# Angiodynamics Inc: Form 10-Q for the period ended Feb 28, 2023

- Company: [Angiodynamics Inc](/companies/ango.md) (CIK 1275187)
- Form: 10-Q
- Filed: 2023-03-31
- Accepted by EDGAR: Mar 31, 2023, 14:32 ET
- Period: 2023-02-28
- Accession: 0001628280-23-010093
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1275187/000162828023010093/ango-20230228.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1275187/000162828023010093/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-02-28.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-12-01 to 2023-02-28 | $80.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2022-06-01 to 2023-02-28 | $247.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-12-01 to 2023-02-28 | $40.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-06-01 to 2023-02-28 | $119.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-12-01 to 2023-02-28 | $40.5m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-06-01 to 2023-02-28 | $127.9m | us-gaap:GrossProfit |
| Research and development | 3 months, 2022-12-01 to 2023-02-28 | $6.9m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2022-06-01 to 2023-02-28 | $22.0m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2022-12-01 to 2023-02-28 | −$8.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-06-01 to 2023-02-28 | −$30.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-12-01 to 2023-02-28 | $736.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-06-01 to 2023-02-28 | $1.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-12-01 to 2023-02-28 | −$179.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-06-01 to 2023-02-28 | −$1.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-12-01 to 2023-02-28 | −$9.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-06-01 to 2023-02-28 | −$31.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-12-01 to 2023-02-28 | −$0.24 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-06-01 to 2023-02-28 | −$0.79 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-12-01 to 2023-02-28 | −$0.24 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-06-01 to 2023-02-28 | −$0.79 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-12-01 to 2023-02-28 | 39,509,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-06-01 to 2023-02-28 | 39,436,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-06-01 to 2023-02-28 | −$15.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-06-01 to 2023-02-28 | $2.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-02-28 | $30.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-02-28 | $152.6m | us-gaap:AssetsCurrent |
| Total assets | at 2023-02-28 | $542.8m | us-gaap:Assets |
| Current liabilities | at 2023-02-28 | $69.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-02-28 | $145.2m | us-gaap:Liabilities |
| Long-term debt | at 2023-02-28 | $49.8m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-02-28 | $397.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 32,794 characters.

The following information should be read together with the consolidated financial statements and the notes thereto and other information included elsewhere in this quarterly report on Form 10-Q. The following discussion should be read in conjunction with the Company's 2022 Annual Report on Form 10-K, and the consolidated financial statements and notes thereto included elsewhere in the Form 10-Q.

### Disclosure Regarding Forward-Looking Statements

This quarterly report on Form 10-Q, including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements regarding AngioDynamics' expected future financial position, results of operations, cash flows, business strategy, budgets, projected costs, capital expenditures, products, competitive positions, growth opportunities, plans and objectives of management for future operations, as well as statements that include the words such as "expects," "reaffirms," "intends," "anticipates," "plans," "believes," "seeks," "estimates," "projects," "optimistic," or variations of such words and similar expressions, are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Investors are cautioned that actual events or results may differ materially from AngioDynamics' expectations, expressed or implied. Factors that may affect the actual results achieved by AngioDynamics include, without limitation, the scale and scope of the COVID-19 global pandemic, the ability of AngioDynamics to develop its existing and new products, technological advances and patents attained by competitors, infringement of AngioDynamics' technology or assertions that AngioDynamics' technology infringes the technology of third parties, the ability of AngioDynamics to effectively compete against competitors that have substantially greater resources, future actions by the FDA or other regulatory agencies, domestic and foreign health care reforms and government regulations, results of pending or future clinical trials, overall economic conditions (including inflation, labor shortages and supply chain challenges including the cost and availability of raw materials), the results of on-going litigation, challenges with respect to third-party distributors or joint venture partners or collaborators, the results of sales efforts, the effects of product recalls and product liability claims, changes in key personnel, the ability of AngioDynamics to execute on strategic initiatives, the effects of economic, credit and capital market conditions, general market conditions, market acceptance, foreign currency exchange rate fluctuations, the effects on pricing from group purchasing organizations and competition, the ability of AngioDynamics to obtain regulatory clearances or approval of its products, or to integrate acquired businesses. Other risks and uncertainties include, but are not limited to, the factors described from time to time in our reports filed with the Securities and Exchange Commission (the "SEC").

Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this quarterly report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, investors are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date stated, or if no date is stated, as of the date of this report. AngioDynamics disclaims any obligation to update the forward-looking statements.

### Disclosure Regarding Trademarks

This report includes trademarks, tradenames and service marks that are our property or the property of other third parties. Solely for convenience, such trademarks and tradenames sometimes appear without any “™” or “®” symbol. However, failure to include such symbols is not intended to suggest, in any way, that we will not assert our rights or the rights of any applicable licensor, to these trademarks and tradenames. For a complete listing of all our trademarks, tradenames and service marks please visit www.angiodynamics.com/IP. Information on our website or connected to our website is not incorporated by reference into this Quarterly Report on Form 10-Q.

### Executive Overview

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 devices; 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.

On August 30, 2022, the Company repaid all amounts outstanding under its then existing credit agreement and entered into a new Credit Agreement. The new Credit Agreement provides for a $75.0 million Revolving Facility and a $30.0 million Delayed Draw Term Loan. As of February 28, 2023, $25.0 million was drawn on the Revolving Facility and $25.0 million was drawn on the Delayed Draw Term Loan. See Note 7 "Long-Term Debt" set forth in the Notes to the consolidated financial statements.

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.

In evaluating the operating performance of our business, management focuses on company-wide and segment revenue and gross margin and company-wide operating income, earnings per share and cash flow from operations. A summary of these key financial metrics for the three and nine months ended February 28, 2023 compared to the three and nine months ended February 28, 2022 are as follows:

Three months ended February 28, 2023:

- Revenue increased by 9.1% to $80.7 million.
- Med Tech growth of 16.6% and Med Device growth of 6.4%.
- Gross profit decreased 200 bps to 50.2%.
- Med Tech gross profit decreased 150 bps to 64.6% and Med Device gross profit decreased 260 bps to 44.5%.
- Net loss increased by $4.5 million to $9.5 million.
- Loss per share increased by $0.11 to a loss of $0.24.

Nine months ended February 28, 2023:

- Revenue increased by 8.1% to $247.7 million.
- Med Tech growth of 25.1% and Med Device growth of 2.5%.
- Gross profit decreased 40 bps to 51.6%.
- Med Tech gross profit decreased 230 bps to 63.8% and Med Device gross profit decreased 70 bps to 46.8%.
- Net loss increased by $10.7 million to $31.0 million.
- Loss per share increased by $0.27 to a loss of $0.79.

Our Med Tech revenue, comprised of Auryon, the thrombus management platform and NanoKnife, grew 16.6% in the third quarter of fiscal year 2023. The growth in Auryon, AlphaVac and NanoKnife disposables was partially offset by continued softness in AngioVac. Our Med Device revenue grew 6.4% in the third quarter of fiscal year 2023 driven by growth in Core, Dialysis, Ports and Microwave products.

### Results of Operations

For the three months ended February 28, 2023, the Company reported a net loss of $9.5 million, or a loss of $0.24 per diluted share, on net sales of $80.7 million, compared with a net loss of $5.0 million, or a loss of $0.13 per diluted share, on net sales of $74.0 million during the same quarter of the prior year. For the nine months ended February 28, 2023, the Company reported a net loss of $31.0 million, or a loss of $0.79 per diluted share, on net sales of $247.7 million, compared with a net loss of $20.3 million, or a loss of $0.52 per diluted share, on net sales of $229.2 million during the same quarter of the prior year.

### Net Sales

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

*(in thousands)*

| Net Sales | Three Months Ended Feb 28, 2023 | Feb 28, 2022 | % Change | Nine Months Ended Feb 28, 2023 | Feb 28, 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Med Tech | $22,874 | $19,612 | 16.6% | $70,193 | $56,106 | 25.1% |
| Med Device | 57,838 | 54,358 | 6.4% | 177,485 | 173,115 | 2.5% |
| Total | $80,712 | $73,970 | 9.1% | $247,678 | $229,221 | 8.1% |

*(in thousands)*

| Net Sales | Three Months Ended Feb 28, 2023 | Feb 28, 2022 | % Change | Nine Months Ended Feb 28, 2023 | Feb 28, 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| United States | $67,620 | $62,445 | 8.3% | $208,274 | $192,259 | 8.3% |
| International | 13,092 | 11,525 | 13.6% | 39,404 | 36,962 | 6.6% |
| Total | $80,712 | $73,970 | 9.1% | $247,678 | $229,221 | 8.1% |

For the three months ended February 28, 2023, net sales increased $6.7 million to $80.7 million compared to the same period in the prior year. For the nine months ended February 28, 2023, net sales increased $18.5 million to $247.7 million compared to the same period in the prior year. At February 28, 2023, the Company had a backlog of $5.4 million, an increase of $0.4 million from November 30, 2022.

The Med Tech segment net sales increased $3.3 million and $14.1 million for the three and nine months ended February 28, 2023 compared to the same periods in the prior year, respectively. The change in sales for both periods was primarily driven by:

- Increased Auryon sales of $3.1 million and $9.9 million compared to the same periods in the prior year, respectively;
- Growth in the thrombus management platform of $2.3 million for the nine months ended February 28, 2023 compared to the same period in the prior year, while the thrombus management platform decreased $0.1 million for the three months ended February 28, 2023 compared to the same period in the prior year. Growth in the mechanical thrombectomy platform was driven by AlphaVac sales of $2.0 million and $5.4 million compared to the same periods in the prior year, respectively, offset by softness in AngioVac sales of of 15.7% and 8.2% compared to the same periods in the prior year, respectively; and
- Increased NanoKnife sales of $0.2 million and $1.9 million compared to the same periods in the prior year, respectively, which was primarily driven by increased probe sales domestically and internationally.

The Med Device segment net sales increased $3.5 million and $4.4 million for the three and nine months ended February 28, 2023 compared to the same periods in the prior year, respectively. The change in sales for both periods was primarily driven by:

- The backlog of $5.4 million at February 28, 2023, which primarily impacted sales of Core and Vascular Access products; and
- Increased sales of Core, Ports and Dialysis, despite the impact of the backlog, along with increased Microwave and other Oncology sales for the three months ended February 28, 2023 compared to the same period in the prior year of $2.1 million, $1.4 million, $1.1 million, $0.7 million and $0.5 million, respectively. These increases were partially offset by decreased Venous, PICCs and Midlines sales for the three months ended February 28, 2023 compared to the same period in the prior year of $1.4 million, $0.6 million and $0.4 million, respectively; and
- Increased sales of Core, Dialysis and Ports, despite the impact of the backlog, along with increased Microwave sales for the nine months ended February 28, 2023 compared to the same period in the prior year of $4.9 million, $3.9 million, $1.4 million and $1.3 million, respectively. These increases were partially offset by decreased Venous, PICCs, Midlines and other Oncology and Vascular Access sales for the nine months ended February 28, 2023 compared to the same period in the prior year of $3.1 million, $1.9 million, $0.8 million and $1.3 million, respectively.

### Gross Profit

*(in thousands)*

|  | Three Months Ended Feb 28, 2023 | Feb 28, 2022 | % Change | Nine Months Ended Feb 28, 2023 | Feb 28, 2022 | $ Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Med Tech | $14,774 | $12,965 | 14.0% | $44,816 | $37,060 | 20.9% |
| Gross profit % of sales | 64.6% | 66.1% |  | 63.8% | 66.1% |  |
| Med Device | $25,730 | $25,618 | 0.4% | $83,071 | $82,217 | 1.0% |
| Gross profit % of sales | 44.5% | 47.1% |  | 46.8% | 47.5% |  |
| Total | $40,504 | $38,583 | 5.0% | $127,887 | $119,277 | 7.2% |
| Gross profit % of sales | 50.2% | 52.2% |  | 51.6% | 52.0% |  |

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 $1.9 million and $8.6 million for the three months and nine months ended February 28, 2023 compared to the same periods in the prior year. The change for both periods was primarily driven by:

- Sales volume, which positively impacted gross profit by $3.7 million and $10.6 million, respectively;
- Production volume, mix and other incentives which positively impacted gross profit by $1.8 million and $11.1 million, respectively;
- Pricing, which negatively impacted gross profit by $0.5 million and $3.8 million, respectively;
- Inflationary costs on raw materials, labor shortages and freight costs, which negatively impacted gross profit by $1.7 million and $6.9 million, respectively;
- Depreciation on placement units of $0.5 million and $1.7 million, respectively; 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 third quarter of the prior year.

The Med Tech segment gross profit increased by $1.8 million and $7.8 million for the three and nine months ended February 28, 2023 compared to the same periods in the prior year. The change for both periods was primarily driven by:

- Sales volume, which positively impacted gross profit by $2.6 million and $11.2 million, respectively;
- Production volume, overhead, manufacturing and other incentives which positively impacted gross profit by $0.5 million and $2.7 million, respectively;
- Pricing pressures and mix, which negatively impacted gross profit by $0.9 million and $4.7 million, respectively;
- Inflationary costs on raw materials, labor shortages and freight costs, which negatively impacted gross profit by $0.1 million and $0.5 million, respectively; and
- Depreciation on placement units of $0.4 million and $1.0 million, respectively.

The Med Device segment gross profit increased by $0.1 million and $0.9 million for the three and nine months ended February 28, 2023 compared to the same periods in the prior year. The change for both periods was primarily driven by:

- Sales volume, which positively impacted gross profit by $1.5 million and $1.6 million, respectively;
- Production volume, manufacturing and other incentives which positively impacted gross profit by $0.4 million and $6.8 million, respectively;
- Pricing pressures and mix, which negatively impacted gross profit by $0.1 million and $0.8 million, respectively;
- Inflationary costs on raw materials, labor shortages and freight costs, which negatively impacted gross profit by $1.6 and $6.4 million, respectively; and
- Depreciation on placement units of $0.1 million and $0.3 million, respectively.

### Operating Expenses, and Other Income (expense)

*(in thousands)*

|  | Three Months Ended Feb 28, 2023 | Feb 28, 2022 | % Change | Nine Months Ended Feb 28, 2023 | Feb 28, 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Research and development | $6,852 | $7,280 | (5.9)% | $22,023 | $22,873 | (3.7)% |
| % of sales | 8.5% | 9.8% |  | 8.9% | 10.0% |  |
| Selling and marketing | $25,406 | $20,416 | 24.4% | $77,956 | $68,468 | 13.9% |
| % of sales | 31.5% | 27.6% |  | 31.5% | 29.9% |  |
| General and administrative | $8,839 | $8,727 | 1.3% | $29,775 | $27,348 | 8.9% |
| % of sales | 11.0% | 11.8% |  | 12.0% | 11.9% |  |

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, and manage clinical, regulatory and medical affairs.

R&D expense decreased $0.4 million and $0.9 million for the three and nine months ended February 28, 2023 compared to the same periods in the prior year, respectively. The change for both periods was primarily driven by:

- The timing of certain projects and clinical spend associated with the ongoing clinical trials, which decreased R&D expense by $0.7 million and $1.3 million, respectively;
- Compensation and benefits expenses, which decreased $0.1 million for the three months ended February 28, 2023; 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 third quarter of 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 $5.0 million and $9.5 million for the three and nine months ended February 28, 2023 compared to the same periods in the prior year, respectively. The change for both periods 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 $0.9 million and $3.4 million, respectively; and
- Travel, meeting, tradeshow and other selling expenses, which increased $1.3 million and $3.9 million, respectively;
- Other fixed expenses (utilities, insurance, depreciation, etc.), which decreased $0.2 million and $0.5 million, respectively; 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 third quarter of 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 $0.1 million and $2.4 million for the three and nine months ended February 28, 2023 compared to the same periods in the prior year, respectively. The change for both periods was primarily driven by:

- Compensation and benefits expenses, which increased $0.3 million for the nine months ended February 28, 2023 and decreased $0.2 million for the three months ended February 28, 2023; and
- Other outside consultant spend for legal and IT which increased $0.3 million and $2.0 million, respectively.

*(in thousands)*

|  | Three Months Ended Feb 28, 2023 | Feb 28, 2022 | $ Change | Nine Months Ended Feb 28, 2023 | Feb 28, 2022 | $ Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Amortization of intangibles | $4,739 | $4,895 | $(156) | $14,384 | $14,605 | $(221) |
| Change in fair value of contingent consideration | $227 | $201 | $26 | $2,084 | $1,005 | $1,079 |
| Acquisition, restructuring and other items, net | $3,369 | $2,359 | $1,010 | $12,009 | $7,052 | $4,957 |
| Other expense, net | $(736) | $(462) | $(274) | $(2,228) | $(1,154) | $(1,074) |

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

- Amortization expense remained consistent with the prior year.

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 nine months ended February 28, 2023 is related to the Eximo contingent consideration and the increased probability of achieving the revenue milestones.

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 $1.0 million and $5.0 million for the three and nine months ended February 28, 2023, compared to the same periods in the prior year, respectively. The change for both periods was primarily driven by:

- Legal expense, related to litigation that is outside of the normal course of business, which increased $0.9 million and $1.1 million, respectively;
- Manufacturing relocation expense related to the move of certain manufacturing lines to Costa Rica, which decreased $0.1 million for the three months ended February 28, 2023 and increased $0.6 million for the nine months ended February 28, 2023;
- Other expenses (mainly severance associated with organizational changes), which increased $0.1 million for the three months ended February 28, 2023 and decreased $0.2 million for the nine months ended February 28, 2023; 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, net - Other expenses include interest expense, foreign currency impacts, bank fees, and amortization of deferred financing costs.

- The change in other expense of $0.3 million and $1.1 million for the three and nine months ended February 28, 2023, respectively, compared to the same periods in the prior year, is primarily due to increased interest expense of $0.6 million and $1.3 million, respectively and unrealized foreign currency fluctuations of $0.3 million and $0.2 million, respectively.

### Income Tax Benefit

*(in thousands)*

|  | Three Months Ended Feb 28, 2023 | Feb 28, 2022 | Nine Months Ended Feb 28, 2023 | Feb 28, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Income tax benefit | $(0.2) | $(0.8) | $(1.6) | $(2.9) |
| Effective tax rate including discrete items | 1.9% | 13.9% | 4.9% | 12.7% |

Our effective tax rate including discrete items for the three months ended February 28, 2023 and 2022 was 1.9% and 13.9%, respectively. Our effective tax rate including discrete items for the nine months ended February 28, 2023 and 2022 was 4.9% and 12.7%, respectively. In fiscal year 2023, the Company’s effective tax rate differs 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 and non-deductible share-based compensation).

### 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 Credit Agreement provides 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 $30.1 million as of February 28, 2023, compared with $28.8 million as of May 31, 2022. As of February 28, 2023 and May 31, 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 contingent consideration liability as of February 28, 2023 and May 31, 2022, was $19.1 million and $16.9 million, respectively.

The table below summarizes our cash flows:

*(in thousands)*

| Cash provided by (used in): | Nine Months Ended Feb 28, 2023 | Feb 28, 2022 |
| --- | ---: | ---: |
| Operating activities | $(15,876) | $(15,754) |
| Investing activities | (8,218) | (15,534) |
| Financing activities | 25,420 | 7,354 |
| Effect of exchange rate changes on cash and cash equivalents | (40) | (337) |
| Net change in cash and cash equivalents | $1,286 | $(24,271) |

During the quarters ended February 28, 2023 and 2022, cash flows consisted of the following:

#### Cash used in operating activities

Nine months ended February 28, 2023 and 2022:

- Net loss of $31.0 million and $20.3 million, respectively, plus the non-cash items, primarily driven by depreciation and amortization and stock based compensation, along with the changes in working capital below, contributed to cash used in operations of $15.9 million and $15.8 million, respectively, for these periods.
- For the period ended February 28, 2023, working capital was unfavorably impacted by decreased accounts payable, accrued liabilities and other liabilities of $7.1 million, along with increased inventory and prepaid expenses of $12.3 million and $0.4 million, respectively, partially offset by decreased accounts receivable of $0.8 million.
- For the period ended February 28, 2022, working capital was unfavorably impacted by decreased accounts payable, accrued liabilities and other liabilities of $11.8 million, along with increased receivables and prepaid expenses of $6.4 million and $7.1 million, respectively.

#### Cash used in investing activities

Nine months ended February 28, 2023 and 2022:

- $2.8 million and $3.3 million, respectively, of cash was used for fixed asset additions;
- $4.9 million and $8.7 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

Nine months ended February 28, 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 7 "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 $2.4 million, respectively, of proceeds from stock option and ESPP activity.

On August 30, 2022, the Company repaid all amounts outstanding under its then existing credit agreement and entered into a new Credit Agreement. The new Credit Agreement 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 February 28, 2023 applicable to each was 6.15%. The Company was in compliance with the Credit Agreement covenants as of February 28, 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.

### New Accounting Pronouncements

Information regarding new accounting pronouncements is included in Note 17 to our consolidated financial statements in this Quarterly Report on Form 10-Q.

## Market risk

As filed, 3,153 characters.

### Foreign Currency Exchange Rate Risk

We are exposed to market risk from changes in currency exchange rates, as well as interest rate fluctuations on our Credit Agreement and investments that could impact our results of operations and financial position.

We transact sales in currencies other than the U.S. Dollar, particularly the Euro, British Pound and Canadian Dollar. For the nine months ended February 28, 2023, approximately 5% of our sales were denominated in foreign currencies. We do not have expenses denominated in foreign currencies at the level of our sales and as a result, our profitability is exposed to currency fluctuations. When the U.S. Dollar strengthens, our sales and gross profit will be negatively impacted. In addition, we have assets and liabilities denominated in non-functional currencies which are remeasured at each reporting period, with the offset to changes presented as a component of Other (Expenses) Income. Significant non-functional balances include accounts receivable due from a sub-section of our international customers.

### Interest Rate Risk

The Credit Agreement provides for a $75.0 million Revolving Facility and a $30.0 million Delayed Draw Term Loan. Interest on the Revolving Facility and Delayed Draw Term Loan will be based, at the Company's option, on a rate equal to (i) the SOFR plus 0.10% (subject to a floor of 0%), or (ii) if the Company elects to treat a borrowing as an ABR Borrowing, an alternate base rate based on SOFR, plus, in each case an applicable margin of 1.25%, 1.50% or 1.75%, depending on the leverage ratio. If any amount is not paid when due, the interest rate may be increased by 2.0%. As of February 28, 2023, there was $25.0 million outstanding on the Delayed Draw Term Loan and $25.0 million outstanding on the Revolving Facility and the interest rate at February 28, 2023 was 6.15%.

### Concentration of Credit Risk

Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash and cash equivalents, our Credit Facility and trade accounts receivable.

The Company maintains cash and cash equivalents at various institutions and performs periodic evaluations of the relative credit standings of these financial institutions to ensure their credit worthiness. In addition, the Credit Agreement is structured across three above investment grade banks. The Company has the ability to draw amongst the three banks which limits the concentration of credit risk of one institution.

Concentration of credit risk with respect to trade accounts receivable is limited due to the large number of customers that purchase products from the Company. No single customer represents more than 10% of total sales. The Company monitors the creditworthiness of its customers. 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. Although the Company does not currently foresee a significant credit risk associated with the outstanding accounts receivable, repayment is dependent upon the financial stability of our customers.

## Controls and procedures

As filed, 1,362 characters.

### Evaluation of disclosure controls and procedures

As of the end of the period covered by this report, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

### Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting for the fiscal quarter ended February 28, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 684 characters.

In addition to information set forth in this report, you should carefully consider the factors discussed in “Part I, Item 1A. Risk Factors” of our annual report on Form 10-K for our fiscal year ended May 31, 2022 which set forth information relating to important risks and uncertainties that could materially adversely affect our business, financial condition or operating results. You should review and consider such Risk Factors in making any investment decision with respect to our securities. An investment in our securities continues to involve a high degree of risk. There have been no material changes to the risk factors previously disclosed in our annual report on Form 10-K.

Filed Mar 31, 2023.
Source: SEC EDGAR, the filing index for accession 0001628280-23-010093. Last ingested by Listed: Nov 4, 2026, 20:24 ET. No prices; not investment advice.