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Table of Contents

    
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission file number 0-50761

 
AngioDynamics, Inc.
(Exact name of registrant as specified in its charter)
angologoa23.gif
 
 

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 and 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
 
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



Table of Contents

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):
Large accelerated filer
 
  
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 
 
 
 
 
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.
Class
 
Outstanding as of January 7, 2020
Common Stock, par value $.01
 
37,625,690
 



Table of Contents

AngioDynamics, Inc. and Subsidiaries
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.

2

Table of Contents

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
 
Six Months Ended
 
 
Nov 30, 2019
 
Nov 30, 2018
 
Nov 30, 2019
 
Nov 30, 2018
Net sales
 
$
70,003

 
$
69,985

 
$
136,045

 
$
133,928

Cost of sales (exclusive of intangible amortization)
 
28,459

 
29,433

 
56,284

 
57,423

Gross profit
 
41,544

 
40,552

 
79,761

 
76,505

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
7,764

 
7,076

 
14,055

 
14,450

Sales and marketing
 
20,113

 
19,263

 
39,493

 
37,669

General and administrative
 
10,994

 
9,262

 
19,448

 
17,697

Amortization of intangibles
 
4,530

 
4,506

 
8,398

 
7,939

Change in fair value of contingent consideration
 
145

 
244

 
(303
)
 
256

Acquisition, restructuring and other items, net
 
1,421

 
2,728

 
2,921

 
7,150

Total operating expenses
 
44,967

 
43,079

 
84,012

 
85,161

Operating loss
 
(3,423
)
 
(2,527
)
 
(4,251
)
 
(8,656
)
Other (expenses) income:
 
 
 
 
 
 
 
 
Interest expense, net
 
(41
)
 
(1,330
)
 
(506
)
 
(2,247
)
Other income (expense), net
 
162

 
80

 
64

 
194

Total other income (expense), net
 
121

 
(1,250
)
 
(442
)
 
(2,053
)
Loss from continuing operations before income tax benefit
 
(3,302
)
 
(3,777
)
 
(4,693
)
 
(10,709
)
Income tax benefit
 
(566
)
 
(190
)
 
(682
)
 
(1,418
)
Net loss from continuing operations
 
(2,736
)
 
(3,587
)
 
(4,011
)
 
(9,291
)
Income from discontinued operations, net of income tax
 

 
5,727

 

 
10,962

Net income (loss)
 
$
(2,736
)
 
$
2,140

 
$
(4,011
)
 
$
1,671

Loss per share - continuing operations
 
 
 
 
 
 
 
 
Basic
 
$
(0.07
)
 
$
(0.10
)
 
$
(0.11
)
 
$
(0.25
)
Diluted
 
$
(0.07
)
 
$
(0.10
)
 
$
(0.11
)
 
$
(0.25
)
Income per share - discontinued operations
 
 
 
 
 
 
 
 
Basic
 
$
0.00

 
$
0.15

 
$
0.00

 
$
0.29

Diluted
 
$
0.00

 
$
0.15

 
$
0.00

 
$
0.29

Income (loss) per share
 
 
 
 
 
 
 
 
Basic
 
$
(0.07
)
 
$
0.06

 
$
(0.11
)
 
$
0.04

Diluted
 
$
(0.07
)
 
$
0.06

 
$
(0.11
)
 
$
0.04

Weighted average shares outstanding
 
 
 
 
 
 
 
 
Basic
 
37,992

 
37,500

 
37,887

 
37,411

Diluted
 
37,992

 
37,500

 
37,887

 
37,411

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 (LOSS)
(unaudited)
(in thousands of dollars)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
Nov 30, 2019
 
Nov 30, 2018
 
Nov 30, 2019
 
Nov 30, 2018
Net income (loss)
 
$
(2,736
)
 
$
2,140

 
$
(4,011
)
 
$
1,671

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
 
Unrealized gain on marketable securities
 

 

 


 
33

Foreign currency translation
 
231

 
(206
)
 
80

 
(331
)
Other comprehensive income (loss), before tax
 
231

 
(206
)
 
80

 
(298
)
Income tax expense related to items of other comprehensive income
 

 

 

 

Other comprehensive income (loss), net of tax
 
231

 
(206
)
 
80

 
(298
)
Total comprehensive income (loss), net of tax
 
$
(2,505
)
 
$
1,934

 
$
(3,931
)
 
$
1,373

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)
 
Nov 30, 2019
 
May 31, 2019
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
41,247

 
$
227,641

Accounts receivable, net of allowances of $2,068 and $1,906 respectively
33,994

 
43,577

Inventories
50,239

 
40,071

Prepaid expenses and other
6,496

 
4,003

Total current assets
131,976

 
315,292

Property, plant and equipment, net
27,508

 
24,258

Other assets
8,976

 
3,835

Intangible assets, net
196,325

 
145,387

Goodwill
360,094

 
347,666

Total assets
$
724,879

 
$
836,438

Liabilities and stockholders' equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
17,968

 
$
22,829

Accrued liabilities
28,478

 
38,338

Current portion of long-term debt

 
7,500

Current portion of contingent consideration
889

 
4,635

Other current liabilities
9,670

 

Total current liabilities
57,005

 
73,302

Long-term debt, net of current portion

 
124,407

Contingent consideration, net of current portion
25,986

 
8,851

Deferred income taxes
24,586

 
14,542

Other long-term liabilities
3,492

 
521

Total liabilities
111,069

 
221,623

Commitments and contingencies (Note 15)

 

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; 38,363,926 and 37,984,382 shares issued and 37,993,926 and 37,614,382 shares outstanding at November 30, 2019 and May 31, 2019, respectively
373

 
372

Additional paid-in capital
557,965

 
555,040

Retained earnings
62,458

 
66,469

Treasury stock, 370,000 shares at November 30, 2019 and May 31, 2019, respectively
(5,714
)
 
(5,714
)
Accumulated other comprehensive loss
(1,272
)
 
(1,352
)
Total Stockholders’ Equity
613,810

 
614,815

Total Liabilities and Stockholders' Equity
$
724,879

 
$
836,438

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)
 
Six Months Ended
 
Nov 30, 2019
 
Nov 30, 2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(4,011
)
 
$
1,671

Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
11,110

 
12,291

Non-cash lease expense
904

 

Stock based compensation
4,226

 
4,741

Change in fair value of contingent consideration
(303
)
 
256

Deferred income taxes
(734
)
 
495

Change in accounts receivable allowances
199

 
(75
)
Fixed and intangible asset impairments and disposals
369

 
12

              Write-off of other assets
593

 

Other
(27
)
 
(17
)
Changes in operating assets and liabilities:

 

Accounts receivable
9,464

 
(3,068
)
Inventories
(10,009
)
 
(955
)
Prepaid expenses and other
(3,544
)
 
(1,183
)
Accounts payable, accrued and other liabilities
(8,834
)
 
(10,082
)
Net cash provided by (used in) operating activities
(597
)
 
4,086

Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(4,014
)
 
(1,416
)
Acquisition of intangibles
(350
)
 

Cash paid for acquisitions
(45,760
)
 
(84,920
)
Net cash used in investing activities
(50,124
)
 
(86,336
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of and borrowings on long-term debt

 
55,000

Repayment of long-term debt
(132,500
)
 
(2,500
)
Deferred financing costs on long-term debt
(741
)
 

Payment of acquisition related contingent consideration
(1,208
)
 
(2,100
)
Proceeds (outlays) from exercise of stock options and employee stock purchase plan
(1,300
)
 
854

Net cash provided by (used in) financing activities
(135,749
)
 
51,254

Effect of exchange rate changes on cash and cash equivalents
76

 
(280
)
Decrease in cash and cash equivalents
(186,394
)
 
(31,276
)
Cash and cash equivalents at beginning of period
227,641

 
74,096

Cash and cash equivalents at end of period
$
41,247

 
$
42,820

 
 
 
 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
 
 
 
 
Accrual for capital expenditures incurred during the period
$
444

 
$
(19
)
Fair value of contingent consideration for acquisitions
14,900

 
25,100

Fair value of acquisition consideration included in other long-term liabilities

 
4,863

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

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AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS 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
 
 
 
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
)
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

Net loss
 
 
 
 


 
(2,736
)
 
 
 
 
 
 
 
(2,736
)
Issuance/Cancellation of restricted stock units
4,051

 
 
 
 
 
 
 
 
 
 
 
 
 

Stock-based compensation
 
 


 
2,242

 
 
 
 
 
 
 
 
 
2,242

Other comprehensive loss, net of tax
 
 
 
 
 
 


 
231

 
 
 
 
 
231

Balance at November 30, 2019
38,363,926

 
$
373

 
$
557,965

 
$
62,458

 
$
(1,272
)
 
(370,000
)
 
$
(5,714
)
 
$
613,810






















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AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - continued
(unaudited)
(in thousands of dollars, except share data)

 
Common Stock
 
Additional
paid in
capital
 
Retained earnings
 
Accumulated
other
comprehensive
loss
 
Treasury Stock
 
 
 
Shares
 
Amount
 
 
 
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


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

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Table of Contents

AngioDynamics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Balance Sheet as of November 30, 2019, the Consolidated Statements of Operations and the Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended November 30, 2019 and 2018, the Consolidated Statements of Stockholders’ Equity for the three months ended November 30, 2019 and 2018 and the Consolidated Statements of Cash Flows for the six months ended November 30, 2019 and 2018 have been prepared by us and are unaudited. The Consolidated Balance Sheet as of May 31, 2019 was derived from audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to state fairly the financial position, changes in stockholders’ equity and comprehensive income, results of operations and cash flows as of and for the period ended November 30, 2019 (and for all periods presented) have been made.
The unaudited interim consolidated financial statements for the three and six months ended November 30, 2019 and 2018 include the accounts of AngioDynamics, Inc. and its wholly owned subsidiaries, collectively, the “Company”. All intercompany balances and transactions have been eliminated.
On May 31, 2019, the Company completed the sale of the Fluid Management business and all of the assets used primarily in connection with the Fluid Management business (Note 3). As the disposal of this business represents a strategic shift with a major effect on the Company's operations, for all periods presented in our Consolidated Statements of Operations and Comprehensive Loss, all sales, costs, expenses, gains and income taxes attributable to Fluid Management have been reported under the captions, “Income from Discontinued Operations, Net of Income Tax.”  Cash flows used in or provided by Fluid Management have been reported in the Consolidated Statements of Cash Flows under operating and investing activities.
2. ACQUISITIONS
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 preliminary aggregate purchase price allocated to the net assets acquired:

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Table of Contents

(in thousands)
Oct 2, 2019
Accounts receivable
$
50

Inventory
150

Prepaid and other current assets
54

Long-term deposits
51

Property, plant and equipment
397

Intangible assets:
 
Product technology
59,000

Goodwill
12,428

Total assets acquired
$
72,130

Liabilities assumed
 
Accounts payable
$
84

Other current liabilities
615

Deferred tax liabilities
10,771

Total liabilities assumed
$
11,470

Net assets acquired
$
60,660



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 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.
RadiaDyne Acquisition

On September 21, 2018, the Company acquired RadiaDyne, a privately held medical diagnostic and device company that designs and develops patient dose monitoring technology to improve cancer treatment outcomes. The aggregate purchase price of $75.0 million included an upfront payment of $47.9 million, contingent consideration with an estimated fair value of $22.3 million, an indemnification holdback of $4.6 million and a purchase price holdback of $0.2 million. The fair value of $22.3 million in contingent consideration is comprised of $16.5 million for the revenue milestones and $5.8 million for the technical milestones. The $4.6 million indemnification holdback is recorded in accrued liabilities at November 30, 2019 and the $0.2 million purchase price holdback was initially recorded in accrued liabilities, and was paid during the third quarter of fiscal year 2019.
This acquisition expands the Company’s growing Oncology business by adding RadiaDyne’s early-stage, proprietary OARtrac® real-time radiation dose monitoring platform and other market-leading oncology solutions, including the IsoLoc®/ImmobiLoc® and Alatus® balloon stabilizing technologies.
The Company accounted for the RadiaDyne acquisition under the acquisition method of accounting for business combinations. Accordingly, the cost to acquire the assets was allocated to the underlying net assets in proportion to estimates of their respective fair values. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill. Goodwill is deductible for income tax purposes.
The Company has not disclosed the amount of revenue and earnings for sales of RadiaDyne products since acquisition, nor proforma information, because these amounts are not significant to the Company's financial statements. Acquisition-related costs associated with the RadiaDyne acquisition, which are included in "acquisition, restructuring and other items, net" in the accompanying Consolidated Statements of Operations, were approximately $1.6 million in fiscal year 2019. The following table summarizes the preliminary and final aggregate purchase price allocated to the net assets acquired:

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Table of Contents

(in thousands)
Final allocation
Accounts receivable
$
900

Inventory
732

Prepaid and other current assets
98

Property, plant and equipment
133

Intangible assets:
 
RadiaDyne trademark
400

OARtrac trademark
200

RadiaDyne legacy product technology
1,500

OARtrac product technology
18,900

RadiaDyne customer relationships
4,600

Goodwill
47,982

Total assets acquired
$
75,445

Liabilities assumed
 
Accounts payable
$
352

Accrued expenses
106

Total liabilities assumed
$
458

Net assets acquired
$
74,987


The Company finalized the allocation of the purchase price to the assets acquired and liabilities assumed in the fourth quarter of FY19.
The values assigned to the RadiaDyne and OARtrac trademark and product technologies were derived using the relief-from-royalties method under the income approach. This approach is used to estimate the cost savings that accrue for the owner of an intangible asset who would otherwise have to pay royalties or licensing fees on revenues earned through the use of the asset if they had not owned the rights to use the assets. The net after-tax royalty savings are calculated for each year in the remaining economic life of the intangible asset and discounted to present value. The trademarks are deemed to have a useful life of five to seven years and the product technologies are deemed to have a useful life of seven to ten years. Both are amortized on a straight-line basis over their useful life.
The value assigned to customer relationships was derived using the multi-period excess earnings method under the income approach. This approach estimates the excess earnings generated over the lives of the customers that existed as of the acquisition date and discounts such earnings to present value. Customer relationships are amortized on a straight-line basis over fifteen years.
The goodwill arising from the acquisition consists largely of synergies and economies of scale the Company hopes to achieve from combining the acquired assets with the Company's current operations.
BioSentry Acquisition
On August 14, 2018, the Company acquired the BioSentry product from Surgical Specialties, LLC (“SSC”), for an aggregate purchase price of $39.8 million of which $37.0 million was paid on August 14, 2018 and $2.8 million was recorded as contingent consideration. The contingent consideration liability was recorded at fair value and was paid in the fourth quarter of fiscal year 2019 upon fulfillment of hydrogel orders by SSC.
The Company accounted for the BioSentry acquisition under the acquisition method of accounting for business combinations. Accordingly, the cost to acquire the assets was allocated to the underlying net assets in proportion to estimates of their respective fair values. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill. Goodwill is deductible for income tax purposes.
The Company has not disclosed the amount of revenue and earnings for sales of BioSentry products since acquisition, nor proforma information, because these amounts are not significant to the Company's financial statements. Acquisition-related costs associated with the BioSentry acquisition, which are included in "acquisition, restructuring and other items, net" in the accompanying Consolidated Statements of Operations, were approximately $1.0 million in fiscal year 2019. The following

11

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table summarizes the preliminary and revised final purchase price allocated to the net assets acquired:
(in thousands)
Final allocation
Inventory
$
50

Property, plant and equipment
10

Intangible assets:

    BioSentry trademark
2,500

    BioSentry product technology
20,900

    Customer relationships
2,600

Goodwill
13,740

Net assets acquired
$
39,800


The Company finalized the allocation of the purchase price to the assets acquired and liabilities assumed in the fourth quarter of FY19.
The values assigned to the BioSentry trademark and product technologies were derived using the relief-from-royalties method under the income approach. This approach is used to estimate the cost savings that accrue for the owner of an intangible asset who would otherwise have to pay royalties or licensing fees on revenues earned through the use of the asset if they had not owned the rights to use the assets. The net after-tax royalty savings are calculated for each year in the remaining economic life of the intangible asset and discounted to present value. The trademark and product technologies are deemed to have a fifteen year useful life and are amortized on a straight-line basis over their useful life.
The value assigned to customer relationships was derived using the multi-period excess earnings method under the income approach. This approach estimates the excess earnings generated over the lives of the customers that existed as of the acquisition date and discounts such earnings to present value. Customer relationships are amortized on a straight-line basis over ten years.
The goodwill arising from the acquisition consists largely of synergies and economies of scale the Company hopes to achieve from combining the acquired assets with the Company's current operations.
3. DIVESTITURES    

Fluid Management
On May 31, 2019, the Company completed the sale of the NAMIC Fluid Management business (the “Divestiture”) and all of the assets used primarily in connection with the Fluid Management business to Medline Industries, Inc. (“Medline”) pursuant to an asset purchase agreement dated April 17, 2019 (the “Asset Purchase Agreement”). Total consideration received by the Company for the Divestiture in the fourth quarter of fiscal year 2019 was $169.2 million in cash and resulted in a gain of $46.6 million after working capital adjustments of $0.6 million. The gain was recorded in discontinued operations. On June 3, 2019, a portion of the net proceeds were used to retire the outstanding balance on the Term Loan and Revolving Facility and the remaining net proceeds will continue to be invested in the business.
Pursuant to a transition services agreement entered into and effective on the closing of the transaction, the Company will supply certain services to Medline. Medline will receive certain legal, human resource, tax, accounting and information technology services from the Company for a period generally not to exceed 24 months.
As a result of the Divestiture, the results of operations from the Fluid Management business are reported in the accompanying Consolidated Statements of Operations as “Income from discontinued operations, net of income tax” for the three months and six months ended November 30, 2018. The following table summarizes the financial results of our discontinued operations:

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Three Months Ended
 
Six Months Ended
(in thousands)
Nov 30, 2018
 
Nov 30, 2018
Net sales
$
21,518

 
$
42,915

Cost of sales (exclusive of amortization)
12,962

 
25,844

Gross profit
8,556

 
17,071

Operating expenses
 
 
 
Research and development
287

 
575

Sales and marketing
1,005

 
2,033

General and administrative
73

 
135

Amortization of intangibles
683

 
1,365

Total operating expenses
2,048

 
4,108

Operating income
6,508

 
12,963

 
 
 
 
Income from discontinued operations before income taxes
6,508

 
12,963

Income tax expense
781

 
2,001

Income from discontinued operations
$
5,727

 
$
10,962


In accordance with accounting principles generally accepted in the United States (“GAAP”), only expenses specifically identifiable and related to a business to be disposed may be allocated to discontinued operations. As such, the selling and marketing, research and development and general and administrative expenses recorded in discontinued operations include corporate costs incurred directly in support of the Fluid Management portfolio.
Total operating and investing cash flows of discontinued operations for the six months ended November 30, 2018 is comprised of the following, which excludes the effect of income taxes:
 
Six Months Ended
(in thousands)
Nov 30, 2018
Net cash provided by operating activities
$
516

Net cash provided by investing activities
446


4. REVENUE FROM CONTRACTS WITH CUSTOMERS

Revenue Recognition

Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
The Company has one primary revenue stream which is the sales of its products.
Disaggregation of Revenue
The following tables summarize net product revenue by Global Business Unit ("GBU") and geography for the three and six months ended November 30, 2019 and 2018:

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Three months ended Nov 30, 2019
 
Three months Ended Nov 30, 2018
(in thousands)
United States
 
International
 
Total
 
United States
 
International
 
Total
Net sales
 
 
 
 
 
 
 
 
 
 
 
Vascular Interventions & Therapies
$
27,601

 
$
3,549

 
$
31,150

 
$
27,243

 
$
3,733

 
$
30,976

Vascular Access
18,563

 
4,221

 
22,784

 
20,081

 
3,642

 
$
23,723

Oncology
9,391

 
6,678

 
16,069

 
8,976

 
6,310

 
$
15,286

Total
$
55,555

 
$
14,448

 
$
70,003

 
$
56,300

 
$
13,685

 
$
69,985

 
Six months ended Nov 30, 2019
 
Six months Ended Nov 30, 2018
(in thousands)
United States
 
International
 
Total
 
United States
 
International
 
Total
Net sales
 
 
 
 
 
 
 
 
 
 
 
Vascular Interventions & Therapies
$
53,277

 
$
6,786

 
$
60,063

 
$
53,093

 
$
6,480

 
$
59,573

Vascular Access
37,847

 
8,096

 
45,943

 
40,528

 
6,985

 
47,513

Oncology
17,368

 
12,671

 
30,039

 
14,175

 
12,667

 
26,842

Total
$
108,492

 
$
27,553

 
$
136,045

 
$
107,796

 
$
26,132

 
$
133,928

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.

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Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.
Variable Consideration
Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established for discounts, returns, rebates and allowances that are offered within contracts between the Company and its customers. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as a current liability.
Rebates and Allowances: The Company provides certain customers with rebates and allowances that are explicitly stated in the Company’s contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. The Company establishes a liability for such amounts, which is included in accrued expenses in the accompanying Consolidated Balance Sheets. These rebates and allowances result from performance-based offers that are primarily based on attaining contractually specified sales volumes and administrative fees the Company is required to pay to group purchasing organizations.
Product Returns: The Company generally offers customers a limited right of return. Product returns after 30 days must be pre-approved by the Company and customers may be subject to a 20% restocking charge. To be accepted, a returned product must be unadulterated, undamaged and have at least twelve months remaining prior to its expiration date. The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return liabilities using its historical product return information and considers other factors that it believes could significantly impact its expected returns, including product recalls. During the six months ended November 30, 2019, such product returns were not material.
Contract Balances with Customers
A receivable is recognized in the period the Company ships the product. Payment terms on invoiced amounts are based on contractual terms with each customer and generally coincide with revenue recognition. Accordingly, the Company does not have any contract assets associated with the future right to invoice its customers. In some cases, if control of the product has not yet transferred to the customer or the timing of the payments made by the customer precedes the Company’s fulfillment of the performance obligation, the Company recognizes a contract liability that is included in deferred revenue in the accompanying Consolidated Balance Sheets.
The following table presents changes in the Company’s receivables, contract assets and contract liabilities with customers:
(in thousands)
Nov 30, 2019
 
May 31, 2019
Receivables
$
33,994

 
$
43,577

Contract assets
$

 
$

Contract liabilities
$
465

 
$
681


During the six months ended November 30, 2019, the Company recognized $0.6 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 $0.3 million.
Costs to Obtain or Fulfill a Customer Contract
Under ASC 606, the Company recognizes an asset for incremental costs of obtaining a contract with a customer if it expects to recover those costs. The Company’s sales incentive compensation plans qualify for capitalization since these plans are directly related to sales achieved during a period of time. However, the Company has elected the practical expedient under ASC 340-40-25-4 to expense the costs as they are incurred within selling and marketing expenses since the amortization period is less than one year.
The Company accounts for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. Shipping and handling costs, associated with the distribution of finished products to customers, are recorded in costs of goods sold and are recognized when the related finished product is shipped to the customer. Amounts charged to customers for shipping are recorded in net sales.





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5. INVENTORIES
Inventories are stated at lower of cost and net realizable value (using the first-in, first-out method). Inventories consisted of the following:
(in thousands)
Nov 30, 2019
 
May 31, 2019
Raw materials
$
19,092

 
$
16,045

Work in process
10,541

 
6,786

Finished goods
20,606

 
17,240

Inventories
$
50,239

 
$
40,071



The Company periodically reviews for both obsolescence and loss of value. The Company makes assumptions about the future demand for and market value of the inventory. Based on these assumptions, the Company estimates the amount of obsolete, expiring and slow moving inventory. The total inventory reserve at November 30, 2019 and May 31, 2019 was $4.0 million and $4.2 million, respectively. Of the $4.0 million reserve as of November 30, 2019 and the $4.2 million reserve as of May 31, 2019, $0.3 million and $0.4 million, respectively, relates to the inventory reserve for Acculis inventory as a result of the recall announced in the fourth quarter of fiscal year 2017 and $0.7 million relates to a specific reserve related to the termination of an agreement with a Japanese distributor in the second quarter of fiscal year 2018.

6. GOODWILL AND INTANGIBLE ASSETS

Intangible assets other than goodwill are amortized over their estimated useful lives on either a straight-line basis or proportionately to the benefit being realized. Useful lives range from two to eighteen years. The Company periodically reviews the estimated useful lives of its intangible assets and reviews such assets or asset groups for impairment whenever events or changes in circumstances indicate that the carrying value of the assets or asset groups may not be recoverable. If an intangible asset or asset group is considered to be impaired, the amount of the impairment will equal the excess of the carrying value over the fair value of the asset.

Goodwill is not amortized, but rather, is tested for impairment annually or more frequently if impairment indicators arise. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination.

The Company's annual testing for impairment of goodwill was completed as of December 31, 2018. The Company operates as a single operating segment with one reporting unit and consequently evaluates goodwill for impairment based on an evaluation of the fair value of the Company as a whole. The Company determines the fair value of the reporting unit based on the market valuation approach and concluded that it was not more-likely-than-not that the fair value of the Company's reporting unit was less than its carrying value.

Even though the Company determined that there was no goodwill impairment as of December 31, 2018, the future occurrence of a potential indicator of impairment, such as a significant adverse change in legal, regulatory, business or economic conditions or a more-likely-than-not expectation that the reporting unit or a significant portion of the reporting unit will be sold or disposed of, would require an interim assessment for the reporting unit prior to the next required annual assessment as of December 31, 2019.

The changes in the carrying amount of goodwill for the six months ended November 30, 2019 were as follows:
(in thousands)
 
Goodwill balance at May 31, 2019
$
347,666

Additions for Eximo acquisition (Note 2)
12,428

Goodwill balance at November 30, 2019
$
360,094







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Intangible assets consisted of the following:
 
Nov 30, 2019
(in thousands)
Gross
carrying
value
 
Accumulated
amortization
 
Net carrying
value
Product technologies
$
241,973

 
$
(81,314
)
 
$
160,659

Customer relationships
60,148

 
(28,000
)
 
32,148

Trademarks
9,300

 
(6,536
)
 
2,764

Licenses
6,087

 
(5,333
)
 
754

 
$
317,508

 
$
(121,183
)
 
$
196,325

 
May 31, 2019
(in thousands)
Gross
carrying
value
 
Accumulated
amortization
 
Net carrying
value
Product technologies
$
182,971

 
$
(75,412
)
 
$
107,559

Customer relationships
60,166

 
(25,950
)
 
34,216

Trademarks
9,300

 
(6,404
)
 
2,896

Licenses
5,752

 
(5,036
)
 
716

 
$
258,189

 
$
(112,802
)
 
$
145,387


Amortization expense for the three months ended November 30, 2019 and 2018 was $4.5 million and $4.5 million, respectively. Amortization expense for the six months ended November 30, 2019 and 2018 was $8.4 million and $7.9 million, respectively.
Expected future amortization expense related to the intangible assets is as follows:
(in thousands)

Remainder of 2020
$
9,510

2021
17,963

2022
17,347

2023
17,309

2024
15,755

2025 and thereafter
118,441


$
196,325




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