AtriCure, Inc. 10-Q

Item 1. Financial Statements ATRICURE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands, Except Per Share Amounts) (Unaudited) September 30, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 48,823 $ 43,654 Short-term investments 73,821 75,436 Accounts receivable, less allowance for credit losses of $ 1,096 41,466 33,021 Inventories 43,953 38,964 Prepaid and other current assets 4,222 5,001 Total current assets 212,285 196,076 Long-term investments 51,413 104,338 Property and equipment, net 38,556 31,409 Operating lease right-of-use assets 3,969 4,761 Intangible assets, net 40,078 42,992 Goodwill 234,781 234,781 Other noncurrent assets 829 955 Total Assets $ 581,911 $ 615,312 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 24,405 $ 18,597 Accrued liabilities 31,162 36,092 Current maturities of leases 2,031 1,756 Total current liabilities 57,598 56,445 Long-term debt 60,061 59,741 Finance lease liabilities 9,407 10,082 Operating lease liabilities 3,314 4,068 Other noncurrent liabilities 1,223 1,220 Total Liabilities 131,603 131,556 Commitments and contingencies (Note 8) Stockholders’ Equity: Common stock, $ 0.001 par value, 90,000 shares authorized and 46,443 and 46,016 issued and outstanding 46 46 Additional paid-in capital 778,006 764,811 Accumulated other comprehensive loss ( 5,295 ) ( 948 ) Accumulated deficit ( 322,449 ) ( 280,153 ) Total Stockholders’ Equity 450,308 483,756 Total Liabilities and Stockholders’ Equity $ 581,911 $ 615,312 See accompanying notes to condensed consolidated financial statements. 3 Table of Contents ATRICURE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (In Thousands, Except Per Share Amounts) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Revenue $ 83,246 $ 70,460 $ 242,351 $ 201,111 Cost of revenue 21,533 18,234 61,524 50,267 Gross profit 61,713 52,226 180,827 150,844 Operating expenses (benefit): Research and development expenses 15,169 11,284 43,589 34,698 Selling, general and administrative expenses 57,267 49,873 175,771 150,939 Change in fair value of contingent consideration — ( 189,900 ) — ( 184,800 ) Intangible asset impairment — 82,300 — 82,300 Total operating expenses (benefit) 72,436 ( 46,443 ) 219,360 83,137 (Loss) income from operations ( 10,723 ) 98,669 ( 38,533 ) 67,707 Other income (expense): Interest expense ( 1,324 ) ( 1,449 ) ( 3,425 ) ( 3,835 ) Interest income 370 117 562 354 Other ( 549 ) ( 191 ) ( 753 ) ( 151 ) (Loss) income before income tax expense ( 12,226 ) 97,146 ( 42,149 ) 64,075 Income tax expense 46 38 147 135 Net (loss) income $ ( 12,272 ) $ 97,108 $ ( 42,296 ) $ 63,940 Net (loss) income per share Basic net (loss) income per share $ ( 0.27 ) $ 2.15 $ ( 0.93 ) $ 1.42 Diluted net (loss) income per share $ ( 0.27 ) $ 2.11 $ ( 0.93 ) $ 1.39 Weighted average shares outstanding Basic 45,823 45,258 45,682 44,977 Diluted 45,823 46,100 45,682 45,996 Comprehensive (loss) income: Unrealized loss on investments $ ( 691 ) $ ( 14 ) $ ( 3,479 ) $ ( 177 ) Foreign currency translation adjustment ( 260 ) ( 112 ) ( 868 ) ( 348 ) Other comprehensive loss ( 951 ) ( 126 ) ( 4,347 ) ( 525 ) Net (loss) income ( 12,272 ) 97,108 ( 42,296 ) 63,940 Comprehensive (loss) income, net of tax $ ( 13,223 ) $ 96,982 $ ( 46,643 ) $ 63,415 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents ATRICURE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In Thousands) (Unaudited) 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 Three-Month Period Ended September 30, 2022 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance—June 30, 2022 46,423 $ 46 $ 771,185 $ ( 310,177 ) $ ( 4,344 ) $ 456,710 Impact of equity compensation plans 20 — 6,821 — — 6,821 Other comprehensive loss — — — — ( 951 ) ( 951 ) Net loss — — — ( 12,272 ) — ( 12,272 ) Balance—September 30, 2022 46,443 $ 46 $ 778,006 $ ( 322,449 ) $ ( 5,295 ) $ 450,308 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 Nine-Month Period Ended September 30, 2022 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance—December 31, 2021 46,016 $ 46 $ 764,811 $ ( 280,153 ) $ ( 948 ) $ 483,756 Impact of equity compensation plans 427 — 13,195 — — 13,195 Other comprehensive loss — — — — ( 4,347 ) ( 4,347 ) Net loss — — — ( 42,296 ) — ( 42,296 ) Balance—September 30, 2022 46,443 $ 46 $ 778,006 $ ( 322,449 ) $ ( 5,295 ) $ 450,308 See accompanying notes to condensed consolidated financial statements. 5 Table of Contents ATRICURE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) Nine Months Ended September 30, 2022 2021 Cash flows from operating activities: Net income (loss) $ ( 42,296 ) $ 63,940 Adjustments to reconcile net loss to net cash used in operating activities: Share-based compensation expense 21,574 20,539 Depreciation 5,877 5,672 Amortization of intangible assets 2,914 1,936 Amortization of deferred financing costs 383 628 Loss on disposal of property and equipment 34 68 Amortization of investments 1,272 1,847 Change in fair value of contingent consideration — ( 184,800 ) Intangible asset impairment — 82,300 Other non-cash adjustments 1,424 896 Changes in operating assets and liabilities: Accounts receivable ( 8,985 ) ( 10,583 ) Inventories ( 5,710 ) ( 3,809 ) Other current assets 699 436 Accounts payable 5,675 4,527 Accrued liabilities ( 4,606 ) 3,987 Other noncurrent assets and liabilities ( 442 ) ( 1,665 ) Net cash used in operating activities ( 22,187 ) ( 14,081 ) Cash flows from investing activities: Purchases of available-for-sale securities ( 24,637 ) ( 160,577 ) Sales and maturities of available-for-sale securities 74,351 190,047 Purchases of property and equipment ( 12,710 ) ( 7,043 ) Net cash provided by investing activities 37,004 22,427 Cash flows from financing activities: Payments on debt and leases ( 662 ) ( 2,269 ) Proceeds from stock option exercises and employee stock purchase plan 3,757 10,020 Shares repurchased for payment of taxes on stock awards ( 12,136 ) ( 17,900 ) Net cash used in financing activities ( 9,041 ) ( 10,149 ) Effect of exchange rate changes on cash and cash equivalents ( 607 ) ( 255 ) Net increase (decrease) in cash and cash equivalents 5,169 ( 2,058 ) Cash and cash equivalents—beginning of period 43,654 41,944 Cash and cash equivalents—end of period $ 48,823 $ 39,886 Supplemental cash flow information: Cash paid for interest $ 2,926 $ 3,225 Cash paid for income taxes, net of refunds 135 153 Non-cash investing and financing activities: Accrued purchases of property and equipment 1,917 606 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, except per share amounts) (Unaudited) 1. 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. The Company is a leading innovator in surgical treatments and therapies for atrial fibrillation (Afib), left atrial appendage (LAA) management and post-operative pain management, and 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). All intercompany accounts and transactions have been eliminated in consolidation. The accompanying interim financial statements are unaudited, but in the opinion of the Company’s management, contain all 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 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 interim financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC. There have been no changes in the Company's significant accounting policies for the nine months ended September 30, 2022 as compared to the significant accounting policies described in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC. 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. Estimates are based on historical experience, where applicable, and other assumptions believed to be reasonable by management. Actual results could differ from those estimates. Segments —The chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis, accompanied only by information about revenue by product type and geographic area, for purposes of allocating resources and evaluating financial performance. Accordingly, the Company has determined that it has a single operating segment. The Company’s long-lived assets are located primarily in the United States, except for $ 1,670 as of September 30, 2022 and $ 1,399 as of December 31, 2021 located primarily in Europe. 7 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, except per share amounts) (Unaudited) Earnings Per Share —Basic earnings per share is computed by dividing the net (loss) income by the weighted average number of shares of common shares outstanding during the period. Diluted earnings per share reflects net income available to common stockholders divided by the weighted average number of common shares outstanding during the period and any dilutive common share equivalents, including shares issuable upon the 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, 2022 2021 2022 2021 Net (loss) income available to common stockholders $ ( 12,272 ) $ 97,108 $ ( 42,296 ) $ 63,940 Basic weighted average common shares outstanding 45,823 45,258 45,682 44,977 Effect of dilutive securities — 842 — 1,019 Diluted weighted average common shares outstanding 45,823 46,100 45,682 45,996 Basic net (loss) income per common share $ ( 0.27 ) $ 2.15 $ ( 0.93 ) $ 1.42 Diluted net (loss) income per common share $ ( 0.27 ) $ 2.11 $ ( 0.93 ) $ 1.39 For the three and nine months ended September 30, 2022, net loss per share excludes the effect of 1,472 shares because the effect would be anti-dilutive. The computation of diluted earnings per share in the three and nine months periods ended September 30, 2021 excludes 491 and 582 shares because the effect would be anti-dilutive. 2. FAIR VALUE The Financial Accounting Standards 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 fair value hierarchy is based on three 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 of the assets or liabilities. 8 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, except per share amounts) (Unaudited) The following table represents the Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis as of September 30, 2022: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) Total Assets: Money market funds $ — $ 43,130 $ — $ 43,130 Commercial paper — 18,817 — 18,817 Government and agency obligations 32,446 — — 32,446 Corporate bonds — 70,944 — 70,944 Asset-backed securities — 3,027 — 3,027 Total assets $ 32,446 $ 135,918 $ — $ 168,364 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, 2022. The following table represents the Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis as of December 31, 2021: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) Total Assets: Money market funds $ — $ 38,360 $ — $ 38,360 Commercial paper — 22,978 — 22,978 Government and agency obligations 32,690 — — 32,690 Corporate bonds — 95,845 — 95,845 Asset-backed securities — 28,261 — 28,261 Total assets $ 32,690 $ 185,444 $ — $ 218,134 Contingent Consideration. The Company’s contingent consideration arrangements arising from the SentreHEART acquisition obligate the Company to pay certain defined amounts to former shareholders of SentreHEART if specified milestones are met related to the aMAZE™ IDE clinical trial, including pre-market approval (PMA) approval and reimbursement for the therapy involving SentreHEART’s devices. During the third quarter 2021, the Company was informed that the data from the aMAZE clinical trial did not achieve statistical superiority, and the Company assessed the projected probability of payment to be remote. The Company recorded a credit to operating expenses of $ 189,900 reflecting the change in fair value of the contingent consideration. The Company has assessed the projected probability of payment during the contractual achievement periods to be remote, resulting in no fair value as of September 30, 2022 and December 31, 2021. 3. INVENTORIES Inventories consist of the following: September 30, 2022 December 31, 2021 Raw materials $ 16,742 $ 12,653 Work in process 3,268 2,064 Finished goods 23,943 24,247 Total $ 43,953 $ 38,964 9 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, except per share amounts) (Unaudited) 4. INTANGIBLE ASSETS The following table provides a summary of the Company’s intangible assets: September 30, 2022 December 31, 2021 Estimated Useful Life Cost Accumulated Amortization Cost Accumulated Amortization Technology 10 - 15 years $ 55,712 $ 15,634 $ 55,712 $ 12,720 Amortization expense of intangible assets was $ 971 for both the three months ended September 30, 2022 and 2021 and $ 2,914 and $ 1,936 for the nine months ended September 30, 2022 and 2021. Future amortization expense is projected as follows: 2022 (excluding the nine months ended September 30, 2022) $ 739 2023 2,953 2024 2,953 2025 2,953 2026 2,953 2027 and thereafter 27,527 Total $ 40,078 During the third quarter 2021, the Company recorded an impairment charge of $ 82,300 to reduce the carrying value of the aMAZE IPR&D asset to $ 0 as a result of data from the aMAZE clinical trial not achieving statistical superiority. 5. ACCRUED LIABILITIES Accrued liabilities consist of the following: September 30, 2022 December 31, 2021 Accrued compensation and employee-related expenses $ 25,256 $ 30,990 Sales returns and allowances 2,802 2,416 Accrued taxes and value-added taxes payable 1,757 1,452 Other accrued liabilities 1,347 1,234 Total $ 31,162 $ 36,092 6. INDEBTEDNESS Credit Facility. The Company has a Loan and Security Agreement, as amended and modified effective November 1, 2021, (Loan Agreement) with Silicon Valley Bank (SVB). The Loan Agreement provides a $ 60,000 term loan, a $ 30,000 revolving line of credit, and an option for an additional $ 30,000 in term loan borrowings. The Loan Agreement has a five year term, expiring November 2026. Principal payments under the Loan Agreement are to be made ratably commencing 24 months after inception through the loan's maturity date. If the Company meets certain conditions, as specified by the Loan Agreement, the commencement of term loan principal payments may be deferred by 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 Company is accruing the 3.00 % fee over the term of the Loan Agreement, with $ 330 included in the outstanding loan balance as of September 30, 2022. Additionally, the unamortized original financing costs related to the term loan of $ 269 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 0.20 %, and any borrowings thereunder bear interest at the Prime Rate. Borrowing availability under the revolving credit facility is based on the lesser of $ 30,000 or a borrowing base 10 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, except per share amounts) (Unaudited) calculation as defined by the Loan Agreement. As of September 30, 2022, the Company had no borrowings under the revolving credit facility and had borrowing availability of $ 28,750 . The Loan Agreement also provides for certain prepayment and early termination fees, as well as establishes a minimum liquidity covenant and dividend restrictions, along with other customary terms and conditions. Specified assets have been pledged as collateral. Future maturities of long-term debt, excluding the term loan final fee, are projected as follows: 2022 (excluding the nine months ended September 30, 2022) $ — 2023 3,333 2024 20,000 2025 20,000 2026 16,667 Total long-term debt $ 60,000 7. LEASES The Company has operating and finance leases for office, manufacturing and warehouse facilities and equipment. The Company’s leases have remaining lease terms of less than one year to eight years . Options to renew or extend leases beyond their initial term have been excluded from measurement of the ROU assets and lease liabilities 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, 2022 December 31, 2021 Operating Leases Weighted average remaining lease term (years) 4.6 3.6 Weighted average discount rate 4.61 % 4.69 % Finance Leases Weighted average remaining lease term (years) 7.9 8.6 Weighted average discount rate 6.91 % 6.91 % A $ 1,250 letter of credit issued to the lessor of the Company's corporate headquarters building is renewed annually and remains outstanding as of September 30, 2022. The components of lease expense are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Operating lease cost $ 281 $ 234 $ 851 $ 715 Finance lease cost: Amortization of right-of-use assets 253 267 761 765 Interest on lease liabilities 182 196 557 599 Total finance lease cost $ 435 $ 463 $ 1,318 $ 1,364 Short-term lease expense was not significant for the three and nine months ended September 30, 2022 and 2021. 11 Table of Contents 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, 2022 Nine Months Ended September 30, 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 610 $ 748 Operating cash flows for finance leases 557 597 Financing cash flows for finance leases 662 599 Right-of-use assets obtained in exchange for lease obligations: Operating leases — 1,221 Finance leases 62 — Supplemental balance sheet information related to leases was as follows: September 30, 2022 December 31, 2021 Operating Leases Operating lease right-of-use assets $ 3,969 $ 4,761 Current maturities of leases 1,062 861 Operating lease liabilities 3,314 4,068 Total operating lease liabilities $ 4,376 $ 4,929 Finance Leases Property and equipment, at cost $ 14,645 $ 14,607 Accumulated depreciation ( 6,616 ) ( 6,116 ) Property and equipment, net $ 8,029 $ 8,491 Current maturities of leases $ 969 $ 895 Finance lease liabilities 9,407 10,082 Total finance lease liabilities $ 10,376 $ 10,977 Future maturities of lease liabilities as of September 30, 2022 were as follows: Operating Leases Finance Leases 2022 (excluding the nine months ended September 30, 2022) $ 251 $ 417 2023 1,160 1,665 2024 1,164 1,689 2025 920 1,638 2026 592 1,671 2027 and thereafter 868 6,527 Total payments $ 4,955 $ 13,607 Less imputed interest ( 579 ) ( 3,231 ) Total $ 4,376 $ 10,376 12 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, except per share amounts) (Unaudited) 8. COMMITMENTS AND CONTINGENCIES License Agreement. The Company has a license agreement in place with terms that include payment of royalties of 5 % of specified product sales. The agreement terminates the later of 2023 or upon expiration of the underlying patents or patent applications, which is expected to occur after 2023. Parties to the license agreement have the right at any time to terminate the agreement immediately for cause. Royalty expense of $ 804 and $ 792 was recorded for the three months ended September 30, 2022 and 2021 and $ 2,474 and $ 2,356 for the nine months ended September 30, 2022 and 2021 as a component of Cost of Revenue in the accompanying Condensed and Consolidated Statement of Operations. Purchase Agreements. The Company enters into standard purchase agreements with vendors in the ordinary course of business, generally with terms that allow cancellation. 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 are not predictable with assurance and that may not be known for extended periods of time. A liability is established once management determines a loss is probable and an amount can be reasonably 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 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 lawsuit brought on behalf of the United States and 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. During the third quarter, the relator filed a Fourth Amended Complaint, which dropped allegations of off-label promotion and now alleges that the Company paid illegal kickbacks to healthcare providers in exchange for using or referring the Company’s products, in violation of the federal Anti-Kickback Statute and various comparable state and local laws. While the Company is contesting the case, 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. On August 23, 2022, the Cleveland Clinic Foundation (“Clinic”) and IDx Medical, Ltd. (“IDX”) filed a Demand for Arbitration against the Company with the American Arbitration Association (“AAA”), alleging that the Company breached certain provisions of the License Agreement dated December 9, 2003 among the Company, Clinic and IDX (“License Agreement”). Clinic and IDX allege the Company did not include the revenues from sales of certain products in its calculation of royalty payments due under the License Agreement. Clinic and IDX also allege that the Company did not provide related notices required under the License Agreement. The Demand for Arbitration requests a declaration that the termination of the License Agreement shall not occur until the expiration of certain patents and that the Company violated the License Agreement’s non-competition provisions. Clinic and IDX claim they are entitled to no less than $ 6 million plus interest and costs, fees and expenses associated with their claims and future royalties. The Company denies the allegations of Clinic and IDX. The Company filed its Answering Statement and Counterclaims to the allegations in September 2022, denying each claim and counterclaiming for breach of contract, correction of inventorship, declaratory judgment, patent prosecution and legal fees. No dates have been scheduled for this arbitration. While the Company is contesting the case, 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. 9. REVENUE The Company develops, manufactures and sells devices designed primarily for surgical ablation of cardiac tissue, exclusion of the left atrial appendage, and blocking pain by temporarily ablating peripheral nerves. These devices are marketed to a broad base of medical centers globally. The Company recognizes revenue when control of promised goods is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods. 13 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, except per share amounts) (Unaudited) United States revenue by product type is as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Open ablation $ 21,569 $ 17,893 $ 62,613 $ 54,835 Minimally invasive ablation 10,077 9,990 28,846 28,077 Pain management 10,510 6,253 28,734 15,860 Total ablation $ 42,156 $ 34,136 $ 120,193 $ 98,772 Appendage management 27,620 23,401 83,120 69,144 Total United States $ 69,776 $ 57,537 $ 203,313 $ 167,916 International revenue by product type is as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Open ablation $ 6,680 $ 6,690 $ 19,385 $ 16,650 Minimally invasive ablation 1,445 1,849 4,249 4,698 Pain management 121 11 375 22 Total ablation $ 8,246 $ 8,550 $ 24,009 $ 21,370 Appendage management 5,224 4,373 15,029 11,825 Total International $ 13,470 $ 12,923 $ 39,038 $ 33,195 Revenue attributed to customer geographic locations is as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 United States $ 69,776 $ 57,537 $ 203,313 $ 167,916 Europe 7,296 7,770 22,316 20,551 Asia 5,518 4,734 15,008 11,695 Other International 656 419 1,714 949 Total International 13,470 12,923 39,038 33,195 Total Revenue $ 83,246 $ 70,460 $ 242,351 $ 201,111 10. INCOME TAX PROVISION The Company files federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. The Company uses the asset and liability method to determine its provision for income taxes. The Company’s provision for income taxes in interim periods is computed by applying 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 method. The Company is unable to estimate the annual effective tax rate with sufficient precision to use the effective tax rate method, which requires a full-year projection of income. The effective tax rate for the three months ended September 30, 2022 and 2021 was ( 0.38 %) and 0.04 %. The effective tax rate for the nine months ended September 30, 2022 and 2021 was ( 0.35 %) and 0.21 %. The Company’s worldwide effective tax rate differs from the US statutory rate of 21% primarily due to the valuation allowance. 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 net 14 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, except per share amounts) (Unaudited) operating losses. However, if required, the Company will recognize interest and penalties within income tax expense and within the related tax liability. 11. EQUITY COMPENSATION PLANS The Company has two share-based incentive plans: the 2014 Stock Incentive Plan (2014 Plan) and the 2019 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, restricted stock units, nonstatutory stock options, performance share awards and stock appreciation rights to Company employees, directors and consultants. The Compensation Committee of the Board of 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, 2022, 13,999 shares of common stock had been reserved for issuance under the 2014 Plan, and 2,188 shares were available for future grants. Employee Stock Purchase Plan Under the ESPP, shares of the Company’s common stock may be purchased at a 15 % discount of the lesser of the closing price of the Company’s common stock on the first or last trading days of the offering period. The offering period (currently six months ) and the offering price are subject to change. Participants may not purchase more than $ 25 of the Company’s common stock in a calendar year or more than 3 shares during an offering period. As of September 30, 2022, there were 228 shares available for future issuance under the ESPP. Share-Based Compensation Expense Information The following table summarizes the allocation of share-based compensation expense: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Cost of revenue $ 405 $ 622 $ 1,463 $ 1,639 Research and development expenses 1,115 1,077 3,431 3,097 Selling, general and administrative expenses 5,481 5,095 16,680 15,803 Total $ 7,001 $ 6,794 $ 21,574 $ 20,539 15 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, except per share amounts) (Unaudited) 12. COMPREHENSIVE LOSS AND ACCUMULATED OTHER COMPREHENSIVE LOSS In addition to net losses, comprehensive loss includes foreign currency translation adjustments and unrealized gains (losses) on investments. Accumulated other comprehensive loss consisted of the following, net of tax: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Total accumulated other comprehensive (loss) income at beginning of period $ ( 4,344 ) $ ( 87 ) $ ( 948 ) $ 312 Unrealized Gains (Losses) on Investments Balance at beginning of period $ ( 3,675 ) $ ( 109 ) $ ( 887 ) $ 54 Other comprehensive loss before reclassifications ( 691 ) ( 14 ) ( 3,407 ) ( 177 ) Amounts reclassified from accumulated other comprehensive loss to other income (expense) — — ( 72 ) — Balance at end of period $ ( 4,366 ) $ ( 123 ) $ ( 4,366 ) $ ( 123 ) Foreign Currency Translation Adjustment Balance at beginning of period $ ( 669 ) $ 22 $ ( 61 ) $ 258 Other comprehensive loss before reclassifications ( 721 ) ( 293 ) ( 1,508 ) ( 555 ) Amounts reclassified from accumulated other comprehensive loss to other income (expense) 461 181 640 207 Balance at end of period $ ( 929 ) $ ( 90 ) $ ( 929 ) $ ( 90 ) Total accumulated other comprehensive loss at end of period $ ( 5,295 ) $ ( 213 ) $ ( 5,295 ) $ ( 213 ) 16 Table of Contents