AtriCure, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ATRICURE, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Page Financial Statements: Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 43 Consolidated Balance Sheets 45 Consolidated Statements of Operations and Comprehensive (Loss) Income 46 Consolidated Statements of Stockholders’ Equity 47 Consolidated Statements of Cash Flows 48 Notes to Consolidated Financial Statements 49 42 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of AtriCure, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of AtriCure, Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive (loss) income, stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 43 Table of Contents Valuation of Performance Share Awards with a Market Condition - Refer to Note 15 to the financial statements Critical Audit Matter Description Performance share awards (PSAs) granted in 2022 have two performance targets measured at the end of the three-year performance period: (i) the Company's revenue compound annual growth rate, a performance condition; and (ii) relative total shareholder return (TSR), a market condition. The performance and market condition payouts are determined independently. The number of PSAs with a market condition that vest and are issued to the recipient is based upon the Company's TSR relative to the TSR of the selected market index at the end of the three-year performance period. A Monte Carlo simulation was performed to estimate the fair value on the date of grant, with associated share-based compensation expense recognized over the requisite service period as the employee renders service. The determination of the fair value on the date of grant is affected by the stock price of the Company and the market index, as defined by the award agreement, at the beginning of the service period and grant date, the expected stock price volatility of the Company and the market index over the performance period and the correlation coefficient of the daily returns for the Company and the market index over the performance period. Given the level of judgment involved by management, including the use of a specialist, to determine the grant date fair value of the PSAs with a market condition, audit procedures required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the Company's determination of the grant date fair value of the PSAs with a market condition included the following, among others: • We inquired of management of the key valuation assumptions and the Monte Carlo simulation methodology used in the determination of the grant date fair value of the PSAs. • We tested the design and operating effectiveness of the Company's internal controls over the determination of the grant date fair value of the PSAs. • We tested the accuracy of the data used in measuring the awards by agreeing the underlying inputs, such as grant date, share price, and vesting conditions, among others, back to source documents, such as compensation committee minutes or PSA agreements. • With the assistance of our fair value specialists, we evaluated management's valuation of PSAs with a market condition by: ▪ Evaluating the Monte Carlo simulation methodology and the reasonableness of the valuation assumptions, including the risk-free interest rate, expected volatility, and the correlation coefficients. ▪ Independently calculating a fair value estimate for the market condition PSAs using the underlying PSA agreement and independently calculated valuation inputs. /s/ Deloitte & Touche LLP Cincinnati, Ohio February 22, 2023 We have served as the Company's auditor since 2002. 44 Table of Contents ATRICURE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2022 and 2021 (In Thousands, Except Per Share Amounts) 2022 2021 Assets Current assets: Cash and cash equivalents $ 58,099 $ 43,654 Short-term investments 63,014 75,436 Accounts receivable, less allowance for credit losses of $ 230 and $ 1,096 42,693 33,021 Inventories 45,931 38,964 Prepaid and other current assets 5,477 5,001 Total current assets 215,214 196,076 Long-term investments 51,509 104,338 Property and equipment, net 38,833 31,409 Operating lease right-of-use assets 3,787 4,761 Intangible assets, net 39,339 42,992 Goodwill 234,781 234,781 Other noncurrent assets 1,985 955 Total Assets $ 585,448 $ 615,312 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 19,898 $ 18,597 Accrued liabilities 33,022 36,092 Other current liabilities and current maturities of debt and leases 5,472 1,756 Total current liabilities 58,392 56,445 Long-term debt 56,834 59,741 Finance lease liabilities 9,147 10,082 Operating lease liabilities 3,095 4,068 Other noncurrent liabilities 1,226 1,220 Total Liabilities 128,694 131,556 Commitments and contingencies (Note 10) Stockholders’ Equity: Common stock, $ 0.001 par value, 90,000 shares authorized; 46,563 and 46,016 issued and outstanding 47 46 Additional paid-in capital 787,422 764,811 Accumulated other comprehensive loss ( 4,096 ) ( 948 ) Accumulated deficit ( 326,619 ) ( 280,153 ) Total Stockholders’ Equity 456,754 483,756 Total Liabilities and Stockholders’ Equity $ 585,448 $ 615,312 See accompanying notes to consolidated financial statements. 45 Table of Contents ATRICURE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME YEARS ENDED DECEMBER 31, 2022, 2021 and 2020 (In Thousands, Except Per Share Amounts) 2022 2021 2020 Revenue $ 330,379 $ 274,329 $ 206,531 Cost of revenue 84,439 68,469 57,222 Gross profit 245,940 205,860 149,309 Operating expenses (benefit): Research and development expenses 57,337 48,506 43,070 Selling, general and administrative expenses 231,272 204,649 150,829 Change in fair value of contingent consideration (Note 2) — ( 184,800 ) ( 357 ) Intangible asset impairment (Note 4) — 82,300 — Total operating expenses 288,609 150,655 193,542 (Loss) income from operations ( 42,669 ) 55,205 ( 44,233 ) Other income (expense): Interest expense ( 4,986 ) ( 4,918 ) ( 4,885 ) Interest income 1,994 466 1,101 Other ( 537 ) ( 366 ) ( 24 ) (Loss) income before income tax expense ( 46,198 ) 50,387 ( 48,041 ) Income tax expense 268 188 114 Net (loss) income $ ( 46,466 ) $ 50,199 $ ( 48,155 ) Net (loss) income per share: Basic net (loss) income per share $ ( 1.02 ) $ 1.11 $ ( 1.14 ) Diluted net (loss) income per share $ ( 1.02 ) $ 1.09 $ ( 1.14 ) Weighted average shares outstanding: Basic 45,740 45,066 42,125 Diluted 45,740 46,039 42,125 Comprehensive (loss) income: Unrealized loss on investments $ ( 2,811 ) $ ( 941 ) $ ( 46 ) Foreign currency translation adjustment ( 337 ) ( 319 ) 516 Other comprehensive (loss) income ( 3,148 ) ( 1,260 ) 470 Net (loss) income ( 46,466 ) 50,199 ( 48,155 ) Comprehensive (loss) income, net of tax $ ( 49,614 ) $ 48,939 $ ( 47,685 ) See accompanying notes to consolidated financial statements. 46 Table of Contents ATRICURE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2022, 2021, and 2020 (In Thousands) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive (Loss) Income 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 Issuance of common stock under equity incentive plans 1,013 — ( 2,194 ) — — ( 2,194 ) Issuance of common stock under employee stock purchase plan 104 — 3,330 — — 3,330 Share-based employee compensation expense — — 22,642 — — 22,642 Other comprehensive income — — — — 470 470 Net loss — — — ( 48,155 ) — ( 48,155 ) Balance—December 31, 2020 45,346 $ 45 $ 742,389 $ ( 330,352 ) $ 312 $ 412,394 Issuance of common stock under equity incentive plans 589 1 ( 9,837 ) — — ( 9,836 ) Issuance of common stock under employee stock purchase plan 81 — 4,181 — — 4,181 Share-based employee compensation expense — — 28,078 — — 28,078 Other comprehensive loss — — — — ( 1,260 ) ( 1,260 ) Net income — — — 50,199 — 50,199 Balance—December 31, 2021 46,016 $ 46 $ 764,811 $ ( 280,153 ) $ ( 948 ) $ 483,756 Issuance of common stock under equity incentive plans 426 1 ( 10,385 ) — — ( 10,384 ) Issuance of common stock under employee stock purchase plan 121 — 4,225 — — 4,225 Share-based employee compensation expense — — 28,771 — — 28,771 Other comprehensive loss — — — — ( 3,148 ) ( 3,148 ) Net loss — — — ( 46,466 ) — ( 46,466 ) Balance—December 31, 2022 46,563 $ 47 $ 787,422 $ ( 326,619 ) $ ( 4,096 ) $ 456,754 See accompanying notes to consolidated financial statements. 47 Table of Contents ATRICURE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2022, 2021 and 2020 (In Thousands) 2022 2021 2020 Cash flows from operating activities: Net (loss) income $ ( 46,466 ) $ 50,199 $ ( 48,155 ) Adjustments to reconcile net (loss) income to net cash used in operating activities: Share-based compensation expense 28,771 28,078 22,642 Depreciation 8,057 7,534 7,866 Amortization of intangible assets 3,653 2,907 1,682 Amortization of deferred financing costs 507 759 509 Amortization of investments 1,478 2,482 1,236 Change in fair value of contingent consideration — ( 184,800 ) ( 357 ) Intangible asset impairment — 82,300 — Other non-cash adjustments 739 1,607 1,347 Changes in operating assets and liabilities: Accounts receivable ( 8,989 ) ( 10,087 ) 5,087 Inventories ( 7,305 ) ( 4,274 ) ( 5,265 ) Other current assets ( 515 ) ( 700 ) ( 477 ) Accounts payable 2,677 4,710 ( 1,560 ) Accrued liabilities ( 2,966 ) 8,271 ( 4,908 ) Other noncurrent assets and liabilities ( 1,782 ) ( 2,766 ) 484 Net cash used in operating activities ( 22,141 ) ( 13,780 ) ( 19,869 ) Cash flows from investing activities: Purchases of available-for-sale securities ( 24,637 ) ( 173,105 ) ( 227,045 ) Sales and maturities of available-for-sale securities 85,524 206,362 75,306 Purchases of property and equipment ( 16,881 ) ( 9,753 ) ( 5,259 ) Proceeds from capital grant — — 800 Net cash provided by (used in) investing activities 44,006 23,504 ( 156,198 ) Cash flows from financing activities: Proceeds from sale of stock, net of offering costs of $ 218 — — 188,958 Proceeds from debt borrowings — 5,000 — Payments on debt and finance leases ( 899 ) ( 5,816 ) ( 667 ) Payment of debt fees — ( 1,171 ) ( 35 ) Proceeds from stock option exercises 1,816 8,175 10,835 Shares repurchased for payment of taxes on stock awards ( 12,201 ) ( 18,011 ) ( 13,029 ) Proceeds from issuance of common stock under employee stock purchase plan 4,225 4,181 3,330 Net cash (used in) provided by financing activities ( 7,059 ) ( 7,642 ) 189,392 Effect of exchange rate changes on cash and cash equivalents ( 361 ) ( 372 ) 136 Net increase in cash and cash equivalents 14,445 1,710 13,461 Cash and cash equivalents—beginning of period 43,654 41,944 28,483 Cash and cash equivalents—end of period $ 58,099 $ 43,654 $ 41,944 Supplemental cash flow information: Cash paid for interest $ 4,270 $ 4,223 $ 4,366 Cash paid for income taxes, net of refunds 192 190 217 Non-cash investing and financing activities: Accrued purchases of property and equipment 272 1,552 298 Assets obtained in exchange for finance lease obligations — — 22 See accompanying notes to consolidated financial statements. 48 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) 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. Principles of Consolidation— The Consolidated Financial Statements include the accounts of AtriCure, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents— The Company considers highly liquid investments with maturities of three months or less at the date of purchase as cash equivalents. Cash equivalents include demand deposits, money market funds and repurchase agreements on deposit with financial institutions. Investments— The Company invests primarily in government and agency obligations, corporate bonds, commercial paper and asset-backed securities and classifies all investments as available-for-sale. Investments 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. Revenue Recognition — Revenue is generated primarily from the sale of medical devices. Sales of devices are categorized based on the type of product as follows: open ablation, minimally invasive ablation, pain management and appendage management. The Company recognizes revenue when control of promised devices is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those devices. Revenue is recognized at a point in time upon shipment or delivery of products. Shipping and handling activities performed after control transfers to customers are considered activities to fulfill the promise to transfer the products. Revenue includes shipping and handling revenue of $ 1,496 , $ 1,354 and $ 1,192 in the years ended December 31, 2022, 2021 and 2020. 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 subsequent to shipment in order to render products operational. The Company expects to be entitled to the total consideration for the products ordered as product pricing is fixed and payment terms fall within one year to forgo adjustment 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 commission expense for product sales and royalties paid for sales of certain products. As revenue from product sales are satisfied at a point in time, commission expense and royalties are incurred at that point in time rather than over time. Commissions are included in selling, general and administrative expenses, while royalties are included in cost of revenue. Significant judgments and estimates involved in the Company’s recognition of revenue include the estimation of a provision for returns. 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. Sales Returns and Allowances — The Company maintains a provision for potential returns of defective or damaged products, and invoice adjustments. The Company adjusts the provision using the expected value method based on historical experience. Increases to the provision reduce revenue, and the provision is included in accrued liabilities. Allowance for Credit Losses on Accounts Receivable —The Company evaluates expected credit losses on accounts receivable, considering historical credit losses, current customer-specific information and other relevant factors when determining the allowance. An increase to the allowance for credit losses results in a corresponding increase in selling, general and administrative expenses. The Company charges off uncollectible receivables against the allowance when all attempts to collect the receivable have failed. The Company’s history of write-offs has not been significant. Recoveries are recognized when received as a reduction to the allowance for credit losses by decreasing bad debt expense. The following 49 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) table provides a reconciliation of the changes in the allowance for estimated accounts receivable credit losses for the years ended December 31, 2022, 2021 and 2020: Year Ended December 31, 2022 2021 2020 Beginning balance - January 1 $ 1,096 $ 1,096 $ 1,124 Adoption of ASU 2016-13 — — ( 28 ) Provision for expected credit losses 190 65 — Recovery ( 1,056 ) ( 65 ) — Ending balance - December 31 $ 230 $ 1,096 $ 1,096 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 regulatory approvals, variability in product launch strategies and variation in product use all impact inventory reserves for excess, obsolete and expired products. An increase to inventory reserves results in a corresponding increase in cost of revenue. Inventories are written off against the reserve when they are physically disposed. Property and Equipment— Property and equipment is stated at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful life. The estimated useful life of leasehold improvements is the shorter of the estimated life or the lease term. The estimated useful lives of buildings is 15 to 20 years, while furniture, fixtures, computers and office equipment are depreciated from three to seven years . The Company’s radiofrequency and cryothermic generators are generally placed with customers that use the Company’s disposable products. The estimated useful lives of generators are based on anticipated usage by customers and may change in future periods with changes in usage or introduction of new technology. Depreciation related to generators is recorded in cost of revenue over three years . Maintenance and repair costs are expensed as incurred. The Company assesses the useful lives of property and equipment at least annually and retires assets no longer in use. Intangible Assets— Intangible assets with determinable useful lives are amortized on a straight-line basis over the estimated fifteen year period benefited. The Company reviews intangible assets at least annually for impairment using its best estimates based on reasonable and supportable assumptions and projections. Goodwill— Goodwill represents the excess of purchase price over the fair value of the net assets acquired in business combinations. 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. Long-lived Assets— The Company reviews property and equipment and intangible assets, excluding goodwill, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. When such an event occurs, management determines whether there has been impairment by comparing the anticipated undiscounted future net cash flows to the related asset's carrying value. Leases —The Company 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 payments under the lease. Lease assets and liabilities are measured and recorded at the commencement date based on the present value of payments over the lease term. Lease assets and liabilities include lease incentives and 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 generally uses its incremental borrowing rate. The Company also applies the short-term lease recognition exemption, recognizing lease payments in profit or loss, for lease terms of 12 months or less at commencement and with no option to extend the lease whose exercise is reasonably certain. The Company accounts for the lease and non-lease components as a single lease component. Additionally, the portfolio approach is applied for operating leases based on the terms of the underlying leases. 50 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) 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 9 for further discussion. Other Noncurrent Liabilities— This balance consists of contractual obligations, including asset retirement obligations. 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 and Australian Dollars . Income Taxes —Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of 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 significant estimates and judgments about 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 a 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 assets on an annual basis to determine if valuation allowances are required by considering all available evidence. 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, taxable income in prior carryforward years and tax planning strategies that are both prudent and feasible. In evaluating the need for a valuation allowance, the existence of cumulative losses in recent years is significant objectively-verifiable negative evidence that must be overcome by objectively-verifiable positive evidence to avoid the need for a valuation allowance. The Company's valuation allowance offsets 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. The Company has not reclassified income tax effects of the Tax Cuts and Jobs Act within accumulated other comprehensive (loss) income to retained earnings due to its full valuation allowance. Earnings Per Share— Basic earnings per share is computed by dividing net (loss) 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 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). Year Ended December 31, 2022 2021 2020 Net (loss) income available to common stockholders $ ( 46,466 ) $ 50,199 $ ( 48,155 ) Basic weighted average common shares outstanding 45,740 45,066 42,125 Effect of dilutive securities — 973 — Diluted weighted average common shares outstanding 45,740 46,039 42,125 Basic net (loss) income per common share $ ( 1.02 ) $ 1.11 $ ( 1.14 ) Diluted net (loss) income per common share $ ( 1.02 ) $ 1.09 $ ( 1.14 ) For the years ended December 31, 2022 and 2020, the number of shares calculated for basic net loss per share is also used for the diluted net loss per share calculation, and net loss per share excludes the effect of 1,292 and 2,301 shares 51 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) because the effect would be anti-dilutive. The computation of diluted earnings per share in the year ended December 31, 2021 excludes 404 shares because the effect would be anti-dilutive. Research and Development Costs — Research and development costs include compensation and other internal and external costs associated with the development and research of new and existing products or concepts, preclinical studies, clinical trials and related regulatory activities, as well as amortization of technology assets. Research and development costs are expensed as incurred. Clinical trial costs and other development costs incurred by third parties are expensed as contracted work is performed. Advertising Costs — The Company expenses advertising costs as incurred. Advertising expense was $ 1,233 , $ 907 and $ 655 during the years ended December 31, 2022, 2021 and 2020. Share-Based Compensation— The Company recognizes share-based compensation expense for all share-based payment awards, including stock options, restricted stock awards, restricted stock units, performance share awards (PSAs) and stock purchases related to an employee stock purchase plan, based on estimated fair values. The value of the portion of an award that is ultimately expected to vest is recognized as expense over the service period. The Company estimates forfeitures at the time of grant and revises them, as necessary, in subsequent periods as actual forfeitures differ from those estimates. 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, 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 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 target will be achieved and may adjust expense over the performance period based on changes to estimates of performance target achievement. If such targets are not met or service is not rendered for the requisite service period, no compensation cost is recognized, and any recognized compensation cost in prior periods 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 market index stock performance, as defined by the award agreement, at the beginning of the service period and grant date; the expected volatility of the Company and market index stock performance over the performance period and the correlation coefficient of the daily returns for the Company and market index 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. Use of Estimates— The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires estimates and assumptions that affect the reported amounts of assets and liabilities, including intangible assets, contingent assets and liabilities 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. Segments— 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, systems designed for the exclusion of the left atrial 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 operating segment. 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. 52 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) The Company’s long-lived assets are located in the United States, except for $ 1,616 as of December 31, 2022 and $ 1,399 as of December 31, 2021 located primarily in Europe. Fair Value Disclosures —The Company classifies cash investments in U.S. government and agency obligations, accounts receivable, other current assets, and accounts payable 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, repurchase agreements, commercial paper and asset-backed securities are classified as Level 2 within the 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. Significant unobservable inputs with respect to the fair value measurements of the Level 3 contingent consideration liabilities are developed using Company data. See Note 2 – Fair Value for further information on fair value measurements. Recent Accounting Pronouncements —The Company has considered all recent accounting pronouncements and has concluded that there are no recent accounting pronouncements which are expected to have a material effect on the Company's financial statements. The Company continues to monitor and evaluate recently issued accounting guidance upon issuance for any potential impact. 2. FAIR VALUE FASB ASC 820, “Fair Value Measurements and Disclosures”, 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 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. • 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. 53 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) 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, 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 $ — $ 54,414 $ — $ 54,414 Commercial paper — 11,935 — 11,935 Government and agency obligations 32,637 — — 32,637 Corporate bonds — 67,598 — 67,598 Asset-backed securities — 2,353 — 2,353 Total assets $ 32,637 $ 136,300 $ — $ 168,937 There were no changes in the levels or methodology of measurement of financial assets and liabilities during the years ended December 31, 2022 and 2021. 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, 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 PMA approval and reimbursement for the therapy involving SentreHEART's devices. The achievement periods for the PMA approval and reimbursement milestones expire on December 31, 2023 and December 31, 2026, respectively. The contingent consideration liabilities are measured by applying the probability weighted scenario method using unobservable inputs, thus representing a Level 3 measurement within the fair value hierarchy. During 2021, the Company was informed that 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 $ 184,800 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 December 31, 2022 and 2021. 54 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) The following table represents the Company’s Level 3 fair value measurements using significant other unobservable inputs for acquisition-related contingent consideration for each of the years ended December 31: 2022 2021 2020 Beginning Balance – January 1 $ — $ 184,800 $ 185,157 Amounts acquired — — — Changes in fair value of contingent consideration — ( 184,800 ) ( 357 ) Ending Balance – December 31 $ — $ — $ 184,800 3. INVESTMENTS Investments as of December 31, 2022 consisted of the following: Cost Basis Unrealized Losses Fair Value Corporate bonds $ 69,832 $ ( 2,234 ) $ 67,598 Government and agency obligations 33,971 ( 1,334 ) 32,637 Commercial paper 11,935 — 11,935 Asset-backed securities 2,483 ( 130 ) 2,353 Total $ 118,221 $ ( 3,698 ) $ 114,523 Investments as of December 31, 2021 consisted of the following: Cost Basis Unrealized Losses Fair Value Corporate bonds $ 96,408 $ ( 563 ) $ 95,845 Government and agency obligations 32,953 ( 263 ) 32,690 Commercial paper 22,978 — 22,978 Asset-backed securities 28,322 ( 61 ) 28,261 Total $ 180,661 $ ( 887 ) $ 179,774 The gross realized gains or losses from sales of available-for-sale investments were not material in the years ended December 31, 2022, 2021 and 2020. The cost and fair value of investments in debt securities, by contractual maturity, as of December 31, 2022 were as follows: Available-for-sale Amortized Cost Fair Value Due in 1 year or less $ 63,596 $ 62,840 Due after 1 year through 5 years 52,142 49,330 Due after 5 years through 10 years — — Instruments not due at a single maturity date 2,483 2,353 Total $ 118,221 $ 114,523 Instruments not due at a single maturity date consist of asset-backed securities. Actual maturities may differ from the contractual maturities due to call or prepayment rights. 55 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) 4. INTANGIBLE ASSETS AND GOODWILL The following table provides a summary of the Company’s intangible assets at December 31: 2022 2021 Cost Accumulated Amortization Cost Accumulated Amortization Technology $ 46,470 $ 7,131 $ 55,712 $ 12,720 During 2021, the Company recorded an impairment charge of $ 82,300 to reduce the carrying value of the aMAZE IPR&D asset to $ 0 as of December 31, 2022 as a result of data from the aMAZE clinical trial not achieving statistical superiority. This impairment charge was reflected as a component of operating expenses. The $ 9,242 reduction in technology cost and accumulated amortization during 2022 is a result of a write-off fully-amortized asset no longer in use. Amortization expense of intangible assets was $ 3,653 , $ 2,907 and $ 1,682 for the years ended December 31, 2022, 2021 and 2020. Future amortization expense is projected as follows: 2023 $ 2,953 2024 2,953 2025 2,953 2026 2,953 2027 2,953 2028 and thereafter 24,574 Total $ 39,339 The following table provides a summary of the Company’s goodwill, which is not amortized, but rather tested annually for impairment: Net carrying amount as of December 31, 2020 $ 234,781 Additions — Net carrying amount as of December 31, 2021 234,781 Additions — Net carrying amount as of December 31, 2022 $ 234,781 5. INVENTORIES Inventories consisted of the following at December 31: 2022 2021 Raw materials $ 19,880 $ 12,653 Work in process 2,959 2,064 Finished goods 23,092 24,247 Inventories $ 45,931 $ 38,964 56 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) 6. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31: 2022 2021 Buildings and improvements $ 28,947 $ 22,977 Generators 21,354 20,175 Machinery and office equipment 20,184 14,758 Computer equipment and software 10,251 7,762 Construction in progress 3,909 5,999 Land 1,006 1,006 Total 85,651 72,677 Less accumulated depreciation ( 46,818 ) ( 41,268 ) Property and equipment, net $ 38,833 $ 31,409 Property and equipment depreciation expense was $ 8,057 , $ 7,534 and $ 7,866 for the years ended December 31, 2022, 2021 and 2020. As of December 31, 2022 and 2021, the net carrying value of generators and other capital equipment was $ 4,447 and $ 3,637 . 7. ACCRUED LIABILITIES Accrued liabilities consisted of the following at December 31: 2022 2021 Accrued compensation and employee-related expenses $ 26,924 $ 30,990 Other accrued liabilities 3,301 2,686 Sales returns and allowances 2,797 2,416 Total $ 33,022 $ 36,092 8. INDEBTEDNESS Credit Facility. The Company has a Loan and Security Agreement, as amended and modified effective February 8, 2021 and as further amended November 1, 2021 (Loan Agreement) with Silicon Valley Bank (SVB). The Loan Agreement includes 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 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. 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 Company is accruing the 3.00 % fee over the term of the Loan Agreement, with $ 420 included in the outstanding loan balance as of December 31, 2022. Additionally, the unamortized financing costs related to the term loan of $ 253 are netted against the outstanding loan balance in the 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 % of the revolving line of credit, 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 calculation as defined by the Loan Agreement. As of December 31, 2022, the Company had no borrowings under the revolving credit facility and had borrowing availability of approximately $ 28,750 . Financing costs related to the revolving line of credit are included in other assets in the Consolidated Balance Sheets and amortized ratably over the twelve-month period of the annual fee. 57 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) 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: 2023 $ 3,333 2024 20,000 2025 20,000 2026 16,667 Total long-term debt, of which $ 3,333 is current and $ 56,667 is noncurrent $ 60,000 9. 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 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 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: As of As of As of December 31, 2022 December 31, 2021 December 31, 2020 Operating Leases Weighted average remaining lease term (years) 4.4 3.6 3.2 Weighted average discount rate 4.60 % 4.69 % 5.68 % Finance Leases Weighted average remaining lease term (years) 7.6 8.6 9.7 Weighted average discount rate 6.92 % 6.91 % 6.91 % A letter of credit for $ 1,250 was issued to the lessor of the Company's corporate headquarters building in October 2015, and is renewed annually and remains outstanding as of December 31, 2022. The components of lease expense are as follows: Year Ended Year Ended Year Ended December 31, 2022 December 31, 2021 December 31, 2020 Operating lease cost $ 1,133 $ 1,052 $ 1,237 Finance lease cost: Amortization of right-of-use assets 1,016 1,019 1,050 Interest on lease liabilities 735 792 844 Total finance lease cost $ 1,751 $ 1,811 $ 1,894 Short term lease expense was not significant for the twelve months ended December 31, 2022, 2021 and 2020. 58 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) Supplemental cash flow information related to leases was as follows: Year Ended Year Ended Year Ended December 31, 2022 December 31, 2021 December 31, 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 845 $ 998 $ 1,236 Operating cash flows for finance leases 735 620 844 Financing cash flows for finance leases 899 792 664 Right-of-use assets obtained in exchange for lease obligations: Operating Leases — 3,752 1,421 Finance Leases 62 — 22 Early termination of operating lease — — 2,743 Supplemental balance sheet information related to leases was as follows: As of December 31, 2022 As of December 31, 2021 Operating Leases Operating lease right-of-use assets $ 3,787 $ 4,761 Other current liabilities and current maturities of debt and leases 1,147 861 Operating lease liabilities 3,095 4,068 Total operating lease liabilities $ 4,242 $ 4,929 Finance Leases Property and equipment, at cost $ 14,645 $ 14,607 Accumulated depreciation ( 7,109 ) ( 6,116 ) Property and equipment, net $ 7,536 $ 8,491 Other current liabilities and current maturities of debt and leases $ 992 $ 895 Finance lease liabilities 9,147 10,082 Total finance lease liabilities $ 10,139 $ 10,977 Maturities of lease liabilities as of December 31, 2022 were as follows: Operating Leases Finance Leases 2023 $ 1,160 $ 1,665 2024 1,164 1,689 2025 920 1,638 2026 592 1,671 2027 609 1,703 2028 and thereafter 259 4,824 Total payments $ 4,704 $ 13,190 Less imputed interest ( 462 ) ( 3,051 ) Total lease liabilities $ 4,242 $ 10,139 59 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) 10. COMMITMENTS AND CONTINGENCIES License Agreements. The Company has a license agreement that requires payments of 5 % of specified product sales. The agreement terminates the later of 2023 or 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 was $ 3,264 , $ 3,124 and $ 2,596 for the years ended December 31, 2022, 2021 and 2020. Purchase Agreements. The Company enters into standard purchase agreements with suppliers 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 of 2022, 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. This arbitration has been scheduled for May 2023. 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. 11. 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. In 2022, the Company changed the presentation of its disaggregated revenue within the notes to the Consolidated Financial Statements to align with current product line offerings. Specifically, pain management revenue, representing 60 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) sales of the cryoSPHERE ® product, was historically presented within open ablation revenue and is now a separately stated revenue product type. Valve revenue, historically presented as a separate product type revenue, is now included in open ablation revenue. Revenue amounts for comparative prior fiscal periods have been reclassified to conform to the current period presentation. United States revenue by product type is as follows: 2022 2021 2020 Open ablation $ 86,119 $ 72,396 $ 65,301 Minimally invasive ablation 38,553 39,380 25,647 Pain management 39,974 22,787 11,315 Total ablation $ 164,646 $ 134,563 $ 102,263 Appendage management 112,555 94,568 66,981 Total United States $ 277,201 $ 229,131 $ 169,244 International revenue by product type is as follows: 2022 2021 2020 Open ablation $ 26,809 $ 23,194 $ 18,760 Minimally invasive ablation 5,986 6,409 6,171 Pain management 558 61 3 Total ablation $ 33,353 $ 29,664 $ 24,934 Appendage management 19,825 15,534 12,353 Total International $ 53,178 $ 45,198 $ 37,287 Revenue attributed to customer geographic locations is as follows: 2022 2021 2020 United States $ 277,201 $ 229,131 $ 169,244 Europe 30,428 27,931 23,217 Asia 20,734 16,077 13,118 Other International 2,016 1,190 952 Total International 53,178 45,198 37,287 Total Revenue $ 330,379 $ 274,329 $ 206,531 12. INCOME TAXES 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 in accordance with FASB ASC 740, “Income Taxes”, under which deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. Deferred taxes are measured using provisions of currently enacted tax laws. A valuation allowance against deferred tax assets is recorded when it is more likely than not that such assets will not be fully realized. The Company's valuation allowance offsets substantially all its net deferred tax assets as it is more likely than not that the benefit of the deferred tax assets will not be recognized in future periods. 61 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) The Company’s provision for income taxes for each of the years ended December 31 is as follows: 2022 2021 2020 Current tax expense Federal $ — $ — $ ( 26 ) State 142 42 78 Foreign 118 125 74 Total current tax expense 260 167 126 Deferred tax expense Federal $ ( 8,351 ) $ ( 30,925 ) $ ( 10,304 ) State ( 459 ) ( 4,803 ) ( 1,686 ) Foreign ( 1,636 ) ( 826 ) ( 3,071 ) Change in valuation allowance 10,454 36,575 15,049 Total deferred tax expense 8 21 ( 12 ) Total tax expense $ 268 $ 188 $ 114 The detail of deferred tax assets and liabilities at December 31 is as follows: 2022 2021 Deferred tax assets: Net operating loss carryforwards $ 138,263 $ 137,920 Research and development credit carryforwards 13,205 11,269 Research and experimental expenditures 10,104 — Equity compensation 8,287 7,974 Finance and operating lease liabilities 3,395 3,700 Deferred interest 2,411 2,469 Inventories 1,896 2,434 Accruals and reserves 1,332 1,755 Other 506 587 Total deferred tax assets 179,399 168,108 Deferred tax liabilities: Intangible assets ( 9,278 ) ( 9,993 ) Right-of-use assets ( 2,626 ) ( 3,037 ) Property and equipment ( 2,568 ) ( 1,264 ) Total deferred tax liabilities ( 14,472 ) ( 14,294 ) Valuation allowance ( 164,918 ) ( 153,798 ) Net deferred tax assets $ 9 $ 16 Provisions enacted in the Tax Cut and Jobs Act of 2017 related to the capitalization of research and experimental expenditures for tax purposes became effective on January 1, 2022. These provisions require us to capitalize and amortize research and experimental expenditures for tax purposes over five or fifteen years , depending on where research is conducted. The Company has federal net operating loss carryforwards of $ 331,169 which expire between 2023 and 2037 and $ 175,758 which have no expiration. The Company has state and local net operating loss carryforwards of $ 322,819 which expire between 2023 to 2042. A portion of the Company’s federal and state net operating loss carryforwards are subject to certain limitations under Internal Revenue Code Sections 382 and 383. The Company has federal research and development credit carryforwards of $ 13,205 which expire between 2023 and 2042. Additionally, the Company has foreign net operating loss carryforwards of approximately $ 60,381 which have no expiration. 62 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) The Company’s 2022, 2021 and 2020 effective income tax rates differ from the federal statutory rate as follows: 2022 2021 2020 Federal tax at statutory rate 21.0 % $ ( 9,701 ) 21.0 % $ 10,580 21.0 % $ ( 10,088 ) Permanent differences ( 1.9 ) 876 ( 80.3 ) ( 40,439 ) ( 2.5 ) 1,214 Valuation allowance ( 22.6 ) 10,454 72.6 36,575 ( 31.3 ) 15,048 State income taxes 0.7 ( 317 ) ( 9.4 ) ( 4,760 ) 3.3 ( 1,607 ) Federal R&D credit 4.2 ( 1,936 ) ( 3.7 ) ( 1,878 ) 2.0 ( 985 ) Foreign income taxes ( 0.5 ) 215 0.7 344 4.5 ( 2,140 ) Federal deferred adjustments ( 1.5 ) 677 ( 0.5 ) ( 234 ) 2.8 ( 1,328 ) Effective tax rate ( 0.6 ) % $ 268 0.4 % $ 188 ( 0.2 ) % $ 114 The Company’s pre-tax book (loss) income for domestic and international operations was $( 38,008 ) and $( 8,190 ) for 2022, $ 55,666 and $( 5,279 ) for 2021 and $( 43,218 ) and $( 4,823 ) for 2020. The Company had undistributed earnings of foreign subsidiaries of approximately $ 379 at December 31, 2022. The Company does not consider these earnings as permanently reinvested and has determined that no current and deferred taxes are required on such amounts. Federal, state and local tax returns of the Company are routinely subject to examination by various taxing authorities. Federal income tax returns for periods beginning in 2019 are open for examination. Generally, state and foreign income tax returns for periods beginning in 2018 are open for examination. However, taxing authorities have the ability to audit net operating loss and tax credit carryforwards from years prior to these periods. The Company has not recognized certain tax benefits because of the uncertainty of realizing the entire value of the tax position taken on income tax returns upon review by the taxing authorities. A reconciliation of the change in federal and state unrecognized tax benefits for 2022, 2021 and 2020 is presented below: 2022 2021 2020 Balance at the beginning of the year $ 1,798 $ 1,798 $ 1,777 Increases (decreases) for prior year tax positions ( 36 ) — 21 Increases (decreases) for current year tax positions — — — Increases (decreases) related to settlements — — — Decreases related to statute lapse — — — Balance at the end of the year $ 1,762 $ 1,798 $ 1,798 The balance of unrecognized tax benefits at December 31, 2022, 2021 and 2020 includes $ 1,762 , $ 1,798 and 1,798 of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes and valuation allowance. The Company does not expect that its unrecognized tax benefits for research credits will significantly change within twelve months of December 31, 2022. 13. CONCENTRATIONS During 2022, 2021 and 2020, approximately 9.7 %, 10.5 % and 10.8 % of the Company’s total net revenue was derived from its top ten customers. During 2022, 2021 and 2020 no individual customer accounted for more than 10% of the Company’s revenue. As of December 31, 2022 and 2021, 11.7 % and 16.0 % of the Company’s total accounts receivable balance was derived from its top ten customers. No individual customer accounted for more than 10% of the Company’s accounts receivable as of December 31, 2022 and 2021. 63 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) The Company maintains cash and cash equivalents balances at financial institutions which at times exceed FDIC limits. As of December 31, 2022, $ 57,849 of the cash and cash equivalents balance was in excess of the FDIC limits. 14. EMPLOYEE BENEFIT PLANS The Company sponsors the AtriCure, Inc. 401(k) Plan (401(k) Plan), a defined contribution plan covering substantially all U.S. employees of the Company. Eligible employees may contribute pre-tax annual compensation up to specified maximums under the Internal Revenue Code. During the year ended December 31, 2022, the Company made matching contributions of 50 % on the first 8 % of employee contributions to the 401(k) Plan. During the year ended December 31, 2021 and 2020, the Company made matching contributions of 50 % on the first 6 % of employee contributions to the 401(k) Plan. The Company’s matching contributions in 2022, 2021 and 2020 were $ 4,447 , $ 2,651 and $ 2,237 . Additional amounts may be contributed to the 401(k) Plan at the discretion of the Company’s Board of Directors, however, no such discretionary contributions were made in 2022, 2021 or 2020. The Company also provides retirement benefits for employees of its foreign subsidiaries. Total contributions to foreign retirement plans were $ 446 , $ 349 and $ 244 in 2022, 2021 and 2020. 15. EQUITY COMPENSATION PLANS The Company has two share-based incentive plans: the 2014 Stock Incentive Plan (2014 Plan) and the 2018 Employee Stock Purchase Plan (ESPP). Stock Incentive Plan Under the 2014 Plan, the Board of Directors may grant restricted stock awards or restricted stock units (collectively RSAs), nonstatutory stock options, performance share awards (PSAs) or stock appreciation rights to Company employees, directors and consultants, and may grant incentive stock options to Company employees. 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 December 31, 2022, 13,999 shares of common stock had been reserved for issuance under the 2014 Plan and 2,183 shares were available for future grants. Stock options, restricted stock awards and restricted stock units granted generally vest at a rate of 33.3 % on the first, second and third anniversaries of the grant date. Stock options generally expire ten years from the date of grant. The award agreements for the PSAs provide that each PSA that vests represents the right to receive one 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 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. PSAs granted in 2020 have performance targets based on the Company’s compound annual revenue growth rate (CAGR) over the three year performance period, and payout opportunities range from 0 % to 100 % of the target amount. PSAs awarded subsequent to 2020 have two weighted performance targets: (i) the Company’s CAGR and (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 start and end of the performance period. PSAs granted in 2021 have payout opportunities ranging from 0 % to 200 % of the target amount, based on equally weighting of the performance targets. Awards granted in 2022 have payout opportunities ranging from 0 % to 300 % of the target amount and are weighted 60 % on the CAGR performance target and 40 % on the TSR performance target. These ranges are used to determine the number of shares that will be issuable when the award vests. The performance and market condition payouts will be determined independently and accumulated to determine the total payout for the three year performance period, subject to the maximum payout defined in the PSA agreements. All or a portion of the PSAs may vest following a change of control or a termination of service by reason of death or disability. 64 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) Activity under the plans during 2022 was as follows: Weighted Weighted Average Number of Average Remaining Aggregate Shares Exercise Contractual Intrinsic Time-Based Stock Options Outstanding Price Term Value Outstanding at January 1, 2022 653 $ 25.53 Granted — — Exercised ( 159 ) 11.45 Forfeited ( 13 ) 55.33 Outstanding at December 31, 2022 481 $ 29.34 4.2 $ 9,437 Vested and expected to vest 479 $ 29.17 4.2 $ 9,436 Exercisable at December 31, 2022 411 $ 23.46 3.5 $ 9,352 The total intrinsic value of options exercised during the years ended December 31, 2022, 2021 and 2020 was $ 5,565 , $ 27,318 and $ 29,594 . As a result of the Company’s full valuation allowance on its net deferred tax assets, no tax benefit was recognized related to the stock option exercises. The exercise price per share of each option is equal to the fair market value of the underlying share on the date of grant. For 2022, 2021 and 2020, $ 1,816 , $ 8,175 and $ 10,835 in cash proceeds from the exercise of stock options were included in the Consolidated Statements of Cash Flows. Weighted Weighted RSA Average PSA Average Shares Grant Date Shares Grant Date Restricted Stock Awards and Performance Share Awards Outstanding Fair Value Outstanding Fair Value Outstanding at January 1, 2022 628 $ 50.96 227 $ 64.27 Awarded 356 63.14 117 91.05 Released ( 362 ) 47.58 ( 116 ) 44.21 Forfeited ( 24 ) 57.45 ( 15 ) 55.17 Outstanding at December 31, 2022 598 $ 60.00 213 $ 90.70 The total fair value of restricted stock vested during 2022, 2021 and 2020 was $ 23,242 , $ 40,510 and $ 34,200 . The total fair value of performance share awards vested during 2022, 2021 and 2020 was $ 5,185 , $ 8,165 and $ 4,003 . The Company issues registered shares of common stock to satisfy stock option exercises and restricted stock and performance award grants. Employee Stock Purchase Plan Under the ESPP, shares of the Company’s common stock may be purchased at a discount ( 15 %) to the lesser of the closing price of the Company’s common stock on the first or 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. As of December 31, 2022, there were 184 shares available for future issuance under the ESPP. 65 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) Valuation and Expense Information Under FASB ASC 718 The following table summarizes total share-based compensation expense related to employees, directors and consultants for 2022, 2021 and 2020. The expense was allocated as follows: 2022 2021 2020 Cost of revenue $ 1,868 $ 2,243 $ 1,425 Research and development expenses 4,544 4,206 3,530 Selling, general and administrative expenses 22,359 21,629 17,687 Total $ 28,771 $ 28,078 $ 22,642 The expense by award type was allocated as follows: 2022 2021 2020 Restricted Stock Awards & Time-Based Stock Options $ 18,633 $ 18,727 $ 18,612 Performance Share Awards 8,731 8,095 2,921 ESPP 1,407 1,256 1,109 Total $ 28,771 $ 28,078 $ 22,642 In 2020, the Compensation Committee modified the methodology for measuring performance of the 2018, 2019 and 2020 performance awards. The modification to vesting conditions and performance measures resulted in incremental compensation cost of $ 994 , $ 2,856 and $ 569 during 2022, 2021 and 2020. As of December 31, 2022 there was $ 23,252 of unrecognized compensation costs related to non-vested stock options and restricted stock arrangements ($ 1,160 relating to stock options and $ 22,092 relating to restricted stock). This cost is expected to be recognized over a weighted-average period of 1.4 years for stock options and 1.8 years for restricted stock. As of December 31, 2022 there was $ 11,648 of unrecognized compensation costs related to non-vested performance share awards, and this cost is expected to be recognized over a weighted-average period of 1.7 years. In determining compensation expense, the fair value of restricted stock awards, restricted stock units and performance share awards with a performance condition is based on the market value of the Company’s stock on the grant date of the awards or subsequent modification (as applicable). The fair value of options is estimated on the grant date using the Black-Scholes model. No options were granted during 2022. Options granted in prior years included the following assumptions: 2021 2020 Range of risk-free interest rate 0.43 - 1.22 % 0.30 - 1.73 % Range of expected life of stock options (years) 5.3 to 5.7 5.2 to 5.7 Range of expected volatility of stock 40.00 - 43.00 % 40.00 - 43.00 % Weighted-average volatility 41.84 % 41.54 % Dividend yield 0.00 % 0.00 % The Company’s estimate of volatility is based solely on the Company’s stock price over the expected option life. The risk-free interest rate assumption is based upon the U.S. treasury yield curve at the time of grant for the expected option life. The Company estimates the expected terms of options using historical employee exercise behavior. 66 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) The fair value of performance share awards with a market condition is estimated on the grant date using a Monte Carlo simulation and includes the following assumptions: 2022 2021 Stock price $ 39.94 - $ 69.59 $ 66.31 Expected term (years) 2.6 to 2.8 2.8 Company volatility 43.50 - 46.90 % 42.10 % Market index average volatility 90.30 - 92.00 % 91.00 % Market index average correlation 33.50 - 35.40 % 31.50 % Risk-free interest rate 1.40 - 2.70 % 0.20 % Dividend yield 0.00 % 0.00 % The expected term is estimated as the remaining performance period at the grant date. Expected volatility is estimated based on the Company and daily trading prices of the market index, adjusted for dividends and stock splits over the remaining performance period. The risk-free interest rate is based upon the US Constant Maturity yield curve at the time of grant for the expected term of the performance share awards. Based on the assumptions noted above, the weighted average estimated grant date fair value per share of the stock options, restricted stock awards and performance share awards granted for 2022, 2021 and 2020 was as follows: 2022 2021 2020 Stock options $ — $ 27.31 $ 15.25 Restricted stock awards 63.14 67.51 40.77 Performance share awards 91.05 89.36 38.42 16. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME In addition to net (loss) income, comprehensive (loss) income includes foreign currency translation adjustments and unrealized losses on investments. Accumulated other comprehensive (loss) income consisted of the following, net of tax: 2022 2021 2020 Total accumulated other comprehensive (loss) income at beginning of period $ ( 948 ) $ 312 $ ( 158 ) Unrealized (losses) gains on investments Balance at beginning of period $ ( 887 ) $ 54 $ 100 Other comprehensive (loss) income before reclassifications ( 2,739 ) ( 941 ) ( 70 ) Amounts reclassified from accumulated other comprehensive (loss) income to interest income ( 72 ) — 24 Balance at end of period $ ( 3,698 ) $ ( 887 ) $ 54 Foreign currency translation adjustment Balance at beginning of period $ ( 61 ) $ 258 $ ( 258 ) Other comprehensive (loss) income before reclassifications ( 774 ) ( 768 ) 555 Amounts reclassified from accumulated other comprehensive (loss) income to other (expense) income 437 449 ( 39 ) Balance at end of period $ ( 398 ) $ ( 61 ) $ 258 Total accumulated other comprehensive (loss) income at end of period $ ( 4,096 ) $ ( 948 ) $ 312 67 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.