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, 2022 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, 2022. 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,” “opportunity,” “could,” “can,” “may,” “future,” “predicts,” “target,” “potential,” and similar expressions and the negative versions of those words, and may be identified by the context in which they are used. 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. 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. 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 procedures performed by an electrophysiologist. 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, 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; direct sales transactions outside the United States are transacted in Euros, British Pounds or Australian Dollars. Recent Developments 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: 17 Table of Contents PRODUCT INNOVATION . 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 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. 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. This prospective, multicenter, randomized trial 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. 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. TRAINING . 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. 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 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 March 31, 2023 2022 Amount % of Revenues Amount % of Revenues Revenue $ 93,494 100.0 % $ 74,576 100.0 % Cost of revenue 23,885 25.5 18,981 25.5 Gross profit 69,609 74.5 55,595 74.5 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 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 before income tax expense (6,398) (6.8) (15,127) (20.3) Income tax expense 78 0.1 56 0.1 Net loss $ (6,476) (7.0) % $ (15,183) (20.4) % 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: 18 Table of Contents Three Months Ended March 31, Change 2023 2022 Amount % Open ablation $ 25,142 $ 18,974 $ 6,168 32.5 % Minimally invasive ablation 9,637 8,615 1,022 11.9 Pain management 11,068 8,014 3,054 38.1 Appendage management 32,342 26,669 5,673 21.3 Total United States $ 78,189 $ 62,272 $ 15,917 25.6 Total International 15,305 12,304 3,001 24.4 Total revenue $ 93,494 $ 74,576 $ 18,918 25.4 % Worldwide revenue increased 25.4% (25.9% on a constant currency basis). 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. 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 $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 $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%. 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. Liquidity and Capital Resources 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. 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 (dollars in thousands) Net cash used in operating activities $ (4,079) $ (24,632) $ (20,553) Net cash provided by investing activities 28,813 19,722 9,091 Net cash used in financing activities (5,517) (10,497) (4,980) 19 Table of Contents Cash flows used in operating activities. 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 $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 $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) 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 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 March 31, 2023. 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; costs 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 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. 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, 2022 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 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. 20 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk 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.