AtriCure, Inc. - Quarter Report: 2022 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_____________________________________________
FORM 10-Q
___________________________________________________________________________________________
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____________to_____________
Commission File Number 000-51470
_____________________________________________
AtriCure, Inc.
(Exact name of Registrant as specified in its charter)
_____________________________________________
| Delaware | 34-1940305 | ||||
(State or other jurisdiction of incorporation) | (IRS Employer Identification No.) | ||||
7555 Innovation Way
Mason, OH 45040
(Address of principal executive offices)
(513) 755-4100
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
_____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, $.001 par value | ATRC | NASDAQ | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | x | Accelerated Filer | ¨ | Emerging growth company | ¨ | ||||||||||||
| Non-Accelerated Filer | ¨ | Smaller reporting company | ¨ | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act: ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): YES ¨ NO x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at August 1, 2022 | ||||
| Common Stock, $.001 par value | 46,424,652 | ||||
Table of Contents
| Page | ||||||||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ATRICURE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Amounts)
(Unaudited)
| June 30, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 54,556 | $ | 43,654 | |||||||
| Short-term investments | 63,898 | 75,436 | |||||||||
Accounts receivable, less allowance for credit losses of $1,096 | 41,488 | 33,021 | |||||||||
| Inventories | 41,292 | 38,964 | |||||||||
| Prepaid and other current assets | 4,932 | 5,001 | |||||||||
| Total current assets | 206,166 | 196,076 | |||||||||
| Long-term investments | 64,295 | 104,338 | |||||||||
| Property and equipment, net | 36,053 | 31,409 | |||||||||
| Operating lease right-of-use assets | 4,241 | 4,761 | |||||||||
| Intangible assets, net | 41,049 | 42,992 | |||||||||
| Goodwill | 234,781 | 234,781 | |||||||||
| Other noncurrent assets | 804 | 955 | |||||||||
| Total Assets | $ | 587,389 | $ | 615,312 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 23,721 | $ | 18,597 | |||||||
| Accrued liabilities | 30,775 | 36,092 | |||||||||
| Current maturities of leases | 1,820 | 1,756 | |||||||||
| Total current liabilities | 56,316 | 56,445 | |||||||||
| Long-term debt | 59,954 | 59,741 | |||||||||
| Finance lease liabilities | 9,603 | 10,082 | |||||||||
| Operating lease liabilities | 3,591 | 4,068 | |||||||||
| Other noncurrent liabilities | 1,215 | 1,220 | |||||||||
| Total Liabilities | 130,679 | 131,556 | |||||||||
| Commitments and contingencies (Note 8) | |||||||||||
| Stockholders’ Equity: | |||||||||||
Common stock, $0.001 par value, 90,000 shares authorized and 46,423 and 46,016 issued and outstanding | 46 | 46 | |||||||||
| Additional paid-in capital | 771,185 | 764,811 | |||||||||
| Accumulated other comprehensive loss | (4,344) | (948) | |||||||||
| Accumulated deficit | (310,177) | (280,153) | |||||||||
| Total Stockholders’ Equity | 456,710 | 483,756 | |||||||||
| Total Liabilities and Stockholders’ Equity | $ | 587,389 | $ | 615,312 | |||||||
See accompanying notes to condensed consolidated financial statements.
3
ATRICURE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In Thousands, Except Per Share Amounts)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue | $ | 84,529 | $ | 71,376 | $ | 159,105 | $ | 130,651 | |||||||||||||||
| Cost of revenue | 21,010 | $ | 17,298 | 39,991 | 32,033 | ||||||||||||||||||
| Gross profit | 63,519 | $ | 54,078 | 119,114 | 98,618 | ||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development expenses | 14,791 | 12,197 | 28,420 | 23,414 | |||||||||||||||||||
| Selling, general and administrative expenses | 62,388 | 56,958 | 118,504 | 106,166 | |||||||||||||||||||
| Total operating expenses | 77,179 | 69,155 | 146,924 | 129,580 | |||||||||||||||||||
| Loss from operations | (13,660) | (15,077) | (27,810) | (30,962) | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | (1,101) | (1,197) | (2,101) | (2,386) | |||||||||||||||||||
| Interest income | 76 | 103 | 192 | 237 | |||||||||||||||||||
| Other | (111) | (14) | (204) | 40 | |||||||||||||||||||
| Loss before income tax expense | (14,796) | (16,185) | (29,923) | (33,071) | |||||||||||||||||||
| Income tax expense | 45 | 66 | 101 | 97 | |||||||||||||||||||
| Net loss | $ | (14,841) | $ | (16,251) | $ | (30,024) | $ | (33,168) | |||||||||||||||
| Basic and diluted net loss per share | $ | (0.32) | $ | (0.36) | $ | (0.66) | $ | (0.74) | |||||||||||||||
| Weighted average shares outstanding—basic and diluted | 45,692 | 45,035 | 45,610 | 44,834 | |||||||||||||||||||
| Comprehensive loss: | |||||||||||||||||||||||
| Unrealized loss on investments | $ | (449) | $ | (132) | $ | (2,788) | $ | (163) | |||||||||||||||
| Foreign currency translation adjustment | (430) | 63 | (608) | (236) | |||||||||||||||||||
| Other comprehensive loss | (879) | (69) | (3,396) | (399) | |||||||||||||||||||
| Net loss | (14,841) | (16,251) | (30,024) | (33,168) | |||||||||||||||||||
| Comprehensive loss, net of tax | $ | (15,720) | $ | (16,320) | $ | (33,420) | $ | (33,567) | |||||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
ATRICURE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands)
(Unaudited)
| Three-Month Period Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||||||||
Balance—March 31, 2021 | 45,623 | $ | 46 | $ | 738,484 | $ | (347,269) | $ | (18) | $ | 391,243 | ||||||||||||||||||||||||
| Impact of equity compensation plans | 258 | — | 10,160 | — | — | 10,160 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (69) | (69) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (16,251) | — | (16,251) | |||||||||||||||||||||||||||||
Balance—June 30, 2021 | 45,881 | $ | 46 | $ | 748,644 | $ | (363,520) | $ | (87) | $ | 385,083 | ||||||||||||||||||||||||
| Three-Month Period Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||||||||
Balance—March 31, 2022 | 46,268 | $ | 46 | $ | 761,580 | $ | (295,336) | $ | (3,465) | $ | 462,825 | ||||||||||||||||||||||||
| Impact of equity compensation plans | 155 | — | 9,605 | — | — | 9,605 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (879) | (879) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (14,841) | — | (14,841) | |||||||||||||||||||||||||||||
Balance—June 30, 2022 | 46,423 | $ | 46 | $ | 771,185 | $ | (310,177) | $ | (4,344) | $ | 456,710 | ||||||||||||||||||||||||
| Six-Month Period Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||||||||
Balance—December 31, 2020 | 45,346 | $ | 45 | $ | 742,389 | $ | (330,352) | $ | 312 | $ | 412,394 | ||||||||||||||||||||||||
| Impact of equity compensation plans | 535 | 1 | 6,255 | — | — | 6,256 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (399) | (399) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (33,168) | — | (33,168) | |||||||||||||||||||||||||||||
Balance—June 30, 2021 | 45,881 | $ | 46 | $ | 748,644 | $ | (363,520) | $ | (87) | $ | 385,083 | ||||||||||||||||||||||||
| Six-Month Period Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||||||||
Balance—December 31, 2021 | 46,016 | $ | 46 | $ | 764,811 | $ | (280,153) | $ | (948) | $ | 483,756 | ||||||||||||||||||||||||
| Impact of equity compensation plans | 407 | — | 6,374 | — | — | 6,374 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (3,396) | (3,396) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (30,024) | — | (30,024) | |||||||||||||||||||||||||||||
Balance—June 30, 2022 | 46,423 | $ | 46 | $ | 771,185 | $ | (310,177) | $ | (4,344) | $ | 456,710 | ||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
5
ATRICURE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (30,024) | $ | (33,168) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Share-based compensation expense | 14,573 | 13,745 | |||||||||
| Depreciation | 3,861 | 3,815 | |||||||||
| Amortization of intangible assets | 1,943 | 965 | |||||||||
| Amortization of deferred financing costs | 255 | 249 | |||||||||
| Loss on disposal of property and equipment | 25 | 52 | |||||||||
| Amortization of investments | 983 | 1,206 | |||||||||
| Change in fair value of contingent consideration | — | 5,100 | |||||||||
| Other non-cash adjustments | 654 | 472 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (8,757) | (10,799) | |||||||||
| Inventories | (2,727) | (2,707) | |||||||||
| Other current assets | 32 | (308) | |||||||||
| Accounts payable | 4,240 | 3,571 | |||||||||
| Accrued liabilities | (5,136) | 4,529 | |||||||||
| Other noncurrent assets and liabilities | (325) | (571) | |||||||||
| Net cash used in operating activities | (20,403) | (13,849) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of available-for-sale securities | (3,941) | (94,817) | |||||||||
| Sales and maturities of available-for-sale securities | 51,749 | 147,884 | |||||||||
| Purchases of property and equipment | (7,565) | (5,539) | |||||||||
| Net cash provided by investing activities | 40,243 | 47,528 | |||||||||
| Cash flows from financing activities: | |||||||||||
| Payments on leases | (437) | (399) | |||||||||
| Proceeds from stock option exercises and employee stock purchase plan | 3,374 | 9,010 | |||||||||
| Shares repurchased for payment of taxes on stock awards | (11,573) | (16,500) | |||||||||
| Net cash used in financing activities | (8,636) | (7,889) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (302) | (115) | |||||||||
| Net increase in cash and cash equivalents | 10,902 | 25,675 | |||||||||
| Cash and cash equivalents—beginning of period | 43,654 | 41,944 | |||||||||
| Cash and cash equivalents—end of period | $ | 54,556 | $ | 67,619 | |||||||
| Supplemental cash flow information: | |||||||||||
| Cash paid for interest | $ | 1,797 | $ | 2,147 | |||||||
| Cash paid for income taxes, net of refunds | 132 | 128 | |||||||||
| Non-cash investing and financing activities: | |||||||||||
| Accrued purchases of property and equipment | 2,562 | 529 | |||||||||
See accompanying notes to condensed consolidated financial statements.
6
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
1.DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business—The “Company” or “AtriCure” consists of AtriCure, Inc. and its wholly-owned subsidiaries. The Company is a leading innovator in surgical treatments and therapies for atrial fibrillation (Afib), left atrial appendage (LAA) management and post-operative pain management, and sells its products to medical centers globally through its direct sales force and distributors.
Basis of Presentation—The accompanying interim financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). All intercompany accounts and transactions have been eliminated in consolidation. The accompanying interim financial statements are unaudited, but in the opinion of the Company’s management, contain all normal, recurring adjustments considered necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America (GAAP) applicable to interim periods. Certain information and footnote disclosures included in annual financial statements prepared in accordance with GAAP have been omitted or condensed. The Company believes the disclosures herein are adequate to make the information presented not misleading. Results of operations are not necessarily indicative of the results expected for the full year or for any future period.
The accompanying interim financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC. There have been no changes in the Company's significant accounting policies for the six months ended June 30, 2022 as compared to the significant accounting policies described in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC.
Use of Estimates—The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including intangible assets, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Estimates are based on historical experience, where applicable, and other assumptions believed to be reasonable by management. Actual results could differ from those estimates.
Segments—The chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis, accompanied only by information about revenue by product type and geographic area, for purposes of allocating resources and evaluating financial performance. Accordingly, the Company has determined that it has a single operating segment. The Company’s long-lived assets are located primarily in the United States, except for $1,516 as of June 30, 2022 and $1,399 as of December 31, 2021 located primarily in Europe.
Net Loss Per Share—Basic and diluted net loss per share is computed by dividing the net loss by the weighted average number of shares of common shares outstanding during the period. Since the Company has experienced net losses for all periods presented, net loss per share excludes the effect of 1,548 and 1,807 stock options, restricted shares, restricted stock units and performance award shares as of June 30, 2022 and 2021 because they are anti-dilutive. Therefore, the number of shares calculated for basic net loss per share is also used for the diluted net loss per share calculation.
2.FAIR VALUE
The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 820, “Fair Value Measurements and Disclosures” (ASC 820), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:
•Level 1—Quoted prices in active markets for identical assets or liabilities.
•Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
7
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following table represents the Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis as of June 30, 2022:
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Other Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds | $ | — | $ | 48,832 | $ | — | $ | 48,832 | |||||||||||||||
| Commercial paper | — | 15,940 | — | 15,940 | |||||||||||||||||||
| Government and agency obligations | 31,735 | — | — | 31,735 | |||||||||||||||||||
| Corporate bonds | — | 66,789 | — | 66,789 | |||||||||||||||||||
| Asset-backed securities | — | 13,729 | — | 13,729 | |||||||||||||||||||
| Total assets | $ | 31,735 | $ | 145,290 | $ | — | $ | 177,025 | |||||||||||||||
There were no changes in the levels or methodology of measurement of financial assets and liabilities during the three and six months ended June 30, 2022.
The following table represents the Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis as of December 31, 2021:
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Other Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds | $ | — | $ | 38,360 | $ | — | $ | 38,360 | |||||||||||||||
| Commercial paper | — | 22,978 | — | 22,978 | |||||||||||||||||||
| Government and agency obligations | 32,690 | — | — | 32,690 | |||||||||||||||||||
| Corporate bonds | — | 95,845 | — | 95,845 | |||||||||||||||||||
| Asset-backed securities | — | 28,261 | — | 28,261 | |||||||||||||||||||
| Total assets | $ | 32,690 | $ | 185,444 | $ | — | $ | 218,134 | |||||||||||||||
Contingent Consideration. The Company’s contingent consideration arrangements arising from the SentreHEART acquisition obligate the Company to pay certain defined amounts to former shareholders of SentreHEART if specified milestones are met related to the aMAZE IDE clinical trial, including PMA approval and reimbursement for the therapy involving SentreHEART’s devices. The Company has assessed the projected probability of payment during the contractual achievement periods to be remote, resulting in no remaining fair value as of June 30, 2022 and December 31, 2021.
3.INVENTORIES
Inventories consist of the following:
| June 30, 2022 | December 31, 2021 | ||||||||||
| Raw materials | $ | 14,235 | $ | 12,653 | |||||||
| Work in process | 2,742 | 2,064 | |||||||||
| Finished goods | 24,315 | 24,247 | |||||||||
| Total | $ | 41,292 | $ | 38,964 | |||||||
8
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
4.INTANGIBLE ASSETS
The following table provides a summary of the Company’s intangible assets:
| June 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||
| Estimated Useful Life | Cost | Accumulated Amortization | Cost | Accumulated Amortization | |||||||||||||||||||||||||
| Technology | 10 - 15 years | $ | 55,712 | $ | 14,663 | $ | 55,712 | $ | 12,720 | ||||||||||||||||||||
Amortization expense of intangible assets was $971 and $727 for the three months ended June 30, 2022 and 2021 and $1,943 and $965 for the six months ended June 30, 2022 and 2021. Future amortization expense is projected as follows:
2022 (excluding the six months ended June 30, 2022) | $ | 1,710 | |||
| 2023 | 2,953 | ||||
| 2024 | 2,953 | ||||
| 2025 | 2,953 | ||||
| 2026 | 2,953 | ||||
2027 and thereafter | 27,527 | ||||
| Total | $ | 41,049 | |||
5.ACCRUED LIABILITIES
Accrued liabilities consist of the following:
| June 30, 2022 | December 31, 2021 | ||||||||||
| Accrued compensation and employee-related expenses | $ | 25,197 | $ | 30,990 | |||||||
| Sales returns and allowances | 2,613 | 2,416 | |||||||||
| Accrued taxes and value-added taxes payable | 1,572 | 1,452 | |||||||||
| Other accrued liabilities | 1,393 | 1,234 | |||||||||
| Total | $ | 30,775 | $ | 36,092 | |||||||
6.INDEBTEDNESS
Credit Facility. The Company has a Loan and Security Agreement, as amended and modified effective November 1, 2021 (Loan Agreement), with Silicon Valley Bank (SVB). The Loan Agreement includes a $60,000 term loan, a $30,000 revolving line of credit, and an option for an additional $30,000 in term loan borrowings. The Loan Agreement has a five year term, expiring November 2026.
Principal payments under the Loan Agreement are to be made ratably commencing 24 months after inception 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. The Company is accruing the 3.00% fee over the term of the Loan Agreement, with $240 included in the outstanding loan balance as of June 30, 2022. Additionally, the unamortized original financing costs related to the term loan of $286 are netted against the outstanding loan balance in the Condensed Consolidated Balance Sheets and are amortized ratably over the term of the Loan Agreement.
The revolving line of credit is subject to an annual facility fee of 0.20%, and any borrowings thereunder bear interest at the Prime Rate. Borrowing availability under the revolving credit facility is based on the lesser of $30,000 or a borrowing base calculation as defined by the Loan Agreement. As of June 30, 2022, the Company had no borrowings under the revolving credit facility and had borrowing availability of $28,750.
9
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
The Loan Agreement also provides for certain prepayment and early termination fees, as well as establishes a minimum liquidity covenant and dividend restrictions, along with other customary terms and conditions. Specified assets have been pledged as collateral.
Future maturities of long-term debt, excluding the term loan final fee, are projected as follows:
2022 (excluding the six months ended June 30, 2022) | $ | — | |||
| 2023 | 3,333 | ||||
| 2024 | 20,000 | ||||
| 2025 | 20,000 | ||||
| 2026 | 16,667 | ||||
| Total long-term debt | $ | 60,000 | |||
7.LEASES
The Company has operating and finance leases for office, manufacturing and warehouse facilities and equipment. The Company’s leases have remaining lease terms of less than one year to nine years. Options to renew or extend leases beyond their initial term have been excluded from measurement of the ROU assets and lease liabilities as exercise is not reasonably certain.
The weighted average remaining lease term and the discount rate for the reporting periods are as follows:
| June 30, 2022 | December 31, 2021 | ||||||||||||||||
| Operating Leases | |||||||||||||||||
| Weighted average remaining lease term (years) | 4.8 | 3.6 | |||||||||||||||
| Weighted average discount rate | 4.66 | % | 4.69 | % | |||||||||||||
| Finance Leases | |||||||||||||||||
| Weighted average remaining lease term (years) | 8.1 | 8.6 | |||||||||||||||
| Weighted average discount rate | 6.92 | % | 6.91 | % | |||||||||||||
A $1,250 letter of credit issued to the lessor of the Company's corporate headquarters building is renewed annually and remains outstanding as of June 30, 2022.
The components of lease expense are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Operating lease cost | $ | 284 | $ | 203 | $ | 570 | $ | 481 | |||||||||||||||
| Finance lease cost: | |||||||||||||||||||||||
| Amortization of right-of-use assets | 338 | 242 | 508 | 484 | |||||||||||||||||||
| Interest on lease liabilities | 185 | 200 | 375 | 403 | |||||||||||||||||||
| Total finance lease cost | $ | 523 | $ | 442 | $ | 883 | $ | 887 | |||||||||||||||
Short-term lease expense was not significant for the three and six months ended June 30, 2022 and 2021.
10
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
Supplemental cash flow information related to leases was as follows:
| Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows for operating leases | $ | 505 | $ | 494 | |||||||
| Operating cash flows for finance leases | 375 | 403 | |||||||||
| Financing cash flows for finance leases | 437 | 399 | |||||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | — | 1,221 | |||||||||
| Finance leases | — | — | |||||||||
Supplemental balance sheet information related to leases was as follows:
| June 30, 2022 | December 31, 2021 | ||||||||||
| Operating Leases | |||||||||||
| Operating lease right-of-use assets | $ | 4,241 | $ | 4,761 | |||||||
| Current maturities of leases | 884 | 861 | |||||||||
| Operating lease liabilities | 3,591 | 4,068 | |||||||||
| Total operating lease liabilities | $ | 4,475 | $ | 4,929 | |||||||
| Finance Leases | |||||||||||
| Property and equipment, at cost | $ | 14,607 | $ | 14,607 | |||||||
| Accumulated depreciation | (6,624) | (6,116) | |||||||||
| Property and equipment, net | $ | 7,983 | $ | 8,491 | |||||||
| Current maturities of leases | $ | 936 | $ | 895 | |||||||
| Finance lease liabilities | 9,603 | 10,082 | |||||||||
| Total finance lease liabilities | $ | 10,539 | $ | 10,977 | |||||||
Future maturities of lease liabilities as of June 30, 2022 were as follows:
| Operating Leases | Finance Leases | ||||||||||
2022 (excluding the six months ended June 30, 2022) | $ | 356 | $ | 817 | |||||||
| 2023 | 1,160 | 1,652 | |||||||||
| 2024 | 1,164 | 1,674 | |||||||||
| 2025 | 920 | 1,625 | |||||||||
| 2026 | 592 | 1,657 | |||||||||
2027 and thereafter | 868 | 6,515 | |||||||||
| Total payments | $ | 5,060 | $ | 13,940 | |||||||
| Less imputed interest | (585) | (3,401) | |||||||||
| Total | $ | 4,475 | $ | 10,539 | |||||||
11
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
8.COMMITMENTS AND CONTINGENCIES
Royalty Agreement. The Company has a royalty agreement in place with terms that include payment of royalties of 5% of specified product sales. The agreement terminates the later of 2023 or upon expiration of the underlying patents or patent applications, which is expected to occur after 2023. Parties to the royalty agreement have the right at any time to terminate the agreement immediately for cause. Royalty expense of $877 and $842 was recorded for the three months ended June 30, 2022 and 2021 and $1,670 and $1,564 for the six months ended June 30, 2022 and 2021 as a component of Cost of Revenue in the accompanying Condensed and Consolidated Statement of Operations.
Purchase Agreements. The Company enters into standard purchase agreements with vendors in the ordinary course of business, generally with terms that allow cancellation.
Legal. The Company may, from time to time, become a party to legal proceedings. Such matters are subject to many uncertainties and to outcomes of which the financial impacts are not predictable with assurance and that may not be known for extended periods of time. A liability is established once management determines a loss is probable and an amount can be reasonably estimated.
The Company received a Civil Investigative Demand (CID) from the U.S. Department of Justice (USDOJ) in December 2017 stating that it is investigating the Company to determine whether the Company has violated the False Claims Act, relating to the promotion of certain medical devices related to the treatment of atrial fibrillation for off-label use and submitted or caused to be submitted false claims to certain federal and state health care programs for medically unnecessary healthcare services related to the treatment of atrial fibrillation. The CID covers the period from January 2010 to December 2017 and required the production of documents and answers to written interrogatories. The Company had no knowledge of the investigation prior to receipt of the CID. The Company maintains rigorous policies and procedures to promote compliance with the False Claims Act and other applicable regulatory requirements. The Company provided the USDOJ with documents and answers to the written interrogatories. In March 2021, USDOJ informed the Company that its investigation was based on a lawsuit brought on behalf of the United States and various state and local governments under the qui tam provisions of federal and certain state and local False Claims Acts. Although the USDOJ and all of the state and local governments declined to intervene, the relator continues to pursue the case. While the Company is vigorously contesting the case, it is not possible to predict when this matter may be resolved or what impact, if any, the outcome of this matter might have on our consolidated financial position, results of operations, or cash flows.
During the first quarter, the Company received a notice of breach under a license agreement regarding its potential underpayment of royalties. The notice asserts that the Company's calculation of royalties payable under the license agreement throughout the agreement term did not include sales of all products that were subject to royalties. The Company disputes the basis of the claim and any potential underpayment. While a loss related to this claim is possible, the Company does not believe such loss is probable or estimable at this time.
9.REVENUE
The Company develops, manufactures and sells devices designed primarily for surgical ablation of cardiac tissue, exclusion of the left atrial appendage, and blocking pain by temporarily ablating peripheral nerves. These devices are developed and marketed to a broad base of medical centers globally. The Company recognizes revenue when control of promised goods is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods.
12
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
United States revenue by product type is as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Open ablation | $ | 22,070 | $ | 19,503 | $ | 41,044 | $ | 36,942 | |||||||||||||||
| Minimally invasive ablation | 10,154 | 9,702 | 18,769 | 18,087 | |||||||||||||||||||
| Pain management | 10,210 | 5,709 | 18,224 | 9,607 | |||||||||||||||||||
| Total ablation | $ | 42,434 | $ | 34,914 | $ | 78,037 | $ | 64,636 | |||||||||||||||
| Appendage management | 28,831 | 25,156 | 55,500 | 45,743 | |||||||||||||||||||
| Total United States | $ | 71,265 | $ | 60,070 | $ | 133,537 | $ | 110,379 | |||||||||||||||
International revenue by product type is as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Open ablation | $ | 6,213 | $ | 5,526 | $ | 12,705 | $ | 9,960 | |||||||||||||||
| Minimally invasive ablation | 1,271 | 1,575 | 2,804 | 2,849 | |||||||||||||||||||
| Pain management | 114 | 11 | 254 | 11 | |||||||||||||||||||
| Total ablation | $ | 7,598 | $ | 7,112 | $ | 15,763 | $ | 12,820 | |||||||||||||||
| Appendage management | 5,666 | 4,194 | 9,805 | 7,452 | |||||||||||||||||||
| Total International | $ | 13,264 | $ | 11,306 | $ | 25,568 | $ | 20,272 | |||||||||||||||
Revenue attributed to customer geographic locations is as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| United States | $ | 71,265 | $ | 60,070 | $ | 133,537 | $ | 110,379 | |||||||||||||||
| Europe | 7,783 | 7,015 | 15,020 | 12,781 | |||||||||||||||||||
| Asia | 4,933 | 4,088 | 9,490 | 6,961 | |||||||||||||||||||
| Other International | 548 | 203 | 1,058 | 530 | |||||||||||||||||||
| Total International | 13,264 | 11,306 | 25,568 | 20,272 | |||||||||||||||||||
| Total Revenue | $ | 84,529 | $ | 71,376 | $ | 159,105 | $ | 130,651 | |||||||||||||||
10.INCOME TAX PROVISION
The Company files federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. The Company uses the asset and liability method to determine its provision for income taxes. The Company’s provision for income taxes in interim periods is computed by applying the discrete method and is based on financial results through the end of the interim period. The Company determined that using the discrete method is more appropriate than using the annual effective tax rate method. The Company is unable to estimate the annual effective tax rate with sufficient precision to use the effective tax rate method, which requires a full-year projection of income. The effective tax rate for the three months ended June 30, 2022 and 2021 was (0.30%) and (0.41%). The effective tax rate for the six months ended June 30, 2022 and 2021 was (0.34%) and (0.29%). The Company’s worldwide effective tax rate differs from the US statutory rate of 21% primarily due to the Company’s valuation allowance.
Federal, state and local returns of the Company are routinely subject to review by various taxing authorities. The Company has not accrued any interest and penalties related to unrecognized income tax benefits as a result of offsetting net operating losses. However, if required, the Company will recognize interest and penalties within income tax expense and within the related tax liability.
13
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
11.EQUITY COMPENSATION PLANS
The Company has two share-based incentive plans: the 2014 Stock Incentive Plan (2014 Plan) and the 2019 Employee Stock Purchase Plan (ESPP).
Stock Incentive Plan
Under the 2014 Plan, the Board of Directors may grant incentive stock options to Company employees and may grant restricted stock awards, restricted stock units, nonstatutory stock options, performance share awards and stock appreciation rights to Company employees, directors and consultants. The Compensation Committee of the Board of Directors, as the administrator of the 2014 Plan, has the authority to determine the terms of any awards, including the number of shares subject to each award, the exercisability of the awards and the form of consideration. As of June 30, 2022, 12,899 shares of common stock had been reserved for issuance under the 2014 Plan, and 1,076 shares were available for future grants. At the Company's 2022 Annual Meeting of Stockholders, stockholders approved an amendment to the 2014 Plan increasing the shares authorized under the 2014 Plan by 1,100.
Employee Stock Purchase Plan
Under the ESPP, shares of the Company’s common stock may be purchased at a discount (15%) of the lesser of the closing price of the Company’s common stock on the first or last trading days of the offering period. The offering period (currently six months) and the offering price are subject to change. Participants may not purchase more than $25 of the Company’s common stock in a calendar year or more than 3 shares during an offering period. As of June 30, 2022, there were 228 shares available for future issuance under the ESPP.
Share-Based Compensation Expense Information
The following table summarizes the allocation of share-based compensation expense:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Cost of revenue | $ | 487 | $ | 598 | $ | 1,058 | $ | 1,017 | |||||||||||||||
| Research and development expenses | 1,186 | 1,083 | 2,316 | 2,020 | |||||||||||||||||||
| Selling, general and administrative expenses | 5,851 | 5,460 | 11,199 | 10,708 | |||||||||||||||||||
| Total | $ | 7,524 | $ | 7,141 | $ | 14,573 | $ | 13,745 | |||||||||||||||
14
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
12.COMPREHENSIVE LOSS AND ACCUMULATED OTHER COMPREHENSIVE LOSS
In addition to net losses, comprehensive loss includes foreign currency translation adjustments and unrealized gains (losses) on investments.
Accumulated other comprehensive loss consisted of the following, net of tax:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Total accumulated other comprehensive (loss) income at beginning of period | $ | (3,465) | $ | (18) | $ | (948) | $ | 312 | |||||||||||||||
| Unrealized Gains (Losses) on Investments | |||||||||||||||||||||||
| Balance at beginning of period | $ | (3,226) | $ | 23 | $ | (887) | $ | 54 | |||||||||||||||
| Other comprehensive loss before reclassifications | (377) | (132) | (2,716) | (163) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss to other income (expense) | (72) | — | (72) | — | |||||||||||||||||||
| Balance at end of period | $ | (3,675) | $ | (109) | $ | (3,675) | $ | (109) | |||||||||||||||
| Foreign Currency Translation Adjustment | |||||||||||||||||||||||
| Balance at beginning of period | $ | (239) | $ | (41) | $ | (61) | $ | 258 | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (527) | 36 | (787) | (262) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss to other income (expense) | 97 | 27 | 179 | 26 | |||||||||||||||||||
| Balance at end of period | $ | (669) | $ | 22 | $ | (669) | $ | 22 | |||||||||||||||
| Total accumulated other comprehensive loss at end of period | $ | (4,344) | $ | (87) | $ | (4,344) | $ | (87) | |||||||||||||||
15
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, 2021 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, 2021. There may be additional risks of which we are not presently aware or that we currently believe are immaterial which could have an adverse impact on our business. Forward-looking statements address our expected future business, financial performance, financial condition and results of operations, and often contain words such as “intends,” “estimates,” “anticipates,” “hopes,” “projects,” “plans,” “expects,” “seek,” “believes,” “see,” “should,” “will,” “would,” “could,” “can,” “may,” “future,” “predicts,” “target,” and similar expressions and the negative versions thereof. 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 including developments related to the COVID-19 pandemic, as discussed herein. 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. Afib affects 1-2% of the population in the United States and an estimated 33 million people worldwide. It is the most common cardiac arrhythmia, or irregular heartbeat, encountered in clinical practice and results in high utilization of healthcare services. Patients often progress from being in Afib intermittently (paroxysmal) to being in Afib continuously. The continuous Afib patient population includes persistent Afib, which lasts seven days to one year, and long-standing persistent Afib, which lasts longer than one year. Afib often occurs in conjunction with other cardiovascular diseases, including hypertension, congestive heart failure, left ventricular dysfunction, coronary artery disease and valvular disease. 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.
We believe that we are currently the market leader in the surgical treatment of Afib. Our Isolator® Synergy™ Ablation System is approved by the United States Food and Drug Administration (FDA) for the treatment of persistent and long-standing persistent Afib concomitant to other open-heart surgical procedures. Our EPi-Sense® System is approved by FDA to treat patients with long-standing persistent Afib. All of our other ablation devices are cleared for sale in the United States under FDA 510(k) clearances, including our other radio frequency (RF) and cryoablation products, which are indicated for the ablation of cardiac tissue and/or the treatment of cardiac arrhythmias. In addition, certain of our cryoablation probes are cleared for managing pain by temporarily ablating peripheral nerves, or Cryo Nerve Block therapy. Our AtriClip® LAA Exclusion System products are 510(k)-cleared with an indication for the exclusion of the LAA, performed under direct visualization and in conjunction with other cardiac surgical procedures. Direct visualization, in this context, requires that the surgeon is able to see the heart directly, with or without assistance from a camera, endoscope or other appropriate viewing technologies. Studies have demonstrated exclusion of the LAA with AtriClip also results in electrical isolation of the LAA. The LARIAT® system is cleared under the 510(k) process for soft tissue ligation. Several of our products are currently being studied to expand labeling
16
claims or to support indications specifically for the treatment of Afib, prophylactic stroke reduction or other arrhythmias. Our Isolator Synergy clamps, Isolator Synergy pens, Coolrail® linear pen, cryoablation devices, cryoSPHERE® probe, certain products of the AtriClip LAA Exclusion System, the EPi-Sense® system and LARIAT Suture Delivery Device bear the CE mark and may be commercially distributed throughout the member states of the European Union and other countries that comply with or mirror the Medical Device Directive. Our Isolator Synergy clamps, Isolator Synergy pens, Coolrail linear pen, cryoablation devices and certain products of the AtriClip LAA Exclusion System are available in select Asia-Pacific countries. 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 and in certain international markets, such as Germany, France, the United Kingdom, the Benelux region 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, with certain exceptions. Direct sales transactions outside the United States are transacted in Euros, British Pounds or Australian Dollars.
Recent Developments
During 2022, we continued to experience variability and intermittent demand for our products as non-emergent procedures were deferred in order to preserve resources for COVID-19 patients and caregivers and hospital staffing was impacted by the pandemic and related factors. We saw many regions stabilize through the quarter with overall improvements in procedure volumes. However, we expect some variability to continue as we operate in many geographic regions with diverse restrictions that are impacted as new COVID-19 variants emerge. Despite the challenging environment resulting from the pandemic, our worldwide revenue in the six months ended June 30, 2022 was $159,105, representing an increase of $28,454, or 21.8%, over the first six months of 2021, driven by growing adoption across key product lines. We continue to build on our strategic initiatives of product innovation, investing in clinical science and expanding awareness and adoption by providing superior training and education.
PRODUCT INNOVATION. During the first half of 2022, we launched our ENCOMPASS® clamp, following the receipt of 510(k) clearance for ablation of cardiac tissue during cardiac surgery in July 2021. The ENCOMPASS clamp marks innovation in our core open ablation market and is designed to make concomitant surgical ablations more efficient. It is expected to drive deeper penetration of cardiac surgery procedures.
CLINICAL SCIENCE. We continue to invest in studies to expand labeling claims or support various indications for our products, and we also conduct various studies to gather clinical data regarding our products.
HEAL-IST. In February 2022, FDA approved the protocol for the Hybrid Epicardial and Endocardial Sinus Node Sparing Ablation Therapy for Inappropriate Sinus Tachycardia (IST) clinical trial (HEAL-IST) . The HEAL-IST clinical trial is designed to study the safety and efficacy of a hybrid sinus node sparing ablation procedure using the Isolator Synergy Surgical Ablation System for the treatment of symptomatic, drug refractory or drug intolerant IST. The trial is a prospective, multicenter, single arm trial that evaluates safety 30 days post-procedure and evaluates primary effectiveness of freedom from IST (as specified) at 12 months post-procedure. The trial provides for enrollment of up to 142 patients at up to 40 sites in the United States, United Kingdom and European Union. We announced the first patient enrollment in the trial in June 2022; site initiation and enrollment is ongoing.
LeAAPS. In April 2022, 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. The trial is a prospective, multicenter, randomized trial that 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. The Company anticipates enrollment to begin later this year.
TRAINING. Our professional education and marketing teams conduct virtual, in-person and mobile training for physicians and our sales teams. These training methods ensure invaluable access to continuing education and awareness of our products and related procedures. The 2021 FDA approval of the EPi-Sense system has enabled us to educate and train physicians on the benefits of Hybrid AF™ therapy in treating long-standing persistent Afib patients. Our Hybrid Training Course and Advanced Hybrid Ablation Training Course are co-sponsored by the Hearth Rhythm Society (HRS).
17
Results of Operations
Three months ended June 30, 2022 compared to three months ended June 30, 2021
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, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Amount | % of Revenues | Amount | % of Revenues | ||||||||||||||||||||
| Revenue | $ | 84,529 | 100.0 | % | $ | 71,376 | 100.0 | % | |||||||||||||||
| Cost of revenue | 21,010 | 24.9 | % | 17,298 | 24.2 | % | |||||||||||||||||
| Gross profit | 63,519 | 75.1 | % | 54,078 | 75.8 | % | |||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development expenses | 14,791 | 17.5 | % | 12,197 | 17.1 | % | |||||||||||||||||
| Selling, general and administrative expenses | 62,388 | 73.8 | % | 56,958 | 79.8 | % | |||||||||||||||||
| Total operating expenses | 77,179 | 91.3 | % | 69,155 | 96.9 | % | |||||||||||||||||
| Loss from operations | (13,660) | (16.2) | % | (15,077) | (21.1) | % | |||||||||||||||||
| Other expense, net: | (1,136) | (1.3) | % | (1,108) | (1.6) | % | |||||||||||||||||
| Loss before income tax expense | (14,796) | (17.5) | % | (16,185) | (22.7) | % | |||||||||||||||||
| Income tax expense | 45 | 0.1 | % | 66 | 0.1 | % | |||||||||||||||||
| Net loss | $ | (14,841) | (17.6) | % | $ | (16,251) | (22.8) | % | |||||||||||||||
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 | ||||||||||||||||||||||
| 2022 | 2021 | Amount | % | ||||||||||||||||||||
| Open ablation | $ | 22,070 | $ | 19,503 | $ | 2,567 | 13.2 | % | |||||||||||||||
| Minimally invasive ablation | 10,154 | 9,702 | 452 | 4.7 | % | ||||||||||||||||||
| Pain management | 10,210 | 5,709 | 4,501 | 78.8 | % | ||||||||||||||||||
| Appendage management | 28,831 | 25,156 | 3,675 | 14.6 | % | ||||||||||||||||||
| Total United States | $ | 71,265 | $ | 60,070 | $ | 11,195 | 18.6 | % | |||||||||||||||
| Total International | 13,264 | 11,306 | 1,958 | 17.3 | % | ||||||||||||||||||
| Total revenue | $ | 84,529 | $ | 71,376 | $ | 13,153 | 18.4 | % | |||||||||||||||
Worldwide revenue increased 18.4% (19.8% on a constant currency basis). In the United States, we experienced growth in most of our key product lines. Physician acceptance of our cryoSPHERE® probe for post-operative pain management and expanded sales efforts drove growth in pain management revenue. Appendage management sales were driven by continuing adoption of our AtriClip® Flex⋅V® and Pro⋅V® devices, while the launch of the new ENCOMPASS clamp accelerated growth in our open ablation revenue. While minimally invasive procedures continue to experience residual impacts from the pandemic and staffing, we saw growing adoption of the EPi-Sense® System in an increasing customer base. The increase in EPi-Sense revenue was largely offset by a decline in revenue from all other minimally invasive ablation products. International sales increased 17.3% (26.3% on a constant currency basis), a result of rebounding procedure volumes in Europe, primarily in the Netherlands and United Kingdom, and growth in Australia. The increase in international revenue was driven mainly by our appendage management business which grew 35.1%.
18
Revenue reported on a constant currency basis is a non-GAAP measure and is calculated by applying previous period foreign currency (Euro) exchange rates, which are determined by the average daily Euro to Dollar 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 $3,712, reflecting higher sales volumes, while gross margin decreased approximately 70 basis points, reflecting changes in U.S. product mix and cost increases driven by inflationary and supply chain pressures.
Research and development expenses. Research and development expenses increased $2,594 or 21.3%. Personnel costs rose $1,372 from increased headcount as we continue to build our product development, regulatory and clinical teams, and from increased travel costs. Product development and regulatory expenses increased $869 driven mainly by regulatory filings, submissions and consulting related to compliance with the European Union Medical Device Regulation (EU MDR). Amortization expense increased $247 following the April 2021 PMA resulting from the CONVERGE IDE clinical trial.
Selling, general and administrative expenses. Selling, general and administrative expenses increased $5,430, or 9.5%. Additional headcount and travel activities of $4,058 drove the increase in expenses, primarily reflecting the expansion of our sales and training teams, while meetings, marketing, trainings and tradeshow activities contributed $2,054 of the increase in expenses as we saw further transition from virtual to in-person events. Other operating costs grew $838 compared with the prior period, which includes consulting, professional services and information systems enhancements. Additionally, 2021 included a $2,600 charge for the change in fair value of the SentreHEART contingent consideration liability, as well as a reduction in expenses from a one-time tax credit of $759.
Other income (expense). Other income and expense consists primarily of net interest expense and foreign currency transaction gains and losses. Net interest expense decreased $69 primarily due to lower interest expense as a result of the November 2021 amendment of our Loan Agreement.
Six months ended June 30, 2022 compared to six months ended June 30, 2021
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, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Amount | % of Revenues | Amount | % of Revenues | ||||||||||||||||||||
| Revenue | $ | 159,105 | 100.0 | % | $ | 130,651 | 100.0 | % | |||||||||||||||
| Cost of revenue | 39,991 | 25.1 | % | 32,033 | 24.5 | % | |||||||||||||||||
| Gross profit | 119,114 | 74.9 | % | 98,618 | 75.5 | % | |||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development expenses | 28,420 | 17.9 | % | 23,414 | 17.9 | % | |||||||||||||||||
| Selling, general and administrative expenses | 118,504 | 74.5 | % | 106,166 | 81.3 | % | |||||||||||||||||
| Total operating expenses | 146,924 | 92.3 | % | 129,580 | 99.2 | % | |||||||||||||||||
| Loss from operations | (27,810) | (17.5) | % | (30,962) | (23.7) | % | |||||||||||||||||
| Other expense, net: | (2,113) | (1.3) | % | (2,109) | (1.6) | % | |||||||||||||||||
| Loss before income tax expense | (29,923) | (18.8) | % | (33,071) | (25.3) | % | |||||||||||||||||
| Income tax expense | 101 | 0.1 | % | 97 | 0.1 | % | |||||||||||||||||
| Net loss | $ | (30,024) | (18.9) | % | $ | (33,168) | (25.4) | % | |||||||||||||||
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:
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| Six Months Ended June 30, | Change | ||||||||||||||||||||||
| 2022 | 2021 | Amount | % | ||||||||||||||||||||
| Open ablation | $ | 41,044 | $ | 36,942 | $ | 4,102 | 11.1 | % | |||||||||||||||
| Minimally invasive ablation | 18,769 | 18,087 | 682 | 3.8 | % | ||||||||||||||||||
| Pain management | 18,224 | 9,607 | 8,617 | 89.7 | % | ||||||||||||||||||
| Appendage management | 55,500 | 45,743 | 9,757 | 21.3 | % | ||||||||||||||||||
| Total United States | $ | 133,537 | $ | 110,379 | $ | 23,158 | 21.0 | % | |||||||||||||||
| Total International | 25,568 | 20,272 | 5,296 | 26.1 | % | ||||||||||||||||||
| Total revenue | $ | 159,105 | $ | 130,651 | $ | 28,454 | 21.8 | % | |||||||||||||||
Worldwide revenue increased 21.8% (23.0% on a constant currency basis). In the United States, we experienced growth across most key product lines as cardiac surgery volumes began to stabilize. Appendage management revenue increases were driven by sales of the AtriClip® Flex⋅V® and Pro⋅V® devices, while continuing adoption of the cryoSPHERE® probe for post-operative pain management drove pain management sales. The launch of the new ENCOMPASS clamp contributed to the open ablation sales growth, while adoption of the EPi-Sense® System drove increases in minimally invasive ablation and offset declines in other minimally invasive ablation products. International sales increased 26.1% (33.7% on a constant currency basis), with procedure volumes rising across all major franchises and regions.
Cost of revenue and gross margin. Cost of revenue increased $7,958, reflecting higher revenue and a decrease in gross margin of approximately 60 basis points, resulting from changes in U.S. product mix and cost inflation and supply chain pressures, slightly offset by geographic mix.
Research and development expenses. Research and development expenses increased $5,006 or 21.4%. Personnel costs increased $2,560 from additional headcount as we continue to build our product development, regulatory and clinical teams and return to historical travel levels. Regulatory submissions, consulting, as well as product development projects increased $1,119. Amortization expense increased $978 following the April 2021 PMA resulting from the CONVERGE IDE clinical trial.
Selling, general and administrative expenses. Selling, general and administrative expenses increased $12,338, or 11.6%. Additional headcount and travel activities increased $9,459, primarily reflecting the expansion across our teams, as well as a return to historical travel levels. Additional tradeshow, meetings, physician training and marketing activities contributed $4,969 of the increase reflecting continuing transition from virtual to in-person events and the expansion of training programs. Other operating costs, including contracting, product demo costs and professional services grew $1,161 as compared to the prior period. Additionally, 2021 expenses included a $5,100 charge for the change in fair value of the SentreHEART contingent consideration liability, partially offset by a one-time tax credit of $759.
Other income (expense). Other income and expense consists primarily of net interest expense and foreign currency transaction gains and losses. Net interest expense decreased $240 primarily due to lower interest expense stemming from the November 2021 amendment of our Loan Agreement.
Liquidity and Capital Resources
As of June 30, 2022, the Company had cash, cash equivalents and investments of $182,749 and outstanding debt of $60,000. We had unused borrowing capacity of $28,750 under our revolving credit facility. Most of our operating cash and all cash equivalents and investments are held by United States financial institutions. We had net working capital of $149,850 and an accumulated deficit of $310,177 as of June 30, 2022.
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | Change | |||||||||
| (dollars in thousands) | |||||||||||
| Net cash used in operating activities | $ | (20,403) | $ | (13,849) | $ | 6,554 | |||||
| Net cash provided by investing activities | 40,243 | 47,528 | (7,285) | ||||||||
| Net cash used in financing activities | (8,636) | (7,889) | 747 | ||||||||
Cash flows used in operating activities. Net cash used in operating activities increased $6,554 in 2022 compared to 2021. This change is driven by the fluctuation in working capital and other assets and liabilities of $6,389, primarily due to the
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$9,665 reduction in accrued liabilities as a result of higher annual variable compensation payments due to improved operating performance, offset by a $2,042 decrease in accounts receivable. The remaining fluctuation is a decrease in the net loss of $3,144, largely driven by a decrease in non-cash expenses, including $5,100 non-cash impact for the fair value adjustment of the SentreHEART contingent consideration liability in 2021, offset partially by increased amortization of the CONVERGE technology asset.
Cash flows provided by investing activities. Net cash provided by investing activities decreased by $7,285 in 2022 compared to 2021, reflecting decreases in net sales and maturities of available-for-sale securities of $5,259 and increased purchases of property and equipment of $2,026 for the expansion of our manufacturing facilities and new product introductions.
Cash flows used in financing activities. Net cash used in financing activities increased by $747 in 2022 largely reflecting lower stock option exercise activity of $6,090, offset by a decrease of $4,927 in cash tax payments from restricted and performance share vesting and increased proceeds from issuance of shares under ESPP of $453.
Credit facility. Our Loan and Security Agreement, as amended and modified effective November 1, 2021 (Loan Agreement) with Silicon Valley Bank (SVB) 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 June 30, 2022, our outstanding debt was $60,000 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 6 — Indebtedness.
Our corporate headquarters lease agreement requires a $1,250 letter of credit which renews annually and remains outstanding as of June 30, 2022.
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; future expenses 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 our liquidity and capital resources through the recovery from, and any further disruptions caused by, COVID-19. 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, 2021 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, 2022, there were no material changes to the information provided in Note 2, “Recent Accounting Pronouncements” in the Company’s Form 10-K for the fiscal year ended December 31, 2021.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of June 30, 2022, 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, 2021.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the President and Chief Executive Officer (the Principal Executive Officer) and Chief Financial Officer (the Principal Accounting and Financial Officer), has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13(a) -15(e) and 15(d) -15(e) of the Securities Exchange Act of 1934 as amended (Exchange Act), as of the end of the period covered by this report. Based on this evaluation, we concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s forms and rules, and the material information relating to the Company is accumulated and communicated to management, including the President and Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that control objectives are met. Because of inherent limitations in all control systems, no evaluation of controls can provide assurance that all control issues and instances of fraud, if any, within a company will be detected. Additionally, controls can be circumvented by individuals, by collusion of two or more people or by management override. Over time, controls can become inadequate because of changes in conditions or the degree of compliance may deteriorate. Further, the design of any system of controls is based in part upon assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions. Because of the inherent limitations in any cost-effective control system, misstatements due to errors or fraud may occur and not be detected.
Changes in Internal Control Over Financial Reporting
In the ordinary course of business, we routinely enhance our information systems by either upgrading current systems or implementing new ones. There were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to legal proceedings can be found under the heading “Legal” in Note 8 – Commitments and Contingencies to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.
Item 1A. Risk Factors
In addition to the other information set forth in this report, careful consideration should be given to the factors discussed in Item 1A, “Risk Factors” in our Form 10-K for the year ended December 31, 2021, all of which could materially affect our business, financial condition or future results. The risks described therein are not the only risks facing us. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may adversely affect our business, financial condition and/or operating results. There have been no material changes with respect to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
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Item 6. Exhibits
| Exhibit No. | Description | ||||
| 10.1# | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 101.INS | XBRL Instance Document | ||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.DEF | XBRL Taxonomy Definition Linkbase Document | ||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||
____________________________
# Compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AtriCure, Inc. | |||||
| (REGISTRANT) | |||||
Date: August 3, 2022 | /s/ Michael H. Carrel | ||||
| Michael H. Carrel | |||||
President and Chief Executive Officer (Principal Executive Officer) | |||||
Date: August 3, 2022 | /s/ Angela L. Wirick | ||||
| Angela L. Wirick | |||||
Chief Financial Officer (Principal Accounting and Financial Officer) | |||||
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