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. 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 the primary unmet need in electrophysiology procedures today. We were incorporated in theState of Delaware 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 were a series of recent strategic transactions and regulatory approvals, including: 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. , or Rhythm Xience; and the acquisition of our AcQBlate Force sensing product line fromBiotronik SE & Co. KG , orBiotronik . Since our full launch, we have continued to enhance our product portfolio and global presence by entering into bi-lateral distribution agreements withBiotronik inMay 2020 , which added a full suite of diagnostic and ablation catheters to our product portfolio and significantly expanded our international distribution and market development capabilities. 31 -------------------------------------------------------------------------------- Table of Contents The diagram below depicts a chronology of these and other key events since our inception: [[Image Removed]] 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 withBiotronik 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 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. As ofJune 30, 2020 , our commercial organization consisted of 60 individuals with substantial applicable medical device, sales and clinical experience, including sales managers, sales representatives and mappers. Over time, we plan to selectively add highly qualified personnel to our commercial organization with a strategic mix of sales representatives and mappers to cover the concentrated group of hospitals that we believe perform the majority of the cardiac ablation procedures in our direct markets. Our revenue has historically consisted predominantly of sales of our disposable products (principally our mapping catheters and related access sheaths, and to a lesser extent our transseptal crossing tools, ablation catheters and other accessories), as we generally loaned our first-generation AcQMap console and workstation to our customers without charge to facilitate the use of our disposable products. 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 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. In addition, we have also generated a small portion of our revenue from service agreements with our customers. We currently manufacture our novel access sheaths, transseptal crossing tools, diagnostic and mapping catheters, ablation catheters, mapping and imaging consoles and accessories at our approximately 50,800 square foot facility inCarlsbad, California . This facility provides approximately 15,750 square feet of space for our production and distribution operations, including manufacturing, quality control and storage. In addition, we stock inventory of raw materials, components and finished goods at our facility inCarlsbad and, to a limited extent, with our sales representatives, who travel to our customers' locations as part of their sales efforts. We rely on a single or limited number of suppliers for certain raw materials and components, and we generally have no long-term supply arrangements with our suppliers, as we generally order on a purchase order basis. Furthermore, we rely on third parties to manufacture certain products we offer our customers as part of our product portfolio, includingBiotronik for diagnostic and ablation catheters, radiofrequency, or RF, generators and irrigation pumps,Innovative Health for reprocessed diagnostic catheters and MedFact for robotic navigation enabled ablation catheters. As ofJune 30, 2020 , we have completed three clinical trials that collectively evaluated 223 subjects across 16 centers in multiple countries. We are currently conducting two post-market trials to provide physicians with additional safety and effectiveness data on the use of our AcQMap System, and we are planning two investigational device exemption, or IDE, trials to support regulatory approval of our AcQBlate Force ablation catheters. Our ongoing and planned trials are anticipated to involve an aggregate of over 700 subjects in at least 35 centers inthe United States and internationally. We expect to provide data readouts from these ongoing and planned trials at various points in time through 2023. 32 -------------------------------------------------------------------------------- Table of Contents For the six months endedJune 30, 2020 , and 2019, we generated revenue of$2.7 million and$1.5 million , respectively, of which 51% and 70%, respectively, was from customers located outside ofthe United States . Since our inception, we have generated significant losses. Our net loss was$41.3 million and$45.0 million for the six months endedJune 30, 2020 and 2019, respectively. As ofJune 30, 2020 andDecember 31, 2019 , we had an accumulated deficit of$300.4 million and$259.0 million , respectively, and working capital of$15.1 million and$50.5 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. We intend to continue to make significant investments in our sales and marketing organization. We believe increasing the number of sales representatives and expanding our international marketing programs will help facilitate further adoption of our products among existing customer accounts as well as broaden awareness of our products to new accounts. We also expect to continue to make substantial investments in our ongoing clinical trials and in additional clinical trials that are designed to provide clinical evidence of the safety and effectiveness of our existing and future generations of products. We expect to continue to make investments in research and development and regulatory affairs to develop future generations of products based on our technology, supported with appropriate regulatory submissions. We 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. We will also incur costs as a public company that we have not previously incurred or have previously incurred 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. Biotronik Agreements Biotronik License Agreement InJuly 2019 , we entered into the Biotronik License Agreement withBiotronik andVascoMed GmbH , or VascoMed (who we refer to together as the Biotronik Parties), whereby we acquired certain manufacturing equipment and obtained from the Biotronik Parties a license under certain patents and technology to develop, commercialize, distribute and manufacture our AcQBlate Force ablation catheters and Qubic Force device. We refer to this transaction as the Biotronik Asset Acquisition. Pursuant to the Biotronik License Agreement, we paidBiotronik 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 . The Biotronik License Agreement also requires that we pay the Biotronik Parties certain milestone payments as follows: (i)$2.0 million upon receipt of marketing approval for the sale of our AcQBlate Force ablation catheters inEurope ; (ii)$5.0 million upon the receipt of marketing approval for the sale of our AcQBlate Force ablation catheters inthe United States ; and (iii)$3.0 million upon the first commercial sale of our AcQBlate Force ablation catheters inthe United States . We are also required to pay theBiotronik Parties unit-based royalties on any sales we make of our AcQBlate Force ablation catheters following commercialization. Bi-Lateral Distribution Agreements InMay 2020 , we entered into more expansive bi-lateral distribution agreements withBiotronik . We refer to these agreements as the Bi-Lateral Distribution Agreements and our relationship withBiotronik as theAcutus/Biotronik Global Alliance for Electrophysiology . Pursuant to our Bi-Lateral Distribution Agreements, we obtained a non-exclusive license to distribute a range ofBiotronik's therapeutic electrophysiology products and accessories (including the AlCath family of RF ablation catheters) inthe United States ,Canada ,China ,Hong Kong and multiple Western European countries under our own private label. Moreover, if an IDE clinical trial is required for these products to obtain regulatory approval inthe United States , or a clinical trial is required for these products to obtain regulatory approval inChina , we will obtain an exclusive distribution right in such territories for a term of up to five years commencing on the date of regulatory approval if we cover the cost of the IDE or other clinical trial and we conduct such study within a specified period. We also obtained a non-exclusive license to distribute a range ofBiotronik's diagnostic electrophysiology products and accessories in each of the foregoing territories under our own private label. Pursuant to the Bi-Lateral Distribution Agreements,Biotronik has also agreed to distribute our products, including our AcQMap System, our Qubic Force device and our disposable products (including our AcQBlate Force catheters) and accessories inGermany ,Japan ,Mexico ,Switzerland and multiple countries inAsia-Pacific ,Eastern Europe , theMiddle East andSouth America . We also grantedBiotronik a co-exclusive right to distribute these products inHong Kong .Biotronik is required to use our branding with respect to the AcQMap console and workstation, but retains the right to distribute our disposable products and accessories under its private label. Each party will pay to the other party specified transfer prices on the sale of the other party's products under the Bi-Lateral Distribution Agreements and, accordingly, will earn a distribution margin on the sale of the other party's products. 33 -------------------------------------------------------------------------------- Table of Contents Key Business Metric We regularly review a number of operating and financial metrics, including the following key business metric, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe that the following metric is representative of our current business. However, we anticipate this metric may change or may be substituted for additional or different metrics as our business grows and as we introduce new products. 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. We believe our installed base is one of the key indicators of our ability to drive customer adoption of our products. 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 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, 2020 and 2019 is set forth in the table below: As of June 30, 2020 2019 (unaudited) Acutus Direct US 20 8 Europe 18 18 Total Acutus Direct 38 26 Biotronik - - Total net system placements 38 26
Our net increase in installed base for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(unaudited) (unaudited)
Acutus Direct
US 7 1 10 3
Europe - 2 1 2
Total Acutus Direct 7 3 11 5
Biotronik - - - -
Total net system placements 7 3 11 5
34-------------------------------------------------------------------------------- Table of Contents Growth in our quarterly installed base can fluctuate due to a number of factors, including the commercial effectiveness of our sales representatives and strategic partners such asBiotronik , and the procurement and budgeting cycles of many of our customers, especially those where unused funds may be forfeited or future budgets may be reduced if purchases are not made by their fiscal year end. We also believe the timing of installations has been impacted and will continue to be impacted by the timing of product introductions and transitions. In addition, the growth of our market in certain geographic regions and our continued efforts to service these regions impact unit volumes quarter to quarter. 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 ourportfolio 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 of June 30, 2020 , our commercial organization consisted of 60
individuals with substantial applicable medical device, sales andclinical experience, including sales managers, sales representatives and
mappers. We intend to continue to make significant investments in our
commercial organization by increasing the number of our sales
representatives, sales managers and mappers, as well as by expanding our
global marketing and training programs, to help facilitate further
adoption of our products among existing and new customer accounts. The
rate at which we grow our commercial organization and the speed at which
newly hired personnel become effective 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
with
into our
2020. In addition, we added an integrated family of transseptal crossing
and steerable introducer systems to our product portfolio through our
acquisition of Rhythm Xience in
sensing product line from Biotronik in July 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 dependsubstantially 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.
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•
.
Our business strategy relies significantly on innovation to develop and
introduce new products and to differentiate our products from our
competitors. For example, in 2019, our research and development team
released five new disposable products, two hardware products, including a
major generational update to our AcQMap System, and 15 software updates.
We expect our research and development expenditures to increase as we
make additional investments to support our growth strategies. We plan to
increase our research and development expenditures with 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 areundertaking such investments in the belief that they will contribute to
long-term growth.
• Product and Geographic Mix; Timing
.
Our financial results, including our gross margins, may fluctuate from
period to period due to a variety of factors, including: average sellingprices; 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; thelevel of reimbursement available for our products; discounting practices;
manufacturing costs; product yields; headcount; and cost-reduction
strategies. For example, gross margins on the sale of our products by our
direct selling organization in
higher than gross margins on the sale of our products by
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 mayfluctuate 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
.
We are seeking FDA clearance and CE Mark for the use of our AcQBlate
Force ablation catheters and Qubic Force device in
Europe , 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 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. Publications of clinical results
by us, our competitors and other third 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.
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• COVID-19
Pandemic
. Beginning in early March 2020 , the
COVID-19pandemic and the measures imposed to contain this pandemic disrupted and
are expected to continue to impact our business. For example, on
issued Executive Order
N-33-20,
ordering all individuals in the State of California to stay home or at
their place of residence except as needed to maintain continuity of
operations of the federal critical infrastructure sectors. Our primary
operations are located in Carlsbad, California . As a result of such
order, the majority of our employees have telecommuted, which may impactcertain of our operations over the near term and long term. Moreover,
beginning in
restricted to essential personnel, 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. Moreover, hospitals and other therapeutic centers
suspended many elective procedures, resulting in a significantly reduced
volume of procedures using our products. In addition, all clinical trials
in
follow-ups
for clinical trials done via telecom, and we believe enrollment timing in
our planned clinical trials will be slowed due to
COVID-19
driven delayed access to enrollment sites. As a result of the
interruptions to our business due to
COVID-19,we enacted a cash conservation program, which included delaying certain
non-critical
capital expenditures and other projects and implementing a hiring freeze,
headcount reductions and temporary compensation reductions (through
late
volumes began increasing as compared to
COVID-19
related low points in March 2020 , the magnitude of the impact of the
COVID-19
pandemic on our productivity, results of operations and financialposition, and its disruption to our business and our clinical programs
and timelines, will depend, in part, on the length and severity of these
restrictions and on our ability to conduct business in the ordinary
course. Quarantines,
shelter-in-place
and similar government orders have also impacted, and may continue to
impact, our third-party manufacturers and suppliers, and could in turn
adversely impact the availability or cost of materials, which could
disrupt our supply chain.
In addition, we may experience meaningful variability in our quarterly revenue
and gross profit/loss as a result of a number of factors, including, but not
limited to: inventory write-offs and write-downs; costs, benefits and timing of
new product introductions; the availability and cost of components and raw
materials; and fluctuations in foreign currency exchange rates. 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 all 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;
and (ii) systems and service revenue. In the United States and select markets in
Western 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. 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.
Our revenue has historically consisted predominantly of sales of our disposable
products (principally our mapping catheters and related access sheaths, and to a
lesser extent our transseptal crossing tools, ablation catheters and other
accessories), as we generally loaned our first-generation AcQMap console and
workstation to our customers without charge to facilitate the use of our
disposable products. 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 second-generation
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 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. When a sale of a second-generation AcQMap system is made,
the sale includes installation of the equipment, software updates and
maintenance, and equipment service. Evaluation contracts are not accounted for
as sales under Accounting Standards Codification, or ASC, 606,
Revenue from Contracts with Customers
. In addition, we also generate a small portion of our revenue from service
agreements. Revenue is recognized when the customer obtains control of the
promised goods or services, generally at a point in time, and is recognized in
an amount that reflects the consideration that we expect to receive in exchange
for those goods or services. For the six months ended June 30, 2020 and 2019,
approximately 51% and 70%, respectively, of our sales were denominated in
currencies other than U.S. dollars, primarily in Euros and the British
Pound Sterling, or GBP. Our revenue is subject to fluctuation based on the
foreign currency in which our products are sold.
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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.
Gross profit is calculated as revenue less cost of products sold. Gross margin
is gross profit expressed as a percentage of revenue. 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;
headcount; and cost-reduction strategies. For example, gross margins on the sale
of our products by our direct selling organization in the United States and
Western 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.
In addition, we have experienced negative gross margins in recent periods as a
result of significant investments in our infrastructure to support our
commercial launch and to enable our production volumes to scale as our business
grows. We expect our gross margins to increase over the long term to the extent
we are successful in increasing our sales volume and are therefore able to
leverage our fixed costs. We intend to use our design, engineering and
manufacturing capabilities to further advance and improve the efficiency of our
manufacturing processes, which, if successful, we believe will reduce costs and
enable us to increase our gross margins. Such manufacturing cost improvement
efforts may involve moving production of key subassemblies in house, volume
driven supplier cost reductions and process redesigns. While we expect gross
margins to increase over the long term, they will likely fluctuate from quarter
to quarter as we continue to introduce new products and adopt new manufacturing
processes and technologies.
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.
We expect our research and development expenses to increase in absolute dollars
for the foreseeable future, though they may vary from period to period as a
percentage of revenue, as we hire additional research and development personnel,
as well as continue to develop new products, enhance existing products and
technologies and perform activities related to obtaining additional regulatory
approvals or clearances.
Research and Development Expenses-License Acquired
In July 2019 , we entered into the Biotronik License Agreement with the Biotronik
Parties in connection with the Biotronik Asset Acquisition. In accordance with
ASC 805,
Business Combinations
, the Biotronik Asset Acquisition was accounted for as an asset acquisition as
substantially all of the $15.0 million in value transferred to Biotronik was
allocated to intellectual property. On the acquisition date, the products
licensed had not yet received regulatory approval and the intellectual property
did not have an alternative use. Accordingly, the $15.0 million paid to
Biotronik was immediately charged to research and development expenses-license
acquired in our consolidated statement of operations and comprehensive loss in
July 2019 . Additional contingent milestone payments of up to $10.0 million are
to be made to the Biotronik Parties upon certain regulatory approvals and first
commercial sale, as described above. In further consideration of the rights
granted, beginning with our first commercial sale of the first force sensing
ablation catheter within the licensed product line, we will also make per unit
royalty payments. We have determined that as of the acquisition date and as of
June 30, 2020 and December 31, 2019 , the contingent milestone and royalty
payments are not probable and estimable and therefore have not been recorded as
a liability. Upon regulatory approval of our force sensing ablation catheter in
Europe , the milestone payments will be capitalized and amortized, and the
royalty payments will be recorded as cost of products sold as sales of catheters
are recognized.
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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.
We expect our selling, general and administrative expenses to increase in
absolute dollars for the foreseeable future, though they may vary from period to
period as a percentage of revenue, as we expand our sale force and increase the
number of our mappers, increase our professional education and physician
training, as well as to support our expanded infrastructure and incur increased
costs associated with operating as a public company. These increases are
expected to include increased costs for fees to members of our board of
directors, increased employee-related expenses, and increased director and
officer insurance premiums, audit and legal fees, investor relations fees and
expenses for compliance with public company reporting requirements under the
Exchange Act and rules implemented by the SEC , as well as stock exchange rules.
In connection with our IPO, certain performance-based restricted stock awards
vested as the completion of our IPO constituted the relevant performance
condition. As a result, we expect to record an incremental stock-based
compensation charge of $3.8 million as part of selling, general and
administrative expenses for the quarter ending September 30, 2020 in our
condensed consolidated financial statements.
Other Income (Expense)
Change in Fair Value of Warrant Liability
We accounted for certain of our freestanding warrants to purchase shares of our
common stock and preferred stock as liabilities at fair value. We accounted for
certain features of our convertible notes issued in 2018, or the 2018
Convertible Notes (which were converted into shares of our Series D convertible
preferred stock in 2019), that were determined to be an embedded derivative
requiring bifurcation and separate accounting at fair value. The warrants and
embedded derivative were subject
to re-measurement at
each balance sheet date with gains and losses reported in our condensed
consolidated statements of operations and comprehensive loss.
Loss on Debt Extinguishment
During 2019, we repaid the entire principal amount of our loan under our loan
and security agreement with Oxford Finance LLC , or the 2018 Term Loan. We
recorded a loss on debt extinguishment for the write off of deferred financing
fees, the prepayment penalty and related fees upon our prepayment of this loan.
Interest Income
Interest income consists primarily of interest earned on our cash, cash
equivalents and marketable securities.
Interest Expense
Interest expense relates to our: (i) Credit Agreement with Orbimed Royalty
Opportunities II, LP and Deerfield Private Design Fund II, L.P. , or the 2019
Credit Agreement; (ii) 2018 Term Loan, which was repaid during 2019; (iii) 2018
Convertible Notes; and (iv) convertible notes issued in 2019, or the 2019
Convertible Notes. Our 2018 Convertible Notes and our 2019 Convertible Notes
were converted into shares of our Series D convertible preferred stock during
2019.
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Results of Operations for the Three Months Ended June 30, 2020 and 2019
The results of operations presented below should be reviewed in conjunction with
our condensed consolidated financial statements and related notes included
elsewhere in this Form
10-Q.
The following table sets forth our results of operations for the three months
ended June 30, 2020 and 2019:
Three Months Ended June 30, Change
(dollars in thousands) 2020 2019 $ %
(Unaudited)
Revenue
(2) $ 1,134 $ 734 $ 400 54 %
Costs and operating expenses:
Costs of products sold
(1) 2,663 2,435 228 9 %
Research and development
(1) 8,176 5,247 2,929 56 %
Selling, general and administrative
(1) 9,125 6,927 2,198 32 %
Change in fair value of contingent
consideration 635 - 635 NM
Total operating expenses 20,599 14,609 5,990 41 %
Loss from operations (19,465 ) (13,875 ) (5,590 ) 40 %
Other income (expense):
Change in fair value of warrant
liability and embedded derivative (2,453 ) (1,446 ) (1,007 ) 70 %
Loss on debt extinguishment - (1,398 ) 1,398 (100 %)
Interest income 95 143 (48 ) (34 %)
Interest expense (1,370 ) (13,769 ) 12,399 (90 %)
Total other expense, net (3,728 ) (16,470 ) 12,742 (77 %)
Net loss $ (23,193 ) $ (30,345 ) $ 7,152 (24 %)
Other comprehensive income (loss)
Unrealized gain (loss) on marketable
securities (14 ) 6 (20 ) NM
Foreign currency translation adjustment 96 2 94 NM
Comprehensive loss $ (23,111 ) $ (30,337 ) $ 7,226 (24 %)
NM - Not meaningful
(1) The following table sets forth the stock-based compensation expense included
in our results of operations for the three months ended June 30, 2020 and
2019:
Three Months Ended June 30,
2020 2019
(unaudited)
Cost of products sold $ 58 $ 54
Research and development 167 150
Selling, general and administrative 932 599
Total stock-based compensation $ 1,157
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(2) The following table sets forth our revenue for disposables and
systems/service for the three months ended June 30, 2020 and 2019:
Three Months Ended June 30,
2020 2019
(Unaudited)
Acutus Direct
Disposables $ 899 $ 705
Systems - -
Service/Other 12 4
Total Acutus direct revenue 911 709
Distribution agreements 223 25
Total revenue $ 1,134 $ 734
Three Months Ended June 30,
2020 2019
(Unaudited)
Acutus Direct
United States $ 544 $ 221
Europe 367 488
Total Acutus direct revenue 911 709
Distribution Agreements
United States 15 -
Europe 208 25
Total revenue through distribution 223 25
Total revenue $ 1,134 $ 734
Revenue
Revenue was $1.1 million for the three months ended June 30, 2020 , compared to
$0.7 million for the three months ended June 30, 2019 . This increase of
$0.4 million , or 54%, was primarily attributable to a $0.4 million increase in
purchase volume of our disposable products used in electrophysiology procedures
as a result of a higher installed base, as well as slightly higher average
selling prices on certain of our disposable products.
Revenue, classified by the major geographic areas in which our products are
shipped, was $0.6 million for the United States and $0.6 million for all other
countries in the three months ended June 30, 2020 , compared to $0.2 million for
the United States and $0.5 million for all other countries for the comparative
period in 2019.
Costs and Operating Expenses
Cost of Products Sold
Cost of products sold was $2.7 million for the three months ended June 30, 2020 ,
compared to $2.4 million for the three months ended June 30, 2019 . This increase
of $0.2 million , or 9%, was primarily attributable to a $0.2 million increase in
warranty and field service expense to support the higher installed base. Gross
margin was negative 135% for the three months ended June 30, 2020 compared to
negative 232% for the three months ended June 30, 2019 . This improvement in
gross margin was primarily attributable to increased sales volume of our
disposable products.
Research and Development Expenses
Research and development expenses were $8.2 million for the three months ended
June 30, 2020 , compared to $5.2 million for the three months ended June 30,
2019 . This increase of $2.9 million , or 56%, was primarily attributable to
$0.9 million in increased compensation and related costs from higher headcount,
and $2.0 million in increased materials and supplies costs related to higher
engineering project spending.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $9.1 million for the three
months ended June 30, 2020 , compared to $6.9 million for the three months ended
June 30, 2019 . This increase of $2.2 million , or 32%, was primarily attributable
to $3.1 million in increased compensation and related costs due to our
investment in our commercial organization in support of our full commercial
launch in the United States in the first quarter of 2020. However, due to the
COVID-19
pandemic, the increase was offset by a $0.2 million decrease in consulting
expenses and $0.5 million decrease in general marketing expenses.
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Change in Fair Value of Contingent Consideration
For the three months ended June 30, 2020 , we recorded a change in fair value of
contingent consideration of $0.6 million for the increase in the fair value of
the contingent consideration for the acquisition of Rhythm Xience.
Other Income (Expense)
Other expense, net was $3.7 million for the three months ended June 30, 2020 ,
compared to $16.5 million for the three months ended June 30, 2019 . This
decrease of $12.7 million , or 77%, was primarily attributable to a decrease of
$12.4 million in interest expense primarily related to the 2019 Credit Agreement
and 2018 Convertible Notes.
Results of Operations for the Six Months Ended June 30, 2020 and 2019
The results of operations presented below should be reviewed in conjunction with
our condensed consolidated financial statements and related notes included
elsewhere in this Form
10-Q.
The following table sets forth our results of operations for the six months
ended June 30, 2020 and 2019:
Six Months Ended June 30, Change
2020 2019 $ %
(Unaudited)
Revenue
(2) $ 2,717 $ 1,521 $ 1,196 79 %
Costs and operating expenses:
Costs of products sold
(1) 5,857 4,611 1,246 27 %
Research and development
(1) 16,149 9,624 6,525 68 %
Selling, general and administrative
(1) 19,360 11,020 8,340 76 %
Change in fair value of contingent
consideration (1,584 ) - (1,584 ) NM
Total operating expenses 39,782 25,255 14,527 58 %
Loss from operations (37,065 ) (23,734 ) (13,331 ) 56 %
Other income (expense):
Change in fair value of warrant liability
and embedded derivative (1,872 ) (605 ) (1,267 ) 209 %
Loss on debt extinguishment - (1,398 ) 1,398 (100 %)
Interest income 370 208 162 78 %
Interest expense (2,724 ) (19,511 ) 16,787 (86 %)
Total other expense, net (4,226 ) (21,306 ) 17,080 (80 %)
Net loss $ (41,291 ) $ (45,040 ) $ 3,749 (8 %)
Other comprehensive income (loss)
Unrealized gain (loss) on marketable
securities (41 ) 7 (48 ) NM
Foreign currency translation adjustment 69 (12 ) 81 NM
Comprehensive loss $ (41,263 ) $ (45,045 ) $ 3,782 (8 %)
NM - Not meaningful
(1) The following table sets forth the stock-based compensation expense included
in our results of operations for the six months ended June 30, 2020 and 2019:
Six Months Ended June 30,
2020 2019
(unaudited)
Cost of products sold $ 166 $ 106
Research and development 378 292
Selling, general and administrative 2,354 964
Total stock-based compensation
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(2) The following table sets forth our revenue for disposables and
systems/service for the six months ended June 30, 2020 and 2019:
Six Months Ended June 30,
2020 2019
(unaudited)
Acutus Direct
Disposables $ 1,919 $ 1,487
Systems 520 -
Service/Other 18 9
Total Acutus direct revenue 2,457 1,496
Distribution agreements 260 25
Total revenue $ 2,717 $ 1,521
Six Months Ended June 30,
2020 2019
(unaudited)
Acutus Direct
United States $ 1,313 $ 456
Europe 1,144 1,040
Total Acutus direct revenue 2,457 1,496
Distribution Agreements
United States 15 -
Europe 245 25
Total revenue through distribution 260 25
Total revenue $ 2,717 $ 1,521
Revenue
Revenue was $2.7 million for the six months ended June 30, 2020 , compared to
$1.5 million for the six months ended June 30, 2019 . This increase of
$1.2 million , or 79%, was primarily attributable to $0.5 million of AcQMap
systems sales and a $0.7 million increase in purchase volume of our disposable
products used in electrophysiology procedures as a result of a higher installed
base, as well as slightly higher average selling prices on certain of our
disposable products.
Revenue, classified by the major geographic areas in which our products are
shipped, was $1.3 million for the United States and $1.4 million for all other
countries in the three months ended June 30, 2020 , compared to $0.5 million for
the United States and $1.1 million for all other countries for the comparative
period in 2019.
Costs and Operating Expenses
Cost of Products Sold
Cost of products sold was $5.9 million for the six months ended June 30, 2020 ,
compared to $4.6 million for the six months ended June 30, 2019 . This increase
of $1.2 million , or 27%, was primarily attributable to $1.0 million due to an
increase in sales volume, and a $0.4 million increase in warranty and field
service expense to support the higher installed base, partially offset by
$0.2 million decrease in depreciation costs due to impairment of first
generation systems at the end of 2019. Gross margin was negative 116% for the
six months ended June 30, 2020 compared to negative 203% for the six months
ended June 30, 2019 . This improvement in gross margin was primarily attributable
to increased sales volume of our disposable products.
Research and Development Expenses
Research and development expenses were $16.1 million for the six months ended
June 30, 2020 , compared to $9.6 million for the six months ended June 30, 2019 .
This increase of $6.5 million , or 68%, was primarily attributable to
$2.9 million in increased compensation and related costs from higher headcount,
and $3.6 million in increased materials and supplies costs related to higher
engineering project spending.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $19.4 million for the six
months ended June 30, 2020 , compared to $11.0 million for the six months ended
June 30, 2019 . This increase of $8.3 million , or 76%, was primarily attributable
to $7.6 million in increased compensation and related costs due to our
investment in our commercial organization in support of our full commercial
launch in the United States in the first quarter of 2020, $0.6 million in
increased consulting expenses and $0.2 million in increased general marketing
expenses.
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Change in Fair Value of Contingent Consideration
For the six months ended June 30, 2020 , we recorded a change in fair value of
contingent consideration of $1.6 million for the decrease in the fair value of
the contingent consideration for the acquisition of Rhythm Xience.
Other Income (Expense)
Other expense, net was $4.2 million for the six months ended June 30, 2020 ,
compared to $21.3 million for the six months ended June 30, 2019 . This decrease
of $17.1 million , or 80%, was primarily attributable to a decrease of
$16.8 million in interest expense primarily related to the 2019 Credit Agreement
and 2018 Convertible Notes.
Liquidity and Capital Resources
We have incurred significant operating losses and negative cash flows from
operations since our inception, and we anticipate that we will incur significant
losses for at least the next several years. As of June 30, 2020 and December 31,
2019 , we had cash and cash equivalents and marketable securities of
$29.3 million and $71.8 million , respectively. For the six months ended June 30,
2020 and the years ended December 31, 2019 and 2018, our net losses were
$41.3 million , $97.0 million and $47.9 million , respectively, and our net cash
used in operating activities was $35.5 million , $56.0 million and $33.8 million ,
respectively. We had an accumulated deficit of $300.3 million and $259.0 million
as of June 30, 2020 and December 31, 2019 , respectively.
Prior to our initial public offering ("IPO") in August 2020 , our operations had
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. In June and July 2019 , we
completed an equity financing pursuant to which we issued 8,200,297 shares of
Series D convertible preferred stock in a private placement. The Series D
convertible preferred stock issuance was comprised of: (i) 4,091,819 shares at
$16.67 per share for cash proceeds of $66.6 million , net of fees of
$1.6 million ; and (ii) 1,884,565 shares at $13.33 per share (including a 20%
discount) for the conversion of our 2018 Convertible Notes (and related accrued
interest) and 2,223,913 shares at $16.67 per share for the conversion of our
2019 Convertible Notes (and related accrued interest), in an aggregate amount of
$68.5 million , including the fair value of the embedded derivative of
$6.3 million relating to the 20% discount for the conversion of the 2018
Convertible Notes. On August 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, at the public
offering price less underwriting discounts and commissions, up to an additional
1,323,529 shares. The price to the public for each share was $18.00 .
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
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;
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• 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 collaborative, 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, in June 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. In February 2020 , we issued to the former owners of Rhythm Xience
119,993 shares of our Series D convertible preferred stock and paid them
$2.6 million 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 in December
2019 and $5.0 million in shares of our Series D convertible preferred stock in
February 2020 . We are required to pay the Biotronik Parties up to $10.0 million
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.
With the closing of our IPO, our current cash and cash equivalents are
sufficient to fund operations for at least the next 12 months. However, we will
need to raise additional funds through one or more of the following: issuance of
additional debt, equity or both. 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. There can be no assurance that we will be able to obtain the needed
financing on acceptable terms or at all.
Debt Obligations
During 2019, we repaid our 2018 Term Loan and our 2018 Convertible Notes and our
2019 Convertible Notes were converted into shares of our Series D convertible
preferred stock.
On May 20, 2019 , we entered into the 2019 Credit Agreement. The 2019 Credit
Agreement provided us with a senior term loan facility in aggregate principal
amount of $70.0 million , of which we borrowed $40.0 million upon closing. Of the
remaining $30.0 million , $10.0 million is no longer available for borrowing and
$20.0 million is available for borrowing by us on or prior to December 31, 2020 ,
subject to our achievement of specified trailing revenue levels. The 2019 Credit
Agreement bears interest per annum at 7.75% plus LIBOR for such interest period,
and the principal amount of term loans outstanding under the 2019 Credit
Agreement is due on May 20, 2024 . The 2019 Credit Agreement can be prepaid but
is subject to prepayment penalties. The 2019 Credit Agreement provides for final
payment fees of an additional $4.6 million that are due upon prepayment, on the
maturity date or upon acceleration.
Our obligations under the 2019 Credit Agreement are secured by substantially all
of our assets, including our intellectual property, and is guaranteed by our
subsidiary. The 2019 Credit Agreement contains customary affirmative and
restrictive covenants, including
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with respect to our ability to enter into fundamental transactions, incur
additional indebtedness, grant liens, pay any dividend or make any distributions
to our holders, make investments and merge or consolidate with any other person
or engage in transactions with our affiliates, but does not include any
financial covenants, other than a minimum liquidity requirement.
In connection with our entry into the 2019 Credit Agreement, we issued
liability-classified warrants with a fair value of $0.9 million to purchase
419,992 shares of our Series C convertible preferred stock at $16.67 per share.
These warrants were subsequently automatically converted into warrants to
purchase an equal number of shares of our Series D convertible preferred stock
at a price of $16.67 per share. Upon closing of our IPO, these warrants were
automatically converted into warrants to purchase an equal number of shares of
our common stock at a price of $16.67 per share.
Cash Flows
The following table shows a summary of our cash flows for the six months ended
June 30, 2020 and 2019 (in thousands):
Six Months Ended June 30,
2020 2019
(Unaudited)
Net cash used in operating activities $ (34,761 ) $ (22,084 )
Net cash provided by (used in) investing activities 52,650 (17,424 )
Net cash (used in) provided by financing activities (3,115 ) 97,951
Effect of exchange rate changes on cash, cash equivalents and restricted cash 69
(12 )
Net change in cash, cash equivalents and restricted cash$ 14,843 $ 58,431 Operating Activities During the six months endedJune 30, 2020 , operating activities used$34.8 million of cash, an increase of$12.7 million from the six months endedJune 30, 2019 . This increase was primarily driven by a decrease of$17.0 million in amortization of debt issuance costs, a decrease of$1.6 million in the fair value of the contingent consideration and a decrease of$1.4 million of loss on debt extinguishment. This increase was partially offset by a$3.7 million decrease in the net loss, a$1.5 million increase of stock-based compensation expense and$1.3 million increase in the fair value of warrant liability and embedded derivative. Investing Activities During the six months endedJune 30, 2020 , investing activities provided$52.7 million of cash, an increase of$70.1 million from the six months endedJune 30, 2019 . This increase was attributable to an increase of maturities of marketable securities of$31.9 million , sales of marketable securities of$17.1 million , a decrease of$22.2 million of purchases of marketable securities and$3.0 million of cash paid for the Rhythm Xience acquisition, partially offset by a$4.1 million increase in purchases of property and equipment. Financing Activities During the six months endedJune 30, 2020 , financing activities used$3.1 million of cash, a decrease of$101.1 million from the six months endedJune 30, 2019 . The primary financing activity for the six months endedJune 30, 2020 was payment of contingent consideration related to the Rhythm Xience acquisition for the achievement of certain regulatory milestones and revenue targets. The primary financing activities for the six months endedJune 30, 2019 included$40.0 million resulting from the closing of the 2019 Credit Agreement,$38.2 million from the issuance of shares of our Series D convertible preferred stock inJune 2019 and$37.0 million from the issuance of the 2019 Convertible Notes inMay 2019 , partially offset by$17.3 million in debt repayments related to the repayment of the 2018 Term Loan and payments of issuance and extinguishment costs Contractual Obligations and Commitments During the six months endedJune 30, 2020 , there have been no material changes outside the ordinary course of business to our contractual obligations from those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the prospectus datedAugust 5, 2020 (the "Prospectus") that forms a part of the Company's Registration Statements on Form S-1 (File No. 333-239873), as filed with theSEC pursuant to Rule 424(b)(4) promulgated under the Securities Act of 1933, as amended. 46 -------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements As ofJune 30, 2020 andDecember 31, 2019 , we did not have, and we do not currently have, any off-balance sheet arrangements, as defined in theSEC rules and regulations. 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, orU.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, 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 endedJune 30, 2020 , there have been no material changes to our critical accounting policies and estimates from those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Prospectus that forms a part of the Company's Registration Statements on Form S-1 (File No. 333-239873), as filed with theSEC pursuant to Rule 424(b)(4) promulgated under the Securities Act of 1933, as amended. Our significant accounting policies are described in the 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. Item 3. Quantitative and Qualitative Disclosures about Market Risk As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this item. Item 4. Controls and Procedures Disclosure Controls and Procedures We maintain "disclosure controls and procedures," as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified inSecurities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Principal Financial Officer, to allow timely decisions regarding required disclosure. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. With respect to the quarter endedJune 30, 2020 , under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures are effective. Management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected. Changes in Internal Control over Financial Reporting: There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter endedJune 30, 2020 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 47
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