NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Balance Sheet as of August 31, 2019, the Consolidated Statements of Operations, Consolidated Statements of Comprehensive Loss, Consolidated Statements of Cash Flows, and the Consolidated Statements of Stockholders’ Equity for the three months ended August 31, 2019 and 2018, have been prepared by us and are unaudited. The Consolidated Balance Sheet as of May 31, 2019 was derived from audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to state fairly the financial position, changes in stockholders’ equity and comprehensive income, results of operations and cash flows as of and for the period ended August 31, 2019 (and for all periods presented) have been made.
The unaudited interim consolidated financial statements for the three months ended August 31, 2019 and 2018 include the accounts of AngioDynamics, Inc. and its wholly owned subsidiaries, collectively, the “Company”. All intercompany balances and transactions have been eliminated.
On May 31, 2019, the Company completed the sale of the Fluid Management business and all of the assets used primarily in connection with the Fluid Management business (Note 3). As the disposal of this business represents a strategic shift with a major effect on the Company's operations, for all periods presented in our Consolidated Statements of Operations and Comprehensive Loss, all sales, costs, expenses, gains and income taxes attributable to Fluid Management have been reported under the captions, “Income from Discontinued Operations, Net of Income Tax.” Cash flows used in or provided by Fluid Management have been reported in the Consolidated Statements of Cash Flows under operating and investing activities.
2. ACQUISITIONS
RadiaDyne Acquisition
On September 21, 2018, the Company acquired RadiaDyne, a privately held medical diagnostic and device company that designs and develops patient dose monitoring technology to improve cancer treatment outcomes. The aggregate purchase price of $75.0 million included an upfront payment of $47.9 million, contingent consideration with an estimated fair value of $22.3 million, an indemnification holdback of $4.6 million and a purchase price holdback of $0.2 million. The fair value of $22.3 million in contingent consideration is comprised of $16.5 million for the revenue milestones and $5.8 million for the technical milestones. The $4.6 million indemnification holdback is recorded in accrued liabilities at August 31, 2019 and the $0.2 million purchase price holdback was initially recorded in accrued liabilities, and was paid during the third quarter of fiscal year 2019.
This acquisition expands the Company’s growing Oncology business by adding RadiaDyne’s early-stage, proprietary OARtrac® real-time radiation dose monitoring platform and other market-leading oncology solutions, including the IsoLoc®/ImmobiLoc® and Alatus® balloon stabilizing technologies.
The Company accounted for the RadiaDyne acquisition under the acquisition method of accounting for business combinations. Accordingly, the cost to acquire the assets was allocated to the underlying net assets in proportion to estimates of their respective fair values. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill. Goodwill is deductible for income tax purposes.
The Company has not disclosed the amount of revenue and earnings for sales of RadiaDyne products since acquisition, nor proforma information, because these amounts are not significant to the Company's financial statements. Acquisition-related costs associated with the RadiaDyne acquisition, which are included in "acquisition, restructuring and other expenses, net" in the accompanying Consolidated Statements of Operations, were approximately $1.6 million in fiscal year 2019. The following table summarizes the preliminary and final aggregate purchase price allocated to the net assets acquired:
|
|
|
|
|
|
|
|
(in thousands)
|
Final allocation
|
|
Accounts receivable
|
$
|
900
|
|
|
Inventory
|
732
|
|
|
Prepaid and other current assets
|
98
|
|
|
Property, plant and equipment
|
133
|
|
|
Intangible assets:
|
|
|
RadiaDyne trademark
|
400
|
|
|
OARtrac trademark
|
200
|
|
|
RadiaDyne legacy product technology
|
1,500
|
|
|
OARtrac product technology
|
18,900
|
|
|
RadiaDyne customer relationships
|
4,600
|
|
|
Goodwill
|
47,982
|
|
|
Total assets acquired
|
$
|
75,445
|
|
|
Liabilities assumed
|
|
|
Accounts payable
|
$
|
352
|
|
|
Accrued expenses
|
106
|
|
|
Total liabilities assumed
|
$
|
458
|
|
|
Net assets acquired
|
$
|
74,987
|
|
The Company finalized the allocation of the purchase price to the assets acquired and liabilities assumed in the fourth quarter of FY19.
The values assigned to the RadiaDyne and OARtrac trademark and product technologies were derived using the relief-from-royalties method under the income approach. This approach is used to estimate the cost savings that accrue for the owner of an intangible asset who would otherwise have to pay royalties or licensing fees on revenues earned through the use of the asset if they had not owned the rights to use the assets. The net after-tax royalty savings are calculated for each year in the remaining economic life of the intangible asset and discounted to present value. The trademarks are deemed to have a useful life of five to seven years and the product technologies are deemed to have a useful life of seven to ten years. Both are amortized on a straight-line basis over their useful life.
The value assigned to customer relationships was derived using the multi-period excess earnings method under the income approach. This approach estimates the excess earnings generated over the lives of the customers that existed as of the acquisition date and discounts such earnings to present value. Customer relationships are amortized on a straight-line basis over fifteen years.
The goodwill arising from the acquisition consists largely of synergies and economies of scale the Company hopes to achieve from combining the acquired assets with the Company's current operations.
BioSentry Acquisition
On August 14, 2018, the Company acquired the BioSentry product from Surgical Specialties, LLC (“SSC”), for an aggregate purchase price of $39.8 million of which $37.0 million was paid on August 14, 2018 and $2.8 million was recorded as contingent consideration. The contingent consideration liability was recorded at fair value and was paid in the fourth quarter of fiscal year 2019 upon fulfillment of hydrogel orders by SSC.
The Company accounted for the BioSentry acquisition under the acquisition method of accounting for business combinations. Accordingly, the cost to acquire the assets was allocated to the underlying net assets in proportion to estimates of their respective fair values. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill. Goodwill is deductible for income tax purposes.
The Company has not disclosed the amount of revenue and earnings for sales of BioSentry products since acquisition, nor proforma information, because these amounts are not significant to the Company's financial statements. Acquisition-related costs associated with the BioSentry acquisition, which are included in "acquisition, restructuring and other expenses, net" in the accompanying Consolidated Statements of Operations, were approximately $1.0 million in fiscal year 2019. The following
table summarizes the preliminary and revised final purchase price allocated to the net assets acquired:
|
|
|
|
|
|
|
|
(in thousands)
|
Final allocation
|
|
Inventory
|
$
|
50
|
|
|
Property, plant and equipment
|
10
|
|
|
Intangible assets:
|
|
|
BioSentry trademark
|
2,500
|
|
|
BioSentry product technology
|
20,900
|
|
|
Customer relationships
|
2,600
|
|
|
Goodwill
|
13,740
|
|
|
Net assets acquired
|
$
|
39,800
|
|
The Company finalized the allocation of the purchase price to the assets acquired and liabilities assumed in the fourth quarter of FY19.
The values assigned to the BioSentry trademark and product technologies were derived using the relief-from-royalties method under the income approach. This approach is used to estimate the cost savings that accrue for the owner of an intangible asset who would otherwise have to pay royalties or licensing fees on revenues earned through the use of the asset if they had not owned the rights to use the assets. The net after-tax royalty savings are calculated for each year in the remaining economic life of the intangible asset and discounted to present value. The trademark and product technologies are deemed to have a fifteen year useful life and are amortized on a straight-line basis over their useful life.
The value assigned to customer relationships was derived using the multi-period excess earnings method under the income approach. This approach estimates the excess earnings generated over the lives of the customers that existed as of the acquisition date and discounts such earnings to present value. Customer relationships are amortized on a straight-line basis over ten years.
The goodwill arising from the acquisition consists largely of synergies and economies of scale the Company hopes to achieve from combining the acquired assets with the Company's current operations.
3. DIVESTITURES
Fluid Management
On May 31, 2019, the Company completed the sale of the NAMIC Fluid Management business (the “Divestiture”) and all of the assets used primarily in connection with the Fluid Management business to Medline Industries, Inc. (“Medline”) pursuant to an asset purchase agreement dated April 17, 2019 (the “Asset Purchase Agreement”). Total consideration received by the Company for the Divestiture in the fourth quarter of fiscal year 2019 was $169.2 million in cash and resulted in a gain of $46.6 million after working capital adjustments of $0.6 million. The gain was recorded in discontinued operations. On June 3, 2019, a portion of the net proceeds were used to retire the outstanding balance on the Term Loan and Revolving Facility and the remaining net proceeds will continue to be invested in the business.
Pursuant to a transition services agreement entered into and effective on the closing of the transaction, the Company will supply certain services to Medline. Medline will receive certain legal, human resource, tax, accounting and information technology services from the Company for a period generally not to exceed 24 months.
As a result of the Divestiture, the results of operations from the Fluid Management business are reported in the accompanying Consolidated Statements of Operations as “Income from discontinued operations, net of income tax” for the
three months ended August 31, 2018. The following table summarizes the financial results of our discontinued operations:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(in thousands)
|
Aug 31, 2018
|
|
Net sales
|
$
|
21,397
|
|
|
Cost of sales (exclusive of amortization)
|
12,882
|
|
|
Gross profit
|
8,515
|
|
|
Operating expenses
|
|
|
Research and development
|
288
|
|
|
Sales and marketing
|
1,028
|
|
|
General and administrative
|
62
|
|
|
Amortization of intangibles
|
682
|
|
|
Total operating expenses
|
2,060
|
|
|
Operating income
|
6,455
|
|
|
|
|
|
Income from discontinued operations before income taxes
|
6,455
|
|
|
Income tax expense
|
1,220
|
|
|
Income from discontinued operations
|
$
|
5,235
|
|
In accordance with accounting principles generally accepted in the United States (“GAAP”), only expenses specifically identifiable and related to a business to be disposed may be allocated to discontinued operations. As such, the selling and marketing, research and development and general and administrative expenses recorded in discontinued operations include corporate costs incurred directly in support of the Fluid Management portfolio.
Total operating and investing cash flows of discontinued operations for the three months ended August 31, 2018 is comprised of the following, which excludes the effect of income taxes:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(in thousands)
|
Aug 31, 2018
|
|
Net cash provided by operating activities
|
$
|
524
|
|
|
Net cash provided by investing activities
|
224
|
|
4. REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue Recognition
Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
The Company has one primary revenue stream which is the sales of its products.
Disaggregation of Revenue
The following tables summarize net product revenue by Global Business Unit ("GBU") and geography for the three months ended August 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended August 31, 2019
|
|
(in thousands)
|
United States
|
|
International
|
|
Total
|
|
Net sales
|
|
|
|
|
|
|
Vascular Interventions & Therapies
|
$
|
25,676
|
|
|
$
|
3,237
|
|
|
$
|
28,913
|
|
|
Vascular Access
|
19,284
|
|
|
3,875
|
|
|
23,159
|
|
|
Oncology
|
7,977
|
|
|
5,993
|
|
|
13,970
|
|
|
Total
|
$
|
52,937
|
|
|
$
|
13,105
|
|
|
$
|
66,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended August 31, 2018
|
|
(in thousands)
|
United States
|
|
International
|
|
Total
|
|
Net sales
|
|
|
|
|
|
|
Vascular Interventions & Therapies
|
$
|
25,851
|
|
|
$
|
2,747
|
|
|
$
|
28,598
|
|
|
Vascular Access
|
20,447
|
|
|
3,343
|
|
|
23,790
|
|
|
Oncology
|
5,198
|
|
|
6,357
|
|
|
11,555
|
|
|
Total
|
$
|
51,496
|
|
|
$
|
12,447
|
|
|
$
|
63,943
|
|
Net Product Revenue
The Company's products consist of a wide range of medical, surgical and diagnostic devices used by professional healthcare providers for vascular access, for the treatment of peripheral vascular disease and for use in oncology and surgical settings. The Company's devices are generally used in minimally invasive, image-guided procedures. Most of the Company's products are intended to be used once and then discarded, or they may be implanted for short or long term use. The Company sells its products to its distribution partners and to end users, such as interventional radiologists, interventional cardiologists, vascular surgeons, urologists, interventional and surgical oncologists and critical care nurses.
Contracts and Performance Obligations
The Company contracts with its customers based on customer purchase orders, which in many cases are governed by master purchasing agreements. The Company’s contracts with customers are generally for product only, and do not include other performance obligations such as services or other material rights. As part of its assessment of each contract, the Company evaluates certain factors including the customer’s ability to pay (or credit risk). For each contract, the Company considers the promise to transfer products, each of which is distinct, to be the identified performance obligations.
Transaction Price and Allocation to Performance Obligations
Transaction prices of products are typically based on contracted rates. Product revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products to a customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the expected value method. As such, revenue is recorded net of rebates, returns and other deductions.
If a contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products underlying each performance obligation. The Company has standard pricing for its products and determines standalone selling prices based on the price at which the performance obligation is sold separately.
Revenue Recognition
Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which occurs at a point in time, and may be upon shipment from the Company’s manufacturing site or delivery to the customer’s named location, based on the contractual shipping terms of a contract.
In determining whether control has transferred, the Company considers if there is a present right to payment from the customer and when physical possession, legal title and risks and rewards of ownership have transferred to the customer.
The Company typically invoices customers upon satisfaction of identified performance obligations. As the Company’s standard payment terms are 30 to 90 days from invoicing, the Company does not provide any significant financing to its customers.
Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.
Variable Consideration
Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established for discounts, returns, rebates and allowances that are offered within contracts between the Company and its customers. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as a current liability.
Rebates and Allowances: The Company provides certain customers with rebates and allowances that are explicitly stated in the Company’s contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. The Company establishes a liability for such amounts, which is included in accrued expenses in the accompanying Consolidated Balance Sheets. These rebates and allowances result from performance-based offers that are primarily based on attaining contractually specified sales volumes and administrative fees the Company is required to pay to group purchasing organizations.
Product Returns: The Company generally offers customers a limited right of return. Product returns after 30 days must be pre-approved by the Company and customers may be subject to a 20% restocking charge. To be accepted, a returned product must be unadulterated, undamaged and have at least twelve months remaining prior to its expiration date. The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return liabilities using its historical product return information and considers other factors that it believes could significantly impact its expected returns, including product recalls. During the three months ended August 31, 2019, such product returns were not material.
Contract Balances with Customers
A receivable is recognized in the period the Company ships the product. Payment terms on invoiced amounts are based on contractual terms with each customer and generally coincide with revenue recognition. Accordingly, the Company does not have any contract assets associated with the future right to invoice its customers. In some cases, if control of the product has not yet transferred to the customer or the timing of the payments made by the customer precedes the Company’s fulfillment of the performance obligation, the Company recognizes a contract liability that is included in deferred revenue in the accompanying Consolidated Balance Sheets.
The following table presents changes in the Company’s receivables, contract assets and contract liabilities with customers:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Aug 31, 2019
|
|
May 31, 2019
|
|
Receivables
|
$
|
32,540
|
|
|
$
|
43,577
|
|
|
Contract assets
|
$
|
—
|
|
|
$
|
—
|
|
|
Contract liabilities
|
$
|
607
|
|
|
$
|
681
|
|
During the three months ended August 31, 2019, the Company recognized $0.2 million in revenue that was included in contract liabilities as of the beginning of the period. This was offset by additions to contract liabilities of $0.1 million.
Costs to Obtain or Fulfill a Customer Contract
Under ASC 606, the Company recognizes an asset for incremental costs of obtaining a contract with a customer if it expects to recover those costs. The Company’s sales incentive compensation plans qualify for capitalization since these plans are directly related to sales achieved during a period of time. However, the Company has elected the practical expedient under ASC 340-40-25-4 to expense the costs as they are incurred within selling and marketing expenses since the amortization period is less than one year.
The Company accounts for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. Shipping and handling costs, associated with the distribution of finished products to customers, are recorded in costs of goods sold and are recognized when the related finished product is shipped to the customer. Amounts charged to customers for shipping are recorded in net sales.
5. INVENTORIES
Inventories are stated at lower of cost and net realizable value (using the first-in, first-out method). Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Aug 31, 2019
|
|
May 31, 2019
|
|
Raw materials
|
$
|
17,443
|
|
|
$
|
16,045
|
|
|
Work in process
|
8,539
|
|
|
6,786
|
|
|
Finished goods
|
19,247
|
|
|
17,240
|
|
|
Inventories
|
$
|
45,229
|
|
|
$
|
40,071
|
|
The Company periodically reviews for both obsolescence and loss of value. The Company makes assumptions about the future demand for and market value of the inventory. Based on these assumptions, the Company estimates the amount of obsolete, expiring and slow moving inventory. The total inventory reserve at August 31, 2019 and May 31, 2019 was $4.1 million and $4.2 million, respectively. Of the $4.1 million reserve as of August 31, 2019 and the $4.2 million reserve as of May 31, 2019, $0.4 million relates to the inventory reserve for Acculis inventory as a result of the recall announced in the fourth quarter of fiscal year 2017 and $0.7 million relates to a specific reserve related to the termination of an agreement with a Japanese distributor in the second quarter of fiscal year 2018.
6. GOODWILL AND INTANGIBLE ASSETS
Intangible assets other than goodwill are amortized over their estimated useful lives on either a straight-line basis or proportionately to the benefit being realized. Useful lives range from two to eighteen years. The Company periodically reviews the estimated useful lives of its intangible assets and reviews such assets or asset groups for impairment whenever events or changes in circumstances indicate that the carrying value of the assets or asset groups may not be recoverable. If an intangible asset or asset group is considered to be impaired, the amount of the impairment will equal the excess of the carrying value over the fair value of the asset.
Goodwill is not amortized, but rather, is tested for impairment annually or more frequently if impairment indicators arise. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination.
The Company's annual testing for impairment of goodwill was completed as of December 31, 2018. The Company operates as a single operating segment with one reporting unit and consequently evaluates goodwill for impairment based on an evaluation of the fair value of the Company as a whole. The Company determines the fair value of the reporting unit based on the market valuation approach and concluded that it was not more-likely-than-not that the fair value of the Company's reporting unit was less than its carrying value.
Even though the Company determined that there was no goodwill impairment as of December 31, 2018, the future occurrence of a potential indicator of impairment, such as a significant adverse change in legal, regulatory, business or economic conditions or a more-likely-than-not expectation that the reporting unit or a significant portion of the reporting unit will be sold or disposed of, would require an interim assessment for the reporting unit prior to the next required annual assessment as of December 31, 2019. There were no adjustments to goodwill for the three months ended August 31, 2019.
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aug 31, 2019
|
|
(in thousands)
|
Gross
carrying
value
|
|
Accumulated
amortization
|
|
Net carrying
value
|
|
Product technologies
|
$
|
182,968
|
|
|
$
|
(77,967
|
)
|
|
$
|
105,001
|
|
|
Customer relationships
|
60,147
|
|
|
(26,995
|
)
|
|
33,152
|
|
|
Trademarks
|
9,300
|
|
|
(6,470
|
)
|
|
2,830
|
|
|
Licenses
|
5,887
|
|
|
(5,215
|
)
|
|
672
|
|
|
|
$
|
258,302
|
|
|
$
|
(116,647
|
)
|
|
$
|
141,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2019
|
|
(in thousands)
|
Gross
carrying
value
|
|
Accumulated
amortization
|
|
Net carrying
value
|
|
Product technologies
|
$
|
182,971
|
|
|
$
|
(75,412
|
)
|
|
$
|
107,559
|
|
|
Customer relationships
|
60,166
|
|
|
(25,950
|
)
|
|
34,216
|
|
|
Trademarks
|
9,300
|
|
|
(6,404
|
)
|
|
2,896
|
|
|
Licenses
|
5,752
|
|
|
(5,036
|
)
|
|
716
|
|
|
|
$
|
258,189
|
|
|
$
|
(112,802
|
)
|
|
$
|
145,387
|
|
Amortization expense for the three months ended August 31, 2019 and 2018 was $3.9 million and $3.4 million, respectively.
Expected future amortization expense related to the intangible assets is as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Remainder of 2020
|
$
|
11,308
|
|
|
2021
|
14,022
|
|
|
2022
|
13,406
|
|
|
2023
|
13,369
|
|
|
2024
|
11,813
|
|
|
2025 and thereafter
|
77,737
|
|
|
|
$
|
141,655
|
|
7. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Aug 31, 2019
|
|
May 31, 2019
|
|
Payroll and related expenses
|
$
|
5,970
|
|
|
$
|
14,987
|
|
|
Royalties
|
1,439
|
|
|
2,088
|
|
|
Accrued severance
|
616
|
|
|
504
|
|
|
Sales and franchise taxes
|
3,417
|
|
|
807
|
|
|
Outside services
|
1,781
|
|
|
3,514
|
|
|
Litigation matters
|
—
|
|
|
2,700
|
|
|
Indemnification holdback
|
4,866
|
|
|
4,807
|
|
|
Other
|
4,604
|
|
|
8,931
|
|
|
|
$
|
22,693
|
|
|
$
|
38,338
|
|
8. LONG TERM DEBT
On June 3, 2019 and in connection with the completion of the Fluid Management divestiture, the Company repaid all amounts outstanding under its existing Credit Agreement and entered into a new Credit Agreement with the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and Bank of America, N.A. and KeyBank National Association, as co-syndication agents.
The Credit Agreement provides for a $125.0 million secured revolving credit facility (the “Revolving Facility”), which includes an uncommitted expansion feature that allows the Company to increase the total revolving commitments and/or add new tranches of term loans in an aggregate amount not to exceed $75.0 million. The proceeds may be used to refinance certain existing indebtedness of the Company and its subsidiaries, to finance the working capital needs, and for general corporate purposes (including permitted acquisitions), of the Company and its subsidiaries.
The Credit Agreement has a five year maturity. Interest on the facility will be based, at the Company’s option, on a base rate of LIBOR plus an applicable margin tied to the Company’s total leverage ratio and having ranges between 0.25% and 0.75% for base rate loans and between 1.25% and 1.75% for LIBOR loans. After default, the interest rate may be increased by 2.0%. The facility will also carry a commitment fee of 0.20% to 0.25% per annum on the unused portion.
The Company's obligations under the Revolving Facility are unconditionally guaranteed, jointly and severally, by the Company's material direct and indirect domestic subsidiaries (the “Guarantors”). All obligations of the Company and the Guarantors under the Revolving Facility are secured by first priority security interests in substantially all of the assets of the Company and the Guarantors.
The Credit Agreement includes customary representations, warranties and covenants, and acceleration, indemnity and events of default provisions, including, among other things, two quarterly financial covenants as follows:
|
|
|
|
•
|
maximum leverage ratio of consolidated total indebtedness* to consolidated EBITDA* of not greater than 3.00 to 1.00 (during certain periods following material acquisitions the ratio shall be increased to 3.50 to 1.00).
|
|
|
|
|
•
|
fixed charge coverage ratio of consolidated EBITDA minus consolidated capital expenditures to consolidated interest expense paid or payable in cash plus scheduled principal payments in respect of indebtedness under the Credit Agreement of not less than 1.25 to 1.00.
|
* The definitions of consolidated total indebtedness and consolidated EBITDA are maintained in the credit agreement included as an exhibit to Form 8-k filed on June 6, 2019.
The Company was in compliance with the Credit Agreement covenants as of August 31, 2019.
As of August 31, 2019, there was no outstanding balance on the Revolving Facility. As of May 31, 2019 the carrying value of long-term debt approximates its fair market value.
9. INCOME TAXES
The Company provides for income taxes at the end of each interim period based on the estimated effective tax rate for the full fiscal year adjusted for any discrete events, which are recorded in the period that they occur. The estimated annual effective tax rate prior to discrete items was 8.3% in the first quarter of fiscal 2020, as compared to 17.8% for the same period in fiscal 2019. In fiscal 2020, the Company’s effective tax rate differs from the U.S. statutory rate primarily due to the impact of the valuation allowance, foreign taxes, and other non-deductible permanent items (such as non-deductible meals and entertainment, Section 162(m) excess compensation and non-deductible stock based compensation).
The Company regularly assesses its ability to realize its deferred tax assets. Assessing the realization of deferred tax assets requires significant management judgment. In determining whether its deferred tax assets are more likely than not realizable, the Company evaluated all available positive and negative evidence, and weighted the evidence based on its objectivity. Evidence that the Company considered included its history of net operating losses, which resulted in the Company recording a full valuation allowance for its deferred tax assets in fiscal 2016, except the naked credit deferred tax liability.
Based on the review of all available evidence, the Company determined that it has not yet attained a sustained level of profitability and the objectively verifiable negative evidence outweighed the positive evidence. Therefore, the Company has provided a valuation allowance on its federal and state net operating loss carryforwards, federal and state R&D credit carryforwards and other net deferred tax assets that have a limited life and are not supportable by the naked credit deferred tax liability sourced income as of August 31, 2019. The Company will continue to assess the level of the valuation allowance required. If sufficient positive evidence exists in future periods to support a release of some or all of the valuation allowance, such a release would likely have a material impact on the Company’s results of operations.
10. SHARE-BASED COMPENSATION
The Company has two stock-based compensation plans that provide for the issuance of up to approximately 11.3 million shares of common stock. The 2004 Stock and Incentive Award Plan (the "2004 Plan") provides for the grant of incentive options to the Company's employees and for the grant of non-statutory stock options, restricted stock, stock appreciation rights, performance units, performance shares and other incentive awards to the Company's employees, directors and other service providers. The Company also has an employee stock purchase plan.
For the three months ended August 31, 2019 and 2018, share-based compensation expense was $1.9 million and $2.2 million, respectively.
During the three months ended August 31, 2019 and 2018, the Company granted stock options and restricted stock units under the 2004 Plan to certain employees and members of the Board of Directors. Stock option awards are valued using the Black-Scholes option-pricing model and then amortized on a straight-line basis over the requisite service period of the award. Restricted stock unit awards are valued based on the closing trading value of the Company's shares on the date of grant and then amortized on a straight-line basis over the requisite service period of the award.
As of August 31, 2019, there was $16.6 million of unrecognized compensation expense related to share-based payment arrangements. These costs are expected to be recognized over a weighted-average period of approximately four years. The Company has sufficient shares to satisfy expected share-based payment arrangements.
11. EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of common shares outstanding without consideration of potential common stock. Diluted earnings per share includes the dilutive effect of potential common stock consisting of stock options, restricted stock units and performance stock units, provided that the inclusion of such securities is not anti-dilutive. In periods with a net loss, stock options and restricted stock units are not included in the computation of diluted loss per share as the impact would be anti-dilutive.
The following table reconciles basic to diluted weighted-average shares outstanding for the three months ended August 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(in thousands)
|
Aug 31, 2019
|
|
Aug 31, 2018
|
|
Basic
|
37,783
|
|
|
37,323
|
|
|
Effect of dilutive securities
|
—
|
|
|
—
|
|
|
Diluted
|
37,783
|
|
|
37,323
|
|
|
|
|
|
|
|
Securities excluded as their inclusion would be anti-dilutive
|
2,503
|
|
|
2,309
|
|
12. SEGMENT AND GEOGRAPHIC INFORMATION
The Company considers the business to be a single operating segment engaged in the development, manufacture and sale of medical devices for vascular access, peripheral vascular disease and oncology on a global basis. The Company's chief operating decision maker, the President and Chief Executive Officer (CEO), evaluates the various global product portfolios on a net sales basis. Executives reporting to the CEO include those responsible for commercial operations, manufacturing operations, regulatory and quality and certain corporate functions. The CEO evaluates profitability, investment and cash flow metrics on a consolidated worldwide basis due to shared infrastructure and resources.
The table below summarizes net sales by Global Business Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(in thousands)
|
Aug 31, 2019
|
|
Aug 31, 2018
|
|
Net sales
|
|
|
|
|
Vascular Interventions & Therapies
|
$
|
28,913
|
|
|
$
|
28,598
|
|
|
Vascular Access
|
23,159
|
|
|
23,790
|
|
|
Oncology
|
13,970
|
|
|
11,555
|
|
|
Total
|
$
|
66,042
|
|
|
$
|
63,943
|
|
The table below presents net sales by geographic area based on external customer location:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(in thousands)
|
Aug 31, 2019
|
|
Aug 31, 2018
|
|
Net sales
|
|
|
|
|
United States
|
$
|
52,937
|
|
|
$
|
51,496
|
|
|
International
|
13,105
|
|
|
12,447
|
|
|
Total
|
$
|
66,042
|
|
|
$
|
63,943
|
|
13. FAIR VALUE
On a recurring basis, the Company measures certain financial assets and financial liabilities at fair value based upon quoted market prices, where available. Where quoted market prices or other observable inputs are not available, the Company applies valuation techniques to estimate fair value. FASB ASC Topic 820, Fair Value Measurements and Disclosures, establishes a three-level valuation hierarchy for disclosure of fair value measurements. The categorization of financial assets and financial liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy are defined as follows:
|
|
|
|
•
|
Level 1 - Inputs to the valuation methodology are quoted market prices for identical assets or liabilities.
|
|
|
|
|
•
|
Level 2 - Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs.
|
|
|
|
|
•
|
Level 3 - Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk.
|
The Company's financial instruments include cash and cash equivalents, accounts receivable, accounts payable and contingent consideration. The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable approximates fair value due to the immediate or short-term maturities. The Company's recurring fair value measurements using significant unobservable inputs (Level 3) relate to contingent consideration liabilities.
The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis as of August 31, 2019 and May 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements using
inputs considered as:
|
|
Fair Value at August 31, 2019
|
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
Contingent consideration for acquisition earn outs
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,830
|
|
|
$
|
11,830
|
|
|
Total Financial Liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,830
|
|
|
$
|
11,830
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements using
inputs considered as:
|
|
Fair Value at May 31, 2019
|
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
Contingent consideration for acquisition earn outs
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,486
|
|
|
$
|
13,486
|
|
|
Total Financial Liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,486
|
|
|
$
|
13,486
|
|
There were no transfers between Level 1, 2 and 3 for the three months ended August 31, 2019.
The table below presents the changes in fair value components of Level 3 instruments in the three months ended August 31, 2019:
|
|
|
|
|
|
|
|
|
Three Months Ended August 31, 2019
|
|
(in thousands)
|
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
|
|
Balance, May 31, 2019
|
$
|
13,486
|
|
|
Total gains or losses (realized/unrealized):
|
|
|
|
Change in present value of contingent consideration (1)
|
(448
|
)
|
|
Contingent consideration payments
|
(1,208
|
)
|
|
Balance, August 31, 2019
|
$
|
11,830
|
|
(1) Change in the fair value of contingent consideration is included in earnings and comprised of changes in estimated earn out payments based on projections of Company performance and amortization of the present value discount.
Contingent Consideration for Acquisition Earn Outs
Some of the Company's business combinations involve the potential for the payment of future contingent consideration upon the achievement of certain product development milestones or various other performance conditions. Payment of the additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels or product development targets. Contingent consideration is recorded at the estimated fair value of the contingent payments on the acquisition date. The fair value of the contingent consideration is remeasured at the estimated fair value at each reporting period with the change in fair value recognized as income or expense within change in fair value of contingent consideration in the Consolidated Statements of Operations.
The Company measures the initial liability and remeasures the liability on a recurring basis using Level 3 inputs as defined under authoritative guidance for fair value measurements. The fair value is determined using a discounted cash flow model applied to projected net sales, using probabilities of achieving projected net sales and projected payment dates. Projected net sales are based on the Company's internal projections and extensive analysis of the target market and the sales potential. Increases or decreases in any valuation inputs in isolation may result in a significantly lower or higher fair value measurement in the future.
The recurring Level 3 fair value measurements of the contingent consideration liabilities include the following significant unobservable inputs as of August 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range
|
|
Revenue based payments
|
$
|
8,533
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
4% - 5%
|
|
|
|
|
|
|
Probability of payment
|
|
66% - 100%
|
|
|
|
|
|
|
Projected fiscal year of payment
|
|
2023
|
|
Technical milestones
|
$
|
3,297
|
|
|
Estimated probability
|
|
Estimated probability
|
|
90%
|
|
|
|
|
|
|
Projected year of payment
|
|
2020 - 2022
|
|
Total
|
$
|
11,830
|
|
|
|
|
|
|
|
At August 31, 2019, the range of estimated potential undiscounted future contingent consideration that the Company expects to pay as a result of all completed acquisitions is $14.0 million to $34.0 million. The milestones, including revenue projections and technical milestones, associated with the contingent consideration must be reached in future periods ranging from fiscal years 2020 to 2023 in order for the associated consideration to be paid.
14. LEASES
Adoption of ASU No. 2016-02, Leases (Topic 842)
On June 1, 2019, the Company adopted ASU No. 2016-02 using the modified retrospective approach. This ASU increases transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Comparative periods prior to adoption have not been retrospectively adjusted.
The Company elected the three practical expedients that permit an entity to a) not reassess whether expired or existing contracts contain leases, b) not reassess lease classification for existing or expired leases, and c) not consider whether previously capitalized initial direct costs would be appropriate under the new standard. Further, the Company has elected to not recognize leases with terms of 12 months or less on the balance sheet, and elected to account for lease and non-lease components as a single component for certain classes of assets.
The adoption of this standard resulted in the recording of an additional lease asset and lease liability of approximately $5.6 million. The standard did not have a material impact on the Company's Consolidated Statement of Operations, Stockholders Equity or Cash Flows.
Leases
The Company determines if an arrangement is a lease at inception of the contract. The Company has operating leases for buildings, primarily for office space, R&D, manufacturing and warehousing.
Operating lease right-of-use (“ROU”) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Many of the lease agreements contain renewal or termination clauses that are factored into the determination of the lease term if it is reasonably certain that these options would be exercised. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.
The following table presents supplemental balance sheet information related to our leases:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Balance Sheet Location
|
|
Aug 31, 2019
|
|
Assets
|
|
|
|
|
Operating lease ROU asset
|
Other assets
|
|
$
|
5,104
|
|
|
Liabilities
|
|
|
|
|
Current operating lease liabilities
|
Other current liabilities
|
|
1,606
|
|
|
Non-current operating lease liabilities
|
Other long-term liabilities
|
|
3,489
|
|
|
Total lease liabilities
|
|
|
$
|
5,095
|
|
The interest rate implicit in lease agreements is typically not readily determinable, and as such the Company used the incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The incremental borrowing rate is defined as the interest the Company would pay to borrow on a
collateralized basis, considering factors such as length of lease term. The following table presents the weighted average remaining lease term and discount rate:
|
|
|
|
|
|
|
|
Aug 31, 2019
|
|
Weighted average remaining term (in years)
|
3.7
|
|
|
Weighted average discount rate
|
4.3
|
%
|
The following table presents the maturities of the lease liabilities:
|
|
|
|
|
|
|
|
(in thousands)
|
Aug 31, 2019
|
|
Remainder of 2020
|
$
|
1,142
|
|
|
2021
|
1,251
|
|
|
2022
|
1,118
|
|
|
2023
|
1,138
|
|
|
2024
|
576
|
|
|
2025 and thereafter
|
—
|
|
|
Total lease payments
|
$
|
5,225
|
|
|
Less: Imputed Interest
|
130
|
|
|
Total lease obligations
|
$
|
5,095
|
|
|
Less: Current portion of lease obligations
|
1,606
|
|
|
Long-term lease obligations
|
$
|
3,489
|
|
The Company recognized $0.7 million of operating lease expense during the three months ended August 31, 2019, which includes immaterial short-term leases. Within the accompanying Consolidated Statements of Operations, $0.3 million is classified in cost of sales and $0.4 million is classified as general and administrative.
In addition to the total lease obligations presented in the table above, we have a 7-year building operating lease with undiscounted payment obligations of $6.5 million and a 2-year building operating lease with undiscounted payment obligations of $0.4 million that are expected to commence during fiscal year 2020.
Future annual payments under non-cancelable operating leases in the aggregate at May 31, 2019, are summarized as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
May 31, 2019
|
|
2020
|
$
|
2,920
|
|
|
2021
|
2,338
|
|
|
2022
|
2,133
|
|
|
2023
|
2,131
|
|
|
2024 and thereafter
|
3,227
|
|
|
Total lease payments
|
$
|
12,749
|
|
The following table presents supplemental cash flow and other information related to our leases:
|
|
|
|
|
|
|
|
|
Three Months Ended August 31, 2019
|
|
(in thousands)
|
Aug 31, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
Operating cash flows from operating leases
|
$
|
563
|
|
|
ROU assets obtained in exchange for lease liabilities
|
|
|
Operating leases
|
—
|
|
15. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved in various legal proceedings, including commercial, intellectual property, product liability, and regulatory matters of a nature considered normal for its business. The Company accrues for amounts related to these matters if it is probable that a liability has been incurred, and an amount can be reasonably estimated. The Company discloses such matters when there is at least a reasonable possibility that a material loss may have been incurred. However, the Company cannot predict the outcome of any litigation or the potential for future litigation.
C.R. Bard, Inc. v. AngioDynamics, Inc.
On January 11, 2012, C.R. Bard, Inc. (“Bard”) filed a suit in the United States District Court of Utah claiming certain of the Company's implantable port products infringe on three U.S. patents held by Bard (the "Utah Action"). Bard’s complaint sought unspecified damages and other relief. The Company filed petitions for reexamination in the US Patent and Trademark Office ("USPTO") seeking to invalidate all three patents asserted by Bard in the litigation. The Company's petitions were granted and 40 of Bard's 41 patent claims were rejected and, following further proceedings, the Patent Office issued a Final Rejection of all 40 claims subject to reexamination. Thereafter, Bard filed appeals to the USPTO Board of Appeals and Interferences for all three reexaminations which were decided as follows: In one (issued on March 11, 2016 for US Patent No. 7,785,302), the rejections of six of the ten claims under reexamination were affirmed, but were reversed on four of the ten claims. In the second (issued on March 24, 2016 for U.S. Patent No. 7,959,615), the rejections of eight of the ten claims under reexamination were affirmed but the rejections of the other two of the ten claims were reversed. In the third (issued on March 29 for U.S. Patent No. 7,947,022) the rejections of all twenty claims under reexamination were affirmed. Thereafter, Bard sought Rehearing in all three appeals and the Company sought Rehearing in the ‘302 and ‘615 appeals. The PTO denied all three Rehearing Requests, but modified its characterization of one prior art reference for the ‘302 and ‘022 decisions.
Bard filed appeals to the Federal Circuit Court of Appeals in all three reexams and the Company filed Cross-Appeals for the ‘302 and the ‘615 reexams and completed briefing. Medcomp also filed an Amicus Brief in support of the Company on November 22, 2017. An oral hearing was held on September 5, 2018 and the Court rendered its decision on September 28, 2018, affirming that claims 1-5 and 10 of the ‘615 patent were invalid, but that claims 6-7 of the 615 patent and 1-4 of the 302 patent were valid over the prior art references considered in the Reexamination proceedings. The Federal Circuit also reversed the PTAB’s claim construction ruling and remanded for consideration of obviousness for the remaining claims under the new claim construction ruling and for further findings with respect to whether one of the asserted references qualified as a printed publication. On January 28, 2019, on remand, the USPTO reversed the rejections of the ‘302 claims 1-10, ‘022 claims 1-20 and ‘615 claims 6-9. The USPTO has since issued Inter Partes Reexamination Certificates for the ‘302 Patent (confirming validity of claims 1-10) on June 10, 2019, and for the ‘022 patent (confirming validity of claims 1-20) on July 2, 2019, and for the ‘615 patent on August 26, 2019. The Company has since filed a Motion to Unstay the Utah Case; that motion is fully briefed and awaiting decision by the Utah Court. Meanwhile, on July 12, 2017, Bard assigned the asserted patents to Bard Peripheral Vascular, Inc. (“BPV”) which was added as Co-Appellant before the Federal Circuit and as a co-Plaintiff in the Utah action. The Company believes these claims are without merit and intends to defend them vigorously. The Company has not recorded an expense related to the outcome of this litigation because it is not yet possible to determine if a potential loss is probable nor reasonably estimable.
On March 10, 2015, Bard and BPV filed suit in the United States District Court for the District of Delaware (the “Delaware Action") claiming certain of the Company's implantable port products infringe on three other U.S. patents held by Bard, which are different from those asserted in the Utah action. Bard's complaint seeks unspecified damages and other relief. On June 1, 2015, the Company filed two motions in response to Bard’s Complaint - one sought transfer to the District of Utah where the Utah Action is currently pending, and the other sought dismissal of the entire complaint on grounds that none of the claims in the asserted patents is directed to patent eligible subject matter under Section 101 of the Patent Statute and in light of recent authority from the U. S. Supreme Court.
On January 12, 2016, the Court issued a decision denying both motions. A Markman hearing was held on March 10, 2017 and the Court issued its Claim Construction Order on May 19, 2017. On May 19, 2017, Bard served its Final Infringement Contentions and on June 2, 2017, the Company served its Final Invalidity Contentions.
On October 20, 2017, the scheduling order for the case was amended to, among other things, set a trial date commencing July 23, 2018. The parties completed Expert Discovery in January 2018 and completed briefing on their respective case
dispositive motions on April 27, 2018. On June 26, 2018, the Court denied all case dispositive motions, ruling that issues of material fact remained in dispute. On July 9, 2018, the Court continued the trial until March 2019. On January 9, 2019 the Court held a further claim construction hearing to resolve two outstanding claim construction issues prior to trial. A Report and Recommendation was issued on February 11, 2019 and entered by the Court on February 28, 2019. Jury selection was held on Friday March 1, 2019 and trial began on March 4, 2019. On day four of the jury trial, at the close of C.R. Bard’s case (Plaintiff), Judge Bataillon granted judgment as a matter of law under rule 50(a) in favor of AngioDynamics, dismissing Bard’s suit. On April 5, 2019, Bard filed a precautionary Notice of Appeal to the Federal Circuit. On April 26, 2019, the District Court issued a Memorandum and Order confirming the grant of judgment in the Company’s favor of patent ineligibility, non-infringement, patent invalidity and no willful infringement. Meanwhile, on May 10, 2019, the Company filed a Motion for Attorney fees and non-taxable expenses under 35 USC Sec. 285. On May 21, 2019, the Court issued a Memorandum and Order which, inter alia, stayed proceedings on the Company’s fee Motion and the Company’s equitable claims pending appeal; and entered Final Judgment on May 21, 2019 as well. Bard filed a second Notice of Appeal on May 23, 2019. Both appeals have since been consolidated and Bard’s opening brief was served on September 27, 2019 and the Company's answering brief is currently due on November 6, 2019. We maintain our belief that Bard’s claims are without merit. The Company has not recorded an expense related to the outcome of this litigation because it is not yet possible to determine if a potential loss is probable nor reasonably estimable.
AngioDynamics, Inc. v. C.R. Bard, Inc.
On May 30, 2017, the Company commenced an action in the United States District Court for the Northern District of New York entitled AngioDynamics, Inc. v. C.R. Bard, Inc. and Bard Access Systems, Inc. (“Bard”). In this action, the Company alleges that Bard has illegally tied the sales of its tip location systems to the sales of its PICCs. The Company alleges that this practice violates the federal antitrust laws and has had, and continues to have, an anti-competitive effect in the market for PICCs. The Company seeks both monetary damages and injunctive relief. Bard moved to dismiss on September 8, 2017. On August 6, 2018 the court denied Bard’s motion in its entirety. The parties are currently engaged in discovery, which is set to close in February 2020.
Merz North America Settlement
On May 16, 2019, Merz North America, Inc. (“Merz”) commenced an action in the United States District Court for the Southern District of New York entitled Merz North America, Inc. v. AngioDynamics, Inc. In this action, Merz alleged breach of contract against AngioDynamics based on a March 1, 2016 Distribution Agreement. On June 28, 2019, AngioDynamics reached a settlement with Merz. AngioDynamics made a lump-sum payment of $2.5 million to Merz in return for dismissal of the case with prejudice during the first quarter. Merz filed a stipulation of dismissal with the Court on July 23, 2019.
16. ACQUISITION, RESTRUCTURING, AND OTHER ITEMS, NET
Acquisition, Restructuring and Other Items
For the three months ended August 31, 2019 and 2018 acquisition, restructuring and other items, net consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
(in thousands)
|
Aug 31, 2019
|
|
Aug 31, 2018
|
|
Legal (1)
|
$
|
669
|
|
|
$
|
2,880
|
|
|
Mergers and acquisitions (2)
|
246
|
|
|
1,318
|
|
|
Transition service agreement (3)
|
(737
|
)
|
|
—
|
|
|
Divestiture (4)
|
758
|
|
|
—
|
|
|
Restructuring
|
26
|
|
|
130
|
|
|
Other
|
538
|
|
|
94
|
|
|
Total
|
$
|
1,500
|
|
|
$
|
4,422
|
|
(1) Legal expenses related to litigation that is outside the normal course of business.
(2) Mergers and acquisitions expenses related to investment banking, legal and due diligence.
(3) Transition services agreement that was entered into as a result of the sale of the Fluid Management business.
(4) Divestiture expenses incurred to transition manufacturing from Glens Falls, NY to Queensbury, NY.
Included in the $0.7 million in legal for the three months ended August 31, 2019 is a $0.4 million settlement received for the Biolitec bankruptcy litigation. The settlement received offsets legal expenses paid related to the settlement proceedings.
Restructuring
The Company evaluates its performance and looks for opportunities to improve the overall operations of the Company on an ongoing basis. As a result of this evaluation, certain restructuring initiatives are taken to enhance the Company’s overall operations.
Operational Consolidation
On February 1, 2017, the Company announced to employees an operational consolidation plan (the “plan”) to consolidate its manufacturing facilities in Manchester, GA and Denmead, UK into the Glens Falls and Queensbury, NY facilities. This plan will streamline and optimize the manufacturing functions into one centralized location increasing the utilization of the Glens Falls and Queensbury facilities, optimizing inventory and reducing cost of goods sold through savings in overhead expenses and direct labor. The restructuring activities associated with the plan were completed in the fourth quarter of fiscal year 2018 with immaterial regulatory filing costs to be incurred.
The Company recorded restructuring charges related to the plan during the three months ended August 31, 2019 and 2018 of less than $0.1 million and $0.1 million, respectively. Total restructuring charges recorded to date are $6.3 million. The Company’s remaining restructuring liability is comprised of regulatory expenses which are expected to be paid in the next twelve months and are included in "accrued liabilities" on the Consolidated Balance Sheet.
17. ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in each component of accumulated other comprehensive loss, net of tax, are as follows for the three months ended August 31, 2019:
|
|
|
|
|
|
|
|
|
Three months ended August 31, 2019
|
|
(in thousands)
|
Foreign currency translation loss
|
|
Balance at May 31, 2019
|
$
|
(1,352
|
)
|
|
Other comprehensive loss before reclassifications, net of tax
|
(151
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
Net other comprehensive loss
|
$
|
(151
|
)
|
|
Balance at August 31, 2019
|
$
|
(1,503
|
)
|
18. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The following table provides a description of recent accounting pronouncements that may have a material effect on the Company's consolidated financial statements:
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|
|
|
|
|
|
|
Recently Issued Accounting Pronouncements - Adopted
|
|
Standard
|
Description
|
Date Adopted
|
Effect on the Consolidated Financial Statements
|
|
ASU 2016-02, Leases (Topic 842)
|
This ASU increases transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. For leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities.
|
June 1, 2019
|
Refer to Note 14, Leases, for the required disclosures related to adopting this standard.
|
|
|
|
|
|
|
|
|
Recently Issued Accounting Pronouncements - Not Yet Applicable or Adopted
|
|
Standard
|
Description
|
Effective Date
|
Effect on the Consolidated Financial Statements
|
|
ASU 2018-13, Fair Value Measurement (Topic 820)
|
This ASU removes, modifies and adds various disclosure requirements related to fair value disclosures. Disclosures related to transfers between fair value hierarchy levels will be removed and further detail around changes in unrealized gains and losses for the period and unobservable inputs used in determining level 3 fair value measurements will be added, among other changes.
|
June 1, 2020
|
The Company is currently assessing the impact of this standard on the consolidated financial statements.
|
|
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
|
This ASU replaces the current incurred loss impairment methodology for financial assets measured at amortized cost with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information, including forecasted information, to develop credit loss estimates.
|
June 1, 2020
|
The Company is currently assessing the impact of this standard on the consolidated financial statements.
|
19. SUBSEQUENT EVENTS
On October 2, 2019, the Company acquired Eximo Medical, Ltd., a pre-commercial stage medical device company and its proprietary 355nm B Laser Atherectomy technology, for an aggregate purchase price of $45.8 million with up to $20.0 million of potential future contingent consideration related to technical and revenue milestones. This acquisition expands and complements the Company’s Vascular Interventions and Therapies product portfolio by adding the 355nm B Laser Atherectomy technology which treats Peripheral Artery Disease.