ANGIODYNAMICS, INC. The following information should be read together with the consolidated financial statements and the notes thereto and other information included elsewhere in this quarterly report on Form 10-Q.
Forward-Looking Statements This quarterly report on Form 10-Q, including the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements regardingAngioDynamics' expected future financial position, results of operations, cash flows, business strategy, budgets, projected costs, capital expenditures, products, competitive positions, growth opportunities, plans and objectives of management for future operations, as well as statements that include the words such as "expects," "reaffirms," "intends," "anticipates," "plans," "believes," "seeks," "estimates," or variations of such words and similar expressions, are forward-looking statements. These forward looking statements are not guarantees of future performance and are subject to risks and uncertainties. Investors are cautioned that actual events or results may differ from our expectations. Factors that may affect our actual results achieved include, without limitation, our ability to develop existing and new products, future actions by FDA or other regulatory agencies, results of pending or future clinical trials, the results of ongoing litigation, overall economic conditions, general market conditions, market acceptance, foreign currency exchange rate fluctuations, the effects on pricing from group purchasing organizations and competition, our ability to integrate purchased businesses and other factors including natural disasters and pandemics (such as the scope, scale and duration of the impact of the novel coronavirus, COVID-19). Other risks and uncertainties include, but are not limited to, the factors described from time to time in our reports filed with theSEC . Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this quarterly report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made.AngioDynamics disclaims any obligation to update the forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date stated, or if no date is stated, as of the date of this document. Executive Overview We design, manufacture and sell a wide range of medical, surgical and diagnostic devices used by professional healthcare providers for vascular access, for the treatment of peripheral vascular disease and for use in oncology and surgical settings. Our devices are generally used in minimally invasive, image-guided procedures. Many of our products are intended to be used once and then discarded, or they may be temporarily implanted for short- or longer-term use. Our business operations cross a variety of markets. Our financial performance is impacted by changing market dynamics, which have included an emergence of value-based purchasing by healthcare providers, consolidation of healthcare providers, the increased role of the consumer in health care decision-making and an aging population, among others. In addition, our growth is impacted by changes within our sector, such as the merging of competitors to gain scale and influence; changes in the regulatory environment for medical device; and fluctuations in the global economy. Our sales and profitability growth also depends, in part, on the introduction of new and innovative products, together with ongoing enhancements to our existing products. Expansions to our product offerings are created through internal product development, technology licensing and strategic alliances. We recognize the importance of, and intend to continue to make investments in research and development activities and business development opportunities and feel confident that our existing capital structure and free cash flow generation will allow us to properly fund those activities. We sell our products inthe United States primarily through a direct sales force, and outside theU.S. through a combination of a direct sales and distributor relationships. We expect our businesses to grow in both sales and profitability through geographic expansion, market penetration, new product introductions and increasing our direct presence internationally. OnDecember 17, 2019 , the Company acquired the C3 Wave tip location asset fromMedical 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 29 -------------------------------------------------------------------------------- Table of Contents of$0.6 million and intangible assets of a trademark of$0.9 million and product technology of$8.5 million . The intangible asset will be amortized over 15 years. The contingent consideration comprises technical milestones and will be accounted for when the contingency is resolved or becomes probable and reasonably estimable under ASC 450. OnOctober 2, 2019 , the Company entered into a share purchase agreement to acquireEximo 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. OnMay 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 toMedline Industries, Inc. ("Medline") pursuant to an asset purchase agreement datedApril 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 . A portion of the net proceeds were used onJune 3, 2019 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. The COVID-19 global pandemic may pose significant risks to our business. It is too early to quantify the impact this situation will have on revenue and profits for the remainder of our fiscal year endedMay 31, 2020 or beyond, but the public health actions being undertaken to reduce spread of the virus are and may continue to create significant disruptions with respect to consumer demand, hospital operating procedures and workflow, our ability to continue to manufacture products and the reliability of our supply chain. Accordingly, management is evaluating the Company's liquidity position, communicating with and monitoring the actions of our customers and suppliers, and reviewing our near-term financial performance as we manage the Company through the uncertainty related to the coronavirus.
As of the date of this report:
1.our field based sales personnel are restricted from traveling, both in the interests of their health as well as at the request of our customers as they seek to increase critical care capacity; 2.our office-based employees have been instructed to work remotely, and 3.our manufacturing facility inQueensbury, New York is operating under our business continuity plan with precautions including, without limitation, creating small "work pods", increasing distancing and regularly monitoring temperatures. We anticipate that guidance and restrictions from theCenter for Medicaid Services , hospitals and hospital systems to reduce "elective-like" procedures and prioritize critical care and coronavirus patients will have a materially adverse impact on certain procedure volumes to which certain of our products relate. As discussed in more detail below, we will closely monitor our liquidity and capital resources through the disruption caused by the COVID-19 pandemic. In evaluating the operating performance of our business, management focuses on revenue, gross margin, operating income, earnings per share and cash flow from operations. A summary of these key financial metrics for the three and nine months endedFebruary 29, 2020 compared to the three and nine months endedFebruary 28, 2019 follows: Three months endedFebruary 29, 2020 : •Revenue increased by 6.5% to$69.8 million •Gross margin decreased 40 bps to 57.8% •Operating loss increased by$2.6 million to$6.2 million •Loss per share from continuing operations increased by$0.03 to a loss of$0.15 Nine months endedFebruary 29, 2020 : •Revenue increased by 3.2% to$205.8 million •Gross margin increased 80 bps to 58.3% •Operating loss decreased by$1.8 million to$10.5 million •Loss per share from continuing operations improved by$0.11 to a loss of$0.26 30 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Use of Estimates Our significant accounting policies are summarized in Note 1 to Notes to Consolidated Financial Statements included in our Form 10-K. While all these significant accounting policies affect the reporting of our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require us to use a greater degree of judgment and/or estimates. Actual results may differ from those estimates. As of the third quarter of fiscal year 2020, the following updates were made as a result of the COVID-19 global pandemic:
Intangible assets other than goodwill, indefinite lived intangible assets and in
process research and development ("IP R&D") are amortized over their estimated
useful lives, which range between two to eighteen years, on either a
straight-line basis over the expected period of benefit or as revenues are
earned from the sales of the related products. We periodically review the
estimated useful lives of our intangible assets and review such assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable. If an intangible asset is
considered to be impaired, the amount of the impairment will equal the excess of
the carrying value over the fair value of the asset.
Goodwill and other intangible assets that have indefinite useful lives are not
amortized, but rather, are tested for impairment annually or more frequently if
impairment indicators arise. Goodwill represents the excess of the purchase
price over the fair value of the net tangible and identifiable intangible assets
acquired in each business combination. Goodwill and intangible assets have been
recorded at either incurred or allocated cost. Allocated costs were based on
respective fair market values at the date of acquisition.
For goodwill, the impairment test requires a comparison of the estimated fair
value of the reporting unit to which the goodwill is assigned to the carrying
value of the assets and liabilities of that reporting unit. The determination of
reporting units also requires management judgment. The Company considers whether
a reporting unit exists within a reportable segment based on the availability of
discrete financial information. If the carrying value of the reporting unit
exceeds the fair value of the reporting unit, the carrying value of the
reporting unit's goodwill is reduced to its fair value through an adjustment to
the goodwill balance, resulting in an impairment charge.
Whenever events or changes in circumstances indicate that the carrying value of
the assets may not be recoverable we test intangible assets for impairment based
on estimates of future cash flows. Based upon the ultimate scope and scale of
the COVID-19 global pandemic, there may be materially negative impacts to the
assumptions made with respect to our goodwill and other long lived intangible
assets that could result in an impairment of such assets.
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 determined 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.
New Accounting Pronouncements
Information regarding new accounting pronouncements is included in Note 18 to our consolidated financial statements in this Quarterly Report on Form 10-Q.
Results of Operations for the Three Months Ended
For the three months endedFebruary 29, 2020 , the Company reported net loss of$5.7 million , or$0.15 per diluted share, on net sales of$69.8 million , compared with net loss of$4.6 million from continuing operations, or$0.12 loss per diluted share, on net sales of$65.5 million during the same quarter of the prior year.Net Sales
Net sales - Net sales are derived from the sale of products and related freight charges, less discounts and returns.
Net sales for the three months ended
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Three months ended
(in thousands) Feb 29, 2020 Feb 28, 2019 % Growth
Net Sales by Global Business Unit
Vascular Interventions & Therapies $ 30,552 $ 29,298 4.3%
Vascular Access 24,642 22,348 10.3%
Oncology 14,586 13,878 5.1%
Total $ 69,780 $ 65,524 6.5%
Net Sales by Geography
United States $ 54,889 $ 53,400 2.8%
International 14,891 12,124 22.8%
Total $ 69,780 $ 65,524 6.5%
For the three months ended
•Total Vascular Interventions & Therapies sales increased$1.3 million primarily attributable to strong performance in the AngioVac business which grew$1.5 million and in Core Peripheral products which grew$1.3 million year over year. During the quarter, the Company continued to see strong case volumes in AngioVac, which increased 33% from the prior year due to increased adoption of the Company's unique technology and the launch of the next generation of the AngioVac product. There was$0.2 million in sales of the atherectomy product that was acquired as part of the Eximo acquisition in the second quarter of fiscal year 2020. These increases were partially offset by the termination of the Asclera distribution agreement, which contributed$1.7 million of revenue in the prior year. •U.S. Vascular Interventions & Therapies sales increased$0.5 million due to increased case volume in AngioVac and increased Core Peripheral product sales which was partially offset by the termination of the Asclera distribution agreement, which contributed$1.7 million of revenue in the prior year. •International Vascular Interventions & Therapies sales increased$0.8 million .
Vascular Access
•Total Vascular Access sales increased$2.3 million due to increased sales across all product lines along with sales from the acquisition of the C3 Wave tip location asset fromMedical Components Inc. BioFlo product lines comprise 51% of overall Vascular Access sales compared to 52% a year ago. •U.S. Vascular Access sales increased$1.1 million across all product lines, including a$0.5 million increase in Port sales as a result of the new GPO arrangement with Premier. •International Vascular Access sales increased by$1.2 million as the Company continues to expand its global reach of its Vascular Access product offerings.
Oncology
•Total Oncology sales increased$0.7 million year over year primarily due to increased NanoKnife capital sales of$1.0 million and increased NanoKnife disposable sales of$0.5 million . This was partially offset by decreased sales of RadioFrequency Ablation disposables. •U.S. Oncology sales decreased by$0.1 million due to a decrease in RadioFrequency Ablation and Microwave disposable sales. This was partially offset by an increase in NanoKnife capital sales of$0.6 million and NanoKnife disposable sales of$0.2 million . •International Oncology sales increased by$0.8 million year over year as a result of increased NanoKnife capital sales of$0.4 million and NanoKnife disposable sales of$0.3 million . 32 -------------------------------------------------------------------------------- Table of Contents Gross Profit, Operating expenses, and Other income (expense) Three months ended (in thousands) Feb 29, 2020 Feb 28, 2019 % Change Gross profit$ 40,299 $ 38,163 5.6 % Gross profit % of sales 57.8 % 58.2 % Research and development$ 8,395 $ 6,915 21.4 % % of sales 12.0 % 10.6 % Selling and marketing$ 20,934 $ 18,385 13.9 % % of sales 30.0 % 28.1 %
General and administrative
14.6 % 13.3 %
Gross profit - Gross profit consists of net sales less the cost of goods sold,
which includes the costs of materials, products purchased from third parties and
sold by us, manufacturing personnel, royalties, freight, business insurance,
depreciation of property and equipment and other manufacturing overhead,
exclusive of intangible amortization.
Gross profit increased by
•Sales volume and price, driven by AngioVac and NanoKnife capital sales, positively contributed$4.5 million year over year. •Mix negatively impacted gross margin by$0.9 million as a result of higherVA sales. •Net productivity and a prior year supplier reimbursement negatively impacted gross margin by$0.7 million . •The termination of the Asclera distribution agreement negatively impacted gross margin by$0.7 million . Research and development expenses - Research and development ("R&D") expenses include internal and external costs to develop new products, enhance existing products, validate new and enhanced products, and manage clinical, regulatory and medical affairs.
R&D expense increased
•Compensation and benefits increased approximately$0.3 million due to increased variable compensation along with increased headcount as a result of the Eximo acquisition. •Research and development spend related to the Eximo acquisition contributed$1.2 million .
Sales and marketing expenses - Sales and marketing ("S&M") expenses consist primarily of salaries, commissions, travel and related business expenses, attendance at medical society meetings, product promotions and marketing activities.
S&M expense increased
•Compensation and benefits increase of approximately$1.1 million which is primarily attributed to increased variable compensation and increased commissions as a result of NanoKnife capital sales. •Expenses related to the build-out of the Eximo sales and marketing teams to prepare for full product launch of$1.2 million . •Other sales and marketing expenses increased$0.5 million to support company-wide initiatives was partially offset by decreased outside service fees of$0.2 million . General and administrative expenses - General and administrative ("G&A") expenses include executive management, finance, information technology, human resources, business development, legal, and the administrative and professional costs associated with those activities.
G&A expense increased
•Legal and professional fees relating to ongoing litigation that is within the
normal course of business increased
33
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•Compensation and benefits increased approximately $0.3 million primarily as a
result of variable based compensation offset by the reversal of share based
compensation expense of $0.7 million for employees who are no longer with the
Company.
•Increased consultant spend of $0.2 million , increased expenses related to the
Eximo acquisition to integrate the business of $0.2 million and increased travel
and expenses of $0.1 million .
Three months ended
(in thousands) Feb 29, 2020 Feb 28, 2019 $ Change
Amortization of intangibles $ 5,019 $ 4,660 $ 359
Change in fair value of contingent consideration $ 419 $ 609 $ (190)
Acquisition, restructuring and other items, net $ 1,565 $ 2,550 $ (985)
Other expense $ (297) $ (1,708) $ 1,411 Amortization of intangibles - Represents the amount of amortization expense that was taken on intangibles assets held by the Company.
•Amortization expense increased$0.4 million compared to the prior year. The addition of the Eximo product technology intangible asset and the C3 Wave tip location intangible assets increased intangible assets by$60.3 million and$9.4 million , respectively. These additions resulted in additional amortization expense of$1.1 million . This was partially offset by the write-off of the Merz intangible in the fourth quarter of fiscal year 2019 and other intangibles that became fully amortized.
Change in fair value of contingent consideration - Represents changes in contingent consideration driven by changes to estimated future payments on earn-out liabilities created through acquisitions and amortization of present value discounts on long-term contingent consideration.
•The change from the prior year is due to decreased amortization on the RadiaDyne contingent consideration as a result of the gain of$8.4 million that was recorded in the fourth quarter of fiscal year 2019 and the gain of$0.6 million that was recorded in the first quarter of fiscal year 2020. The Eximo contingent consideration was recorded for$14.9 million in the second quarter of fiscal year 2020. In addition, the final minimum payment of$1.2 million was paid for theMicrosulis contingent consideration during the first quarter of fiscal 2020.
Acquisition, restructuring and other items, net - Represents costs associated with mergers and acquisitions, restructuring expenses, legal costs that are related to litigation that is not in the ordinary course of business, legal settlements and other one-time items.
Acquisition, restructuring and other items, net decreased by
•M&A expense of$0.2 million was incurred in the third quarter of fiscal year 2020 compared to$0.3 million in the prior year. •Legal expense, related to litigation that is outside of the normal course of business, of$0.6 million was recorded in the third quarter of fiscal year 2020 compared to$1.8 million in the prior year. •In the third quarter of fiscal year 2020, the Company incurred$0.8 million of expense to move manufacturing facilities as a result of the sale of the Fluid Management business. •As part of the sale of the Fluid Management business, the Company entered into a transition services agreement with Medline for certain legal, human resource, tax, accounting and information technology services from the Company for a period not to exceed 24 months. As a result of the transition services agreement, the Company invoiced Medline$0.4 million in the third quarter of fiscal year 2020. •Other expenses of$0.4 million in the third quarter of fiscal year 2020 consists of expenses to move the manufacturing of BioSentry products and severance associated with the sale of the Fluid Management business.
Other expenses, net - Other expenses include interest expense, foreign currency impacts, bank fees, and amortization of deferred financing costs.
•The decrease in other expenses from the prior year of$1.4 million is due to decreased interest expense of$1.3 million as the Credit Facility was paid down in full at the beginning of the first quarter of fiscal year 2020. 34 -------------------------------------------------------------------------------- Table of Contents Income Tax Provision (Benefit) Three months ended (in thousands) Feb 29, 2020 Feb 28,
2019
Income tax expense (benefit)$ (0.8) $
(0.8)
Effective tax rate including discrete items 12.6 %
14.4 %
Our effective tax rate including discrete items for the three month periods endedFebruary 29, 2020 andFebruary 28, 2019 was 12.6% and 14.4%, respectively. In fiscal 2020, the Company's effective tax rate differs from theU.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 estimated annual effective tax rate, however, prior to discrete items was 12.9% in the third quarter of fiscal 2020, as compared to 14.0% for the same period in fiscal 2019.
Results of Operations for the Nine Months Ended
For the nine months endedFebruary 29, 2020 , the Company reported net loss of$9.7 million , or$0.26 per diluted share, on net sales of$205.8 million , compared with net loss of$13.9 million from continuing operations, or$0.37 loss per diluted share, on net sales of$199.5 million during the same quarter of the prior year.Net Sales
Net sales - Net sales are derived from the sale of products and related freight charges, less discounts and returns.
Net sales for the nine months endedFebruary 29, 2020 andFebruary 28, 2019 : Nine months ended (in thousands) Feb 29, 2020 Feb 28, 2019 % GrowthNet Sales by Global Business Unit Vascular Interventions & Therapies$ 90,616 $ 88,870 2.0% Vascular Access 70,585 69,861 1.0% Oncology 44,624 40,720 9.6% Total$ 205,825 $ 199,451 3.2%Net Sales by Geography United States$ 163,381 $ 161,195 1.4% International 42,444 38,256 10.9% Total$ 205,825 $ 199,451 3.2%
For the nine months ended
•Total Vascular Interventions & Therapies sales increased$1.7 million primarily attributable to strong performance in the AngioVac business which grew$4.2 million and in Core Peripheral products which grew$1.6 million year over year. During the period, the Company continued to see strong case volumes in AngioVac, which increased 33% from the prior year due to increased adoption of the Company's unique technology and the launch of the next generation of the AngioVac product. There was$0.2 million in sales of the atherectomy product that was acquired as part of the Eximo acquisition in the second quarter of fiscal year 2020. These increases were partially offset by the termination of the Asclera distribution agreement, which contributed$4.8 million of revenue in the prior year. •U.S. Vascular Interventions & Therapies sales increased$0.6 million due to increased case volume in AngioVac and increased Core Peripheral product sales which were partially offset by the termination of the Asclera distribution agreement, which contributed$4.8 million of revenue in the prior year. 35 -------------------------------------------------------------------------------- Table of Contents •International Vascular Interventions & Therapies sales increased$1.1 million due to increased volume in Angiographic catheters primarily in EMEA (Europe , theMiddle East andAfrica ). Vascular Access •Total Vascular Access sales increased$0.7 million driven by Midline and Dialysis sales of$1.2 million which were partially offset by decreases in PICCs and Ports. BioFlo product lines comprise 51% of overall Vascular Access sales in both the current year and prior year. •U.S. Vascular Access sales decreased by$1.6 million due to competitive pressures in the PICC product lines and lower Port sales. This was partially offset by growth in Midlines and in Dialysis products which continued to gain traction in the marketplace. •International Vascular Access sales increased by$2.3 million as the Company continues to expand its global reach of its Vascular Access product offerings.
Oncology
•Total Oncology sales increased$3.9 million year over year primarily due to increased NanoKnife capital sales of$3.8 million along with$1.8 million and$0.9 million in increased sales of balloons and BioSentry products, respectively. This was partially offset by decreased sales of Radiofrequency Ablation and NanoKnife disposable sales. •U.S. Oncology sales increased by$3.2 million , driven by NanoKnife capital sales of$1.9 million , balloon sales of$1.8 million and BioSentry sales of$0.7 million . This was partially offset by a decrease in RadioFrequency Ablation and NanoKnife disposable sales. •International Oncology sales increased by$0.7 million year over year as a result of increased NanoKnife capital sales of$1.9 million . This was offset by decreased RadioFrequency product sales. Gross Profit, Operating expenses, and Other income (expense) Nine months ended (in thousands) Feb 29, 2020 Feb 28, 2019 % Change Gross profit$ 120,060 $ 114,668 4.7 % Gross profit % of sales 58.3 % 57.5 % Research and development$ 22,450 $ 21,365 5.1 % % of sales 10.9 % 10.7 % Selling and marketing$ 60,427 $ 56,054 7.8 % % of sales 29.4 % 28.1 %
General and administrative
14.4 % 13.2 %
Gross profit - Gross profit consists of net sales less the cost of goods sold,
which includes the costs of materials, products purchased from third parties and
sold by us, manufacturing personnel, royalties, freight, business insurance,
depreciation of property and equipment and other manufacturing overhead,
exclusive of intangible amortization.
Gross profit increased by
•Sales volume and price driven by AngioVac and NanoKnife capital sales positively contributed$7.1 million year over year. •Net productivity contributed$1.1 million of favorability. •Mix negatively impacted gross margin by$0.6 million as a result of higherVA sales. •Other items, including a royalty step-up and a prior year supplier reimbursement, negatively impacted gross margin by$0.2 million . •The termination of the Asclera distribution agreement negatively impacted gross margin by$2.1 million . Research and development expenses - Research and development ("R&D") expenses include internal and external costs to develop new products, enhance existing products, validate new and enhanced products, and manage clinical, regulatory and medical affairs. 36 -------------------------------------------------------------------------------- Table of Contents R&D expense increased$1.1 million compared to the prior year. The increase is primarily attributable to the following: •Compensation and benefits increased approximately$0.3 million due to increased variable compensation along with increased headcount as a result of the Eximo acquisition. •Research and development spend related to the Eximo acquisition contributed$1.7 million . •Other R&D expenses, including facilities, samples and project initiatives timing resulted in a decrease of$0.8 million .
Sales and marketing expenses - Sales and marketing ("S&M") expenses consist primarily of salaries, commissions, travel and related business expenses, attendance at medical society meetings, product promotions and marketing activities.
S&M expense increased
•Compensation and benefits increase of approximately$2.4 million which is primarily attributed to increased variable compensation and increased commissions as a result of NanoKnife capital sales. •Expenses related to the build-out of the Eximo sales and marketing teams to prepare for full product launch of$1.5 million . •Other sales and marketing expenses increased$1.0 million to support company-wide initiatives. •Outside service fees decreased$0.4 million . General and administrative expenses - General and administrative ("G&A") expenses include executive management, finance, information technology, human resources, business development, legal, and the administrative and professional costs associated with those activities.
G&A expense increased
•Legal and professional fees relating to ongoing litigation that is within the normal course of business increased$3.5 million , primarily related to the Company's suit againstC.R. Bard . •Compensation and benefits decreased approximately$1.4 million primarily as a result of the reversal of share based compensation expense for employees who are no longer with the Company along with the timing of fully vested share based compensation awards.. •Increased expenses related to the Eximo acquisition to integrate the business of$0.5 million and increased other expenses of$0.6 million . Nine months ended (in thousands) Feb 29, 2020 Feb 28, 2019 $ Change Amortization of intangibles$ 13,417 $ 12,599 $ 818 Change in fair value of contingent consideration$ 116 $ 865 $ (749) Acquisition, restructuring and other items, net$ 4,486 $ 9,700 $ (5,214) Other expense$ (739) $ (3,761) $ 3,022
Amortization of intangibles - Represents the amount of amortization expense that was taken on intangibles assets held by the Company.
•Amortization expense increased$0.8 million compared to the prior year. The addition of the Eximo product technology intangible asset and the C3 Wave tip location intangible assets increased intangible assets by$60.3 million and$9.4 million , respectively. These additions resulted in additional amortization expense of$1.8 million . This was partially offset by the write-off of the Merz intangible in the fourth quarter of fiscal year 2019 and other intangibles that became fully amortized.
Change in fair value of contingent consideration - Represents changes in contingent consideration driven by changes to estimated future payments on earn-out liabilities created through acquisitions and amortization of present value discounts on long-term contingent consideration.
•The change from the prior year is due to the gain of$0.6 million that was recorded on the technical milestones for the RadiaDyne contingent consideration in the first quarter of fiscal year 2020. The gain was partially offset by decreased amortization on the RadiaDyne contingent consideration as a result of the first quarter gain along with the$8.4 million 37 -------------------------------------------------------------------------------- Table of Contents gain that was recorded in the fourth quarter of fiscal year 2019. The Eximo contingent consideration was recorded for$14.9 million in the second quarter of fiscal year 2020. In addition, the final minimum payment of$1.2 million was paid for theMicrosulis contingent consideration during the first quarter of fiscal 2020.
Acquisition, restructuring and other items, net - Represents costs associated with mergers and acquisitions, restructuring expenses, legal costs that are related to litigation that is not in the ordinary course of business, legal settlements and other one-time items.
Acquisition, restructuring and other items, net decreased by
•M&A expense of$0.8 million was incurred in fiscal year 2020 compared to$3.2 million in the prior year. •Legal expense, related to litigation that is outside of the normal course of business, of$2.0 million was recorded in fiscal year 2020, which includes an offset of$0.4 million from theBiolitec bankruptcy settlement, compared to$5.5 million in the prior year. •In fiscal year 2020, the Company incurred$2.2 million of expense to move manufacturing facilities as a result of the sale of the Fluid Management business. •As part of the sale of the Fluid Management business, the Company entered into a transition services agreement with Medline for certain legal, human resource, tax, accounting and information technology services from the Company for a period not to exceed 24 months. As a result of the transition services agreement, the Company invoiced Medline$1.7 million in fiscal year 2020. •Other expenses of$1.2 million in fiscal year 2020 consists of expenses to move the manufacturing of BioSentry products and severance associated with the sale of the Fluid Management business.
Other expenses, net - Other expenses include interest expense, foreign currency impacts, bank fees, and amortization of deferred financing costs.
•The decrease in other expenses from the prior year of$3.0 million is due to decreased interest expense of$3.4 million as the Credit Facility was paid down in full at the beginning of the first quarter of fiscal year 2020. In addition to the decrease in interest expense, interest income increased$0.3 million from the prior year as a result of increased cash due to proceeds from the sale of the Fluid Management business. These increases are partially offset by the write-off of the deferred financing fees that were associated with the old Credit Facility of$0.5 million . Other expenses also include foreign currency fluctuations which increased by$0.2 million .
Income Tax Provision (Benefit)
Nine months ended
(in thousands) Feb 29, 2020 Feb 28, 2019
Income tax expense (benefit)$ (1.5) $
(2.1)
Effective tax rate including discrete items 13.4 %
13.6 %
Our effective tax rate including discrete items for the nine month periods endedFebruary 29, 2020 andFebruary 28, 2019 was 13.4% and 13.6%, respectively. In fiscal 2020, the Company's effective tax rate differs from theU.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 estimated annual effective tax rate, however, prior to discrete items was 12.9% in the third quarter of fiscal 2020, as compared to 14.0% for the same period in fiscal 2019.
Liquidity and Capital Resources
We are continuously and critically reviewing our liquidity and anticipated
capital requirements in light of the significant uncertainty created by the
COVID-19 global pandemic. We believe that our current cash on hand and
availability under our revolving credit facility provide sufficient liquidity to
meet our anticipated needs for capital for at least the next 12 months. We are
closely monitoring receivables and payables. In addition, we believe that our
recently increased inventory levels provide additional risk mitigation in the
event we incur a manufacturing disruption.
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Our cash and cash equivalents totaled $27.2 million as of February 29, 2020 ,
compared with $227.6 million as of May 31, 2019 . As of February 29, 2020 , there
was $15.0 million in debt outstanding and as of May 31, 2019 there was $132.5
million principal debt outstanding. The fair value of contingent consideration
liability as of February 29, 2020 and May 31, 2019 , was $27.3 million and $13.5
million , respectively.
The table below summarizes our cash flows for the nine months ended February 29,
2020 and February 28, 2019 :
Nine Months Ended
(in thousands) Feb 29, 2020 Feb 28, 2019
Cash used in:
Operating activities $ (18,434) $ 12,428
Investing activities (61,866) (85,873)
Financing activities (120,189) 41,173
Effect of exchange rate changes on cash and cash equivalents 8 (120)
Net change in cash and cash equivalents $
(200,481)
During the nine months ended
Cash used in operating activities
Nine months ended
•Net loss of$9.7 million plus the non-cash items, primarily driven by depreciation and amortization and share based compensation, contributed to cash used in operations of$18.4 million . •Working capital was negatively impacted by increased inventory on hand of$14.0 million and decreased accounts payable and accrued liabilities of$18.0 million . Accounts receivable had a favorable impact on working capital as a result of the sale of the Fluid Management business.
Nine months ended
•Net income was driven by increased sales and increased gross profit. This was partially offset by higher operating expenses in research and development, selling and marketing and general administrative as well as costs related to our acquisition and restructuring activities. •The Company continues to focus on optimizing its cash conversion cycle. In the third quarter of fiscal year 2019, working capital was negatively impacted by increased inventory on hand of$2.7 million . Days sales outstanding ("DSO") increased as a result of increased sales in the third quarter. This had a$3.9 million negative impact on working capital. Also, the$12.7 million DOJ settlement payment that was made during the first quarter of fiscal year 2019 negatively impacted working capital from accounts payable and accrued liabilities.
Cash used in investing activities
Nine months ended
•$5.8 million in fixed asset additions versus$2.3 million in the prior year. •$10.0 million cash payment toMedical Components Inc to acquire the C3 wave tip location asset and$45.8 million cash payment to acquireEximo Medical Ltd. in fiscal year 2020 compared to a$37.0 million cash payment to acquire the BioSentry product from SSC and a$47.9 million cash payment to acquire RadiaDyne in fiscal year 2019. Refer to Note 2 to the financial statements.
Cash used in financing activities
Nine months ended
•$132.5 million repayment of long-term debt in conjunction with the new Credit
Agreement that was entered into at the beginning of the first quarter of fiscal
year 2020. Refer to Note 8 of the financial statements.
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•$15.0 million draw on the revolver in fiscal year 2020 for the acquisition of
the C3 Wave tip location asset compared with $55.0 million draw on the revolver
in fiscal year 2019 as a result of the RadiaDyne acquisition described in Note 2
to the financial statements.
•$13.8 million repayment on the Term Loan in the prior year. This was consistent
with the required amortization payment on the Term Loan.
•$0.7 million of outlays from stock option and ESPP activity versus $2.0 million
in proceeds in the prior year.
•$1.2 million payment on earn-out liabilities in the current year compared to
$2.1 million in the prior year.
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. The Credit Agreement
provides for a $125.0 million secured revolving credit 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 Credit Agreement includes customary
representations, warranties and covenants, and acceleration, indemnity and
events of default provisions, including, among other things, two financial
covenants. One financial covenant requires us to maintain a fixed charge
coverage ratio of not less than 1.25 to 1.00. The other financial covenant
requires us to maintain a total leverage ratio of not greater than 3.00 to 1.00.
The total leverage ratio is based upon our trailing twelve months total adjusted
EBITDA (as defined in the Credit Agreement). The amount that we can borrow under
our Credit Agreement is directly based on our leverage ratio.
On December 17, 2019 , the Company made a $15.0 million draw on the revolving
credit facility as part of the acquisition of the C3 Wave tip location asset
from Medical Components Inc. that is described Note 2 to the financial
statements. We believe that our current cash and investment balances, together
with cash generated from operations and access to our revolving credit facility,
will provide sufficient liquidity to meet our anticipated needs for capital for
at least the next 12 months. If we seek to make significant acquisitions of
other businesses or technologies in the future for cash, we may require external
financing.
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