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, labor shortages and supply chain challenges, including the cost and availability of raw materials), 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 long-term use. Our business operations cross a variety of markets. Our financial performance is impacted by changing market dynamics, which have included an emergence of value-based purchasing by healthcare providers, consolidation of healthcare providers, the increased role of the consumer in health care decision-making and an aging population, among others. In addition, our growth is impacted by changes within our sector, such as the merging of competitors to gain scale and influence; changes in the regulatory environment for medical devices; and fluctuations in the global economy. Our sales and profitability growth also depends, in part, on the introduction of new and innovative products, together with ongoing enhancements to our existing products. Expansions of our product offerings are created through internal and external product development, technology licensing and strategic alliances. We recognize the importance of, and intend to continue to 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 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 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. A summary of these key financial metrics for the three and nine months ended February 28, 2022 compared to the three and nine months ended February 28, 2021 are as follows: Three months ended February 28, 2022: • Revenue increased by 3.9% to $74.0 million. • Med Tech growth of 28.6% while Med Device declined 2.8%. • Gross profit decreased 190 bps to 52.2%. • Net loss increased by $1.4 million to $5.0 million. • Loss per share increased by $0.04 to a loss of $0.13. Nine months ended February 28, 2022: • Revenue increased by 7.0% to $229.2 million. • Med Tech growth of 41.8% while Med Device declined 0.8%. • Gross profit decreased 140 bps to 52.0%. • Net loss increased by $8.2 million to $20.3 million. • Loss per share increased by $0.20 to a loss of $0.52. • Cash used in operations in creased by $27.6 million to $15.8 million. In our Med Tech business, comprised of Auryon, the Thrombectomy platform and NanoKnife, Auryon and the Thrombectomy platform experienced improved performance during the third quarter of fiscal year 2022. Our Med Device business was negatively impacted by the backlog in Vascular Access products and our Oncology products continued to face pressure from reductions in procedure volumes due to challenges resulting from the COVID-19 pandemic, a trend that may continue. Results of Operations For the three months ended February 28, 2022, the Company reported a net loss of $5.0 million, or a loss of $0.13 per diluted share, on net sales of $74.0 million, compared with a net loss of $3.5 million, or a loss of $0.09 per diluted share, on net sales of $71.2 million during the same quarter of the prior year. For the nine months ended February 28, 2022, the Company reported a net loss of $20.3 million, or a loss of $0.52 per diluted share, on net sales of $229.2 million, compared with a net loss of $12.1 million, or a loss of $0.32 per diluted share, on net sales of $214.2 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 Nine Months Ended (in thousands) Feb 28, 2022 Feb 28, 2021 % Change Feb 28, 2022 Feb 28, 2021 % Change Net Sales Med Tech $ 19,612 $ 15,246 28.6% $ 56,117 $ 39,581 41.8% Med Device 54,358 55,936 (2.8)% 173,104 174,587 (0.8)% Total $ 73,970 $ 71,182 3.9% $ 229,221 $ 214,168 7.0% Three Months Ended Nine Months Ended (in thousands) Feb 28, 2022 Feb 28, 2021 % Change Feb 28, 2022 Feb 28, 2021 % Change Net Sales by Global Business Unit Endovascular Therapies $ 38,083 $ 33,251 14.5% $ 115,799 $ 97,008 19.4% Vascular Access 23,431 24,813 (5.6)% 73,459 76,848 (4.4)% Oncology 12,456 13,118 (5.0)% 39,963 40,312 (0.9)% Total $ 73,970 $ 71,182 3.9% $ 229,221 $ 214,168 7.0% Net Sales by Geography United States $ 62,445 $ 58,654 6.5% $ 192,259 $ 173,446 10.8% International 11,525 12,528 (8.0)% 36,962 40,722 (9.2)% Total $ 73,970 $ 71,182 3.9% $ 229,221 $ 214,168 7.0% For the three months ended February 28, 2022, net sales increased $2.8 million to $74.0 million compared to the same period in the prior year. For the nine months ended February 28, 2022, net sales increased $15.1 million to $229.2 million compared to the same period in the prior year. At February 28, 2022, the Company had a backlog of $9.6 million. The Med Tech business net sales increased $4.4 million and $16.5 million for the three and nine months ended February 28, 2022 compared to the same periods in the prior year, respectively. The change in sales for both periods was primarily driven by: • Increased Auryon sales of $3.9 million and $12.9 million compared to the same periods in the prior year, respectively; • Growth in the thrombectomy platform of $0.6 million and $2.7 million compared to the same periods in the prior year, respectively, which was driven by growth in the mechanical thrombectomy platform partially offset by decreased sales of thrombolytics. Increased sales in the mechanical thrombectomy platform of $0.9 million and $3.3 million, compared to the same periods in the prior year, respectively, was driven by AngioVac and the launch of the AlphaVac product in the second quarter of fiscal year 2022. Even though sales increased, AngioVac case volume declined in the third quarter of fiscal year 2022 due to continued COVID-19 challenges; and • Decreased NanoKnife sales of $0.2 million for the three months ended February 28, 2022 compared to the same period in the prior year and increased NanoKnife sales of $0.8 million for the nine months ended February 28, 2022 compared to the same period in the prior year. The decrease for the three months ended February 28, 2022 was driven by decreased capital sales internationally, partially offset by an increase in disposable sales in the U.S. For the nine months ended February 28, 2022, NanoKnife disposable sales increased $1.2 million, driven by sales in the U.S., partially offset by decreased capital sales. The Med Device business net sales decreased $1.6 million and $1.5 million for the three and nine months ended February 28, 2022 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 $3.7 million for the nine months ended February 28, 2022. The change in sales for both periods was primarily driven by: • The backlog of $9.6 million at February 28, 2022, which primarily impacted sales of Core, Venous and Vascular Access products, for the three and nine month periods; • Decreased sales in Vascular Access (specifically Midlines, Ports and Dialysis), Radio Frequency A blation and Microwave products for the three months ended February 28, 2022 compared to the same period in the prior year of $1.4 million, $0.3 million and $0.2 million, respectively. This was partially offset by increased sales of Core products of $0.3 million for the three months ended February 28, 2022 compared to the same period in the prior year; 25 Table of Contents • Increased case volume for the nine months ended February 28, 2022 compared to the same period in the prior year, which resulted in increased sales of Core (despite the impact of the backlog) and BioSentry products of $3.1 million and $0.4 million, respectively. Port sales also increased $1.5 million, driven primarily by sales in the U.S. These increases for the nine months ended February 28, 2022 compared to the same period in the prior year were partially offset by decreased Midline, PICCs, Di alysis, Radio Frequency Ablation and Microwave sales of $2.3 million, $1.6 million, $1.0 million, $0.6 million, $0.8 million, respectively; and • Midlines, PICCs and Ports increased $2.8 million, excluding the prior year order in the UK, for the nine months ended February 28, 2022 compared to the prior year period. Gross Profit, Operating Expenses, and Other Income (expense) Three Months Ended Nine Months Ended (in thousands) Feb 28, 2022 Feb 28, 2021 % Change Feb 28, 2022 Feb 28, 2021 % Change Gross profit $ 38,583 $ 38,530 0.1 % $ 119,277 $ 114,468 4.2 % Gross profit % of sales 52.2 % 54.1 % 52.0 % 53.4 % Research and development $ 7,280 $ 8,565 (15.0) % $ 22,873 $ 27,286 (16.2) % % of sales 9.8 % 12.0 % 10.0 % 12.7 % Selling and marketing $ 20,416 $ 19,607 4.1 % $ 68,468 $ 57,486 19.1 % % of sales 27.6 % 27.5 % 29.9 % 26.8 % General and administrative $ 8,727 $ 9,011 (3.2) % $ 27,348 $ 26,787 2.1 % % of sales 11.8 % 12.7 % 11.9 % 12.5 % 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 $0.1 million for th e three months ended February 28, 2022 compared to the same period in the prior year. The change was primarily driven by: • Sales volume, which positively impacted gross profit by $1.5 million; • Labor shortages, inflationary costs on raw materials and production volume which negatively impacted gross profit by $1.7 million; and • A benefit of $0.8 million that was recorded as a result of the employee retention credit that the Company filed for under the 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. Gross profit increased by $4.8 million for the nine months ended February 28, 2022 compared to the same period in the prior year. The change was primarily driven by: • Sales volume which positively impacted gross profit by $9.2 million; • Price and mix which positively impacted gross profit by $0.9 million as a result of increased sales of Auryon and AngioVac products. This positive impact was partially offset by sales of lower margin Vascular Access products; • Start-up costs related to Auryon and AlphaVac of $2.1 million, including depreciation on Auryon placement units of $0.8 million, which negatively impacted gross profit; • Labor shortages, freight and inflationary costs on raw materials which negatively impacted gross profit by $2.7 million year over year; and • A benefit of $0.8 million that was recorded as a result of the employee retention credit that the Company filed for under the 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, and manage clinical, regulatory and medical affairs. R&D expense decreased $1.3 million and $4.4 million for the three and nine months ended February 28, 2022 compared to the same period in the prior year, respectively. The change for both periods was primarily driven by: 26 Table of Contents • The timing of certain projects, which reduced R&D project expense by $0.3 million and $2.4 million compared to the same periods in the prior year, respectively; • Open R&D positions, which resulted in decreased compensation and benefits expense of $0.9 and $2.0 million compared to the same periods in the prior year, respectively; and • A benefit of $0.5 million that was recorded as a result of the employee retention credit that the Company filed for under the 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 $0.8 million and $11.0 million for the three and nine months ended February 28, 2022 compared to the same period in the prior year, respectively. The change for both periods was primarily driven by: • Additional headcount from the build-out of the Auryon sales and marketing teams, which increased compensation and benefits expense by $2.2 million and $8.9 million compared to the same periods in the prior year, respectively; • Travel, meeting and tradeshow expenses, which increased $0.8 million and $4.2 million compared to the same periods in the prior year, respectively, as some COVID-19 restrictions were lifte d; and • 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 $0.3 million for the three months ended February 28, 2022 and increased $0.6 million for the nine months ended February 28, 2022 compared to the same periods in the prior year. The change for both periods was primarily driven by: • Compensation and benefits expense, which decreased $1.1 million for the three months ended February 28, 2022 compared to the same period in the prior year while compensation and benefits expense for the nine months ended February 28, 2022 increased $0.2 million compared to the same period in the prior year; • Other outside consultant spend, which increased $0.7 million for the three months ended February 28, 2022 compared to the same period in the prior year; and • Legal expense, which decreased $1.2 million while other outside consultant spend increased $1.6 million for the nine months ended February 28, 2022 compared to the same period in the prior year. Three Months Ended Nine Months Ended (in thousands) Feb 28, 2022 Feb 28, 2021 $ Change Feb 28, 2022 Feb 28, 2021 $ Change Amortization of intangibles $ 4,895 $ 4,292 $ 603 $ 14,605 $ 13,838 $ 767 Change in fair value of contingent consideration $ 201 $ 183 $ 18 $ 1,005 $ (290) $ 1,295 Acquisition, restructuring and other items, net $ 2,359 $ 610 $ 1,749 $ 7,052 $ 3,057 $ 3,995 Other expense, net $ (462) $ (389) $ (73) $ (1,154) $ (417) $ (737) Amortization of intangibles - Represents the amount of amortization expense that was taken on intangibles assets held by the Company. • Amortization expense increased $0.6 million and $0.8 million, respectively, for the three and nine months ended February 28, 2022 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. 27 Table of Contents 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 nine months ended February 28, 2022 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 $1.7 million and $4.0 million for the three and nine months ended February 28, 2022, respectively, compared to the same periods in the prior year. The change for both periods was primarily driven by: • Legal expense, re lated to litigation that is outside of the normal course of business, which increased $0.7 million and $2.9 million compared to the same periods in the prior year, respectively; • Manufacturing relocation expense related to the move of certain manufacturing lines to Costa Rica of $0.4 million and $0.5 million compared to the same periods in the prior year, respectively; • Other expenses (mainly severance associated with organizational changes), which increased $0.3 million for the three months ended February 28, 2022 compared to the same period in the prior year; • Manufacturing facilities relocation expense of $0.4 million for the nine months ended February 28, 2021 as a result of the sale of the Fluid Management business ; and • Transition Services Agreement fees of $0.3 million and $1.0 million from Medline Industries were received for the three and nine months ended February 28, 2021. These activities were completed during fiscal year 2021. 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 $0.1 million and $0.7 million for the three and nine months ended February 28, 2022 compared to the same period in the prior year, respectively, is primarily due to unrealized foreign currency fluctuations of $0.1 million and $0.9 million, respectively. Income Tax Benefit Three Months Ended Nine Months Ended (in thousands) Feb 28, 2022 Feb 28, 2021 Feb 28, 2022 Feb 28, 2021 Income tax benefit $ (0.8) $ (0.6) $ (2.9) $ (2.0) Effective tax rate including discrete items 13.9 % 14.1 % 12.7 % 14.4 % Our effective tax rate including discrete items for the three-month periods ended February 28, 2022 and 2021 was 13.9% and 14.1%, respectively. Our effective tax rate including discrete items for the nine-month periods ended February 28, 2022 and 2021 was 12.7% and 14.4%, 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 $23.9 million as of February 28, 2022, compared with $48.2 million as of May 31, 2021. As of February 28, 2022 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 February 28, 2022 and May 31, 2021, was $16.7 million and $15.7 million, respectively. 28 Table of Contents The table below summarizes our cash flows: Nine Months Ended (in thousands) Feb 28, 2022 Feb 28, 2021 Cash provided by (used in): Operating activities $ (15,754) $ 11,894 Investing activities (15,534) (4,567) Financing activities 7,354 (7,541) Effect of exchange rate changes on cash and cash equivalents (337) 248 Net change in cash and cash equivalents $ (24,271) $ 34 Cash flows consisted of the following: Cash (used in) provided by operating activities Nine months ended February 28, 2022 and 2021: • Net loss of $20.3 million and $12.1 million for the period ended February 28, 2022 and 2021, respectively, plus the non-cash items, primarily driven by depreciation and amortization and stock based compensation, along with the changes in working capital below, contributed to cash used in operations of $15.8 million and cash provided by operations of $11.9 million, respectively, for these periods. • For the period ended February 28, 2022, working capital was negatively impacted by decreased accounts payable, accrued liabilities and other liabilities of $11.8 million, mainly driven by the payment of annual incentive compensation in the first fiscal quarter along with increased accounts rec eivable of $6.4 million. • For the period ended February 28, 2021, working capital was negatively impacted by increased accounts receivable of $1.8 million and decreased accounts payable, accrued liabilities and other liabilities of $1.7 million. Inventory had a favorable impact on working capital of $11.1 million. Cash used in investing activities Nine months ended February 28, 2022 and 2021: • $3.3 million and $4.6 million, respectively, of cash was used for fixed asset additions; • $8.7 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 (used in) financing activities Nine months ended February 28, 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; • $10.0 million payment on the Revolving Facility in the third quarter of fiscal year 2021; and • $2.4 million and $2.5 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 February 28, 2022 was 1.36%. The Company was in compliance with the Credit Agreement covenants as of February 28, 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. 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. 29 Table of Contents 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. 30 Table of Contents