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 2022 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 the words such as "expects," "reaffirms," "intends," "anticipates," "plans," "believes," "seeks," "estimates," “projects”, "optimistic," 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 AngioDynamics' expectations, expressed or implied. Factors that may affect the actual results achieved by AngioDynamics include, without limitation, the scale and scope of the COVID-19 global pandemic, the ability of AngioDynamics to develop its existing and new products, technological advances and patents attained by competitors, infringement of AngioDynamics' technology or assertions that AngioDynamics' technology infringes the technology of third parties, the ability of AngioDynamics to effectively compete against competitors that have substantially greater resources, future actions by the FDA or other regulatory agencies, domestic and foreign health care reforms and government regulations, results of pending or future clinical trials, overall economic conditions (including inflation, labor shortages and supply chain challenges including the cost and availability of raw materials), the results of on-going litigation, challenges with respect to third-party distributors or joint venture partners or collaborators, the results of sales efforts, the effects of product recalls and product liability claims, changes in key personnel, the ability of AngioDynamics to execute on strategic initiatives, the effects of economic, credit and capital market conditions, general market conditions, market acceptance, foreign currency exchange rate fluctuations, the effects on pricing from group purchasing organizations and competition, the ability of AngioDynamics to obtain regulatory clearances or approval of its products, or to integrate acquired businesses. 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 AngioDynamics is a leading and transformative medical technology company focused on restoring healthy blood flow in the body's vascular system, expanding cancer treatment options and improving quality of life for patients. 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. 22 Table of Contents 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 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. On August 30, 2022, the Company repaid all amounts outstanding under its then existing credit agreement and entered into a new Credit Agreement. The new Credit Agreement provides for a $75.0 million Revolving Facility and a $30.0 million Delayed Draw Term Loan as of August 31, 2022, $25.0 million was drawn on the Revolving Facility and $25.0 million was drawn on the Delayed Draw Term Loan . See Note 7 "Long-Term Debt" set forth in the Notes to the consolidated financial statements. Commencing with the first quarter of fiscal year 2023, the Company began to manage its operations through two segments, Med Tech and Med Device to align with the transformation from a company with a broad portfolio of largely undifferentiated products to a more focused medical technology company. In evaluating the operating performance of our business, management focuses on company-wide and segment revenue and gross margin and company-wide operating income, earnings per share and cash flow from operations. A summary of these key financial metrics for the three months ended August 31, 2022 compared to the three months ended August 31, 2021 are as follows: Three months ended August 31, 2022: • Revenue increased by 5.9% to $81.5 million. • Med Tech growth of 29.6% while Med Device declined 1.1%. • Gross profit decreased 20 bps to 51.9%. • Med Tech gross profit decreased 220 bps to 63.2% and Med Device gross profit decreased 70 bps to 47.5%. • Net loss increased by $6.0 million to $13.0 million. • Loss per share increased by $0.15 to a loss of $0.33. Our Med Tech revenue, comprised of Auryon, the thrombus management platform and NanoKnife grew 29.6% in the first quarter of fiscal year 2023. The growth in Auryon, the thrombus management platform and NanoKnife disposables was partially offset by decreased NanoKnife capital sales. Our Med Device revenue declined 1.1% in the first quarter of fiscal year 2023 driven by the backlog in Vascular Access products and continued pressures from reductions in Oncology procedure volumes due to challenges resulting from the COVID-19 pandemic, a trend that may continue. Results of Operations For the three months ended August 31, 2022, the Company reported a net loss of $13.0 million, or a loss of $0.33 per diluted share, on net sales of $81.5 million, compared with a net loss of $7.0 million, or a loss of $0.18 per diluted share, on net sales of $77.0 million during the same quarter of the prior year. 23 Table of Contents Net Sales Net sales - Net sales are derived from the sale of products and related freight charges, less discounts, rebates and returns. Three Months Ended (in thousands) Aug 31, 2022 Aug 31, 2021 % Change Net Sales Med Tech $ 22,817 $ 17,607 29.6% Med Device 58,720 59,364 (1.1)% Total $ 81,537 $ 76,971 5.9% Three Months Ended (in thousands) Aug 31, 2022 Aug 31, 2021 % Change Net Sales by Geography United States $ 69,023 $ 64,464 7.1% International 12,514 12,507 0.1% Total $ 81,537 $ 76,971 5.9% For the three months ended August 31, 2022, net sales increased $4.6 million to $81.5 million compared to the same period in the prior year. At August 31, 2022, the Company had a backlog of $7.1 million, a decrease of $1.3 million from May 31, 2022. The Med Tech segment net sales increased $5.2 million for the three months ended August 31, 2022 compared to the same period in the prior year period. The change in sales from the prior year was primarily driven by: • Increased Auryon sales of $2.9 million; • Growth in the thrombus management platform of $2.4 million . Increased sales in the mechanical thrombectomy platform of $2.3 million was driven by AngioVac and the launch of the AlphaVac product in the second quarter of fiscal year 2022; and • Decreased NanoKnife sales of $0.1 million, which was driven by decreased capital sales internationally. This decrease was partially offset by a $0.3 million increase in disposable sales in the U.S. and internationally. The Med Device segment net sales decreased $0.6 million for the three months ended August 31, 2022 compared to the same period in the prior year period. The change in sales from the prior year was primarily driven by: • The backlog of $7.1 million at August 31, 2022, which primarily impacted sales of Core and Vascular Access products; and • Decreased sales of Venous, Midlines, PICCs, Ports, Radio Frequency A blation and BioSentry of $0.5 million, $0.4 million, $0.6 million, $0.6 million, $0.4 million and $0.3 million, respectively. These decreases were partially offset by increased Dialysis (despite the impact of the backlog), Core and Microwave sales of $1.2 million, $0.9 million and $0.3 million, respectively. 24 Table of Contents Gross Profit Three Months Ended (in thousands) Aug 31, 2022 Aug 31, 2021 % Change Med Tech $ 14,429 $ 11,517 25.3 % Gross profit % of sales 63.2 % 65.4 % Med Device $ 27,876 $ 28,622 (2.6) % Gross profit % of sales 47.5 % 48.2 % Total $ 42,305 $ 40,139 5.4 % Gross profit % of sales 51.9 % 52.1 % 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. Total Company gross profit increased by $2.2 million for the three months ended August 31, 2022 compared to the same period in the prior year. The change from the prior year was primarily driven by: • Sales volume, which positively impacted gross profit by $2.7 million; • Net productivity, which positively impacted gross profit by $2.0 million; • Pricing and mix, which positively impacted gross profit by $0.4 million; • Inflationary costs on raw materials, labor shortages and freight costs, which negatively impacted gross profit by $2.2 million; and • Depreciation on placement units of $0.7 million. The Med Tech segment gross profit increased by $2.9 million for the three months ended August 31, 2022 compared to the same period in the prior year. The change from the prior year was primarily driven by: • Sales volume, which positively impacted gross profit by $3.9 million; • Net productivity, which positively impacted gross profit by $0.7 million; • Pricing pressures and mix, which negatively impacted gross profit by $1.2 million; • Inflationary costs on raw materials, labor shortages and freight costs, which negatively impacted gross profit by $0.2 million; and • Depreciation on Auryon and NanoKnife placement units of $0.4 million. The Med Device segment gross profit decreased by $0.7 million for the three months ended August 31, 2022 compared to the same period in the prior year. The change from the prior year was primarily driven by: • Net productivity, which positively impacted gross profit by $1.5 million was driven by the additional manufacturing capacity with the Costa Rica plant; • Price and mix, which positively impacted gross profit by $0.3 million; • Sales volume, which negatively impacted gross profit by $0.4 million; and • Inflationary costs on raw materials, labor shortages and freight costs, which negatively impacted gross profit by $2.0 million. 25 Table of Contents Operating Expenses, and Other Income (expense) Three Months Ended (in thousands) Aug 31, 2022 Aug 31, 2021 % Change Research and development $ 8,333 $ 7,394 12.7 % % of sales 10.2 % 9.6 % Selling and marketing $ 26,543 $ 24,446 8.6 % % of sales 32.6 % 31.8 % General and administrative $ 10,101 $ 8,943 12.9 % % of sales 12.4 % 11.6 % Research and development expense - Research and development (“R&D”) expense includes internal and external costs to develop new products, enhance existing products, validate new and enhanced products, and manage clinical, regulatory and medical affairs. R&D expense increased $0.9 million for the three months ended August 31, 2022 compared to the same period in the prior year. The change from the prior year was primarily driven by: • The timing of certain projects and clinical spend associated with the ongoing clinical trials, which increased R&D expense by $0.9 million. 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 $2.1 million for the three months ended August 31, 2022 compared to the same period in the prior year. The change from the prior year was primarily driven by: • Additional headcount from the build-out of the Auryon and mechanical thrombectomy sales and marketing teams, which increased compensation and benefits expense by $1.2 million; and • Travel, meeting and tradeshow expenses, which increased $1.2 million and was partially offset by decreased facilities and depreciation expense of $0.2 million. 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 $1.2 million for the three months ended August 31, 2022 compared to the same period in the prior year. The change from the prior year was primarily driven by: • Compensation and benefits and travel expenses, which increased $0.6 million and $0.2 million, respectively; and • Other outside consultant spend for legal and IT, which increased $0.4 million. Three Months Ended (in thousands) Aug 31, 2022 Aug 31, 2021 $ Change Amortization of intangibles $ 4,837 $ 4,821 $ 16 Change in fair value of contingent consideration $ 211 $ 195 $ 16 Acquisition, restructuring and other items, net $ 5,581 $ 2,440 $ 3,141 Other expense, net $ (556) $ (508) $ (48) Amortization of intangibles - Represents the amount of amortization expense that was taken on intangibles assets held by the Company. • Amortization expense remained consistent with the prior year. 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. 26 Table of Contents • The change in the fair value for the three months ended August 31, 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 $3.1 million for the three months ended August 31, 2022, compared to the same period in the prior year. The change from the prior year was primarily driven by: • The payment to the Israeli Innovation Authority of $3.5 million related to grant funds that were provided to Eximo to develop the Auryon laser prior to the acquisition in the second quarter of fiscal year 2020. These grant funds were fully repaid in the first quarter of fiscal year 2023 to satisfy the obligation which was otherwise being paid as a royalty based on a percentage of sales; • Manufacturing relocation expense related to the move of certain manufacturing lines to Costa Rica of $0.1 million; • Legal expense, re lated to litigation that is outside of the normal course of business, which decreased $0.2 million; and • Other expenses (mainly severance associated with organizational changes), which decreased $0.3 million. Other expense, net - Other expenses include interest expense, foreign currency impacts, bank fees, and amortization of deferred financing costs. • Other expense, net remained consistent with the prior year. Income Tax Benefit Three Months Ended (in thousands) Aug 31, 2022 Aug 31, 2021 Income tax benefit $ (0.9) $ (1.6) Effective tax rate including discrete items 6.2 % 19.0 % Our effective tax rate including discrete items for the three-month periods ended August 31, 2022 and 2021 was 6.2% and 19.0%, respectively. In fiscal year 2023, 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 Credit Agreement provides 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 $24.6 million as of August 31, 2022, compared with $28.8 million as of May 31, 2022. As of August 31, 2022 and May 31, 2022, total debt outstanding related to the Credit Agreement was $50.0 million ($25.0 million on the Revolving Facility and $25.0 million on the Delayed Draw Term Loan) and $25.0 million, respectively. The fair value of contingent consideration liability as of August 31, 2022 and May 31, 2022, was $17.2 million and $16.9 million, respectively. The table below summarizes our cash flows: Three Months Ended (in thousands) Aug 31, 2022 Aug 31, 2021 Cash provided by (used in): Operating activities $ (24,745) $ (8,904) Investing activities (3,576) (9,092) Financing activities 24,376 5,446 Effect of exchange rate changes on cash and cash equivalents (316) (139) Net change in cash and cash equivalents $ (4,261) $ (12,689) 27 Table of Contents During the quarters ended August 31, 2022 and 2021, cash flows consisted of the following: Cash used in operating activities Three months ended August 31, 2022 and 2021: • Net loss of $13.0 million and $7.0 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 $24.7 million and $8.9 million, respectively, for these periods. • For the period ended August 31, 2022, working capital was unfavorably impacted by decreased accounts payable, accrued liabilities and other liabilities of $9.0 million, mainly driven by the payment of annual incentive compensation in the first fiscal quarter, along with increased accounts rec eivable, inventory and prepaid expenses of $1.4 million, $6.2 million and $5.7 million, respectively. • For the period ended August 31, 2021, working capital was unfavorably 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 fiscal quarter, along with increased inventory of $0.7 million. Cash used in investing activities Three months ended August 31, 2022 and 2021: • $0.8 million and $1.0 million, respectively, of cash was used for fixed asset additions; • $2.2 million and $4.5 million, respectively, of cash was used for Auryon placement and evaluation unit additions; • $0.5 million of cash was used for the acquisition of an exclusive license in the first quarter of fiscal year 2023; 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, 2022 and 2021: • $70.0 million in proceeds on long-term debt less the repayment of $45.0 million associated with the new Credit Agreement in the first quarter of fiscal year 2023. The $25.0 million draw on the Delayed Draw Term Loan associated with the new Credit Agreement is to fund the historical and planned fiscal year 2023 purchases of Auryon placement and evaluation units. See Note 7 "Long-Term Debt" set forth in the Notes to the consolidated financial statements; • $0.7 million of deferred financing costs associated with the new Credit Agreement; • $5.0 million draw on the Revolving Facility in the first quarter of fiscal year 2022 for the QX Medical asset acquisition; and • $0.1 million and $0.4 million, respectively, of proceeds from stock option and ESPP activity. On August 30, 2022, the Company repaid all amounts outstanding under its then existing credit agreement and entered into a new Credit Agreement. The new Credit Agreement provides for a $75.0 million Revolving Facility and a $30.0 million Delayed Draw Term Loan, and also 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 at August 31, 2022 applicable to each was 4.06%. The Company was in compliance with the Credit Agreement covenants as of August 31, 2022. In the first quarter of fiscal year 2023 and in connection with the new Credit Agreement, the Company drew $25.0 million on the Revolving Facility. The Company also drew $25.0 million on the Delayed Draw Term Loan to fund the historical and planned fiscal year 2023 purchases of Auryon placement and evaluation units for total long-term debt outstanding of $50.0 million. 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. 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. 28 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. 29 Table of Contents