Acutus Medical, Inc. (NASDAQ:AFIB) Q4 2022 Earnings Call Transcript

Acutus Medical, Inc. (NASDAQ:AFIB) Q4 2022 Earnings Call Transcript March 16, 2023

Operator: Thank you for standing by. Welcome to Acutus Medical’s Fourth Quarter and Full Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. . I would now like to hand the call over to Caroline Corner, Investor Relations. Please go ahead.

Caroline Corner: Thank you, operator. Welcome to Acutus’ fourth quarter 2022 earnings call. Joining me on today’s call is David Roman, Chief Executive Officer; and Takeo Mukai, Chief Financial Officer. This call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements. Factors that may cause results to differ from these forward-looking statements are discussed under the forward-looking statements section in the press release attached as an exhibit to Acutus’ Form 8-K filed with the SEC today and are also discussed in more detail under the Risk Factors section in Acutus’ most recent filings with the SEC, including the risk factors described in Acutus’ Form 10-K.

Any forward-looking statements provided during this call, including projections for future performance, are based on management’s expectations as of today. Acutus undertakes no obligation to update these statements, except as required by applicable law. Acutus’ press release with fourth quarter 2022 results is available on the Acutus Web site, www.acutusmedical.com under the Investors section and includes additional details about Acutus’ financial results. The Acutus Web site also has Acutus’ SEC filings, which you are encouraged to review. A recording of today’s call will be available on the Acutus Web site by 5.00 PM Pacific Time. Now I’d like to turn the call over to David.

David Roman: Thank you, Caroline, and good afternoon, everyone. Before jumping into today’s call, I wanted to share an exciting milestone in Acutus’ mission to transform patient care. Just last month, we crossed our 6,000 patient treated with AcQMap globally. We continue to positively impact the lives of patients in ways that no other EP company can, and there’s no greater reward for us as a company than seeing our technology come to life. With our focus on treating complex cases, we are seeing AcQMap change the course of disease management for a growing number of patients for whom the societal, personal and care burdens are all significant. I am humbled and proud to hear when AcQMap guided therapy improves patient quality of life and materially reduces the need for another redo procedure.

I’d like to take a moment to recognize the extraordinary commitment of my Acutus colleagues as well as the support and engagement from our physician partners for putting our mission into action each and every day. This is also the spirit that will carry us into 2023 and beyond, as we return our business to growth through accelerated innovation and ongoing execution. Turning to our recent performance and business updates, we are making good progress on our two key strategic imperatives that we’ve presented on our November call, driving utilization and operational excellence. Starting with our first priority to drive utilization and adoption for AcQMap. We continue to execute our commercial strategy with intensified focus on procedure volume growth and utilization over expanding the installed base.

While our installed base ended the year down versus 2021, we drove growth in all utilization-related metrics. For the full year 2022, commercial AcQMap procedure volumes increased 19%, console utilization increased 13% and revenue per procedure grew 11% constant currency. Overall, these performance metrics reflect strength in our core business and give us confidence in our ability to deliver growth in 2023 and beyond. Further to achieving our growth objectives is our product pipeline that is geared to both strengthening our position and expanding our addressable opportunity. As we have discussed previously, AcQMap is most regularly used today in redo procedures. Specifically, about 55% of U.S. and 80% of OUS procedures come from redo cases.

AcQMap has clear differentiation in these procedures and our clinical results and sustained utilization in these segments underscore the value proposition we offer. At the same time, these procedure categories represent only a portion of the total complex ablation segments. Today, we estimate that our core addressable market is in the $750 million to $1 billion range, which includes all redo AF procedures, transient atrial tachycardias and atypical flutter. By our estimate, this leads about $2 billion to $2.5 billion of opportunity for AcQMap that we expect to approach incrementally in 2023, expand to cover an additional 1.5 billion in 2024 with the balance coming into view in 2025 and 2026. In aggregate, this brings the addressable market for AcQMap to approximately 475,000 procedures and $3 billion in disposable revenue based on trailing market estimates.

Assuming sustained market growth of 10%, our opportunity will likely exceed $4 billion by 2026. The key innovations required to enter new categories largely center around software, including algorithm development and disposables. Earlier this year, our leadership team undertook a strategic assessment of our R&D roadmap and decided to redirect resources to prioritize software and catheter development. These are two areas where we are growing headcount and expect a steady cadence of product launches over the next several years. In 2023 and 2024, we expect to have two significant launches in each year for both software and disposables. The sequence of launches starts with our AcQMap 9 software platform, which is designed to make significant improvements to catheter localization, procedural efficiency and workflow flexibility.

AcQMap 9 will be followed by U.S. introduction of our AcQBlate Force Sensing Ablation Catheter and System. Data we presented at the 2023 AF Symposium as part of the Late-Breaking Clinical Trials session demonstrated strong efficacy with 94% success in the primary efficacy endpoint with an excellent safety profile of zero adverse event. Introducing AcQMap 9 and AcQBlate are among the primary drivers for our expectation of improved revenue performance. Moving to 2024, our revamped roadmap pulls forward our next major software platform AcQMap 10 by about one year. AcQMap 10 will position us to be a stand-alone system across a broader spectrum of target procedures. Specifically, AcQMap 10 will enable physicians to perform contact and non-contact mapping in a single session.

This is a major step forward in aligning our workflow with standard practice and eliminating one of the key barriers to broader adoption of our differentiated mapping solution. Later in 2024, we expect to launch our next generation AcQBlate 2.0 ablation catheter with bidirectional steering capabilities, improved handling and a lower cost of goods profile. In addition to our new product pipeline, critical to the adoption of AcQMap will be additional clinical research. Over the course of this year, we have plans to release several data presentations and publications that build on the UNCOVER AF study that showed freedom from AF in persistent patients of 72.5% at one year. As a reminder, most landmark study data for the treatment of persistent AF with conventional systems show one year success rates in the 50% to 60% range.

Data we have gathered in additional AcQMap studies show improved outcomes relative to the 72.5% UNCOVER AF benchmark, and we look forward to sharing meaningful clinical research throughout the year. Switching gears to our efforts to strengthen our financial performance. We continue to make significant progress during Q4 2022 and recorded our lowest level of operating expenses and cash burn since IPO with year-over-year declines of 35% and 41%, respectively. We expect our cash burn and operating expenses to continue to decline on a year-over-year basis, at least for the first nine months of 2023. This reflects the ongoing benefits of our restructuring program, disciplined operating expense management and gross margin improvement. Takeo will discuss these dynamics in more detail later in the call.

In addition to the internal restructuring to strengthen our financial position, the transition of our left-heart access portfolio to Medtronic is progressing well. We have achieved all earn-out milestones under the agreement and are now eligible to receive four years of uncapped revenue base earn-out starting from February of this year. As a reminder, the earn-outs are for 100% of net sales in the first year, 75% of sales in the second year, and 50% of sales in the third and fourth years. Putting this all together, 2022 is a transition year where we reset our strategic priorities, focus our R&D programs and establish a strong operating foundation. We expect our business to see progressive improvements in 2023 and even stronger performance in 2024.

When combined with our operational improvement initiatives, this business trajectory will position us well for the future and allow us to maximize value for all stakeholders. I’d be happy to cover any of these topics in more detail during our Q&A session. And I will now turn the call over to Takeo.

Takeo Mukai: Thank you, David, and good afternoon, everyone. During my remarks today, I will review our fourth quarter and full year 2022 results as well as provide our outlook for 2023. For the fourth quarter, net revenue of $5 million compared to $4.4 million in the year ago fourth quarter, as we closed 2022 with our highest level of quarterly sales on record. The 14% year-over-year increase was primarily driven by disposable sales associated with higher AcQMap procedure volumes, growth in left-heart access, both organically and through a distribution agreement with Medtronic and modest increases in capital and service other revenue. For the full year of 2022, net revenue of $16.4 million compared to $17.3 million in the prior year with declines attributable to a 2.3 million year-over-year reduction in capital equipment sales and $0.4 million in foreign exchange headwinds.

Balancing these factors was strong execution on our strategy to drive utilization and procedure volume growth, which drove strong underlying growth in disposables service and other revenue. We ended 2022 with an installed base of 76 systems globally, up sequentially from 74 last quarter and down from 77 in the year ago fourth quarter. We have mostly finished our strategy of moving consoles into higher value accounts throughout 2022. We will continuously evaluate our console utilization to ensure that we are optimizing the installed base and we expect to grow our installed base globally in 2023. Disposables revenue in the fourth quarter of $3.5 million grew 8% compared to the year ago fourth quarter driven by 15% growth in global commercial AcQMap procedures and left-heart access products.

For the full year, disposables revenue of $12.9 million advanced 8% year-over-year on a reported basis and 11%, excluding negative impact of foreign exchange, supported by 19% growth in commercial AcQMap procedure volumes. We saw stabilization of capital revenue in the fourth quarter, with revenue of $0.9 million compared to $0.8 million in the year ago fourth quarter. For the full year, capital revenue of $1.8 million declined 57% from $4.1 million to 2021, consistent with our expectations and strategic prioritization of procedure volume and same-store utilization growth. Service and other revenue of $0.5 million was up slightly from $0.4 million in Q4 2021. Supply chain disruptions that emerged during the third quarter of 2022 continued through the fourth quarter and we estimate that these disruptions negatively impacted Q4 2022 and full year 2022 sales by $200,000 and $300,000, respectively.

More specifically, we had discussed shortages on our third quarter call related to the AcQGuide MAX 2.0 introducer sheath. This product is used on all Acutus mapping cases as well as other electrophysiology procedures involving large bore sheath. To expedite remediation and ensure long-term supply, we have qualified a secondary vendor for key components and now have sufficient inventory of this particular component for at least the next 18 months. While we resolved AcQGuide MAX shortages in Q1, we did experience disruption with our sole supplier for components in our flagship AcQMap product. This resulted in several weeks of lost production that has created a backorder situation. The AcQMap production shortfall would negatively impact Q1 results where we now have the requisite supply in-house and our teams are working six days a week to bring production and inventory levels in line with current and expected demand.

Non-GAAP gross margins of negative 64% in Q4 2022 improved from negative 110% in the third quarter of 2022 and were favorable compared to the negative 119% registered in the fourth quarter of 2021. The year-over-year and sequential improvement in our non-GAAP gross margins was driven by higher volumes, lower manufacturing variances, the positive impact from our restructuring actions taken earlier in the year and favorable mix, all helping offset increases in raw material costs. We will continue to dedicate significant attention to improving our gross margins and expect to show marked improvement for the full year of 2023. As demonstrated by the fourth quarter, our gross margin will ebb and flow with revenue and overall volumes. This will drive a downtick in Q1 2023 sequentially with improvements through the rest of the year, with a path to positive gross margin in the first quarter of 2024.

In addition to volumes driving a positive year-over-year trajectory in gross margins, several work streams are underway to drive efficiency in our overhead pool, reduce product costs to improve yield and bringing select processes in-house. Non-GAAP operating expenses were approximately $13.9 million in the fourth quarter of 2022, down 35% from the same period last year, and it’s the lowest level of quarterly non-GAAP operating expenses since IPO. On a sequential basis, non-GAAP operating expenses were down 8% as we realized the benefits of our continued discipline around expense management. As a reference point, the annualized fourth quarter non-GAAP operating expenses of $55.8 million is down 36% compared to 2021. Excluding specified items, our non-GAAP net loss for the fourth quarter of 2022 was $17.9 million or $0.63 per share compared to a non-GAAP net loss of $28 million for the fourth quarter of 2021 or $1.00 per share.

Our total cash and cash equivalents balance including restricted cash at the end of 2022 was $76.2 million. Our cash burn, excluding milestone payments and the employee retention credit, was $15.6 million in the fourth quarter, down 41% versus the prior year and down 29% on a sequential basis. We are pleased with the improvements we have made in reducing our quarterly cash burn and will continue to drive intense focus on optimizing our financial position. Closing with our outlook for 2023, we expect to see continued execution of our strategy to drive procedure volume, utilization and case revenue share growth. At the same time, we continue to navigate intermittent supply chain disruption, seasonality and variability in hospital capital expenditure spending, which is strong in Q4 of 2022 but relatively weak the rest of last year.

For the full year 2023, we expect revenue to be in the range of $18 million to $21 million, reflecting the continued shift in our trajectory from stabilization to growth. Key drivers underpinning our outlook for 2023 include growth in AcQMap procedure volumes and associated disposable sales globally, selected expansion in our installed base within our direct businesses, further geographic expansion with our partner BIOTRONIK and the second half 2023 launch of AcQBlate in the U.S. Accordingly, we expect approximately 45% of full year sales to come in the first half of the year and 55% in the second half, relatively consistent with 2022 phasing and normal industry seasonality. In regards to the first quarter of 2023, we expect sales to show modest year-over-year growth compared to the $3.7 million registered in the prior year period.

The primary factor weighing on growth in the first quarter of 2023 are the aforementioned AcQMap back orders that will reduce sales by $300,000 to $400,000. These issues are actively being resolved and we expect to recoup these sales in the balance of the year. As a result, we expect stronger year-over-year growth in the latter nine months of the year. Overall, we are pleased with our performance exiting 2022. We are executing our strategic imperatives and staying laser focused on the variables we can control in our business. Strong underlying fundamentals set us up to return the business to growth in 2023, with accelerating performance into the outer years. We appreciate your continued interest and support. And I will now turn the call back to the operator to facilitate our Q&A session.

Operator?

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Q&A Session

Operator: . Our first question comes from the line of Marie Thibault of BTIG. Your question please, Marie.

Marie Thibault: Hi, yes, David and Takeo. Thanks so much for taking the questions and congrats on the progress in 2022. In particular, the reduced OpEx and cash burn, I’d really like to see that. I wanted to ask a first question here on your 2023 guidance and see if we could try to understand what’s assumed from the Medtronic left-heart access portfolio sales. I’m not sure how much you can tell us, but would love to understand what you’re trying to incorporate into that 18 to 21 range?

David Roman: Yes. Thanks for the question, Marie, and I appreciate the comments. In our distribution agreement with Medtronic, just to make sure everyone’s on the same page, we sell to them very similar to the way we do it with BIOTRONIK. Medtronic owns our left-heart access portfolio. We continue to manufacture. We sell to them under a distribution agreement. And then they sell it to their end users. In that agreement, as you might imagine, the transfer pricing is considerably lower than where we had been selling the product previously as the primary manufacturer. We can’t disclose specifically what sales are expected to be for ‘2023. But I would say at a high level, the lower distribution price at which we were selling is offset by higher volume. So our expected sales for left-heart access products under the distribution agreement is not too different from what we thought it was going to be under Acutus as the primary manufacturer.

Marie Thibault: Okay, that’s helpful. Thank you for that. And then maybe I can ask a question here on the AcQGuide MAX shortage update, certainly good to hear that you’re resolving and have a qualified vendor and working to remedy that backlog. Wondering if this is going to impact Q2 in your mind? We are almost in Q2, I guess, at this point. And so would love to just sort of get ahead of some of that. Do you think this will all be resolved in Q1? And really from Q2 and Q3, we should be making up some of that difference. Thanks for taking the questions.

David Roman: Sure. So on the AcQGuide MAX, that product is required in every AcQMap procedure because it’s a large bore incision. In the fourth quarter and the third quarter when we were on back order and did have shortages, we did have some customers who were willing to go back to the prior version of their product. But I still think we probably lost procedure volumes in the fourth quarter and likely early in the first quarter due to those shortages. It also put our sales team in a position where couldn’t necessarily hit the accelerator on new account openings. And we actually restricted the sale of AcQGuide MAX to mapping customers only. And just to put it into perspective, prior to this back order, we were selling about two AcQGuide MAX sheaths for every AcQMap catheter.

So we were seeing this product used in other EP procedures. That ratio obviously converged pretty heavily to one to one and slightly below that exiting last year and into the early part of this year. So I do think there was a dampening effect a little bit to some degree on procedure volumes last year and early this year, mostly associated with our ability to open and support new accounts. We do not expect there to be a direct impact from AcQGuide MAX in the second quarter or through the balance of the year based on where we sit today. The only carryover effect that there may be is earlier this year, as I mentioned, we were restricting the distribution of that product to certain customers. So we might have lost them early in the year momentum around this product.