AtriCure(ATRC) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This part presents the company's unaudited financial statements, management's discussion and analysis, and disclosures on market risk and internal controls Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements and accompanying notes for the period Condensed Consolidated Balance Sheets This statement summarizes the company's assets, liabilities, and stockholders' equity at the end of the reporting period Condensed Consolidated Balance Sheet Highlights (In Thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------------------- | :----------- | :----------- | | Total Assets | $612,969 | $714,539 | | Total Liabilities | $124,500 | $302,145 | | Total Stockholders' Equity | $488,469 | $412,394 | | Current Assets | $195,707 | $306,737 | | Long-term investments | $105,097 | $14,178 | | Intangible assets, net | $43,963 | $128,199 | | Contingent consideration and other noncurrent liabilities | $2,282 | $187,424 | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) This statement details the company's revenues, expenses, and resulting net income or loss over the reporting period Key Financials for Three Months Ended September 30 (In Thousands, Except Per Share Amounts) | Metric | Sep 30, 2021 | Sep 30, 2020 | | :------------------------------------------- | :----------- | :----------- | | Revenue | $70,460 | $54,757 | | Gross profit | $52,226 | $40,334 | | Change in fair value of contingent consideration | $(189,900) | $192 | | Intangible asset impairment | $82,300 | — | | Net income (loss) | $97,108 | $(4,949) | | Basic net income (loss) per share | $2.15 | $(0.11) | | Diluted net income (loss) per share | $2.11 | $(0.11) | Key Financials for Nine Months Ended September 30 (In Thousands, Except Per Share Amounts) | Metric | Sep 30, 2021 | Sep 30, 2020 | | :------------------------------------------- | :----------- | :----------- | | Revenue | $201,111 | $148,806 | | Gross profit | $150,844 | $106,872 | | Change in fair value of contingent consideration | $(184,800) | $(4,854) | | Intangible asset impairment | $82,300 | — | | Net income (loss) | $63,940 | $(29,593) | | Basic net income (loss) per share | $1.42 | $(0.71) | | Diluted net income (loss) per share | $1.39 | $(0.71) | Condensed Consolidated Statements of Stockholders' Equity This statement outlines the changes in the company's equity accounts over the reporting period Stockholders' Equity Changes (Nine Months Ended September 30, 2021) (In Thousands) | Metric | Amount | | :------------------------------------ | :------- | | Balance—December 31, 2020 | $412,394 | | Impact of equity compensation plans | $12,660 | | Other comprehensive loss | $(525) | | Net income | $63,940 | | Balance—September 30, 2021 | $488,469 | - Accumulated deficit improved from $(330,352) thousand at December 31, 2020, to $(266,412) thousand at September 30, 2021, primarily due to net income[7][17] Condensed Consolidated Statements of Cash Flows This statement reports the cash generated and used by operating, investing, and financing activities during the period Cash Flow Summary (Nine Months Ended September 30) (In Thousands) | Cash Flow Activity | 2021 | 2020 | | :------------------------------------------ | :----------- | :----------- | | Net cash used in operating activities | $(14,081) | $(23,823) | | Net cash provided by (used in) investing activities | $22,427 | $(154,218) | | Net cash (used in) provided by financing activities | $(10,149) | $182,939 | | Net (decrease) increase in cash and cash equivalents | $(2,058) | $4,898 | | Cash and cash equivalents—end of period | $39,886 | $33,381 | Notes to Condensed Consolidated Financial Statements These notes provide detailed disclosures and explanations of the accounting policies and financial data presented 1. Description of Business and Summary of Significant Accounting Policies This note details the company's business operations and the key accounting principles applied in the financial statements - AtriCure, Inc is a leading innovator in treatments for atrial fibrillation (Afib) and left atrial appendage (LAA) management, selling products globally through direct sales and distributors[23] - The company reclassified the change in contingent consideration from selling, general and administrative expenses to a separate line item in the condensed consolidated statement of operations, with no impact on net income or financial position[25] - Inventories are valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method[29] - Depreciation of generators and related equipment, included in cost of revenue, was $1,735 thousand for the nine months ended September 30, 2021, down from $1,898 thousand in the prior year[33] - Intangible assets include In Process Research and Development (IPR&D), which is treated as an indefinite-lived asset until technological feasibility is achieved, after which it is amortized[37] - The company has established 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[41] 2. Fair Value This note explains the methodology for measuring financial assets and liabilities at fair value across a three-level hierarchy - Financial assets and liabilities are classified into Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs) based on the fair value hierarchy[55] - Cash, government obligations, accounts receivable, and accounts payable are classified as Level 1, while cash equivalents and corporate bonds are classified as Level 2[56] - Contingent consideration liabilities from the SentreHEART acquisition were measured using unobservable (Level 3) inputs via the probability-weighted scenario method[61] - As of September 30, 2021, the fair value of the SentreHEART contingent consideration was re-measured to $0, resulting in a $189,900 thousand credit to operating expenses due to clinical trial data results[62][65] 3. Intangible Assets This note provides details on the company's intangible assets, including amortization, impairment, and reclassifications - Following PMA approval of the EPi-Sense System, the related IPR&D asset of $44,021 thousand was reclassified to technology assets and is being amortized over a fifteen-year life[67][38] - An impairment loss of $82,300 thousand was recorded in Q3 2021 for the aMAZE IPR&D asset, reducing its carrying value to $0 due to clinical trial data results[67][38] Amortization Expense of Intangible Assets (In Thousands) | Period | 2021 | 2020 | | :-------------------------------- | :----- | :----- | | Three months ended September 30 | $971 | $467 | | Nine months ended September 30 | $1,936 | $1,444 | Projected Future Amortization Expense (In Thousands) | Year | Amount | | :-------------------------- | :------- | | 2021 (remaining) | $972 | | 2022 | $3,653 | | 2023 | $2,953 | | 2024 | $2,953 | | 2025 | $2,953 | | 2026 and thereafter | $30,479 | | Total | $43,963 | 4. Accrued Liabilities This note itemizes the components of the company's accrued liabilities at the end of the reporting periods - The significant decrease in accrued legal settlement from $6,000 thousand to $10 thousand reflects the substantial payment of a settlement agreement with former nContact stockholders[72][93] Accrued Liabilities (In Thousands) | Category | Sep 30, 2021 | Dec 31, 2020 | | :----------------------------------------- | :----------- | :----------- | | Accrued compensation and employee-related expenses | $26,670 | $17,730 | | Sales returns and allowances | $2,611 | $1,889 | | Accrued taxes and value-added taxes payable | $1,487 | $1,256 | | Accrued royalties | $783 | $703 | | Other accrued liabilities | $285 | $406 | | Accrued legal settlement | $10 | $6,000 | | Total | $31,846 | $27,984 | 5. Indebtedness This note describes the terms of the company's loan and security agreements, including credit facilities and debt maturities - The company has a Loan and Security Agreement with Silicon Valley Bank (SVB), including a $60,000 thousand term loan and a $20,000 thousand revolving line of credit, maturing August 1, 2024[73][141] - Term loan principal payments commenced September 1, 2021, and as of September 30, 2021, there were no borrowings under the revolving credit facility[74][75][141] - Effective November 1, 2021, the company entered into the Sixth Amendment with SVB, providing a new $60,000 thousand term loan and a $30,000 thousand revolving line of credit, expiring November 2026[76][143] Projected Future Maturities of Long-Term Debt (Post-Refinancing) (In Thousands) | Year | Amount | | :--- | :------- | | 2021 (remaining) | — | | 2022 | — | | 2023 | $3,333 | | 2024 | $20,000 | | 2025 | $20,000 | | 2026 | $16,667 | | Total long-term debt | $60,000 | 6. Leases This note provides information on the company's operating and finance leases, including terms, discount rates, and liabilities Weighted Average Lease Terms and Discount Rates | Lease Type | Sep 30, 2021 | Dec 31, 2020 | | :------------------------------------ | :----------- | :----------- | | Operating Leases - Remaining Lease Term (years) | 3.3 | 3.2 | | Operating Leases - Discount Rate | 5.60% | 5.68% | | Finance Leases - Remaining Lease Term (years) | 8.9 | 9.7 | | Finance Leases - Discount Rate | 6.91% | 6.91% | Total Lease Liabilities (In Thousands) | Lease Type | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------- | :----------- | :----------- | | Total operating lease liabilities | $2,613 | $2,107 | | Total finance lease liabilities | $11,191 | $11,792 | Maturities of Lease Liabilities as of September 30, 2021 (In Thousands) | Year | Operating Leases | Finance Leases | | :-------------------------- | :--------------- | :--------------- | | 2021 (remaining) | $252 | $406 | | 2022 | $967 | $1,629 | | 2023 | $682 | $1,652 | | 2024 | $609 | $1,674 | | 2025 | $348 | $1,625 | | 2026 and thereafter | — | $8,172 | | Total payments | $2,858 | $15,158 | | Less imputed interest | $(245) | $(3,967) | | Total | $2,613 | $11,191 | 7. Commitments and Contingencies This note discloses the company's contractual commitments, legal proceedings, and other potential liabilities - The company is committed to funding renovation of a recently purchased building for additional manufacturing capacity, with an estimated cost of $5,500 thousand[90] - An ongoing Civil Investigative Demand (CID) from the U.S. Department of Justice (USDOJ) since December 2017 is investigating potential False Claims Act violations[91] - In February 2021, the company entered into a settlement agreement with former nContact stockholders for $6,000 thousand, which was substantially paid as of September 30, 2021[93] Royalty Expense (In Thousands) | Period | 2021 | 2020 | | :-------------------------------- | :----- | :----- | | Three months ended September 30 | $792 | $699 | | Nine months ended September 30 | $2,356 | $1,880 | 8. Revenue This note details the company's revenue recognition policies and disaggregates revenue by product category - Revenue is primarily generated from the sale of medical devices and recognized when control of goods is transferred to customers, generally upon shipment or delivery[94][27] - Sales are categorized into open ablation, minimally invasive ablation, appendage management, and valve tools[94] - A provision for sales returns and allowances is estimated using the expected value method based on historical experience[96][27] - Commissions and royalties associated with product sales are recognized as expense when incurred[98] 9. Income Tax Provision This note explains the calculation of the company's income tax provision and the factors affecting its effective tax rate - The company uses the discrete method to compute its provision for income taxes in interim periods, as it is unable to reliably estimate the annual effective tax rate[99] - The worldwide effective tax rate differs from the US statutory rate of 21% primarily due to a full valuation allowance against net deferred income tax assets[99] Effective Tax Rate | Period | 2021 | 2020 | | :-------------------------------- | :----- | :----- | | Three months ended September 30 | 0.04% | 0.08% | | Nine months ended September 30 | 0.21% | (0.05)% | 10. Equity Compensation Plans This note describes the company's stock-based compensation plans and the associated expenses recognized - The 2014 Stock Incentive Plan allows for grants of stock options, restricted stock awards/units (RSAs), performance share awards (PSAs), and stock appreciation rights[102] - PSAs granted in 2021 have two equally weighted performance targets: the company's revenue compound annual growth rate (CAGR) and relative total shareholder return (TSR)[104] - The 2018 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase common stock at a 15% discount[105] Share-Based Compensation Expense (In Thousands) | Period | 2021 | 2020 | | :-------------------------------- | :----- | :----- | | Three months ended September 30 | $6,794 | $5,549 | | Nine months ended September 30 | $20,539 | $16,126 | 11. Segment and Geographic Information This note provides a breakdown of the company's revenue by geographic location and product type - The company operates as a single operating segment, developing, manufacturing, and selling devices for cardiac tissue ablation and related procedures[110] Total Revenue by Geographic Location (Nine Months Ended September 30) (In Thousands) | Region | 2021 | 2020 | | :------------------ | :----------- | :----------- | | United States | $167,916 | $121,838 | | Europe | $20,551 | $16,775 | | Asia | $11,695 | $9,367 | | Other international | $949 | $826 | | Total international | $33,195 | $26,968 | | Total revenue | $201,111 | $148,806 | United States Revenue by Product Type (Nine Months Ended September 30) (In Thousands) | Product Type | 2021 | 2020 | | :-------------------------------------- | :----------- | :----------- | | Open ablation | $69,693 | $54,679 | | Minimally invasive ablation | $28,077 | $18,295 | | Appendage management | $69,144 | $47,870 | | Total ablation and appendage management | $166,914 | $120,844 | | Valve tools | $1,002 | $994 | | Total United States | $167,916 | $121,838 | International Revenue by Product Type (Nine Months Ended September 30) (In Thousands) | Product Type | 2021 | 2020 | | :-------------------------------------- | :----------- | :----------- | | Open ablation | $16,629 | $13,766 | | Minimally invasive ablation | $4,698 | $4,346 | | Appendage management | $11,825 | $8,778 | | Total ablation and appendage management | $33,152 | $26,890 | | Valve tools | $43 | $78 | | Total international | $33,195 | $26,968 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, results of operations, liquidity, and critical accounting policies Overview This section provides a high-level summary of the company's business, products, and market focus - AtriCure is a leading innovator in treatments for atrial fibrillation (Afib) and left atrial appendage (LAA) management, with products used in open-heart and minimally invasive procedures[119] - Key products include the FDA-approved Isolator Synergy™ Ablation System, the EPi-Sense system, and AtriClip® products for LAA exclusion[120] - The company anticipates that substantially all future revenue will come from its currently sold or developing products[121] Recent Developments This section highlights significant recent events, including product approvals, clinical trial results, and market conditions - The company experienced a significant decrease in demand in 2020 and early 2021 due to COVID-19, but has observed stabilization and improvements in cardiac surgery procedure volumes[122] - In July 2021, the company received 510(k) clearance for the new ENCOMPASS clamp, initiating a limited product launch to drive deeper market penetration[124] - PMA approval for the EPi-Sense system in April 2021 has enabled education and training on Hybrid AF™ therapy for long-standing persistent atrial fibrillation[125] - Data from the aMAZE clinical trial in July 2021 did not achieve statistical superiority, leading to a pause in enrollment for the Continued Access Protocol (CAP)[126] - The company maintains a strong liquidity position with $224,843 thousand in cash and investments as of September 30, 2021[124] Results of Operations (Three Months Ended September 30, 2021 vs. 2020) This section analyzes the company's financial performance for the third quarter of 2021 compared to the same period in 2020 - Revenue increased by 28.7% (28.6% on a constant currency basis) due to an upturn in cardiac surgery procedure volumes and increased product adoption[128] - U.S. sales growth: open ablation increased 19.4%, minimally invasive (MIS) ablation increased 43.1%, and appendage management sales rose 34.3%[128] - Gross margin improved by approximately 40 basis points, reflecting a favorable product mix partially offset by inventory charges and unfavorable geographic mix[129] - Selling, general and administrative expenses increased by $16,316 thousand or 48.6%, primarily due to higher personnel costs, training, and marketing activities[130] Key Financial Performance (Three Months Ended September 30) (In Thousands, Except Percentages) | Metric | 2021 Amount | 2021 % of Revenues | 2020 Amount | 2020 % of Revenues | | :------------------------------------------- | :---------- | :----------------- | :---------- | :----------------- | | Revenue | $70,460 | 100.0% | $54,757 | 100.0% | | Gross profit | $52,226 | 74.1% | $40,334 | 73.7% | | Research and development expenses | $11,284 | 16.0% | $10,576 | 19.3% | | Selling, general and administrative expenses | $49,873 | 70.8% | $33,557 | 61.3% | | Change in fair value of contingent consideration | $(189,900) | (269.5)% | $192 | 0.4% | | Intangible asset impairment | $82,300 | 116.8% | — | 0.0% | | Income (loss) from operations | $98,669 | 140.0% | $(3,991) | (7.3)% | | Net income (loss) | $97,108 | 137.8% | $(4,949) | (9.0)% | Results of Operations (Nine Months Ended September 30, 2021 vs. 2020) This section analyzes the company's financial performance for the first nine months of 2021 compared to the same period in 2020 - Revenue increased by 35.1% (34.4% on a constant currency basis), with U.S. sales growing across all product lines: MIS ablation +53.5%, appendage management +44.4%, and open ablation +27.5%[134] - Gross margin increased by over 300 basis points, driven by a return to normal production activity, leverage from higher revenue, and favorable mix[135] - Selling, general and administrative expenses increased by $44,682 thousand or 42.1%, primarily due to additional headcount, variable compensation, and marketing activities[136] Key Financial Performance (Nine Months Ended September 30) (In Thousands, Except Percentages) | Metric | 2021 Amount | 2021 % of Revenues | 2020 Amount | 2020 % of Revenues | | :------------------------------------------- | :---------- | :----------------- | :---------- | :----------------- | | Revenue | $201,111 | 100.0% | $148,806 | 100.0% | | Cost of revenue | $50,267 | 25.0% | $41,934 | 28.2% | | Gross profit | $150,844 | 75.0% | $106,872 | 71.8% | | Research and development expenses | $34,698 | 17.3% | $32,199 | 21.6% | | Selling, general and administrative expenses | $150,939 | 75.1% | $106,257 | 71.4% | | Change in fair value of contingent consideration | $(184,800) | (91.9)% | $(4,854) | (3.3)% | | Intangible asset impairment | $82,300 | 40.9% | — | 0.0% | | Income (loss) from operations | $67,707 | 33.7% | $(26,730) | (18.0)% | | Net income (loss) | $63,940 | 31.8% | $(29,593) | (19.9)% | Liquidity and Capital Resources This section discusses the company's cash position, sources and uses of cash, and ability to fund future operations - As of September 30, 2021, the company had cash, cash equivalents, and investments totaling $224,843 thousand, with outstanding debt of $58,333 thousand[138] - Net cash used in operating activities reflects net income offset by non-cash adjustments (e.g., contingent consideration revaluation and intangible asset impairment)[139] - Effective November 1, 2021, the company secured an Amended Loan and Security Agreement with SVB, providing a $60,000 thousand term loan and a $30,000 thousand revolving line of credit[143] - Management believes current cash, investments, and access to the credit facility will be sufficient to meet anticipated cash needs for at least the next twelve months[147] Cash Flow Summary (Nine Months Ended September 30, 2021) (In Thousands) | Cash Flow Activity | Amount | | :------------------------------------------ | :----------- | | Net cash used in operating activities | $(14,081) | | Net cash provided by investing activities | $22,427 | | Net cash used in financing activities | $(10,149) | Critical Accounting Policies and Estimates This section identifies the accounting policies that are most critical to the portrayal of the company's financial condition - The financial statements are prepared in accordance with GAAP, requiring management to make estimates and judgments that affect reported amounts[149] - Key areas requiring significant estimates include sales returns, accounts receivable, inventories, intangible assets, contingent liabilities, and share-based compensation[149] Recent Accounting Pronouncements This section discloses any recently issued accounting standards that could materially impact the company's financial statements - There were no material changes to the information provided in Note 2, 'Recent Accounting Pronouncements' in the Company's Form 10-K for the fiscal year ended December 31, 2020[151] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states there have been no material changes to the company's market risk disclosures since its last annual report - 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, 2020[152] Item 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and reports on changes in internal financial reporting controls Evaluation of Disclosure Controls and Procedures This section confirms management's assessment of the effectiveness of the company's disclosure controls and procedures - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[153] - Control systems, by their inherent limitations, can only provide reasonable, not absolute, assurance and can be circumvented[154] Changes in Internal Control Over Financial Reporting This section reports on any significant changes to the company's internal controls over financial reporting during the quarter - No material changes in internal control over financial reporting occurred during the three months ended September 30, 2021[155] - The company routinely enhances its information systems through upgrades or new implementations[155] PART II. OTHER INFORMATION This part contains information on legal proceedings, risk factors, other corporate actions, and filed exhibits Item 1. Legal Proceedings This section refers to the financial statement notes for detailed information regarding the company's legal proceedings - Information regarding legal proceedings is incorporated by reference from Note 7 – Commitments and Contingencies in Part I, Item 1 of this report[157] Item 1A. Risk Factors This section directs readers to previous SEC filings for a comprehensive discussion of risk factors - No material changes have occurred with respect to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020[158] Item 5. Other Information This section provides details on the Sixth Amendment to the Loan and Security Agreement with Silicon Valley Bank - Effective November 1, 2021, the company and SVB entered into the Sixth Amendment to the Loan and Security Agreement, providing a $60,000 thousand term loan and a $30,000 thousand revolving line of credit[159] - The Amended Loan and Security Agreement has a five-year term, expiring November 2026, with principal payments commencing 24 months after inception[159] - The term loan accrues interest at the Prime Rate plus 1.25% and the revolving line of credit bears interest at the floating Prime Rate[159] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including agreements, certifications, and XBRL documents - Exhibit 10.1 is the AtriCure, Inc 2018 Employee Stock Purchase Plan (Amended and Restated effective January 1, 2022)[162] - Exhibit 10.2 is the Sixth Amendment to Loan and Security Agreement dated November 1, 2021, among AtriCure, Inc and Silicon Valley Bank[162] - Includes Rule 13a-14(a) Certifications of Principal Executive Officer and Principal Accounting and Financial Officer, as well as XBRL documents[162]