NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of
August 31, 2017
, the consolidated statement of stockholders’ equity for the
three
months ended
August 31, 2017
and the consolidated statements of income (loss), consolidated statements of comprehensive income (loss), and consolidated statements of cash flows for the
three
months ended
August 31, 2017
and
2016
have been prepared by us and are unaudited. The consolidated balance sheet as of
May 31, 2017
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, 2017
(and for all periods presented) have been made.
The unaudited interim consolidated financial statements for the
three
months ended
August 31, 2017
and
2016
include the accounts of AngioDynamics, Inc. and its wholly owned subsidiaries, collectively, the “Company”. All intercompany balances and transactions have been eliminated.
Reclassifications
A reclassification was made to conform the prior year consolidated financial statements to reclassify bad debt expense from Sales and Marketing to General and Administrative. The amount of the reclassification related to fiscal year 2017 is
$0.03 million
.
2. INVENTORIES
Inventories are stated at lower of cost (using the first-in, first-out method) or market. As of
August 31, 2017
and
May 31, 2017
, inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
Aug 31, 2017
|
|
May 31, 2017
|
(in thousands)
|
|
Raw materials
|
$
|
18,389
|
|
|
$
|
17,563
|
|
Work in process
|
11,313
|
|
|
12,602
|
|
Finished goods
|
25,723
|
|
|
24,341
|
|
Inventories
|
$
|
55,425
|
|
|
$
|
54,506
|
|
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, 2017
and
May 31, 2017
was
$5.5 million
and
$7.3 million
, respectively. Of the
$5.5 million
in the first quarter of fiscal year 2018,
$1.2 million
relates to the inventory reserve for Acculis inventory as a result of the recall announced in the fourth quarter of fiscal year 2017. Of the
$7.3 million
in the prior year,
$2.4 million
relates to the inventory reserve for Acculis inventory as a result of the recall.
3. 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 our intangible assets and review 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, 2016. 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, 2016, 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, 2017. The Company continued to assess for potential impairment through
August 31, 2017
and noted no events that would be considered a triggering event. There were
no
adjustments to goodwill for the
three
months ended
August 31, 2017
.
As of
August 31, 2017
and
May 31, 2017
, intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
Gross
carrying
value
|
|
Accumulated
amortization
|
|
Net carrying
value
|
(in thousands)
|
|
Product technologies
|
$
|
147,172
|
|
|
$
|
(61,916
|
)
|
|
$
|
85,256
|
|
Customer relationships
|
56,455
|
|
|
(20,290
|
)
|
|
36,165
|
|
Trademarks
|
28,400
|
|
|
(9,782
|
)
|
|
18,618
|
|
Licenses
|
4,487
|
|
|
(3,919
|
)
|
|
568
|
|
Distributor relationships
|
1,250
|
|
|
(274
|
)
|
|
976
|
|
|
$
|
237,764
|
|
|
$
|
(96,181
|
)
|
|
$
|
141,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2017
|
|
Gross
carrying
value
|
|
Accumulated
amortization
|
|
Net carrying
value
|
(in thousands)
|
|
Product technologies
|
$
|
147,172
|
|
|
$
|
(59,696
|
)
|
|
$
|
87,476
|
|
Customer relationships
|
56,375
|
|
|
(19,194
|
)
|
|
37,181
|
|
Trademarks
|
28,400
|
|
|
(9,069
|
)
|
|
19,331
|
|
Licenses
|
4,487
|
|
|
(3,821
|
)
|
|
666
|
|
Distributor relationships
|
1,250
|
|
|
(229
|
)
|
|
1,021
|
|
|
$
|
237,684
|
|
|
$
|
(92,009
|
)
|
|
$
|
145,675
|
|
Amortization expense for the three months ended
August 31, 2017
and
2016
was
$4.1 million
and
$4.2 million
, respectively.
Expected future amortization expense related to the intangible assets is as follows:
|
|
|
|
|
(in thousands)
|
|
Remainder of 2018
|
$
|
12,362
|
|
2019
|
16,081
|
|
2020
|
14,525
|
|
2021
|
13,571
|
|
2022
|
12,893
|
|
2023 and thereafter
|
72,151
|
|
|
$
|
141,583
|
|
4. ACCRUED LIABILITIES
As of
August 31, 2017
and
May 31, 2017
, accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
Aug 31, 2017
|
|
May 31, 2017
|
(in thousands)
|
|
Payroll and related expenses
|
$
|
6,139
|
|
|
$
|
11,383
|
|
Royalties
|
2,293
|
|
|
2,885
|
|
Accrued severance
|
1,931
|
|
|
2,075
|
|
Sales and franchise taxes
|
829
|
|
|
856
|
|
Outside services
|
1,899
|
|
|
1,622
|
|
Litigation matters
|
12,500
|
|
|
12,500
|
|
Acculis recall liability
|
1,001
|
|
|
2,563
|
|
Other
|
5,672
|
|
|
4,920
|
|
|
$
|
32,264
|
|
|
$
|
38,804
|
|
In the fourth quarter of fiscal year 2017, the Company issued a voluntary recall of its Acculis probes that were sold over the past
two
years. As of the first quarter of fiscal year 2018, the deferral of revenue related to the Acculis recall was
$1.0 million
compared to
$2.6 million
at May 31, 2017.
5. LONG TERM DEBT
On November 7, 2016, the Company entered into a Credit Agreement (the “Credit Agreement”) with the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A. and Keybank National Association as co-syndication agents, and JPMorgan Chase Bank, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Keybank National Association as joint bookrunners and joint lead arrangers.
The Credit Agreement provides for a
$100.0 million
senior secured term loan facility (“Term Loan”) and a
$150.0 million
senior secured revolving credit facility, which includes up to a
$20.0 million
sublimit for letters of credit and a
$5.0 million
sublimit for swingline loans (the “Revolving Facility”, and together with the Term Loan, the “Facilities”).
On November 7, 2016, the Company borrowed
$100.0 million
under the Term Loan and approximately
$16.5 million
under the Revolving Facility to repay the balance of
$116.5 million
under the former credit agreement. As of February 28, 2017 the revolver was paid off in full. As of
August 31, 2017
and
May 31, 2017
the carrying value of long-term debt approximates its fair market value.
The interest rate on the Term Loan at
August 31, 2017
was
2.74%
.
The Company was in compliance with the Credit Agreement covenants as of
August 31, 2017
.
The Company's maturities of principal obligations under the Credit Agreement are as follows, as of
August 31, 2017
:
|
|
|
|
|
(in thousands)
|
|
Remainder of 2018
|
$
|
3,750
|
|
2019
|
5,000
|
|
2020
|
7,500
|
|
2021
|
11,250
|
|
2022
|
68,750
|
|
Total term loan
|
96,250
|
|
Revolving facility
|
—
|
|
Total debt
|
96,250
|
|
Less: Unamortized debt issuance costs
|
(1,103
|
)
|
Total
|
95,147
|
|
Less: Current portion of long-term debt
|
(5,000
|
)
|
Total long-term debt, net
|
$
|
90,147
|
|
6. 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
52.9%
in the
first
quarter of fiscal
2018
, as compared to
55.2%
for the same period in fiscal
2017
. The Company’s effective tax rate differs from the U.S. statutory rate primarily due to the valuation allowance, the impact of the deferred tax liability related to indefinite lived intangibles, foreign taxes and state taxes.
A valuation allowance is established if it is more likely than not that all, or a portion of the deferred tax asset will not be realized. The Company has established that it is more likely than not that some, or all of their deferred tax assets will not be recognized in future years. Consequently, the Company continues to maintain a full U.S. valuation allowance on its net deferred tax assets. Management will continue to reevaluate the positive and negative evidence at each reporting period and if future results as projected in the U.S. and our tax planning strategies are favorable, the valuation allowance may be removed, which could have a favorable material impact on our results of operations in the period in which it is recorded.
7. SHARE-BASED COMPENSATION
The Company has two stock-based compensation plans that provide for the issuance of up to approximately
9.5 million
shares of common stock. The 2004 Stock and Incentive Award Plan (the "2004 Plan") provides for the grant of incentive options to our employees and for the grant of non-statutory stock options, restricted stock, stock appreciation rights, performance units, performance shares and other incentive awards to our employees, directors and other service providers. The Company also has an employee stock purchase plan.
For the
three
months ended
August 31, 2017
and
2016
, share-based payment expense was
$1.8 million
and
$1.7 million
, respectively.
During the
three
months ended
August 31, 2017
and
2016
, 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.
In the first quarter of fiscal year
2018
, the Company granted performance share awards under the 2004 Plan to certain employees. The awards may be earned by achieving relative performance levels over the three year requisite service period. The performance criteria are based on the total shareholder return ("TSR") of the Company's common stock relative to the TSR of the common stock of a pre-defined industry peer-group. The fair value of these awards are based on the closing trading value of the Company's shares on the date of grant and use a Monte Carlo simulation model.
As of
August 31, 2017
, there were
$18.0 million
of unrecognized compensation expenses 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.
8. 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, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
Aug 31, 2017
|
|
Aug 31, 2016
|
Basic
|
36,919
|
|
|
36,319
|
|
Effect of dilutive securities
|
—
|
|
|
379
|
|
Diluted
|
36,919
|
|
|
36,698
|
|
|
|
|
|
Securities excluded as their inclusion would be anti-dilutive
|
1,085
|
|
|
1,503
|
|
9. SEGMENT AND GEOGRAPHIC INFORMATION
The Company considers our business to be a single operating segment entity engaged in the development, manufacture and sale of medical devices for vascular access, peripheral vascular disease, oncology and surgery on a global basis. The Company's chief operating decision maker (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 product category (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
Aug 31, 2017
|
|
Aug 31, 2016
|
Net sales
|
|
|
|
Peripheral Vascular
|
$
|
49,865
|
|
|
$
|
52,029
|
|
Vascular Access
|
23,238
|
|
|
25,005
|
|
Oncology/Surgery
|
12,308
|
|
|
11,064
|
|
Total
|
$
|
85,411
|
|
|
$
|
88,098
|
|
The table below presents net sales by geographic area based on external customer location (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
Aug 31, 2017
|
|
Aug 31, 2016
|
Net sales
|
|
|
|
United States
|
$
|
68,931
|
|
|
$
|
72,208
|
|
International
|
16,480
|
|
|
15,890
|
|
Total
|
$
|
85,411
|
|
|
$
|
88,098
|
|
10. 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, marketable securities, 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 our marketable securities, which are comprised of auction rate securities, and our 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, 2017
and
May 31, 2017
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements using
inputs considered as:
|
|
Fair Value at August 31, 2017
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
|
|
|
|
|
U.S. government agency obligations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,215
|
|
|
$
|
1,215
|
|
Total Financial Assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,215
|
|
|
$
|
1,215
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
Contingent consideration for acquisition earn out
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,766
|
|
|
$
|
10,766
|
|
Total Financial Liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,766
|
|
|
$
|
10,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements using
inputs considered as:
|
|
Fair Value at May 31,
2017
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
|
|
|
|
|
U.S. government agency obligations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,215
|
|
|
$
|
1,215
|
|
Total Financial Assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,215
|
|
|
$
|
1,215
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
Contingent consideration for acquisition earn out
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,761
|
|
|
$
|
12,761
|
|
Total Financial Liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,761
|
|
|
$
|
12,761
|
|
There were no transfers between Level 1, 2 and 3 for the
three
months ended
August 31, 2017
.
The table below presents the changes in fair value components of Level 3 instruments in the
three
months ended
August 31, 2017
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31, 2017
|
|
Financial Assets
|
|
Financial Liabilities
|
(in thousands)
|
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
|
|
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
|
Balance, May 31, 2017
|
$
|
1,215
|
|
|
$
|
12,761
|
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
|
Change in present value of contingent consideration
|
—
|
|
|
105
|
|
Contingent consideration payments
|
—
|
|
|
(2,100
|
)
|
Balance, August 31, 2017
|
$
|
1,215
|
|
|
$
|
10,766
|
|
Contingent Consideration for Acquisition Earn Outs
Some of our 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 income.
We measure the initial liability and remeasure the liability on a recurring basis using Level 3 inputs as defined under authoritative guidance for fair value measurements and 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 our 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, 2017
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at
|
|
Valuation
|
|
|
|
|
(in thousands)
|
Aug 31, 2017
|
|
Technique
|
|
Unobservable Input
|
|
Range
|
Revenue based payments
|
$
|
10,766
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
4%
|
|
|
|
|
|
Probability of payment
|
|
100%
|
|
|
|
|
|
Projected fiscal year of payment
|
|
2018-2020
|
At
August 31, 2017
, the estimated potential amount of undiscounted future contingent consideration that we expect to pay as a result of all completed acquisitions is approximately
$11.0 million
, which represents the remaining contractual minimum payments.
11. MARKETABLE SECURITIES
Marketable securities, which can be government agency bonds, auction rate investments or corporate commercial paper, are classified as “available-for-sale securities” and are reported at fair value, with unrealized gains and losses excluded from operations and reported as accumulated other comprehensive income (loss), net of the related tax effects, in stockholders’ equity. Cost is determined using the specific identification method. We hold an investment in an auction rate security that is high credit quality and generally achieved with municipal bond insurance. Sell orders for any security traded through an auction process could exceed bids and, in such cases, the auction fails and we may be unable to liquidate our position in the security in the near term. We have not participated in any recent auctions. As of
August 31, 2017
and
May 31, 2017
, we had
$1.2 million
and
$1.2 million
, respectively, in investments in
one
auction rate security. The authorities are current in their interest payments on the security. The auction rate security will mature in 2029.
As of
August 31, 2017
and
May 31, 2017
, marketable securities consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
(in thousands)
|
Amortized
cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
Government agency obligations
|
$
|
1,350
|
|
|
$
|
—
|
|
|
$
|
(135
|
)
|
|
$
|
1,215
|
|
|
$
|
1,350
|
|
|
$
|
—
|
|
|
$
|
(135
|
)
|
|
$
|
1,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2017
|
(in thousands)
|
Amortized
cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
Government agency obligations
|
$
|
1,350
|
|
|
$
|
—
|
|
|
$
|
(135
|
)
|
|
$
|
1,215
|
|
|
$
|
1,350
|
|
|
$
|
—
|
|
|
$
|
(135
|
)
|
|
$
|
1,215
|
|
12. 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 our implantable port products infringe on
three
U.S. patents held by Bard (the "Utah Action"). Bard is seeking unspecified damages and other relief. The Court denied Bard’s motion for pre-trial consolidation with separate actions it filed on the same day against Medical Components, Inc. and Smiths Medical ASD, Inc., but had asked for supplemental briefing on the issue of whether to conduct a common Markman hearing. Meanwhile, we filed petitions for reexamination in the US Patent and Trademark Office ("PTO") which seek to invalidate all
three
patents asserted by Bard in the litigation. Our 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 PTO Board of Appeals and Interferences for all
three
reexams. The parties completed briefing on the appeals and oral argument was held on June 18, 2015. The Patent Office issued decisions in the three appeals. 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 filed Requests for Rehearing in all
three
reexamination appeals and the Company filed Requests for Rehearing in
two
of the reexamination appeals (the ‘302 and ‘615 patent reexaminations). Each party filed comments in Opposition to the other party’s Rehearing Requests, The PTO has since issued decisions denying all Rehearing Requests on February 1, 2017 for the ‘302; on February 17, 2017 for the ‘022; and on February 21, 2017 for the ‘615. In the ‘302 and ‘022, the PTO modified its characterization of one prior art reference. Bard has since filed a Notice of Appeal to the Federal Circuit Court of Appeals in all three reexams and the Company has filed Cross-Appeals in the ‘302 and the ‘615 reexams. The parties are in the process of preparing and filing the various appellate briefs, starting with Bard’s Opening Brief which was served on August 30, 2017 and ending with our Reply Brief which is currently due on December 6, 2017.
The Utah Action has been stayed pending final resolution of the PTO process. However, Bard has moved to substitute Bard Peripheral Vascular, Inc. ("BPV") as plaintiff because Bard assigned the asserted patents to BPV on July 12, 2016, but the Company has opposed. We believe these claims are without merit and intend
to defend them vigorously. We have 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, C.R. Bard, Inc. ("Bard") and Bard Peripheral Vascular, Inc. (“BPV”) filed suit in the United States District Court for the District of Delaware claiming certain of our implantable port products infringe on
three
U.S. patents held by Bard (the “Delaware Action"). Bard is seeking unspecified damages and other relief. The patents asserted in the Delaware Action are different than those asserted in the Utah Action. 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. We have since served an Answer and Counterclaim to which Bard has served a Reply. On March 10, 2016, the Court held a case management conference, and, on March 14, 2016, the court entered a Scheduling Order which set, inter alia, a Markman hearing for March 10, 2017, a summary judgment hearing for December 8, 2017 and trial for March 12, 2018. The parties have served various discovery requests on each other, and have been producing documents to each other; on May 27, 2016 Bard served its Infringement Contentions which identified all the port products accused of infringement; and, on June 24, 2016, we served Invalidity Contentions which detail various grounds for invalidating the three asserted patents. The parties completed briefing on the claim construction issues and the Markman hearing was held on March 10, 2017 and the Court issued its Claim Construction Order on May 19, 2017. The Court has since amended the Scheduling Order to provide for the completion of Expert Discovery on October 30, 2017; briefing on Case-Dispositive Motions between November 17, 2017 and January 24, 2018 with oral argument set for February 22, 2018 and trial to commence May 29, 2018. Meanwhile, Bard also sought to substitute BPV as plaintiff in this case via a Supplemental Complaint, but stipulated that the Company could assert in Cross-Claims and/or Third-Party complaint against Bard for our claims of inequitable conduct and unclean hands, which the Company has since done. BPV responded with a partial Motion to Dismiss and the Company has served an amended Answer, Counterclaims and Cross-Claims/Third-Party Complaint. BPV/Bard responses are due September 29, 2017. We believe these claims are without merit and intend to defend them vigorously. We have 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, we 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, we allege that Bard has illegally tied the sales of its tip location systems to the sales of its PICCs. We allege that this practice violates the federal antitrust laws and has had, and continues to have, an anti-competitive effect in the market for PICCs. We seek both monetary damages and injunctive relief. Bard moved to dismiss on September 8, 2017 and set a return date of November 16, 2017. The court has adjourned the initial conference in the case pending its resolution of the motion to dismiss.
Governmental Investigations
In June 2014 we received a subpoena from the U.S. Department of Justice (the “DOJ”) requesting documents in relation to a criminal and civil investigation the DOJ is conducting regarding BTG International, Inc.’s LC Bead® product beginning in 2003. RITA Medical Systems and AngioDynamics, Inc., after its acquisition of RITA, was the exclusive distributor of LC Beads in the United States from 2006 through December 31, 2011. We are cooperating fully with this investigation.
In April 2015 we received a subpoena from the DOJ requesting documents in relation to a criminal and civil investigation the DOJ is conducting regarding purported promotion of certain of AngioDynamics’ VenaCure EVLT products for un-cleared indications. We are cooperating fully with this investigation.
As of May 31, 2017, the Company accrued
$12.5 million
for these matters and in August 2017 the Company agreed in principle with the government to resolve these matters for approximately
$12.5 million
.
13. ACQUISITION, RESTRUCTURING, AND OTHER ITEMS, NET
Acquisition, Restructuring and Other Items
For the three months ended
August 31, 2017
and
2016
acquisition, restructuring and other items, net consisted of:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
Aug 31, 2017
|
|
Aug 31, 2016
|
Legal
|
$
|
1,764
|
|
|
$
|
1,790
|
|
Restructuring
|
1,216
|
|
|
—
|
|
Other
|
9
|
|
|
627
|
|
Total
|
$
|
2,989
|
|
|
$
|
2,417
|
|
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 our 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 are expected to be completed in the third quarter of fiscal year 2018.
The following table provides a summary of our estimated costs associated with the plan:
|
|
|
|
Type of cost
|
|
Total estimated amount expected to be incurred (in millions)
|
Termination benefits
|
|
$1.75 to $2.25
|
Plant Consolidation (1)
|
|
$2.25 to $2.50
|
Regulatory filings
|
|
$0.75 to $1.00
|
Contract cancellations
|
|
$0.75 to $1.00
|
Other
|
|
$0.75 to $1.00
|
|
|
$6.25 to $7.75
|
(1) Equipment transfer, validation and other start-up costs to prepare the facilities for the new product lines.
The Company recorded restructuring charges related to the plan during the three months ended
August 31, 2017
of
$1.2 million
. There were
no
costs associated with this plan during the three months ended
August 31, 2016
. Termination benefits are only earned if an employee stays until their termination date; therefore, the expenses related to termination benefits are being recorded ratably over the service period.
The following table presents a rollforward of the restructuring reserve for the first quarter of fiscal year 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
|
|
|
|
Termination
|
|
Plant
|
|
Regulatory
|
|
Cancellation
|
|
Other
|
|
|
|
|
Benefits
|
|
Consolidation
|
|
Filings
|
|
Costs
|
|
Costs
|
|
Total
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2017
|
|
$
|
851
|
|
|
$
|
111
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
962
|
|
Charges
|
|
594
|
|
|
600
|
|
|
—
|
|
|
—
|
|
|
22
|
|
|
1,216
|
|
Non-cash adjustments
|
|
—
|
|
|
(108
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(108
|
)
|
Cash payments
|
|
(71
|
)
|
|
(555
|
)
|
|
—
|
|
|
—
|
|
|
(21
|
)
|
|
(647
|
)
|
Balance at August 31, 2017
|
|
$
|
1,374
|
|
|
$
|
48
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1,423
|
|
The Company’s restructuring liability of
$1.4 million
mainly comprises accruals for termination benefits which are included in accrued expenses on the consolidated balance sheet.
14. ACCUMULATED OTHER COMPREHESIVE INCOME (LOSS)
Changes in each component of accumulated other comprehensive income (loss), net of tax, are as follows as of
August 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Foreign currency translation gain (loss)
|
|
Unrealized gain (loss) on marketable securities
|
|
Total
|
Balance at May 31, 2017
|
|
$
|
(1,305
|
)
|
|
$
|
(19
|
)
|
|
$
|
(1,324
|
)
|
Other comprehensive income (loss) before reclassifications, net of tax
|
|
283
|
|
|
—
|
|
|
283
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
Net other comprehensive income (loss)
|
|
$
|
283
|
|
|
$
|
—
|
|
|
$
|
283
|
|
Balance at August 31, 2017
|
|
$
|
(1,022
|
)
|
|
$
|
(19
|
)
|
|
$
|
(1,041
|
)
|
15. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently Issued Accounting Pronouncements - Adopted
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Based Compensation (Topic 718: Improvements to Employee Share-Based Payment Accounting)
. ASU 2016-09 simplifies and improves various aspects of ASC 718 for share-based payments, including income tax items and the classification of these items on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 31, 2016 and early application is permitted. The Company adopted ASU 2016-09 as of June 1, 2017.
Under ASU 2016-09, the Company now recognizes unrealized excess tax benefits and will classify such benefits as an operating activity in the statement of cash flows on a prospective basis. Due to the full valuation allowance on our federal and state income taxes, the adoption of ASU 2016-09 did not impact our accounting for income taxes. Without the valuation allowance, we estimate that we would have recognized a deferred tax asset of approximately $0.6 million upon adoption of ASU 2016-09.
The Company elected the accounting policy change to account for forfeitures as they occur. This was adopted using the modified retrospective transition method by means of a cumulative-effect adjustment to equity as of June 1, 2017. The adoption of ASU 2016-09 did not materially impact the Company’s consolidated statements of income, consolidated balance sheet, equity or cash flows.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350)
, which simplifies the subsequent measurement of goodwill by eliminating steps from the goodwill impairment test. ASU 2017-04 should be adopted for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. ASU 2017-04 should be applied prospectively and early adoption is permitted, including adoption in an interim period. The Company adopted ASU 2017-04 in the first quarter of fiscal year 2018. This adoption did not have an impact on the Company's financial statements.
In July 2015, the FASB issued ASC Update No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. Update No. 2015-11 more closely aligns the measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards by requiring companies using the first-in, first-out and average costs methods to measure inventory using the lower of cost and net realizable value, where net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Update No. 2015-11 is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years. Update No. 2015-11 should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. This adoption did not have an impact on the Company's financial statements.
Recently Issued Accounting Pronouncements - Not Yet Applicable or Adopted
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (ASU 2014-09)
. ASU 2014-09 provides a single, comprehensive accounting model for revenues arising from contracts with customers that supersedes most of the existing revenue recognition guidance, including industry-specific guidance. Under this model, revenue is recognized at an amount that an entity expects to be entitled to upon transferring control of goods or services to a customer, as opposed to when risks and rewards transfer to a customer under existing revenue recognition guidance. ASU 2014-09 is effective for the Company beginning in its fiscal year 2019, and may be applied retrospectively to all prior periods presented or through a cumulative adjustment to the opening retained earnings balance in the year of adoption. The Company is currently in the process of evaluating the impact of ASU 2014-09 on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. ASU 2016-02 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. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and early application is permitted. The Company is currently in the process of evaluating the impact of ASU 2016-02 on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15)
. ASU 2016-15 identifies how certain cash receipts and cash payments are presented and classified in the Statement of Cash Flows under Topic 230. ASU 2016-15 is effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. ASU 2016-15 should be applied retrospectively and early adoption is permitted, including adoption in an interim period. The Company is currently in the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.