UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2017~~

2021

☐

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from_____________to_____________

Commission File Number 000-51470

AtriCure, Inc.

(Exact name of Registrant as specified in its charter)


Delaware			34-1940305
(State or other jurisdiction of incorporation)			(IRS Employer Identification No.)

7555 Innovation Way

Mason, OH 45040

(Address of principal executive offices)

(513) 755-4100

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.001 par value	ATRC	NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: ~~YES ☒ NO ☐~~

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). ~~YES ☒ NO ☐~~

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☐

Accelerated Filer

☒

Emerging growth company

Non-Accelerated Filer

~~☐ (Do not check if a smaller reporting company)~~

Smaller reporting company

☐


~~Emerging growth company~~	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act: ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): YES ☐¨ NO ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at November 1, 2021
~~Class~~		~~Outstanding at October 30, 2017~~
Common Stock, $.001 par value	~~34,474,119~~ 45,931,819

Table of Contents


		~~Page~~
		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2021 and December 31, ~~2016~~2020	3
	Condensed Consolidated Statements of Operations and Comprehensive ~~Loss~~Income (Loss) for the Three and Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~2020	4
	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~2020	5 6
	Notes to Condensed Consolidated Financial Statements	6 7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18 23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24 29
Item 4.	Controls and Procedures	24 29
PART II. OTHER INFORMATION		30
Item 1.	Legal Proceedings	24 30
Item 1A.	Risk Factors	24 30
Item 6. 5.	~~Exhibits~~Other Information	25 30
Item 6.	Exhibits	31
Signatures		26 32

Table of Contents

PART

PART I. FINANCIAL INFORMATION

~~Ite~~m

Item 1. Financial Statements

ATRICURE, INC. AND SUBSIDIARIES

~~CONDENSED~~

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Per Share Amounts)

(Unaudited)



	September 30,		December 31,
	2017		2016			September 30, 2021		December 31, 2020
Assets					Assets
Current assets:					Current assets:
Cash and cash equivalents	$	19,444	$	24,208	Cash and cash equivalents	$	39,886	$	41,944
Short-term investments		14,942		19,801	Short-term investments	79,860		202,274
Accounts receivable, less allowance for doubtful accounts of $82 and $246		22,580		21,094
Accounts receivable, less allowance for credit losses of $1,161 and $1,096					Accounts receivable, less allowance for credit losses of $1,161 and $1,096	33,498		23,146
Inventories		22,565		17,660	Inventories	38,587		35,026
Other current assets		2,615		2,954
Prepaid and other current assets					Prepaid and other current assets	3,876		4,347
Total current assets		82,146		85,717	Total current assets	195,707		306,737
Property and equipment, net		29,267		29,995	Property and equipment, net	29,901		28,290
Operating lease right-of-use assets					Operating lease right-of-use assets	2,465		1,914
Long-term investments		—		3,000	Long-term investments	105,097		14,178
Intangible assets, net		51,105		52,131	Intangible assets, net	43,963		128,199
Goodwill		105,257		105,257	Goodwill	234,781		234,781
Other noncurrent assets		676		321	Other noncurrent assets	1,055		440
Total Assets	$	268,451	$	276,421	Total Assets	$	612,969	$	714,539
Liabilities and Stockholders’ Equity					Liabilities and Stockholders’ Equity
Current liabilities:					Current liabilities:
Accounts payable	$	10,791	$	10,673	Accounts payable	$	17,527	$	12,736
Accrued liabilities		18,188		16,467	Accrued liabilities	31,846		27,984
Other current liabilities and current maturities of capital leases and long-term debt		7,093		1,688
Other current liabilities and current maturities of debt and leases					Other current liabilities and current maturities of debt and leases	4,581		8,417
Total current liabilities		36,072		28,828	Total current liabilities	53,954		49,137
Capital leases		12,910		13,319
Long-term debt		18,689		23,886	Long-term debt	56,354		53,435
Other noncurrent liabilities		41,861		41,946
Finance lease liabilities					Finance lease liabilities	10,317		10,969
Operating lease liabilities					Operating lease liabilities	1,593		1,180
Contingent consideration and other noncurrent liabilities					Contingent consideration and other noncurrent liabilities	2,282		187,424
Total Liabilities		109,532		107,979	Total Liabilities	124,500		302,145
Commitments and contingencies (Note 7)					Commitments and contingencies (Note 7)	0		0
Stockholders’ Equity:					Stockholders’ Equity:
Common stock, $0.001 par value, 90,000 shares authorized and 34,474 and 33,342 issued and outstanding		34		33
Common stock, $0.001 par value, 90,000 shares authorized and 45,933 and 45,346 issued and outstanding					Common stock, $0.001 par value, 90,000 shares authorized and 45,933 and 45,346 issued and outstanding	46		45
Additional paid-in capital		382,181		367,851	Additional paid-in capital	755,048		742,389
Accumulated other comprehensive loss		(10)		(468)
Accumulated other comprehensive (loss) income					Accumulated other comprehensive (loss) income	(213)		312
Accumulated deficit		(223,286)		(198,974)	Accumulated deficit	(266,412)		(330,352)
Total Stockholders’ Equity		158,919		168,442	Total Stockholders’ Equity	488,469		412,394
Total Liabilities and Stockholders’ Equity	$	268,451	$	276,421	Total Liabilities and Stockholders’ Equity	$	612,969	$	714,539

See accompanying notes to condensed consolidated financial statements.

Table of Contents

ATRICURE, INC. AND SUBSIDIARIES

CONDENSED ~~CONSOLIDATED~~CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE ~~LOSS~~

INCOME (LOSS)

(In Thousands, Except Per Share Amounts)

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
Revenue

$
42,150

$
38,340

$
128,654

$
113,952
Cost of revenue

11,232

10,868

35,174

31,748
Gross profit

30,918

27,472

93,480

82,204
Operating expenses:

Research and development expenses

7,966

8,271

26,423

25,958
Selling, general and administrative expenses

29,799

25,487

89,901

79,689
Total operating expenses

37,765

33,758

116,324

105,647
Loss from operations

(6,847)

(6,286)

(22,844)

(23,443)
Other income (expense):

Interest expense

(576)

(530)

(1,694)

(1,266)
Interest income

58

67

160

166
Other

145

(32)

132

(146)
Loss before income tax expense

(7,220)

(6,781)

(24,246)

(24,689)
Income tax expense

26

2

66

24
Net loss

$
(7,246)

$
(6,783)

$
(24,312)

$
(24,713)
Basic and diluted net loss per share

$
(0.22)

$
(0.21)

$
(0.75)

$
(0.78)
Weighted average shares outstanding—basic and diluted

32,576

31,706

32,297

31,547
Comprehensive loss:

Unrealized gain (loss) on investments

$
8

$
(19)

$
14

$
35
Foreign currency translation adjustment

29

60

444

127
Other comprehensive income

37

41

458

162
Net loss

(7,246)

(6,783)

(24,312)

(24,713)
Comprehensive loss, net of tax

$
(7,209)

$
(6,742)

$
(23,854)

$
(24,551)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue	$	70,460	$	54,757	201,111		$	148,806
Cost of revenue	18,234		$	14,423	50,267		41,934
Gross profit	52,226		$	40,334	150,844		106,872
Operating (benefit) expenses:
Research and development expenses	11,284		10,576		34,698		32,199
Selling, general and administrative expenses	49,873		33,557		150,939		106,257
Change in fair value of contingent consideration (Note 2)	(189,900)		192		(184,800)		(4,854)
Intangible asset impairment (Note 3)	82,300		—		82,300		—
Total operating (benefit) expenses	(46,443)		44,325		83,137		133,602
Income (loss) from operations	98,669		(3,991)		67,707		(26,730)
Other income (expense):
Interest expense	(1,449)		(1,232)		(3,835)		(3,691)
Interest income	117		246		354		914
Other	(191)		24		(151)		(70)
Income (loss) before income tax expense	97,146		(4,953)		64,075		(29,577)
Income tax expense (benefit)	38		(4)		135		16
Net income (loss)	$	97,108	$	(4,949)	$	63,940	$	(29,593)
Net income (loss) per share
Basic net income (loss) per share	$	2.15	$	(0.11)	$	1.42	$	(0.71)
Diluted net income (loss) per share	$	2.11	$	(0.11)	$	1.39	$	(0.71)
Weighted average shares outstanding
Basic	45,258		44,012		44,977		41,442
Diluted	46,100		44,012		45,996		41,442
Comprehensive income (loss):
Unrealized (loss) gain on investments	$	(14)	$	(85)	$	(177)	$	26
Foreign currency translation adjustment	(112)		238		(348)		189
Other comprehensive (loss) income	(126)		153		(525)		215
Net income (loss)	97,108		(4,949)		63,940		(29,593)
Comprehensive income (loss), net of tax	$	96,982	$	(4,796)	$	63,415	$	(29,378)

See accompanying notes to condensed consolidated financial statements.

Table of Contents

ATRICURE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED ST~~ATEMENTS~~STATEMENTS OF ~~CASH FLOWS~~

STOCKHOLDERS’ EQUITY

(In Thousands)

(Unaudited)

Nine Months Ended

September 30,

2017

2016
Cash flows from operating activities:

Net loss

$
(24,312)

$
(24,713)
Adjustments to reconcile net loss to net cash used in operating activities:

Share-based compensation expense

10,947

8,796
Depreciation

5,831

5,625
Amortization of intangible assets

1,026

1,233
Amortization of deferred financing costs

198

152
Loss on disposal of property and equipment

95

107
Realized gain from foreign exchange on intercompany transactions

(163)

(23)
Amortization/accretion on investments

42

96
Change in allowance for doubtful accounts

(149)

142
Changes in operating assets and liabilities:

Accounts receivable

(1,030)

(1,777)
Inventories

(4,632)

(1,234)
Other current assets

477

136
Accounts payable

55

(756)
Accrued liabilities

1,532

(3,472)
Other noncurrent assets and liabilities

(389)

(192)
Net cash used in operating activities

(10,472)

(15,880)
Cash flows from investing activities:

Purchases of available-for-sale securities

(12,769)

(27,395)
Maturities of available-for-sale securities

20,600

14,602
Purchases of property and equipment

(5,135)

(6,102)
Proceeds from sale of property and equipment

—

3
Net cash provided by (used in) investing activities

2,696

(18,892)
Cash flows from financing activities:

Proceeds from debt borrowings

—

25,000
Payments on capital leases

(365)

(343)
Payment of debt fees

(50)

(120)
Proceeds from stock option exercises

4,170

2,595
Shares repurchased for payment of taxes on stock awards

(1,991)

(1,078)
Proceeds from issuance of common stock under employee stock purchase plan

1,205

987
Net cash provided by financing activities

2,969

27,041
Effect of exchange rate changes on cash and cash equivalents

43

74
Net decrease in cash and cash equivalents

(4,764)

(7,657)
Cash and cash equivalents—beginning of period

24,208

23,764
Cash and cash equivalents—end of period

$
19,444

$
16,107
Supplemental cash flow information:

Cash paid for interest

$
1,497

$
1,043
Cash paid for income taxes

37

30
Non-cash investing and financing activities:

Accrued purchases of property and equipment

263

243
Assets acquired through capital lease

2

125
Capital lease asset early termination

—

28


	Three-Month Period Ended September 30, 2020
	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Shares	Amount
Balance—June 30, 2020	44,939	$	45	$	723,754	$	(306,841)	$	(96)	$	416,862
Impact of equity compensation plans	82	—		5,466		—		—		5,466
Other comprehensive income	—	—		—		—		153		153
Net loss	—	—		—		(4,949)		—		(4,949)
Balance—September 30, 2020	45,021	$	45	$	729,220	$	(311,790)	$	57	$	417,532

	Three-Month Period Ended September 30, 2021
	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Shares	Amount
Balance—June 30, 2021	45,881	$	46	$	748,644	$	(363,520)	$	(87)	$	385,083
Impact of equity compensation plans	52	—		6,404		—		—		6,404
Other comprehensive loss	—	—		—		—		(126)		(126)
Net income	—	—		—		97,108		—		97,108
Balance—September 30, 2021	45,933	$	46	$	755,048	$	(266,412)	$	(213)	$	488,469


	Nine-Month Period Ended September 30, 2020
	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Shares	Amount
Balance—December 31, 2019	39,655	$	40	$	529,658	$	(282,197)	$	(158)	$	247,343
Issuance of common stock through public offering	4,574	5		188,953		—		—		188,958
Impact of equity compensation plans	792	—		10,609		—		—		10,609
Other comprehensive income	—	—		—		—		215		215
Net loss	—	—		—		(29,593)		—		(29,593)
Balance—September 30, 2020	45,021	$	45	$	729,220	$	(311,790)	$	57	$	417,532

	Nine-Month Period Ended September 30, 2021
	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Shares	Amount
Balance—December 31, 2020	45,346	$	45	$	742,389	$	(330,352)	$	312	$	412,394
Impact of equity compensation plans	587	1		12,659		—		—		12,660
Other comprehensive loss	—	—		—		—		(525)		(525)
Net income	—	—		—		63,940		—		63,940
Balance—September 30, 2021	45,933	$	46	$	755,048	$	(266,412)	$	(213)	$	488,469

See accompanying notes to condensed consolidated financial statements.

Table of Contents

ATRICURE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)


	Nine Months Ended September 30,
	2021		2020
Cash flows from operating activities:
Net income (loss)	$	63,940	$	(29,593)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Share-based compensation expense	20,539		16,126
Depreciation	5,672		5,937
Amortization of intangible assets	1,936		1,444
Amortization of deferred financing costs	628		423
Loss on disposal of property and equipment	68		93
Amortization of investments	1,847		628
Change in fair value of contingent consideration	(184,800)		(4,854)
Intangible asset impairment	82,300		—
Other non-cash adjustments to income	896		871
Changes in operating assets and liabilities:
Accounts receivable	(10,583)		2,675
Inventories	(3,809)		(4,746)
Other current assets	436		481
Accounts payable	4,527		(515)
Accrued liabilities	3,987		(13,688)
Other noncurrent assets and liabilities	(1,665)		895
Net cash used in operating activities	(14,081)		(23,823)
Cash flows from investing activities:
Purchases of available-for-sale securities	(160,577)		(200,795)
Sales and maturities of available-for-sale securities	190,047		49,984
Purchases of property and equipment	(7,043)		(4,207)
Proceeds from capital grant	—		800
Net cash provided by (used in) investing activities	22,427		(154,218)
Cash flows from financing activities:
Proceeds from sale of stock, net of offering costs of $0 and $218	—		188,958
Payments on debt and leases	(2,269)		(468)
Payments of debt fees	—		(34)
Proceeds from stock option exercises and employee stock purchase plan	10,020		7,412
Shares repurchased for payment of taxes on stock awards	(17,900)		(12,929)
Net cash (used in) provided by financing activities	(10,149)		182,939
Effect of exchange rate changes on cash and cash equivalents	(255)		—
Net (decrease) increase in cash and cash equivalents	(2,058)		4,898
Cash and cash equivalents—beginning of period	41,944		28,483
Cash and cash equivalents—end of period	$	39,886	$	33,381
Supplemental cash flow information:
Cash paid for interest	$	3,225	$	3,286
Cash paid for income taxes, net of refunds	153		206
Non-cash investing and financing activities:
Accrued purchases of property and equipment	606		88

See accompanying notes to condensed consolidated financial statements.

Table of Contents

ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In ~~thousands,~~Thousands, except per share amounts)

(Unaudited)

1. ~~DESCRIPTION~~DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of the Business—The “Company” or “AtriCure” consists of AtriCure, Inc. and its wholly-owned subsidiaries. ~~All intercompany accounts and transactions have been eliminated in consolidation.~~ The Company is a leading innovator in treatments for atrial fibrillation (Afib) and left atrial appendage (LAA) management and it sells its products to medical centers globally through its direct sales force and distributors.

Basis of Presentation—The accompanying interim financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The accompanying interim financial statements are unaudited, but in the opinion of the Company’s management, contain all ~~of the~~ normal, recurring adjustments considered necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America (GAAP) applicable to interim periods. Certain information and footnote disclosures ~~normally~~ included in annual financial statements prepared in accordance with GAAP have been omitted or condensed. The Company believes the disclosures herein are adequate to make the information presented not misleading. Results of operations are not necessarily indicative of the results expected for the full year or for any future period.

The accompanying ~~Condensed Consolidated Financial Statements~~interim financial statements should be read in conjunction with the Company’s audited financial statements ~~of the Company~~ included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2020 filed with the SEC.

All intercompany accounts and transactions have been eliminated in consolidation.

Reclassification—In the quarter ended September 30, 2021, the Company changed the presentation of its condensed consolidated statement of operations and comprehensive income (loss) to separately disclose the change in contingent consideration, previously reported in selling, general and administrative expenses. Amounts for comparative prior fiscal periods have been reclassified to conform to the current period presentation. This reclassification had no impact on previously reported net income or financial position.

Cash and Cash Equivalents—The Company considers highly liquid investments with maturities of three months or less at the date of ~~acquisition~~purchase as cash equivalents. Cash equivalents ~~in the accompanying Condensed Consolidated Financial Statements.~~

include demand deposits, money market funds and repurchase agreements on deposit with financial institutions.

Investments—The Company ~~places its investments~~invests primarily in ~~U.S. Government agencies~~government and ~~securities,~~agency obligations, corporate bonds, ~~and~~ commercial paper and asset-backed securities and classifies all investments as available-for-sale. Investments ~~with maturities of~~maturing in less than one year are classified as short-term investments. Investments are recorded at fair value, with unrealized gains and losses recorded as accumulated other comprehensive income (loss). Gains and losses are recognized using the specific identification method when securities are sold and are included in interest ~~income or expense in the Condensed Consolidated Statements of Operations and Comprehensive Loss.~~

income.

Revenue ~~Recognition—The Company accounts for revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605, “Revenue Recognition” (ASC 605).~~ Recognition—The Company recognizes revenue when ~~all~~control of ~~the following criteria are met: (i) there~~promised goods is persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured.

~~Pursuant to the Company’s standard terms of sale, revenue is recognized when title to the goods and risk of loss transfers~~transferred to customers ~~and there are no remaining obligations~~in an amount that ~~will affect~~reflects the ~~customers’ final acceptance of~~consideration the ~~sale. Generally, the Company’s standard terms of sale define the transfer of title and risk of loss~~Company expects to ~~occur~~be entitled to in exchange for those goods. This generally occurs upon shipment of goods to the respective customer. The Company does not normally maintain any post-shipping obligations to the recipients of products. No installation, calibration or testing of products is performed by the Company subsequent to shipment to the customer in order to render it operational.

~~Revenue includes shipping and handling revenue of $170 and $306~~customers. See Note 8 for ~~the three months ended September 30, 2017 and 2016 and $810 and $931 for the nine months ended September 30, 2017 and 2016. Cost of freight for shipments made to customers is included in cost of~~further discussion on revenue. Sales and other value-added taxes collected from customers and remitted to governmental authorities are excluded from revenue. The Company sells its products primarily through its direct sales force, with certain international market product sales made through distributors. Terms of sale are generally consistent for both end-users and distributors except that payment terms are generally net 30 days for end-users and net 60 days for distributors, with limited exceptions.

Sales Returns and Allowances—The Company maintains a provision ~~for sales returns and allowances to account~~ for potential returns of defective or damaged products ~~products shipped in error~~ and invoice ~~adjustments, as well as current deferrals of revenue.~~adjustments. The Company adjusts the provision ~~quarterly~~ using ~~a combination of specific identification and an estimated general reserve~~the expected value method based on historical experience. Increases to the provision ~~result in a reduction of revenue. The~~reduce revenue, and the provision is included in accrued ~~liabilities in the Condensed Consolidated Balance Sheets.~~

liabilities.

Allowance for ~~Doubtful~~Credit Losses on Accounts Receivable—The Company evaluates the ~~collectability of~~expected credit losses on accounts receivable, ~~to determine the appropriate reserve for doubtful accounts. In determining the amount of the reserve, the Company considers aging of account balances,~~considering historical credit losses, current customer-specific information and other relevant ~~factors.~~factors when determining the allowance. An increase to the allowance for ~~doubtful accounts~~credit losses results in a corresponding increase in selling, general and administrative expenses. The Company ~~reviews accounts receivable and adjusts the allowance based on current circumstances and~~ charges off uncollectible receivables against the allowance

~~Table of Contents~~

~~ATRICURE, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In thousands, except per share amounts)~~

~~(Unaudited)~~

when all attempts to collect the receivable have failed. The Company’s history of write-offs ~~against the allowance~~ has not been significant.

Inventories—Inventories are stated at the lower of cost or net realizable value based on the first-in, first-out cost method (FIFO). and consist of raw materials, work in process and finished goods. The Company’s industry is characterized by rapid product development and frequent new product introductions. Uncertain timing of ~~product~~regulatory approvals, variability in product launch strategies and variation in product use all impact inventory reserves for excess, obsolete and ~~obsolete~~expired products. ~~An estimated inventory reserve for excess, slow moving and obsolete inventory and for specific inventory, if carrying value exceeds net realizable value, is recorded quarterly.~~ An increase to ~~the~~ inventory ~~reserve~~reserves results in a corresponding increase in cost of revenue. ~~Products~~Inventories are written off against the reserve when they are physically disposed.

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, except per share amounts)

(Unaudited)

Inventories consist of the following:



	September 30,		December 31,
	2017		2016			September 30, 2021		December 31, 2020
Raw materials	$	6,455	$	5,719	Raw materials	$	13,053	$	11,966
Work in process		1,381		1,221	Work in process	3,357		2,424
Finished goods		14,729		10,720	Finished goods	22,177		20,636
Inventories	$	22,565	$	17,660	Inventories	$	38,587	$	35,026

Property and Equipment—Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of assets. The estimated useful life by major asset category is the following: generators and other capital equipment - one to three years; machinery, equipment and vehicles - three to seven years; computer and other office equipment - three years; furniture and fixtures - three to seven years; and leasehold improvements, buildings and equipment under capital leases - the shorter of the useful life or remaining lease term.


			Estimated Useful Life
Generators and related equipment			1 - 3 years
Building and building under finance lease			15 - 20 years
Computers, software and office equipment			3 - 5 years
Machinery and equipment			3 - 7 years
Furniture and fixtures			3 - 7 years
Leasehold improvements			5 - 15 years
Equipment under finance leases			3 - 5 years

The Company ~~reassesses~~assesses the useful lives of property and equipment at least annually and retires assets no longer in ~~service.~~use. Maintenance and repair costs are expensed as incurred.

~~Generators~~ The Company reviews property and ~~other capital~~ equipment ~~(such as the~~for impairment at least annually using its best estimates based on reasonable and supportable assumptions and expected future cash flows. Property and equipment impairments have not been significant.

The Company’s ~~switchbox units~~radiofrequency (RF) and ~~cryosurgical consoles)~~cryo generators are generally placed with customers that use the Company’s disposable products. The estimated useful lives of ~~this equipment~~generators are based on anticipated usage by customers and ~~the timing and impact of expected new technology rollouts by the Company and~~ may change in a future ~~period if the Company experiences~~periods with changes in ~~the~~ usage or introduction of ~~the equipment or introduces~~ new ~~technologies.~~technology. Depreciation ~~related to~~of generators and ~~other capital~~related equipment, which is ~~recorded~~included in cost of revenue, ~~in the Condensed Consolidated Statements of Operations~~was $532 and ~~Comprehensive Loss, was $877 and $914~~$613 for the three months ended September 30, ~~2017~~2021 and ~~2016~~2020 and ~~$2,702~~$1,735 and ~~$2,629~~$1,898 for the nine months ended September 30, ~~2017~~2021 and ~~2016.~~2020. As of September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, the net carrying ~~amount~~value of ~~loaned~~generators and related equipment included in net property and equipment ~~in the Condensed Consolidated Balance Sheets~~ was ~~$5,064~~$3,609 and ~~$5,692.~~

$3,410.

Leases— The Company ~~reviews~~leases office, manufacturing and warehouse facilities and computer equipment under leases that qualify as either financing or operating leases, as determined at the inception of the lease arrangement. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Lease assets and liabilities are measured and recorded at the commencement date based on the present value of lease payments over the lease term.

Lease assets and liabilities exclude lease incentives and include options to extend or terminate when it is reasonably certain the Company will exercise that option. The Company uses the implicit rate when readily determinable; however, as most leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at measurement. The Company also applies the short-term lease recognition exemption, recognizing lease payments in profit or loss, for leases that have a lease term of 12 months or less at commencement and do not include an option to extend the lease whose exercise is reasonably certain. For real estate and equipment leases, the Company accounts for the lease and non-lease components as a single lease component. Additionally, the portfolio approach is applied for the operating leases based on the terms of the underlying leases.

Operating leases are included in operating lease right-of-use (ROU) assets and operating lease liabilities, while finance leases are included in property and equipment and finance lease liabilities. The short-term portions of both lease liabilities are included in other current liabilities and current maturities of debt and leases. Operating lease expense is recognized on a straight-line basis over the lease term. See Note 6 for ~~impairment using its best estimates based on reasonable and supportable assumptions and projections~~further discussion.

Table of ~~expected cash flows. Property and equipment impairments recorded by the Company have not been significant.~~

Contents

ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, except per share amounts)

(Unaudited)

Intangible Assets—Intangible assets with determinable useful lives are amortized on a straight-line basis over the estimated periods benefited.

~~Included in intangible~~ Intangible assets isinclude In Process Research and Development (IPR&D)~~. The Company defines IPR&D as~~, representing the value of technology acquired ~~technology which~~in business combinations that has not yet reached technological feasibility. The primary basis for determining ~~the~~ technological feasibility is obtaining specific regulatory approvals. IPR&D is accounted for as an indefinite-lived intangible asset until completion or abandonment of the IPR&D project. Upon completion of the development project, ~~the~~ IPR&D will be amortized over its estimated useful life. IfDue to the nature of IPR&D projects, the Company may experience future delays or failures to obtain regulatory approvals or market clearances, or may discontinue or abandon the project, all which may impact the estimated fair value of the IPR&D ~~project is abandoned,~~project. As a result, the Company may have a full or partial impairment charge related to the IPR&D, calculated as the excess carrying value of the IPR&D asset ~~would be written off.~~ over the estimated fair value.

The Company reviews intangible assets at least annually for impairment using its best estimates based on reasonable and supportable assumptions and projections. The Company performs impairment testing annually on October 1 or more often if impairment indicators are present.

Through April 2021, the IPR&D asset ~~represents~~included an estimate of the fair value of the pre-market approval (PMA) that could result from the CONVERGE IDE and aMAZE™ IDE clinical ~~trial.~~

trials. The Company ~~reviews intangible assets~~received PMA approval for CONVERGE on April 28, 2021 and began amortizing the $44,021 technology asset over an estimated fifteen year life. During the third quarter 2021, the Company identified indicators of impairment ~~using its best estimates based on reasonable and supportable assumptions and projections.~~

for the IPR&D asset that represents an estimate of the fair value of the PMA that could result from the aMAZE clinical trial. As a result of the analysis performed, the Company recorded an impairment loss of $82,300. See Note 3 for further discussion.

Goodwill—Goodwill represents the excess of purchase price over the fair value of the net assets acquired in business combinations. The ~~Company tests goodwill for impairment annually on November 30, or more often if impairment indicators are present. The~~ Company’s goodwill is accounted for in a single reporting unit representing the Company as a whole.

The Company performs impairment testing annually on October 1 or more often if impairment indicators are present.

Contingent Consideration and Other Noncurrent Liabilities—~~Other noncurrent liabilities are primarily~~This balance consists of contingent consideration ~~recorded in~~from business combinations, ~~long-term~~as well as deferred ~~revenues~~payroll taxes as a result of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), asset retirement obligations and other contractual obligations. ~~Although the Company expects to settle a portion of the~~

~~Table of Contents~~

~~ATRICURE, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In thousands, except per share amounts)~~

~~(Unaudited)~~

The contingent consideration ~~liability within the following year, the~~ balance is included in noncurrent liabilities as ~~such~~any settlement is ~~required and~~ expected to be made primarily in shares of the Company’s common stock pursuant to the ~~nContact Surgical,~~SentreHEART, Inc. ~~(nContact)~~(SentreHEART) merger agreement.

See Note 2 for further discussion.

Other Income (Expense)—Other income (expense) consists primarily of foreign currency transaction gains and losses generated by settlements of intercompany balances denominated in Euros and customer invoices transacted in British Pounds.

Taxes—Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of ~~existing~~ assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities from a change in tax rates is recognized in the period that includes the enactment date.

The Company’s estimate of the valuation allowance for deferred income tax assets requires ~~it to make~~ significant estimates and judgments about ~~its~~ future operating results. Deferred income tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more-likely-than-not that ~~some portion of~~ the deferred income tax asset will not be realized. Significant weight is given to evidence that can be objectively verified. The Company evaluates deferred income tax ~~income~~ assets on an annual basis to determine if valuation allowances are ~~required by considering all available evidence.~~required. Deferred income tax assets are realized by having sufficient future taxable income to allow the related tax benefits to reduce taxes otherwise payable. The sources of taxable income that may be available to realize the benefit of deferred income tax assets are future taxable income, future reversals of existing taxable temporary differences, ~~future taxable income, exclusive of reversing temporary differences and~~ carryforwards ~~taxable income in carry-back years~~ and tax planning strategies that are both prudent and feasible. In evaluating ~~whether to record~~the need for a valuation allowance, ~~the applicable accounting standards deem that~~ the existence of cumulative losses in recent years is a significant ~~piece of~~ objectively verifiable negative evidence that must be overcome by objectively verifiable positive evidence to avoid the need ~~to record~~for a valuation allowance. The Company has ~~recorded~~established a full valuation allowance against ~~its~~substantially all net deferred income tax assets as it is more-likely-than-not that the benefit of the deferred income tax assets will not be recognized in future periods.

~~Net Loss~~ The Company has not reclassified income tax effects of the Tax Cuts and Jobs Act within accumulated other comprehensive income (loss) to retained earnings due to its full valuation allowance.

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, except per share amounts)

(Unaudited)

Earnings Per Share—Basic ~~and diluted net loss~~earnings per share is computed ~~in accordance with FASB ASC 260, “Earnings Per Share” (ASC 260)~~ by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflects net ~~loss~~income available to common stockholders divided by the weighted average number of common shares outstanding during the ~~period. Since~~period and any dilutive common share equivalents, including shares issuable upon the ~~Company has experienced net losses for all periods presented,~~vesting of restricted stock awards and restricted stock units, exercise of stock options as well as shares issuable under the Company's employee stock purchase plan (ESPP).


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income (loss) available to common stockholders	$	97,108	$	(4,949)	$	63,940	$	(29,593)

Basic weighted average common shares outstanding	45,258		44,012		44,977		41,442
Effect of dilutive securities	842		—		1,019		—
Diluted weighted average common shares outstanding	46,100		44,012		45,996		41,442

Basic net income (loss) per common share	$	2.15	$	(0.11)	$	1.42	$	(0.71)
Diluted net income (loss) per common share	$	2.11	$	(0.11)	$	1.39	$	(0.71)

For the three and nine months ended September 30, 2020, net loss per share excludes the effect of ~~4,311~~2,687 shares because the effect would be anti-dilutive. The computation of diluted earnings per share in the three and ~~4,433 stock options and restricted stock shares as of~~nine month periods ended September 30, ~~2017~~2021 excludes 491 and ~~2016~~582 shares because ~~they are~~the effect would be anti-dilutive. ~~Therefore, the number of shares calculated for basic net loss per share is also used for the diluted net loss per share calculation.~~

Comprehensive ~~Loss~~Income (Loss) and Accumulated Other Comprehensive ~~Loss~~Income (Loss)—In addition to net ~~losses,~~income (loss), the comprehensive ~~loss~~income (loss) includes foreign currency translation adjustments and unrealized gains (losses) on investments.

Accumulated other comprehensive income (loss) consisted of the following, net of tax:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Total accumulated other comprehensive income (loss) at beginning of period	$	(87)	$	(96)	$	312	$	(158)
Unrealized Gains (Losses) on Investments
Balance at beginning of period	$	(109)	$	211	$	54	$	100
Other comprehensive (loss) income before reclassifications	(14)		(85)		(177)		7
Amounts reclassified from accumulated other comprehensive income (loss) to other income (expense)	—		—		—		19
Balance at end of period	$	(123)	$	126	$	(123)	$	126
Foreign Currency Translation Adjustment
Balance at beginning of period	$	22	$	(307)	$	258	$	(258)
Other comprehensive (loss) income before reclassifications	(293)		290		(555)		177
Amounts reclassified from accumulated other comprehensive income (loss) to other income (expense)	181		(52)		207		12
Balance at end of period	$	(90)	$	(69)	$	(90)	$	(69)
Total accumulated other comprehensive income (loss) at end of period	$	(213)	$	57	$	(213)	$	57

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In ~~thousands,~~Thousands, except per share amounts)

(Unaudited)

~~Accumulated other comprehensive loss consisted of the following (net of tax):~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
Total accumulated other comprehensive loss at
beginning of period

$
(47)

$
(490)

$
(468)

$
(611)
Unrealized (Losses) Gains on Investments

Balance at beginning of period

$
(15)

$
15

$
(21)

$
(39)
Other comprehensive income (loss) before reclassifications

8

(19)

14

35
Amounts reclassified from accumulated other comprehensive income to other income on the statement of operations and comprehensive loss

—

—

—

—
Balance at end of period

$
(7)

$
(4)

$
(7)

$
(4)
Foreign Currency Translation Adjustment

Balance at beginning of period

$
(32)

$
(505)

$
(447)

$
(572)
Other comprehensive income before reclassifications

182

52

607

104
Amounts reclassified from accumulated other comprehensive income to other income on the statement of operations and comprehensive loss

(153)

8

(163)

23
Balance at end of period

$
(3)

$
(445)

$
(3)

$
(445)
Total accumulated other comprehensive loss at end of period

$
(10)

$
(449)

$
(10)

$
(449)

Research and Development Costs—Research and development costs are expensed as incurred. These costs include compensation and other internal and external costs associated with the development of and research ~~related to~~of new and existing products or concepts, preclinical studies, clinical trials ~~healthcare compliance~~ and related regulatory ~~affairs.~~

activities, as well as amortization of technology assets.

Advertising Costs—The Company expenses advertising costs as incurred. Advertising costs were not significant during the three and nine months ended September 30, ~~2017~~2021 and ~~2016.~~

2020.

Share-Based Compensation—The Company ~~follows FASB ASC 718, “Compensation-Stock Compensation” (ASC 718) to record~~records share-based compensation for all ~~employee~~ share-based payment awards, including stock options, restricted stock awards, restricted stock units, performance shares (PSAs) and stock purchases related to an employee stock purchase plan, based on estimated fair values. The Company’s share-based compensation expense recognized under ASC 718 was $3,622 and $2,927 for the three months ended September 30, 2017 and 2016 and $10,947 and $8,796 for the nine months ended September 30, 2017 and 2016.

~~ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The~~ value of the portion of ~~the~~an award that is ultimately expected to vest, net of estimated forfeitures, is recognized as expense over the ~~requisite~~ service ~~periods in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Loss. The expense has been reduced for estimated forfeitures.~~period. The Company estimates forfeitures at the time of grant and revises them, ifas necessary, in subsequent periods ifas actual forfeitures differ from those estimates.

The Company recognized share-based compensation expense of $6,794 and $5,549 for the three months ended September 30, 2021 and 2020 and $20,539 and $16,126 for the nine months ended September 30, 2021 and 2020.

The Company estimates the fair value of time-based options on the date of grant using the Black-Scholes option-pricing model (Black-Scholes model). The Company’s determination of the fair value is affected by the Company’s stock price as well as several subjective assumptions, ~~regarding a number of subjective variables. These variables include but are not limited to~~such as the Company’s expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. The fair value of market-based performance option grants is estimated at the date of grant using a Monte-Carlo simulation. The value of the portion of the awards that is ultimately expected to vest is recognized as expense over the requisite service periods in the Condensed Consolidated Statement of Operations and Comprehensive Loss.

~~The~~ Company estimates the fair value of restricted stock awards and restricted stock units based upon the grant date closing market price of the Company’s common stock.

The Company estimates the fair value of PSAs with a performance condition based on the closing stock price on the date of grant assuming the performance goal will be achieved and may adjust expense over the performance period based on changes to estimates of performance target achievement. If such goals are not met or service is not rendered for the requisite service period, no compensation cost is recognized, and any recognized compensation cost will be reversed. For PSAs with a market condition, a Monte Carlo simulation is performed to estimate the fair value on the date of grant, and compensation cost is recognized over the requisite service period as the employee renders service, even if the market condition is not satisfied. The Company’s determination of the fair value is affected by the Company and the peer group’s stock price, as defined by the award agreement, at the beginning of the service period and grant date, the expected volatility of the Company and peer group’s stock price over the performance period and the correlation coefficient of the daily returns for the Company and peer group over the performance period.

The Company also has an employee stock purchase plan (ESPP) which is available to all eligible employees as defined by the plan document. Under the ESPP, shares of the Company’s common stock may be purchased at a discount. The Company estimates the number of shares to be purchased under the ESPP at the beginning of each purchase period based upon the fair value of the stock at the beginning of the purchase period using the Black-Scholes model and records estimated compensation expense during the purchase period. Expense is adjusted at the time of stock purchase.

~~Table of Contents~~

~~ATRICURE, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In thousands, except per share amounts)~~

~~(Unaudited)~~

Use of Estimates—The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including intangible assets, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Estimates are based on historical experience, where applicable, and other assumptions believed to be reasonable by management. Actual results could differ from those estimates.

~~Fair Value Disclosures~~—

2.FAIR VALUE

The Company classifies and records cash and investments in U.S. government agencies and securities as Level 1 within the fair value hierarchy. Accounts receivable, short-term other assets, accounts payable and accrued liabilities are also classified as Level 1. The carrying amounts of these assets and liabilities approximate their fair value due to their relatively short-term nature. Cash equivalents and investments in corporate bonds and commercial paper are classified as Level 2 within the fair value hierarchy (see Note 3 – Fair Value for further information). Fixed term debt fair value is determined by calculating the net present value of future debt payments at current market interest rates and is classified as Level 2. The recorded value of the Company’s fixed term debt approximates its fair value as of September 30, 2017. Significant unobservable inputs with respect to the Level 3 fair value measurement of the contingent consideration liability is developed using Company data. When an input is changed, the corresponding valuation models are updated and the results are analyzed for reasonableness.

~~2. RECENT ACCOUNTING PRONOUNCEMENTS~~

~~In May 2014 the FASB issued~~Financial Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09), which requires an entity to recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled in exchange for those goods or services. ASU 2014-09 supersedes most current revenue recognition guidance. In July 2015 the FASB deferred the effective date of ASU 2014-09 for entities reporting under U.S. GAAP from interim and annual reporting periods beginning after December 15, 2016 to interim and annual reporting periods beginning after December 15, 2017. A full retrospective or modified retrospective approach may be taken to adopt the guidance in the ASU. FASB ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net)”, FASB ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”, FASB ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” and FASB ASU 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)” were issued to further refine the guidance in ASU 2014-09.

The Company has performed a comprehensive review of the requirements of ASU 2014-09. This review identified customer contracts and associated revenue streams within the scope of the new guidance by applying the five-step model of the new standard and comparing the results to current accounting to identify potential differences that would result from applying the requirements of the new standard. Based on the work performed to date, the Company expects revenue recognition related to product sales to remain substantially unchanged since the majority of the Company’s revenue arrangements consist of a single performance obligation related to the transfer of a promised good to a customer that allows the Company to recognize revenue at a point in time.The Company continues to assess the impact of ASU 2014-09 on its financial statement disclosures, as well as its current policies, procedures and internal controls related to revenue recognition and disclosure. The Company will adopt the new guidance as of January 1, 2018, using the modified retrospective adoption method, and currently does not expect ASU 2014-09 to have a material impact on the amount and timing of revenue recognized in the consolidated financial statements. The foregoing preliminary assessments and expectations are subject to change pending further analysis throughout the remainder of the 2017 fiscal year.

~~In February 2016 the FASB issued ASU 2016-02, “Leases”~~(ASU 2016-02) which requires lessees to record most leases onto their balance sheet but recognize expenses on their income statement in a manner similar to today’s accounting. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. The Company is evaluating the provisions of ASU 2016-02 to determine the impact on its consolidated financial position, results of operations and related disclosures.

In May 2017 the FASB issued ASU 2017-09, “Compensation — Stock Compensation (Topic 718), Scope of Modification Accounting” (ASU 2017-09), which amends the scope of modification accounting for share-based payment arrangements. ASU 2017-09 provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The new guidance also clarifies that a modification to an award could be significant and therefore require disclosure, even if modification accounting is not required. ASU 2017-09 is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The Company will consider the new guidance in its accounting and financial reporting for modifications if and when they occur.

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~~ATRICURE, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In thousands, except per share amounts)~~

~~(Unaudited)~~

~~3. FAIR VALUE~~

~~FASB ASC~~Board’s (FASB) Accounting Standards Codification (ASC) 820, “Fair Value Measurements and Disclosures” (ASC 820), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The ~~standard describes a~~ fair value hierarchy is based on three

Table of Contents

ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, except per share amounts)

(Unaudited)

levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

•Level 1—Quoted prices in active markets for identical assets or liabilities.

•Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value ~~which~~of the assets or liabilities.

The Company classifies cash and investments in government and agency obligations, accounts receivable, short-term other assets, accounts payable and accrued liabilities as Level 1 within the fair value hierarchy. The carrying amounts of these assets and liabilities approximate their fair value due to their relatively short-term nature. Cash equivalents and investments in corporate bonds, commercial paper and asset-backed securities are classified as Level 2 within the ~~following:~~

Level 1—Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. The valuation under this approach does not entail a significant degree of judgment.

fair value hierarchy. The fair value of fixed term debt is estimated by calculating the net present value of future debt payments at current market interest rates and is classified as Level 2. The book value of the Company’s fixed term debt approximates its fair value because the interest rate varies with market rates.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The valuation technique for the Company’s Level 2 assets is based on quoted market prices for similar assets from observable pricing sources at the reporting date.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, ~~2017:~~

2021:



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total
Assets:									Assets:
Money market funds	$	—	$	10,420	$	—	$	10,420	Money market funds	$	—	$	36,262	$	—	$	36,262
U.S. government agencies and securities		5,997		—		—		5,997
Commercial paper									Commercial paper	—		28,968		—		28,968
Government and agency obligations									Government and agency obligations	27,936		—		—		27,936
Corporate bonds		—		1,479		—		1,479	Corporate bonds	—		98,505		—		98,505
Commercial paper		—		8,215		—		8,215
Asset-backed securities									Asset-backed securities	—		29,548		—		29,548
Total assets	$	5,997	$	20,114	$	—	$	26,111	Total assets	$	27,936	$	193,283	$	—	$	221,219
Liabilities:									Liabilities:
Acquisition-related contingent consideration		—		—		41,176		41,176
Contingent consideration									Contingent consideration	$	—	$	—	$	—	$	—
Total liabilities	$	—	$	—	$	41,176	$	41,176	Total liabilities	$	—	$	—	$	—	$	—

There were no changes in the levels or methodology of measurement of financial assets and liabilities during the three and nine months ended September 30, ~~2017.~~

2021.

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In ~~thousands,~~Thousands, except per share amounts)

(Unaudited)

The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, ~~2016:~~

2020:



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total
Assets:									Assets:
Money market funds	$	—	$	17,085	$	—	$	17,085	Money market funds	$	—	$	38,452	$	—	$	38,452
Commercial paper		—		5,996		—		5,996	Commercial paper	—		76,914		—		76,914
U.S. government agencies and securities		7,000		1,529		—		8,529
Government and agency obligations									Government and agency obligations	45,399		—		—		45,399
Corporate bonds		—		8,276		—		8,276	Corporate bonds	—		73,730		—		73,730
Asset-backed securities									Asset-backed securities	—		20,409		—		20,409
Total assets	$	7,000	$	32,886	$	—	$	39,886	Total assets	$	45,399	$	209,505	$	—	$	254,904
Liabilities:									Liabilities:
Acquisition-related contingent consideration		—		—		41,176		41,176
Contingent consideration									Contingent consideration	$	—	$	—	$	184,800	184,800
Total liabilities	$	—	$	—	$	41,176	$	41,176	Total liabilities	$	—	$	—	$	184,800	$	184,800

~~Acquisition-Related~~

Contingent Consideration.~~Contingent~~The Company’s contingent consideration arrangements arising from the SentreHEART acquisition obligate the Company to pay certain defined amounts to former shareholders of ~~an acquired entity~~SentreHEART if specified ~~future events occur or conditions~~milestones are met ~~such as~~related to the ~~achievement of certain technological milestones or~~aMAZE IDE clinical trial, including PMA approval and reimbursement for the ~~achievement of targeted revenue milestones.~~therapy involving SentreHEART’s devices. As of ~~September 30, 2017 and~~ December 31, ~~2016, such~~2020, the terms of the contingent consideration arrangements ~~relate solely to~~under the ~~Company’s acquisition of nContact.~~ nContact merger agreement expired.

The Company measures ~~such~~contingent consideration liabilities using unobservable inputs by applying ~~an income approach, such as the discounted cash flow technique or~~ the probability-weighted scenario ~~method.~~method, an income approach. Various key assumptions, such as the probability and timing of achievement of the agreed milestones, ~~projected revenues from acquisitions and the discount rate,~~ are ~~used in~~significant to the determination of fair value of contingent consideration arrangements and are not observable in the market, thus representing a Level 3 measurement within the fair value hierarchy. ~~Subsequent revisions to key assumptions, which impact~~Contingent consideration liabilities are periodically measured, with changes in the estimated fair value reflected in operating expenses. Changes in the discount rate, projected time until payment and probability of payment may result in materially different fair value measurements. A decrease in the discount rate would result in a higher fair value measurement, while a decrease in the probability of payment would result in a lower fair value measurement. Movement in the forecasted timing of achievement to later in the milestone periods would cause a decrease in the fair value measurement.

In July 2021, the Company was informed that data from the aMAZE clinical trial did not achieve statistical superiority. Specifically, while the trial met the safety endpoint, the trial did not meet the primary efficacy endpoint. As the contingent consideration liabilities, are reflected in the Condensed Consolidated Statements of Operations and Comprehensive Loss. Acquisition-related contingent consideration is recorded in other noncurrent liabilities in the Condensed Consolidated Balance Sheets. Therearrangements were ~~no changes in the underlying estimates or discount rate used to calculate~~success-based milestone payments, the fair value of the SentreHEART contingent consideration ~~for~~was remeasured as of September 30, 2021 resulting in a decrease in fair value due to changes in estimates related to both the ~~three~~forecasted timing and ~~nine~~probability of achievement of the regulatory and reimbursement milestones. Specifically, the Company assessed the projected probability of payment during the contractual achievement periods to be remote as of September 30, 2021, resulting in no remaining fair value. Accordingly, the Company recorded a credit to operating expenses of $189,900 in the third quarter 2021, reflecting the change in fair value of the contingent consideration during the three months ended September 30, ~~2017.~~

2021.

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, except per share amounts)

(Unaudited)

The following table represents the Company’s Level 3 fair value measurements using significant other unobservable inputs for acquisition-related contingent ~~consideration as of September 30, 2017:~~

consideration:



~~Beginning Balance – January 1, 2017~~	$	~~41,176~~
~~Amounts acquired~~		—
~~Transfers in (out) of Level 3~~		—
~~Changes in fair value included in earnings~~		—
~~Ending Balance – September 30, 2017~~	$	~~41,176~~


	Nine Months Ended September 30, 2021		Twelve Months Ended December 31, 2020
Beginning Balance	$	184,800	$	185,157
Amounts acquired	—		—
Changes in fair value included in earnings	(184,800)		(357)
Ending Balance	$	—	$	184,800

~~The following table represents the Company’s Level 3 fair value measurements using significant other unobservable inputs for acquisition-related contingent consideration as of December 31, 2016:~~



~~Beginning Balance – January 1, 2016~~	$	~~40,207~~
~~Amounts acquired~~		—
~~Transfers in (out) of Level 3~~		—
~~Changes in fair value included in earnings~~		~~969~~
~~Ending Balance – December 31, 2016~~	$	~~41,176~~

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~~ATRICURE, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In thousands, except per share amounts)~~

~~(Unaudited)~~

4. 3.INTANGIBLE ASSETS

The following table provides a summary of the Company’s intangible assets:

September 30,

December 31,

2017

2016

Cost

Accumulated
Amortization

Cost

Accumulated
Amortization
Fusion technology

$
9,242

$
3,466

$
9,242

$
2,773
Clamp & probe technology

829

829

829

829
SUBTLE access technology

2,179

871

2,179

538
IPR&D

44,021

—

44,021

—
Total

$
56,271

$
5,166

$
56,271

$
4,140


		September 30, 2021				December 31, 2020
	Estimated Useful Life	Cost		Accumulated Amortization		Cost		Accumulated Amortization
Technology	5 - 15 years	$	55,712	$	11,749	$	11,691	$	9,813
IPR&D		—		—		126,321		—
Total		$	55,712	$	11,749	$	138,012	$	9,813

Following PMA approval of the EPi-Sense® System in the second quarter 2021, the related IPR&D asset with a value of $44,021 was determined to have a finite useful life. The intangible asset is now included in technology assets and is amortized over an estimated fifteen year life.

As a result of data from the aMAZE clinical trial not achieving statistical superiority, the Company identified indicators of impairment for the IPR&D asset that represents an estimate of the fair value of the PMA that could result from the aMAZE clinical trial. During the third quarter 2021, an impairment test was performed using estimates based on reasonable and supportable assumptions and projections of expected future cash flows, and the Company recorded an impairment charge of $82,300, reducing the carrying value of the aMAZE IPR&D asset to $0 at September 30, 2021. This impairment charge is reflected as a component of operating expenses.

Amortization expense ~~related to~~of intangible assets with definite lives, which excludes ~~the~~ IPR&D ~~asset,~~assets, was ~~$342~~$971 and ~~$411~~$467 for the three months ended September 30, ~~2017~~2021 and ~~2016~~2020 and ~~$1,026~~$1,936 and ~~$1,233~~$1,444 for the nine months ended September 30, ~~2017~~2021 and ~~2016.~~

2020.

Future amortization expense ~~related to intangible assets with definite lives~~ is projected as follows:

2017

$
341

October 1, 2017 through December 31, 2017
2018

1,367

2019

1,367

2020

1,235

2021

924

2022 and thereafter

1,850

Total

$
7,084


2021 (excluding the nine months ended September 30, 2021)	$	972
2022	3,653
2023	2,953
2024	2,953
2025	2,953
2026 and thereafter	30,479
Total	$	43,963

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, except per share amounts)

(Unaudited)

4.ACCRUED LIABILITIES

Accrued liabilities consisted of the following:

September 30,

December 31,

2017

2016
Accrued bonus

$
5,171

$
2,871
Accrued commissions

4,749

5,737
Accrued payroll and related benefits

4,499

4,326
Other accrued liabilities

1,319

929
Sales returns allowance

1,066

834
Accrued taxes and value-added taxes

870

1,289
Accrued royalties

514

481
Total

$
18,188

$
16,467


	September 30, 2021		December 31, 2020
Accrued compensation and employee-related expenses	$	26,670	$	17,730
Sales returns and allowances	2,611		1,889
Accrued taxes and value-added taxes payable	1,487		1,256
Accrued royalties	783		703
Other accrued liabilities	285		406
Accrued legal settlement	10		6,000
Total	$	31,846	$	27,984

5.INDEBTEDNESS

Credit Facility. The Company has a Loan and Security Agreement (Loan Agreement) with Silicon Valley Bank (SVB)~~. The Loan Agreement, as amended, restated and modified, effective April 25, 2016,~~, which includes a ~~$25,000~~$60,000 term loan and ~~$15,000~~a $20,000 revolving line of credit. The total combined term loan and revolving line of credit outstanding under the Loan Agreement cannot exceed $70,000 at any time prior to SVB’s consent. The term loan and revolving credit facility both mature or expire, as applicable, on August 1, 2024. On February 8, 2021, the Company and SVB entered into an amendment to the Loan Agreement which ~~mature~~modified the covenant reporting requirements and allowed the Company to defer the term loan principal payments until September 2021. The amendment was treated as a debt modification.

Term loan principal payments commenced September 1, 2021. The term loan accrues interest at the greater of the Prime Rate or 5.00%, plus 0.75% and is subject to an additional 3.00% fee on the $60,000 term loan principal payable at maturity or upon acceleration or prepayment of the term loan. The Company is accruing the 3.00% fee over the term of the Loan Agreement, with $1,020 accrued in ~~April~~the current portion of the outstanding loan balance as of September 30, 2021. Additionally, the unamortized original financing costs related to the term loan of $313 are netted against the outstanding loan balance in the Condensed Consolidated Balance Sheets and are amortized ratably over the term of the Loan Agreement.

The revolving line of credit is subject to an annual facility fee of 0.15% of the revolving line of credit, and any borrowings thereunder bear interest at the greater of the Prime Rate or 5.00%. Borrowing availability under the revolving credit facility is based on the lesser of ~~$15,000~~$20,000 or a borrowing base calculation as defined by the Loan Agreement. As of September 30, ~~2017,~~2021, the Company had no borrowings under the revolving credit facility and had borrowing availability of ~~$15,000. The revolving line of credit is subject to an annual commitment fee of $50, and any borrowings bear interest at the Prime Rate.~~approximately $10,000. Financing costs related to the revolving line of credit are included in other assets in the Condensed Consolidated Balance Sheets and amortized ratably over the ~~term~~twelve-month period of the ~~Loan Agreement.~~

annual fee.

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~~ATRICURE, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In thousands, except per share amounts)~~

~~(Unaudited)~~

The term loan has a five-year term, with principal payments to be made ratably commencing eighteen months after the inception of the loan (November 2017) through the loan’s maturity date. The term loan accrues interest at the Prime Rate and is subject to an additional 4.0% fee on the original $25,000 principal amount at maturity or prepayment of the term loan. The Company is accruing the 4.0% fee over the term of the Loan Agreement. As of September 30, 2017, the Company has accrued $287 of this fee and included it in the outstanding loan balance in the Condensed Consolidated Balance Sheets. Financing costs related to the term loan are net against the outstanding loan balance in the Condensed Consolidated Balance Sheets and amortized ratably over the term of the Loan Agreement.

The Loan Agreement also provides for certain prepayment and early termination fees, as well as establishes ~~covenants related to liquidity, sales growth and~~ a minimum ~~cash balance,~~liquidity covenant and ~~includes~~dividend restrictions, along with other customary terms and conditions. Specified assets have been pledged as collateral.

~~Capital Lease Obligations.~~ As

Effective November 1, 2021, the Company and SVB entered into the Sixth Amendment to the Loan and Security Agreement (Amended Loan and Security Agreement). The agreement provides for a $60,000 term loan, with an option to make available an additional $30,000 in term loan borrowings, and a $30,000 revolving line of credit. The Amended Loan and Security Agreement has a five year term, expiring November 2026. Principal payments are to be made ratably commencing 24 months after the inception of the loan through the loan's maturity date. At the option of the Company, the commencement of term loan principal payments may be extended an additional twelve months. The term loan accrues interest at the Prime Rate plus 1.25% and is subject to an additional 3.00% fee on the term loan principal amount at maturity. The revolving line of credit is subject to an annual facility fee of 0.20%, and any borrowings bear interest at the floating Prime Rate. The Amended Loan and Security Agreement also provides for certain prepayment and early termination fees, as well as establishes a liquidity covenant, along with other customary terms and conditions similar to those in the Company's current agreement with SVB. This refinancing has been treated as a debt modification, with the $1,667 principal repayment made in October 2021 classified as current, while the remaining borrowings of $56,666 have been classified as long-term in the Condensed Consolidated Balance Sheet as of September 30, 2017, the Company had capital leases for its corporate headquarters building and computer equipment that expire at various terms through 2030. The capital lease assets are depreciated over their estimated useful lives. As2021.

Table of ~~September 30, 2017, the cost of the leased assets, both building and computer equipment, was $14,470 and accumulated amortization on the capital lease assets was $1,998.~~

Contents

ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, except per share amounts)

(Unaudited)

Future maturities of long-term debt, excluding the term loan final fee, and ~~capital lease obligations~~after consideration of the refinancing transaction in November 2021, are projected as follows:

2017

$
1,556

October 1, 2017 through December 31, 2017
2018

8,611

2019

8,630

2020

8,645

2021

4,124

2022 and thereafter

14,487

Total payments

$
46,053

Imputed interest

(7,361)

Net long-term debt and capital lease obligations, of which $7,093 is current and $31,599 is noncurrent

$
38,692


2021 (excluding the nine months ended September 30, 2021)	$	—
2022	—
2023	3,333
2024	20,000
2025	20,000
2026	16,667
Total long-term debt	$	60,000

~~In connection with the~~

6.LEASES

The Company has operating and finance leases for offices, manufacturing and warehouse facilities and computer equipment. The Company’s leases have remaining lease terms of one year to ten years. Options to renew or extend leases beyond their initial term have been excluded from measurement of the ~~Company’s corporate headquarters~~ROU assets and lease aliabilities for the majority of leases as exercise is not reasonably certain.

The weighted average remaining lease term and the discount rate for the reporting periods are as follows:


	September 30, 2021		December 31, 2020
Operating Leases
Weighted average remaining lease term (years)	3.3		3.2
Weighted average discount rate	5.60	%	5.68	%

Finance leases
Weighted average remaining lease term (years)	8.9		9.7
Weighted average discount rate	6.91	%	6.91	%

A letter of credit ~~in the amount of~~for $1,250 was issued to the ~~landlord~~lessor of the Company's corporate headquarters building in October ~~2015. The letter of credit was~~2015, which is renewed ~~in June 2017~~annually and remains outstanding as of September 30, ~~2017.~~

2021.

The components of lease expense are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Operating lease cost	$	234	$	293	$	715	$	986

Finance lease cost:
Amortization of right-of-use assets	267		260		765		786
Interest on lease liabilities	196		209		599		638
Total finance lease cost	$	463	$	469	$	1,364	$	1,424

Short term lease expense was not significant for the three and nine months ended September 30, 2021 and 2020.

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, except per share amounts)

(Unaudited)

Supplemental cash flow information related to leases was as follows:


	Nine Months Ended September 30, 2021		Nine Months Ended September 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	748	$	944
Operating cash flows from finance leases	597		638
Financing cash flows from finance leases	599		468

Right-of-use assets obtained in exchange for lease obligations:
Operating Leases	1,221		1,691
Finance Leases	—		—
Early termination of operating lease	—		2,473

Supplemental balance sheet information related to leases was as follows:


	September 30, 2021		December 31, 2020
Operating Leases
Operating lease right-of-use assets	$	2,465	$	1,914

Other current liabilities and current maturities of debt and leases	1,020		927
Operating lease liabilities	1,593		1,180
Total operating lease liabilities	$	2,613	$	2,107

Finance Leases
Property and equipment, at cost	$	14,607	$	14,659
Accumulated depreciation	(5,862)		(5,247)
Property and equipment, net	$	8,745	$	9,412

Other current liabilities and current maturities of debt and leases	$	874	$	823
Finance lease liabilities	10,317		10,969
Total finance lease liabilities	$	11,191	$	11,792

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, except per share amounts)

(Unaudited)

Maturities of lease liabilities as of September 30, 2021 were as follows:


	Operating Leases		Finance Leases
2021 (excluding the nine months ended September 30, 2021)	$	252	$	406
2022	967		1,629
2023	682		1,652
2024	609		1,674
2025	348		1,625
2026 and thereafter	—		8,172
Total payments	$	2,858	$	15,158
Less imputed interest	(245)		(3,967)
Total	$	2,613	$	11,191

7.COMMITMENTS AND CONTINGENCIES

~~Lease Commitments.~~ ~~The Company leases certain office and warehouse facilities and a vehicle under noncancelable operating leases that expire at various terms through 2022.~~

Royalty Agreements. The Company has ~~certain~~ royalty agreements in place with terms that include payment of royalties ~~based on product revenue from sales~~ of ~~specified current products. The current royalty agreements have effective dates as early as 2003 and terms ranging from eighteen years to at least twenty years. The royalties range from~~ 3% to 5% of specified product sales. One royalty agreement remains in effect through 2025, while the other agreement remains in effect until the later of 2023 or expiration of the underlying patents or patent applications. Parties to the royalty agreements have the right at any time to terminate the agreement immediately for cause. Royalty expense of ~~$537~~$792 and ~~$499~~$699 was recorded ~~as part of cost of revenue~~ for the three months ended September 30, ~~2017~~2021 and ~~2016. Royalty expense of $1,673~~2020 and ~~$1,385 was recorded as part of cost of revenue~~$2,356 and $1,880 for the nine months ended September 30, ~~2017~~2021 and ~~2016.~~

2020.

Purchase Agreements. The Company enters into standard purchase agreements with ~~certain~~ vendors in the ordinary course of ~~business. Outstanding commitments at September 30, 2017 were not significant.~~

business, generally with terms that allow cancellation. The Company is committed to funding renovation of a recently purchased building for additional manufacturing capacity. The Company estimates the cost of the construction project to be approximately $5,500.

Legal. The Company may, from time to time, become a party to legal proceedings. Such matters are subject to many uncertainties and to outcomes of which the financial impacts ~~of which~~ are not predictable with assurance and that may not be known for extended periods of time. ~~When~~A liability is established once management ~~has assessed that~~determines a loss is probable and an amount that can be reasonably ~~estimated,~~estimated.

The Company received a Civil Investigative Demand (CID) from the U.S. Department of Justice (USDOJ) in December 2017 stating that it is investigating the Company ~~records~~to determine whether the Company has violated the False Claims Act, relating to the promotion of certain medical devices related to the treatment of atrial fibrillation for off-label use and submitted or caused to be submitted false claims to certain federal and state health care programs for medically unnecessary healthcare services related to the treatment of atrial fibrillation. The CID covers the period from January 2010 to December 2017 and required the production of documents and answers to written interrogatories. The Company had no knowledge of the investigation prior to receipt of the CID. The Company maintains rigorous policies and procedures to promote compliance with the False Claims Act and other applicable regulatory requirements. The Company provided the USDOJ with documents and answers to the written interrogatories. In March 2021, USDOJ informed the Company that its investigation was based on a ~~liability~~lawsuit brought on behalf of the United States and the various state and local governments under the qui tam provisions of federal and certain state and local False Claims Acts. Although the USDOJ and all of the state and local governments declined to intervene, the relator continues to pursue the case. The Company is vigorously contesting the case, however, it is not possible to predict when this matter may be resolved or what impact, if any, the outcome of this matter might have on our consolidated financial position, results of operations, or cash flows.

The Company acquired nContact Surgical, Inc. pursuant to a merger agreement dated October 4, 2015. The merger agreement provided for contingent consideration or “earnout” to be paid upon attaining specified regulatory approvals and clinical and revenue milestones. The merger agreement’s earnout provisions required the Company to deliver periodic earnout reports to a designated representative of former nContact stockholders. In response to the reports delivered in and after February 2018, the Company received letters from representatives purporting to serve as “earnout objection statements” (as that term is defined in the ~~Condensed Consolidated Financial Statements. Costs associated with legal proceedings~~merger agreement) and claim that ~~may be~~

for purposes of determining the commercial milestone payment, the

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In ~~thousands,~~Thousands, except per share amounts)

(Unaudited)

~~commenced could have a material adverse effect on the Company’s future consolidated results~~

Company should be including revenues of ~~operations, financial position, or cash flows.~~

~~The~~certain additional items and products that the Company has ~~been named the defendant~~not included in ~~a lawsuit filed by the Regents of the University of California claiming infringement of patents covering methods of treating atrial fibrillation. While~~its earnout statements. During February 2021, the Company ~~believes it had meritorious defenses against the lawsuit,~~entered into a settlement ~~was reached in October 2017.~~agreement with the former nContact stockholders requiring payment of $6,000. The Company recorded the $6,000 settlement as a component of current ~~liability~~liabilities as of December 31, 2020 as the underlying cause occurred prior to December 31, 2020, and ~~operating expenses related~~has made substantially all of the settlement payment as of September 30, 2021.

8.REVENUE

Revenue is generated primarily from the sale of medical devices. The Company recognizes revenue in an amount that reflects the consideration the Company expects to be entitled to in exchange for those devices when control of promised devices is transferred to customers. At contract inception, the Company assesses the products promised in its contracts with customers and identifies a performance obligation for each promise to transfer to the ~~settlement~~customer a product that is distinct. The Company’s devices are distinct and represent performance obligations. These performance obligations are satisfied, and revenue is recognized at a point in time upon shipment or delivery of products. Sales of devices are categorized as follows: open ablation, minimally invasive ablation, appendage management and valve tools. Shipping and handling activities performed after control over products transfers to customers are considered activities to fulfill the promise to transfer the products rather than as separate promises to customers.

Products are sold primarily through a direct sales force and through distributors in certain international markets. Terms of sale are generally consistent for both end-users and distributors except that payment terms are generally net 30 days for end-users and net 60 days for distributors, with some exceptions. The Company does not maintain any post-shipping obligations to customers. No installation, calibration or testing of products is performed by the Company subsequent to shipment in order to render products operational.

Significant judgments and estimates involved in the ~~Condensed Consolidated Financial Statements.~~

8. Company’s recognition of revenue include the estimation of a provision for returns. The Company estimates the provision for sales returns and allowances using the expected value method based on historical experience and other factors that we believe could impact our expected returns, including defective or damaged products and invoice adjustments. In the normal course of business, the Company generally does not accept product returns unless a product is defective as manufactured. The Company does not provide customers with the right to a refund.

The Company expects to be entitled to the total consideration for the products ordered by customers as product pricing is fixed according to the terms of customer contracts and payment terms are short. Payment terms fall within the one-year guidance for the practical expedient which allows the Company to forgo adjustment of the promised amount of consideration for the effects of a significant financing component. The Company excludes taxes assessed by governmental authorities on revenue-producing transactions from the measurement of the transaction price.

Costs associated with product sales include commissions and royalties. Considering that product sales are performance obligations in contracts that are satisfied at a point in time, commission expense associated with product sales and royalties paid based on sales of certain products is incurred at that point in time rather than over time. Therefore, the Company applies the practical expedient and recognizes commissions and royalties as expense when incurred because the expense is incurred at a point in time and the amortization period is less than one year. Commissions are included in selling expense while royalties are included in cost of revenue.

See Note 11 for disaggregated revenue by geographic area and by product category.

9.INCOME TAX PROVISION

The Company files federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. ~~Income taxes are computed using~~The Company uses the asset and liability method ~~in accordance with FASB ASC 740, “Income Taxes”.~~to determine its provision for income taxes. The Company’s provision for income taxes ~~for continuing operations~~ in interim periods is computed by applying ~~its estimated~~the discrete method and is based on financial results through the end of the interim period. The Company determined that using the discrete method is more appropriate than using the annual effective tax rate ~~against its loss before income~~method. The Company is unable to estimate the annual effective tax ~~expense for~~rate with sufficient precision to use the ~~period. In addition, non-recurring or discrete items are recorded during the period in~~effective tax rate method, which ~~they occur.~~requires a full-year projection of income. The effective tax rate for the three months ended September 30, ~~2017~~2021 and ~~2016~~2020 was ~~(0.36%)~~0.04% and ~~(0.03%)~~0.08%. The effective tax rate for the nine months ended September 30, ~~2017~~2021 and ~~2016~~2020 was ~~(0.27%~~0.21% and (0.05%) The Company’s worldwide effective tax rate differs from the US statutory rate of 21% primarily due to the Company’s valuation allowance in the United States and ~~(0.10%).~~

Netherlands.

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, except per share amounts)

(Unaudited)

Federal, state and local returns of the Company are routinely subject to review by various taxing authorities. The Company has not accrued any interest and penalties related to unrecognized income tax benefits as a result of offsetting of net operating losses. However, if ~~the situation occurs,~~required, the Company will recognize interest and penalties within income tax expense ~~in the Condensed Consolidated Statements of Operations and Comprehensive Loss~~ and within the related tax ~~liability in the Condensed Consolidated Balance Sheets. Federal, state and local tax returns of the Company are routinely subject to review by various taxing authorities.~~

9. liability.

10.EQUITY COMPENSATION PLANS

The Company has ~~two~~2 share-based incentive plans: the 2014 Stock Incentive Plan (2014 Plan) and the ~~2008~~2018 Employee Stock Purchase Plan (ESPP).

Stock Incentive Plan

Under the 2014 Plan, the Board of Directors may grant incentive stock options to Company employees and may grant restricted stock awards or restricted stock units (collectively RSAs), nonstatutory stock options, ~~restricted stock~~performance share awards (PSAs) or stock appreciation rights to Company employees, directors and consultants. The ~~administrator (currently the~~ Compensation Committee of the Board of ~~Directors)~~Directors, as the administrator of the 2014 Plan, has the authority to determine the terms of any awards, including the number of shares subject to each award, the exercisability of the awards and the form of consideration. As of September 30, ~~2017, 10,249~~2021, 12,899 shares of common stock had been reserved for issuance under the 2014 Plan, and ~~1,179~~1,471 shares were available for future grants.

~~Options~~

Stock options, restricted stock awards and restricted stock units granted ~~under~~generally vest at a rate of 33.3% on the ~~2014 Plan~~first, second and third anniversaries of the grant date. Stock options generally expire ten years from the date of ~~grant~~grant.

The award agreements for the PSAs provide that each PSA that vests represents the right to receive 1 share of the Company’s common stock at the end of the performance period. With respect to the PSAs, the number of shares that vest and ~~generally~~are issued to the recipient is based upon the Company’s performance with respect to specified targets at the end of the three year performance period. Payout opportunities range from 0% to 100% of the target amount for awards granted prior to 2021, while awards granted in 2021 have payout opportunities ranging from 0% to 200% of the target amount. These ranges are used to calculate the number of shares that will be issuable when the award vests. All or a portion of the PSAs may vest atfollowing a ~~rate~~change of ~~25%~~control or a termination of service by reason of death or disability. PSAs granted prior to 2021 have performance targets based on the ~~first anniversary date~~Company’s revenue compound annual growth rate (CAGR) over the three year performance period. PSAs granted in 2021 have two equally weighted performance targets measured at the end of the ~~grant~~three year performance period: (i) the Company’s revenue CAGR; and ~~ratably each month thereafter~~(ii) relative total shareholder return (TSR). TSR is measured against the Nasdaq Health Care Index constituents and the 20-trading-day average stock price prior to the end of the performance period over the ~~following~~20- trading-day average stock price prior to the beginning of the performance period. The performance and market condition payouts will be determined independently and accumulated to determine the total payout for the three ~~years. Restricted stock awards granted under~~year performance period, subject to the ~~2014 Plan generally vest 25% annually over four years from date of grant.~~

maximum payout defined in the PSA agreements.

Employee Stock Purchase Plan

~~The ESPP is available to eligible employees as defined in the plan document.~~

Under the ESPP, shares of the Company’s common stock may be purchased at a discount ~~(currently 15%~~(15%) of the lesser of the closing price of the Company’s common stock on the first trading day or the last trading day of the offering period. The offering period (currently six months) and the offering price are subject to change. Participants may not purchase a value of more than $25 of the Company’s common stock in a calendar year and may not purchase a value of more than 3 shares during an offering period. On the first day of each fiscal year during the term of the ESPP, the number of shares available for sale under the ESPP may be increased by the lesser of (i) two percent (2%) of the Company’s outstanding shares of common stock as of the close of business on the last business day of the prior calendar year, not to exceed 600 shares, or (ii) a lesser amount determined by the Board of Directors. Shares have not been added to the ESPP since 2011. As of September 30, ~~2017,~~2021, there were ~~283~~338 shares available for future issuance under the ESPP.

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, except per share amounts)

(Unaudited)

Expense Information Under FASB ASC 718

The following table summarizes the allocation of share-based compensation ~~expense related to employees, directors and consultants under FASB ASC 718 for the three and nine months ended September 30, 2017 and 2016. The expense was allocated as follows:~~

expense:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Cost of revenue	$	622	$	366	$	1,639	$	1,004
Research and development expenses	1,077		859		3,097		2,531
Selling, general and administrative expenses	5,095		4,324		15,803		12,591
Total	$	6,794	$	5,549	$	20,539	$	16,126

~~Table of Contents~~

~~ATRICURE, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In thousands, except per share amounts)~~

~~(Unaudited)~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
Cost of revenue

$
179

$
97

$
448

$
325
Research and development expenses

512

458

1,515

1,380
Selling, general and administrative expenses

2,931

2,372

8,984

7,091
Total

$
3,622

$
2,927

$
10,947

$
8,796

~~10.~~ 11.SEGMENT AND GEOGRAPHIC INFORMATION

~~The Company evaluates reporting segments in accordance with FASB ASC 280, “Segment Reporting”.~~

The Company develops, manufactures, and sells devices designed primarily for the surgical ablation of cardiac tissue, ~~and~~ systems designed for the exclusion of the left atrial ~~appendage.~~appendage, and devices designed to block pain by temporarily ablating peripheral nerves. These devices are developed and marketed to a broad base of medical centers globally. Management considers all such sales to be part of a single ~~reportable~~operating segment. Revenue attributed to customer geographic ~~areas~~locations is ~~based on the location of the customers to whom products are sold.~~

~~Revenue by geographic area was~~ as follows:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016			2021		2020		2021		2020
United States	$	33,394	$	30,575	$	102,196	$	89,719	United States	$	57,537	$	44,701	$	167,916	$	121,838

Europe		5,096		4,379		15,973		14,548	Europe	7,770		6,514		20,551		16,775
Asia		3,493		3,158		9,929		9,148	Asia	4,734		3,196		11,695		9,367
Other international		167		228		556		537	Other international	419		346		949		826
Total international		8,756		7,765		26,458		24,233	Total international	12,923		10,056		33,195		26,968
Total revenue	$	42,150	$	38,340	$	128,654	$	113,952	Total revenue	$	70,460	$	54,757	$	201,111	$	148,806

United States revenue by product type ~~was~~is as follows:


										Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended				Nine Months Ended					2021		2020		2021		2020
	September 30,				September 30,
	2017		2016		2017		2016
Open-heart ablation	$	15,351	$	14,766	$	47,846	$	43,455
Open ablation									Open ablation	$	23,779	$	19,911	$	69,693	$	54,679
Minimally invasive ablation		9,049		7,517		26,056		22,232	Minimally invasive ablation	9,990		6,979		28,077		18,295
AtriClip		8,471		7,721		26,636		21,917
Total ablation and AtriClip		32,871		30,004		100,538		87,604
Appendage management									Appendage management	23,401		17,430		69,144		47,870
Total ablation and appendage management									Total ablation and appendage management	57,170		44,320		166,914		120,844
Valve tools		523		571		1,658		2,115	Valve tools	367		381		1,002		994
Total United States	$	33,394	$	30,575	$	102,196	$	89,719	Total United States	$	57,537	$	44,701	$	167,916	$	121,838

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In ~~thousands,~~Thousands, except per share amounts)

(Unaudited)

International revenue by product type ~~was~~is as follows:


										Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended				Nine Months Ended					2021		2020		2021		2020
	September 30,				September 30,
	2017		2016		2017		2016
Open-heart ablation	$	5,255	$	5,152	$	15,519	$	15,062
Open ablation									Open ablation	$	6,699	$	4,907	$	16,629	$	13,766
Minimally invasive ablation		1,766		1,533		5,859		5,883	Minimally invasive ablation	1,849		1,692		4,698		4,346
AtriClip		1,653		994		4,825		2,883
Total ablation and AtriClip		8,674		7,679		26,203		23,828
Appendage management									Appendage management	4,373		3,445		11,825		8,778
Total ablation and appendage management									Total ablation and appendage management	12,921		10,044		33,152		26,890
Valve tools		82		86		255		405	Valve tools	2		12		43		78
Total international	$	8,756	$	7,765	$	26,458	$	24,233	Total international	$	12,923	$	10,056	$	33,195	$	26,968

The Company’s long-lived assets are located primarily in the United States, except for ~~$881~~$1,415 as of September 30, ~~2017~~2021 and ~~$931~~$1,693 as of December 31, ~~2016, which are~~2020 located primarily in Europe.

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Item

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollar amounts referenced in this Item 2 are in thousands, except per share amounts.)

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and notes thereto contained in Item 1 of Part I of this Form 10-Q and our audited financial statements and notes thereto as of and for the year ended December 31, ~~2016~~2020 included in our Form 10-K filed with the Securities and Exchange Commission (SEC) to provide an understanding of our results of operations, financial condition and cash flows.

Forward-Looking Statements

This Form 10-Q, including the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” contains forward-looking statements regarding our future performance. All forward-looking information is inherently uncertain and actual results may differ materially from assumptions, estimates or expectations reflected or contained in the forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this quarterly report on Form 10-Q, and in our annual report on Form 10-K for the year ended December 31, ~~2016.~~2020. There may be additional risks of which we are not presently aware or that we currently believe are immaterial which could have an adverse impact on our business. Forward-looking statements address our expected future business, financial performance, financial condition and results of operations, and often contain words such as “intends,” “estimates,” “anticipates,” “hopes,” “projects,” “plans,” “expects,” “seek,” “believes,” ~~"see,"~~“see,” “should,” “will,” “would,” “target,” and similar expressions and the negative versions thereof. Such statements are based only upon current expectations of AtriCure. Any forward-looking statement speaks only as of the date made. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to differ materially from those expressed or implied. Forward-looking statements include statements that address activities, events or developments that AtriCure expects, believes or anticipates will or may occur in the future. Forward-looking statements are based on AtriCure’s experience and perception of current conditions, trends, expected future developments and other factors it believes are appropriate under the circumstances and are subject to numerous risks and uncertainties, many of which are beyond AtriCure’s ~~control.~~control including developments related to the COVID-19 pandemic, as discussed herein. With respect to the forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements speak only as of the date of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise unless required by law.

Overview

We are a leading innovator in treatments for atrial fibrillation (Afib) and left atrial appendage (LAA) management. Our ablation and left atrial appendage management (LAAM) products are used by physicians during both open-heart and minimally invasive procedures. In open-heart procedures, the physician is performing heart surgery for other conditions and our products are used in conjunction with (“concomitant” to) such a procedure. Minimally invasive procedures are performed on a standalone basis, and often include multi-disciplinary or “hybrid” approaches, combining both surgical procedures using AtriCure ablation and LAAM products and catheter ablation.

We have several product lines for the ablation of cardiac tissue, including our Isolator® Synergy™ Ablation System ~~the first and only surgical device~~ approved by the United States Food and Drug Administration (FDA) for the treatment of persistent and ~~longstanding~~long-standing persistent forms of Afib in patients undergoing certain open concomitant procedures. We also offer a variety of minimally invasive ablation devices and access tools to facilitate the growing trend in less invasive cardiac and thoracic surgery. Our cryoICE® ~~cryosurgery product line offers a variety of cryoablation devices for use in multiple different types of cardiothoracic surgery. Our AtriClip~~® ~~Left Atrial Appendage Exclusion System is the most widely sold device worldwide specifically designed to occlude the heart’s left atrial appendage.~~

Physicians have adopted our radiofrequency (RF) ablation and cryoablation systems to treat Afib in over 243,000 patients since 2004, and we believe that we are currently the market leader in the surgical treatment of Afib. Our products are used by physicians during both open-heart and minimally invasive surgical procedures, either on a concomitant or standalone basis. During a concomitant procedure, the physician ablates cardiac tissue and/or occludes the LAA, secondary, or concomitant, to a primary structural heart procedure such as a valve repair or replacement or coronary artery bypass graft (CABG). Our Isolator Synergy System is approved by FDA for the treatment of persistent and long-standing persistent Afib concomitant to other open-heart surgical procedures. The EPi-Sense® system is approved by FDA to treat patients with long-standing persistent Afib. All of our other ablation devices are ~~cleared~~approved for sale in the United States under FDA 510(k) clearances, including our other RF and cryoablation products, which are indicated for the ablation of cardiac tissue and/or treatment of cardiac arrhythmias. In addition, certain of our ~~cryoICE probe is~~cryoablation probes are cleared for managing pain by temporarily ablating peripheral nerves. Our AtriClip® products are 510(k)-cleared with an indication for the ~~occlusion~~exclusion of the heart’s LAA, performed under direct visualization and in conjunction with other cardiac surgical procedures. Direct visualization, in this context, requires that the surgeon is able to see the heart directly, with or without assistance from a camera, endoscope or other appropriate viewing technologies. ~~We also have a line~~The LARIAT® system is cleared for soft tissue ligation. Several of ~~reusable surgical instruments typically used~~our products are currently being studied to expand labeling claims or support indications specifically for ~~cardiac valve replacement~~the treatment of Afib. Our Isolator Synergy clamps, Isolator Synergy pens, Coolrail® linear pen, cryoablation devices, certain products of the AtriClip LAA Exclusion System, COBRA Fusion® Ablation System, the EPi-Sense® Guided Coagulation System with VisiTrax® technology, and LARIAT Suture Delivery Device bear the CE mark and may be commercially distributed throughout the member states of the European Union and other countries that comply with or ~~repair.~~mirror the Medical Device Directive. Our Isolator Synergy clamps, Isolator Synergy pens, Coolrail linear pen, cryoablation devices and certain products of the AtriClip

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LAA Exclusion System are available in select Asia-Pacific countries. We anticipate that substantially all of our revenue for the foreseeable future will relate to products we currently sell or are in the process of developing, which are used to ablate cardiac tissue, to occlude the left atrial appendage, to perform mitral and aortic valve replacement and repair and/or to ablate peripheral nerves during cardiothoracic surgery.

~~In the United States, we~~developing.

We sell our products to medical centers through our direct sales ~~force. In~~force in the United States and in certain international markets, such as Germany, France, the United Kingdom and the Benelux ~~region, sales are~~region. We also ~~made directly to medical centers, while other international sales are made~~sell our products to distributors who in turn sell our products to ~~end users.~~medical centers in other international markets. Our business is ~~primarily~~ transacted in U.S. Dollars with the exception of transactions with our European ~~subsidiary,~~subsidiaries, which are transacted in ~~Euros~~the Euro or British Pounds.

~~Table of Contents~~

Recent Developments

~~In September 2017 we launched~~

Throughout 2020 and the AtriClip PRO·V™ Left Atrial Appendage (LAA) Exclusion System in the United States. The AtriClip PRO·V LAA Exclusion System is an extension of our AtriClip product line and has identical forces and pressure specifications to the closed-end designbeginning of the ~~other AtriClip devices, such as the AtriClip FLEX device and the AtriClip PRO2~~® ~~device. The new device offers an open-ended design combined with a tip-first closure mechanism to enable easier navigation and placement when operating in minimally-invasive surgery environments.~~

~~Clinical trials are required to support a pre-market approval (PMA) and are sometimes required for 510(k) clearance. In the United States, clinical trials for~~first quarter of 2021, we experienced a significant ~~risk device require~~decrease in demand for our products asnon-emergent procedures were being indeterminately deferred in order to preserve resources for COVID-19 patients and caregivers and to protect patients from potential exposure to COVID-19. While we have seen many regions begin to stabilize with improvements in procedure volumes, there continues to be variability throughout our markets and uncertainty as variants of the ~~prior submission~~virus emerge. We can make no assurance regarding any future level of ~~an application~~demand for an Investigational Device Exemption (IDE) to FDA for approval. An IDE application must be submitted before initiating a new clinical trial. Some trials require a feasibility study followed by a pivotal trial. An IDE supplement is utilized as a means of obtaining approval to initiate a pivotal trial following the conclusion of a feasibility trial. We are conducting several clinical trials to validate the long-term results of procedures using our products, and COVID-19 may adversely impact our results of operations and financial condition.

We are continuing to serve our customers while taking every precaution to provide a safe work environment for our employees and customers. Field-based sales and clinical employees continue to support ~~applications~~cases, using technology to ~~regulatory agencies~~engage with customers in virtual settings when physical access is prohibited. We are maintaining manufacturing and fulfillment operations to continue providing products to our customers. We continue to modify our remote working protocols and evaluate hybrid work models for our office-based employees, and we will take further actions in the best interests of our employees or as required by law.

Despite the challenging environment resulting from the pandemic, we continue to build on our strategic initiatives of product innovation, investing in clinical science and providing superior training and education. We remain confident in our liquidity position, which includes cash and investments of $224,843 as of September 30, 2021, and access to additional funding through our credit facility.

PRODUCT INNOVATION. In July 2021, we received 510(k) clearance for the new ENCOMPASS® clamp, and we have initiated a limited product launch. The ENCOMPASS clamp marks innovation in our core open ablation market, and is expected to drive deeper penetration of cardiac surgery procedures.

TRAINING. Our professional education and marketing teams have adapted to the pandemic by conducting online and mobile trainings for physicians and our sales team. These adaptations expanded ~~indications. In addition,~~our training methods and ensured invaluable access to continuing education and awareness of our products and related procedures. The recent FDA approval of the EPi-Sense system has enabled us to educate and train physicians on the benefits of Hybrid AF™ therapy in treating long-standing persistent Afib patients. The first of several training courses planned for 2021 was held in June.

CLINICAL SCIENCE. We continue to invest in studies to expand labeling claims or support indications for the treatment of Afib, and we also conduct various studies to gather clinical data regarding our products. ~~Key trials and studies are:~~

~~CONVERGE.~~ ~~We are conducting~~In April 2021, we announced the ~~CONVERGE IDE clinical trial to evaluate the safety and efficacy~~PMA approval of the EPi-Sense® ~~Guided Coagulation System~~ system for treatment of symptomatic, drug-refractory, long-standing persistent atrial fibrillation, when augmented with ~~VisiTrax~~® ~~technology to treat symptomatic persistent Afib patients who are refractory~~an endocardial ablation catheter. We believe the Convergent procedure, or ~~intolerant to at least one Class I and/or III anti-arrhythmic drug. We have FDA approval to enroll up to 153 patients at 27 domestic medical centers~~Hybrid AF therapy, provides the only compelling treatment option for a large and ~~three international medical centers. Enrollment began~~vastly underpenetrated patient population. The CONVERGE™ trial demonstrated superiority in ~~2014 and remains ongoing. We received FDA approval to use a Sub-Xyphoid approach as an alternative surgical approach during~~ the ~~third quarter of 2017.~~

~~ATLAS.~~ The ATLAS study is a non-IDE randomized pilot study evaluating outcomes of patients with risk factors for developing postoperative Afib as well as risk of bleeding on oral anticoagulation. There are two types of patients subject to this study: those with a postoperative Afib diagnosis and receiving prophylactic exclusion of the left atrial appendage with the AtriClip device concomitant to cardiac surgery and those with a postoperative Afib diagnosis who are medically managed. Enrollment began in February 2016. At full capacity, we expect to enroll approximately 2,000 patients at up to 40 sites.

~~FROST.~~ We are conducting a cryoanalgesia study, which is a non-IDE randomized pilot study evaluating whether intraoperative intercostal cryoanalgesia in conjunction with standard of care provides improved analgesic efficacy in patients undergoing unilateral thoracotomy cardiac procedures ashybrid therapy arm compared to the current standard of care. The study involves treatment arm patients who receive intercostal cryoanalgesia in conjunction with standard post-operative pain management and control arm patients who receive standard post-operative pain management only. We began enrollment in June 2016. At full capacity, we expect to enroll up to 100 patients at up to five sites.

~~DEEP AF Pivotal Study.~~ The DEEP AF pivotal trial evaluates the safety and efficacy of the Isolator Synergy System when used in a staged approach, where a minimally invasive surgical ablation procedure is first performed and the patient undergoes the intracardiac catheter procedure approximately 90-120 days later. We have FDA approval to enroll up to 220 patients at 23 domestic medical centers and two international medical centers. Enrollment was temporarily suspended beginning in May 2016 while we evaluated changes to the trial protocol with FDA. We received FDA approval on the updated trial protocol during the third quarter of 2017 and are working with medical centers to resume patient enrollment.

~~CEASE AF.~~ We are also pursuing this non-IDE trial in Europe to compare staged hybrid ablation treatment (minimally invasive surgical ablation procedure is first performed and the patient undergoes the intracardiac catheter procedure approximately 91-180 days later) versusendocardial catheter ablation alone. ~~We expect~~In patients diagnosed with long-standing persistent Afib, the hybrid therapy arm showed a 29% absolute difference in efficacy at 12 months (78% relative improvement) and an absolute difference of 35% at 18 months (110% relative improvement). There was also a 33% absolute difference in Afib burden reduction in favor of the hybrid AF therapy at 12 months, which increased to 37% at 18 months.

aMAZE. Enrollment was completed in December 2019. Patient follow-up for twelve months post pulmonary vein isolation catheter ablation is required by the study ~~to have an~~protocol and was completed in April 2021. In January 2020, we received approval for a Continued Access Protocol (CAP) for the aMAZE study. The aMAZE CAP provides for additional enrollment of ~~approximately 210~~up to 85 patients at ~~twelve sites.~~

existing aMAZE trial sites, with the opportunity to further expand to 250 patients while the PMA application is under review. In July 2021, the Company was informed that data from the aMAZE clinical trial did not achieve statistical superiority. Specifically, while the trial met the safety endpoint, the trial did not meet the primary efficacy endpoint. The Company has paused enrollment in the aMAZE CAP, and is in the process of further analyzing aMAZE trial data and determining next steps for the trial, PMA application and any related future development activities.

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Results of Operations

Three months ended September 30, ~~2017~~2021 compared to three months ended September 30, ~~2016~~

2020

The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of ~~total~~ revenue:

Three Months Ended

September 30,

2017

2016

Amount

% of
Revenues

Amount

% of
Revenues
Revenue

$
42,150

100.0
%

$
38,340

100.0
%
Cost of revenue

11,232

26.6
%

10,868

28.3
%
Gross profit

30,918

73.4
%

27,472

71.7
%
Operating expenses:

Research and development expenses

7,966

18.9
%

8,271

21.6
%
Selling, general and administrative expenses

29,799

70.7
%

25,487

66.5
%
Total operating expenses

37,765

89.6
%

33,758

88.0
%
Loss from operations

(6,847)

(16.2)
%

(6,286)

(16.4)
%
Other income (expense):

Interest expense

(576)

(1.4)
%

(530)

(1.4)
%
Interest income

58

0.1
%

67

0.2
%
Other

145

0.3
%

(32)

(0.1)
%
Total other expense

(373)

(0.9)
%

(495)

(1.3)
%
Loss before income tax expense

(7,220)

(17.1)
%

(6,781)

(17.7)
%
Income tax expense

26

0.1
%

2

0.0
%
Net loss

$
(7,246)

(17.2)
%

$
(6,783)

(17.7)
%


	Three Months Ended September 30,
	2021				2020
	Amount		% of Revenues		Amount		% of Revenues
Revenue	$	70,460	100.0	%	$	54,757	100.0	%
Cost of revenue	18,234		25.9	%	14,423		26.3	%
Gross profit	52,226		74.1	%	40,334		73.7	%
Operating (benefit) expenses:
Research and development expenses	11,284		16.0	%	10,576		19.3	%
Selling, general and administrative expenses	49,873		70.8	%	33,557		61.3	%
Change in fair value of contingent consideration	(189,900)		(269.5)	%	192		0.4	%
Intangible asset impairment	82,300		116.8	%	—		0.0	%
Total operating (benefit) expenses	(46,443)		(65.9)	%	44,325		80.9	%
Income (loss) from operations	98,669		140.0	%	(3,991)		(7.3)	%
Other income (expense)	(1,523)		(2.2)	%	(962)		(1.8)	%
Income (loss) before income tax expense	97,146		137.9	%	(4,953)		(9.0)	%
Income tax expense (benefit)	38		0.1	%	(4)		0.0	%
Net income (loss)	$	97,108	137.8	%	$	(4,949)	(9.0)	%

Revenue. ~~Total~~Revenue increased 28.7% (28.6% on a constant currency basis) reflecting an upturn in activity within each franchise and across our key markets globally from an improvement in cardiac surgery procedure volumes over 2020 as well as increasing adoption of our products. Revenue from customers in the United States increased $12,836, or 28.7% while revenue from international customers increased ~~9.9% (9.3%~~$2,867 or 28.5% (27.9% on a constant currency basis). ~~Revenue~~In the United States, open ablation sales increased $3,868 (19.4%) primarily from growth in Cryo Nerve Block therapy. Minimally invasive (MIS) ablation sales increased $3,011 (43.1%) driven by Hybrid AF therapy procedure growth from the PMA approval of the EPi-Sense system in late April 2021. Appendage management sales rose $5,971 (34.3%) as a result of continued volume growth of the AtriClip® Flex·V® and AtriClip Pro·VTM devices and other appendage management product lines. Similar to ~~customers~~the results in the United States, increased $2,819, or 9.2%, and revenue from sales to international customers increased $991, or 12.8% (9.5% on a constant currency basis). Sales of ablation-related open-heart products increased $585 in the United States, due to growth in our cryo products line. Sales of ablation-related minimally invasive (MIS) products increased $1,532 in the United States, influenced primarily by our EPi-Sense product line. Finally, sales of the AtriClip system increased $750 in the United States, primarily due to increased volume. Revenue growth in the United States was hindered as a result of hurricanes that impacted our customers as well as our field sales team. The increase in international revenue ~~was primarily due to~~ increased ~~sales~~ in ~~Japan, Germany, the Benelux region~~most major markets and ~~the United Kingdom.~~

across product lines.

Revenue reported on a constant currency basis is a non-GAAP measure and is calculated by applying previous period foreign currency (Euro) exchange rates, which are determined by the average daily Euro to Dollar exchange rate, to each of the comparable periods. Revenue is analyzed on a constant currency basis to better measure the comparability of results between periods. Because changes in foreign currency exchange rates have a non-operating impact on revenue, ~~the Company believes~~we believe that evaluating revenue growth ~~in revenue~~ on a constant currency basis provides an additional and meaningful assessment of revenue to both management and ~~the company’s~~our investors.

Cost of revenue and gross margin. Cost of revenue increased ~~$364 and~~$3,811 reflecting revenue growth, while gross margin ~~increased 1.7% from 71.7% in 2016 to 73.4% in 2017.~~improved approximately 40 basis points. The ~~overall increase~~improvement in gross margin ~~was driven solely~~reflects favorable product mix , largely offset by ~~product~~inventory management charges related to the Lariat system and unfavorable geographic mix.

Research and development expenses. Research and development expenses ~~decreased $305,~~increased $708 or ~~3.7%. The decrease~~6.7% as a result of a $1,571 rise in personnel costs due to an increase in headcount and variable compensation. This increase in research and development expense was ~~primarily due to~~offset by a ~~$638~~$1,377 decrease in product development project expenses and a $126 decrease in regulatory filing fees, offset by increases of $475 in product development, regulatory and clinical personnel expense, along with a slight increase in various operating costs.

Selling, general and administrative expenses. Selling, general and administrative expenses increased ~~$4,312,~~$16,316 or ~~16.9%. The increase was primarily due to~~48.6% as a ~~$2,154~~result of a $10,678 increase in personnel costs, primarily driven by increases in headcount, variable compensation and ~~related~~travel. Other increases in selling, general and administrative expenses included $1,008 additional training costs and $1,127 of incremental tradeshow and marketing activities, as well as legal, professional and consulting fees of $1,645 and share-based

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compensation of $772. The remaining fluctuation in selling, general and administrative expenses relates to other corporate costs, such as ~~travel costs, a $708 increase~~IT software and payment processing fees.

Change in ~~legal~~fair value of contingent consideration. The credit to operating expenses (including a legal settlement discussed in Note 7 to the condensed consolidated financial statements), a $411 increase in product samples, largely related to the September 2017 launch of the AtriClip PRO·V LAA Exclusion System, a $178 increase in professional education and tradeshow expenses, a $560 increase in share-based compensation expense and increases in other operating expenses.

~~Net interest expense.~~ ~~Net interest expense for~~during the three months ended September 30, ~~2017~~2021 reflects a change in the forecasted timing and ~~2016 was $518~~probability of achievement of the regulatory and ~~$463. Interest expense~~reimbursement milestones related to the aMAZE clinical trial. See Note 2 of the condensed consolidated financial statements for further discussion.

Impairment of intangible assets. During the three months ended September 30, 2021, the Company recorded an impairment charge for the IPR&D asset associated with ~~outstanding amounts on our term loan and capital lease obligations, as well as~~ the ~~amortization~~aMAZE PMA. See Note 3 of

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~~financing costs, are included in net interest expense. Also included in net interest expense is interest income from investments, including gains and losses on investments sold during~~ the ~~period.~~

condensed consolidated financial statements for further discussion.

Other income ~~and expense.~~ (expense).Other income and expense consists primarily of net interest expense and foreign currency transaction gains and losses.

Net interest expense increased $346 driven by lower interest income from a decline in investment yields.

Nine months ended September 30, ~~2017~~2021 compared to nine months ended September 30, ~~2016~~

2020

The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of ~~total~~ revenue:

Nine Months Ended

September 30,

2017

2016

Amount

% of
Revenues

Amount

% of
Revenues
Revenue

$
128,654

100.0
%

$
113,952

100.0
%
Cost of revenue

35,174

27.3
%

31,748

27.9
%
Gross profit

93,480

72.7
%

82,204

72.1
%
Operating expenses:

Research and development expenses

26,423

20.5
%

25,958

22.8
%
Selling, general and administrative expenses

89,901

69.9
%

79,689

69.9
%
Total operating expenses

116,324

90.4
%

105,647

92.7
%
Loss from operations

(22,844)

(17.8)
%

(23,443)

(20.6)
%
Other income (expense):

Interest expense

(1,694)

(1.3)
%

(1,266)

(1.1)
%
Interest income

160

0.1
%

166

0.1
%
Other

132

0.1
%

(146)

(0.1)
%
Total other expense

(1,402)

(1.1)
%

(1,246)

(1.1)
%
Loss before income tax expense

(24,246)

(18.8)
%

(24,689)

(21.7)
%
Income tax expense

66

0.1
%

24

0.0
%
Net loss

$
(24,312)

(18.9)
%

$
(24,713)

(21.7)
%


	Nine Months Ended September 30,

	2021				2020

	Amount		% of Revenues		Amount		% of Revenues
Revenue	$	201,111	100.0	%	$	148,806	100.0	%
Cost of revenue	50,267		25.0	%	41,934		28.2	%
Gross profit	150,844		75.0	%	106,872		71.8	%
Operating (benefit) expenses:
Research and development expenses	34,698		17.3	%	32,199		21.6	%
Selling, general and administrative expenses	150,939		75.1	%	106,257		71.4	%
Change in fair value of contingent consideration	(184,800)		(91.9)	%	(4,854)		(3.3)	%
Intangible asset impairment	82,300		40.9	%	—		0.0	%
Total operating (benefit) expenses	83,137		41.3	%	133,602		89.8	%
Income (loss) from operations	67,707		33.7	%	(26,730)		(18.0)	%
Other income (expense):	(3,632)		(1.8)	%	(2,847)		(1.9)	%
Income (loss) before income tax expense	64,075		31.9	%	(29,577)		(19.9)	%
Income tax expense	135		0.1	%	16		0.0	%
Net income (loss )	$	63,940	31.8	%	$	(29,593)	(19.9)	%

Revenue. ~~Total revenue~~Revenue increased ~~12.9% (13.0%~~35.1% (34.4% on a constant currency basis). Revenue from ~~sales to~~ customers in the United States increased ~~$12,477,~~$46,078, or ~~13.9%~~37.8%, ~~and~~while revenue from ~~sales to~~ international customers increased ~~$2,225,~~$6,227, or ~~9.2% (9.4%~~23.1% (19.0% on a constant currency basis). ~~The increase in sales to customers~~Sales in the United States ~~resulted from growth~~grew across ~~our key~~all product ~~categories. Sales of ablation-related open-heart products increased $4,391,~~lines with MIS ablation sales increasing $9,782 (53.5%), appendage management sales increasing $21,274 (44.4%), and open ablation sales increasing $15,014 (27.5%). International sales rose across all major franchises driven primarily ~~due to growth in our cryo products line, including the impact of the cryoFORM~~® product which launched in the second quarter of 2016. Sales of ablation-related minimally invasive (MIS) products increased $3,824, reflecting strong growth in our EPi-Sense product line which was offset partially by ~~a decline in legacy MIS product sales. Sales of the AtriClip system increased $4,719 due to both pricing~~Germany and ~~increased volume. AtriClip system revenues also reflect the positive impact of the AtriClip PRO2~~® device, which launched in the second quarter of 2016. The increase in international revenue was primarily due to increased sales in Asia, Germany, France, Turkey, Austria and the Benelux region, while the United Kingdom was flat between years.

Revenue reported on a constant currency basis is a non-GAAP measure and is calculated by applying previous period foreign currency (Euro) exchange rates to each of the comparable periods. Revenue is analyzed on a constant currency basis to better measure the comparability of results between periods. Because changes in foreign currency exchange rates have a non-operating impact on revenue, the Company believes that evaluating growth in revenue on a constant currency basis provides an additional and meaningful assessment of revenue to both management and the company’s investors.

Asian markets.

Cost of revenue and gross margin. Cost of revenue increased ~~$3,426 and~~$8,333, reflecting higher sales volumes, while gross margin increased ~~0.6%,~~more than 300 basis points. The overall increase in gross margin was driven largely by a return to normal production activity in 2021, leverage from 72.1% in 2016 to 72.7% in 2017. While 2017 includes heavier capital equipment sales and increased loaner generator depreciation, such factors are offset by increased sales to customers in the United Stateshigher revenue, and favorable geographic and product mix.

Research and development expenses. Research and development expenses increased ~~$465,~~$2,499 or ~~1.8%~~7.8%. ~~The increase in expense was primarily due~~Personnel costs grew $3,979 driven by additional variable compensation and headcount as we continue to ~~a $1,015 increase in~~build our product development, regulatory, and clinical ~~personnel expense, a $165~~teams. This increase ~~in clinical trial spending, as well as compliance-related consulting expenses which increased $572. These increased costs were partially~~is offset by a ~~$207 decrease in amortization expense, a $699~~$1,428 decrease in product development project ~~expense, a $162 decrease in regulatory filing fees, as well as reductions in various operating~~ costs.

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Selling, general and administrative expenses. Selling, general and administrative expenses increased ~~$10,212,~~$44,682, or ~~12.8%~~42.1%. ~~The increase~~Additional headcount, variable compensation, and travel expenses totaling $32,646 was ~~primarily due to a $6,117~~the largest driver of the increase in ~~personnel~~expenses. In addition, as quarantine and ~~related expenses, such as~~ travel ~~costs, a $1,079~~restrictions have lifted from 2020, there has been an increase in ~~professional education,~~live events. As a result, training expenses increased $3,975, while tradeshow and marketing ~~and tradeshow expenses,~~activities increased $1,189 as compared to the prior year. Other changes included a ~~$1,893~~$3,212 increase in share-based compensation ~~expense,~~and a ~~$417 increase in product samples, largely related to the September 2017 launch of the AtriClip PRO·V LAA Exclusion System, a $1,097~~$2,605 increase in legal, ~~expenses (including a legal settlement discussed~~professional and consulting expenses.

Change in ~~Note 7~~fair value of contingent consideration. The credit to ~~the condensed consolidated financial statements) and increases in other~~ operating expenses ~~which were slightly offset by a $632 reduction in consulting and professional services.~~

~~Net interest expense.~~ ~~Net interest expense for~~during the nine months ended September 30, ~~2017~~2021 reflects a change in the forecasted timing and ~~2016 was $1,534~~probability of achievement of the regulatory and ~~$1,100. Interest expense~~reimbursement milestones related to the aMAZE clinical trial. See Note 2 of the condensed consolidated financial statements for further discussion.

Impairment of intangible assets. During the nine months ended September 30, 2021, the Company recorded an impairment charge for the IPR&D asset associated with ~~outstanding amounts on our term loan and capital lease obligations, as well as~~ the ~~amortization of financing costs, are included in net interest expense. The increase in interest expense was driven by the addition~~aMAZE PMA. See Note 3 of the ~~term loan in April 2016. Included in net interest expense is interest income from investments, including gains and losses on investments sold during the period.~~

condensed consolidated financial statements for further discussion.

Other income ~~and expense.~~ (expense).Other income and expense consists primarily of net interest expense and foreign currency transaction gains and losses.

Net interest expense increased $704 driven by lower interest income from a decline in investment yields.

Liquidity and Capital Resources

As of September 30, ~~2017,~~2021, the Company had cash, cash equivalents and investments of ~~$34,386~~$224,843 and outstanding debt of ~~$25,000.~~$58,333. We had unused borrowing capacity of ~~$15,000~~approximately $10,000 under our revolving credit facility. Most of our operating cash isand all cash equivalents and investments are held by ~~financial institutions in the~~ United States ~~of America.~~financial institutions. We had net working capital of ~~$46,074~~$141,753 and an accumulated deficit of ~~$223,286~~$266,412 as of September 30, ~~2017.~~

2021.

Cash flows used in operating activities. ~~Net~~We used $14,081 of net cash ~~used~~ in operating activities ~~for~~during the nine months ended September 30, ~~2017 was $10,472.~~2021. The ~~primary~~ net ~~uses~~cash outflow from operating activities reflects our net income of $63,940, offset by $70,914 of non-cash adjustments, as well as $7,107 net cash used for operating ~~activities were~~assets and liabilities. Non-cash adjustments reflect the impact of the aMAZE trial results contributing to a $184,800 change in value of the contingent consideration liability, offset by an $82,300 impairment charge on the aMAZE IPR&D asset. Other non-cash expenses included $20,539 share-based compensation, as ~~follows:~~

~~the net loss of $24,312, offset by $17,827 of non-cash expenses, including $10,947 in share-based compensation and $6,857 in depreciation and amortization; and~~

well as $7,608 of depreciation and amortization. Net cash used for operating assets and liabilities was driven by higher customer receivables in the first nine months of 2021 due to the increase in revenue and continued investment in inventories, offset by increases to both accounts payable and accrued liabilities balances, reflecting the increase in inventories, operating expenses and variable compensation as of September 30, 2021.

~~a net decrease in cash used related to changes in operating assets and liabilities of $3,987, due primarily to the following:~~

~~an increase in accounts receivable of $1,030 due to increasing sales;~~

~~an increase in inventory of $4,632, due primarily to additional products in inventory, well as increased inventory levels in support of anticipated revenue growth; and~~

~~a $1,587 increase in accounts payable and accrued liabilities due primarily to the timing of payments, including variable compensation payments.~~

Cash flows provided by investing activities. ~~Net~~We generated $22,427 of net cash ~~provided by~~from investing activities ~~was $2,696 for~~during the nine months ended September 30, ~~2017. The primary source~~2021, reflecting $29,470 of ~~cash from investing activities was $20,600 related to~~net sales and maturities of available-for-sale ~~securities. This source of cash was~~securities, partially offset by ~~$5,135 related to the purchase~~$7,043 of purchases of property and ~~equipment, which included the placement of our RF and cryo generators with our customers, and $12,769 related to the purchase of available-for-sale securities.~~

equipment.

Cash flows ~~provided by~~used in financing activities. ~~Net~~ We used $10,149 of net cash ~~provided by~~in financing activities during the nine months ended September 30, ~~2017 was $2,969, which was primarily due to proceeds from stock option exercises of $4,170 and proceeds from the issuance of stock under our employee stock purchase plan of $1,205, partially offset by~~2021. Activity included $17,900 for shares repurchased for payment of taxes on stock awards and $2,269 repayment of ~~$1,991~~debt and ~~capital~~ lease ~~payments~~obligations, partially offset by $10,020 of ~~$365.~~

proceeds from stock option exercises and ESPP purchases.

Credit facility. ~~The Company’s~~ Our Loan and Security Agreement with Silicon Valley Bank (SVB), as amended, ~~restated, and modified effective April 25, 2016~~ (Loan Agreement), provides for a ~~$25,000~~$60,000 term loan and a $20,000 revolving ~~credit facility under which we may borrow a maximum~~line of ~~$15,000.~~credit. The term loan and revolving credit facility both mature ~~in April 2021. According to the Loan Agreement, principal payments~~or expire, as applicable, on ~~the term loan are to be made ratably commencing eighteen months after the inception of the loan (November 2017) through to the loan’s maturity date.~~August 1, 2024. The term loan accrues interest at the greater of the Prime Rate or 5.00%, plus 0.75% and is subject to an additional ~~4.0%~~3.00% fee on the ~~original $25,000~~$60,000 term loan principal amount, payable at maturity or upon acceleration or prepayment of the term loan. ~~Borrowing~~Our borrowing availability under the revolving credit facility is based on the lesser of ~~$15,000~~$20,000 or a borrowing base calculation as defined by the Loan Agreement. Borrowing availability under the revolving credit facility is further limited by a cap on total debt outstanding under the Loan Agreement, including outstanding letters of credit, of $70,000. As of September 30, ~~2017~~2021 we had no borrowings under the revolving credit facility, and we had borrowing availability approximately of ~~$15,000. The revolving line of credit is subject to an annual commitment fee of $50, and any borrowings bear interest at the Prime Rate.~~$10,000. The Loan Agreement also provides for certain prepayment and early termination fees if the term loan is repaid before maturity and ~~includes~~establishes a minimum liquidity ratio and dividend restrictions, along with other customary terms and conditions.

The Loan Agreement establishes covenants related to maintaining a minimum liquidity ratio, achieving a minimum sales growth measured over a trailing twelve-month period and maintaining a minimum cash balance. Additional covenants include, among others, covenants that limit our ability to dispose of assets, enter into mergers or acquisitions, incur indebtedness, incur liens, pay dividends or make distributions on our capital stock, make investments or loans and enter into certain affiliate transactions, in each case subject to

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customary exceptions for a credit facility of this size and type. Certain covenants apply when we have outstanding borrowings under the revolving credit facility or when we hold less than $20,000 in cash and investments with SVB. Further, a minimum fixed charge ratio applies when specific covenant milestones are achieved. The occurrence of an event of default could result in an increase to the applicable interest rate by 3.0%, an acceleration of all obligations under the Loan Agreement, an obligation to repay all obligations in full and a right by SVB to exercise all remedies available to it under the Loan Agreement and related agreements including the Guaranty and Security Agreement. Specified assets have been pledged as collateral. WePrincipal payments on the term loan commenced September 1, 2021 and were made through October 2021.

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Effective November 1, 2021, the Company and SVB entered into the Sixth Amendment to the Loan and Security Agreement (Amended Loan and Security Agreement). This amendment provides for a $60,000 term loan, with an option to make available an additional $30,000 in term loan borrowings, and a $30,000 revolving line of credit. The Amended Loan and Security Agreement has a five year term, expiring November 2026. Principal payments are to be made ratably commencing 24 months after the inception of the loan through the loan's maturity date. At the option of the Company, the commencement of term loan principal payments may be extended an additional twelve months. The term loan accrues interest at the Prime Rate plus 1.25% and is subject to an additional 3.00% fee on the term loan principal amount at maturity. The revolving line of credit is subject to an annual facility fee of 0.20% of the revolving line of credit fully earned at close, and any borrowings bear interest at the floating Prime Rate. The Amended Loan and Security Agreement also provides for certain prepayment and early termination fees, as well as establishes a liquidity covenant, along with other customary terms and conditions similar to those in ~~compliance~~the Company's current agreement with SVB. This refinancing has been treated as a debt modification, with the ~~covenants~~$1,667 principal repayment made in October 2021 classified as current, while the remaining borrowings of $56,666 have been classified as long-term in the ~~Loan Agreement~~Condensed Consolidated Balance Sheet as of September 30, ~~2017.~~

~~In connection with the terms of our~~2021.

Our corporate headquarters lease agreement requires a $1,250 letter of credit ~~in the amount of $1,250 was issued to the landlord in October 2015. The letter of credit was renewed in June 2017~~which renews annually and remains outstanding as of September 30, ~~2017.~~

2021.

Uses of liquidity and capital resources. Our future capital requirements depend on a number of factors, including ~~the rate of~~ market acceptance of our current and future ~~products,~~products; the resources we devote to developing and supporting our products, including professional training costs; future expenses to ~~expand~~support and ~~support~~expand our sales and marketing ~~efforts,~~efforts; costs relating to changes in regulatory policies or laws that affect our operations and ~~costs~~cost of ~~filings,~~filings; costs associated with clinical trials and securing regulatory approval for new ~~products,~~products; costs associated with acquiring and integrating ~~businesses,~~businesses; costs associated with prosecuting, defending and enforcing our intellectual property ~~rights~~rights; and possible acquisitions and joint ventures. ~~Global economic turmoil may adversely impact~~We continue to evaluate additional measures to maintain financial flexibility, and we will continue to closely monitor our ~~revenue, access to the~~liquidity and capital ~~markets or future demand for our products.~~

resources through recovery from, and any further disruptions caused by, COVID-19.

We have on file with the SEC a shelf registration statement which allows us to sell any combination of senior or subordinated debt securities, common stock, preferred stock, warrants, ~~depositary~~depository shares and units in one or more offerings should we choose to do so in the future. We expect to maintain the effectiveness of this shelf registration statement for the foreseeable future.

We believe that our current cash, cash equivalents and investments, along with the cash we expect to generate or use for operations or access via our ~~term loan and revolving line of~~ credit facility agreement with SVB, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. The ~~nContact transaction~~SentreHEART acquisition provides for contingent consideration to be paid upon ~~attaining specified regulatory approvals~~PMA approval before December 2023 and ~~clinical and revenue milestones over the next four years.~~CPT reimbursement before December 2026. Subject to the terms and conditions of the ~~nContact~~SentreHEART merger agreement, such contingent consideration ~~will~~must be paid primarily in AtriCure common stock, ~~and cash, with a requirement to make payments in AtriCure common stock first,~~ up to a specified maximum number of shares. ~~Over the next twelve months, we~~We do not expect our cash requirements to include significant cash payments offor contingent consideration based on likelihood and progress towards achievement of the related success-based milestones and terms of the acquisition agreement ~~and related milestones. However, we do expect to issue shares in~~over the ~~amount of $7,500 as payment of contingent consideration related to the completion of the trial enrollment milestone.~~

next twelve months.

If our sources of cash are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or obtain a revised or additional credit facility. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Finally, our term loan agreement and revolving line of credit require compliance with certain financial and other covenants. If we are unable to maintain these financing arrangements, we may be required to reduce the scope of our planned research and development, clinical activities and selling, training, education and marketing efforts.

~~Seasonality~~

During the third quarter, we typically experience a moderate decline in revenue that we attribute primarily to the elective nature of certain procedures in which our products are used. We believe this is due to fewer people choosing to undergo elective procedures during the summer months.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses and disclosures of contingent assets and liabilities at the date of the financial statements. On a periodic basis, we evaluate our estimates, including those related to sales returns and allowances, accounts receivable, inventories, intangible assets including goodwill, contingent liabilities and share-based compensation. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates under different assumptions or conditions. Our Annual Report on Form 10-K for the fiscal

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year ended December 31, ~~2016~~2020 includes additional information about the Company, our operations, our financial position and our critical accounting policies and estimates and should be read in conjunction with this Quarterly Report on Form 10-Q.

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Recent Accounting Pronouncements

~~See~~

As of September 30, 2021, there were no material changes to the information provided in Note 2, “Recent Accounting Pronouncements” in the ~~Notes to~~Company’s Form 10-K for the ~~Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements.~~

~~Ite~~mfiscal year ended December 31, 2020.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of September 30, ~~2017~~2021 there were no material changes to the information provided under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Form 10-K for the year ended December 31, ~~2016.~~

~~Ite~~m2020.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

~~We have~~

The Company’s management, with the participation of the President and Chief Executive Officer (the Principal Executive Officer) and Chief Financial Officer (the Principal Accounting and Financial Officer), has evaluated the effectiveness of the ~~design and operation of our~~Company’s disclosure controls and procedures, as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934 as amended (Exchange Act), as of the end of the period covered by this report. Our management, including the President and Chief Executive Officer (the Principal Executive Officer) and Senior Vice President and Chief Financial Officer (the Principal Accounting and Financial Officer), supervised and participated in the evaluation. Based on ~~the~~this evaluation, we concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s forms and rules, and the material information relating to the Company is accumulated and communicated to management, including the President and Chief Executive Officer and the ~~Senior Vice President and~~ Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that control objectives are met. Because of inherent limitations in all control systems, no evaluation of controls can provide assurance that all control issues and instances of fraud, if any, within a company will be detected. Additionally, controls can be circumvented by individuals, by collusion of two or more people or by management override. Over time, controls can become inadequate because of changes in conditions or the degree of compliance may deteriorate. Further, the design of any system of controls is based in part upon assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions. Because of the inherent limitations in any cost-effective control system, misstatements due to errors or fraud may occur and not be detected.

Changes in Internal Control Over Financial Reporting

In the ordinary course of business, we routinely enhance our information systems by either upgrading current systems or implementing new ones. There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, ~~2017~~2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

~~Ite~~m

Item 1. Legal Proceedings

Information with respect to legal proceedings can be found under the heading “Legal” in Note 7 – Commitments and Contingencies to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.

~~Ite~~m

Item 1A. Risk Factors

In addition to the other information set forth in this report, careful consideration should be given to the factors discussed in Item 1A, “Risk Factors” in our Form 10-K for the year ended December 31, ~~2016,~~2020, as amended by our Form 10-Q for the quarter ended June 30, 2021, all of which could materially affect our business, financial condition or future results. The risks described ~~herein and~~ therein are not the only risks facing us. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may adversely affect our business, financial condition and/or operating results. There have been no material changes with respect to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~

2020, as amended by risk factors provided in our Form 10-Q for the quarter ended June 30, 2021 which are incorporated herein by reference.

Item 5. Other Information

months after the inception of the loan through the loan's maturity date. At the option of the Company, the commencement of term loan principal payments may be extended an additional twelve months. The term loan accrues interest at Prime Rate plus 1.25% and is subject to an additional 3.00% fee on the term loan principal amount at maturity. The revolving line of credit is subject to an annual facility fee of 0.20% of the revolving line of credit fully earned at close, and any borrowings bear interest at the floating Prime Rate. The Amended Loan and Security Agreement also provides for certain prepayment and early termination fees, as well as establishes a liquidity covenant, along with other customary terms and conditions similar to those in the Company's current agreement with SVB.

The foregoing description of the Amended Loan and Security Agreement does not purport to be complete. The Amended Loan and Security Agreement is attached to this report as Exhibit 10.2 and is incorporated by reference into this Item 5 in its entirety.

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Item 6. Exhibits


Exhibit No.			Description
~~Exhibit~~ ~~No.~~ 10.1#			~~Description~~ AtriCure, Inc. 2018 Employee Stock Purchase Plan (Amended and Restated effective January 1, 2022)
~~31.1~~ 10.2			Sixth Amendment to Loan and Security Agreement dated November 1, 2021 among AtriCure, Inc. and Silicon Valley Bank and the other parties named therein.
31.1			Rule 13a-14(a) Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2			Rule 13a-14(a) Certification of Principal Accounting and Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1			Certification pursuant to 18 U.S.C. Section 1350 by the Principal Executive Officer, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2			Certification pursuant to 18 U.S.C. Section 1350 by the Principal Accounting and Financial Officer, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS			XBRL Instance Document
101.SCH			XBRL Taxonomy Extension Schema Document
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF			XBRL Taxonomy Definition Linkbase Document
101.LAB			XBRL Taxonomy Extension Label Linkbase Document
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

____________________________

# Compensatory plan or arrangement.

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~~SIGNATURES~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		AtriCure, Inc.
		~~AtriCure, Inc.~~ (REGISTRANT)
		~~(REGISTRANT)~~


Date: November ~~2, 2017~~ 4, 2021	/s/ Michael H. Carrel
		Michael H. Carrel
		President and Chief Executive Officer (Principal Executive Officer)


Date: November ~~2, 2017~~ 4, 2021		/s/ ~~M. Andrew Wade~~ Angela L. Wirick
		~~M. Andrew Wade~~ Angela L. Wirick
		~~Senior Vice President and~~ Chief Financial Officer (Principal Accounting and Financial Officer)



2017	$	341	October 1, 2017 through December 31, 2017
2018		1,367
2019		1,367
2020		1,235
2021		924
2022 and thereafter		1,850
Total	$	7,084



2017	$	1,556	October 1, 2017 through December 31, 2017
2018		8,611
2019		8,630
2020		8,645
2021		4,124
2022 and thereafter		14,487
Total payments	$	46,053
Imputed interest		(7,361)
Net long-term debt and capital lease obligations, of which $7,093 is current and $31,599 is noncurrent	$	38,692