AtriCure, Inc. 10-Q

Item 1. Financial Statements ATRICURE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands, Except Per Share Amounts) (Unaudited) June 30, 2023 December 31, 2022 Assets Current assets: Cash and cash equivalents $ 67,240 $ 58,099 Short-term investments 59,785 63,014 Accounts receivable, less allowance for credit losses of $ 230 48,362 42,693 Inventories 55,409 45,931 Prepaid and other current assets 7,179 5,477 Total current assets 237,975 215,214 Long-term investments 7,598 51,509 Property and equipment, net 40,540 38,833 Operating lease right-of-use assets 4,353 3,787 Intangible assets, net 67,383 39,339 Goodwill 234,781 234,781 Other noncurrent assets 1,541 1,985 Total assets $ 594,171 $ 585,448 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 23,709 $ 19,898 Accrued liabilities 31,986 33,022 Current maturities of debt and leases 15,715 5,472 Total current liabilities 71,410 58,392 Long-term debt 47,047 56,834 Finance lease liabilities 8,614 9,147 Operating lease liabilities 3,458 3,095 Other noncurrent liabilities 1,220 1,226 Total liabilities 131,749 128,694 Commitments and contingencies (Note 9) Stockholders’ Equity: Common stock, $ 0.001 par value, 90,000 shares authorized and 47,352 and 46,563 issued and outstanding 47 47 Additional paid-in capital 803,197 787,422 Accumulated other comprehensive loss ( 2,609 ) ( 4,096 ) Accumulated deficit ( 338,213 ) ( 326,619 ) Total stockholders’ equity 462,422 456,754 Total liabilities and stockholders’ equity $ 594,171 $ 585,448 See accompanying notes to condensed consolidated financial statements. 3 Table of Contents ATRICURE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In Thousands, Except Per Share Amounts) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Revenue $ 100,918 $ 84,529 $ 194,412 $ 159,105 Cost of revenue 23,841 21,010 47,726 39,991 Gross profit 77,077 63,519 146,686 119,114 Operating expenses: Research and development expenses 17,438 14,791 32,765 28,420 Selling, general and administrative expenses 63,783 62,388 123,847 118,504 Total operating expenses 81,221 77,179 156,612 146,924 Loss from operations ( 4,144 ) ( 13,660 ) ( 9,926 ) ( 27,810 ) Other income (expense): Interest expense ( 1,719 ) ( 1,101 ) ( 3,355 ) ( 2,101 ) Interest income 961 76 1,836 192 Other ( 123 ) ( 111 ) 22 ( 204 ) Loss before income tax expense ( 5,025 ) ( 14,796 ) ( 11,423 ) ( 29,923 ) Income tax expense 93 45 171 101 Net loss $ ( 5,118 ) $ ( 14,841 ) $ ( 11,594 ) $ ( 30,024 ) Basic and diluted net loss per share $ ( 0.11 ) $ ( 0.32 ) $ ( 0.25 ) $ ( 0.66 ) Weighted average shares outstanding—basic and diluted 46,266 45,692 46,187 45,610 Comprehensive income (loss): Unrealized gain (loss) on investments $ 427 $ ( 449 ) $ 1,468 $ ( 2,788 ) Foreign currency translation adjustment 36 ( 430 ) 19 ( 608 ) Other comprehensive income (loss) 463 ( 879 ) 1,487 ( 3,396 ) Net loss ( 5,118 ) ( 14,841 ) ( 11,594 ) ( 30,024 ) Comprehensive loss, net of tax $ ( 4,655 ) $ ( 15,720 ) $ ( 10,107 ) $ ( 33,420 ) 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 June 30, 2022 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance—March 31, 2022 46,268 $ 46 $ 761,580 $ ( 295,336 ) $ ( 3,465 ) $ 462,825 Impact of equity compensation plans 155 — 9,605 — — 9,605 Other comprehensive loss — — — — ( 879 ) ( 879 ) Net loss — — — ( 14,841 ) — ( 14,841 ) Balance—June 30, 2022 46,423 $ 46 $ 771,185 $ ( 310,177 ) $ ( 4,344 ) $ 456,710 Three-Month Period Ended June 30, 2023 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance—March 31, 2023 47,244 $ 47 $ 790,965 $ ( 333,095 ) $ ( 3,072 ) $ 454,845 Impact of equity compensation plans 108 — 12,232 — — 12,232 Other comprehensive income — — — — 463 463 Net loss — — — ( 5,118 ) — ( 5,118 ) Balance—June 30, 2023 47,352 $ 47 $ 803,197 $ ( 338,213 ) $ ( 2,609 ) $ 462,422 Six-Month Period Ended June 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 407 — 6,374 — — 6,374 Other comprehensive loss — — — — ( 3,396 ) ( 3,396 ) Net loss — — — ( 30,024 ) — ( 30,024 ) Balance—June 30, 2022 46,423 $ 46 $ 771,185 $ ( 310,177 ) $ ( 4,344 ) $ 456,710 Six-Month Period Ended June 30, 2023 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance—December 31, 2022 46,563 $ 47 $ 787,422 $ ( 326,619 ) $ ( 4,096 ) $ 456,754 Impact of equity compensation plans 789 — 15,775 — — 15,775 Other comprehensive income — — — — 1,487 1,487 Net loss — — — ( 11,594 ) — ( 11,594 ) Balance—June 30, 2023 47,352 $ 47 $ 803,197 $ ( 338,213 ) $ ( 2,609 ) $ 462,422 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) Six Months Ended June 30, 2023 2022 Cash flows from operating activities: Net loss $ ( 11,594 ) $ ( 30,024 ) Adjustments to reconcile net loss to net cash used in operating activities: Share-based compensation expense 17,755 14,573 Depreciation 4,567 3,861 Amortization of intangible assets 1,956 1,943 Amortization of deferred financing costs 243 255 Amortization of investments 294 983 Other non-cash adjustments 487 679 Changes in operating assets and liabilities: Accounts receivable ( 5,563 ) ( 8,757 ) Inventories ( 9,377 ) ( 2,727 ) Other current assets ( 1,696 ) 32 Accounts payable 2,945 4,240 Accrued liabilities ( 1,084 ) ( 5,136 ) Other noncurrent assets and liabilities ( 1 ) ( 325 ) Net cash used in operating activities ( 1,068 ) ( 20,403 ) Cash flows from investing activities: Purchases of available-for-sale securities — ( 3,941 ) Sales and maturities of available-for-sale securities 48,315 51,749 Purchases of property and equipment ( 5,582 ) ( 7,565 ) Acquisition of intellectual property ( 30,000 ) — Net cash provided by investing activities 12,733 40,243 Cash flows from financing activities: Payments on leases ( 483 ) ( 437 ) Payment of debt fees ( 60 ) — Proceeds from stock option exercises and employee stock purchase plan 4,058 3,374 Shares repurchased for payment of taxes on stock awards ( 6,038 ) ( 11,573 ) Net cash used in financing activities ( 2,523 ) ( 8,636 ) Effect of exchange rate changes on cash and cash equivalents ( 1 ) ( 302 ) Net increase in cash and cash equivalents 9,141 10,902 Cash and cash equivalents—beginning of period 58,099 43,654 Cash and cash equivalents—end of period $ 67,240 $ 54,556 Supplemental cash flow information: Cash paid for interest $ 3,078 $ 1,797 Net cash paid for income taxes 159 132 Non-cash investing and financing activities: Accrued purchases of property and equipment 1,046 2,562 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, 2022 filed with the SEC. Except as discussed herein, there have been no changes in the Company's significant accounting policies for the six months ended June 30, 2023 as compared to the significant accounting policies described in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. 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 inventories, intangible assets, valuation allowance for deferred income tax assets, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense, including share-based compensation 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 Company's chief operating decision maker is its Chief Executive Officer, who reviews financial information presented on a consolidated basis, accompanied only by revenue information 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 in the United States, except for $ 2,934 as of June 30, 2023 and $ 1,616 as of December 31, 2022 located primarily in Europe. Earnings Per Share —Basic and diluted net loss per share are computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Since the Company has experienced net losses for all periods presented, net loss per share excludes the effect of 1,839 and 1,548 shares as of June 30, 2023 and 2022 because they are anti-dilutive. Therefore, the number of shares used for basic and diluted net loss per share are the same. 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 through 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 ratably over the service period. Prior to January 1, 2023, the Company estimated forfeitures at the time of grant and revises them, as necessary, in subsequent periods as actual forfeitures differ from those estimates. Effective January 1, 2023, the Company's policy was amended to account for forfeitures as they occur rather than estimating at the time of grant, and the effect on income from continuing operations and retained earnings is not significant. Intangible Assets— Technology intangible assets with determinable useful lives are amortized on a straight-line basis over the estimated fifteen year period benefited. Patent intangible assets with determinable useful lives are amortized over the estimated useful life of 5 years in a pattern reflecting the estimated economic benefit of the asset to the Company. Amortization of technology intangible assets is recorded in selling, general and administrative expense, while amortization of patent intangible assets is recorded in cost of revenue. The Company reviews intangible assets at least annually for impairment using its best estimates based on reasonable and 7 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, except per share amounts) (Unaudited) supportable assumptions and projections. 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 settle 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. The following table represents the Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis as of June 30, 2023: 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 $ — $ 62,100 $ — $ 62,100 Government and agency obligations 24,273 — — 24,273 Corporate bonds — 40,914 — 40,914 Asset-backed securities — 2,196 — 2,196 Total assets $ 24,273 $ 105,210 $ — $ 129,483 There were no changes in the levels or methodology of measurement of financial assets and liabilities during the three and six months ended June 30, 2023. 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, 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 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 8 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, except per share amounts) (Unaudited) reimbursement for the therapy involving SentreHEART’s devices. The Company assessed the projected probability of payment during the contractual achievement periods to be remote, resulting in no reported fair value as of June 30, 2023 and December 31, 2022. 3. INVESTMENTS Investments as of June 30, 2023 consisted of the following: Cost Basis Unrealized Losses Fair Value Corporate bonds $ 42,334 $ ( 1,420 ) $ 40,914 Government and agency obligations 24,993 ( 720 ) 24,273 Asset-backed securities 2,286 ( 90 ) 2,196 Total $ 69,613 $ ( 2,230 ) $ 67,383 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 The gross realized gains or losses from sales of available-for-sale investments were not significant in the three and six months ended June 30, 2023 and 2022. The cost and fair value of investments in debt securities, by contractual maturity, as of June 30, 2023 were as follows: Available-for-sale Amortized Cost Fair Value Due in 1 year or less $ 59,332 $ 57,589 Due after 1 year through 5 years 7,995 7,598 Due after 5 years through 10 years — — Instruments not due at a single maturity date 2,286 2,196 Total $ 69,613 $ 67,383 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. 4. INVENTORIES Inventories consist of the following: June 30, 2023 December 31, 2022 Raw materials $ 26,487 $ 19,880 Work in process 3,893 2,959 Finished goods 25,029 23,092 Total $ 55,409 $ 45,931 9 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, except per share amounts) (Unaudited) 5. INTANGIBLE ASSETS The following table provides a summary of the Company’s intangible assets: June 30, 2023 December 31, 2022 Cost Accumulated Amortization Cost Accumulated Amortization Technology $ 46,470 $ 8,607 $ 46,470 $ 7,131 Patents 30,000 480 — — Total $ 76,470 $ 9,087 $ 46,470 $ 7,131 In May 2023, the Company acquired patents that will be amortized over an estimated useful life of 5 years. See Note 9 - Commitments and Contingencies for further information on the asset acquisition. The following table summarizes the allocation of amortization expense of intangible assets: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Cost of revenues $ 480 $ — $ 480 $ — Selling, general and administrative expenses 738 971 1,476 1,943 Total $ 1,218 $ 971 $ 1,956 $ 1,943 Future amortization expense is projected as follows: 2023 (excluding the six months ended June 30, 2023) $ 3,397 2024 7,453 2025 8,353 2026 9,553 2027 10,453 2028 and thereafter 28,174 Total $ 67,383 6. ACCRUED LIABILITIES Accrued liabilities consist of the following: June 30, 2023 December 31, 2022 Accrued compensation and employee-related expenses $ 26,807 $ 26,924 Sales returns and allowances 3,172 2,797 Other accrued liabilities 2,007 3,301 Total $ 31,986 $ 33,022 7. INDEBTEDNESS Credit Facility. The Company has a Loan and Security Agreement, as amended and modified effective November 1, 2021, (Loan Agreement). Our primary banking relationship in the United States was with Silicon Valley Bank. During the first quarter of 2023 all deposits and loans of Silicon Valley Bank were purchased by First-Citizens Bank & Trust Company, and our banking relationship is now with Silicon Valley Bank, a division of First-Citizens Bank & Trust Company as of March 31, 2023. 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. 10 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, except per share amounts) (Unaudited) 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 $ 600 included in the outstanding loan balance as of June 30, 2023. Additionally, the unamortized original financing costs related to the term loan of $ 220 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 calculation as defined by the Loan Agreement. As of June 30, 2023, 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: 2023 (excluding the six months ended June 30, 2023) $ 3,333 2024 20,000 2025 20,000 2026 16,667 Total long-term debt, of which $ 13,333 is current and $ 46,667 is noncurrent $ 60,000 8. 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 ten 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: June 30, 2023 December 31, 2022 Operating Leases Weighted average remaining lease term (years) 5.2 4.4 Weighted average discount rate 5.39 % 4.60 % Finance Leases Weighted average remaining lease term (years) 7.1 7.6 Weighted average discount rate 6.92 % 6.92 % 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 June 30, 2023. 11 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, except per share amounts) (Unaudited) The components of lease expense are as follows: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Operating lease cost $ 325 $ 284 $ 635 $ 570 Finance lease cost: Amortization of right-of-use assets 255 338 510 508 Interest on lease liabilities 170 185 345 375 Total finance lease cost $ 425 $ 523 $ 855 $ 883 Short-term lease expense was not significant for the three and six months ended June 30, 2023 and 2022. Supplemental cash flow information related to leases was as follows: Six Months Ended June 30, 2023 Six Months Ended June 30, 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 602 $ 505 Operating cash flows for finance leases 345 375 Financing cash flows for finance leases 483 437 Right-of-use assets obtained in exchange for lease obligations: Operating leases 1,068 — Finance leases — — Supplemental balance sheet information related to leases was as follows: June 30, 2023 December 31, 2022 Operating Leases Operating lease right-of-use assets $ 4,353 $ 3,787 Current maturities of leases 1,340 1,147 Operating lease liabilities 3,458 3,095 Total operating lease liabilities $ 4,798 $ 4,242 Finance Leases Property and equipment, at cost $ 14,620 $ 14,645 Accumulated depreciation ( 7,339 ) ( 7,109 ) Property and equipment, net $ 7,281 $ 7,536 Current maturities of leases $ 1,042 $ 992 Finance lease liabilities 8,614 9,147 Total finance lease liabilities $ 9,656 $ 10,139 12 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, except per share amounts) (Unaudited) Future maturities of lease liabilities as of June 30, 2023 were as follows: Operating Leases Finance Leases 2023 (excluding the six months ended June 30, 2023) $ 663 $ 836 2024 1,270 1,689 2025 1,034 1,638 2026 727 1,671 2027 754 1,703 2028 and thereafter 1,169 4,824 Total payments $ 5,617 $ 12,361 Less imputed interest ( 819 ) ( 2,705 ) Total $ 4,798 $ 9,656 9. COMMITMENTS AND CONTINGENCIES License Agreement. The Company had been a party to a license agreement that required royalty payments of 5 % of specified product sales. In May 2023, the Company entered into an agreement that terminated the license agreement and the Company's obligations to make royalty payments under the license agreement. See Legal section below for additional information. 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 recognizes income from a favorable resolution of legal proceedings when the associated cash or assets are received. 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 (“CCF”) 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 alleged that the Company did not include the revenues from sales of certain products in its royalty payments due under the License Agreement, and the Company did not provide related notices required under the License Agreement. The Company filed its Answering Statement and Counterclaims to the allegations in September 2022, denying each 13 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, except per share amounts) (Unaudited) claim and counterclaiming for breach of contract, correction of inventorship, declaratory judgment, patent prosecution and legal fees. In May 2023, the Company entered into an Assignment and Agreement Regarding IDx and CCF Intellectual Property (“Assignment Agreement”) with Clinic and IDx. Pursuant to the Assignment Agreement, during the second quarter of 2023, the Company made a one-time payment of $ 33,400 to Clinic and IDx for the acquisition of patents and other intellectual property. The Assignment Agreement also requires dismissal of the arbitration and release of payment for royalty obligations due to Clinic and IDx under the License Agreement after March 31, 2023. The amount paid, together with transaction costs, was allocated between the acquired intangible asset, the release of payment for royalty obligations and the settlement of the dispute. The intangible asset was assigned a value of $ 30,000 and is being amortized over an estimated useful life of 5 years. The release of the royalty obligations was valued at $ 432 . The remaining $ 3,088 was allocated to the settlement and is included in selling, general and administrative expenses for the three months ended June 30, 2023. During the first quarter of 2023, the Company entered into a legal settlement for $ 7,500 in connection with the settlement of claims filed against a competitor. The Company recorded a $ 3,500 gain for the three months ended June 30, 2023 and $ 7,500 for the six months ended June 30, 2023 for the proceeds received as a reduction to selling, general and administrative expenses. 10. REVENUE The Company develops, manufactures and sells devices designed primarily for surgical ablation of cardiac tissue, exclusion of the left atrial appendage, and blocking post-operative 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. United States revenue by product type is as follows: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Open ablation $ 27,002 $ 22,070 $ 52,144 $ 41,044 Minimally invasive ablation 11,370 10,154 21,007 18,769 Pain management 12,590 10,210 23,658 18,224 Total ablation $ 50,962 $ 42,434 $ 96,809 $ 78,037 Appendage management 33,941 28,831 66,283 55,500 Total United States $ 84,903 $ 71,265 $ 163,092 $ 133,537 International revenue by product type is as follows: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Open ablation $ 7,722 $ 6,213 $ 15,008 $ 12,705 Minimally invasive ablation 1,375 1,271 3,242 2,804 Pain management 439 114 667 254 Total ablation $ 9,536 $ 7,598 $ 18,917 $ 15,763 Appendage management 6,479 5,666 12,403 9,805 Total International $ 16,015 $ 13,264 $ 31,320 $ 25,568 14 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, except per share amounts) (Unaudited) Revenue attributed to customer geographic locations is as follows: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 United States $ 84,903 $ 71,265 $ 163,092 $ 133,537 Europe 9,457 7,783 18,858 15,020 Asia Pacific 6,125 4,933 11,527 9,490 Other International 433 548 935 1,058 Total International 16,015 13,264 31,320 25,568 Total Revenue $ 100,918 $ 84,529 $ 194,412 $ 159,105 11. 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 June 30, 2023 and 2022 was ( 1.9 %) and ( 0.3 %). The effective tax rate for the six months ended June 30, 2023 and 2022 was ( 1.5 %) and ( 0.3 %). The Company’s worldwide effective tax rate differs from the US statutory rate of 21% primarily due to its valuation allowances. The Company's federal, state, local and foreign tax returns 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 operating losses. However, if required, the Company will recognize interest and penalties within income tax expense and within the related tax liability. 12. EQUITY COMPENSATION PLANS The Company has two share-based incentive plans: the 2023 Stock Incentive Plan (2023 Plan) and the 2018 Employee Stock Purchase Plan (ESPP). Stockholders approved the 2023 Plan at the 2023 Annual Meeting of Stockholders. Pursuant to its terms, the 2023 Plan supersedes and replaces the 2014 Stock Incentive Plan (Prior Plan). Stock Incentive Plan Under the 2023 Plan, the Board of Directors may grant restricted stock awards, restricted stock units, nonstatutory stock options, performance share awards and 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 2023 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 June 30, 2023, 2,287 shares of common stock have been reserved for issuance under the 2023 Plan, and 2,269 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 June 30, 2023, there were 847 shares available for future issuance under the ESPP. 15 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, except per share amounts) (Unaudited) Share-Based Compensation Expense Information The following table summarizes the allocation of share-based compensation expense: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Cost of revenue $ 471 $ 487 $ 914 $ 1,058 Research and development expenses 1,540 1,186 2,844 2,316 Selling, general and administrative expenses 6,984 5,851 13,997 11,199 Total $ 8,995 $ 7,524 $ 17,755 $ 14,573 13. 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 June 30, Six Months Ended June 30, 2023 2022 2023 2022 Total accumulated other comprehensive loss at beginning of period $ ( 3,072 ) $ ( 3,465 ) $ ( 4,096 ) $ ( 948 ) Unrealized Gains (Losses) on Investments Balance at beginning of period $ ( 2,657 ) $ ( 3,226 ) $ ( 3,698 ) $ ( 887 ) Other comprehensive income (loss) before reclassifications 427 ( 377 ) 1,468 ( 2,716 ) Amounts reclassified to other income (expense) — ( 72 ) — ( 72 ) Balance at end of period $ ( 2,230 ) $ ( 3,675 ) $ ( 2,230 ) $ ( 3,675 ) Foreign Currency Translation Adjustment Balance at beginning of period $ ( 415 ) $ ( 239 ) $ ( 398 ) $ ( 61 ) Other comprehensive income (loss) before reclassifications 28 ( 527 ) 153 ( 787 ) Amounts reclassified to other income (expense) 8 97 ( 134 ) 179 Balance at end of period $ ( 379 ) $ ( 669 ) $ ( 379 ) $ ( 669 ) Total accumulated other comprehensive loss at end of period $ ( 2,609 ) $ ( 4,344 ) $ ( 2,609 ) $ ( 4,344 ) 16 Table of Contents