AtriCure(ATRC) - 2021 Q4 - Annual Report

Part I Business AtriCure is a medical device company specializing in treatments for atrial fibrillation (Afib), left atrial appendage (LAA) management, and postoperative pain Overview AtriCure is a leading innovator in treatments for atrial fibrillation (Afib), left atrial appendage (LAA) management, and postoperative pain, with products used in both open-heart and minimally invasive procedures - AtriCure is a market leader in the surgical treatment of Afib, with its Isolator Synergy™ Ablation System approved by the FDA for treating persistent and long-standing persistent Afib during open-heart surgery[14] - The EPi-Sense system is FDA-approved to treat patients with long-standing persistent Afib, and certain cryoablation probes are cleared for managing pain by temporarily ablating peripheral nerves (Cryo Nerve Block therapy)[14] - The AtriClip® LAA Exclusion System products are 510(k)-cleared for excluding the LAA in conjunction with other cardiac surgical procedures[14] - The company utilizes a direct sales force in the United States, Germany, France, the United Kingdom, and the Benelux region, and uses distributors for other international markets[15] Market Overview The global market for atrial fibrillation (Afib) treatment is substantial, driven by an aging population and the significant stroke risk associated with Afib, creating opportunities for LAA management and minimally invasive treatments - Afib affects approximately 33 million people worldwide, with about 1.2 million new diagnoses annually in the United States[16] - The risk of stroke is five times higher in people with Afib, and studies suggest 90% of these stroke-causing clots originate in the Left Atrial Appendage (LAA)[19] - The company estimates over 250,000 patients undergoing open-heart surgery globally each year are potential candidates for surgical ablation[18] - The market for post-operative pain management using Cryo Nerve Block is significant, with roughly 140,000 cardiac and thoracic procedures performed annually in the U.S. via thoracotomy access, which often results in significant pain[22] AtriCure Solutions and Products AtriCure provides a diverse portfolio of products for cardiac tissue ablation and appendage management, utilizing radio frequency or cryo-thermal energy, alongside enabling surgical technologies - Open & Minimally Invasive Ablation: Products include the Isolator Synergy Clamps (primary revenue driver), Multifunctional Pens, and Linear Ablation Devices[25][26] - Open Ablation & Pain Management: The cryoICE Cryoablation System and cryoSPHERE probe are used for cardiac ablation and for Cryo Nerve Block to provide temporary post-operative pain relief[27][28] - Minimally Invasive Ablation: The EPi-Sense Guided Coagulation System is used in the FDA-approved Convergent procedure (Hybrid AF Therapy) to treat long-standing persistent Afib[29] - Appendage Management: The AtriClip System mechanically excludes the LAA, while the LARIAT System uses a suture-based approach for soft-tissue closure[30][31] Business Strategy AtriCure's strategy focuses on new product innovation, clinical science investment, physician education, and strategic acquisitions to address the global Afib epidemic - Continue new product innovation to extend existing product lines and enter new market opportunities[42] - Invest in clinical science through landmark trials to validate product results and support expanded regulatory indications[42] - Build relationships with physicians and medical societies to gain insights and increase awareness of Afib treatment options[43] - Provide extensive training and education to physicians on the safe and effective use of its products, particularly for newly approved therapies like the EPi-Sense Hybrid AF therapy[44] - Expand adoption of minimally invasive products, viewing the hybrid Afib procedure as its largest market opportunity[39][45] Clinical Trials AtriCure is engaged in several pivotal clinical trials to expand product indications and validate efficacy, including CONVERGE, aMAZE, ICE-AFIB, and DEEP AF - CONVERGE: Led to PMA approval in April 2021 for the EPi-Sense System to treat long-standing persistent Afib. A Post Approval Study (PAS) is now underway[47][48] - aMAZE: Data from this trial for the LARIAT system did not achieve statistical superiority for its primary effectiveness endpoint in July 2021. The company has stopped enrollment in the continued access protocol (CAP) and is analyzing the data[49] - ICE-AFIB: This trial is ongoing, studying the safety and efficacy of the cryoICE system for treating persistent and long-standing persistent Afib during concomitant on-pump cardiac surgery[50] - DEEP AF: This pivotal trial for a staged minimally invasive surgical ablation received FDA approval in July 2021 to enroll the full cohort of 220 patients[51] Competition The medical device industry for Afib treatment is highly competitive, with AtriCure differentiating itself through product safety, efficacy, and unique FDA approvals for long-standing persistent Afib - The company's primary competitor in the cardiac surgery market is Medtronic, plc[55] - AtriCure has the only medical devices approved by the FDA for treating long-standing persistent Afib: the Isolator Synergy Ablation system and the EPi-Sense System[55] - The company competes by differentiating products based on safety, efficacy, ease of use, and by investing in training and education[56] Government Regulation AtriCure's products are subject to extensive regulation by the FDA in the U.S. and comparable international authorities, requiring stringent approvals, manufacturing compliance, and promotional adherence - In the U.S., medical devices require either 510(k) clearance or Pre-Market Approval (PMA) from the FDA[63] - The company is subject to numerous ongoing FDA regulations, including the Quality System Regulation (QSR) for manufacturing, labeling requirements, and rules against promoting products for unapproved (off-label) uses[68][67] - In the European Union, devices must conform to the new Medical Device Regulation (MDR), effective May 26, 2021, which imposes stricter controls and clinical data requirements to affix the CE mark[75][179] Human Capital Management AtriCure prioritizes a strong corporate culture and human capital management, evidenced by its recognition as a top workplace, competitive benefits, and commitment to Diversity, Equity, and Inclusion - The company had approximately 875 employees as of January 31, 2022, with none represented by a labor union[86] - AtriCure has been voted a Top Workplace six times in the past seven years, citing its culture as a key asset[86] - The company has an ongoing commitment to Diversity, Equity, and Inclusion (DE&I) overseen by a dedicated leader and the Chief Human Resources Officer[89][90] - During the COVID-19 pandemic, the company implemented safety protocols, allowed remote work where possible, and did not implement any reductions in headcount or non-executive employee compensation[94] Risk Factors The company faces various risks, including ongoing COVID-19 impacts, intense competition, clinical trial uncertainties, significant legal and compliance challenges, a history of net losses, and operational dependencies - COVID-19 Pandemic: The pandemic has negatively impacted product demand by causing deferrals of non-emergent procedures and may continue to disrupt business operations and clinical trials[104][105] - Competition: The company faces intense competition from existing and new products, particularly from larger companies like Medtronic with greater resources[112] - Clinical Trials & Regulatory Approval: Clinical trials are expensive and may not yield positive data or satisfy regulatory requirements, which could slow product adoption. The success of the recently approved EPi-Sense device is critical[113][118] - Legal & Compliance: The company is defending a qui tam lawsuit under the False Claims Act related to alleged off-label promotion. An adverse outcome could materially affect the business[163] - Financial Performance: The company has a history of net losses, and future profitability is not guaranteed. As of Dec 31, 2021, the accumulated deficit was $280.1 million[181] - Operational Dependence: The company relies on single-source third-party suppliers for key components and conducts its manufacturing at a single location in Ohio, creating vulnerability to supply chain disruptions[128][132] Unresolved Staff Comments The company reports that there are no unresolved staff comments - None Properties AtriCure's principal operations are based at its corporate headquarters campus in Mason, Ohio, with additional facilities in Minnesota, California, and the Netherlands, which are deemed adequate for immediate needs - The main corporate headquarters campus is in Mason, Ohio, and includes three buildings totaling approximately 169,000 square feet for various functions including manufacturing[200] - Other key locations include a 32,000 sq. ft. office in Minnetonka, MN, a 6,000 sq. ft. facility in Pleasanton, CA, and a 9,000 sq. ft. administrative office in Amsterdam, Netherlands[200][201] Legal Proceedings The company may be involved in legal proceedings that arise in the ordinary course of business, with detailed information available in Note 11 of the Consolidated Financial Statements - The company refers to Note 11 of its Consolidated Financial Statements for details on legal proceedings[202] Mine Safety Disclosures This item is not applicable to the company - Not applicable Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities AtriCure's common stock trades on the NASDAQ Global Market under "ATRC", demonstrating strong performance by outperforming key indices from 2016 to 2021 - The company's common stock trades on the NASDAQ Global Market under the symbol "ATRC"[205] Stock Performance Comparison (2016-2021) | | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | |:---|---:|---:|---:|---:|---:|---:| | AtriCure, Inc. | $100.00 | $93.20 | $156.36 | $166.12 | $284.47 | $355.29 | | NASDAQ Composite | $100.00 | $129.64 | $125.96 | $172.17 | $249.51 | $304.85 | | NASDAQ Medical Equipment | $100.00 | $145.08 | $161.91 | $196.50 | $281.91 | $332.54 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) In 2021, AtriCure's revenue grew 32.8% to $274.3 million, achieving a net income of $50.2 million due to a $184.8 million non-cash gain from contingent consideration and an $82.3 million impairment charge, while maintaining strong liquidity Results of Operations (2021 vs. 2020) For the year ended December 31, 2021, AtriCure's revenue increased by 32.8% to $274.3 million, resulting in a net income of $50.2 million, primarily driven by a $184.8 million non-cash gain from contingent consideration and offset by an $82.3 million intangible asset impairment charge Financial Performance (2021 vs. 2020) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (%) | |:---|---:|---:|---:| | Revenue | $274,329 | $206,531 | 32.8% | | Gross Profit | $205,860 | $149,309 | 37.9% | | Gross Margin | 75.0% | 72.3% | +270 bps | | Income (Loss) from Operations | $55,205 | $(44,233) | N/A | | Net Income (Loss) | $50,199 | $(48,155) | N/A | - U.S. revenue increased 35.4% to $229.1 million, with strong growth across all product categories: open ablation (+24.5%), minimally invasive ablation (+53.5%), and appendage management (+41.2%)[219][389] - International revenue grew 21.2% (19.1% on a constant currency basis) to $45.2 million[219][388] - A significant credit of $184.8 million was recorded due to a change in the fair value of contingent consideration related to the SentreHEART acquisition, as the probability of achieving milestones from the aMAZE trial was deemed remote[216][223] - An intangible asset impairment charge of $82.3 million was recorded for the In-Process R&D (IPR&D) asset associated with the aMAZE clinical trial after it did not achieve its primary effectiveness endpoint[216][223] Liquidity and Capital Resources As of December 31, 2021, AtriCure maintained a strong liquidity position with $223.4 million in cash and investments, supported by a credit facility providing a $60 million term loan and a $30 million revolving line of credit Liquidity Position as of Dec 31, 2021 | Metric | Amount (in thousands) | |:---|---:| | Cash, cash equivalents and investments | $223,428 | | Working Capital | $139,631 | | Accumulated Deficit | $(280,153) | | Borrowing Capacity (Revolver) | $28,750 | Historical Cash Flow Summary (in thousands) | Cash Flow Activity | 2021 | 2020 | |:---|---:|---:| | Net cash used in operating activities | $(13,780) | $(19,869) | | Net cash provided by (used in) investing activities | $23,504 | $(156,198) | | Net cash (used in) provided by financing activities | $(7,642) | $189,392 | - The company has a Loan Agreement with SVB for a $60 million term loan and a $30 million revolving line of credit, expiring in November 2026[226] Financial Statements and Supplementary Data This section presents AtriCure's audited consolidated financial statements for 2021, including balance sheets, statements of operations, cash flows, and detailed notes on accounting policies, fair value, intangible assets, debt, and revenue segmentation Consolidated Balance Sheets As of December 31, 2021, AtriCure reported total assets of $615.3 million, a decrease from $714.5 million in 2020, while total liabilities significantly decreased to $131.6 million from $302.1 million, and total stockholders' equity increased to $483.8 million from $412.4 million Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2021 | Dec 31, 2020 | |:---|---:|---:| | Assets | | | | Total Current Assets | $196,076 | $306,737 | | Goodwill | $234,781 | $234,781 | | Intangible assets, net | $42,992 | $128,199 | | Total Assets | $615,312 | $714,539 | | Liabilities & Equity | | | | Total Current Liabilities | $56,445 | $49,137 | | Long-term debt | $59,741 | $53,435 | | Contingent consideration | $0 | $187,424 | | Total Liabilities | $131,556 | $302,145 | | Total Stockholders' Equity | $483,756 | $412,394 | Consolidated Statements of Operations For the year ended December 31, 2021, AtriCure reported total revenue of $274.3 million and a net income of $50.2 million, or $1.09 per diluted share, a significant improvement from a net loss of $48.2 million in 2020, influenced by non-cash adjustments Consolidated Statement of Operations (in thousands, except per share data) | Metric | 2021 | 2020 | 2019 | |:---|---:|---:|---:| | Revenue | $274,329 | $206,531 | $230,807 | | Gross Profit | $205,860 | $149,309 | $170,335 | | Income (Loss) from Operations | $55,205 | $(44,233) | $(33,122) | | Net Income (Loss) | $50,199 | $(48,155) | $(35,194) | | Diluted Net Income (Loss) per Share | $1.09 | $(1.14) | $(0.94) | Consolidated Statements of Cash Flows For the year ended December 31, 2021, net cash used in operating activities improved to $13.8 million, while investing activities provided $23.5 million, leading to a $1.7 million increase in cash and cash equivalents Consolidated Statement of Cash Flows (in thousands) | Cash Flow Activity | 2021 | 2020 | |:---|---:|---:| | Net cash used in operating activities | $(13,780) | $(19,869) | | Net cash provided by (used in) investing activities | $23,504 | $(156,198) | | Net cash (used in) provided by financing activities | $(7,642) | $189,392 | | Net increase (decrease) in cash | $1,710 | $13,461 | | Cash and cash equivalents, end of period | $43,654 | $41,944 | Notes to Consolidated Financial Statements The notes detail AtriCure's accounting policies and financial results, including a $184.8 million gain from re-measuring contingent consideration to $0 and an $82.3 million impairment charge on the aMAZE IPR&D asset, alongside revenue breakdowns - Contingent Consideration (Note 3): Following unfavorable results from the aMAZE clinical trial in July 2021, the fair value of the SentreHEART contingent consideration was remeasured. The probability of achieving milestones was deemed remote, resulting in a $184.8 million credit to operating expenses and reducing the liability to $0[308][310] - Intangible Assets (Note 5): The company recorded an impairment charge of $82.3 million, reducing the carrying value of the aMAZE IPR&D asset to $0, after the clinical trial did not achieve statistical superiority[317] - Legal Proceedings (Note 11): The company is defending a False Claims Act lawsuit initiated by a relator after the U.S. Department of Justice declined to intervene. The investigation relates to the promotion of devices for off-label use from 2010-2017[343] Revenue by Product and Geography - 2021 (in thousands) | Product Category | United States | International | Total | |:---|---:|---:|---:| | Open ablation | $93,895 | $23,206 | $117,101 | | Minimally invasive ablation | $39,380 | $6,409 | $45,789 | | Appendage management | $94,568 | $15,534 | $110,102 | | Total | $229,131 | $45,198 | $274,329 | Controls and Procedures Management concluded that AtriCure's disclosure controls and internal control over financial reporting were effective as of December 31, 2021, a conclusion affirmed by an unqualified auditor's opinion - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[394] - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2021[397] - The independent registered public accounting firm, Deloitte & Touche LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[398][400] Part III Directors, Executive Officers and Corporate Governance Information regarding the company's directors, executive officers, and corporate governance is incorporated by reference from its 2022 Annual Meeting of Stockholders proxy statement - All information required by this item is incorporated by reference from the registrant's definitive proxy statement for the 2022 Annual Meeting of Stockholders[405][406] Executive Compensation Details on executive and director compensation are incorporated by reference from the 2022 Proxy Statement, supplemented by a new Executive Leadership Severance Policy approved in February 2022 - Most information is incorporated by reference from the 2022 Proxy Statement[407] - A new Executive Leadership Severance Policy was approved in February 2022, providing 18 months of base salary continuation for eligible executives terminated due to position elimination or reduction in force (not related to a change in control)[409] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section summarizes securities authorized for issuance under the company's security holder-approved equity compensation plans as of December 31, 2021, with detailed ownership information incorporated by reference from the 2022 Proxy Statement Equity Compensation Plan Information as of December 31, 2021 | Plan Category | Securities to be issued upon exercise (a) | Weighted-average exercise price (b) | Securities remaining available for future issuance (c) | |:---|---:|---:|---:| | Equity compensation plans approved by security holders | 1,507,801 | $26 | 1,504,648 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 1,507,801 | $26 | 1,504,648 | - Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the 2022 Proxy Statement[414] Certain Relationships and Related Transactions, and Director Independence Information regarding director independence and certain relationships and related transactions is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders - All information required by this item is incorporated by reference from the registrant's definitive proxy statement[415] Principal Accountant Fees and Services Information regarding principal accountant fees and services, along with the Audit Committee's pre-approval policies, is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders - All information required by this item is incorporated by reference from the registrant's definitive proxy statement[416] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and various exhibits filed as part of the Form 10-K, including corporate governance documents and material contracts - This section contains a list of all exhibits filed with the Form 10-K, including the company's certificate of incorporation, bylaws, loan agreements, and various equity compensation plan documents[418][419] Form 10-K Summary A Form 10-K summary was not provided in this report - Not provided[422]