Good afternoon, and welcome to AtriCure's Second Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Marissa Bych from the Gilmartin Group for a few introductory comments. Please go ahead, Marissa.

Great. Thank you. By now, you should have received a copy of the earnings press release. If you have not received a copy, please call 513-644-4484 to have one emailed to you. Before we begin today, let me remind you that the company's remarks include forward-looking statements. Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond AtriCure's control, including risks and uncertainties described from time to time in AtriCure's SEC filings. These statements include, but are not limited to, financial expectations and guidance, expectations regarding the potential market opportunity for AtriCure's franchises and growth initiatives, including the adoption of Hybrid AF therapy, future product approvals, clearances, reimbursement and clinical trial outcomes. AtriCure's results may differ materially from those projected. AtriCure undertakes no obligation to publicly update any forward-looking statements. Additionally, we refer to non-GAAP financial measures, specifically revenue reported on a constant currency basis, adjusted EBITDA and adjusted loss per share. A reconciliation of these non-GAAP financial measures with the most directly comparable GAAP measures is included in our press release, which is available on our website. And with that, I will turn the call over to Mike Carrel, President and CEO.

Great. Good afternoon, and thank you for joining us today. I am very proud to report another outstanding quarter at AtriCure as our team continues to expand patient care and awareness for the treatment of Afib, left atrial appendage management, and postoperative pain management. We achieved quarterly revenue of $101 million, reflecting 19% year-over-year growth. Second quarter growth was broad-based across all franchises and geographies, reflecting the depth of AtriCure's product portfolio and the impact our therapies are making. We are thrilled to surpass the $100 million mark this quarter and remain excited about the trajectory of our business. We are also driving meaningful leverage in our business as we work towards sustainable profitability. To that end, we achieved positive adjusted EBITDA of $8 million in the quarter, driven by our robust top line performance and improving operating leverage throughout the entire business. Given our progress to date and the confidence in activities throughout the business, we now expect full year revenue of $392 million to $395 million, reflecting approximately 19% to 20% growth over last year. We also expect full year adjusted EBITDA to be approximately $12 million, largely driven by our strong second quarter. While we are pleased that our recent results showcase the leverage that we can generate across the business, we continue to see immense opportunity to support growth across the markets, and we are excited to ramp investments in the back half of the year in several new and ongoing research and development initiatives as we build our pipeline and continue to expand our markets. Turning to highlights for the quarter. I will start with our open ablation franchise, where our focus is on driving awareness and expanding adoption of our EnCompass clamp. The EnCompass clamp leverages the proven technology of our synergy ablation system to provide simpler and faster ablations in open heart procedures. Quarterly sales of the EnCompass clamp exceeded $10 million in the quarter, reflecting rapid adoption since the full market release in April 2022 in the U.S. The EnCompass clamp and persistence of our team has deepened penetration of cardiac surgery market resulting in 23% worldwide growth of our open ablation franchise in the second quarter. We are continuing efforts to make the concomitant treatment, the standard of care for all patients around the world, and see significant opportunity ahead with our proven technology and leading market position. Shifting to appendage management and our AtriClip devices, which represent approximately 40% of our global revenue. In the second quarter of 2023, worldwide revenue grew 17% over the prior year, reflecting healthy activity across all geographies. The AtriClip product line embodies almost 20 years of innovation at AtriCure and is a key growth driver of our business. To that end, I'm delighted to announce the strategic acquisition of key foundational patents and intellectual property during the second quarter related to the AtriClip line. This acquisition enables AtriCure to fully control patents in this critical space while also eliminating any future royalty obligations. We have several activities in the appendage management franchise ramping in the second half of 2023. First, we are continuing to iterate on the AtriClip product line to enhance functionality, improve the ergonomics and decrease the profile. In addition, we are studying the prophylactic use of the AtriClip devices through the groundbreaking LeAAPS clinical trial. With two-thirds of the well over 1 million annual cardiac surgery patients worldwide, not having any preoperative AFib diagnosis, LeAAPS has the potential to greatly expand the market for this franchise while making a positive impact on patient lives. As we discussed on previous calls, the primary endpoint of the study is a demonstrated reduction in ischemic stroke and systemic arterial embolism, laying the groundwork for a new frontier in stroke prevention. We are experiencing significant interest in LeAAPS among cardiothoracic surgeons from around the world. As a result, momentum has been building at an extraordinary rate. With 492 patients as of today, already enrolled in just the first six months at only three dozen sites, simply amazing is the progress that we've made to date, and we are investing in a major expansion of trial sites in North America and Europe through the remainder of 2023 and expect robust enrollment and acceleration. Reflecting on the progress that we've made in 15 months since the FDA approval of this landmark trial, I am truly grateful for the cross-functional team at AtriCure leading this work and the thoughtful collaboration with many key opinion leaders to elevate patient care. Now turning to our pain management franchise, which continues to deliver impressive growth. In the second quarter, worldwide revenue grew 26% with life-to-date sales of cryoSPHERE Probe surpassing $100 million. The rapid pace of adoption for AtriCure's Cryo Nerve Block therapy in thoracotomy procedures reflects its exceptional ease of use and outstanding patient outcomes. Our team is driving awareness for Cryo Nerve Block through new and enhanced training programs, and we are seeing a continual expansion of sites. Earlier this year, we began a limited rollout of Cryo Nerve Block for sternotomy procedures. While the initial results have been positive, it is still early, and we are taking a very measured approach as we do with most of our launches. The milestone of $100 million life-to-date revenue from cryoSPHERE probe is exciting. However, penetration in our markets is low. There is still tremendous opportunity for growth in postoperative pain management for patients in thoracic and sternotomy procedures. Finally, we continue to make progress with adoption of our hybrid therapy. The second quarter saw strong revenue performance with overall increases in accounts ordering and productivity as well. We are focused on providing comprehensive support for the many programs we have in various stages of adoption, collaborating with care teams to build scalable patient workflows, in-depth reviews of clinical protocols between surgery and the EP lab, as well as cultivating new referral pathways. Our activities are establishing the foundation for strong and durable growth of hybrid AF therapy in the future. We continue to hear that patient outcomes are exceptional, and the growing body of clinical evidence repeatedly demonstrates that combining AtriCure's EPi-Sense technology with catheter ablation results in over a 100% improvement versus catheter ablation alone. Our dedication to the treatment of long-standing persistent AF patients is unrivaled, with no competing technology or clinical studies addressing the millions of patients suffering from this disease. In closing, we are incredibly pleased with our strong first half performance and activities across our diverse portfolio. I will reiterate my comments from our first quarter call. We are building a complementary portfolio with diversified drivers while being intentional about our spending as we progress to sustained profitability. Our results this year have shown the potential for AtriCure to drive meaningful, accelerating, and profitable growth for years to come, and we are excited to elevate patient impact throughout all of our markets. I will now turn the call over to Angie Wirick, our Chief Financial Officer for more details regarding our financial performance.

Thank you, Mike. Second quarter 2023 worldwide revenue of $100.9 million increased 19.4% on a reported basis and 19.3% on a constant currency basis when compared to the second quarter of 2022 as a result of strong performance across our franchises globally. On a sequential basis, worldwide revenue grew 7.9% over the first quarter 2023. In the second quarter 2023, U.S. revenue grew to $84.9 million, a 19.1% increase from the second quarter of 2022. Open ablation product sales were $27 million compared to $22.1 million, up 22.3% over 2022, driven by adoption of the EnCompass clamp in both existing and new accounts. As Mike mentioned, this quarter marks the one-year anniversary of the full commercial launch of the EnCompass clamp. We are seeing this technology push open ablation volume growth above our historical results, and the uplift from the pricing benefit has gradually declined. Pain management sales were $12.6 million compared to $10.2 million, up 23.3% over the second quarter of 2022. While we are making progress with our evaluation of pain management for sternotomy procedures in the U.S., there was minimal revenue contribution during the quarter. Minimally invasive ablation sales were $11.4 million, up 12% from 2022, solely on the growth of sales of our EPi-Sense system. Although we are pleased with the activity seen in hybrid therapy this quarter, we continue to expect very modest growth in 2023 as we focus on fundamentals for long-term accelerated growth in this franchise. And finally, U.S. sales of appendage management products were $33.9 million, up 17.7% over the second quarter of 2022. International revenue was $16 million, up 20.7% on a reported basis and 19.9% on a constant currency basis compared to the second quarter of 2022, driven by strong procedure volumes and increasing adoption. European sales accounted for $9.5 million, up 21.5% over the prior year, and Asia Pacific and other international markets accounted for $6.6 million in sales, up 19.7% over the same period in the prior year. We are seeing excellent growth across franchises in our key markets outside the U.S. and expect strength from our international business for the remainder of 2023. Now turning to another key metric for the second quarter of 2023. Gross margin was 76.4%, up 130 basis points from the second quarter of 2022. Strong manufacturing efficiencies in the quarter drove improvements to gross margin, partially offset by pressure from product and geographic mix. Moving to details of our operating expenses for the quarter. Total operating expenses increased $4 million or 5.2% from $77.2 million in the second quarter of 2022 to $81.2 million in the second quarter of 2023. A significant driver of this change was the purposeful expansion in personnel across our teams to support incremental growth. Additionally, LeAAPS trial expenses also contributed to the approximately 18% growth in research and development costs over the prior year. Conversely, we saw a very modest increase in SG&A expense in the second quarter as we improved leverage of our commercial team and realized efficiencies and savings notably within the physician training programs. Adjusted EBITDA for the quarter was positive $8 million compared to a negative adjusted EBITDA of $3.2 million for the second quarter of 2022. Our loss per share was $0.11 in the second quarter 2023, compared to a loss per share of $0.32 in the second quarter of 2022, while the adjusted loss per share each period was $0.12 and $0.32, respectively. Our balance sheet remains strong, and we ended the second quarter with approximately $135 million in cash and investments. Earlier, Mike noted the strategic acquisition of patents and intellectual property related to our AtriClip product line, which drove the increased cash usage for the quarter. It is important to note when you remove the effects of one-time items from the quarter, we generated approximately $3 million in cash. Overall, we remain confident in our capital position as we continue our current and future business initiatives. And finally, turning to our outlook for 2023, given ongoing strength from the combination of our many growth catalysts and our second quarter results, we now expect to achieve $392 million to $395 million in revenue for the year reflecting growth of approximately 19% to 20% over 2022. For quarterly cadence, we anticipate a slight decline in third quarter revenue from normal summer seasonality, followed by a rebound in the fourth quarter. The momentum across franchises globally is strong, and we expect to enter next year in a position to deliver accelerated growth. We are maintaining our forecast for 2023 gross margin to be comparable to the full year 2022 with strong manufacturing activity, partially offset by increasing investments in the second half of 2023 and the potential for varying effects from product and geographic mix. Our production, operations, and quality teams continue to support strong top line growth while also making meaningful improvements to scale manufacturing. Note that amortization expense for the intellectual property acquired in the second quarter is charged to cost of revenue. However, with the elimination of corresponding royalty costs previously included in cost of revenue, we do not anticipate the net effect of these changes to have a significant impact on our gross profit. Moving to the bottom line, we are balancing investments in our business with our commitment to sustaining profitability. We are leaning into areas that we anticipate will fuel growth at AtriCure over the coming years. For that reason, in the second half of 2023, we expect a significant increase in operating expenses largely to fund new and ongoing research and development programs. We are experiencing very strong activity within the LeAAPS clinical trial and we'll see a substantial increase in expense for the remainder of 2023 as we accelerate site initiation and patient enrollment. Within product development, we are progressing the next generations of the cryoSPHERE probe and AtriClip device, ensuring our technology stays on the front line of innovation. We are also making a strategic investment in the HEAL-IST clinical trial in a dedicated IST clamp to expand into adjacent markets. Additionally, R&D expenses for the remainder of 2023 include ongoing efforts for the approval of our products under EU MVR as well as clinical research across our platforms, with growing investments in registries and investigator-sponsored research studies. Finally, our plans anticipate thoughtful development of our commercial teams, along with training and awareness programs to boost market and development activities. In summary, with our outlook on gross margin and increasing investments in R&D for the balance of the year, we now expect positive adjusted EBITDA of approximately $12 million for the full year 2023 corresponding to an adjusted loss per share for 2023 of approximately $0.92 to $0.94. We are truly pleased with our performance over the first half of 2023 and the collaboration of our AtriCure team across so many exciting and impactful initiatives to advance our mission. As we execute the remainder of this year, we are confident in the prospects of our business in 2023 and beyond. Now I will turn the call back to Mike for closing comments.

Thank you, Angie. I would like to close by thanking our team for their dedication and thoughtful approach to innovation and therapy expansion. The determination of AtriCure employees over the many years has positioned our company to celebrate a number of milestones within our business this quarter, including the achievement of $100 million in quarterly revenue and record profitability. Our future is bright, and we look forward to many more years of durable growth and progress ahead. And with that, I'll turn it over to questions. Operator?

Thank you. The first question is from Robbie Marcus of JPMorgan. Your line is open.

Great. Congrats on a really nice quarter and thanks for taking the questions. Maybe to start, I'll just ask both my questions upfront because they're sort of related to each other, both on guidance. First, on the top line, nice, a little over $3 million beat, you raised guidance by $3 million to $7 million at the high and low end of the range. Maybe just walk through where you're seeing the incremental upside. And I think the one we're seeing nice base business with EnCompass and minimally invasive, had $1 million beat. Are those the two areas you expect to see the revised higher guidance for the year-end sales? And then maybe if you could spend a minute down the P&L, especially on the EBITDA and the components. You touched on it a lot, but it feels like gross margin going back to flat year-over-year, seems like a really conservative starting point given what you put up in second quarter here and some of the higher margin products are what's contributing outsized benefit. So would just love to hear the thoughts on guidance? Thanks a lot.

Sure. Thanks, Robert. I'll take the revenue and Angie will take the operating expense and leverage side of that. On the revenue side, I think you hit it right. We obviously are seeing great momentum, first and foremost, on the open ablation side of our business. EnCompass has been a great product, as we've been talking about for the past year. The number of sites has continued to accelerate. Our team has done a really nice job once we went to full launch of bringing it out and getting more and more patients treated. We're seeing that just the sheer volume of people that are treating now, it's an easier product to use, and that ease of use has made a really big difference. We track it every single quarter in terms of what's the percent penetration. And I think for years, we've been talking about being below 30% and we believe that we've cracked that 30% at this point, really primarily due to that EnCompass clamp. So we do think that that's going to continue. The growth will continue in a strong way, maybe not at the same level from a percentage standpoint as obviously we had some EnCompass in the back half of last year, but we do anticipate strength in our open business on the EnCompass. I think CLIP continues at a really nice solid pace for the business. As you've seen, Cryo Nerve Block, we believe will continue at a very nice solid pace you saw. It was over the corporate average overall this quarter and feel like that's in a good spot for our business. And hybrid, as we talked about. That's the one area that I would say we had a really nice quarter. I feel good about it, but we're cautious as we're kind of building it out as the year goes for the rest of the year. And so we remain kind of cautious as we kind of look at the back half of the year on the hybrid side of our business.

Yeah. And I'd say further down the P&L, when you think first and foremost about gross margin, our operations team has done some really fantastic work to maintain the stability of our manufacturing, ensuring the timely delivery of products to customers, and we remain committed to this as we execute the rest of 2023. Part of that is in the coming months we are expecting some pressure to gross margin from capacity improvement projects that have been planned for this year and will ultimately benefit our operations long term and in the future. And there's always varying potential impact from product and geographic mix, which is kind of the balance incorporated into our guidance for '23 in the gross margin perspective. Further down the P&L, when you think about OpEx, I'm really pleased with the results this year. I think the quarter highlights what we're capable of doing from a leverage perspective, notably with the progress that we're making on our SG&A spend. Between the ramping investments, I went through a lot of detail on the call in that area as well as the incremental cost for manufacturing capacity improvement projects, which have a short-term impact to gross margin. Those are the two factors that are really the major drivers behind the incremental costs in the second half of '23. We are being very deliberate about our spend. But beyond that, I think we've been prudent with our guidance, both top and bottom line. It's an incredible start to the year, but want to make sure that we continue to execute and do the right things over the next six months that will build for a bright future.

Great. And I know I said I had both. But if I could squeeze one more in. Just I heard you talk about accelerating growth next year. And I just wanted to make sure I heard that right, and that's accelerating sales growth off of your 2023 into 2024? Thanks.

That wasn’t intended to imply that we are accelerating or providing exact guidance for 2024 just yet. What I mean is that we have witnessed a notable overall acceleration in this business. Historically, our average growth has been around 14% to 15%. Over the last three years, we've seen growth rates of 31%, 21%, and this year we're guiding for 19% to 20%. We are indeed seeing strong growth and expect to continue that trend, but we are not ready to provide specific guidance for next year or beyond.

Thank you for your question. One moment while we prepare for the next question. And our next question will be coming from William Plovanic of Canaccord. Your line is open.

Thank you, good evening, and congratulations on a strong quarter. I have a couple of questions. First, regarding EnCompass, could you provide an update on the rollout and the percentage of accounts it has been implemented in? Secondly, with EPi-Sense showing good performance this quarter, could you share any additional insights on that? Lastly, I'm curious about gross margins and EBITDA. You mentioned a gross margin of over 76% and projected a 74.5% for the year, which matches last year's figure. However, it seems there might be a significant decline in the second half. Can you clarify that? As for EBITDA, you're guiding for $2 million in the latter half of the year having already achieved $10 million, aiming for a total of $12 million. I would appreciate some clarification on that as well. Thank you for addressing my questions.

I'll start with the first two points and then continue from there. Regarding EnCompass, I believe we're making significant strides in our market penetration. We've surpassed 30%, which had historically been in the 25% to 30% range for several years. Now we are seeing penetration in the low 30% of what we estimate to be actual treatments at the time of surgery. We've made excellent progress on this front. It's challenging to quantify true penetration as you've described it, but currently, over 40% of sites are using the product consistently. We expect this will eventually reach 100%, although we're still in the early stages. Importantly, we do not leave a site until we are confident that the staff fully understands how to utilize the technology. We invest considerable time in training. We are not hastily moving to new sites, which is why we anticipate a continuous growth trajectory in the years ahead. Additionally, we typically start with one surgeon at a site and then expand from there, which indicates further growth potential within existing sites as well. As for EPi-Sense, we indeed had an exceptional quarter with a record number of sites making purchases during this period. We feel that progress is undeniably being made, especially after a year filled with uncertainties regarding our momentum. We are focused on enhancing workflows and collaborating with surgeons and electrophysiologists to ensure a smooth patient process, which is crucial for the long-term success of these sites. Looking ahead to the next six months, we must tread carefully, without overestimating our momentum right away. We are confident these are strong sites, and our goal is to support their patient treatment activities consistently every month and quarter. This will help us build a solid foundation for 2024 and 2025, which we believe will be strong years for us. However, we need to remain cautious with our guidance for the latter half of the year.

Yeah, Bill. And I'll touch on both gross margin and OpEx again. I think the margin guide, I think that as directional there are one-time costs that we are expecting to incur in the back half of the year as we continue to focus on capacity improvement and expansion there. And those are one-time costs that just weren't baked into the first part of the year. I think other headwinds when you think about the rest of the year would be strength of the EnCompass clamp continuing, driving performance for the back half of the year as well as continued strength within our international markets. Those two are both headwinds to margin. So I think maybe a cautious guide, but the expectations relative to some of the work that we need to do to set us up to continue to support capacity longer term. On the OpEx side, again, I think the big story here is the expansion within R&D costs. And I went through a lot of those on the call. I'd say the biggest kind of individual component of that would be the LeAAPS trial. We're rapidly approaching 500 patients in enrollment, and the back half of the year is really focused on a pretty massive expansion of sites both in North America and Europe, setting us up to be in a great position for enrollment in 2024 and beyond.

Hey, Angie. Were there any one-time gains in the front half of the year that could have skewed the adjusted EBITDA higher?

The gains you observed were related to legal activities that we've previously discussed and are considered an add back, so they won't affect our adjusted EBITDA. In the first half of the year, we achieved significant savings in our professional education and training programs, along with good leverage in our sales team. We anticipate this trend will continue in the latter half of the year, although we do expect a notable increase in R&D costs during that time.

Okay. Great. Again, congrats on the quarter. Thanks.

Thanks.

Thank you. One moment while we prepare for the next question. And our next question will be coming from Matthew O'Brien of Piper Sandler. Your line is open.

Good afternoon. Thank you for the questions. Mike, could you discuss pain management? It’s performing well, although perhaps later than I expected. You're seeing 10% penetration in thoracotomy, and there's significant potential in sternotomy, though I know there's more work to be done there. Additionally, there are resection and other growth drivers for that business. What do you need to ensure growth continues at 25% to 30% over the upcoming quarters and years?

We experienced a growth of 23% this quarter. While I understand that expectations were somewhat higher, we are at an early stage with many sites operational, and we are now seeing growth both within those sites and from adding more sites. In any new market, you typically see an initial surge of remarkable growth. Achieving 23% growth for our business is still impressive, and it's partly a function of having larger revenue numbers to build upon. Looking ahead, areas like sternotomy and below the knee present future opportunities for market expansion, which will support our strong growth in 2025 and 2026. I believe growth will continue for a long time without specifying an exact percentage. Overall, I’m pleased with our performance this quarter, but I recognize that the larger revenue numbers can affect perceptions as we move forward.

Got it. That makes sense. You faced a tough comparison as well. My other question is about the number on LeAAPS. I understand this is a long-term project, but the figure is impressive, nearing 500, especially since you initiated the first patient in Q1. You are targeting 6,500 patients and have already established 536 sites in just six months. It seems like you might finish enrollment around mid-2025 or early 2025. I believe the follow-up period is five years, but could we see interim data in 2026 or 2027? If the results are significantly positive compared to the control group, could the study wrap up early and lead to an indication? I remember you mentioned 2029 as a potential timeline for updates, but is there a chance we might get something in 2026 or 2027 if everything goes well?

I appreciate the enthusiasm because we are really excited about the progress we've made, which is ahead of expectations. The team has done an incredible job, and I want to recognize them. When this trial began, our team was prepared to get the sites operational and move them through the process, resulting in nearly 40 sites by the end of the quarter, and that number is continuing to grow rapidly. The priority was to have those sites operational. Additionally, our Key Opinion Leaders and the sites we've engaged are very passionate about this initiative. They believe that implementing the AtriClip in these patients will improve health care outcomes and reduce strokes. They are eager to gather data and participate in this trial, and that enthusiasm has set a positive tone at their sites as well. This progress has surpassed our expectations and, as you mentioned, it's quite remarkable. Once they are operational, their commitment is strong. We expect enrollment to be quicker than initially projected. While I don't want to speculate too far ahead regarding when we might receive early data insights, I genuinely think we will enroll more rapidly than we originally anticipated. However, it’s still premature to make specific forecasts about the actual data or expected indications. For now, we will keep moving forward and provide updates on enrollment. We will also have some early insights based on event rates, but those are likely several years away. Again, we share your excitement, but it’s too early to make long-term projections.

Understood. Thank you.

Thank you for your question. One moment while we prepare for the next question. And our next question will be coming from Marie Thibault.

Hello, this is Marie.

Hey, Marie.

Hi, Marie.

Operator? Sorry, I just went blank. I didn't hear my name. Thanks. Hi, Mike. Hi, Angie. Congrats on a very nice quarter. I wanted to ask just a few follow-ups to some questions that have been asked already. Maybe I'll jump on the back of the question. Matt just asked on the LeAAPS trial. Curious about awareness and what that could mean for the commercial business as people become more aware of AtriClip and potential benefits. How are you thinking about that potential impact to revenue in the out years?

We're not focused on that right now. Our primary concern is the clinical trial. We believe this is a long-term vision, and we are concentrating on achieving solid clinical data, which will open up substantial market opportunities in the future. We are not making any short-term plans related to that awareness in our models. Our focus is on this being the next growth stage for the business, looking ahead into this decade and the next. We're committed to ensuring this trial is successful and clinically relevant, which is why it's a large trial. We're actually pleased with the rapid enrollment pace and the data we are gathering from it. For instance, we are collecting information on post-op A fibrates for patients with AtriClip. These bits of data come in regularly and are beneficial for our other trials and initiatives.

Okay. Great. Understood. And then on the open ablation business, curious to hear a little bit about the underlying procedure volume trends in cardiac surgery and sort of the sustainability of these trends, what you've seen in the first half and how you're thinking about it second half, certainly heard about the strength from the CLAMP, but just curious about sort of the underlying cardiac surgery market.

I think what you're seeing in the underlying cardiac surgery, and if you listen to other companies' calls as well that sell valves in that space, you're definitely seeing you're back at a more normalized pace and actually seeing a little bit of growth in the overall underlying area there. I think in all aspects of it, both in the mitral AVRs and CABGs. I think that's indicative of what we've talked about for many years, which is that you have an aging population that is living longer, and therefore, they're very likely to have more complicated cardiac disease, and therefore, they are in need of cardiac surgery for one of those areas, both in the U.S. and globally. So we do see it kind of more normalizing and growing slightly and anticipate that, that's going to happen. It's not going to grow dramatically from year to year, but I think you're going to continue to see kind of small movements in growth in the overall market from that side.

Okay. Very good. And last quick one. I may be imagining it. I know it's small numbers, but it looks like international pain management seems to be gaining traction. Any color on what's going on over there with that launch?

We have started to build out that team, and you are right; we have seen some movement. The numbers are still quite small, as you mentioned. However, our team has grown to several members now. While this is minor compared to our presence in the U.S., we are making progress in some areas of Europe and Australia, and we're receiving positive feedback there. It's still early, particularly in Europe where we need to navigate reimbursement issues, which will take years to resolve. We don't want to rush our growth expectations in that region, but the feedback has mirrored what we've experienced in the U.S. Once users start utilizing the product, they find it effective; then the challenge is integrating it into their systems, which varies by country. You are right to note that we've seen some positive movement, and we are increasing our headcount because of it.

All right. Thank you and congrats again.

Thank you.

Thank you. One moment for our next question. And our next question will be coming from Rick Wise of Stifel. Your line is open.

Hi, Mike. Hi, Angie. Could you provide more details about the MIS ablation business? The performance was impressive and exceeded our expectations. How is CONVERGE performing? How is DEEP doing? What updates can you share about those? Also, what are the expectations for the second half?

Thank you for the question, Rick. What we're seeing is that the hybrid and conversion aspects of our business, particularly the EPi-Sense side, are driving growth. DEEP has remained relatively stable. In our last call, we discussed the CEASE results that revealed significant improvements in the DEEP approach through a randomized trial, published in Lancet. This data is particularly impactful in Europe, but overall, the company has seen flat growth, with most of the expansion coming from EPi-Sense and the addition of new CONVERGE sites. We've been closely engaging with our customers to better understand hospital workflows, focusing on patient intake, communication between cardiac surgery and electrophysiologists, and follow-up logistics. Our sales teams are strategically leveraging these relationships. The progress has been encouraging, and our education team has effectively conducted best practice meetings with leading experts nationwide. I will be attending one of these meetings soon to discuss how hospitals are implementing these workflows. The data is compelling, and our goal is to ensure that our solutions remain valuable in the long term. Looking ahead, I believe this will be a significant growth area for us. However, as we approach the latter half of the year, I want to remain cautious and ensure we are laying the groundwork for sustained growth over the decades, not just the next six months. Each site must have a solid long-term strategy to ensure continued engagement. Therefore, we aim to maintain a moderate approach in the second half of the year, with the potential for acceleration in early next year.

Got you. That's very clear and helpful. Thank you. Turning to sort of from two aspects, your solid cash position. It seems like cash and cash burn is pretty stable. I think you're $127 million this quarter. And I'm curious from two angles. One, I was hoping you'd talk a little more about the acquisition of the key foundational patents. Obviously, that's a use of cash. Why it's so important? And I didn't know I needed to worry about you not having them. So why is it good to have it how? And second, talk about cash? Are you more open maybe than you've been as cash stabilizes and maybe grows to tuck-in products or how are you thinking about?

Thank you for the question regarding our patents. As you may know, we have maintained a strong partnership with the Cleveland Clinic, where we initially developed our technology. This collaboration has been essential, and we have worked closely with them for many years. We continue to innovate, particularly with the CLIP, and have several new iterations and technologies planned for the future. Historically, the patents were owned by the Cleveland Clinic and another entity, and we saw the value in acquiring ownership ourselves. Having control over these patents is significant for us as we plan for the long-term. We decided to make an upfront payment to eliminate the royalty fees we were paying, which will enhance our EBITDA while not affecting our margins. This change allows for a cleaner picture in our P&L and supports our innovation efforts moving into the next decade. Now, I'll pass it over to Angie to discuss other cash-related matters.

Yeah. Rick, in the quarter, you saw about a $27 million burn, $30 million is kind of one-time burn or usage of cash, which means we generated $3 million from just the activities of the quarter. We feel really good ending the quarter with $135 million in cash and investments, continue to feel really good about our capital position and the ability to fund the business and operations. Now that being said, there’s a limitation to that, which is we are able to fund our operations, anything, I think that’s strategic would be outside of kind of that window and something that we would evaluate with a lot of care and thoughts.

Thank you so much.

Thank you. One moment for the next question. And our next question will be coming from Mike Matson of Needham. Your line is open.

Thanks. I have a couple more questions about EnCompass. Can you discuss whether you are selling it outside the U.S. and how penetration compares between those markets and the U.S.? Also, is EnCompass primarily used for CABG, or is it also being utilized in valve procedures?

So I'll start with the OUS. We are not selling it OUS at this time. We are definitely working on that. I'd say that our European colleagues would love to have it in market. And as they see kind of the success that they started to see it in the U.S. market, we are working on getting that approved and cleared in Europe first, and then we'll obviously work on other countries around the globe. After that, I'd say probably Australia would be the next logical place from that standpoint. But it is not being sold outside of the United States at this point. In terms of it being used outside of CABG, it's being used in all procedures. I mean it's really meant for people that are uncomfortably getting behind the veins or opening up the heart and really want to just do kind of a really fulsome ablation, and that's really what it provides. It also is a lot quicker, but some people are using it in their valve procedures as well. So while it was originally targeted for that CABG surgeon, we definitely see it in some valvular surgery as well. Still predominantly CABG, but we do see it in valvular surgery as well, partially because the ablation lines are so incredibly thick transmural and like it's amazing at how well this product works. And that's partly why people are using it and switching to it.

Okay. Understood. Regarding the pain management aspect, I know it’s early for sternotomy, but could you share any feedback you’ve received? While I recognize it's mostly anecdotal, are you experiencing similar types of pain reductions as those observed with thoracotomy?

It's a bit varied in the sternotomy market. Some surgeons are really enthusiastic, expressing that they must use it on their patients because they observe quicker recoveries and improved mobility. However, there are others who feel they're not observing much difference. In contrast, with thoracotomy, all surgeons noticed a clear benefit. Overall, while most see significant advantages, it can be inconsistent. The main concern is whether the time investment is worthwhile since the full ablation process takes over 30 minutes. We are exploring ways to conduct it alongside other cardiac procedures to minimize that time, as this is a common concern. Our approach has been to manage initial expectations while we develop strategies to ease the process and maximize benefits. While the advantages with sternotomy aren't as pronounced as with thoracotomy, we anticipated this and are finding benefits in more than half of our current locations.

Okay. Great. Thank you.

Thank you. One moment for the next question. Our next question is going to come from Suraj Kalia of Oppenheimer. Your line is open.

Hey, Mike, Angie. Can you hear me alright?

We can, Suraj.

Perfect. So Mike, I have several questions for you, and one for Angie specifically. Mike, regarding open surgery, I appreciate your comments. It's clear that the last two quarters have shown significant progress. Could you explain how EnCompass affects utilization rates? In your earlier remarks, you mentioned transmural lesions. Is this a different concept? I would like to understand how transmurality is assessed with EnCompass.

I'll begin with the latter part of your question. Before we launched EnCompass, we conducted extensive research to examine transmurality and understand how this product functions. We found that it actually causes thicker lesions than what we've observed with our existing clamps, which are already highly effective. The design and size of the clamp allow it to encompass the heart well, resulting in lesions that have received positive feedback. Additionally, we mandate testing at all our sites to ensure there's no activity in between the lines, which they perform in every case. Our team supports them during their initial cases to guarantee they achieve quality lesions and effective block during the procedure. This is a crucial aspect of the protocol when using the EnCompass clamp. Several sites have conducted electophysiological mapping afterward, and we expect publications over the next six months to a year showcasing the effectiveness observed during follow-up mapping at intervals of 45, 60, and 90 days. We are aware of some independent sites conducting their own research, and we are hopeful for those findings to be published soon, encouraging similar studies as we have significant confidence in the capabilities of EnCompass. Please remind me of the second part of your question.

Just on utilization, how it's in utilization in your existing.

We are definitely noticing that surgeons who previously weren't performing ablations are starting to do them now. This is reflected in the rising number of procedures. In particular, this trend is evident in CABG, but it's also seen on both sides. The technology is easier to use, allowing for quick and effective ablations, which helps reduce procedural time. Overall, we are observing an increase in utilization and a definite uptick in volumes.

Got it. Mike, regarding LeAAPS, the enthusiasm is evident. I'm curious about the clinical significance of the time to first ischemic stroke or systemic embolism. Specifically, do these patients already have MRI scans before the baseline?

They do not have MRI scans beforehand, and we are not conducting a pre-scan. Instead, they are reviewing all their charts and testing to determine if they have AFib. If they do not have AFib, that qualifies them for the LeAAPS trial, and then they will be randomized. Regarding strokes, we are examining stroke rates, specifically the occurrence of the first stroke. Half of the patients will receive a clip, while the other half will not, and we will analyze the event rates within these groups. As you noted in the LAS study, the LAS 3 trial demonstrated a 33% reduction in strokes over a period of 3.8 years. We anticipate our study will last five years to achieve statistically significant results that benefit patients by assessing the reduction in stroke rates. It is crucial to determine if we can lower stroke rates for these patients over their lifetimes. Many of these patients, after undergoing CABG and cardiac surgery, expect to live 15 to 20 years. If we can remove the appendage at the outset, our objective is to show that we can significantly reduce stroke rates, allowing these patients to benefit from having the appendage removed, especially since many may eventually experience AFib, cardiomyopathies, heart failure, or other issues that can lead to strokes.

Got it. Mike, finally, on hybrid, are we still at the 80% to 90% staged or is there any underlying shift in terms of same days? Thank you for taking my questions.

There isn't a significant change regarding same-day procedures. I think aiming for 80 to 90 percent is a bit too ambitious. It's probably more realistic to consider around 70 to 80 percent. Most of the new sites tend to stage their procedures for logistical reasons. This coordination helps ensure that patient care is managed effectively, which many sites believe improves the quality of care for patients. Thus, many of the new sites, as we've discussed, do implement staging.

Thank you. There are no more questions in the queue at this time, just listening to the Q&A session. I would like to turn the call back over to Mike Carrel for closing remarks. Please go ahead.

Great. Thank you, everybody, for your interest and for joining tonight and for all the great questions. As you can tell, we're excited about the first half of the year, even more excited about the second half of the year and the years to come. So again, I appreciate your interest in AtriCure and look forward to talking to you all soon. Have a great one.

This concludes today's conference. Thank you all for joining. Everyone may disconnect now and enjoy the rest of your evening.