Earnings Call Transcript - ANGO Q3 2020

Operator, Operator

Good morning, and welcome to the AngioDynamics Fiscal Year 2020 Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. The news release detailing the fiscal 2020 third quarter results crossed the wire earlier this morning and is available on the company’s website. This conference call is also being broadcast live over the Internet at the Investors section of the company’s website. And the webcast replay of the call will be available at the same site approximately one hour after the end of today's call. Before we begin, I would like to caution listeners that during the course of this conference call, the company will make projections or forward-looking statements regarding future events, including statements about expected revenue, adjusted earnings, and gross margins for fiscal year 2020. Management encourages you to review the company’s past and future filings with the SEC, including without limitation to the company's most recent annual report on Form 10-K, as well as most recent Form 10-Q for the quarter ending February 29, 2020, which identify specific factors that may cause the actual results or events to differ materially from those described in the forward-looking statements. A slide package offering insight into the company's financial results is also available on the Investors section of the company's website under Events & Presentations. This presentation should be read in conjunction with the press release discussing the company's operating results and financial performance during this morning's conference call. I'd now like to turn the call over to Jim Clemmer, AngioDynamics' President and Chief Executive Officer. Mr. Clemmer?

Jim Clemmer, CEO

Thank you, Melissa, and good morning everyone. And thank you for joining us for AngioDynamics' fiscal 2020 third 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 third quarter financial performance. Given the impact that the COVID-19 pandemic is having on our company and our customers, during this call, Steve and I will take a tailored approach to assessing our third quarter results and discussing our perspectives on the business moving forward. With respect to the third quarter, we will discuss our results through the lens of the facts as they existed at that time. With respect to our business moving forward, we will discuss our perspectives looking through the lens of the facts as they exist today, while acknowledging that the facts, circumstances, and situations for everyone remain highly fluid and dynamic, and are likely to change significantly in the short and medium term. With that said, I’d now like to provide an overview of our operating and execution highlights for the quarter as well as some commentary on the impacts of the COVID-19 pandemic on our company. We had a strong third quarter. We reported solid top-line performance during the quarter. Our revenue increased 6.5% year-over-year, and increased 9.3% when excluding Asclera. It was driven by growth in all three of our businesses. In addition, we are pleased to report that we delivered adjusted EPS of $0.01 per share. We believe this clearly demonstrates our ability to simultaneously invest in those businesses that will fuel our transformation into a growth company while being thoughtful and disciplined about our overall spending. We believe these results provide continued evidence of our successful ongoing transformation into a more focused medical technology company delivering unique and innovative healthcare solutions into larger and faster growth markets. During the quarter, we remained focused on three drivers to continue this transformation: Internal research and development; M&A; and clinical and regulatory pathway expansion. Let me update you on our accomplishments in each of these areas. On the R&D front, we continue to focus investments on our three key technologies: AngioVac, AURYON, and NanoKnife, while seeking out ways to increase the profitability profile of our other products. Earlier this year, we announced that we had launched NanoKnife 3.0 and AngioVac 3.0, and we spoke with you about expanding our AngioVac platform through the continued commitment to focused internal research and development. I'm happy to say that we remain on track to deliver two new AngioVac products in the next 12 to 18 months and we look forward to sharing these developments with you in the future. In terms of our recent M&A activities, we continue to advance the AURYON Technology and progress towards commercial launch through investment in three primary areas: Ensuring a strong and robust supply chain; building physician and sales training programs; and building a dedicated selling and marketing channel to take this product to the market in the proper way. Additionally, the integration of our recently acquired C3 Wave PICC tip location system is progressing nicely, and customers have already begun to express interest in this new product. M&A will continue over the medium and long term to play an important role in our transformation. However, we are clearly in uncharted territory due to the COVID-19 global pandemic. While we will maintain our disciplined approach of identifying appropriate M&A targets and we'll continue to assess opportunities, we will also prioritize the strength of our balance sheet amid this rapidly evolving macroeconomic climate. Steve will provide more details and perspectives on our liquidity position later in the call. Given that backdrop, I am comfortable saying that we will be more conservative with respect to M&A opportunities in the current environment of heightened uncertainty. The third driver of our transformation is clinical and regulatory expansion and data generation, which are foundational pillars to our strategic transformation. I'd like to update you on our two most important efforts underway: PATHFINDER and DIRECT. While we continue to focus on these areas, the current environment obviously requires flexibility. With CMS and hospitals throughout the country seeking to prioritize critical care procedures and seeking to preserve treatment capacity, additional site initiation activities and patient enrollment efforts in both PATHFINDER and DIRECT have been paused. We are working internally to be in a position to ramp up these efforts as quickly as possible, once the situation allows us to do so. In mid-January, we launched the PATHFINDER I Registry, a pilot study to evaluate the safety and efficacy of our AURYON Atherectomy System. We believe this study will provide valuable, scientifically backed data to further differentiate the AURYON system from competitive products in this space and to build upon the excellent long-term results that patients experienced during the IDE. The NanoKnife DIRECT IDE saw solid progress through the third quarter. As of today, 19 study sites have secured IRB approval. We remain very pleased with the pace at which leading institutions have committed to our comprehensive clinical study in securing IRB approval. Before I turn the call over to Steve, I'd like to provide an update on how the COVID-19 pandemic is currently impacting our business. Our office-based employees are working remotely and doing so efficiently and effectively. From a manufacturing standpoint, we have employees on the manufacturing floor to ensure that our products are available to help save lives. Given the nature of this pandemic, while we've effectively implemented the business continuity and contingency plans that we've had in place, we've also had to create some new ones to help to protect our employees while they protect our supply chain and ensure that production of our critical care products continues uninterrupted. In the interest of their safety, at the request of our customers, we have grounded all of our field-based sales reps in order to help reduce transmission of the virus and free up hospital resources to focus on caring for patients with COVID-19. Despite these challenges, I'm very proud of our team. They've done a terrific job in adjusting and providing remote support to our global customers. We have been very proactive around CRM activities and business development planning, so that we are prepared to spring into action once our customers are ready and have elective procedures resume. We have had great momentum heading into this and we want to be sure we're ready to continue to build upon that momentum as we exit whenever that may be. From a procedural impact perspective, our business includes products that fall on both sides of the critical care and necessary line. AngioVac cases saw strong growth during the third quarter and into the early days of the fourth quarter, driven by AngioVac 3.0. But over the past few weeks, we have seen procedures slow as hospitals have rightfully shifted their focus to preparing for COVID-19 patients. We have seen some slowing of EVLT procedures, and even some labs closing their doors in the past couple of weeks. We anticipate that this business will be softer in the fourth quarter. Oncology procedures are straddling the line between acute and elective. We expect this trend to continue, with some cases proceeding as planned, and others seeing delays. We do believe that these are delays, not cancellations, as these are treatments that the majority of patients will proceed with. Laser Atherectomy procedures with our AURYON laser have been continuing in patches consistent with other procedures and are still in the very early ramp-up stage. Lastly, sales of our VA products, including PICCs, midlines, and ports remained strong, even over the past few weeks, driven by our new agreement with Premier and a couple of new line extensions for our PICCs. While the current environment is certainly unprecedented, we are taking the necessary steps to prioritize the health and safety of our employees while also ensuring that we are positioning ourselves for continued innovation as the environment returns to normal over time. With that, I'd like to turn the call over to Steve Trowbridge, our Executive Vice President and Chief Financial Officer.

Steve Trowbridge, CFO

Thanks, Jim. Good morning, everyone. Before I start, I want to highlight the presentation on our Investor Relations website that summarizes the key items related to our quarterly and year-to-date results. I want to reiterate something Jim mentioned earlier, which is that for the third quarter, we will discuss our results based on the circumstances at that time. As for our business moving forward, we will share our perspectives based on the current facts. Additionally, unless stated otherwise, all prior year results and comparisons exclude our NAMIC fluid management business, which we divested at the end of our fiscal year on May 31, 2019. Our net sales for the third quarter of fiscal 2020 rose 6.5% year-over-year to $69.8 million. Excluding the fiscal 2019 revenue contribution from the Asclera sclerotherapy products, which we stopped distributing in the fourth quarter of fiscal year 2019, revenue for the third quarter grew 9.3%. As Jim noted earlier, all three of our businesses showed solid growth in the quarter, led by strong performances from AngioVac and NanoKnife, as well as our core PICCs and ports products. Our total VIT business grew 4.3% year-over-year, and when excluding Asclera, it grew 10.5%, driven by a 44% increase in sales of AngioVac year-over-year and a second consecutive quarter of growth in our core products. AngioVac procedural volume remained robust, with procedures up 33% year-over-year, marking our 10th consecutive quarter of double-digit growth in volume and revenue. Vascular Access revenue rose 10.3% during the quarter, supported by double-digit growth in sales of PICCs, ports, and midlines. We are making progress in integrating our newly acquired C3 Wave tip location system and are already seeing a positive impact on our PICC business, along with a value PICC distribution relationship we established during the third quarter. Revenue from our oncology business grew 5.1%, mainly due to an increase in sales from NanoKnife, which benefited from strong capital and disposable sales. Total NanoKnife sales increased by 47% year-over-year, including a 21% rise in disposable sales. Total NanoKnife capital sales were $1.4 million in the quarter. This growth was partially offset by an expected decline in sales of our radiofrequency ablation product and softness in the performance of our BioSentry and balloon businesses. Moving to our income statement, our gross margin for the third quarter of fiscal 2020 was 57.8%, down 40 basis points compared to last year, primarily due to product mix. As we discussed in our last call, this decrease was in line with our expectations. Our research and development expenses for the third quarter of fiscal 2020 were $8.4 million, or 12% of sales, compared to $6.9 million, or 10.6% of sales a year ago. We continue to invest strategically in R&D and clinical efforts, focusing on further developing our NanoKnife, AngioVac, and AURYON products while aiming to drive profitability in our other businesses. Before the current environment, we anticipated R&D spending between $32 million and $34 million in fiscal year 2020, including investments related to our acquisition of Eximo Medical, now AURYON. In the current landscape, we're looking to maintain our investments in our three key technologies while taking a more measured approach in other areas. SG&A expenses for the third quarter of fiscal 2020 increased to $31.1 million, representing 44.6% of sales, up from $27.1 million, or 41.4% of sales a year ago. Prior to the current situation, we projected SG&A spending would be between $126 million and $130 million for fiscal year 2020. We are committed to supporting our upcoming product launches and making necessary investments for a commercial release of AURYON heading into fiscal '21. Given the current environment, we're constantly evaluating controllable discretionary spending with a focus on cash management while prioritizing investments in our key technologies. Our adjusted net income for the third quarter of fiscal 2020 was $0.4 million, or $0.01 per share, compared to adjusted net income of $1.9 million, or $0.05 per share in the same quarter last year. Adjusted EBITDA in the third quarter was $3.8 million, down from $7.7 million in the third quarter of fiscal 2019. Regarding our balance sheet, at the start of the third quarter, we had approximately $41.2 million in cash, from which we utilized $17.8 million in operating activities. We also spent $10 million of cash to acquire the C3 Wave PICC tip location system. As of February 29, 2020, we held $27.2 million in cash and cash equivalents and had $15 million in outstanding debt. We entered this current situation with a solid foundation, having a net cash position and a revolver with significant available capacity. Additionally, inventory levels were elevated in anticipation of completing our exit from the Glens Falls facility, which we sold to Medline at the end of fiscal '19. In the current situation, we have continued to raise inventory levels as part of our evolving business continuity plans. We have been in touch with our strong and longstanding banking group and are closely monitoring the environment. We're taking a thoughtful and disciplined approach to our balance sheet, focusing on our collections. While we will keep a close watch on them, we are pleased to report that commerce is still progressing. We are also carefully managing our payables, taking a proactive stance, and positioning ourselves to be a reliable customer. Overall, we believe we are in a solid position and will focus on maintaining liquidity while being proactive in the current environment. Consistent with this approach, we have initiated a modest draw of $25 million on our revolver. We see this as a prudent action that reflects our focus on cash and liquidity while underscoring our solid foundational position. Turning now to our guidance, as Jim and I have discussed in this call, we are pleased with our third quarter results. Additionally, we are hopeful about our sales in March, which are noteworthy in light of the current conditions. However, we have observed a slowdown and shift in procedures over the past couple of weeks. Given the existing uncertainties, we do not believe we can provide reliable guidance for the fourth quarter or full year at this time. Consequently, as noted in our morning press release, we are officially withdrawing our full-year guidance. Nonetheless, I will provide some directional insights to help illustrate what we are seeing in the market. As discussed earlier, the COVID-19 situation is highly dynamic, with mandates and recommendations changing daily at both national and state levels, with no clear end in sight. The primary unknowns at this moment are twofold. First, we are uncertain about the duration of the COVID-19 pandemic and its impact on elective procedures. Second, we are unsure when our representatives will be permitted to return to the field and access hospitals and physicians’ offices. The potential outcomes given these unknowns are so varied that we cannot provide an accurate guidance range at this time. As mentioned before, we had a strong third quarter and observed that strength continuing for most of March. We are encouraged by this, but we noticed a decline in procedural volumes towards the end of March and into the first week of April, which we expect will persist throughout the fourth quarter. Although this offers more detail on the current quarter than we typically provide, we felt it was important to share this context. As Jim indicated earlier, we established good momentum through the end of Q3 and are working hard to ensure we can maintain and build on that momentum once circumstances allow.

Operator, Operator

At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Jayson Bedford with Raymond James. Please proceed with your question.

Jayson Bedford, Analyst

So just a few questions. I was surprised with the strength in the Vascular Access business. Can you just give us a little more detail on kind of the drivers of the strength, and if you could maybe quantify the impact from the Premier agreement on the port business? And also you mentioned some sort of value PICC distribution agreement in the quarter and I was a little unclear as to what that was, so a little detail on that would be helpful?

Jim Clemmer, CEO

Hi Jason, good morning. Hope you and your family are well. A couple of things, so in our VA business, as we mentioned in the fall, the port win on the Premier business was important for us. But it wasn't the only piece of strength we saw during the quarter. Because really this quarter was more getting those customers that are part of the two Premier compliant agreements to get signed on with us and start the conversion processes. So, there was some growth there, but not a whole lot. The good news was the growth was balanced. So our base PICC business, both our BioFlo and non-BioFlo also experienced a strong quarter, and a lot of that, Jayson, so we haven't talked a lot about it, but we have a couple of really good partners in the mobile PICC business. And these partners are committed to our BioFlo PICCs, and some of these partners have been gaining market share over the past year or so building up their markets as they provide that valuable service to many hospitals looking to outsource that technique and that procedure to these mobile PICC teams. So again, they choose BioFlo in most of those cases. And finally, we did add some new products. We’ve talked a little bit about it just around our PICC portfolio. As you know, with BioFlo, we have a high-end PICC with unique capabilities, but we had some gaps in our PICC line. So we just filled in a couple of the gaps with some other products. Jayson, we expect the VA business to grow in the areas that we guided last year. As you know, 2019 was the first year of growth in many, and I think we anticipated growth about that same level this year. And going forward, it'll be a business that's very well run, and the portfolio is a bit more balanced. And now, we’ve made the acquisition of the C3 Wave tip location system. Again, it takes out one more barrier that we had there.

Steve Trowbridge, CFO

And Jayson, we did see strength throughout the VA portfolio throughout the third quarter. It was pretty balanced, as Jim mentioned, with our PICCs, ports, midlines, and dialysis businesses all growing. So we hit a little bit on the value PICC that Jim talked about, filling in the gap in those lines. We've mentioned C3 in the prepared remarks. As we talked about before, we don't really expect to see a big inflection potential from C3 until we get to the point where we're adding navigation to that technology. So we've seen strength in the base PICCs business moving in throughout this third quarter, and we see that strength continuing as we head into the fourth quarter.

Jayson Bedford, Analyst

Okay. So I guess just to summarize that point, Steve, the growth that you saw this quarter seems pretty durable, at least for the next few quarters?

Steve Trowbridge, CFO

We believe so, yes.

Jayson Bedford, Analyst

Okay. And then I'll just ask one more, and then I'll get back in queue. Can you just update us on the status of the AURYON launch here? I'm just a little unclear as to the rep build-out. Is that complete? Given the dynamic with COVID, when do you expect a full commercial launch?

Jim Clemmer, CEO

So Jason, good point. It’s six months now that we've owned the Eximo business and the AURYON product. So, as we told you before, the first three parts of the move were: A, supply chain build-out. So now we're manufacturing the laser hardware to our specs and our supply chain. We're also manufacturing now the disposable catheters to our specs and our supply chain. Our supply chain team has done a great job with our quality partners in the last six months building this out. Number two, we needed to build a sales training program and a physician training program. We've done those as well, so already prepared to communicate those to the fields. And finally, number three was the dedicated commercial team as we communicated we’ve built. So today, we have 15 people dedicated to this AURYON business, and over 10 of those people are dedicated field sales reps. Each of those have been hired. They have experience in their past life working for probably one of the other companies in this space. So, these folks are already experienced atherectomy salespeople. They have relationships in their field, in the areas that we've hired them in, and we expect good performance from them. As we get closer to full launch, though Jayson, then we'll give you a little more timeline as to when we'll add more people. So we're not at a full launch yet. We're right on track where we'd be with this process. So, we're excited about what we've learned. As soon as we get through a little bit of this COVID-19 situation, we can take a deep breath, and we'll share with you a little more details around the next phase of the launch. But it includes podium presence, speakers talking about the product, how it works, and how it's being received in the market.

Jayson Bedford, Analyst

Is COVID the limiting factor here? Once the situation improves, will you be able to launch the product?

Jim Clemmer, CEO

Jayson, I don't believe COVID has altered our plans. We mentioned when we acquired it that we required approximately a six-month window prior to launching. Recently, we've responsibly moderated our spending and scaled back some investments to ensure we maintain discipline with our cash management and balance sheet. However, COVID will not be a factor in the AURYON narrative. We are primarily focusing on three key areas, and I'm eager to share more details with you. Everything is progressing at the expected pace, and we are excited to continue building the team there.

Steve Trowbridge, CFO

Jayson, we continue to invest in AURYON. And so, as we talked about our cash management priorities, we want to make sure that we're ready to hit the ground running when market dynamics allow us to do that. So we’ve continued to, as Jim mentioned, build up our supply chain, bring in the salespeople, and be ready to go. We do see the atherectomy procedures as some that are on that line, tending to be delayed during the current environment while healthcare systems are looking to build up capacity. So once that does ease a bit, given the investments we're making, we'll be ready to hit the ground running, as Jim said, according to our original plan.

Operator, Operator

Thank you. Our next question comes from the line of Jason Mills with Canaccord Genuity. Please proceed with your question.

Jason Mills, Analyst

Thank you for taking the questions. To start with a high-level question, we've found it surprising that certain procedures, which one might expect to decline due to the crisis like COVID, are not being observed. For instance, there are even reports of fewer STEMIs and acute ischemic strokes being admitted to hospitals. Additionally, there has been mention of pulmonary embolism, with some physicians indicating they are encountering fewer cases. These are critical situations that cannot be postponed, as they are life-saving. Have you noticed this trend as well, and what reasons do you think are contributing to it? It seems physicians are puzzled by this, and I would appreciate your insights on the matter. Also, could you provide a regional perspective? Are there specific areas in the country or globally where this trend is not apparent, and where you are observing a more normalized pattern for acute cases like pulmonary embolism? I also have a follow-up question.

Jim Clemmer, CEO

Jason, it's Jim. I hope you and everyone in your office and family are doing well. That's a good question. I had a conversation a few days ago with a Chief of Surgery at one of the large Boston hospitals. They mentioned that for the past three weeks, they've been focused on preparing to care for COVID-19 patients, which has required them to ask some doctors to scale back. This is not only to free up ICU space but also to conserve PPE for the caregivers in critical care environments. We've engaged with many of our physician partners, and as you noticed in Q3, there was significant growth with the AngioVac product, which was well received. However, we are now seeing some slowdown in cases. Physicians are often being told to stay home or hold off on treatments. The physician I spoke with last week mentioned they are now diagnosing patients with Stage 1 cancers and advising them to go home, promising to call back with a treatment plan soon. In the past, there would typically be an initial treatment plan where we might have been involved. Like you, we are seeking clarity from our customers. We are in communication with a lot of them to gauge their needs and prepare to support them, acknowledging that their expectations of our support may have shifted as a result of this situation. Regarding geographical trends in the U.S., we have noticed various pockets where the situation is more severe. Doctors have been asked to defer treatments when possible, although some cases require immediate attention based on patient acuity. I anticipate that some hospitals we are in touch with are planning to resume treatment protocols soon to catch up on delayed treatments. I believe we will eventually see not only a return to normal treatment plans but also a period of catch-up for those who have had to postpone care. Outside the U.S., while 80% of our revenue comes from the U.S., our global partners are reporting similar situations. We have seen a few instances in Europe where some treatments have returned earlier than expected in the last week or two, with patients being treated with our oncology products.

Steve Trowbridge, CFO

Jason, this is Steve. You mentioned pulmonary embolism. Our current AngioVac product is not intended for pulmonary embolism. Generally, it is used for tumbling right atrial masses and tricuspid valve vegetation. The market we are involved in illustrates what we are experiencing in this changing environment. Earlier, in March, our AngioVac sales and the procedures our clinical specialists supported were robust. Initially, we viewed those right heart and tricuspid valve vegetation cases as necessary acute cases. However, we have observed in recent weeks that the definition of those necessary cases has shifted according to the physicians, and that continues to evolve. We have experienced a decrease in those procedures. Oncology procedures are another example of what is shifting, largely due to physicians focusing on increasing their capacity, as Jim mentioned. Regarding oncology cases and those involving the current AngioVac product, we believe these are delays rather than lost procedures, and we expect them to return. As we have discussed previously, and as Jim indicated about the two AngioVac product extensions anticipated in the next 12 to 18 months, we believe these products will enable us to enter the pulmonary embolism space and access the thrombus management sector, where we see significant opportunities.

Jason Mills, Analyst

And I wanted to get into a little bit more detail if you're willing on the new AngioVac products or at least targeting, and you sort of answered that to some extent, but with pulmonary embolism maybe talk about the targets for those two products. Are they products that target two separate anatomies i.e., pulmonary embolism for one, deep vein thrombosis, generally speaking on the venous side, on the other, or one detail can you give? And I guess lastly, and I'll get back in queue, just back to them sort of macro discussion here because I'm interested in the macro before we tackle the micro. I mean society has to tackle with macro. And the other thing that is really disconcerting to some extent is what we're seeing is when healthcare workers we need as many of them as we can get on the frontline for COVID, you're seeing hospitals furlough healthcare workers, techs, et cetera that would otherwise be participating in these elective procedures. And as you mentioned, they're not happening as ubiquitously as they were before. Is that when we're on the other side of this, will those hospitals be able to re-hire quickly enough so that there's no lag in the way getting back to some sort of a normalized environment? That phenomenon is interesting to me, and I'd be interested in your take on that as well as any detail you might be willing to give on the two new AngioVac products?

Jim Clemmer, CEO

So, two things. So, again, I don't want to speak for the caregivers and the hospital. I won’t speak for how they’re doing it, but I can share with you the conversations we're having and the tone that we're getting. Because it's been pretty consistent Jason, some of which is right exactly what you're asking for. So we've seen some furloughs as well, some hospitals and I think if you see the root cause of that it's because some of the censuses are very low, some of the hospitals telling us that the patient census is down, because they tried to move people out of the hospitals, get them back home, and they try to free up or create more ICU or critical care spaces, preparing for an influx of COVID-19 patients. So, I think that the care they're delivering on a routine basis is as much lower than it was a month ago. They need less people. We hope, again, by talking to our hospital customers and partners that when this thing settles, they can re-hire people back to get back to normal care standards that they would operate in. We also believe too even some of the conversations, I think they're doing some of that contingency planning now to speak to some of those hospitals. They told us they're doing some of that contingency planning, how they can get back in a rapid fashion. Some people told us, they may go to a seven-day operating schedule in their operating rooms, to go back and treat people who’ve had to stand down for a little bit. So to macro scale Jason, I think we're all learning together of how we're going to treat the situation. But we're hearing things enough, we're close enough to the market that gives us that hope that when people are ready to start treating people again in a normal situation, we want to be their partner and we will be ready to partner as you’ve seen with momentum we've already generated this year. Now back to your initial question on AngioVac. We're not ready to discuss all the details, but we have talked openly in the past publicly. The next two products will launch. So AngioVac 3.0 that was launched in the fall is extremely successful. And how it was launched, we redesigned the funnel tip and did a few other things that our physician partners asked us to do. The next version that comes out which we're not naming AngioVac 4 we'll probably have a better name for it by the time we launch it, but it's a smaller version. Our physicians that say, hey, you can give us the same great features, and still on pump on circuit so can reperfuse the patient’s blood, which makes the procedure much less complicated from a patient recovery aspect. We're going to have the AngioVac 4 with different sizing to allow them to treat more people and maybe open up a clinical pathway for us to get indications back to the areas that you and I spoke a few minutes ago, and Steve did with PE and other places. Now the other product which is really special and unique, we've talked about we want to also use some of the unique features of AngioVac, but take it off the pump and circuit that it's on today. So we want to be able to visit that largest space of people with maybe less acute situations of thrombus. And we will be able to treat a lot of those patients where we've seen mechanical thrombectomy options in the marketplace being chosen and selected by physicians as a better care treatment. And some of that I think is due to some of the good options other companies have come out with. We think when we take AngioVac off the circuit with its other unique features, will be a really, really competitive option in that space. We think a lot of physicians would like to try our product in that space. And we will get back to you soon with launch dates there but that's when we said Jason 12 to 18 months we expect both of those products to launch.

Operator, Operator

Thank you. Our next question comes from the line of Matthew Mishan with KeyBanc Capital Markets. Please proceed with your question.

Matthew Mishan, Analyst

Hey, Jim. I just wanted to switch over to oncology first. I think you had an expectation coming into the year where you thought you could do about 20% growth in that area. Definitely looks like it's fallen short over the first three quarters. And really outside of just some very big numbers in NanoKnife, it looks like the other areas are coming in negative. Can you go through the puts and takes of the balloon, BioSentry and microwave as well?

Jim Clemmer, CEO

Yes, that's a good question, Matt. I hope you’re doing well. We've learned quite a bit this year, as we had high expectations for our technologies. Regarding balloons and BioSentry, I think we may have placed too much on our sales reps, and I take responsibility for that. While we believed we could have productive conversations about these two new technologies, the expected synergies haven't materialized. Our focus is now more on what NanoKnife can achieve with our registry-based approach and the IDE. As a response to what we've learned, we're going to create a new inside sales group to handle most of our balloons and BioSentry business, moving it out of field sales. We realize how effective these products can be in patient care, but we need to improve our commercialization efforts. We've missed the mark there, and we recognize it. For microwaves, we strongly believe our product is superior to those offered by Medtronic and J&J. However, we've found that our advantages aren’t enough to compete with the resources and market presence of these larger companies. While physicians tend to acknowledge our product's quality, we’re not able to compete as we had hoped. Although we've had success with some major medical centers choosing our microwave, it hasn't happened at the rate we anticipated. Moving forward, we will launch a few initiatives over the summer to realign our strategy. We now expect microwave growth to align more closely with market growth rather than the 20% increase we initially anticipated. We will shift more resources toward supporting NanoKnife growth, assisting customers who are participating in our registry, and gathering treatment data. Regarding NanoKnife, we've had great success with the 3.0 version, achieving record sales in either new units or upgrades. However, we recognize that while NanoKnife is effective, it is also complex and requires significant physician training. We are also working on making NanoKnife easier to use with our new design, H-FIRE, or high frequency IRE. We aim to develop this next platform and bring it to market quickly, as we believe it will align well with our DIRECT study results in the coming years. We're seeing increased interest in using NanoKnife for other organs as well and want to ensure our platform supports that need effectively. Overall, I’ve shared a lot about our challenges, learnings, and how we plan to move forward.

Matthew Mishan, Analyst

Regarding NanoKnife, can you provide insight into the strong numbers related to placements, probes, and recurring revenue? How are you performing with that in the U.S. compared to internationally?

Jim Clemmer, CEO

That's a great question. I'll turn to Steve for more specific insights on the geographic breakdown. Currently, we have seen balanced sales within our capital this year, both domestically and internationally. It's encouraging to note that some of the recent purchases in the U.S. have been full systems, which are high-value products. There seems to be growing interest in our DIRECT study and the opportunity for facilities to participate and establish treatment protocols. As we mentioned earlier this year, we anticipated strong disposable sales in Q3, which we just reported, particularly with NanoKnife probes, aligning with our expectation following Q2 discussions. After achieving record hardware sales in the first half of the year, we anticipated that disposables would continue to perform well. I'm not ready to make predictions about this upcoming quarter, but we are on track with what we expected.

Steve Trowbridge, CFO

Yes. And I think Matt we are seeing strength both in the United States and outside the United States. You can think of our current breakdown at about 60% in the U.S., about 40% outside the U.S. We've seen some particular strength in the Asia-Pac area outside the U.S. I think we've modified a little bit and mitigated a little bit by EMEA but we think that that's a temporary trend and we expect to see EMEA catch up and also be a big contributor going forward. So we have seen strength throughout the globe driven by the U.S., but definitely some strength outside the U.S. as well.

Matthew Mishan, Analyst

Okay. And then on NanoKnife and AngioVac both, do you need a clinically trained salesperson in the procedure room to make those effective or are the doctors that are performing capable of doing that without Angio representative in there?

Jim Clemmer, CEO

That’s interesting Matt, before the world changed recently, I think the answer from both our physicians as well as us in terms of what we were seeing at the time to that question would have been yes. You need clinical specialists in those cases. As the world has changed, we've noticed that both our customers as well as our own clinical specialists have been very creative in providing that case support in this dynamic environment. So, I think the answer is, at a very high level, yes, I do think that these NanoKnife procedures as well as AngioVac are complicated procedures, that there's a tremendous value provided by our clinical specialists and the knowledge that they have. I think what we're seeing through this new environment is the manner in which we support those cases can be somewhat dynamic. I think there's an opportunity to be creative in how we do that support going forward. But ultimately, in the type of procedures that they have with the differing disease states and the complexity of our products, there is a role that is necessary for some level of support.

Matthew Mishan, Analyst

Okay. And then for my last question on cash flow, you broke even on net income, but your free cash flow was negative $20 million. Can you provide more insight into what caused that? Additionally, if your inventory levels are as you expect, how well are you positioned to handle multiple quarters of business downturns, especially when the extent of the fluctuations is uncertain, while also maintaining your current balance sheet?

Jim Clemmer, CEO

Yes, it's a great question, Matt, and it's absolutely something that we've been focused on over the last four weeks. So I think you kind of hit the point that we were looking at pretty critically over the last several weeks and looking at the cash flow versus the net income. There are a couple points that feed into that change in cash that I think are temporary. And I think you would talk about the temporary. So, we talked about the inventory build, that's actually a big part of it, right. $4 million to $5 million of that cash usage was in inventory build. Now, as we talked about going into the current environment, we were planning to increase our inventories in anticipation of moving all of our lines out of the Glens Falls facility that we sold to Medline into Queensbury. So we had a big build as we were coming in. We had continued to build in the first several weeks of this process. The next aspect of that, that is going to be, okay now as you've got inventory as a backstop to what could be some potential disruptions depending upon what happens, at least in terms of our production process, you want to then burn off that inventory, so we're focusing on that. There was some short term additional funding that was acquired during the third quarter related to AURYON into the Israeli R&D aspects there. I think that'll pull back a little bit. There was also a lot of timing, $7 million to $8 million of that cash usage I would say was in timing related to the TSAs and some of the disaggregation activities coming out of the Medline divestiture. So that won't repeat. So we talked earlier about focusing on our cash, understanding where we want to continue to invest so we don't lose momentum in areas like AngioVac, AURYON and NanoKnife. But then being much more controlling in terms of that discretionary spend, the third-party R&D spend in all the other products. The other thing we're keeping a close eye on, you’ve got a whole bunch of expenses that end up not being expense just by the very nature of the situation that we're in. The fact that nobody can be traveling, T&E goes way down. So we're keeping a close eye on that. We feel really good that we're going to be able to maintain our strong foundational cash position through this downturn. And we talked a little bit about initiating that draw as both an opportunity to keep our eye on cash flow, make sure that we've got the right cash balances that we need, but then also illustrate our strength. We're not looking to draw the entire revolver. It’s not the prudent thing to do. It's not something that we need to do at this time. So we feel pretty comfortable that we'll be able to maintain that cash position by reducing our expenses that we've talked about, not cutting into those areas that we want to make sure are going to maintain momentum when it's time to come out of that. And also seeing some of those one-time timing things that we saw in Q3 not repeat as we head into Q4, and then into the first half of our FY '21.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Clemmer for any closing remarks.

Jim Clemmer, CEO

So thank you for joining us today for our quarter three 2020 call. I'd like to again call out the dedication and commitment of our employees. We have manufacturing quality and distribution people working today in Queensbury and Glens Falls, New York. They've worked over the past three or four weeks during this pandemic process with their commitment to manufacturing high-quality products that are used around the globe and the care and treatment of those in need of care. We've done a good job here at AngioDynamics, helping to make their workplace as safe as we can make it and reduce risks of transmission internally. We've changed how we do what we do. We made sure that our people are thought of first. So we've got a great group of people. We're proud to report our good Q3 results today. We look forward to sharing with you our Q4 results and beyond. I think we did a good job highlighting today just some of the uncertainty we see from our customers. As soon as we can get better clarity and transparency from our customers, we’d be happy to share with you our new thinking when that occurs. But today, our company is driven by a belief that our products make a difference in the wellness and care of others. And the company is committed to that. I want to thank our employees for working through this difficult process. Thank you. We'll speak with you soon.

Operator, Operator

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