(Dollar amounts referenced in this Section 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, 2021included in our Form 10-K filed with the Securities and Exchange Commission(SEC) to provide an understanding of our results of operations, financial condition and cash flows.
This 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," "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 AtriCureexpects, believes or anticipates will or may occur in the future. Forward-looking statements are based on AtriCure'sexperience 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'scontrol including, without limitation, 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.
We are a leading innovator in treatments for atrial fibrillation (Afib), left atrial appendage (LAA) management and post-operative pain management. Afib affects 1% to 2% of the population in
the United Statesand an estimated 37 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 AtriCureablation 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 Statesunder 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 17 -------------------------------------------------------------------------------- Table of Contents 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 claims or to support indications specifically for the treatment of Afib, prophylactic stroke reduction or other arrhythmias. Our Isolator Synergyclamps, Isolator Synergypens, Coolrail® linear pen, cryoablation devices, cryoSPHERE® probe, certain products of the AtriClip LAA Exclusion System, the EPi-Sense® system and LARIAT system bear the CE mark and may be commercially distributed throughout the member states of the European Unionand other countries that comply with or mirror the Medical Device Directive. Our Isolator Synergyclamps, Isolator Synergypens, Coolrail linear pen, cryoablation devices and certain products of the AtriClip LAA Exclusion System are available in select Asia-Pacificcountries. 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 Statesand 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; direct sales transactions outside the United Statesare transacted in Euros, British Pounds or Australian Dollars.
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. Beginning in the second quarter many regions began to stabilize 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 nine months ended
September 30, 2022was $242,351, representing an increase of $41,240, or 20.5%, over the first nine months of 2021, driven by growing adoption across key product lines. We continue to build on our strategic initiatives of product innovation, clinical science and expanding awareness and adoption by providing superior training and education. PRODUCT INNOVATION. In April 2022we launched our EnCompass® clamp, following 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. During September 2022, the Company received final labeling approval for the next generation EPi-Sense ST device that will be launched in the fourth quarter. CLINICAL SCIENCE. We continue to invest in studies to expand labeling claims, support various indications for our products, and 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 Kingdomand European Union. The first patient enrollment in the trial occurred 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. 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. 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 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. 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). 18
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Results of Operations
three months ended
The following table sets forth, for the periods indicated, our results of operations expressed in dollars and as percentages of revenues:
Three Months Ended September 30, 2022 2021 % of % of Amount Revenues Amount Revenues Revenue
$ 83,246100.0 % $ 70,460100.0 % Cost of revenue 21,533 25.9 % 18,234 25.9 % Gross profit 61,713 74.1 % 52,226 74.1 % Operating expenses (benefit): Research and development expenses 15,169 18.2 % 11,284 16.0 % Selling, general and administrative expenses 57,267 68.8 % 49,873 70.8 % Change in fair value of contingent consideration - - % (189,900) (269.5) % Intangible asset impairment - - % 82,300 116.8 % Total operating expenses (benefit) 72,436 87.0 % (46,443) (65.9) % (Loss) income from operations (10,723) (12.9) % 98,669 140.0 % Other expense, net: (1,503) (1.8) % (1,523) (2.2) % (Loss) income before income tax expense (12,226) (14.7) % 97,146 137.9 % Income tax expense 46 0.1 % 38 0.1 % Net (loss) income $ (12,272)(14.7) % $ 97,108137.8 % 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 September 30, Change 2022 2021 Amount % Open ablation $ 21,569 $ 17,893 $ 3,67620.5 % Minimally invasive ablation 10,077 9,990 87 0.9 % Pain management 10,510 6,253 4,257 68.1 % Appendage management 27,620 23,401 4,219 18.0 % Total United States $ 69,776 $ 57,537 $ 12,23921.3 % Total International13,470 12,923 547 4.2 % Total revenue $ 83,246 $ 70,460 $ 12,78618.1 % Worldwide revenue increased 18.1% (19.8% on a constant currency basis). In the United States, we experienced growth in all key product lines. Strong physician adoption of our cryoSPHERE® probe for post-operative pain management and our AtriClip® Flex·V® device drove increased pain management and appendage management sales. Open ablation revenue increased as a result of both procedure volume and additional revenue per procedure from the EnCompass clamp. Growth in Epi-Sense System sales, reflecting continuing adoption of Convergent Hybrid AF Therapy in a growing number of accounts, was offset by a decline in sales of all other legacy minimally invasive devices. Minimally invasive procedures, which are the most elective of our therapies, continue to experience some residual impact from the pandemic and staffing constraints. International sales increased 4.2% (13.5% on a constant currency basis), primarily a result of growth in Australiaand Japan. The increase in international revenue was driven mainly by our appendage management business which grew 19.5%. 19
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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
$3,299, while gross margin remained flat, reflecting the benefit of higher sales volumes offset by inflationary and supply chain cost pressures and shift in product mix to lower margin products. Research and development expenses. Research and development expenses increased $3,885or 34.4%. Personnel costs increased $1,755as a result of increased headcount and travel costs as we continue to build our product development, regulatory and clinical teams. Continued development of our product pipeline and clinical trial activity, as well as compliance with the European Union Medical Device Regulation (EU MDR), resulted in a $1,992increase in discretionary expense.
Selling, general and administrative expenses. Selling, general and administrative expenses increased
increase in staff and travel expenses. Training expenses increased
Change in fair value of contingent consideration. The credit to operating expenses during the three months ended
September 30, 2021reflects the change in probability of payment during the contractual achievement periods to remote for the regulatory and reimbursement milestones related to the aMAZE clinical trial. Impairment of intangible assets. During the three months ended September 30, 2021, the Company recorded an impairment charge for the IPR&D asset associated with the aMAZE PMA. Other income (expense). Other income and expense consists primarily of net interest expense and net foreign currency transaction losses. Net interest expense decreased $378primarily due to lower interest expense as a result of the November 2021amendment of our Loan Agreement, while foreign currency transaction losses increased $360primarily as a result of the strengthening U.S.Dollar. 20
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Nine months done
The following table sets forth, for the periods indicated, our results of operations expressed in dollars and as percentages of revenues:
Nine Months Ended September 30, 2022 2021 % of % of Amount Revenues Amount Revenues Revenue
$ 242,351100.0 % $ 201,111100.0 % Cost of revenue 61,524 25.4 % 50,267 25.0 % Gross profit 180,827 74.6 % 150,844 75.0 % Operating expenses (benefit): Research and development expenses 43,589 18.0 % 34,698 17.3 % Selling, general and administrative expenses 175,771 72.5 % 150,939 75.1 % Change in fair value of contingent consideration - - % (184,800) (91.9) % Intangible asset impairment - - % 82,300 40.9 % Total operating expenses (benefit) 219,360 90.5 % 83,137 41.3 % (Loss) income from operations (38,533) (15.9) % 67,707 33.7 % Other expense, net: (3,616) (1.5) % (3,632) (1.8) % (Loss) income before income tax expense (42,149) (17.4) % 64,075 31.9 % Income tax expense 147 0.1 % 135 0.1 % Net (loss) income $ (42,296)(17.5) % $ 63,94031.8 % 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: Nine Months Ended September 30, Change 2022 2021 Amount % Open ablation $ 62,613 $ 54,835 $ 7,77814.2 % Minimally invasive ablation 28,846 28,077 769 2.7 % Pain management 28,734 15,860 12,874 81.2 % Appendage management 83,120 69,144 13,976 20.2 % Total United States $ 203,313 $ 167,916 $ 35,39721.1 % Total International39,038 33,195 5,843 17.6 % Total revenue $ 242,351 $ 201,111 $ 41,24020.5 % Worldwide revenue increased 20.5% (21.9% on a constant currency basis). In the United States, growth reflected continuing adoption of our products and recovery of cardiac surgery volume. Appendage management revenue increases were driven by sales of the AtriClip® Flex·V® device, while pain management growth reflects continuing adoption of the cryoSPHERE® probe for post-operative pain. The launch of the new EnCompass clamp in April 2022contributed to the open ablation sales growth. Wider adoption of the EPi-Sense® System drove increases in minimally invasive ablation, offset by declines in our legacy minimally invasive ablation products. International sales increased 17.6% (25.8% on a constant currency basis), with growth across all major franchises and regions. Cost of revenue and gross margin. Cost of revenue increased $11,257, while gross margin decreased approximately 40 basis points, reflecting a shift in product mix to lower margin products and inflationary and supply chain cost pressures, partially offset by the benefit of higher sales volumes. Research and development expenses. Research and development expenses increased $8,891or 25.6%. Personnel costs increased $4,315from additional headcount as we continue to build our product development, regulatory and clinical teams and return to historical travel levels. Product development project spend increased $1,859on continued expansion of our product 21
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pipeline. Clinical activities, regulatory submissions and consulting activities increased
$1,288, largely the result of compliance with EU MDR. Amortization expense increased $998following the April 2021PMA resulting from the CONVERGE IDE clinical trial. Selling, general and administrative expenses. Selling, general and administrative expenses increased $24,832, or 16.5%. Higher headcount and travel activities contributed an additional $15,435in personnel costs, while training activities, meetings and trade shows increased $6,532reflecting an increase in the frequency and cost of in-person events. Other administrative expenses increased $2,168for legal activity and information technology costs.
Change in the fair value of the contingent consideration. The credit to operating expenses for the nine months ended
Impairment of intangible assets. During the nine months that ended
Other income (expense). Other income and expense consists primarily of net interest expense and net foreign currency transaction losses. Net interest expense decreased
$618due to lower interest expense stemming from the November 2021amendment of our Loan Agreement, offset by an increase in foreign currency transaction losses of $603primarily as a result of the strengthening U.S.Dollar.
Liquidity and Capital Resources
September 30, 2022, the Company had cash, cash equivalents and investments of $174,057and outstanding debt of $60,000. We had unused borrowing capacity of $28,750under our revolving credit facility. Most of our operating cash and all cash equivalents and investments are held by United Statesfinancial institutions. We had net working capital of $154,687and an accumulated deficit of $322,449as of September 30, 2022. Nine Months Ended September 30, 2022 2021 Change (dollars in thousands)
Net cash used in operating activities
Net cash provided by investing activities
37,004 22,427 14,577 Net cash used in financing activities (9,041)
Cash flows used in operating activities. Net cash used in operating activities increased
$8,106from 2021 to 2022. This change is driven by the fluctuation in working capital and other assets and liabilities of $6,261. Working capital fluctuations are primarily due to the $8,593reduction in accrued liabilities from higher annual variable compensation payments in 2022 due to improved operating performance in 2021 versus 2020, offset by a decrease of $1,598in accounts receivable. Cash flows provided by investing activities. Net cash provided by investing activities increased by $14,577in 2022 compared to 2021, reflecting higher net sales and maturities of available-for-sale securities of $20,244and increase in purchases of property and equipment of $5,667primarily for the expansion of our manufacturing facilities. Cash flows used in financing activities. Net cash used in financing activities decreased by $1,108in 2022 largely reflecting lower proceeds from stock option exercise activity and employee stock purchase plan of $6,263, a decrease of $5,764in share repurchases for payment of taxes for stock awards and a decrease of $1,607in repayments of debt and lease obligations. 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 $60,000term loan, a $30,000revolving line of credit, and an option to make available an additional $30,000in term loan borrowings. The Loan Agreement has a five year term, expiring November 2026. Principal payments are to be made ratably commencing 24 months after the inception of the loan through the loan's maturity date. At the option of the Company, the commencement of term loan principal payments may be extended an additional twelve months. The term loan accrues interest at the Prime Rate plus 1.25% and is subject to an additional 3.00% fee on the term loan principal amount at maturity. As of September 30, 2022, our outstanding debt was $60,000and is classified as noncurrent. We had unused borrowing capacity of $28,750under our revolving credit facility. For additional information on the terms and conditions, as well as applicable interest and fee payments, see Note 6 - Indebtedness. 22
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Our corporate headquarters lease requires a
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 and other macroeconomic conditions including, but not limited to, inflationary pressures, rising interest rates and fluctuations in currency exchange rates. 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, 2021includes 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
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