ANGIODYNAMICS INC 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 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 2020 Annual Report on Form 10-K, and the consolidated financial statements and notes thereto included elsewhere in the Form 10-Q. Forward-Looking Statements This quarterly report on Form 10-Q, including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements 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 words such as “expects,” “reaffirms,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” "projects," 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 our expectations, expressed or implied. Factors that may affect our actual results achieved include, without limitation, our ability to develop existing and new products, future actions by FDA or other regulatory agencies, results of pending or future clinical trials, the results of ongoing litigation, overall economic conditions, general market conditions, market acceptance, foreign currency exchange rate fluctuations, the effects on pricing from group purchasing organizations and competition, our ability to integrate purchased businesses and other factors including natural disasters and pandemics (such as the scope, scale and duration of the impact of the novel coronavirus, COVID-19). Other risks and uncertainties include, but are not limited to, the factors described from time to time in our reports filed with 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. Executive Overview We design, manufacture and sell a wide range of medical, surgical and diagnostic devices used by professional healthcare providers for vascular access, for the treatment of peripheral vascular disease and for use in oncology and surgical settings. Our devices are generally used in minimally invasive, image-guided procedures. Many of our products are intended to be used once and then discarded, or they may be temporarily implanted for short- or longer-term use. Our business operations cross a variety of markets. Our financial performance is impacted by changing market dynamics, which have included an emergence of value-based purchasing by healthcare providers, consolidation of healthcare providers, the increased role of the consumer in health care decision-making and an aging population, among others. In addition, our growth is impacted by changes within our sector, such as the merging of competitors to gain scale and influence; changes in the regulatory environment for medical device; and fluctuations in the global economy. Our sales and profitability growth also depends, in part, on the introduction of new and innovative products, together with ongoing enhancements to our existing products. Expansions 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. 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 may pose significant risks to our business. It remains too early to quantify the impact this situation will have on fiscal year 2021 or beyond, but the public health actions being undertaken to reduce spread of the virus, and continued spikes in cases experienced in various regions in which we conduct business are causing and may continue to cause significant disruptions with respect to consumer demand, hospital operating procedures and workflow, our ability to 23 Table of Contents continue to manufacture products and the reliability of our supply chain. Accordingly, management is evaluating the Company’s liquidity position, communicating with and monitoring the actions of our customers and suppliers, and reviewing our near-term financial performance as we manage the Company through the uncertainty related to the novel coronavirus. 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 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 three and nine months ended February 28, 2021 compared to the three and nine months ended February 29, 2020 are as follows: Three months ended February 28, 2021: • Revenue increased by 2.0% to $71.2 million. • Gross margin decreased 370 bps to 54.1%. • Operating loss decreased by $2.5 million to $3.7 million. • Loss per share decreased by $0.06 to a loss of $0.09. Nine months ended February 28, 2021: • Revenue increased by 4.1% to $214.2 million. • Gross margin decreased 490 bps to 53.4%. • Operating loss increased by $3.2 million to $13.7 million. • Loss per share increased by $0.06 to a loss of $0.32. • Cash provided by operations increased by $30.3 million to $11.9 million. The ongoing recovery from the COVID-19 pandemic has had a varying impact on each of our three businesses. Our Vascular Interventions & Therapies and Vascular Access businesses performed the strongest of the businesses during the quarter. The number of procedures improved from the COVID-19 lows in the second half of last fiscal year, but remain below pre-COVID-19 levels. 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. We continued supporting and progressing our key growth initiatives (AngioVac, Auryon and NanoKnife), managing operating expenses and managing our cash and balance sheet. 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. Results of Operations for the Three Months Ended February 28, 2021 and February 29, 2020 For the three months ended February 28, 2021, the Company reported a net loss of $3.5 million, or a loss of $0.09 per diluted share, on net sales of $71.2 million, compared with a net loss of $5.7 million, or a loss of $0.15 per diluted share, on net sales of $69.8 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. 24 Table of Contents Three Months Ended (in thousands) Feb 28, 2021 Feb 29, 2020 % Change Net Sales by Global Business Unit Vascular Interventions & Therapies $ 33,251 $ 30,552 8.8% Vascular Access 24,813 24,642 0.7% Oncology 13,118 14,586 (10.1)% Total $ 71,182 $ 69,780 2.0% Net Sales by Geography United States $ 58,654 $ 54,889 6.9% International 12,528 14,891 (15.9)% Total $ 71,182 $ 69,780 2.0% For the three months ended February 28, 2021, net sales increased $1.4 million to $71.2 million compared to the same period in the prior year. Vascular Interventions & Therapies • Total Vascular Interventions & Therapies net sales increased $2.7 million, or 8.8%. Auryon, which was acquired as part of the Eximo acquisition in the second quarter of fiscal year 2020, contributed $3.3 million in sales. Additionally, the AngioVac business grew $1.3 million as the Company continued to see increased case volumes in AngioVac, which increased 38% from the prior year. These increases were partially offset by lower volume in Venous products due to fewer elective procedures during the COVID-19 pandemic and decreased volume in the Core business. • U.S. Vascular Interventions & Therapies net sales increased $2.7 million due to increased case volume in AngioVac and $3.3 million in sales of Auryon, which were the primary contributors to the 10.2% growth in sales in the U.S. These increases were partially offset by decreased sales volume in Venous and the Core business. • International Vascular Interventions & Therapies sales remained consistent with the prior year. Vascular Access • Total Vascular Access net sales increased $0.2 million due to increased sales in Midlines. BioFlo product lines comprise 50% of overall Vascular Access sales compared to 51% a year ago. • U.S. Vascular Access net sales increased $1.0 million as a result of increased sales of Midlines, PICCs and dialysis. • International Vascular Access net sales decreased by $0.8 million. Oncology • Total Oncology net sales decreased $1.5 million year over year primarily due to a large NanoKnife distributor order in the Asia Pacific region ("APAC") in the prior year. • While U.S. Oncology net sales increased across the majority of product lines, this was offset by Balloon product sales which decreased $0.3 million due to lower volumes. The Company has discussed the 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, the growth in the near to mid-term will be driven by our high technology platforms including AngioVac, Auryon and NanoKnife. 25 Table of Contents Gross Profit, Operating expenses, and Other income (expense) Three Months Ended (in thousands) Feb 28, 2021 Feb 29, 2020 % Change Gross profit $ 38,530 $ 40,299 (4.4) % Gross profit % of sales 54.1 % 57.8 % Research and development $ 8,565 $ 8,395 2.0 % % of sales 12.0 % 12.0 % Selling and marketing $ 19,607 $ 20,934 (6.3) % % of sales 27.5 % 30.0 % General and administrative $ 9,011 $ 10,203 (11.7) % % of sales 12.7 % 14.6 % Gross profit - Gross profit consists of net sales less the cost of goods sold, which includes the costs of materials, products purchased from third parties and sold by us, manufacturing personnel, royalties, freight, business insurance, depreciation of property and equipment and other manufacturing overhead, exclusive of intangible amortization. Gross profit decreased by $1.8 million compared to the prior year. The change is primarily attributable to the following: • Sales volume positively impacted gross profit by $0.8 million year over year. • Net productivity negatively impacted gross profit by $2.9 million primarily as a result of under absorption of $1.5 million and increased start-up costs of $1.4 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 $0.4 million as a result of decreased NanoKnife capital sales. This was partially offset by increased AngioVac sales. • A benefit of $0.7 million was recorded as a result 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. 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 increased $0.2 million compared to the prior year. The change is primarily attributable to the following: • R&D expenses related to the AngioVac platform expansion, the NanoKnife DIRECT© study and the Pathfinder study increased $1.2 million. This was partially offset by decreased expenses of $0.2 million related to Auryon. • Outside consultant expense and other expenses decreased $0.3 million along with decreased travel expenses of $0.2 million. • A benefit of $0.3 million was recorded as a result 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 decreased $1.3 million compared to the prior year. The change is primarily attributable to the following: • Travel expenses decreased $1.2 million due to less travel as a result of the COVID-19 pandemic. In addition, tradeshow and other expenses decreased $1.1 million primarily due to the cancellation of events. • Expenses related to the build-out of the Auryon sales and marketing teams to prepare for full product launch of $2.0 million. • A benefit of $0.9 million was recorded as a result 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. 26 Table of Contents 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 $1.2 million compared to the prior year. The change is primarily attributable to the following: • Legal expenses decreased $1.5 million Three Months Ended (in thousands) Feb 28, 2021 Feb 29, 2020 $ Change Amortization of intangibles $ 4,292 $ 5,019 $ (727) Change in fair value of contingent consideration $ 183 $ 419 $ (236) Acquisition, restructuring and other items, net $ 610 $ 1,565 $ (955) Other income (expense), net $ (389) $ (297) $ (92) Amortization of intangibles - Represents the amount of amortization expense that was taken on intangibles assets held by the Company. • Amortization expense decreased $0.7 million from the prior year due to assets that became fully amortized in fiscal year 2021. 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 of the contingent consideration is the normal amortization of the present value of the Eximo contingent consideration. Acquisition, restructuring and other items, net - Represents costs associated with mergers and acquisitions, restructuring expenses, legal costs that are related to litigation that is not in the ordinary course of business, legal settlements and other one-time items. Acquisition, restructuring and other items, net, decreased by $1.0 million compared to the prior year. The decrease is primarily attributable to the following: • Legal expense, related to litigation that is outside of the normal course of business, of $1.0 million was recorded in the third quarter of fiscal year 2021 compared to $0.6 million in the prior year. • There was no M&A expense incurred in the third quarter of fiscal year 2021 compared to $0.2 million in the prior year. • In the third quarter of fiscal year 2020, the Company incurred $0.8 million of expense to move manufacturing facilities as a result of the sale of the Fluid Management business. • As part of the sale of the Fluid Management business, the Company entered into a transition services agreement with Medline Industries, Inc. ("Medline") for certain legal, human resource, tax, accounting and information technology services from the Company for a period not to exceed 24 months. As a result of the transition services agreement, the Company invoiced Medline $0.3 million in the third quarter of fiscal year 2021 compared to $0.4 million in the prior year. • Other expenses of $0.4 million in the third quarter of fiscal year 2020 consisted of severance associated with organizational changes. Other income (expense), net - Other expenses include interest expense, foreign currency impacts, bank fees, and amortization of deferred financing costs. • The increase in other expense from the prior year of $0.1 million is primarily due to increased interest expense of $0.1 million for the $30.0 million outstanding on the Revolving Facility at the end of the third quarter of fiscal year 2021 compared to $15.0 million outstanding in the prior year. 27 Table of Contents Income Tax Benefit Three Months Ended (in thousands) Feb 28, 2021 Feb 29, 2020 Income tax benefit $ (0.6) $ (0.8) Effective tax rate including discrete items 14.1 % 12.6 % Our effective tax rate including discrete items for the three-month periods ended February 28, 2021 and February 29, 2020 was 14.1% and 12.6%, respectively. In fiscal year 2021, 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). The estimated annual effective tax rate, however, prior to discrete items was 15.6% in the third quarter of fiscal year 2021, as compared to 12.9% for the same period in fiscal year 2020. Results of Operations for the Nine Months Ended February 28, 2021 and February 29, 2020 For the nine months ended February 28, 2021, the Company reported a net loss of $12.1 million, or a loss of $0.32 per diluted share, on net sales of $214.2 million, compared with a net loss of $9.7 million, or a loss of $0.26 per diluted share, on net sales of $205.8 million during 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. Nine Months Ended (in thousands) Feb 28, 2021 Feb 29, 2020 % Change Net Sales by Global Business Unit Vascular Interventions & Therapies $ 97,008 $ 90,616 7.1% Vascular Access 76,848 70,585 8.9% Oncology 40,312 44,624 (9.7)% Total $ 214,168 $ 205,825 4.1% Net Sales by Geography United States $ 173,446 $ 163,381 6.2% International 40,722 42,444 (4.1)% Total $ 214,168 $ 205,825 4.1% For the nine months ended February 28, 2021, net sales increased $8.3 million to $214.2 million compared to the same period in the prior year. Vascular Interventions & Therapies • Total Vascular Interventions & Therapies net sales increased $6.4 million, or 7.1%. Auryon, which was acquired as part of the Eximo acquisition in the second quarter of fiscal year 2020, contributed $6.5 million in sales. Additionally, the AngioVac business grew $4.3 million as the Company continued to experience increases in case volumes in AngioVac, which increased 30% from the prior year. These increases were partially offset by lower volume in Venous products due to fewer elective procedures during the COVID-19 pandemic. • U.S. Vascular Interventions & Therapies net sales increased $7.1 million due to increased case volume in AngioVac, increased Core Peripheral product sales and $6.5 million in sales of Auryon. These increases were partially offset by decreased sales volume in Venous. • International Vascular Interventions & Therapies net sales decreased $0.7 million. 28 Table of Contents Vascular Access • Total Vascular Access net sales increased $6.3 million due to increased sales of PICCs, Midlines and Dialysis of $3.4 million, $3.1 million and $0.3 million, respectively. These increases are partially the result of a large order in the United 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. These increases were offset by decreased sales in Ports, which declined by 1%. BioFlo product lines comprise 53% of overall Vascular Access sales compared to 51% in the prior year. • U.S. Vascular Access net sales increased $2.5 million primarily due to increased PICCs, Midlines and Dialysis sales of $1.1 million, $1.1 million and $0.4 million, respectively. • International Vascular Access net sales increased by $3.8 million primarily as a result of a large order in the United Kingdom related to the COVID-19 pandemic for $5.2 million. This was partially offset by decreased PICC sales in Latin America of $1.3 million. Oncology • Total Oncology net sales decreased $4.3 million year over year. Of this decrease, $2.1 million is due to a large NanoKnife distributor order in APAC in the prior year. There was also decreased capital and disposable sales internationally of $2.5 million due to reduced case volumes as a result of the COVID-19 pandemic. • U.S. Oncology net sales increased by $0.4 million primarily due to increased NanoKnife disposable sales of $0.9 million, BioSentry sales of $1.0 million and Microwave disposable sales of $0.7 million. This was partially offset by decreased NanoKnife capital sales of $0.5 million and Balloon product sales of $1.2 million. Gross Profit, Operating expenses, and Other income (expense) Nine Months Ended (in thousands) Feb 28, 2021 Feb 29, 2020 % Change Gross profit $ 114,468 $ 120,060 (4.7) % Gross profit % of sales 53.4 % 58.3 % Research and development $ 27,286 $ 22,450 21.5 % % of sales 12.7 % 10.9 % Selling and marketing $ 57,486 $ 60,427 (4.9) % % of sales 26.8 % 29.4 % General and administrative $ 26,787 $ 29,651 (9.7) % % of sales 12.5 % 14.4 % Gross profit - Gross profit consists of net sales less the cost of goods sold, which includes the costs of materials, products purchased from third parties and sold by us, manufacturing personnel, royalties, freight, business insurance, depreciation of property and equipment and other manufacturing overhead, exclusive of intangible amortization. Gross profit decreased by $5.6 million compared to the prior year. The change is primarily attributable to the following: • Sales volume positively impacted gross profit by $5.4 million year over year. • Net productivity negatively impacted gross profit by $8.9 million primarily as a result of under absorption of $6.1 million and start-up costs of $2.8 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 $1.1 million as a result of the large order in the United Kingdom for lower gross margin products and decreased NanoKnife capital sales. This was partially offset by increased AngioVac sales. • A reserve for recalled products of $0.5 million and amortization of prior year capitalized variances of $0.4 million negatively impacted gross margin. • A benefit of $0.7 million was recorded as a result 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. Research and development expense - 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. 29 Table of Contents R&D expense increased $4.8 million compared to the prior year. The change is primarily attributable to the following: • R&D expenses related to the AngioVac platform expansion, the NanoKnife DIRECT © study and the Pathfinder study increased $4.6 million along with $1.7 million of expenses related to Auryon. • Outside consultant expense and other expenses decreased $0.7 million along with decreased travel expenses of $0.4 million. • A benefit of $0.3 million was recorded as a result 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 - 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 decreased $2.9 million compared to the prior year. The change is primarily attributable to the following: • Travel expenses decreased $4.0 million due to less travel as a result of the COVID-19 pandemic. In addition, tradeshow and other expenses decreased $4.3 million primarily due to the cancellation of events. • Compensation and benefits decrease of $0.7 million due to open roles. • Expenses related to the build-out of the Auryon sales and marketing teams to prepare for full product launch of $6.8 million. • A benefit of $0.9 million was recorded as a result 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 - 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 $2.9 million compared to the prior year. The change is primarily attributable to the following: • Legal expenses decreased $2.7 million. • Travel expenses decreased $0.4 million due to less travel as a result of the COVID-19 pandemic. Nine Months Ended (in thousands) Feb 28, 2021 Feb 29, 2020 $ Change Amortization of intangibles $ 13,838 $ 13,417 $ 421 Change in fair value of contingent consideration $ (290) $ 116 $ (406) Acquisition, restructuring and other items, net $ 3,057 $ 4,486 $ (1,429) Other expense, net $ (417) $ (739) $ 322 Amortization of intangibles - Represents the amount of amortization expense that was taken on intangibles assets held by the Company. • Amortization expense increased $0.4 million compared to the prior year as a result of the Eximo Medical and C3 Wave tip location acquisitions, which increased intangible assets by $60.3 million and $9.4 million, respectively. These additions resulted in additional amortization expense of $1.8 million. These additions were partially offset by assets that became fully amortized during fiscal year 2021. Change in fair value of contingent consideration - Represents changes in contingent consideration driven by changes to estimated future payments on earn-out liabilities created through acquisitions and amortization of present value discounts on long-term contingent consideration. • The change from the prior year is due to a decision 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 - 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. 30 Table of Contents Acquisition, restructuring and other items, net decreased by $1.4 million compared to the prior year. The decrease is primarily attributable to the following: • Legal expense, related to litigation that is outside of the normal course of business, of $2.9 million was recorded in fiscal year 2021 compared to $2.0 million in the prior year. • 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 $2.2 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 $1.7 million in the prior year. • Other expenses of $0.7 million consists of severance associated with organizational changes, compared to $1.2 million in the prior year. Other expense, net - Other expenses include 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 $0.5 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 $0.3 million for the $30.0 million outstanding on the Revolving Facility at the end of the third quarter of fiscal year 2021 compared to $15.0 million outstanding in the prior year. In addition, interest income decreased by $0.3 million. Income Tax Benefit Nine Months Ended (in thousands) Feb 28, 2021 Feb 29, 2020 Income tax benefit $ (2.0) $ (1.5) Effective tax rate including discrete items 14.4 % 13.4 % Our effective tax rate including discrete items for the nine-month periods ended February 28, 2021 and February 29, 2020 was 14.4% and 13.4%, respectively. In fiscal year 2021, 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). The estimated annual effective tax rate, however, prior to discrete items was 15.6% in the third quarter of fiscal year 2021, as compared to 12.9% for the same period in fiscal year 2020. Liquidity and Capital Resources We are continuously and critically reviewing our liquidity and anticipated capital requirements in light of the significant uncertainty created by the COVID-19 global pandemic. We believe that our current cash on hand and availability under our Revolving 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 $54.5 million as of February 28, 2021, compared with $54.4 million as of May 31, 2020. As of February 28, 2021 and May 31, 2020, total debt outstanding related to the Revolving Facility was $30.0 million and $40.0 million, respectively. The fair value of contingent consideration liability as of February 28, 2021 and May 31, 2020, was $15.4 million and $15.6 million, respectively. The table below summarizes our cash flows: 31 Table of Contents Nine Months Ended (in thousands) Feb 28, 2021 Feb 29, 2020 Cash provided by (used in): Operating activities $ 11,894 $ (18,434) Investing activities (4,567) (61,866) Financing activities (7,541) (120,189) Effect of exchange rate changes on cash and cash equivalents 248 8 Net change in cash and cash equivalents $ 34 $ (200,481) Cash flows consisted of the following: Cash provided by (used in) operating activities Nine months ended February 28, 2021 and February 29, 2020: • Net loss of $12.1 million and $9.7 million, respectively, 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 $11.9 million for fiscal year 2021 and cash used in operations in the prior year of $18.4 million. • In fiscal year 2021, working capital was favorably impacted by decreased inventory on hand of $11.1 million. This was partially offset by increased accounts receivable of $1.8 million and decreased accounts payable and accrued liabilities of $1.7 million. • In fiscal year 2020, working capital was negatively impacted by increased inventory on hand of $14.0 million and decreased accounts payable and accrued liabilities of $18.0 million. Accounts receivable had a favorable impact on working capital as a result of the sale of the Fluid Management business. Cash used in investing activities Nine months ended February 28, 2021 and February 29, 2020: • $4.6 million of cash was used for fixed asset additions versus $5.8 million in the prior year. • $45.8 million of cash was used to acquire Eximo Medical Ltd. in the second quarter of fiscal year 2020 and $10.0 million of cash was used to acquire the C3 wave tip location asset in the third quarter of fiscal year 2020. Cash used in financing activities Nine months ended February 28, 2021 and February 29, 2020: • $10.0 million payment on the Revolving Facility in the third quarter of fiscal year 2021. • $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. • $15.0 million draw on the revolver in fiscal year 2020 for the acquisition of the C3 Wave tip location asset. • $2.5 million of proceeds from stock option and ESPP activity versus $0.7 million in outlays in the prior year. • $1.2 million payment on earn-out liabilities in the prior year. On June 3, 2019 and in connection with the completion of the Fluid Management divestiture, the Company repaid all amounts outstanding under its existing Credit Agreement and entered into a new Credit Agreement. The Credit Agreement provides for a $125.0 million secured Revolving 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 at February 28, 2021 was 1.63%. On December 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 from Medical 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. In December 2020, a payment of $10.0 million was made on the Revolving Facility and in March 2021 another $10.0 million payment was made 32 Table of Contents 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. 33 Table of Contents