ATRICURE, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

ATRICURE, INC.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

(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, 2021 included in our Form 10-K filed with
the Securities and Exchange Commission (SEC) to provide an understanding of our
results of operations, financial condition and cash flows.

Forward-looking statements


This Form 10-Q, including the sections titled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Risk Factors,"
contains forward-looking statements regarding our future performance. All
forward-looking information is inherently uncertain and actual results may
differ materially from assumptions, estimates or expectations reflected or
contained in the forward-looking statements as a result of various factors,
including those set forth under "Risk Factors" and elsewhere in this quarterly
report on Form 10-Q, and in our annual report on Form 10-K for the year ended
December 31, 2021. There may be additional risks of which we are not presently
aware or that we currently believe are immaterial which could have an adverse
impact on our business. Forward-looking statements address our expected future
business, financial performance, financial condition and results of operations,
and often contain words such as "intends," "estimates," "anticipates," "hopes,"
"projects," "plans," "expects," "seek," "believes," "see," "should," "will,"
"would," "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 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.

Overview

We are a leading innovator in treatments for atrial fibrillation (Afib), left
atrial appendage (LAA) management and post-operative pain management. Afib
affects 1% to 2% of the population in the United States and 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
AtriCure ablation and LAAM products with catheter ablation.

We believe that we are currently the market leader in the surgical treatment of
Afib. Our Isolator® Synergy™ Ablation System is approved by the United States
Food and Drug Administration (FDA) for the treatment of persistent and
long-standing persistent Afib concomitant to other open-heart surgical
procedures. Our EPi-Sense® System is approved by FDA to treat patients with
long-standing persistent Afib. All of our other ablation devices are cleared for
sale in the United States under FDA 510(k) clearances, including our other radio
frequency (RF) and cryoablation products, which are indicated for the ablation
of cardiac tissue and/or the treatment of cardiac arrhythmias. In addition,
certain of our cryoablation probes are cleared for managing pain by temporarily
ablating peripheral nerves, or Cryo Nerve Block therapy. Our AtriClip® LAA
Exclusion System products are 510(k)-cleared with an indication for the
exclusion of the LAA, performed under direct visualization and in conjunction
with other cardiac surgical procedures. Direct visualization, in this context,
requires that the surgeon is able to see the heart directly, with or without
assistance from a camera, endoscope or other appropriate viewing technologies.
Studies have
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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
Synergy clamps, Isolator Synergy pens, Coolrail® linear pen, cryoablation
devices, cryoSPHERE® probe, certain products of the AtriClip LAA Exclusion
System, the EPi-Sense® system and LARIAT system bear the CE mark and may be
commercially distributed throughout the member states of the European Union and
other countries that comply with or mirror the Medical Device Directive. Our
Isolator Synergy clamps, Isolator Synergy pens, Coolrail linear pen,
cryoablation devices and certain products of the AtriClip LAA Exclusion System
are available in select Asia-Pacific countries. We anticipate that substantially
all of our revenue for the foreseeable future will relate to products we
currently sell or are in the process of developing.

We sell our products to medical centers through our direct sales force in the
United States and in certain international markets, such as Germany, France, the
United Kingdom, the Benelux region and Australia. We also sell our products
through distributors who in turn sell our products to medical centers in other
international markets. Our business is primarily transacted in U.S. Dollars;
direct sales transactions outside the United States are transacted in Euros,
British Pounds or Australian Dollars.

recent developments


During 2022, we continued to experience variability and intermittent demand for
our products as non-emergent procedures were deferred in order to preserve
resources for COVID-19 patients and caregivers and hospital staffing was
impacted by the pandemic and related factors. 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, 2022 was $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 2022 we 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 Kingdom and
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).
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Results of Operations

three months ended September 30, 2022 compared to the three months ended September 30, 2021

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                                      $    83,246                 100.0   %       $     70,460                  100.0   %
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)  %       $   97,108                    137.8   %


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      $  3,676        20.5   %
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      $ 12,239        21.3   %
Total International               13,470        12,923           547         4.2   %
Total revenue                 $   83,246      $ 70,460      $ 12,786        18.1   %


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
Australia and Japan. The increase in international revenue was driven mainly by
our appendage management business which grew 19.5%.
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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
$3,885 or 34.4%. Personnel costs increased $1,755 as 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 $1,992 increase in discretionary
expense.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $7,394or 14.8%, as a result of a $5,975
increase in staff and travel expenses. Training expenses increased $1,150 for additional physician training programs to drive further adoption of our products.


Change in fair value of contingent consideration. The credit to operating
expenses during the three months ended September 30, 2021 reflects 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 $378 primarily due to lower interest expense as a result of
the November 2021 amendment of our Loan Agreement, while foreign currency
transaction losses increased $360 primarily as a result of the strengthening
U.S. Dollar.
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Nine months done September 30, 2022 compared to nine months ended September 30, 2021

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                                      $   242,351                 100.0   %       $   201,111                 100.0   %
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)  %       $  63,940                    31.8   %


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      $  7,778        14.2   %
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      $ 35,397        21.1   %
Total International              39,038         33,195         5,843        17.6   %
Total revenue                 $ 242,351      $ 201,111      $ 41,240        20.5   %


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 2022 contributed 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
$8,891 or 25.6%. Personnel costs increased $4,315 from 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
$1,859 on continued expansion of our product
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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 $998 following the April 2021 PMA 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 $15,435 in personnel costs, while training
activities, meetings and trade shows increased $6,532 reflecting an increase in
the frequency and cost of in-person events. Other administrative expenses
increased $2,168 for 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 September 30, 2021 reflects a change in the anticipated timing and likelihood of achieving regulatory and reimbursement milestones related to the aMAZE clinical trial.

Impairment of intangible assets. During the nine months that ended September 30, 2021The Company recorded an IPR&D asset impairment charge associated with 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 $618 due to lower interest expense stemming from the November
2021 amendment of our Loan Agreement, offset by an increase in foreign currency
transaction losses of $603 primarily as a result of the strengthening U.S.
Dollar.

Liquidity and Capital Resources


As of September 30, 2022, the Company had cash, cash equivalents and investments
of $174,057 and outstanding debt of $60,000. We had unused borrowing capacity of
$28,750 under our revolving credit facility. Most of our operating cash and all
cash equivalents and investments are held by United States financial
institutions. We had net working capital of $154,687 and an accumulated deficit
of $322,449 as of September 30, 2022.

                                                Nine Months Ended September 30,
                                                     2022               2021            Change
                                                             (dollars in thousands)

Net cash used in operating activities $(22,187) $ (14,081) $8,106
Net cash provided by investing activities

               37,004           22,427           14,577
Net cash used in financing activities                   (9,041)         

(10,149) (1,108)



Cash flows used in operating activities. Net cash used in operating activities
increased $8,106 from 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 $8,593 reduction 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 $1,598 in
accounts receivable.

Cash flows provided by investing activities. Net cash provided by investing
activities increased by $14,577 in 2022 compared to 2021, reflecting higher net
sales and maturities of available-for-sale securities of $20,244 and increase in
purchases of property and equipment of $5,667 primarily for the expansion of our
manufacturing facilities.

Cash flows used in financing activities. Net cash used in financing activities
decreased by $1,108 in 2022 largely reflecting lower proceeds from stock option
exercise activity and employee stock purchase plan of $6,263, a decrease of
$5,764 in share repurchases for payment of taxes for stock awards and a decrease
of $1,607 in 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 $60,000 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
September 30, 2022, our outstanding debt was $60,000 and is classified as
noncurrent. We had unused borrowing capacity of $28,750 under our revolving
credit facility. For additional information on the terms and conditions, as well
as applicable interest and fee payments, see Note 6 - Indebtedness.
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Our corporate headquarters lease requires a $1,250 letter of credit that is renewed annually and remains pending at September 30, 2022.


Uses of liquidity and capital resources. Our executive officers and Board of
Directors review our funding sources and future capital requirements in
connection with our annual operating plan and periodic updates to the plan. Our
future capital requirements depend on a number of factors, including, without
limitation: market acceptance of our current and future products; costs to
develop and support our products, including professional training; future
expenses to expand and support our sales and marketing efforts; operating and
filing costs relating to changes in regulatory policies or laws; costs for
clinical trials and to secure regulatory approval for new products; costs to
prosecute, defend and enforce our intellectual property rights; maintenance and
enhancements to our information systems and security; and possible acquisitions
and joint ventures, including potential business integration costs. We continue
to evaluate additional measures to maintain financial flexibility, and we will
continue to closely monitor our liquidity and capital resources through the
recovery from, and any further disruptions caused by, COVID-19 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, 2021 includes additional information about the
Company, our operations, our financial position and our critical accounting
policies and estimates and should be read in conjunction with this Quarterly
Report on Form 10-Q.

Recent Accounting Pronouncements

From September 30, 2022there were no material changes to the information provided in Note 2, “Recent Accounting Pronouncements” on the Company’s Form 10-K for the fiscal year ended December 31, 2021.

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