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, 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”, "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 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. 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. 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 different materially from those expressed or implied. Forward-looking statements are based on AtriCure’s expectations, 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. 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 (or “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 electrophysiologists. 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, 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. Dollars; direct sales transactions outside the United States are transacted in Euros, British Pounds, Australian Dollars or Canadian Dollars. 17 Table of Contents Recent Developments In 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 six months ended June 30, 2024 was $225,120, representing an increase of $30,708, or 15.8%, over the first six months of 2023, driven by growing adoption across key product lines. Historically there have been limited competitors in our key markets. We are seeing new entrants developing competing products, procedures, and/or clinical solutions that may cause variability in our results. Highlights of the strategic and operational advancements include: PRODUCT INNOVATION . We continue to invest in research and development of new products across our business and pursue approvals to market and sell our products globally. Activities for the first half of 2024 include: • Launch of the cryoSPHERE ® + cryoablation probe for pain management in the US in the second quarter of 2024. The cryoSPHERE ® + device leverages new technology that minimizes thermal loss by focusing energy at the ball tip, allowing for a reduction in freeze time by 25%, which reduces operative time. • Regulatory approval received from the National Medical Products Administration (NMPA) of China to market and sell several models of our AtriClip ® Left Atrial Appendage Exclusion System. • FDA granted 510(k) clearance for EPi-Ease™, our Hybrid access device to facilitate guide-wire delivery, vacuum application and endoscope insertion. • 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 and publish 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. The first patient was enrolled in the trial in January 2023, and we ended the second quarter of 2024 with over 2,700 patients enrolled. Site initiation and enrollment is ongoing. TRAINING . 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 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. 18 Table of Contents Results of Operations Three months ended June 30, 2024 compared to three months ended June 30, 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 June 30, 2024 2023 Amount % of Revenues Amount % of Revenues Revenue $ 116,269 100.0 % $ 100,918 100.0 % Cost of revenue 29,425 25.3 23,841 23.6 Gross profit 86,844 74.7 77,077 76.4 Operating expenses: Research and development expenses 20,416 17.6 17,438 17.3 Selling, general and administrative expenses 73,596 63.3 63,783 63.2 Total operating expenses 94,012 80.9 81,221 80.5 Loss from operations (7,168) (6.2) (4,144) (4.1) Other expense, net: (587) (0.5) (881) (0.9) Loss before income tax expense (7,755) (6.7) (5,025) (5.0) Income tax expense 253 0.2 93 0.1 Net loss $ (8,008) (6.9) % $ (5,118) (5.1) % 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 June 30, Change 2024 2023 Amount % Open ablation $ 30,760 $ 27,002 $ 3,758 13.9 % Minimally invasive ablation 11,828 11,370 458 4.0 Pain management 15,006 12,590 2,416 19.2 Appendage management 37,945 33,941 4,004 11.8 Total United States $ 95,539 $ 84,903 $ 10,636 12.5 Total International 20,730 16,015 4,715 29.4 Total revenue $ 116,269 $ 100,918 $ 15,351 15.2 % Worldwide revenue increased 15.2% (15.4% on a constant currency basis). In the United States, we experienced growth in several key product lines, including our ENCOMPASS ® clamp in open ablation and the AtriClip ® Flex⋅V ® for appendage management in open-chest procedures. In addition, the full launch of the cryoSPHERE ® + probe in the second quarter augmented strong growth in post-operative pain management sales. Growth in minimally invasive ablation was driven by our Epi-Sense ® System devices for Hybrid AF™ Therapy. International sales increased 29.4% (30.4% on a constant currency basis), with strength across all franchises and most of our major markets. 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 $5,584 primarily reflecting higher sales volumes. Gross margin decreased 168 basis points, driven primarily by unfavorable geographic and product mix, as well as increased product costs. 19 Table of Contents Research and development expenses. Research and development expenses increased $2,978 or 17.1%. Expansion of product development, clinical and regulatory teams resulted in $1,525 increase in personnel costs including travel and share-based compensation. Clinical trial expenses increased $1,331 primarily from higher patient enrollment and follow-up activity in the LeAAPS clinical trial throughout the quarter. Selling, general and administrative expenses. Selling, general and administrative expenses increased $9,813, or 15.4%, driven by a $6,997 increase in personnel costs including travel and share-based compensation, primarily reflecting headcount growth. Marketing, training, and meeting costs increased $725 and legal and professional services, IT and other corporate costs grew $848. Fluctuation was also driven by legal settlements in the prior year, resulting in a $412 non-recurring net gain recorded in 2023. Other income (expense). Other income and expense consists primarily of net interest expense and net foreign currency transaction losses. Six months ended June 30, 2024 compared to six months ended June 30, 2024 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 June 30, 2024 2023 Amount % of Revenues Amount % of Revenues Revenue $ 225,120 100.0 % $ 194,412 100.0 % Cost of revenue 57,008 25.3 47,726 24.5 Gross profit 168,112 74.7 146,686 75.5 Operating expenses: Research and development expenses 40,261 17.9 32,765 16.9 Selling, general and administrative expenses 145,936 64.8 123,847 63.7 Total operating expenses 186,197 82.7 156,612 80.6 Loss from operations (18,085) (8.0) (9,926) (5.1) Other expense, net: (2,756) (1.2) (1,497) (0.8) Loss before income tax expense (20,841) (9.3) (11,423) (5.9) Income tax expense 436 0.2 171 0.1 Net loss $ (21,277) (9.5) % $ (11,594) (6.0) % 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: Six Months Ended June 30, Change 2024 2023 Amount % Open ablation $ 60,060 $ 52,144 $ 7,916 15.2 % Minimally invasive ablation 24,146 21,007 3,139 14.9 Pain management 27,745 23,658 4,087 17.3 Appendage management 73,837 66,283 7,554 11.4 Total United States $ 185,788 $ 163,092 $ 22,696 13.9 Total International 39,332 31,320 8,012 25.6 Total revenue $ 225,120 $ 194,412 $ 30,708 15.8 % Worldwide revenue increased 15.8% (15.8% on a constant currency basis). In the United States, growth in key product lines reflected continuing adoption of our products, 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 20 Table of Contents management and AtriClip ® Flex⋅V ® for appendage management in open-chest procedures. International sales increased 25.6% (25.8% on a constant currency basis), across all franchises and most major geographic regions. Cost of revenue and gross margin. Cost of revenue increased $9,282, reflecting higher sales volumes, while gross margin decreased 77 basis points, primarily driven by unfavorable geographic and product mix, as well as an increase in product costs. Research and development expenses. Research and development expenses increased $7,496 or 22.9%, primarily from a $3,489 increase in personnel costs as a result of additional headcount in our product development, regulatory, and clinical teams. Clinical trial expenses increased $2,786 due to increased clinical activity primarily driven by the LeAAPS trial. Product development project spend and consulting costs also contributed incremental expense of $1,141, reflecting continued investment in our product pipeline. Selling, general and administrative expenses. Selling, general and administrative expenses increased $22,089, or 17.8%, due to a $13,426 increase in personnel costs, including travel and share-based compensation, as a result of growth in headcount. Selling, general and administrative expenses were also increased by $1,569 in marketing, training and meeting activities, and $1,433 in legal and professional services, IT and corporate costs reflecting operational growth. The increase was further driven by a $4,466 non-recurring net gain during 2023 related to legal settlements. Other income (expense). 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 June 30, 2024, the Company had cash, cash equivalents and investments of $114,020 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 $191,627 and an accumulated deficit of $378,334 as of June 30, 2024. Six Months Ended June 30, 2024 2023 Change (dollars in thousands) Net cash used in operating activities $ (13,636) $ (1,068) $ 12,568 Net cash provided by investing activities 40,535 12,733 27,802 Net cash used in financing activities (5,008) (2,523) 2,485 Cash flows used in operating activities. Net cash used in operating activities increased $12,568 from 2023 to 2024, driven by a decrease in operating results of $9,683, primarily due to a prior year $4,466 nonrecurring net gain for legal settlements, partially offset by a current period increase in non-cash charges of $5,575. Cash used for working capital and other assets and liabilities increased $8,460 on higher annual variable compensation payments due to improved operating performance, partially offset by increased collections of receivables and fewer purchases of inventory. Cash flows provided by investing activities. Net cash provided by investing activities increased by $27,802 in 2024 compared to 2023, due to the $30,000 in cash paid for acquisition of intellectual property in the prior year, offset by a $2,647 decrease in sales and maturities of available-for-sale securities and $424 decrease in purchases of property and equipment. Cash flows used in financing activities. Net cash used in financing activities increased by $2,485 in 2024. This increase was a result of a $1,556 payment for extinguishment of debt and financing fees, net of borrowings, and a $658 increase in shares repurchased for payment of taxes on stock awards. 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 21 Table of Contents 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 June 30, 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 June 30, 2024. For additional information on the terms and conditions, as well as applicable interest and fee payments, see Note 7 – Indebtedness. 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, 2023 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 June 30, 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk As of June 30, 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.