Good afternoon, and welcome to AtriCure's Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Lynn Lewis from the Gilmartin Group for a few introductory comments.

Thank you. By now, you should have received a copy of the earnings press release. If you have not received a copy, please call 513-755-4136 to have one e-mailed to you. Before we begin today, let me remind you, 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. 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. With that, I'd like to turn the call over to Mike Carrel, President and Chief Executive Officer. Mike?

Thank you, Lynn. Good afternoon and thank you for joining us. We hope you are staying safe and healthy as we continue to face unprecedented challenges with this pandemic. Before we begin our quarterly review of our results, we want to express our gratitude to the selfless workers on the front line to continue to rise to the occasion to keep our communities safe and functioning. Thank you for taking care of us. You are the true heroes. We are encouraged by our second quarter results despite the impact and challenges of COVID-19, which we felt, especially early in the quarter. Total revenue was just under $41 million, down 31% from the same period last year. We experienced the trough in April, with monthly revenue down 54%, as compared to April 2019 due to the significant debt slowdown of non-emergent procedures in response to COVID-19 pandemic in the U.S. and Europe. We began to see return, rapid return in May followed by steady volumes throughout June with procedures coming back online and the easing of shelter-in-place restrictions. Specifically, in May we saw revenue improve by nearly 50% over April and in June we saw a similar improvement over May. While we are pleased by the encouraging rebound of our business in the U.S. and parts of Europe, through the second half of the quarter, the situation does remain fluid, especially with the recent trends indicating growing case volumes in some regions of the United States. In the last few weeks, we began to see more volatility in case volumes and now expect July revenue can be down somewhat compared to June. As we look to the second half of 2020, we remain cautious optimistic about our outlook while continuing to make sure we stay flexible and ready to mitigate any…

Thanks, Mike. Second quarter 2020 worldwide revenue was $40.8 million, a decline of 30.7% on a GAAP basis and 30.6% on a constant currency basis, compared to the second quarter of 2019. U.S. revenue was $33.7 million, a decrease of 28.6% from the second quarter of 2019. U.S. sales of open ablation and appendage management products experienced a slightly lower decline in sales than minimally invasive ablation due to the inherent ability to defer MIS procedures. Appendage management sales declined 21.1% to $13 million and open ablation sales decreased 24.4% to $15.6 million, while minimally invasive sales decreased 47.7% to $4.8 million. International revenue decreased to $7.1 million, down 39% on a GAAP basis and 38.5% on a constant currency basis as compared to the second quarter of 2019. We experienced significant variability in our international markets, resulting in a steep decline in volume across all product types. Gross Margin for the second quarter of 2020 was 67.7% as compared with 74.5% for the second quarter of 2019. During the second quarter, we temporarily reduced our production capacity and modified our manufacturing operations in order to adhere to social distancing recommendations. We have not furloughed or decreased pay of our production employees and remain committed to their safety. However, the fixed costs and reduction of production volumes to below our normal operating levels burden cost of revenue, decreasing our gross margin by 6.8%. Despite the temporary reduction in production, we ended the quarter with a strong inventory position. Turning to operating expenses, excluding the effect of non-cash adjustments to the contingent consideration liability, our operating costs decreased $7.5 million from $49.9 million for the second quarter of 2019 to $42.4 million for the second quarter of 2020. This decrease was primarily driven by lower variable compensation costs, as well as…

Sorry. Thank you, Andy. I would like to thank the entire AtriCure team for their passionate commitment to working as one to help patients, our communities, and our partners through these challenging times. I'm proud to say that once again, we've been recognized as one of the top workplaces in the Cincinnati Enquirer, and our Minnetonka office was recognized as a national standard top workplace. Thank you to everyone at AtriCure for creating a world-class culture. I'm humbled to be part of this team, and work alongside of you each and every day. Please stay safe and healthy everyone. With that, I'll turn it over to questions.

Thank you. [Operator Instructions] Our first question comes from Robbie Marcus with JPMorgan. Your line is open.

Hi, this is actually Lily on for Robbie. Thanks for taking the question. You guys had previously mentioned fourth quarter resembling something close to normal, but with July now potentially below June does this outlook still hold true? And how is your view on the recovery in the back half of the year change, given the spike in cases we've seen across the country?

I mean, I think if you look at the numbers, obviously we did very well, better than expected in the May and the June timeframe, much better than expected. I mean the bounce back was very strong, came close to being back to normal in the June timeframe. And as you mentioned, July was kind of, has been basically kind of flat to down a little bit in terms of overall case volume. I think it's unpredictable as cases kind of pop-up in big states like Florida and Texas, and there's shutdowns and lock downs on some of the hospitals, it's a little bit uncertain. We’re not going to go back to levels that we saw earlier in the second quarter, so at this point, that’s why we're not giving specific guidance. I think that it's kind of stabilized to some degree, but it's not like it's going to – it’s not growing back necessarily as fast as it was in the second quarter.

Got you. And then just a quick follow up on CONVERGE. What are you guys doing now to prepare ahead of the panel and eventually approval? Thanks.

Yeah, thanks for that question. I mean, we're obviously, again, really excited. Most of you heard the data that came out at HRS this year, where we won across every metric that was out there, both on safety and on advocacy, in terms of beating the numbers that were previously established, and showed superiority. So, we're excited about that, working collaboratively with the FDA. What we're doing to prepare for that is that we've got sites set up all over the country. We've done deep dive analysis, pretty much in every site around the country for all the EPs. All of our marketing materials are ready to go. And in addition to that, we've kind of got a team of over 35 people on the EP side of our business that have been trained, understand the procedure very well, we've merged the team from the LARIAT team that we have with this with the DEEP EP background. And that's where we're adding headcount as well. So we've got broad based coverage. We've got sites ready to do training and education once we're able to get up and running and be much more proactive on that front. And we are in a really good position. The good news that we've been training for this and preparing for since we bought the company to make sure we were in this position, and now we're just waiting for that label to come through so that we can kind of really go after the market in a big way.

Thank you. And our next question comes from a line of Suraj Kalia with Oppenheimer. Your line is open,

Good afternoon, everyone. Thank you for taking my question. Mike, can you hear me all right?

Yep.

Okay, perfect. Hope everyone is safe and healthy. So, a lot of information provided, Mike, can you stratify the backlog versus the new patient pull-through? What are you’ll seeing in the market? What level of backlog cannot be converted or, you know is being delayed? Just trying to stratify the numbers we are seeing versus those two buckets?

Yeah, I don't know that it’s as much of a backlog issue to stratify Suraj. It's a very fair and good question to think through like what’s backlog versus net new patients. What we're seeing is, because some of the backlog was one of the – as an example, one of the issues that you see are that patients who need to get treated are hesitant to go into hospitals during this time, and so there's a big push to try to get the – to realize that it's a safe place to go. That would essentially be backlog, but they're not coming into the hospital. So, a lot of what you're seeing is more net new patients versus really all backlog kind of coming in and coming into the hospital, quite frankly. And so, as we look forward, I mean, I think there's a little bit of backlog, but we really got to get those patients to come back and realize it’s incredibly safe place to get treated and they should get treated, or else they're going to have bigger issues down the road.

Got it. And Mike, in terms of at least if we look at the numbers, in the U.S., MIS got hit or impacted more than open. Should we expect that moving forward, and presumably the open cases are being influenced more, so by the immediacy of the procedure, I guess, and MIS is being delayed? It's not the right way of thinking about it for the remainder of the year?

I know it's the right way to think, but – it’s a good way to think about it, because I think naturally, that is what happens is that the open cases come back first primarily because two reasons; one, some of the open numbers, small amount, but our cryoSPHERE, which is basically the cryo and nerve block piece, which is actually a growing part of our business. The other part of open is that obviously, it's natural, but the patients that are need to cabbage and need to be treated and are compromised, they've got to get back earlier. It's really not an elective procedure quite frankly. You can only push off cardiac surgery for a valve or a bypass only so long. So, you're correct in thinking that. I was surprised, interestingly enough, that if you looked at it by month, April was almost no MIS revenue and some of the comeback that happened in the May, June timeframe was actually MIS coming back and there were sites that were beginning to kind of get up to speed. We actually saw a steady increase as the quarter came along on the MIS side of our business. So, while you're right, to think of it the way that you said, I’d also caution because interestingly enough, the MIS cases have started to see some strength overall as the quarter came together.

Thank you. And our next question comes from the line of Matthew O’Brien with Piper Sandler. Your line is open. Matthew O’Brien: Afternoon guys. Thanks for taking my questions. Just to follow up a little bit on the CONVERGE panel, you know, Mike and Andy, I know, you know, with the data, you didn't want to say a heck of a lot in front of, you know, the outcome, what can you help us think through as far as the panel goes in terms of what FDA may be really examining? What investors should kind of queue themselves up for to really be looking for during that panel? Because those things are typically set up to really question a lot of things, but at the end of the day, they tend to be favorable. So, how do we think about the key things to really monitor with respect to the panel?

Really fair question. I think that, as you've seen, the data looks great. I mean, so, we hit superiority across the board on efficacy. At the panel, I think we'll look at really the three main components, efficacy, safety, and then the net benefit of that advocacy over the safety in the trial. On the efficacy side of things, we'll probably just want to look at the cuts of the data. As I mentioned in my comments, the more that we peel back the onion on it, and the more we looked at the data from all different angles, the durability of the data and the efficacy look even better, like the more questions that they ask. So we feel really good about the efficacy side of things. On the safety side, I think they'll probably wind up talking about, really just, I mean it’s a small number of cases, but we'll just want to make sure that these are items that for – the good news, there were no deaths, all the patients actually wound up doing well and had no long term effects across any of the issues that were out there. And then they'll want to get into maybe possibly some details of, okay, well with pericardial fusion, what does that mean, and what did that look like? And how did the patient recover, etcetera? And just get some more specifics on it. So, I think those are the kinds of things that they'll dive into probably. The good news is the safety rates were within what we had prescribed. They would be with the FDA when we started the trial and we feel really good about it overall. Matthew O’Brien: Got it. That's helpful. And then just following up a little bit, you know, again, the data was excellent in my view, you know, what was the commentary coming out of HRS from clinicians? What kind of feedback did you get, but I think you had a 900 doc seminar that you can talk to. I know you guys really want us to be reasonable with our expectations for what kind of contribution we get on the MIS side from CONVERGE next year, but you know, what kind of momentum or feedback or excitement enthusiasm are you hearing from clinicians coming out of the data?

I'm mostly cautious just because I don't know when the exact date that you'll get the actual approval, and what's happening with COVID and just kind of the ramp back up of hospitals and facilities that kind of get down that path, but I'm really excited about the data because I think the data is incredibly compelling, and you're seeing that on Twitter feeds and others from really top-notch EPs in the world that are talking about this procedure and talking about back wall ablation being something that is really positive. In fact – just almost every day, there's a new Tweet going out from one of the leading EPs in the world, whether it's Dr. Natale or the Cleveland Clinic. Dr. Wazni talking about CONVERGE. These are people that were not doing the Convergent procedure. I've seen the data and are talking about the fact that it's really the only randomized control data that is out there, and they're having debates online about it. And they're really pushing it forward in a lot of ways. I think that's really fascinating to kind of watch that happen. I'd say that's a typical response and the conversations we've had. And so I'm, you know, it's been really positive feedback we got from people. Matthew O’Brien: Got it. Very helpful. Thank you.

Thank you. And our next question comes from Mike Matson with Needham & Co. Your line is open.

Yeah, hi, good afternoon. This is David on for Mike. Thanks for taking the questions. Just a couple more on CONVERGE, I mean, it's – I understand you're running on the assumption that you'll probably see a panel, but it sounds like that might be delayed from what you were previously thinking. So, is [mid-2021] approval a fair assumption? And then, also just on the data and then to the hiring freeze, has there been any change in pace of hiring for that sales force?

Yeah, well, I'll start with the last one, which is that, you know, we feel – we felt really good about kind of where we were looking into the back half of the year, not only on May, in June, but also even – even though July wasn't as good as June, it was still a strong month relative to what you saw at the beginning of the pandemic, and we feel we need to invest in our long-term. And so we've lifted that and we're actually out aggressively hiring all those roles right now, and we feel good that we're going to be able to find really talented and great people on board. In terms of timing on the FDA, I just don't – I can't and I'm not really going to give specifics on timing. We're having great dialogue with the FDA. It's back and forth good questions both over the phone and on email, etcetera, and really working collaboratively with them on it. And so, I just am hesitant to say there's going to be an exact date there. I know the data, you guys have seen the data, and so, you know, from my standpoint, I'm just trying to work through that process. And once we get that process, we get through it, obviously, we believe that we'll actually get and eventually getting approval to predict the exact dates really tough. The reason I said that, just given the fact that we're going back and forth with them in a really good, positive, collaborative way and knowing that we're sitting here at the beginning of August, you know the likelihood of us actually getting a panel done probably in the fall timeframe is just not that likely. I don't have any specific feedback that says, this is why, this is just me giving you my insights given the back and forth we've had, which again is that really positive and we feel good about the process that we're going through with the FDA.

Okay, that's helpful. And then maybe for Andy, OpEx was down year-on-year. So just wondering how durable these cost savings initiatives are and then relative to the second quarter how we should be thinking about margins in the third and fourth quarter?

Yes, sure David. So, on the spend, you're right. Some of it is a mix – it is a mix of temporary things like travel. Some of the reduction has been in pushing out headcount, as Mike mentioned, you know, some of that we’ll look to reinvest as we get into the latter part of the year, as we talked about. But, you know, it's – this is where we're trying to watch things closely in terms of, you know, what's going on with the business and making sure that, you know, we're keep an eye on the areas where we've got some flexibility. On the margin, you know, a lot of that really was due to just being less productive in the second quarter, in terms of, you know, the inventory that we were producing. So, you know, we still, you know, like our longer-term gross margin profile, but again, we've got to flex our production capability with demand. So, I think the team's doing a very, very good job of managing that. And, you know, we'll look to, you know, we'll look to grow from here.

Thank you. Our next question comes from Cecilia Furlong with Canaccord. Your line is open.

Hi, Mike and Andy, thanks for taking the questions. I guess just to start off, I wanted to continue with CONVERGE, but just ask how you're viewing the adoption potential, longer-term and persistent versus long standing persistent patients, and just any nuances around really reaching those long standing persistent patients specifically, and creating new standard of care for that patient population?

I mean, it's a really good question to piece back kind of what's happening in a persistent market. We believe that we're going to be applicable to both the persistent and the long standing persistent market. For sure the benefits are even greater in the long standing persistent market. They're more durable and that's a great patient population to start with. It's 45% of the patients that are out there. They're the ones that the EPs already raised their hands up immediately and say, I can't do these. So, in a lot of ways, they’ll probably start with some of those more difficult to treat patients, see the great success, and then move their way into the persistent over time, depending on how well they're treating the persistence today. What you see – I mean, I think that's kind of how it's going to progress. I think they'll probably do the long standing persistence first, primarily just because those are the sickest patients, and they're the ones that they have no option for today. And on the persistence side, they have – some people feel comfortable doing some aspects of persistent upfront maybe as a first line therapy with a catheter only, and then move in to Convergent after that. I think we'll probably see some of that, but that'll be over time. So the good news is that there's millions and millions of patients here and will kind of fit within both buckets and the results were strong across the board.

Great, thank you. And then I guess if I could follow up and just ask about your cryo nerve block franchise, just the market drivers and dynamics you saw during the quarter that drove the ramping adoption. And then just as you're thinking longer-term, the role of data and really opening up this opportunity further. Thank you.

What's amazing about it is that, I mean, if you think about cryo nerve block, I mean a lot of the – what we saw was in the thoracic patients. It really falls into three major buckets that you have cryo nerve block being used for today. The first bucket is for lung cancer patients and cancer patients really don't get deferred. If they've got cancer, and they've got to take out a lung nodule that's based, they're still going to continue down that path. They don't want it to metastasize. And cryo nerve block is used quite a bit within that area. So, I’d say that's kind of one, is that that's continuing to grow. And people are seeing the benefits of it. Two, is in trauma cases where you're coming into the ER, and those cases continue to be used. Now there were fewer trauma cases in general across the United States because people were driving less at the beginning of the pandemic. You saw that, come back near the end. And then finally, they're being used in other types of procedures. And we'll kind of see like the [indiscernible] procedure is one that is being used and that's one that there's lots of data that's getting published that’s out there. And we're actually seeking an adolescent label in that area as well.

Thank you. And our next question comes from the line of Rick Wise with Stifel. Your line is open.

Hi, Mike and Andy. It's Drew on Rick tonight. Just to touch on search – hey, Mike. Just a touch on [surgeon] training for a moment, it's always been a critical growth driver for AtriCure. You mentioned on the call that you've shifted more towards interactive virtual training and case coverage. Can you talk about any notable trends that you're seeing moving forward? I mean, could these drive or could these initiatives drive even better procedure recovery when COVID or as COVID dies down? Or should we be thinking that today's education initiatives virtual or in-person should just drive even better cardiac surgery penetration over time.

I think a little bit of both. I mean, the great thing about it – it’s a really good question, you can teach it back into a variety of areas. I mean, one is, if you look at our core basic Maze training courses, we've been able to touch more cardiac surgeons during this period of time than really we've ever been able to, because it’s been virtual. People are willing to get on the phone for a couple of hours go through that training and have a really good interactive dialogue. They’d love the journal clubs that we've put together, whether in smaller group settings and have intimate conversations with their peers that we've been able to kind of run that you can't really get if you're doing it in another environment. In addition to that, what we're seeing is we've got these mobile cadaver labs that are going around, and there's a lot of training that's occurred there. We're getting a lot of demand that people want to, to kind of hands on technical training with the product. And that's gone really well because we bring it to the hospital and the hospital they just kind of go outside. They go into cadaver lab, and we're getting comments like that's the best kind of hands on training that I've ever had. And I didn't have to travel and train for three days. So, those are the kinds of transformational things that are going on, that I think will be sticky for the long-term that will enable us to get in front of more people that I do think will eventually, to your point, have stickiness to kind of long-term adoption.

Got it. Thank you. And then just on EnCompass, you mentioned that you're still on track for 510(k) submission, just want to make sure that I have that that timeline correct, and when that timeline would be? And then just touching on commercialization of the device, I mean, would you expect a full commercial launch or something or is there something about this particular clamp that might require a little bit more training for a surgeon?

We’ll anticipate a full commercial launch sometime next year? We're in conversations with the FDA. We've got feedback on our submission, and it's been a great submission so far. So from, I don't know what the exact timing is going to be, but sometime early part of next year we'll likely begin the roll out of that.

Thanks for taking the questions Mike.

Thank you. And our next question comes from Danielle Antalffy with SVB Leerink. Your line is open.

Hey, good afternoon, guys. Thanks so much for taking the question. Congrats on putting up a solid quarter despite all that's happening. I was curious Mike, if you could give – two questions, first on the back half of the year and where we're seeing some of the regional variations? I mean, can you give any color on sort of how your regional revenue breaks down a little bit to give a sense of sort of South versus West versus Northeast, I mean, it sounds like maybe you have a lot of exposure in Texas, for example, but just any sort of color to give comfort on how to think about the back half of the year, as we do see COVID sort of spread seemingly in waves throughout the country?

Yeah, I mean, it's a really fair question, Danielle. I'll start with the kind of Northeast that was hit the hardest in the early part of the year. The Northeast is a solid region for us. It's been a solid performer for us, but it basically went down to pretty much zero in the beginning part of April. I mean, it was almost no cases were actually happening up there. That's made a nice recovery in the last couple months, but it's been a slow recovery and it's not back to full normal, but the good news is that it's actually, you know, cases are happening everyday now, and people are busy, which is really good, but you kind of alluded to it. If you look at Florida, Texas, and Southern California, those are three of our biggest, most penetrated regions in the country, in the world. Their big aspects of when a hospital shuts down and pushes off two weeks, you lose a couple of weeks here and then they're going to come back and that's why it's a really fluid moment that we're tracking every single day from that standpoint. That's why we're uncertain to exactly what the numbers are going to look like in the back half of the year. We do think that, especially for right now you're getting impacted a little bit in Southern Florida in particular, kind of in the Miami area. And then you'll – a little bit obviously in Texas and certain areas like Houston and places like that where you're seeing an impact. So, it's in pockets. And what we're hopeful for is that those begin to recover and then if others get hit, they're a little slowdown in some other areas. Right now it's hitting in some of the heavier areas, but we've got the heavier volume, for sure. And that's kind of I think, a more short-term phenomenon. Hopefully, everything's going to recover here and those hospitals will come back online over the coming months.

Got it. Okay, that's actually very helpful color. Thank you for that. And then my second question is on CONVERGE and how to think about the go to market strategy here? Since you are targeting not just the cardiac surgeon here, but really the EP, and just curious about how does it, you know, I think you had what 27 U.S. trial centers, do you go there first as a room to grow the number of procedures done in those existing trial centers and then you go to your currently implanting cardiac surgeon centers and try to get the EP buy in there? Or how do we think about that?

A little bit of all the above. I mean, we've got over 100 – we had about 100 sites or so that continuously had been using our product, not only the 27 trial sites, but really, there's about 100 sites that we're ordering every quarter. They’re solid sites. They've got good case fines. Obviously, COVID has hit them. So things have been kind of shifted a little bit, but those are the obvious ones. We've got plans for each one of those that wants to get the approval for how to expand within those sites. Get more EP referrals, and more EPs to understand it besides just maybe the one or two EPs that were a part of a trial that were part of initially. We've also got a list of those that we think are sites that would be good partners for us, based on who the EP might be, what hospital coverage they've got, if they've got a good surgeon that's going to be very interested. So, we're hitting on all those and then we prioritize that on the timeframe and so once we get the approval, we'll be ready to kind of hit the ground running within all of those hospitals. We're all taking in-bound calls to people that are very interested as well. So there have been people that have obviously seen the data and they're interested once we get the approval to kind of move forward.

Thank you so much.

Thank you. And I'm not showing any further questions at this time.

Okay. Without any further questions, again, I hope everybody stays safe and healthy. Appreciate your interest in AtriCure and look forward to talking to many of you over the coming months. Have a great rest of the summer. Bye now.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a good day.