AtriCure(ATRC) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Unaudited financial statements reflect significant asset growth from the SentreHEART acquisition, increased revenue, and a wider net loss due to higher operating expenses Condensed Consolidated Balance Sheets Balance sheets show significant asset and liability growth by September 30, 2019, primarily due to the SentreHEART acquisition Balance Sheet Highlights (In Thousands) | Balance Sheet Highlights (In Thousands) | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Assets | $560,756 | $356,759 | | Goodwill | $236,316 | $105,257 | | Intangible assets, net | $130,370 | $49,254 | | Total Liabilities | $302,535 | $107,378 | | Other noncurrent liabilities | $183,998 | $19,419 | | Total Stockholders' Equity | $258,221 | $249,381 | Condensed Consolidated Statements of Operations and Comprehensive Loss Q3 2019 saw revenue growth but a wider net loss due to increased operating expenses, despite higher gross profit Income Statement (In Thousands) | Income Statement (In Thousands) | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $56,614 | $49,941 | $169,486 | $148,737 | | Gross Profit | $41,797 | $35,948 | $125,561 | $108,530 | | Loss from Operations | ($8,637) | ($6,048) | ($17,796) | ($14,520) | | Net Loss | ($9,362) | ($7,235) | ($19,098) | ($17,707) | | Basic and Diluted Net Loss Per Share | ($0.25) | ($0.22) | ($0.51) | ($0.53) | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased by September 30, 2019, driven by stock issuances for acquisition and compensation, partially offset by net loss - For the nine months ended September 30, 2019, total stockholders' equity increased by $8.8 million, reflecting stock issuances for the SentreHEART acquisition and employee compensation plans, offset by the net loss[14] - The company issued 699 thousand shares of common stock valued at approximately $22.0 million as part of the SentreHEART acquisition during the third quarter of 2019[11][14] Condensed Consolidated Statements of Cash Flows Cash flows show increased cash usage in operations, with investing activities impacted by the SentreHEART acquisition, and liquidity supported by new debt Cash Flow Summary (In Thousands) | Cash Flow Summary (In Thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | ($12,282) | ($5,156) | | Net cash provided by (used in) investing activities | $454 | ($14,578) | | Net cash provided by financing activities | $13,019 | $16,047 | | Net increase (decrease) in cash | $951 | ($3,810) | - The SentreHEART business combination involved a cash payment of $18.0 million, which was a primary use of cash in investing activities[16] Notes to Condensed Consolidated Financial Statements Notes detail the SentreHEART acquisition's financial impact, ongoing legal matters, and revenue breakdown by geography and product type - On August 13, 2019, the company acquired SentreHEART, Inc. for a total purchase price of $210.5 million, consisting of $17.3 million in cash, $22.0 million in stock, and a preliminary fair value of $171.3 million for contingent consideration liabilities[62][67] - The SentreHEART acquisition added $131.1 million to goodwill and $82.6 million to intangible assets, primarily consisting of In-Process Research and Development (IPR&D) related to the aMAZE IDE clinical trial[68][69][70] - The company is under investigation by the U.S. Department of Justice for potential violations of the False Claims Act related to off-label promotion and medically unnecessary services from January 2010 to December 2017[94] YTD 2019 Revenue by Geography (In Thousands) | YTD 2019 Revenue by Geography (In Thousands) | Amount | % of Total | | :--- | :--- | :--- | | United States | $136,292 | 80.4% | | International | $33,194 | 19.6% | | Total Revenue | $169,486 | 100.0% | YTD 2019 U.S. Revenue by Product (In Thousands) | YTD 2019 U.S. Revenue by Product (In Thousands) | Amount | % of U.S. Total | | :--- | :--- | :--- | | Open ablation | $59,311 | 43.5% | | Appendage management | $49,075 | 36.0% | | Minimally invasive ablation | $25,860 | 19.0% | | Valve tools | $2,046 | 1.5% | | Total U.S. Revenue | $136,292 | 100.0% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 revenue growth driven by U.S. market strength, the strategic SentreHEART acquisition, increased net loss from higher operating expenses, and sufficient liquidity Overview and Recent Developments AtriCure's recent developments include the SentreHEART acquisition, expanded FDA clearances for AtriClip, new product launches, and ongoing clinical trials - Acquired SentreHEART in August 2019, a developer of percutaneous LAA management solutions, for approximately $40 million upfront in cash and stock, plus up to $260 million in contingent milestone payments[123] - Received FDA 510(k) clearance for expanded labeling claims for AtriClip devices, including changing the indication from 'occlusion' to 'exclusion' and adding 'electrical isolation'[124] - The company is conducting multiple clinical trials, including the CONVERGE trial (enrollment completed) and the aMAZE trial (enrollment ongoing), to support expanded indications for its products[126][127] Results of Operations Q3 2019 revenue grew significantly, particularly in U.S. appendage management, with improved gross margin but higher operating expenses due to acquisition costs and R&D Q3 2019 vs Q3 2018 Revenue Growth | Q3 2019 vs Q3 2018 Revenue Growth | Growth Rate | | :--- | :--- | | Total Revenue | 13.4% | | U.S. Revenue | 16.0% | | International Revenue | 3.1% | | U.S. Appendage Management Sales | 25.4% | | U.S. Minimally Invasive Ablation Sales | 14.3% | - Gross margin improved by 1.8 percentage points, primarily due to a decrease in share-based compensation within cost of revenue, favorable product/geographic mix, and improved operating costs[136] - Selling, general and administrative expenses increased by $6.8 million (20.5%), primarily due to $4.0 million in higher headcount costs and $2.8 million in costs related to the SentreHEART acquisition[138] Liquidity and Capital Resources The company maintains sufficient liquidity with cash and credit facilities, though future capital needs include potential contingent acquisition payments - The company has a Loan and Security Agreement with Silicon Valley Bank providing a $60 million term loan and a $20 million revolving line of credit, both maturing in August 2024[151] - Net cash used in operating activities for the first nine months of 2019 was $12.3 million, primarily due to the net loss of $19.1 million and increases in inventory and accounts receivable[148] - Future capital uses include potential contingent consideration payments related to the nContact and SentreHEART acquisitions, which are payable in a mix of cash and stock[155] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes occurred in the company's quantitative and qualitative market risk disclosures compared to the 2018 Annual Report - There were no material changes to the company's market risk disclosures as of September 30, 2019, compared to those reported in the 2018 Form 10-K[159] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2019, with no material changes to internal controls during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[160] - No changes occurred during the third quarter of 2019 that materially affected or are reasonably likely to materially affect the company's internal control over financial reporting[162] PART II. OTHER INFORMATION Item 1. Legal Proceedings Legal proceedings information is incorporated by reference from Note 9, detailing a DOJ investigation and an earnout dispute - Information regarding legal proceedings is incorporated by reference from Note 9 of the Condensed Consolidated Financial Statements[163] Item 1A. Risk Factors No material changes to risk factors were reported compared to the 2018 Annual Report on Form 10-K - There have been no material changes to the risk factors disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018[163] Item 6. Exhibits Exhibits filed with the Form 10-Q include the SentreHEART merger agreement, loan agreement amendments, and CEO/CFO certifications - Exhibits filed include the SentreHEART merger agreement, amendments to the company's loan agreement, and required CEO/CFO certifications[165]