AtriCure, Inc. (NASDAQ:ATRC) Q3 2020 Results Conference Call November 5, 2020 4:30 PM ET Company Participants Lynn Lewis - Gilmartin Group Mike Carrel - President and CEO Angie Wirick - CFO Conference Call Participants Robby Marcus - JP Morgan Rick Wise - Stifel Danielle Antalffy - SVB Leerink Matthew O’Brien - Piper Sandler Mike Matson - Needham & Company Marie Thibault - BTIG Bill Plovanic - Canaccord Operator Good afternoon and welcome to AtriCure’s Third Quarter 2020 Earnings Conference Call. At this ti ...

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 September 30, 2020 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 ______________ ...

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section presents AtriCure, Inc.'s unaudited condensed consolidated financial statements, management's analysis, market risk, and internal controls [Item 1. Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents AtriCure, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, income statements, equity, cash flows, and detailed accounting notes [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheet shows a significant increase in total assets and stockholders' equity as of June 30, 2020, compared to December 31, 2019, primarily driven by an increase in cash, cash equivalents, and short-term investments | Metric | June 30, 2020 (Thousands) | December 31, 2019 (Thousands) | | :-------------------------- | :------------------------ | :-------------------------- | | Total Assets | $704,233 | $557,880 | | Total Liabilities | $287,371 | $310,537 | | Total Stockholders' Equity | $416,862 | $247,343 | - Cash and cash equivalents increased from **$28,483 thousand** at December 31, 2019, to **$88,522 thousand** at June 30, 2020, and short-term investments increased from **$53,318 thousand** to **$143,976 thousand**[4](index=4&type=chunk) [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) The company reported increased net losses for both the three and six months ended June 30, 2020, compared to the same periods in 2019, primarily due to a significant decline in revenue and gross profit, alongside increased operating expenses relative to revenue | Metric | Three Months Ended June 30, 2020 (Thousands) | Three Months Ended June 30, 2019 (Thousands) | Six Months Ended June 30, 2020 (Thousands) | Six Months Ended June 30, 2019 (Thousands) | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Revenue | $40,824 | $58,906 | $94,049 | $112,872 | | Gross Profit | $27,654 | $43,893 | $66,538 | $83,764 | | Loss from Operations | $(7,285) | $(3,839) | $(22,739) | $(9,159) | | Net Loss | $(8,236) | $(4,101) | $(24,644) | $(9,736) | | Basic and Diluted Net Loss Per Share | $(0.20) | $(0.11) | $(0.61) | $(0.26) | - Revenue decreased by **30.7%** for the three months and **16.7%** for the six months ended June 30, 2020, compared to the prior year periods[6](index=6&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) Stockholders' equity significantly increased from December 31, 2019, to June 30, 2020, primarily due to a public offering of common stock, which generated substantial additional paid-in capital, despite an accumulated deficit from net losses | Metric | June 30, 2020 (Thousands) | December 31, 2019 (Thousands) | | :-------------------------- | :------------------------ | :-------------------------- | | Common Stock Amount | $45 | $40 | | Additional Paid-in Capital | $723,754 | $529,658 | | Accumulated Deficit | $(306,841) | $(282,197) | | Total Stockholders' Equity | $416,862 | $247,343 | - Issuance of common stock through a public offering contributed **$188,958 thousand** to additional paid-in capital during the six months ended June 30, 2020[9](index=9&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the six months ended June 30, 2020, the company experienced significant cash usage in operating and investing activities, which was more than offset by a large cash inflow from financing activities, primarily a public stock offering, resulting in a net increase in cash and cash equivalents | Cash Flow Activity | Six Months Ended June 30, 2020 (Thousands) | Six Months Ended June 30, 2019 (Thousands) | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | | Net cash used in operating activities | $(27,635) | $(9,692) | | Net cash (used in) provided by investing activities | $(95,481) | $10,087 | | Net cash provided by (used in) financing activities | $183,240 | $(7,274) | | Net increase (decrease) in cash and cash equivalents | $60,039 | $(6,984) | | Cash and cash equivalents—end of period | $88,522 | $25,247 | - A public stock offering generated **$188,958 thousand** in net proceeds, significantly boosting cash from financing activities[11](index=11&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes provide detailed explanations of the accounting policies and specific financial statement line items, offering critical context for understanding the company's financial position, performance, and cash flows, including impacts from recent accounting pronouncements and the COVID-19 pandemic [1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=7&type=section&id=1.%20DESCRIPTION%20OF%20BUSINESS%20AND%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) AtriCure, Inc. is a global innovator in Afib and LAA treatments, with this section detailing its business and significant accounting policies for various financial items - AtriCure is a leading innovator in treatments for atrial fibrillation (Afib) and left atrial appendage (LAA) management, selling products globally through direct sales and distributors[13](index=13&type=chunk) - The company classifies investments as available-for-sale, recorded at fair value, with unrealized gains/losses in accumulated other comprehensive income (loss)[17](index=17&type=chunk) - Revenue is recognized when control of promised goods is transferred to customers, generally upon shipment[18](index=18&type=chunk) Inventories (Thousands) | Category | June 30, 2020 | December 31, 2019 | | :---------------- | :------------ | :---------------- | | Raw materials | $12,771 | $11,126 | | Work in process | $2,226 | $1,260 | | Finished goods | $17,812 | $17,028 | | **Total Inventories** | **$32,809** | **$29,414** | [2. RECENT ACCOUNTING PRONOUNCEMENTS](index=11&type=section&id=2.%20RECENT%20ACCOUNTING%20PRONOUNCEMENTS) The company adopted ASU 2016-13 for credit losses and ASU 2017-04 for goodwill impairment as of January 1, 2020, neither of which had a material impact on its consolidated financial statements - ASU 2016-13, 'Financial Instruments – Credit Losses (Topic 326),' was adopted, requiring financial assets at amortized cost to be presented net of expected credit losses, with no material impact[44](index=44&type=chunk) - ASU 2017-04, 'Intangibles – Goodwill and Other (Topic 350),' simplifying goodwill impairment measurement, was adopted with no material impact[45](index=45&type=chunk) [3. FAIR VALUE](index=11&type=section&id=3.%20FAIR%20VALUE) The company categorizes its financial assets and liabilities into a three-level fair value hierarchy, with contingent consideration being a significant Level 3 liability measured using unobservable inputs and a probability-weighted scenario approach Fair Value Hierarchy for Financial Assets (June 30, 2020, Thousands) | Asset Category | Level 1 | Level 2 | Level 3 | Total | | :------------------------ | :------ | :-------- | :------ | :-------- | | Money market funds | — | $85,286 | — | $85,286 | | Commercial paper | — | $42,373 | — | $42,373 | | U.S. government agencies and securities | $46,202 | — | — | $46,202 | | Corporate bonds | — | $48,140 | — | $48,140 | | Asset-backed securities | — | $22,600 | — | $22,600 | | **Total Assets** | **$46,202** | **$198,399** | **—** | **$244,601** | Fair Value Hierarchy for Financial Liabilities (June 30, 2020, Thousands) | Liability Category | Level 1 | Level 2 | Level 3 | Total | | :-------------------------- | :------ | :-------- | :-------- | :-------- | | Contingent consideration | — | — | $180,111 | $180,111 | | **Total Liabilities** | **—** | **—** | **$180,111** | **$180,111** | - Contingent consideration liabilities, arising from nContact and SentreHEART acquisitions, are measured using a probability-weighted scenario approach with unobservable inputs like probability and timeline of milestone achievement[51](index=51&type=chunk)[52](index=52&type=chunk) [4. INTANGIBLE ASSETS](index=13&type=section&id=4.%20INTANGIBLE%20ASSETS) The company's intangible assets primarily consist of technology and In Process Research and Development (IPR&D), with IPR&D accounted for as an indefinite-lived asset until regulatory approval. Goodwill is tested annually for impairment and remains unchanged from December 31, 2019 Intangible Assets (Thousands) | Category | June 30, 2020 Cost | June 30, 2020 Accumulated Amortization | December 31, 2019 Cost | December 31, 2019 Accumulated Amortization | | :---------------- | :----------------- | :------------------------------------- | :--------------------- | :------------------------------------- | | Technology | $11,691 | $9,108 | $11,691 | $8,131 | | IPR&D | $126,321 | — | $126,321 | — | | **Total** | **$138,012** | **$9,108** | **$138,012** | **$8,131** | - IPR&D assets, representing the value of technology acquired in business combinations not yet technologically feasible, are accounted for as indefinite-lived intangible assets[28](index=28&type=chunk)[29](index=29&type=chunk) Goodwill (Thousands) | Period | Beginning Balance | Amounts Acquired | Ending Balance | | :------------------------------------ | :---------------- | :--------------- | :------------- | | Six Months Ended June 30, 2020 | $234,781 | — | $234,781 | | Twelve Months Ended December 31, 2019 | $105,257 | $129,524 | $234,781 | [5. ACCRUED LIABILITIES](index=14&type=section&id=5.%20ACCRUED%20LIABILITIES) Accrued liabilities significantly decreased from December 31, 2019, to June 30, 2020, primarily due to reductions in accrued commissions and accrued bonus Accrued Liabilities (Thousands) | Category | June 30, 2020 | December 31, 2019 | | :------------------------------------ | :------------ | :---------------- | | Accrued payroll and employee-related expenses | $7,322 | $6,748 | | Sales returns and allowances | $3,921 | $3,979 | | Accrued commissions | $3,031 | $8,734 | | Accrued bonus | $1,728 | $10,840 | | Accrued taxes and value-added taxes payable | $1,136 | $1,658 | | Accrued royalties | $495 | $732 | | Other accrued liabilities | $251 | $59 | | **Total** | **$17,884** | **$32,750** | [6. INDEBTEDNESS](index=14&type=section&id=6.%20INDEBTEDNESS) The company maintains a Loan and Security Agreement with Silicon Valley Bank, comprising a $60 million term loan and a $20 million revolving line of credit, both maturing in August 2024. An amendment in April 2020 modified a liquidity ratio covenant and increased early termination fees - The Loan Agreement includes a **$60,000 thousand** term loan and a **$20,000 thousand** revolving line of credit, maturing on August 1, 2024[59](index=59&type=chunk) - As of June 30, 2020, the company had no borrowings under the revolving credit facility and **$8,750 thousand** in borrowing availability[61](index=61&type=chunk) - An amendment to the Loan Agreement on April 29, 2020, modified a liquidity ratio covenant and increased early termination fees[61](index=61&type=chunk) [7. LEASES](index=15&type=section&id=7.%20LEASES) The company has operating and finance leases for facilities and equipment, with weighted average remaining lease terms of 3.2 years for operating leases and 10.1 years for finance leases as of June 30, 2020 Weighted Average Lease Terms and Discount Rates (June 30, 2020) | Lease Type | Weighted Average Remaining Lease Term (years) | Weighted Average Discount Rate | | :---------------- | :------------------------------------------ | :----------------------------- | | Operating Leases | 3.2 | 5.68% | | Finance Leases | 10.1 | 6.93% | Lease Expense (Thousands) | Expense Type | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :-------------------------- | :------------------------------- | :----------------------------- | | Operating lease cost | $340 | $690 | | Total finance lease cost | $475 | $954 | Maturities of Lease Liabilities (June 30, 2020, Thousands) | Year | Operating Leases | Finance Leases | | :-------------------------------------------------- | :--------------- | :------------- | | 2020 (excluding six months ended June 30, 2020) | $554 | $383 | | 2021 | $1,198 | $1,602 | | 2022 | $619 | $1,623 | | 2023 | $220 | $1,646 | | 2024 | $227 | $1,670 | | 2025 and thereafter | $234 | $9,799 | | **Total payments** | **$3,052** | **$16,723** | | Less imputed interest | $(264) | $(4,566) | | **Total** | **$2,788** | **$12,157** | [8. COMMITMENTS AND CONTINGENCIES](index=17&type=section&id=8.%20COMMITMENTS%20AND%20CONTINGENCIES) The company has royalty agreements and standard purchase agreements, and is involved in legal proceedings, including a USDOJ investigation into potential False Claims Act violations and a dispute over earnout calculations from the nContact acquisition - The company has royalty agreements requiring payments of **3% to 5%** of specified product sales, with one agreement effective through 2023 and another through 2025 or patent expiration[71](index=71&type=chunk) - A Civil Investigative Demand from the USDOJ is investigating potential False Claims Act violations related to off-label promotion of medical devices for atrial fibrillation treatment[74](index=74&type=chunk) - The company is disputing earnout objection statements from former nContact stockholders regarding the inclusion of certain revenues for commercial milestone payments[75](index=75&type=chunk) [9. REVENUE](index=17&type=section&id=9.%20REVENUE) Revenue is primarily generated from medical device sales, recognized when control is transferred to customers, typically upon shipment. Sales are made through a direct sales force and distributors, with fixed pricing and short payment terms - Revenue is recognized when control of promised medical devices is transferred to customers, generally at the point of shipment or delivery[76](index=76&type=chunk)[78](index=78&type=chunk) - Products are sold through a direct sales force in the US and certain international markets, and through distributors in other international markets[77](index=77&type=chunk) - The company does not accept product returns unless a product is defective and establishes estimated provisions for returns based on historical experience[79](index=79&type=chunk) [10. INCOME TAX PROVISION](index=18&type=section&id=10.%20INCOME%20TAX%20PROVISION) The company uses the discrete method to determine its income tax provision, resulting in negative effective tax rates for the periods presented, primarily due to a full valuation allowance against net deferred income tax assets in the United States and Netherlands - The income tax provision for the period ended June 30, 2020, was estimated using the discrete method[83](index=83&type=chunk) Effective Tax Rates | Period | Effective Tax Rate | | :------------------------------------ | :----------------- | | Three Months Ended June 30, 2020 | (0.15%) | | Three Months Ended June 30, 2019 | (0.24%) | | Six Months Ended June 30, 2020 | (0.08%) | | Six Months Ended June 30, 2019 | (0.79%) | - A full valuation allowance has been recorded against substantially all net deferred income tax assets, as it is more-likely-than-not that the benefit will not be recognized[35](index=35&type=chunk) [11. EQUITY COMPENSATION PLANS](index=18&type=section&id=11.%20EQUITY%20COMPENSATION%20PLANS) The company operates two share-based incentive plans: the 2014 Stock Incentive Plan, offering various awards including performance share awards, and the 2018 Employee Stock Purchase Plan (ESPP), allowing employees to purchase stock at a discount - The 2014 Stock Incentive Plan allows for grants of incentive stock options, restricted stock, restricted stock units, nonstatutory stock options, and performance share awards[86](index=86&type=chunk) - Performance share awards vest based on achieving specified performance measurements, such as revenue CAGR, over a three-year period[88](index=88&type=chunk) - The Employee Stock Purchase Plan (ESPP) enables eligible employees to purchase common stock at a **15% discount**[91](index=91&type=chunk) Share-Based Compensation Expense Allocation (Thousands) | Category | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :------------------------------------ | :------------------------------- | :----------------------------- | | Cost of revenue | $351 | $638 | | Research and development expenses | $1,017 | $1,672 | | Selling, general and administrative expenses | $4,825 | $8,267 | | **Total** | **$6,193** | **$10,577** | [12. SEGMENT AND GEOGRAPHIC INFORMATION](index=20&type=section&id=12.%20SEGMENT%20AND%20GEOGRAPHIC%20INFORMATION) The company operates as a single operating segment, developing and selling medical devices globally. Revenue is disaggregated by geographic area and product type, showing a decline in both US and international markets across all product categories for the reported periods - The company operates as a single operating segment, focusing on devices for surgical ablation of cardiac tissue and left atrial appendage exclusion[93](index=93&type=chunk) Total Revenue by Geographic Area (Thousands) | Geographic Area | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | United States | $33,664 | $47,165 | $77,137 | $90,169 | | Europe | $4,316 | $6,987 | $10,261 | $13,772 | | Asia | $2,634 | $4,470 | $6,171 | $8,384 | | Other international | $210 | $284 | $480 | $547 | | **Total international** | **$7,160** | **$11,741** | **$16,912** | **$22,703** | | **Total revenue** | **$40,824** | **$58,906** | **$94,049** | **$112,872** | United States Revenue by Product Type (Thousands) | Product Type | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Open ablation | $15,550 | $20,561 | $34,768 | $39,557 | | Minimally invasive ablation | $4,755 | $9,092 | $11,316 | $16,854 | | Appendage management | $13,021 | $16,498 | $30,440 | $32,168 | | Valve tools | $338 | $1,014 | $613 | $1,590 | | **Total United States** | **$33,664** | **$47,165** | **$77,137** | **$90,169** | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=21&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial performance and condition, highlighting the adverse impact of the COVID-19 pandemic on revenue and operations, updates on clinical trials, and details on liquidity and capital resources [Overview](index=21&type=section&id=Overview) AtriCure is a leading innovator in treatments for atrial fibrillation (Afib) and left atrial appendage (LAA) management, offering various product lines including the FDA-approved Isolator Synergy™ Ablation System for persistent Afib and the AtriClip LAA Exclusion System - AtriCure is a leading innovator in treatments for atrial fibrillation (Afib) and left atrial appendage (LAA) management[100](index=100&type=chunk) - Key products include the Isolator Synergy™ Ablation System (FDA-approved for persistent Afib concomitant procedures) and the AtriClip LAA Exclusion System (510(k)-cleared for LAA exclusion)[100](index=100&type=chunk)[101](index=101&type=chunk) - The company sells products globally through a direct sales force in the US and certain international markets, and through distributors in other international markets[103](index=103&type=chunk) [Recent Developments](index=22&type=section&id=Recent%20Developments) Recent developments include the adverse impact of the COVID-19 pandemic on product demand and operations, leading to expense reductions and a public stock offering to bolster liquidity, alongside ongoing progress in key clinical trials like CONVERGE and aMAZE [COVID-19 Pandemic Impact](index=22&type=section&id=COVID-19%20Pandemic%20Impact) The COVID-19 pandemic significantly decreased demand for AtriCure's products due to deferred non-emergent procedures, prompting operational adjustments like remote work, reduced production, and expense-reduction measures, while also leading to a public stock offering to enhance liquidity - The COVID-19 pandemic caused a significant decrease in demand for products due to deferred non-emergent procedures, adversely impacting 2020 results[104](index=104&type=chunk) - The company implemented measures such as remote work, temporary production capacity reductions, and delayed capital investments and hiring to mitigate the impact[105](index=105&type=chunk)[106](index=106&type=chunk) - A public offering in May 2020 issued **4,574 thousand** shares of common stock, generating net proceeds of **$188,958 thousand** to strengthen liquidity[106](index=106&type=chunk) [Clinical Trials Updates](index=22&type=section&id=Clinical%20Trials%20Updates) AtriCure is actively progressing with its CONVERGE IDE trial, having submitted its PMA and engaged with the FDA, while the aMAZE trial completed enrollment and received approval for a Continued Access Protocol (CAP) to enroll additional patients - For the CONVERGE IDE trial, AtriCure conducted an initial meeting with the FDA in April 2020 following its PMA submission in December 2019[107](index=107&type=chunk) - Enrollment for the aMAZE trial was completed in December 2019, with patient follow-up ongoing, and a Continued Access Protocol (CAP) was approved in January 2020 for additional patient enrollment[108](index=108&type=chunk)[109](index=109&type=chunk) [Results of Operations](index=23&type=section&id=Results%20of%20Operations) The company experienced significant revenue declines and increased net losses for both the three and six months ended June 30, 2020, primarily due to the COVID-19 pandemic's impact on surgical procedures and increased SentreHEART-related expenses [Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019](index=23&type=section&id=Three%20Months%20Ended%20June%2030%2C%202020%20Compared%20to%20Three%20Months%20Ended%20June%2030%2C%202019) Revenue decreased by 30.7% due to the global decline in surgical procedures caused by COVID-19, leading to a 6.8% decrease in gross margin. Operating expenses saw a significant decrease in SG&A, largely from reduced variable compensation and a fluctuation in contingent consideration liability, while R&D expenses slightly increased due to SentreHEART activities Three Months Ended June 30, Financial Highlights (Thousands) | Metric | 2020 Amount | % of Revenues | 2019 Amount | % of Revenues | | :------------------------------------ | :---------- | :------------ | :---------- | :------------ | | Revenue | $40,824 | 100.0% | $58,906 | 100.0% | | Cost of revenue | $13,170 | 32.3% | $15,013 | 25.5% | | Gross profit | $27,654 | 67.7% | $43,893 | 74.5% | | Research and development expenses | $10,036 | 24.6% | $9,804 | 16.6% | | Selling, general and administrative expenses | $24,903 | 61.0% | $37,928 | 64.4% | | Loss from operations | $(7,285) | (17.8)% | $(3,839) | (6.5)% | | Net loss | $(8,236) | (20.2)% | $(4,101) | (7.0)% | - Revenue decreased **30.7%** (**30.6%** on a constant currency basis) due to the global decline in surgical procedures caused by the COVID-19 pandemic[110](index=110&type=chunk) - Selling, general and administrative expenses decreased **$13,025 thousand** (**34.3%**), driven by reduced variable compensation, travel, training, marketing costs, and a **$5,299 thousand** fluctuation in contingent consideration liability[114](index=114&type=chunk) [Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019](index=24&type=section&id=Six%20Months%20Ended%20June%2030%2C%202020%20Compared%20to%20Six%20Months%20Ended%20June%2030%2C%202019) Revenue decreased by 16.7% for the six months ended June 30, 2020, primarily due to COVID-19 related deferrals of medical procedures. This led to a higher net loss, despite a decrease in selling, general, and administrative expenses, which was offset by increased research and development expenses mainly from SentreHEART operations Six Months Ended June 30, Financial Highlights (Thousands) | Metric | 2020 Amount | % of Revenues | 2019 Amount | % of Revenues | | :------------------------------------ | :---------- | :------------ | :---------- | :------------ | | Revenue | $94,049 | 100.0% | $112,872 | 100.0% | | Cost of revenue | $27,511 | 29.3% | $29,108 | 25.8% | | Gross profit | $66,538 | 70.7% | $83,764 | 74.2% | | Research and development expenses | $21,623 | 23.0% | $17,980 | 15.9% | | Selling, general and administrative expenses | $67,654 | 71.9% | $74,943 | 66.4% | | Loss from operations | $(22,739) | (24.2)% | $(9,159) | (8.1)% | | Net loss | $(24,644) | (26.2)% | $(9,736) | (8.6)% | - Revenue decreased **16.7%** (**16.5%** on a constant currency basis) due to the deferral of medical procedures from the COVID-19 pandemic[117](index=117&type=chunk) - Research and development expenses increased **$3,643 thousand** (**20.3%**), primarily due to **$3,774 thousand** in incremental costs related to SentreHEART operations[120](index=120&type=chunk) [Liquidity and Capital Resources](index=24&type=section&id=Liquidity%20and%20Capital%20Resources) As of June 30, 2020, the company had strong liquidity with $247,837 thousand in cash, cash equivalents, and investments, and $8,750 thousand in unused borrowing capacity. A public stock offering provided significant cash, which is expected to meet anticipated needs for at least the next twelve months, despite ongoing operating cash usage - As of June 30, 2020, the company had **$247,837 thousand** in cash, cash equivalents, and investments, with **$60,000 thousand** in outstanding debt[123](index=123&type=chunk) - Net cash used in operating activities was **$27,635 thousand** for the six months ended June 30, 2020, primarily due to a net loss and changes in operating assets and liabilities[124](index=124&type=chunk)[125](index=125&type=chunk) - Net cash provided by financing activities was **$183,240 thousand**, mainly from **$188,958 thousand** in net proceeds from a May 2020 public stock offering[127](index=127&type=chunk) - The company believes current liquidity, along with expected cash generation or access via its revolving line of credit, will be sufficient for anticipated cash needs for at least the next twelve months[132](index=132&type=chunk) [Critical Accounting Policies and Estimates](index=26&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The company's financial statements rely on management's estimates and judgments, particularly concerning sales returns, accounts receivable, inventories, intangible assets (including goodwill), contingent liabilities, and share-based compensation, which are periodically evaluated - Preparation of financial statements requires management to make estimates and judgments affecting reported amounts of assets, liabilities, revenue, expenses, and contingent assets/liabilities[134](index=134&type=chunk) - Key estimates include those related to sales returns and allowances, accounts receivable, inventories, intangible assets (including goodwill), contingent liabilities, and share-based compensation[134](index=134&type=chunk) [Recent Accounting Pronouncements](index=26&type=section&id=Recent%20Accounting%20Pronouncements) Information regarding recent accounting pronouncements is detailed in Note 2 of the Condensed Consolidated Financial Statements - Refer to Note 2 in the Notes to the Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements[135](index=135&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=26&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As of June 30, 2020, there were no material changes to the company's market risk disclosures, apart from the ongoing negative impact of the COVID-19 pandemic on business and results of operations - No material changes to market risk disclosures as of June 30, 2020, except for the negative impact of the COVID-19 pandemic[136](index=136&type=chunk) [Item 4. Controls and Procedures](index=26&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, providing reasonable assurance for timely and accurate financial reporting, with no material changes to internal control over financial reporting during the quarter [Evaluation of Disclosure Controls and Procedures](index=26&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2020, concluding they were effective in providing reasonable assurance for timely and accurate financial reporting - Management concluded that disclosure controls and procedures were effective as of June 30, 2020[137](index=137&type=chunk) - Controls provide reasonable, not absolute, assurance and can be circumvented by inherent limitations, individual actions, collusion, or management override[138](index=138&type=chunk) [Changes in Internal Control Over Financial Reporting](index=27&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) There were no material changes in the company's internal control over financial reporting during the three months ended June 30, 2020 - No material changes in internal control over financial reporting occurred during the three months ended June 30, 2020[140](index=140&type=chunk) [PART II. OTHER INFORMATION](index=27&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section details legal proceedings, updated risk factors, executive compensation adjustments, and a comprehensive list of filed exhibits [Item 1. Legal Proceedings](index=27&type=section&id=Item%201.%20Legal%20Proceedings) Information regarding legal proceedings is incorporated by reference from Note 8 – Commitments and Contingencies to the Condensed Consolidated Financial Statements - Legal proceedings information is incorporated by reference from Note 8 – Commitments and Contingencies[141](index=141&type=chunk) [Item 1A. Risk Factors](index=27&type=section&id=Item%201A.%20Risk%20Factors) This section updates previously disclosed risk factors, emphasizing new risks related to the unpredictability of clinical trial results and the critical importance of obtaining regulatory approval for the CONVERGE IDE device, which could significantly impact the business if unsuccessful - New risk factors include the unpredictability of clinical trial results and the potential failure to satisfy FDA or other non-U.S. regulatory requirements[142](index=142&type=chunk) - The company's success depends on achieving regulatory approval for the CONVERGE IDE device, with no assurance of timely approval or approval for desired indications, which could materially adversely affect the business[143](index=143&type=chunk) - Positive results from clinical trials should not be relied upon as evidence that future trials will succeed or satisfy regulatory requirements[142](index=142&type=chunk) [Item 5. Other Information](index=28&type=section&id=Item%205.%20Other%20Information) In response to COVID-19, executive officers and non-employee directors voluntarily reduced their cash compensation, which was subsequently restored to 100% effective June 30, 2020 - Executive officers voluntarily reduced their 2020 annual cash base salaries (CEO by **35%**, others by **20%**) as a COVID-19 expense-reduction measure[144](index=144&type=chunk) - Non-employee directors also reduced their 2020 cash compensation by **35%**[144](index=144&type=chunk) - Effective June 30, 2020, all executive officer salaries and non-employee director cash compensation were restored to **100%** of their prior levels[144](index=144&type=chunk) [Item 6. Exhibits](index=28&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including amendments to the stock incentive plan and loan agreement, certifications, and XBRL taxonomy documents - Exhibits include the AtriCure, Inc. 2014 Stock Incentive Plan (Amended and Restated as of May 20, 2020) and the Fourth Amendment to Loan and Security Agreement dated April 29, 2020[146](index=146&type=chunk) - Certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer and Principal Accounting and Financial Officer are included[146](index=146&type=chunk) - XBRL Instance Document and Taxonomy Extension Schema, Calculation, Definition, Label, and Presentation Linkbase Documents are provided[146](index=146&type=chunk) [Signatures](index=29&type=section&id=Signatures) The report is duly signed on behalf of AtriCure, Inc. by Michael H. Carrel, President and Chief Executive Officer, and M. Andrew Wade, Chief Financial Officer, on July 29, 2020 - The report is signed by Michael H. Carrel, President and Chief Executive Officer, and M. Andrew Wade, Chief Financial Officer[148](index=148&type=chunk) - The signing date for the report is July 29, 2020[148](index=148&type=chunk)

AtriCure, Inc. (NASDAQ:ATRC) Q2 2020 Earnings Conference Call July 28, 2020 4:30 PM ET Company Participants Lynn Lewis - Gilmartin Group Mike Carrel - President and Chief Executive Officer Andy Wade - Chief Financial Officer Conference Call Participants Suraj Kalia - Oppenheimer Matthew O’Brien - Piper Sandler Cecilia Furlong - Canaccord Danielle Antalffy - SVB Leerink Operator Good afternoon, and welcome to AtriCure's Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a li ...

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes on accounting policies and financial details [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The condensed consolidated balance sheets provide a snapshot of the company's financial position as of March 31, 2020, compared to December 31, 2019, showing a decrease in total assets and stockholders' equity, while liabilities saw a slight reduction | Metric | March 31, 2020 (in Thousands) | December 31, 2019 (in Thousands) | | :------------------------------------------ | :---------------------------- | :------------------------------- | | Total Assets | $527,734 | $557,880 | | Total Liabilities | $300,368 | $310,537 | | Total Stockholders' Equity | $227,366 | $247,343 | | Cash and cash equivalents | $21,766 | $28,483 | | Short-term investments | $46,771 | $53,318 | | Accounts receivable, net | $22,131 | $28,046 | | Inventories | $32,063 | $29,414 | | Contingent consideration and other noncurrent liabilities | $188,871 | $186,417 | [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) The statements of operations and comprehensive loss for the three months ended March 31, 2020, reveal a significant increase in net loss and operating expenses compared to the prior year, despite a slight decrease in revenue | Metric | Three Months Ended March 31, 2020 (in Thousands) | Three Months Ended March 31, 2019 (in Thousands) | Change (YoY) | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :----------- | | Revenue | $53,225 | $53,966 | -1.4% | | Cost of revenue | $14,341 | $14,095 | +1.7% | | Gross profit | $38,884 | $39,871 | -2.5% | | Research and development expenses | $11,587 | $8,176 | +41.7% | | Selling, general and administrative expenses | $42,751 | $37,015 | +15.5% | | Loss from operations | $(15,454) | $(5,320) | -190.5% | | Net loss | $(16,408) | $(5,635) | -191.2% | | Basic and diluted net loss per share | $(0.42) | $(0.15) | -180.0% | [Condensed Consolidated Statements of Stockholders' Equity](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) The condensed consolidated statements of stockholders' equity illustrate the changes in equity for the three months ended March 31, 2020, and 2019, primarily reflecting the impact of net loss and equity compensation plans | Metric | March 31, 2020 (in Thousands) | December 31, 2019 (in Thousands) | | :------------------------------------------ | :---------------------------- | :------------------------------- | | Total Stockholders' Equity | $227,366 | $247,343 | | Net loss (Q1 2020) | $(16,408) | N/A | | Impact of equity compensation plans (Q1 2020) | $(3,356) | N/A | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) The condensed consolidated statements of cash flows for the three months ended March 31, 2020, show a net decrease in cash and cash equivalents, primarily driven by cash used in operating and financing activities, partially offset by cash provided by investing activities | Metric | Three Months Ended March 31, 2020 (in Thousands) | Three Months Ended March 31, 2019 (in Thousands) | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | | Net cash used in operating activities | $(16,087) | $(13,438) | | Net cash provided by investing activities | $17,331 | $11,017 | | Net cash used in financing activities | $(7,834) | $(8,970) | | Net decrease in cash and cash equivalents | $(6,717) | $(11,511) | | Cash and cash equivalents—end of period | $21,766 | $20,720 | [Notes to Condensed Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes provide comprehensive details on the company's accounting policies, recent accounting pronouncements, fair value measurements, intangible assets, accrued liabilities, indebtedness, leases, commitments, contingencies, revenue recognition, income tax provisions, equity compensation plans, and segment and geographic information [1. Description of Business and Summary of Significant Accounting Policies](index=7&type=section&id=1.%20DESCRIPTION%20OF%20BUSINESS%20AND%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) AtriCure, Inc. is a leading innovator in treatments for atrial fibrillation (Afib) and left atrial appendage (LAA) management, selling products globally, with this section outlining key accounting policies including revenue recognition, inventory, depreciation, leases, intangible assets, contingent consideration, and share-based compensation - AtriCure is a leading innovator in treatments for atrial fibrillation (Afib) and left atrial appendage (LAA) management, selling its products to medical centers globally through its direct sales force and distributors[13](index=13&type=chunk) - Revenue is recognized when control of promised goods is transferred to customers, generally upon shipment of goods[18](index=18&type=chunk) Inventories (in Thousands) | Inventories (in Thousands) | March 31, 2020 | December 31, 2019 | | :----------------- | :------------- | :---------------- | | Raw materials | $11,122 | $11,126 | | Work in process | $2,316 | $1,260 | | Finished goods | $18,625 | $17,028 | | **Total Inventories** | **$32,063** | **$29,414** | - Intangible assets with determinable useful lives are amortized on a straight-line basis, while In Process Research and Development (IPR&D) is accounted for as an indefinite-lived intangible asset until project completion or abandonment[28](index=28&type=chunk) - Contingent consideration, primarily settled in common stock, arises from the nContact Surgical, Inc. and SentreHEART, Inc. merger agreements[31](index=31&type=chunk) - Share-based compensation expense was **$4,384 thousand** for the three months ended March 31, 2020, compared to **$4,154 thousand** for the same period in 2019[38](index=38&type=chunk) [2. Recent Accounting Pronouncements](index=11&type=section&id=2.%20RECENT%20ACCOUNTING%20PRONOUNCEMENTS) The company adopted ASU 2016-13 (Credit Losses) and ASU 2017-04 (Goodwill Impairment) as of January 1, 2020, neither of which had a material impact on its consolidated financial statements - Adopted ASU 2016-13, 'Financial Instruments – Credit Losses (Topic 326),' on January 1, 2020, which requires financial assets measured at amortized costs to be presented net of expected credit losses; the adjustment did not have a material impact[41](index=41&type=chunk) - Adopted ASU 2017-04, 'Intangibles – Goodwill and Other (Topic 350),' on January 1, 2020, simplifying goodwill impairment accounting; the adoption did not have a material impact[42](index=42&type=chunk) [3. Fair Value](index=11&type=section&id=3.%20FAIR%20VALUE) Fair value measurements are categorized into a three-level hierarchy, with contingent consideration liabilities from acquisitions classified as Level 3 due to unobservable inputs and showing an increase in fair value due to accretion in Q1 2020 - The fair value hierarchy is based on three levels of inputs: Level 1 (quoted prices in active markets for identical assets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[43](index=43&type=chunk) Assets and Liabilities (in Thousands) | Assets and Liabilities (in Thousands) | Level 1 | Level 2 | Level 3 | Total | | :------------------------------------ | :------ | :------ | :------ | :---- | | **Assets (March 31, 2020):** | | | | | | Money market funds | $— | $18,235 | $— | $18,235 | | U.S. government agencies and securities | $5,556 | $— | $— | $5,556 | | Corporate bonds | $— | $24,739 | $— | $24,739 | | Asset-backed securities | $— | $16,476 | $— | $16,476 | | **Total assets** | **$5,556** | **$59,450** | **$—** | **$65,006** | | **Liabilities (March 31, 2020):** | | | | | | Contingent consideration | $— | $— | $187,615 | $187,615 | | **Total liabilities** | **$—** | **$—** | **$187,615** | **$187,615** | - Contingent consideration liabilities from nContact and SentreHEART acquisitions are Level 3 measurements, valued using an income approach (e.g., probability-weighted scenario method) with unobservable inputs such as the probability of milestone achievement[47](index=47&type=chunk)[48](index=48&type=chunk)[49](index=49&type=chunk) Level 3 Fair Value Measurements (in Thousands) | Level 3 Fair Value Measurements (in Thousands) | Three Months Ended March 31, 2020 | Twelve Months Ended December 31, 2019 | | :--------------------------------------------- | :-------------------------------- | :------------------------------------ | | Beginning Balance | $185,157 | $18,773 | | Amounts acquired | $— | $171,300 | | Changes in fair value included in earnings | $2,458 | $(4,916) | | Ending Balance | $187,615 | $185,157 | [4. Intangible Assets](index=13&type=section&id=4.%20INTANGIBLE%20ASSETS) This section summarizes the company's intangible assets, including technology and In Process Research and Development (IPR&D), and goodwill, with technology assets amortized over their useful lives, while IPR&D and goodwill are tested annually for impairment Intangible Assets (in Thousands) | Intangible Assets (in Thousands) | Estimated Useful Life | March 31, 2020 Cost | March 31, 2020 Accumulated Amortization | December 31, 2019 Cost | December 31, 2019 Accumulated Amortization | | :----------------- | :-------------------- | :------------------ | :-------------------------------------- | :------------------- | :----------------------------------------- | | Technology | 3-15 years | $11,691 | $8,620 | $11,691 | $8,131 | | IPR&D | N/A | $126,321 | $— | $126,321 | $— | | **Total** | | **$138,012** | **$8,620** | **$138,012** | **$8,131** | - Amortization expense of intangible assets with definite lives was **$489 thousand** for the three months ended March 31, 2020, compared to **$484 thousand** for the same period in 2019[51](index=51&type=chunk) Goodwill (in Thousands) | Goodwill (in Thousands) | Three Months Ended March 31, 2020 | Twelve Months Ended December 31, 2019 | | :---------------------- | :-------------------------------- | :------------------------------------ | | Beginning Balance | $234,781 | $105,257 | | Amounts acquired | $— | $129,524 | | Ending Balance | $234,781 | $234,781 | [5. Accrued Liabilities](index=14&type=section&id=5.%20ACCRUED%20LIABILITIES) Accrued liabilities significantly decreased from December 31, 2019, to March 31, 2020, primarily due to reductions in accrued commissions and bonuses Accrued Liabilities (in Thousands) | Accrued Liabilities (in Thousands) | March 31, 2020 | December 31, 2019 | | :--------------------------------- | :------------- | :---------------- | | Accrued payroll and employee-related expenses | $7,434 | $6,748 | | Accrued commissions | $3,529 | $8,734 | | Accrued bonus | $1,151 | $10,840 | | Sales returns and allowances | $3,940 | $3,979 | | Accrued royalties | $663 | $732 | | Accrued taxes and value-added taxes payable | $1,171 | $1,658 | | Other accrued liabilities | $267 | $59 | | **Total** | **$18,155** | **$32,750** | [6. Indebtedness](index=14&type=section&id=6.%20INDEBTEDNESS) The company maintains a Loan and Security Agreement with Silicon Valley Bank, comprising a **$60,000 thousand** term loan and a **$20,000 thousand** revolving line of credit, both maturing in August 2024, with **$8,750 thousand** in borrowing availability as of March 31, 2020 - The company has a Loan and Security Agreement with Silicon Valley Bank, which includes a **$60,000 thousand** term loan and a **$20,000 thousand** revolving line of credit, both maturing on August 1, 2024[56](index=56&type=chunk) - As of March 31, 2020, the company had no borrowings under the revolving credit facility and had borrowing availability of **$8,750 thousand**[58](index=58&type=chunk) - An amendment to the Loan Agreement on April 29, 2020, modified a covenant related to the company's liquidity ratio and increased early termination fees[58](index=58&type=chunk) Future Maturities of Long-Term Debt (in Thousands) | Future Maturities of Long-Term Debt (in Thousands) | | | :----------------------------------------------- | :----- | | 2020 (excluding the three months ended March 31, 2020) | $— | | 2021 | $14,286 | | 2022 | $17,143 | | 2023 | $17,143 | | 2024 | $11,428 | | **Total** | **$60,000** | [7. Leases](index=15&type=section&id=7.%20LEASES) The company adopted ASU 2018-11 for leases, recognizing operating right-of-use (ROU) assets and lease liabilities, with this section detailing weighted average remaining lease terms, discount rates, lease expense components, and supplemental balance sheet information - The company adopted ASU 2018-11, 'Leases (Topic 842),' effective January 1, 2019, resulting in the recording of operating right-of-use assets of approximately **$1,884 thousand** and operating lease liabilities of **$2,189 thousand**[61](index=61&type=chunk) Lease Metrics | Lease Metrics | March 31, 2020 | December 31, 2019 | | :-------------------------------------- | :------------- | :---------------- | | **Operating Leases** | | | | Weighted average remaining lease term (years) | 3.1 | 3.5 | | Weighted average discount rate | 5.9% | 5.9% | | **Finance Leases** | | | | Weighted average remaining lease term (years) | 10.4 | 11.0 | | Weighted average discount rate | 7.0% | 7.0% | Components of Lease Expense (in Thousands) | Components of Lease Expense (in Thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Operating lease cost | $349 | $159 | | Amortization of right-of-use assets (Finance) | $263 | $250 | | Interest on lease liabilities (Finance) | $216 | $221 | | **Total finance lease cost** | **$479** | **$471** | Supplemental Balance Sheet Information (in Thousands) | Supplemental Balance Sheet Information (in Thousands) | March 31, 2020 | December 31, 2019 | | :---------------------------------------------------- | :------------- | :---------------- | | Operating lease right-of-use assets | $3,739 | $4,032 | | Total operating lease liabilities | $(3,945) | $(4,261) | | Property and equipment, net (Finance Leases) | $10,273 | $10,536 | | Total finance lease liabilities | $(12,343) | $(12,527) | [8. Commitments and Contingencies](index=17&type=section&id=8.%20COMMITMENTS%20AND%20CONTINGENCIES) This section details the company's royalty agreements, standard purchase agreements, and legal matters, including a Civil Investigative Demand from the USDOJ regarding potential False Claims Act violations and an ongoing dispute over earnout payments related to the nContact acquisition - The company has royalty agreements requiring payments of **3% to 5%** of specified product sales, with royalty expense of **$677 thousand** for Q1 2020 and **$709 thousand** for Q1 2019 included in cost of revenue[70](index=70&type=chunk) - The U.S. Department of Justice (USDOJ) is investigating the company for potential False Claims Act violations related to the promotion of certain medical devices for off-label use and submission of false claims to federal and state health care programs[73](index=73&type=chunk) - The company received an 'earnout objection statement' from representatives of former nContact stockholders, disputing the calculation of commercial milestone payments under the merger agreement[74](index=74&type=chunk) [9. Revenue](index=17&type=section&id=9.%20REVENUE) Revenue is primarily generated from the sale of medical devices, recognized at a point in time upon transfer of control to customers, categorized into open ablation, minimally invasive ablation (MIS), appendage management, and valve tools, and sold through direct sales and distributors - Revenue is generated primarily from the sale of medical devices and recognized when control of promised devices is transferred to customers, typically upon shipment or delivery[75](index=75&type=chunk) - Sales of devices are categorized as open ablation, minimally invasive ablation (MIS), appendage management, and valve tools[75](index=75&type=chunk) - Products are sold primarily through a direct sales force and distributors in select international markets, with consistent terms of sale[76](index=76&type=chunk) - The company generally does not accept product returns unless a product is defective as manufactured, and recognized an allowance for sales returns and refunds of **$2,240 thousand** in connection with the SentreHEART acquisition[78](index=78&type=chunk) [10. Income Tax Provision](index=18&type=section&id=10.%20INCOME%20TAX%20PROVISION) The company computes its income tax provision using the asset and liability method, applying an estimated annual effective rate, which for Q1 2020 was (0.05)%, differing from the US statutory rate primarily due to a full valuation allowance against net deferred income tax assets Effective Tax Rate | Effective Tax Rate | | | :----------------- | :--------------------------------------- | | Three months ended March 31, 2020 | (0.05)% | | Three months ended March 31, 2019 | (1.19)% | - The company has recorded a full valuation allowance against substantially all net deferred income tax assets, as it is more-likely-than-not that the benefit will not be recognized in future periods[34](index=34&type=chunk)[82](index=82&type=chunk) [11. Equity Compensation Plans](index=18&type=section&id=11.%20EQUITY%20COMPENSATION%20PLANS) The company operates two share-based incentive plans, the 2014 Stock Incentive Plan and the 2018 Employee Stock Purchase Plan (ESPP), with share-based compensation expense totaling **$4,384 thousand** for Q1 2020 - The 2014 Stock Incentive Plan allows for grants of incentive stock options, restricted stock, restricted stock units, nonstatutory stock options, and performance share awards to employees, directors, and consultants, with **1,140 shares** available for future grants as of March 31, 2020[85](index=85&type=chunk) - Performance Share Awards (PSAs) vest based on achieving specified performance measurements, such as revenue CAGR, over a three-year period, with payouts ranging from **0% to 200%** of the target amount[86](index=86&type=chunk)[87](index=87&type=chunk) - The Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase common stock at a **15% discount**, with **491 shares** available for future issuance as of March 31, 2020[89](index=89&type=chunk) Allocation of Share-Based Compensation Expense (in Thousands) | Allocation of Share-Based Compensation Expense (in Thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :---------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Cost of revenue | $287 | $189 | | Research and development expenses | $655 | $495 | | Selling, general and administrative expenses | $3,442 | $3,470 | | **Total** | **$4,384** | **$4,154** | [12. Segment and Geographic Information](index=20&type=section&id=12.%20SEGMENT%20AND%20GEOGRAPHIC%20INFORMATION) The company operates as a single segment, developing and selling medical devices globally, with revenue disaggregated by geographic area and product type, showing a slight increase in U.S. revenue and a decrease in international revenue for Q1 2020 - The company operates as a single operating segment, developing, manufacturing, and selling devices for surgical ablation of cardiac tissue and left atrial appendage exclusion globally[92](index=92&type=chunk) Revenue by Geographic Area (in Thousands) | Revenue by Geographic Area (in Thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :------------------------ | :-------------------------------- | :-------------------------------- | | United States | $43,473 | $43,004 | | Europe | $5,945 | $6,785 | | Asia | $3,537 | $3,914 | | Other international | $270 | $263 | | **Total international** | **$9,752** | **$10,962** | | **Total revenue** | **$53,225** | **$53,966** | United States Revenue by Product Type (in Thousands) | United States Revenue by Product Type (in Thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Open ablation | $19,218 | $18,996 | | Minimally invasive ablation | $6,561 | $7,762 | | Appendage management | $17,419 | $15,670 | | Valve tools | $275 | $576 | | **Total United States** | **$43,473** | **$43,004** | International Revenue by Product Type (in Thousands) | International Revenue by Product Type (in Thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Open ablation | $5,115 | $6,300 | | Minimally invasive ablation | $1,545 | $2,129 | | Appendage management | $3,062 | $2,454 | | Valve tools | $30 | $79 | | **Total international** | **$9,752** | **$10,962** | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=21&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial performance and condition, emphasizing the adverse impact of the COVID-19 pandemic on revenue and operations, updates on clinical trials, and strategies for managing liquidity and capital resources [Overview](index=21&type=section&id=Overview) AtriCure is a market leader in surgical treatments for atrial fibrillation (Afib) and left atrial appendage (LAA) management, offering various ablation systems and devices sold globally through direct sales and distributors, with future revenue expected primarily from current or developing products - AtriCure is a leading innovator in treatments for atrial fibrillation (Afib) and left atrial appendage (LAA) management, offering product lines such as the Isolator Synergy™ Ablation System (FDA-approved for persistent Afib) and the AtriClip Left Atrial Appendage Exclusion System[99](index=99&type=chunk)[100](index=100&type=chunk) - The company sells its products to medical centers through a direct sales force in the United States and certain international markets, and through distributors in other international markets[102](index=102&type=chunk) [Recent Developments](index=22&type=section&id=Recent%20Developments) The COVID-19 pandemic has significantly decreased demand for the company's products due to deferred non-emergent surgical procedures, adversely impacting 2020 results, leading to delayed capital investments, hiring, and other expense-reduction measures, while clinical trials CONVERGE and aMAZE are ongoing - The COVID-19 pandemic is adversely impacting 2020 results of operations and financial condition due to a significant decrease in demand for products as non-emergent procedures are indeterminately deferred[103](index=103&type=chunk) - In response to COVID-19, the company has delayed certain capital investments and hiring, and implemented other expense-reduction measures[105](index=105&type=chunk) - For the CONVERGE IDE trial, an initial meeting with the FDA was conducted in April 2020 following a pre-market approval (PMA) submission in December 2019[106](index=106&type=chunk) - Enrollment for the aMAZE study was completed in December 2019, and a Continued Access Protocol (CAP) was approved in January 2020 for additional patient enrollment[107](index=107&type=chunk) [Results of Operations](index=23&type=section&id=Results%20of%20Operations) Revenue decreased by 1.4% due to global surgical procedure declines, while gross profit saw a 2.5% reduction, and operating expenses significantly increased, leading to a substantial rise in net loss for the three months ended March 31, 2020 | Metric | Three Months Ended March 31, 2020 (in Thousands) | Three Months Ended March 31, 2019 (in Thousands) | Change (YoY) | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------- | :----------- | | Revenue | $53,225 | $53,966 | -1.4% | | Gross profit | $38,884 | $39,871 | -2.5% | | Research and development expenses | $11,587 | $8,176 | +41.7% | | Selling, general and administrative expenses | $42,751 | $37,015 | +15.5% | | Loss from operations | $(15,454) | $(5,320) | -190.5% | | Net loss | $(16,408) | $(5,635) | -191.2% | - Revenue decreased **1.4%** (**1.0%** on a constant currency basis) due to the global decline in surgical procedures as healthcare providers limited activity not related to addressing the COVID-19 pandemic[109](index=109&type=chunk) - Research and development expenses increased **$3,411 thousand**, primarily due to **$2,122 thousand** incremental costs related to SentreHEART operations, including aMAZE clinical activities, personnel, and product development[112](index=112&type=chunk) - Selling, general and administrative expenses increased **$5,736 thousand**, primarily due to a **$4,125 thousand** fluctuation in the contingent consideration liability adjustment and **$2,970 thousand** headcount growth, partially offset by a **$2,437 thousand** decrease in variable compensation and travel expenses due to COVID-19[113](index=113&type=chunk) - Net interest expense increased **$681 thousand** due to a **$366 thousand** increase in interest expense from higher borrowings and a **$315 thousand** decline in interest income from a lower investment balance[114](index=114&type=chunk) [Liquidity and Capital Resources](index=23&type=section&id=Liquidity%20and%20Capital%20Resources) As of March 31, 2020, the company maintained **$68,537 thousand** in cash and investments, with **$60,000 thousand** in outstanding debt, and utilized cash in operating and financing activities while generating cash from investing activities, anticipating sufficient liquidity for the next twelve months despite pandemic uncertainties Liquidity Position (in Thousands) | Liquidity Position (in Thousands) | | | :-------------------------------- | :------------- | | Cash, cash equivalents and investments | $68,537 | | Outstanding debt | $60,000 | | Unused borrowing capacity (revolving credit facility) | $8,750 | | Net working capital | $87,953 | | Accumulated deficit | $(298,605) | Cash Flow Summary (in Thousands) | Cash Flow Summary (in Thousands) | | | :-------------------------------- | :--------------------------------------- | | Net cash used in operating activities | $(16,087) | | Net cash provided by investing activities | $17,331 | | Net cash used in financing activities | $(7,834) | - Net cash used in operating activities was **$16,087 thousand**, driven by a net loss of **$16,408 thousand** (including **$9,816 thousand** of non-cash expenses) and a **$9,495 thousand** net increase in cash used related to changes in operating assets and liabilities, primarily a **$14,545 thousand** decrease in accrued liabilities[115](index=115&type=chunk)[116](index=116&type=chunk) - Net cash provided by investing activities was **$17,331 thousand**, primarily from **$19,163 thousand** of maturities of available-for-sale securities, offset by **$1,832 thousand** of purchases of property and equipment[117](index=117&type=chunk) - Net cash used in financing activities was **$7,834 thousand**, primarily due to **$11,776 thousand** for shares repurchased for payment of taxes on stock awards, partially offset by **$4,036 thousand** from stock option exercises[118](index=118&type=chunk) - The company believes its current cash, cash equivalents, investments, and access to its revolving line of credit will be sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next twelve months[123](index=123&type=chunk) [Seasonality](index=25&type=section&id=Seasonality) The company typically experiences a moderate decline in revenue during the third quarter, primarily attributed to the elective nature of certain procedures and fewer people choosing to undergo them during the summer months - A moderate decline in revenue is typically experienced during the third quarter, primarily attributed to the elective nature of certain procedures and fewer people choosing to undergo them during the summer months[125](index=125&type=chunk) [Critical Accounting Policies and Estimates](index=25&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The company's financial statements are prepared in accordance with GAAP, requiring management to make significant estimates and judgments related to sales returns and allowances, accounts receivable, inventories, intangible assets (including goodwill), contingent liabilities, and share-based compensation - Management makes significant estimates and judgments in preparing financial statements, particularly concerning sales returns and allowances, accounts receivable, inventories, intangible assets (including goodwill), contingent liabilities, and share-based compensation[126](index=126&type=chunk) [Recent Accounting Pronouncements](index=25&type=section&id=Recent%20Accounting%20Pronouncements) This section refers to Note 2 in the Notes to the Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements - Refer to Note 2 in the Notes to the Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements[127](index=127&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=25&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As of March 31, 2020, there were no material changes to the company's market risk disclosures compared to its 2019 Form 10-K, apart from the negative impact of the COVID-19 pandemic on its business and results of operations - As of March 31, 2020, there were no material changes to market risk disclosures, other than the negative impact of the COVID-19 pandemic on the business and results of operations[128](index=128&type=chunk) [Item 4. Controls and Procedures](index=25&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, with the participation of the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of March 31, 2020, concluding they were effective, with no material changes in internal control over financial reporting occurring during the quarter - Management, with the participation of the President and Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective as of March 31, 2020, providing reasonable assurance for timely and accurate financial reporting[129](index=129&type=chunk)[130](index=130&type=chunk) - No changes in internal control over financial reporting occurred during the three months ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[132](index=132&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=26&type=section&id=Item%201.%20Legal%20Proceedings) Information regarding legal proceedings is incorporated by reference from Note 8 – Commitments and Contingencies in the Condensed Consolidated Financial Statements - Information with respect to legal proceedings is incorporated by reference from the heading 'Legal' in Note 8 – Commitments and Contingencies to the Condensed Consolidated Financial Statements[133](index=133&type=chunk) [Item 1A. Risk Factors](index=26&type=section&id=Item%201A.%20Risk%20Factors) This section highlights that the COVID-19 pandemic is materially and adversely affecting demand for the company's products, impacting clinical trials, and disrupting business operations, leading to a significant decrease in surgical procedures, with the extent of its future effect remaining highly uncertain - The outbreak of coronavirus (COVID-19) is materially and adversely affecting demand for the company's products and impacting clinical trials, causing disruption to business and negatively impacting results of operations and financial condition[135](index=135&type=chunk) - Government 'shelter-in-place' orders, quarantines, and travel restrictions have resulted in slowdowns and delays, negatively impacting operations, including personnel travel, customer access, regulatory approvals, and product development efforts[136](index=136&type=chunk) - The spread of COVID-19 may divert healthcare resources from clinical trials, interrupt key activities, and cause delays in FDA or other regulatory authority operations, impacting review and approval timelines[137](index=137&type=chunk) - The extent to which the COVID-19 pandemic may impact the business and financial results is highly uncertain and depends on future developments, potentially heightening many other risks described in this section and the Annual Report on Form 10-K[139](index=139&type=chunk)[140](index=140&type=chunk) [Item 6. Exhibits](index=28&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including various certifications (e.g., Rule 13a-14(a), 18 U.S.C. Section 1350) and XBRL taxonomy documents - Exhibits include Rule 13a-14(a) Certifications of the Principal Executive Officer and Principal Accounting and Financial Officer, and Certifications pursuant to 18 U.S.C. Section 1350[142](index=142&type=chunk) - Various XBRL taxonomy extension documents (Schema, Calculation, Definition, Label, Presentation Linkbase) and the XBRL Instance Document are included[142](index=142&type=chunk) Signatures This section contains the official signatures of the President and Chief Executive Officer, and the Chief Financial Officer, certifying the report on behalf of AtriCure, Inc - The report is signed by Michael H. Carrel, President and Chief Executive Officer, and M. Andrew Wade, Chief Financial Officer, on April 30, 2020[144](index=144&type=chunk)

Financial Data and Key Metrics Changes - First quarter 2020 worldwide revenue was $53.2 million, a decline of 1.4% on a GAAP basis and a decline of 1% on a constant currency basis compared to Q1 2019 [8] - U.S. revenue was $43.5 million, an increase of 1.1% from Q1 2019, impacted by COVID-19 in the last three weeks of the quarter [9] - Gross margin for Q1 2020 was 73.1%, down from 73.9% in Q1 2019 [10] - Operating loss for the quarter was $15.5 million compared to a loss of $5.3 million in Q1 2019 [12] - Adjusted EBITDA loss was $6.1 million compared to a loss of $491,000 in Q1 2019 [12] - Cash, cash equivalents, and investments at the end of the quarter were approximately $68.5 million [13] Business Line Data and Key Metrics Changes - U.S. sales of appendage management products grew 11.2% to $17.4 million [9] - U.S. open ablation-related product sales increased to $19.2 million, representing growth of 1.2% [9] - U.S. sales of products used in minimally invasive procedures were $6.6 million, down 15.5% [9] - International revenue decreased to $9.8 million, down 11% on a GAAP basis compared to Q1 2019 [10] Market Data and Key Metrics Changes - COVID-19 significantly impacted revenue, with U.S. sales declining roughly 70% in the final weeks of Q1 [8] - International orders, particularly from China, were affected, with no orders received in Q1 [10] Company Strategy and Development Direction - The company is prioritizing investments in CONVERGE and aMAZE trials, as well as new product development [26] - The CONVERGE trial results are expected to be presented on May 8, 2020, with implications for the Afib market [26][27] - The company is focused on maintaining operational readiness and supporting physicians and patients during the pandemic [25][19] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the unprecedented uncertainty due to COVID-19 and the impact on nonemergent procedures [17] - There is optimism about the return of deferred procedures as states begin to reopen [31] - Management expects a rough second quarter but anticipates gradual recovery in the following months [39][41] Other Important Information - The company has implemented measures to reduce operating expenses by over $25 million [15] - The company is continuing critical manufacturing and fulfillment of products while ensuring employee safety [20] Q&A Session Summary Question: How should we think about the deferrability of various business lines? - Management indicated that open procedures are more emergent and are starting to see a pickup, while elective procedures are expected to bounce back in May and June [34][35] Question: How do you see the recovery of volumes over the coming months? - Management expects April and May to be challenging, with gradual improvement anticipated in the second quarter and a return to normalcy by the fourth quarter [38][39] Question: Can you provide insight into the CONVERGE trial expectations? - Management emphasized the importance of statistical significance in the trial results, which would drive excitement in the market [60][70] Question: What is the status of the aMAZE trial? - Enrollment for the aMAZE trial is complete, and management does not anticipate significant delays in follow-up procedures [62] Question: How is the company preparing for the CONVERGE rollout post-FDA approval? - Management is focusing on internal training and cross-training staff to ensure readiness for the launch [54][55]

PART I [ITEM 1. BUSINESS](index=3&type=section&id=ITEM%201.%20BUSINESS) AtriCure is a leading innovator in Afib and LAA management, offering surgical and minimally invasive products, with a strategy focused on innovation, clinical science, and market expansion - AtriCure is a market leader in surgical Afib treatment, with its Isolator Synergy System being the only FDA-approved surgical device for persistent and long-standing persistent Afib in concomitant open-heart procedures[6](index=6&type=chunk) - The company's business strategy includes new product innovation, investing in clinical trials (e.g., CONVERGE, aMAZE, ICE-AFIB trials), building physician and societal relationships, providing training and education, expanding adoption of minimally invasive products, and evaluating acquisition opportunities[27](index=27&type=chunk)[28](index=28&type=chunk)[29](index=29&type=chunk) [Overview](index=3&type=section&id=Overview) AtriCure innovates Afib and LAA management with surgical and minimally invasive products, including the FDA-approved Isolator Synergy™ Ablation System, sold via direct and distributor channels - AtriCure is a leading innovator in treatments for atrial fibrillation (Afib) and left atrial appendage (LAA) management, utilizing products in both open-heart and minimally invasive procedures[6](index=6&type=chunk) - The Isolator Synergy™ Ablation System is the first and only surgical device approved by the FDA for treating persistent and long-standing persistent Afib in patients undergoing certain open concomitant procedures[6](index=6&type=chunk) - Products are sold via a direct sales force in the U.S. and key international markets (Germany, France, UK, Benelux), and through distributors in other international regions[8](index=8&type=chunk) [Market Overview](index=4&type=section&id=Market%20Overview) Afib affects 33 million globally, with increasing diagnoses and Class I recommendations for surgical ablation, while LAA exclusion with AtriClip offers significant growth due to stroke risk - Afib affects approximately **33 million people globally**, including six million in the United States, with incidence doubling each decade of adult life[9](index=9&type=chunk) - Societal guidelines (STS, HRS, AATS) now provide **Class I recommendations for surgical ablation** for patients with structural heart disease and Afib, indicating it as a 'recommended' treatment[10](index=10&type=chunk) - The AtriClip system for LAA exclusion represents a significant growth opportunity, as **90% of Afib-related stroke clots originate in the LAA**, and surgeons are increasingly addressing the LAA[12](index=12&type=chunk) [The AtriCure Solution and Products](index=5&type=section&id=The%20AtriCure%20Solution%20and%20Products) AtriCure provides surgical and minimally invasive devices for cardiac ablation and LAA management, including RF, cryoablation, AtriClip, and LARIAT systems, to improve Afib treatment - AtriCure's products aim to safely, rapidly, and reliably create lesions to block abnormal electrical impulses causing Afib, particularly for severe forms or patients who failed catheter ablations[15](index=15&type=chunk) - The product lines include devices for cardiac tissue ablation (RF and cryo-thermal energy) and left atrial appendage management[16](index=16&type=chunk) [Products for open and minimally invasive ablation](index=5&type=section&id=Products%20for%20open%20and%20minimally%20invasive%20ablation) AtriCure offers Isolator Synergy Clamps, Multifunctional Pens, and Linear Ablation Devices for effective RF ablation and arrhythmia evaluation in open and minimally invasive procedures - Isolator Synergy Clamps are the primary RF ablation product line, generating most of the related revenue, and are single-use disposables with parallel closing jaws for effective tissue compression and ablation[17](index=17&type=chunk) - Multifunctional Pens and Linear Ablation Devices are single-use RF products enabling surgeons to evaluate arrhythmias, perform temporary cardiac pacing, sensing, stimulation, and ablate cardiac tissue[17](index=17&type=chunk) [Products for open ablation](index=5&type=section&id=Products%20for%20open%20ablation) The cryoICE Cryoablation System provides linear ablations in open procedures and offers cryo nerve block for temporary pain relief in cardiothoracic surgery - The cryoICE cryoablation system is used in open ablation procedures for linear ablations, and can be used independently or with Isolator Synergy clamps[17](index=17&type=chunk) - The cryoSPHERE system and cryoICE CRYO2 probe are cleared for managing pain by temporarily ablating peripheral nerves (cryo nerve block) in cardiothoracic surgery, offering temporary pain relief for up to **90 days**[6](index=6&type=chunk)[17](index=17&type=chunk) [Products for minimally invasive ablation](index=5&type=section&id=Products%20for%20minimally%20invasive%20ablation) The EPi-Sense Guided Coagulation System with VisiTrax technology is AtriCure's primary minimally invasive ablation product, using monopolar energy for tissue coagulation and cardiac signal sensing - The EPi-Sense Guided Coagulation System with VisiTrax technology uses monopolar energy for tissue coagulation and can perform intra-operative cardiac signal sensing[18](index=18&type=chunk) - The CONVERGE IDE clinical trial is evaluating the safety and efficacy of the EPi-Sense system for symptomatic persistent and long-standing persistent Afib patients refractory to anti-arrhythmic drugs[18](index=18&type=chunk) [Products for appendage management](index=5&type=section&id=Products%20for%20appendage%20management) AtriCure offers the AtriClip System for mechanical LAA exclusion and the LARIAT System, a suture-based solution, currently studied in the aMAZE trial for combined LAA exclusion and PVI - The AtriClip System is designed to mechanically clamp the LAA from outside the heart, permanently excluding it and electrically isolating it, which is believed to be safer and more effective than other techniques[19](index=19&type=chunk)[20](index=20&type=chunk) - The LARIAT System is a suture-based solution for LAA occlusion, currently being studied in the aMAZE clinical trial for its effectiveness when combined with pulmonary vein isolation for persistent and long-standing persistent Afib[21](index=21&type=chunk) [Current Afib Treatment Alternatives](index=6&type=section&id=Current%20Afib%20Treatment%20Alternatives) Afib treatments range from drugs and implantable devices to catheter ablation, with AtriCure's products used in open-heart and minimally invasive 'hybrid' procedures - Initial Afib treatments often involve drugs (anti-arrhythmics, anti-coagulants) to prevent clots, control heart rate, or restore normal rhythm[23](index=23&type=chunk)[24](index=24&type=chunk) - Implantable devices (defibrillators, pacemakers) can reduce Afib symptoms but do not treat the condition itself[24](index=24&type=chunk) - Catheter ablation is a minimally invasive procedure performed by electrophysiologists from inside the heart, primarily for paroxysmal Afib[24](index=24&type=chunk) - AtriCure's products are used in open-heart surgeries for Afib treatment and in 'hybrid' or 'multi-disciplinary' approaches combining minimally invasive epicardial and endocardial ablations, particularly for non-paroxysmal Afib[24](index=24&type=chunk)[25](index=25&type=chunk)[26](index=26&type=chunk) [Business Strategy](index=7&type=section&id=Business%20Strategy) AtriCure's strategy focuses on expanding Afib treatment through product innovation, clinical science investment, physician engagement, training, and strategic acquisitions - The core strategy is to expand Afib treatment options and reduce stroke risk through technology development and product offering expansion[27](index=27&type=chunk) - Key strategic elements include new product innovation, investment in clinical trials (CONVERGE, aMAZE, ICE-AFIB), building physician and societal relationships, providing training and education, expanding adoption of minimally invasive products, and evaluating acquisition opportunities[27](index=27&type=chunk)[28](index=28&type=chunk)[29](index=29&type=chunk)[30](index=30&type=chunk)[31](index=31&type=chunk)[32](index=32&type=chunk)[33](index=33&type=chunk) [Clinical Trials](index=7&type=section&id=Clinical%20Trials) AtriCure conducts multiple clinical trials, including CONVERGE, aMAZE, and ICE-AFIB, to validate products and expand regulatory indications for Afib and LAA management - CONVERGE IDE clinical trial (EPi-Sense Guided Coagulation System) for symptomatic persistent and long-standing persistent Afib completed enrollment in **August 2018**, with the final PMA module submitted in **late 2019**[33](index=33&type=chunk) - aMAZE IDE clinical trial (LARIAT Suture Delivery Device for LAA closure adjunctive to PVI) for persistent and long-standing persistent Afib completed enrollment of **600 patients** in **December 2019**[34](index=34&type=chunk) - ICE-AFIB clinical trial (cryoICE system) for persistent and long-standing persistent Afib treatment during concomitant on-pump cardiac surgery began enrollment in **February 2019** and is ongoing[35](index=35&type=chunk) [Sales, Marketing and Medical Education](index=9&type=section&id=Sales%2C%20Marketing%20and%20Medical%20Education) AtriCure's global sales and marketing educate physicians on product benefits, adhering to regulatory approvals, utilizing a direct sales force in the U.S. and key international markets, and providing essential training - Global sales and marketing efforts focus on educating physicians about unique technologies and technical benefits, promoting products only for uses described in their regulatory labeling[41](index=41&type=chunk) - The U.S. sales team comprises approximately **160 employees** across **53 territories**, selected for expertise and knowledge in medical devices and cardiac surgery[42](index=42&type=chunk) - International sales are conducted through direct sales personnel in markets like Germany, France, UK, and Benelux, and via independent distributors in Asia, South America, and Canada[43](index=43&type=chunk) [Competition](index=9&type=section&id=Competition) AtriCure faces intense competition from larger medical device companies but differentiates with its FDA-approved Isolator Synergy System for persistent Afib in concomitant surgical settings - The medical device industry is highly competitive, with most competitors possessing greater financial and human resources and more established distribution channels[44](index=44&type=chunk) - Medtronic, plc is a primary competitor in the cardiac surgery market, offering similar products for Afib and related conditions[44](index=44&type=chunk) - AtriCure's Isolator Synergy System is the only medical device FDA-approved to treat persistent or long-standing persistent Afib in a concomitant surgical setting, providing a key differentiator[44](index=44&type=chunk) [Third-Party Reimbursement](index=9&type=section&id=Third-Party%20Reimbursement) Third-party reimbursement, including Medicare, is crucial for AtriCure, though concomitant Afib/LAA procedures lack incremental hospital payment and surgical LAA management lacks a specific CPT code - Medicare's coding, coverage, and payment policies are significant due to the large percentage of beneficiaries using AtriCure's products and private insurers often following Medicare guidelines[46](index=46&type=chunk) - For concomitant open-heart procedures, Medicare hospital reimbursement is based on the primary structural heart surgery, with no incremental payment for additional Afib or LAA exclusion procedures[47](index=47&type=chunk) - Physicians report CPT codes for surgical cardiac ablation, but there are no Category I CPT codes for surgical LAA management, sometimes requiring unlisted codes for reimbursement[48](index=48&type=chunk) [Government Regulation](index=10&type=section&id=Government%20Regulation) AtriCure's medical devices face extensive regulation by the FDA and global authorities, requiring compliance with 510(k)/PMA pathways, clinical trials, and strict promotion rules, with increasing stringency from EU MDR - AtriCure's products are medical devices subject to extensive regulation by the FDA in the U.S. and comparable authorities in the EU and worldwide[51](index=51&type=chunk) - FDA regulations cover the entire product lifecycle, including design, development, testing, clearance/approval (510(k) or PMA), commercialization, and post-market surveillance[51](index=51&type=chunk) - In the EU, medical devices require CE mark based on conformity assessment procedures, with the new Medical Device Regulation (MDR) effective **May 26, 2020**, imposing stricter controls and clinical data expectations[62](index=62&type=chunk)[63](index=63&type=chunk) [US Regulation](index=10&type=section&id=US%20Regulation) U.S. medical device regulation by the FDA requires 510(k) clearance or PMA, extensive clinical data, and post-market compliance with QSR, labeling, advertising rules, and anti-kickback/false claims statutes - Most medical devices in the U.S. require either 510(k) clearance (demonstrating substantial equivalence to a predicate device) or Premarket Approval (PMA) (requiring extensive data on safety and effectiveness)[51](index=51&type=chunk)[52](index=52&type=chunk)[53](index=53&type=chunk) - Clinical trials, often required for PMA and sometimes for 510(k), must comply with FDA regulations, including current good clinical practices and Institutional Review Board (IRB) oversight[54](index=54&type=chunk) - Post-market, products are subject to FDA's Quality System Regulation (QSR), labeling, advertising, promotion, and safety monitoring, in addition to federal and state laws like the Anti-Kickback Statute and Federal False Claims Act[56](index=56&type=chunk)[57](index=57&type=chunk)[58](index=58&type=chunk) [Regulation Outside of the United States](index=11&type=section&id=Regulation%20Outside%20of%20the%20United%20States) International medical device sales face diverse and stringent regulations, including the EU's new MDR effective May 26, 2020, which mandates stricter controls and clinical data for CE mark compliance - Sales outside the U.S. are subject to foreign governmental regulations, which vary significantly by country and are generally becoming more stringent[60](index=60&type=chunk)[61](index=61&type=chunk) - In the European Union, medical devices must conform to 'essential requirements' and bear the CE Mark, with conformity assessment procedures varying by device classification[62](index=62&type=chunk) - The new EU Medical Device Regulation (MDR), effective **May 26, 2020**, introduces stricter controls, increased clinical data expectations, and more robust vigilance requirements, impacting continued sales and new product introductions in the EU[62](index=62&type=chunk)[63](index=63&type=chunk) [Intellectual Property](index=12&type=section&id=Intellectual%20Property) AtriCure protects its intellectual property through patents, copyrights, trademarks, and trade secrets globally, holding numerous patents and using confidentiality agreements to maintain competitive advantage - AtriCure relies on patent, copyright, trademark, and trade secret laws to protect its intellectual property, which is crucial for continued development and commercialization[64](index=64&type=chunk) - The company holds numerous issued U.S. and international patents and has multiple pending applications, also licensing patents and technology as needed[65](index=65&type=chunk) - Confidentiality agreements with employees and consultants are used to protect unpatentable proprietary information and trade secrets[66](index=66&type=chunk) [Manufacturing](index=12&type=section&id=Manufacturing) AtriCure manufactures products in Ohio and California, with third-party sterilization, managing supply chain risks through inventory and supplier audits, and is an FDA-registered, ISO 13485:2016, and MDSAP certified manufacturer - The majority of products are assembled, inspected, tested, and packaged at facilities in Ohio and California, with third parties handling sterilization[67](index=67&type=chunk) - Supply chain risks are minimized by maintaining inventory levels and sourcing components, generally from single suppliers with available alternatives[67](index=67&type=chunk)[68](index=68&type=chunk) - AtriCure is an FDA-registered medical device manufacturer, certified to ISO 13485:2016, and has successfully participated in the Medical Device Single Audit Program (MDSAP)[69](index=69&type=chunk) [Consulting Relationships](index=12&type=section&id=Consulting%20Relationships) AtriCure collaborates with global scientists and physicians for R&D, clinical, and training programs, ensuring compliance with 'Safe Harbor' regulations and disclosing U.S. physician payments under 'Open Payments' law - AtriCure collaborates with scientists and physicians worldwide to support research, development, clinical, and training programs[70](index=70&type=chunk) - Physician consulting agreements comply with 'Safe Harbor' regulations and industry codes, ensuring fair market value for services without requiring product promotion[71](index=71&type=chunk) - Payments to U.S. physicians are disclosed in annual reports to CMS under the federal 'Open Payments' law[71](index=71&type=chunk) [Employees](index=13&type=section&id=Employees) As of January 31, 2020, AtriCure employed approximately **730 full-time individuals**, none unionized, reporting positive employee relations and no work stoppages - As of **January 31, 2020**, AtriCure had approximately **730 full-time employees**[72](index=72&type=chunk) - None of the employees were represented by a labor union or covered by a collective bargaining agreement[72](index=72&type=chunk) [Available Information](index=13&type=section&id=Available%20Information) AtriCure files SEC reports (10-K, 10-Q, 8-K) and provides corporate governance documents on the SEC and company websites - AtriCure is subject to SEC reporting requirements, filing Forms 10-K, 10-Q, and 8-K[73](index=73&type=chunk) - Reports and information are available on the SEC's website (http://www.sec.gov) and AtriCure's website (http://www.atricure.com)[73](index=73&type=chunk) [ITEM 1A. RISK FACTORS](index=13&type=section&id=ITEM%201A.%20RISK%20FACTORS) AtriCure faces risks from product reliance, intense competition, economic conditions, healthcare reforms, regulatory compliance, litigation, IP challenges, DOJ investigation, financial losses, and operational dependencies - The company's primary revenue sources are ablation and LAA management products; failure to achieve widespread market acceptance for these products would harm operating results[74](index=74&type=chunk)[75](index=75&type=chunk) - AtriCure operates in a highly competitive medical device industry, facing larger competitors and risks from new product introductions, which could lead to reduced market share and revenue[77](index=77&type=chunk)[78](index=78&type=chunk) - The company is subject to extensive and complex government regulations (FDA, EU MDR, anti-kickback, false claims), with non-compliance potentially leading to significant fines, penalties, injunctions, product recalls, or suspension of operations[51](index=51&type=chunk)[58](index=58&type=chunk)[62](index=62&type=chunk)[126](index=126&type=chunk)[128](index=128&type=chunk)[134](index=134&type=chunk) - AtriCure has a history of net losses, with an accumulated deficit of **$282.2 million** as of **December 31, 2019**, and expects to incur substantial expenditures and potential operating losses in the future[107](index=107&type=chunk)[108](index=108&type=chunk) - The company is currently under investigation by the U.S. Department of Justice regarding potential False Claims Act violations related to off-label promotion of medical devices for Afib treatment, which could result in significant penalties[98](index=98&type=chunk)[99](index=99&type=chunk)[100](index=100&type=chunk) [Risks Relating To Our Business and Industry](index=13&type=section&id=Risks%20Relating%20To%20Our%20Business%20and%20Industry) AtriCure faces business risks from market acceptance, competition, economic downturns, healthcare reforms, regulatory changes, product liability, IP infringement, supply chain disruptions, growth management, personnel retention, acquisitions, and the ongoing DOJ investigation - Market acceptance of AtriCure's products in the U.S. is crucial, depending on demonstrated safety, efficacy, long-term clinical performance, cost-effectiveness, and adequate reimbursement[75](index=75&type=chunk) - Competition from drugs, catheter-based ablation, implantable devices, and other surgical treatments may decrease market share and revenue[77](index=77&type=chunk) - The company is subject to various federal and state laws (e.g., Anti-Kickback Statute, False Claims Act, HIPAA) and foreign regulations, with non-compliance potentially leading to substantial penalties[134](index=134&type=chunk) - Delays or failures in clinical trials, or negative data, could hinder product adoption and harm the business[93](index=93&type=chunk)[94](index=94&type=chunk)[136](index=136&type=chunk) - Reliance on single and limited source third-party suppliers for manufacturing and sterilization creates vulnerability to supply problems and price fluctuations[120](index=120&type=chunk)[121](index=121&type=chunk) - The ongoing U.S. Department of Justice investigation into alleged False Claims Act violations related to off-label promotion could result in enforcement actions, fines, or changes to business practices[98](index=98&type=chunk)[99](index=99&type=chunk)[100](index=100&type=chunk) - Brexit creates significant uncertainty regarding trade, regulations, and costs in European markets, potentially impacting sales and profitability[157](index=157&type=chunk) - An epidemic of the coronavirus disease could delay or interrupt business operations[165](index=165&type=chunk) [Risks Relating To Our Common Stock](index=29&type=section&id=Risks%20Relating%20To%20Our%20Common%20Stock) AtriCure's common stock faces high volatility from financial results, regulatory changes, and competition; future issuances may dilute ownership, anti-takeover provisions exist, and no dividends are anticipated - The market price of AtriCure's common stock is likely to be volatile due to factors such as financial results, regulatory developments, competition, and market conditions[166](index=166&type=chunk) - Issuance of additional common stock to former nContact and SentreHEART stockholders for contingent consideration, or for future capital raising, could dilute existing ownership[170](index=170&type=chunk)[172](index=172&type=chunk) - Anti-takeover provisions in the company's certificate of incorporation and bylaws, and under Delaware law, could delay or prevent a change in control or management[173](index=173&type=chunk)[175](index=175&type=chunk) - AtriCure does not anticipate paying cash dividends in the foreseeable future, meaning stockholders must rely on stock appreciation for returns[176](index=176&type=chunk) - Failure to meet publicly announced guidance or expectations could cause a decline in stock price[178](index=178&type=chunk)[179](index=179&type=chunk) [ITEM 1B. UNRESOLVED STAFF COMMENTS](index=32&type=section&id=ITEM%201B.%20UNRESOLVED%20STAFF%20COMMENTS) No unresolved staff comments are reported - No unresolved staff comments to report[396](index=396&type=chunk) [ITEM 2. PROPERTIES](index=32&type=section&id=ITEM%202.%20PROPERTIES) AtriCure's main offices are in Mason, Ohio, with other key leased facilities in Minneapolis, Redwood City, and Amsterdam, deemed adequate for current and future needs - Principal executive offices are in Mason, Ohio, also used for warehousing and distribution (approx. **40,000 sq ft**)[183](index=183&type=chunk) - Other key leased locations include Minneapolis, Minnesota (administrative and product development, approx. **27,500 sq ft**) and Redwood City, California (LARIAT System product development, R&D, manufacturing, approx. **19,500 sq ft**)[183](index=183&type=chunk) - European subsidiaries' administration is located in Amsterdam, Netherlands[183](index=183&type=chunk) [ITEM 3. LEGAL PROCEEDINGS](index=32&type=section&id=ITEM%203.%20LEGAL%20PROCEEDINGS) AtriCure is not currently involved in material litigation but may encounter legal proceedings in the ordinary course of business, with further details in Note 12 - The Company is not party to any material pending or threatened litigation[184](index=184&type=chunk) - The Company may become a party to additional legal proceedings in the ordinary course of business[184](index=184&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=32&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This disclosure item is not applicable to AtriCure, Inc PART II [ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES](index=33&type=section&id=ITEM%205.%20MARKET%20FOR%20REGISTRANT%27S%20COMMON%20EQUITY%2C%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) AtriCure's common stock (ATRC) trades on NASDAQ, with a closing price of **$40.70** on February 20, 2020, and no dividends have been paid - AtriCure's common stock is traded on the NASDAQ Global Market under the symbol "**ATRC**"[186](index=186&type=chunk) - As of **February 20, 2020**, the closing price was **$40.70 per share**, with **91 stockholders of record**[186](index=186&type=chunk) - No dividends have been declared or paid on the common stock[187](index=187&type=chunk) [Common Stock Market Price](index=33&type=section&id=Common%20Stock%20Market%20Price) AtriCure's common stock (ATRC) is listed on NASDAQ, closing at **$40.70 per share** on February 20, 2020, with **91 stockholders of record** - Common stock trades on NASDAQ Global Market (**ATRC**)[186](index=186&type=chunk) - Closing price on **Feb 20, 2020**: **$40.70 per share**[186](index=186&type=chunk) - Stockholders of record: **91**[186](index=186&type=chunk) [Performance Graph](index=33&type=section&id=Performance%20Graph) The performance graph compares AtriCure's cumulative total stockholder return against NASDAQ indices, showing its stock grew to **$162.88** by December 31, 2019, with no dividends paid Cumulative Total Stockholder Return (Dec 31, 2014 = $100) | Index | 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | |:---|:---|:---|:---|:---|:---| | AtriCure, Inc. | $112.42 | $98.05 | $91.38 | $153.31 | $162.88 | | NASDAQ Composite | $106.96 | $116.45 | $150.96 | $146.67 | $200.49 | | NASDAQ Medical Equipment | $111.06 | $116.87 | $166.41 | $187.88 | $227.84 | - AtriCure's stock performance is historical and not indicative of future price performance[187](index=187&type=chunk) - No dividends have been declared or paid on AtriCure's common stock[187](index=187&type=chunk) [ITEM 6. SELECTED FINANCIAL DATA](index=34&type=section&id=ITEM%206.%20SELECTED%20FINANCIAL%20DATA) Selected financial data for the past five years highlights AtriCure's consistent revenue growth, ongoing net losses, and impacts from the SentreHEART acquisition and new accounting standards Selected Financial Data (in thousands, except per share amounts) | Operating Results | 2019 | 2018 | 2017 | 2016 | 2015 | |:---|:---|:---|:---|:---|:---| | Revenue | $230,807 | $201,630 | $174,716 | $155,109 | $129,755 | | Gross profit | $170,335 | $147,120 | $126,163 | $111,101 | $92,875 | | Gross margin | 73.8% | 73.0% | 72.2% | 71.6% | 71.6% | | Net loss | $(35,194) | $(21,137) | $(26,892) | $(33,338) | $(27,212) | | Basic and diluted net loss per share | $(0.94) | $(0.62) | $(0.83) | $(1.05) | $(0.97) | | Weighted average shares outstanding | 37,589 | 34,087 | 32,387 | 31,609 | 28,058 | | Financial Position | 2019 | 2018 | 2017 | 2016 | 2015 | |:---|:---|:---|:---|:---|:---| | Cash, cash equivalents and investments | $94,476 | $124,402 | $34,451 | $47,009 | $42,284 | | Working capital | $93,244 | $134,457 | $50,355 | $56,889 | $43,164 | | Total assets | $557,880 | $356,759 | $267,704 | $276,421 | $273,092 | | Long-term debt and leases | $74,204 | $47,743 | $36,861 | $37,205 | $13,710 | | Stockholders' equity | $247,343 | $249,381 | $161,166 | $168,442 | $186,685 | - Acquired SentreHEART for **$208.8 million** on **August 13, 2019**, impacting balance sheets from that date and results of operations from **August 14, 2019**[191](index=191&type=chunk) - Adopted FASB ASC 842 (Leases) on **January 1, 2019**, recording operating right-of-use assets and liabilities[191](index=191&type=chunk) - Adopted FASB ASC 606 (Revenue from Contracts with Customers) on **January 1, 2018**, with no material impact on revenue recognition[191](index=191&type=chunk) [ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=35&type=section&id=ITEM%207.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section analyzes AtriCure's financial condition and operations, detailing 2019 revenue growth, increased operating expenses, net losses, liquidity, capital resources, critical accounting policies, and recent accounting pronouncements - AtriCure is a leading innovator in treatments for atrial fibrillation (Afib) and left atrial appendage (LAA) management, with products for both open-heart and minimally invasive procedures[194](index=194&type=chunk) - In **2019**, the company acquired SentreHEART for approximately **$40 million upfront**, with up to **$260 million** in contingent consideration, expanding addressable markets and LAA management portfolio[195](index=195&type=chunk) - Net loss for fiscal year **2019** was **$35.2 million**, compared to **$21.1 million** in **2018**, primarily due to increased operating expenses[196](index=196&type=chunk) - Liquidity as of **December 31, 2019**, included **$94.5 million** in cash, cash equivalents, and investments, with **$60 million** in outstanding debt and **$8.75 million** in unused revolving credit facility capacity[206](index=206&type=chunk) [Overview](index=35&type=section&id=Overview) AtriCure, a market leader in Afib and LAA management, achieved **14.5% revenue growth** to **$230.8 million** in 2019, but net loss increased to **$35.2 million** due to higher operating expenses - AtriCure is a leading innovator in Afib and LAA management, with the Isolator Synergy System FDA-approved for persistent and long-standing persistent Afib in concomitant procedures[194](index=194&type=chunk) - Annual revenues for **2019** reached **$230.8 million**, a **14.5% increase** over the prior year, and over **200,000 AtriClip devices** have been sold to date[196](index=196&type=chunk) - The acquisition of SentreHEART in **August 2019** expanded addressable markets and LAA management portfolio, with aMAZE trial enrollment completed in **December 2019**[195](index=195&type=chunk) - Net loss for fiscal year **2019** was **$35.2 million**, up from **$21.1 million** in **2018**, primarily due to increased operating expenses from personnel, clinical trials, and product development[196](index=196&type=chunk)[197](index=197&type=chunk) [Results of Operations](index=36&type=section&id=Results%20of%20Operations) AtriCure's 2019 operations saw **14.5% revenue growth** to **$230.8 million** and improved gross margin, but net loss increased to **$35.2 million** due to higher R&D and SG&A expenses Consolidated Statements of Operations and Comprehensive Loss (in thousands) | Metric | 2019 Amount | % of Revenue | 2018 Amount | % of Revenue | |:---|:---|:---|:---|:---|\n| Revenue | $230,807 | 100.0% | $201,630 | 100.0% |\n| Cost of revenue | $60,472 | 26.2% | $54,510 | 27.0% |\n| Gross profit | $170,335 | 73.8% | $147,120 | 73.0% |\n| Research and development expenses | $41,230 | 17.9% | $34,723 | 17.2% |\n| Selling, general and administrative expenses | $162,227 | 70.3% | $129,524 | 64.2% |\n| Total operating expenses | $203,457 | 88.2% | $164,247 | 81.5% |\n| Loss from operations | $(33,122) | (14.4)% | $(17,127) | (8.5)% |\n| Net loss | $(35,194) | (15.2)% | $(21,137) | (10.5)% | - Total revenue increased **14.5%** (**15.2%** on a constant currency basis) in **2019**, with U.S. revenue up **14.6%** and international revenue up **13.9%** (**17.6%** constant currency)[198](index=198&type=chunk) - Open ablation sales increased **11.0%** (**$7,955 thousand**), driven by CryoSPHERE launch and cardiac ablation device volume. Appendage management sales increased **28.9%** (**$15,275 thousand**) due to AtriClip Flex·V and LARIAT System growth[198](index=198&type=chunk) - Research and development expenses increased **$6,507 thousand** (**18.7%**) due to personnel costs (**$2,015 thousand**), aMAZE clinical trial expenses (**$1,059 thousand**), and other development costs[201](index=201&type=chunk) - Selling, general and administrative expenses increased **$32,703 thousand** (**25.2%**) due to higher personnel expense (**$14,902 thousand**), acquisition-related expenses (**$3,978 thousand**), and lower contingent consideration liability reduction (**$5,909 thousand**)[202](index=202&type=chunk) [Year Ended December 31, 2019 compared to December 31, 2018](index=36&type=section&id=Year%20Ended%20December%2031%2C%202019%20compared%20to%20December%2031%2C%202018) In 2019, AtriCure's revenue grew **14.5%** to **$230.8 million**, but net loss widened to **$35.2 million** due to increased R&D (**18.7%**) and SG&A (**25.2%**) expenses, despite lower net interest expense Key Financial Performance (2019 vs. 2018) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change ($) | Change (%) | |:---|:---|:---|:---|:---|\n| Revenue | $230,807 | $201,630 | $29,177 | 14.5% |\n| Gross profit | $170,335 | $147,120 | $23,215 | 15.8% |\n| Gross margin | 73.8% | 73.0% | 0.8% pts | - |\n| Net loss | $(35,194) | $(21,137) | $(14,057) | 66.5% |\n| R&D expenses | $41,230 | $34,723 | $6,507 | 18.7% |\n| SG&A expenses | $162,227 | $129,524 | $32,703 | 25.2% |\n| Net interest expense | $1,713 | $3,601 | $(1,888) | (52.4)% | - U.S. open ablation sales increased by **$7,955 thousand** (**11.0%**), driven by the CryoSPHERE device launch and increased cardiac ablation device volumes[198](index=198&type=chunk) - Appendage management sales increased by **$15,275 thousand** (**28.9%**), attributed to the AtriClip Flex·V LAA Exclusion System and LARIAT System sales[198](index=198&type=chunk) - R&D expense increase included **$2,015 thousand** in personnel costs and **$1,059 thousand** in clinical trial expenses, primarily for the aMAZE trial[201](index=201&type=chunk) - SG&A expense increase included **$14,902 thousand** in personnel costs, **$3,978 thousand** in acquisition-related expenses, and a **$5,909 thousand** lower reduction from contingent consideration liability compared to the prior year[202](index=202&type=chunk) [Year Ended December 31, 2018 compared to December 31, 2017](index=37&type=section&id=Year%20Ended%20December%2031%2C%202018%20compared%20to%20December%2031%2C%202017) Detailed financial comparison for 2018 versus 2017 is available in the company's Form 10-K for the fiscal year ended December 31, 2018 - Comparison of **2018** to **2017** results is available in the annual report on Form 10-K for the fiscal year ended **December 31, 2018**[205](index=205&type=chunk) [Liquidity and Capital Resources](index=37&type=section&id=Liquidity%20and%20Capital%20Resources) As of December 31, 2019, AtriCure held **$94.5 million** in cash and investments, with **$60 million** debt, and used **$15.8 million** in operating cash, believing current resources are sufficient for 12 months but future capital needs are uncertain Liquidity and Capital Resources (as of December 31, 2019, in thousands) | Metric | Amount | |:---|:---|\n| Cash, cash equivalents and investments | $94,476 |\n| Outstanding debt | $60,000 |\n| Unused revolving credit facility | $8,750 |\n| Net working capital | $93,244 |\n| Accumulated deficit | $282,197 | - Net cash used in operating activities was **$15,811 thousand** in **2019**, driven by net loss (**$35,194 thousand**) and changes in operating assets and liabilities, partially offset by non-cash expenses[207](index=207&type=chunk) - Net cash used in investing activities was **$2,147 thousand** in **2019**, primarily for the SentreHEART acquisition (**$17,240 thousand**) and property/equipment purchases (**$12,182 thousand**), offset by net sales/maturities of available-for-sale securities (**$27,236 thousand**)[207](index=207&type=chunk) - Net cash provided by financing activities was **$14,373 thousand** in **2019**, mainly from debt borrowings (**$20,000 thousand**) and stock issuances, partially offset by share repurchases for taxes[208](index=208&type=chunk) - The company's Loan and Security Agreement with Silicon Valley Bank provides a **$60,000 thousand** term loan and a **$20,000 thousand** revolving line of credit, maturing **August 1, 2024**, with compliance to covenants as of **December 31, 2019**[209](index=209&type=chunk)[210](index=210&type=chunk) - Future capital requirements are uncertain and depend on market acceptance, R&D, sales expansion, regulatory costs, acquisitions, and intellectual property enforcement[212](index=212&type=chunk) [Contractual Obligations and Commitments](index=39&type=section&id=Contractual%20Obligations%20and%20Commitments) As of December 31, 2019, AtriCure's contractual obligations totaled **$86.2 million**, including **$60.0 million** in long-term debt and significant contingent consideration from acquisitions, with nContact's expiring by **December 31, 2020** Contractual Obligations and Commitments (as of December 31, 2019, in thousands) | Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |:---|:---|:---|:---|:---|:---|\n| Long-term debt | $60,000 | $0 | $32,195 | $27,805 | $0 |\n| Finance leases | $17,937 | $1,597 | $3,225 | $3,316 | $9,799 |\n| Operating leases | $4,688 | $1,465 | $2,515 | $708 | $0 |\n| Royalty obligations | $2,895 | $2,895 | $0 | $0 | $0 |\n| Restricted grants | $726 | $726 | $0 | $0 | $0 |\n| **Total contractual obligations** | **$86,246** | **$6,683** | **$37,935** | **$31,829** | **$9,799** | - Contingent consideration payments related to nContact and SentreHEART acquisitions are payable in common stock and cash, with nContact's expiring **December 31, 2020**, and SentreHEART's by **December 31, 2026**[216](index=216&type=chunk) [Off-Balance-Sheet Arrangements](index=39&type=section&id=Off-Balance-Sheet%20Arrangements) AtriCure has no off-balance-sheet arrangements with a material current or future effect on its financial condition, operations, liquidity, or capital resources - The company has no off-balance-sheet arrangements with a material effect on its financial condition or results[217](index=217&type=chunk) [Inflation](index=39&type=section&id=Inflation) Inflation has not significantly impacted AtriCure's historical operations and is not expected to materially affect future results or financial condition - Inflation has not had a significant impact on historical operations and is not expected to in the foreseeable future[218](index=218&type=chunk) [Critical Accounting Policies and Estimates](index=39&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) AtriCure's financial statements rely on critical accounting policies and estimates, including revenue recognition, inventory valuation, IPR&D, goodwill, share-based compensation, contingent consideration, and income taxes, all requiring significant management judgment - Revenue recognition involves significant judgments on timing of control transfer and estimation of sales returns[221](index=221&type=chunk)[224](index=224&type=chunk)[225](index=225&type=chunk) - Inventories are stated at the lower of cost or net realizable value, with reserves for excess, expired, and obsolete inventory impacted by product development and regulatory approvals[227](index=227&type=chunk) - IPR&D (In Process Research and Development) is an indefinite-lived intangible asset, valued based on technological feasibility (regulatory approvals) and tested for impairment annually[229](index=229&type=chunk) - Acquisition-related contingent consideration liabilities are measured at fair value using unobservable inputs and the probability-weighted scenario method, with key assumptions including probability and timing of milestone achievement[235](index=235&type=chunk) - Income taxes involve deferred tax assets and liabilities, with a full valuation allowance recorded against substantially all net deferred tax assets due to uncertainty of realization[236](index=236&type=chunk)[237](index=237&type=chunk) [Recent Accounting Pronouncements](index=41&type=section&id=Recent%20Accounting%20Pronouncements) AtriCure has adopted or will adopt several new accounting standards, including ASU 2016-13 (Credit Losses) and ASU 2017-04 (Goodwill Impairment) in 2020, with no material financial statement impact expected - ASU 2016-13 (Credit Losses) is effective in **2020**, expected to increase disclosures but not materially impact financial statements[297](index=297&type=chunk) - ASU 2017-04 (Goodwill Impairment) is effective in **2020**, simplifying impairment measurement with no expected material impact[298](index=298&type=chunk) - ASU 2018-13 (Fair Value Measurement Disclosures) was early adopted as of **December 31, 2019**[299](index=299&type=chunk) - ASU 2018-15 (Cloud Computing Implementation Costs) was adopted prospectively in **2019**, deferring eligible costs[300](index=300&type=chunk) - ASU 2019-12 (Income Taxes) was early adopted in **2019** with no impact on prior periods[301](index=301&type=chunk) [ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=42&type=section&id=ITEM%207A.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) AtriCure faces market risks from foreign exchange fluctuations (Euro, British Pound) and variable interest rates, with unhedged currency exposure and credit risk from cash balances exceeding FDIC limits - AtriCure is exposed to market risks from foreign exchange fluctuations (primarily Euro and British Pound) and changes in interest rates[241](index=241&type=chunk)[242](index=242&type=chunk) - Products sold by AtriCure Europe, B.V. accounted for **11.7% of total revenue** in **2019**, exposing the company to exchange rate volatility[242](index=242&type=chunk) - The company does not currently hedge its exposure to foreign currency fluctuations[242](index=242&type=chunk) - Interest on the term loan and revolving credit facility accrues at a variable rate based on the Prime Rate[241](index=241&type=chunk) - Cash and cash equivalents balances exceeding FDIC insured limits (**$28,096 thousand** as of **December 31, 2019**) expose the company to credit risk[244](index=244&type=chunk) [ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA](index=43&type=section&id=ITEM%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) This section provides AtriCure's audited consolidated financial statements for 2017-2019, including the independent auditor's report and critical audit matters regarding contingent consideration and IPR&D valuation from the SentreHEART merger - Includes audited consolidated financial statements: Balance Sheets, Statements of Operations and Comprehensive Loss

Financial Data and Key Metrics Changes - For the full year 2019, worldwide revenue was $230.8 million, an increase of 14.5% on a GAAP basis and 15.2% on a constant currency basis [25] - Fourth quarter revenue was $61.3 million, representing growth of 15.9% on a GAAP basis and 16.4% on a constant currency basis compared to Q4 2018 [19] - Gross margin was 73% for Q4 2019, consistent with Q4 2018, while full year gross margin was 73.8%, up from 73% in 2018 [21][26] - The adjusted EBITDA loss for 2019 was $6.7 million compared to $2.7 million in 2018, with a net loss per share of $0.94 for 2019 compared to $0.62 for 2018 [27] Business Line Data and Key Metrics Changes - U.S. sales of appendage management products grew 28.9% to $68.2 million, driven by strong performance of the AtriClip Flex V LAA exclusion system [25] - U.S. open ablation revenue increased 11% to $80.2 million, with growth led by the cryoSPHERE probe [25] - U.S. sales of minimally invasive ablation products were down 5% to $9 million, indicating continued volatility in this business [19] Market Data and Key Metrics Changes - International revenue totaled $45 million for the full year 2019, growing 13.9% on a GAAP basis and 17.6% on a constant currency basis [26] - Strong growth was noted in Asia, particularly in Japan and China, as well as in European markets, notably the UK, Germany, and France [20][26] - The appendage management business saw significant international growth, particularly with the V clip products being available in Europe after securing CE mark in late 2019 [14] Company Strategy and Development Direction - The company aims for another year of double-digit revenue growth in 2020, with revenue guidance in the range of $254 million to $261 million [9][28] - Focus on clinical trials such as CONVERGE and aMAZE to address under-penetrated patient populations, representing a market opportunity of over $1 billion [10] - The company is building a strong sales force and clinical education team to support the expansion of its minimally invasive and appendage management products [39] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the growth potential of the minimally invasive surgery (MIS) market, projecting it as a multibillion-dollar opportunity [36] - The company anticipates that the approval of the CONVERGE trial will significantly accelerate growth in the coming years [38] - Management highlighted the importance of training and collaboration with surgeons to ensure successful adoption of new technologies [63] Other Important Information - The company has invested heavily in clinical trials and training programs, having trained over 3,000 healthcare professionals globally [8] - The adjusted loss per share for 2020 is expected to be between $1.14 to $1.24, with a GAAP reported loss per share expected to be between $1.40 to $1.55 [30] Q&A Session Summary Question: Future of the MIS business and revenue growth post-CONVERGE - Management views the MIS market as a multibillion-dollar opportunity, with expectations of significant growth following FDA approval [36][37] Question: Insights on the appendage management business - The appendage management market is expected to grow significantly, with the acquisition of SentreHEART enhancing growth potential [41][42] Question: Guidance for 2020 and factors influencing it - The guidance of 10% to 13% growth reflects a conservative approach to ensure the company can meet expectations [66][68] Question: Impact of TAVR on open heart business - Management does not see any significant impact from TAVR on the open heart business, as the market remains under-penetrated [78] Question: Timing and confidence regarding CONVERGE approval - The company submitted data to the FDA in December 2019 and anticipates feedback in April 2020, with potential panel discussions in mid-2020 [59][61]

AtriCure Inc (NASDAQ:ATRC) Q3 2019 Earnings Conference Call October 30, 2019 4:30 PM ET Company Participants Lynn Lewis - Gilmartin Group Mike Carrel - President and Chief Executive Officer Andrew Wade - Senior Vice President and Chief Financial Officer Conference Call Participants Robbie Marcus - JP Morgan David Saxon - Needham Danielle Antalffy - SVB Leerink Adam Gunther - Piper Jaffray Cecilia Furlong - Canaccord Genuity Andrew Ranieri - Stifel Nicolaus Operator Good afternoon and welcome to AtriCure's ...