What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-05-02 compared with 2023-11-02 · 71 added, 112 removed, 92 unchanged (67% of the section changed)

2 unchanged sentences

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, 2023 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.

This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.

The actual results may differ from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under Item 1A “Risk Factors,” the cautionary statement regarding forward-looking statements below and elsewhere in this Form 10-Q.

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.

This Form 10-Q, including the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, "Quantitative and Qualitative Disclosures about Market Risk" 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, 2023.

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.

Forward-looking statements often 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,” "forecast," "trend," "might" 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.

However, the absence of these words does not mean that a statement is not forward-looking.

Forward-looking statements include, without limitation, statements that address activities, events, circumstances or developments that AtriCure expects, believes or anticipates will or may occur in the future, such as earnings estimates (including projections and guidance), other predictions of financial performance, launches by AtriCure of new products, developments with competitors and market acceptance of AtriCure's products.

Such statements are based largely 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.

In other words, these statements are not guarantees of future performance and inherently involve a wide range of risks and uncertainties that are difficult to predict.

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.

3 unchanged sentences

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.

In open-heart procedures, the physician is performing heart surgery for other conditions and our products are used in conjunction with (or “concomitant” to) such a procedure.

Our pain management devices are 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.

We sell our products to medical centers through our direct sales force in the United States, Germany, France, the United Kingdom, the Benelux region, Australia and Canada.

We also sell our products through distributors who in turn sell our products to medical centers in other markets.

Our business is primarily transacted in U.S.

direct sales transactions outside the United States are transacted in Euros, British Pounds, Canadian Dollars or Australian Dollars.

direct sales transactions outside the United States are transacted in Euros, British Pounds, Australian Dollars or Canadian 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.

During the first quarter of 2024, we realized strong global revenue growth and continued our strategic initiatives of product innovation, clinical science and physician education and training to expand awareness and adoption.

Our worldwide revenue for the three months ended March 31, 2024 was $108,851, representing an increase of $15,357, or 16.4%, over the first three months of 2023, driven by growing adoption across key product lines.

Historically there have been limited competitors in our key markets, but we have begun to see more entrants that may cause variability in 2024 results.

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, 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.

In October 2023, FDA granted 510(k) clearance for our next generation cryoSPHERE ® + cryoablation probe for pain management.

During the first quarter of 2024, we completed the initial procedures with the cryoSPHERE+, realizing a 25% reduction in ablation time.

The product is currently in an extended limited launch period in the United States with full launch expected by the end of the second quarter.

In addition, we received several CE mark certifications under the European Medical Device Regulation (EU MDR).

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, 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.

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

One of our critical initiatives is the Left Atrial Appendage Exclusion for Prophylactic Stroke Reduction (LeAAPS) IDE clinical trial.

LeAAPS 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, and efficacy over a minimum follow-up of five years post procedure.

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;

The first patient was enrolled in the trial in January 2023, and we ended the first quarter of 2024 with over 2,000 patients enrolled.

Site initiation and enrollment is ongoing.

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.

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.

Our professional education and marketing teams conduct a variety of in-person and virtual training programs for physicians and other healthcare professionals.

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.

These training events allow for collaborative, hands-on engagement with our physician partners and other healthcare professionals.

Additionally, our professional education courses continue to be enhanced by the use of simulation models or synthetic cadavers, known as CADets.

These reusable CADets provide a sustainable alternative to the use of cadaver specimens, in addition to increasing the efficiencies of education and more cost effective training alternatives.

Results of Operations

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

Three months ended March 31, 2024 compared to three months ended March 31, 2023

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

7 unchanged sentences

Loss from operations (10,917) (10.0) (5,782) (6.2)

Other income (expense), net:

Other expense, net:

(2,169) (2.0) (616) (0.7)

4 unchanged sentences

Three Months Ended

September 30, Change

March 31, Change

2024 2023 Amount %

7 unchanged sentences

Worldwide revenue increased 16.4% (16.3% 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.

In the United States, we experienced growth in key product lines, including the ENCOMPASS ® clamp in open ablation, Hybrid AF™ Therapy procedures using the EPi-Sense System in minimally invasive ablation, cryoSPHERE ® probe for post-operative pain management and AtriClip ® Flex⋅V ® for appendage management.

International sales increased 21.5% (21.1% on a constant currency basis), across franchises and major geographic regions, bolstered by strong sales of appendage management and post-operative pain management products.

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.

3 unchanged sentences

Cost of revenue increased $3,698 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.

Gross margin increased 21 basis points, driven by product and geographic mix.

Research and development expenses.

Research and development expenses increased $4,518 or 29.5%.

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,

Revenues Amount % of

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) %

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 %

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.

Expansion of product development, clinical and regulatory teams resulted in $1,964 of increased personnel costs, including travel and share-based compensation.

Clinical trial expenses increased $1,455 from increased enrollment activity in the LeAAPS clinical trial throughout the quarter.

Product development project spend increased $1,001 reflecting continued investment in our product pipeline.

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.

Selling, general and administrative expenses increased $12,276, or 20.4%, driven by a $6,429 increase in personnel costs as a result of growth in headcount and travel expenses.

The increase was further driven by the $4,000 gain on proceeds from a legal settlement during the first quarter of 2023.

During the first quarter of 2024, fees for professional services, legal and IT increased $930 and marketing activities also increased $654.

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.

During the first quarter of 2024, the Company recognized a loss on debt extinguishment of $1,362;

see Note 7 - Indebtedness for related discussion.

The remaining activity consists primarily of net interest expense and net foreign currency transaction losses.

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,

As of March 31, 2024, the Company had cash, cash equivalents and investments of $105,957 and outstanding debt of $61,865.

We had unused borrowing capacity of $61,885 (see Note 7 - Indebtedness for related discussion).

All cash equivalents and investments and most of our operating cash are held in United States financial institutions.

A small portion of our cash is held in foreign banks to support our international operations.

We had net working capital of $183,973 and an accumulated deficit of $370,326 as of March 31, 2024.

Three Months Ended March 31,

2024 2023 Change

(dollars in thousands)

Net cash provided by (used in) operating activities $ 454 $ (22,187) $ 22,641

Net cash used in operating activities $ (21,016) $ (4,079) $ 16,937

Net cash provided by investing activities 9,644 28,813 (19,169)

1 unchanged sentence

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.

Net cash used in operating activities increased $16,937 from 2023 to 2024.

Cash used for working capital and other assets and liabilities increased $13,543 on higher annual variable compensation payments due to improved operating performance, as well as continued investment in inventory to support future growth.

The remaining change is largely attributable to decrease in operating margin due to a one-time gain on legal settlement recorded in 2023 of $4,000.

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.

Net cash provided by investing activities decreased by $19,169 in 2024 compared to 2023, driven by a $18,897 decrease in sales and maturities of available-for-sale securities.

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.

Net cash used in financing activities increased by $2,345 in 2024.

This increase was a result of $1,451 payment for extinguishment of debt and financing fees, net of borrowings, and a $798 increase in shares repurchased for payment of taxes on 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 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.

As of January 5, 2024, we entered into a credit agreement (Credit Agreement) with JPMorgan Chase Bank, N.A.

as Administrative Agent, JPMorgan Chase Bank, N.A.

and Silicon Valley Bank, a division of First-Citizens Bank and Trust Company, as Joint Lead Arrangers and Joint Bookrunners that provides for a $125,000 asset-based revolving credit facility (ABL Facility), with an option to increase the revolving commitment by an additional $40,000.

A portion of the ABL Facility, limited to $5,000, is available for the issuance of letters of credit.

The Credit Agreement has a three-year term and expires January 5, 2027.

Amounts available to be drawn from time to time under the ABL Facility are determined by calculating the applicable borrowing base, which is based upon applicable percentages of the values of eligible accounts receivable, eligible inventory, eligible liquid assets, less reserves as determined by the Administrative Agent, all as specified in the Credit Agreement.

The borrowings bear interest at a rate per annum equal to, at the Company's election:

(i) an alternate base rate (ABR) plus an applicable margin or (ii) an adjusted term secured overnight financing rate (SOFR) plus an applicable margin.

As of March 31, 2024, the Company has borrowed $61,865, classified as noncurrent and had unused borrowing availability of $61,885.

Our corporate headquarters lease agreement requires a $1,250 letter of credit which we renew annually and remains outstanding as of March 31, 2024.

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.

19 unchanged sentences

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.

As of March 31, 2024, 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, 2023.

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.

As of March 31, 2024, 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, 2023.

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