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ATRC > SEC Filings for ATRC > Form 10-Q on 2-Aug-2013All Recent SEC Filings

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Form 10-Q for ATRICURE, INC.


2-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

(Dollar amounts referenced in this Item 2 are in thousands, except per share amounts.)

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and notes thereto contained in Item 1 of Part I of this Form 10-Q and our audited financial statements and notes thereto as of and for the year ended December 31, 2012 included in our Form 10-K filed with the Securities and Exchange Commission ("SEC") to provide an understanding of our results of operations, financial condition and cash flows.

Forward-Looking Statements

This Form 10-Q, including the sections titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors," contains forward-looking statements regarding our future performance. All forward-looking information is inherently uncertain and actual results may differ materially from assumptions, estimates or expectations reflected or contained in the forward-looking statements as a result of various factors, including those set forth under "Risk Factors" and elsewhere in this quarterly report on Form 10-Q, and in our annual report on Form 10-K for the year ended December 31, 2012. Forward-looking statements convey our current expectations or forecasts of future events. All statements contained in this Form 10-Q other than statements of historical fact are forward-looking statements. Forward-looking statements include statements regarding our future financial position, business strategy, budgets, projected costs, plans and objectives of management for future operations. The words "may," "continue," "estimate," "intend," "plan," "will," "believe," "project," "expect," "anticipate" and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. With respect to the forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements speak only as of the date of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise unless required by law.

Overview

We are a medical device company providing innovative Atrial Fibrillation ("Afib") solutions designed to produce superior outcomes that reduce the economic and social burden of Afib. Our Synergy Ablation System ("Synergy System") is the first and only device approved by the United States Food and Drug Administration ("FDA") for the treatment of persistent and long-standing persistent forms of Afib in patients undergoing certain open concomitant procedures. We have two primary product lines for the ablation of cardiac tissue. Our primary product line for the ablation of cardiac tissue is our Synergy System, a bipolar ablation clamp system and related radiofrequency ("RF") ablation devices. We also offer a cryoablation product line, which features reusable and disposable cryoablation devices. Additionally, we offer the AtriClip™ Gillinov-Cosgrove Left Atrial Appendage System ("AtriClip system"), which is designed to safely and effectively exclude the left atrial appendage.

Cardiothoracic surgeons have adopted our RF ablation and cryoablation systems to treat Afib in an estimated 138,000 patients since January 2003, and we believe that we are currently the market leader in the surgical treatment of Afib. Our products are utilized by cardiothoracic surgeons during concomitant open-heart surgical procedures and also during sole-therapy minimally invasive cardiac ablation procedures. During a concomitant open procedure, the surgeon ablates cardiac tissue and/or excludes the left atrial appendage, secondary, or concomitant, to a primary cardiac procedure such as a valve or coronary bypass. Additionally, although our products are not FDA-approved for this specific use, cardiothoracic surgeons have adopted our products as a treatment alternative for Afib patients who may be candidates for sole-therapy minimally invasive surgical procedures. Our Synergy System, which includes our Isolator® Synergy clamps, an RF generator and related switchbox, is approved by the FDA for the treatment of patients with persistent and long-standing persistent Afib during open-heart concomitant coronary artery bypass grafting and/or valve replacement or repair procedures. To date, none of our other products have been approved or cleared by the FDA for the treatment of other forms of Afib or for other uses for the treatment of Afib. Additionally, the FDA has not cleared or approved our products for a reduction in the risk of stroke. We anticipate that substantially all of our revenue for the foreseeable future will relate to products we currently sell, or are in the process of developing, which surgeons generally use to ablate cardiac tissue for the treatment of Afib or for the exclusion of the left atrial appendage.

Recent Developments

The December 2011 FDA approval of our Synergy System included the requirement to implement a 350-patient post-approval study ("PAS"). The trial is designed to evaluate the long-term treatment effect of our Synergy Ablation System in persistent and long-standing persistent Afib patients undergoing open-heart procedures. We submitted a protocol for the PAS to the FDA in February 2012, and it was approved in September 2012. Approximately 153 patients have been enrolled in the trial. The approval also included the requirement to implement a physician training and education program for existing and new users. Approximately 911 physicians at 647 hospitals have been certified through the education program.


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We are also conducting a Staged DEEP clinical trial. The Staged DEEP AF trial protocol was submitted to the FDA in February 2012. The trial evaluates the effectiveness of a staged approach, where a minimally invasive ablation procedure is performed initially and the catheter and mapping optimization procedure is performed on a different day during the same hospitalization. Final FDA approval was received in June 2012. Enrollment in the Staged DEEP trial was initiated during the third quarter of 2012, and there are currently 25 patients enrolled. We expect to enroll up to 30 patients at six medical centers during the course of the trial.

A provision of The Patient Protection and Affordable Care Act enacted in 2010, as amended, (the "Patient Act") requires manufacturers of medical devices to pay a 2.3% excise tax on all U.S. medical device sales beginning in January 2013. We recorded $128 related to the medical device excise tax in cost of revenue during the three months ended June 30, 2013 and $248 during the six months ended June 30, 2013.

In January 2013 we completed a public offering of common stock under our July 2011 shelf registration. We sold 3,996 shares of common stock, par value $0.001 per share, at a price of $7.25 per share to generate proceeds of $26,872 after expenses. Offering costs were recorded in additional paid in capital to offset proceeds. We plan to use the proceeds from the offering for general corporate purposes and working capital.

Results of Operations

Three months ended June 30, 2013 compared to three months ended June 30, 2012

The following table sets forth, for the periods indicated, our results of
operations expressed as dollar amounts and as percentages of total revenue:



                                                            Three Months Ended June 30,
                                                      2013                               2012
                                                              % of                               % of
                                            Amount          Revenues           Amount          Revenues
Revenue                                    $ 20,429             100.0 %       $ 18,268             100.0 %
Cost of revenue                               5,306              26.0 %          5,557              30.4 %

Gross profit                                 15,123              74.0 %         12,711              69.6 %
Operating expenses:
Research and development expenses             3,049              14.9 %          2,885              15.8 %
Selling, general and administrative
expenses                                     13,713              67.1 %         11,146              61.0 %

Total operating expenses                     16,762              82.1 %         14,031              76.8 %

Loss from operations                         (1,639 )            (8.0 %)        (1,320 )            (7.2 %)
Other income (expense):
Interest expense                               (132 )            (0.6 %)          (201 )            (1.1 %)
Interest income                                   2               0.0 %              2               0.0 %
Other                                           (17 )            (0.1 %)           199               1.1 %

Total other income (expense)                   (147 )            (0.7 %)            (0 )            (0.0 %)

Loss before income tax expense               (1,786 )            (8.7 %)        (1,320 )            (7.2 %)
Income tax expense                                5               0.0 %              6               0.0 %

Net loss                                   $ (1,791 )            (8.7 %)      $ (1,326 )            (7.2 %)

Revenue. Total revenue increased 11.8% (11.5% on a constant currency basis) from $18,268 for the three months ended June 30, 2012 to $20,429 for the three months ended June 30, 2013. Revenue from sales to customers in the United States increased $2,043 million, or 15.2%, and revenue from sales to international customers increased $118, or 2.4% (1.1% on a constant currency basis). The increase in sales to customers in the United States was primarily due to increased sales of ablation-related open-heart products of $768 and increased sales of the AtriClip system of $1,028. The increase in international revenue was primarily due to an increase in sales to direct customers and certain distributors.

Cost of revenue and gross margin. Cost of revenue decreased $251, from $5,557 for the three months ended June 30, 2012 to $5,306 for the three months ended June 30, 2013. As a percentage of revenue, cost of revenue decreased from 30.4% for the three months ended June 30, 2012 to 26.0% for the three months ended June 30, 2013. Gross margin for the three months ended June 30, 2013 and 2012 was 74.0% and 69.6%, respectively. The increase in gross margin was primarily due to volume-driven leverage of manufacturing overhead expenses, a higher mix of domestic sales and the strong performance of our new AtriClip Pro product.


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Research and development expenses. Research and development expenses increased $164, from $2,885 for the three months ended June 30, 2012 to $3,049 for the three months ended June 30, 2013. The increase in expense was primarily due to a $488 increase in product development project and personnel expense and a $134 increase in clinical trial spending, offset by a $401 decrease in clinical affairs consulting.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $2,567, or 23.0%, from $11,146 for the three months ended June 30, 2012 to $13,713 for the three months ended June 30, 2013. The increase was primarily due to an increase in sales and marketing expenditures and an increase in training related to the FDA clearance of our Synergy System for the treatment of Afib.

Net interest expense. Net interest expense for the three months ended June 30, 2013 and 2012 was $130 and $199, respectively. Net interest expense primarily represents interest expense related to amounts outstanding on our term loan and amortization of debt issuance costs.

Other income and expense. Other income and expense consists primarily of foreign currency transaction gains and losses, grant income and non-employee option gains and losses related to the fair market value change for fully vested options outstanding for consultants, which are accounted for as free-standing derivatives. Other (expense) income for the three months ended June 30, 2013 and 2012 totaled ($17) and $199, respectively.

Six months ended June 30, 2013 compared to six months ended June 30, 2012

The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of total revenue:

                                                             Six Months Ended June 30,
                                                      2013                               2012
                                                              % of                               % of
                                            Amount          Revenues           Amount          Revenues
Revenue                                    $ 39,859             100.0 %       $ 35,744             100.0 %
Cost of revenue                              10,650              26.7 %         10,281              28.8 %

Gross profit                                 29,209              73.3 %         25,463              71.2 %
Operating expenses:
Research and development expenses             6,555              16.4 %          6,275              17.6 %
Selling, general and administrative
expenses                                     26,093              65.5 %         22,005              61.6 %

Total operating expenses                     32,648              81.9 %         28,280              79.1 %

Loss from operations                         (3,439 )            (8.6 %)        (2,817 )            (7.9 %)
Other income (expense):
Interest expense                               (305 )            (0.8 %)          (426 )            (1.2 %)
Interest income                                   6               0.0 %              4               0.0 %
Other                                            14               0.0 %            301               0.9 %

Total other income (expense)                   (285 )            (0.8 %)          (121 )            (0.3 %)

Loss before income tax expense               (3,724 )            (9.4 %)        (2,938 )            (8.2 %)
Income tax expense                               10               0.0 %              8               0.0 %

Net loss                                   $ (3,734 )            (9.4 %)      $ (2,946 )            (8.2 %)

Revenue. Total revenue increased 11.5% (11.3% on a constant currency basis) from $35,744 for the six months ended June 30, 2012 to $39,859 for the six months ended June 30, 2013. Revenue from sales to customers in the United States increased $3,488, or 13.1%, and revenue from sales to international customers increased $627, or 6.9% (6.1% on a constant currency basis). The increase in sales to customers in the United States was primarily due to increased sales of ablation-related open-heart products of $1,402 and increased sales of the AtriClip system of $1,655. The increase in international revenue was primarily due to an increase in sales to direct customers and certain distributors.

Cost of revenue and gross margin. Cost of revenue increased $369, from $10,281 for the six months ended June 30, 2012 to $10,650 for the six months ended June 30, 2013. As a percentage of revenue, cost of revenue decreased from 28.8% for the six months ended June 30, 2012 to 26.7% for the six months ended June 30, 2013. Gross margin for the six months ended June 30, 2013 and 2012 was 73.3% and 71.2%, respectively. The increase in gross margin was primarily due to volume-driven leverage of manufacturing overhead expenses, a higher mix of domestic sales, lower sales of capital equipment and the strong performance of our new AtriClip Pro product.


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Research and development expenses. Research and development expenses increased $280, from $6,275 for the six months ended June 30, 2012 to $6,555 for the six months ended June 30, 2013. The increase in expense was primarily due to a $643 increase in product development project and personnel expense and a $192 increase in clinical trial spending, offset by a $615 decrease in clinical affairs consulting.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $4,088, or 18.6%, from $22,005 for the six months ended June 30, 2012 to $26,093 for the six months ended June 30, 2013. The increase was primarily due to an increase in sales and marketing expenditures and an increase in training related to the FDA clearance of our Synergy System for the treatment of Afib.

Net interest expense. Net interest expense for the six months ended June 30, 2013 and 2012 was $299 and $422, respectively. Net interest expense primarily represents interest expense related to amounts outstanding on our term loan and amortization of debt issuance costs.

Other income and expense. Other income and expense consists primarily of foreign currency transaction gains and losses, grant income and non-employee option gains and losses related to the fair market value change for fully vested options outstanding for consultants, which are accounted for as free-standing derivatives. Other income for the six months ended June 30, 2013 and 2012 totaled $14 and $301, respectively.

Liquidity and Capital Resources

As of June 30, 2013 the Company had cash, cash equivalents and investments of $34,942 and short-term and long-term debt of $7,333, resulting in a net cash position of $27,609. We had unused borrowing capacity of approximately $7,957 under our revolving credit facility. We had net working capital of $40,063 and an accumulated deficit of $114,485 as of June 30, 2013.

Cash flows used in operating activities. Net cash used in operating activities for the six months ended June 30, 2013 was $2,832. The primary net uses of cash for operating activities were as follows:

• the net loss of $3,734, offset by $2,366 of non-cash expenses, including $1,338 in share-based compensation and $957 in depreciation and amortization; and

• a net increase in cash used related to changes in operating assets and liabilities of $1,464, due primarily to the following:

• an increase in accounts receivable of $1,463, due primarily to an increase in sales during the first half of 2013 as compared to the first half of 2012; and

• a $420 increase in accounts payable and accrued liabilities due primarily to the timing of payments.

Cash flows used in investing activities. Net cash used in investing activities was $835 for the six months ended June 30, 2013. The primary net uses of cash for investing activities were:

• a use of cash of $1,191 related to the purchase of equipment, which consisted primarily of the placement of our RF and cryo generators with our customers; and

• net investment maturities of $356.

Cash flows provided by financing activities. Net cash provided by financing activities during the six months ended June 30, 2013 was $27,057, which was primarily due to proceeds from the sale of stock of $26,872 and proceeds from stock option exercises of $1,240, partially offset by shares repurchased for payment of taxes on stock awards of $269 and debt payments of $1,014.

Credit facility. The Company's Loan and Security Agreement with Silicon Valley Bank ("SVB"), as amended, restated, and modified (the "Agreement") provides for a term loan and a revolving credit facility under which we could borrow a maximum of $20,000. As of June 30, 2013 we had no borrowings under the revolving credit facility, and we had borrowing availability of approximately $7,957. The applicable borrowing rate on the revolving facility is the prime rate during a Streamline Period and prime plus 1.25% during a Non-Streamline Period, and the revolving credit facility expires on April 30, 2014. Also, as of June 30, 2013, $7,333 was outstanding under the term loan, which included $2,000 classified as current maturities of long-term debt. The term loan has a five year term, and principal payments in the amount of $167, together with accrued interest, are due and payable monthly. The term loan accrues interest at a fixed rate of 4.75% and matures in February 2017.

The Agreement contains covenants that include, among others, covenants that limit our ability to dispose of assets, enter into mergers or acquisitions, incur indebtedness, incur liens, pay dividends or make distributions on our capital stock, make investments or loans, and enter into certain affiliate transactions, in each case subject to customary exceptions for a credit facility of this size and type. Additional covenants apply when we have outstanding borrowings under the revolving loan facility or when we achieve specific covenant milestones. Financial covenants include a limitation on capital expenditures and a minimum liquidity ratio. Further, a minimum fixed charge ratio and a minimum EBITDA apply when specific events occur. The occurrence of an event of default could


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result in an increase to the applicable interest rate by 3.0%, an acceleration of all obligations under the Agreement, an obligation to repay all obligations in full, and a right by SVB to exercise all remedies available to it under the Agreement and related agreements including the Guaranty and Security Agreement. As of and for the period ended June 30, 2013 we were in compliance with all of the financial covenants of our amended and modified credit facility. In addition, if the guarantee by the Export-Import Bank of the United States ceases to be in full force and effect, we must repay all loans under the Export-Import agreement.

The effective interest rate on borrowings under the modified term loan, including debt issuance costs, is 6.5%. We have an outstanding letter of credit of €75 issued to our European subsidiary's corporate credit card provider which will expire on June 30, 2015.

Uses of liquidity and capital resources. Our future capital requirements depend on a number of factors, including the rate of market acceptance of our current and future products, the resources we devote to developing and supporting our products, future expenses to expand and support our sales and marketing efforts, costs relating to changes in regulatory policies or laws that affect our operations and costs of filing, costs associated with clinical trials and securing regulatory approval for new products, costs associated with prosecuting, defending and enforcing our intellectual property rights and possible acquisitions and joint ventures. Global economic turmoil may adversely impact our revenue, access to the capital markets or future demand for our products.

In July 2011 we filed a shelf registration statement with the SEC, which allows us to sell any combination of senior or subordinated debt securities, common stock, preferred stock, warrants, depositary shares and units in one or more offerings should we choose to do so in the future. In January 2013 we sold approximately 3,996 shares of common stock under the shelf registration which resulted in net proceeds of approximately $26,872.

We believe that our current cash, cash equivalents and investments, along with the cash we expect to generate or use for operations or access via our revolving credit facility, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. Significant cash needs over the next twelve months include debt service of approximately $2,309 ($167 per month plus interest) on our outstanding term loan and payments under our settlement agreement with the DOJ and Relator of $1,400. If our sources of cash are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or obtain a revised or additional credit facility. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Additional financing may not be available at all, or in amounts or terms acceptable to us. Finally, our credit facilities require compliance with certain financial and other covenants. In the event we cannot or do not comply with such covenants, our debt may be callable and become currently due. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned research and development, clinical activities and selling and marketing efforts.

Off-Balance-Sheet Arrangements

As of June 30, 2013 we had operating lease agreements not recorded on the Condensed Consolidated Balance Sheets. Operating leases are utilized in the normal course of business.

Seasonality

During the third quarter, we typically experience a decline in revenue that we attribute primarily to the elective nature of the procedures in which our products are used, which we believe arises from fewer people choosing to undergo elective procedures during the summer months.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses, and disclosures of contingent assets and liabilities at the date of the financial statements. On a periodic basis, we evaluate our estimates, including those related to sales returns and allowances, accounts receivable, inventories and share-based compensation. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates under different assumptions or conditions. Our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 includes additional information about the Company, our operations, our financial position, our critical accounting policies and accounting estimates and should be read in conjunction with this Quarterly Report.


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Recent Accounting Pronouncements

See Note 2 in the Notes to the Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements.

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