AtriCure, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts referenced in this Item 2 are in thousands, except per share amounts.) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and notes thereto contained in Item 1 of Part I of this Form 10-Q and our audited financial statements and notes thereto as of and for the year ended December 31, 2021 included in our Form 10-K filed with the Securities and Exchange Commission (SEC) to provide an understanding of our results of operations, financial condition and cash flows. Forward-Looking Statements This Form 10-Q, including the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” contains forward-looking statements regarding our future performance. All forward-looking information is inherently uncertain and actual results may differ materially from assumptions, estimates or expectations reflected or contained in the forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this quarterly report on Form 10-Q, and in our annual report on Form 10-K for the year ended December 31, 2021. There may be additional risks of which we are not presently aware or that we currently believe are immaterial which could have an adverse impact on our business. Forward-looking statements address our expected future business, financial performance, financial condition and results of operations, and often contain words such as “intends,” “estimates,” “anticipates,” “hopes,” “projects,” “plans,” “expects,” “seek,” “believes,” “see,” “should,” “will,” “would,” “could,” “can,” “may,” “future,” “predicts,” “target,” and similar expressions and the negative versions thereof. Such statements are based only upon current expectations of AtriCure. Any forward-looking statement speaks only as of the date made. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to differ materially from those expressed or implied. Forward-looking statements include statements that address activities, events, circumstances or developments that AtriCure expects, believes or anticipates will or may occur in the future. Forward-looking statements are based on AtriCure’s experience and perception of current conditions, trends, expected future developments and other factors it believes are appropriate under the circumstances and are subject to numerous risks and uncertainties, many of which are beyond AtriCure’s control including developments related to the COVID-19 pandemic, as discussed herein. With respect to the forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements speak only as of the date of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise unless required by law. Overview We are a leading innovator in treatments for atrial fibrillation (Afib), left atrial appendage (LAA) management and post-operative pain management. Afib affects 1-2% of the population in the United States and an estimated 33 million people worldwide. It is the most common cardiac arrhythmia, or irregular heartbeat, encountered in clinical practice and results in high utilization of healthcare services. Patients often progress from being in Afib intermittently (paroxysmal) to being in Afib continuously. The continuous Afib patient population includes persistent Afib, which lasts seven days to one year, and long-standing persistent Afib, which lasts longer than one year. Afib often occurs in conjunction with other cardiovascular diseases, including hypertension, congestive heart failure, left ventricular dysfunction, coronary artery disease and valvular disease. Our ablation and left atrial appendage management (LAAM) products are used by physicians during both open-heart and minimally invasive procedures. In open-heart procedures, the physician is performing heart surgery for other conditions, and our products are used in conjunction with (“concomitant” to) such a procedure. Minimally invasive procedures are performed on a standalone basis, and often include multi-disciplinary or “hybrid” approaches, combining surgical procedures using AtriCure ablation and LAAM products with catheter ablation. We believe that we are currently the market leader in the surgical treatment of Afib. Our Isolator ® Synergy™ Ablation System is approved by the United States Food and Drug Administration (FDA) for the treatment of persistent and long-standing persistent Afib concomitant to other open-heart surgical procedures. Our EPi-Sense ® System is approved by FDA to treat patients with long-standing persistent Afib. All of our other ablation devices are cleared for sale in the United States under FDA 510(k) clearances, including our other radio frequency (RF) and cryoablation products, which are indicated for the ablation of cardiac tissue and/or the treatment of cardiac arrhythmias. In addition, certain of our cryoablation probes are cleared for managing pain by temporarily ablating peripheral nerves, or Cryo Nerve Block therapy. Our AtriClip ® LAA Exclusion System products are 510(k)-cleared with an indication for the exclusion of the LAA, performed under direct visualization and in conjunction with other cardiac surgical procedures. Direct visualization, in this context, requires that the surgeon is able to see the heart directly, with or without assistance from a camera, endoscope or other appropriate viewing technologies. Studies have demonstrated exclusion of the LAA with AtriClip also results in electrical isolation of the LAA. The LARIAT® system is cleared under the 510(k) process for soft tissue ligation. Several of our products are currently being studied to expand labeling 16 Table of Contents claims or to support indications specifically for the treatment of Afib, prophylactic stroke reduction or other arrhythmias. Our Isolator Synergy clamps, Isolator Synergy pens, Coolrail ® linear pen, cryoablation devices, cryoSPHERE ® probe, certain products of the AtriClip LAA Exclusion System, the EPi-Sense ® system and LARIAT Suture Delivery Device bear the CE mark and may be commercially distributed throughout the member states of the European Union and other countries that comply with or mirror the Medical Device Directive. Our Isolator Synergy clamps, Isolator Synergy pens, Coolrail linear pen, cryoablation devices and certain products of the AtriClip LAA Exclusion System are available in select Asia-Pacific countries. We anticipate that substantially all of our revenue for the foreseeable future will relate to products we currently sell or are in the process of developing. We sell our products to medical centers through our direct sales force in the United States and in certain international markets, such as Germany, France, the United Kingdom, the Benelux region and Australia. We also sell our products through distributors who in turn sell our products to medical centers in other international markets. Our business is primarily transacted in U.S. Dollars, with certain exceptions. Direct sales transactions outside the United States are transacted in Euros, British Pounds or Australian Dollars. Recent Developments During 2022, we continued to experience variability and intermittent demand for our products as non-emergent procedures were deferred in order to preserve resources for COVID-19 patients and caregivers and hospital staffing was impacted by the pandemic and related factors. We saw many regions stabilize through the quarter with overall improvements in procedure volumes. However, we expect some variability to continue as we operate in many geographic regions with diverse restrictions that are impacted as new COVID-19 variants emerge. Despite the challenging environment resulting from the pandemic, our worldwide revenue in the six months ended June 30, 2022 was $159,105, representing an increase of $28,454, or 21.8%, over the first six months of 2021, driven by growing adoption across key product lines. We continue to build on our strategic initiatives of product innovation, investing in clinical science and expanding awareness and adoption by providing superior training and education. PRODUCT INNOVATION . During the first half of 2022, we launched our ENCOMPASS ® clamp, following the receipt of 510(k) clearance for ablation of cardiac tissue during cardiac surgery in July 2021. The ENCOMPASS clamp marks innovation in our core open ablation market and is designed to make concomitant surgical ablations more efficient. It is expected to drive deeper penetration of cardiac surgery procedures. CLINICAL SCIENCE . We continue to invest in studies to expand labeling claims or support various indications for our products, and we also conduct various studies to gather clinical data regarding our products. HEAL-IST. In February 2022, FDA approved the protocol for the Hybrid Epicardial and Endocardial Sinus Node Sparing Ablation Therapy for Inappropriate Sinus Tachycardia (IST) clinical trial (HEAL-IST) . The HEAL-IST clinical trial is designed to study the safety and efficacy of a hybrid sinus node sparing ablation procedure using the Isolator Synergy Surgical Ablation System for the treatment of symptomatic, drug refractory or drug intolerant IST. The trial is a prospective, multicenter, single arm trial that evaluates safety 30 days post-procedure and evaluates primary effectiveness of freedom from IST (as specified) at 12 months post-procedure. The trial provides for enrollment of up to 142 patients at up to 40 sites in the United States, United Kingdom and European Union. We announced the first patient enrollment in the trial in June 2022; site initiation and enrollment is ongoing. LeAAPS. In April 2022, FDA approved the protocol for the Left Atrial Appendage Exclusion for Prophylactic Stroke Reduction (LeAAPS) IDE clinical trial. The trial is designed to evaluate the effectiveness of prophylactic LAA exclusion using the AtriClip LAA Exclusion System for the prevention of ischemic stroke or systemic arterial embolism in cardiac surgery patients without pre-operative AF diagnosis who are at risk for these events. The trial is a prospective, multicenter, randomized trial that evaluates safety at 30 days post-procedure to demonstrate no increased risk with LAA exclusion during cardiac surgery. The trial provides for enrollment of up to 6,500 subjects at up to 250 sites worldwide. The Company anticipates enrollment to begin later this year. TRAINING . Our professional education and marketing teams conduct virtual, in-person and mobile training for physicians and our sales teams. These training methods ensure invaluable access to continuing education and awareness of our products and related procedures. The 2021 FDA approval of the EPi-Sense system has enabled us to educate and train physicians on the benefits of Hybrid AF™ therapy in treating long-standing persistent Afib patients. Our Hybrid Training Course and Advanced Hybrid Ablation Training Course are co-sponsored by the Hearth Rhythm Society (HRS). 17 Table of Contents Results of Operations Three months ended June 30, 2022 compared to three months ended June 30, 2021 The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of revenue: Three Months Ended June 30, 2022 2021 Amount % of Revenues Amount % of Revenues Revenue $ 84,529 100.0 % $ 71,376 100.0 % Cost of revenue 21,010 24.9 % 17,298 24.2 % Gross profit 63,519 75.1 % 54,078 75.8 % Operating expenses: Research and development expenses 14,791 17.5 % 12,197 17.1 % Selling, general and administrative expenses 62,388 73.8 % 56,958 79.8 % Total operating expenses 77,179 91.3 % 69,155 96.9 % Loss from operations (13,660) (16.2) % (15,077) (21.1) % Other expense, net: (1,136) (1.3) % (1,108) (1.6) % Loss before income tax expense (14,796) (17.5) % (16,185) (22.7) % Income tax expense 45 0.1 % 66 0.1 % Net loss $ (14,841) (17.6) % $ (16,251) (22.8) % Revenue. The following table sets forth, for the periods indicated, our revenue by product type and geography expressed as dollar amounts and the corresponding change in such revenues between periods, in both dollars and percentages: Three Months Ended June 30, Change 2022 2021 Amount % Open ablation $ 22,070 $ 19,503 $ 2,567 13.2 % Minimally invasive ablation 10,154 9,702 452 4.7 % Pain management 10,210 5,709 4,501 78.8 % Appendage management 28,831 25,156 3,675 14.6 % Total United States $ 71,265 $ 60,070 $ 11,195 18.6 % Total International 13,264 11,306 1,958 17.3 % Total revenue $ 84,529 $ 71,376 $ 13,153 18.4 % Worldwide revenue increased 18.4% (19.8% on a constant currency basis). In the United States, we experienced growth in most of our key product lines. Physician acceptance of our cryoSPHERE ® probe for post-operative pain management and expanded sales efforts drove growth in pain management revenue. Appendage management sales were driven by continuing adoption of our AtriClip® Flex⋅V ® and Pro⋅V ® devices, while the launch of the new ENCOMPASS clamp accelerated growth in our open ablation revenue. While minimally invasive procedures continue to experience residual impacts from the pandemic and staffing, we saw growing adoption of the EPi-Sense ® System in an increasing customer base. The increase in EPi-Sense revenue was largely offset by a decline in revenue from all other minimally invasive ablation products. International sales increased 17.3% (26.3% on a constant currency basis), a result of rebounding procedure volumes in Europe, primarily in the Netherlands and United Kingdom, and growth in Australia. The increase in international revenue was driven mainly by our appendage management business which grew 35.1%. 18 Table of Contents Revenue reported on a constant currency basis is a non-GAAP measure and is calculated by applying previous period foreign currency (Euro) exchange rates, which are determined by the average daily Euro to Dollar exchange rate, to each of the comparable periods. Revenue is analyzed on a constant currency basis to better measure the comparability of results between periods. Because changes in foreign currency exchange rates have a non-operating impact on revenue, we believe that evaluating growth in revenue on a constant currency basis provides an additional and meaningful assessment of revenue to both management and investors. Cost of revenue and gross margin. Cost of revenue increased $3,712, reflecting higher sales volumes, while gross margin decreased approximately 70 basis points, reflecting changes in U.S. product mix and cost increases driven by inflationary and supply chain pressures. Research and development expenses. Research and development expenses increased $2,594 or 21.3%. Personnel costs rose $1,372 from increased headcount as we continue to build our product development, regulatory and clinical teams, and from increased travel costs. Product development and regulatory expenses increased $869 driven mainly by regulatory filings, submissions and consulting related to compliance with the European Union Medical Device Regulation (EU MDR). Amortization expense increased $247 following the April 2021 PMA resulting from the CONVERGE IDE clinical trial. Selling, general and administrative expenses. Selling, general and administrative expenses increased $5,430, or 9.5%. Additional headcount and travel activities of $4,058 drove the increase in expenses, primarily reflecting the expansion of our sales and training teams, while meetings, marketing, trainings and tradeshow activities contributed $2,054 of the increase in expenses as we saw further transition from virtual to in-person events. Other operating costs grew $838 compared with the prior period, which includes consulting, professional services and information systems enhancements. Additionally, 2021 included a $2,600 charge for the change in fair value of the SentreHEART contingent consideration liability, as well as a reduction in expenses from a one-time tax credit of $759. Other income (expense). Other income and expense consists primarily of net interest expense and foreign currency transaction gains and losses. Net interest expense decreased $69 primarily due to lower interest expense as a result of the November 2021 amendment of our Loan Agreement. Six months ended June 30, 2022 compared to six months ended June 30, 2021 The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of revenue: Six Months Ended June 30, 2022 2021 Amount % of Revenues Amount % of Revenues Revenue $ 159,105 100.0 % $ 130,651 100.0 % Cost of revenue 39,991 25.1 % 32,033 24.5 % Gross profit 119,114 74.9 % 98,618 75.5 % Operating expenses: Research and development expenses 28,420 17.9 % 23,414 17.9 % Selling, general and administrative expenses 118,504 74.5 % 106,166 81.3 % Total operating expenses 146,924 92.3 % 129,580 99.2 % Loss from operations (27,810) (17.5) % (30,962) (23.7) % Other expense, net: (2,113) (1.3) % (2,109) (1.6) % Loss before income tax expense (29,923) (18.8) % (33,071) (25.3) % Income tax expense 101 0.1 % 97 0.1 % Net loss $ (30,024) (18.9) % $ (33,168) (25.4) % Revenue. The following table sets forth, for the periods indicated, our revenue by product type and geography expressed as dollar amounts and the corresponding change in such revenues between periods, in both dollars and percentages: 19 Table of Contents Six Months Ended June 30, Change 2022 2021 Amount % Open ablation $ 41,044 $ 36,942 $ 4,102 11.1 % Minimally invasive ablation 18,769 18,087 682 3.8 % Pain management 18,224 9,607 8,617 89.7 % Appendage management 55,500 45,743 9,757 21.3 % Total United States $ 133,537 $ 110,379 $ 23,158 21.0 % Total International 25,568 20,272 5,296 26.1 % Total revenue $ 159,105 $ 130,651 $ 28,454 21.8 % Worldwide revenue increased 21.8% (23.0% on a constant currency basis). In the United States, we experienced growth across most key product lines as cardiac surgery volumes began to stabilize. Appendage management revenue increases were driven by sales of the AtriClip® Flex⋅V ® and Pro⋅V ® devices, while continuing adoption of the cryoSPHERE ® probe for post-operative pain management drove pain management sales. The launch of the new ENCOMPASS clamp contributed to the open ablation sales growth, while adoption of the EPi-Sense ® System drove increases in minimally invasive ablation and offset declines in other minimally invasive ablation products. International sales increased 26.1% (33.7% on a constant currency basis), with procedure volumes rising across all major franchises and regions. Cost of revenue and gross margin. Cost of revenue increased $7,958, reflecting higher revenue and a decrease in gross margin of approximately 60 basis points, resulting from changes in U.S. product mix and cost inflation and supply chain pressures, slightly offset by geographic mix. Research and development expenses. Research and development expenses increased $5,006 or 21.4%. Personnel costs increased $2,560 from additional headcount as we continue to build our product development, regulatory and clinical teams and return to historical travel levels. Regulatory submissions, consulting, as well as product development projects increased $1,119. Amortization expense increased $978 following the April 2021 PMA resulting from the CONVERGE IDE clinical trial. Selling, general and administrative expenses. Selling, general and administrative expenses increased $12,338, or 11.6%. Additional headcount and travel activities increased $9,459, primarily reflecting the expansion across our teams, as well as a return to historical travel levels. Additional tradeshow, meetings, physician training and marketing activities contributed $4,969 of the increase reflecting continuing transition from virtual to in-person events and the expansion of training programs. Other operating costs, including contracting, product demo costs and professional services grew $1,161 as compared to the prior period. Additionally, 2021 expenses included a $5,100 charge for the change in fair value of the SentreHEART contingent consideration liability, partially offset by a one-time tax credit of $759. Other income (expense). Other income and expense consists primarily of net interest expense and foreign currency transaction gains and losses. Net interest expense decreased $240 primarily due to lower interest expense stemming from the November 2021 amendment of our Loan Agreement. Liquidity and Capital Resources As of June 30, 2022, the Company had cash, cash equivalents and investments of $182,749 and outstanding debt of $60,000. We had unused borrowing capacity of $28,750 under our revolving credit facility. Most of our operating cash and all cash equivalents and investments are held by United States financial institutions. We had net working capital of $149,850 and an accumulated deficit of $310,177 as of June 30, 2022. Six Months Ended June 30, 2022 2021 Change (dollars in thousands) Net cash used in operating activities $ (20,403) $ (13,849) $ 6,554 Net cash provided by investing activities 40,243 47,528 (7,285) Net cash used in financing activities (8,636) (7,889) 747 Cash flows used in operating activities. Net cash used in operating activities increased $6,554 in 2022 compared to 2021. This change is driven by the fluctuation in working capital and other assets and liabilities of $6,389, primarily due to the 20 Table of Contents $9,665 reduction in accrued liabilities as a result of higher annual variable compensation payments due to improved operating performance, offset by a $2,042 decrease in accounts receivable. The remaining fluctuation is a decrease in the net loss of $3,144, largely driven by a decrease in non-cash expenses, including $5,100 non-cash impact for the fair value adjustment of the SentreHEART contingent consideration liability in 2021, offset partially by increased amortization of the CONVERGE technology asset. Cash flows provided by investing activities. Net cash provided by investing activities decreased by $7,285 in 2022 compared to 2021, reflecting decreases in net sales and maturities of available-for-sale securities of $5,259 and increased purchases of property and equipment of $2,026 for the expansion of our manufacturing facilities and new product introductions. Cash flows used in financing activities. Net cash used in financing activities increased by $747 in 2022 largely reflecting lower stock option exercise activity of $6,090, offset by a decrease of $4,927 in cash tax payments from restricted and performance share vesting and increased proceeds from issuance of shares under ESPP of $453. Credit facility. Our Loan and Security Agreement, as amended and modified effective November 1, 2021 (Loan Agreement) with Silicon Valley Bank (SVB) provides for a $60,000 term loan, a $30,000 revolving line of credit, and an option to make available an additional $30,000 in term loan borrowings. The Loan Agreement has a five year term, expiring November 2026. Principal payments are to be made ratably commencing 24 months after the inception of the loan through the loan's maturity date. At the option of the Company, the commencement of term loan principal payments may be extended an additional twelve months. The term loan accrues interest at the Prime Rate plus 1.25% and is subject to an additional 3.00% fee on the term loan principal amount at maturity. As of June 30, 2022, our outstanding debt was $60,000 and is classified as noncurrent. We had unused borrowing capacity of $28,750 under our revolving credit facility. For additional information on the terms and conditions, as well as applicable interest and fee payments, see Note 6 — Indebtedness. Our corporate headquarters lease agreement requires a $1,250 letter of credit which renews annually and remains outstanding as of June 30, 2022. Uses of liquidity and capital resources. Our executive officers and Board of Directors review our funding sources and future capital requirements in connection with our annual operating plan and periodic updates to the plan. Our future capital requirements depend on a number of factors, including, without limitation: market acceptance of our current and future products; costs to develop and support our products, including professional training; future expenses to expand and support our sales and marketing efforts; operating and filing costs relating to changes in regulatory policies or laws; costs for clinical trials and to secure regulatory approval for new products; costs to prosecute, defend and enforce our intellectual property rights; maintenance and enhancements to our information systems and security; and possible acquisitions and joint ventures, including potential business integration costs. We continue to evaluate additional measures to maintain financial flexibility, and we will continue to closely monitor our liquidity and capital resources through the recovery from, and any further disruptions caused by, COVID-19. Our principal cash requirements include costs of operations, capital expenditures, debt service costs and other contractual obligations. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses and disclosures of contingent assets and liabilities at the date of the financial statements. On a periodic basis, we evaluate our estimates, including those related to sales returns and allowances, inventories, share-based compensation and income taxes. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates under different assumptions or conditions. Our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 includes additional information about the Company, our operations, our financial position and our critical accounting policies and estimates and should be read in conjunction with this Quarterly Report on Form 10-Q. Recent Accounting Pronouncements As of June 30, 2022, there were no material changes to the information provided in Note 2, “Recent Accounting Pronouncements” in the Company’s Form 10-K for the fiscal year ended December 31, 2021. 21 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk As of June 30, 2022, there were no material changes to the information provided under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Form 10-K for the year ended December 31, 2021.