AtriCure(ATRC) - 2019 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for the periods ended March 31, 2019 and 2018 Condensed Consolidated Balance Sheets Total assets and stockholders' equity decreased from December 31, 2018, to March 31, 2019, primarily due to reductions in cash and investments | Metric | March 31, 2019 (in $ thousands) | December 31, 2018 (in $ thousands) | | :---------------------- | :---------------------------- | :------------------------------- | | Total Assets | $338,360 | $356,759 | | Total Current Assets | $155,019 | $174,673 | | Cash and Cash Equivalents | $20,720 | $32,231 | | Short-term Investments | $79,910 | $92,171 | | Total Liabilities | $99,068 | $107,378 | | Total Stockholders' Equity | $239,292 | $249,381 | Condensed Consolidated Statements of Operations and Comprehensive Loss Net loss significantly decreased for the three months ended March 31, 2019, driven by increased revenue and improved gross profit | Metric (in $ thousands, except per share) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Revenue | $53,966 | $46,994 | | Cost of Revenue | $14,095 | $12,491 | | Gross Profit | $39,871 | $34,503 | | Operating Expenses | $45,191 | $43,933 | | Loss from Operations | $(5,320) | $(9,430) | | Net Loss | $(5,635) | $(10,134) | | Basic and Diluted Net Loss Per Share | $(0.15) | $(0.31) | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased from December 31, 2018, to March 31, 2019, primarily due to net loss and equity incentive plan impacts | Metric (in $ thousands) | December 31, 2018 | March 31, 2019 | | :------------------------------------ | :---------------- | :------------- | | Total Stockholders' Equity (Beginning) | $249,381 | $249,381 | | Issuance of common stock under equity incentive plans | N/A | $(8,521) | | Share-based employee compensation expense | N/A | $4,154 | | Other comprehensive loss | N/A | $(87) | | Net loss | N/A | $(5,635) | | Total Stockholders' Equity (Ending) | N/A | $239,292 | Condensed Consolidated Statements of Cash Flows Net cash and cash equivalents decreased for the three months ended March 31, 2019, driven by operating and financing activities | Metric (in $ thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(13,438) | $(9,434) | | Net cash provided by (used in) investing activities | $11,017 | $(4,245) | | Net cash (used in) provided by financing activities | $(8,970) | $13,063 | | Net decrease in cash and cash equivalents | $(11,511) | $(580) | | Cash and cash equivalents—end of period | $20,720 | $21,229 | Notes to Condensed Consolidated Financial Statements Notes detail business, accounting policies, fair value, intangible assets, liabilities, leases, revenue, income tax, equity plans, and segment information 1. Description of Business and Summary of Significant Accounting Policies AtriCure, Inc. is a global leader in Afib and LAA management, with this section detailing its business and key accounting policies - AtriCure, Inc. is a leading innovator in treatments for atrial fibrillation (Afib) and left atrial appendage (LAA) management, selling products to medical centers globally through its direct sales force and distributors[16] - The company recognizes revenue when control of promised goods is transferred to customers, generally upon shipment. Inventories are stated at the lower of cost or net realizable value using the FIFO method, with reserves for excess, slow-moving, and obsolete inventory[20][23] - Share-based compensation expense was $4,154 thousand for the three months ended March 31, 2019, an increase from $3,890 thousand in the prior year period[41] Inventory Components | Inventory Component | March 31, 2019 (in $ thousands) | | :------------------ | :---------------------------- | | Raw materials | $9,988 | | Work in process | $2,026 | | Finished goods | $12,108 | | Total Inventories | $24,122 | 2. Recent Accounting Pronouncements The company adopted ASU 2016-02 (Leases) and is evaluating other recent ASUs on goodwill impairment, fair value, and cloud computing costs - The company adopted ASU 2016-02, 'Leases,' on January 1, 2019, recording operating right-of-use assets of approximately $1,884 thousand and operating lease liabilities of approximately $2,189 thousand[45][46] - The company is evaluating the provisions of ASU 2017-04 (Goodwill Impairment), ASU 2018-13 (Fair Value Measurement Disclosure), and ASU 2018-15 (Cloud Computing Arrangement Implementation Costs) to determine their impact on its consolidated financial statements and disclosures[47][48][49] 3. Fair Value Financial assets and liabilities are classified within a three-level fair value hierarchy, with total assets at $89,136 thousand and Level 3 liabilities at $17,106 thousand Financial Assets | Financial Assets (in $ thousands) | Level 1 | Level 2 | Level 3 | Total | | :------------------------------ | :------ | :------ | :------ | :---- | | Money market funds | — | $9,226 | — | $9,226 | | Commercial paper | — | $35,497 | — | $35,497 | | U.S. government agencies and securities | $5,473 | — | — | $5,473 | | Corporate bonds | — | $25,626 | — | $25,626 | | Asset-backed securities | — | $13,314 | — | $13,314 | | Total Assets | $5,473| $83,663| — | $89,136| Financial Liabilities | Financial Liabilities (in $ thousands) | Level 1 | Level 2 | Level 3 | Total | | :----------------------------------- | :------ | :------ | :------ | :---- | | Acquisition-related contingent consideration | — | — | $17,106 | $17,106 | - The acquisition-related contingent consideration liability decreased by $1,667 thousand during the three months ended March 31, 2019, primarily due to a decrease in forecasted revenue for the 2019 commercial milestone[56][58] 4. Intangible Assets Intangible assets, including IPR&D, totaled $56,271 thousand as of March 31, 2019, with amortization expense of $484 thousand for the quarter Intangible Assets Summary | Intangible Asset | Estimated Useful Life | Cost (March 31, 2019, in $ thousands) | Accumulated Amortization (March 31, 2019, in $ thousands) | | :------------------------------ | :-------------------- | :-------------------- | :---------------------------------------- | | Fusion technology | 8 years | $9,242 | $5,136 | | Clamp & probe technology | 3 years | $829 | $829 | | SUBTLE access technology | 5 years | $2,179 | $1,536 | | IPR&D | Indefinite | $44,021 | — | | Total | | $56,271 | $7,501 | - Amortization expense for intangible assets with definite lives was $484 thousand for the three months ended March 31, 2019, compared to $342 thousand for the same period in 2018[59] 5. Accrued Liabilities Total accrued liabilities decreased to $17,051 thousand as of March 31, 2019, driven by reductions in commissions and bonuses Accrued Liabilities Summary | Accrued Liability (in $ thousands) | March 31, 2019 | December 31, 2018 | | :------------------------------- | :------------- | :---------------- | | Accrued payroll and employee-related expenses | $5,683 | $4,512 | | Accrued commissions | $5,032 | $8,065 | | Accrued bonus | $2,480 | $9,100 | | Sales returns and allowances | $1,438 | $1,410 | | Accrued royalties | $687 | $662 | | Accrued taxes and value-added taxes payable | $870 | $886 | | Other accrued liabilities | $861 | $1,205 | | Total | $17,051 | $25,840 | 6. Indebtedness The company has a $40,000 thousand term loan and a $20,000 thousand revolving credit facility with Silicon Valley Bank, maturing in February 2023 - The company has a Loan and Security Agreement with Silicon Valley Bank, comprising a $40,000 thousand term loan and a $20,000 thousand revolving line of credit, both maturing in February 2023[62] - As of March 31, 2019, the company had no borrowings under the revolving credit facility and maintained $20,000 thousand in borrowing availability[64] Future Maturities of Long-Term Debt | Year | Future Maturities of Long-Term Debt (in $ thousands) | | :--- | :----------------------------------------------- | | 2019 | $3,809 | | 2020 | $11,429 | | 2021 | $11,429 | | 2022 | $11,429 | | 2023 | $1,904 | | Total | $40,000 | 7. Leases Adoption of ASU 2018-11 led to recognition of operating right-of-use assets and liabilities, with total lease expenses of $630 thousand for the quarter - The company adopted ASU 2018-11 on January 1, 2019, resulting in the recognition of operating right-of-use assets of approximately $1,884 thousand and operating lease liabilities of approximately $2,189 thousand[66] Lease Expense Components | Lease Expense Component (in $ thousands) | Three Months Ended March 31, 2019 | | :------------------------------------- | :-------------------------------- | | Operating lease cost | $159 | | Finance lease cost: | | | Amortization of right-of-use assets | $250 | | Interest on lease liabilities | $221 | | Total finance lease cost | $471 | Lease Type Balances | Lease Type (in $ thousands) | March 31, 2019 | | :------------------------ | :------------- | | Operating lease right-of-use assets | $1,778 | | Total operating lease liabilities | $2,068 | | Finance lease property and equipment, net | $11,015 | | Total finance lease liabilities | $12,646 | 8. Commitments and Contingencies Royalty expense was $709 thousand for the quarter, while the company faces a USDOJ investigation and disputes nContact earnout payments - Royalty expense was $709 thousand for the three months ended March 31, 2019, compared to $672 thousand for the same period in 2018, under agreements with terms of 3% to 5% of specified product sales[73] - The company is cooperating with a USDOJ investigation under the False Claims Act concerning the promotion of certain medical devices for off-label use and potentially false claims to federal and state health care programs[76] - The company has received and disputes 'earnout objection statements' from former nContact Surgical, Inc. stockholders regarding the calculation of commercial milestone payments under the merger agreement[77] 9. Revenue Revenue from disposable surgical devices is recognized upon transfer of control, with sales through direct force and distributors, and no material impact from ASC 606 - Revenue is primarily generated from the sale of disposable surgical devices, with recognition occurring when control of promised devices is transferred to customers, generally upon shipment or delivery[79][81] - Products are sold through a direct sales force in the United States and certain international markets, and through distributors in other international markets[82] - The adoption of FASB ASC 606, 'Revenue from Contracts with Customers,' effective January 1, 2018, did not have a material impact on the amount and timing of revenue recognized[78] 10. Income Tax Provision The effective tax rate was (1.19%) for the quarter, with a full valuation allowance against deferred income tax assets Effective Tax Rate | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------- | :-------------------------------- | :-------------------------------- | | Effective Tax Rate | (1.19%) | (0.47%) | - The company has recorded a full valuation allowance against substantially all net deferred income tax assets, indicating that it is more-likely-than-not that the benefit of these assets will not be recognized in future periods[36] 11. Equity Compensation Plans The company operates the 2014 Stock Incentive Plan and 2018 ESPP, with share-based compensation expense of $4,154 thousand for the quarter - The company has two share-based incentive plans: the 2014 Stock Incentive Plan and the 2018 Employee Stock Purchase Plan (ESPP)[90] - Performance Share Awards (PSAs) under the 2014 Plan vest based on the company achieving specified performance measurements, including revenue CAGR, over a three-year performance period[92][93] - The ESPP allows eligible employees to purchase common stock at a 15% discount. Share-based compensation expense was $4,154 thousand for the three months ended March 31, 2019, compared to $3,890 thousand in the prior year[95][96] 12. Segment and Geographic Information Operating as a single segment, total revenue increased by 14.8% to $53,966 thousand, driven by U.S. and international growth - 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[98] Revenue by Geographic Area | Geographic Area (in $ thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | YoY Change (%) | | :----------------------------- | :-------------------------------- | :-------------------------------- | :------------- | | United States | $43,004 | $38,436 | 11.9% | | International | $10,962 | $8,558 | 28.1% | | Total Revenue | $53,966 | $46,994 | 14.8% | U.S. Revenue by Product Type | U.S. Revenue by Product Type (in $ thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Open-heart ablation | $18,996 | $17,579 | | Minimally invasive ablation | $7,762 | $8,613 | | Appendage management | $15,670 | $11,797 | | Valve tools | $576 | $447 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, condition, and operations, including business overview, recent developments, liquidity, and critical accounting policies Overview AtriCure leads the market in surgical Afib treatment and LAA management, selling FDA-approved products globally through direct sales and distributors - AtriCure is a leading innovator and market leader in treatments for atrial fibrillation (Afib) and left atrial appendage (LAA) management, with products like the Isolator® Synergy™ Ablation System (FDA approved for persistent Afib) and AtriClip® Left Atrial Appendage Exclusion System[105][106] - 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[107] Recent Developments Recent developments include the launch of the cryoICE® cryoSPHERE™ probe and progress in key clinical trials like CONVERGE and ICE-AFIB - In February 2019, AtriCure launched the cryoICE® cryoSPHERE™ probe in the United States, designed for temporarily ablating peripheral nerves to block pain, demonstrating commitment to innovation in Cryo Nerve Block Therapy (cryoNB)[109] - The CONVERGE IDE clinical trial, evaluating the EPi-Sense Guided Coagulation System for symptomatic persistent Afib, completed enrollment in August 2018[110] - Enrollment began in February 2019 for the ICE-AFIB clinical trial, which studies the safety and efficacy of the cryoICE system for persistent and long-standing persistent Afib treatment during concomitant on-pump cardiac surgery[115] Results of Operations Revenue increased by 14.8% to $53,966 thousand, gross margin improved to 73.9%, and net loss decreased to $(5,635) thousand for the quarter Financial Performance | Metric (in $ thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | YoY Change (%) | | :-------------------- | :-------------------------------- | :-------------------------------- | :------------- | | Revenue | $53,966 | $46,994 | 14.8% | | Gross Profit | $39,871 | $34,503 | 15.6% | | Gross Margin | 73.9% | 73.4% | +0.5 pp | | R&D Expenses | $8,176 | $9,057 | -9.7% | | SG&A Expenses | $37,015 | $34,876 | 6.1% | | Net Loss | $(5,635) | $(10,134) | -44.4% | - U.S. revenue increased by 11.9%, with ablation-related open-heart sales up 8.1% and appendage management sales significantly increasing due to the AtriClip FLEX-V and PRO-V LAA Exclusion Systems. International revenue grew 28.1% (34.4% constant currency), primarily in China, the UK, Germany, and France[116] - Research and development expenses decreased by $881 thousand due to the timing of product development activities and a reduction in clinical trial expense, partially offset by increased headcount[119] - Selling, general and administrative expenses increased by $2,139 thousand, primarily due to higher personnel and related expenses, partially offset by a $1,667 thousand reduction in the contingent consideration liability[120] Liquidity and Capital Resources The company held $100,630 thousand in cash and investments, with $40,000 thousand debt, anticipating sufficient liquidity for the next twelve months Liquidity Metrics | Metric (in $ thousands) | March 31, 2019 | | :-------------------- | :------------- | | Cash, cash equivalents and investments | $100,630 | | Outstanding debt | $40,000 | | Unused revolving credit facility | $20,000 | | Net working capital | $119,554 | | Accumulated deficit | $(252,638) | - Net cash used in operating activities was $13,438 thousand, primarily due to net loss, payment of variable compensation, and increases in inventories, other current assets, and accounts receivable[124] - Net cash provided by investing activities was $11,017 thousand, mainly from maturities of available-for-sale securities, partially offset by purchases of property and equipment and new securities[125] - Net cash used in financing activities was $8,970 thousand, primarily for shares repurchased for payment of taxes on stock awards, finance lease payments, and debt fees[126] - The company believes its current cash, cash equivalents, investments, and revolving line of credit will be sufficient to meet anticipated cash needs for at least the next twelve months[131] Seasonality Revenue typically declines in the third quarter due to the elective nature of certain procedures during summer months - The company typically experiences a moderate decline in revenue during the third quarter, primarily due to the elective nature of certain procedures and fewer people choosing to undergo them during the summer months[134] Critical Accounting Policies and Estimates Financial statements prepared under GAAP require management estimates and judgments for sales returns, receivables, inventories, intangible assets, and contingent liabilities - The preparation of financial statements requires management to make estimates and judgments that affect reported amounts, including those related to sales returns and allowances, accounts receivable, inventories, intangible assets (including goodwill), contingent liabilities, and share-based compensation[135] Recent Accounting Pronouncements Refer to Note 2 in the Condensed Consolidated Financial Statements for recent accounting pronouncements and their potential impact - For a discussion of recent accounting pronouncements, refer to Note 2 in the Notes to the Condensed Consolidated Financial Statements[136] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to market risk disclosures were reported as of March 31, 2019, compared to the prior annual report - As of March 31, 2019, there were no material changes to the information provided under Item 7A, 'Quantitative and Qualitative Disclosures About Market Risk' in the Company's Form 10-K for the year ended December 31, 2018[137] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of March 31, 2019, with no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2019, ensuring timely and accurate financial reporting - Management concluded that, as of March 31, 2019, the company's disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed is recorded, processed, summarized, and reported within specified time periods[138] - The report acknowledges that control systems have inherent limitations and can only provide reasonable, not absolute, assurance that control objectives are met[139][140] Changes in Internal Control Over Financial Reporting No material changes in internal control over financial reporting occurred during the three months ended March 31, 2019 - No material changes in internal control over financial reporting occurred during the three months ended March 31, 2019[141] PART II. OTHER INFORMATION Item 1. Legal Proceedings Legal proceedings, including a USDOJ investigation and nContact earnout dispute, are incorporated by reference from Note 8 - Information regarding legal proceedings is incorporated by reference from Note 8 – Commitments and Contingencies to the Condensed Consolidated Financial Statements[142] Item 1A. Risk Factors No material changes to risk factors were reported compared to the Annual Report on Form 10-K for the year ended December 31, 2018 - There have been no material changes with respect to the risk factors disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018[143] Item 6. Exhibits This section lists exhibits filed with Form 10-Q, including Sarbanes-Oxley certifications and XBRL documents - Exhibits include Rule 13a-14(a) Certifications of Principal Executive Officer and Principal Accounting and Financial Officer, Certification pursuant to 18 U.S.C. Section 1350, and various XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase Documents)[145] Signatures The report was signed on April 26, 2019, by Michael H. Carrel, President and CEO, and M. Andrew Wade, SVP and CFO - The report was signed by Michael H. Carrel, President and Chief Executive Officer, and M. Andrew Wade, Senior Vice President and Chief Financial Officer, on April 26, 2019[148]