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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 31, 2020
OR
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☐ | 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)
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Delaware | | 11-3146460 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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14 Plaza Drive, Latham, New York 12110
(Address of principal executive offices and zip code)
(518) 795-1400
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading symbol | | Name of each exchange on which registered |
Common stock, par value $.01 | | ANGO | | NASDAQ Global Select Market |
Preferred Stock Purchase Rights | | | | 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 ☒
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 ☒
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | | ☐ | | Accelerated filer | | ☒ |
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Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
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Emerging growth company | | ☐ | | | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the Issuer’s classes of common stock, as of the latest practicable date.
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Class | | Outstanding as of October 5, 2020 |
Common Stock, par value $.01 | | 37,953,078 |
AngioDynamics, Inc. and Subsidiaries
TABLE OF CONTENTS
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands of dollars, except per share data)
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | |
| | Aug 31, 2020 | | Aug 31, 2019 | | | | |
Net sales | | $ | 70,216 | | | $ | 66,042 | | | | | |
Cost of sales (exclusive of intangible amortization) | | 34,452 | | | 27,825 | | | | | |
Gross profit | | 35,764 | | | 38,217 | | | | | |
Operating expenses: | | | | | | | | |
Research and development | | 9,009 | | | 6,292 | | | | | |
Sales and marketing | | 17,705 | | | 19,380 | | | | | |
General and administrative | | 8,557 | | | 8,453 | | | | | |
Amortization of intangibles | | 4,953 | | | 3,868 | | | | | |
Change in fair value of contingent consideration | | (657) | | | (448) | | | | | |
Acquisition, restructuring and other items, net | | 1,319 | | | 1,500 | | | | | |
| | | | | | | | |
Total operating expenses | | 40,886 | | | 39,045 | | | | | |
Operating loss | | (5,122) | | | (828) | | | | | |
Other income (expense): | | | | | | | | |
Interest expense, net | | (215) | | | (465) | | | | | |
| | | | | | | | |
Other income (expense), net | | 524 | | | (98) | | | | | |
Total other income (expense), net | | 309 | | | (563) | | | | | |
Loss before income tax benefit | | (4,813) | | | (1,391) | | | | | |
Income tax benefit | | (545) | | | (116) | | | | | |
Net loss | | $ | (4,268) | | | $ | (1,275) | | | | | |
| | | | | | | | |
| | | | | | | | |
Loss per share | | | | | | | | |
Basic | | $ | (0.11) | | | $ | (0.03) | | | | | |
Diluted | | $ | (0.11) | | | $ | (0.03) | | | | | |
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Weighted average shares outstanding | | | | | | | | |
Basic | | 38,157 | | | 37,783 | | | | | |
Diluted | | 38,157 | | | 37,783 | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
(in thousands of dollars)
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | |
| | Aug 31, 2020 | | Aug 31, 2019 | | | | |
Net loss | | $ | (4,268) | | | $ | (1,275) | | | | | |
Other comprehensive income (loss), before tax: | | | | | | | | |
| | | | | | | | |
Foreign currency translation | | 2,095 | | | (151) | | | | | |
Other comprehensive income (loss), before tax | | 2,095 | | | (151) | | | | | |
Income tax expense related to items of other comprehensive income (loss) | | — | | | — | | | | | |
Other comprehensive income (loss), net of tax | | 2,095 | | | (151) | | | | | |
Total comprehensive loss, net of tax | | $ | (2,173) | | | $ | (1,426) | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands of dollars, except share data)
| | | | | | | | | | | |
| Aug 31, 2020 | | May 31, 2020 |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 47,929 | | | $ | 54,435 | |
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Accounts receivable, net of allowances of $2,373 and $2,150 respectively | 33,590 | | | 31,263 | |
Inventories | 52,762 | | | 59,905 | |
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Prepaid expenses and other | 7,957 | | | 7,310 | |
Total current assets | 142,238 | | | 152,913 | |
Property, plant and equipment, net | 29,427 | | | 28,312 | |
Other assets | 16,833 | | | 15,338 | |
Intangible assets, net | 194,318 | | | 197,136 | |
Goodwill | 200,943 | | | 200,515 | |
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Total assets | $ | 583,759 | | | $ | 594,214 | |
Liabilities and stockholders' equity | | | |
Current liabilities | | | |
Accounts payable | $ | 14,008 | | | $ | 19,096 | |
Accrued liabilities | 23,587 | | | 29,380 | |
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Current portion of contingent consideration | — | | | 836 | |
Other current liabilities | 2,251 | | | 2,133 | |
Total current liabilities | 39,846 | | | 51,445 | |
Long-term debt, net of current portion | 40,000 | | | 40,000 | |
Deferred income taxes | 23,817 | | | 24,057 | |
Contingent consideration, net of current portion | 14,994 | | | 14,811 | |
Other long-term liabilities | 10,048 | | | 9,029 | |
Total liabilities | 128,705 | | | 139,342 | |
Commitments and contingencies (Note 14) | | | |
Stockholders' equity | | | |
Preferred stock, par value $0.01 per share, 5,000,000 shares authorized; no shares issued and outstanding | — | | | — | |
Common stock, par value $0.01 per share, 75,000,000 shares authorized; 38,693,078 and 38,448,536 shares issued and 38,323,078 and 38,078,536 shares outstanding at August 31, 2020 and May 31, 2020, respectively | 375 | | | 374 | |
Additional paid-in capital | 564,225 | | | 561,871 | |
Accumulated deficit | (104,586) | | | (100,318) | |
Treasury stock, 370,000 shares at August 31, 2020 and May 31, 2020, respectively | (5,714) | | | (5,714) | |
Accumulated other comprehensive income (loss) | 754 | | | (1,341) | |
Total Stockholders’ Equity | 455,054 | | | 454,872 | |
Total Liabilities and Stockholders' Equity | $ | 583,759 | | | $ | 594,214 | |
The accompanying notes are an integral part of these consolidated financial statements.
AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands of dollars)
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| Three Months Ended | | |
| Aug 31, 2020 | | Aug 31, 2019 |
Cash flows from operating activities: | | | |
Net loss | $ | (4,268) | | | $ | (1,275) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Depreciation and amortization | 6,577 | | | 5,207 | |
Non-cash lease expense | 666 | | | — | |
Stock based compensation | 1,864 | | | 1,984 | |
Change in fair value of contingent consideration | (657) | | | (448) | |
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Deferred income taxes | (620) | | | (175) | |
Change in accounts receivable allowances | 460 | | | (453) | |
Fixed and intangible asset impairments and disposals | 90 | | | 99 | |
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Write-off of other assets | — | | | 593 | |
Other | (432) | | | (8) | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | (2,706) | | | 11,474 | |
Inventories | 7,247 | | | (5,153) | |
Prepaid expenses and other | (3,559) | | | (746) | |
Accounts payable, accrued and other liabilities | (10,087) | | | (17,633) | |
Net cash used in operating activities | (5,425) | | | (6,534) | |
Cash flows from investing activities: | | | |
Additions to property, plant and equipment | (1,824) | | | (1,391) | |
Acquisition of intangibles | — | | | (150) | |
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Net cash used in investing activities | (1,824) | | | (1,541) | |
Cash flows from financing activities: | | | |
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Repayment of long-term debt | — | | | (132,500) | |
Deferred financing costs on long-term debt | — | | | (741) | |
Payment of acquisition related contingent consideration | — | | | (1,208) | |
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Proceeds (outlays) from exercise of stock options and employee stock purchase plan | 491 | | | (1,300) | |
Net cash provided by (used in) financing activities | 491 | | | (135,749) | |
Effect of exchange rate changes on cash and cash equivalents | 252 | | | (168) | |
Decrease in cash and cash equivalents | (6,506) | | | (143,992) | |
Cash and cash equivalents at beginning of period | 54,435 | | | 227,641 | |
Cash and cash equivalents at end of period | $ | 47,929 | | | $ | 83,649 | |
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Supplemental disclosure of non-cash investing and financing activities: | | | |
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Accrual for capital expenditures incurred during the period | $ | 197 | | | $ | 477 | |
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The accompanying notes are an integral part of these consolidated financial statements.
AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
(in thousands of dollars, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Additional paid in capital | | Accumulated deficit | | Accumulated other comprehensive income (loss) | | Treasury Stock | | | | |
| Shares | | Amount | | | | | | | | Shares | | Amount | | Total |
Balance at May 31, 2020 | 38,448,536 | | | $ | 374 | | | $ | 561,871 | | | $ | (100,318) | | | $ | (1,341) | | | (370,000) | | | $ | (5,714) | | | $ | 454,872 | |
Net loss | | | | | | | (4,268) | | | | | | | | | (4,268) | |
| | | | | | | | | | | | | | | |
Issuance/Cancellation of restricted stock units | 164,946 | | | | | (143) | | | | | | | | | | | (143) | |
| | | | | | | | | | | | | | | |
Purchases of common stock under ESPP | 79,596 | | | 1 | | | 633 | | | | | | | | | | | 634 | |
Stock-based compensation | | | | | 1,864 | | | | | | | | | | | 1,864 | |
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Other comprehensive income, net of tax | | | | | | | | | 2,095 | | | | | | | 2,095 | |
Balance at August 31, 2020 | 38,693,078 | | | $ | 375 | | | $ | 564,225 | | | $ | (104,586) | | | $ | 754 | | | (370,000) | | | $ | (5,714) | | | $ | 455,054 | |
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| Common Stock | | | | Additional paid in capital | | Retained earnings | | Accumulated other comprehensive loss | | Treasury Stock | | | | |
| Shares | | Amount | | | | | | | | Shares | | Amount | | Total |
Balance at May 31, 2019 | 37,984,382 | | | $ | 372 | | | $ | 555,040 | | | $ | 66,469 | | | $ | (1,352) | | | (370,000) | | | $ | (5,714) | | | $ | 614,815 | |
Net loss | | | | | | | (1,275) | | | | | | | | | (1,275) | |
Exercise of stock options | 48,136 | | | 1 | | | 530 | | | | | | | | | | | 531 | |
Issuance/Cancellation of restricted stock units | 287,087 | | | | | (2,459) | | | | | | | | | | | (2,459) | |
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Purchases of common stock under ESPP | 40,270 | | | | | 628 | | | | | | | | | | | 628 | |
Stock-based compensation | | | | | 1,984 | | | | | | | | | | | 1,984 | |
Other comprehensive loss, net of tax | | | | | | | | | (151) | | | | | | | (151) | |
Balance at August 31, 2019 | 38,359,875 | | | $ | 373 | | | $ | 555,723 | | | $ | 65,194 | | | $ | (1,503) | | | (370,000) | | | $ | (5,714) | | | $ | 614,073 | |
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The accompanying notes are an integral part of these consolidated financial statements.
AngioDynamics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Balance Sheet as of August 31, 2020, the Consolidated Statements of Operations and the Consolidated Statements of Comprehensive Loss for the three months ended August 31, 2020 and August 31, 2019, the Consolidated Statements of Stockholders’ Equity for the three months ended August 31, 2020 and August 31, 2019 and the Consolidated Statements of Cash Flows for the three months ended August 31, 2020 and August 31, 2019 have been prepared by the Company and are unaudited. The Consolidated Balance Sheet as of May 31, 2020 was derived from audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to state fairly the financial position, changes in stockholders’ equity and comprehensive income, results of operations and cash flows as of and for the period ended August 31, 2020 (and for all periods presented) have been made.
The unaudited interim consolidated financial statements for the three months ended August 31, 2020 and August 31, 2019 include the accounts of AngioDynamics, Inc. and its wholly owned subsidiaries, collectively, the “Company”. All intercompany balances and transactions have been eliminated.
2. ACQUISITIONS
C3 Wave Tip Location Acquisition
On December 17, 2019, the Company acquired the C3 Wave tip location asset from Medical Components Inc. for an aggregate purchase price of $10.0 million with $5.0 million of potential future contingent consideration related to technical milestones. This acquisition fills a gap in the Vascular Access portfolio and supports the Company's strategic plan. The Company accounted for this acquisition as an asset purchase. The Company recorded the amount paid at closing as inventory of $0.6 million and intangible assets of a trademark of $0.9 million and product technology of $8.5 million. The intangible assets will be amortized over 15 years. The contingent consideration is comprised of technical milestones and will be accounted for when the contingency is resolved or becomes probable and reasonably estimable.
Eximo Acquisition
On October 2, 2019, the Company entered into a share purchase agreement to acquire Eximo Medical, Ltd., a pre-commercial stage medical device company and its proprietary 355nm B Laser Atherectomy technology. The aggregate purchase price of $60.7 million included an upfront payment of $45.8 million and contingent consideration with an estimated fair value of $14.9 million. This acquisition expands and complements the Company’s Vascular Interventions and Therapies product portfolio by adding the 355nm B Laser Atherectomy technology which treats Peripheral Artery Disease.
The Company accounted for the Eximo acquisition under the acquisition method of accounting for business combinations. Accordingly, the cost to acquire the assets was allocated to the underlying net assets in proportion to estimates of their respective fair values. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill. Goodwill is non-deductible for income tax purposes.
The Company has not disclosed the amount of revenue and earnings for sales of Eximo products since acquisition, nor proforma information, because these amounts are not significant to the Company's financial statements. Acquisition-related costs associated with the Eximo acquisition, which are included in "acquisition, restructuring and other items, net" in the accompanying Consolidated Statements of Operations, were approximately $0.6 million in fiscal year 2020. The following table summarizes the final aggregate purchase price allocated to the net assets acquired:
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(in thousands) | | | | | Final allocation |
Accounts receivable | | | | | $ | 50 | |
Inventory | | | | | 150 | |
Prepaid and other current assets | | | | | 54 | |
Long-term deposits | | | | | 51 | |
Property, plant and equipment | | | | | 397 | |
Intangible assets: | | | | | |
Product technology | | | | | 60,300 | |
Goodwill | | | | | 11,427 | |
Total assets acquired | | | | | $ | 72,429 | |
Liabilities assumed | | | | | |
Accounts payable | | | | | $ | 84 | |
Other current liabilities | | | | | 615 | |
Deferred tax liabilities | | | | | 11,070 | |
Total liabilities assumed | | | | | $ | 11,769 | |
Net assets acquired | | | | | $ | 60,660 | |
The Company finalized the allocation of the purchase price to the assets acquired and liabilities assumed in the fourth quarter of fiscal year 2020.
The value assigned to the product technology was derived using the multi-period excess earnings method under the income approach. This approach estimates the excess earnings generated over the lives of the customers that existed as of the acquisition date and discounts such earnings to present value. The product technology is deemed to have a useful life of fifteen years and will be amortized on a straight-line basis over the useful life.
The goodwill arising from the acquisition consists largely of synergies and economies of scale the Company hopes to achieve from combining the acquired assets with the Company's current operations.
3. REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue Recognition
Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
The Company has one primary revenue stream which is the sales of its products.
Disaggregation of Revenue
The following tables summarize net product revenue by Global Business Unit ("GBU") and geography:
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| Three Months Ended Aug 31, 2020 | | | | | | Three Months Ended Aug 31, 2019 | | | | |
(in thousands) | United States | | International | | Total | | United States | | International | | Total |
Net sales | | | | | | | | | | | |
Vascular Interventions & Therapies | $ | 26,981 | | | $ | 2,876 | | | $ | 29,857 | | | $ | 25,676 | | | $ | 3,237 | | | $ | 28,913 | |
Vascular Access | 19,222 | | | 8,883 | | | 28,105 | | | 19,284 | | | 3,875 | | | $ | 23,159 | |
Oncology | 7,905 | | | 4,349 | | | 12,254 | | | 7,977 | | | 5,993 | | | $ | 13,970 | |
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Total | $ | 54,108 | | | $ | 16,108 | | | $ | 70,216 | | | $ | 52,937 | | | $ | 13,105 | | | $ | 66,042 | |
Net Product Revenue
The Company's products consist of a wide range of medical, surgical and diagnostic devices used by professional healthcare providers for vascular access, for the treatment of peripheral vascular disease and for use in oncology and surgical settings. The Company's devices are generally used in minimally invasive, image-guided procedures. Most of the Company's products are intended to be used once and then discarded, or they may be implanted for short or long term use. The Company sells its products to its distribution partners and to end users, such as interventional radiologists, interventional cardiologists, vascular surgeons, urologists, interventional and surgical oncologists and critical care nurses.
Contracts and Performance Obligations
The Company contracts with its customers based on customer purchase orders, which in many cases are governed by master purchasing agreements. The Company’s contracts with customers are generally for product only, and do not include other performance obligations such as services or other material rights. As part of its assessment of each contract, the Company evaluates certain factors including the customer’s ability to pay (or credit risk). For each contract, the Company considers the promise to transfer products, each of which is distinct, to be the identified performance obligations.
Transaction Price and Allocation to Performance Obligations
Transaction prices of products are typically based on contracted rates. Product revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products to a customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the expected value method. As such, revenue is recorded net of rebates, returns and other deductions.
If a contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products underlying each performance obligation. The Company has standard pricing for its products and determines standalone selling prices based on the price at which the performance obligation is sold separately.
Revenue Recognition
Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which occurs at a point in time, and may be upon shipment from the Company’s manufacturing site or delivery to the customer’s named location, based on the contractual shipping terms of a contract.
In determining whether control has transferred, the Company considers if there is a present right to payment from the customer and when physical possession, legal title and risks and rewards of ownership have transferred to the customer.
The Company typically invoices customers upon satisfaction of identified performance obligations. As the Company’s standard payment terms are 30 to 90 days from invoicing, the Company does not provide any significant financing to its customers.
Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.
Variable Consideration
Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established for discounts, returns, rebates and allowances that are offered within contracts between the Company and its customers. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as a contra asset.
Rebates and Allowances: The Company provides certain customers with rebates and allowances that are explicitly stated in the Company’s contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. The Company establishes a liability for such amounts, which is included in accrued expenses in the accompanying Consolidated Balance Sheets. These rebates and allowances result from performance-based offers that are primarily based on attaining contractually specified sales volumes and administrative fees the Company is required to pay to group purchasing organizations.
Product Returns: The Company generally offers customers a limited right of return. Product returns after 30 days must be pre-approved by the Company and customers may be subject to a 20% restocking charge. To be accepted, a returned product
must be unadulterated, undamaged and have at least twelve months remaining prior to its expiration date. The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return liabilities using its historical product return information and considers other factors that it believes could significantly impact its expected returns, including product recalls. During the three months ended August 31, 2020, such product returns were not material.
Contract Balances with Customers
A receivable is recognized in the period the Company ships the product. Payment terms on invoiced amounts are based on contractual terms with each customer and generally coincide with revenue recognition. Accordingly, the Company does not have any contract assets associated with the future right to invoice its customers. In some cases, if control of the product has not yet transferred to the customer or the timing of the payments made by the customer precedes the Company’s fulfillment of the performance obligation, the Company recognizes a contract liability that is included in deferred revenue in the accompanying Consolidated Balance Sheets.
The following table presents changes in the Company’s receivables, contract assets and contract liabilities with customers:
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(in thousands) | Aug 31, 2020 | | May 31, 2020 |
Receivables | $ | 33,590 | | | $ | 31,263 | |
Contract assets | $ | — | | | $ | — | |
Contract liabilities | $ | 595 | | | $ | 545 | |
During the three months ended August 31, 2020, the Company had additions to contract liabilities of $0.4 million. This was offset by $0.4 million in revenue that was recognized during the three months ended August 31, 2020.
Costs to Obtain or Fulfill a Customer Contract
Under ASC 606, the Company recognizes an asset for incremental costs of obtaining a contract with a customer if it expects to recover those costs. The Company’s sales incentive compensation plans qualify for capitalization since these plans are directly related to sales achieved during a period of time. However, the Company has elected the practical expedient under ASC 340-40-25-4 to expense the costs as they are incurred within selling and marketing expenses since the amortization period is less than one year.
The Company accounts for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. Shipping and handling costs, associated with the distribution of finished products to customers, are recorded in costs of goods sold and are recognized when the related finished product is shipped to the customer. Amounts charged to customers for shipping are recorded in net sales.
4. INVENTORIES
Inventories are stated at lower of cost and net realizable value (using the first-in, first-out method). Inventories consisted of the following:
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(in thousands) | Aug 31, 2020 | | May 31, 2020 |
Raw materials | $ | 22,858 | | | $ | 23,308 | |
Work in process | 8,133 | | | 8,318 | |
Finished goods | 21,771 | | | 28,279 | |
Inventories | $ | 52,762 | | | $ | 59,905 | |
The Company periodically reviews for both obsolescence and loss of value. The Company makes assumptions about the future demand for and market value of the inventory. Based on these assumptions, the Company estimates the amount of obsolete, expiring and slow moving inventory. The total inventory reserve at August 31, 2020 and May 31, 2020 was $4.4 million and $4.7 million, respectively.
5. GOODWILL AND INTANGIBLE ASSETS
Intangible assets other than goodwill are amortized over their estimated useful lives on either a straight-line basis or proportionately to the benefit being realized. Useful lives range from two to eighteen years. The Company periodically reviews the estimated useful lives of its intangible assets and reviews such assets or asset groups for impairment whenever events or changes in circumstances indicate that the carrying value of the assets or asset groups may not be recoverable. If an intangible
asset or asset group is considered to be impaired, the amount of the impairment will equal the excess of the carrying value over the fair value of the asset.
Goodwill is not amortized, but rather, is tested for impairment annually or more frequently if impairment indicators arise. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination.
The Company's annual testing for impairment of goodwill was completed as of December 31, 2019. The Company operates as a single operating segment with one reporting unit and consequently evaluates goodwill for impairment based on an evaluation of the fair value of the Company as a whole. The Company determines the fair value of the reporting unit based on the market valuation approach and concluded that it was not more-likely-than-not that the fair value of the Company's reporting unit was less than its carrying value as of December 31, 2019. In the fourth quarter of fiscal year 2020, the Company concluded that the sustained decline in its market capitalization represented an impairment indicator that required the Company to perform an interim test for goodwill impairment as of May 31, 2020 and the Company recorded a goodwill impairment charge of $158.6 million as of May 31, 2020 to write down the carrying value of the reporting unit to fair value.
The future occurrence of another 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 another interim assessment for the reporting unit prior to the next required annual assessment as of December 31, 2020.
There were no adjustments to goodwill for the three months ended August 31, 2020 other than foreign currency translation adjustments.
Intangible assets consisted of the following:
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| Aug 31, 2020 | | | | | | |
(in thousands) | Gross carrying value | | Accumulated amortization | | Net carrying value | | |
Product technologies | $ | 253,833 | | | $ | (92,425) | | | $ | 161,408 | | | |
Customer relationships | 60,257 | | | (31,119) | | | 29,138 | | | |
Trademarks | 10,150 | | | (6,771) | | | 3,379 | | | |
Licenses | 6,087 | | | (5,694) | | | 393 | | | |
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| $ | 330,327 | | | $ | (136,009) | | | $ | 194,318 | | | |
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| May 31, 2020 | | | | | | |
(in thousands) | Gross carrying value | | Accumulated amortization | | Net carrying value | | |
Product technologies | $ | 251,569 | | | $ | (88,547) | | | $ | 163,022 | | | |
Customer relationships | 60,160 | | | (30,018) | | | 30,142 | | | |
Trademarks | 10,150 | | | (6,691) | | | 3,459 | | | |
Licenses | 6,087 | | | (5,574) | | | 513 | | | |
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| $ | 327,966 | | | $ | (130,830) | | | $ | 197,136 | | | |
Amortization expense for the three months ended August 31, 2020 and August 31, 2019 was $5.0 million and $3.9 million, respectively.
Expected future amortization expense related to the intangible assets is as follows:
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(in thousands) | |
Remainder of 2021 | $ | 13,753 | |
2022 | 17,588 | |
2023 | 17,488 | |
2024 | 15,870 | |
2025 | 16,625 | |
2026 and thereafter | 112,994 | |
| $ | 194,318 | |
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
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(in thousands) | Aug 31, 2020 | | May 31, 2020 |
Payroll and related expenses | $ | 6,844 | | | $ | 13,059 | |
Royalties | 1,425 | | | 2,392 | |
Accrued severance | 1,253 | | | 794 | |
Sales and franchise taxes | 812 | | | 634 | |
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Outside services | 2,400 | | | 2,222 | |
Indemnification holdback | 5,000 | | | 5,000 | |
Other | 5,853 | | | 5,279 | |
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| $ | 23,587 | | | $ | 29,380 | |
7. LONG TERM DEBT
On June 3, 2019 and in connection with the completion of the Fluid Management divestiture, the Company repaid all amounts outstanding under its existing Credit Agreement and entered into a new Credit Agreement with the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and Bank of America, N.A. and KeyBank National Association, as co-syndication agents.
The Credit Agreement provides for a $125.0 million secured revolving credit facility (the “Revolving Facility”), which includes an uncommitted expansion feature that allows the Company to increase the total revolving commitments and/or add new tranches of term loans in an aggregate amount not to exceed $75.0 million. The proceeds may be used to refinance certain existing indebtedness of the Company and its subsidiaries, to finance the working capital needs, and for general corporate purposes (including permitted acquisitions), of the Company and its subsidiaries.
The Credit Agreement has a five year maturity. Interest on the facility will be based, at the Company’s option, on a base rate of LIBOR plus an applicable margin tied to the Company’s total leverage ratio and having ranges between 0.25% and 0.75% for base rate loans and between 1.25% and 1.75% for LIBOR loans. After default, the interest rate may be increased by 2.0%. The facility will also carry a commitment fee of 0.20% to 0.25% per annum on the unused portion.
The Company's obligations under the Revolving Facility are unconditionally guaranteed, jointly and severally, by the Company's material direct and indirect domestic subsidiaries (the “Guarantors”). All obligations of the Company and the Guarantors under the Revolving Facility are secured by first priority security interests in substantially all of the assets of the Company and the Guarantors.
The Credit Agreement includes customary representations, warranties and covenants, and acceleration, indemnity and events of default provisions, including, among other things, two quarterly financial covenants as follows:
•maximum leverage ratio of consolidated total indebtedness* to consolidated EBITDA* of not greater than 3.00 to 1.00 (during certain periods following material acquisitions the ratio shall be increased to 3.50 to 1.00).
•fixed charge coverage ratio of consolidated EBITDA minus consolidated capital expenditures to consolidated interest expense paid or payable in cash plus scheduled principal payments in respect of indebtedness under the Credit Agreement of not less than 1.25 to 1.00.
* The definitions of consolidated total indebtedness and consolidated EBITDA are maintained in the credit agreement included as an exhibit to Form 8-k filed on June 6, 2019.
As of August 31, 2020, there was $40.0 million outstanding balance on the Revolving Facility. As of August 31, 2020 and May 31, 2020, the carrying value of long-term debt approximated its fair market value.
The interest rate on the Revolving Facility at August 31, 2020 was 1.41%.
The Company was in compliance with the Credit Agreement covenants as of August 31, 2020.
8. INCOME TAXES
The Company provides for income taxes at the end of each interim period based on the estimated effective tax rate for the full fiscal year adjusted for any discrete events, which are recorded in the period that they occur. The estimated annual effective tax rate prior to discrete items was 14.2% as of the first quarter of fiscal year 2021, as compared to 8.3% for the same period in fiscal year 2020. In fiscal year 2021, the Company’s effective tax rate differs from the U.S. statutory rate primarily due to the impact of the valuation allowance, foreign taxes, and other non-deductible permanent items (such as non-deductible meals and entertainment, Section 162(m) excess compensation and non-deductible share based compensation).
The Company regularly assesses its ability to realize its deferred tax assets. Assessing the realization of deferred tax assets requires significant management judgment. In determining whether its deferred tax assets are more likely than not realizable, the Company evaluated all available positive and negative evidence, and weighted the evidence based on its objectivity. Evidence that the Company considered included its history of net operating losses, which resulted in the Company recording a full valuation allowance for its deferred tax assets in fiscal year 2016, except the naked credit deferred tax liability.
Based on the review of all available evidence, the Company determined that it has not yet attained a sustained level of profitability and the objectively verifiable negative evidence outweighed the positive evidence. Therefore, the Company has provided a valuation allowance on its federal and state net operating loss carryforwards, federal and state R&D credit carryforwards and other net deferred tax assets that have a limited life and are not supportable by the naked credit deferred tax liability sourced income as of August 31, 2020. The Company will continue to assess the level of the valuation allowance required. If sufficient positive evidence exists in future periods to support a release of some or all of the valuation allowance, such a release would likely have a material impact on the Company’s results of operations.
9. SHARE-BASED COMPENSATION
The Company has two stock-based compensation plans that provide for the issuance of up to approximately 11.3 million shares of common stock. The 2004 Stock and Incentive Award Plan (the "2004 Plan") provides for the grant of incentive options to the Company's employees and for the grant of non-statutory stock options, restricted stock, stock appreciation rights, performance units, performance shares and other incentive awards to the Company's employees, directors and other service providers. The Company also has an employee stock purchase plan.
For the three months ended August 31, 2020 and August 31, 2019, share-based compensation expense was $1.9 million and $2.0 million, respectively.
During the three months ended August 31, 2020 and August 31, 2019, the Company granted stock options and restricted stock units under the 2004 Plan to certain employees and members of the Board of Directors. Stock option awards are valued using the Black-Scholes option-pricing model and then amortized on a straight-line basis over the requisite service period of the award. Restricted stock unit awards are valued based on the closing trading value of the Company's shares on the date of grant and then amortized on a straight-line basis over the requisite service period of the award.
As of August 31, 2020, there was $15.3 million of unrecognized compensation expense related to share-based payment arrangements. These costs are expected to be recognized over a weighted-average period of approximately four years. The Company has sufficient shares to satisfy expected share-based payment arrangements.
10. EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of common shares outstanding without consideration of potential common stock. Diluted earnings per share includes the dilutive effect of potential common stock consisting of stock options, restricted stock units and performance stock units, provided that the inclusion of such securities is not anti-dilutive. In periods with a net loss, stock options and restricted stock units are not included in the computation of diluted loss per share as the impact would be anti-dilutive.
The following table reconciles basic to diluted weighted-average shares outstanding:
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| Three Months Ended | | | | | | |
(in thousands) | Aug 31, 2020 | | Aug 31, 2019 | | | | |
Basic | 38,157 | | | 37,783 | | | | | |
Effect of dilutive securities | — | | | — | | | | | |
Diluted | 38,157 | | | 37,783 | | | | | |
| | | | | | | |
Securities excluded as their inclusion would be anti-dilutive | 3,180 | | | 2,503 | | | | | |
11. SEGMENT AND GEOGRAPHIC INFORMATION
The Company considers the business to be a single operating segment engaged in the development, manufacture and sale of medical devices for vascular access, peripheral vascular disease and oncology on a global basis. The Company's chief operating decision maker, the President and Chief Executive Officer (CEO), evaluates the various global product portfolios on a net sales basis. Executives reporting to the CEO include those responsible for commercial operations, manufacturing operations, regulatory and quality and certain corporate functions. The CEO evaluates profitability, investment and cash flow metrics on a consolidated worldwide basis due to shared infrastructure and resources.
The table below summarizes net sales by Global Business Unit:
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
(in thousands) | Aug 31, 2020 | | Aug 31, 2019 | | | | |
Net sales | | | | | | | |
Vascular Interventions & Therapies
| $ | 29,857 | | | $ | 28,913 | | | | | |
Vascular Access | 28,105 | | | 23,159 | | | | | |
Oncology | 12,254 | | | 13,970 | | | | | |
Total | $ | 70,216 | | | $ | 66,042 | | | | | |
The table below presents net sales by geographic area based on external customer location:
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
(in thousands) | Aug 31, 2020 | | Aug 31, 2019 | | | | |
Net sales | | | | | | | |
United States | $ | 54,108 | | | $ | 52,937 | | | | | |
International | 16,108 | | | 13,105 | | | | | |
| | | | | | | |
Total | $ | 70,216 | | | $ | 66,042 | | | | | |
12. FAIR VALUE
On a recurring basis, the Company measures certain financial assets and financial liabilities at fair value based upon quoted market prices, where available. Where quoted market prices or other observable inputs are not available, the Company applies valuation techniques to estimate fair value. FASB ASC Topic 820, Fair Value Measurements and Disclosures, establishes a three-level valuation hierarchy for disclosure of fair value measurements. The categorization of financial assets and financial liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy are defined as follows:
•Level 1 - Inputs to the valuation methodology are quoted market prices for identical assets or liabilities.
•Level 2 - Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs.
•Level 3 - Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk.
The Company's financial instruments include cash and cash equivalents, accounts receivable, accounts payable and contingent consideration. The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable approximates fair value due to the immediate or short-term maturities. The Company's recurring fair value measurements using significant unobservable inputs (Level 3) relate to contingent consideration liabilities.
The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements using inputs considered as: | | | | | | Fair Value at Aug 31, 2020 |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Financial Liabilities | | | | | | | |
| | | | | | | |
Contingent consideration for acquisition earn outs | $ | — | | | $ | — | | | $ | 14,994 | | | $ | 14,994 | |
Total Financial Liabilities | $ | — | | | $ | — | | | $ | 14,994 | | | $ | 14,994 | |
| | | | | | | |
| Fair Value Measurements using inputs considered as: | | | | | | Fair Value at May 31, 2020 |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Financial Liabilities | | | | | | | |
| | | | | | | |
Contingent consideration for acquisition earn outs | $ | — | | | $ | — | | | $ | 15,647 | | | $ | 15,647 | |
Total Financial Liabilities | $ | — | | | $ | — | | | $ | 15,647 | | | $ | 15,647 | |
There were no transfers between Level 1, 2 and 3 for the three months ended August 31, 2020.
The table below presents the changes in fair value components of Level 3 instruments:
| | | | | | | |
| | | Three Months Ended Aug 31, 2020 |
| | | |
(in thousands) | | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
Balance, May 31, 2020 | | | $ | 15,647 | |
Total gains or losses (realized/unrealized): | | | |
| | | |
Change in present value of contingent consideration (1) | | | (657) | |
Currency gain from remeasurement | | | 4 | |
| | | |
| | | |
| | | |
Balance, August 31, 2020 | | | $ | 14,994 | |
(1) Change in the fair value of contingent consideration is included in earnings and comprised of changes in estimated earn out payments based on projections of Company performance and amortization of the present value discount.
Contingent Consideration for Acquisition Earn Outs
Some of the Company's business combinations involve the potential for the payment of future contingent consideration upon the achievement of certain product development milestones or various other performance conditions. Payment of the additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels or product development targets. Contingent consideration is recorded at the estimated fair value of the contingent payments on the acquisition date. The fair value of the contingent consideration is remeasured at the estimated fair value at each reporting period with the change in fair value recognized as income or expense within change in fair value of contingent consideration in the Consolidated Statements of Operations.
The Company measures the initial liability and remeasures the liability on a recurring basis using Level 3 inputs as defined under authoritative guidance for fair value measurements. The fair value is determined using a discounted cash flow model applied to projected net sales, using probabilities of achieving projected net sales and projected payment dates. Projected net sales are based on the Company's internal projections and extensive analysis of the target market and the sales potential. Increases or decreases in any valuation inputs in isolation may result in a significantly lower or higher fair value measurement in the future.
The recurring Level 3 fair value measurements of the contingent consideration liabilities include the following significant unobservable inputs as of August 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Fair Value | | Valuation Technique | | Unobservable Input | | Range |
Revenue based payments | $ | 14,994 | | | Discounted cash flow | | Discount rate | | 5% |
| | | | | Probability of payment | | 66% - 100% |
| | | | | Projected fiscal year of payment | | 2024 - 2025 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
At August 31, 2020, the range of estimated potential undiscounted future contingent consideration that the Company expects to pay as a result of all completed acquisitions is $20.0 million. The revenue projections milestones associated with the contingent consideration must be reached in future periods ranging from fiscal years 2021 to 2029 in order for the associated consideration to be paid.
13. LEASES
The Company determines if an arrangement is a lease at inception of the contract. The Company has operating leases for buildings, primarily for office space, R&D, manufacturing and warehousing.
Operating lease right-of-use (“ROU”) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Many of the lease agreements contain renewal or termination clauses that are factored into the determination of the lease term if it is reasonably certain that these options would be exercised. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.
The following table presents supplemental balance sheet information related to leases:
| | | | | | | | | | | | | | | | | |
(in thousands) | Balance Sheet Location | | Aug 31, 2020 | | May 31, 2020 |
Assets | | | | | |
Operating lease ROU asset | Other assets | | $ | 9,990 | | | $ | 10,146 | |
Liabilities | | | | | |
Current operating lease liabilities | Other current liabilities | | 2,174 | | | 2,077 | |
Non-current operating lease liabilities | Other long-term liabilities | | 8,178 | | | 8,345 | |
Total lease liabilities | | | $ | 10,352 | | | $ | 10,422 | |
The interest rate implicit in lease agreements is typically not readily determinable, and as such the Company used the incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The incremental borrowing rate is defined as the interest the Company would pay to borrow on a collateralized basis, considering factors such as length of lease term. The following table presents the weighted average remaining lease term and discount rate:
| | | | | |
| Aug 31, 2020 |
Weighted average remaining term (in years) | 4.74 |
Weighted average discount rate | 4.1 | % |
The following table presents the maturities of the lease liabilities:
| | | | | |
(in thousands) | Aug 31, 2020 |
Remainder of 2021 | $ | 1,927 | |
2022 | 2,484 | |
2023 | 2,532 | |
2024 | 1,984 | |
2025 | 1,259 | |
2026 and thereafter | 1,188 | |
Total lease payments | $ | 11,374 | |
Less: Imputed Interest | 1,022 | |
Total lease obligations | $ | 10,352 | |
Less: Current portion of lease obligations | 2,174 | |
Long-term lease obligations | $ | 8,178 | |
During the three months ended August 31, 2020 and 2019, the Company recognized $0.9 million and $0.6 million of operating lease expense, respectively, which includes immaterial short-term leases. The expenses on the Consolidated Statement of Operations were classified as follows:
| | | | | | | | | | | |
(in thousands) | Aug 31, 2020 | | Aug 31, 2019 |
Cost of sales | $ | 201 | | | $ | 270 | |
Research and development | 288 | | | — | |
Sales and marketing | 100 | | | 98 | |
General and administrative | 295 | | | 272 | |
| $ | 884 | | | $ | 640 | |
The following table presents supplemental cash flow and other information related to leases for the three months ended:
| | | | | | | | | | | |
(in thousands) | Aug 31, 2020 | | Aug 31, 2019 |
Cash paid for amounts included in the measurement of lease liabilities | | | |
Operating cash flows from operating leases | $ | 672 | | | $ | 563 | |
ROU assets obtained in exchange for lease liabilities | | | |
Operating leases | $ | 487 | | | $ | — | |
14. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved in various legal proceedings, including commercial, intellectual property, product liability, and regulatory matters of a nature considered normal for its business. The Company accrues for amounts related to these matters if it is probable that a liability has been incurred, and an amount can be reasonably estimated. The Company discloses such matters when there is at least a reasonable possibility that a material loss may have been incurred. However, the Company cannot predict the outcome of any litigation or