Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar and share amounts referenced in this Item 7 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 Consolidated Financial Statements and notes thereto contained in Item 8, “Financial Statements and Supplementary Data,” to provide an understanding of our results of operations, financial condition and cash flows. This section of this Form 10-K generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. 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 at the beginning of Part I and elsewhere in this Form 10-K.
Year Ended December 31, 2023 compared to December 31, 2022
For a comparison of our results of operations for the years ended December 31, 2023 and December 31, 2022, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 16, 2024.
Overview
We are a leading innovator in treatments for atrial fibrillation, left atrial appendage management and post-operative pain management. Our ablation and left atrial appendage management 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 to distributors who in turn sell our products to medical centers in other markets. Our business is primarily transacted in U.S. Dollars; direct international sales transactions are transacted in Euros, British Pounds, Australian Dollars or Canadian Dollars.
In 2024, we realized significant 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 revenues for the year ended December 31, 2024 of $465,307 was an increase of 16.5% over the prior year driven by growing adoption across key product lines as well as new product launches. Historically there have been limited competitors in our key markets, but new entrants are marketing and developing competing products, procedures, and/or clinical solutions that may cause variability in our results.
Highlights of the strategic and operational advancements in 2024 include:
PRODUCT INNOVATION. We continue to invest in research and development of new products and pursue regulatory approvals to market and sell globally across all franchises.
• Open . Upon receiving regulatory approval during the third quarter of 2024, we began selling the EnCompass clamp in CE-marked countries in the European Union, representing a significant expansion of our open ablation franchise products in Europe.
• Minimally invasive . In the first half of 2024, FDA granted 510(k) clearance for EPi-Ease, our Hybrid access device to facilitate guide-wire delivery, vacuum application and endoscope insertion. During the third quarter, FDA granted 510(k) clearance for our EnCapture clamp, the newest in our line of Isolator Synergy Ablation System clamps, with enhanced geometry and features to facilitate engagement with intended cardiac tissue.
• Pain management . During the second quarter of 2024, we launched the cryoSPHERE+ cryoablation probe for pain management in the United States. 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%. Further, the cryoSPHERE MAX probe was launched during the fourth quarter of 2024 and features a larger ball tip designed
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to optimize Cryo Nerve Block therapy. This new probe reduces freeze times by 50% when compared to the first generation cryoSPHERE cryoablation probe, and over 30% when compared to the cryoSPHERE+ probe.
• Appendage management . We launched the AtriClip FLEX-Mini device in the United States during the third quarter of 2024. The AtriClip FLEX-Mini sets a new standard as the smallest profile for surgical LAA device on the market and builds upon the proven technology of our AtriClip platform, with ease of use and design simplicity that offers enhanced access and increased visibility for physicians. We also obtained additional international regulatory approvals for our AtriClip platform during the third quarter. In China, we received approval to market and sell several models of our AtriClip Left Atrial Appendage Exclusion System from the National Medical Products Administration (NMPA) of China. In CE-marked countries in Europe, we received expanded indication for the AtriClip for use in patients at high risk of thromboembolism for whom left atrial appendage exclusion is warranted.
Throughout 2024, we received several additional CE Mark certifications under the European Union Medical Device Regulation (EU MDR). As of December 31, 2024, substantially all of our products were cleared under EU MDR. During the fourth quarter of 2024, we entered into an exclusive licensing agreement with a third-party to co-develop and commercialize equipment incorporating pulsed field ablation. See Note 3 - Asset Acquisition for additional information.
CLINICAL SCIENCE. We invest in studies to expand labeling claims, support various indications for our products and publish clinical data for therapies and procedures involving our products. During 2024, we supported the publication of 19 articles and 17 congress abstracts featuring clinical studies with our product.
LeAAPS. The Left Atrial Appendage Exclusion for Prophylactic Stroke Reduction (LeAAPS) IDE clinical 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, 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, the first patient was enrolled in the trial, and we ended 2024 with over 4,200 patients enrolled. Site initiation and enrollment is ongoing.
BoxX-NoAF . The EnCompass clamp and the AtriClip in Box Lesion and Left Atrial Appendage E X clusion Procedure for the Prevention of N ew O nset of A trial F ibrillation (BoxX-NoAF) IDE trial will evaluate the impact of concomitant ablation and LAA exclusion in non-AF patients for the reduction of post-operative AF (POAF) and Clinical AF. This prospective, multi-center, multi-national randomized trial evaluates safety at 30 days post-procedure for POAF and secondary effectiveness for Clinical AF through three years. The trial provides for enrollment of up to 960 subjects. During the fourth quarter of 2024, FDA approved the trial protocol. We expect site initiation to begin by the end of 2025.
TRAINING. Our professional education and marketing teams conduct a variety of virtual and in-person training programs for physicians and other healthcare professionals. These training methods ensure 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 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. In 2024, we continue to innovate physician training to improve accessibility and efficiency for our physician partners. We are currently piloting the use of live streaming to enable remote proctoring and case observation.
SOCIETY GUIDELINES. In 2024, the European Society of Cardiology (ESC) released Guidelines for Management of Atrial Fibrillation developed in collaboration with European Association of Cardio-Thoracic Surgery (EACTS), in which they upgraded LAAM to the highest Class 1 recommendation. During 2023, the American College of Cardiology (ACC), American Heart Association (AHA), American College of Clinical Pharmacy (ACCP) and HRS released Guidelines for Diagnosis and Management of Atrial Fibrillation, and upgraded LAAM to the highest recommendation of Class 1 and included Hybrid AF Therapy as a Class 2 recommendation. All major cardiac societal guidelines now include a Class 1 recommendation for surgical management of the left atrial appendage. These societal guidelines are reflective of the scientific evidence suggesting that surgical and hybrid ablation is safe and effective for patients who have Afib.
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Results of Operations
Year Ended December 31, 2024 compared to December 31, 2023
The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of total revenue:
Year Ended December 31,
2024 2023
% of % of
Amount Revenue Amount Revenue
Revenue $ 465,307 100.0 % 399,245 100.0 %
Cost of revenue 117,783 25.3 98,875 24.8
Gross profit 347,524 74.7 300,370 75.2
Operating expense:
Research and development expenses 96,178 20.7 73,915 18.5
Selling, general and administrative expenses 291,359 62.6 253,138 63.4
Total operating expenses 387,537 83.3 327,053 81.9
Loss from operations (40,013) (8.6) (26,683) (6.7)
Other expense, net (3,661) (0.8) (3,164) (0.8)
Loss before income tax expense (43,674) (9.4) (29,847) (7.5)
Income tax expense 1,024 0.2 591 0.1
Net loss $ (44,698) (9.6) % $ (30,438) (7.6) %
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:
Year Ended December 31, Change
2024 2023 Amount %
Open ablation $ 123,647 $ 105,287 $ 18,360 17.4 %
Minimally invasive ablation 45,737 44,577 1,160 2.6 %
Pain management 61,844 49,199 12,645 25.7 %
Appendage management 151,588 134,481 17,107 12.7 %
Total United States $ 382,816 $ 333,544 $ 49,272 14.8 %
Total International 82,491 65,701 16,790 25.6 %
Total Revenue $ 465,307 $ 399,245 $ 66,062 16.5 %
Worldwide revenue increased 16.5% as reported and on a constant currency basis. We experienced growth in all key product lines as a result of deepening market penetration, continuing physician adoption and new product launches. International revenue increased 25.6% as reported and on a constant currency basis, across all franchises and major geographic regions, while key products contributing to the increase in revenue in the United States were:
• EnCompass clamp in open ablation,
• cryoSPHERE probes for post-operative pain management and
• AtriClip ® Flex⋅V ® for appendage management.
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.
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Cost of revenue and gross margin. Cost of revenue increased $18,908 primarily reflecting higher sales volumes. Gross margin decreased by 55 basis points driven by less favorable geographic and product mix, as well as an increase in product costs.
Research and development expenses. Research and development expenses increased $22,263, or 30.1%. During 2024, we entered into an exclusive licensing agreement requiring upfront cash payment of $12,000 for the acquired in-process research and development (IPR&D), which was included in research and development expenses in 2024. See Note 3 – Asset Acquisition for further information. Expansion of product development, regulatory and clinical teams resulted in additional headcount-related costs (including travel and share-based compensation) of $6,773. Clinical trial expenses increased $4,801 due to increased trial activity driven by our LeAAPS clinical trial. These increases were partially offset by a $1,606 decrease in product development project spend and regulatory approval costs as several new products were brought to market in 2024, including cryoSPHERE+ and AtriClip FLEX-Mini.
Selling, general and administrative expenses. Selling, general and administrative expenses increased $38,221, or 15.1%. Personnel costs, including travel and share-based compensation, increased $27,384 as a result of growth in headcount and variable compensation. Operational growth drove $2,156 additional professional services, IT and corporate costs along with $2,079 additional marketing and meeting activities. Finally, the increase reflects a $4,412 non-recurring net gain in 2023 related to legal settlements. See Note 11 – Commitments and Contingencies for related discussion.
Other income and expense. During 2024, the Company recognized a loss on debt extinguishment of $1,362. See Note 9 - 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 December 31, 2024, we had cash and cash equivalents of $122,721 and unused borrowing capacity of approximately $61,885 under our existing credit agreement. All cash equivalents and most of our operating cash are held in United States financial institutions. A minor portion of our cash is held in foreign banks to support our international operations. We had net working capital of $194,402 and an accumulated deficit of $401,755 as of December 31, 2024.
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 principal cash requirements include costs of operations, capital expenditures, debt service costs and other contractual obligations. Our future capital requirements depend on a number of factors, including, without limitation: market acceptance of our current and future products; investments in working capital; costs to develop and support our products, including professional training, clinical trials and contractual development costs; costs to expand and support our sales and marketing efforts; operating and filing costs required by 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; costs to defend against and/or resolve litigation or claims against us; 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, changing interest rates, and fluctuations in currency exchange rates that may impact our liquidity and access to capital resources.
Credit facility. On January 5, 2024, we entered into an asset-based credit agreement with JPMorgan Chase Bank, N.A. as Administrative Agent, JPMorgan Chase Bank, N.A. and Silicon Valley Bank, a division of First-Citizen Bank and Trust Company, as Joint Lead Arrangers and Joint Bookrunners (Credit Agreement) 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. The proceeds of the ABL Facility were used to terminate the Company’s indebtedness under the prior loan agreement with Silicon Valley Bank. As of December 31, 2024, our outstanding debt was $61,865 and we had unused borrowing availability of approximately $61,885.
Our corporate headquarters lease requires a $1,250 letter of credit which renews annually and remains outstanding as of December 31, 2024.
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For additional information on the terms and conditions, as well as applicable interest and fee payments, see Note 9 – Indebtedness.
Capital Expenditures. We incur capital expenditures on an ongoing basis to continue investment in our growth and our ability to better serve our customers. In recent years, we have expanded the manufacturing and engineering facilities in our Mason, Ohio campus and expect to continue to invest in facilities to support our growth.
Other Contractual Obligations. Our future obligations include both current and long-term obligations. In 2022, the Company entered into a clinical trial management agreement for the LeAAPS clinical trial. The terms of the agreement require payments upon achievement of various enrollment and project milestones over the estimated ten-year term, yet the agreement may be terminated early for any reason. Furthermore, we incur additional variable costs, including pass through costs from clinical trial sites. We expect to disburse between $14,000 and $17,000 of fixed and variable costs based on estimated achievement of milestone payments, site initiation and trial enrollment within the next twelve months.
In 2024, we entered into an exclusive licensing agreement to co-develop and commercialize equipment incorporating PFA technology. The agreement requires that we pay additional contingent consideration in cash upon achievement of specified developmental and regulatory approval milestones within defined periods over the ten-year term. We expect to disburse between $6,000 and $10,000 based on estimated achievement of milestone payments within the next twelve months. For additional information, see Note 3 – Asset Acquisition.
We have operating and finance leases primarily for our offices, manufacturing and warehouse facilities and automobiles. Our finance leases consist primarily of principal and interest payments related to our Mason, Ohio headquarters building. As of December 31, 2024, current finance lease obligations are $1,186 and long-term obligations are $7,281. Our operating leases for office and warehouse space includes current obligations of $1,619 and long-term obligations of $4,579 as of December 31, 2024. For additional information, see Note 10 – Leases.
We have a contractual obligation for a contingent consideration payment under the SentreHEART merger agreement that would be paid in AtriCure common stock and cash, up to a specified maximum number of shares. As of December 31, 2024, we believe the likelihood of payment is remote, and the estimated fair value of the contingent consideration is $0. See Note 2 – Fair Value.
Sources of liquidity. We believe that our current cash and cash equivalents, along with the cash we expect to generate or use for operations or access via our Credit Agreement, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. However, we have a shelf registration statement on file with the SEC which allows us to sell any combination of debt securities, common stock, preferred stock, warrants, depository shares and units in one or more offerings should we choose to do so in the future. We expect to maintain the effectiveness of the shelf registration statement for the foreseeable future.
If our sources of cash are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or obtain a revised or additional credit facility. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities would have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Finally, our Credit Agreement requires compliance with certain financial and other covenants. If we are unable to maintain these financing arrangements, we may be required to reduce the scope of our planned research and development, clinical activities and selling, training, education and marketing efforts.
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Historical Cash Flow Activity. The following table summarizes our consolidated cash flow activities:
Years Ended December 31,
2024 2023 Change
Net cash provided by operating activities
$ 12,204 $ 4,484 $ 7,720
Net cash provided by investing activities 30,234 21,817 8,417
Net cash used in financing activities (3,603) (32) (3,571)
Cash flows provided by operating activities. Net cash provided by operating activities increased $7,720 in 2024 as compared to 2023. While operating results declined $14,260, this decline was driven primarily by an increase in adjustments to income and changes in non-cash expenses as well as the acquisition of in-process research and development for $12,000. Changes in non-cash expenses include $4,677 increase in share-based compensation, $3,920 increase in depreciation & amortization and $1,362 loss on extinguishment of debt. Cash used in working capital remained flat year over year due to moderating investments in inventory in 2024, offset by higher annual variable compensation due to improved operating performance.
Cash flows provided by investing activities. Net cash provided by investing activities increased by $8,417 in 2024 compared to 2023. This increase is attributable to a $18,000 decrease in cash paid for acquisitions year over year, offset by a $10,147 decrease in maturities of available-for-sale securities.
Cash flows used in financing activities. Net cash used in financing activities increased by $3,571 in 2024 compared to 2023, driven by $1,686 payment for extinguishment of debt and financing fees, net of borrowings, and a $1,491 decrease in proceeds from stock option exercises and the employee stock purchase plan.
Inflation
Inflationary pressures may have an adverse impact on our results of operations or financial condition in the foreseeable future. Inflation has impacted our operating costs throughout 2024 and 2023. Continued increases in our cost of revenue may affect our ability to maintain our gross margin if selling prices of our products do not increase commensurately, while continued increases in our operating expenses may adversely affect our operating results and the ability to make discretionary investments. We will continue to monitor the impact of inflation on our cost of revenue and operating expenses.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of consolidated 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, using authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. We have described our significant accounting policies in Note 1 – Description of Business and Summary of Significant Accounting Policies to our Consolidated Financial Statements included in this Form 10-K.
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We believe the following critical accounting policies involve a significant level of estimation uncertainty and judgments that are reasonably likely to have a material impact on our Consolidated Financial Statements. We base our judgments and estimates on historical experience, current conditions and other reasonable factors. Actual results could differ from those estimates under different assumptions or conditions.
Revenue Recognition— Revenue is generated from the sale of medical devices. We recognize revenue in an amount that reflects the consideration we expect to be entitled to in exchange for those devices when control of promised devices is transferred to customers. We account for revenue in accordance with FASB ASC 606, “Revenue from Contracts with Customers”. Significant judgments and estimates involved in the Company’s recognition of revenue include the estimation of a provision for returns. We estimate the provision for sales returns and allowances using the expected value method based on historical experience and other factors that we believe could impact our expected returns, including defective or damaged products and invoice adjustments. In the normal course of business, we are not obligated to accept product returns unless a product is defective as manufactured, and we do not provide customers with the right to a refund.
Inventories —Our inventories are stated at the lower of cost or net realizable value based on the first-in, first-out cost method (FIFO) and consist of raw materials, work in process and finished goods. Our industry is characterized by rapid product development and frequent new product introductions. Uncertain timing of product approvals, variability in product launch strategies and variation in product sales all impact inventory reserves for excess, obsolete and expired products. An increase to inventory reserves results in a corresponding increase in cost of revenue. Inventories are written off against the reserve when they are physically disposed.
Share-Based Employee Compensation— We estimate the fair value of performance share awards with a performance condition initially based on the closing stock price on the date of grant assuming the performance goal will be achieved. Such performance share awards have specified performance targets based on the compound annual growth rate (CAGR) of our revenue over a three-year performance period. With respect to these performance share awards, the number of shares that vest and are issued to the recipient is based upon revenue performance over the performance period. We may adjust the expense over the performance period based on changes to estimates of performance target achievement. If such goals are not met or service is not rendered for the requisite service period, no compensation cost is recognized, and any recognized compensation cost from prior periods will be reversed.
Income Taxes— Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases along with operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities from changes in tax rates is recognized in the period that includes the enactment date.
Our estimate of the valuation allowance for deferred tax assets requires significant estimates and judgments about our future operating results. Deferred income tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more-likely-than-not that a deferred tax asset will not be realized. Significant weight is given to evidence that can be objectively verified. We evaluate deferred income tax assets on an annual basis to determine if valuation allowances are required by considering all available evidence. Deferred income tax assets are realized by having sufficient future taxable income to allow the related tax benefits to reduce taxes otherwise payable. The sources of taxable income that may be available to realize the benefit of deferred tax assets are future taxable income, future reversals of existing taxable temporary differences, taxable income in prior carryforward years and tax planning strategies that are both prudent and feasible. In evaluating the need for a valuation allowance, the existence of cumulative losses in recent years is significant objectively verifiable negative evidence that must be overcome by objectively-verifiable positive evidence to avoid the need for a valuation allowance. Our valuation allowance offsets substantially all net deferred income tax assets as it is more-likely-than-not that the benefit of such deferred income tax assets will not be recognized in future periods.
Recent Accounting Pronouncements
See Note 1 – Description of Business and Summary of Significant Accounting Policies to the Consolidated Financial Statements in Item 8 of Part II for more information regarding recent accounting pronouncements.