Acutus Medical, Inc. (AFIB) has undergone a significant transformation in its business model, shifting its focus to exclusively support the manufacturing and distribution of Medtronic Inc.'s left-heart access product portfolio. This strategic realignment comes as the company seeks to maximize the potential for future contingent cash consideration and cash flow from its partnership with the medical device giant.
Business Overview
In 2022, Acutus completed the sale of its left-heart access portfolio to Medtronic for an upfront cash consideration of $50.0 million, of which $4.0 million was placed in an indemnity escrow account. The company also became eligible for up to $37.0 million in contingent cash consideration, including a $20.0 million OEM Earnout achieved in October 2022 and a $17.0 million Transfer Earnout achieved in December 2022. Additionally, Acutus is entitled to receive a portion of Medtronic's future net sales of the left-heart access products, ranging from 100% in the first year to 50% in the fourth year.
Following this transaction, Acutus entered into a distribution agreement with Medtronic, under which the company acts as the exclusive original equipment manufacturer (OEM) supplier of the left-heart access products. This strategic partnership has become the primary driver of Acutus' revenue, as the company no longer manufactures or distributes its own mapping and ablation products.
In November 2023, Acutus' board of directors approved a strategic realignment of resources and corporate restructuring, known as the "Restructuring." This initiative was designed to simplify the company's operational footprint, reduce costs, and focus exclusively on the manufacturing and distribution of Medtronic's left-heart access products. As part of the Restructuring, Acutus wound down its mapping and ablation businesses and reduced its workforce by approximately 65%.
Financials
For the full year 2023, Acutus reported annual revenue of $7.2 million, a significant decrease from the prior year's $35.8 million. This decline was primarily attributable to the company's strategic shift away from its legacy mapping and ablation products. Net loss for the year was $81.7 million, reflecting the costs associated with the Restructuring, including severance expenses, asset impairments, and other one-time charges.
Despite the challenges faced during the Restructuring, Acutus' cash flow performance has shown signs of improvement. For the full year 2023, the company reported annual operating cash flow of -$63.6 million and annual free cash flow of -$63.8 million, representing a significant improvement from the prior year's figures of -$78.2 million and -$78.4 million, respectively.
Looking at the company's latest quarterly results, for the three months ended March 31, 2024, Acutus reported revenue of $3.6 million, a 192% increase compared to the same period in the prior year. This growth was driven by increased sales volumes of the left-heart access products through the company's partnership with Medtronic. Gross margin for the quarter was negative 1%, a significant improvement from the negative 70% reported in the same period of 2023, reflecting gains in manufacturing efficiencies.
Net loss from continuing operations for the first quarter of 2024 was $2.1 million, compared to a net loss of $4.3 million in the same period of 2023. The improvement in net loss was primarily attributable to the Restructuring, which led to a decrease in research and development expenses and selling, general, and administrative expenses. Additionally, Acutus recognized a gain of $2.8 million related to the net sales earnouts from Medtronic during the quarter.
Liquidity
As of March 31, 2024, Acutus had cash, cash equivalents, restricted cash, and marketable securities of $20.0 million, compared to $29.4 million as of December 31, 2023. The company's working capital stood at $24.5 million as of March 31, 2024, down from $27.3 million at the end of 2023.
Risks and Challenges
Acutus' strategic shift towards its partnership with Medtronic is not without risks. The company's future performance is largely dependent on Medtronic's success in selling the left-heart access products and Acutus' ability to achieve the associated earnout payments. Additionally, the company's manufacturing and supply chain operations must continue to function efficiently to meet Medtronic's demand.
Furthermore, Acutus faces the challenge of navigating the termination of its Bi-Lateral Distribution Agreements with Biotronik, which the company alleges was due to the Restructuring. Biotronik has filed a demand for arbitration against Acutus, alleging breach of contractual obligations, and is seeking damages. The outcome of this dispute could have a material impact on the company's financial position and operations.
Outlook
Despite these risks, Acutus' management believes that the Restructuring and its exclusive focus on the Medtronic partnership will maximize the potential for future cash flow and contingent consideration. The company's liquidity position, as of March 31, 2024, appears sufficient to fund operations for at least the next 12 months, according to management.
Conclusion
Acutus Medical, Inc. has undergone a significant transformation, shifting its business model to exclusively support the manufacturing and distribution of Medtronic's left-heart access product portfolio. While the company faces risks related to its partnership with Medtronic and the ongoing dispute with Biotronik, the Restructuring and focus on the Medtronic relationship have the potential to stabilize Acutus' financial performance and cash flow in the near term. Investors should closely monitor the company's progress in executing its new strategic direction and managing the challenges that lie ahead.