What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-26 compared with 2023-05-03 · 89 added, 34 removed, 116 unchanged (51% of the section changed)

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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.

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,” “drives,” “seek,” “believes,” “see,” “focus,” “should,” “will,” “would,” “opportunity,” “outlook,” “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.

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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:

In 2023, we realized significant global 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 six months ended June 30, 2023 was $194,412, representing an increase of $35,307, or 22.2%, over the first six months of 2022, driven by growing adoption across key product lines.

Highlights of the strategic and operational advancements include:

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.

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, with a full launch commencing in the second quarter of 2023.

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

As of the second quarter 2023, all of our products have been submitted to our Notified Body under EU MDR.

These activities are in addition to several new product development programs currently underway.

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.

In April 2022, the 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.

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site initiation and enrollment is ongoing.

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

Recently, results from our CEASE-AF trial were 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.

Trial enrollment was completed in the second quarter of 2023 for the ICE-AFIB clinical trial, which is designed to study the safety and efficacy of our cryoICE ® system for persistent and long-standing persistent Afib treatment during concomitant on-pump cardiac surgery.

The trial provided for enrollment of up to 150 patients at up to 20 sites in the United States.

Patient follow-up for twelve months post ablation required by the study protocol remains ongoing.

Our professional education and marketing teams conduct a variety of virtual and in-person training programs 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.

Our professional education courses continue to benefit from the use of inanimate models or synthetic cadavers, known as cadets, for our physician training activities.

These reusable cadets provide a sustainable alternative to the use of animals or cadavers, in addition to reducing spend on training programs.

Results of Operations

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

Three months ended June 30, 2023 compared to three months ended June 30, 2022

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

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Three Months Ended

March 31, Change

June 30, Change

2023 2022 Amount %

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Worldwide revenue increased 19.4% (19.3% 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.

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

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

International sales increased 20.7% (19.9% on a constant currency basis), across all franchises and major geographic regions, bolstered by strong sales of open ablation and LAAM products in the Asia Pacific market and our direct markets in the United Kingdom and Germany.

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.

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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.

Cost of revenue increased $2,831 primarily reflecting higher sales volumes.

Gross margin increased 130 basis points, driven by favorable production and strategic sourcing efficiencies and offset partially by cost increases and unfavorable geographic and product mix.

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.

Research and development expenses increased $2,647 or 17.9%.

Expansion of product development, regulatory and clinical teams resulted in $1,474 of increased personnel costs, including variable compensation, travel and share-based compensation.

Clinical trial expenses contributed a further $1,406 increase due to strong enrollment activity in the LeAAPS clinical trial during the quarter.

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.

Selling, general and administrative expenses increased $1,395, or 2.2%, driven by a $4,240 increase in personnel costs as a result of growth in headcount and share-based compensation.

This increase was offset by the $1,587 decrease in training costs as a result of growing efficiencies and enhancements to our training programs globally, and a $567 decrease in professional services, information technology, and consulting costs.

The increase in selling, general and administrative expenses was further offset by a net credit to expense of $412 from non-recurring legal settlements, including a $3,500 gain for proceeds received in the second quarter for a matter settled during the first quarter of 2023, partially offset by $3,088 charge for settlement of an intellectual property matter in the second quarter of 2023.

See Note 9 – Commitments and Contingencies for further discussion.

Other income (expense).

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

Six months ended June 30, 2023 compared to six months ended June 30, 2022

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

Revenues Amount % of

Revenue $ 194,412 100.0 % $ 159,105 100.0 %

Cost of revenue 47,726 24.5 39,991 25.1

Gross profit 146,686 75.5 119,114 74.9

Operating expenses:

Research and development expenses 32,765 16.9 28,420 17.9

Selling, general and administrative expenses 123,847 63.7 118,504 74.5

Total operating expenses 156,612 80.6 146,924 92.3

Loss from operations (9,926) (5.1) (27,810) (17.5)

Other income (expense), net:

(1,497) (0.8) (2,113) (1.3)

Loss before income tax expense (11,423) (5.9) (29,923) (18.8)

Income tax expense 171 0.1 101 0.1

Net loss $ (11,594) (6.0) % $ (30,024) (18.9) %

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:

Six Months Ended

June 30, Change

2023 2022 Amount %

Open ablation $ 52,144 $ 41,044 $ 11,100 27.0 %

Minimally invasive ablation 21,007 18,769 2,238 11.9

Pain management 23,658 18,224 5,434 29.8

Appendage management 66,283 55,500 10,783 19.4

Total United States $ 163,092 $ 133,537 $ 29,555 22.1

Total International 31,320 25,568 5,752 22.5

Total revenue $ 194,412 $ 159,105 $ 35,307 22.2 %

Worldwide revenue increased 22.2% (22.4% on a constant currency basis).

In the United States, growth in all key product lines reflected continuing adoption of our products.

Open ablation revenue increases were driven by the EnCompass clamp, which was launched in April 2022.

Sales of the AtriClip Flex⋅V and cryoSPHERE probe contributed to revenue growth in the appendage management and post-operative pain management franchises.

Increased physician adoption of the Hybrid AF™ Therapy procedure using the EPi-Sense System drove growth in minimally invasive sales.

International sales increased 22.5% (23.8% on a constant currency basis) across all franchises and major geographic regions.

Cost of revenue and gross margin.

Cost of revenue increased $7,735 primarily reflecting higher sales volumes, while gross margin increased 60 basis points as realization of increasing production efficiencies more than offset cost pressure from supply chain challenges and geographic and product mix.

Research and development expenses.

Research and development expenses increased $4,345 or 15.3%, primarily from a $3,130 increase in personnel costs due to additional headcount in our product development, regulatory and clinical teams.

The increase in clinical activity driven by the LeAAPS and HEAL-IST clinical trials also contributed incremental expense of $2,162.

This increase was offset by a $770 decrease in product development and consulting costs as EU MDR compliance efforts diminished in 2023.

Selling, general and administrative expenses.

Selling, general and administrative expenses increased $5,343, or 4.5%, largely due to increased personnel costs of $12,003 as a result of growth in headcount, variable compensation and share-based compensation and $1,229 of additional marketing, trade shows, and meeting activities.

Offsetting the increase was a $2,882 decrease in training due to improved efficiencies from our various global training programs, and a $1,182 decrease in legal spend as a result of settlements reached in the first half of 2023.

Selling, general and administrative expenses were also offset by a net gain of $4,466 for non-recurring legal settlements, including a $7,500 gain from proceeds on a matter settled during the first quarter of 2023, partially offset by $3,088 charge for settlement of an intellectual property matter.

See Note 9 – Commitments and Contingencies for further discussion.

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.

As of June 30, 2023, the Company had cash, cash equivalents and investments of $134,623 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.

During the first quarter of 2023 all deposits and loans of Silicon Valley Bank 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,

We had net working capital of $166,565 and an accumulated deficit of $338,213 as of June 30, 2023.

Six Months Ended June 30,

2023 2022 Change

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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.

Net cash used in operating activities decreased $19,335 from 2022 to 2023, reflecting the improvement in operating results after non-cash charges of $21,438 driven by higher sales and a net gain from legal settlements.

This improvement was offset by a $2,103 increase in cash used in working capital and other assets and liabilities.

The increase in cash used in working capital was driven by increased inventory, partially offset by increased collections of accounts receivable.

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.

Net cash provided by investing activities decreased by $27,510 in 2023 compared to 2022, reflecting $30,000 in cash paid for acquisition of intellectual property and a reduction in purchases of property and equipment following our 2022 manufacturing facilities expansion.

Cash flows used in financing activities.

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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 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.

As of June 30, 2023, our outstanding debt was $60,000, of which $13,333 is classified as current and $46,667 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.

Our corporate headquarters lease agreement requires a $1,250 letter of credit which renews annually and remains outstanding as of June 30, 2023.

Uses of liquidity and capital resources.

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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.

As of June 30, 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 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.

As of June 30, 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