AtriCure, Inc. - Quarter Report: 2023 March (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 March 31, 2023
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 April 28, 2023 | ||||
| Common Stock, $.001 par value | 47,242,346 | ||||
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)
| March 31, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 77,341 | $ | 58,099 | |||||||
| Short-term investments | 58,519 | 63,014 | |||||||||
Accounts receivable, less allowance for credit losses of $230 | 45,661 | 42,693 | |||||||||
| Inventories | 48,848 | 45,931 | |||||||||
| Prepaid and other current assets | 7,956 | 5,477 | |||||||||
| Total current assets | 238,325 | 215,214 | |||||||||
| Long-term investments | 25,561 | 51,509 | |||||||||
| Property and equipment, net | 39,607 | 38,833 | |||||||||
| Operating lease right-of-use assets | 4,605 | 3,787 | |||||||||
| Intangible assets, net | 38,601 | 39,339 | |||||||||
| Goodwill | 234,781 | 234,781 | |||||||||
| Other noncurrent assets | 1,620 | 1,985 | |||||||||
| Total Assets | $ | 583,100 | $ | 585,448 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 23,561 | $ | 19,898 | |||||||
| Accrued liabilities | 28,233 | 33,022 | |||||||||
| Current maturities of debt and leases | 10,677 | 5,472 | |||||||||
| Total current liabilities | 62,471 | 58,392 | |||||||||
| Long-term debt | 51,940 | 56,834 | |||||||||
| Finance lease liabilities | 8,883 | 9,147 | |||||||||
| Operating lease liabilities | 3,725 | 3,095 | |||||||||
| Other noncurrent liabilities | 1,236 | 1,226 | |||||||||
| Total Liabilities | 128,255 | 128,694 | |||||||||
| Commitments and contingencies (Note 9) | |||||||||||
| Stockholders’ Equity: | |||||||||||
Common stock, $0.001 par value, 90,000 shares authorized and 47,244 and 46,563 issued and outstanding | 47 | 47 | |||||||||
| Additional paid-in capital | 790,965 | 787,422 | |||||||||
| Accumulated other comprehensive loss | (3,072) | (4,096) | |||||||||
| Accumulated deficit | (333,095) | (326,619) | |||||||||
| Total Stockholders’ Equity | 454,845 | 456,754 | |||||||||
| Total Liabilities and Stockholders’ Equity | $ | 583,100 | $ | 585,448 | |||||||
3
ATRICURE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In Thousands, Except Per Share Amounts)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Revenue | $ | 93,494 | $ | 74,576 | |||||||
| Cost of revenue | 23,885 | 18,981 | |||||||||
| Gross profit | 69,609 | 55,595 | |||||||||
| Operating expenses: | |||||||||||
| Research and development expenses | 15,327 | 13,629 | |||||||||
| Selling, general and administrative expenses | 60,064 | 56,116 | |||||||||
| Total operating expenses | 75,391 | 69,745 | |||||||||
| Loss from operations | (5,782) | (14,150) | |||||||||
| Other income (expense): | |||||||||||
| Interest expense | (1,636) | (1,000) | |||||||||
| Interest income | 875 | 116 | |||||||||
| Other | 145 | (93) | |||||||||
| Loss before income tax expense | (6,398) | (15,127) | |||||||||
| Income tax expense | 78 | 56 | |||||||||
| Net loss | $ | (6,476) | $ | (15,183) | |||||||
| Basic and diluted net loss per share | $ | (0.14) | $ | (0.33) | |||||||
| Weighted average shares outstanding—basic and diluted | 46,107 | 45,528 | |||||||||
| Comprehensive income (loss): | |||||||||||
| Unrealized gain (loss) on investments | $ | 1,041 | $ | (2,339) | |||||||
| Foreign currency translation adjustment | (17) | (178) | |||||||||
| Other comprehensive income (loss) | 1,024 | (2,517) | |||||||||
| Net loss | (6,476) | (15,183) | |||||||||
| Comprehensive loss, net of tax | $ | (5,452) | $ | (17,700) | |||||||
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 March 31, 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 | 252 | — | (3,231) | — | — | (3,231) | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (2,517) | (2,517) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (15,183) | — | (15,183) | |||||||||||||||||||||||||||||
Balance—March 31, 2022 | 46,268 | $ | 46 | $ | 761,580 | $ | (295,336) | $ | (3,465) | $ | 462,825 | ||||||||||||||||||||||||
| Three-Month Period Ended March 31, 2023 | |||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||||||||
Balance—December 31, 2022 | 46,563 | $ | 47 | $ | 787,422 | $ | (326,619) | $ | (4,096) | $ | 456,754 | ||||||||||||||||||||||||
| Impact of equity compensation plans | 681 | — | 3,543 | — | — | 3,543 | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 1,024 | 1,024 | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (6,476) | — | (6,476) | |||||||||||||||||||||||||||||
Balance—March 31, 2023 | 47,244 | $ | 47 | $ | 790,965 | $ | (333,095) | $ | (3,072) | $ | 454,845 | ||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
5
ATRICURE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (6,476) | $ | (15,183) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Share-based compensation expense | 8,760 | 7,049 | |||||||||
| Depreciation | 2,205 | 1,895 | |||||||||
| Amortization of intangible assets | 738 | 972 | |||||||||
| Amortization of deferred financing costs | 121 | 128 | |||||||||
| Amortization of investments | 169 | 559 | |||||||||
| Other non-cash adjustments | 160 | 338 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (2,900) | (7,950) | |||||||||
| Inventories | (2,847) | (1,934) | |||||||||
| Other current assets | (2,472) | (1,581) | |||||||||
| Accounts payable | 3,066 | 1,729 | |||||||||
| Accrued liabilities | (4,819) | (10,701) | |||||||||
| Other noncurrent assets and liabilities | 216 | 47 | |||||||||
| Net cash used in operating activities | (4,079) | (24,632) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Sales and maturities of available-for-sale securities | 31,315 | 23,103 | |||||||||
| Purchases of property and equipment | (2,502) | (3,381) | |||||||||
| Net cash provided by investing activities | 28,813 | 19,722 | |||||||||
| Cash flows from financing activities: | |||||||||||
| Payments on leases | (240) | (217) | |||||||||
| Payment of debt fees | (60) | — | |||||||||
| Proceeds from stock option exercises | 522 | 355 | |||||||||
| Shares repurchased for payment of taxes on stock awards | (5,739) | (10,635) | |||||||||
| Net cash used in financing activities | (5,517) | (10,497) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 25 | (106) | |||||||||
| Net increase (decrease) in cash and cash equivalents | 19,242 | (15,513) | |||||||||
| Cash and cash equivalents—beginning of period | 58,099 | 43,654 | |||||||||
| Cash and cash equivalents—end of period | $ | 77,341 | $ | 28,141 | |||||||
| Supplemental cash flow information: | |||||||||||
| Cash paid for interest | $ | 1,487 | $ | 866 | |||||||
| Net cash (received) paid for income taxes | (12) | 50 | |||||||||
| Non-cash investing and financing activities: | |||||||||||
| Accrued purchases of property and equipment | 787 | 1,558 | |||||||||
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, 2022 filed with the SEC. Except as discussed herein, there have been no changes in the Company's significant accounting policies for the three months ended March 31, 2023 as compared to the significant accounting policies described in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
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. 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 Company's chief operating decision maker is its Chief Executive Officer, who reviews financial information presented on a consolidated basis, accompanied only by revenue information 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 in the United States, except for $2,859 as of March 31, 2023 and $1,616 as of December 31, 2022 located primarily in Europe.
Earnings Per Share—Basic and diluted net loss per share are 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 1,882 and 1,567 shares as of March 31, 2023 and 2022 because they are anti-dilutive. Therefore, the number of shares used for basic and diluted net loss per share are the same.
Share-Based Compensation—The Company recognizes share-based compensation expense for all share-based payment awards, including stock options, restricted stock awards, restricted stock units, performance share awards (PSAs) and stock purchases through an employee stock purchase plan, based on estimated fair values. The value of the portion of an award that is ultimately expected to vest is recognized as expense ratably over the service period. The Company estimated forfeitures at the time of grant and revises them, as necessary, in subsequent periods as actual forfeitures differ from those estimates. Effective January 1, 2023, the Company's policy was amended to account for forfeitures as they occur rather than estimating at the time of grant, and the effect on income from continuing operations and retained earnings is not significant.
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 settle 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
7
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
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.
•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 March 31, 2023:
| 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 | $ | — | $ | 72,418 | $ | — | $ | 72,418 | |||||||||||||||
| Commercial paper | — | 2,977 | — | 2,977 | |||||||||||||||||||
| Government and agency obligations | 33,044 | — | — | 33,044 | |||||||||||||||||||
| Corporate bonds | — | 45,865 | — | 45,865 | |||||||||||||||||||
| Asset-backed securities | — | 2,194 | — | 2,194 | |||||||||||||||||||
| Total assets | $ | 33,044 | $ | 123,454 | $ | — | $ | 156,498 | |||||||||||||||
There were no changes in the levels or methodology of measurement of financial assets and liabilities during the three months ended March 31, 2023.
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, 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 | $ | — | $ | 54,414 | $ | — | $ | 54,414 | |||||||||||||||
| Commercial paper | — | 11,935 | — | 11,935 | |||||||||||||||||||
| Government and agency obligations | 32,637 | — | — | 32,637 | |||||||||||||||||||
| Corporate bonds | — | 67,598 | — | 67,598 | |||||||||||||||||||
| Asset-backed securities | — | 2,353 | — | 2,353 | |||||||||||||||||||
| Total assets | $ | 32,637 | $ | 136,300 | $ | — | $ | 168,937 | |||||||||||||||
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 pre-market approval (PMA) approval and reimbursement for the therapy involving SentreHEART’s devices. The Company assessed the projected probability of payment during the contractual achievement periods to be remote, resulting in no reported fair value as of March 31, 2023 and December 31, 2022.
8
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
3.INVESTMENTS
Investments as of March 31, 2023 consisted of the following:
| Cost Basis | Unrealized Losses | Fair Value | |||||||||||||||
| Corporate bonds | $ | 47,477 | $ | (1,612) | $ | 45,865 | |||||||||||
| Government and agency obligations | 33,985 | (941) | 33,044 | ||||||||||||||
| Commercial paper | 2,977 | — | 2,977 | ||||||||||||||
| Asset-backed securities | 2,298 | (104) | 2,194 | ||||||||||||||
| Total | $ | 86,737 | $ | (2,657) | $ | 84,080 | |||||||||||
Investments as of December 31, 2022 consisted of the following:
| Cost Basis | Unrealized Losses | Fair Value | |||||||||||||||
| Corporate bonds | $ | 69,832 | $ | (2,234) | $ | 67,598 | |||||||||||
| Government and agency obligations | 33,971 | (1,334) | 32,637 | ||||||||||||||
| Commercial paper | 11,935 | — | 11,935 | ||||||||||||||
| Asset-backed securities | 2,483 | (130) | 2,353 | ||||||||||||||
| Total | $ | 118,221 | $ | (3,698) | $ | 114,523 | |||||||||||
The gross realized gains or losses from sales of available-for-sale investments were not significant in the three months ended March 31, 2023 and 2022.
The cost and fair value of investments in debt securities, by contractual maturity, as of March 31, 2023 were as follows:
| Available-for-sale | |||||||||||
| Amortized Cost | Fair Value | ||||||||||
Due in 1 year or less | $ | 59,947 | $ | 58,519 | |||||||
Due after 1 year through 5 years | 24,492 | 23,367 | |||||||||
Due after 5 years through 10 years | — | — | |||||||||
| Instruments not due at a single maturity date | 2,298 | 2,194 | |||||||||
| Total | $ | 86,737 | $ | 84,080 | |||||||
Instruments not due at a single maturity date consist of asset-backed securities. Actual maturities may differ from the contractual maturities due to call or prepayment rights.
4.INVENTORIES
Inventories consist of the following:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Raw materials | $ | 22,289 | $ | 19,880 | |||||||
| Work in process | 5,742 | 2,959 | |||||||||
| Finished goods | 20,817 | 23,092 | |||||||||
| Total | $ | 48,848 | $ | 45,931 | |||||||
9
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
5.INTANGIBLE ASSETS
The following table provides a summary of the Company’s intangible assets:
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Cost | Accumulated Amortization | Cost | Accumulated Amortization | ||||||||||||||||||||
| Technology | $ | 46,470 | $ | 7,869 | $ | 46,470 | $ | 7,131 | |||||||||||||||
Amortization expense of intangible assets was $738 and $972 for the three months ended March 31, 2023 and 2022. Future amortization expense is projected as follows:
2023 (excluding the three months ended March 31, 2023) | $ | 2,215 | |||
| 2024 | 2,953 | ||||
| 2025 | 2,953 | ||||
| 2026 | 2,953 | ||||
| 2027 | 2,953 | ||||
2028 and thereafter | 24,574 | ||||
| Total | $ | 38,601 | |||
6.ACCRUED LIABILITIES
Accrued liabilities consist of the following:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Accrued compensation and employee-related expenses | $ | 22,300 | $ | 26,924 | |||||||
| Other accrued liabilities | 3,033 | 3,301 | |||||||||
| Sales returns and allowances | 2,900 | 2,797 | |||||||||
| Total | $ | 28,233 | $ | 33,022 | |||||||
7.INDEBTEDNESS
Credit Facility. The Company has a Loan and Security Agreement, as amended and modified effective November 1, 2021, (Loan Agreement). Our primary banking relationship in the United States was with Silicon Valley Bank. All deposits and loans of Silicon Valley Bank were purchased by First-Citizens Bank & Trust Company, and our banking relationship is now with Silicon Valley Bank, a division of First-Citizens Bank & Trust Company as of March 31, 2023. The Loan Agreement provides 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. If the Company meets certain conditions, as specified by the Loan Agreement, the commencement of term loan principal payments may be deferred by 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 $510 included in the outstanding loan balance as of March 31, 2023. Additionally, the unamortized original financing costs related to the term loan of $237 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 March 31, 2023, the Company had no borrowings under the revolving credit facility and had borrowing availability of $28,750.
10
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:
2023 (excluding the three months ended March 31, 2023) | $ | 3,333 | |||
| 2024 | 20,000 | ||||
| 2025 | 20,000 | ||||
| 2026 | 16,667 | ||||
Total long-term debt, of which $8,333 is current and $51,667 is noncurrent | $ | 60,000 | |||
8.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 eight 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:
| March 31, 2023 | December 31, 2022 | ||||||||||||||||
| Operating Leases | |||||||||||||||||
| Weighted average remaining lease term (years) | 5.3 | 4.4 | |||||||||||||||
| Weighted average discount rate | 5.36 | % | 4.60 | % | |||||||||||||
| Finance Leases | |||||||||||||||||
| Weighted average remaining lease term (years) | 7.4 | 7.6 | |||||||||||||||
| Weighted average discount rate | 6.92 | % | 6.92 | % | |||||||||||||
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 March 31, 2023.
The components of lease expense are as follows:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating lease cost | $ | 310 | $ | 286 | |||||||
| Finance lease cost: | |||||||||||
| Amortization of right-of-use assets | 255 | 169 | |||||||||
| Interest on lease liabilities | 175 | 189 | |||||||||
| Total finance lease cost | $ | 430 | $ | 358 | |||||||
Short-term lease expense was not significant for the three months ended March 31, 2023 and 2022.
11
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:
| Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows for operating leases | $ | 317 | $ | 251 | |||||||
| Operating cash flows for finance leases | 175 | 189 | |||||||||
| Financing cash flows for finance leases | 240 | 217 | |||||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | 1,061 | — | |||||||||
| Finance leases | — | — | |||||||||
Supplemental balance sheet information related to leases was as follows:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Operating Leases | |||||||||||
| Operating lease right-of-use assets | $ | 4,605 | $ | 3,787 | |||||||
| Current maturities of leases | 1,328 | 1,147 | |||||||||
| Operating lease liabilities | 3,725 | 3,095 | |||||||||
| Total operating lease liabilities | $ | 5,053 | $ | 4,242 | |||||||
| Finance Leases | |||||||||||
| Property and equipment, at cost | $ | 14,620 | $ | 14,645 | |||||||
| Accumulated depreciation | (7,339) | (7,109) | |||||||||
| Property and equipment, net | $ | 7,281 | $ | 7,536 | |||||||
| Current maturities of leases | $ | 1,016 | $ | 992 | |||||||
| Finance lease liabilities | 8,883 | 9,147 | |||||||||
| Total finance lease liabilities | $ | 9,899 | $ | 10,139 | |||||||
Future maturities of lease liabilities as of March 31, 2023 were as follows:
| Operating Leases | Finance Leases | ||||||||||
2023 (excluding the three months ended March 31, 2023) | $ | 991 | $ | 1,250 | |||||||
| 2024 | 1,270 | 1,689 | |||||||||
| 2025 | 1,034 | 1,638 | |||||||||
| 2026 | 727 | 1,671 | |||||||||
| 2027 | 754 | 1,703 | |||||||||
2028 and thereafter | 1,169 | 4,824 | |||||||||
| Total payments | $ | 5,945 | $ | 12,775 | |||||||
| Less imputed interest | (892) | (2,876) | |||||||||
| Total | $ | 5,053 | $ | 9,899 | |||||||
12
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
9.COMMITMENTS AND CONTINGENCIES
License Agreement. The Company has a license agreement that requires royalty payments 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 license agreement have the right at any time to terminate the agreement immediately for cause. Royalty expense of $901 and $794 was recorded for the three months ended March 31, 2023 and 2022 as a component of Cost of Revenue in the accompanying Condensed Consolidated Statement of Operations.
Purchase Agreements. The Company enters into standard purchase agreements with suppliers 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 recognizes income from a favorable resolution of legal proceedings when the associated cash or assets are received.
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. During the third quarter of 2022, the relator filed a Fourth Amended Complaint, which dropped allegations of off-label promotion and now alleges that the Company paid illegal kickbacks to healthcare providers in exchange for using or referring the Company’s products, in violation of the federal Anti-Kickback Statute and various comparable state and local laws. While the Company is 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.
On August 23, 2022, the Cleveland Clinic Foundation (“Clinic”) and IDx Medical, Ltd. (“IDX”) filed a Demand for Arbitration against the Company with the American Arbitration Association (“AAA”), alleging that the Company breached certain provisions of the License Agreement dated December 9, 2003 among the Company, Clinic and IDX (“License Agreement”). Clinic and IDX allege the Company did not include the revenues from sales of certain products in its royalty payments due under the License Agreement. Clinic and IDX also allege that the Company did not provide related notices required under the License Agreement. The Demand for Arbitration requests a declaration that the termination of the License Agreement shall not occur until the expiration of certain patents and that the Company violated the License Agreement’s non-competition provisions. Clinic and IDX claim they are entitled to no less than $6,000 plus interest and costs, fees and expenses associated with their claims and future royalties. The Company filed its Answering Statement and Counterclaims to the allegations in September 2022, denying each claim and counterclaiming for breach of contract, correction of inventorship, declaratory judgment, patent prosecution and legal fees. This arbitration has been scheduled for May 2023. While the Company is 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 of 2023, the Company entered into a legal settlement for $7,500 in connection with the settlement of claims filed against a competitor. As of March 31, 2023, the Company recorded a $4,000 gain for the proceeds received as a reduction to selling, general and administrative expenses. In April 2023, the Company collected the remaining $3,500 proceeds.
13
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
10. REVENUE
The Company develops, manufactures and sells devices designed primarily for surgical ablation of cardiac tissue, exclusion of the left atrial appendage, and blocking post-operative pain by temporarily ablating peripheral nerves. These devices are 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.
United States revenue by product type is as follows:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Open ablation | $ | 25,142 | $ | 18,974 | |||||||
| Minimally invasive ablation | 9,637 | 8,615 | |||||||||
| Pain management | 11,068 | 8,014 | |||||||||
| Total ablation | $ | 45,847 | $ | 35,603 | |||||||
| Appendage management | 32,342 | 26,669 | |||||||||
| Total United States | $ | 78,189 | $ | 62,272 | |||||||
International revenue by product type is as follows:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Open ablation | $ | 7,286 | $ | 6,492 | |||||||
| Minimally invasive ablation | 1,867 | 1,533 | |||||||||
| Pain management | 228 | 140 | |||||||||
| Total ablation | $ | 9,381 | $ | 8,165 | |||||||
| Appendage management | 5,924 | 4,139 | |||||||||
| Total International | $ | 15,305 | $ | 12,304 | |||||||
Revenue attributed to customer geographic locations is as follows:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| United States | $ | 78,189 | $ | 62,272 | |||||||
| Europe | 9,401 | 7,237 | |||||||||
| Asia Pacific | 5,402 | 4,557 | |||||||||
| Other International | 502 | 510 | |||||||||
| Total International | 15,305 | 12,304 | |||||||||
| Total Revenue | $ | 93,494 | $ | 74,576 | |||||||
11. 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 March 31, 2023
14
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
and 2022 was (1.2%) and (0.4%). The Company’s worldwide effective tax rate differs from the US statutory rate of 21% primarily due to its valuation allowances.
The Company's federal, state, local and foreign tax returns 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.
12. EQUITY COMPENSATION PLANS
The Company has two share-based incentive plans: the 2014 Stock Incentive Plan (2014 Plan) and the 2018 Employee Stock Purchase Plan (ESPP). The Company is asking stockholders at the 2023 Annual Meeting of Stockholders to approve the 2023 Stock Incentive Plan, which if adopted, will replace the 2014 Plan.
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 March 31, 2023, 13,999 shares of common stock had been reserved for issuance under the 2014 Plan, and 1,285 shares were available for future grants.
Employee Stock Purchase Plan
Under the ESPP, shares of the Company’s common stock may be purchased at a 15% discount 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 March 31, 2023, there were 184 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 March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cost of revenue | $ | 443 | $ | 571 | |||||||
| Research and development expenses | 1,304 | 1,130 | |||||||||
| Selling, general and administrative expenses | 7,013 | 5,348 | |||||||||
| Total | $ | 8,760 | $ | 7,049 | |||||||
15
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
13. 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 March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Total accumulated other comprehensive loss at beginning of period | $ | (4,096) | $ | (948) | |||||||
| Unrealized Gains (Losses) on Investments | |||||||||||
| Balance at beginning of period | $ | (3,698) | $ | (887) | |||||||
| Other comprehensive income (loss) before reclassifications | 1,041 | (2,339) | |||||||||
| Amounts reclassified to other income (expense) | — | — | |||||||||
| Balance at end of period | $ | (2,657) | $ | (3,226) | |||||||
| Foreign Currency Translation Adjustment | |||||||||||
| Balance at beginning of period | $ | (398) | $ | (61) | |||||||
| Other comprehensive income (loss) before reclassifications | 125 | (261) | |||||||||
| Amounts reclassified to other income (expense) | (142) | 83 | |||||||||
| Balance at end of period | $ | (415) | $ | (239) | |||||||
| Total accumulated other comprehensive loss at end of period | $ | (3,072) | $ | (3,465) | |||||||
16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollar amounts referenced in this Item 2 are in thousands, except per share amounts.)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and notes thereto contained in Item 1 of Part I of this Form 10-Q and our audited financial statements and notes thereto as of and for the year ended December 31, 2022 included in our Form 10-K filed with the Securities and Exchange Commission (SEC) to provide an understanding of our results of operations, financial condition and cash flows.
Forward-Looking Statements
This Form 10-Q, including the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” contains forward-looking statements regarding our future performance. All forward-looking information is inherently uncertain and actual results may differ materially from assumptions, estimates or expectations reflected or contained in the forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this quarterly report on Form 10-Q, and in our annual report on Form 10-K for the year ended December 31, 2022. There may be additional risks of which we are not presently aware or that we currently believe are immaterial which could have an adverse impact on our business. Forward-looking statements address our expected future business, financial performance, financial condition and results of operations, and often contain words such as “intends,” “estimates,” “anticipates,” “hopes,” “projects,” “plans,” “expects,” “seek,” “believes,” “see,” “should,” “will,” “would,” “opportunity,” “could,” “can,” “may,” “future,” “predicts,” “target,” “potential,” and similar expressions and the negative versions of those words, and may be identified by the context in which they are used. Such statements are based only upon current expectations of AtriCure. Any forward-looking statement speaks only as of the date made. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to differ materially from those expressed or implied. Forward-looking statements include statements that address activities, events, circumstances or developments that AtriCure expects, believes or anticipates will or may occur in the future. Forward-looking statements are based on AtriCure’s experience and perception of current conditions, trends, expected future developments and other factors it believes are appropriate under the circumstances and are subject to numerous risks and uncertainties, many of which are beyond AtriCure’s control. With respect to the forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements speak only as of the date of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise unless required by law.
Overview
We are a leading innovator in treatments for atrial fibrillation (Afib), left atrial appendage (LAA) management and post-operative pain management. Our ablation and left atrial appendage management (LAAM) products are used by physicians during both open-heart and minimally invasive procedures. In open-heart procedures, the physician is performing heart surgery for other conditions, and our products are used in conjunction with (“concomitant” to) such a procedure. Minimally invasive procedures are performed on a standalone basis, and often include multi-disciplinary or “hybrid” approaches, combining surgical procedures using AtriCure ablation and LAAM products with catheter ablation procedures performed by an electrophysiologist. Our pain management device is used by physicians to freeze nerves during cardiothoracic or thoracic surgical procedures. We anticipate that substantially all of our revenue for the foreseeable future will relate to products we currently sell or are in the process of developing.
We sell our products to medical centers through our direct sales force in the United States, Germany, France, the United Kingdom, the Benelux region and Australia. We also sell our products through distributors who in turn sell our products to medical centers in other international markets. Our business is primarily transacted in U.S. Dollars; direct sales transactions outside the United States are transacted in Euros, British Pounds or Australian Dollars.
Recent Developments
During the first quarter of 2023, we realized significant revenue growth and expanded on our strategic initiatives of product innovation, clinical science and expanding physician awareness and adoption through superior training and education. Our worldwide revenue for the three months ended March 31, 2023 was $93,494, representing an increase of $18,918, or 25.4%, over the first three months of 2022, driven by growing adoption across key product lines. Key strategic and operational advancements during the first quarter include:
17
PRODUCT INNOVATION. During September 2022, the Company received final labeling approval from FDA for the next generation EPi-Sense ST device and began a limited launch in the fourth quarter of 2022 that was completed in the first quarter. We expect to begin a full launch later in 2023. We continue to make significant progress on the submission of our products for clearance under the European Medical Device Regulation.
CLINICAL SCIENCE. We invest in studies to expand labeling claims, support various indications for our products and gather clinical data regarding our products. In April 2022, FDA approved the protocol for the Left Atrial Appendage Exclusion for Prophylactic Stroke Reduction (LeAAPS) IDE clinical trial. The trial is designed to evaluate the effectiveness of prophylactic LAA exclusion using the AtriClip LAA Exclusion System for the prevention of ischemic stroke or systemic arterial embolism in cardiac surgery patients without pre-operative AF diagnosis who are at risk for these events. This prospective, multicenter, randomized trial evaluates safety at 30 days post-procedure to demonstrate no increased risk with LAA exclusion during cardiac surgery. The trial provides for enrollment of up to 6,500 subjects at up to 250 sites worldwide. In January 2023, we announced first patient enrollment in the trial; site initiation and enrollment is ongoing.
Recently, data from our CEASE-AF trial was presented at the European Heart Rhythm Association meeting. CEASE-AF is a prospective, multi-center randomized control trial that demonstrated superior freedom from atrial arrhythmias for staged hybrid ablation compared to endocardial catheter ablation.
TRAINING. Our professional education and marketing teams conduct virtual, in-person and mobile training for physicians and other healthcare professionals, as well as our sales teams. These training methods ensure invaluable access to continuing education and awareness of our products and related procedures. During 2023, we launched new training courses for Advanced Practice Providers, pain management in pectus procedures, as well as a best practice course for developing arrhythmia programs, with a primary focus on hybrid therapies.
Results of Operations
Three months ended March 31, 2023 compared to three months ended March 31, 2022
The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of revenue:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Amount | % of Revenues | Amount | % of Revenues | ||||||||||||||||||||
| Revenue | $ | 93,494 | 100.0 | % | $ | 74,576 | 100.0 | % | |||||||||||||||
| Cost of revenue | 23,885 | 25.5 | 18,981 | 25.5 | |||||||||||||||||||
| Gross profit | 69,609 | 74.5 | 55,595 | 74.5 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development expenses | 15,327 | 16.4 | 13,629 | 18.3 | |||||||||||||||||||
| Selling, general and administrative expenses | 60,064 | 64.2 | 56,116 | 75.2 | |||||||||||||||||||
| Total operating expenses | 75,391 | 80.6 | 69,745 | 93.5 | |||||||||||||||||||
| Loss from operations | (5,782) | (6.2) | (14,150) | (19.0) | |||||||||||||||||||
| Other income (expense), net: | (616) | (0.7) | (977) | (1.3) | |||||||||||||||||||
| Loss before income tax expense | (6,398) | (6.8) | (15,127) | (20.3) | |||||||||||||||||||
| Income tax expense | 78 | 0.1 | 56 | 0.1 | |||||||||||||||||||
| Net loss | $ | (6,476) | (7.0) | % | $ | (15,183) | (20.4) | % | |||||||||||||||
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:
18
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2023 | 2022 | Amount | % | ||||||||||||||||||||
| Open ablation | $ | 25,142 | $ | 18,974 | $ | 6,168 | 32.5 | % | |||||||||||||||
| Minimally invasive ablation | 9,637 | 8,615 | 1,022 | 11.9 | |||||||||||||||||||
| Pain management | 11,068 | 8,014 | 3,054 | 38.1 | |||||||||||||||||||
| Appendage management | 32,342 | 26,669 | 5,673 | 21.3 | |||||||||||||||||||
| Total United States | $ | 78,189 | $ | 62,272 | $ | 15,917 | 25.6 | ||||||||||||||||
| Total International | 15,305 | 12,304 | 3,001 | 24.4 | |||||||||||||||||||
| Total revenue | $ | 93,494 | $ | 74,576 | $ | 18,918 | 25.4 | % | |||||||||||||||
Worldwide revenue increased 25.4% (25.9% on a constant currency basis). In the United States, we experienced growth in all key product lines, including the EnCompass® clamp in open ablation, cryoSPHERE® probe for post-operative pain management and AtriClip® Flex⋅V® in the appendage management franchise. Hybrid AF™ Therapy procedures using the EPi-Sense System drove growth in minimally invasive sales. International sales increased 24.4% (27.7% on a constant currency basis), across all franchises and geographic regions.
Revenue reported on a constant currency basis is a non-GAAP measure calculated by applying previous period foreign currency exchange rates, which are determined by the average daily exchange rate, to each of the comparable periods. Revenue is analyzed on a constant currency basis to better measure the comparability of results between periods. Because changes in foreign currency exchange rates have a non-operating impact on revenue, we believe that evaluating growth in revenue on a constant currency basis provides an additional and meaningful assessment of revenue to both management and investors.
Cost of revenue and gross margin. Cost of revenue increased $4,904 reflecting higher sales volumes, while gross margin remained flat as production efficiencies offset continuing supply chain challenges and product mix pressures.
Research and development expenses. Research and development expenses increased $1,698 or 12.5%, primarily from $1,656 increase in personnel costs due to expansion of product development, regulatory and clinical teams. The LeAAPS and HEAL-IST clinical trials drove $755 increased cost, partially offset by a $525 reduction in product development and regulatory submission spending compared to 2022 primarily due to project timing.
Selling, general and administrative expenses. Selling, general and administrative expenses increased $3,948, or 7.0%. Growth in both headcount and variable compensation drove $7,763 increase in expense in addition to $948 increases in fees for professional services, consulting and IT expenses during the quarter. These increases were partially offset by a $4,000 gain for proceeds received for a legal settlement settled during the first quarter of 2023 and $1,067 reduction in legal spending, including a $740 legal cost reimbursement, as a result of a recently settled legal matter.
Other income (expense). Other income and expense consists primarily of net interest expense and net foreign currency transaction losses.
Liquidity and Capital Resources
As of March 31, 2023, the Company had cash, cash equivalents and investments of $161,421 and outstanding debt of $60,000. We had unused borrowing capacity of $28,750 under our revolving credit facility. Our primary banking relationship in the United States was with Silicon Valley Bank. All deposits and loans of Silicon Valley Bridge Bank, N.A. were purchased by First-Citizens Bank & Trust Company, and our banking relationship is now with Silicon Valley Bank, a division of First-Citizens Bank & Trust Company as of March 31, 2023. Access to our funds, funding sources and other credit arrangements are adequate to finance or capitalize our current and projected future business operations. We had net working capital of $175,854 and an accumulated deficit of $333,095 as of March 31, 2023.
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | Change | |||||||||
| (dollars in thousands) | |||||||||||
| Net cash used in operating activities | $ | (4,079) | $ | (24,632) | $ | (20,553) | |||||
| Net cash provided by investing activities | 28,813 | 19,722 | 9,091 | ||||||||
| Net cash used in financing activities | (5,517) | (10,497) | (4,980) | ||||||||
19
Cash flows used in operating activities. Net cash used in operating activities decreased $20,553 from 2022 to 2023, reflecting the improvement in operating results after non-cash charges of $9,919 driven by higher sales and a gain from legal settlement. Cash used in working capital and other assets and liabilities decreased $10,634. The decrease in cash used in working capital was primarily a reduction in variable compensation payments and collections of increased sales as compared to the same period in 2022.
Cash flows provided by investing activities. Net cash provided by investing activities increased by $9,091 in 2023 compared to 2022, reflecting higher sales and maturities of available-for-sale securities of $8,212 and a reduction in purchases of property and equipment of $879.
Cash flows used in financing activities. Net cash used in financing activities decreased by $4,980 in 2023, as fewer shares were repurchased for payment of taxes for stock awards.
Credit facility. Our Loan and Security Agreement, as amended and modified effective November 1, 2021 (Loan Agreement) provides for a $60,000 term loan, a $30,000 revolving line of credit, and an option to make available an additional $30,000 in term loan borrowings. The Loan Agreement has a five year term, expiring November 2026. Principal payments are to be made ratably commencing 24 months after the inception of the loan through the loan's maturity date. At the option of the Company, the commencement of term loan principal payments may be extended an additional twelve months. The term loan accrues interest at the Prime Rate plus 1.25% and is subject to an additional 3.00% fee on the term loan principal amount at maturity. As of March 31, 2023, our outstanding debt was $60,000, of which $8,333 is classified as current and $51,667 and is classified as noncurrent. We had unused borrowing capacity of $28,750 under our revolving credit facility. For additional information on the terms and conditions, as well as applicable interest and fee payments, see Note 7 – Indebtedness.
Our corporate headquarters lease agreement requires a $1,250 letter of credit which renews annually and remains outstanding as of March 31, 2023.
Uses of liquidity and capital resources. Our executive officers and Board of Directors review our funding sources and future capital requirements in connection with our annual operating plan and periodic updates to the plan. Our future capital requirements depend on a number of factors, including, without limitation: market acceptance of our current and future products; costs to develop and support our products, including professional training; costs to expand and support our sales and marketing efforts; operating and filing costs relating to changes in regulatory policies or laws; costs for clinical trials and to secure regulatory approval for new products; costs to prosecute, defend and enforce our intellectual property rights; maintenance and enhancements to our information systems and security; and possible acquisitions and joint ventures, including potential business integration costs. We continue to evaluate additional measures to maintain financial flexibility, and we will continue to closely monitor macroeconomic conditions including, but not limited to, inflationary pressures, rising interest rates, and fluctuations in currency exchange rates that may impact our liquidity and access to capital resources. Our principal cash requirements include costs of operations, capital expenditures, debt service costs and other contractual obligations.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses and disclosures of contingent assets and liabilities at the date of the financial statements. On a periodic basis, we evaluate our estimates, including those related to sales returns and allowances, inventories, share-based compensation and income taxes. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates under different assumptions or conditions. Our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 includes additional information about the Company, our operations, our financial position and our critical accounting policies and estimates and should be read in conjunction with this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
As of March 31, 2023, there were no material changes to the information provided regarding recent accounting pronouncements in Note 1, “Description of the Business and Summary of Significant Accounting Policies” in the Company’s Form 10-K for the fiscal year ended December 31, 2022.
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of March 31, 2023, there were no material changes to the information provided under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Form 10-K for the year ended December 31, 2022.
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 March 31, 2023 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 9 – 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, 2022, all of which could materially affect our business, financial condition or future results. The risks described herein and 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, 2022, except for the following:
Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance by financial institutions or transactional counterparties, could adversely affect our current and projected business operations, our financial condition and results of operations.
Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks may adversely affect our liquidity in the future. Access to our funds could be significantly impaired by events such as liquidity constraints or failures, disruptions or instability in the financial services industry or financial markets, or concerns or
21
negative expectations about the prospects for companies in the financial services industry. These factors may also adversely affect our ability to access our cash and cash equivalents at affected financial institutions.
In addition, concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on terms favorable to us, or at all. Declines in available funding or access to our cash and liquidity resources could, among other things, adversely impact our ability to meet our operating expenses, financial obligations or fulfill our other obligations. Any of these impacts, or any other impacts resulting from the factors described above or other related or similar factors not described above, could have material adverse impacts on our liquidity and our business, financial condition or results of operations.
Item 6. Exhibits
| Exhibit No. | Description | ||||
| 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) | ||||
22
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: May 3, 2023 | /s/ Michael H. Carrel | ||||
| Michael H. Carrel | |||||
President and Chief Executive Officer (Principal Executive Officer) | |||||
Date: May 3, 2023 | /s/ Angela L. Wirick | ||||
| Angela L. Wirick | |||||
Chief Financial Officer (Principal Accounting and Financial Officer) | |||||
23