Edgar Filing: ANGIODYNAMICS INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2019



¨	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)

(518) 795-1400

Registrant’s telephone number, including area code

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		NASDAQ Global Select Market
Preferred Stock Purchase Rights		NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

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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 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 x 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):



Large accelerated filer	x	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	¨

Emerging growth company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the Issuer’s classes of common stock, as of the latest practicable date.



Class		Outstanding as of March 29, 2019
Common Stock, par value $.01		37,215,894

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AngioDynamics, Inc. and Subsidiaries

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		Page
	Part I: Financial Information

Item 1.	Financial Statements

	Consolidated Statements of Income (unaudited)	3

	Consolidated Statements of Comprehensive Income (unaudited)	4

	Consolidated Balance Sheets (unaudited)	5

	Consolidated Statements of Cash Flows (unaudited)	6

	Consolidated Statement of Stockholders’ Equity (unaudited)	7

	Notes to Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	40

	Part II: Other Information

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 3.	Defaults on Senior Securities	44

Item 4.	Mine Safety Disclosures	44

Item 5.	Other Information	44

Item 6.	Exhibits	45

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PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements.

AngioDynamics, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(in thousands of dollars, except per share data)



	Three Months Ended						Nine Months Ended
	Feb 28, 2019			Feb 28, 2018			Feb 28, 2019			Feb 28, 2018
Net sales	$	86,341		$	83,851		$	263,184		$	255,968
Cost of sales (exclusive of intangible amortization)	39,650			38,403			122,917			126,560
Gross profit	46,691			45,448			140,267			129,408
Operating expenses:
Research and development	7,210			6,457			22,235			19,005
Sales and marketing	19,413			18,009			59,115			56,378
General and administrative	8,780			7,723			26,612			23,319
Amortization of intangibles	5,342			4,191			14,646			12,433
Change in fair value of contingent consideration	609			31			865			218
Acquisition, restructuring and other items, net	2,550			4,177			9,700			11,932
Total operating expenses	43,904			40,588			133,173			123,285
Operating income	2,787			4,860			7,094			6,123
Other (expenses) income:
Interest expense, net	(1,442		)	(740		)	(3,689		)	(2,223		)
Other income (expense), net	(266		)	(49		)	(72		)	238
Total other expenses, net	(1,708		)	(789		)	(3,761		)	(1,985		)
Income before income tax expense	1,079			4,071			3,333			4,138
Income tax expense (benefit)	283			(9,948		)	866			(10,095		)
Net income	$	796		$	14,019		$	2,467		$	14,233
Earnings per share
Basic	$	0.02		$	0.38		$	0.07		$	0.38
Diluted	$	0.02		$	0.37		$	0.06		$	0.38
Weighted average shares outstanding
Basic	37,518			37,122			37,446			37,031
Diluted	38,338			37,442			38,350			37,358

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

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AngioDynamics, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands of dollars)



	Three Months Ended				Nine Months Ended
	Feb 28, 2019		Feb 28, 2018		Feb 28, 2019			Feb 28, 2018
Net income	$	796	$	14,019	$	2,467		$	14,233
Other comprehensive income, before tax:
Unrealized gain on marketable securities	—		21		33			66
Foreign currency translation	173		188		(158		)	621
Other comprehensive income (loss), before tax	173		209		(125		)	687
Income tax expense related to items of other comprehensive income	—		—		—			—
Other comprehensive income (loss), net of tax	173		209		(125		)	687
Total comprehensive income, net of tax	$	969	$	14,228	$	2,342		$	14,920

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

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AngioDynamics, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands of dollars, except share data)



	Feb 28, 2019			May 31, 2018
Assets
Current assets
Cash and cash equivalents	$	41,704		$	74,096
Marketable securities	—			1,317
Accounts receivable, net of allowances of $2,128 and $2,466, respectively	44,208			39,401
Inventories	52,388			48,916
Prepaid expenses and other	4,440			4,302
Total current assets	142,740			168,032
Property, plant and equipment, net	41,207			42,461
Other assets	3,610			3,417
Intangible assets, net	166,564			130,310
Goodwill	423,674			361,252
Total assets	$	777,795		$	705,472
Liabilities and stockholders' equity
Current liabilities
Accounts payable	$	18,443		$	15,775
Accrued liabilities	21,929			34,426
Current portion of long-term debt	6,250			5,000
Current portion of contingent consideration	6,673			2,100
Total current liabilities	53,295			57,301
Long-term debt, net of current portion	126,837			86,621
Contingent consideration, net of current portion	20,454			1,161
Deferred income taxes	17,834			17,173
Other long-term liabilities	5,296			621
Total liabilities	223,716			162,877
Commitments and contingencies (Note 14)
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; 37,955,894 and 37,594,493 shares issued and 37,585,894 and 37,224,493 shares outstanding at February 28, 2019 and May 31, 2018, respectively	372			370
Additional paid-in capital	552,902			543,762
Retained earnings	7,596			5,129
Treasury stock, 370,000 shares at February 28, 2019 and May 31, 2018, respectively	(5,714		)	(5,714		)
Accumulated other comprehensive loss	(1,077		)	(952		)
Total Stockholders’ Equity	554,079			542,595
Total Liabilities and Stockholders' Equity	$	777,795		$	705,472

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

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AngioDynamics, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands of dollars)



	Nine Months Ended
	Feb 28, 2019			Feb 28, 2018
Cash flows from operating activities:
Net income	$	2,467		$	14,233
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	19,158			17,395
Stock based compensation	7,119			5,821
Change in fair value of contingent consideration	865			218
Deferred income taxes	633			(10,150		)
Change in accounts receivable allowances	(99		)	(35		)
Fixed and intangible asset impairments and disposals	689			30
Other	(5		)	(635		)
Changes in operating assets and liabilities:
Accounts receivable	(3,853		)	2,897
Inventories	(2,702		)	(1,913		)
Prepaid expenses and other	(1,508		)	(548		)
Accounts payable, accrued and other liabilities	(10,336		)	(9,797		)
Net cash provided by operating activities	12,428			17,516
Cash flows from investing activities:
Additions to property, plant and equipment	(2,303		)	(1,647		)
Acquisition of intangibles	—			(1,265		)
Cash paid for acquisitions	(84,920		)	—
Proceeds from sale of marketable securities	1,350			—
Net cash used in investing activities	(85,873		)	(2,912		)
Cash flows from financing activities:
Proceeds from issuance of and borrowings on long-term debt	55,000			—
Repayment of long-term debt	(13,750		)	(3,750		)
Payment of acquisition related contingent consideration	(2,100		)	(9,500		)
Proceeds from exercise of stock options and employee stock purchase plan	2,023			2,560
Net cash provided by (used) in financing activities	41,173			(10,690		)
Effect of exchange rate changes on cash and cash equivalents	(120		)	834
(Decrease) increase in cash and cash equivalents	(32,392		)	4,748
Cash and cash equivalents at beginning of period	74,096			47,544
Cash and cash equivalents at end of period	$	41,704		$	52,292
Supplemental disclosure of non-cash investing and financing activities:

Accrual for capital expenditures incurred during the period	$	(42	)	$	95
Fair value of contingent consideration for acquisitions	25,100			—
Fair value of acquisition consideration included in other long-term liabilities	4,691			—

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

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AngioDynamics, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands of dollars, except share data)



	Common Stock			Additional paid in capital			Retained earnings			Accumulated other comprehensive loss			Treasury Stock
	Shares	Amount		Additional paid in capital			Retained earnings			Accumulated other comprehensive loss			Shares		Amount			Total
Balance at May 31, 2018	37,594,493	$	370	$	543,762		$	5,129		$	(952	)	(370,000	)	$	(5,714	)	$	542,595
Net loss							$	(469	)									(469		)
Exercise of stock options	71,336	1		607														608
Issuance/Cancellation of restricted stock units	149,446			(460		)												(460		)
Issuance/Cancellation of performance share units	5,235																	—
Purchases of common stock under ESPP	40,547	1		556														557
Stock-based compensation				2,150														2,150
Other comprehensive loss, net of tax										(92		)						(92		)
Balance at August 31, 2018	37,861,057	$	372	$	546,615		$	4,660		$	(1,044	)	(370,000	)	$	(5,714	)	$	544,889
Net income							2,140											2,140
Exercise of stock options	10,571			149														149
Issuance/Cancellation of restricted stock units	3,901																	—
Stock-based compensation				2,591														2,591
Other comprehensive loss, net of tax										(206		)						(206		)
Balance at November 30, 2018	37,875,529	$	372	$	549,355		$	6,800		$	(1,250	)	(370,000	)	$	(5,714	)	$	549,563
Net income							796											796
Exercise of stock options	40,346			603														603
Issuance/Cancellation of restricted stock units	7,703			(49		)												(49		)
Purchases of common stock under ESPP	32,316			615														615
Stock-based compensation				2,378														2,378
Other comprehensive income, net of tax										173								173
Balance at February 28, 2019	37,955,894	$	372	$	552,902		$	7,596		$	(1,077	)	(370,000	)	$	(5,714	)	$	554,079

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AngioDynamics, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY - continued

(unaudited)

(in thousands of dollars, except share data)



	Common Stock			Additional paid in capital		Retained earnings (deficit)			Accumulated other comprehensive loss			Treasury Stock
	Shares	Amount		Additional paid in capital		Retained earnings (deficit)			Accumulated other comprehensive loss			Shares		Amount			Total
Balance at May 31, 2017	37,210,091	$	367	$	532,705	$	(11,007	)	$	(1,324	)	(370,000	)	$	(5,714	)	$	515,027
Net loss						(35		)									(35		)
Adjustment from the adoption of ASU 2016-09				199		(199		)									—
Exercise of stock options	17,897			89													89
Issuance/Cancellation of restricted stock units	119,098	1															1
Purchases of common stock under ESPP	50,900			722													722
Stock-based compensation				1,797													1,797
Other comprehensive loss, net of tax									283								283
Balance at August 31, 2017	37,397,986	$	368	$	535,512	$	(11,241	)	$	(1,041	)	(370,000	)	$	(5,714	)	$	517,884
Net income						249											249
Exercise of stock options	78,211	1		925													926
Issuance/Cancellation of restricted stock units	5,478																—
Stock-based compensation				1,966													1,966
Other comprehensive loss, net of tax									195								195
Balance at November 30, 2017	37,481,675	$	369	$	538,403	$	(10,992	)	$	(846	)	(370,000	)	$	(5,714	)	$	521,220
Net income						14,019											14,019
Exercise of stock options	22,269			281													281
Issuance/Cancellation of restricted stock units	1,519																—
Purchases of common stock under ESPP	39,043	1		540													541
Stock-based compensation				2,058													2,058
Other comprehensive loss, net of tax									209								209
Balance at February 28, 2018	37,544,506	$	370	$	541,282	$	3,027		$	(637	)	(370,000	)	$	(5,714	)	$	538,328

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

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AngioDynamics, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. CONSOLIDATED FINANCIAL STATEMENTS

The consolidated balance sheet as of February 28, 2019, the consolidated statement of stockholders’ equity for the three and nine months ended February 28, 2019 and 2018, and the consolidated statements of income, consolidated statements of comprehensive income for the three and nine months ended February 28, 2019 and 2018, and consolidated statements of cash flows for the nine months ended February 28, 2019 and 2018, have been prepared by us and are unaudited. The consolidated balance sheet as of May 31, 2018 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 February 28, 2019 (and for all periods presented) have been made.

The unaudited interim consolidated financial statements for the three and nine months ended February 28, 2019 and 2018 include the accounts of AngioDynamics, Inc. and its wholly owned subsidiaries, collectively, the “Company”. All intercompany balances and transactions have been eliminated.

2. ACQUISITIONS

RadiaDyne Acquisition

On September 21, 2018, the Company acquired RadiaDyne, a privately held medical diagnostic and device company that designs and develops patient dose monitoring technology to improve cancer treatment outcomes. The aggregate purchase price of $75.0 million included an upfront payment of $47.9 million, contingent consideration with an estimated fair value of $22.3 million, an indemnification holdback of $4.6 million and a purchase price holdback of $0.2 million. The fair value of $22.3 million in contingent consideration is comprised of $16.5 million for the revenue milestones and $5.8 million for the technical milestones. The $4.6 million indemnification holdback is recorded in other long-term liabilities and the $0.2 million purchase price holdback was initially recorded in accrued liabilities, but was paid during the third quarter of fiscal year 2019.

This acquisition expands the Company’s growing Oncology business by adding RadiaDyne’s early-stage, proprietary OARtrac® real-time radiation dose monitoring platform and other market-leading oncology solutions, including the IsoLoc®/ImmobiLoc® and Alatus® balloon stabilizing technologies.

The Company accounted for the RadiaDyne acquisition under the acquisition method of accounting for business combinations. Accordingly, the cost to acquire the assets was allocated to the underlying net assets in proportion to estimates of their respective fair values. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill. Goodwill is deductible for income tax purposes.

The Company has not disclosed the amount of revenue and earnings for sales of RadiaDyne products since acquisition, nor proforma information, because these amounts are not significant to the Company's financial statements. Acquisition-related costs associated with the RadiaDyne acquisition, which are included in acquisition, restructuring and other expenses, net in the accompanying consolidated statements of income, were approximately $1.6 million. The following table summarizes the preliminary and revised aggregate purchase price allocated to the net assets acquired:

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	Preliminary allocation		Adjustments (1)			Revised allocation
(in thousands)
Accounts receivable	$	900	$	—		$	900
Inventory	732		—			732
Prepaid and other current assets	98		—			98
Property, plant and equipment	133		—			133
Intangible assets:
RadiaDyne trademark	400		—			400
OARtrac trademark	200		—			200
RadiaDyne legacy product technology	1,500		—			1,500
OARtrac product technology	16,300		2,600			18,900
RadiaDyne customer relationships	3,700		600			4,300
Goodwill	51,482		(3,200		)	48,282
Total assets acquired	$	75,445	$	—		$	75,445
Liabilities assumed
Accounts payable	$	352	$	—		$	352
Accrued expenses	106		—			106
Total liabilities assumed	$	458	$	—		$	458
Net assets acquired	$	74,987	$	—		$	74,987

(1) Measurement period adjustments are recognized on a prospective basis in the period of change, instead of restating prior periods. There was no impact to reported earnings in connection with these measurement period adjustments for the periods presented. Amounts represent adjustments to the preliminary purchase price allocation first presented in the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 2018 resulting from revising the Company's purchase price allocation for this acquisition.

The allocation of the purchase price to the assets acquired and liabilities assumed, including the amount allocated to goodwill, is subject to change within the measurement period (up to one year from the acquisition date) as additional information that existed at the date of the acquisition related to the values of assets acquired and liabilities assumed is obtained.

The values assigned to the RadiaDyne and OARtrac trademark and product technologies were derived using the relief-from-royalties method under the income approach. This approach is used to estimate the cost savings that accrue for the owner of an intangible asset who would otherwise have to pay royalties or licensing fees on revenues earned through the use of the asset if they had not owned the rights to use the assets. The net after-tax royalty savings are calculated for each year in the remaining economic life of the intangible asset and discounted to present value. The trademarks are deemed to have a useful life of five to seven years and the product technologies are deemed to have a useful life of seven to ten years. Both are amortized on a straight-line basis over their useful life.

The value assigned to customer relationships was derived using the multi-period excess earnings method under the income approach. This approach estimates the excess earnings generated over the lives of the customers that existed as of the acquisition date and discounts such earnings to present value. Customer relationships are amortized on a straight-line basis over fifteen years.

The goodwill arising from the acquisition consists largely of synergies and economies of scale the Company hopes to achieve from combining the acquired assets with the Company's current operations.

BioSentry Acquisition

On August 14, 2018, the Company acquired the BioSentry product from Surgical Specialties, LLC (“SSC”), for an aggregate purchase price of $39.8 million of which $37.0 million was paid on August 14, 2018 and $2.8 million was recorded as contingent consideration. The contingent consideration liability was recorded at fair value and will be payable to SSC upon fulfillment of certain hydrogel orders.

The Company accounted for the BioSentry acquisition under the acquisition method of accounting for business combinations. Accordingly, the cost to acquire the assets was allocated to the underlying net assets in proportion to estimates of their respective fair values. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill. Goodwill is deductible for income tax purposes.

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The Company has not disclosed the amount of revenue and earnings for sales of BioSentry products since acquisition, nor proforma information, because these amounts are not significant to the Company's financial statements. Acquisition-related costs associated with the BioSentry acquisition, which are included in acquisition, restructuring and other expenses, net in the accompanying consolidated statements of income, were approximately $1.0 million. The following table summarizes the preliminary and revised aggregate purchase price allocated to the net assets acquired:



	Preliminary allocation		Adjustments (1)			Revised allocation
(in thousands)
Inventory	$	50	$	—		$	50
Property, plant and equipment	10		—			10
Intangible assets:
BioSentry trademark	1,700		800			2,500
BioSentry product technology	13,800		7,100			20,900
Customer relationships	2,500		(300		)	2,200
Goodwill	21,740		(7,600		)	14,140
Net assets acquired	$	39,800	$	—		$	39,800

(1) Measurement period adjustments are recognized on a prospective basis in the period of change, instead of restating prior periods. There was no impact to reported earnings in connection with these measurement period adjustments for the periods presented. Amounts represent adjustments to the preliminary purchase price allocation first presented in the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 2018 resulting from revising the Company's purchase price allocation for this acquisition.

The values assigned to the BioSentry trademark and product technologies were derived using the relief-from-royalties method under the income approach. This approach is used to estimate the cost savings that accrue for the owner of an intangible asset who would otherwise have to pay royalties or licensing fees on revenues earned through the use of the asset if they had not owned the rights to use the assets. The net after-tax royalty savings are calculated for each year in the remaining economic life of the intangible asset and discounted to present value. The trademark and product technologies are deemed to have a fifteen year useful life and are amortized on a straight-line basis over their useful life.

The 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

Adoption of ASC Topic 606 "Revenue from Contracts with Customers"

The Company adopted ASC 606, Revenue from Contracts with Customers on June 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for fiscal 2019 reflect the application of ASC 606 guidance while the reported results for fiscal 2018 were prepared under the guidance of ASC 605, Revenue Recognition (“ASC 605”). For discussion of the Company’s accounting policy for revenue recognition under ASC 605, refer to Item 8 of the Annual Report on Form 10-K for the year ended May 31, 2018. The adoption of ASC 606 did not have an impact on the Company’s consolidated balance sheet, results of operations, equity or cash flows as of the adoption date or for the periods presented, other than the enhanced disclosures included in this footnote.

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

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five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

The Company has one primary revenue stream which is the sales of its products.

Disaggregation of Revenue

The following tables summarize net product revenue by Global Business Unit ("GBU") and geography for the three and nine months ended February 28, 2019:



	Three months ended February 28, 2019
(in thousands)	United States		International		Total
Net sales
Vascular Interventions & Therapies	$	41,225	$	8,890	$	50,115
Vascular Access	18,952		3,396		22,348
Oncology	8,154		5,724		13,878
Total	$	68,331	$	18,010	$	86,341



	Nine months ended February 28, 2019
(in thousands)	United States		International		Total
Net sales
Vascular Interventions & Therapies	$	126,089	$	26,514	$	152,603
Vascular Access	59,480		10,381		69,861
Oncology	22,329		18,391		40,720
Total	$	207,898	$	55,286	$	263,184

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 temporarily implanted for short- or longer-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.

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Revenue Recognition

Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which occurs at a point in time, and may be upon shipment from the Company’s manufacturing site or delivery to the customer’s named location, based on the contractual shipping terms of a contract.

In determining whether control has transferred, the Company considers if there is a present right to payment from the customer and when physical possession, legal title and risks and rewards of ownership have transferred to the customer.

The Company typically invoices customers upon satisfaction of identified performance obligations. As the Company’s standard payment terms are 30 to 90 days from invoicing, the Company does not provide any significant financing to its customers.

Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.

Variable Consideration

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established for discounts, returns, rebates and allowances that are offered within contracts between the Company and its customers. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as a current liability.

Rebates and Allowances: The Company provides certain customers with rebates and allowances that are explicitly stated in the Company’s contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. The Company establishes a liability for such amounts, which is included in accrued expenses in the accompanying condensed 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 nine months ended February 28, 2019, such product returns were not material.

Contract Balances with Customers

A receivable is recognized in the period the Company ships the product. Payment terms on invoiced amounts are based on contractual terms with each customer and generally coincide with revenue recognition. Accordingly, the Company does not have any contract assets associated with the future right to invoice its customers. In some cases, if control of the product has not yet transferred to the customer or the timing of the payments made by the customer precedes the Company’s fulfillment of the performance obligation, the Company recognizes a contract liability that is included in deferred revenue in the accompanying condensed consolidated balance sheets.

The following table presents changes in the Company’s receivables, contract assets and contract liabilities with customers:



	Feb 28, 2019		May 31, 2018
(in thousands)
Receivables	$	44,208	$	39,401
Contract assets	$	—	$	—
Contract liabilities	$	1,047	$	1,203

During the nine months ended February 28, 2019, the Company recognized $0.7 million in revenue that was included in contract liabilities as of the beginning of the period. This was offset by additions to contract liabilities of $0.6 million.

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Costs to Obtain or Fulfill a Customer Contract

Prior to the adoption of ASC 606, the Company expensed incremental commissions paid to sales representatives for obtaining product sales. 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:



	Feb 28, 2019		May 31, 2018
(in thousands)
Raw materials	$	19,852	$	18,678
Work in process	11,210		10,808
Finished goods	21,326		19,430
Inventories	$	52,388	$	48,916

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 February 28, 2019 and May 31, 2018 was $5.1 million and $6.1 million, respectively. Of the $5.1 million reserve as of February 28, 2019, $0.4 million relates to the inventory reserve for Acculis inventory as a result of the recall announced in the fourth quarter of fiscal year 2017 and $0.7 million relates to a specific reserve related to the termination of an agreement with a Japanese distributor in the second quarter of fiscal year 2018. Of the $6.1 million reserve as of May 31, 2018, $1.6 million relates to the inventory reserve for Acculis inventory as a result of the recall announced in the fourth quarter of fiscal year 2017 and $0.7 million relates to a specific reserve related to the termination of an agreement with a Japanese distributor in the second quarter of fiscal year 2018.

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, 2018. The Company operates as a single operating segment with one reporting unit and consequently evaluates goodwill for impairment based on an evaluation of the fair value of the Company as a whole. The Company determines the fair value of the reporting unit based on the market valuation approach and concluded that it was not more-likely-than-not that the fair value of the Company's reporting unit was less than its carrying value.

Even though the Company determined that there was no goodwill impairment as of December 31, 2018, the future occurrence of a potential indicator of impairment, such as a significant adverse change in legal, regulatory, business or economic conditions or a more-likely-than-not expectation that the reporting unit or a significant portion of the reporting unit will be sold or disposed of, would require an interim assessment for the reporting unit prior to the next required annual

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assessment as of December 31, 2019. The Company continued to assess for potential impairment through February 28, 2019 and noted no events that would be considered a triggering event.

The changes in the carrying amount of goodwill for the nine months ended February 28, 2019 were as follows:



(in thousands)
Goodwill balance at May 31, 2018	$	361,252
Additions for BioSentry acquisition (Note 2)	14,140
Additions for RadiaDyne acquisition (Note 2)	48,282
Goodwill balance at February 28, 2019	$	423,674

Intangible assets consisted of the following:



	Feb 28, 2019
	Gross carrying value		Accumulated amortization			Net carrying value
(in thousands)
Product technologies	$	188,475	$	(77,772	)	$	110,703
Customer relationships	62,890		(26,363		)	36,527
Trademarks	31,500		(13,752		)	17,748
Licenses	5,752		(4,867		)	885
Distributor relationships	1,250		(549		)	701
	$	289,867	$	(123,303	)	$	166,564



	May 31, 2018
	Gross carrying value		Accumulated amortization			Net carrying value
(in thousands)
Product technologies	$	147,175	$	(68,880	)	$	78,295
Customer relationships	56,428		(23,237		)	33,191
Trademarks	28,400		(11,809		)	16,591
Licenses	5,752		(4,357		)	1,395
Distributor relationships	1,250		(412		)	838
	$	239,005	$	(108,695	)	$	130,310

Amortization expense for the three months ended February 28, 2019 and 2018 was $5.3 million and $4.2 million, respectively. Amortization expense for the nine months ended February 28, 2019 and 2018 was $14.6 million and $12.4 million, respectively.

Expected future amortization expense related to the intangible assets is as follows:



(in thousands)
Remainder of 2019	$	5,168
2020	18,955
2021	17,795
2022	16,910
2023	16,459
2024 and thereafter	91,277
	$	166,564

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6. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:



	Feb 28, 2019		May 31, 2018
(in thousands)
Payroll and related expenses	$	10,499	$	10,235