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 2021 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 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 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. 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 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. 21 Table of Contents 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 pose future risks. Even with the public health actions that have been taken to reduce the spread of the virus, there may continue to be disruptions with respect to consumer demand, hospital operating procedures and workflow, our ability to continue to manufacture products, the reliability of our supply chain and inflation. Accordingly, management continues to evaluate the Company’s liquidity position, communicate with and monitor the actions of our customers and suppliers, and review our near-term financial performance. In 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 months ended August 31, 2021 compared to the three months ended August 31, 2020 are as follows: Three months ended August 31, 2021: • Revenue increased by 9.6% to $77.0 million. • Gross profit increased 120 bps to 52.1%. • Net loss increased by $2.7 million to $7.0 million. • Loss per share increased by $0.07 to a loss of $0.18 Our Med Tech business, comprised of Mechanical Thrombectomy, Auryon and NanoKnife, experienced improved performance during the first quarter of fiscal year 2022 as the number of procedures continued to improve from the COVID-19 impact in the first quarter of the prior year. In our Med Device business, Vascular Access, excluding the large prior year order in the UK, also improved in the first quarter of fiscal year 2022 compared to the prior year period. This was partially offset by our Med Device Oncology products, which continued to face pressure from reductions in procedure volumes due to challenges resulting from the COVID-19 pandemic. 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 August 31, 2021 and 2020 For the three months ended August 31, 2021, the Company reported a net loss of $7.0 million, or a loss of $0.18 per diluted share, on net sales of $77.0 million, compared with a net loss of $4.3 million, or a loss of $0.11 per diluted share, on net sales of $70.2 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. The table below summarizes net sales by Med Tech and Med Device: Three Months Ended (in thousands) Aug 31, 2021 Aug 31, 2020 % Change Net Sales Med Tech $ 17,619 $ 10,486 68.0% Med Device 59,352 59,730 (0.6)% Total $ 76,971 $ 70,216 9.6% 22 Table of Contents Three Months Ended (in thousands) Aug 31, 2021 Aug 31, 2020 % Change Net Sales by Global Business Unit Endovascular Therapies $ 38,058 $ 29,857 27.5% Vascular Access 24,957 28,105 (11.2)% Oncology 13,956 12,254 13.9% Total $ 76,971 $ 70,216 9.6% Net Sales by Geography United States $ 64,464 $ 54,108 19.1% International 12,507 16,108 (22.4)% Total $ 76,971 $ 70,216 9.6% For the three months ended August 31, 2021, net sales increased $6.8 million to $77.0 million compared to the same period in the prior year. The Med Tech business increased $7.1 million from the first quarter of the prior year. This growth was driven by Auryon sales which grew $4.8 million compared to the prior year. The AngioVac business grew $0.7 million as the Company generally continued to see consistent case volumes in AngioVac despite continued COVID-19 challenges. Additionally, NanoKnife also had improved capital and disposable sales which increased $1.0 and $0.7 million, respectively. NanoKnife capital growth was in the U.S and Europe while the disposable growth was driven by U.S sales. The Med Device business net sales decreased $0.4 million from the prior year; however, excluding the large prior year order in the UK, net sales increased $4.8 million. This increase was driven by increased case volume compared to the first quarter of the prior year which resulted in increased sales of Core, Venous and BioSentry products of $2.1 million, $0.6 million and $0.4 million, respectively. Excluding the prior year order in the UK, Midlines, PICCs and Ports increased $2.2 million, with $1.1 million of the increase driven by U.S port sales. These increases were partially offset by decreased Microwave sales of $0.4 million. Gross Profit, Operating expenses, and Other income (expense) Three Months Ended (in thousands) Aug 31, 2021 Aug 31, 2020 % Change Gross profit $ 40,139 $ 35,764 12.2 % Gross profit % of sales 52.1 % 50.9 % Research and development $ 7,394 $ 9,009 (17.9) % % of sales 9.6 % 12.8 % Selling and marketing $ 24,446 $ 17,705 38.1 % % of sales 31.8 % 25.2 % General and administrative $ 8,943 $ 8,557 4.5 % % of sales 11.6 % 12.2 % 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 increased by $4.4 million compared to the prior year. The change is primarily attributable to the following: • Sales volume positively impacted gross profit by $4.2 million year over year; • Sales mix positively impacted gross profit by $0.7 million as a result of increased sales of NanoKnife, Auryon and AngioVac; • Increased Auryon start up costs related to placed units of $1.0 million negatively impacted gross profit year over year; and 23 Table of Contents • Inflationary costs on raw materials, labor and freight had a negative impact of $1.4 million year over year, partially offset by favorablility in production volume and other initiatives of $1.2 million and $0.4 million, respectively. 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 $1.6 million compared to the prior year. The change is primarily attributable to the following: • R&D project expense decreased $1.0 million year over year primarily due to the timing of certain projects; and • Compensation and benefits expense decreased $0.4 million as a result of open roles. 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 $6.7 million compared to the prior year. The change is primarily attributable to the following: • Compensation and benefits expense increased $4.3 million due to additional headcount from the build-out of the Auryon sales and marketing teams; and • Travel and other expenses increased $2.5 million as some COVID-19 restrictions were lifted. 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 $0.4 million compared to the prior year. The change is primarily attributable to the following: • Compensation and benefits expense increased $0.9 million year over year primarily due to increased headcount; and • Outside consultant spend decreased $0.7 million, partially offsetting the foregoing increase. Three Months Ended (in thousands) Aug 31, 2021 Aug 31, 2020 $ Change Amortization of intangibles $ 4,821 $ 4,953 $ (132) Change in fair value of contingent consideration $ 195 $ (657) $ 852 Acquisition, restructuring and other items, net $ 2,440 $ 1,319 $ 1,121 Other income (expense), net $ (508) $ 309 $ (817) Amortization of intangibles - Represents the amount of amortization expense that was taken on intangibles assets held by the Company. • Amortization expense decreased $0.1 million from the prior year due to assets that became fully amortized in fiscal year 2021 along with the write-off of the OARtrac intangible asset in the fourth quarter of fiscal year 2021. This was partially offset by amortization relating to the Camaro intangible asset addition of $3.9 million in the first quarter of fiscal year 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 in the fair value is related to 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, increased by $1.1 million compared to the prior year. The change is primarily attributable to the following: 24 Table of Contents • Legal expense, related to litigation that is outside of the normal course of business, of $2.1 million was recorded in the first quarter of fiscal year 2022 compared to $0.8 million in the prior year; • In the first quarter of fiscal year 2021, and as a result of the sale of the Fluid Management business, the Company incurred $0.3 million of expense to move manufacturing facilities and the Company received $0.4 million from Medline Industries, Inc. as part of the TSA agreement. These activities were completed during fiscal year 2021; and • Other expenses of $0.4 million in the first quarter of fiscal year 2022 compared to $0.6 million in the prior year consisted mainly 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 $0.8 million is primarily due to unrealized foreign currency losses of $0.9 million. Income Tax Benefit Three Months Ended (in thousands) Aug 31, 2021 Aug 31, 2020 Income tax benefit $ (1.6) $ (0.5) Effective tax rate including discrete items 19.0 % 11.3 % Our effective tax rate including discrete items for the three-month periods ended August 31, 2021 and 2020 was 19.0% and 11.3%, respectively. In fiscal year 2022, 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 10.6% in the first quarter of fiscal year 2022, as compared to 14.2% for the same period in fiscal year 2021. Liquidity and Capital Resources We regularly review our liquidity and anticipated capital requirements in light of the significant uncertainty created by the COVID-19 global pandemic. We believe that our current cash on hand and availability under our Revolving Facility provide sufficient liquidity to meet our anticipated needs for capital for at least the next 12 months. We are closely monitoring receivables and payables. Our cash and cash equivalents totaled $35.5 million as of August 31, 2021, compared with $48.2 million as of May 31, 2021. As of August 31, 2021 and May 31, 2021, total debt outstanding related to the Revolving Facility was $25.0 million and $20.0 million, respectively. The fair value of contingent consideration liability as of August 31, 2021 and May 31, 2021, was $15.9 million and $15.7 million, respectively. The table below summarizes our cash flows: Three Months Ended (in thousands) Aug 31, 2021 Aug 31, 2020 Cash provided by (used in): Operating activities $ (8,904) $ (5,425) Investing activities (9,092) (1,824) Financing activities 5,446 491 Effect of exchange rate changes on cash and cash equivalents (139) 252 Net change in cash and cash equivalents $ (12,689) $ (6,506) Cash flows consisted of the following: Cash used in operating activities Three months ended August 31, 2021 and 2020: • Net loss of $7.0 million and $4.3 million for the period ended August 31, 2021 and 2020, respectively, plus the non-cash items, primarily driven by depreciation and amortization and stock based compensation, along with the changes 25 Table of Contents in working capital below, contributed to cash used in operations of $8.9 million and $5.4 million, respectively, for these periods. • For the period ended August 31, 2021, working capital was negatively impacted by decreased accounts payable, accrued liabilities and other liabilities of $6.3 million, mainly driven by the payment of annual incentive compensation in the first quarter. • For the period ended August 31, 2020, working capital was negatively impacted by increased accounts receivable of $2.7 million and decreased accounts payable, accrued liabilities and other liabilities of $10.1 million. Inventory had a favorable impact on working capital of $7.2 million. Cash used in investing activities Three months ended August 31, 2021 and 2020: • $1.0 million and $1.8 million, respectively, of cash was used for fixed asset additions; • $4.5 million of cash was used for Auryon placement and evaluation unit additions in the first quarter of fiscal year 2022; 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 Three months ended August 31, 2021 and 2020: • $5.0 million draw on the revolver in the first quarter of fiscal year 2022 for the QX Medical asset acquisition; and • $0.4 million and $0.5 million, respectively, of proceeds from stock option and ESPP activity. 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 August 31, 2021 was 1.34%. The Company was in compliance with the Credit Agreement covenants as of August 31, 2021. 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. 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. 26 Table of Contents