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ATRC > SEC Filings for ATRC > Form 10-Q on 30-Jul-2014All Recent SEC Filings

Show all filings for ATRICURE, INC.

Form 10-Q for ATRICURE, INC.


30-Jul-2014

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, 2013 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, 2013. 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 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 Isolator Synergy® Ablation System ("Isolator 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 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 radiofrequency ("RF") ablation device. 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") Occlusion System ("AtriClip system"), which is designed to 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 158,000 patients since 2004, 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 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 replacement or coronary bypass graft. Additionally, although our products are not indicated for this specific use, cardiothoracic surgeons have adopted our products to treat Afib patients in sole-therapy minimally invasive surgical procedures. Our Isolator 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 specifically for the treatment of other forms of Afib. Additionally, the FDA has not determined that our products are safe and effective for the purpose of reducing 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, for the exclusion of the left atrial appendage or for mitral and aortic valve procedures.

Recent Developments

The December 2011 FDA approval of our Isolator Synergy System included the requirement to implement a 350-patient post-approval study ("PAS"). The PAS trial is designed to evaluate the long-term treatment effect of our Isolator 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 325 patients have been enrolled in the trial. The


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approval also included the requirement to implement a physician training and education program for existing and new users. We submitted a protocol amendment to increase enrollment by up to 40 patients to the FDA in April 2014. The amendment was approved in June 2014.

We are also conducting a Staged DEEP AF Feasibility clinical trial. The Staged DEEP AF Feasibility trial protocol was submitted to the FDA in February 2012. The feasibility trial evaluates the effectiveness of a staged approach, where a minimally invasive surgical ablation procedure is performed initially and a catheter ablation and mapping optimization procedure is performed on a different day during the same hospitalization. FDA approval of the feasibility trial 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 submitted an Investigational Device Exemption ("IDE") for a Staged DEEP Pivotal clinical trial to the FDA in May 2014. The pivotal trial evaluates the safety and effectiveness of a staged approach, where a minimally invasive surgical ablation procedure is performed initially and a catheter and mapping optimization procedure is performed approximately 90 days after the surgical procedure. FDA conditional approval was received in July 2014. We have conditional approval to enroll up to 220 subjects at 23 domestic medical centers and 2 international medical centers.

We are also conducting a Stroke Feasibility clinical trial with the AtriClip System. 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 System for stroke prophylaxis (i.e., prevention of stroke) in patients with non-valvular Afib 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 began in the first quarter of 2014 and currently stands at four patients.

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 $116 related to the medical device excise tax in cost of revenue during the three months ended June 30, 2014 and $230 during the six months ended June 30, 2014.

On December 31, 2013 we acquired Endoscopic Technologies, Inc. ("Estech") by issuing 2,126,343 shares of common stock 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 open concomitant 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 $65,830. We believe our current financial position will support the execution of our strategic plan.


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Results of Operations

Three months ended June 30, 2014 compared to three months ended June 30, 2013

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,
                                                      2014                               2013
                                                              % of                               % of
                                            Amount          Revenues           Amount          Revenues
Revenue                                    $ 26,514             100.0 %       $ 20,429             100.0 %
Cost of revenue                               7,733              29.2 %          5,306              26.0 %

Gross profit                                 18,781              70.8 %         15,123              74.0 %
Operating expenses:
Research and development expenses             4,569              17.2 %          3,049              14.9 %
Selling, general and administrative
expenses                                     17,065              64.4 %         13,713              67.1 %

Total operating expenses                     21,634              81.6 %         16,762              82.1 %

Loss from operations                         (2,853 )           (10.8 %)        (1,639 )            (8.0 %)
Other income (expense):
Interest expense                                (29 )            (0.1 %)          (132 )            (0.6 %)
Interest income                                  23               0.1 %              2               0.0 %
Other                                           172               0.6 %            (17 )            (0.1 %)

Total other income (expense)                    166               0.6 %           (147 )            (0.7 %)

Loss before income tax expense               (2,687 )           (10.2 %)        (1,786 )            (8.7 %)
Income tax expense                                5               0.0 %              5               0.0 %

Net loss                                   $ (2,692 )           (10.2 %)      $ (1,791 )            (8.7 %)

Revenue. Total revenue increased 29.8% (28.9% on a constant currency basis) from $20,429 for the three months ended June 30, 2013 to $26,514 for the three months ended June 30, 2014. Revenue from sales to customers in the United States increased $4,449, or 28.8%, and revenue from sales to international customers increased $1,636, or 32.9% (29.1% 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 $1,702 and increased sales of the AtriClip system of $1,162. The increase in international revenue was primarily due to an increase in sales in Europe and Asia. Revenue from both the United States and Europe was positively impacted by the addition of products from the Estech acquisition.

Cost of revenue and gross margin. Cost of revenue increased $2,427, from $5,306 for the three months ended June 30, 2013 to $7,733 for the three months ended June 30, 2014. The increase was partially due to approximately $184 in expenses related to the transition of the Estech business. As a percentage of revenue, cost of revenue increased from 26.0% for the three months ended June 30, 2013 to 29.2% for the three months ended June 30, 2014. Gross margin for the three months ended June 30, 2014 and 2013 was 70.8% and 74.0%, respectively. The decrease in gross margin was primarily due to an increased mix of international sales, which carry lower gross margins, an increase in costs related to the recently-acquired Estech products and increased capital equipment placement.

Research and development expenses. Research and development expenses increased $1,520, from $3,049 for the three months ended June 30, 2013 to $4,569 for the three months ended June 30, 2014. Approximately $165 of the increase was due to expenses related to the transition of the Estech business. The remaining increase in expense was primarily due to a $1,096 increase in product development, regulatory, clinical and quality personnel expense and a $534 increase in clinical trial spending, offset by a $574 decrease in clinical affairs consulting.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $3,352, or 24.4%, from $13,713 for the three months ended June 30, 2013 to $17,065 for the three months ended June 30, 2014. Approximately $593 of the increase was due to transaction, transition and severance expense related to the acquisition of Estech. Approximately $2,662 of selling, general and administrative income was recognized due to the fair value adjustment of the Estech contingent consideration. The remaining increase was primarily due to an increase in sales, marketing and training expenditures.

Net interest expense. Net interest expense for the three months ended June 30, 2014 and 2013 was $6 and $130, respectively. Net interest expense primarily represents amortization of debt issuance costs.


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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 income (expense) for the three months ended June 30, 2014 and 2013 totaled $172 and ($17), respectively.

Six months ended June 30, 2014 compared to six months ended June 30, 2013

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,
                                                     2014                                2013
                                                              % of                               % of
                                           Amount           Revenues           Amount          Revenues
Revenue                                   $  51,361             100.0 %       $ 39,859             100.0 %
Cost of revenue                              14,923              29.1 %         10,650              26.7 %

Gross profit                                 36,438              70.9 %         29,209              73.3 %
Operating expenses:
Research and development expenses             8,570              16.7 %          6,555              16.4 %
Selling, general and administrative
expenses                                     38,646              75.2 %         26,093              65.5 %

Total operating expenses                     47,216              91.9 %         32,648              81.9 %

Loss from operations                        (10,778 )           (21.0 %)        (3,439 )            (8.6 %)
Other income (expense):
Interest expense                               (266 )            (0.5 %)          (305 )            (0.8 %)
Interest income                                  37               0.1 %              6               0.0 %
Other                                           638               1.2 %             14               0.0 %

Total other income (expense)                    409               0.8 %           (285 )            (0.8 %)

Loss before income tax expense              (10,369 )           (20.2 %)        (3,724 )            (9.4 %)
Income tax expense                               32               0.1 %             10               0.0 %

Net loss                                  $ (10,401 )           (20.3 %)      $ (3,734 )            (9.4 %)

Revenue. Total revenue increased 28.9% (28.0% on a constant currency basis) from $39,859 for the six months ended June 30, 2013 to $51,361 for the six months ended June 30, 2014. Revenue from sales to customers in the United States increased $7,953, or 26.4%, and revenue from sales to international customers increased $3,549, or 36.3% (32.7% 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 $2,958 and increased sales of the AtriClip system of $2,396. The increase in international revenue was primarily due to an increase in sales in Europe and Asia. Revenue from both the United States and Europe was positively impacted by the addition of products from the Estech acquisition.

Cost of revenue and gross margin. Cost of revenue increased $4,273, from $10,650 for the six months ended June 30, 2013 to $14,923 for the six months ended June 30, 2014. The increase was partially due to approximately $375 in expenses related to the transition of the Estech business. As a percentage of revenue, cost of revenue increased from 26.7% for the six months ended June 30, 2013 to 29.1% for the six months ended June 30, 2014. Gross margin for the six months ended June 30, 2014 and 2013 was 70.9% and 73.3%, respectively. The decrease in gross margin was primarily due to an increased mix of international sales, which carry lower gross margins, an increase in costs related to the recently-acquired Estech products and increased capital equipment placement.

Research and development expenses. Research and development expenses increased $2,015, from $6,555 for the six months ended June 30, 2013 to $8,570 for the six months ended June 30, 2014. Approximately $360 of the increase was due to expenses related to the transition of the Estech business. The remaining increase in expense was primarily due to a $2,035 increase in product development, regulatory, clinical and quality personnel expense and a $833 increase in clinical trial spending, offset by a $1,653 decrease in clinical affairs consulting.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $12,553, or 48.1%, from $26,093 for the six months ended June 30, 2013 to $38,646 for the six months ended June 30, 2014. Approximately $2,765 of the increase was due to transaction, transition and severance expense related to the acquisition of Estech. Approximately $2,662 of selling, general and administrative income was recognized due to the fair value adjustment of the Estech contingent consideration. The remaining increase was primarily due to an increase in sales, marketing and training expenditures.


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Net interest expense. Net interest expense for the six months ended June 30, 2014 and 2013 was $229 and $299, respectively. Net interest expense primarily represents interest expense related to amounts outstanding on our term loan, amortization of debt issuance costs and expense related to the payoff of our term loan.

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 income for the six months ended June 30, 2014 and 2013 totaled $638 and $14, respectively.

Liquidity and Capital Resources

As of June 30, 2014 the Company had cash, cash equivalents and investments of $74,588 and short-term and long-term debt of $0, resulting in a net cash position of $74,588. We had unused borrowing capacity of $10,000 under our revolving credit facility. We had net working capital of $75,885 and an accumulated deficit of $132,614 as of June 30, 2014.

Cash flows used in operating activities. Net cash used in operating activities for the six months ended June 30, 2014 was $18,373. The primary net uses of cash for operating activities were as follows:

• the net loss of $10,401, offset by $3,927 of non-cash expenses, including $3,988 in share-based compensation and $2,217 in depreciation and amortization partially offset by $2,662 related to contingent consideration fair value adjustment; and

• a net increase in cash used related to changes in operating assets and liabilities of $11,899, due primarily to the following:

• an increase in accounts receivable of $1,448, due primarily to an increase in sales during the first half of 2014 as compared to the first half of 2013;

• an increase in inventory of $2,457, due primarily to increased inventory levels in support of new products and anticipated revenue growth; and

• a $7,640 decrease in accounts payable and accrued liabilities due primarily to the timing of payments, Estech acquisition expenses and variable compensation payments.

Cash flows used in investing activities. Net cash used in investing activities was $16,048 for the six months ended June 30, 2014. The primary uses of cash in investing activities were $27,322 for purchases of available-for-sale securities and $2,475 related to the purchase of equipment, which consisted primarily of the placement of our RF and cryo generators with our customers. This was partially offset by sources of cash from investing activities of $5,400 in maturities of available-for-sale securities and $8,349 in sales of available-for-sale securities.

Cash flows provided by financing activities. Net cash provided by financing activities during the six months ended June 30, 2014 was $61,501, which was primarily due to proceeds from the sale of stock of $65,830 and proceeds from stock option exercises of $1,637, partially offset by shares repurchased for payment of taxes on stock awards of $153 and debt and capital lease payments of $6,352.

Credit facility. The Company's Loan and Security Agreement with Silicon Valley Bank ("SVB"), as amended, restated, and modified (the "Agreement") provides for a revolving credit facility under which we could borrow a maximum of $15,000. As of June 30, 2014 we had no borrowings under the revolving credit facility, and we had borrowing availability of $10,000. 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, 2016. The Company repaid the term loan portion of the credit facility in full in March 2014, resulting in $0 outstanding under the term loan as of June 30, 2014.

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 credit 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 June 30, 2014 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.

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.


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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 3,996,250 shares of common stock under the shelf registration which resulted in net proceeds of approximately $26,872.

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 $65,830.

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. 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 . . .

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