AngioDynamics, Inc.

Good morning and welcome to the NGO Dynamics fiscal year 2022 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. The news release detailing the fiscal 2022 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 investor section of the company's website at www.angiodynamics.com. 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'd 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 the fiscal year 2022, as well as trends that may continue. Management encourages you to review the company's past and future filings with the SEC, including without limitation the company's forms 10Q and 10K, which identify specific factors that may cause actual results to differ materially from those described in the forward-looking statements. The company will also discuss certain non-GAAP financial measures during this call. Management uses these measures to establish operational goals and review operational performance and believes that these measures may assist investors in analyzing the underlying trends in the company's business over time. Investors should consider these non-GAAP measures in addition to, not as a substitute for, or as superior to, financial reporting measures prepared in accordance with GAAP. A slide package offering insight into the company's financial results is also available on the Investor section of the company's website under Events and Presentations. This presentation should be read in conjunction with the press release discussing the company's operational results and financial performances during this morning's conference call. I'd now like to turn the call over to Jim Clemmer, Angio Dynamics President and Chief Executive Officer. Mr. Clemmer?

Thank you, Melissa. And good morning, everyone, and thank you for joining us for AngioDynamics' fiscal 22 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 and our reaffirmed FY22 guidance. Our third quarter saw continued excellent progress in our transformation into a high-growth, innovation-driven MedTech company. We are reporting another quarter of solid revenue growth despite significant headwinds related to the COVID-19 global pandemic and the Omicron variant spike, which were particularly pronounced in December and January during our quarter-ended February 28th. We credit our team's resiliency and focus on driving our transformation to our higher-growth MedTech platforms including Arion, NanoKnife, and Thrombectomy. We ended the quarter with revenue of $74 million, representing growth of about 4% year-over-year. Net sales from our MedTech platforms were $19.6 million, representing growth of about 29% over the previous year. Through Q3, our MedTech business grew about 42% year-over-year, and year-to-date comprised approximately 24% of our overall revenue base, up from 18% in the prior year period. During our Q3, our MedTech revenue was 27% of our total revenue, and as we've highlighted as part of our corporate strategy, we expect that ratio will grow over time. Our Arion Otherectomy business continued its impressive performance, with revenue of $7.3 million for the quarter, up sequentially from $6.3 million in our second quarter. Ariane performed well, particularly in light of the tough environment in January, when hospitals and OBLs were significantly impacted by COVID spikes, both in terms of patient admittance and healthcare worker shortages due to nurses and providers falling ill. Ariane procedures remain fairly evenly divided between above and below the knee, demonstrating the versatility of both our technology and platform, the unique breadth of our addressable market, and opportunities for continued growth. We continue to expect Ariane to generate robust revenue growth during the fourth quarter, and as a result of the strong performance, we are raising our Ariane guidance to a range of $26.5 to $27.5 million for the year from our prior range of $24 to $26 million. Our mechanical thrombectomy business grew 14% year over year, despite the fact that it was one of our businesses that was most impacted by Omicron during the quarter. As other participants of the market have noted, DVT thrombectomy procedure volumes were significantly impacted during the December and January period. But we have seen an improving environment beginning with the back half of February, which has continued through March. We are pleased with the resiliency of this business, along with the feedback we have received from physicians regarding AlphaVac. We will provide more detail on AlphaVac a bit later in the call. Turning to NanoKnife, Disposable sales grew 11% during the quarter. Year-to-date, nanonife disposables have grown 17% year-over-year. Growth during the third quarter was driven by strength in the United States, with U.S. disposable sales growing 56% over the prior year. International markets, most notably in China and Europe, were impacted by the continuing global COVID headwinds. we remain very excited about the opportunities for NanoKnife, particularly in prostate. Our med device business, which includes the remainder of our portfolio, declined approximately 3% year over year in the quarter. Our med device third quarter performance continued to be impacted by our larger than typical backlog. During our second fiscal quarter call, we discussed the tight labor market and the impact on our manufacturing capacity. As we anticipated, the backlog at the end of Q2 did rise through our third quarter, and we continued implementing our response plans, including increasing manufacturing capacity through our Costa Rican partnership and increasing wage rates and retention bonuses at our facilities. I'm pleased to tell you that as we exited Q3, our production hours were up by 20% relative to the December-January timeframe, and we are making great headway on that side of the equation. As was the case last quarter, the demand environment for our med device products remains strong, while our response plans are taking hold. At the end of March, the backlog was approximately $11 million. Clearly, increased demand also impacts the rate at which we are able to work down our backlog. Year-to-date, our med device business declined 1%. When adjusting for the one-time $5 million order from NHS during the prior year period, our med device business grew 2% year-to-date. As we stated during our Investor in Technology Day last summer, we expect our med device business to grow 1% to 3% over our three-year strategic plan period. we are very pleased with this performance, particularly in light of the challenging supply chain environment. As was the case last quarter, while the demand environment remains strong, macro-related factors weighed on margins, which Steve will discuss in more detail. Over the last few quarters, we have noted several macro-related headwinds, including interruptions to the supply chain due to COVID, a tight labor market, and inflationary pressures on wages, raw materials, and freight. We saw COVID, and particularly the Omicron variant, contribute to delays of elective procedures during the third quarter. However, we continue to manage through it well and saw a meaningful improvement beginning in late February, and we are pleased that our procedural volumes continue to increase in March. As has been the case throughout the past two years, we are working through these challenges while simultaneously making the necessary investments in our MedTech businesses to drive growth and facilitate our strategic transformation. Turning to earnings, we generated an adjusted EPS of $0.03 in the quarter. This result was positively impacted by a benefit from the employee retention credit under the CARES Act, which resulted in a fractional reimbursement of expenses that we actually incurred during the first two calendar quarters of 2021. This reimbursement related to maintaining employment for sales, R&D, and support functions materially impacted by restrictive state and federal COVID rules and regulations. We made the decision to maintain our employment and investment levels before we knew this benefit was available to us, and we are appreciative of the assistance in maintaining our hardworking, talented workforce and our investment imperatives. The CARES Act had an approximately $0.08 positive impact on adjusted EPS in the quarter. While we didn't contemplate this relief in our original earnings guidance, it has allowed us to maintain and even accelerate certain investments across a number of areas in our business. As a result, we do not expect this to be additive to our full year adjusted EPS guidance, and we continue to expect full year adjusted earnings per share to be in the range of a loss of two cents to a gain of two cents. Turning to internal R&D during the quarter, we continue 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. One great example is how we recently have received FDA clearance of our AlphaVac F18 mechanical thrombectomy system for use in the venous vasculature. The F18 is a unique design that was purpose-built to allow physicians to treat VTE without lytics with the control and the power they seek when utilizing mechanical thrombectomy. as a first-line treatment tool for patients. The F18 device is also the subject device for our PE IDE. We currently plan to initiate a limited market release later this quarter with a full market release anticipated in the first fiscal quarter of 2023. We are excited about our progress in the mechanical thrombectomy market, and we look forward to continuing to open up a larger, faster growing segments of this market through new product clearances and subsequent launches. Regarding our clinical programs, we remain in investment mode to drive our MedTech platforms and we are excited by our continued progress with respect to our clinical initiatives associated with our thrombectomy and nano knife platforms. We are pleased to announce that the FDA has approved our IDE study for the use of our AlphaVac F18 system to treat acute pulmonary embolism. The study is named APEX-AV and we expect to start enrollment in the second half of this calendar year. We are proud to announce a partnership with the Pulmonary Embolism Response Team, PERT Consortium, in this important study. APEX is a single-arm, multi-center investigational study of 122 subjects. We expect to initiate approximately 20 sites. The primary efficacy endpoint is the reduction in RV-LV ratio between baseline and 48 hours post-procedure as assessed by CT and geography. Subjects will be followed for 30 days post-procedure. We are also excited to announce that we have enrolled our first patients in our Preserve study for NanoKnife treatment of prostate cancer. We have more than 20 sites in the initiation process for Preserve, and we are excited about our progress. NanoKnife's unique mechanism of action enables it to be used as a focal option for physicians and patients seeking alternatives to radical prostatectomy. We think the NanoLife system can grow the focal treatment market due to its ease of use and unique mechanism of action and can potentially serve as a more favorable treatment option for patients and physicians alike. This could open up a potential addressable market for NanoLife, which we believe is more than $600 million in the U.S. alone. We currently have 22 active sites in our direct study. and we remain excited by the awareness generated by this study. We also note that the U.S. direct study has pawned interest in initiating similar research in other countries. For example, the multicenter direct INSPIRE study in Australia recently enrolled its first patient. Finally, I would like to congratulate our international team for the very successful International Life Symposium held March 10 through 12 in Barcelona, Spain. This international symposium brought together leading experts in the surgery, oncology, urology, and vascular fields to discuss the latest clinical learning and explore new and exciting directions for future patient care. Physician and partner feedback has been exceedingly positive, and this is a testament to the investments that we've made and building out our talented international team. 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.

Thanks, Jim. Good morning, everyone. Before I begin, I'd like to direct everyone to the presentation on our Investor Relations website, summarizing the key items from our quarterly results. Our revenue for the third quarter of FY22 increased 3.9% year-over-year to $74 million, driven by continued strength in our MedTech business, including Arion, NanoKnife, and Thrombectomy. MedTech revenue was $19.6 million, a 28.6% year-over-year increase, while MedDevice revenue was $54.4 million, declining approximately 2.8% compared to the third quarter of FY21. For the first nine months of the year, MedTech grew 41.8 percent. MedDevice was down 0.8 percent compared to the prior year period and grew roughly 2 percent year-over-year when excluding last year's NHS order. For our third fiscal quarter, our MedTech platform comprised 27 percent of our total revenue. Year-to-date, our MedTech platform comprised 24 percent of our total revenue compared to 18 percent at this time last year. Overall demand during the quarter was impacted by both macro-level and company-specific dynamics. Macro-level demand was clearly challenged in December and January, but did improve during the second half of February as Omicron cases declined and hospital access improved. Staffing remains a headwind and likely will remain so through the rest of this calendar year. Customer demand for angiodynamics products has been resilient as evidenced by our results for the quarter and the status of the backlog that Jim mentioned. Revenue in our endovascular therapies business increased 14.5% year-over-year to $38.1 million, benefiting from the continued adoption of Arion in our FromBeckamy portfolio. Arion contributed $7.3 million in revenue during the third quarter, continuing the momentum we've been building since last year's launch. As of today, our installed base is 285 lasers, with 43 lasers placed during the third quarter. As planned, we continued to build out our commercial infrastructure during the third quarter in order to drive ongoing, consistent growth. As Jim stated earlier, we now expect Arion to generate revenue in the range of $26.5 to $27.5 million for the year. Mechanical thrombectomy revenue, which includes angiovac and alphavac sales, grew 14% over the third quarter of FY21. When including unifuse, thrombectomy revenue grew 7% year over year. As Jim noted, DVT thrombectomy procedures were negatively impacted during the quarter, particularly in December and January. We did see improvement beginning in the second half of February, which continued through March. For our fiscal year to date, mechanical thrombectomy grew 18%, and when including unifuse, grew 12%. Given the acute demand disruption due to lower procedure volumes, particularly during that December and January timeframe, we now expect mechanical thrombectomy to grow approximately 20% for the full year, as opposed to the 30% growth we expected before the Omicron disruption. We remain confident that it will be a significant contributor to our overall growth, and we plan to continue to invest in the platform as a key driver of our transformation, as evidenced by the recent clearance of our AlphaVac F18 system and the approval of our PE IDE. The launch of our AlphaVac F18 system provides an initial entry into expanded portions of the DVT market, and the IDE for PE, as we've indicated in the past, gives us the opportunity to more than double our overall available peripheral market. Vascular access revenue decreased 5.6% during the prior year period. Vascular access is one of the three businesses, along with our core angiographic catheter business, and our EVLT business that felt the most impact of the supply chain headwinds and tight labor market that resulted in our backlog. Demand has remained strong for our VA products, and we expect this business to return to growth as we implement our supply chain improvement plans and work through the backlog. For our fiscal year to date, our VA business is down 4.4%, and when accounting for the one-time $5 million NHS order last year, our VA business is up 2.5%. Revenue from our oncology business declined 5% during the quarter as compared to prior year, as oncology-related procedures were acutely impacted by COVID and hospital staffing disruptions. NanoKnife disposable revenue increased 11%, driven by 56% growth in the United States. NanoKnife growth was driven by increased awareness from our clinical studies and a growing installed base. Year-to-date, NanoKnife probe sales were up 17%. The capital environment remained challenged, with capital sales during the quarter of $1 million. Sales of our microwave product declined 6%. And moving down the income statement, as illustrated in the gross margin bridge included in the earnings presentation posted this morning, our gross margin for the third quarter of fiscal year 22 was 52.2%, a decrease of 190 basis points compared to a year ago, but up 40 basis points sequentially including the impact of the CARES Act reimbursement Jim mentioned earlier. In accordance with our strategy, we expect our gross margin to expand as growth in our higher margin MedTech platforms accelerates and our manufacturing initiatives have an increasing impact. In our third quarter, we did see approximately 100 basis points of a benefit from product mix. This benefit was offset by a continuation of the headwinds we discussed during our second quarter call, including the ongoing COVID impact increases in labor and manufacturing costs, inflationary pressures, and freight costs. For our third quarter, gross margin was negatively impacted by approximately 110 basis points versus the prior year period due to increased labor and manufacturing costs. Inflationary pressures on raw material prices resulted in another approximately 100 basis point negative impact. Higher freight costs had an approximately 10 basis point negative impact, and production volume had an approximately 40 basis point negative impact. Arion and Alphavec startup costs accounted for an approximately 50 basis point negative impact. These headwinds were partially offset by an approximately 20 basis point incremental tailwind provided by the CARES Act benefit. We began to see the positive impacts from our capacity improvement initiatives during the second half of the quarter. As an example, excluding the CARES Act benefit, gross margin in the month of February was 53.7%. We expect these dynamics to continue to pressure margins near term and still expect FY22 gross margin to be in the range of 52% to 54%. Our research and development expenses during the third quarter of fiscal year 22 was $7.3 million, or 9.8% of sales, compared to $8.6 million, or 12% of sales, a year ago. We continued our disciplined investment in R&D, focused on driving our key technology platforms, including the clinical spend for our medtech businesses. For FY22, we continue to anticipate R&D spend to target 10% to 13% of sales. SG&A expense for the third quarter of FY22 was $29.1 million, representing 39.4% of sales, compared to $28.6 million, representing 40.2% of sales a year ago. We continue to anticipate FY22 SG&A spending to approximate 40% to 45% of revenues. Our adjusted net income for the third quarter of fiscal year 22 was $1.3 million or adjusted earnings per share of $0.03 compared to adjusted net income of $0.7 million or adjusted earnings per share of $0.02 in the third quarter of last year. COVID relief expense reimbursement under the CARES Act in the third quarter of FY22 and FY21 were $4.2 million and $1.9 million respectively. Adjusted EBITDA in the third quarter of fiscal year 22 was $6.7 million, compared to $5.4 million in the third quarter of fiscal year 21. In the third quarter of fiscal year 22, we used $8.8 million in operating cash, had capital expenditures of $1.1 million, and additions to ARION placement and evaluation units of $1.5 million. As of February 28, 2022, we had $23.9 million in cash and cash equivalents, compared to $34.3 million in cash and cash equivalents on November 30th, 2021. As we discussed in Q2, cash utilization was higher in Q3, primarily as a result of our manufacturing enhancement initiatives. In addition, in line with our expectations, VSOs have increased largely due to customary market terms associated with our Arion customers and the growing revenue contribution of that business. Our debt outstanding remained consistent at $25 million. Turning now to guidance, we continue to anticipate that fiscal year 22 revenue will be in the range of $310 million to $315 million. This does imply a significant step up in revenue from our Q3. Our fourth quarter has four additional selling days relative to our third quarter. And in addition to the improving procedural environment, we continue to add manufacturing capacity and work through the backlog. We also continue to expect full-year adjusted earnings per share to be in the range of a loss of two cents to a gain of two cents as we continue to invest in driving sustainable growth in our key MedTech platforms while also managing the continued headwinds we discussed. As Jim mentioned, while we saw an eight-cent tailwind from the impact of the CARES Act during the third quarter, we used this as an opportunity to continue and accelerate investment in R&D and SG&A across certain areas of the business, and this is contemplated in our full year guidance range. Accordingly, our guidance range remains a loss of two cents to a gain of two cents, despite the CARES Act impact. Overall, we've seen steady improvement in procedural volumes during February and March, and even here in the first week of April, and are confident in our ability to continue to grow the business. We're pleased with the progress we've made towards our strategic transformation, We continue to balance our priorities of achieving top-line growth in the near term with investments that will create sustainable, profitable growth over the long term. I'm proud of our team's ability to continue working towards these goals despite a very challenging operating environment. With that, I'll turn it back to Jim.

Thank you, Steve. This is an incredibly exciting time at Angio Dynamics. We are continuing to improve. our ability to service our growing demand through our manufacturing capacity expansion programs, and increased capabilities of our sales, marketing, and clinical support teams. The COVID pandemic presented unprecedented challenges, and we are proud of how we're managing through it as a resilient company committed to supporting physicians who treat our patients with our unique technologies. We remain focused on transforming angiodynamics into an innovative medical technology company with solutions that address some of the most dynamic opportunities in healthcare. We want to improve patient outcomes and drive high physician satisfaction. We are committed to improving patient care and proving our ability to do so by supporting data collection and research studies. Our third quarter results are evidence of our progress towards that goal and we plan to continue to deliver on our strategic initiatives in the coming quarters. I'd like to thank everyone on the angiodynamics team for all of their hard work during the quarter and their ongoing commitment to our mission. With that, I'd like to turn the call back to our operator to open up the call for questions. Melissa?

Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Jason Bedford with Raymond James. Please proceed with your question.

Good morning, guys. I hope you're doing well. So a few questions. First, on the $11 million question, What's the timing and, I guess, more importantly, the key steps into bringing this down?

Hi, Jason. This is Jim. Good morning. Key steps are expanding our capacity, Jason, to do so. Some of those we outlined on the January call, some of which we have reinforced today. To us, Jason, the largest part of the backlog is really two facets. One, still really strong demand, not just in our MedTech products. But our med device products, our VA team has done a great job articulating the value of our products, as you know, there. And we have strong demand in our VA business, our EVLT lasers, strong demand in our core angiographic catheters, what this company is founded upon. So really strong demand, Jason, is one half of that. Second side, obviously, is our ability to produce, which has been challenged by COVID. Not just with absenteeism and employees having issues with dealing with COVID and recovering safely to return to work. but also us attracting the level of employees that we'd like to have. So we made the decision to move some processes to our Costa Rican partner, and we'll continue that process until we get to a stabilized workforce across our facilities that can support our growing demand. So it's been a challenge, Jason. That's part of it. We believe now, as I mentioned on the call, we're now producing 20% more than we were in the past quarter, and we're starting to eat into that backlog. It'll take a while, Jason. We don't believe we'll be clear by the end of Q4, It will bleed into the first quarter or so of next year. But we have a detailed recovery plan internally, and we know when we're recovering each of those three categories.

Okay. So the assumption here is that the backlog doesn't grow exiting the fiscal fourth quarter. You eat into a portion of that here in the fiscal fourth quarter.

Correct. So our assumption here, Jason, it will be lower at the end of the fourth quarter than it is today.

Okay.

Jason, just to add one piece of clarity to that, we do expect that it will be lower as we exit Q4 than it is today. But one thing I want to emphasize is we are not expecting that we have to clear a significant portion of that to be in line with the guidance that we gave you for Q4.

Right. Okay. That's fair. Just from a macro standpoint, you called out staff shortages. is a continued issue. Can we make the assumption that it's better today than it was in January? And is this kind of the single biggest macro weight on demand right now?

Jason, it is better. Our employees are healthier, so they're back to work in a more consistent basis. So that's a good sign. And we've attracted new employees. And they may be not at the rate we'd love to, as we know there's still a challenge of getting labor for some roles that we offer. We're not the only company having that challenge of attracting employees in this environment. to come work for us. So we've also done things, as we mentioned earlier, we've increased wage rates, other things, as Steve mentioned, which has impacted gross margin. But we are better today than we were three months ago.

And Jason, certainly on the macro side of the equation, staff shortages at hospitals and OBLs were particularly pronounced in December, but even more so in January. That dynamic has changed as we've come out of February and into March and April. So we have seen that as a as a lifting pressure on the macro side that isn't there quite as acutely today as it was back in our third quarter. Okay.

And then maybe last one, and I'll jump back in queue. On the mechanical thrombectomy guide, the delta between kind of the old and the new guidance, is it more of a reflection of softness in alpha vac, angio vac, or is it almost all COVID-related?

It is primarily COVID-related. The difference in the guide is really stemming from the procedural pressures that we saw in Q3. And if you think about that, a lot of that is angiovac because, you know, we're in the very early stages of the alphavac launch. But we definitely saw the DVT procedure volume be impacted in that December-January timeframe because of the macro COVID headwinds. And then, you know, that will have kind of just a lingering effect as you push those procedures out. does not change our perspective at all in terms of this market or the products that we have to go into this market and the benefits that that will drive for us over our strategic planning horizon. But it does impact, you know, it is a follow-on impact from what we saw in Q3. Okay, thank you.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of Bill Polizonic with Canaccord Genuity. Please proceed with your question.

Bill Polizonic Great. Thanks for taking my questions. Good morning. One clarifying question on the backlog. You know, you ended at 9.6 million. You're at 11 million. The commentary was that it would be lower at the end of the fourth quarter than it is today or versus the end of the third quarter. Like, how much do we expect to bleed off over the next quarter? is my first question.

Hey, Bill. Good morning. It's Jim. Bill, I think the comment I made is lower than it is today. It's what we expect. And as you know, the two inputs, Bill, we can't control one of them. We can't control our order and our demand rate. We're fortunate it's very strong in our tech and our device platforms. But number two, we can control our output, our capacity expansion programs, and those are growing as we speak.

Okay. Okay. And then you made some commentary specifically, I think this hits mostly the vascular access. Does this have any impact on any of the other areas? And if you could quantify it, is it like 70%, 80% into the vascular access? And are there any one or two products it's impacting?

So, Bill, it's clearly wholly resident within our med device segments. And it's fairly evenly split among the three product lines in that device segment of our angiographic catheters, EVLT, and then vascular access. So you can think about it as being relatively, you know, a third, a third, a third.

Great. Thank you. And then in terms of the mechanical thrombectomy, just for clarity, you know, it seems – You know, the December-January commentary, was that relative to the AngioVac product? And how is AlphaVac ramping against your initial plans at this point?

So, Bill, most of the commentary we made is regarding AngioVac. And as you know, you know, we have products that are okay to use in the right heart. And now with AlphaVac, we're looking at DVT as the first line of VTE we're treating. As you know, we have the PE study kicking off to prove it for the AlphaVac F18 for PE. So ultimately, what we saw was some DVT procedures were being postponed or suspended or people were treated differently with the hospital shortage and ICU full beds. I think on the PE side, those are more acute. Other companies were treating PE maybe in a more acute space than what we saw for DVT. So that was the experience we had, Bill, in the last three months. It really related back to the shortage that we had, a little bit of procedures on angioVac. Second, I think your question was on AlphaVac. We have terrific feedback from Alpha Fac. You can probably go online and read what doctors are saying. We're really pleased, not just with the F22 that was launched in the first week of December. We also remind everybody we knew that was a limited opportunity market as it only can treat certain parts of the anatomy that allow a product of a 22 French catheter design to enter the body. Now with the new F18, we'll be able to go lower into the body, treat more parts for people with DVT, and ultimately start our PE study. So, Bill, we're off to a great start. Feedback's terrific. And we're excited now to get the F18 product in the limited market release and full release in the summer.

Great. And then last question for me, if I may, is just, you know, Arion continues to just blow away our expectations. And I'm just curious, is this a, you know, as you look back, is this the same store sales? I mean, I know the unit placements, new placements have been very strong. How would you categorize the driver of this?

Great question, Bill. We are pleased, too. It's a combination of an amazing product. It is truly amazing, and we have more to come on what it can do beyond its current arthrectomy indication. We think it can do other things. We'll talk more detail at another time. So number one, the product, it does a really effective job, and some of the proof of that is the ratio of the below-the-knee procedures that patients now are being treated for. Because there weren't a lot of other options before in that space. There may have been one or maybe two devices that could do that. Now we're offering customers the safety and security of a laser with the power Ariane brings. So, Bill, it's really a combination of both. We're expanding the usage based on demand. That's why we highlighted another 43 lasers placed. Strong demand is there for the product. And number two, back to your same-store sales comment, we agree. and we're getting more and more people, once they get the unit in-house, they get confidence in using it and try it in more situations, we're seeing increases then in the procedures on a monthly basis in our current settings. And that's really our goal over time, Bill. Over time, you know, we're not going to keep putting, you know, 43 or 45 lasers in every quarter. We want to work on that utilization and getting customers confident to use Arion as their first-line treatment in their care settings, and we'll think we'll grow same-store sales over time at a more robust rate, and it'll be a more important part of our growth for years to come.

Thank you very much.

Thank you. Our next question comes in line of Stephen Lichtman with Oppenheimer & Company. Please proceed with your question.

Thank you. Good morning, guys. I guess just building on Orion, what success are you seeing in instant re-stenosis and Is that playing out as you expected? Is it better than expected in terms of how much you're gathering of that portion of the market?

Hi, Steve. Good morning. We're really pleased. One of the things that drew us to the device initially was the fact that it could do ISR. It was approved by the FDA during the study to do ISR. So we're really pleased. So what you do, you know, it's funny. Steve and I quote about half above the knee and half below the knee. That's taking out about 10% of the overall procedures that are done for instant retinosis. So when you look at it on a macro scale, Steve, 10% of the overall procedures that we track are really for ISR, and then the other 90% are split about half and half above and below the knee. So that's about what our expectations were. We're pleased with that ratio.

It's a great question, Steve. And it's important to realize that laser technologies are the only technologies that are out there that can do ISR. And so getting that segment of the market with this particular product really does help us. But then you add into that the fact that we can go above and below the knee. It really does highlight the versatility of the ARION technology.

Thanks.

You also mentioned commercial investment in Orion. How many sales reps did you reach in the quarter in that business, and where do you anticipate ending the fiscal year?

Yeah, so it's a good question. So we have 77 dedicated employees in that business as of today. That includes roughly 40 field-based sales reps, quota-carrying reps. We also have We have 14 employees that are clinical field specialists, and then we have a number of per diems that are helping support that business. We're going to continue to invest in that business, probably not exactly at the same pace that we have over the last two years as we continue up our ramp on this business. But we're really pleased with the trajectory we've seen in this business, and we want to make sure that we continue that trajectory going forward. So we're going to continue those investments. I would expect we'll end the year a little higher than the numbers I just quoted you. as we continue to be very thoughtful about how we invest in the business.

Got it. Thanks, Stephen. And lastly, we focused a lot on the macro dynamics in the U.S. to make sense given the proportion of sales in the U.S. for you guys. But how are things trending internationally? Are you seeing improvements there as well in terms of the end markets?

We're starting to, but it's very choppy. I'm sure others would probably comment in a similar fashion. Bill, there still are regional challenges. As you know, China is a massive challenge with the issues they've had and the way they're trying to take care of their population there presents challenges for us on a commercial scale. You look at areas like our Latin America business, our Canadian teams have done an excellent job. A lot of parts of Europe, our European teams and our Middle East teams have done a really, really good job. So we have a lot of not just solid business, but people really interested now. Nanonife adoption has been very high, and we're really pleased with how that goes. And over time, we're building out a commercial team with a new international leader, and we're putting a lot of resource deployment into that team behind her strategy. So we have more to come, and we'll share more with you over time.

Okay, great. Thanks, Jim and Steve. Thanks, Steve.

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

Hey, good morning, guys. One of the questions we're getting this morning is around free cash flows. What's the free cash flow expectation for the remainder of the year? And it seems like spending is increasing here to fund growth. How are you thinking about funding the growth into next year? Yeah, it's a great question. So as we had talked about coming out of our Q2, we did expect that we were going to seek higher cash utilization in our Q3. The investments that we needed to make to bring the additional manufacturing capacity online was a big part of that. the disruption that we've talked about is also going to have an impact in that quarter. And so we're seeing an improving environment as we move out of Q3 into Q4. One of the other things to point to is we saw that increase in our receivables, particularly in our day's sales outstanding. That was expected. That's something that we see with that Arianne customer base becoming a larger portion of our overall customer base. Those are customary market terms to give them a little bit longer payment cycles. So you see some element that was coming from the additional to bring the capacity online, and then some being a little bit more structural in terms of timing, but that we were expecting that. We do expect you're going to see a reversal of that trend as we head into Q4. And so some of those spending will abate, and then as we move into Q4, I expect to see a different profile in terms of cash utilization. You know, your question on investment into the growth drivers. Yeah, I think one of the things I'll point to is the balancing that we had mentioned, you know, coming from some of the CARES Act. We do expect that that cash will be coming in as we, you know, get towards the end of our fiscal year or into next fiscal year. But it shows some of the balancing that we do as we handled the EPS question. We're always looking at, you know, prioritizing first and foremost those investments that are necessary to drive short and medium-term growth in our growth drivers. And then we're looking from there, you know, ways to balance that with other areas of OPEX in the business. So we're still confident that we're on track to fund the investments that are necessary to drive our long-term growth initiatives as set out in our investor day plan. We're always looking at it. And, you know, we definitely saw higher cash utilization in Q3, but we do expect that to flip a little bit as we head into Q4 and then certainly into next year. Okay. And then just on the gross margin, you know, you kind of had 52 to 54 this year, you know, what do you, as we think about next year, what do you think is transitory in this 52 to 54? I mean, it seems like you're going to get a product mixed benefit, you know, regardless going into next year because of the growth in, in, in, in med tech. But what, what can, what can, can, can switch on you from 22 to 23 to the positives? Yeah, it's a, it's a good question. And I think the first thing to point to is that product mixed benefits. That's right in line with what our long-term strategy has been. As those med tech products comprise a much larger portion of our revenue base, they're going to see gross margin accretion. And that's really our story over our strategic planning horizon. As you saw in this quarter, the COVID impacts did take a chunk out of that, and it kind of reset a little bit of the baseline. So we talked about inflation coming from raw materials. Look, I think that's going to be around for a little while. That probably continues as you move into Q4 and into the first half of next year at least. we'll see where the macro environment goes. Labor inflation, that's also something that's going to be with us for a while. The tight labor market just has that follow-on effect of additional wage rate increase being necessary and some of those retention and referral bonuses that we talked about, keeping people in our plant. I think those things are going to be around for a while. I do expect that over our horizon, they will normalize and that you'll get back to seeing the full story of that gross margin accretion coming from product mix. All right, excellent. And then the last question, just can you give us a sense of the timeline to completion for the IDE on PE? Yeah, so what we really are excited about that product is that the precedent has been set, right? So Jim talked about the RV-LV ratio as being the primary efficacy endpoint. The other products that are out there that have a PE indication, that's the endpoint that they use. So it's a nice predictable target to go after. And we talked about a 30-day follow-up. And so, you know, with 120 patients or so, we think that can be a relatively quick and rolling trial. You know, it's going to be very different than what you saw with some of those oncology endpoint trials that we've talked about with Nanonife in the past. Excellent. Thank you. Thank you, Matt.

Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll turn the floor back to Mr. Klemmer for final comments.

Thank you, Melissa. And again, we're really proud of the work that our team has done here. Working through the pandemic, we have employees across the globe who are committed to serve our customers who serve patients in need of our technologies for wellness and care. So I want to thank the Agile Dynamics employees and remind investors on the call, we are committed to our future, investing in our growth, investing in our platforms. Thank you again for joining us today on the call.

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