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 ) 45 Consolidated Balance Sheets 47 Consolidated Statements of Operations and Comprehensive (Loss) Income 48 Consolidated Statements of Stockholders’ Equity 49 Consolidated Statements of Cash Flows 50 Notes to Consolidated Financial Statements 51 44 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, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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, 2023, 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 16, 2024, 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. 45 Table of Contents Valuation of Performance Share Awards with a Market Condition - Refer to Note 14 to the financial statements Critical Audit Matter Description Performance share awards (PSAs) granted in 2023 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 grant date, 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, the risk-free interest rate, 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 with management regarding 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 16, 2024 We have served as the Company's auditor since 2002. 46 Table of Contents ATRICURE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2023 and 2022 (In Thousands, Except Per Share Amounts) 2023 2022 Assets Current assets: Cash and cash equivalents $ 84,310 $ 58,099 Short-term investments 52,975 63,014 Accounts receivable, less allowance for credit losses of $ 500 and $ 230 52,501 42,693 Inventories 67,897 45,931 Prepaid and other current assets 8,563 5,477 Total current assets 266,246 215,214 Long-term investments — 51,509 Property and equipment, net 42,435 38,833 Operating lease right-of-use assets 4,324 3,787 Intangible assets, net 63,986 39,339 Goodwill 234,781 234,781 Other noncurrent assets 2,160 1,985 Total Assets $ 613,932 $ 585,448 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 27,354 $ 19,898 Accrued liabilities 44,682 33,022 Current maturities of debt and leases 2,533 5,472 Total current liabilities 74,569 58,392 Long-term debt 60,593 56,834 Finance lease liabilities 8,061 9,147 Operating lease liabilities 3,307 3,095 Other noncurrent liabilities 1,234 1,226 Total Liabilities 147,764 128,694 Commitments and contingencies (Note 10) Stockholders’ Equity: Common stock, $ 0.001 par value, 90,000 shares authorized; 47,526 and 46,563 issued and outstanding 48 47 Additional paid-in capital 824,170 787,422 Accumulated other comprehensive loss ( 993 ) ( 4,096 ) Accumulated deficit ( 357,057 ) ( 326,619 ) Total Stockholders’ Equity 466,168 456,754 Total Liabilities and Stockholders’ Equity $ 613,932 $ 585,448 See accompanying notes to consolidated financial statements. 47 Table of Contents ATRICURE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME YEARS ENDED DECEMBER 31, 2023, 2022 and 2021 (In Thousands, Except Per Share Amounts) 2023 2022 2021 Revenue $ 399,245 $ 330,379 $ 274,329 Cost of revenue 98,875 84,439 68,469 Gross profit 300,370 245,940 205,860 Operating expenses (benefit): Research and development expenses 73,915 57,337 48,506 Selling, general and administrative expenses 253,138 231,272 204,649 Change in fair value of contingent consideration (Note 2) — — ( 184,800 ) Intangible asset impairment (Note 4) — — 82,300 Total operating expenses 327,053 288,609 150,655 (Loss) income from operations ( 26,683 ) ( 42,669 ) 55,205 Other income (expense): Interest expense ( 6,925 ) ( 4,986 ) ( 4,918 ) Interest income 3,792 1,994 466 Other ( 31 ) ( 537 ) ( 366 ) (Loss) income before income tax expense ( 29,847 ) ( 46,198 ) 50,387 Income tax expense 591 268 188 Net (loss) income $ ( 30,438 ) $ ( 46,466 ) $ 50,199 Net (loss) income per share: Basic net (loss) income per share $ ( 0.66 ) $ ( 1.02 ) $ 1.11 Diluted net (loss) income per share $ ( 0.66 ) $ ( 1.02 ) $ 1.09 Weighted average shares outstanding: Basic 46,309 45,740 45,066 Diluted 46,309 45,740 46,039 Comprehensive (loss) income: Unrealized gain (loss) on investments $ 2,898 $ ( 2,811 ) $ ( 941 ) Foreign currency translation adjustment 205 ( 337 ) ( 319 ) Other comprehensive income (loss) 3,103 ( 3,148 ) ( 1,260 ) Net (loss) income ( 30,438 ) ( 46,466 ) 50,199 Comprehensive (loss) income, net of tax $ ( 27,335 ) $ ( 49,614 ) $ 48,939 See accompanying notes to consolidated financial statements. 48 Table of Contents ATRICURE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2023, 2022, and 2021 (In Thousands) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive (Loss) Income Total Stockholders’ Equity Shares Amount 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 Issuance of common stock under equity incentive plans 811 1 ( 4,241 ) — — ( 4,240 ) Issuance of common stock under employee stock purchase plan 152 — 5,261 — — 5,261 Share-based employee compensation expense — — 35,728 — — 35,728 Other comprehensive income — — — — 3,103 3,103 Net loss — — — ( 30,438 ) — ( 30,438 ) Balance—December 31, 2023 47,526 $ 48 $ 824,170 $ ( 357,057 ) $ ( 993 ) $ 466,168 See accompanying notes to consolidated financial statements. 49 Table of Contents ATRICURE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2023, 2022 and 2021 (In Thousands) 2023 2022 2021 Cash flows from operating activities: Net (loss) income $ ( 30,438 ) $ ( 46,466 ) $ 50,199 Adjustments to reconcile net (loss) income to net cash used in operating activities: Share-based compensation expense 35,728 28,771 28,078 Depreciation 9,460 8,057 7,534 Amortization of intangible assets 5,353 3,653 2,907 Amortization of deferred financing costs 486 507 759 Amortization of investments 632 1,478 2,482 Change in fair value of contingent consideration — — ( 184,800 ) Intangible asset impairment — — 82,300 Other non-cash adjustments 1,503 739 1,607 Changes in operating assets and liabilities: Accounts receivable ( 9,872 ) ( 8,989 ) ( 10,087 ) Inventories ( 21,830 ) ( 7,305 ) ( 4,274 ) Other current assets ( 3,084 ) ( 515 ) ( 700 ) Accounts payable 6,177 2,677 4,710 Accrued liabilities 11,562 ( 2,966 ) 8,271 Other noncurrent assets and liabilities ( 1,193 ) ( 1,782 ) ( 2,766 ) Net cash provided by (used in) operating activities 4,484 ( 22,141 ) ( 13,780 ) Cash flows from investing activities: Purchases of available-for-sale securities — ( 24,637 ) ( 173,105 ) Sales and maturities of available-for-sale securities 63,815 85,524 206,362 Purchases of property and equipment ( 11,998 ) ( 16,881 ) ( 9,753 ) Acquisition of intellectual property ( 30,000 ) — — Net cash provided by investing activities 21,817 44,006 23,504 Cash flows from financing activities: Proceeds from debt borrowings — — 5,000 Payments on debt and finance leases ( 992 ) ( 899 ) ( 5,816 ) Payment of debt fees ( 60 ) — ( 1,171 ) Proceeds from stock option exercises 2,316 1,816 8,175 Shares repurchased for payment of taxes on stock awards ( 6,557 ) ( 12,201 ) ( 18,011 ) Proceeds from issuance of common stock under employee stock purchase plan 5,261 4,225 4,181 Net cash used in financing activities ( 32 ) ( 7,059 ) ( 7,642 ) Effect of exchange rate changes on cash and cash equivalents ( 58 ) ( 361 ) ( 372 ) Net increase in cash and cash equivalents 26,211 14,445 1,710 Cash and cash equivalents—beginning of period 58,099 43,654 41,944 Cash and cash equivalents—end of period $ 84,310 $ 58,099 $ 43,654 Supplemental cash flow information: Cash paid for interest $ 6,376 $ 4,270 $ 4,223 Cash paid for income taxes, net of refunds 395 192 190 Non-cash investing and financing activities: Accrued purchases of property and equipment 1,427 272 1,552 See accompanying notes to consolidated financial statements. 50 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) CAK 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 and money market funds 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 $ 1,860 , $ 1,496 and $ 1,354 in the years ended December 31, 2023, 2022 and 2021. 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 there are no adjustments for a significant financing component as payment terms fall within one year . 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 is not obligated to 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 51 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, 2023, 2022 and 2021: Year Ended December 31, 2023 2022 2021 Beginning balance - January 1 $ 230 $ 1,096 $ 1,096 Provision for expected credit losses 270 190 65 Recovery — ( 1,056 ) ( 65 ) Ending balance - December 31 $ 500 $ 230 $ 1,096 Concentration of Credit Risk and Significant Customers — During 2023, 2022 and 2021, 8.8 %, 9.7 % and 10.5 % of the Company’s total revenue was derived from its top ten customers. During 2023, 2022 and 2021 no individual customer accounted for more than 10% of the Company’s revenue. As of December 31, 2023 and 2022, 11.3 % and 11.7 % of the Company’s total accounts receivable were derived from its top ten customers. No individual customer accounted for more than 10% of the Company’s accounts receivable as of December 31, 2023 and 2022. 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 sales 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 purchase 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— 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 five years in a pattern reflecting the estimated economic benefit of the asset to the Company. Amortization of technology intangible assets is recorded in research and development expense, while amortization of patent intangible assets is recorded in cost of revenue. The Company reviews intangible assets for impairment at least annually or more often if impairment indicators are present 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 automobiles 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. 52 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) 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. 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 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 – Leases for further discussion. Other Income (Expense)— Other income (expense) consists primarily of foreign currency transaction gains and losses generated by settlements of intercompany balances denominated in Euros and customer invoices transacted in British Pounds, Australian Dollars and Canadian 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). 53 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) Year Ended December 31, 2023 2022 2021 Net (loss) income available to common stockholders $ ( 30,438 ) $ ( 46,466 ) $ 50,199 Basic weighted average common shares outstanding 46,309 45,740 45,066 Effect of dilutive securities — — 973 Diluted weighted average common shares outstanding 46,309 45,740 46,039 Basic net (loss) income per common share $ ( 0.66 ) $ ( 1.02 ) $ 1.11 Diluted net (loss) income per common share $ ( 0.66 ) $ ( 1.02 ) $ 1.09 For the years ended December 31, 2023 and 2022, 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 1,668 and 1,292 shares 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 studies, 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 or over the expected service period. Advertising Costs — The Company expenses advertising costs as incurred. Advertising expense was $ 1,695 , $ 1,233 and $ 907 during the years ended December 31, 2023, 2022 and 2021. 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. Prior to January 1, 2023, the Company estimated forfeitures at the time of grant and revised 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. 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) covering substantially all U.S. employees of the Company. 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 54 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) 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. The Company’s long-lived assets are located in the United States, except for $ 3,432 as of December 31, 2023 and $ 1,616 as of December 31, 2022 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, 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 —In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”. This guidance provides new segment disclosure requirements for entities with a single reportable segment and modifies certain reportable segment disclosure requirements. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is in the process of assessing the impact of the adoption of this guidance; however, adoption is not expected to have a material impact on the Company’s consolidated financial statements. In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. This guidance requires disclosure of specific categories in the rate reconciliation and provide additional information for reconciling items that meet a specified quantitative threshold. The guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is in the process of assessing the impact of the adoption of this guidance; however, adoption is not expected to have a material impact on the Company’s consolidated financial statements. 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 55 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) 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. 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, 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 $ — $ 77,864 $ — $ 77,864 Government and agency obligations 12,711 — — 12,711 Corporate bonds — 38,033 — 38,033 Asset-backed securities — 2,231 — 2,231 Total assets $ 12,711 $ 118,128 $ — $ 130,839 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, 2023 and 2022. 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 56 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) 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 continues to assess the projected probability of payment during the contractual achievement periods to be remote, resulting in no fair value as of December 31, 2023 and 2022. 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: 2023 2022 2021 Beginning Balance – January 1 $ — $ — $ 184,800 Amounts acquired — — — Changes in fair value of contingent consideration — — ( 184,800 ) Ending Balance – December 31 $ — $ — $ — 3. INVESTMENTS Investments as of December 31, 2023 consisted of the following: Cost Basis Unrealized Losses Fair Value Corporate bonds $ 38,514 $ ( 481 ) $ 38,033 Government and agency obligations 12,998 ( 287 ) 12,711 Asset-backed securities 2,263 ( 32 ) 2,231 Total $ 53,775 $ ( 800 ) $ 52,975 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 material in the years ended December 31, 2023, 2022 and 2021. The cost and fair value of investments in debt securities, by contractual maturity, as of December 31, 2023 were as follows: Available-for-sale Amortized Cost Fair Value Due in 1 year or less $ 51,512 $ 50,744 Instruments not due at a single maturity date 2,263 2,231 Total $ 53,775 $ 52,975 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. 57 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: 2023 2022 Cost Accumulated Amortization Cost Accumulated Amortization Technology $ 46,470 $ 10,084 $ 46,470 $ 7,131 Patents 30,000 2,400 $ — $ — Total $ 76,470 $ 12,484 $ 46,470 $ 7,131 In May 2023, the Company acquired patents that are amortizable over an estimated useful life of five years , in a pattern reflecting the estimated economic benefit of the patents to the Company. See Note 10 – Commitments and Contingencies for further information on the patent acquisition. 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, 2021 resulting from the aMAZE clinical trial not achieving statistical superiority. Amortization expense of intangible assets was $ 5,353 , $ 3,653 and $ 2,907 for the years ended December 31, 2023, 2022 and 2021. The following table summarizes the allocation of amortization expense of intangible assets: 2023 2022 2021 Cost of revenues $ 2,400 $ — $ — Selling, general and administrative expenses 2,953 3,653 2,907 Total $ 5,353 $ 3,653 $ 2,907 Future amortization expense is projected as follows: 2024 $ 7,453 2025 8,353 2026 9,553 2027 10,453 2028 6,553 2029 and thereafter 21,621 Total $ 63,986 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, 2021 $ 234,781 Additions (Impairment) — Net carrying amount as of December 31, 2022 234,781 Additions (Impairment) — Net carrying amount as of December 31, 2023 $ 234,781 58 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) 5. INVENTORIES Inventories consisted of the following at December 31: 2023 2022 Raw materials $ 36,751 $ 19,880 Work in process 3,582 2,959 Finished goods 27,564 23,092 Inventories $ 67,897 $ 45,931 6. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31: 2023 2022 Buildings and improvements $ 29,193 $ 28,947 Generators 23,407 21,354 Machinery and office equipment 24,076 20,184 Computer equipment and software 9,845 10,251 Construction in progress 7,332 3,909 Land 1,006 1,006 Total 94,859 85,651 Less accumulated depreciation ( 52,424 ) ( 46,818 ) Property and equipment, net $ 42,435 $ 38,833 Property and equipment depreciation expense was $ 9,460 , $ 8,057 and $ 7,534 for the years ended December 31, 2023, 2022 and 2021. As of December 31, 2023 and 2022, the net carrying value of generators was $ 4,912 and $ 4,447 . 7. ACCRUED LIABILITIES Accrued liabilities consisted of the following at December 31: 2023 2022 Accrued compensation and employee-related expenses $ 39,425 $ 26,924 Other accrued liabilities 2,503 3,301 Sales returns and allowances 2,754 2,797 Total $ 44,682 $ 33,022 8. INDEBTEDNESS SVB Loan Agreement. As of December 31, 2023, the Company has a Loan and Security Agreement, as amended and modified effective February 8, 2021 and as further amended November 1, 2021 with Silicon Valley Bank (SVB) (SVB Loan Agreement). The SVB 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 SVB Loan Agreement has a five-year term, expiring November 2026. Principal payments under the SVB Loan Agreement are to be made ratably commencing 24 months after inception through the loan's maturity date. In November 2023, the Company exercised its option to extend the commencement of term loan principal payments for 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 SVB Loan Agreement, with $ 780 included in the outstanding loan balance as of December 31, 2023. Additionally, the unamortized financing costs related to the term loan of $ 187 are netted against the 59 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) outstanding loan balance in the Consolidated Balance Sheets and are amortized ratably over the term of the SVB 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 SVB Loan Agreement. 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. As of December 31, 2023, the Company had no borrowings under the revolving credit facility and had borrowing availability of approximately $ 28,750 . The SVB 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. New Credit Agreement. On January 5, 2024, the Company entered into an asset-based credit agreement (Credit Agreement) among the Borrowers, JPMorgan Chase Bank, N.A., as administrative agent, and JPMorgan Chase Bank, N.A., as bookrunner and lead arranger (JPMCB), and Silicon Valley Bank, a Division of First-Citizen Bank & Trust Company, as Joint Lead Arrangers and Joint Bookrunners, and the lenders party thereto (Lenders). The Credit Agreement provides for an asset based revolving credit facility (ABL Facility) in an amount of up to $ 125,000 . The Company may request an increase in the revolving commitment by up to $ 40,000 (not to exceed a total of $ 165,000 ). Borrowing availability under the ABL Facility is based on the lesser of $ 125,000 or a borrowing base calculation as defined by the Credit Agreement. A portion of the ABL Facility, limited to $ 5,000 , is available for the issuance of letters of credit by JPMCB or other financial institutions. JPMCB in its sole discretion, may create swingline loans by advancing floating rate revolving loans requested. Any such swingline loans will reduce availability under the ABL Facility on a dollar-for-dollar basis. The Credit Agreement has a three-year term, expiring January 5, 2027. The ABL facility is subject to a facility fee of 0.37 % per annum of the daily available revolving commitment and paid on a quarterly basis. Outstanding amounts under the Credit Agreement bear interest at a rate per annum equal to, at the Company's election: (i) an alternate base rate (ABR) plus an applicable margin or (ii) an adjusted term secured overnight financing rate (SOFR) plus an applicable margin. All swingline loans bear interest at a rate per annum equal to the ABR plus the applicable margin under the Credit Agreement. Alternate base rate is equal to the greatest of Prime, the NYFRB Rate plus 0.50 % and Adjusted Term SOFR Rate plus 1.00 %. The applicable margin on borrowings will adjust ranging 1.50 % to 1.75 % per annum for ABR borrowings and from 2.50 % to 2.75 % per annum for SOFR term borrowings determined by the average historical excess availability. Participation and fronting fees are accrued and paid on a quarterly basis. At time of closing, the Company borrowed $ 61,865 and had $ 61,885 of available borrowing capacity under the ABL facility. The proceeds of the ABL Facility were used to terminate the Company’s indebtedness under the SVB Loan Agreement. The SVB Loan Agreement terminated on January 5, 2024 and was treated as a debt extinguishment. Certain prepayment and early termination fees under the SVB Loan Agreement were waived at termination. The resulting loss on debt extinguishment in 2024 is not significant. As a result of the new Credit Agreement, borrowings outstanding under the existing SVB Loan Agreement have been classified as long-term in the Consolidated Balance Sheet as of December 31, 2023. Outstanding borrowings are due upon maturity of the Credit Agreement in January 5, 2027. Through January 2025, the Company's required minimum utilization of the ABL facility is 40 % of the aggregate revolving commitment or $ 50,000 . Subject to customary exceptions and restrictions, the Company may voluntarily prepay outstanding amounts under the ABL Facility at any time thereafter without premium or penalty. Any voluntary prepayments made will not reduce commitments under the ABL Facility. The Credit Agreement contains mandatory prepayment provisions which require prepayment of amounts outstanding under the ABL Facility upon specified events or shortfall. The ABL Facility is secured by the assets of the Company, whether consisting of personal, tangible or intangible property, including specified all of the outstanding equity interests of the Company’s direct subsidiaries, subject to limitations specified in the Credit Agreement. The Credit Agreement contains customary representations and warranties, events of default and financial, affirmative and negative covenants for facilities of this type, including but not limited to financial covenants relating to a fixed charge coverage ratio, a minimum liquidity requirement and a minimum excess availability requirement, and restrictions on indebtedness, liens, investments and acquisitions, asset dispositions, specified agreements, restricted payments and prepayment of certain indebtedness. 60 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) Future maturities of debt, after consideration of the new Credit Agreement on January 5, 2024, are projected as follows: 2024 $ — 2025 — 2026 — 2027 61,865 2028 — Total long-term debt, of which $ 0 is current and $ 61,865 is noncurrent $ 61,865 9. LEASES The Company has operating and finance leases for office, manufacturing and warehouse facilities and automobiles. The Company’s leases have remaining lease terms of one to nine 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: As of As of As of December 31, 2023 December 31, 2022 December 31, 2021 Operating Leases Weighted average remaining lease term (years) 4.8 4.4 3.6 Weighted average discount rate 5.75 % 4.60 % 4.69 % Finance Leases Weighted average remaining lease term (years) 6.7 7.6 8.6 Weighted average discount rate 6.93 % 6.92 % 6.91 % A letter of credit for $ 1,250 was issued to the lessor of the Company's corporate headquarters building at inception of the lease and is renewed annually and remains outstanding as of December 31, 2023. The components of lease expense are as follows: Year Ended Year Ended Year Ended December 31, 2023 December 31, 2022 December 31, 2021 Operating lease cost $ 1,284 $ 1,133 $ 1,052 Finance lease cost: Amortization of right-of-use assets 1,020 1,016 1,019 Interest on lease liabilities 673 735 792 Total finance lease cost $ 1,693 $ 1,751 $ 1,811 Short term lease expense was not significant for the twelve months ended December 31, 2023, 2022 and 2021. 61 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, 2023 December 31, 2022 December 31, 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 1,235 $ 845 $ 998 Operating cash flows for finance leases 673 735 620 Financing cash flows for finance leases 992 899 792 Right-of-use assets obtained in exchange for lease obligations: Operating Leases 1,509 — 3,752 Finance Leases — 62 — Supplemental balance sheet information related to leases was as follows: As of December 31, 2023 As of December 31, 2022 Operating Leases Operating lease right-of-use assets $ 4,324 $ 3,787 Other current liabilities and current maturities of debt and leases 1,447 1,147 Operating lease liabilities 3,307 3,095 Total operating lease liabilities $ 4,754 $ 4,242 Finance Leases Property and equipment, at cost $ 14,620 $ 14,645 Accumulated depreciation ( 8,105 ) ( 7,109 ) Property and equipment, net $ 6,515 $ 7,536 Other current liabilities and current maturities of debt and leases $ 1,086 $ 992 Finance lease liabilities 8,061 9,147 Total finance lease liabilities $ 9,147 $ 10,139 Maturities of lease liabilities as of December 31, 2023 were as follows: Operating Leases Finance Leases 2024 $ 1,449 $ 1,689 2025 1,188 1,638 2026 848 1,671 2027 842 1,703 2028 458 1,725 2029 and thereafter 767 3,099 Total payments $ 5,552 $ 11,525 Less imputed interest ( 798 ) ( 2,378 ) Total lease liabilities $ 4,754 $ 9,147 62 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 had been party to a license agreement that required 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. See Legal section below for additional information. Royalty expense was $ 1,333 , $ 3,264 and $ 3,124 for the years ended December 31, 2023, 2022 and 2021. 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 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, and that 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 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 required 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 twelve months ended December 31, 2023. During the first quarter of 2023, the Company entered into a legal settlement of $ 7,500 in connection with the settlement of claims filed against a competitor. The Company recorded a $ 7,500 gain for the twelve months ended December 31, 2023 for the proceeds received as a reduction to selling, general and administrative expenses. 63 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) 11. REVENUE The Company develops, manufactures and sells devices designed primarily for surgical ablation of cardiac tissue, exclusion of the left atrial appendage, and temporarily blocking pain by 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: 2023 2022 2021 Open ablation $ 105,287 $ 86,119 $ 72,396 Minimally invasive ablation 44,577 38,553 39,380 Pain management 49,199 39,974 22,787 Total ablation $ 199,063 $ 164,646 $ 134,563 Appendage management 134,481 112,555 94,568 Total United States $ 333,544 $ 277,201 $ 229,131 International revenue by product type is as follows: 2023 2022 2021 Open ablation $ 31,483 $ 26,809 $ 23,194 Minimally invasive ablation 6,670 5,986 6,409 Pain management 2,013 558 61 Total ablation $ 40,166 $ 33,353 $ 29,664 Appendage management 25,535 19,825 15,534 Total International $ 65,701 $ 53,178 $ 45,198 Revenue attributed to customer geographic locations is as follows: 2023 2022 2021 United States $ 333,544 $ 277,201 $ 229,131 Europe 38,469 30,428 27,931 Asia-Pacific 24,526 20,734 16,077 Other International 2,706 2,016 1,190 Total International 65,701 53,178 45,198 Total Revenue $ 399,245 $ 330,379 $ 274,329 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. 64 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: 2023 2022 2021 Current tax expense Federal $ — $ — $ — State 389 142 42 Foreign 217 118 125 Total current tax expense 606 260 167 Deferred tax expense Federal $ ( 2,972 ) $ ( 8,351 ) $ ( 30,925 ) State ( 928 ) ( 459 ) ( 4,803 ) Foreign ( 3,671 ) ( 1,636 ) ( 826 ) Change in valuation allowance 7,556 10,454 36,575 Total deferred tax expense ( 15 ) 8 21 Total tax expense $ 591 $ 268 $ 188 The detail of deferred tax assets and liabilities at December 31 is as follows: 2023 2022 Deferred tax assets: Net operating loss carryforwards $ 129,744 $ 138,263 Research and development credit carryforwards 15,171 13,205 Research and experimental expenditures 20,193 10,104 Equity compensation 10,599 8,287 Finance and operating lease liabilities 3,083 3,395 Deferred interest — 2,411 Inventories 2,822 1,896 Accruals and reserves 1,131 1,332 Property and equipment 219 ( 2,568 ) Total deferred tax assets 182,962 176,325 Deferred tax liabilities: Intangible assets ( 8,568 ) ( 9,278 ) Right-of-use assets ( 2,160 ) ( 2,626 ) Other ( 444 ) 506 Total deferred tax liabilities ( 11,172 ) ( 11,398 ) Valuation allowance ( 171,766 ) ( 164,918 ) Net deferred tax assets $ 24 $ 9 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 the Company 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 $ 276,866 which expire between 2024 and 2037 and $ 175,758 which have no expiration. The Company has state and local net operating loss carryforwards of $ 301,639 which expire between 2024 to 2043. 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 $ 15,171 which expire between 2024 and 2043. Additionally, the Company has foreign net operating loss carryforwards of approximately $ 75,355 which have no expiration. 65 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) The Company’s 2023, 2022 and 2021 effective income tax rates differ from the federal statutory rate as follows: 2023 2022 2021 Federal tax at statutory rate 21.0 % $ ( 6,268 ) 21.0 % $ ( 9,701 ) 21.0 % $ 10,580 Permanent differences ( 10.4 ) 3,092 ( 1.9 ) 876 ( 80.3 ) ( 40,439 ) Valuation allowance ( 25.3 ) 7,556 ( 22.6 ) 10,454 72.6 36,575 State income taxes 1.8 ( 539 ) 0.7 ( 317 ) ( 9.4 ) ( 4,760 ) Federal R&D credit 6.6 ( 1,966 ) 4.2 ( 1,936 ) ( 3.7 ) ( 1,878 ) Foreign income taxes 3.4 ( 1,012 ) ( 0.5 ) 215 0.7 344 Federal deferred adjustments 0.9 ( 272 ) ( 1.5 ) 677 ( 0.5 ) ( 234 ) Effective tax rate ( 2.0 ) % $ 591 ( 0.6 ) % $ 268 0.4 % $ 188 The Company’s pre-tax book (loss) income for domestic and international operations was $( 17,822 ) and $( 12,025 ) for 2023, $( 38,008 ) and $( 8,190 ) for 2022, and $ 55,666 and $( 5,279 ) for 2021. The Company had undistributed earnings of foreign subsidiaries of approximately $ 444 at December 31, 2023. 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 2020 are open for examination. Generally, state and foreign income tax returns for periods beginning in 2019 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 2023, 2022 and 2021 is presented below: 2023 2022 2021 Balance at the beginning of the year $ 1,762 $ 1,798 $ 1,798 Increases (decreases) for prior year tax positions ( 90 ) ( 36 ) — Increases (decreases) for current year tax positions — — — Increases (decreases) related to settlements — — — Decreases related to statute lapse — — — Balance at the end of the year $ 1,672 $ 1,762 $ 1,798 The balance of unrecognized tax benefits at December 31, 2023, 2022 and 2021 includes $ 1,672 , $ 1,762 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, 2023. 13. 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 years ended December 31, 2023 and 2022, the Company matched contributions of 50 % on the first 8 % of employee contributions to the 401(k) Plan. During the year ended December 31, 2021, the Company matched contributions of 50 % on the first 6 % of employee contributions to the 401(k) Plan. The Company’s matching contributions in 2023, 2022 and 2021 were $ 4,949 , $ 4,447 and $ 2,651 . 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 2023, 2022 or 2021. The Company also provides retirement benefits for 66 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) employees of its foreign subsidiaries. Total contributions to foreign retirement plans were $ 503 , $ 446 and $ 349 in 2023, 2022 and 2021. 14. 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 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 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 December 31, 2023, 2,287 shares of common stock had been reserved for issuance under the 2023 Plan and 2,238 shares were available for future grants. The Company issues registered shares of common stock for stock option exercises, restricted stock grants and performance award grants. The following table summarizes total share-based compensation expense related to employees, directors and consultants for 2023, 2022 and 2021. The expense was allocated as follows: 2023 2022 2021 Cost of revenue $ 1,817 $ 1,868 $ 2,243 Research and development expenses 5,802 4,544 4,206 Selling, general and administrative expenses 28,109 22,359 21,629 Total $ 35,728 $ 28,771 $ 28,078 Performance Share Awards. 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. 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 since 2021 have two weighted performance targets: (i) the Company’s compound annual growth rate (CAGR), a performance condition and (ii) relative total shareholder return (TSR), a market condition, both measured over the three-year performance period. 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 weighted performance targets. PSAs granted beginning in 2022 have payout opportunities ranging from 0 % to 300 % of the target amount. PSAs granted in 2022 are weighted 60 % on the CAGR performance target and 40 % on the TSR performance target. PSAs granted in 2023 are weighted 75 % on the CAGR performance target and 25 % 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. 67 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) PSA activity at target attainment under the plans during 2023 was as follows: Performance Share Awards Number of Shares Outstanding Weighted Average Grant Date Fair Value Outstanding at January 1, 2023 213 $ 90.70 Awarded 236 46.16 Vested ( 96 ) 89.36 Forfeited — — Outstanding at December 31, 2023 353 $ 61.09 During the year ended December 31, 2023, the 2021 PSAs with a TSR performance target vested at the target threshold, while 2021 PSAs with a CAGR performance target vested over the target threshold. An additional 43 shares were earned that are excluded from plan activity above. The total fair value of performance share awards vested during 2023, 2022 and 2021 was $ 4,955 , $ 5,185 and $ 8,165 . In determining compensation expense, the fair value of 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. 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: 2023 2022 2021 Stock price $ 38.81 $ 39.94 - $ 69.59 $ 66.31 Expected term (years) 2.8 2.6 to 2.8 2.8 Company volatility 44.80 % 43.50 - 46.90 % 42.10 % Market index average volatility 91.00 % 90.30 - 92.00 % 91.00 % Market index average correlation 32.20 % 33.50 - 35.40 % 31.50 % Risk-free interest rate 4.60 % 1.40 - 2.70 % 0.20 % Dividend yield 0.00 % 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 above, the weighted average estimated grant date fair value per share and expense was as follows: 2023 2022 2021 Weighted average estimated grant date fair value $ 46.16 $ 91.05 $ 89.36 Expense 11,417 8,731 8,095 As of December 31, 2023, $ 11,610 of unrecognized compensation costs related to non-vested performance share awards are expected to be recognized over a weighted-average period of 1.7 years. 68 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) Restricted Stock Awards and Units. 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. Activity under the plans during 2023 was as follows: Restricted Stock Awards RSA Shares Outstanding Weighted Average Grant Date Fair Value Outstanding at January 1, 2023 598 $ 60.00 Awarded 751 39.21 Released ( 338 ) 54.08 Forfeited ( 29 ) 50.25 Outstanding at December 31, 2023 982 $ 46.43 The total fair value of restricted stock vested during 2023, 2022 and 2021 was $ 13,824 , $ 23,242 and $ 40,510 . In determining compensation expense, the fair value of restricted stock awards and restricted stock units is based on the market value of the Company’s stock on the grant date of the awards. The weighted average estimated grant date fair value per share and expense was as follows: 2023 2022 2021 Weighted average estimated grant date fair value $ 39.21 $ 63.14 $ 67.51 Expense 21,797 17,621 17,746 As of December 31, 2023, $ 28,202 of unrecognized compensation costs related to non-vested performance share are expected to be recognized over a weighted-average period of 1.9 years. Stock Options. Stock options granted generally vest at a rate of 33.3 % on the first, second and third anniversaries of the grant date and expire ten years from the date of grant. Activity under the plans during 2023 was as follows: Time-Based Stock Options Number of Shares Outstanding Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at January 1, 2023 481 $ 29.34 Granted — — Exercised ( 137 ) 16.93 Forfeited ( 12 ) 64.93 Outstanding at December 31, 2023 332 $ 33.20 4.0 $ 3,584 Vested and expected to vest 332 $ 33.15 4.0 $ 3,584 Exercisable at December 31, 2023 308 $ 30.22 3.7 $ 3,584 The total intrinsic value of options exercised during the years ended December 31, 2023, 2022 and 2021 was $ 2,982 , $ 5,565 and $ 27,318 . 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 2023, 2022 and 2021, $ 2,316 , $ 1,816 and $ 8,175 in cash proceeds from the exercise of stock options were included in the Consolidated Statements of Cash Flows. The fair value of options is estimated on the grant date using the Black-Scholes model. No options were granted during 2023 or 2022. 69 Table of Contents ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) Options granted in 2021 included the following assumptions: 2021 Range of risk-free interest rate 0.43 - 1.22 % Range of expected life of stock options (years) 5.3 to 5.7 Range of expected volatility of stock 40.00 - 43.00 % Weighted-average volatility 41.84 % Dividend yield 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. Based on the assumptions noted above, the weighted average estimated grant date fair value per share and expense was as follows: 2023 2022 2021 Weighted average estimated grant date fair value $ — $ — $ 27.31 Expense 765 1,012 981 As of December 31, 2023, $ 287 of unrecognized compensation costs related to non-vested stock options are expected to be recognized over a weighted-average period of 0.5 years. 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 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, 2023, 782 shares are available for future issuance under the ESPP. ESPP expense was $ 1,749 , $ 1,407 and $ 1,256 for the years ended December 31, 2023, 2022 and 2021. 15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) In addition to net (loss) income, comprehensive (loss) income includes foreign currency translation adjustments and unrealized losses on investments. Accumulated other comprehensive income (loss) consisted of the following, net of tax: 2023 2022 2021 Total accumulated other comprehensive (loss) income at beginning of period $ ( 4,096 ) $ ( 948 ) $ 312 Unrealized (losses) gains on investments Balance at beginning of period $ ( 3,698 ) $ ( 887 ) $ 54 Other comprehensive income (loss) before reclassifications 2,898 ( 2,739 ) ( 941 ) Amounts reclassified from accumulated other comprehensive income (loss) to interest income — ( 72 ) — Balance at end of period $ ( 800 ) $ ( 3,698 ) $ ( 887 ) Foreign currency translation adjustment Balance at beginning of period $ ( 398 ) $ ( 61 ) $ 258 Other comprehensive income (loss) before reclassifications 154 ( 774 ) ( 768 ) Amounts reclassified from accumulated other comprehensive (loss) income to other (expense) income 51 437 449 Balance at end of period $ ( 193 ) $ ( 398 ) $ ( 61 ) Total accumulated other comprehensive loss at end of period $ ( 993 ) $ ( 4,096 ) $ ( 948 ) 70 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.