ACUTUS MEDICAL, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes and other financial information included elsewhere in this Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to our plans and strategy for our business, includes "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In some cases, you can identify these statements by forward-looking words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "should," "estimate" or "continue," and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included in this Form 10-Q and in the section titled "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . The forward-looking statements in this Form 10-Q represent our views as of the date of this Form 10-Q. Except as may be required by law, we assume no obligation to update these forward-looking statements or the reasons that results could differ from these forward-looking statements. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Form 10-Q.
Overview
We are an arrhythmia management company focused on improving the way cardiac arrhythmias are diagnosed and treated. Despite several decades of effort by the incumbents in this field, the clinical and economic challenges associated with arrhythmia treatment continue to be a huge burden for patients, providers and payors. We are committed to advancing the field of electrophysiology with a unique array of products and technologies which will enable more physicians to treat more patients more effectively and efficiently. Through internal product development, acquisitions and global partnerships, we have established a global sales presence delivering a broad portfolio of highly differentiated electrophysiology products. Our goal is to provide our customers with a complete solution for catheter-based treatment of cardiac arrhythmias in each of our geographic markets. Our product portfolio includes novel access catheters, diagnostic and mapping catheters, ablation catheters, mapping and imaging consoles and accessories, as well as supporting algorithms and software programs. Our foundational and most highly differentiated product is our AcQMap imaging and mapping system. Our paradigm-shifting AcQMap System offers a novel approach to mapping the drivers and maintainers of arrhythmias with unmatched speed and precision. With the ability to rapidly and accurately identify ablation targets and to confirm both ablation success and procedural completion, we believe our AcQMap System addresses a significant primary unmet need in electrophysiology procedures today. We were incorporated in the state ofDelaware onMarch 25, 2011 and are headquartered inCarlsbad, California . Early versions of our AcQMap System and certain related accessory products have been used inthe United States sinceMay 2018 andWestern Europe sinceJuly 2016 in a limited, pilot launch capacity, where our focus was on optimizing workflow and validating our value proposition. We fully commenced the launch of our commercial-grade console and software products in the first quarter of 2020. Critical to our launch and future market adoption are a series of strategic transactions, regulatory approvals, and clinical trial milestones including: ongoing development and expansion of our bi-lateral distribution agreement withBiotronik SE & Co. KG ("Biotronik"),Food and Drug Administration (the "FDA") 510(k) clearance and CE Mark of our second-generation AcQMap console and SuperMap software suite; the addition of an integrated family of transseptal crossing and steerable introducer systems to our product portfolio through our acquisition ofRhythm Xience, Inc. ("Rhythm Xience"); and the completion of enrollment in our US clinical study for the AcQBlate Force sensing ablation catheter and system. In June of 2022, we completed the first closing of the sale of our left-heart access portfolio toMedtronic, Inc. ("Medtronic"). We will continue to distribute this product line until Medtronic qualifies us as an original equipment manufacturer ("OEM") and will manufacture this product line exclusively for Medtronic for a period of up to four years until such time that Medtronic transfers the product to a dedicated manufacturing facility and becomes the manufacturer of record. We market our electrophysiology products worldwide to hospitals and electrophysiologists that treat patients with arrhythmias. We have strategically developed a direct selling presence inthe United States and select markets inWestern Europe where cardiac ablation is a standard of care and third-party reimbursement is well-established. In these markets, we install our AcQMap console and workstation with customer accounts and then sell our disposable products to those accounts for use with our system. In other international markets, we leverage our partnership with Biotronik to install our AcQMap console and workstation with customer accounts and then to sell our disposable products to those accounts. Once an AcQMap console and workstation is established in a customer account, our revenue from that account becomes predominantly recurring in nature and derived from the sale of our portfolio of disposable products used with our system. Our currently marketed disposable products 33
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include access sheaths, transseptal crossing tools, diagnostic and mapping catheters, ablation catheters and accessories. We plan to leverage the geographically concentrated nature of procedure volumes and the recurring nature of our sales to drive an increasingly efficient commercial model.
For the six months endedJune 30, 2022 and 2021, we generated revenue of$7.8 million and$8.3 million , respectively, of which 48% and 51%, respectively, was from customers located outside ofthe United States . Since our inception, we have generated significant losses. Our net loss was$34.3 million and$57.9 million for the six months endedJune 30, 2022 and 2021, respectively. As ofJune 30, 2022 andDecember 31, 2021 , we had an accumulated deficit of$513.0 million and$478.7 million , respectively, and working capital of$93.3 million and$107.8 million , respectively. Prior to our initial public offering ("IPO") onAugust 10, 2020 , our operations have been financed primarily by aggregate net proceeds from the sale of our convertible preferred stock and principal of our converted debt of$253.9 million , as well as other indebtedness. OnJanuary 19, 2022 , we announced a corporate restructuring to reduce our operating expenses and optimize our cash resources, pursuant to which we undertook a reduction in force ("RIF") and implemented additional cost reduction measures. The restructuring was the result of a detailed review of our strategic priorities, the external environment, and cost structure and is intended to sharpen our focus and strengthen our financial position. As part of the restructuring, we intend to prioritize maximizing console utilization and procedure volume growth in targeted geographic regions, as well as a more focused scope of product development initiatives. Based on the timing of notifications under the Worker Adjustment and Retraining Notification ("WARN") Act, we started realizing the benefits of our restructuring plan beginning late in the first quarter of 2022. The sales organization will continue to focus on driving utilization and procedure growth in targeted geographic regions. Investments in research and development and clinical and regulatory affairs will have a focused scope on key product development initiatives. Additionally, we will continue to incur costs as a public company that we did not incur prior to our IPO or incurred prior to our IPO at lower rates, including increased costs for employee-related expenses, director and officer insurance premiums, audit and legal fees, investor relations fees, fees to members of our Board of Directors and expenses for compliance with public company reporting requirements under the Exchange Act and rules implemented by theSEC , as well as Nasdaq rules. Because of these and other factors, we expect to continue to incur substantial net losses and negative cash flows from operations for at least the next several years.
Key Business Metrics
We regularly review a number of operating and financial metrics, including the following key business metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe that the following metrics are representative of our current business. However, we anticipate these metrics may change or may be substituted for additional or different metrics as our business grows and as we introduce new products.
Installed Base
Our mapping and therapy platform is enabled by our AcQMap console that we install at customer sites globally. We believe our installed base is a key driver of our business model, enabling utilization and disposable pull-through. We define our installed base as the cumulative number of AcQMap consoles and workstations placed into service at customer sites. Beginning in late 2019, we began to install our second-generation AcQMap console and workstation with customers under evaluation contracts. Under these evaluation contracts, we place our AcQMap console and workstation with customers for no upfront fee to the customer during the applicable evaluation period and seek to reach agreement with the customer for the purchase of the console and workstation in the form of a contractual commitment to purchase a minimum amount of our disposable products or a cash purchase. Our total installed base as ofJune 30, 2022 and 2021 is set forth in the table below: As of June 30, 2022 2021 (unaudited) Acutus U.S. 37 42 Outside the U.S. 38 28 Total Acutus net system placements 75 70 34
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Procedure Volumes
Once an AcQMap console and workstation is established in a customer account, our revenue from that account becomes predominantly recurring in nature and derived from the sale of our portfolio of disposable products used with our system. Procedure volumes and the utilization of our AcQMap console will be the primary driver of our business over the long-term.
Our total procedure volumes for the three and six months ended
Three Months Ended June 30, 2022 Six Months Ended June 30, 2022
2022 2021 2022 2021
(unaudited) (unaudited)
Procedure volumes 481 401 948 768
Factors Affecting Our Performance
There are a number of factors that have impacted, and we believe will continue to impact, or that we expect to impact, our results of operations and growth. These factors include: •Market Acceptance. The growth of our business will depend substantially on our ability to increase our installed base. Once an AcQMap console and workstation is established in a customer account, our revenue from that account becomes predominantly recurring in nature and derived from the sale of our portfolio of disposable products used with our system. Our ability to increase our installed base will depend on our ability to gain broader acceptance of our AcQMap System by continuing to make physicians and other hospital staff aware of the benefits of the AcQMap System, thereby generating increased demand for system installations and the frequency of use of our disposable products. Although we are attempting to increase our installed base through our established relationships and focused sales efforts, we cannot provide assurance that our efforts will be successful. •Commercial Organization Size and Effectiveness. As ofJune 30, 2022 , our commercial organization consisted of 63 individuals with substantial applicable medical device, sales and clinical experience, which is comprised of sales representatives, sales managers, mappers and marketing personnel. We intend to continue to make investments in our commercial organization in training, developing, continuing education, and targeted increases in sales representatives, sales managers and mappers to help facilitate further adoption of our products among existing and new customer accounts. The effectiveness with which we manage our commercial organization, the speed at which newly hired personnel contribute to business performance, and the impact of turnover can impact our revenue growth or our costs incurred in anticipation of such growth. •Strategic Partnerships and Acquisitions. We have in the past, and may in the future, enter into strategic partnerships and acquire complementary businesses, products or technologies. For example, we have entered into strategic partnerships withInnovative Health and Stereotaxis in addition to ourGlobal Alliance for Electrophysiology with Biotronik. In addition, we added an integrated family of transseptal crossing and steerable introducer systems to our product portfolio through our acquisition of Rhythm Xience inJune 2019 and acquired our AcQBlate Force Sensing Ablation System from Biotronik inJuly 2019 . Our strategic partnerships and acquisitions have helped us establish a global sales presence delivering a broad portfolio of highly differentiated electrophysiology products. Our ability to grow our revenue will depend substantially on our ability to leverage our strategic partnerships and acquisitions to achieve distribution at a global scale, broaden our product portfolio and enable and accelerate global connectivity. •Asset Divestitures. OnApril 26, 2022 , we entered into a definitive agreement with Medtronic to sell our left-heart access portfolio, which includes the AcQCross line of sheath-compatible septal crossing devices, the AcQGuide Mini integrated crossing device and sheath, the AcQGuide Flex steerable introducer with integrated transseptal dilator and needle, and the AcQGuide VUE steerable sheath. Under the terms of the agreement, at the first closing onJune 30, 2022 , Medtronic paid cash consideration of$50.0 million and acquired from us, among other things, intellectual property rights to our left-heart access portfolio and certain equipment used in the manufacturing of these products. We will also be eligible to receive contingent consideration payments of up to$37 million associated with certain manufacturing and regulatory milestones. In addition to these payments, we are eligible to receive up to four years of revenue-based earnouts. We will continue to commercialize the left-heart access portfolio until we reach certain milestones to become a supplier to Medtronic. For further information regarding the sale and certain related transactions, see Note 4 - Sale of Business and Note 11 - Debt in the notes to our condensed consolidated financial statements included elsewhere in this quarterly report. 35
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•Continued Investment in Innovation. Our business strategy relies significantly on innovation to develop and introduce new products and to differentiate our products from our competitors. In 2021, research and development continued to provide both new products as well as generational improvements to the current product lines through the release of multiple versions of software and disposable products including significant improvements to our mapping system hardware. Additionally, research efforts evolved into development projects for advanced therapies, improved navigational accuracy and enhanced mapping capabilities. We expect our investments in research and development to decrease as we have a focused scope on key product development initiatives. We plan our research and development expenditures in accordance with our internal initiatives, as well as potentially licensing or acquiring technology from third parties. We also expect expenditures associated with our manufacturing organization to grow over time as production volume increases and we bring new products to market. Our internal and external investments will be focused on initiatives that we believe will offer the greatest opportunity for growth and profitability. With a significant investment in research and development, a strong focus on innovation and a well-managed innovation process, we believe we can continue to innovate and grow. Introducing additional, innovative products is also expected to help support our existing installed base and help drive demand for additional installations of our system. If, however, our future innovations are not successful in meeting customers' needs or prove to be too costly relative to their perceived benefit, we may not be successful. Moreover, as cost of products sold, operating expenses and capital expenditures fluctuate over time, we may experience short-term, negative impacts to our results of operations and cash flows, but we are undertaking such investments in the belief that they will contribute to long-term growth. •Product and Geographic Mix and Timing. Our financial results, including our gross margins, may fluctuate from period to period due to a variety of factors, including: average selling prices; production volumes; the cost of direct materials; the timing of customer orders or medical procedures and the timing and number of system installations; the number of available selling days in a particular period, which can be impacted by a number of factors such as holidays or days of severe inclement weather in a particular geography; the mix of products sold and the geographic mix of where products are sold; the level of reimbursement available for our products; discounting practices; manufacturing costs; product yields; and headcount and cost-reduction strategies. For example, gross margins on the sale of our products by our direct selling organization inthe United States andWestern Europe are higher than gross margins on the sale of our products by Biotronik in other parts of the world. Moreover, gross margins on the sale of our proprietary products are generally higher than gross margins on the sale of products we source through our strategic partnerships with third parties. Future selling prices and gross margins for our products may fluctuate due to a variety of other factors, including the introduction by others of competing products or the attempted integration by third parties of capabilities similar to ours into their existing products. We aim to mitigate downward pressure on our selling prices by increasing the value proposition offered by our products through innovation. While we have not yet experienced significant seasonality in our results, it is not uncommon in our industry to experience seasonally weaker revenue during the summer months and end-of-year holiday season. •Regulatory Approvals/Clearances and Timing and Efficiency of New Product Introductions. InMay 2022 , we completed enrollment in our US Investigational Device Exemption study for the AcQBlate Force Sensing Ablation System for use in right atrial flutter. We plan to file for US Premarket Approval ("PMA") in the second half of 2022. Additionally, we received CE Mark approval for a broad suite of electrophysiology products that includes the AcQCross family of universal transseptal crossing devices, the next-generation AcQGuide MAX and AcQGuide VUE large bore delivery sheaths and the next-generation AcQMap mapping catheter inMay 2021 . We also received FDA clearance of our AcQCross family of universal transseptal crossing devices inApril 2021 . Further, we received CE Mark inDecember 2020 inEurope for the use of our AcQBlate Force Sensing Ablation System and are seeking FDA PMA for this system inthe United States , as well as regulatory clearance or approval of our other pipeline products inthe United States and in international markets. Our ability to grow our revenue will depend on our obtaining necessary regulatory approvals or clearances for our products. In addition, as we introduce new products, we expect to build our inventory of components and finished goods in advance of sales, which may cause quarterly and annual fluctuations in our results of operations. •Competition. Our industry is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. Our most significant competitors are large, well-capitalized companies. We must continue to successfully compete considering our competitors' existing and future products and related pricing and their resources to successfully market to the physicians who could use our products. Publication of clinical results by us, our competitors and other third 36
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parties can also have a significant influence on whether, and the degree to which, we are able to gain market share and increase utilization of our products.
•COVID-19 Pandemic.COVID-19 has restricted access to hospitals and other customer sites, which negatively impacted our ability to install our AcQMap consoles and workstations in new accounts and for our sales representatives and mappers to promote the use of our products with physicians. Furthermore, the impact of COVID-19 has varied by region and by healthcare facility, hampering our ability to forecast the sustained impact on our business from COVID-19. We expect medical procedure rates to continue to vary by therapy and country, and could be impacted by regional COVID-19 case volumes, healthcare staffing shortages, patient's willingness to schedule deferrable procedures, travel restrictions, transportation limitations, quarantine restriction, vaccine and booster immunization rates, and new COVID-19 variants. While COVID-19 case volumes appear to be decreasing in theU.S. and certain other countries as a result of higher vaccination rates, the global COVID-19 outlook remain uncertain as new variants emerge. The magnitude of the impact of the COVID-19 pandemic on our productivity, results of operations and financial position, and its disruption to our business and our clinical programs and timelines, will depend, in part, on the length and severity of the pandemic, associated restrictions and other measures designed to prevent the spread of COVID-19 and on our ability to conduct business in the ordinary course. The markets we serve could see continued impacts from COVID-19 for the foreseeable future, and the emergence of new variants of COVID-19 creates significant uncertainty as to how long COVID-19 will continue to impact our business. •Global Supply Chain Disruption. Our costs are subject to fluctuations, particularly due to change in the price of raw and packing materials and the cost of labor, transportation and operating supplies. In addition, it is possible that we may be negatively affected from unexpected delays resulting from the global supply-chain disruptions and other adverse global conditions, including supply shortages of key electronic components and other raw materials, vendor disruptions related to COVID-19, extended lead times for raw material procurement, or geopolitical factors that could restrict the manufacturing and delivery of raw materials or other components. •Variability in Operating Results. In addition, we may experience meaningful variability in our yearly revenue and gross profit/loss as a result of a number of factors, including, but not limited to: competitive activity; trends in elective procedure volumes; inventory write-offs and write-downs; costs, benefits and timing of new product introductions; the availability and cost of components and raw materials; fluctuations in foreign currency exchange rates, inflation rates and interest rates; and our ability to realize the benefits of our recent corporate restructuring. Additionally, we may experience quarters in which our costs and operating expenses, in particular our research and development expenses, fluctuate depending on the stage and timing of product development. While certain of these factors may present significant opportunities for us, they also pose significant risks and challenges that we must address. See the section titled "Risk Factors" for more information.
Components of Results of Operations
Revenue
Our revenue consists of: (i) revenue from the sale of our disposable products; (ii) revenue from the sale, rental, or leasing of systems; and (iii) service/other revenue. Inthe United States and select markets inWestern Europe where we have developed a direct selling presence, we install our AcQMap console and workstation with our customer accounts and then generate revenue from the sale of our disposable products to these accounts for use with our system. We also generate revenue from the direct sale of our AcQMap console into hospital accounts as well as revenue through long-term customer commitments on disposable purchases. In other international markets, we leverage our partnership with Biotronik to install our AcQMap console and workstation with customer accounts and then generate revenue from Biotronik's sale of our disposable products to these accounts for use with our system. Our currently marketed disposable products include access sheaths, transseptal crossing tools, diagnostic and mapping catheters, ablation catheters and accessories. For the six months endedJune 30, 2022 and 2021, approximately 48% and 51%, respectively, of our sales were sold outside of theU.S. Additionally, for the six months endedJune 30, 2022 and 2021, approximately 23% and 28% of our sales were denominated in currencies other thanU.S. dollars, primarily in Euros and the British Pound Sterling. Our revenue is subject to fluctuation based on the foreign currency in which our products are sold. For the six months endedJune 30, 2022 , changes in foreign currency rates negatively impacted sales growth compared to the prior year by an estimated$0.1 million , and adversely impacted growth by 1.6%. 37
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Costs and Operating Expenses
Cost of Products Sold
Cost of products sold consist primarily of raw materials, direct labor, manufacturing overhead associated with the production and sale of our disposable products and, to a more limited extent, production and depreciation of our AcQMap console and workstation that we install with our customer accounts. We depreciate equipment over a three-year period. Cost of products sold also includes expenditures for warranty, field service, freight, royalties and inventory reserve provisions. We expect cost of products sold to increase in absolute dollars in future periods as our revenue increases.
Research and Development Expenses
Research and development expenses consist primarily of salaries and employee-related costs (including stock-based compensation) for personnel directly engaged in research and development activities, clinical trial expenses, equipment costs, materials costs, allocated rent and facilities costs and depreciation.
Research and development expenses related to possible future products are expensed as incurred. We also accrue and expense costs for activities associated with clinical trials performed by third parties as incurred. All other costs relative to setting up clinical trial sites are expensed as incurred. Clinical trial site costs related to patient enrollment are accrued as patients are entered into the trials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries and employee-related costs (including stock-based compensation) for personnel in sales, executive, finance and other administrative functions, allocated rent and facilities costs, legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services, marketing costs and insurance costs. To align resources with our current strategic direction, we have undertaken a RIF and have implemented additional cost reduction measures. Due to this strategic realignment, we do not expect to increase our selling, general and administrative expenses in the upcoming years.
Goodwill Impairment
Restructuring Expenses
To align resources with our current strategic direction, we have undertaken a RIF and have implemented additional cost reduction measures. Our restructuring expenses consist of severance expenses related to employees affected by the organizational RIF.
Change in Fair Value of Contingent Consideration
The change in fair value of contingent consideration relates to the contingent consideration associated with ourJune 2019 acquisition of Rhythm Xience, an entity with an integrated family of transseptal crossing and steerable introducer systems. This acquisition included potential earn out considerations based on the achievement of certain regulatory milestones and revenue milestones. Changes in the estimated fair value of the contingent consideration earn out are recognized in the condensed consolidated statement of operations and comprehensive income (loss), and reflect the changes within this account.
Gain on Sale of Business
On
Other Income (Expense)
Change in Fair Value of Warrant Liability
The warrants to purchase shares of our common stock issued pursuant to our credit agreement with Deerfield Private Design Fund III, L.P and Deerfield Partners, L.P. (the "2022 Credit Agreement") met the definition of a freestanding financial instrument and as such, they were initially recorded onJune 30, 2022 as a liability at fair value on our condensed consolidated balance sheet. The warrant liability will be remeasured at fair value at the end of each reporting period and subsequent changes in the fair value will be recognized as a component of other income (expense). 38
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Interest Income
Interest income consists primarily of interest earned on our cash, cash equivalents and marketable securities.
Interest Expense
Interest expense for the six months endedJune 30, 2022 and 2021 primarily relates to our credit agreement withOrbiMed Royalty Opportunities II, LP andDeerfield Private Design Fund II, L.P. (the "2019 Credit Agreement"), which was repaid onJune 30, 2022 . Interest expense in future periods will primarily relate to our 2022 Credit Agreement. The Company also recognized a loss on the extinguishment of the 2019 Credit Agreement.
Results of Operations for the Three Months Ended
The results of operations presented below should be reviewed in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q. The following table sets forth our results of operations for the three months endedJune 30, 2022 and 2021: Three Months Ended June 30, Change (dollars in thousands) 2022 2021 $ % (unaudited) Revenue(1)$ 4,076 $ 4,709 $ (633) (13) % Costs and operating (income) expenses: Costs of products sold(2) 9,697 7,492 2,205 29 % Research and development(2) 7,935 9,174 (1,239) (14) % Selling, general and administrative(2) 14,143 15,601 (1,458) (9) % Change in fair value of contingent consideration 948 (258) 1,206 (467) % Gain on sale of business (43,575) - (43,575) * Total costs and operating (income) expenses (10,852) 32,009 (42,861) (134) % Income (loss) from operations 14,928 (27,300) 42,228 (155) % Other income (expense): Loss on debt extinguishment (7,947) - (7,947) * Interest income 27 29 (2) (7) % Interest expense (1,290) (1,456) 166 (11) % Total other expense, net (9,210) (1,427) (7,783) 545 % Net income (loss)$ 5,718 $ (28,727) $ 34,445 (120) % Other comprehensive income (loss) Unrealized loss on marketable securities 18 4 14 350 % Foreign currency translation adjustment (387) 92 (479) (521) % Comprehensive income (loss)$ 5,349 $ (28,631) $ 33,980 (119) % * - Not meaningful (1)The following table sets forth our revenue for disposables, systems, and service/other for the three months endedJune 30, 2022 and 2021 (in thousands): Three Months Ended June 30, 2022 2021 (unaudited) Disposables$ 3,334 $ 3,509 Systems 346 799 Service/Other 396 401 Total revenue$ 4,076 $ 4,709 39
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The following table provides revenue by geographic location for the three months
ended
Three Months Ended June 30,
2022 2021
(unaudited)
United States $ 2,037 $ 2,486
Outside the United States 2,039 2,223
Total revenue $ 4,076 $ 4,709
(2)The following table sets forth the stock-based compensation expense included
in our results of operations for the three months ended June 30, 2022 and 2021
(in thousands):
Three Months Ended June 30,
2022 2021
(unaudited)
Cost of products sold $ 225 $ 223
Research and development 554 629
Selling, general and administrative 1,802 2,924
Total stock-based compensation$ 2,581 $ 3,776 Revenue Revenue was$4.1 million for the three months endedJune 30, 2022 , compared to$4.7 million for the three months endedJune 30, 2021 . This decrease of$0.6 million , or 13%, was primarily attributable to a decrease of$0.4 million in capital revenue and$0.2 million in disposable revenue as stocking orders for AcQMap installs declined with the decrease in new customer accounts.
Costs and Operating Expenses
Cost of Products Sold
Cost of products sold was$9.7 million for the three months endedJune 30, 2022 , compared to$7.5 million for the three months endedJune 30, 2021 . This increase of$2.2 million , or 29%, was primarily attributable to$0.9 million excess and obsolescence charge related to inventory,$0.8 million increase in amortized capitalized variances, and$0.7 million idle capacity on console manufacturing, partially offset by$0.2 million related to a decrease in capital sales. Gross margin was negative 138% for the three months endedJune 30, 2022 , and negative 59% for the three months endedJune 30, 2021 .
Research and Development Expenses
Research and development expenses were$7.9 million for the three months endedJune 30, 2022 , compared to$9.2 million for the three months endedJune 30, 2021 . This decrease of$1.2 million , or 14%, was primarily attributable to the decrease in project related spend and compensation and related costs from lower headcount.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were$14.1 million for the three months endedJune 30, 2022 , as compared to$15.6 million for the three month endedJune 30, 2021 . This decrease of$1.5 million , or 9%, was primarily attributable to a decrease in compensation and related costs from lower headcount.
Change in Fair Value of Contingent Consideration
For the three months endedJune 30, 2022 and 2021, we recorded an increase of$0.9 million and a decrease of$0.3 million , respectively, for the change in the fair value of the contingent consideration for the acquisition of Rhythm Xience. The increase in 2022 was primarily attributable to an increase in the expected term, while the decrease in 2021 was primarily attributable to a decrease in projected net revenue, along with a decrease to the expected term. 40
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Gain on Sale of Business
We recognized a$43.6 million gain during the three months endedJune 30, 2022 from the sale of certain assets to Medtronic. Refer to Note 4 - Sale of Business for more information. Other Expense, Net Other expense, net was$9.2 million for the three months endedJune 30, 2022 , compared to$1.4 million for the three months endedJune 30, 2021 . This increase of$7.8 million was primarily attributable to a$7.9 million loss on debt extinguishment recognized during the current three-month period, partially offset by a decrease of$0.2 million in interest expense. 41
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Results of Operations for the Six Months Ended
The results of operations presented below should be reviewed in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q. The following table sets forth our results of operations for the six months endedJune 30, 2022 and 2021: Six Months Ended June 30, Change (dollars in thousands) 2022 2021 $ % (unaudited) Revenue(1)$ 7,757 $ 8,300 $ (543) (7) % Costs and operating income (expenses): Costs of products sold(2) 16,638 14,447 2,191 15 % Research and development(2) 15,938 18,544 (2,606) (14) % Selling, general and administrative(2) 28,528 31,853 (3,325) (10) % Goodwill impairment 12,026 - 12,026 * Restructuring 949 - 949 * Change in fair value of contingent consideration 955 (1,411) 2,366 (168) % Gain on sale of business (43,575) - (43,575) * Total costs and operating expenses 31,459 63,433 (31,974) (50) % Loss from operations (23,702) (55,133) 31,431 (57) % Other income (expense): Loss on debt extinguishment (7,947) - (7,947) * Interest income 51 69 (18) (26) % Interest expense (2,701) (2,844) 143 (5) % Total other expense, net (10,597) (2,775) (7,822) 282 % Net loss$ (34,299) $ (57,908) $ 23,609 (41) % Other comprehensive income (loss) Unrealized (loss) gain on marketable securities (39) 10 (49) (490) % Foreign currency translation adjustment (553) (134) (419) 313 % Comprehensive loss$ (34,891) $ (58,032) $ 23,141 (40) % * - Not meaningful (1)The following table sets forth our revenue for disposables, systems, and service/other for the six months endedJune 30, 2022 and 2021 (in thousands): Six Months Ended June 30, 2022 2021 (unaudited) Disposables$ 6,545 $ 5,852 Systems 346 1,768 Service/Other 866 680 Total revenue$ 7,757 $ 8,300 42
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The following table provides revenue by geographic location for the six months
ended
Six Months Ended June 30,
2022 2021
(unaudited)
United States $ 4,060 $ 4,068
Outside the United States 3,697 4,232
Total revenue $ 7,757 $ 8,300
(2)The following table sets forth the stock-based compensation expense included
in our results of operations for the six months ended June 30, 2022 and 2021 (in
thousands):
Six Months Ended June 30,
2022 2021
(unaudited)
Cost of products sold $ 451 $ 380
Research and development 1,068 1,071
Selling, general and administrative 4,094 5,235
Total stock-based compensation$ 5,613 $ 6,686 Revenue Revenue was$7.8 million for the six months endedJune 30, 2022 , compared to$8.3 million for the six months endedJune 30, 2021 . This decrease of$0.5 million , or 7%, was attributable to a$1.4 million decrease in revenue from system sales, partially offset by a$0.7 million increase in purchase volume of our disposable products used in electrophysiology procedures and an increase of$0.2 million in services/other.
Costs and Operating Expenses
Cost of Products Sold
Cost of products sold was$16.6 million for the six months endedJune 30, 2022 , compared to$14.4 million for the six months endedJune 30, 2021 . This increase of$2.2 million , or 15%, was primarily attributable to$2.2 million in increased amortization related to unfavorable manufacturing variances,$1.5 million in excess and obsolescence charges related to inventory, and$0.7 million idle capacity on console manufacturing, partially offset by a$1.5 million benefit attributable to an Employee Tax Credit ("ERC") received under the CARES Act and$0.8 million related to decrease in capital sales. Gross margin was negative 114% for the six months endedJune 30, 2022 and negative 74% for the six months endedJune 30, 2021 .
Research and Development Expenses
Research and development expenses were$15.9 million for the six months endedJune 30, 2022 , compared to$18.5 million for the six months endedJune 30, 2021 . This decrease of$2.6 million , or 14%, was primarily attributable to an ERC benefit received under the CARES Act. Selling, General and Administrative Expenses Selling, general and administrative expenses were$28.5 million for the six months endedJune 30, 2022 , compared to$31.9 million for the six months endedJune 30, 2021 . This decrease of$3.3 million , or 10%, was primarily attributable to an ERC benefit received under the CARES Act and a decrease in headcount related expenses.
Goodwill Impairment
Goodwill impairment expense was$12.0 million for the six months endedJune 30, 2022 , which consisted of a full impairment of our goodwill balance. Refer to Note 9 -Goodwill and Intangible Assets for further details.
Restructuring
Restructuring expenses were$0.9 million for the six months endedJune 30, 2022 , and consisted of severance expenses for employees affected by the organizational RIF. 43
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Change in Fair Value of Contingent Consideration
For the six months endedJune 30, 2022 and 2021, we recorded changes in fair value of contingent consideration of$1.0 million and negative$1.4 million , respectively, for the change in the fair value of the contingent consideration for the acquisition of Rhythm Xience. The increase in 2022 was primarily attributable to an increase in the expected term, while the decrease in 2021 was primarily attributable to a decrease in projected net revenue, along with a decrease to the expected term.
Gain on Sale of Business
We recognized a$43.6 million gain during the six months endedJune 30, 2022 from the sale of certain assets to Medtronic. Refer to Note 4 - Sale of Business for more information. Other Expense, Net Other expense, net was$10.6 million for the six months endedJune 30, 2022 , compared to$2.8 million for the six months endedJune 30, 2021 . The increase in expense of$7.8 million was primarily due to a$7.9 million loss on debt extinguishment recognized during the current six-month period, partially offset by a decrease of$0.1 million in interest expense.
Liquidity, Capital Resources, and Going Concern
We have limited revenue, have incurred significant operating losses and negative cash flows from operations since our inception, and anticipate that we will incur significant losses for at least the next several years. As ofJune 30, 2022 andDecember 31, 2021 , we had cash, cash equivalents, restricted cash and marketable securities of$93.1 million and$108.0 million , respectively. For the six months endedJune 30, 2022 and 2021, net losses were$34.3 million and$57.9 million , respectively, and net cash used in operating activities was$48.2 million and$49.9 million respectively. As ofJune 30, 2022 andDecember 31, 2021 , we had an accumulated deficit of$513.0 million and$478.7 million , respectively, and working capital of$93.3 million and$107.8 million , respectively. Prior to our IPO inAugust 2020 , operations had been financed primarily by aggregate net proceeds from the sale of convertible preferred stock and principal of converted debt of$253.9 million as well as other indebtedness. OnAugust 10, 2020 , we issued 10,147,058 shares of common stock in our IPO, which included 1,323,529 shares of common stock issued upon the exercise in full by the underwriters of an option to purchase additional shares of common stock, at the public offering price less underwriting discounts and commissions. The price to the public was$18.00 per share, for net proceeds of$166.3 million . InJuly 2021 , we issued 6,325,000 shares of common stock in a public offering, which included 825,000 shares of common stock issued upon the underwriter's exercise in full of an option to purchase additional shares of common stock. The price to the public for each share was$14.00 . We received gross proceeds of$88.6 million from the offering. Net of underwriting discounts and commission and other offering expenses, we received proceeds of$82.7 million from the offering. With the closing of our IPO inAugust 2020 , the follow on offering inJuly 2021 , the reduction in force ("RIF") announced inJanuary 2022 ,$50.0 million of proceeds received from theJune 30, 2022 first closing in the sale of certain transseptal access and sheath assets to Medtronic, as further discussed in Note 4 - Sale of Business, and further cost reduction actions taken inJuly 2022 , management believes our current cash, cash equivalents and marketable securities are sufficient to fund operations for at least the next 12 months. To ensure that we have sufficient resources to fund operations, management continues to review cost improvement opportunities and pathways to reduce expenses and cash burn, while preserving the resources to invest in future growth. In the future, we may need to raise additional funds through one or more of the following: the issuance of debt and/or equity securities or otherwise. Until such time, if ever, that we can generate revenue sufficient to achieve profitability, we expect to finance our operations through equity or debt financings, which may not be available to us on the timing needed or on terms that we deem to be favorable. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends. If we are unable to maintain sufficient financial resources, our business, financial condition, and results of operations will be materially and adversely affected. We may be required to delay, limit, reduce or terminate our product discovery and development activities or future commercialization efforts. 44
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Our future liquidity and capital funding requirements will depend on numerous factors, including:
•our revenue growth;
•our research and development efforts;
•our sales and marketing activities;
•our success in leveraging our strategic partnerships, including with Biotronik, as well as entrance into any other strategic partnerships or strategic transactions in the future;
•our ability to raise additional funds to finance our operations;
•the outcome, costs and timing of any clinical trial results for our current or future products;
•the emergence and effect of competing or complementary products;
•the availability and amount of reimbursement for procedures using our products;
•our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;
•our ability to retain our current employees and the need and ability to hire additional management and sales, scientific and medical personnel;
•the terms and timing of any collaboration, licensing or other arrangements that we have or may establish;
•debt service requirements;
•the extent to which we acquire or invest in businesses, products or technologies; and
•the impact of the COVID-19 pandemic.
Our primary uses of capital are, and we expect will continue to be, investment in our commercial organization and related expenses, clinical research and development services, laboratory and related supplies, legal and other regulatory expenses, general administrative costs and working capital. In addition, we have acquired, and may in the future seek to acquire or invest in, additional businesses, products or technologies that we believe could complement or expand our portfolio, enhance our technical capabilities or otherwise offer growth opportunities. For example, inJune 2019 , we acquired Rhythm Xience, a medical device company specializing in the design and manufacture of transseptal crossing and steerable introducer systems, for$3.0 million in cash. The cash payment did not include the potential$17.0 million in earn out consideration to be paid based on the achievement of certain regulatory milestones and revenue milestones. InFebruary 2020 , we issued to the former owners of Rhythm Xience 119,993 shares of our Series D convertible preferred stock and paid them$2.5 million in the first quarter of 2020, an additional$3.4 million in 2021 and$0.6 million in the first half of 2022, in connection with the regulatory and revenue milestones earned to date. In addition, pursuant to the Biotronik license agreement, we paid Biotronik a$3.0 million upfront fee at the time the agreement was signed, as well as a technology transfer fee consisting of$7.0 million in cash inDecember 2019 and$5.0 million in shares of our Series D convertible preferred stock inFebruary 2020 . We are required to payBiotronik and VascoMed GmbH (the "Biotronik Parties") up to$10.0 million , of which$2.0 million has been paid as ofJune 30, 2022 , upon the achievement of various regulatory and sales-related milestones, as well as unit-based royalties on any sales of Force sensing catheters. We will also incur costs as a public company that we have not previously incurred or have previously incurred at lower rates. Under Accounting Standards Codification Subtopic 205-40, Presentation of Financial Statements-Going Concern, we have the responsibility to evaluate whether conditions and/or events could raise substantial doubt about our ability to meet our future financial obligations as they become due within one year after the date that the financial statements are issued. Going concern matters are more fully discussed in Note 1, "Organization and Description of Business - Liquidity, Capital Resources and Going Concern" of our condensed consolidated financial statements. Additionally, we will need to raise additional funds through the issuance of debt and/or equity securities or otherwise, which may not be available to us on the timing needed or on terms that we deem to be favorable. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends. If we are unable to maintain sufficient financial resources, our business, financial condition and results of operations will be materially and adversely affected. To raise sufficient additional funds, we may be required to delay, limit, reduce or terminate our product discovery and development activities or future commercialization efforts. There can be no assurance that we will be able to obtain the needed 45 -------------------------------------------------------------------------------- Table of Contents financing on acceptable terms or at all. In addition, our recent corporate restructuring is intended to reduce our operating expenses and optimize our cash resources. Based on the timing of notifications under the WARN Act, we started realizing the benefits of our restructuring plan beginning late in the first quarter of 2022; however, there can be no assurance that we will realize the benefits of the restructuring on the anticipated timeline, or at all. Debt Obligations OnJune 30, 2022 , we entered into the 2022 Amended & Restated Credit Agreement (the "2022 Credit Agreement"). The 2022 Credit Agreement provided us with a term loan facility in aggregate principal amount of$35.0 million . The 2022 Credit Agreement bears interest at the one-month adjusted term Secured Overnight Financing Rate, with a floor of 2.50% per annum, plus 9.00% per annum. The principal amount of the term loan will be paid in installments with the final principal payment due onJune 30, 2027 . The 2022 Credit Agreement can be prepaid but is subject to prepayment penalties. The 2022Credit Agreement provides for final payment fees of an additional$1.8 million that are due upon prepayment, on the maturity date or upon acceleration. Proceeds from the 2022 Credit Agreement, along with cash on hand, were used to repay the 2019 Credit Agreement and to pay related fees and expenses and for working capital purposes. The 2022 Credit Agreement contains certain customary negative covenants, including, but not limited to, restrictions on our ability and that of our subsidiaries to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, pay dividends or make other restricted payments, sell or otherwise transfer assets or enter into transactions with affiliates. The 2022 Credit Agreement provides that, upon the occurrence of certain events of default, our obligations thereunder may be accelerated. Such events of default include payment defaults to the lenders, material inaccuracies of representations and warranties, covenant defaults, cross-defaults to certain other indebtedness, voluntary and involuntary bankruptcy proceedings, certain money judgments, change of control events and other customary events of default.
Our obligations under the 2022 Credit Agreement are secured by substantially all of our assets, including our intellectual property.
We also issued warrants to purchase our common stock toDeerfield Management Company ("Deerfield") in connection with the 2022 Credit Agreement. We issued warrants to purchase up to an aggregate 3,779,018 shares of our common stock, par value$0.001 per share common stock, at an exercise price of$1.1114 per warrant share for a period of eight years.
Cash Flows
The following table shows a summary of our cash flows for the six months ended
Six Months Ended June 30,
2022 2021
(unaudited)
Net cash used in operating activities $ (48,218) $ (49,915)
Net cash provided by investing activities 86,680 34,022
Net cash used in financing activities (11,643) (2,149)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(323) (65)
Net change in cash, cash equivalents and restricted cash
Operating Activities During the six months endedJune 30, 2022 , operating activities used$48.2 million of cash, a decrease of$1.7 million from the six months endedJune 30, 2021 . This decrease was attributable to favorable changes in operating assets and liabilities of$0.5 million and lower net losses of$23.6 million , partially offset by a decrease in non-cash items and reclasses of$22.4 million . Non-cash items and reclasses were primarily due to the$43.6 million gain on sale of business and reduced stock-based compensation expense of$1.1 million , partially offset by the goodwill impairment charge of$12.0 million , loss on debt extinguishment of$7.9 million and an increase in the change in fair value of contingent consideration of$2.4 million .
Investing Activities
During the six months endedJune 30, 2022 , investing activities provided$86.7 million of cash, an increase of$52.7 million from the six months endedJune 30, 2021 . This increase was attributable to proceeds from the first closing in the sale of assets to Medtronic, net of transaction costs paid, of$47.5 million , a decrease in purchases of marketable securities of$9.1 million compared to the prior period, a decrease in the purchases of property and equipment of$4.1 million compared to the prior period, and an increase in the sales of marketable securities of$8.5 million compared to the prior period. These increases were partially offset by a decrease in the maturities of marketable securities of$16.6 million compared to the prior period. 46
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Financing Activities
During the six months endedJune 30, 2022 , financing activities used$11.6 million of cash, an increase of$9.5 million from the six months endedJune 30, 2021 . The increase is primarily related to the repayment of the borrowings under our 2019 Credit Agreement for$44.6 million and payment of debt issuance costs for the 2022 Credit Agreement of$0.6 million and$1.1 million of penalty fees for early repayment of the 2019 Credit Agreement, partially offset by borrowings under the 2022 Credit Agreement of$35.0 million and a$2.2 million decrease in payments of contingent consideration.
Contractual Obligations and Commitments
We enter into agreements in the normal course of business with contract research organizations for clinical trials and with vendors for preclinical trials and other services and products for operating purposes which are cancellable at any time by us, generally upon 30 days prior written notice. Further, the agreement to acquire Rhythm Xience requires us to pay the former owners of Rhythm Xience up to$17.0 million in earn out consideration based on the achievement of certain regulatory and revenue milestones. InFebruary 2020 , we issued to the former owners of Rhythm Xience 119,993 shares of our Series D convertible preferred stock valued at$2.2 million and paid them$2.5 million in the first quarter of 2020, an additional$3.4 million in 2021 and$0.6 million in the first half of 2022, in connection with the regulatory and revenue milestones earned to date. In addition, pursuant to the Biotronik license agreement, we issued to Biotronik$5.0 million in shares of our Series D convertible preferred stock inFebruary 2020 , and we are required to pay the Biotronik Parties up to$10.0 million , of which$2.0 million has been paid as ofJune 30, 2022 , upon the achievement of various regulatory and sales-related milestones, as well as unit-based royalties on any sales of Force sensing catheters.
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue and expenses. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.
During the six months ended
Our significant accounting policies are described in Note 2 to our condensed consolidated financial statements.
Recent Accounting Pronouncements
See Note 2 to our condensed consolidated financial statements for a description of recent accounting pronouncements applicable to our condensed consolidated financial statements.
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