may or may not follow historical trends. Generally, the reserve for returns increases as net sales
increase. The Company continually monitors the reserve for returns and makes adjustments when management believes that actual product
returns may differ from the established reserve.
Sales of nutraceutical products, pharmaceutical
active ingredients and intermediates, specialty performance chemicals, including agricultural intermediates and agricultural protection
products are recorded net of estimated returns of damaged goods from customers, which historically have been immaterial.
Government Rebates
Government rebates relate to our reimbursement
arrangements with state and federal government agencies. Government rebate accruals are based on estimated payments due to governmental
agencies for purchases made by plan participants. The Company provides a provision for government reimbursed rebates at the time
of sale based on historical redemption rates. Government rebate amounts per product unit for generic products are established by
law, based on the Average Manufacturer Price (“AMP”), which is reported on a monthly and quarterly basis. Aceto regularly
reviews the information related to these estimates and adjusts the provision accordingly.
Non-Governmental Rebates & Other
Other rebates are offered to the Company’s
key chain drug store, distributor and wholesaler customers to promote customer loyalty and increase product sales. These rebate
programs provide customers with credits upon attainment of pre-established volumes or attainment of net sales milestones for a
specified period. Other promotional programs are incentive programs offered to the customers. These rebates and other promotional
programs vary by product and by volume purchase by each eligible customer. The Company provides a provision for other rebates at
the time of sale based on contracted rates, actual product sales data and historical redemption rates. Aceto regularly reviews
the information related to these estimates and adjusts the provision accordingly.
Sales of nutraceutical products, pharmaceutical
active ingredients and intermediates, specialty performance chemicals, including agricultural intermediates and agricultural protection
products are recorded net of sales incentives which include volume incentive rebates. The Company records volume incentive rebates
based on the underlying revenue transactions that result in progress by the customer in earning the rebate.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited and in thousands, except per-share
amounts)
Sales Discounts
Sales discount accruals are based on payment
terms extended to customers purchasing our finished dosage form generic products. The sales discount reserve is based on the invoices
outstanding at period end and the sales discount rate.
The following table summarizes activity
in the consolidated balance sheet for contra assets and liability for price concessions for the quarter ended September 30, 2018:
|
|
Accruals for Chargebacks,
Rebates, Returns and Other Allowances
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
Non-Governmental
|
|
|
Sales
|
|
|
|
Chargebacks
|
|
|
Returns
|
|
|
Reimbursed Rebates
|
|
|
Rebates & Other
|
|
|
Discounts
|
|
Balance at June 30, 2018
|
|
$
|
66,687
|
|
|
$
|
41,511
|
|
|
$
|
9,658
|
|
|
$
|
86,259
|
|
|
$
|
6,408
|
|
Current period provision
|
|
|
184,559
|
|
|
|
6,465
|
|
|
|
3,061
|
|
|
|
43,386
|
|
|
|
6,584
|
|
Credits issued during the period
|
|
|
(157,732
|
)
|
|
|
(2,220
|
)
|
|
|
(3,357
|
)
|
|
|
(30,717
|
)
|
|
|
(1,991
|
)
|
Balance at September 30, 2018
|
|
$
|
93,514
|
|
|
$
|
45,756
|
|
|
$
|
9,362
|
|
|
$
|
98,928
|
|
|
$
|
11,001
|
|
Credits issued during a given period represent
cash payments or credit memos issued to the Company’s customers as settlement for the related reserve. Management has the
experience and access to relevant information that it believes is necessary to reasonably estimate the amounts of such deductions
from gross revenues. The Company regularly reviews the information related to these estimates and adjusts its reserves accordingly,
if and when actual experience differs from previous estimates. The Company has not experienced any significant changes in its estimates
as it relates to its chargebacks, rebates, sales discounts or product returns for the periods presented.
(3) Stock-Based Compensation
Under the Aceto Corporation 2015 Equity
Participation Plan (the “2015 Plan”), grants of stock options, stock appreciation rights, restricted stock, restricted
stock units and other stock-based awards (“Stock Awards”) may be offered to employees, non-employee directors, consultants
and advisors of the Company, including the chief executive officer, chief financial officer and other named executive officers.
The maximum number of shares of common stock of the Company that may be issued pursuant to Stock Awards granted under the 2015
Plan will not exceed, in the aggregate, 4,250 shares. Stock Awards that are intended to qualify as “performance-based compensation”
for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended, may be granted. Performance-based awards
may be granted, vested and paid based on the attainment of specified performance goals.
Under the Aceto Corporation 2010 Equity
Participation Plan (as amended and restated in 2012, the “2010 Plan”), grants of stock options, restricted stock, restricted
stock units, stock appreciation rights, and stock bonuses may be made to employees, non-employee directors and consultants of the
Company. The maximum number of shares of common stock of the Company that may be issued pursuant to awards granted under the 2010
Plan will not exceed, in the aggregate, 5,250 shares. In addition, restricted stock may be granted to an eligible participant in
lieu of a portion of any annual cash bonus earned by such participant. Such award may include additional shares of restricted stock
(premium shares) greater than the portion of bonus paid in restricted stock. The restricted stock award is vested at issuance and
the restrictions lapse ratably over a period of years as determined by the Board of Directors, generally three years. The premium
shares vest when all the restrictions lapse, provided that the participant remains employed by the Company at that time.
During the three months ended September
30, 2018, there were no grants of restricted common stock. During the three months ended September 30, 2017, the Company granted
337 shares of restricted common stock to its employees that vest over three years. In addition, during the three months ended September
30, 2017, the Company also issued a target grant of 168 performance-vested restricted stock units, which grant could be as much
as 294 units if certain performance criteria and market conditions are met. These performance-vested restricted stock units will
cliff vest 100% at the end of the third year following grant in accordance with the performance metrics set forth in the applicable
employee performance-vested restricted stock unit grant.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited and in thousands, except per-share
amounts)
For the three months ended September 30,
2018 and 2017, the Company recorded stock-based compensation (benefit) expense of approximately $(24), which includes forfeitures,
and $3,132, respectively, related to restricted common stock and restricted stock units. Included in the stock-based compensation
expense for the three months ended September 30, 2017 is $2,017 associated with the separation of the Company’s former Chief
Executive Officer in September 2017. As of September 30, 2018, the total unrecognized stock-based compensation cost is approximately
$4,476.
(4) Capital Stock
On September 6, 2018, the Company's board
of directors declared a regular quarterly dividend of $.01 per share which was distributed on October 9, 2018 to shareholders of
record as of September 24, 2018.
On May 4, 2017, the Board of Directors
of the Company authorized the continuation of the Company’s stock repurchase program, expiring in May 2020. Under the stock
repurchase program, the Company is authorized to purchase up to 5,000 shares of common stock in open market or private transactions,
at prices not to exceed the market value of the common stock at the time of such purchase. The Company did not repurchase shares
in the three months ended September 30, 2018 or in fiscal year 2018.
The Company is authorized to issue 75,000
shares of Common Stock and 2,000 shares of Preferred Stock. The Board of Directors has authority under the Company’s Restated
Certificate of Incorporation to issue shares of preferred stock with voting and other relative rights to be determined by the Board
of Directors.
(5) Net Income Per Common Share
Basic income per common share is based
on the weighted average number of common shares outstanding during the period. Diluted income per common share includes the dilutive
effect of potential common shares outstanding. The following table sets forth the reconciliation of weighted average shares outstanding
and diluted weighted average shares outstanding:
|
|
Three Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
35,487
|
|
|
|
34,975
|
|
Dilutive effect of stock options and restricted stock awards and units
|
|
|
-
|
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
35,487
|
|
|
|
35,259
|
|
The effect of approximately 35 common equivalent
shares for the three months ended September 30, 2018 was excluded from the diluted weighted average shares outstanding due to a
net loss for the period. There were 1,171 common equivalent shares outstanding for the three months ended September 30, 2018 that
were not included in the calculation of diluted net income per common share because their effect would have been anti-dilutive.
The weighted average shares outstanding
for the three months ended September 30, 2018 and 2017 includes the effect of 5,122 shares to be issued in connection with the
acquisition of certain products and related assets from Citron and Lucid. The Convertible Senior Notes (see Note 6) will only be
included in the dilutive net income per share calculations using the treasury stock method during periods in which the average
market price of Aceto’s common stock is above the applicable conversion price of the Convertible Senior Notes, or $33.215
per share, and the impact would not be anti-dilutive.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited and in thousands, except per-share
amounts)
There were 61 common equivalent shares
outstanding as of September 30, 2017 that were not included in the calculation of diluted net income per common share for the three
months ended September 30, 2017 because their effect would have been anti-dilutive.
(6) Debt
Long-term debt
|
|
September
30,
2018
|
|
|
June
30,
2018
|
|
|
|
|
|
|
|
|
Convertible Senior Notes, net
|
|
$
|
129,457
|
|
|
$
|
127,857
|
|
Revolving Bank Loans
|
|
|
62,000
|
|
|
|
62,000
|
|
Term Bank Loans
|
|
|
121,392
|
|
|
|
124,959
|
|
Mortgage
|
|
|
2,533
|
|
|
|
2,582
|
|
|
|
|
315,382
|
|
|
|
317,398
|
|
Less current portion
|
|
|
14,482
|
|
|
|
14,482
|
|
|
|
$
|
300,900
|
|
|
$
|
302,916
|
|
Convertible Senior Notes
In November 2015, Aceto offered $125,000
aggregate principal amount of Convertible Senior Notes due 2020 (the "Notes") in a private offering to qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. In addition, Aceto granted the initial purchasers for
the offering an option to purchase up to an additional $18,750 aggregate principal amount pursuant to the initial purchasers’
option to purchase additional Notes, which was exercised in November 2015. Therefore, the total offering was $143,750 aggregate
principal amount. The Notes are unsecured obligations of Aceto and rank senior in right of payment to any of Aceto’s subordinated
indebtedness, equal in right of payment to all of Aceto’s unsecured indebtedness that is not subordinated, effectively junior
in right of payment to any of Aceto’s secured indebtedness to the extent of the value of the assets securing such indebtedness
and structurally junior in right of payment to all indebtedness and other liabilities (including trade payables) of Aceto’s
subsidiaries. The Notes will be convertible into cash, shares of Aceto common stock or a combination thereof, at Aceto’s
election, upon the satisfaction of specified conditions and during certain periods. The Notes will mature in November 2020. The
Notes pay 2.0% interest semi-annually in arrears on May 1 and November 1 of each year, which commenced on May 1, 2016. The Notes
are convertible into 4,328 shares of common stock, based on an initial conversion price of $33.215 per share.
Holders may convert all or any portion
of their notes, in multiples of one thousand dollar principal amount, at their option at any time prior to the close of business
on the business day immediately preceding May 1, 2020 only under the following circumstances: (i) during any calendar quarter (and
only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or
not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar
quarter is greater than or equal to 130% of the conversion price on each applicable trading day, (ii) during the five consecutive
business day period after any five consecutive trading day period (which is referred to as the “measurement period”)
in which the trading price per one thousand dollar principal amount of Notes for each trading day of the measurement period was
less than 98% of the product of the last reported sale price of Aceto’s common stock and the conversion rate on each such
trading day; or (iii) upon the occurrence of specified corporate events.
Upon conversion
by the holders, the Company may elect to settle such conversion in shares of its common stock, cash, or a combination thereof.
As a result of its cash conversion option, the Company separately accounted for the value of the embedded conversion option as
a debt discount (with an offset to capital in excess of par value). The debt discount is being amortized as additional non-cash
interest expense using the effective interest method over the term of the Notes. Debt issuance costs are being amortized as additional
non-cash interest expense.
The Company presents debt issuance costs as a direct deduction from the carrying value of the
debt liability rather than showing the debt issuance costs as a deferred charge on the balance sheet.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited and in thousands, except per-share
amounts)
In connection
with the offering of the Notes, Aceto entered into privately negotiated convertible note hedge transactions with option counterparties,
which are affiliates of certain of the initial purchasers. The convertible note hedge transactions are expected generally to reduce
the potential dilution to Aceto’s common stock and/or offset any cash payments Aceto is required to make in excess of the
principal amount of converted Notes upon any conversion of Notes. Aceto also entered into privately negotiated warrant transactions
with the option counterparties. The warrant transactions could separately have a dilutive effect to the extent that the market
price per share of Aceto’s common stock as measured over the applicable valuation period at the maturity of the warrants
exceeds the applicable strike price of the warrants. By entering into these transactions with the option counterparties, the Company
issued convertible debt and a freestanding “call-spread.”
The carrying value
of the Notes is as follows:
|
|
September
30,
2018
|
|
|
June
30,
2018
|
|
|
|
|
|
|
|
|
Principal amount
|
|
$
|
143,750
|
|
|
$
|
143,750
|
|
Unamortized debt discount
|
|
|
(12,518
|
)
|
|
|
(13,909
|
)
|
Unamortized debt issuance costs
|
|
|
(1,775
|
)
|
|
|
(1,984
|
)
|
Net carrying value
|
|
$
|
129,457
|
|
|
$
|
127,857
|
|
The following
table sets forth the components of total “interest expense” related to the Notes recognized in the accompanying condensed
consolidated statements of operations for the three months ended September 30:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Contractual coupon
|
|
$
|
670
|
|
|
$
|
709
|
|
Amortization of debt discount
|
|
|
1,391
|
|
|
|
1,304
|
|
Amortization of debt issuance costs
|
|
|
209
|
|
|
|
209
|
|
|
|
$
|
2,270
|
|
|
$
|
2,222
|
|
Credit Facilities
On December 21, 2016 the Company entered
into a Second Amended and Restated Credit Agreement (the “A&R Credit Agreement”), with eleven banks, which amended
and restated in its entirety the Amended and Restated Credit Agreement, dated as of October 28, 2015, as amended by Amendment No.
1 to Amended and Restated Credit Agreement, dated as of November 10, 2015, and Amendment No. 2 to Amended and Restated Credit Agreement,
dated as of August 26, 2016 (collectively, the “First Amended Credit Agreement”). The A&R Credit Agreement increased
the aggregate available revolving commitment under the First Amended Credit Agreement from $150,000 to an initial aggregate available
revolving commitment of $225,000 (the “Initial Revolving Commitment”). Under the A&R Credit Agreement, the Company
was permitted to borrow, repay and reborrow from and as of December 21, 2016, to but excluding December 21, 2021 (the “Maturity
Date”) provided, that if any of the Notes remain outstanding on the date that is 91 days prior to the maturity date of the
Notes (the “2015 Convertible Maturity Date”), then the Maturity Date shall mean the date that is 91 days prior to the
2015 Convertible Maturity Date. The A&R Credit Agreement provides for (i) Eurodollar Loans (as such terms are defined in the
A&R Credit Agreement), (ii) ABR Loans (as such terms are defined in the A&R Credit Agreement), or (iii) a combination thereof.
As of September 30, 2018, the Company borrowed Revolving Loans (as defined under the A&R Credit Agreement) aggregating $62,000
which loans are Eurodollar Loans at interest rates ranging from 5.00% to 5.02% at September 30, 2018. The applicable interest rate
margin percentage is subject to adjustment quarterly based upon the Company’s senior secured net leverage ratio.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited and in thousands, except per-share
amounts)
Under the A&R Credit Agreement, the
Company also borrowed $150,000 in term loans (the “Initial Term Loan). Subject to certain conditions, including obtaining
commitments from existing or prospective lenders, the Company had the right to increase the amount of the Initial Revolving Commitment
(each, a “Revolving Facility Increase” and, together with the Initial Revolving Commitment, the “Revolving Commitment”)
and/or the Initial Term Loan in an aggregate amount not to exceed $100,000 pursuant to an incremental loan feature in the A&R
Credit Agreement. As of September 30, 2018, the remaining amount outstanding under the Initial Term Loan was $123,750 and was payable
as a Eurodollar Loan at an interest rate of 9.39%. The proceeds of the Initial Revolving Commitment and Initial Term Loan were
used to partially finance the acquisition of generic products and related assets of Citron and its affiliate Lucid, and pay fees
and expenses related thereto. The applicable interest rate margin percentage is subject to adjustment quarterly based upon the
Company’s senior secured net leverage ratio.
The Initial Term Loan is payable as to
principal in nineteen consecutive, equal quarterly installments of $3,750, which commenced on March 31, 2017 and will continue
on each March 31, June 30, September 30 and December 31 thereafter. To the extent not previously paid, the final payment on the
Term Loan Maturity Date (as defined in the A&R Credit Agreement) shall be in an amount equal to the then outstanding unpaid
principal amount of the Initial Term Loan.
The A&R Credit Agreement provides that
commercial letters of credit shall be issued to provide the primary payment mechanism in connection with the purchase of any materials,
goods or services in the ordinary course of business. The Company had no open letters of credit at September 30, 2018 and June
30, 2018.
In accordance with generally accepted accounting
principles, deferred financing costs associated with the Initial Term Loan are presented as a direct deduction from the carrying
value of the debt liability rather than showing the deferred financing costs as a deferred charge on the balance sheet. In addition,
deferred financing costs associated with the Revolving Commitment have been recorded as a deferred charge on the balance sheet.
The A&R Credit Agreement provides for
a security interest in substantially all of the personal property of the Company and certain of its subsidiaries. The A&R Credit
Agreement contains several financial covenants including, among other things, maintaining a minimum level of debt service and certain
leverage ratios. Under the A&R Credit Agreement, the Company and its subsidiaries are also subject to certain restrictive covenants,
including, among other things, covenants governing liens, limitations on indebtedness, limitations on guarantees, limitations on
sales of assets and sales of receivables, and limitations on loans and investments.
On December 13, 2017, the Company entered into a First Amendment
to the Second Amended and Restated Credit Agreement (the “2017 Amendment”), which amended the A&R Credit Agreement.
The 2017 Amendment, among other things, contained several amendments to the financial covenants in the A&R Credit Agreement.
On May 3, 2018, the Company entered into a Second Amendment and Waiver to the Second Amended and Restated
Credit Agreement (the “May 2018 Amendment”).
The
May 2018 Amendment, among other things, contained a waiver of any event of default under the A&R Credit Agreement arising as
a result of the non-compliance by the Company with Total Net Leverage Ratio and Debt Service Coverage Ratio financial covenants,
in each case, solely for the fiscal quarter ended March 31, 2018. The May 2018 Amendment also contained several amendments to the
A&R Credit Agreement including, among other things, reducing the available revolving commitment thereunder to $100,000, fixing
the applicable margin on loans to the highest level provided under the A&R Credit Agreement at the time, fixing the commitment
fee on the undrawn revolving commitments to the highest level provided under the A&R Credit Agreement at the time, requiring
prior written consent of Required Lenders (as defined in the A&R Credit Agreement) as a condition precedent to the lenders
making any additional loans or extending any further credit, restricting dividends or distributions the Company may make to its
shareholders to no more than $0.01 per share for the quarter ending on June 30, 2018 and restricting dividends or distributions
thereafter, restricting the incurrence of certain indebtedness, limiting acquisitions and other investments and imposing certain
other restrictions
.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited and in thousands, except per-share
amounts)
As of June 30, 2018, the Company was not
in compliance with its financial covenants relating to its Total Net Leverage Ratio, Senior Secured Net Leverage Ratio and Debt
Service Coverage Ratio. The Company and its lenders agreed upon another amendment to the A&R Credit Agreement (referred to
herein as the “September 2018 Amendment”). The September 2018 Amendment provides for a waiver of any event of default
under the A&R Credit Agreement arising as a result of the non-compliance by the Company with the Total Net Leverage Ratio,
Senior Secured Net Leverage Ratio and Debt Service Coverage Ratio financial covenants, in each case, solely for the fiscal quarters
ended or ending June 30, 2018, September 30, 2018, December 31, 2018, March 31, 2019 and June 30, 2019. The September 2018 Amendment
also contains several amendments to the A&R Credit Agreement including, among other things, (a) a limitation on dividends
for the fiscal quarters ending September 30, 2018, December 31, 2018, March 31, 2019 and June 30, 2019, to an amount not to exceed
$325 for any fiscal quarter, (b) increasing the applicable margin with respect to the interest rates on all loans under the A&R
Credit Agreement by 450 basis points and fixing (during the September 2018 Amendment Limitation Period (as hereinafter defined))
the applicable margin with respect to the interest rate on all loans under the A&R Credit Agreement to the highest level provided
under the A&R Credit Agreement which is currently 6.00% in the case of ABR Loans (as defined in the A&R Credit Agreement)
and 7.00% in the case of Eurodollar Loans (as defined in the A&R Credit Agreement), (c) during the period commencing on the
closing of the September 2018 Amendment and ending on the date the Company demonstrates compliance with each financial covenant
set forth in the A&R Credit Agreement for the fiscal quarter ending September 30, 2019 (referred to herein as “the September
2018 Amendment Limitation Period”; provided that if the Company is not in compliance with any of the financial covenants
set forth in the A&R Credit Agreement for the fiscal quarter ending September 30, 2019, then the September 2018 Amendment
Limitation Period shall continue indefinitely), requiring the Company to maintain the sum of Domestic Liquidity (as defined in
the A&R Credit Agreement) plus Foreign Liquidity (as defined in the A&R Credit Agreement) and the undrawn portion of the
Revolving Commitment (as defined in the A&R Credit Agreement) (referred to herein as “Covenant Liquidity”) to
an amount of at least $55,000 (the “Covenant Liquidity Amount”) as of the last business day of each week following
the effectiveness of the September 2018 Amendment; provided that the Company shall not be in breach of the minimum liquidity covenant
unless the Covenant Liquidity is less than the Covenant Liquidity Amount as of the last business day of two consecutive weeks,
(d) requiring the prior written consent of the Required Lenders as a condition precedent to the lenders extending any Loans (as
defined in the A&R Credit Agreement) or the issuing banks issuing, amending, renewing or extending any Letter of Credit, (e)
permitting the purchase, during fiscal 2019, of assets for an aggregate consideration not to exceed $12,300, consisting of intangibles
assets relating to strategic product acquisitions and certain capital expenditures, and (f) restricting the incurrence of certain
indebtedness, limiting acquisitions and other investments and imposing certain other restrictions.
In conjunction with the Credit
Agreement, the Company entered into an interest rate swap on March 21, 2017 for an additional interest cost of 2.005% on a notional
amount of $100,000, which has been designated as a cash flow hedge. The expiration date of this interest rate swap is December
21, 2021. The remaining notional balance of this derivative as of September 30, 2018 is $82,500.
Mortgage
On June 30, 2011, the Company entered into
a mortgage payable for $3,947 on its corporate headquarters, in Port Washington, New York. This mortgage payable is secured by
the land and building and is being amortized over a period of 20 years. The mortgage payable, which was modified in October 2013,
bears interest at 4.92% per annum as of September 30, 2017 and matures on June 30, 2021.
(7) Commitments, Contingencies and Other Matters
The Company and its subsidiaries are subject
to various claims which have arisen in the normal course of business. The Company provides for costs related to contingencies when
a loss from such claims is probable and the amount is reasonably determinable. In determining whether it is possible to provide
an estimate of loss, or range of possible loss, the Company reviews and evaluates its litigation and regulatory matters on a quarterly
basis in light of potentially relevant factual and legal developments. If the Company determines an unfavorable outcome is not
probable or reasonably estimable, the Company does not accrue for a potential litigation loss. While the Company has determined
that there is a reasonable possibility that a loss has been incurred, no amounts have been recognized in the financial statements,
other than what has been discussed below, because the amount of the liability cannot be reasonably estimated at this time.
In fiscal years 2011, 2009, 2008 and 2007,
the Company received letters from the Pulvair Site Group, a group of potentially responsible parties (PRP Group) who are working
with the State of Tennessee (the State) to remediate a contaminated property in Tennessee called the Pulvair site. The PRP Group
has alleged that Aceto shipped hazardous substances to the site which were released into the environment. The State had begun administrative
proceedings against the members of the PRP Group and Aceto with respect to the cleanup of the Pulvair site and the PRP Group has
begun to undertake cleanup. The PRP Group is seeking a settlement of approximately $1,700 from the Company for its share to remediate
the site contamination. Although the Company acknowledges that it shipped materials to the site for formulation over twenty years
ago, the Company believes that the evidence does not show that the hazardous materials sent by Aceto to the site have significantly
contributed to the contamination of the environment and thus believes that, at most, it is a de minimis contributor to the site
contamination. Accordingly, the Company believes that the settlement offer is unreasonable. Management believes that the ultimate
outcome of this matter will not have a material adverse effect on the Company's financial condition or liquidity.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited and in thousands, except per-share
amounts)
The Company has environmental remediation
obligations in connection with Arsynco, Inc. (“Arsynco”), a subsidiary formerly involved in manufacturing chemicals
located in Carlstadt, New Jersey, which was closed in 1993 and is currently held for sale. Based on continued monitoring of the
contamination at the site and the approved plan of remediation, Arsynco received an estimate from an environmental consultant stating
that the costs of remediation could be between $22,900 and $24,700. Remediation commenced in fiscal 2010, and as of September 30,
2018 and June 30, 2018, a liability of $4,943 and $5,746, respectively, is included in the accompanying consolidated balance sheets
for this matter. For the three months ended September 30, 2017, the Company recorded an environmental charge of $902, which is
included in selling, general and administrative expenses in the accompanying condensed consolidated statement of operations. In
accordance with GAAP, management believes that the majority of costs incurred to remediate the site will be capitalized in preparing
the property which is currently classified as held for sale. In June 2018, the Company entered into an agreement to sell the Arsynco
property to an unrelated third party for $6,340. The sale is subject to due diligence by the buyer and the Company is not sure
when or if the sale will close. The sale price supports the assumption that the expected fair value after the remediation is in
excess of the amount required to be capitalized. However, these matters, if resolved in a manner different from those assumed in
current estimates, could have a material adverse effect on the Company’s financial condition, operating results and cash
flows when resolved in a future reporting period.
In connection with the environmental remediation
obligation for Arsynco, in July 2009, Arsynco entered into a settlement agreement with BASF Corporation (“BASF”), the
former owners of the Arsynco property. In accordance with the settlement agreement, BASF paid for a portion of the prior remediation
costs and going forward, will co-remediate the property with the Company. The contract requires that BASF pay $550 related to past
response costs and pay a proportionate share of the future remediation costs. Accordingly, the Company had recorded a gain of $550
in fiscal 2009. This $550 gain relates to the partial reimbursement of costs of approximately $1,200 that the Company had previously
expensed. The Company also recorded an additional receivable from BASF, with an offset against property held for sale, representing
its estimated portion of the future remediation costs. The balance of this receivable for future remediation costs as of September
30, 2018 and June 30, 2018 is $2,224 and $2,586, respectively, which is included in the accompanying consolidated balance sheets.
In March 2006, Arsynco received notice
from the EPA of its status as a PRP under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) for
a site described as the Berry’s Creek Study Area (“BCSA”). Arsynco is one of over 150 PRPs which have potential
liability for the required investigation and remediation of the site. The estimate of the potential liability is not quantifiable
for a number of reasons, including the difficulty in determining the extent of contamination and the length of time remediation
may require. In addition, any estimate of liability must also consider the number of other PRPs and their financial strength. In
July 2014, Arsynco received notice from the U.S. Department of Interior (“USDOI”) regarding the USDOI’s intent
to perform a Natural Resource Damage (NRD) Assessment at the BCSA. Arsynco has to date declined to participate in the development
and performance of the NRD assessment process. Based on prior practice in similar situations, it is possible that the State may
assert a claim for natural resource damages with respect to the Arsynco site itself, and either the federal government or the State
(or both) may assert claims against Arsynco for natural resource damages in connection with Berry's Creek; any such claim with
respect to Berry's Creek could also be asserted against the approximately 150 PRPs which the EPA has identified in connection with
that site. Any claim for natural resource damages with respect to the Arsynco site itself may also be asserted against BASF, the
former owners of the Arsynco property. In September 2012, Arsynco entered into an agreement with three of the other PRPs that had
previously been impleaded into New Jersey Department of Environmental Protection, et al. v. Occidental Chemical Corporation, et
al., Docket No. ESX-L-9868-05 (the "NJDEP Litigation") and were considering impleading Arsynco into the same proceeding.
Arsynco entered into an agreement to avoid impleader. Pursuant to the agreement, Arsynco agreed to (1) a tolling period that would
not be included when computing the running of any statute of limitations that might provide a defense to the NJDEP Litigation;
(2) the waiver of certain issue preclusion defenses in the NJDEP Litigation; and (3) arbitration of certain potential future liability
allocation claims if the other parties to the agreement are barred by a court of competent jurisdiction from proceeding against
Arsynco. In July 2015, Arsynco was contacted by an allocation consultant retained by a group of the named PRPs, inviting Arsynco
to participate in the allocation among the PRPs’ investigation and remediation costs relating to the BCSA. Arsynco declined
that invitation. Since an amount of the liability cannot be reasonably estimated at this time, no accrual is recorded for these
potential future costs. The impact of the resolution of this matter on the Company’s results of operations in a particular
reporting period is not currently known.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited and in thousands, except per-share
amounts)
A subsidiary of the Company markets certain
agricultural protection products which are subject to the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA). FIFRA requires
that test data be provided to the EPA to register, obtain and maintain approved labels for pesticide products. The EPA requires
that follow-on registrants of these products compensate the initial registrant for the cost of producing the necessary test data
on a basis prescribed in the FIFRA regulations. Follow-on registrants do not themselves generate or contract for the data. However,
when FIFRA requirements mandate that new test data be generated to enable all registrants to continue marketing a pesticide product,
often both the initial and follow-on registrants establish a task force to jointly undertake the testing effort. The Company is
presently a member of several such task force groups, which requires payments for such memberships. In addition, in connection
with our agricultural protection business, the Company plans to acquire product registrations and related data filed with the United
States Environmental Protection Agency to support such registrations and other supporting data for several products. The acquisition
of these product registrations and related data filed with the United States Environmental Protection Agency as well as payments
to various task force groups could approximate $5,616 in fiscal 2019.
In connection with the acquisition of certain
products and related assets from Citron and Lucid, Aceto committed to make a $50,000 unsecured deferred payment that bears interest
at a rate of 5% per annum to the sellers on December 21, 2021 and to issue 5,122 shares of Aceto common stock beginning on December
21, 2019. The product purchase agreement also provides for a 5-year potential earn-out of up to an additional $50,000 in cash,
based on the financial performance of four pre-specified pipeline products that are currently in development. As of September 30,
2018, the Company accrued $703 related to this contingent consideration.
In February 2018, the Company was notified
by the U.S. government that 11 generic drug products it acquired through its Acetris Health subsidiary in a product purchase agreement
with Lucid were not in compliance with the federal Trade Agreement Act (“TAA”) country-of-origin provisions of a clause
(the “Trade Agreements Clause”) contained in the government supply contracts acquired from Lucid (the “TAA Notification”).
The 11 finished dosage form products purchased by the U.S. government are manufactured by Aurolife Pharma LLC which is located
in Dayton, New Jersey using APIs sourced from India. In conjunction with this finding, the U.S. Department of Veterans Affairs
(“VA”) requested that Acetris supply new TAA-compliant sources for the referenced products by March 9, 2018 and supply
new TAA-compliant drugs to the government purchasers under the contracts by March 26, 2018. Acetris knew that it would be unable
to meet these short deadlines. To avoid the government’s imposition of penalties for failure to meet these deadlines
while Acetris appealed the above-mentioned findings, Acetris requested that the government defer imposition of these deadlines
pending resolution of Acetris’ appeal. The Government declined this request and thereafter Acetris and the government
entered into agreements that provided for a no-cost termination of each of the 11 supply contracts.
On July 10, 2018,
the Company was informed that Acetris received a favorable ruling from the United States Court of Federal Claims (the “Court”),
in Acetris Health, LLC v. United States, invalidating the VA interpretation of the Trade Agreements Clause, which had resulted
in the termination of 11 Acetris contracts with the VA. Finding in favor of Acetris, the Court granted a declaratory judgment
establishing that under the federal Buy America Act the agencies are permitted to buy domestic end products, including commercial
off-the-shelf products like generic drugs, that are manufactured in the United States when the Trade Agreements Clause is incorporated
in government supply contracts, even if their components are not all manufactured in the United States. Although Department of
Defense (the “DoD”) contracts were not at issue in the case, the decision also impacts Acetris’ ability to supply
DoD with its products. The government’s appeal of the ruling is pending. Even if the Court’s ruling is affirmed on
appeal, the Court’s ruling did not have the effect of reinstating the 11 terminated government supply agreements. Acetris
may seek new contracts with these agencies, but no assurance can be given that any such contracts will be awarded.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited and in thousands, except per-share
amounts)
In March 2018, Sigmapharm Laboratories,
LLC (“SigmaPharm”) commenced an action against Rising and the Company in the United States District Court for the Eastern
District of Pennsylvania. The complaint arises out of an agreement, effective as of June 22, 2006 (the “SigmaPharm
Agreement”), pursuant to which SigmaPharm agreed to supply certain generic pharmaceutical products (the “Products”)
to Rising, and Rising in turn agreed to market and distribute the Products in the United States and pay SigmaPharm a share of the
profits pursuant to a formula specified in the Agreement. The complaint alleges that Rising and Aceto breached the Agreement
by failing to pay or timely make payments due under the Agreement and to disclose certain information to SigmaPharm. The
complaint seeks, among other relief, a declaration that the Agreement has been terminated and that SigmaPharm has exclusive marketing
and distribution rights to the Products; injunctive relief; and an unspecified amount of damages. In May 2018, Rising
and the Company filed a motion to stay the action and compel arbitration, as required by the Agreement. In addition, SigmaPharm
filed a “motion to enforce audit rights” in the federal litigation. On October 26, 2018, the district court granted
Rising’s and the Company’s Motion to Stay and Compel Arbitration and denied Sigmapharm’s Motion to Enforce and
Audit; thus the federal court action has been placed in suspense and the parties must proceed to arbitration.
SigmaPharm has stopped supplying Products
to Rising, claiming that it has validly terminated the Sigmapharm Agreement. Accordingly, in June 2018, Rising filed an arbitration
claim against SigmaPharm in New Jersey, seeking recovery from SigmaPharm of any failure-to-supply losses Rising may incur as well
as lost future profits on sale of the Products, among other relief. The Company intends to vigorously protect its rights in these
matters and prosecute its claim for damages against SigmaPharm. The impact of the resolution of this matter on the Company’s
results of operations in a particular reporting period is not currently known.
On April 16, 2018, the Company’s
Rising subsidiary received a Grand Jury subpoena (the “DOJ Subpoena”) from the Antitrust Division of the DOJ. Rising
is cooperating with the DOJ in response to the DOJ Subpoena.
The Company and certain of its current
and former officers are named defendants in two putative securities class actions (the “Securities Class Action Lawsuits”)
filed in the United States District Court for the Eastern District of New York in April 2018, captioned Mulligan v. Aceto Corporation,
et al, No. 2:18-cv-02425, and Yang v. Aceto Corporation, No. 1:18-cv-02437. The complaints arise from the April 19, 2018
drop in the Company’s stock price following the Company’s announcement on April 18, 2018 that it would recognize a
substantial impairment charge for the third fiscal quarter. The complaints generally allege that the defendants violated
the Securities Exchange Act of 1934 by making false and misleading statements in public filings with the SEC and seek unspecified
damages. On June 26, 2018, five motions were filed seeking to appoint lead plaintiff and approve lead plaintiff’s counsel
pursuant to the Private Securities Litigation Reform Act of 1995, as well as to consolidate the Mulligan or Yang actions.
Three motions were subsequently withdrawn or abandoned, and the remaining two motions are pending before the Court. Following
the appointment of a lead plaintiff, the Company expects that the appointed lead plaintiff will file a single consolidated amended
class action complaint to supersede the earlier complaints. The Company intends to vigorously defend itself. The impact of the
resolution of this matter on the Company’s results of operations in a particular reporting period is not currently known.
(8) Fair Value Measurements
GAAP defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement
date. GAAP establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions
based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three
levels:
Level 1 – Quoted market prices in active markets
for identical assets or liabilities;
Level 2 – Inputs other than Level 1 inputs
that are either directly or indirectly observable; and
Level 3 – Unobservable inputs that are not
corroborated by market data.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited and in thousands, except per-share
amounts)
On a recurring basis, Aceto measures at
fair value certain financial assets and liabilities, which consist of cash equivalents, investments and foreign currency contracts.
The Company classifies cash equivalents and investments within Level 1 if quoted prices are available in active markets. Level
1 assets include instruments valued based on quoted market prices in active markets which generally include corporate equity securities
publicly traded on major exchanges. Time deposits are very short-term in nature and are accordingly valued at cost plus accrued
interest, which approximates fair value, and are classified within Level 2 of the valuation hierarchy. The Company uses foreign
currency futures contracts to minimize the risk caused by foreign currency fluctuation on its foreign currency receivables and
payables by purchasing futures with one of its financial institutions. Futures are traded on regulated U.S. and international exchanges
and represent commitments to purchase or sell a particular foreign currency at a future date and at a specific price. Aceto’s
foreign currency derivative contracts are classified within Level 2 as the fair value of these hedges is primarily based on observable
futures foreign exchange rates. At September 30, 2018, the Company had foreign currency contracts outstanding that had a notional
amount of $67,797. Unrealized (losses) gains on hedging activities for the three months ended September 30, 2018 and 2017, was
$(331) and $295 respectively, and are included in interest and other income, net, in the consolidated statements of operations.
The contracts have varying maturities of less than one year.
In conjunction
with its existing credit agreement (see Note 6), the Company entered into an interest rate swap on March 21, 2017 for an additional
interest cost of 2.005% on a notional amount of $100,000, which has been designated as a cash flow hedge
.
The
expiration date of this interest rate swap is December 21, 2021. The remaining balance of this derivative as of September 30, 2018
is $82,500. The unrealized gain to date associated with this derivative, which is recorded in accumulated other comprehensive loss
in the consolidated balance sheet at September 30, 2018, is $2,051. Aceto’s interest rate swaps are classified within Level
2 as the fair value of this hedge is primarily based on observable interest rates.
At September 30, 2018 and June 30, 2018,
the Company had $703 and $683, respectively, of contingent consideration which related to the acquisition of certain products and
related assets of Citron and Lucid, which was completed in December 2016. The contingent consideration was calculated using the
present value of a probability weighted income approach.
The Company evaluates goodwill for impairment
at the reporting unit level using a market participant approach using Level 3 inputs. Additionally, on a nonrecurring basis, the
Company uses fair value measures when analyzing asset impairment. During the three months ended September 30, 2018 and 2017, there
were no indicators of impairment. During the fiscal year ended June 30, 2018, the Company recognized a pre-tax non-cash goodwill
impairment charge of $235,110 related to the Rising reporting unit.
Long-lived assets and certain identifiable intangible assets
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be
fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are
reduced to estimated fair value. Measurements based on undiscounted cash flows are Level 3 inputs. During
the three months ended September 30, 2018 and 2017, there were no indicators of impairment.
In connection with the acquisition of certain
products and related assets of Citron and Lucid, the Company will issue 5,122 shares of Aceto common stock beginning on December
21, 2019. The fair value of the future issuance of these shares was determined to be $90,400 at the time of the product acquisition
after taking into effect that the shares won’t be issued until the third and fourth anniversary of the closing and the present
value calculation of dividends.
In November 2015, the Company issued $143,750
aggregate principal amount of Notes (see Note 6). Since Aceto has the option to settle the potential conversion of the Notes in
cash, the Company separated the embedded conversion option feature from the debt feature and accounts for each component separately,
based on the fair value of the debt component assuming no conversion option. The calculation of the fair value of the debt component
required the use of Level 3 inputs and was determined by calculating the fair value of similar non-convertible debt, using a theoretical
borrowing rate of 6.5%.
The value of the embedded conversion option was determined using an expected
present value technique (income approach) to estimate the fair value of similar non-convertible debt
and included utilization
of c
onvertible investors’ credit assumptions and high yield bond indices. The Notes approximate
a full fair value of $109,000 at September 30, 2018 giving effect to certain factors, including the term of the Notes, current
stock price of Aceto stock and effective interest rate.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited and in thousands, except per-share
amounts)
The carrying values of all financial instruments
classified as a current asset or current liability are deemed to approximate fair value because of the short maturity of these
instruments. The fair values of the Company’s notes receivable and short-term and long-term bank loans were based upon current
rates offered for similar financial instruments to the Company.
The following tables summarize the valuation
of the Company’s financial assets and liabilities which were determined by using the following inputs at September 30, 2018
and June 30, 2018:
|
|
Fair Value Measurements at September 30, 2018 Using
|
|
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
-
|
|
|
$
|
3,092
|
|
|
|
-
|
|
|
$
|
3,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
-
|
|
|
|
955
|
|
|
|
-
|
|
|
|
955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts-assets (1)
|
|
|
-
|
|
|
|
55
|
|
|
|
-
|
|
|
|
55
|
|
Foreign currency contracts-liabilities (2)
|
|
|
-
|
|
|
|
386
|
|
|
|
-
|
|
|
|
386
|
|
Derivative asset for interest rate swap (3)
|
|
|
-
|
|
|
|
2,051
|
|
|
|
-
|
|
|
|
2,051
|
|
Contingent consideration (4)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
703
|
|
|
|
703
|
|
|
(1)
|
Included in “Other receivables” in the accompanying
Condensed Consolidated Balance Sheet as of September 30, 2018.
|
|
(2)
|
Included in “Accrued expenses” in the accompanying
Condensed Consolidated Balance Sheet as of September 30, 2018.
|
|
(3)
|
Included in “Other Assets” in the accompanying
Condensed Consolidated Balance Sheet as of September 30, 2018.
|
|
(4)
|
Included in “Long-term liabilities” in the accompanying Condensed Consolidated Balance Sheet as of September 30,
2018.
|
|
|
Fair Value Measurements at June 30, 2018 Using
|
|
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
-
|
|
|
$
|
3,218
|
|
|
|
-
|
|
|
$
|
3,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
-
|
|
|
|
3,030
|
|
|
|
-
|
|
|
|
3,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts-assets (5)
|
|
|
-
|
|
|
|
362
|
|
|
|
-
|
|
|
|
362
|
|
Foreign currency contracts-liabilities (6)
|
|
|
-
|
|
|
|
304
|
|
|
|
-
|
|
|
|
304
|
|
Derivative asset for interest rate swap (7)
|
|
|
-
|
|
|
|
1,839
|
|
|
|
-
|
|
|
|
1,839
|
|
Contingent consideration (8)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
683
|
|
|
|
683
|
|
|
(5)
|
Included in “Other receivables” in the accompanying Consolidated Balance Sheet as of
June 30, 2018.
|
|
(6)
|
Included in “Accrued expenses” in the accompanying
Consolidated Balance Sheet as of June 30, 2018.
|
|
(7)
|
Included in “Other Assets” in the accompanying
Consolidated Balance Sheet as of June 30, 2018.
|
|
(8)
|
Included in “Long-term liabilities” in the accompanying Consolidated Balance Sheet
as of June 30, 2018.
|
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited and in thousands, except per-share
amounts)
(9) Recent Accounting Pronouncements
In August 2018, the Financial Accounting
Standards Board (“FASB”) issued ASU No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework—Changes
to the Disclosure Requirements for Fair Value Measurement
. The primary focus of ASU 2018-13 is to improve the effectiveness
of the disclosure requirements for fair value measurements. The changes affect all companies that are required to include fair
value measurement disclosures. In general, the amendments in ASU 2018-13 are effective for all entities for fiscal years and interim
periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early adopt the removed or
modified disclosures upon the issuance of ASU 2018-13 and may delay adoption of the additional disclosures, which are required
for public companies only, until their effective date. The Company is currently evaluating the impact these changes will have on
the Company’s consolidated financial statements and disclosures.
In June 2018, the FASB issued ASU 2018-07
Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting.
This ASU
is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the
accounting for employee share-based compensation. It is effective for annual reporting periods, and interim periods within those
years, beginning after December 15, 2018. The Company does not believe this new accounting standard update will have a material
impact on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income,
which gives entities the option to reclassify the disproportionate income tax effects ("stranded
tax effects") caused by the newly-enacted U.S. Tax Cuts and Jobs Act from accumulated other comprehensive income to retained
earnings. The update also requires new disclosures, some of which are applicable for all entities. The guidance in ASU 2018-02
is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company does not
believe this new accounting standard update will have a material impact on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,
which has the objective
of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk
management activities in its financial statements. In addition to that main objective, the amendments in ASU 2017-12 make certain
targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The amendments in ASU 2017-12
are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those
fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the provisions of ASU 2017-12.
In May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting,
which provides guidance about which
changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718.
ASU 2017-09 is effective for all entities for annual periods, and interim periods within those annual periods, beginning after
December 15, 2017. Early adoption is permitted. The Company adopted ASU 2017-09 in the first quarter of fiscal 2019. The adoption
did not have any impact on the Company’s condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01
Business Combinations (Topic 805): Clarifying the Definition of a Business
with the objective of adding guidance to assist
entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU
2017-01 is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within
those periods. The adoption did not have any impact on the Company’s condensed consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
which addresses eight specific
cash flow issues with the objective of reducing diversity in how certain cash receipts and cash payments are presented and classified
in the statement of cash flows. ASU 2016-15 is effective for public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. The Company adopted ASU 2016-15 in the first quarter of fiscal 2019. The
adoption did not have any impact on the Company’s condensed consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited and in thousands, except per-share
amounts)
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
as amended in July 2018 by ASU 2018-10,
Codification Improvements to Topic 842, Leases
and ASU
2018-11,
Leases (Topic 842), Targeted Improvements
, that replace existing lease guidance. The new standard is intended to
provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities
on the balance sheet. The new guidance will continue to classify leases as either finance or operating, with classification affecting
the pattern of expense recognition in the statement of income. These ASU’s are effective for fiscal years (and interim reporting
periods within those years) beginning after December 15, 2018. The Company is currently evaluating the impact of the provisions
of these ASU’s and anticipates recognition of additional assets and corresponding liabilities relating to these leases on
its consolidated balance sheet but does not expect the adjustment to be material assuming no changes in lease activity.
(10) Segment Information
The Company's business is organized along
product lines into three principal segments: Human Health, Pharmaceutical Ingredients and Performance Chemicals.
Human Health
- includes finished
dosage form generic drugs and nutraceutical products.
Pharmaceutical Ingredients –
includes
pharmaceutical intermediates and active pharmaceutical ingredients (“APIs”).
Performance Chemicals
- The Performance
Chemicals segment is made up of two product groups: Specialty Chemicals and Agricultural Protection Products. Specialty Chemicals
include a variety of chemicals used in the manufacture of plastics, surface coatings, cosmetics and personal care, textiles, fuels
and lubricants, perform to their designed capabilities. Dye and pigment intermediates are used in the color-producing industries
such as textiles, inks, paper, and coatings. Organic intermediates are used in the production of agrochemicals.
Agricultural Protection Products include
herbicides, fungicides and insecticides that control weed growth as well as control the spread of insects and other microorganisms
that can severely damage plant growth.
The Company's chief operating decision
maker evaluates performance of the segments based on net sales, gross profit and income before income taxes. Unallocated corporate
amounts are deemed by the Company as administrative, oversight costs, not managed by the segment managers. The Company does not
allocate assets by segment because the chief operating decision maker does not review the assets by segment to assess the segments'
performance, as the assets are managed on an entity-wide basis. During all periods presented, our chief operating decision maker
has been the Chief Executive Officer of the Company. In accordance with GAAP, the Company has aggregated certain operating segments
into reportable segments because they have similar economic characteristics, and the operating segments are similar in all of the
following areas: (a) the nature of the products and services; (b) the nature of the production processes; (c) the type or class
of customer for their products and services; (d) the methods used to distribute their products or provide their services; and (e)
the nature of the regulatory environment.
Three months Ended September 30, 2018 and 2017:
|
|
Human
Health
|
|
|
Pharmaceutical
Ingredients
|
|
|
Performance
Chemicals
|
|
|
Unallocated
Corporate
|
|
|
Consolidated
Totals
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
80,846
|
|
|
$
|
38,848
|
|
|
$
|
44,711
|
|
|
$
|
-
|
|
|
$
|
164,405
|
|
Gross profit
|
|
|
8,476
|
|
|
|
6,894
|
|
|
|
10,110
|
|
|
|
-
|
|
|
|
25,480
|
|
(Loss) income before income taxes
|
|
|
(13,047
|
)
|
|
|
3,398
|
|
|
|
5,928
|
|
|
|
(15,374
|
)
|
|
|
(19,095
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
106,015
|
|
|
$
|
36,576
|
|
|
$
|
42,664
|
|
|
$
|
-
|
|
|
$
|
185,255
|
|
Gross profit
|
|
|
24,647
|
|
|
|
5,840
|
|
|
|
9,496
|
|
|
|
-
|
|
|
|
39,983
|
|
Income (loss) before income taxes
|
|
|
5,026
|
|
|
|
2,231
|
|
|
|
4,945
|
|
|
|
(10,064
|
)
|
|
|
2,138
|
|
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited and in thousands, except per-share
amounts)
(11) Subsequent Event
On November 2, 2018, the Board approved
the adoption of a Tax Asset Protection Plan and on November 5, 2018, the Company entered into a Tax Asset Protection Rights Agreement
(the “Rights Agreement”), between the Company and American Stock Transfer & Trust Company, LLC, as Rights Agent
(the “Rights Agent”). The purpose of the Rights Agreement is to help preserve the Company’s ability to utilize
its significant tax benefits. On November 5, 2018, in connection with the entry into the Rights Agreement, the Board authorized
and declared a dividend of one preferred stock purchase right (a “Right”) for each share of Common Stock outstanding
as of the close of business on November 15, 2018 (the “Record Date”). Each Right entitles the registered holder to
purchase from the Company one one-thousandth (subject to adjustment) of a share of Series A Participating Cumulative Preferred
Stock, par value $2.50 per share (each, a “Series A Preferred Share” and collectively, the “Series A Preferred
Shares”), of the Company at a price of $10.85 (as the same may be adjusted, the “Purchase Price”), and upon the
terms and conditions set forth in the Rights Agreement.
The Rights become exercisable upon (i)
a shareholder acquiring beneficial ownership of 4.99% or more of the outstanding shares of the Company’s common stock without
prior approval of the Board, or (ii) a shareholder who already beneficially owns 4.99% or more of the outstanding shares of the
Company’s common stock increasing its beneficial ownership by more than 0.5%. The Rights Agreement and the related Rights
expire on November 5, 2020, or earlier upon the occurrence of certain other circumstances specified in the Rights Agreement. The
Company intends to submit the Rights Agreement to a vote of its shareholders at the Company’s next annual meeting. For more
information, please see the Current Report on Form 8-K filed with the SEC on November 6, 2018.