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Future maturities of lease liabilities as of September 30, 2024 are as follows:
Operating Leases
Finance Leases
2024 (excluding the nine months ended September 30, 2024)
$
388
$
435
2025
1,808
1,742
2026
1,606
1,774
2027
1,560
1,808
2028
959
1,842
2029 and thereafter
1,416
3,158
Total payments
$
7,737
$
10,759
Less imputed interest
(1,222)
(2,011)
Total
$
6,515
$
8,748
9.COMMITMENTS AND CONTINGENCIES
License Agreement. The Company had been a party to a license agreement that required royalty payments of 5% of specified product sales. In May 2023, the Company entered into an agreement that terminated the license agreement and the Company's obligations to make royalty payments under the license agreement. See Legal section below for additional information.
Purchase Agreements. The Company enters into standard purchase agreements with suppliers in the ordinary course of business, generally with terms that allow cancellation.
Legal. The Company may, from time to time, become a party to legal proceedings. Such matters are subject to many uncertainties and to outcomes of which the financial impacts are not predictable with assurance and that may not be known for extended periods of time. A liability is established once management determines a loss is probable and an amount can be reasonably estimated. The Company recognizes income from a favorable resolution of legal proceedings when the associated cash or assets are received.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
The Company received a Civil Investigative Demand from the U.S. Department of Justice (USDOJ) in December 2017 stating that it was investigating the Company to determine whether the Company has violated the False Claims Act, relating to the promotion of certain medical devices related to the treatment of atrial fibrillation for off-label use and submitted or caused to be submitted false claims to certain federal and state health care programs for medically unnecessary healthcare services. In March 2021, USDOJ informed the Company that its investigation was based on a lawsuit brought on behalf of the United States and various state and local governments under the qui tam provisions of federal and certain state and local False Claims Acts. Although the USDOJ and all of the state and local governments declined to intervene, the relator continued to pursue the case. During the third quarter of 2022, the relator filed a Fourth Amended Complaint, which alleged that the Company paid illegal kickbacks. In September 2024, the District Court granted the Company's motion to dismiss the Fourth Amended Complaint and denied the relator's request for leave to further amend the complaint.
On August 23, 2022, the Cleveland Clinic Foundation (“CCF”) and IDx Medical, Ltd. (“IDx”) filed a Demand for Arbitration against the Company with the American Arbitration Association (“AAA”), alleging that the Company breached certain provisions of the License Agreement dated December 9, 2003 among the Company, Clinic and IDx (“License Agreement”). Clinic and IDx alleged that the Company did not include the revenues from sales of certain products in its royalty payments due under the License Agreement, and the Company did not provide related notices required under the License Agreement. The Company filed its Answering Statement and Counterclaims to the allegations in September 2022, denying each claim and counterclaiming for breach of contract, correction of inventorship, declaratory judgment, patent prosecution and legal fees. In May 2023, the Company entered into an Assignment and Agreement Regarding IDx and CCF Intellectual property (“Assignment Agreement”) with Clinic and IDx. Pursuant to the Assignment Agreement, during the second quarter of 2023, the Company made a one-time payment of $33,400 to Clinic and IDx for the acquisition of patents and other intellectual property. The Assignment Agreement also requires dismissal of the arbitration and release of payment for royalty obligations due to Clinic and IDx under the License Agreement after March 31, 2023. The amount paid, together with transaction costs, was allocated between the acquired intangible asset, the release of payment for royalty obligations and the settlement of the dispute. The intangible asset was assigned a value of $30,000 and is being amortized over an estimated useful life of 5 years. The release of the royalty obligations was valued at $432. The remaining $3,088 was allocated to the settlement and was included in selling, general and administrative expenses for the nine months ended September 30, 2023.
During the first quarter of 2023, the Company entered into a legal settlement for $7,500 in connection with the settlement of claims filed against a competitor. The Company recorded a $7,500 gain for the nine months ended September 30, 2023 for the proceeds received as a reduction to selling, general and administrative expenses.
10.REVENUE
The Company develops, manufactures and sells devices designed for surgical ablation of cardiac tissue, exclusion of the left atrial appendage, and temporarily blocking pain by ablating peripheral nerves. These devices are marketed to a broad base of medical centers globally. The Company recognizes revenue when control of promised goods is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods.
United States revenue by product type is as follows:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
International revenue by product type is as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Open ablation
$
8,607
$
8,007
$
25,679
$
23,015
Minimally invasive ablation
1,681
1,578
5,559
4,820
Pain management
1,590
547
3,768
1,214
Total ablation
$
11,878
$
10,132
$
35,006
$
29,049
Appendage management
8,580
6,466
24,784
18,869
Total International
$
20,458
$
16,598
$
59,790
$
47,918
Revenue attributed to customer geographic locations is as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
United States
$
95,452
$
81,692
$
281,240
$
244,784
Europe
12,215
9,217
36,193
28,075
Asia Pacific
6,914
6,568
19,916
18,095
Other International
1,329
813
3,681
1,748
Total International
20,458
16,598
59,790
47,918
Total Revenue
$
115,910
$
98,290
$
341,030
$
292,702
11.INCOME TAX PROVISION
The Company files federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. The Company uses the asset and liability method to determine its provision for income taxes. The Company’s provision for income taxes in interim periods is computed by applying the discrete method and is based on financial results through the end of the interim period. The Company determined that using the discrete method is more appropriate than using the annual effective tax rate method. The Company is unable to estimate the annual effective tax rate with sufficient precision to use the effective tax rate method, which requires a full-year projection of income. The effective tax rate for the three months ended September 30, 2024 and 2023 was (4.3%) and (0.5%). The effective tax rate for the nine months ended September 30, 2024 and 2023 was (2.7%) and (1.1%). The Company’s worldwide effective tax rate differs from the US statutory rate of 21% primarily due to valuation allowances.
The Company's federal, state, local and foreign tax returns are routinely subject to review by various taxing authorities. The Company has not accrued any interest and penalties related to unrecognized income tax benefits as a result of offsetting net operating losses. However, if required, the Company will recognize interest and penalties within income tax expense and within the related tax liability.
12.EQUITY COMPENSATION PLANS
The Company has two share-based incentive plans: the 2023 Stock Incentive Plan (2023 Plan) and the 2018 Employee Stock Purchase Plan (ESPP).
Stock Incentive Plan
Under the 2023 Plan, the Board of Directors may grant restricted stock awards or restricted stock units (collectively RSAs), nonstatutory stock options, performance share awards (PSAs) or stock appreciation rights to Company employees, directors and consultants, and may grant incentive stock options to Company employees. The Compensation Committee of the Board of Directors, as the administrator of the 2023 Plan, has the authority to determine the terms of any awards, including the number of shares subject to each award, the exercisability of the awards and the form of consideration. As of September 30,
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
2024, 4,087 shares of common stock have been reserved for issuance under the 2023 Plan, and 2,482 shares were available for future grants. The Company issues registered shares of common stock for stock option exercises, restricted stock grants and performance share award payments.
Employee Stock Purchase Plan
Under the ESPP, shares of the Company’s common stock may be purchased at a discount (15%) to the lesser of the closing price of the Company’s common stock on the first or last trading day of the offering period. The offering period (currently six months) and the offering price are subject to change. Participants may not purchase more than $25 of the Company’s common stock in a calendar year or more than 3 shares during an offering period. As of September 30, 2024, there were 621 shares available for future issuance under the ESPP.
Share-Based Compensation Expense Information
The following table summarizes the allocation of share-based compensation expense:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Cost of revenue
$
578
$
442
$
1,736
$
1,356
Research and development expenses
1,738
1,485
5,090
4,329
Selling, general and administrative expenses
8,048
6,734
23,194
20,731
Total
$
10,364
$
8,661
$
30,020
$
26,416
13.COMPREHENSIVE LOSS AND ACCUMULATED OTHER COMPREHENSIVE LOSS
In addition to net losses, comprehensive loss includes foreign currency translation adjustments and unrealized gains (losses) on investments.
Accumulated other comprehensive loss consisted of the following, net of tax:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Total accumulated other comprehensive loss at beginning of period
$
(569)
$
(2,609)
$
(993)
$
(4,096)
Unrealized Gains (Losses) on Investments
Balance at beginning of period
$
(15)
$
(2,230)
$
(800)
$
(3,698)
Other comprehensive income before reclassifications
15
701
800
2,169
Balance at end of period
$
—
$
(1,529)
$
—
$
(1,529)
Foreign Currency Translation Adjustment
Balance at beginning of period
$
(554)
$
(379)
$
(193)
$
(398)
Other comprehensive income (loss) before reclassifications
586
(286)
199
(133)
Amounts reclassified to other (expense) income
(179)
10
(153)
(124)
Balance at end of period
$
(147)
$
(655)
$
(147)
$
(655)
Total accumulated other comprehensive loss at end of period
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except per share amounts)
(Unaudited)
14.SUBSEQUENT EVENT
During October 2024, the Company entered into an exclusive licensing agreement with a third-party to co-develop and commercialize equipment incorporating pulsed field ablation (PFA) technology. The agreement requires upfront payment of $12,000 during the fourth quarter of 2024 and obligates the Company to pay up to $28,000 in additional consideration if defined milestones are met during specified periods concluding ten years from the effective date. The agreement also contains provisions requiring future royalty payments on devices incorporating co-developed technology upon commercialization. There was no financial impact during the third quarter of 2024 related to the agreement.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollar amounts referenced in this Item 2 are in thousands, except per share amounts.)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and notes thereto contained in Item 1 of Part I of this Form 10-Q and our audited financial statements and notes thereto as of and for the year ended December 31, 2023 included in our Form 10-K filed with the Securities and Exchange Commission (SEC) to provide an understanding of our results of operations, financial condition and cash flows. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under Item 1A “Risk Factors,” the cautionary statement regarding forward-looking statements below and elsewhere in this Form 10-Q.
Forward-Looking Statements
This Form 10-Q, including the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, "Quantitative and Qualitative Disclosures about Market Risk" and “Risk Factors,” contains forward-looking statements regarding our future performance. All forward-looking information is inherently uncertain and actual results may differ materially from assumptions, estimates or expectations reflected or contained in the forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this quarterly report on Form 10-Q, and in our annual report on Form 10-K for the year ended December 31, 2023. There may be additional risks of which we are not presently aware or that we currently believe are immaterial which could have an adverse impact on our business. Forward-looking statements often address our expected future business, financial performance, financial condition and results of operations, and often contain words such as “intends,” “estimates,” “anticipates,” “hopes,” “projects,” “plans,” “expects,” “drives,” “seek,” “believes,” “see,” “focus,” “should,” “will,” “would,” “opportunity,” “outlook,” “could,” “can,” “may,” “future,” “predicts,” “target,” “potential,” "forecast," "trend," "might" and similar expressions and the negative versions of those words, and may be identified by the context in which they are used. However, the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements include, without limitation, statements that address activities, events, circumstances or developments that AtriCure expects, believes or anticipates will or may occur in the future, such as earnings estimates (including projections and guidance), other predictions of financial performance, launches by AtriCure of new products, developments with competitors and market acceptance of AtriCure's products. Such statements are based largely upon current expectations of AtriCure. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to different materially from those expressed or implied. Forward-looking statements are based on AtriCure’s expectations, experience and perception of current conditions, trends, expected future developments and other factors it believes are appropriate under the circumstances and are subject to numerous risks and uncertainties, many of which are beyond AtriCure’s control. In other words, these statements are not guarantees of future performance and inherently involve a wide range of risks and uncertainties that are difficult to predict. With respect to the forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements speak only as of the date of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise unless required by law.
Overview
We are a leading innovator in treatments for atrial fibrillation (Afib), left atrial appendage (LAA) management and post-operative pain management. Our ablation and left atrial appendage management (LAAM) products are used by physicians during both open-heart and minimally invasive procedures. In open-heart procedures, the physician is performing heart surgery for other conditions and our products are used in conjunction with (or “concomitant” to) such a procedure. Minimally invasive procedures are performed on a standalone basis, and often include multi-disciplinary or “hybrid” approaches, combining surgical procedures using AtriCure ablation and LAAM products with catheter ablation procedures performed by electrophysiologists. Our pain management devices are used by physicians to freeze nerves during cardiothoracic or thoracic surgical procedures. We anticipate that substantially all of our revenue for the foreseeable future will relate to products we currently sell or are in the process of developing.
We sell our products to medical centers through our direct sales force in the United States, Germany, France, the United Kingdom, the Benelux region, Australia and Canada. We also sell our products through distributors who in turn sell our products to medical centers in other markets. Our business is primarily transacted in U.S. Dollars; direct sales transactions outside the United States are transacted in Euros, British Pounds, Australian Dollars or Canadian Dollars.
In 2024, we realized strong global revenue growth resulting from our continued strategic initiatives of product innovation, clinical science and physician education and training to expand awareness and adoption. Our worldwide revenue for the nine months ended September 30, 2024 was $341,030, representing an increase of $48,328, or 16.5%, over the first nine months of 2023, driven by growing adoption across key product lines as well as new product launches. Historically there have been limited competitors in our key markets. However, new entrants are developing competing products, procedures, and/or clinical solutions that may cause variability in our results.
Highlights of the strategic and operational advancements include:
PRODUCT INNOVATION. We continue to invest in research and development of new products and pursue regulatory approvals to market and sell globally across all franchises. Throughout 2024, we received several additional CE Mark certifications under the European Medical Device Regulation (EU MDR).
•Open. During the third quarter 2024, we received regulatory approval to sell the ENCOMPASS® clamp in CE-marked countries in the European Union, representing a significant expansion of our open ablation franchise products in Europe.
•Minimally invasive. In the first half of 2024, FDA granted 510(k) clearance for EPi-Ease™, our Hybrid access device to facilitate guide-wire delivery, vacuum application and endoscope insertion. During the third quarter, FDA granted 510(k) clearance for our EnCapture clamp, the newest in our line of Isolator® Synergy™ Ablation System clamps, with enhanced geometry and features to facilitate engagement with intended cardiac tissue.
•Pain management. During the second quarter of 2024, we launched the cryoSPHERE®+ cryoablation probe for pain management in the US. The cryoSPHERE®+ device leverages new technology that minimizes thermal loss by focusing energy at the ball tip, allowing for a reduction in freeze time by 25%. Further, the cryoSPHERE MAX™ probe, recently launched in October 2024, features a larger ball tip designed to optimize Cryo Nerve Block therapy. This new probe reduces freeze times by 50% when compared to the first generation cryoSPHERE® cryoablation probe, and over 30% when compared to the cryoSPHERE®+ probe.
•Appendage management. The first patient was treated and we launched the AtriClip® FLEX-Mini™ device in the US during the third quarter of 2024. The AtriClip FLEX-Mini sets a new standard as the smallest profile for surgical LAA device on the market and builds upon the proven technology of our AtriClip platform, with ease of use and design simplicity that offers enhanced access and increased visibility for physicians. We also obtained additional international regulatory approvals for our AtriClip platform during the third quarter. In China, we received approval to market and sell several models of our AtriClip® Left Atrial Appendage Exclusion System from the National Medical Products Administration (NMPA) of China. In CE-marked countries in Europe, we received expanded indication for the AtriClip for use in patients at high risk of thromboembolism for whom left atrial appendage exclusion is warranted.
CLINICAL SCIENCE. We invest in studies to expand labeling claims, support various indications for our products and gather and publish clinical data for therapies and procedures involving our products. One of our critical initiatives is the Left Atrial Appendage Exclusion for Prophylactic Stroke Reduction (LeAAPS) IDE clinical trial. LeAAPS is designed to evaluate the effectiveness of prophylactic LAA exclusion using the AtriClip LAA Exclusion System for the prevention of ischemic stroke or systemic arterial embolism in cardiac surgery patients without pre-operative AF diagnosis who are at risk for these events. This prospective, multicenter, randomized trial evaluates safety at 30 days post-procedure to demonstrate no increased risk with LAA exclusion during cardiac surgery, and efficacy over a minimum follow-up of five years post procedure. The trial provides for enrollment of up to 6,500 subjects at up to 250 sites worldwide. The first patient was enrolled in the trial in January 2023, and we ended the third quarter of 2024 with over 3,400 patients enrolled. Site initiation and enrollment is ongoing.
TRAINING. Our professional education team conducts a variety of in-person and virtual training programs for physicians and other healthcare professionals. These training methods ensure access to continuing education and awareness of our products and related procedures. During 2023, we launched new training courses for Advanced Practice Providers, pain management in pectus procedures, as well as a best practice course for developing arrhythmia programs, with a primary focus on Hybrid therapies. These training events allow for collaborative, hands-on engagement with our physician partners and other healthcare professionals. Additionally, our professional education courses continue to be enhanced by the use of simulation models or synthetic cadavers, known as CADets. These reusable CADets provide a sustainable alternative to the use of cadaver specimens, in addition to increasing the efficiencies of education and more cost effective training alternatives. In 2024, we continue to innovate physician training to improve accessibility and efficiency for our physician partners. We are currently piloting the use of live streaming to enable remote proctoring and case observation.
Three months ended September 30, 2024 compared to three months ended September 30, 2023
The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of revenue:
Three Months Ended September 30,
2024
2023
Amount
% of Revenues
Amount
% of Revenues
Revenue
$
115,910
100.0
%
$
98,290
100.0
%
Cost of revenue
29,117
25.1
24,421
24.8
Gross profit
86,793
74.9
73,869
75.2
Operating expenses:
Research and development expenses
20,960
18.1
20,354
20.7
Selling, general and administrative expenses
73,238
63.2
61,604
62.7
Total operating expenses
94,198
81.3
81,958
83.4
Loss from operations
(7,405)
(6.4)
(8,089)
(8.2)
Other expense, net:
(126)
(0.1)
(919)
(0.9)
Loss before income tax expense
(7,531)
(6.5)
(9,008)
(9.2)
Income tax expense
322
0.3
47
—
Net loss
$
(7,853)
(6.8)
%
$
(9,055)
(9.2)
%
Revenue. The following table sets forth, for the periods indicated, our revenue by product type and geography expressed as dollar amounts and the corresponding change in such revenues between periods, in both dollars and percentages:
Three Months Ended September 30,
Change
2024
2023
Amount
%
Open ablation
$
30,601
$
25,844
$
4,757
18.4
%
Minimally invasive ablation
11,117
10,893
224
2.1
Pain management
16,314
12,591
3,723
29.6
Appendage management
37,420
32,364
5,056
15.6
Total United States
$
95,452
$
81,692
$
13,760
16.8
Total International
20,458
16,598
3,860
23.3
Total revenue
$
115,910
$
98,290
$
17,620
17.9
%
Worldwide revenue increased 17.9% (17.8% on a constant currency basis). In the United States, sales grew in key product lines, including our ENCOMPASS® clamp in open ablation, AtriClip® Flex⋅V® for appendage management and our cryoSPHERE® probes for post-operative pain management. Growth in minimally invasive ablation was driven by our EPi-Sense® System devices for Hybrid AF™ Therapy. International sales increased 23.3% (22.4% on a constant currency basis), with strength across all franchises in Europe and most of our other major markets.
Revenue reported on a constant currency basis is a non-GAAP measure calculated by applying previous period foreign currency exchange rates, which are determined by the average daily exchange rate, to each of the comparable periods. Revenue is analyzed on a constant currency basis to better measure the comparability of results between periods. Because changes in foreign currency exchange rates have a non-operating impact on revenue, we believe that evaluating growth in revenue on a constant currency basis provides an additional and meaningful assessment of revenue to both management and investors.
Cost of revenue and gross margin. Cost of revenue increased $4,696 primarily reflecting higher sales volumes. Gross margin decreased 27 basis points, driven primarily by less favorable geographic and product mix.
Research and development expenses. Research and development expenses increased $606 or 3.0%. Expansion of product development, clinical and regulatory teams resulted in $1,815 increase in personnel costs including travel and share-based compensation. Clinical trial expenses increased $739 from increased clinical activity and consulting costs, driven by LeAAPS clinical trial patient enrollment and follow up activities. These increases were partially offset by a $2,179 decrease in product development project spend and regulatory filings and submission costs incurred in 2023 related to several products brought to market in 2024, including cryoSPHERE+ and AtriClip FLEX-Mini.
Selling, general and administrative expenses. Selling, general and administrative expenses increased $11,634, or 18.9%, driven by $9,337 increase in personnel costs including travel and share-based compensation, primarily reflecting headcount growth and variable compensation. Consulting fees increased $1,274, while marketing and meeting costs increased $725. Professional services, IT and other corporate costs grew $444, offset by a $401 decrease in training costs.
Other income (expense). Other income and expense consists primarily of net interest expense and net foreign currency transaction gains or losses.
Nine months ended September 30, 2024 compared to nine months ended September 30, 2023
The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of revenue:
Nine Months Ended September 30,
2024
2023
Amount
% of Revenues
Amount
% of Revenues
Revenue
$
341,030
100.0
%
$
292,702
100.0
%
Cost of revenue
86,125
25.3
72,147
24.6
Gross profit
254,905
74.7
220,555
75.4
Operating expenses:
Research and development expenses
61,221
18.0
53,119
18.1
Selling, general and administrative expenses
219,174
64.3
185,451
63.4
Total operating expenses
280,395
82.2
238,570
81.5
Loss from operations
(25,490)
(7.5)
(18,015)
(6.2)
Other expense, net:
(2,882)
(0.8)
(2,416)
(0.8)
Loss before income tax expense
(28,372)
(8.3)
(20,431)
(7.0)
Income tax expense
758
0.2
218
0.1
Net loss
$
(29,130)
(8.5)
%
$
(20,649)
(7.1)
%
Revenue. The following table sets forth, for the periods indicated, our revenue by product type and geography expressed as dollar amounts and the corresponding change in such revenues between periods, in both dollars and percentages:
Nine Months Ended September 30,
Change
2024
2023
Amount
%
Open ablation
$
90,661
$
77,988
$
12,673
16.2
%
Minimally invasive ablation
35,263
31,900
3,363
10.5
Pain management
44,059
36,249
7,810
21.5
Appendage management
111,257
98,647
12,610
12.8
Total United States
$
281,240
$
244,784
$
36,456
14.9
Total International
59,790
47,918
11,872
24.8
Total revenue
$
341,030
$
292,702
$
48,328
16.5
%
Worldwide revenue increased 16.5% (16.5% on a constant currency basis). In the United States, growth in all key product lines reflected continuing adoption of our products, including the ENCOMPASS clamp in open ablation, Hybrid AF Therapy procedures using the EPi-Sense System in minimally invasive ablation, cryoSPHERE probes for post-operative pain
management and AtriClip Flex⋅Vfor appendage management in open-chest procedures. International sales increased 24.8% (24.6% on a constant currency basis), across all franchises and major geographic regions.
Cost of revenue and gross margin. Cost of revenue increased $13,978, reflecting higher sales volumes, while gross margin decreased 61 basis points, primarily driven by less favorable geographic and product mix, as well as an increase in product costs.
Research and development expenses. Research and development expenses increased $8,102 or 15.3%, primarily from a $5,305 increase in personnel costs as a result of additional headcount in our product development, regulatory, and clinical teams. Clinical trial expenses increased $3,448 due to increased clinical activity primarily driven by the LeAAPS trial. These were partially offset by a $574 decrease due to higher regulatory approval costs in 2023.
Selling, general and administrative expenses. Selling, general and administrative expenses increased $33,723, or 18.2%, due to a $22,763 increase in personnel costs, including travel and share-based compensation, as a result of growth in headcount and variable compensation. Selling, general and administrative expenses also increased $1,877 for professional services, IT and corporate costs reflecting operational growth, a $1,892 increase in marketing, training and meeting activities and an increase of $901 in consulting fees. The increase was further driven by a $4,412 non-recurring net gain during 2023 related to legal settlements; see Note 9 - Commitments and Contingencies for related discussion.
Other income (expense). During the first quarter of 2024, the Company recognized a loss on debt extinguishment of $1,362; see Note 7 - Indebtedness for related discussion. The remaining activity consists primarily of net interest expense and net foreign currency transaction gains or losses.
Liquidity and Capital Resources
As of September 30, 2024, we had cash, cash equivalents and investments of $130,335 and outstanding debt of $61,865. We had unused borrowing capacity of $61,885 (see Note 7 - Indebtedness for related discussion). All cash equivalents and investments and most of our operating cash are held in United States financial institutions. A small portion of our cash is held in foreign banks to support our international operations. We had net working capital of $194,855 and an accumulated deficit of $386,187 as of September 30, 2024.
Consolidated Cash Flows - For the nine months ended September 30, 2024 and 2023
Cash flows provided by operating activities. Net cash provided by operating activities increased $5,914 from 2023 to 2024. Operating results declined $8,481, primarily due to a $4,412 nonrecurring net gain for legal settlements recorded in 2023. In addition, non-cash charges increased $7,633 in 2024. Cash used for working capital and other assets and liabilities decreased $6,762 due to collection of accounts receivable and moderating investments in inventory in 2024, partially offset by higher annual variable compensation payments due to improved operating performance.
Cash flows provided by investing activities. Net cash provided by investing activities increased by $20,324 in 2024 compared to 2023, due to the cash paid for acquisition of intellectual property in the prior year of $30,000, offset by a $10,147 decrease in sales and maturities of available-for-sale securities.
Cash flows used in financing activities. Net cash used in financing activities increased by $2,950 in 2024. This increase was a result of a $1,623 payment for extinguishment of debt and financing fees, net of borrowings, and a $998 decrease in proceeds from stock option exercises and the employee stock purchase plan.
Credit facility. As of January 5, 2024, we entered into a credit agreement (Credit Agreement) with JPMorgan Chase Bank, N.A. as Administrative Agent, JPMorgan Chase Bank, N.A. and Silicon Valley Bank, a division of First-Citizens Bank and Trust Company, as Joint Lead Arrangers and Joint Bookrunners that provides for a $125,000 asset-based revolving credit facility (ABL Facility), with an option to increase the revolving commitment by an additional $40,000. A portion of the ABL Facility, limited to $5,000, is available for the issuance of letters of credit. The Credit Agreement has a three-year term and expires January 5, 2027. Amounts available to be drawn from time to time under the ABL Facility are determined by calculating the applicable borrowing base, which is based upon applicable percentages of the values of eligible accounts receivable, eligible inventory, eligible liquid assets, less reserves as determined by the Administrative Agent, all as specified in the Credit Agreement. The borrowings bear interest at a rate per annum equal to, at the Company's election: (i) an alternate base rate (ABR) plus an applicable margin or (ii) an adjusted term secured overnight financing rate (SOFR) plus an applicable margin. As of September 30, 2024, the Company has borrowed $61,865, classified as noncurrent and had unused borrowing availability of $61,885.
Our corporate headquarters lease agreement requires a $1,250 letter of credit which we renew annually and remains outstanding as of September 30, 2024.
For additional information on the terms and conditions, as well as applicable interest and fee payments, see Note 7 – Indebtedness.
Uses of liquidity and capital resources. Our executive officers and Board of Directors review our funding sources and future capital requirements in connection with our annual operating plan and periodic updates to the plan. Our future capital requirements depend on a number of factors, including, without limitation: market acceptance of our current and future products; costs to develop and support our products, including professional training; costs to expand and support our sales and marketing efforts; operating and filing costs relating to changes in regulatory policies or laws; costs for clinical trials and to secure regulatory approval for new products; costs to prosecute, defend and enforce our intellectual property rights; maintenance and enhancements to our information systems and security; and possible acquisitions and joint ventures, including potential business integration costs. We continue to evaluate additional measures to maintain financial flexibility, and we will continue to closely monitor macroeconomic conditions including, but not limited to, inflationary pressures, rising interest rates, and fluctuations in currency exchange rates that may impact our liquidity and access to capital resources. Our principal cash requirements include costs of operations, capital expenditures, debt service costs and other contractual obligations.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses and disclosures of contingent assets and liabilities at the date of the financial statements. On a periodic basis, we evaluate our estimates, including those related to sales returns and allowances, inventories, share-based compensation and income taxes. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates under different assumptions or conditions. Our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 includes additional information about the Company, our operations, our financial position and our critical accounting policies and estimates and should be read in conjunction with this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
As of September 30, 2024, there were no material changes to the information provided regarding recent accounting pronouncements in Note 1, “Description of the Business and Summary of Significant Accounting Policies” in the Company’s Form 10-K for the fiscal year ended December 31, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of September 30, 2024, there were no material changes to the information provided under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Form 10-K for the year ended December 31, 2023.
The Company’s management, with the participation of the President and Chief Executive Officer (the Principal Executive Officer) and Chief Financial Officer (the Principal Accounting and Financial Officer), has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13(a) -15(e) and 15(d) -15(e) of the Securities Exchange Act of 1934 as amended (Exchange Act), as of the end of the period covered by this report. Based on this evaluation, we concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s forms and rules, and the material information relating to the Company is accumulated and communicated to management, including the President and Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that control objectives are met. Because of inherent limitations in all control systems, no evaluation of controls can provide assurance that all control issues and instances of fraud, if any, within a company will be detected. Additionally, controls can be circumvented by individuals, by collusion of two or more people or by management override. Over time, controls can become inadequate because of changes in conditions or the degree of compliance may deteriorate. Further, the design of any system of controls is based in part upon assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions. Because of the inherent limitations in any cost-effective control system, misstatements due to errors or fraud may occur and not be detected.
Changes in Internal Control Over Financial Reporting
In the ordinary course of business, we routinely enhance our information systems by either upgrading current systems or implementing new ones. There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to legal proceedings can be found under the heading “Legal” in Note 9 – Commitments and Contingencies to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.
Item 1A. Risk Factors
In addition to the other information set forth in this report, careful consideration should be given to the factors discussed in Item 1A, “Risk Factors” in our Form 10-K for the year ended December 31, 2023, which could materially affect our business, financial condition or future results. The risks described therein are not the only risks facing us. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may adversely affect our business, financial condition and/or operating results. There have been no material changes with respect to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, which are incorporated herein by reference.
Item 5. Other Information
During the three months ended September 30, 2024, none of our executive officers or directors adopted,terminated or modified a "Rule 10b5-1(c) trading arrangement" or a “non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 408 of Regulation S-K).
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
