What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-07-22 compared with 2021-07-27 · 123 added, 160 removed, 213 unchanged (57% of the section changed)

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Our actual results may differ materially from those anticipated in any forward-looking statements as a result of many factors, including those set forth in Part I, Item 1A, "Risk Factors" and "Disclosure Regarding Forward-Looking Statements" included in this Annual Report on Form 10-K.

For all periods presented in Management's Discussion and Analysis of Financial Conditions and Results of Operations, all sales, cost of sales, expenses, gains and income taxes are exclusive of Fluid Management.

EXECUTIVE OVERVIEW

Company and Market

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We expect our businesses to grow in both sales and profitability by expanding geographically, penetrating new markets, introducing new products and increasing our presence internationally.

The COVID-19 global pandemic has impacted our business and may pose future risks.

Even with the public health actions that have been taken to reduce the spread of the virus, there may continue to be disruptions with respect to consumer demand, hospital operating procedures and workflow, our ability to continue to manufacture products, the reliability of our supply chain and inflation.

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.

In the third quarter of fiscal year 2021, a benefit of $1.9 million was recorded as a result of the employee retention credit that the Company filed for under the provisions of the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act").

In the third quarter of fiscal year 2022, a benefit of $4.2 million was recorded as a result of the employee retention credit that the Company filed for under the provisions of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020 which amended and extended the employee retention credit under section 2301 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.

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• Revenue increased by 8.7% to $316.2 million

• Gross margin as a percentage of sales decreased by 300 bps to 53.9%

• Operating loss decreased by $131.8 million to $35.3 million

• Cash flow from operations increased by $38.6 million to cash provided by operations of $24.1 million

The ongoing recovery from the COVID-19 pandemic has had a varying impact on each of our three businesses.

Our Endovascular Therapies and Vascular Access businesses performed the strongest of the businesses during the year.

number of procedures continued to improve from the COVID-19 lows in the second half of last fiscal year.

Our Oncology business continued to face pressure from reductions in procedure volumes due to challenges resulting from the COVID-19 pandemic and the resulting challenging capital spending environment.

During fiscal year 2021, we focused on the following areas in responding to the COVID-19 pandemic:

• Supporting and progressing our key growth initiatives (the AngioVac, Auryon and NanoKnife systems);

• Managing operating expenses;

• Managing our cash and balance sheet.

• Med Tech growth of 41.2% and Med Device growth of 0.9%

• Gross profit decreased by 150 bps to 52.4%

• Net loss decreased by $5.0 million to $26.5 million

• Loss per share decreased by $0.14 to a loss of $0.68

• Cash flow from operations decreased by $31.3 million resulting in cash used in operations of $7.2 million

Our Med Tech business, comprised of Auryon, the Thrombectomy platform and NanoKnife grew 41.2% in fiscal year 2022.

This growth was partially offset by reductions in AngioVac procedure volumes due to challenges resulting from the

COVID-19 pandemic.

Our Med Device business grew 0.9% in fiscal year 2022.

It was also adversely impacted by the backlog in Vascular Access products and continued pressure from reductions in Oncology procedure volumes, also due to challenges resulting from the COVID-19 pandemic, a trend that may continue.

Strategic Initiatives to Drive Growth

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The Company believes that this transformation will enable the Company to shift the portfolio from the mature, lower-growth markets where we have competed in the past by investing in technology and products that provide access to larger and faster growing markets.

As such, we believe the growth in the near to mid-term will be driven by our high technology products including Auryon, Mechanical Thrombectomy (which includes AngioVac and thrombolytics) and NanoKnife.

We will refer to these high technology product lines as our Med Tech business and we will refer to the remainder of the portfolio as our Med Device business.

As such, we believe the growth in the near to mid-term will be driven by our high technology products including Auryon, Mechanical Thrombectomy (which includes AngioVac and AlphaVac) and NanoKnife.

The Company regularly evaluates its reportable segments and will continue to do so along with this transformation.

Throughout the year, we introduced strategic moves designed to streamline our business, improve our overall business operations and position ourselves for growth.

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The Company continued its disciplined product development process which is intended to improve the Company’s ability to bring new products to market.

This included the launch of Auryon and SmartPort+, along with continued research and development activities to expand on our Mechanical Thrombectomy portfolio.

This included:

◦ The full market launch of the AlphaVac Mechanical Thrombectomy device in December 2021;

◦ FDA clearance of the AlphaVac F18 thrombectomy system;

◦ FDA approval of an IDE study for the use of AlphaVac F18 to treat pulmonary embolism;

◦ Enrollment of the first patients in the PRESERVE study for the use of NanoKnife in the prostate.

• Value Creation.

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Critical Accounting Policies and Use of Estimates

Our significant accounting policies are summarized in Note 1 "Basis of Presentation, Business Description and Summary of Significant Accounting Policies" in the Consolidated Financial Statements included in our Form 10-K.

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.

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Transaction prices of products are typically based on contracted rates.

Product revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products to a customer.

To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the expected value method.

As such, revenue is recorded net of rebates, returns and other deductions.

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.

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.

Contracts with our customers typically include a single performance obligation related to the sale of our products.

Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which occurs at a point in time, and may be upon shipment from the Company’s manufacturing site or delivery to the customer’s named location, based on the contractual shipping terms of a contract.

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As the Company’s standard payment terms are 30 to 90 days from invoicing, the Company does not provide any significant financing to its customers.

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

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

The duration of these agreements are typically a year and the customer has the right to use the unit at no upfront charge in connection with the customer’s ongoing purchase of disposables.

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 current liability.

A receivable is recognized in the period the Company ships the product.

Payment terms on invoiced amounts are based on contractual terms with each customer and generally coincide with revenue recognition.

Accordingly, the Company does not have any contract assets associated with the future right to invoice its customers.

In some cases, if control of the product has not yet transferred to the customer or the timing of the payments made by the customer precedes the Company’s fulfillment of the performance obligation, the Company recognizes a contract liability that is included in deferred revenue in the accompanying consolidated balance sheets.

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 a liability for such amounts, which is included in accrued expenses in the accompanying consolidated balance sheets.

These rebates and allowances result from performance-based offers that are primarily based on attaining contractually specified sales volumes and administrative fees the Company is required to pay to group purchasing organizations.

The Company 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.

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During the year ended May 31, 2022, 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.

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.

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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 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.

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.

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Changes in projected revenues, probabilities of payment, discount rates, and projected payment dates may result in adjustments to the fair value measurements.

Contingent consideration is remeasured each reporting period using Level 3 inputs, and the change in fair value, including accretion for the passage of time, is recognized as income or expense within operating expenses in the consolidated statements of income.

Contingent consideration payments made soon after the acquisition date are classified as investing activities in the Consolidated Statements of Cash Flows.

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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.

The Company has historically performed its annual goodwill assessment during the third quarter of each year (as of December 31).

During the fourth quarter of fiscal year 2022, the Company decided to change the date of its annual impairment assessment from December 31st to April 30th.

The change was made to more closely align the impairment assessment date with the Company's long term planning and forecasting process.

See Note 8,"Goodwill and Intangible Assets" accompanying the consolidated financial statements.

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.

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Changes in assumptions or estimates could materially affect the estimated fair value, and therefore could affect the likelihood and amount of a potential impairment.

As detailed in Note 9, "Goodwill and Intangible Assets" in the Consolidated Financial Statements including on our Form 10-K, during the fourth quarter of fiscal year 2021, the Company made the decision to abandon the OARtrac product technology and trademark.

This resulted in an impairment charge of $14.0 million.

In the fourth quarter of fiscal year 2020, the Company recorded a goodwill impairment loss of $158.6 million as the fair value of the reporting unit was less than its carrying value.

There were no adjustments to goodwill for the year ended May 31, 2022 other than foreign currency translation adjustments.

Results of Operations for the years ended May 31, 2022 and 2021

For the fiscal year ended May 31, 2021, we reported net loss from continuing operations of $31.5 million, or $0.82 loss per diluted share, on net sales of $291.0 million compared to a fiscal year 2020 net loss of $166.8 million, or $4.39 loss per diluted share, on net sales of $264.2 million.

For the fiscal year ended May 31, 2022, the Company reported a net loss of $26.5 million, or a loss of $0.68 per diluted share, on net sales of $316.2 million compared to a net loss of $31.5 million, or a loss of $0.82 per diluted share, on net sales of $291.0 million in fiscal year 2021.

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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(in thousands) 2022 2021 % Change

Med Tech $ 78,717 $ 55,731 41.2 %

Med Device 237,502 235,279 0.9 %

Total $ 316,219 $ 291,010 8.7 %

Net Sales by Product Category

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For the year ended May 31, 2022, net sales increased $25.2 million to $316.2 million compared to the year ended May 31, 2021.

The prior year net sales numbers, specifically in the fourth quarter, were significantly impacted by the COVID-19 global pandemic.

Endovascular Therapies

• Total Endovascular Therapies sales increased $22.4 million or 19.9%.

Auryon, which was acquired as part of the Eximo acquisition in the second quarter of fiscal year 2020, contributed $11.1 million in disposable sales.

The AngioVac business grew $8.0 million as the Company continued to see increased case volumes in AngioVac, which increased 39% from the prior year.

Additionally, Core Peripheral product sales increased $5.6 million.

EVLT remained consistent with the prior year.

Endovascular Therapies net sales increased $22.5 million due to increased case volume in AngioVac, increased Core Peripheral product sales and $11.1 million in sales of Auryon.

These increases were partially offset by decreased sales volume in EVLT.

• International Endovascular Therapies net sales decreased $0.1 million.

Vascular Access

• Total Vascular Access sales increased $7.0 million due to increased sales of PICCs, Ports, Midlines and Dialysis of $2.5 million, $1.3 million, $3.1 million and $0.1 million, respectively.

These increases are partially the result of a large order in 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 for the sale of certain PICC products.

BioFlo product lines comprised 52% of overall Vascular Access sales compared to 51% in the prior year.

Vascular Access net sales increased $4.3 million primarily due to increased PICCs, Ports and Midline sales of $1.1 million, $1.4 million and $1.5 million, respectively.

These increases are attributed to a group purchasing

organization agreement that was signed in the third quarter of the prior fiscal year, new strategic relationships and the launch of SmartPort+.

• International Vascular Access net sales increased by $2.7 million primarily as a result of a large order in 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 $1.6 million.

Oncology/Surgery

• Total Oncology/Surgery sales decreased $2.5 million year over year.

The sales were significantly impacted by the challenging capital spending environment as a result of the COVID-19 pandemic, as Microwave and NanoKnife capital sales decreased $4.2 million.

Of this decrease, $2.1 million is due to a large NanoKnife distributor order in the Asia-Pacific region ("APAC") in the prior year.

Radiofrequency Ablation sales also decreased $1.6 million, Balloon product sales decreased by $1.1 million and other sales decreased $0.7 million.

These decreases were partially offset by increased Microwave and NanoKnife disposable sales of $2.1 million and $1.2 million, respectively, and increased BioSentry sales of $2.0 million.

Oncology net sales increased by $2.3 million primarily due to increased NanoKnife disposable sales of $1.5 million, BioSentry sales of $2.0 million and Microwave disposable sales of $1.3 million.

The increased NanoKnife disposable sales is the result of the increased capital base that was developed in the prior year along with increased case volumes as hospitals have begun to lift restrictions on procedures.

This was partially offset by decreased NanoKnife capital sales of $1.1 million and Balloon product sales of $1.1 million.

• International Oncology sales decreased $4.8 million year over year.

The decrease was driven by lower NanoKnife capital and disposable sales of $3.0 million and decreased Radiofrequency Ablation sales of $2.1 million as a result of market pressures and hospital restrictions due to the COVID-19 pandemic.

Of the $3.0 million decrease in NanoKnife capital and disposable sales, $2.1 million was related to a NanoKnife distributor order in APAC in the prior year.

At May 31, 2022, the Company had a backlog of $8.4 million.

The Med Tech business net sales increased $23.0 million for the year ended May 31, 2022 compared to the prior year.

The change in sales from the prior year was primarily driven by:

• Increased Auryon sales of $18.0 million;

• Growth in the thrombectomy platform of $3.7 million, which was driven by growth in the mechanical thrombectomy platform and was partially offset by decreased sales of thrombolytics.

Increased sales in the mechanical thrombectomy platform of $4.0 million was driven by AngioVac and the launch of the AlphaVac product in the second quarter of fiscal year 2022;

• Increased NanoKnife sales of $1.3 million, which was driven by NanoKnife disposable sales in the U.S.

which increased $2.3 million due to increased case volume.

This increase was partially offset by decreased NanoKnife capital sales in the U.S.

and NanoKnife disposable sales internationally.

The Med Device business net sales increased $2.2 million for the year ended May 31, 2022 compared to the prior year.

Excluding the large UK order of $5.2 million in the first quarter of the prior year, net sales increased $7.4 million for the year ended May 31, 2022 .

The change in sales from the prior year was primarily driven by:

• The backlog of $8.4 million at May 31, 2022, which primarily impacted sales of Core, Venous and Vascular Access products;

• Increased case volume , which resulted in increased sales of Core and Venous (despite the impact of the backlog) and BioSentry products of $3.7 million, $0.5 million and $0.4 million, respectively.

Port sales also increased $2.7 million, driven primarily by sales in the U.S.

These increases were partially offset by decreased Midline, PICCs, Di alysis,

Radio Frequency Ablation and other Oncology product sales of $2.6 million, $0.9 million, $0.2 million, $0.9 million and $0.6 million respectively.

Excluding the prior year order in the UK, Midlines, PICCs and Ports increased $4.4 million.

Gross Profit, Operating Expenses, and Other Income (expense)

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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.

While gross profit increased by $6.5 million compared to the prior year, gross profit as a percentage of sales decreased 300 basis points.

The change is primarily attributable to the following:

• Sales volume positively impacted gross profit by $16.6 million year over year;

• Net productivity negatively impacted gross profit by $10.0 million primarily as a result of under absorption, and to a lesser extent inflation, of $5.1 million and start-up costs of $4.0 million related to the Auryon launch.

The under absorption in manufacturing operations was due to the Company maintaining staffing levels during the COVID-19 global pandemic to mitigate risk, along with a focus on working capital management through inventory reduction;

• Mix negatively impacted gross margin by $0.8 million as a result of the large order in the United Kingdom for lower gross margin products and decreased NanoKnife capital sales.

This was partially offset by increased AngioVac sales;

• A benefit of $0.7 million was recorded to gross profit which represents a portion of the employee retention credit that the Company filed for under the provisions of the CARES Act in the third quarter of the current year.

Gross profit increased by $8.9 million compared to the prior year.

The change from the prior year was primarily driven by:

• Sales volume, which positively impacted gross profit by $14.6 million;

• Price and mix, which positively impacted gross profit by $1.6 million as a result of increased sales of higher margin Auryon and AngioVac products.

This positive impact was partially offset by sales of lower margin Vascular Access products;

• Rebate expense, which negatively impacted gross profit by $0.9 million;

• Start-up costs related to Auryon and AlphaVac of $3.1 million, including depreciation on Auryon placement units of $1.3 million, which negatively impacted gross profit;

• Labor shortages, freight and inflationary costs on raw materials, which negatively impacted gross profit by $3.4 million year over year;

• A benefit of $0.8 million that 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 compared to a benefit of $0.7 million in the prior year period.

Research and development expense - Research and development (“R&D”) expense includes internal and external costs to develop new products, enhance existing products, validate new and enhanced products, manage clinical, regulatory and medical affairs.

R&D expense increased $6.7 million compared to the prior year.

The increase is primarily attributable to the following:

• AngioVac platform expansion, the NanoKnife DIRECT © study and the Pathfinder study increased $3.6 million and Auryon related expenses increased by $2.7 million;

• Outside consultant expense and other expense increased $0.5 million and travel expenses decreased $0.5 million;

• Compensation and benefits increased $0.7 million, of which $0.4 million related to variable compensation;

• A benefit of $0.3 million was recorded to R&D expense which represents a portion of the employee retention credit that the Company filed for under the provisions of the CARES Act in the third quarter of the current year.

R&D expense decreased $5.7 million compared to the prior year.

The change from the prior year was primarily driven by:

• The timing of certain projects, which reduced R&D project expense by $4.2 million;

• Open R&D positions, which resulted in decreased compensation and benefits expense of $1.6 million ;

• A benefit of $0.5 million that 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 compared to $0.3 million in the prior year period.

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 $14.0 million compared to the prior year.

The increase is primarily attributable to the following:

• Expense related to the build-out of the Auryon sales and marketing teams to prepare for full product launch of $7.7 million;

• Travel expense decreased $2.4 million due to less travel as a result of the COVID-19 pandemic.

In addition, tradeshow and other expense decreased $1.2 million primarily due to the cancellation of events;

• Compensation and benefits decreased $0.7 million due to decreased salaries as a result of open roles partially offset by increased variable compensation and commissions;

• A benefit of $0.9 million was recorded to sales and marketing expense which represents a portion of the employee retention credit that the Company filed for under the provisions of the CARES Act in the third quarter of the current year.

The change from the prior year was primarily driven by:

• Additional headcount from the build-out of the Auryon sales and marketing teams, which increased compensation and benefits expense by $11.7 million;

• Travel, meeting, tradeshow and other expenses, which increased $4.2 million as some COVID-19 restrictions were lifte d;

• A benefit of $2.8 million that 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 compared to $0.9 million in the prior year period.

General and administrative expense - General and administrative (“G&A”) expense includes executive management, finance, information technology, human resources, business development, legal, and the administrative and professional costs associated with those activities.

G&A expense decreased by $2.0 million compared to the prior year.

The decrease is primarily attributable to the following:

• Legal and professional fees relating to ongoing litigation that is within the normal course of business decreased $3.7 million;

• Compensation and benefits increased approximately $2.1 million primarily as a result of increased variable compensation and stock based compensation expense;

• Decreased consulting and other expense of $0.1 million and decreased travel expense of $0.2 million as a result of the COVID-19 pandemic.

G&A expense increased by $2.5 million compared to the prior year.

The change from the prior year was primarily driven by:

• Compensation and benefits expense, which increased $1.3 million;

• Other outside consultant spend, which increased $2.0 million, partially offset by decreased legal expense of $0.9 million.

Year ended May 31,

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Amortization of intangibles $ 19,458 $ 18,136 $ 1,322

Goodwill impairment $ — $ 158,578 $ (158,578)

Change in fair value of contingent consideration $ 1,212 $ 89 $ 1,123

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

• Amortization expense remained consistent compared to the prior year.

Goodwill Impairment - Represents the impairment charge taken on goodwill.

• The Company recorded a non-cash goodwill impairment charge of $158.6 million for the year ended May 31, 2020 as the fair value of the reporting unit was less than its carrying value.

There were no adjustments to goodwill for the year ended May 31, 2021 other than foreign currency translation adjustments.

• Amortization expense increased $1.3 million compared to the prior year.

The increase is due to amortization relating to the Camaro intangible asset addition of $3.9 million in the first quarter of fiscal year 2022, partially offset by assets that became fully amortized in fiscal year 2021 and 2022.

Change in fair value of contingent consideration - Represents changes in contingent consideration driven by changes to estimated future payments on earn-out liabilities created through acquisitions and amortization of present value discounts on long-term contingent consideration.

• The change is primarily due to RadiaDyne revised sales projections and a technical milestone that would not be achieved.

This resulted in a $9.2 million and $2.7 million reduction in the fair value of the contingent liability in the prior year.

• During the current year, a decision was made to no longer pursue the final RadiaDyne technical milestone, which resulted in a reduction in the liability of $0.8 million.

This reduction in the fair value was offset by normal amortization of the present value of the Eximo contingent consideration recorded in the second quarter of fiscal year 2020.

• The change in the fair value for the year ended May 31, 2022 is related to the Eximo contingent consideration.

Acquisition, restructuring and other items, net - Acquisition, restructuring and other items, net represents costs associated with mergers and acquisitions, restructuring expenses, legal costs that are related to litigation that is not in the ordinary course of business, legal settlements and other one-time items.

Acquisition, restructuring and other items, net increased by $14.2 million compared to the prior year.

The increase is attributable to the following:

• Legal expense, related to litigation that is outside of the normal course of business, of $6.2 million was recorded in fiscal year 2021 compared to $2.7 million in the prior year.

Included in legal for fiscal year 2021, is a $1.0 million settlement expense;

• There was no M&A expense incurred in fiscal year 2021 compared to $0.8 million in the prior year;

• In fiscal year 2021, the Company incurred $0.4 million of expense to move manufacturing facilities as a result of the sale of the Fluid Management business compared to $2.8 million in the prior year;

• As part of the sale of the Fluid Management business, the Company entered into a transition services agreement with Medline for certain legal, human resource, tax, accounting and information technology services from the Company for a period not to exceed 24 months.

As a result of the transition services agreement, the Company invoiced Medline $1.0 million in fiscal year 2021 compared to $1.8 million in the prior year;

• Other expenses of $0.8 million consists of severance associated with organizational changes, compared to $1.5 million in the prior year;

• A $14.0 million impairment charge was recorded in fiscal year 2021 as a result of the decision to abandon the OARtrac product technology and trademark.

Acquisition, restructuring and other items, net decreased by $11.2 million compared to the prior year.

The change from the prior year was primarily driven by:

• Legal expense, re lated to litigation that is outside of the normal course of business, which increased $1.5 million;

• Manufacturing relocation expense related to the move of certain manufacturing lines to Costa Rica, which increased $0.6 million;

• Manufacturing facilities relocation expense related to the sale of the Fluid Management business which decreased $0.4 million ;

• Transition Services Agreement fees from Medline Industries of $1.0 million that were received in fiscal year 2021 .

These activities were completed during fiscal year 2021;

• A $14.0 million impairment charge that was recorded in fiscal year 2021 as a result of the decision to abandon the OARtrac product technology and trademark.

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

• The decrease in other expense from the prior year of $0.3 million is primarily due to foreign currency unrealized gains of $0.4 million and the prior year write-off of deferred financing fees associated with the old Credit Facility of $0.6 million.

This was partially offset by increased interest expense of $0.2 million for the $20.0 million outstanding on the Revolving Facility at the end of fiscal year 2021 compared to $40.0 million outstanding in the prior year.

In addition, interest income decreased by $0.3 million.

• The change in other expense of $0.7 million compared to the prior year is primarily due to unrealized foreign currency losses of $0.8 partially offset by decreased interest expense of $0.2 million.

Income Tax Benefit

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Our effective tax rate was a benefit of 11% for fiscal year 2022 compared with an effective tax rate benefit of 12% for the prior year.

The current year 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 prior year effective tax rate differs from the U.S.

Federal statutory tax rate of 21% primarily due to no tax benefit being recorded on the goodwill impairment of $158.6 million.

The current year and prior year effective tax rates differ from the U.S.

The Company regularly assesses its ability to realize its deferred tax assets.

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(in thousands) 2022 2021

Cash provided by (used in):

Cash (used in) provided by:

Operating activities $ (7,194) $ 24,093

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During the years ended May 31, 2022 and 2021, cash flows consisted of the following:

Cash provided by (used in) operating activities:

Year ended 2021:

• Net loss of $31.5 million, plus the non-cash items, primarily driven by depreciation and amortization and share-based compensation, along with the changes in working capital below, contributed to cash provided by operations of $24.1 million.

• In fiscal year 2021, working capital was favorably impacted by decreased inventory on hand of $11.5 million and increased accounts payable and accrued liabilities of $4.9 million.

Cash (used in) provided by operating activities:

Years ended May 31, 2022 and 2021:

• Net loss of $26.5 million and $31.5 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 $7.2 million for the year ended May 31, 2022 and cash provided by operations of $24.1 million for the year ended May 31, 2021.

• For the year ended May 31, 2022, working capital was unfavorably impacted by increased accounts receivable and inventory on hand of $17.2 million and $2.8 million, respectively.

This was partially offset by increased accounts payable and accrued liabilities of $3.9 million.

• For the year ended May 31, 2021, working capital was favorably impacted by decreased inventory on hand of $11.5 million and increased accounts payable and accrued liabilities of $4.9 million.

This was partially offset by increased accounts receivable of $4.2 million.

Year ended 2020:

• Net loss of $166.8 million plus the non-cash items, primarily driven by the goodwill impairment, depreciation and amortization and share-based compensation, along with the changes in working capital below, contributed to cash used in operations of $14.6 million.

• Working capital was negatively impacted by increased inventory on hand of $18.8 million and decreased accounts payable and accrued liabilities of $15.5 million.

Accounts receivable had a favorable impact of $11.9 million on working capital as a result of the sale of the Fluid Management business and decreased sales in the fourth quarter as a result of the impact from COVID-19.

Cash used in investing activities:

Year ended 2021:

• $5.2 million of cash was used for fixed asset additions and $8.5 million of Auryon placement and evaluation units.

Year ended 2020:

• $45.8 million payment to acquire Eximo Medical Ltd.

and $10.0 million payment to acquire the C3 Wave tip location asset from Medical Components, Inc.

Refer to Note 2 of the financial statements;

• $7.2 million in fixed asset additions primarily related to building improvements along with maintenance of equipment.

Cash used in financing activities:

Year ended 2021:

• $20.0 million in payments on the Revolving Facility in fiscal year 2021;

• $3.0 million of proceeds from stock option and ESPP activity.

Year ended 2020:

• $132.5 million repayment of long-term debt in conjunction with the new Credit Agreement that was entered into at the beginning of the first quarter of fiscal year 2020.

Refer to Note 12 of the financial statements;

• $40.0 million draw on the Revolving Facility;

• $0.8 million of outlays from stock option and ESPP activity;

• $1.2 million payment on earn-out liabilities.

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.

Years ended May 31, 2022 and 2021:

• $4.3 million and $5.2 million, respectively, of cash was used for fixed asset additions;

• $11.4 million and $8.5 million, respectively, of cash was used for Auryon placement and evaluation unit additions;

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

Cash provided by (used in) financing activities:

Years ended May 31, 2022 and 2021:

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

• $20.0 million payment on the Revolving Facility in the third quarter of fiscal year 2021;

• $2.7 million and $3.0 million, respectively, of proceeds from stock option and ESPP activity.

Our 2019 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.

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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 total leverage ratio is based upon our trailing twelve months total consolidated 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 May 31, 2022 was 2.31%.

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.

The company was in compliance with the Credit Agreement covenants as of May 31, 2022.

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.

In December 2020 and March 2021, payments of $10.0 million each were made on the Revolving Facility.

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Royalties 44,480 3,840 7,680 7,680 25,280

Litigation matters 975 975 — — —

$ 104,408 $ 23,794 $ 46,351 $ 8,983 $ 25,280

(1) Operating leases include short-term leases that are not recorded on our consolidated balance sheet under ASU No.

(1) Operating leases include short-term leases that are not recorded on our Consolidated Balance Sheets under ASU No.

(2) The inventory purchase obligations are not reflected on our Consolidated Balance Sheets under accounting principles generally accepted in the United States of America.

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Results of Operations for the years ended May 31, 2021 and 2020

For management discussion and analysis of our 2020 financial results and liquidity compared with 2019, see Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended May 31, 2020 filed on August 10, 2020.

For management discussion and analysis of our 2021 financial results and liquidity compared with 2020, 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, 2021 filed on July 27, 2021.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis