# ANGIODYNAMICS INC (ANGO) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ANGIODYNAMICS INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1275187/000162828023027335/ango-20230531.htm
Accession: 0001628280-23-027335
Filing date: 2023-08-03
Report date: 2023-05-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ANGO/
All MD&A years: /company/ANGO/mda/
Previous year: /company/ANGO/mda/fy2022/ (FY 2022)
Next year: /company/ANGO/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

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.

Company and Market

AngioDynamics is a leading and transformative medical technology company focused on restoring healthy blood flow in the body's vascular system, expanding cancer treatment options and improving quality of life for patients. 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 long-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 in the United States primarily through a direct sales force, and outside the U.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 continue to pose future risks with the emergence of new variants. Even with the public health actions that have been taken to reduce the spread of the virus, the market continues to experience disruptions with respect to consumer demand, hospital operating procedures and workflow, trends that may continue. The Company's ability to manufacture products, the reliability of our supply chain, labor shortages, backlog and inflation (including the cost and availability of raw materials, direct labor and shipping) have impacted our business, trends that may continue. 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.

Commencing with the first quarter of fiscal year 2023, the Company began to manage its operations through two segments, Med Tech and Med Device to align with the transformation from a company with a broad portfolio of largely undifferentiated products to a more focused medical technology company.

On August 30, 2022, the Company repaid all amounts outstanding under its then existing credit agreement and entered into a new Credit Agreement that provides for a $75.0 million Revolving Facility and a $30.0 million Delayed Draw Term Loan. As of May 31, 2023, $25.0 million was drawn on the Revolving Facility and $25.0 million was drawn on the Delayed Draw Term Loan. See Note 12 "Long-Term Debt" set forth in the Notes to the consolidated financial statements.

During the fourth quarter of fiscal year 2023, the Company was in discussions with Merit Medical Systems, Inc. ("Merit") to sell the dialysis product portfolio and BioSentry tract sealant system biopsy businesses. This qualified for held for sale accounting as of May 31, 2023. On June 8, 2023, the Company entered into an asset purchase agreement (the "Asset Purchase Agreement") with Merit Medical Systems, Inc. pursuant to which Merit acquired the dialysis product portfolio and BioSentry tract sealant system biopsy businesses for $100.0 million in cash subject to the terms and conditions of the Asset Purchase Agreement. The Company and Merit entered into various agreements to facilitate the transition to Merit, including a Transactions Services Agreement and Contract Manufacturing Agreement. The Company determined that the sale of the

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businesses did not constitute a strategic shift that had a major effect on the Company’s operations or financial results and as a result, this transaction will not be classified as discontinued operations.

As of May 31, 2023, the Company concluded that the sale of the dialysis product portfolio and BioSentry tract sealant system biopsy businesses to Merit Medical Systems, Inc. was a triggering event for the Med Device reporting unit. The Company utilized the income approach to determine the fair value of the remaining Med Device reporting unit. Based on the results of this evaluation, the Company recorded a goodwill impairment charge of $14.5 million for the year ended May 31, 2023 to write down the carrying value of the Med Device reporting unit to fair value.

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 ended May 31, 2023 compared to the year ended May 31, 2022 follows:

Year ended May 31, 2023:

•Revenue increased by 7.1% to $338.8 million

•Med Tech growth of 22.8% and Med Device growth of 1.9%

•Gross profit decreased by 100 bps to 51.4%

•Net loss increased by $25.9 million to $52.4 million

•Loss per share increased by $0.65 to a loss of $1.33

•Cash flow from operations increased by $7.3 million resulting in cash provided by operations of $0.1 million

Our Med Tech business, comprised of Auryon, the Thrombectomy platform and NanoKnife grew 22.8% in fiscal year 2023. The growth in Auryon, AlphaVac and NanoKnife disposables was partially offset by continued softness in AngioVac. Our Med Device business grew 1.9% in fiscal year 2023 driven by growth in Core, Dialysis, Ports and Microwave products.

Strategic Initiatives to Drive Growth

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 continue to be driven by our high technology products including Auryon, Mechanical Thrombectomy (which includes AngioVac and AlphaVac) and NanoKnife.

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:

◦Pathway expansion for Auryon in arterial thrombectomy and full market release of the hyrodphilic coated catheters;

◦FDA clearance of the AlphaVac F18 thrombectomy system;

◦Enrollment of patients in the APEX IDE study for the use of AlphaVac F18 to treat pulmonary embolism; and

◦Continued enrollment of patients in the PRESERVE study for the use of NanoKnife in the prostate.

•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 continues to pursue 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 this 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

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

The Company 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, net of any variable consideration described below.

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 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.

The Company enters into agreements to place placement and evaluation units (“units”) at customer sites, but the Company retains title to the units. For the duration of these agreements 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.

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

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

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 reserves 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. The Company is also required to pay administrative fees 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 ended May 31, 2023, such product returns were not material.

A receivable is generally 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

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fulfillment of the performance obligation, the Company recognizes a contract liability that is included in deferred revenue in the accompanying Consolidated Balance Sheets.

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 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 Operations. 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 a straight-line basis over the expected period of benefit. The Company periodically reviews the estimated useful lives of 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 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. Prior to the first quarter of fiscal year 2023, the Company managed its operations as one reporting unit. At the beginning of the first quarter of fiscal year 2023, the Company began to manage its operations as two operating segments and two reporting units, namely Med Tech and Med Device (see Note 18 "Segment and Geographic Information" set forth in the Notes to our consolidated financial statements included in this Annual Report on Form 10-K). The Company operates as two reporting units and two asset groups. 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.

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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 each reporting unit to which the goodwill is assigned to the carrying value of the assets and liabilities of those reporting units. 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 two operating segments with two reporting units and consequently evaluates goodwill for impairment based on an evaluation of the fair value of each reporting unit. If the carrying value of the reporting units exceed the fair value, the carrying value is reduced to its fair value through an adjustment to the goodwill balance, resulting in an impairment charge.

As detailed in Note 9, "Goodwill and Intangible Assets" set forth in the Notes to our consolidated financial statements included in this Annual Report on Form 10-K, the Company recorded a goodwill impairment loss of $14.5 million for the year ended May 31, 2023 as the fair value of the Med Device reporting unit was less than its carrying value.

There were no adjustments to goodwill for the Med Tech reporting unit for the year ended May 31, 2023 other than foreign currency translation adjustments.

Results of Operations for the years ended May 31, 2023 and 2022

For the fiscal year ended May 31, 2023, the Company reported a net loss of $52.4 million, or a loss of $1.33 per diluted share, on net sales of $338.8 million compared to a net loss of $26.5 million, or a loss of $0.68 per diluted share, on net sales of $316.2 million in fiscal year 2022.

Net Sales

Net sales - Net sales are derived from the sale of our products and related freight charges, less discounts, rebates and returns.

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For the year ended May 31, 2023, net sales increased $22.5 million to $338.8 million compared to the year ended May 31, 2022. At May 31, 2023, the Company had a backlog of $2.7 million compared to $8.4 million at the end of May 31, 2022.

The Med Tech business net sales increased $18.0 million for the year ended May 31, 2023 compared to the prior year. The change in sales from the prior year was primarily driven by:

•Increased Auryon sales of $12.0 million;

•Growth in the thrombectomy platform of $3.0 million, which was driven by growth in the mechanical thrombectomy platform in AlphaVac sales of $5.0 million, partially offset by softness in AngioVac; and

•Increased NanoKnife sales of $3.0 million, which was driven by NanoKnife disposable sales in the U.S. and internationally which increased $3.3 million due to increased case volume. This increase was partially offset by decreased NanoKnife capital sales in the U.S.

The Med Device business net sales increased $4.6 million for the year ended May 31, 2023 compared to the prior year. The backlog, which primarily impacted sales of Core and Vascular Access products, was $2.7 million at May 31, 2023 compared to $8.4 million at May 31, 2022. The change in sales from the prior year was primarily driven by:

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•Increased sales of Core, Dialysis, Ports and Microwave sales of $5.4 million, $5.2 million, $1.4 million and $1.0 million, respectively. These increases were partially offset by decreased Venous, PICCs, Midlines and other Oncology and Vascular Access sales of $3.6 million, $2.4 million, $0.8 million and $1.6 million, respectively.

Gross Profit

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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.

Total Company gross profit increased by $8.5 million compared to the prior year. The change from the prior year was primarily driven by:    

•Sales volume, which positively impacted gross profit by $13.2 million;

•Production volume and other incentives which positively impacted gross profit by $11.3 million

•Price and mix, which negatively impacted gross profit by $4.9 million;

•Inflationary costs on raw materials, labor shortages and freight costs, which negatively impacted gross profit by $8.1 million;

•Incremental depreciation on placement units of $2.2 million; and

•A benefit of $0.8 million that was recorded as a result of the employee retention credit that the Company filed for under the provision of the CARES Act in the prior year.

The Med Tech segment gross profit increased by $9.4 million compared to the prior year. The change from the prior year was primarily driven by:    

•Sales volume, which positively impacted gross profit by $13.9 million;

•Production volume, manufacturing and other incentives which positively impacted gross profit by $2.1 million;

•Pricing pressures and mix, which negatively impacted gross profit by $4.7 million;

•Inflationary costs on raw materials, labor shortages and freight costs, which negatively impacted gross profit by $0.5 million; and

•Incremental depreciation on placement units of $1.3 million.

The Med Device segment gross profit decreased by $0.9 million compared to the prior year. The change from the prior year was primarily driven by:

•Sales volume, which positively impacted gross profit by $2.1 million;

•Production volume, manufacturing and other incentives which positively impacted gross profit by $8.6 million;

•Pricing pressures and mix, which negatively impacted gross profit by $3.7 million;

•Inflationary costs on raw materials, labor shortages and freight costs, which negatively impacted gross profit by $7.6 million; and

•Incremental depreciation on placement units of $0.3 million.

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Operating Expenses and Other Income (expense)

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[[/GREPCENT_TABLE]]

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 decreased $0.9 million compared to the prior year. The change from the prior year was primarily driven by:

•The timing of certain projects and clinical spend associated with the ongoing clinical trials, which decreased R&D expense by $1.1 million;

•Compensation and benefits expenses, which decreased $0.3 million; and

•A benefit of $0.5 million that was recorded as a result of the employee retention credit that the Company filed for under the provision of the CARES Act in the prior 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 $8.9 million compared to the prior year. The change from the prior year was primarily driven by:

•Additional headcount from the build-out of the Auryon and mechanical thrombectomy sales and marketing teams, which increased compensation and benefits expense by $3.1 million;

•Travel, meeting, tradeshow and other selling expenses, which increased $3.7 million;

•Other fixed expenses (utilities, insurance, depreciation, etc.), which decreased $0.6 million; and

•A benefit of $2.8 million that was recorded as a result of the employee retention credit that the Company file for under the provision of the CARES Act in the prior 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 increased by $1.6 million compared to the prior year. The change from the prior year was primarily driven by:

•Compensation and benefits expense, which decreased $0.5 million; and

•Other outside consultant spend for legal and IT which increased $1.9 million.

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[[/GREPCENT_TABLE]]

Amortization of intangibles - Represents the amount of amortization expense that was taken on intangible assets held by the Company.

•Amortization expense decreased $0.7 million compared to the prior year. The decrease is due to assets that became fully amortized in fiscal year 2023.

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Goodwill impairment - Represents the impairment charge taken on goodwill.

•The Company recorded a non-cash goodwill impairment charge of $14.5 million for the year ended May 31, 2023 as the fair value of the Med Device reporting unit was less than its carrying value.

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 in the fair value for the year ended May 31, 2023 is related to the Eximo contingent consideration and the increased probability of achieving the revenue milestones. The first revenue milestone was achieved in May 2023 and will be paid in the first quarter of fiscal year 2024.

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 $6.6 million compared to the prior year. The change from the prior year was primarily driven by:

•Legal expense, related to litigation that is outside of the normal course of business, which increased $2.4 million;

•Mergers and acquisition expense related to legal fees, which increased $0.3 million;

•Manufacturing relocation expense related to the move of certain manufacturing lines to Costa Rica, which increased $0.4 million;

•Other expenses (mainly severance associated with organizational changes), which decreased $0.1 million; and

•The payment to the Israeli Innovation Authority of $3.5 million related to grant funds that were provided to Eximo to develop the Auryon laser prior to the acquisition in the second quarter of fiscal year 2020. These grant funds were fully repaid in the first quarter of fiscal year 2023 to satisfy the obligation which was otherwise being paid as a royalty based on a percentage of sales.

Other expense - Other expense includes interest expense, foreign currency impacts, bank fees, and amortization of deferred financing costs.

•The change in other expense of $1.8 million compared to the prior year, is primarily due to increased interest expense of $2.1 million and unrealized foreign currency fluctuations of $0.2 million.

Income Tax Benefit

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[[/GREPCENT_TABLE]]

Our effective tax rate was a benefit of 3.7% for fiscal year 2023 compared with an effective tax rate benefit of 11.4% for the prior year. The current year and prior year effective tax rates differ from the U.S. statutory rate primarily due to the impact of the valuation allowance, foreign taxes, and other non-deductible permanent items (such as non-deductible meals and entertainment, Section 162(m) excess compensation), goodwill impairment and the impact of stock-based compensation.

The Company regularly assesses its ability to realize its deferred tax assets. Assessing the realization of deferred tax assets requires significant management judgment. In determining whether its deferred tax assets are more likely than not realizable, the Company evaluated all available positive and negative evidence, and weighted the evidence based on its objectivity. Evidence the Company considered included its history of net operating losses, which resulted in the Company recording a full valuation allowance for its deferred tax assets in fiscal year 2016, except the naked credit deferred tax liability.

Based on the review of all available evidence, the Company determined that it has not yet attained a sustained level of profitability and the objectively verifiable negative evidence outweighed the positive evidence. Therefore, the Company has provided a valuation allowance on its federal and state net operating loss carryforwards, federal and state R&D credit carryforwards and other net deferred tax assets that have a limited life and are not supportable by the naked credit deferred tax liability sourced income as of May 31, 2023. 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.

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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 provides sufficient liquidity to meet our anticipated needs for capital for at least the next 12 months.

Our cash and cash equivalents totaled $44.6 million as of May 31, 2023, compared with $28.8 million as of May 31, 2022. As of May 31, 2023 and 2022, total debt outstanding related to the Credit Agreement was $50.0 million ($25.0 million on the Revolving Facility and $25.0 million on the Delayed Draw Term Loan) and $25.0 million, respectively. The fair value of the contingent consideration liability as of May 31, 2023 was $19.3 million.

The table below summarizes our cash flows for the years ended May 31, 2023 and 2022:

[[GREPCENT_TABLE]]
[["","Year ended May 31,"],["(in thousands)","2023","","2022"],["Cash provided by (used in):"],["Operating activities","$","78","","","$","(7,194)"],["Investing activities","(9,746)","","","(19,307)"],["Financing activities","25,420","","","7,683"],["Effect of exchange rate changes on cash and cash equivalents","43","","","(518)"],["Net change in cash and cash equivalents","$","15,795","","","$","(19,336)"]]
[[/GREPCENT_TABLE]]

During the years ended May 31, 2023 and 2022, cash flows consisted of the following:

Cash provided by (used in) operating activities:

Years ended May 31, 2023 and 2022:

•Net loss of $52.4 million and $26.5 million, respectively, plus the non-cash items, primarily driven by depreciation and amortization, goodwill impairment and stock-based compensation, along with the changes in working capital below, contributed to cash provided by operations of $0.1 million for the year ended May 31, 2023 and cash used in operations of $7.2 million for the year ended May 31, 2022.

•For the year ended May 31, 2023, working capital was unfavorably impacted by increased accounts receivable and inventory on hand of $1.3 million and $8.2 million, respectively. This was partially offset by increased accounts payable and accrued liabilities of $2.1 million.

•For the year ended May 31, 2022, working capital was unfavorably impacted by increased accounts receivable, inventory on hand and prepaids of $17.2 million, $2.8 million and $5.0 million respectively. This was partially offset by increased accounts payable and accrued liabilities of $3.9 million.

Cash used in investing activities:

Years ended May 31, 2023 and 2022:

•$3.8 million and $4.3 million, respectively, of cash was used for fixed asset additions;

•$5.4 million and $11.4 million, respectively, of cash was used for Auryon placement and evaluation unit additions;

•$0.5 million of cash was used for the acquisition of an exclusive license in the first quarter of fiscal year 2023; and

•$3.6 million of cash was used for the QX Medical asset acquisition in the first quarter of fiscal year 2022.

Cash provided by financing activities:

Years ended May 31, 2023 and 2022:

•$70.0 million in proceeds on long-term debt less the repayment of $45.0 million associated with the new Credit Agreement in the first quarter of fiscal year 2023. The $25.0 million draw on the Delayed Draw Term Loan associated with the new Credit Agreement is to fund the historical and planned fiscal year 2023 purchases of Auryon placement and evaluation units. See Note 12 "Long-Term Debt" set forth in the Notes to the consolidated financial statements;

•$0.8 million of deferred financing costs associated with the new Credit Agreement;

•$5.0 million draw on the Revolving Facility in the first quarter of fiscal year 2022 for the QX Medical asset acquisition; and

•$1.2 million and $2.7 million, respectively, of proceeds from stock option and ESPP activity.

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On August 30, 2022, the Company repaid all amounts outstanding under its then existing credit agreement and entered into a new Credit Agreement that provides for a $75.0 million Revolving Facility and a $30.0 million Delayed Draw Term Loan, and also 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 at May 31, 2023 applicable to each was 6.73%. The Company was in compliance with the Credit Agreement covenants as of May 31, 2023.

In the first quarter of fiscal year 2023 and in connection with the new Credit Agreement, the Company drew $25.0 million on the Revolving Facility. The Company also drew $25.0 million on the Delayed Draw Term Loan to fund the historical and planned fiscal year 2023 purchases of Auryon placement and evaluation units for total long-term debt outstanding of $50.0 million. In the first quarter of fiscal year 2022, the Company made a $5.0 million draw on the Revolving Facility in conjunction with the QX Medical asset acquisition. 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.

Subsequent to fiscal year 2023, on June 8, 2023, the Company entered into an asset purchase agreement (the "Asset Purchase Agreement") with Merit Medical Systems, Inc. ("Merit") pursuant to which Merit acquired the dialysis product portfolio and BioSentry tract sealant system biopsy businesses. The Company and Merit entered into various agreements to facilitate the transition to Merit, including a Transactions Services Agreement and Contract Manufacturing Agreement. The purchase price for the asset sale was $100.0 million in cash subject to the terms and conditions of the Asset Purchase Agreement. In conjunction with the Asset Purchase Agreement, on June 8, 2023, AngioDynamics used a portion of the consideration received to repay all amounts owed under AngioDynamics’ existing Credit Agreement, dated as of August 30, 2022, and as a result, the Credit Agreement was extinguished.

Our contractual obligations as of May 31, 2023 are set forth in the table below (in thousands). We have no variable interest entities or other off-balance sheet obligations.

[[GREPCENT_TABLE]]
[["","Cash payments due by period as of May 31, 2023"],["(in thousands)","Total","","Less than One Year","","1-3 Years","","3-5 Years","","After 5 Years"],["Contractual Obligations:"],["Long term debt and interest","$","50,108","","","$","50,108","","","$","\u2014","","","$","\u2014","","","$","\u2014"],["Operating leases (1)","5,940","","","2,366","","","3,016","","","558","","","\u2014"],["Purchase obligations (2)","3,166","","","3,166","","","\u2014","","","\u2014","","","\u2014"],["Acquisition-related future obligations (3)","20,000","","","15,000","","","5,000","","","\u2014","","","\u2014"],["Royalties","39,840","","","3,640","","","7,280","","","7,280","","","21,640"],["","$","119,054","","","$","74,280","","","$","15,296","","","$","7,838","","","$","21,640"]]
[[/GREPCENT_TABLE]]

(1) Operating leases include short-term leases that are not recorded on our Consolidated Balance Sheets 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, 2022 and 2021

For management discussion and analysis of our 2022 financial results and liquidity compared with 2021, 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, 2022 filed on July 22, 2022.

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Recent Accounting Pronouncements

Refer to Note 1 of the Notes to the consolidated financial statements for Recently Issued Accounting Pronouncements.

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