ATRC

AtriCure, Inc. 10-Q Summary: Period Ended June 30, 2007

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2007, and the six months ended June 30, 2007. AtriCure, Inc. develops, manufactures, and sells surgical devices, primarily the Isolator® bipolar ablation system, designed to create lesions in cardiac tissue to treat atrial fibrillation. The company operates in a single segment with sales in the United States and internationally (primarily Europe via a Dutch subsidiary).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 28.0% for the three months and 26.3% for the six months compared to the prior year periods, driven by increased unit sales domestically and internationally.
• Cost of Revenues: Increased as a percentage of revenue from 18.5% to 20.6% due to a higher mix of new products with initially higher costs.
• Operating Expenses: Selling, general, and administrative (SG&A) expenses rose significantly ($1.5M increase for the quarter; $4.3M for the six months) due to increased headcount in sales/marketing, higher marketing expenditures (tradeshows), and a $0.4M legal settlement accrual.
• Capital Raise: In May 2007, the company completed a private placement of 1,789,649 shares, generating gross proceeds of approximately $16.5 million and net proceeds of approximately $15.2 million.
• Cash Flow: Net cash used in operating activities was $5.6 million for the six months ended June 30, 2007, compared to $6.2 million in the prior year period. Net cash provided by financing activities was $16.5 million, primarily from the equity offering.

Guidance, Outlook, and Risks

• Regulatory Milestones: On July 5, 2007, the Isolator® bipolar ablation clamp system received FDA 510(k) clearance for the ablation of cardiac tissue. However, no products are currently approved by the FDA specifically for the treatment of atrial fibrillation.
• Product Development: The company is conducting clinical trials for minimally invasive sole-therapy treatment for AF, with FDA approval sought as early as 2009. The Cosgrove-Gillinov Left Atrial Appendage Occlusion Clip is under FDA review, which requested additional information.
• Acquisition: On August 8, 2007 (subsequent to period end), AtriCure acquired the Frigitronics® CCS-200 product line from Cooper Surgical, Inc. for approximately $3.7 million.
• Legal Proceedings: A securities class action lawsuit (Levine v. AtriCure, Inc.) is pending; the company intends to vigorously defend against it. A dispute with former European distributor LST b.v. was tentatively settled with an accrued liability of approximately $300,000.
• Liquidity: Management believes current cash and cash equivalents, along with expected operating cash flows, are sufficient to meet needs for at least the next 12 months.

Investor Verification Checklist

• Regulatory Status: Verify the specific scope of the July 5, 2007 FDA 510(k) clearance and the timeline for the pending clinical trials for atrial fibrillation treatment.
• Profitability Path: Assess the sustainability of SG&A expense growth relative to revenue growth, given the company's continued net losses and accumulated deficit of $63.1 million.
• Capital Usage: Monitor the deployment of the $15.2 million in net proceeds from the May 2007 private placement, specifically regarding R&D and potential acquisitions.
• Legal Exposure: Track the status of the pending securities class action lawsuit and the finalization of the LST b.v. settlement payments.
• Product Mix: Evaluate the impact of the new product mix on gross margins, as new products currently carry higher costs.