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 (including inflation and labor shortages), 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 devices; and fluctuations in the global economy. Our sales and profitability growth also depends, in part, on the introduction of new and innovative products, together with ongoing enhancements to our existing products. Expansions of our product offerings are created through internal and external product development, technology licensing and strategic alliances. We recognize the importance of, and intend to continue to 23 Table of Contents make investments in research and development activities and selective business development opportunities to provide growth opportunities. We sell our products in the United States primarily through a direct sales force, and outside the U.S. through a combination of direct sales and distributor relationships. Our end users include interventional radiologists, interventional cardiologists, vascular surgeons, urologists, interventional and surgical oncologists and critical care nurses. We expect our businesses to grow in both sales and profitability by expanding geographically, penetrating new markets, introducing new products and increasing our presence internationally. The COVID-19 global pandemic has impacted our business and may continue to pose future risks with the emergence of new variants. Even with the public health actions that have been taken to reduce the spread of the virus, the market continues to experience disruptions with respect to consumer demand, hospital operating procedures and workflow, trends that may continue. The Company's ability to manufacture products, the reliability of our supply chain, labor shortages, backlog and inflation (including the cost 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 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 six months ended November 30, 2021 compared to the three and six months ended November 30, 2020 are as follows: Three months ended November 30, 2021: • Revenue increased by 7.6% to $78.3 million. • Med Tech growth of 36.4% and Med Device growth of 0.8%. • Gross profit decreased 340 bps to 51.8%. • Net loss increased by $4.1 million to $8.4 million. • Loss per share increased by $0.10 to a loss of $0.21. Six months ended November 30, 2021: • Revenue increased by 8.6% to $155.3 million. • Med Tech growth of 50.0% and Med Device growth of 0.1%. • Gross profit decreased 110 bps to 52.0%. • Net loss increased by $6.8 million to $15.3 million. • Loss per share increased by $0.17 to a loss of $0.39. • Cash used in operations in creased by $13.0 million to $7.0 million. In our Med Tech business, comprised of Auryon, the Thrombectomy portfolio and NanoKnife, Auryon and the Thrombectomy portfolio experienced improved performance during the second quarter of fiscal year 2022 as the number of procedures increased. In our Med Device business, Vascular Access, also improved in the second quarter of fiscal year 2022 compared to the prior year period. This was partially offset by our Oncology products, which continued to face pressure from reductions in procedure volumes due to challenges resulting from the COVID-19 pandemic. Results of Operations For the three months ended November 30, 2021, the Company reported a net loss of $8.4 million, or a loss of $0.21 per diluted share, on net sales of $78.3 million, compared with a net loss of $4.3 million, or a loss of $0.11 per diluted share, on net sales of $72.8 million during the same quarter of the prior year. For the six months ended November 30, 2021, the Company reported a net loss of $15.3 million, or a loss of $0.39 per diluted share, on net sales of $155.3 million, compared with a net loss of $8.5 million, or a loss of $0.22 per diluted share, on net sales of $143.0 million during the same period 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: 24 Table of Contents Three Months Ended Six Months Ended (in thousands) Nov 30, 2021 Nov 30, 2020 % Change Nov 30, 2021 Nov 30, 2020 % Change Net Sales Med Tech $ 18,886 $ 13,849 36.4% $ 36,504 $ 24,335 50.0% Med Device 59,394 58,921 0.8% 118,747 118,651 0.1% Total $ 78,280 $ 72,770 7.6% $ 155,251 $ 142,986 8.6% Three Months Ended Six Months Ended (in thousands) Nov 30, 2021 Nov 30, 2020 % Change Nov 30, 2021 Nov 30, 2020 % Change Net Sales by Global Business Unit Endovascular Therapies $ 39,660 $ 33,900 17.0% $ 77,718 $ 63,757 21.9% Vascular Access 25,070 23,930 4.8% 50,026 52,035 (3.9)% Oncology 13,550 14,940 (9.3)% 27,507 27,194 1.2% Total $ 78,280 $ 72,770 7.6% $ 155,251 $ 142,986 8.6% Net Sales by Geography United States $ 65,350 $ 60,684 7.7% $ 129,814 $ 114,792 13.1% International 12,930 12,086 7.0% 25,437 28,194 (9.8)% Total $ 78,280 $ 72,770 7.6% $ 155,251 $ 142,986 8.6% For the three months ended November 30, 2021, net sales increased $5.5 million to $78.3 million compared to the same period in the prior year. For the six months ended November 30, 2021, net sales increased $12.3 million to $155.3 million compared to the same period in the prior year. At November 30, 2021, the Company had a backlog of $4.0 million. The Med Tech business net sales increased $5.0 million and $12.2 million for the three and six months ended November 30, 2021 compared to the same periods in the prior year, respectively. The change in sales for both periods was primarily driven by: • Increased Auryon sales of $4.2 million and $9.0 million compared to the same periods in the prior year, respectively; • Growth in the thrombectomy platform driven by the AngioVac business of $1.2 million and $1.9 million, compared to the same periods in the prior year, respectively, as the Company saw increased case volumes in AngioVac despite continued COVID-19 challenges along with the limited market launch of the AlphaVac product during the second quarter of fiscal year 2022; and • Decreased NanoKnife sales of $0.7 million for the three months ended November 30, 2021 compared to the same period in the prior year and increased NanoKnife sales of $1.0 million for the six months ended November 30, 2021 compared to the same period in the prior year. The decrease for the three months ended November 30, 2021 was driven by decreased capital sales offset by a $0.2 million increase in disposable sales, mainly in Europe. For the six months ended November 30, 2021, NanoKnife disposable sales increased $1.0 million, driven by sales in the U.S. and Europe, with consistent capital sales. The Med Device business net sales increased $0.5 million and $0.1 million for the three and six months ended November 30, 2021 compared to the same periods in the prior year, respectively. Excluding the large UK order in the first quarter of the prior year, net sales increased $5.3 million for the six months ended November 30, 2021. The change in sales for both periods was primarily driven by: • Increased case volume for the three months ended November 30, 2021 compared to the same period in the prior year which resulted in increased sales of Core and BioSentry products of $0.7 million and $0.1 million, respectively. PICCs and Port sales also increased $0.9 million and $0.6 million, respectively with the increase in PICCs driven by sales in the U.S. and Latin America and the increase in Ports driven solely by sales in the U.S. These increases for the three months ended November 30, 2021 compared to the same period in the prior year were partially offset by decreased Venous, Midline, Radio Frequency A blation, Microwave and Balloon sales of $0.7 million, $0.2 million, $0.5 million, $0.2 million and $0.1 million, respectively; 25 Table of Contents • Increased case volume for the six months ended November 30, 2021 compared to the same period in the prior year, which resulted in increased sales of Core and BioSentry products of $2.9 million and $0.4 million, respectively. Port sales also increased $1.9 million, driven primarily by sales in the U.S. These increases for the six months ended November 30, 2021 compared to the same period in the prior year were partially offset by decreased Venous, Midline, PICCs, Di alysis, Radio Frequency Ablation and Microwave sales of $0.1 million, $2.0 million, $1.6 million, $0.4 million, $0.4 million and $0.6 million, respectively; • Midlines, PICCs and Ports increased $3.5 million, excluding the prior year order in the UK, for the six months ended November 30, 2021 compared to the prior year period; and • The backlog of $4.0 million at November 30, 2021, which was primarily related to Med Device products. Gross Profit, Operating expenses, and Other income (expense) Three Months Ended Six Months Ended (in thousands) Nov 30, 2021 Nov 30, 2020 % Change Nov 30, 2021 Nov 30, 2020 % Change Gross profit $ 40,555 $ 40,174 0.9 % $ 80,694 $ 75,938 6.3 % Gross profit % of sales 51.8 % 55.2 % 52.0 % 53.1 % Research and development $ 8,199 $ 9,712 (15.6) % $ 15,593 $ 18,721 (16.7) % % of sales 10.5 % 13.3 % 10.0 % 13.1 % Selling and marketing $ 23,606 $ 20,174 17.0 % $ 48,052 $ 37,879 26.9 % % of sales 30.2 % 27.7 % 31.0 % 26.5 % General and administrative $ 9,678 $ 9,219 5.0 % $ 18,621 $ 17,776 4.8 % % of sales 12.4 % 12.7 % 12.0 % 12.4 % 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 increased by $0.4 million for th e three months ended November 30, 2021 compared to the same period in the prior year. The change is primarily attributable to the following: • Sales volume positively impacted gross profit by $3.3 million; • Price and mix negatively impacted gross profit by $0.4 million as a result of increased sales of Vascular Access products and decreased sales of NanoKnife capital. This negative impact was partially offset by increased sales of Auryon and AngioVac products; • Labor shortages, inflationary costs on raw materials and production volume negatively impacted gross profit by $1.7 million; and • Start-up costs related to Auryon and AlphaVac of $0.8 million, including depreciation on Auryon placement units of $0.4 million, negatively impacted gross profit . Gross profit increased by $4.8 million for the six months ended November 30, 2021 compared to the same period in the prior year. The change is primarily attributable to the following: • Sales volume positively impacted gross profit by $6.9 million; • Price and mix positively impacted gross profit by $1.3 million as a result of increased sales of Auryon and AngioVac products. This positive impact was partially offset by increased sales of Vascular Access products; • Start-up costs related to Auryon and AlphaVac of $1.7 million, including depreciation on Auryon placement units of $0.6 million, negatively impacted gross profit; and • Labor shortages, freight and inflationary costs on raw materials, negatively impacted gross profit by $1.7 million year over 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 decreased $1.5 million and $3.1 million for the three and six months ended November 30, 2021 compared to the same period in the prior year, respectively. The change from each period is primarily attributable to: 26 Table of Contents • The timing of certain projects, which reduced R&D project expense by $0.7 million and $2.1 million for the three and six months ended November 30, 2021 compared to the same periods in the prior year, respectively; and • Open R&D positions, which resulted in decreased compensation and benefits expense of $0.7 and $1.1 million for the three and six months ended November 30, 2021 compared to the same periods in the prior year, respectively. 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 $3.4 million and $10.2 million for the three and six months ended November 30, 2021 compared to the same period in the prior year, respectively. The change from each period is primarily attributable to: • Additional headcount from the build-out of the Auryon sales and marketing teams, which increased compensation and benefits expense by $2.5 million and $6.8 million for the three and six months ended November 30, 2021 compared to the same periods in the prior year, respectively; and • Increased travel, meeting and tradeshow expenses of $1.0 million and $3.2 million for the three and six months ended November 30, 2021 compared to the same period in the prior year, respectively, as some COVID-19 restrictions were lifte d. 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 $0.5 million and $0.8 million for the three and six months ended November 30, 2021 compared to the same period in the prior year, respectively. The change from each period is primarily attributable to: • Additional headcount, which increased compensation and benefits expense by $0.5 million and $1.3 million for the three and six months ended November 30, 2021 compared to the same period in the prior year, respectively; and • Legal expense decreased $1.4 million offset by other outside consultant spend of $0.8 million for the six months ended November 30, 2021 compared to the same period in the prior year. Three Months Ended Six Months Ended (in thousands) Nov 30, 2021 Nov 30, 2020 $ Change Nov 30, 2021 Nov 30, 2020 $ Change Amortization of intangibles $ 4,889 $ 4,593 $ 296 $ 9,710 $ 9,546 $ 164 Change in fair value of contingent consideration $ 609 $ 184 $ 425 $ 804 $ (473) $ 1,277 Acquisition, restructuring and other items, net $ 2,253 $ 1,128 $ 1,125 $ 4,693 $ 2,447 $ 2,246 Other income (expense), net $ (184) $ (337) $ 153 $ (692) $ (28) $ (664) Amortization of intangibles - Represents the amount of amortization expense that was taken on intangibles assets held by the Company. • Amortization expense increased $0.3 million and $0.2 million, respectively, for the three and six months ended November 30, 2021 compared to the prior year periods. 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. Change in fair value of contingent consideration - Represents changes in contingent consideration driven by changes to estimated future payments on earn-out liabilities created through acquisitions and amortization of present value discounts on long-term contingent consideration. • The change in the fair value for the three and six months ended November 30, 2021 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. 27 Table of Contents Acquisition, restructuring and other items, net, increased by $1.1 million and $2.2 million for the three and six months ended November 30, 2021, respectively, compared to the same period in the prior year. The change from each period is primarily attributable to: • Legal expense, re lated to litigation that is outside of the normal course of business, which increased $0.9 million and $2.2 million, respectively, for the three and six months ended November 30, 2021 compared to the same period in the prior year, respectively. Other income (expense), net - Other expenses include interest expense, foreign currency impacts, bank fees, and amortization of deferred financing costs. • The change in other expense of $0.2 million and $0.7 million for the three and six months ended November 30, 2021 compared to the same period in the prior year, respectively, is primarily due to unrealized foreign currency fluctuations of $0.1 million and $0.8 million, respectively. Income Tax Benefit Three Months Ended Six Months Ended (in thousands) Nov 30, 2021 Nov 30, 2020 Nov 30, 2021 Nov 30, 2020 Income tax benefit $ (0.5) $ (0.9) $ (2.1) $ (1.5) Effective tax rate including discrete items 5.8 % 17.5 % 12.3 % 14.5 % Our effective tax rate including discrete items for the three-month periods ended November 30, 2021 and 2020 was 5.8% and 17.5%, respectively. Our effective tax rate including discrete items for the six-month periods ended November 30, 2021 and 2020 was 12.3% and 14.5%, 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). 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 $34.3 million as of November 30, 2021, compared with $48.2 million as of May 31, 2021. As of November 30, 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 November 30, 2021 and May 31, 2021, was $16.5 million and $15.7 million, respectively. The table below summarizes our cash flows: Six Months Ended (in thousands) Nov 30, 2021 Nov 30, 2020 Cash provided by (used in): Operating activities $ (6,963) $ 6,023 Investing activities (12,941) (3,185) Financing activities 6,388 481 Effect of exchange rate changes on cash and cash equivalents (354) 271 Net change in cash and cash equivalents $ (13,870) $ 3,590 Cash flows consisted of the following: Cash provided by (used in) operating activities Six months ended November 30, 2021 and 2020: • Net loss of $15.3 million and $8.5 million for the period ended November 30, 2021 and 2020, respectively, plus the non-cash items, primarily driven by depreciation and amortization and stock based compensation, along with the 28 Table of Contents changes in working capital below, contributed to cash used in operations of $7.0 million and cash provided by operations of $6.0 million, respectively, for these periods. • For the period ended November 30, 2021, working capital was negatively impacted by decreased accounts payable, accrued liabilities and other liabilities of $4.5 million, mainly driven by the payment of annual incentive compensation in the first quarter along with increased accounts rec eivable of $2.9 million. • For the period ended November 30, 2020, working capital was negatively impacted by increased accounts receivable of $2.3 million and decreased accounts payable, accrued liabilities and other liabilities of $3.8 million. Inventory had a favorable impact on working capital of $10.5 million. Cash used in investing activities Six months ended November 30, 2021 and 2020: • $2.2 million and $3.2 million, respectively, of cash was used for fixed asset additions; • $7.2 million of cash was used for Auryon placement and evaluation unit additions in 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 Six months ended November 30, 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 • $1.4 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 November 30, 2021 was 1.34%. The Company was in compliance with the Credit Agreement covenants as of November 30, 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. 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. 29 Table of Contents