ANGIODYNAMICS, INC. The following information should be read together with the audited consolidated financial statements and the notes thereto and other information included elsewhere in this annual report on Form 10-K. This discussion may contain forward-looking statements related to future events and our future financial performance that are based on current expectation and are subject to risks and uncertainties. Our actual results may differ materially from those anticipated in any forward-looking statements as a result of many factors, including those set forth in Part I, Item 1A, "Risk Factors" and "Disclosure Regarding Forward-Looking Statements" included in this Annual Report on Form 10-K. For all periods presented in Management's Discussion and Analysis of Financial Conditions and Results of Operations, all sales, cost of sales, expenses, gains and income taxes are exclusive of Fluid Management. EXECUTIVE OVERVIEW Company and Market 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 of our product offerings are created through internal and external 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 selective business development opportunities to provide growth opportunities. We sell our products inthe United States primarily through a direct sales force, and outside theU.S. through a combination of direct sales and distributor relationships. Our end users include interventional radiologists, interventional cardiologists, vascular surgeons, urologists, interventional and surgical oncologists and critical care nurses. We expect our businesses to grow in both sales and profitability by expanding geographically, penetrating new markets, introducing new products and increasing our presence internationally. The COVID-19 global pandemic has impacted our business and may pose future risks. Even with the public health actions that have been taken to reduce the spread of the virus, there may continue to be disruptions with respect to consumer demand, hospital operating procedures and workflow, our ability to continue to manufacture products, the reliability of our supply chain and inflation. Accordingly, management continues to evaluate the Company's liquidity position, communicate with and monitor the actions of our customers and suppliers, and review our near-term financial performance. In the third quarter of fiscal year 2021, a benefit of$1.9 million was recorded as a result of the employee retention credit that the Company filed for under the provisions of the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). 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 year endedMay 31, 2021 compared to the year endedMay 31, 2020 follows: Year endedMay 31, 2021 : •Revenue increased by 10.2% to$291.0 million •Gross margin as a percentage of sales decreased by 300 bps to 53.9% •Operating loss decreased by$131.8 million to$35.3 million •Cash flow from operations increased by$38.6 million to cash provided by operations of$24.1 million The ongoing recovery from the COVID-19 pandemic has had a varying impact on each of our three businesses. Our Endovascular Therapies and Vascular Access businesses performed the strongest of the businesses during the year. The 32 -------------------------------------------------------------------------------- number of procedures continued to improve from the COVID-19 lows in the second half of last fiscal year. Our Oncology business continued to face pressure from reductions in procedure volumes due to challenges resulting from the COVID-19 pandemic and the resulting challenging capital spending environment. During fiscal year 2021, we focused on the following areas in responding to the COVID-19 pandemic: •Supporting and progressing our key growth initiatives (the AngioVac, Auryon and NanoKnife systems); •Managing operating expenses; and •Managing our cash and balance sheet. Strategic Initiatives to Drive Growth As the Company has previously announced, the Company is focused on its ongoing transformation from a company with a broad portfolio of largely undifferentiated products to a more focused medical technology company that delivers unique and innovative health care solutions. The Company believes that this transformation will enable the Company to shift the portfolio from the mature, lower-growth markets where we have competed in the past by investing in technology and products that provide access to larger and faster growing markets. As such, we believe the growth in the near to mid-term will be driven by our high technology products including Auryon, Mechanical Thrombectomy (which includes AngioVac and thrombolytics) and NanoKnife. We will refer to these high technology product lines as our Med Tech business and we will refer to the remainder of the portfolio as our Med Device business. Throughout the year, we introduced strategic moves designed to streamline our business, improve our overall business operations and position ourselves for growth. Those initiatives included: •Product development process. The Company continued its disciplined product development process which is intended to improve the Company's ability to bring new products to market. This included the launch of Auryon and SmartPort+, along with continued research and development activities to expand on our Mechanical Thrombectomy portfolio. •Value Creation. To create value and drive future growth, the Company plans to practice dispassionate portfolio optimization and continue to focus on areas of compelling unmet needs including those that are patient-centric and evidenced-based. In addition, the Company is pursuing targeted global expansion opportunities. Critical Accounting Policies and Use of Estimates Our significant accounting policies are summarized in Note 1 "Basis of Presentation, Business Description and Summary of Significant Accounting Policies" in the Consolidated Financial Statements included in our Form 10-K. While all of 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. 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 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 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 33 -------------------------------------------------------------------------------- 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. Contracts with our customers typically include a single performance obligation related to the sale of our products. 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. The Company enters into agreements to place placement and evaluation units ("units") at customer sites, but the Company retains title to the units. The duration of these agreements are typically a year and the customer has the right to use the unit at no upfront charge in connection with the customer's ongoing purchase of disposables. These types of agreements include an embedded operating lease for the right to use the units. In these arrangements, revenue recognized for the sale of the disposables is not allocated between the disposal revenue and lease revenue due to the insignificant value of the units in relation to the total agreement value. 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. 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 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. 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 year endedMay 31, 2021 , such product returns were not material. Inventory Inventories are stated at the lower of cost or net realizable value based on the first-in, first-out cost method and consist of raw materials, work in process and finished goods. Appropriate consideration is given to deterioration, obsolescence, expiring and other factors in evaluating net realizable value. When we evaluate inventory for excess quantities and obsolescence, we utilize historical product usage experience and expected demand for establishing our reserve estimates. Our actual product usage may vary from the historical experience and estimating demand is inherently difficult which may result in us recording excess and obsolete inventory amounts that do not match the required amounts. An increase to inventory reserves results in a corresponding increase in cost of revenue. Inventories are written off against the reserve when they are physically disposed. Acquisitions and Contingent Consideration The Company allocates the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The estimates used to value the net assets acquired are based in part on 34 -------------------------------------------------------------------------------- historical experience and information obtained from the management of the acquired company. The Company generally values the identifiable intangible assets acquired using a discounted cash flow model. The significant estimates used in valuing certain of the intangible assets include, but are not limited to: future expected cash flows of the asset, discount rates to determine the present value of the future cash flows, attrition rates of customers, royalty rates and expected technology life cycles. The Company also estimates the useful lives of the intangible assets based on the expected period over which the Company anticipates generating economic benefit from the asset. The Company's estimates of fair value are based on assumptions believed to be reasonable at that time. If management made different estimates or judgments, material differences in the fair values of the net assets acquired may result. Certain of the Company's business combinations involve potential payment of future consideration that is contingent upon the achievement of certain product development milestones and/or contingent on the acquired business reaching certain performance milestones. The Company records contingent consideration at fair value at the date of acquisition based on the consideration expected to be transferred, estimated as the probability weighted future cash flows, discounted back to present value. The fair value of contingent consideration is measured using projected payment dates, discount rates, probabilities of payment, and projected revenues (for revenue-based considerations). Projected revenues are based on the Company's most recent internal operational budgets and long-range strategic plans. The discount rate used is determined at the time of measurement in accordance with accepted valuation methodologies. Changes in projected revenues, probabilities of payment, discount rates, and projected payment dates may result in adjustments to the fair value measurements. Contingent consideration is remeasured each reporting period using Level 3 inputs, and the change in fair value, including accretion for the passage of time, is recognized as income or expense within operating expenses in the consolidated statements of income. Contingent consideration payments made soon after the acquisition date are classified as investing activities in the consolidated statements of cash flows. Contingent consideration payments not made soon after the acquisition date that are related to the acquisition date fair value are reported as financing activities in the consolidated statements of cash flows, and amounts paid in excess of the original acquisition date fair value are reported as operating activities in the consolidated statements of cash flows.Goodwill and Intangible Assets 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 revenue is earned from the sales of the related product. The Company periodically reviews the estimated useful lives of intangible assets and reviews such assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Such conditions could include significant adverse changes in the business climate, current-period operating or cash flow losses, significant declines in forecasted operations, or a current expectation that an asset group will be disposed of before the end of its useful life. When testing for impairment of definite-lived intangible assets held for use, the Company groups assets at the lowest level for which cash flows are separately identifiable. The Company operates as a single asset group. If a triggering event is deemed to exist, the Company performs an undiscounted operating cash flow analysis to determine if an impairment exists. 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. 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. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, the carrying value is reduced to its fair value through an adjustment to the goodwill balance, resulting in an impairment charge. Determining the fair value of a reporting unit is judgmental and requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates and future market conditions, among others. Changes in assumptions or estimates could materially affect the estimated fair value, and therefore could affect the likelihood and amount of a potential impairment. 35 -------------------------------------------------------------------------------- As detailed in Note 9, "Goodwill and Intangible Assets" in the Consolidated Financial Statements including on our Form 10-K, during the fourth quarter of fiscal year 2021, the Company made the decision to abandon the OARtrac product technology and trademark. This resulted in an impairment charge of$14.0 million . In the fourth quarter of fiscal year 2020, the Company recorded a goodwill impairment loss of$158.6 million as the fair value of the reporting unit was less than its carrying value. There were no adjustments to goodwill for the year endedMay 31, 2021 other than foreign currency translation adjustments. Results of Operations for the years endedMay 31, 2021 and 2020 For the fiscal year endedMay 31, 2021 , we reported net loss from continuing operations of$31.5 million , or$0.82 loss per diluted share, on net sales of$291.0 million compared to a fiscal year 2020 net loss of$166.8 million , or$4.39 loss per diluted share, on net sales of$264.2 million .Net Sales Net sales - Net sales are derived from the sale of our products and related freight charges, less discounts, rebates and returns. Net sales for the year endedMay 31, 2021 and 2020 were: Year ended May 31, (in thousands) 2021 2020 % Change Net Sales by Product Category Endovascular Therapies$ 135,079 $ 112,706 19.9 % Vascular Access 101,310 94,299 7.4 % Oncology/Surgery 54,621 57,152 (4.4) % Total$ 291,010 $ 264,157 10.2 % Net Sales by Geography United States$ 237,043 $ 207,980 14.0 % International 53,967 56,177 (3.9) % Total$ 291,010 $ 264,157 10.2 % For the year endedMay 31, 2021 , net sales increased$26.9 million to$291.0 million compared to the year endedMay 31, 2020 . The prior year net sales numbers, specifically in the fourth quarter, were significantly impacted by the COVID-19 global pandemic. Endovascular Therapies •Total Endovascular Therapies sales increased$22.4 million or 19.9%. Auryon, which was acquired as part of the Eximo acquisition in the second quarter of fiscal year 2020, contributed$11.1 million in disposable sales. The AngioVac business grew$8.0 million as the Company continued to see increased case volumes in AngioVac, which increased 39% from the prior year. Additionally, Core Peripheral product sales increased$5.6 million . EVLT remained consistent with the prior year. •U.S. Endovascular Therapies net sales increased$22.5 million due to increased case volume in AngioVac, increased Core Peripheral product sales and$11.1 million in sales of Auryon. These increases were partially offset by decreased sales volume in EVLT. •International Endovascular Therapies net sales decreased$0.1 million . Vascular Access •Total Vascular Access sales increased$7.0 million due to increased sales of PICCs, Ports, Midlines and Dialysis of$2.5 million ,$1.3 million ,$3.1 million and$0.1 million , respectively. These increases are partially the result of a large order in theUnited Kingdom related to the COVID-19 pandemic for$5.2 million in the first quarter of fiscal year 2021 along with the distribution agreement with MedComp for the sale of certain PICC products. BioFlo product lines comprised 52% of overall Vascular Access sales compared to 51% in the prior year. •U.S. Vascular Access net sales increased$4.3 million primarily due to increased PICCs, Ports and Midline sales of$1.1 million ,$1.4 million and$1.5 million , respectively. These increases are attributed to a group purchasing 36 -------------------------------------------------------------------------------- organization agreement that was signed in the third quarter of the prior fiscal year, new strategic relationships and the launch of SmartPort+. •International Vascular Access net sales increased by$2.7 million primarily as a result of a large order in theUnited Kingdom related to the COVID-19 pandemic for$5.2 million . This was partially offset by decreased PICC sales inLatin America of$1.6 million . Oncology/Surgery •Total Oncology/Surgery sales decreased$2.5 million year over year. The sales were significantly impacted by the challenging capital spending environment as a result of the COVID-19 pandemic, as Microwave and NanoKnife capital sales decreased$4.2 million . Of this decrease,$2.1 million is due to a large NanoKnife distributor order in theAsia-Pacific region ("APAC") in the prior year. Radiofrequency Ablation sales also decreased$1.6 million , Balloon product sales decreased by$1.1 million and other sales decreased$0.7 million . These decreases were partially offset by increased Microwave and NanoKnife disposable sales of$2.1 million and$1.2 million , respectively, and increased BioSentry sales of$2.0 million . •U.S. Oncology net sales increased by$2.3 million primarily due to increased NanoKnife disposable sales of$1.5 million , BioSentry sales of$2.0 million and Microwave disposable sales of$1.3 million . The increased NanoKnife disposable sales is the result of the increased capital base that was developed in the prior year along with increased case volumes as hospitals have begun to lift restrictions on procedures. This was partially offset by decreased NanoKnife capital sales of$1.1 million and Balloon product sales of$1.1 million . •International Oncology sales decreased$4.8 million year over year. The decrease was driven by lower NanoKnife capital and disposable sales of$3.0 million and decreased Radiofrequency Ablation sales of$2.1 million as a result of market pressures and hospital restrictions due to the COVID-19 pandemic. Of the$3.0 million decrease in NanoKnife capital and disposable sales,$2.1 million was related to a NanoKnife distributor order in APAC in the prior year. Gross Profit, Operating expenses, and Other income (expense) Year ended May 31, (in thousands) 2021 2020 % Change Gross profit (exclusive of intangible amortization)$ 156,788 $ 150,272 4.3 % Gross profit % of sales 53.9 % 56.9 % Research and development$ 36,390 $ 29,682 22.6 % % of sales 12.5 % 11.2 % Selling and marketing$ 81,306 $ 78,634 3.4 % % of sales 27.9 % 29.8 % General and administrative$ 35,918 $ 37,872 (5.2) % % of sales 12.3 % 14.3 % 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. While gross profit increased by$6.5 million compared to the prior year, gross profit as a percentage of sales decreased 300 basis points. The change is primarily attributable to the following: •Sales volume positively impacted gross profit by$16.6 million year over year; •Net productivity negatively impacted gross profit by$10.0 million primarily as a result of under absorption, and to a lesser extent inflation, of$5.1 million and start-up costs of$4.0 million related to the Auryon launch. The under absorption in manufacturing operations was due to the Company maintaining staffing levels during the COVID-19 global pandemic to mitigate risk, along with a focus on working capital management through inventory reduction; •Mix negatively impacted gross margin by$0.8 million as a result of the large order in theUnited Kingdom for lower gross margin products and decreased NanoKnife capital sales. This was partially offset by increased AngioVac sales; and •A benefit of$0.7 million was recorded to gross profit which represents a portion of the employee retention credit that the Company filed for under the provisions of the CARES Act in the third quarter of the current year. 37 -------------------------------------------------------------------------------- Research and development expense - Research and development ("R&D") expense includes internal and external costs to develop new products, enhance existing products, validate new and enhanced products, manage clinical, regulatory and medical affairs. R&D expense increased$6.7 million compared to the prior year. The increase is primarily attributable to the following: •AngioVac platform expansion, the NanoKnife DIRECT© study and the Pathfinder study increased$3.6 million and Auryon related expenses increased by$2.7 million ; •Outside consultant expense and other expense increased$0.5 million and travel expenses decreased$0.5 million ; •Compensation and benefits increased$0.7 million , of which$0.4 million related to variable compensation; and •A benefit of$0.3 million was recorded to R&D expense which represents a portion of the employee retention credit that the Company filed for under the provisions of the CARES Act in the third quarter of the current year. Sales and marketing expense - Sales and marketing ("S&M") expense consists primarily of salaries, commissions, travel and related business expenses, attendance at medical society meetings, product promotions and marketing activities. S&M expense increased by$2.7 million compared to the prior year. The increase is primarily attributable to the following: •Expense related to the build-out of the Auryon sales and marketing teams to prepare for full product launch of$7.7 million ; •Travel expense decreased$2.4 million due to less travel as a result of the COVID-19 pandemic. In addition, tradeshow and other expense decreased$1.2 million primarily due to the cancellation of events; •Compensation and benefits decreased$0.7 million due to decreased salaries as a result of open roles partially offset by increased variable compensation and commissions; and •A benefit of$0.9 million was recorded to sales and marketing expense which represents a portion of the employee retention credit that the Company filed for under the provisions of the CARES Act in the third quarter of the current year. General and administrative expense - General and administrative ("G&A") expense includes executive management, finance, information technology, human resources, business development, legal, and the administrative and professional costs associated with those activities. G&A expense decreased by$2.0 million compared to the prior year. The decrease is primarily attributable to the following: •Legal and professional fees relating to ongoing litigation that is within the normal course of business decreased$3.7 million ; •Compensation and benefits increased approximately$2.1 million primarily as a result of increased variable compensation and stock based compensation expense; and •Decreased consulting and other expense of$0.1 million and decreased travel expense of$0.2 million as a result of the COVID-19 pandemic. Year ended May 31, (in thousands) 2021 2020 $ Change Amortization of intangibles$ 18,136 $ 18,121 $ 15 Goodwill impairment $ -$ 158,578 $ (158,578)
Change in fair value of contingent consideration
Acquisition, restructuring and other items, net$ 20,232 $ 6,014 $ 14,218 Other expense$ (769) $ (1,037) $ 268 Amortization of intangibles - Represents the amount of amortization expense that was taken on intangible assets held by the Company. •Amortization expense remained consistent compared to the prior year. Goodwill Impairment - Represents the impairment charge taken on goodwill. •The Company recorded a non-cash goodwill impairment charge of$158.6 million for the year endedMay 31, 2020 as the fair value of the reporting unit was less than its carrying value. There were no adjustments to goodwill for the year endedMay 31, 2021 other than foreign currency translation adjustments. 38 --------------------------------------------------------------------------------
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 is primarily due to RadiaDyne revised sales projections and a technical milestone that would not be achieved. This resulted in a$9.2 million and$2.7 million reduction in the fair value of the contingent liability in the prior year. •During the current year, a decision was made to no longer pursue the final RadiaDyne technical milestone, which resulted in a reduction in the liability of$0.8 million . This reduction in the fair value was offset by normal amortization of the present value of the Eximo contingent consideration recorded in the second quarter of fiscal year 2020. Acquisition, restructuring and other items, net - 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 increased by$14.2 million compared to the prior year. The increase is attributable to the following: •Legal expense, related to litigation that is outside of the normal course of business, of$6.2 million was recorded in fiscal year 2021 compared to$2.7 million in the prior year. Included in legal for fiscal year 2021, is a$1.0 million settlement expense; •There was no M&A expense incurred in fiscal year 2021 compared to$0.8 million in the prior year; •In fiscal year 2021, the Company incurred$0.4 million of expense to move manufacturing facilities as a result of the sale of the Fluid Management business compared to$2.8 million in the prior year; •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$1.0 million in fiscal year 2021 compared to$1.8 million in the prior year; •Other expenses of$0.8 million consists of severance associated with organizational changes, compared to$1.5 million in the prior year; and •A$14.0 million impairment charge was recorded in fiscal year 2021 as a result of the decision to abandon the OARtrac product technology and trademark. Other expense - Other expense includes interest expense, foreign currency impacts, bank fees, and amortization of deferred financing costs. •The decrease in other expense from the prior year of$0.3 million is primarily due to foreign currency unrealized gains of$0.4 million and the prior year write-off of deferred financing fees associated with the old Credit Facility of$0.6 million . This was partially offset by increased interest expense of$0.2 million for the$20.0 million outstanding on the Revolving Facility at the end of fiscal year 2021 compared to$40.0 million outstanding in the prior year. In addition, interest income decreased by$0.3 million . Income Tax Benefit Year ended May 31, (in thousands) 2021 2020 Income tax benefit$ (4,504) $ (1,348) Effective tax rate 12 % 1 % Our effective tax rate was a benefit of 12% for fiscal year 2021 compared with an effective tax rate benefit of 1% for the prior year. The current year 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 prior year effective tax rate differs from theU.S. Federal statutory tax rate of 21% primarily due to no tax benefit being recorded on the goodwill impairment of$158.6 million . The Company regularly assesses its ability to realize its deferred tax assets. Assessing the realization of deferred tax assets requires significant management judgment. In determining whether its deferred tax assets are more likely than not realizable, the Company evaluated all available positive and negative evidence, and weighted the evidence based on its objectivity. 39 -------------------------------------------------------------------------------- Evidence the Company considered included its history of net operating losses, which resulted in the Company recording a full valuation allowance for its deferred tax assets in fiscal year 2016, except the naked credit deferred tax liability. Based on the review of all available evidence, the Company determined that it has not yet attained a sustained level of profitability and the objectively verifiable negative evidence outweighed the positive evidence. Therefore, the Company has provided a valuation allowance on its federal and state net operating loss carryforwards, federal and state R&D credit carryforwards and other net deferred tax assets that have a limited life and are not supportable by the naked credit deferred tax liability sourced income as ofMay 31, 2021 . The Company will continue to assess the level of the valuation allowance required. If sufficient positive evidence exists in future periods to support a release of some or all of the valuation allowance, such a release would likely have a material impact on the Company's results of operations. Liquidity and Capital Resources We regularly review 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 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. Our cash and cash equivalents totaled$48.2 million as ofMay 31, 2021 , compared with$54.4 million as ofMay 31, 2020 . As ofMay 31, 2021 , total debt outstanding related to the Revolving Facility was$20.0 million . The fair value of the contingent consideration liability as ofMay 31, 2021 was$15.7 million . The table below summarizes our cash flows for the years endedMay 31, 2021 and 2020: Year ended May 31, (in thousands) 2021 2020 Cash provided by (used in): Operating activities$ 24,093 $ (14,554) Investing activities (13,711) (63,345) Financing activities (16,986) (95,242)
Effect of exchange rate changes on cash and cash equivalents 330
(65)
Net change in cash and cash equivalents$ (6,274)
During the years endedMay 31, 2021 and 2020, cash flows consisted of the following: Cash provided by (used in) operating activities: Year ended 2021: •Net loss of$31.5 million , plus the non-cash items, primarily driven by depreciation and amortization and share-based compensation, along with the changes in working capital below, contributed to cash provided by operations of$24.1 million . •In fiscal year 2021, working capital was favorably impacted by decreased inventory on hand of$11.5 million and increased accounts payable and accrued liabilities of$4.9 million . This was partially offset by increased accounts receivable of$4.2 million . Year ended 2020: •Net loss of$166.8 million plus the non-cash items, primarily driven by the goodwill impairment, depreciation and amortization and share-based compensation, along with the changes in working capital below, contributed to cash used in operations of$14.6 million . •Working capital was negatively impacted by increased inventory on hand of$18.8 million and decreased accounts payable and accrued liabilities of$15.5 million . Accounts receivable had a favorable impact of$11.9 million on working capital as a result of the sale of the Fluid Management business and decreased sales in the fourth quarter as a result of the impact from COVID-19. 40 -------------------------------------------------------------------------------- Cash used in investing activities: Year ended 2021: •$5.2 million of cash was used for fixed asset additions and$8.5 million of Auryon placement and evaluation units. Year ended 2020: •$45.8 million payment to acquireEximo Medical Ltd. and$10.0 million payment to acquire the C3 Wave tip location asset fromMedical Components, Inc. Refer to Note 2 of the financial statements; and •$7.2 million in fixed asset additions primarily related to building improvements along with maintenance of equipment. Cash used in financing activities: Year ended 2021: •$20.0 million in payments on the Revolving Facility in fiscal year 2021; and •$3.0 million of proceeds from stock option and ESPP activity. Year ended 2020: •$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 12 of the financial statements; •$40.0 million draw on the Revolving Facility; •$0.8 million of outlays from stock option and ESPP activity; and •$1.2 million payment on earn-out liabilities. OnJune 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 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. The interest rate on the Revolving Facility atMay 31, 2021 was 1.36%. OnDecember 17, 2019 , the Company made a$15.0 million draw on the Revolving Facility as part of the acquisition of the C3 Wave tip location asset fromMedical Components Inc. that is described Note 2 to the financial statements. In the fourth quarter of fiscal year 2020, the Company made an additional$25.0 million draw on the Revolving Facility. InDecember 2020 andMarch 2021 , payments of$10.0 million each were made on the Revolving Facility. We believe that our current cash balance, together with cash generated from operations and access to our Revolving Facility, will provide sufficient liquidity to meet our anticipated needs for capital for at least the next 12 months. If we seek to make acquisitions of other businesses or technologies in the future for cash, we may require external financing. Our contractual obligations as ofMay 31, 2021 are set forth in the table below (in thousands). We have no variable interest entities or other off-balance sheet obligations. 41 --------------------------------------------------------------------------------
Cash payments due by period as of
Less than After 5
(in thousands) Total One Year 1-3 Years 3-5 Years Years
Contractual Obligations:
Long term debt and interest $ 21,008
10,724 2,923 5,032 2,598 171
Purchase obligations (2) 4,697 4,697 - - -
Acquisition-related future obligations (3) 20,000 - 15,000 5,000 -
Royalties 47,700 3,800 7,600 7,600 28,700
Litigation matters 975 975 - - -
$ 105,104 $ 12,899 $ 48,136 $ 15,198 $ 28,871
(1) Operating leases include short-term leases that are not recorded on our
consolidated balance sheet under ASU No. 2016-02.
(2) The inventory purchase obligations are not reflected on our consolidated
balance sheets under accounting principles generally accepted in the United
States of America .
(3) Acquisition-related future obligations include scheduled minimum payments
and contingent payments based upon achievement of performance measures or
milestones such as sales or profitability targets, the achievement of research
and development objectives or the receipt of regulatory approvals. The amount
represents the undiscounted value of contingent liabilities recorded on the
balance sheet. Timing of payments are as contractually scheduled, or where
contingent, the Company's best estimate of payment timing.
Results of Operations for the years ended May 31, 2020 and 2019
For management discussion and analysis of our 2020 financial results and
liquidity compared with 2019, see Part II, Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our Annual Report
on Form 10-K for the year ended May 31, 2020 filed on August 10, 2020 .
Recent Accounting Pronouncements
Refer to Note 1 of the Notes to the Consolidated Financial Statements for
Recently Issued Accounting Pronouncements.
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