Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-K/A

 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended May 31, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
Commission file number 0-50761
 
AngioDynamics, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
11-3146460
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
14 Plaza Drive Latham, New York
 
12110
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (518) 795-1400
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $.01 per share
 
NASDAQ Global Select Market
 
 
 
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  ¨
  
Accelerated filer  x
 
Non-accelerated filer  ¨
  
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of November 30, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates was approximately $431,798,128 computed by reference to the last sale price of the common stock on that date as reported by The NASDAQ Global Select Market.
As of July 22, 2016, there were 36,422,398 shares of the registrant’s common stock outstanding.





DOCUMENTS INCORPORATED BY REFERENCE
The information required for Part III of this annual report on Form 10-K is incorporated by reference to the registrant’s Proxy Statement for its 2016 Annual Meeting of Stockholders to be filed within 120 days of the registrant's fiscal year ended May 31, 2016.




EXPLANATORY NOTE

For convenience purposes in this filing on Form 10-K/A, AngioDynamics, Inc. together with its subsidiaries, is referred to as "AngioDynamics," the "Company," "we," "our" or "us".

We are filing this Amendment No. 1 (this “Amendment” or “Form 10-K/A”) to our Annual Report on Form 10-K for the fiscal year ended May 31, 2016 following an inspection by the Public Company Accounting Oversight Board of PricewaterhouseCoopers LLP’s (“PwC”) audit of our May 31, 2016 financial statements and internal controls over financial reporting, as discussed below. Our Annual Report on Form 10-K for the year ended May 31, 2016 (the “Form 10-K” or the “Original Form 10-K”) was originally filed with the Securities and Exchange Commission (the “SEC”) on August 1, 2016. At the time of filing our Form 10-K, we determined that our disclosure controls and procedures (“DC&P”) and our internal controls over financial reporting (“ICFR”) were each effective as of May 31, 2016. Subsequent to that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our DC&P and ICFR were not effective as of May 31, 2016.

Management of the Company, after discussions with PwC and the Audit Committee, determined that Management’s Report on Internal Control over Financial Reporting included in the Form 10-K should no longer be relied upon due to a material weakness specifically related to the goodwill impairment test as further discussed in Item 9A, Controls and Procedures.

The material weakness did not result in any misstatement of our consolidated financial statements for the year ended May 31, 2016.

See “Items Amended by this Filing” below for a description of the items of the Form 10-K that are being amended pursuant to this Amendment.

Items Amended by this Filing

The following items of the Original Form 10-K are being amended:

Item 9A: Controls and Procedures

Item 15: Exhibits, Financial Statement Schedules
 
In addition to this Amendment, we intend to file amended Quarterly Reports on Form 10-Q for the first three quarters of fiscal year 2017 to amend our disclosures under Item 4 Controls and Procedures.

This Amendment does not modify, amend or update in any way the financial statements set forth in the Original Form 10-K
and there have been no changes to the XBRL data filed in Exhibit 101 of the Original Form 10-K. Other than as described above and the inclusion with this Amendment of new certifications by management, a new consent of PwC, our former independent registered public accounting firm, and related amendments to the List of Exhibits contained in Item 15 of the Original Form 10-K, this Amendment speaks only as of the date of the Original Form 10-K and does not amend, supplement or update any information contained in the Original Form 10-K to give effect to any subsequent events. Accordingly, this Amendment should be read in conjunction with the Original Form 10-K and our reports filed with the SEC subsequent to the Original Form 10-K.








AngioDynamics, Inc. and Subsidiaries
INDEX
 
 
 
Page
Part II:
 
 
Item 9A.
Part IV:
 
 
Item 15.


1



Part II
 

Item 9A.
Controls and Procedures.

Evaluation of disclosure controls and procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision of our Company’s Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of our disclosure controls and procedures as of May 31, 2016. At the time our Annual Report on Form 10-K for the year ended May 31, 2016 was filed on August 1, 2016, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of May 31, 2016. Subsequent to that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of May 31, 2016 because of the material weakness in our internal control over financial reporting described below.

Management’s Report on Internal Control Over Financial Reporting (Restated)

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our company. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States and includes those policies and procedures that:

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that our receipts and expenditures are being made only in accordance with authorizations of our management and members of our board of directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management has assessed the effectiveness of our internal control over financial reporting as of May 31, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).

We identified the following material weakness that existed as of May 31, 2016.

We did not design and maintain effective internal controls over the accounting for the annual goodwill impairment test.  Specifically, we did not design and maintain effective controls to review in sufficient detail the cash flow projections and significant valuation model assumptions used in the goodwill impairment test as of December 31, 2015. 

A material weakness is a deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. This material weakness did not result in a misstatement to the consolidated financial statements. However, this material weakness could result in misstatements that would result in a material misstatement of the consolidated financial statements that would not be prevented or detected.


2



In Management’s Report on Internal Control Over Financial Reporting included in our original 10-K, our management concluded that we maintained effective internal control over financial reporting as of May 31, 2016. Management subsequently concluded that the material weakness described above existed as of May 31, 2016. As a result, we have concluded we did not maintain effective internal control over financial reporting as of May 31, 2016 based on the criteria described in the Internal Control-Integrated Framework (2013). Accordingly, management has restated its report on internal control over financial reporting.     

The effectiveness of our internal control over financial reporting as of May 31, 2016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Remediation Plan

We developed a plan to enhance our internal controls over financial reporting for the goodwill impairment test, which we believe also will address the material weakness discussed above, including the specific remediation initiatives described below:

Update the goodwill impairment control to ensure that it is designed appropriately.
Ensure sufficient documentation is retained if the discounted cash flow method is required for performing the goodwill impairment test including detailed procedures over the cash flow projections and valuation model assumptions.

Changes in Internal Control over Financial Reporting    

There was no change in our internal control over financial reporting for the fiscal quarter ended May 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


3



Part IV

Item 15.
Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements
The following consolidated financial statements and supplementary data of Registrant and its subsidiaries required by Part II, Item 8, are included in Part IV of this report:
 
(2) Financial Statement Schedules
The following consolidated financial statement schedule is included in Part IV of this report:
 
All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto. 

4





Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of AngioDynamics, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive income (loss), of stockholders’ equity, and of cash flows present fairly, in all material respects, the financial position of AngioDynamics, Inc. and its subsidiaries (the Company) at May 31, 2016 and May 31, 2015, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Management and we previously concluded that the Company maintained effective internal control over financial reporting as of May 31, 2016. However, management has subsequently determined that a material weakness in internal control over financial reporting related to the ineffective design and maintenance of controls over accounting for the goodwill impairment test existed as of that date. Accordingly, management’s report has been restated and our present opinion on internal control over financial reporting, as presented herein, is different from that expressed in our previous report. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of May 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because a material weakness in internal control over financial reporting related to the ineffective design and maintenance of controls over accounting for the goodwill impairment test existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2016 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note A to the consolidated financial statements, the Company changed the manner in which it accounts for the classification of deferred income taxes in the consolidated balance sheets due to the adoption of ASU 2015-17, Balance Sheet Classification of Deferred Taxes. 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.


5



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/PricewaterhouseCoopers LLP

Boston, Massachusetts
August 1, 2016, except with respect to our opinion on internal control over financial reporting insofar as it relates to the effects of the matter described in the penultimate paragraph of Management’s Report on Internal Control over Financial Reporting, as to which the date is July 25, 2017


6



AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
 
Years ended
 
May 31,
2016
 
May 31,
2015
 
May 31,
2014
Net sales
$
353,890

 
$
356,534

 
$
354,425

Cost of sales
179,574

 
180,738

 
174,251

Gross profit
174,316

 
175,796

 
180,174

Operating expenses
 
 
 
 
 
Research and development
25,053

 
26,594

 
28,124

Sales and marketing
84,723

 
83,220

 
85,305

General and administrative
29,603

 
29,162

 
26,902

Amortization of intangibles
17,964

 
17,966

 
16,562

Change in fair value of contingent consideration
948

 
(8,096
)
 
(1,908
)
Acquisition, restructuring and other items, net
12,591

 
26,257

 
10,873

Medical device excise tax
2,416

 
4,142

 
3,829

Total operating expenses
173,298

 
179,245

 
169,687

Operating income (loss)
1,018

 
(3,449
)
 
10,487

Other (expenses) income
 
 
 
 
 
Interest income
11

 
4

 

Interest expense
(3,396
)
 
(3,197
)
 
(3,656
)
Other expense
(886
)
 
(1,489
)
 
(1,645
)
Total other expenses, net
(4,271
)
 
(4,682
)
 
(5,301
)
Income (loss) before income tax expense (benefit)
(3,253
)
 
(8,131
)
 
5,186

Income tax expense (benefit)
40,337

 
(4,743
)
 
2,839

Net income (loss)
$
(43,590
)
 
$
(3,388
)
 
$
2,347

Earnings (loss) per share
 
 
 
 
 
Basic
$
(1.21
)
 
$
(0.09
)
 
$
0.07

Diluted
$
(1.21
)
 
$
(0.09
)
 
$
0.07

Weighted average shares outstanding
 
 
 
 
 
Basic
36,161

 
35,683

 
35,136

Diluted
36,161

 
35,683

 
35,440




The accompanying notes are an integral part of these consolidated financial statements.

7



AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
 
 
Years ended
 
May 31, 2016
 
May 31, 2015
 
May 31, 2014
Net income (loss)
$
(43,590
)
 
$
(3,388
)
 
$
2,347

Other comprehensive income (loss), before tax:
 
 
 
 
 
Unrealized gain (loss) on marketable securities
(11
)
 
(120
)
 
(16
)
Unrealized gain (loss) on interest rate swap
257

 
296

 
(32
)
Foreign currency translation gain (loss)
(112
)
 
(264
)
 
442

Other comprehensive income (loss), before tax
134

 
(88
)
 
394

Income tax benefit (expense) related to items of other comprehensive income (loss)
(92
)
 
(64
)
 
18

Other comprehensive income (loss), net of tax
42

 
(152
)
 
412

Total comprehensive income (loss), net of tax
$
(43,548
)
 
$
(3,540
)
 
$
2,759




The accompanying notes are an integral part of these consolidated financial statements.

8



AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
May 31,
2016
 
May 31,
2015
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
32,333

 
$
18,391

Marketable securities, at fair value
1,653

 
1,689

Accounts receivable, net of allowances of $4,372 and $3,043, respectively
52,867

 
58,428

Inventories
55,370

 
67,388

Prepaid income taxes
788

 
770

Prepaid expenses and other
3,243

 
4,132

Total current assets
146,254

 
150,798

Property, Plant and Equipment, net
48,284

 
54,450

Other Assets
4,696

 
5,398

Intangible Assets, net
166,577

 
181,652

Goodwill
361,252

 
361,252

Deferred Income Taxes, long term

 
19,508

Total Assets
$
727,063

 
$
773,058

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
15,616

 
$
23,048

Accrued liabilities
21,896

 
18,109

Income taxes payable
46

 
439

Current portion of long-term debt
16,250

 
8,750

Current portion of contingent consideration
12,919

 
9,969

Other current liabilities

 
200

Total current liabilities
66,727

 
60,515

Long-term Debt, net of current portion
105,160

 
128,910

Deferred Income Taxes, long term
21,684

 
1,119

Contingent Consideration, net of current portion
25,356

 
37,415

Other Long Term Liabilities
908

 

Total Liabilities
219,835

 
227,959

Commitments and Contingencies (Note O)

 

Stockholders’ Equity
 
 
 
Preferred stock, par value $.01 per share, 5,000,000 shares authorized; no shares issued and outstanding

 

Common stock, par value $.01 per share, 75,000,000 shares authorized; 36,420,403 and 36,043,725 shares issued and 36,278,098 and 35,901,420 shares outstanding at May 31, 2016 and May 31, 2015, respectively
363

 
360

Additional paid-in capital
525,775

 
520,101

Retained earnings
(16,015
)
 
27,575

Treasury stock, 142,305 shares, at cost
(2,104
)
 
(2,104
)
Accumulated other comprehensive loss
(791
)
 
(833
)
Total Stockholders' Equity
507,228

 
545,099

Total Liabilities and Stockholders' Equity
$
727,063

 
$
773,058


The accompanying notes are an integral part of these consolidated financial statements.

9



AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years ended May 31, 2016May 31, 2015 and May 31, 2014
(in thousands, except share data)
 
 
Common Stock
 
Additional
paid in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Treasury Stock
 
Total
Shares
 
Amount
 
 
 
 
Shares
 
Amount
Balance at May 31, 2013
35,060,351

 
$
351

 
$
500,554

 
$
28,616

 
$
(1,093
)
 
(142,305
)
 
$
(2,104
)
 
$
526,324

Net loss
 
 
 
 
 
 
2,347

 
 
 
 
 
 
 
2,347

Exercise of stock options
105,676

 
 
 
1,085

 
 
 
 
 
 
 
 
 
1,085

Tax effect of exercise of stock options
 
 
 
 
(146
)
 
 
 
 
 
 
 
 
 
(146
)
Issuance of restricted shares, net
129,702

 
1

 
(1,358
)
 
 
 
 
 
 
 
 
 
(1,357
)
Purchase of common stock under Employee Stock Purchase Plan
146,275

 
1

 
2,717

 
 
 
 
 
 
 
 
 
2,718

Stock-based compensation
 
 
 
 
5,502

 
 
 
 
 
 
 
 
 
5,502

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
412

 
 
 
 
 
412

Balance at May 31, 2014
35,442,004

 
$
353

 
$
508,354

 
$
30,963

 
$
(681
)
 
(142,305
)
 
$
(2,104
)
 
$
536,885

Net income
 
 
 
 
 
 
(3,388
)
 
 
 
 
 
 
 
(3,388
)
Exercise of stock options
341,446

 
3

 
4,335

 
 
 
 
 
 
 
 
 
4,338

Tax effect of exercise of stock options
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Issuance of restricted shares, net
141,274

 
2

 

 
 
 
 
 
 
 
 
 
2

Purchase of common stock under Employee Stock Purchase Plan
119,001

 
2

 
1,414

 
 
 
 
 
 
 
 
 
1,416

Stock-based compensation
 
 
 
 
5,998

 
 
 
 
 
 
 
 
 
5,998

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
(152
)
 
 
 
 
 
(152
)
Balance at May 31, 2015
36,043,725

 
$
360

 
$
520,101

 
$
27,575

 
$
(833
)
 
(142,305
)
 
$
(2,104
)
 
$
545,099

Net loss
 
 
 
 
 
 
(43,590
)
 
 
 
 
 
 
 
(43,590
)
Exercise of stock options
101,040

 
1

 
1,296

 
 
 
 
 
 
 
 
 
1,297

Tax effect of exercise of stock options
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Issuance of restricted shares, net
137,681

 
1

 
(332
)
 
 
 
 
 
 
 
 
 
(331
)
Purchase of common stock under Employee Stock Purchase Plan
137,957

 
1

 
1,470

 
 
 
 
 
 
 
 
 
1,471

Stock-based compensation
 
 
 
 
3,240

 
 
 
 
 
 
 
 
 
3,240

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
42

 
 
 
 
 
42

Balance at May 31, 2016
36,420,403

 
$
363

 
$
525,775

 
$
(16,015
)
 
$
(791
)
 
(142,305
)
 
$
(2,104
)
 
$
507,228




The accompanying notes are an integral part of these consolidated financial statements.

10



AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Years ended
 
May 31,
2016
 
May 31,
2015
 
May 31,
2014
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
$
(43,590
)
 
$
(3,388
)
 
$
2,347

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
28,115

 
29,861

 
28,329

Amortization of acquired inventory basis step-up

 

 
150

Tax effect of exercise of stock options and issuance of performance shares

 

 
(146
)
Deferred income tax provision
39,983

 
(5,123
)
 
2,716

Stock based compensation
3,240

 
5,998

 
5,502

Changes in accounts receivable allowances
2,377

 
1,448

 
465

Change in fair value of contingent consideration
948

 
(8,096
)
 
(1,908
)
Loss on impairment/disposal of long-term assets
806

 
9,381

 

Loss on impairment of intangible assets
384

 
6,400

 

Other
90

 
181

 
130

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
 
 
Accounts receivable
3,131

 
2,095

 
(14,786
)
Inventories
11,976

 
(5,648
)
 
(6,114
)
Prepaid expenses and other
712

 
(1,170
)
 
1,208

Accounts payable and accrued liabilities
(2,956
)
 
(6,254
)
 
6,788

Net cash provided by operating activities
45,216

 
25,685

 
24,681

Cash flows from investing activities:
 
 
 
 
 
Additions to property, plant and equipment
(2,326
)
 
(11,383
)
 
(11,172
)
Acquisition of businesses, net of cash acquired

 

 
(4,169
)
Acquisition of intangible assets
(3,268
)
 
(1,353
)
 
(1,435
)
Acquisition of warrants
(2,000
)
 

 

Purchases of marketable securities

 

 
(25
)
Proceeds from sale or maturity of marketable securities
25

 

 
353

Net cash used in investing activities
(7,569
)
 
(12,736
)
 
(16,448
)
Cash flows from financing activities:
 
 
 
 
 
Repayment of long-term debt
(16,250
)
 
(20,000
)
 
(146,250
)
Proceeds from issuance of and borrowings on long-term debt

 
15,000

 
146,410

Proceeds from exercise of stock options and ESPP
2,437

 
5,757

 
2,444

Payment of acquisition related contingent consideration
(9,850
)
 
(11,222
)
 
(15,943
)
Deferred financing costs on long-term debt

 

 
(677
)
Net cash used in financing activities
(23,663
)
 
(10,465
)
 
(14,016
)
Effect of exchange rate changes on cash and cash equivalents
(42
)
 
(198
)
 
86

Increase (decrease) in cash and cash equivalents
13,942

 
2,286

 
(5,697
)
Cash and cash equivalents at beginning of year
18,391

 
16,105

 
21,802

Cash and cash equivalents at end of year
$
32,333

 
$
18,391

 
$
16,105

 

The accompanying notes are an integral part of these consolidated financial statements.

11



AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(in thousands)
 
Years ended
 
May 31,
2016
 
May 31,
2015
 
May 31,
2014
Supplemental disclosures of cash flow information:
 
 
 
 
 
Supplemental disclosure of non-cash operating, investing and financing activities:
 
 
 
 
 
Contractual obligations for acquisition of fixed assets
$
75

 
$
140

 
$
4,970

Contractual obligations for acquisition of intangibles and business

 

 
2,249

Contractual obligations for tax basis adjustment

 
779

 

Cash paid during the period for:
 
 
 
 
 
Interest
$
3,063

 
$
3,151

 
$
3,591

Income taxes
332

 
699

 
182

 
 



The accompanying notes are an integral part of these consolidated financial statements.

12



AngioDynamics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A—BASIS OF PRESENTATION, BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Basis of Presentation and Description of Business

The consolidated financial statements include the accounts of AngioDynamics, Inc. and its wholly owned subsidiaries, (collectively, the “Company”). We design, manufacture and sell 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 in oncology and surgical settings. Our devices are generally used in minimally invasive, image-guided procedures. Most of our products are intended to be used once and then discarded, or they may be temporarily implanted for short- or long-term use.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates also affect reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.
Assets and liabilities of non-U.S. dollar functional currency entities are translated to U.S. dollars at period-end exchange rates, and the resulting gains and losses arising from the translation of those net assets are recorded as a cumulative translation adjustment, a component of accumulated other comprehensive loss on the consolidated balance sheets.
All intercompany balances and transactions have been eliminated.
2. Cash and Cash Equivalents
We consider all unrestricted highly liquid investments purchased with an initial maturity of less than three months to be cash equivalents. We maintain cash and cash equivalent balances with financial institutions in the United States in excess of amounts insured by the Federal Deposit Insurance Corporation.
3. Marketable Securities
Marketable securities, which include auction rate investments, are classified as “available-for-sale securities” and are reported at fair value, with unrealized gains and losses excluded from operations and reported as a component of accumulated other comprehensive income (loss), net of the related tax effects, in stockholders’ equity. Cost is determined using the specific identification method. We hold investments in auction rate securities in order to generate higher than typical money market rate investment returns. Auction rate securities typically are high credit quality, generally achieved with municipal bond insurance. Credit risks are eased by the historical track record of bond insurers, which back a majority of this market. 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 securities in the near term. As of May 31, 2016 and 2015, we had $1.7 million and $1.7 million, respectively, in investments in two auction rate securities issued by New York state and local government authorities that failed auctions. The authorities are current in their interest payments on the securities.
4. Accounts Receivable
Accounts receivable, principally trade, are generally due within 30 to 90 days and are stated at amounts due from customers, net of an allowance for sales returns and doubtful accounts. We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current creditworthiness, as determined by a review of their current credit information. We continuously monitor aging reports, collections and payments from customers, and a provision for estimated credit losses is maintained based upon our historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that the same credit loss rates will be experienced in the future. We write off accounts receivable when they are determined to be uncollectible.
5. Inventories
Inventories are stated at the lower of cost (using the first-in, first-out method) or market. Appropriate consideration is given to deterioration, obsolescence, expiring and other factors in evaluating net realizable value.

13



6. Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Refer below for useful lives by category:
 
 
Estimated useful lives
Building and building improvements
 
39 years
Machinery and equipment
 
3 to 8 years
Computer software and equipment
 
3 to 10 years
We evaluate these assets for impairment periodically or as changes in circumstances or the occurrence of events suggest the remaining value is not recoverable. Expenditures for repairs and maintenance are charged to expense as incurred. Renewals and betterments are capitalized.
7. Goodwill and Intangible Assets
Intangible assets other than goodwill and acquired IP R&D are amortized over their estimated useful lives, which range between two and eighteen years, on either a straight-line basis over the expected period of benefit or as revenues are earned from the sales of the related products. We periodically review the estimated useful lives of our intangible assets and review such assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets is not recoverable. Our determination of impairment is based on estimates of future cash flows. If an intangible asset 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.
Acquired IP R&D has an indefinite life and is not amortized until completion of the development of the project, at which time the IP R&D becomes an amortizable asset. If the related project is not completed in a timely manner or the project is terminated or abandoned, we may have an impairment related to the IP R&D, calculated as the excess of the asset’s carrying value over its fair value.
Our policy defines IP R&D as the value assigned to those projects for which the related products have not received regulatory approval and have no alternative future use. Determining the portion of the purchase price allocated to IP R&D requires us to make significant estimates. The amount of the purchase price allocated to IP R&D is determined by estimating the future cash flows of each project or technology and discounting the net cash flows back to their present values. The discount rate used is determined at the time of measurement in accordance with accepted valuation methods. These methodologies include consideration of the risk of the project not achieving commercial feasibility.
Goodwill and other intangible assets that have indefinite useful lives are not amortized, but rather, are 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. Goodwill and intangible assets have been recorded at either incurred or allocated cost. Allocated costs were based on respective fair market values at the date of acquisition.
For goodwill, the impairment test requires a comparison of the estimated fair value of the reporting unit to which the goodwill is assigned to the sum of the carrying value of the assets and liabilities of that unit. If the sum of the carrying value of the assets and liabilities of a reporting unit exceeds the fair value of the reporting unit, the carrying value of the reporting unit’s goodwill is reduced to its implied fair value through an adjustment to the goodwill balance, resulting in an impairment charge. Our determination of impairment is based on estimates of future cash flows.
8. Contingent Consideration

The fair value of the liability for contingent consideration recorded on the acquisition date for a business combination is based on probability weighted estimated cash flow streams, discounted back to present value using a discount rate determined in accordance with accepted valuation methods. The liability for contingent consideration is remeasured to fair value at each reporting period with changes recorded in earnings until the contingency is resolved.

9. Revenue Recognition

We recognize revenue when the following four criteria has been met: (i) persuasive evidence that an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) product delivery has occurred or services have been rendered. We recognize revenue, net of sales taxes assessed by any governmental authority, as products are shipped, based on shipping terms, and when title and risk of loss passes to customers. We negotiate shipping and credit terms

14



on a customer-by-customer basis and products are shipped at an agreed upon price. All product returns must be pre-approved by us 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. Charges for discounts, returns, rebates and other allowances are recognized as a deduction from revenue on an accrual basis in the period in which the revenue is recorded. The accrual for product returns, discounts and other allowances is based on the company’s history.

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.
10. Research and Development
Research and development costs, including salaries, consulting fees, building costs, utilities and administrative expenses that are related to developing new products, enhancing existing products, validating new and enhanced products, managing clinical, regulatory and medical affairs are expensed as incurred.
11. Income Taxes

In preparing our financial statements, we calculate income tax expense for each jurisdiction in which we operate. This involves estimating actual current taxes due plus assessing temporary differences arising from differing treatment for tax and accounting purposes that are recorded as deferred tax assets and liabilities. We periodically evaluate deferred tax assets, capital loss carryforwards and tax credit carryforwards to determine their recoverability based primarily on our ability to generate future taxable income and capital gains. Where it is more-likely-than-not these will not be recovered, we estimate a valuation allowance and record a corresponding additional tax expense in our statement of operations.

We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world. Fiscal years 2012 through 2016 remain open to examination by the various tax authorities. New York State is currently auditing AngioDynamic’s franchise tax filings for 2011 through 2013, and we do not anticipate any material adjustments will result. We analyzed filing positions in all of the Federal and state jurisdictions where we are required to file income taxes, as well as all open tax years in these jurisdictions and believe that our income tax filing positions and deductions will be sustained on audit and we do not anticipate any adjustments will result in a material adverse effect on our financial condition, results of operations or cash flows.
12. Derivative Financial Instruments
We are exposed to market risks, including changes in interest rates. We periodically enter into certain derivative financial instruments to hedge the underlying economic exposure. The derivative instruments used are floating-to-fixed rate interest rate swaps, which are subject to hedge accounting treatment.
Derivative instruments are presented in the consolidated financial statements at their fair value. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in stockholders’ equity as a component of accumulated other comprehensive income (loss) depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value or cash flow hedge. Generally, the changes in the fair value of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair value of hedged items that relate to the hedged risks. Changes in the fair value of derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in accumulated other comprehensive income (loss).
13. Supplier Concentrations
We are dependent upon the ability of our suppliers to provide products on a timely basis and on favorable pricing terms. The loss of our principal suppliers or a significant reduction in product availability from these suppliers could have a material adverse effect on us. We believe that our relationships with these suppliers are satisfactory.

14. Recent Events

On March 31, 2016, Joseph DeVivo, former President and Chief Executive Officer, decided to pursue other interests outside of the Company and on April 4, 2016, James C. Clemmer was appointed as the new President and Chief Executive Officer. As part of the separation agreement with Joseph DeVivo, his stock options, restricted stock units and performance shares will continue to vest for one year.


15



On November 3, 2015, Mark Frost resigned as Executive Vice President and Chief Financial Officer (CFO). Michael Trimarchi, Vice President and Global Controller, assumed the responsibilities as principal accounting officer of the Company and interim CFO until his resignation on May 13, 2016. On July 22, 2016, Michael Greiner was appointed Executive Vice President and Chief Financial Officer of the Company, effective August 16, 2016. On July 27, 2016, Peter J. Kish was designated as the principal financial officer and principal accounting officer of the Company by the Board of Directors of the Company. Mr. Kish will serve in this role until Mr. Greiner begins his service as Chief Financial Officer on August 16, 2016.

On December 18, 2015, President Obama signed into law H.R. 2029, the “Consolidated Appropriations Act, 2016”, which includes a two-year moratorium on the medical device excise tax, effective January 1, 2016.  The 2.3 percent tax on sales of medical devices (except certain devices sold at retail) was enacted as part of the Affordable Care Act in 2010 and applied to device sales beginning on January 1, 2013.  Absent further legislative action, the tax will be automatically reinstated for medical device sales starting on January 1, 2018. As presented on our Consolidated Condensed Statement of Operations we have incurred $12.0 million cumulatively since the enactment of the tax on January 1, 2013 through the May 31, 2016.  In the absence of this tax, the company will seek opportunities to further invest in growth drivers to create long-term shareholder value.

On November 17, 2015, the Company received a letter from the FDA closing out the warning letter the Company received from FDA in January 2011 regarding certain promotional activities related to the NanoKnife System. On November 25, 2015, the Company received letters from the FDA closing out the warning letters the Company received from FDA in May 2011 related to the Company’s Queensbury facility and in November 2014 related to the Company’s Glens Falls facility. These close out letters resolved all outstanding warning letters against the Company.

During the quarter ended May 31, 2016, we made the decision to discontinue the Celerity tip location and navigation product line. The discontinuance of the product line was the result of performance and quality issues with the product and a strategic shift to focus on other product within the Vascular Access business. We recorded a write-off of approximately $5.8 million of inventory and $0.1 million of hardware assets during the fourth quarter.
During the quarter ended May 31, 2016 we entered into an agreement with Merz North America where we became the exclusive sub-distributor of ASCLERA in the vein market in the United States and received the Merz customer list for the designated market territory. As part of the agreement we receive a personal, non-exclusive, non-transferable, non-assignable, non-sub licensable, license to use the trademarks, service marks and trades names from Merz. As a result of this agreement we recorded $3.3 million of intangible assets for the exclusive distribution rights and the customer lists obtained. The Asclera product is the replacement for Sotradecol.
Regulatory Matters

On May 27, 2011, we received a Warning Letter from the U.S. Food and Drug Administration ("FDA") in connection with its inspection of our Queensbury, NY manufacturing facility. In the Warning Letter, FDA cited deficiencies in the response letter we provided FDA pertaining to the inspection that occurred from January 4 to January 13, 2011. The deficiencies related to our internal procedures for medical device reporting, corrections and removals and complaint handling. We responded to the Warning Letter and completed corrective and preventive actions to address the observations noted.

In December 2011, we initiated a comprehensive Quality Call to Action Program to review and augment our Quality Management Systems at our Queensbury facility. To accelerate implementation of the program, we engaged a team of external regulatory and quality experts and reallocated a significant number of engineering and product development resources to support this corporate initiative. From inception of the Quality Call to Action Program through fiscal 2014, we have incurred $3.2 million in direct costs associated with the program.

On February 10, 2012, we received from FDA a Form 483, List of Investigational Observations, in connection with its inspection of our Queensbury facility from November 14, 2011 to February 10, 2012. The Form 483 contained 12 observations related to, among other things, our CAPA (Corrective and Preventive Action) system, MDR (Medical Device Reporting), complaint investigation, corrections and removals, acceptance criteria and training. Some of the observations contained in the Form 483 were repeat observations from the May 27, 2011 Warning Letter described above.

On February 13, 2012, we received from FDA a Form 483 in connection with its inspection of our Fremont facility from January 12, 2012 to February 13, 2012. The Form 483 contained six observations related to, among other things, our CAPA system, design controls, risk management and training. We provided responses to FDA within 15 business days of our receipt of the Form 483s.


16



On September 24, 2012, we received from FDA a Form 483 in connection with its subsequent inspection of our Queensbury, NY facility from September 6 to September 14, and September 19 to September 24. This re-inspection followed our response to the original Form 483 issued by FDA on February 13, 2012. The Form 483 contained 5 observations related to 510(k) decisions, complaint investigations, acceptance criteria, corrective and preventive actions and training. All but one of the observations in the Form 483 related to events that occurred before the date that we had indicated to FDA in our previous responses that our corrective and remediation activities related to our Quality Call to Action would be completed. We provided responses to FDA within 15 business days of our receipt of the Form 483.

On February 4, 2014, FDA completed a comprehensive follow-up inspection of our Queensbury facility. The inspection began on January 14, 2014 and resulted in FDA issuing a Form 483 containing one observation. The observation related to the inconsistency of certain complaint investigation elements in certain devices that have hardware and disposable components. The Form 483 observation was annotated to reflect that during the inspection we had corrected the issue, and this correction was verified by the inspector. In addition, we provided a response to FDA within 15 business days of our receipt of the Form 483. We believe that the results of this inspection validate that all of the Quality System and current Good Manufacturing Practice issues raised in the 483s described above have been fully addressed.

On March 31, 2014, FDA completed an inspection of our Glens Falls, NY facility. The inspection began on March 17, 2014 and resulted in FDA issuing a form 483 containing 3 observations. The observations were related to 1) inconsistency of a manufacturing product test process used among similar products, 2) a particular verification test of a product, and 3) non-conforming product control procedure. We responded to the FDA within 15 business days of the receipt of the Form 483.

During the fourth quarter of our fiscal year ended May 31, 2014, we received Certificate to Foreign Governments ("CFGs") from the FDA covering all Vascular Access and Peripheral Vascular products manufactured in our Queensbury facility. During the first quarter of our fiscal year ended May 31, 2016, we received CFGs for our NanoKnife product.

On November 5, 2014, we received a Warning Letter from the FDA relating to observations noted during FDA’s inspection of our Navilyst Medical facilities located in Marlborough, Massachusetts and Glens Falls, New York in 2014.  The matters raised in the Warning Letter and observations focused on design control processes related to packaging validations and accelerated and real time aging testing in connection with our fluid management and PICC families of products, inconsistency of a manufacturing product test process used among similar valved PICC products, a particular verification test of valved PICC products and non-conforming product control procedures.  

On November 17, 2015, we received a letter from the FDA closing out the warning letter we received from FDA in January 2011 regarding certain promotional activities related to the NanoKnife System. On November 25, 2015, we received letters from the FDA closing out the warning letters we received from FDA in May 2011 related to the Company’s Queensbury facility and in November 2014 related to the Company’s Glens Falls facility. These close out letters resolved all outstanding warning letters against the Company.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("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 2018, 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 June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of the Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, that clarified that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target is met. This ASU is effective for the Company in its first quarter beginning after January 1, 2016 and did not have a material impact on the Company’s consolidated financial statements.


17



In April 2015, the FASB issued ASC Update No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. Update No. 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Update No. 2015-03 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those reporting periods. Early adoption is permitted for financial statements that have not been previously issued. This update is not expected to impact the results of our operations.

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. The adoption of Update No. 2015-11 is not expected to have a material impact on our financial position or results of operations.

In November 2015, the FASB issued ASC Update No. 2015-17, “Balance Sheet Classification of Deferred Taxes” as part of its simplification initiatives. This update requires deferred tax liabilities and assets to be classified as non-current on the consolidated condensed balance sheet for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted.  An entity can elect to adopt prospectively or retrospectively to all periods presented. This update was applied retrospectively as of November 30, 2015. The current deferred tax asset balance of $4.4 million was classified as a non-current deferred tax asset for the period ended May 31, 2015 in the consolidated condensed balance sheet.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10). Update No. 2016-01 addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Update No. 2016-01 is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years and early application is permitted. The adoption of Update No. 2016-01 is not expected to have a material impact on our financial position or results of operations.

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 or 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 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 is currently in the process of evaluating the impact of ASU 2016-09 on its consolidated financial statements.


18


NOTE B—OTHER ASSETS

On March 2, 2015, the Company filed an 8-K stating that it executed a non-binding letter of intent to enter into a strategic relationship with privately-held EmboMedics Inc., which develops injectable and resorbable embolic microspheres. On April 9, 2015, the Company entered into a License, Distribution, Manufacturing and Purchase Option Agreement with EmboMedics Inc, subject to certain approvals by EmboMedics shareholders. Under the terms of the agreement, AngioDynamics received an exclusive worldwide license to market and sell, upon regulatory clearances, EmboMedics’ microsphere technology. AngioDynamics has the ability to determine the manufacturing of the products.

On December 7, 2015, AngioDynamics made an initial $2.0 million purchase of non-transferable warrants in a subsidiary of EmboMedics which become exercisable upon a change of control of EmboMedics. The Company does not have significant influence, or control of the subsidiary. This initial investment is recorded at cost and the Company will review for impairment at each balance sheet date. The warrants are not exercisable at the original issue date or the balance sheet date as they only become exercisable upon a change of control, termination of the agreement or delivery of an offer notice. Based on the achievement of certain development activities, the Company will make an additional $5.0 million purchase of non-transferable warrants and an additional $4.0 million in milestone payments based on regulatory approvals. In the future, AngioDynamics could execute an exclusive option to acquire this subsidiary of EmboMedics.


 




19


NOTE C—FAIR VALUE OF FINANCIAL INSTRUMENTS
Our financial instruments include cash and cash equivalents, accounts receivable, marketable securities, accounts payable, interest rate swap agreement and contingent earn outs. 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 marketable securities and interest rate swap agreement has been recorded at its fair value based on a valuation received from an independent third party. The contingent earn out has been recorded at fair value using the income approach.
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This policy establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The policy describes three levels of inputs that may be used to measure fair value which are provided in the table below.
 
Level 1
Quoted prices in active markets for identical assets or liabilities. Level 1 assets include money market funds that are traded in an active exchange market.
Level 2
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. When quoted market prices are unobservable, we obtain pricing information from an independent pricing vendor. The pricing vendor uses various pricing models for each asset class that are consistent with what other market participants would use. The inputs and assumptions to the model of the pricing vendor are derived from market observable sources including: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market-related data. The pricing vendor considers all available market observable inputs in determining the evaluation for a security. Thus, certain securities may not be priced using quoted prices, but rather determined from market observable information. Included in Level 2 assets is our interest rate swap agreement which is valued using a mid-market valuation model.
Level 3
Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category includes the auction rate securities where independent pricing information was not able to be obtained and the contingent consideration related to the acquisitions of Vortex, Microsulis and Clinical Devices. Our investments in auction-rate securities were classified as Level 3 as quoted prices were unavailable since these auction rate securities issued by New York state and local government authorities failed auction. Due to limited market information, we utilized a discounted cash flow (“DCF”) model to derive an estimate of fair value for contingent considerations for all periods presented. The assumptions used in preparing the DCF model included estimates with respect to the discount rate, amount and timing of future interest and principal payments and forward projections. Assumptions associated with the auction rate securities include the interest rate benchmarks, the probability of full repayment of the principal considering the credit quality and guarantees in place, and the rate of return required by investors to own such securities given the current liquidity risk.

20



The following tables provide information by level for assets and liabilities that are measured at fair value (in thousands):
 
 
Fair Value Measurements
using inputs considered as:
 
 
 
Level 1
 
Level 2
 
Level 3
 
Fair Value at May 31, 2016
Financial Assets
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
New York State government agency obligations
$

 
$

 
$
1,653

 
$
1,653

Total

 

 
1,653

 
1,653

Total Financial Assets
$

 
$

 
$
1,653

 
$
1,653

Financial Liabilities
 
 
 
 
 
 
 
Contingent liability for acquisition earn out

 

 
38,275

 
38,275

Total Financial Liabilities
$

 
$

 
$
38,275

 
$
38,275

 
 
Fair Value Measurements
using inputs considered as:
 
 
 
Level 1
 
Level 2
 
Level 3
 
Fair Value at May 31, 2015
Financial Assets
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
New York State government agency obligations
$

 
$

 
$
1,689

 
$
1,689

Total

 

 
1,689

 
1,689

Total Financial Assets
$

 
$

 
$
1,689

 
$
1,689

Financial Liabilities
 
 
 
 
 
 
 
Interest rate swap agreements
$

 
$
257

 
$

 
$
257

Contingent liability for acquisition earn out

 

 
47,384

 
47,384

Total Financial Liabilities
$

 
$
257

 
$
47,384

 
$
47,641

There were no transfers in and out of Level 1, 2 and 3 measurements for the years ended May 31, 2016 and 2015.

The components of Level 3 fair value instruments as of May 31, 2016 are shown below (in thousands):
 

Financial Assets
 
Financial Liabilities
 
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
 
Fair Value Measurements
Using Significant
Unobservable Inputs
Balance at May 31, 2015
$
1,689

 
$
47,384

Change in fair value of contingent consideration (1)

 
948

Currency (gain) loss from remeasurement

 
43

Fair market value adjustments
(36
)
 

Contingent consideration payments

 
(10,100
)
Balance at May 31, 2016
$
1,653

 
$
38,275


The components of Level 3 fair value instruments as of May 31, 2015 are shown below (in thousands):

21


 
Financial Assets
 
Financial Liabilities
 
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
 
Fair Value Measurements
Using Significant
Unobservable Inputs
Balance at May 31, 2014
$
1,809

 
$
67,331

Change in fair value of contingent consideration (1)

 
(8,196
)
Currency (gain) loss from remeasurement

 
(529
)
Included in other comprehensive income (loss)
(120
)
 

Contingent consideration payments

 
(11,222
)
Balance at May 31, 2015
$
1,689

 
$
47,384


(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 Liability for Acquisition Earn Outs
Certain of our business combinations involve the potential for the payment of future contingent consideration upon the achievement of certain product development milestones and/or various other favorable operating conditions. Payment of the additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels or achieving product development targets. Contingent consideration is recorded at the estimated fair value of the contingent milestone payments on the acquisition date. The fair value of the contingent milestone 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 statement of operations. 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.

Contingent consideration liabilities will be remeasured to fair value each reporting period using projected net sales, discount rates, probabilities of payment and projected payment dates. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model. Projected net sales are based on our internal projections and extensive analysis of the target market and the sales potential. Increases in projected net sales and probabilities of payment may result in higher fair value measurements in the future. Increases in discount rates and the projected time to payment may result in lower fair value measurements in the future. 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 May 31, 2016 (in thousands of dollars):
 
 
Fair value at
May 31, 2016
 
Valuation
Technique
 
Unobservable
Input
 
Range
Revenue based payments
$
35,325

 
Discounted cash flow
 
Discount rate
Probability of payment
Projected fiscal year of payment
 
4%
75% - 100%
2017 - 2022
Milestone based payments
2,950

 
Discounted cash flow
 
Discount rate
Probability of payment
Projected fiscal year of payment
 
16%
75% - 100%
2017
 
$
38,275

 
 
 
 
 

At May 31, 2016, the estimated potential amount of undiscounted future contingent consideration that we expect to pay as a result of all completed acquisitions is approximately $40.8 million. The milestones associated with the contingent consideration must be reached in future periods ranging from fiscal years 2017 to 2022 in order for the consideration to be paid.

22



NOTE D—MARKETABLE SECURITIES AND INVESTMENTS
As of May 31, 2016, marketable securities consisted of the following:
 
 
Amortized
cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in thousands)
Available-for-sales securities
 
 
 
 
 
 
 
New York State government agency obligations
$
1,800

 
$

 
$
(147
)
 
$
1,653

 
$
1,800

 
$

 
$
(147
)
 
$
1,653

As of May 31, 2015, marketable securities consisted of the following:
 
 
Amortized
cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in thousands)
Available-for-sales securities
 
 
 
 
 
 
 
New York State government agency obligations
$
1,825

 
$

 
$
(136
)
 
$
1,689

 
$
1,825

 
$

 
$
(136
)
 
$
1,689

The amortized cost and fair value of marketable securities as of May 31, 2016, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
Amortized
cost
 
Fair
Value
 
(in thousands)
As of May 31, 2016:
 
 
 
Due in one year or less
$

 
$

Due after one through five years

 

Due after five through twenty years
1,800

 
1,653

 
$
1,800

 
$
1,653


23


 NOTE E—INVENTORIES
As of May 31, 2016 and 2015, inventories consisted of the following:
 
 
May 31, 2016
 
May 31, 2015
 
(in thousands)
Raw materials
$
21,669

 
$
28,040

Work in process
10,700

 
11,910

Finished goods
23,001

 
27,438

Total
$
55,370

 
$
67,388


Total inventory is reduced to net realizable value by $12.6 million compared to $7.8 million in the prior year. Of the $12.6 million in the current year, $5.8 million relates to the write-off of Celerity.

NOTE F—PREPAID EXPENSES AND OTHER
As of May 31, 2016 and 2015, prepaid expenses and other consisted of the following:
 
 
May 31, 2016
 
May 31, 2015
 
(in thousands)
Deposits
$
190

 
$
2,011

Other prepaid taxes
160

 
165

License fees
108

 
121

Software licenses
282

 
667

Trade shows
278

 
279

Rent
127

 
77

Other
2,098

 
812

Total
$
3,243

 
$
4,132

 

24


NOTE G—PROPERTY, PLANT AND EQUIPMENT, AT COST
As of May 31, 2016 and 2015, property, plant and equipment are summarized as follows:
 
 
May 31, 2016
 
May 31, 2015
 
(in thousands)
Building and building improvements
$
39,585

 
$
33,853

Machinery and equipment
24,078

 
23,626

Computer software and equipment
24,691

 
24,431

Construction in progress
1,743

 
7,033

 
90,097

 
88,943

Less accumulated depreciation and amortization
(43,536
)
 
(36,197
)
 
46,561

 
52,746

Land and land improvements
1,723

 
1,704

 
$
48,284

 
$
54,450

Depreciation expense for fiscal 2016, 2015 and 2014 was $8.2 million, $9.8 million and $8.4 million, respectively. In conjunction with the Operational Excellence Program that was announced in December 2013, we updated the estimated useful lives on certain manufacturing equipment. As a result of the change in the useful life, we recorded additional depreciation of $1.0 million, $1.5 million and $0.8 million for the years ended May 31, 2016, 2015 and 2014, respectively.

25


NOTE H—GOODWILL AND INTANGIBLE ASSETS
Intangible assets other than goodwill and indefinite lived intangible assets are amortized over their estimated useful lives, which range between two and eighteen years, on either a straight-line basis or proportionately to the benefit being realized. We periodically review the estimated useful lives of our intangible assets and review such assets for impairment, based on estimated future cash flows, whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. If an intangible asset 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.
We consider our business to be a single operating segment entity, and a single reporting unit engaged in the development, manufacture and sale on a global basis of medical devices for vascular access, peripheral vascular disease, oncology and surgery.
Goodwill and other intangible assets that have indefinite useful lives are not amortized, but rather, are 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. Goodwill and intangible assets have been recorded at either incurred or allocated costs based on respective fair market values at the date of acquisition.
For goodwill, the impairment test requires a comparison of the estimated fair value of the reporting unit to which the goodwill is assigned to the sum of the carrying value of the assets and liabilities of that unit. If the sum of the carrying value of the assets and liabilities of a reporting unit exceeds the fair value of the reporting unit, the carrying value of the reporting unit’s goodwill is reduced to its implied fair value through an adjustment to the goodwill balance, resulting in an impairment charge.
To determine fair value of our single reporting unit we utilized a market-based approach and an income approach. We determined the discounted cash flow as the best indicator to determine fair value and therefore assigned a weight of 75% with the remaining 25% assigned to the market approach.
Under the market-based approach, we utilized information of our Company as well as publicly available information of certain peer companies within our industry to determine earnings multiples (EBITDA).
Under the income approach, we determined fair value based on estimated future cash flows of the reporting unit, discounted by our estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn. We used a discount rate of 12.5% to calculate the fair value of our reporting unit.
Use of the income approach in determining the fair value of a reporting unit requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates and future market conditions, among others. These assumptions are highly sensitive and changes in these estimates could result in impairment. We applied gross margin assumptions, showing improvement over historical trends, improvements over historical trends of revenue of certain product lines and used a capitalization rate of 8.5% to calculate the terminal value of our reporting unit.
We completed our annual goodwill impairment test of our single reporting unit as of December 31, 2015. Our assessment of goodwill impairment indicated that the fair value of our reporting unit exceeded its carrying value and therefore goodwill was not impaired. The fair value of our reporting unit exceeded its carrying value by 9.2%.
At times our stock market capitalization has been lower than our shareholders’ equity or book value. However, our reporting unit has continued to generate significant cash flows from operations, and we expect to continue to do so in fiscal 2016 and beyond. Furthermore, we believe that a reasonable potential buyer would offer a control premium for our business that would adequately cover the difference between our stock market capitalization and our book value. The implied control premium in our annual goodwill impairment test as of December 31, 2015 is comparable to premiums identified in recent acquisitions of companies of similar size and in similar industries.
Even though we determined that there was no goodwill impairment as of December 31, 2015, 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, 2016. We continued to assess impairment through May 31, 2016 and noted no events that would be considered a triggering event.

26


It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material. Events that could, in the future, result in impairment include, but are not limited to, declining sales for a significant product or in a significant geographic region.
As of May 31, 2016 and 2015, intangible assets consisted of the following:
 
 
May 31, 2016
 
Gross carrying
value
 
Accumulated
amortization
 
Net carrying
value
 
Weighted average
useful life
 
(in thousands)
 
(years)
Product technologies
$
148,387

 
$
(51,313
)
 
$
97,074

 
10.2
Customer relationships
88,389

 
(47,133
)
 
41,256

 
11.9
Trademarks
28,470

 
(6,242
)
 
22,228

 
10.7
In process R&D
3,600

 

 
3,600

 
Indefinite
Licenses
7,931

 
(6,716
)
 
1,215

 
7.6
Distributor relationships
2,150

 
(946
)
 
1,204

 
5.2
 
$
278,927

 
$
(112,350
)
 
$
166,577

 
 
 
 
May 31, 2015
 
Gross carrying
value
 
Accumulated
amortization
 
Net carrying
value
 
Weighted avg
useful life
 
(in thousands)
 
(years)
Product technologies
$
148,776

 
$
(41,447
)
 
$
107,329

 
10.2
Customer relationships
86,371

 
(42,813
)
 
43,558

 
12.0
Trademarks
28,545

 
(3,383
)
 
25,162

 
10.7
In process R&D
3,600

 

 
3,600

 
Indefinite
Licenses
7,913

 
(5,910
)
 
2,003

 
8.3
Distributor relationships
900

 
(900
)
 

 
3.0
 
$
276,105

 
$
(94,453
)
 
$
181,652

 
 
Amortization expense was $18.0 million, $18.0 million and $16.6 million for fiscal 2016, 2015 and 2014, respectively.
Annual amortization of these intangible assets is expected to approximate the following amounts for each of the next five fiscal years (in thousands):
 
2017
$
19,049

2018
$
19,903

2019
$
22,062

2020
$
23,329

2021
$
24,370

Adjustments to goodwill for the fiscal year ended May 31, 2016 and May 31, 2015 are as follows (in thousands):
 
Total
Balance, May 31, 2014
$
360,473

Tax basis adjustment
779

Balance, May 31, 2015
$
361,252

 

Balance, May 31, 2016
$
361,252



27


During fiscal 2015, goodwill and deferred tax liabilities were adjusted by $0.8 million due to the receipt of a New York State tax grant that was not correctly accounted for as part of purchase accounting in fiscal 2012.  The Company has determined that this adjustment was not material to any current or prior annual or interim periods.

NOTE I-INCOME TAXES

The components of income (loss) before income tax provision for the years ended May 31 are as follows:

 
2016
 
2015
 
2014
 
(in thousands)
(Loss) income before tax provision:

 

 

US
$
(4,444
)
 
$
(8,965
)
 
$
4,645

Non-US
1,191

 
834

 
541

 
$
(3,253
)
 
$
(8,131
)
 
$
5,186

 
Income tax (benefit) provision analyzed by category and by statement of operations classification for the years ended May 31 is summarized as follows:
 
2016
 
2015
 
2014
 
(in thousands)
Current

 

 

Federal
$
34

 
$
(242
)
 
$
(133
)
State and local
103

 
205

 
99

Non U.S.
217

 
417

 
157

 
354

 
380

 
123

Deferred
39,983

 
(5,123
)
 
2,716

Income tax (benefit) provision
$
40,337

 
$
(4,743
)
 
$
2,839


The significant components of deferred income tax (benefit) expense from operations for the years ended May 31 consist of the following:
 
 
2016
 
2015
 
2014
 
(in thousands)
Net effect of temporary differences
$
133

 
$
(1,916
)
 
$
1,543

Adjustments for beginning-of-the-year valuation allowance balance for changes in circumstances
40,418

 

 

Impact of NYS tax reform legislation

 

 
1,173

Net operating loss carryforward
(568
)
 
(3,207
)
 

 
$
39,983

 
$
(5,123
)
 
$
2,716












28



Temporary differences that give rise to deferred tax assets and liabilities are summarized as follows:
 
 
May 31, 2016
 
May 31, 2015
 
(in thousands)
Deferred tax assets

 

Net operating loss carryforward
$
52,593

 
$
52,025

Stock-based compensation
4,135

 
4,468

Federal and state R&D tax credit carryforward
2,145

 
1,646

Inventories
4,535

 
2,808

Expenses incurred not currently deductible
3,018

 
2,107

Accrued liabilities
339

 
114

Gross deferred tax asset
66,765

 
63,168

Deferred tax liabilities

 

Excess tax over book depreciation and amortization
46,240

 
42,988

 
46,240

 
42,988

Valuation Allowance
(42,209
)
 
(1,791
)
Net deferred tax asset (liability)
$
(21,684
)
 
$
18,389


Our Federal net operating loss carryforwards as of May 31, 2016 after considering IRC Section 382 limitations are $151.7 million. The expiration of the Federal net operating loss carryforwards are as follows: $29.8 million between 2017 and 2023 and $121.9 million between 2027 and 2036.

Our state net operating loss carryforwards as of May 31, 2016 after considering remaining IRC Section 382 limitations are $30.8 million which expire in various years from 2016 to 2036.

As a result of certain realization requirements of ASC 718, the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets as of May 31, 2016 and 2015 that arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting. Equity will be increased by $0.4 million if and when such excess tax benefits are ultimately realized.

At May 31, 2016, we had a net deferred income tax liability of $21.7 million, after recording a valuation allowance of $42.2 million. The valuation allowance increased by $40.4 million in 2016.

While the net deferred tax asset at May 31, 2016 before the valuation allowance was $19.9 million, the Company was required to record a valuation allowance of $40.4 million due to deferred tax liabilities related to intangibles of $20.5 million that have an indefinite reversal period and can not be used to support the deferred tax asset.

A valuation allowance is provided if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company’s analysis of the need for a valuation allowance considered that the Company has incurred a cumulative loss in the U.S. over the three year period ending May 31, 2016. A majority of the cumulative loss has been caused by the charges associated with the product recall and discontinuance and the impairment of fixed and intangible assets recorded in the quarter end February 28, 2015,  From the time when the Company initially incurred a three year cumulative loss in the quarter ended February 28, 2015, and in each subsequent quarter through the quarter ended February 28, 2016, the Company could still demonstrate a recent history of core earnings , and had anticipated a return to profitability for the full fiscal year 2016. However, in the quarter ended May 31, 2016 the Company did not return to profitability for the full fiscal year and could no longer demonstrate a recent history of core earnings.   Consequently after careful consideration and weighing of all the available positive and negative evidence, the weight given to the three year cumulative loss and lack of a recent history of core earnings was difficult to overcome and a full valuation allowance related to the U.S. deferred tax assets was established. 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

29


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.

Our consolidated income tax provision has differed from the amount that would be provided by applying the U.S. Federal statutory income tax rate to our income before income taxes for the following reasons:
 
2016
 
2015
 
2014
 
(in thousands)
Income tax (benefit) provision at statutory tax rate of 35%
$
(1,139
)
 
$
(2,845
)
 
$
1,814

Effect of graduated tax rates
33

 
81

 
(51
)
State income taxes, net of Federal tax benefit
(215
)
 
(21
)
 
111

Impact of Non US operations
(162
)
 
133

 
(27
)
Research and development tax credit
(499
)
 
(604
)
 
(236
)
Meals and entertainment
329

 

 

Nondeductible interest on contingent payments
262

 
265

 
540

Nontaxable gain on revaluation of contingent consideration liability
(170
)
 
(3,102
)
 
(1,734
)
Tax law changes

 
(454
)
 
1,173

Adjustment to beginning of year valuation allowance
40,685

 

 

Effect of elimination of stock compensation APIC pool
739

 
1,253

 
440

Nondeductible stock-based compensation

 

 
176

Other nondeductible expenses
207

 
498

 
384

Over (under) accrual of prior year Federal and state taxes
356

 
38

 
249

Other
(89
)
 
15

 

Income tax (benefit) expense
$
40,337

 
$
(4,743
)
 
$
2,839


The following table provides a reconciliation of the beginning and ending amount of unrecognized tax benefits, all of which, if recognized, would impact the effective tax rate.
 
2016
 
2015
 
2014
 
(in thousands)
Unrecognized tax benefits balance at June 1
$

 
$

 
$

Increase in gross amounts of tax positions related to prior years
899

 

 

Decrease in gross amounts of tax positions related to prior years

 

 

Increase in gross amounts of tax positions related to current year

 

 

Decrease due to settlements with tax authorities

 

 

Decrease due to lapse in statute of limitations

 

 

Unrecognized tax benefits balance at May 31
$
899

 
$

 
$


The table above includes unrecognized tax benefits associated with the calculation of limitations placed on the utilization of tax attributes related to an acquired company. If recognized, $0.1 million of the balance of unrecognized tax benefits as of May 31, 2016 would affect the effective tax rate and the balance of $0.8 million would result in adjustments to other tax accounts.  

30


We recognize interest and penalties related to unrecognized tax benefits within its global operations as a component of income tax expense. There are no accrued interest and penalties recognized in the consolidated balance sheet as of May 31, 2016 and May 31, 2015.
We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world.
Fiscal years 2012 through 2016 remain open to examination by the various tax authorities. New York State is currently auditing AngioDynamic's franchise tax filings for 2011 through 2013. We do not anticipate any adjustments will result in a material adverse effect on our financial condition, results of operations or cash flows.
We do not anticipate that the amount of unrecognized tax benefits will significantly change in the next twelve months.
The accumulated undistributed earnings of the Company’s foreign operations were approximately $4.6 million, and are intended to remain indefinitely invested in foreign operations. Accordingly, no taxes have been provided on these earnings at May 31, 2016. If these earnings were distributed, the Company would be subject to both foreign withholding taxes and U.S. income taxes that may not be fully offset by foreign tax credits. A reasonable estimate of the deferred tax liability on these earnings is not practicable at this time.
NOTE J—ACCRUED LIABILITIES
As of May 31, 2016 and 2015, accrued liabilities consist of the following:
 
 
May 31,
2016
 
May 31,
2015
 
(in thousands)
Payroll and related expenses
$
9,414

 
$
10,297

Royalties
2,489

 
2,237

Accrued severance
1,524

 
158

Sales and franchise taxes
565

 
489

Interest rate swap liability

 
257

Outside services
2,063

 
1,522

Deferred Rent
35

 
808

Other
5,806

 
2,341

Total
$
21,896

 
$
18,109

NOTE K—LONG-TERM DEBT
On September 19, 2013, we 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 J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Keybank National Association as joint bookrunners and joint lead arrangers.
The Credit Agreement provides for a $100 million senior secured term loan facility (the "Term Loan") and a $100 million senior secured revolving credit facility, which includes up to a $20 million sublimit for letters of credit and a $5 million sublimit for swingline loans (the "Revolving Facility", and together with the Term Loan, the "Facilities").
The proceeds of the Revolving Facility may be used for general corporate purposes of the Company and its subsidiaries. The Facilities have a five years maturity. The Term Loan has a quarterly repayment schedule equal to 5%, 5%, 10%, 15% and 65% of its principal amount in years one through five. Interest on both the Term Loan and Revolving Facility will be based on a base rate or Eurodollar rate plus an applicable margin which increases as our total leverage ratio increases, with the base rate and Eurodollar rate having ranges of 0.5% to 1.25% and 1.5% to 2.25% respectively. After default, the interest rate may be increased by 2.0%. The Revolving Facility will also carry a commitment fee of 0.2% to 0.35% per annum on the unused portion.

31


Our obligations under the Facilities are unconditionally guaranteed, jointly and severally, by our material direct and indirect domestic subsidiaries (the "Guarantors"). All obligations of the Company and the Guarantors under the Facilities are collateralized by first priority security interests in substantially all of the assets of the Company and the Guarantors.
We have entered in an interest rate swap agreement, (the "Swap Agreement"), with an initial notional amount of $100 million, to limit the effect of rising of interest rates. The Swap Agreement, which qualified for hedge accounting, was a contract to exchange floating interest rate payments for fixed interest rate payments of 3.26% on the outstanding balance of the loan over the life of the agreement without the exchange of the underlying notional amounts. The Swap Agreement provides for a fixed rate of 0.74% above the applicable rate provided for in the Credit Agreement. The Swap matured in May 2016.
On September 19, 2013, we borrowed $100 million under the Term Facility and approximately $41.4 million under the Revolving Facility to repay the prior credit agreement. As of May 31, 2016, $85.0 million and $36.4 million were outstanding under the Term Facility and Revolving Facility, respectively. As of May 31, 2016 and 2015 the carrying value of long-term debt approximates its fair market value. The Credit Agreement includes customary representations, warranties and covenants, and acceleration, indemnity and events of default provisions, including, among other things, two financial covenants. The first financial covenant requires us to maintain, as of the end of each of our fiscal quarters, a ratio of (i) consolidated EBITDA minus consolidated capital expenditures to (ii) consolidated interest expense paid or payable in cash plus scheduled principal payments in respect of indebtedness under the Credit Agreement of not less than 1.35 to 1.00. The second financial covenant requires us to maintain, as of the end of each of our fiscal quarters, a ratio of consolidated total indebtedness to consolidated EBITDA of not greater than 3.75 to 1.00. We were in compliance with both financial covenants as of May 31, 2016.
As of May 31, 2016, future minimum principal payments on long-term debt were as follows (in thousands):
 
2017
$
16,250

2018
26,250

2019
78,910

 
$
121,410


NOTE L—RETIREMENT PLANS
We have a 401(k) plan under which eligible employees can defer a portion of their compensation, part of which is matched by us. Matching contributions were $3.7 million, $3.7 million and $2.8 million in 2016, 2015 and 2014, respectively. There are also various immaterial foreign retirement plans.
NOTE M—STOCKHOLDERS’ EQUITY
1. Capitalization
On October 29, 2014, our Board of Directors approved our Amended and Restated Certificate of Incorporation (the “Amended Certificate”). Under the Amended Certificate, the authorized capital stock is 80,000,000 shares, consisting of 75,000,000 shares of common stock, par value $.01 per share and 5,000,000 shares of preferred stock, par value $.01 per share.
The holders of common stock are entitled to one vote for each share held. Subject to preferences applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably dividends, if any, as may be declared by the Board of Directors out of funds legally available for dividend payments. If we liquidate, dissolve, or wind up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no pre-emptive rights or rights to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate in the future.
Our board of directors has the authority to (i) issue the undesignated preferred stock in one or more series, (ii) determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any wholly un-

32


issued series of undesignated preferred stock and (iii) fix the number of shares constituting any series and the designation of the series, without any further vote or action by our stockholders.
2. Stock Options
1997 Stock Option Plan
In 1997, we adopted a Stock Option Plan (the “1997 Plan”). The 1997 Plan provided for the grant to key employees of both nonqualified stock options and incentive stock options and to members of the Board of Directors and consultants of nonqualified stock options. A total of 1,497,674 shares of our common stock were available to be issued under the 1997 Plan pursuant to the exercise of options. All stock options were to have an exercise price of not less than the fair market value of the shares on the date of grant. Options are exercisable over a period of time to be designated by the administrators of the 1997 Plan (but not more than 10 years from the date of grant) and are subject to such other terms and conditions as the administrators may determine. The vesting schedule is subject to the discretion of our Board of Directors. Options are exercisable immediately upon vesting. In addition, all options, whether vested or not, become exercisable in full immediately upon a change of control, as defined under the 1997 Plan. The 1997 Plan terminated in March 2007 and as such, no further options will be granted under this plan.
2004 Stock and Incentive Award Plan
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. A total of 6,750,000 shares of our common stock have been reserved for issuance under the 2004 Plan, of which up to 800,000 shares may be issued upon the exercise of incentive stock options. The compensation committee of the Board of Directors administers the 2004 Plan. The committee determines vesting terms and the exercise price of options granted under the 2004 Plan, but for all incentive stock options the exercise price must at least be equal to the fair market value of our common stock on the date of grant. The term of an incentive stock option may not exceed ten years.
On October 5, 2011, we amended the 2004 Stock and Incentive Award Plan to increase the maximum number of shares of our common stock with respect to which stock options may be granted during any calendar year to one employee from 200,000 shares to 500,000 shares.
 
The following table summarizes information about stock options activity for the fiscal year ended May 31, 2016.
 
 
2016
 
Shares
 
Weighted-
average
exercise
price
 
Weighted
average
remaining
contractual
life
 
Aggregate
intrinsic
value (in
thousands)
Outstanding at beginning of year
2,299,313

 
$
14.86

 
 
 
 
Granted
564,380

 
$
14.22

 
 
 
 
Exercised
(145,260
)
 
$
13.73

 
 
 
 
Forfeited
(304,563
)
 
$
13.85

 
 
 
 
Expired
(132,252
)
 
$
22.75

 
 
 
 
Outstanding at end of year
2,281,618

 
$
14.45

 
3.79
 
$
164

Options exercisable at year-end
1,313,698

 
$
14.25

 
2.34
 
$
130

Options expected to vest in future periods
854,189

 
$
14.72

 
5.76
 
$
30

As of May 31, 2016, there remained approximately 2.2 million shares available for granting of options under the 2004 Plan. Options are exercisable into common stock.


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The following table summarizes information about stock options outstanding at May 31, 2016.
Range of exercise prices
Number
outstanding
 
Weighted-
average
remaining
life in
years
 
Weighted-
average
exercise
price
 
Number
Exercisable
 
Weighted-
average
exercise
price
$10.25 - $14.24
1,398,385

 
3.46
 
$
12.93

 
957,571

 
$
13.14

$14.25 - $18.24
684,427

 
4.75
 
16.04

 
228,571

 
15.84

$18.25 - $22.24
183,695

 
3.01
 
19.30

 
112,445

 
19.23

$22.25 - $26.24
14,250

 
0.48
 
23.62

 
14,251

 
23.62

$26.25 - $30.24
861

 
0.60
 
26.94

 
860

 
26.94

 
2,281,618

 
3.79
 
$
14.45

 
1,313,698

 
$
14.25

Stock options are granted at exercise prices equal to the quoted market price of our common stock at the date of the grant. Options vest 25% per year over four years for employees and 100% after one year for consultants. Grants to directors vest 33.33% per year over three years. Stock options granted prior to May 1, 2007 expire on the tenth anniversary of the grant date. Stock options granted on or after May 1, 2007, expire on the seventh anniversary of the grant date.
We measure the fair value of each stock option grant at the date of grant using a Black-Scholes option pricing model. The weighted average grant-date fair value of options granted during the years ended May 31, 2016, 2015 and 2014 was $4.16, $4.74, and $4.10, respectively. The following assumptions were used in arriving at the fair value of options granted during 2016, 2015 and 2014, respectively: risk-free interest rates of 1.48%, 1.54% and 1.44%; expected volatility of 31%, 31%, and 34%; and expected lives of 4.81 years, 4.76 years, and 4.74 years. We do not declare dividends therefore a dividend yield of zero was used for the years ended 2016, 2015 and 2014. Risk-free interest rates reflect the yield on zero-coupon U.S. Treasury bonds whose maturity period equals the expected term of the option. Expected volatilities are based on the historical volatility of our stock. The expected option lives are based on our historical experience of employee exercise behavior.
The total intrinsic value of options exercised during the years ended 2016, 2015 and 2014 amounted to $0.1 million, $1.6 million, and $1.0 million, respectively. As of May 31, 2016, there was $3.3 million of total unrecognized compensation cost related to non-vested options. The cost is expected to be recognized over a weighted average period of 3 years.
Cash received from option exercises during 2016, 2015 and 2014 was $1.3 million, $4.3 million and $1.3 million, respectively. The tax benefit realized from stock options exercised during the years ended 2016, 2015 and 2014 were $0.1 million, $0.5 million and $0.1 million, respectively.
3. Performance Share and Restricted Stock Unit Awards
We grant restricted stock units to certain employees under the 2004 Plan which give the recipients the right to receive shares of our stock upon vesting. The restricted stock unit awards vest in equal annual installments over the term of the grants. Unvested restricted stock unit awards will be forfeited if the recipient ceases to be employed by us, competes with our business or otherwise engages in activities detrimental to our business before such date.

 The following table summarizes information about restricted stock unit activity for the year ended May 31, 2016.
 
Non-Vested Stock
Award Units
 
Weighted Average
Grant-Date Fair Value
Non-vested at beginning of year
563,101

 
$
13.73

Granted
259,917

 
$
15.21

Vested
(160,845
)
 
$
15.39

Canceled
(112,396
)
 
$
13.81

Non-vested at end of year
549,777

 
$
14.62

Awards expected to vest in future periods
482,594

 
$
14.62

The fair value of each restricted stock unit is the market price of our stock on the date of grant. The weighted average grant date fair value of restricted stock units granted during the years ended May 31, 2016, 2015 and 2014 was $15.21, $14.75

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and $13.23, respectively. The total intrinsic value of restricted stock units vesting during the years ended 2016, 2015 and 2014 was $2.5 million, $2.4 million, and $1.8 million, respectively. As of May 31, 2016, there was $5.4 million of total unrecognized compensation cost related to non-vested restricted stock awards. The cost is expected to be recognized over a weighted average period of 2 years.
We grant performance share awards to certain employees under the 2004 Plan which gives the recipients the right to receive shares of our stock if certain criteria is met. The performance criteria is established by the compensation committee for vesting of the performance share awards and may include factors such as the achievement of relative total shareholder return ("TSR"), certain sales, operating income and earnings per share (“EPS”) goals. Performance share awards are subject to additional conditions, including the recipient’s continued employment with us.

Performance share units are valued using a Monte Carlo simulation model on the date of grant. As of May 31, 2016, 2015 and 2014, the weighted average grant date fair market value for new grants was $18.07, $19.83 and $25.56, respectively. Compensation cost is recognized over the performance period which is typically three years. As of May 31, 2016, 0.4 million performance share units with a weighted average remaining contractual term of 3 years and $4.6 million of unrecognized compensation cost were outstanding. As of May 31, 2015, 0.2 million performance share units with a weighted average remaining contractual term of 3 years and $2.2 million of unrecognized compensation cost were outstanding.
4. Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the “Stock Purchase Plan”) provides a means by which our employees (the “participants”) are given an opportunity to purchase our common stock through payroll deductions. A total of 2,000,000 shares of our common stock have been reserved for issuance under the Stock Purchase Plan. Shares are offered through two purchase periods, each with duration of approximately 6 months, commencing on the first business day of the first and third fiscal quarters. An employee is eligible to participate in an offering period if, on the first day of an offering period, he or she has been employed in a full-time capacity for at least six months, with a customary working schedule of 20 or more hours per week and more than five months in a calendar year. Employees who own stock possessing 5% or more of the total combined voting power or value of all classes of our stock are not eligible to participate in the Stock Purchase Plan. The purchase price of the shares of common stock acquired on each purchase date will be the lower of (i) 85% of the fair market value of a share of common stock on the first day of the offering period or (ii) 85% of the fair market value of a share of common stock on the last day of the purchase period, subject to adjustments made by the Board of Directors. The Stock Purchase Plan is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. During the year ended May 31, 2015, an additional 800,000 shares of our common stock have been reserved for issuance under the Stock Purchase Plan.
 
We use the Black-Scholes option-pricing model to calculate the purchase date fair value of the shares issued under the Stock Purchase Plan and recognize expense related to shares purchased ratably over the offering period. During the years ended 2016, 2015 and 2014, 137,957, 119,001 and 146,275 shares, respectively, were issued at an average price of $10.67, $11.89 and $9.30, respectively, under the Stock Purchase Plan. As of May 31, 2016, 1.0 million shares remained available for future purchases under the Stock Purchase Plan.

5. Other items

Share-based compensation expense recognized in the consolidated statement of operations during the years ended 2016, 2015 and 2014 amounted to $3.2 million, $6.0 million and $5.5 million, respectively. The income tax benefit recognized in earnings on the compensation expense recognized for all share-based compensation arrangements amounted to $1.0 million, $2.0 million and $1.8 million, respectively. Income tax expense of $0.8 million, $1.3 million and $0.5 million was recorded in continuing operations for the excess of cumulative book deductions over actual tax deductions for the years ended 2016, 2015 and 2014, respectively. The income tax benefit on all share based compensation expense in 2016 as well as the income tax expense on the excess book deductions over actual tax deductions in 2016 are negated by the full valuation allowance established at May 31, 2016. Additional income tax expense of $0.1 million for 2014 was recorded in shareholder’s equity for the excess book deductions to the extent prior tax deductions exceeded prior book deductions.

As part of his employment agreement, the Company awarded James C. Clemmer, the Company’s President and CEO, 250,000 performance shares, 200,000 options and 50,000 restricted stock units. The award was unanimously approved by the Company's independent compensation committee.  The performance shares have a three years term with payouts to be made in

35


shares of the Company's common stock at the end of the term ranging between 0 and 200 percent of the grant amount depending on the Company's total shareholder return relative to a peer group of companies. The options will vest in four equal installments beginning on the first anniversary of the grant date, have a strike price equal to the closing price of the company's common stock as of April 4, 2016 and expire, if not exercised, on April 4, 2023. The restricted stock units will vest in four equal installments beginning on the first anniversary of the grant date.
NOTE N—EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of common shares outstanding without consideration of potential common stock. In addition, diluted earnings per share include 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 basic loss per share as the impact would be anti-dilutive.
The following table reconciles basic to diluted weighted average shares outstanding for the years ended May 31, 2016, 2015 and 2014:
 
2016
 
2015
 
2014
Basic
36,161,383

 
35,683,139

 
35,135,689

Effect of dilutive securities

 

 
304,161

Diluted
36,161,383

 
35,683,139

 
35,439,850

 
 
 
 
 
 
Securities excluded as their inclusion would be anti-dilutive
3,277,037

 
2,862,414

 
2,347,426


NOTE O—COMMITMENTS AND CONTINGENCIES
Leases
We are committed under non-cancelable operating leases for facilities and equipment. During fiscal 2016, 2015 and 2014, aggregate rental costs under all operating leases were approximately $2.5 million, $3.4 million and $2.0 million, respectively. Future annual payments under non-cancelable operating leases in the aggregate, of which one includes an escalation clause, with initial remaining terms of more than one year at May 31, 2016, are summarized as follows (in thousands):
 
2017
$
2,183

2018
2,013

2019
1,981

2020
1,772

2021
935

 
$
8,884

 
Litigation Matters

AngioDynamics v. biolitec

On January 2, 2008, we commenced an action in the United States District Court for the Northern District of New York entitled AngioDynamics, Inc. v. biolitec, Inc. In this action, we sought judgment against biolitec for defense and indemnification in two lawsuits which we previously settled. Our claims arise out of a Supply and Distribution Agreement (“SDA”) entered into with biolitec on April 1, 2002. On September 27, 2011, the U.S. District Court granted key portions of our motion for summary judgment in our legal case against biolitec. The Court also dismissed biolitec’s counterclaims against us. The court denied one portion of our summary judgment motion, which sought to recover additional costs from biolitec, leaving this for adjudication at trial. On November 8, 2012, the Court granted partial judgment to us in the amount of $23.2 million. Biolitec appealed this judgment. On August 23, 2013, the U.S. Court of Appeals for the Second Circuit dismissed biolitec’s appeal.

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In October 2009, we commenced an action in the United States District Court for the District of Massachusetts entitled AngioDynamics, Inc. v. biolitec AG and Wolfgang Neuberger. The Complaint in this action was amended in March 2010. This action seeks to recover against biolitec, Inc.’s parent entities and CEO for tortiously interfering with biolitec, Inc.’s contractual obligation to defend and indemnify us, and also seeks to pierce the corporate veil of biolitec, Inc. and to invalidate certain alleged fraudulent transfers in order to hold biolitec, Inc.’s parent entities jointly and severally liable for the alleged breach of the SDA. On September 13, 2012, the Massachusetts Court granted our request for a preliminary injunction prohibiting the downstream merger of biolitec AG with its Austrian subsidiary. On April 1, 2013, the U.S. Court of Appeals for the First Circuit affirmed the preliminary injunction. On January 14, 2014, the District Court entered judgment in our favor as to liability. On March 18, 2014, the District Court entered judgment in our favor against Biolitec AG, Biomed Technology Holdings, Ltd., and Wolfgang Neuberger, jointly and severally, in the amount of $74.9 million. On March 11, 2015, the U.S. Court of Appeals for the First Circuit affirmed the judgment.  The defendants petitioned to the U.S. Supreme Court for a writ of certiorari.  The Supreme Court denied the petition on November 30, 2015. The defendants have also filed an appeal with the U.S. Court of Appeals for the First Circuit regarding civil contempt sanctions imposed by the Massachusetts District Court as a result of defendants’ completion of the downstream merger in violation of the Court’s injunction. On May 6, 2016, the First Circuit issued an opinion rejecting this latest appeal.  On February 18, 2016, the Massachusetts District Court issued an order compelling the Massachusetts defendants to provide post-judgment discovery intended to aid us in potentially collecting our judgment.  On March 21, 2016, the Massachusetts defendants noticed an appeal from this order. On June 27, 2016, we filed a motion asking the Massachusetts District Court to impose sanctions on the Massachusetts defendants for their failure to comply with the post-judgment discovery order.
On November 13, 2014, the U.S. District Court for the District of Massachusetts issued summonses to four Biolitec entities - Biolitec U.S., Inc., Biolitec Holding U.S., Inc., Biolitec Medical Devices, Inc., and CeramOptec Industries, Inc. - pursuant to Massachusetts trustee process.  We sought to use this process to attach the assets of these entities  in order to satisfy our judgment.  The trustee process was automatically stayed when the four Biolitec entities filed Chapter 7 petitions in the U.S. Bankruptcy Court for the District of Delaware. However, on November 3, 2015, the Delaware Bankruptcy Court granted our request to modify the automatic stay to allow us to seek a default against the four Biolitec entities pursuant to trustee process. On January 21, 2016, the four Chapter 7 cases were transferred at our request to the U.S. Bankruptcy Court for the District of New Jersey.
On August 29, 2013, we became co-plaintiffs in an adversary proceeding in the United States Bankruptcy Court for the District of New Jersey entitled Cyganowski, Trustee, et al. v. Biolitec U.S., Inc., et al. In this action, we assert claims of conversion, unjust enrichment, tortious interference, and unfair competition against various biolitec entities for alleged violation of Bankruptcy Court settlement and sale orders under which we acquired certain assets of Biolitec, Inc. On September 3, 2013, we, along with our co-plaintiff, obtained a temporary restraining order against the defendants in this action. On January 22, 2015, the Bankruptcy Court entered a permanent injunction on our behalf for an additional two years.

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 3 patents asserted by Bard in the litigation. Our petitions were granted and 40 of 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 has 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