Item 2. Management’s Discussion and Analysis
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,” “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. 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, Canada 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, Canadian Dollars or Australian Dollars.
Recent Developments
In 2023, we realized significant global revenue growth and continued our strategic initiatives of product innovation, clinical science and expanding physician awareness and adoption through superior training and education. Our worldwide revenue for the nine months ended September 30, 2023 was $292,702, representing an increase of $50,351, or 20.8%, over the first nine months of 2022, driven by growing adoption across key product lines. Highlights of the strategic and operational advancements include:
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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, 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 of 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.
LeAAPS. 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. 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 enrolled our first patient in the trial; site initiation and enrollment is ongoing.
CEASE-AF. During the second quarter of 2023, 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.
ICE-AFIB . 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.
TRAINING . 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. These trainings allow for collaborative, hands-on engagement with our physician partners and other healthcare professionals. Additionally, our professional education courses continue to benefit from the use of inanimate models or synthetic cadavers, known as CADets. These reusable CADets provide a sustainable alternative to the use of animals or cadavers, in addition to reducing spend on training programs.
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Results of Operations
Three months ended September 30, 2023 compared to three months ended September 30, 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,
2023 2022
Amount % of
Revenues Amount % of
Revenues
Revenue $ 98,290 100.0 % $ 83,246 100.0 %
Cost of revenue 24,421 24.8 21,533 25.9
Gross profit 73,869 75.2 61,713 74.1
Operating expenses:
Research and development expenses 20,354 20.7 15,169 18.2
Selling, general and administrative expenses 61,604 62.7 57,267 68.8
Total operating expenses 81,958 83.4 72,436 87.0
Loss from operations (8,089) (8.2) (10,723) (12.9)
Other income (expense), net: (919) (0.9) (1,503) (1.8)
Loss before income tax expense (9,008) (9.2) (12,226) (14.7)
Income tax expense 47 — 46 0.1
Net loss $ (9,055) (9.2) % $ (12,272) (14.7) %
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
September 30, Change
2023 2022 Amount %
Open ablation $ 25,844 $ 21,569 $ 4,275 19.8 %
Minimally invasive ablation 10,893 10,077 816 8.1
Pain management 12,591 10,510 2,081 19.8
Appendage management 32,364 27,620 4,744 17.2
Total United States $ 81,692 $ 69,776 $ 11,916 17.1
Total International 16,598 13,470 3,128 23.2
Total revenue $ 98,290 $ 83,246 $ 15,044 18.1 %
Worldwide revenue increased 18.1% (17.3% on a constant currency basis). 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. International sales increased 23.2% (18.7% on a constant currency basis), across all franchises and major geographic regions, bolstered by strong sales of open ablation and LAAM products in key markets in Europe and ablation products in the Asia Pacific market.
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 $2,888 primarily reflecting higher sales volumes. Gross margin increased approximately 110 basis points, driven by favorable production efficiencies, partially offset by unfavorable geographic and product mix.
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Research and development expenses. Research and development expenses increased $5,185 or 34.2%. Clinical trial expenses increased $2,455 due to strong enrollment activity in the LeAAPS clinical trial throughout the quarter. Expansion of product development, regulatory and clinical teams resulted in $1,320 of increased personnel costs, including variable compensation, travel and share-based compensation. Product development project spend increased $1,034 as we continue to invest in our product development pipeline, with a corresponding $747 increase in spend for regulatory filings and submissions.
Selling, general and administrative expenses. Selling, general and administrative expenses increased $4,337, or 7.6%, driven by a $5,309 increase in personnel costs as a result of growth in headcount and share-based compensation. This increase was partially offset by a $1,375 decrease in training costs as a result of growing efficiencies and enhancements to our global training programs.
Other income (expense). Other income and expense consists primarily of net interest expense and net foreign currency transaction losses.
Nine months ended September 30, 2023 compared to nine months ended September 30, 2022
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,
2023 2022
Amount % of
Revenues Amount % of
Revenues
Revenue $ 292,702 100.0 % $ 242,351 100.0 %
Cost of revenue 72,147 24.6 61,524 25.4
Gross profit 220,555 75.4 180,827 74.6
Operating expenses:
Research and development expenses 53,119 18.1 43,589 18.0
Selling, general and administrative expenses 185,451 63.4 175,771 72.5
Total operating expenses 238,570 81.5 219,360 90.5
Loss from operations (18,015) (6.2) (38,533) (15.9)
Other income (expense), net: (2,416) (0.8) (3,616) (1.5)
Loss before income tax expense (20,431) (7.0) (42,149) (17.4)
Income tax expense 218 0.1 147 0.1
Net loss $ (20,649) (7.1) % $ (42,296) (17.5) %
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:
Nine Months Ended
September 30, Change
2023 2022 Amount %
Open ablation $ 77,988 $ 62,613 $ 15,375 24.6 %
Minimally invasive ablation 31,900 28,846 3,054 10.6
Pain management 36,249 28,734 7,515 26.2
Appendage management 98,647 83,120 15,527 18.7
Total United States $ 244,784 $ 203,313 $ 41,471 20.4
Total International 47,918 39,038 8,880 22.7
Total revenue $ 292,702 $ 242,351 $ 50,351 20.8 %
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Worldwide revenue increased 20.8% (20.7% on a constant currency basis). In the United States, growth in all key product lines reflected continuing adoption of our products. The EnCompass clamp in open ablation revenue, cryoSPHERE probe in pain management and the AtriClip Flex⋅V within appendage management continue to demonstrate superior product adoption and growth. The EPi-Sense System drove revenue growth in minimally invasive ablation. International sales increased 22.7% (22.1% on a constant currency basis) across all franchises and major geographic regions.
Cost of revenue and gross margin. Cost of revenue increased $10,623 primarily reflecting higher sales volumes, while gross margin increased approximately 80 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 $9,530 or 21.9%, primarily due to increased clinical trial activity of $4,617 driven by the LeAAPS trial and $4,463 in personnel costs due to additional headcount in our product development, regulatory and clinical teams. Research and development expenses were further increased by $1,482 for additional product development activity to expand our product pipeline and regulatory submissions both domestically and internationally. These increases were partially offset by a $545 decrease in consulting activities for EU MDR submission costs incurred in the prior year.
Selling, general and administrative expenses. Selling, general and administrative expenses increased $9,680, or 5.5%, largely due to increased personnel costs of $17,328 as a result of growth in headcount, variable compensation and share-based compensation. Offsetting these increases was a $4,257 decrease in training due to improved efficiencies and other enhancements. Selling, general and administrative expenses were also offset by a net gain of $4,412 for non-recurring legal settlements during the first half of 2023, including a $7,500 gain from proceeds on a legal matter settled during the first quarter of 2023, partially offset by a $3,088 charge for settlement of an intellectual property matter during 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, with the fluctuation between periods primarily driven by a $716 decrease in foreign currency transaction losses in 2023.
Liquidity and Capital Resources
As of September 30, 2023, the Company had cash, cash equivalents and investments of $133,014 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. 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. 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 $170,181 and an accumulated deficit of $347,268 as of September 30, 2023.
Nine Months Ended September 30,
2023 2022 Change
(dollars in thousands)
Net cash provided by (used in) operating activities $ 454 $ (22,187) $ 22,641
Net cash provided by investing activities 24,603 37,004 (12,401)
Net cash used in financing activities (2,391) (9,041) (6,650)
Cash flows used in operating activities. Net cash provided by operating activities increased $22,641 from 2022 to 2023, reflecting the improvement in operating results of $21,647, driven by higher sales, improvements to gross margin and a net gain from legal settlements. This was partially offset by a $4,375 increase in cash used for working capital and other assets and liabilities, primarily as a result of an increase in inventory.
Cash flows provided by investing activities. Net cash provided by investing activities decreased by $12,401 in 2023 compared to 2022, reflecting the $30,000 acquisition of intellectual property, partially offset by a $14,101 increase in net maturities of available-for-sale securities and $3,498 decrease in purchases of property and equipment following our 2022 manufacturing facilities expansion.
Cash flows used in financing activities. Net cash used in financing activities decreased by $6,650 in 2023, reflecting savings of $5,663 due to fewer shares repurchased at a lower value for payment of taxes on stock awards and an increase of $1,116 in proceeds from stock option exercise activity and the employee stock purchase plan.
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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 September 30, 2023, our outstanding debt was $60,000, of which $18,333 is classified as current and $41,667 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, 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 September 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of September 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.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.