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ATRC > SEC Filings for ATRC > Form 10-K on 11-Mar-2014All Recent SEC Filings

Show all filings for ATRICURE, INC.

Form 10-K for ATRICURE, INC.


11-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollar amounts referenced in this Item 7 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 consolidated financial statements and notes thereto contained in Item 8, "Financial Statements and Supplementary Data," to provide an understanding of our results of operations, financial condition and cash flows. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under Item 1A "Risk Factors," the cautionary statement regarding forward-looking statements at the beginning of Part I and elsewhere in this Form 10-K.

Overview

We are a leading atrial fibrillation ("Afib") solutions partner providing innovative products, professional education and support for clinical science to 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 surgical treatment of persistent and long-standing persistent forms of Afib in patients undergoing certain open concomitant procedures. We have three 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 radio frequency ("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 ("LAA") System ("AtriClip system"), which is designed to safely and effectively exclude the left atrial appendage and is the most widely implanted device for LAA management worldwide.

Cardiothoracic surgeons have adopted our RF ablation and cryoablation systems to treat Afib in an estimated 147,000 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 Isolatorฎ 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.

We sell our products to medical centers in the U.S. through our direct sales force. AtriCure Europe, B.V., our wholly-owned subsidiary incorporated and based in the Netherlands, markets and sells our products throughout Europe and the Middle East primarily through distributors, while in certain markets, such as Germany, France and the Benelux region, we sell directly to medical centers. We also sell our products to other international distributors, primarily in Asia, South America and Canada. Our business is primarily transacted in U.S. dollars with the exception of transactions with our European subsidiary which are substantially transacted in Euros.

The December 2011 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


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System in persistent and long-standing persistent AF patients undergoing open-heart procedures. We submitted protocol for the PAS to the FDA in February 2012, and it was approved in September 2012. As of February 28, 2014, 259 patients have been enrolled in the trial. The FDA approval also included the requirement to implement a physician training and education program for existing and new users.

We are also conducting a Staged DEEP clinical trial. We submitted a Staged DEEP AF trial protocol 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 is complete with 30 patients enrolled at six medical centers.

We are also in the initial start-up of a Stroke Feasibility clinical trial with the AtriClip. The Stroke Feasibility trial protocol was initially approved by the FDA in December 2011. An amendment to the protocol was submitted to the FDA and approved in October 2013. The trial evaluates the initial procedural safety and efficacy of the AtriClip for stroke prophylaxis (i.e. prevention of stroke) in patients with non-valvular atrial fibrillation in whom long term oral anticoagulation therapy is medically contraindicated. We have approval to enroll up to 30 patients at seven medical centers during the course of the trial. Enrollment is expected to begin in the first quarter of 2014.

A provision of The Patient Protection and Affordable Care Act enacted in 2010, as amended, (the "Affordable Care Act") requires manufacturers of medical devices to pay an excise tax on all U.S. medical device sales beginning in January 2013. We recorded $417 related to the medical device excise tax in cost of revenue during 2013.

On December 31, 2013 we acquired Endoscopic Technologies, Inc. ("Estech") by issuing 2,126,343 shares of common stock, $.001 par value per share, to shareholders of Estech as consideration and up to $26,000 in additional consideration based on the achievement of certain performance based milestones. The product portfolio acquired includes innovative surgical ablation devices that enable physicians to perform a variety of traditional and minimally invasive procedures using Estech's proprietary temperature controlled RF energy.

Our financial position was strengthened by our public offering of 3,996,250 shares of common stock in January 2013, which generated net proceeds of $26,872. We further strengthened our financial position through a public offering of 3,660,525 shares of common stock in February 2014, which generated net proceeds of $65,937. We believe our current financial position will support the execution of our strategic plan.


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Results of Operations

Year Ended December 31, 2013 compared to December 31, 2012

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

                                                               Year Ended December 31,
                                                          2013                          2012
                                                                  % of                          % of
                                                 Amount         Revenue         Amount        Revenue
                                                                (dollars in thousands)
Revenue                                         $  81,889          100.0 %     $ 70,247          100.0 %
Cost of revenue                                    22,326           27.3 %       20,233           28.8 %

Gross profit                                       59,563           72.7 %       50,014           71.2 %
Operating expenses:
Research and development expenses                  13,440           16.4 %       12,147           17.3 %
Selling, general and administrative expenses       57,014           69.6 %       45,065           64.1 %

Total operating expenses                           70,454           86.0 %       57,212           81.4 %
Loss from operations                              (10,891 )        -13.3 %       (7,198 )        -10.2 %
Other (income) expense:
Interest expense                                     (566 )         -0.7 %         (802 )         -1.1 %
Interest income                                        16            0.0 %           11            0.0 %
Other                                                  (3 )          0.0 %          505            0.7 %

Other expense                                        (553 )         -0.7 %         (286 )         -0.4 %

Loss before income tax expense                    (11,444 )        -14.0 %       (7,484 )        -10.6 %
Income tax expense                                     18           -0.0 %           50           -0.1 %

Net loss                                        $ (11,462 )        -14.0 %     $ (7,534 )        -10.7 %

Revenue. Total revenue increased 16.6% (16.1% on a constant currency basis), from $70,247 in 2012 to $81,889 in 2013. Constant currency basis amounts are calculated by applying previous period foreign currency exchange rates to each of the comparable periods. Revenue from sales to customers in the United States increased $9,695, or 18.4%, and revenue from sales to international customers increased $1,947, or 11.0% (9.1% 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 $4,963 and increased sales of the AtriClip system of $3,817. The increase in international revenue was primarily due to an increase in sales in Europe and Asia.

Cost of revenue and gross margin. Cost of revenue increased $2,093, from $20,233 in 2012 to $22,326 in 2013. As a percentage of revenue, cost of revenue decreased from 28.8% for the year ended December 31, 2012 to 27.3% for the year ended December 31, 2013. Gross margin for 2013 and 2012 was 72.7% 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 AtriClip Pro product which was launched during the end of 2012.

Research and development expenses. Research and development expenses increased $1,293, from $12,147 in 2012 to $13,440 in 2013. The increase in expense was primarily due to a $661 increase in product development project expense, a $1,344 increase in product development, clinical and regulatory personnel expense and a $927 increase in clinical trial spending, offset by a $1,493 decrease in clinical affairs consulting.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $11,949, or 26.5%, from $45,065 in 2012 to $57,014 in 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


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for the treatment of Afib, along with $1,207 in expenses related to the acquisition of Estech, offset by a decrease in expense related to the departure of the Company's Chief Financial Officer and Chief Executive Officer. Transaction, transition and severance expense totaling approximately $3,500 is expected in 2014 related to the acquisition of Estech.

Net interest expense. Net interest expense was $550 for 2013 and $791 for 2012. Net interest expense primarily represents interest expense related to amounts outstanding on our term loan and amortization of debt issuance costs. The interest rate on our term loan was 4.75% as of December 31, 2013 and 6.75% as of December 31, 2012.

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. Net other (expense) income for 2013 and 2012 totaled ($3) and $505, respectively.

Year Ended December 31, 2012 compared to December 31, 2011

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

                                                               Year Ended December 31,
                                                         2012                          2011
                                                                 % of                          % of
                                                 Amount        Revenue         Amount        Revenue
                                                               (dollars in thousands)
Revenue                                         $ 70,247          100.0 %     $ 64,402          100.0 %
Cost of revenue                                   20,233           28.8 %       17,406           27.0 %

Gross profit                                      50,014           71.2 %       46,996           73.0 %
Operating expenses:
Research and development expenses                 12,147           17.3 %       11,857           18.4 %
Selling, general and administrative expenses      45,065           64.1 %       39,870           61.9 %

Total operating expenses                          57,212           81.4 %       51,727           80.3 %
Loss from operations                              (7,198 )        -10.2 %       (4,731 )         -7.3 %
Other expense:
Interest expense                                    (802 )         -1.1 %         (814 )         -1.2 %
Interest income                                       11            0.0 %           16            0.0 %
Other                                                505            0.7 %          104            0.1 %

Other expense                                       (286 )         -0.4 %         (694 )         -1.1 %

Loss before income tax expense                    (7,484 )        -10.6 %       (5,425 )         -8.4 %
Income tax expense                                    50           -0.1 %           31           -0.1 %

Net loss                                        $ (7,534 )        -10.7 %     $ (5,456 )         -8.5 %

Revenue. Total revenue increased 9.1% (10.3% on a constant currency basis), from $64.4 million in 2011 to $70.2 million in 2012. Constant currency basis amounts are calculated by applying previous period foreign currency exchange rates to each of the comparable periods. Revenue from sales to customers in the United States increased $3.7 million, or 7.5%, and revenue from sales to international customers increased $2.2 million, or 14.0% (18.9% 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 $2.2 million and increased sales of the AtriClip system of $1.4 million. This increase was partially offset by a reduction in sales of products used in minimally invasive standalone cardiac ablation procedures. The increase in international revenue was primarily due to an increase in product sales in direct European markets, Russia and Asia.


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Cost of revenue and gross margin. Cost of revenue increased $2.8 million, from $17.4 million in 2011 to $20.2 million in 2012. The increase in cost of revenue was primarily due to an increase in revenue and an increase in product cost primarily due to an increase in resources being dedicated to manufacturing-related activities. As a percentage of revenue, cost of revenue increased from 27.0% for the year ended December 31, 2011 to 28.8% for the year ended December 31, 2012. Gross margin for 2012 and 2011 was 71.2% and 73.0%, respectively. The decrease in gross margin was primarily due to:

• an increase in manufacturing costs and inefficiencies primarily associated with transitioning to the manufacturing of PMA approved products;

• an increased mix of international sales, which carry lower gross margins;

• slight pressure on ASPs, primarily in our clamp and clip products; and

• an increase in capital equipment sales, primarily the ORLab, which have a lower gross margin than our single-use products.

Research and development expenses. Research and development expenses increased $0.3 million, from $11.9 million in 2011 to $12.1 million in 2012. As a percentage of revenue, research and development expenses decreased from 18.4% in 2011 to 17.3% in 2012. The increase in research and development expenses was primarily due to:

• a $0.1 million increase in clinical trial spending, primarily driven by the Post Approval Study to support the December 2011 FDA clearance of our Synergy System for the treatment of AF;

• a $0.2 million increase in other clinical and regulatory supporting activities;

• the impact of a $0.3 million sale of a patent in 2011; and

• a $0.3 million decrease in costs related to product development activities, primarily in headcount and share-based compensation expense.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $5.2 million, or 13.0%, from $39.9 million in 2011 to $45.1 million in 2012. The increase in selling, general and administrative expenses was primarily due to:

• a $2.0 million increase in training expenditures related to the December 2011 FDA clearance of our Synergy System for the treatment of AF;

• $1.6 million in expenses related to the departure of the Company's Chief Financial Officer and Chief Executive Officer; and

• a $1.6 million increase in general and administrative expenses.

Net interest expense. Net interest expense was $0.8 million for 2012 and 2011. Net interest expense primarily represents interest expense related to amounts outstanding on our term loan, amortization of the debt discount related to the warrants issued in conjunction with the term loan and amortization of debt issuance costs.

Other income. Other income 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 totaled $0.5 million for 2012 and $0.1 million for 2011.

Liquidity and Capital Resources

As of December 31, 2013 we had cash, cash equivalents and investments of $34,125 and short-term and long-term debt of $6,333, resulting in a net cash position of $27,792. We had unused borrowing capacity of approximately $8,299 under our revolving credit facility. Substantially all cash is held by United States financial institutions. We had net working capital of $25,774 and an accumulated deficit of $122,213 as of December 31, 2013.


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Cash flows used in operating activities. Net cash used in operating activities was $5,222 during 2013. The primary net uses of cash for operating activities were as follows:

• the net loss of $11,462, offset by $5,244 of non-cash expenses, including $3,080 of share-based compensation and $2,020 of depreciation and amortization; and

• a net decrease in cash used related to changes in operating assets and liabilities of $996, due primarily to the following:

• an increase in accounts receivable of $1,248 due primarily to an increase in sales during 2013 as compared to 2012;

• an increase in inventory of $2,288 due primarily to increased inventory levels in support of new products and anticipated revenue growth; and

• a $5,559 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 $14,151 during 2013. The primary uses of cash for investing activities were the use of cash of $2,864 related to the purchase of equipment, which consisted primarily of the placement of our RF and cryo generators with our customers and net investment purchases of $15,043. These uses were partially offset by cash acquired through a business combination of $3,708.

Cash flows provided by financing activities. Net cash provided by financing activities during 2013 was $26,828, which was primarily due to proceeds from the sale of stock of $26,872 and proceeds from stock option exercises of $1,718, partially offset by shares repurchased for payment of taxes on stock awards of $398 and debt and capital lease payments of $2,055.

Credit facility. Our 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 may borrow a maximum of $20,000. As of December 31, 2013 we had no borrowings under the revolving credit facility, and we had borrowing availability of $8,299. 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 December 31, 2013, $6,333 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 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 December 31, 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.


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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 integrating acquired businesses, 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 3,996,250 shares of common stock under the shelf registration which resulted in net proceeds of approximately $26,872. The unissued and unsold securities remaining on this registration statement were removed and withdrawn from registration in February 2014.

In January 2014 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 February 2014 we sold 3,660,525 shares of common stock under the shelf registration which resulted in net proceeds of approximately $65,937.

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 $2,261 ($167 per month plus interest) on our outstanding term loan and payments under our settlement agreement with the DOJ and Relator of $1,125. 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. If we seek a revised or additional credit facility, we may find that additional financing may not be available at all, or in amounts or terms acceptable to us. If we are unable to obtain additional financing, we may be required to reduce the scope of our planned research and development, clinical activities and selling and marketing efforts. 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.

Contractual Obligations and Commitments

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