What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-03 compared with 2022-11-02 · 52 added, 140 removed, 98 unchanged (66% of the section changed)

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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, without limitation, 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.

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We are a leading innovator in treatments for atrial fibrillation (Afib), left atrial appendage (LAA) management and post-operative pain management.

Afib affects 1% to 2% of the population in the United States and an estimated 37 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.

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 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 system 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.

Our pain management device is used by physicians to freeze nerves during cardiothoracic or thoracic surgical procedures.

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 sell our products to medical centers through our direct sales force in the United States, 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.

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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.

Beginning in the second quarter many regions began to stabilize 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 nine months ended September 30, 2022 was $242,351, representing an increase of $41,240, or 20.5%, over the first nine months of 2021, driven by growing adoption across key product lines.

We continue to build on our strategic initiatives of product innovation, clinical science and expanding awareness and adoption by providing superior training and education.

During the first quarter of 2023, we realized significant revenue growth and expanded on our strategic initiatives of product innovation, clinical science and expanding physician awareness and adoption through superior training and education.

Our worldwide revenue for the three months ended March 31, 2023 was $93,494, representing an increase of $18,918, or 25.4%, over the first three months of 2022, driven by growing adoption across key product lines.

Key strategic and operational advancements during the first quarter include:

PRODUCT INNOVATION .

In April 2022 we launched our EnCompass ® clamp, following 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.

During September 2022, the Company received final labeling approval for the next generation EPi-Sense ST device that will be launched in the fourth quarter.

During September 2022, the Company received final labeling approval from FDA for the next generation EPi-Sense ST device and began a limited launch in the fourth quarter of 2022 that was completed in the first quarter.

We expect to begin a full launch later in 2023.

We continue to make significant progress on the submission of our products for clearance under the European Medical Device Regulation.

CLINICAL SCIENCE .

We continue to invest in studies to expand labeling claims, support various indications for our products, and gather clinical data regarding our products.

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.

The first patient enrollment in the trial occurred in June 2022;

site initiation and enrollment is ongoing.

We invest in studies to expand labeling claims, support various indications for our products and gather clinical data regarding our products.

In April 2022, FDA approved the protocol for the Left Atrial Appendage Exclusion for Prophylactic Stroke Reduction (LeAAPS) IDE clinical trial.

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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.

In January 2023, we announced first patient enrollment in the trial;

site initiation and enrollment is ongoing.

Recently, data from our CEASE-AF trial was presented at the European Heart Rhythm Association meeting.

CEASE-AF is a prospective, multi-center randomized control trial that demonstrated superior freedom from atrial arrhythmias for staged hybrid ablation compared to endocardial catheter ablation.

Our professional education and marketing teams conduct virtual, in-person and mobile training for physicians and other healthcare professionals, as well as 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).

During 2023, we launched new training courses for Advanced Practice Providers, pain management in pectus procedures, as well as a best practice course for developing arrhythmia programs, with a primary focus on hybrid therapies.

Results of Operations

Three months ended September 30, 2022 compared to three months ended September 30, 2021

Three months ended March 31, 2023 compared to three months ended March 31, 2022

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

September 30,

Revenues Amount % of

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Gross profit 69,609 74.5 55,595 74.5

Operating expenses (benefit):

Operating expenses:

Research and development expenses 15,327 16.4 13,629 18.3

Selling, general and administrative expenses 60,064 64.2 56,116 75.2

Change in fair value of contingent consideration — — % (189,900) (269.5) %

Intangible asset impairment — — % 82,300 116.8 %

Total operating expenses (benefit) 72,436 87.0 % (46,443) (65.9) %

(Loss) income from operations (10,723) (12.9) % 98,669 140.0 %

Other expense, net:

Total operating expenses 75,391 80.6 69,745 93.5

Loss from operations (5,782) (6.2) (14,150) (19.0)

Other income (expense), net:

(616) (0.7) (977) (1.3)

(Loss) income before income tax expense (12,226) (14.7) % 97,146 137.9 %

Loss before income tax expense (6,398) (6.8) (15,127) (20.3)

Income tax expense 78 0.1 56 0.1

Net (loss) income $ (12,272) (14.7) % $ 97,108 137.8 %

Net loss $ (6,476) (7.0) % $ (15,183) (20.4) %

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

September 30, Change

March 31, Change

2023 2022 Amount %

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Worldwide revenue increased 25.4% (25.9% on a constant currency basis).

In the United States, we experienced growth in all key product lines.

Strong physician adoption of our cryoSPHERE ® probe for post-operative pain management and our AtriClip ® Flex⋅V ® device drove increased pain management and appendage management sales.

Open ablation revenue increased as a result of both procedure volume and additional revenue per procedure from the EnCompass clamp.

Growth in Epi-Sense System sales, reflecting continuing adoption of Convergent Hybrid AF Therapy in a growing number of accounts, was offset by a decline in sales of all other legacy minimally invasive devices.

Minimally invasive procedures, which are the most elective of our therapies, continue to experience some residual impact from the pandemic and staffing constraints.

International sales increased 4.2% (13.5% on a constant currency basis), primarily a result of growth in Australia and Japan.

The increase in international revenue was driven mainly by our appendage management business which grew 19.5%.

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.

In the United States, we experienced growth in all key product lines, including the EnCompass ® clamp in open ablation, cryoSPHERE ® probe for post-operative pain management and AtriClip ® Flex⋅V ® in the appendage management franchise.

Hybrid AF™ Therapy procedures using the EPi-Sense System drove growth in minimally invasive sales.

International sales increased 24.4% (27.7% on a constant currency basis), across all franchises and geographic regions.

Revenue reported on a constant currency basis is a non-GAAP measure calculated by applying previous period foreign currency exchange rates, which are determined by the average daily 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.

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Cost of revenue and gross margin.

Cost of revenue increased $3,299, while gross margin remained flat, reflecting the benefit of higher sales volumes offset by inflationary and supply chain cost pressures and shift in product mix to lower margin products.

Research and development expenses.

Research and development expenses increased $3,885 or 34.4%.

Personnel costs increased $1,755 as a result of increased headcount and travel costs as we continue to build our product development, regulatory and clinical teams.

Continued development of our product pipeline and clinical trial activity, as well as compliance with the European Union Medical Device Regulation (EU MDR), resulted in a $1,992 increase in discretionary expense.

Selling, general and administrative expenses.

Selling, general and administrative expenses increased $7,394, or 14.8%, as a result of a $5,975 increase in headcount and travel costs.

Training expenses increased $1,150 for additional physician training programs to drive further adoption of our products.

Change in fair value of contingent consideration.

The credit to operating expenses during the three months ended September 30, 2021 reflects the change in probability of payment during the contractual achievement periods to remote for the regulatory and reimbursement milestones related to the aMAZE clinical trial.

Impairment of intangible assets.

During the three months ended September 30, 2021, the Company recorded an impairment charge for the IPR&D asset associated with the aMAZE PMA.

Other income (expense).

Other income and expense consists primarily of net interest expense and net foreign currency transaction losses.

Net interest expense decreased $378 primarily due to lower interest expense as a result of the November 2021 amendment of our Loan Agreement, while foreign currency transaction losses increased $360 primarily as a result of the strengthening U.S.

Nine months ended September 30, 2022 compared to nine months ended September 30, 2021

The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of revenue:

Nine Months Ended

September 30,

Revenues Amount % of

Revenue $ 242,351 100.0 % $ 201,111 100.0 %

Cost of revenue 61,524 25.4 % 50,267 25.0 %

Gross profit 180,827 74.6 % 150,844 75.0 %

Operating expenses (benefit):

Research and development expenses 43,589 18.0 % 34,698 17.3 %

Selling, general and administrative expenses 175,771 72.5 % 150,939 75.1 %

Change in fair value of contingent consideration — — % (184,800) (91.9) %

Intangible asset impairment — — % 82,300 40.9 %

Total operating expenses (benefit) 219,360 90.5 % 83,137 41.3 %

(Loss) income from operations (38,533) (15.9) % 67,707 33.7 %

Other expense, net:

(3,616) (1.5) % (3,632) (1.8) %

(Loss) income before income tax expense (42,149) (17.4) % 64,075 31.9 %

Income tax expense 147 0.1 % 135 0.1 %

Net (loss) income $ (42,296) (17.5) % $ 63,940 31.8 %

Nine Months Ended

September 30, Change

2022 2021 Amount %

Open ablation $ 62,613 $ 54,835 $ 7,778 14.2 %

Minimally invasive ablation 28,846 28,077 769 2.7 %

Pain management 28,734 15,860 12,874 81.2 %

Appendage management 83,120 69,144 13,976 20.2 %

Total United States $ 203,313 $ 167,916 $ 35,397 21.1 %

Total International 39,038 33,195 5,843 17.6 %

Total revenue $ 242,351 $ 201,111 $ 41,240 20.5 %

Worldwide revenue increased 20.5% (21.9% on a constant currency basis).

In the United States, growth reflected continuing adoption of our products and recovery of cardiac surgery volume.

Appendage management revenue increases were driven by sales of the AtriClip ® Flex⋅V ® device, while pain management growth reflects continuing adoption of the cryoSPHERE ® probe for post-operative pain.

The launch of the new EnCompass clamp in April 2022 contributed to the open ablation sales growth.

Wider adoption of the EPi-Sense ® System drove increases in minimally invasive ablation, offset by declines in our legacy minimally invasive ablation products.

International sales increased 17.6% (25.8% on a constant currency basis), with growth across all major franchises and regions.

Cost of revenue and gross margin.

Cost of revenue increased $11,257, while gross margin decreased approximately 40 basis points, reflecting a shift in product mix to lower margin products and inflationary and supply chain cost pressures, partially offset by the benefit of higher sales volumes.

Cost of revenue increased $4,904 reflecting higher sales volumes, while gross margin remained flat as production efficiencies offset continuing supply chain challenges and product mix pressures.

Research and development expenses.

Research and development expenses increased $8,891 or 25.6%.

Personnel costs increased $4,315 from additional headcount as we continue to build our product development, regulatory and clinical teams and return to historical travel levels.

Product development project spend increased $1,859 on continued expansion of our product

Clinical activities, regulatory submissions and consulting activities increased $1,288, largely the result of compliance with EU MDR.

Amortization expense increased $998 following the April 2021 PMA resulting from the CONVERGE IDE clinical trial.

Research and development expenses increased $1,698 or 12.5%, primarily from $1,656 increase in personnel costs due to expansion of product development, regulatory and clinical teams.

The LeAAPS and HEAL-IST clinical trials drove $755 increased cost, partially offset by a $525 reduction in product development and regulatory submission spending compared to 2022 primarily due to project timing.

Selling, general and administrative expenses.

Selling, general and administrative expenses increased $3,948, or 7.0%.

Higher headcount and travel activities contributed an additional $15,435 in personnel costs, while training activities, meetings and trade shows increased $6,532 reflecting an increase in the frequency and cost of in-person events.

Other administrative expenses increased $2,168 for legal activity and information technology costs.

Change in fair value of contingent consideration.

The credit to operating expenses during the nine months ended September 30, 2021 reflects a change in the forecasted timing and probability of achievement of the regulatory and reimbursement milestones related to the aMAZE clinical trial.

Impairment of intangible assets.

During the nine months ended September 30, 2021, the Company recorded an impairment charge for the IPR&D asset associated with the aMAZE PMA.

Growth in both headcount and variable compensation drove $7,763 increase in expense in addition to $948 increases in fees for professional services, consulting and IT expenses during the quarter.

These increases were partially offset by a $4,000 gain for proceeds received for a legal settlement settled during the first quarter of 2023 and $1,067 reduction in legal spending, including a $740 legal cost reimbursement, as a result of a recently settled legal matter.

Other income (expense).

Other income and expense consists primarily of net interest expense and net foreign currency transaction losses.

Net interest expense decreased $618 due to lower interest expense stemming from the November 2021 amendment of our Loan Agreement, offset by an increase in foreign currency transaction losses of $603 primarily as a result of the strengthening U.S.

Liquidity and Capital Resources

As of September 30, 2022, the Company had cash, cash equivalents and investments of $174,057 and outstanding debt of $60,000.

As of March 31, 2023, the Company had cash, cash equivalents and investments of $161,421 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 $154,687 and an accumulated deficit of $322,449 as of September 30, 2022.

Nine Months Ended September 30,

Our primary banking relationship in the United States was with Silicon Valley Bank.

All deposits and loans of Silicon Valley Bridge Bank, N.A.

were purchased by First-Citizens Bank & Trust Company, and our banking relationship is now with Silicon Valley Bank, a division of First-Citizens Bank & Trust Company as of March 31, 2023.

Access to our funds, funding sources and other credit arrangements are adequate to finance or capitalize our current and projected future business operations.

We had net working capital of $175,854 and an accumulated deficit of $333,095 as of March 31, 2023.

Three Months Ended March 31,

2023 2022 Change

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Cash flows used in operating activities.

Net cash used in operating activities increased $8,106 from 2021 to 2022.

This change is driven by the fluctuation in working capital and other assets and liabilities of $6,261.

Working capital fluctuations are primarily due to the $8,593 reduction in accrued liabilities from higher annual variable compensation payments in 2022 due to improved operating performance in 2021 versus 2020, offset by a decrease of $1,598 in accounts receivable.

Net cash used in operating activities decreased $20,553 from 2022 to 2023, reflecting the improvement in operating results after non-cash charges of $9,919 driven by higher sales and a gain from legal settlement.

Cash used in working capital and other assets and liabilities decreased $10,634.

The decrease in cash used in working capital was primarily a reduction in variable compensation payments and collections of increased sales as compared to the same period in 2022.

Cash flows provided by investing activities.

Net cash provided by investing activities increased by $14,577 in 2022 compared to 2021, reflecting higher net sales and maturities of available-for-sale securities of $20,244 and increase in purchases of property and equipment of $5,667 primarily for the expansion of our manufacturing facilities.

Net cash provided by investing activities increased by $9,091 in 2023 compared to 2022, reflecting higher sales and maturities of available-for-sale securities of $8,212 and a reduction in purchases of property and equipment of $879.

Cash flows used in financing activities.

Net cash used in financing activities decreased by $1,108 in 2022 largely reflecting lower proceeds from stock option exercise activity and employee stock purchase plan of $6,263, a decrease of $5,764 in share repurchases for payment of taxes for stock awards and a decrease of $1,607 in repayments of debt and lease obligations.

Net cash used in financing activities decreased by $4,980 in 2023, as fewer shares were repurchased for payment of taxes for stock awards.

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.

Our Loan and Security Agreement, as amended and modified effective November 1, 2021 (Loan Agreement) 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.

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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 September 30, 2022, our outstanding debt was $60,000 and is classified as noncurrent.

As of March 31, 2023, our outstanding debt was $60,000, of which $8,333 is classified as current and $51,667 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 7 – Indebtedness.

Our corporate headquarters lease agreement requires a $1,250 letter of credit which renews annually and remains outstanding as of September 30, 2022.

Our corporate headquarters lease agreement requires a $1,250 letter of credit which renews annually and remains outstanding as of March 31, 2023.

Uses of liquidity and capital resources.

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costs to develop and support our products, including professional training;

future expenses to expand and support our sales and marketing efforts;

costs to expand and support our sales and marketing efforts;

operating and filing costs relating to changes in regulatory policies or laws;

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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 and other macroeconomic conditions including, but not limited to, inflationary pressures, rising interest rates and fluctuations in currency exchange rates.

We continue to evaluate additional measures to maintain financial flexibility, and we will continue to closely monitor macroeconomic conditions including, but not limited to, inflationary pressures, rising interest rates, and fluctuations in currency exchange rates that may impact our liquidity and access to capital resources.

Our principal cash requirements include costs of operations, capital expenditures, debt service costs and other contractual obligations.

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Recent Accounting Pronouncements

As of September 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.

As of March 31, 2023, there were no material changes to the information provided regarding recent accounting pronouncements in Note 1, “Description of the Business and Summary of Significant Accounting Policies” in the Company’s Form 10-K for the fiscal year ended December 31, 2022.

Quantitative and Qualitative Disclosures About Market Risk

As of September 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.

As of March 31, 2023, 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, 2022.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis