Angiodynamics Inc Q2 FY2022 Earnings Call

Good morning and welcome to the AngioDynamics Fiscal Year 2022 Second Quarter Earnings Call. All participants are currently in listen-only mode, and a question-and-answer session will follow the formal presentation. This conference call is being recorded. The news release detailing the fiscal 2022 second quarter results was released earlier this morning and is available on the company’s website. This conference call is also being streamed live on the Internet at the Investor section of the company’s website, and the webcast replay will be accessible on the same site approximately one hour after today's call concludes. Before we start, I want to remind listeners that during this call, the company will be making projections or forward-looking statements about future events, including expected revenue, adjusted earnings, and gross margins for fiscal year 2022, as well as ongoing trends. Management urges you to review the company’s historical and future filings with the SEC, including the company’s Forms 10-Q and 10-K, which highlight specific factors that could cause actual results or events to differ significantly from the forward-looking statements made. The company will also discuss certain non-GAAP financial measures during this call. Management uses these metrics to set operational goals and assess performance, believing they may help investors analyze the underlying trends in the company’s business over time. Investors should view these non-GAAP measures in conjunction with, and not as a substitute for or superior to, financial reporting measures prepared in accordance with GAAP. A slide presentation providing insight into the company’s financial results is available on the Investor section of the company’s website under Events and Presentations. This presentation should be considered alongside the press release outlining the company’s operational results and financial performance discussed in this morning’s conference call. I will now hand the call over to Jim Clemmer, AngioDynamics’ President and Chief Executive Officer. Mr. Clemmer?

Thank you, Rob. Good morning, everyone and thank you for joining us for AngioDynamics’ fiscal 2022 second quarter earnings call. Joining me on today’s call is Steve Trowbridge, AngioDynamics’ Executive Vice President and Chief Financial Officer who will provide a detailed analysis of our second quarter financial performance and our revised FY 2022 guidance. I am pleased with our second quarter performance, as we have continued to progress along our strategic transformation. And we have delivered strong revenue growth despite the ongoing challenges related to the COVID-19 global pandemic and other macro-related headwinds. These results are a direct reflection of our team's commitment to and our execution of our long-term strategic plan to transform AngioDynamics into a high growth med tech company. We ended the quarter with revenue of $78.3 million, representing growth of 7.6% year-over-year. Net sales from our Med Tech business, which as a reminder includes Auryon, NanoKnife, and our Thrombectomy platform, were $18.9 million, a 36% increase over the previous year. Our Med Device business, which includes the remainder of our portfolio, grew approximately 1% year-over-year, despite a $4 million backlog. The ongoing disruptions from the COVID pandemic and resulting supply chain headwinds led to this backlog and naturally also impacted gross margin and earnings during the second quarter. We ended the quarter with adjusted EPS of negative $0.02, and gross margin of 51.8%. Before I go into the more specific results across our businesses, I'd like to talk through the current macro environment, the resulting disruptions and how we are addressing those in a little more detail. As we have discussed during previous quarters, we have been impacted by and we are working through supply chain disruptions stemming from COVID. Specifically, we have discussed the tight labor market, increasing labor costs, raw material inflation, and escalating freight costs. Like many other businesses, we are feeling the supply chain impacts. Two of our main challenges are staffing from our internal manufacturing and operations teams and increasing levels of production disruption caused by our employees being exposed to COVID. We are also facing similar dynamics with some of our supply partners who are struggling to service our needs due to similar factors within their production environments. These factors contributed to a more difficult environment in our second quarter, which accelerated in November. In order to address this disruption, we are focused on increasing manufacturing capacity, improving efficiencies, and making adjustments to pricing and shipping terms. All of us have been dealing with the ever-changing impacts of COVID for nearly two years, but we have managed through it well, and will continue to drive our business with the same disciplined approach, while continuing to appropriately prioritize the investments intended to support the long-term growth of our business. Earlier this year, as we saw these macro pressures building, we began to identify and implement solutions to address them. In the second quarter, we initiated a plan to increase manufacturing capacity through a partner in Costa Rica. We are pleased with the pace of this project, and we will keep you updated on the progress of this initiative and others during subsequent quarters. To be clear, we are not moving all of our manufacturing offshore and have no plans to close our existing facilities. We are qualifying additional manufacturing capacity to not only address the short-term supply chain disruption, but also to enhance our ability to supply our customers as we grow our business over the medium and long-term in accordance with our strategic plan. In addition to increasing capacity in Costa Rica, we have continued to actively pursue programs to improve our supply chain. These initiatives include SKU rationalization, and other targeted projects to increase capacity and efficiency in our manufacturing process. As we discussed last quarter, we have recently implemented targeted revisions to our pricing and shipping terms in response to the increased costs of doing business. While the increases in operating costs have affected our business, we have taken actions to address these challenges to minimize any potential long-term effects. The majority of the supply chain challenges and cost increases affect our Med Device portfolio and have a lesser impact on our Med Tech portfolio, as the investment and design processes for our Med Tech products integrated robust supply chain planning. We are continuing to pursue our strategic plan, including funding our core transformational investments, as we know they are vital to driving our growth and the value of our company over the long-term. Now turning back to our detailed results for the second quarter. Our Auryon business saw continued sequential growth during the second quarter with revenue of $6.3 million, up from $5.9 million in the first quarter of FY 2022, despite increased pressure on procedure volumes stemming from COVID and hospital staffing challenges. The continued highly positive feedback from the market confirms our belief that our Auryon platform offers differentiated technology through a broad suite of treatment options that drive positive patient outcomes. At the end of the second quarter, Auryon had been used in over 13,000 procedures, and we estimate that Auryon now represents about 5% share of this market. As we've mentioned on previous calls, Auryon procedures have been fairly divided between above and below the knee. We think this demonstrates both the versatility of our technology and the unique breadth of our addressable market and opportunities for continued growth. We continue to expect Auryon to generate robust revenue growth for the balance of FY 2022. And we believe we've appropriately considered the current headwinds as part of our revenue guidance. As a result, we are reiterating a revenue range of $24 million to $26 million for Auryon for fiscal 2022. We continued to see strong year-over-year growth within our Thrombectomy portfolio, which generated approximately 21% revenue growth over the second quarter of FY 2021 despite the challenging environment. This included 29% year-over-year growth from our Mechanical Thrombectomy portfolio comprising AngioVac and AlphaVac. We are also pleased that we recently completed the limited market release of our AlphaVac Mechanical Thrombectomy System. This highly effective LMR process generated valuable insights, including the highly positive responses from physicians regarding their clinical outcomes, which led us to commence our full market launch of AlphaVac in early December. While it has only been a few weeks, we've received excellent feedback from physicians and are very pleased with the pace of the launch. As a reminder, AlphaVac expands our thrombectomy opportunity by addressing a much larger segment of the DVT venous thromboembolism market. As we've discussed the DVT segment of this market represents an approximately $1.5 billion market opportunity. While the initial AlphaVac product, a 22 French cannula device, increases our addressable market, it's still only a small portion of this $1.5 billion opportunity. We plan to unlock full access to the DVT VTE market through the upcoming launches of our 18 French device and subsequent smaller French AlphaVac devices as we've described in our Investor & Technology Day presentation. In addition, we plan to use the 18 French device for a pulmonary embolism IDE study that upon clearance would provide us access to an additional $1.5 billion market. We have filed the application for this IDE study and are in discussions with the FDA to support approval. NanoKnife probe sales for the second quarter increased 9% year-over-year. Year-to-date NanoKnife probe sales have increased by 20%. We're pleased with our sales of NanoKnife probes, despite the increased COVID-related challenges we faced during the second quarter. One dynamic we've seen as a result of these challenges is an increase in case cancellations for pancreatic procedures due to disease progression. In certain instances, we've noticed that treatment delays throughout the pandemic have led to disease progression in many patients. Some physicians have reported that when they finally try to perform NanoKnife procedures following a staffing or COVID-related delay, they often discover metastasis in the operating room and cancel the ablation, which is a very difficult situation for patients, their families, and the physicians. Despite the challenges of the current market environment, we believe probe volume growth benefited from the tailwind to our larger capital base and increased data-driven awareness from our direct studies. NanoKnife capital sales were down year-over-year against a difficult comp in the second quarter of FY 2021, following the trend of general quarter-to-quarter variability and capital placements. We remain excited and committed to investing in our NanoKnife platform as we continue to make progress with our clinical studies, which will support our planned expansion into new indications, such as prostate. And we also look forward to exploring new geographic opportunities as the OUS environment improves. Our Med Device business grew approximately 1% in the second quarter, which was in line with the long-term trajectory of the business that we laid out for you at our Investor & Technology Day. Our Medical Device performance was impacted by the challenging supply chain environment in Q2 that resulted in the backlog that I discussed earlier. Turning to internal R&D during the quarter. We continued to invest in our key strategic priorities, which are: first, to support our existing platforms to facilitate physician adoption and improve patient outcomes. And second, to continue the development of new products in order to expand into larger, faster growing addressable markets. These investment initiatives include clinical research, product development, and selling and marketing as we prepare to introduce these new products into the market. We also continue to look for opportunities externally, and strategic tuck-in M&A remains a component of our long-term growth strategy. We regularly monitor the landscape for the right opportunities, while also maintaining a disciplined approach to capital allocation and cost management as we do so. Turning to our clinical programs. We currently have 22 active sites in our DIRECT study and are encouraged by the overall execution of the study. We also note that the U.S. DIRECT study spawned interest in initiating similar research in other countries. For example, the multi-center DIRECT INSPIRE study in Australia recently enrolled its first patient. I'd like to take a moment to discuss the progress regarding our prostate initiative for the NanoKnife system. The NanoKnife's unique mechanism of action enables it to be used as a focal option for physicians and patients seeking alternatives to radical prostatectomy. Current focal treatment options have been limited in their ability to grow to no more than 5% of the addressable market. We believe the NanoKnife System has the potential to grow the focal treatment market due to its ease-of-use and unique mechanism of action to serve as a more favorable treatment for patients and physicians alike. In order to prove this belief, we have partnered with the Society of Urologic Oncology to launch the PRESERVE study. The PRESERVE study has been designed to assess local cancer control in patients with intermediate risk disease, with a secondary endpoint measuring quality of life outcomes. This study will be led by our principal investigators, Dr. Jonathan Coleman from Memorial Sloan Kettering and Dr. Arvin George from the University of Michigan. We will keep you up to date on this important study, and we expect to begin patient enrollment in Q3. We believe that the PRESERVE study can provide valuable evidence, proving that the NanoKnife System is a focal treatment option and expand the potential target market to greater than $500 million. With that I'd like to turn the call over to Steve Trowbridge, our Executive Vice President and Chief Financial Officer to review the quarter in more detail.

Thank you, Jim. Good morning, everyone. Before I start, I want to point everyone to the presentation on our investor relations website that outlines the key points from our quarterly results. Our revenue for the second quarter of fiscal year 2022 rose 7.6% year-over-year to $78.3 million, supported by strong performance in our Med Tech sectors, such as Auryon, NanoKnife, and AngioVac. Med Tech revenue reached $18.9 million, up 36.4% year-over-year. Our Med Device revenue was $59.4 million, showing a growth of about 1% compared to the second quarter of fiscal year 2021. In the first half of the year, Med Tech grew by 50%. Med Device remained stable compared to the same period last year but grew approximately 5% year-over-year when excluding last year's NHS order. Year-to-date, our Med Tech platform accounted for 24% of our total revenue, up from 17% at this time last year. Revenue from our endovascular therapies business increased 17% year-over-year to $39.7 million, benefiting from the ongoing adoption of Auryon within our thrombectomy portfolio. Auryon generated $6.3 million in revenue during the second quarter, maintaining the momentum from its launch last year. We did experience some effects from the ongoing COVID pandemic on Auryon hospital procedure volumes this quarter. Despite the challenging market, we still placed new lasers, bringing our total installed base to 242 lasers, with 35 lasers placed in the second quarter. We see Auryon as a significant growth driver moving forward and continue to invest in the platform by enhancing our commercial capabilities and generating clinical evidence for further adoption. As Jim mentioned earlier, we still expect Auryon to deliver revenue in the range of $24 million to $26 million for the year. Mechanical Thrombectomy revenue, which includes AngioVac and AlphaVac LMR sales, increased by 29% over the second quarter of FY 2021, as procedure volumes improve sequentially, reflecting strong demand for the platform. Including units, thrombectomy revenue grew 21% year-over-year. While we observed some decline in procedure volumes in December, we remain optimistic about thrombectomy as a vital growth area. Vascular Access revenue rose 4.8% compared to the previous year, demonstrating solid performance in this business despite challenges like hospital staffing shortages and manufacturing delays, which contributed to some backlog issues discussed earlier. Revenue from our oncology segment fell 9.3% during the quarter compared to the previous year, largely due to a drop in capital sales and procedural pressures linked to COVID and hospital staffing disruptions. Microwave sales also remained difficult, declining by 3%. However, NanoKnife disposable revenue grew by 9% due to increased awareness from our DIRECT study and a larger installed base, with year-to-date disposable sales up 20%. Turning to our income statement, our gross margin for the second quarter of fiscal year 2022 was 51.8%, down 340 basis points from a year ago. We are facing rising labor and manufacturing costs that negatively impact our gross margin, about 170 basis points of which relates to these issues. Inflationary pressures on raw material prices contributed approximately 60 basis points of negative impact to gross margin, while higher freight costs affected it by approximately 10 basis points. As anticipated at the start of the year, the startup costs for Auryon and AlphaVac accounted for roughly a 100 basis point impact compared to last year. We expect these pressures to continue affecting our margins in the near term. In light of these ongoing challenges, we now forecast fiscal year 2022 gross margins to be between 52% and 54%, lowered from our previous guidance of around 55%. While we expect long-term gross margin improvements as our higher-margin Med Tech platforms grow and our manufacturing initiatives take effect, our operations team is focused on enhancing labor and service efficiencies and pursuing material cost reductions. We have made adjustments to our pricing and shipping terms to offset some ongoing challenges. We will keep a close watch on the evolving environment and provide updates accordingly. Our research and development expenses for the second quarter of fiscal year 2022 were $8.2 million or 10% of sales, compared to $9.7 million or 13% of sales the previous year. We maintain our disciplined investment in R&D aimed at advancing our key technology platforms, including clinical expenditures for AlphaVac PE and NanoKnife prostate. For fiscal year 2022, we continue to expect R&D spending to be around 10% to 13% of sales. SG&A expenses for the second quarter of fiscal 2022 reached $33.3 million, accounting for 43% of sales, compared to $29.4 million or 40% of sales last year. This year-over-year increase in SG&A reflects the strategic investments we discussed at our Investor & Technology Day, including hiring in areas like Auryon. We continue to anticipate SG&A spending to be around 40% to 45% of revenue for fiscal year 2022. Our adjusted net loss for the second quarter of fiscal 2022 was $0.9 million or a loss of $0.02 per share, compared to adjusted net income of $0.6 million or earnings of $0.01 per share in the second quarter of last year. The COVID-related challenges previously mentioned had an impact of about $0.03 on the second quarter results. Adjusted EBITDA for the second quarter of fiscal year 2022 was $4.4 million, compared to $5.2 million for the same period in fiscal 2021. During the second quarter of fiscal 2022, we generated $1.9 million in operating cash, had capital expenditures of $1.1 million, and incurred $2.7 million in costs related to Auryon placement and evaluation units. As of November 30, 2021, we held $34.3 million in cash and cash equivalents, slightly down from $35.5 million at August 31, 2021. Our outstanding debt remained at $25 million. We anticipate higher than normal cash usage in the third quarter due to backlog and funding initiatives we discussed. For guidance, we continue to expect fiscal year 2022 net sales to range between $310 million and $315 million. We now forecast full-year adjusted earnings per share to reflect a loss of $0.02 to a gain of $0.02, adjusting from previous guidance of zero to $0.05, as we continue to invest in driving sustainable growth in our key Med Tech platforms while managing the ongoing challenges we've discussed. We anticipate these headwinds may persist into the third quarter, with the potential for recovery as our internal initiatives take hold and external conditions improve. We aim to navigate these challenges consistently. Through the first two quarters of our fiscal 2022, we are pleased with our progress in our strategic transformation, balancing the need for top-line growth with managing profitability, achieving 8.6% growth year-to-date while continuing to invest in our future growth initiatives. Now, I'll turn it back to Jim.

Thanks, Steve. This is an incredibly exciting time at AngioDynamics. Despite all of the challenges in today's operating environment, we are dedicated to transforming AngioDynamics into an innovative medical technology company, with solutions that address some of the most dynamic opportunities in healthcare. We can improve patient outcomes and drive high physician satisfaction. Our second quarter results are evidence of our progress towards that goal. And we've planned to continue to deliver on our strategic plan initiatives in the coming quarters. I want to thank everyone here at AngioDynamics for their dedication and commitment to serving our customers during these challenging times. Our employees face the same challenges that the world faces with COVID. Many of them have family members who have contracted COVID, and they work through this with a commitment to our customers and supporting their work to help patients in need. With that, I'd like the turn the call back to you, Rob, for questions.

Thank you. We will now begin the question-and-answer session. Thank you. Our first question today comes from Bill Plovanic with Canaccord. Please go ahead with your question.

Great. Thanks. Good morning. Can you hear me okay?

Hi, Bill. Good morning.

Hey, good morning. So, the first question is, the current wave of COVID feels like it's very different from anything else. And you have the dubious honor of being the first company to really present some numbers. Maybe your last quarter didn't really get hit as much by Omicron, but as we sit here in the middle, as we're getting into January, and this is hitting into full swing, might be helpful if you could maybe compare and contrast how this wave of COVID is different versus the prior and its impact on your business? And then, that you've seen thus far. And then secondly, you talked about the $4 million backlog, kind of was that any specific product line and what product lines did that relate to and then have you fulfilled and shipped those products? Thank you.

Thank you for the questions, Bill. This is Jim. A couple of points regarding the Omicron variant: we’ve observed increased activity associated with it. Externally, our customers are experiencing mounting pressure, reminiscent of the early pandemic days. The silver lining is that healthcare networks have improved their responses to such challenges, but staffing issues are significant right now, with many employees facing COVID-related restrictions. This has led to higher breakout levels among our customer base. Consequently, major healthcare networks are asking us, along with other companies, to reduce our activities, and some are even canceling elective procedures. Just this week, we learned that a couple of large networks will temporarily halt elective procedures, similar to last year. We are monitoring this situation closely, and our teams worldwide are seeing comparable trends. On a positive note, there are some regions globally where conditions are starting to improve, but in the U.S., the impact on customers remains high. That said, we continue to see strong demand for our products throughout this period, with less negative impact from COVID on our sales. Internally, as mentioned earlier, the backlog and back orders are concerns for us. We are facing challenges in recruiting employees for our operations, quality, and logistics teams, which many companies are encountering at this time. Additionally, we are dealing with disruptions caused by employees being exposed to COVID, needing time to recover, which affects our operations and production plans. In response to your inquiry about specific products, we noted earlier that the impact is greater on our device products compared to our Med Tech products. We have adjusted our supply chain planning for the new tech products to help mitigate these effects. Regarding our earlier announcement about moving some operations to Costa Rica, this will relieve some pressure on our internal capabilities and create new opportunities to reassign personnel within our operations teams once it is operational. This was a long-planned move, as our operations team has consistently faced labor challenges. We recently decided to implement this plan as the effects of COVID and the labor situation intensified. Overall, there's some pressure across all product categories, particularly in devices.

And Bill, just to follow up on the last piece you'd asked about that $4 million backlog and has it cleared. So, it was $4 million at the end of our second quarter. It's actually gotten a little higher and talked about. We expect it to plateau this quarter and then start to get better through the year, as we continue to also focus on the consistent, kind of run-rate demand that we're seeing.

As we consider the impact of Omicron during the quarter and your reaffirmed revenue guidance of $310 million to $315 million, should we anticipate a significant effect in the quarter ending February? Historically, there's been a decline of one to two percentage points sequentially, at least from last fiscal year. Could we expect a more noticeable impact this year due to Omicron as we look at the February quarter?

It's a good question, and we're definitely focused on it. The seasonality you mentioned is valid, and we expect that pattern to continue. The main issue we're facing isn't so much demand, as Jim noted, but rather our ability to clear the backlog and get labor into our plant. As we work through our plans, we anticipate that the third quarter might be a bit uneven. It shouldn't be drastically different from the typical seasonal trends you've pointed out, especially when looking at sequential quarter-over-quarter comparisons. We do expect some fluctuations due to ongoing Omicron effects. However, as we finalize our plans and ramp up operations, you should start to see recovery heading into the end of Q3 and into Q4.

Thank you.

Our next question is from the line of Matthew Mishan with KeyBanc. Please proceed with your question.

Good morning. Regarding Auryon, I believe you mentioned having a 5% market share currently. I’d like to clarify your installed base and the percentage of office-based labs or hospital systems performing these procedures. Are you exceeding the 5% penetration among those performing these procedures, or is there still significant potential for placement growth?

Hey, Matt. No. So, it's interesting. We feel that we've got about 5% of the stated market, as we've talked about it when we launched this product and what our goal was to get to that 10% by the end of year three. What's really driving that is the versatility of the technology. And as Jim mentioned, and we've been very pleased to see the breakdown of procedures with roughly half being above and roughly half being below the knee, which is something that the other technologies really can't do. So, that's what's driving our estimation of the share gain there. We still have plenty of room we think in terms of getting to the share of the market that's out there. We are, of course, as we said much more heavily weighted in our product in OBLs than hospitals, given the dynamics that would have been in the macro environment from when we launched the product. So, we're heavier in the OBL, started to see some nice momentum in the hospitals. I think you're going to see that be a little bit challenged, given the current environment, just as they're dealing with the Omicron uptake over the last month or two, and then maybe the next couple months. But we still think there's runway in terms of getting into new customers. And that's going to go along with the plans that we have to continue to place lasers. You saw that we placed 35 this quarter and we placed 52 last quarter. We said we probably weren't going to be at that pace as we saw some opportunities to get into some of those accounts earlier, but we want to continue to support those accounts and drive utilization. And we'll continue to place new lasers as we go through our Q3 and Q4, as we continue to add those new customers in moving into market share that way. So, we've liked the flexibility that this product has shown to really drive that market share through the first eight months or so of our launch.

Excellent. And then on AlphaVac, just your thoughts on how Omicron and this surge could impact the commercial release, the full commercial release of the products.

Sure. We did notice some softness in December regarding our AngioVac cases and a few procedures. However, I don't believe this will significantly impact AlphaVac since we are still in its launch phase. If you recall the information from our public guidance during Investor Day, this initial version of the 22 French AlphaVac is somewhat limited in the DVT market it addresses. Therefore, I don’t expect the Omicron situation to have a significant effect on it. It might cause some minor delays, such as postponing value analysis committee meetings and possibly slowing down our approval process and discussions with physicians. Nevertheless, we anticipate that larger market opportunities will arise later this year as we launch the 18 French variant and advance our efforts towards the PE indication and introduce a smaller device. Therefore, while there may be some impact, I don't see it being substantial at this moment since we have a lot of tasks ahead unrelated to the Omicron variant.

Yeah. And then I would add a little bit more color to that. I think Jim hit on the value analysis committees, which I think is an important point. So, we don't see Omicron as being something that's derailing to our plans for AlphaVac. As Jim mentioned, we've got a lot of activity going and we're very pleased with the feedback we're getting from our physicians and the results that they're getting when they're using AlphaVac in the LMR. You may see a little bit of an extended period of that ramp, because there might be some slight delays in those value analysis committees, given the hospital activity, but it's not derailing at all to our current plans. We've been really pleased with the way the process has been moving.

All right. Excellent. And then last question, can you provide an update on the timeline for the DIRECT study? Thank you very much.

Thanks, Matt. The environment for DIRECT is clearly challenging due to how hospitals are managing clinical trials and getting patients involved. However, on the registry side, we've been quite satisfied with the current pace. We are actively treating and enrolling patients in the registry, though it's facing some challenges because of hospital staffing issues that Jim highlighted. This is a new factor compared to earlier in the pandemic as hospital workers are affected this time. Additionally, hospitals are focused on treating their patients, but we are still encouraged by the rate of patient enrollment. Regarding the RCT, we anticipated more challenges, and this has proven true, especially given the current COVID situation. We will keep emphasizing our efforts on enrolling patients in the registry and will keep you updated on the progress, recognizing that the RCT has always been expected to be more difficult.

Thank you. The next question is from the line of Jayson Bedford with Raymond James. Please proceed with your question.

Good morning and happy New Year. So, I have a few questions here. Just on the backlog, the $4 million. What is a normal backlog at quarter-end? I'm just curious if the $4 million mentioned can be viewed as excess backlog beyond the amount that you typically carry into a new quarter.

Hi, Jayson. It's Jim. We aim for a target of about half a day’s sales, which we estimate to be around 600,000 to 700,000. This is where we expect to see backlogs due to the complexity of our business with many SKUs. Jayson, this figure is significantly higher than our usual target for a manageable run rate with our customers. This backlog developed during the quarter, hence we put certain plans into action. The reasons include mainly labor issues, and some of our material suppliers are facing challenges in delivering materials. Our operations and logistics teams are addressing these issues. I provided a couple of examples earlier, but they are working on many other plans to reduce this backlog by the end of our fiscal year.

Yeah. Jayson, Jim is exactly right. Typically, we target that that's 600,000 to 700,000 backlog, getting to the $4 million. And we really saw that accelerate in November. As Jim mentioned, we saw this quarter a bigger impact from our employees being impacted by COVID. A great example of that is we had an entire line of products in our facility that we couldn't make for over a week in November, because everybody that was on that line ended up coming down with COVID. Tough scenario. As Jim has mentioned through the beginning of this pandemic, we're doing everything we can to support the health and safety of our employees. But that's a good example and a good kind of anecdote of how some of these things can accelerate and hit. And that's what we saw in November, which led to that increase in the backlog.

Okay. And you mentioned, I think, increasing capacity, improving efficiency and an adjustment to pricing and shipping as initiatives to help the supply chain dynamic. I am a little unclear, what's the specific factor that allows the supply constraints to ease in this $4 million to get a shift?

Good question, Jayson. Let me explain a few things. First, the additional capacity we're adding with our new partner in Costa Rica gives us more resources and access to a larger labor pool. This allows us to reassign some of our internal labor to other tasks. Second, we've been focused on increasing efficiencies, which includes reducing the number of SKUs we manage. By cutting back on SKUs, we simplify our operations, leading to fewer changeovers when we produce products. This means we can produce more of the same items, although there is some customer disruption during this transition. Additionally, in some product areas, we've observed that competitors have faced significant backorder issues, causing customers to shift their purchases to us. This has contributed to our strong demand across the board. Therefore, the steps we're taking internally to streamline operations and increase capacity are essential for addressing the backlog. The labor issues we've encountered are unprecedented, especially with the impact of COVID affecting many of our employees and our production capabilities.

Okay. In answering one of the earlier questions, you talked about your IDN asking you to kind of hold down on elective procedures. Just how would you characterize your portfolio as a kind of percent of your portfolio that's exposed to quote unquote elective procedures?

The situation presents both good and bad aspects. The positive is that it's a smaller percentage. As we expand our Med Tech portfolio, which is becoming a larger part of our business, we see that as a strong indicator of our future. However, there are areas where we anticipate challenges. For instance, we noticed a decline in our AngioVac business in December, with some physicians opting for different treatment methods. This trend seems to be continuing. Nevertheless, concerning our overall portfolio, this is just a small fraction of what we do. Our Vascular Access business is still routinely treating patients who need access for medication delivery, and that part of our operations hasn't slowed down significantly. In some cases, demand even increased, helping to balance out some of the slowness we experienced elsewhere. It is indeed challenging, but we have valuable insights from our customers through our sales team and clinical teams who work globally. We've taken this information into account when maintaining our revenue guidance, thoughtfully weighing the pros and cons of the challenges we are encountering while recognizing that overall demand for our products remains strong.

Okay. Regarding the AlphaVac questions, is the timing for the 18 French launch still set for later this calendar year?

It is. I guess, there's a little unfair being it's only January 6th to say later in the calendar year. So, I'll tell you that up, it'll be in the first half of this calendar year. It would be fair.

Okay.

Yeah.

Okay. And then, is there any way to kind of frame the scope of the LMR versus a full market release?

There's a couple of ways, Jayson. A couple of simple ways to frame it, we only give access to a limited portion of our sales team, that's specially trained to kind of be an advanced team to get out in front of this, because our initial goal isn't to sell as many as we can, is to gain as much info as we can, and to engage with our customers to get their feedback. We want to confirm our assumptions on the product design and development and our launch and training procedures. So, that's what we did. We only gave it to a limited piece of the Salesforce, and they can only take it to pre-approved customers that we knew would give us the feedback that we were seeking. So, that process went very well. We've enabled this process. Now, this is the fourth product we've launched at AngioDynamics in the last couple of years with this process, we put in place and it worked very well. And that gave us the confidence in early December to go to the full launch now. So all of our sales reps now can engage with customers of their choice.

Okay. Thank you.

Yeah. Thank you.

The next question comes from the line of Steven Lichtman with Oppenheimer. Please proceed with your question.

Hi. Good morning. This is actually David on for Steve. I had a few questions. Want to start off with the COVID impact on the AngioVac and the quarter since to have been less of headwinds sequentially with a pickup in growth. Could you just talk about what you're seeing on the ground now, as it relates to COVID impact on the AngioVac business?

Hi, David. Good morning. It’s Jim. As we mentioned earlier, we maintain close relationships with our customers. Unfortunately, there’s a gray area here regarding elective procedures. Not everyone sees it the same way, but the main issue is the staffing challenges facing healthcare centers. When their systems are under stress, it often leads to a large number of nurses being out with COVID, which adds pressure to ICU beds and affects their ability to care for patients in those units. This situation can influence decisions about procedures; for example, a doctor might hesitate to perform an AngioVac procedure on a patient if it means that patient could potentially require ICU care that is already strained. We closely monitor this kind of care continuum. When a doctor considers delaying an AngioVac procedure to manage a patient with alternative treatments, it reflects the current challenges. It's difficult to quantify this precisely, but I wanted to illustrate a real-world scenario of what's happening. We remain deeply engaged with our customers and are committed to partnering with them through this process, ready to assist when they're able to proceed with us.

Yes, David. To provide additional context, we have observed an increase in market demand for AngioVac sequentially from Q1. In Q1, we noted some softness during the summer, but we reported a rise in procedure volumes in September, which continued through much of Q2. However, we are noticing some softness in December. As Jim pointed out, we attribute this to staffing pressures in hospitals. The AngioVac procedure is complex, requiring various specialists, including ICU nurses and perfusionists. When healthcare providers are dealing with increased staffing challenges due to illness, it can lead to temporary declines in procedure volumes, but these typically bounce back. We anticipated the earlier summer softness would improve, and it did. We are currently seeing some softness in December, but we expect an upward trend through the remainder of our fiscal year in a similar pattern.

Okay. Great. That's helpful. And then just looking at the Auryon, are you able to talk about how many reps you ended the quarter with and what are your expectations in terms of your year-end target?

We previously mentioned that we had around 40 field-based salespeople, including territory and regional managers, at the end of the second quarter. In addition to that, we employ clinical specialists and per diem staff, making for another 30 field-based representatives who support our sales team. In total, we currently have approximately 74 field-based Auryon employees. This number may increase as we move into the second half of the year, and I believe we have effectively prepared our team for the anticipated growth this year.

Yes, it's Jim. A question was raised earlier about Auryon and our growth strategy. We will expand by responding to increased demand and interest in our product, which encourages us to place more lasers. Additionally, we monitor the number of procedures performed monthly whenever we install a laser. We're observing consistent growth as users gain confidence in the outcomes delivered by our product. This suggests significant potential for growth with our existing laser base, especially as our clients continue to achieve positive results. Consequently, we anticipate an increase in demand through new laser placements and more intensive use of current lasers. We will ensure that we have the necessary field support to facilitate this growth.

Got it. And just last one for me. Are you expecting the release of the PATHFINDER registry data near-term? Thanks.

And we've started to see publications come out from PATHFINDER. You've already seen a handful of those over the last few trade shows and expect to see a few more coming. So, yeah, the data is coming out of PATHFINDER as we speak and we expect it to continue.

Thank you. I'd now like to turn the call back over to Mr. Clemmer for any closing remarks. Mr. Clemmer?

Thanks, Rob and thanks for joining us on our call today. Again, AngioDynamics is a company in transformation to becoming a high growth innovation-driven med tech company. I think what we delivered today is really solid results. You can see the revenue growth that we exhibited. That's really driven by the demand of our customers. The demand that our customers are having for our products and the interest they have in our technologies. So, we're working through these difficult headwinds and challenges like other companies are. And I want to, again, thank our people for the resilience and their commitment to our business. Thanks again for joining us today. Talk to you soon.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.