AtriCure
Annual Report 2015

Plain-text annual report

A T R I C U R E ® 2 0 1 5 A N N U A L R E P O R T 2015 ANNUAL R E P O R T JOINING FORCES IN THE FIGHT AGAINST AFIB DEAR SHAREHOLDERS, 2015 was an extraordinary year for AtriCure, steered by outstanding growth and operational execution across all areas of our business. Most importantly, our technologies and therapies continue to provide treatment to patients with the most serious forms of atrial fibrillation. During 2015, over 25,000 patients were treated and approximately 23,000 clips implanted. We are still just at the beginning of addressing a multi-billion dollar market. Our accomplishments in 2015 position us well to accelerate sales in 2016, ramp up our clinical trials and leverage the acquisitions of the past two years with new product launches. This year, we released the cryoFORM™ probe in the European Union and received an expanded indication on the CRYO2™ probe to include cryoanalgesia for pain management. With the acquisition of nContact augmenting our strong product and clinical pipeline, we are well positioned to continue delivering our portfolio of innovative solutions for atrial fibrillation to the market. From a financial perspective, we grew revenues over 20 percent [24 percent constant currency]. This growth was predominantly powered by our expanded U.S. team as we grew U.S. sales by over 27 percent. I am continually impressed with how well the team comes together and executes. The strength of AtriCure is our teamwork, patience, intimate knowledge of our customers, products and our commitment to clinical science. We have a truly incredible team across the board. We added 100 new AtriCure colleagues in 2015, closing the year at over 450 employees. To support this growth and enable more collaboration across our business and with our customers, we completed the build-out and move to our new facility in Mason, Ohio. nContact Acquisition In October 2015, we acquired nContact, a company with a portfolio of differentiated devices that provide less invasive ablation options. Its technology is used in the CONVERGENT™ procedure, a multi-disciplinary therapy in which a closed-chest epicardial ablation is performed by a surgeon, along with an endocardial catheter ablation performed by an electrophysiologist. We are continuing the CONVERGE™ IDE trial that nContact started to evaluate the use of its technology in these procedures as a sole therapy treatment for persistent Afib. We are also conducting the DEEP™ trial to evaluate a similar combined endocardial and epicardial approach using various AtriCure technologies. With nContact now part of AtriCure, we are striving to establish even more highly differentiated and successful clinical data. Over time, we hope to enable more surgeons and electrophysiologists to serve patients, expanding our targeted market further. We are excited and confident that the combination of the two companies will enhance our leadership position across the surgical ablation and epicardial left atrial appendage closure markets. Advancing and Growing Our Cryoablation Pipeline We made a lot of progress in our Cryo pipeline in 2015. At the beginning of the year, we rolled out our cryoanalgesia label and completed development of our FROST™ clinical trial protocol, a randomized study which will evaluate the effects of cryoanalgesia therapy for pain management in patients undergoing thoracotomy interventions. In September, we received CE Mark for the cryoFORM probe. The cryoFORM probe is pending 510(k) clearance in the United States. Reaching More Patients in More Countries We also continued to expand into new markets and further penetrate existing markets around the world. We have strengthened our leadership team in Europe and expanded the commercial organization to help drive growth. One example is in Germany where, in 2015, reimbursement was established for the sole therapy placement of AtriClip devices. Looking forward, we expect reimbursement in Japan for AtriClip products by the end of 2016 and for our cryosurgery products in 2017. We are very encouraged by the global developments for our business in 2015 and will continue to increase our presence in countries where demand is high and growth is likely to be significant. Advancing Clinical Opportunities We delivered excellent clinical progress in 2015. Our DEEP™ trial is up, running and building momentum. There are approximately 30 patients enrolled, and twelve sites have received IRB approval. In December, we began our CEASE AF™ trial to compare staged hybrid ablation treatment versus catheter ablation alone. There are already approximately three patients enrolled. With the acquisition of nContact, we also have the CONVERGE trial, adding to our investments in clinical science. We believe that all of our investments in prospective clinical trials will bolster our position as the leading innovator in our market, and we expect that, with the successful conclusion of these trials, we will be able to market our technologies and therapies to a dramatically expanded group of physicians and patients. Promoting Physician Education In 2015, we continued to make significant investments in physician training and education initiatives. During the year, we partnered with the American Association for Thoracic Surgery (AATS) Graham Foundation to initiate the inaugural Dr. James Cox Fellowship in Atrial Fibrillation Surgery. The multi-year commitment provides newly graduated cardiothoracic surgeons with a highly engaging educational experience at leading surgical Afib centers across the United States. We also set up advanced in-person training with Dr. Mark Groh, an expert in concomitant Afib treatment, as well as several others around the country. These opportunities provide physicians the occasion to get a better understanding of how to use AtriCure products safely and effectively in their practices. Looking Ahead… As we look forward to 2016, I am more excited and confident about our business than ever before. We are projecting 2016 revenue growth of approximately 25% over full year 2015 at current exchange rates. We also expect to continue significant and consistent improvement in profitability, with an eye towards adjusted EBITDA profitability in 2018. Our product pipeline is ramping up in 2016 with two new AtriClip products expected to launch by year end. On the clinical front, our ATLAS™ protocol is approved and ready for 2016 enrollment. By the end of the decade, our goal is to be the recognized leader in Afib and appendage management and to have improved the lives of more than 500,000 patients. We remain steadfast in our commitment to improve patient outcomes through continued investment in innovation, clinical science and education. We have a terrific team assembled here at AtriCure, and I am confident we will continue to advance the treatment of atrial fibrillation. I would like to once again thank my AtriCure colleagues for all that they accomplished in 2015, and I would like to thank you personally for your continued support. We look forward to sharing our successes with you. Sincerely, Michael H. Carrel President and Chief Executive Officer UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________________________ FORM 10-K _________________________________ x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2015 ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 000-51470 AtriCure, Inc. (Exact name of registrant as specified in its charter) _________________________________ Delaware State or other jurisdiction of incorporation or organization 7555 Innovation Way, Mason, OH (Address of principal executive offices) 34-1940305 (I.R.S. Employer Identification Number) 45040 (Zip Code) Registrant’s telephone number including area code: (513) 755-4100 Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Common Stock, $.001 Par Value Per Share Name of each exchange on which registered NASDAQ Global Market Securities Registered Pursuant to Section 12(g) of the Act: None _________________________________ Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer ¨ Accelerated Filer x Non-Accelerated Filer ¨ Smaller reporting company ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x The aggregate market value of the voting Common Stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on June 30, 2015, as reported on the NASDAQ Global Market, was $665.2 million. As of February 22, 2016 there were 32,272,648 shares of Common Stock, $.001 par value per share, outstanding. _________________________________ DOCUMENTS INCORPORATED BY REFERENCE Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K incorporate information by reference from the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K. TABLE OF CONTENTS PART I ITEM 1. ITEM 1A. ITEM 1B. ITEM 2. ITEM 3. ITEM 4. BUSINESS RISK FACTORS UNRESOLVED STAFF COMMENTS PROPERTIES LEGAL PROCEEDINGS MINE SAFETY DISCLOSURES PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ITEM 6. ITEM 7. SELECTED FINANCIAL DATA MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 7A. ITEM 8. ITEM 9. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND ITEM 9A. ITEM 9B. PART III FINANCIAL DISCLOSURE CONTROLS AND PROCEDURES OTHER INFORMATION ITEM 10. ITEM 11. ITEM 12. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE EXECUTIVE COMPENSATION SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ITEM 13. ITEM 14. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE PRINCIPAL ACCOUNTANT FEES AND SERVICES PART IV ITEM 15. SIGNATURES EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 1 1 14 29 29 29 29 30 30 32 33 41 42 71 71 73 73 73 73 73 73 73 74 74 76 PART I This Form 10-K, including the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” contains forward-looking statements regarding our future performance. All forward-looking information is inherently uncertain and actual results may differ materially from assumptions, estimates or expectations reflected or contained in the forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this Form 10-K. Forward-looking statements convey our current expectations or forecasts of future events. All statements contained in this Form 10-K other than statements of historical fact are forward-looking statements. Forward-looking statements include statements regarding our future financial position, business strategy, budgets, projected costs, plans and objectives of management for future operations. The words “may,” “continue,” “estimate,” “intend,” “plan,” “will,” “believe,” “project,” “expect,” “anticipate” and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. With respect to the forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These forward- looking statements speak only as of the date of this Form 10-K. Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. (Dollar amounts referenced in this Part 1 are in thousands.) ITEM 1. BUSINESS Overview We are a leading atrial fibrillation (Afib) solutions partner providing innovative products, professional education and support for clinical science to reduce the economic and social burden of atrial fibrillation. We have several product lines for the ablation of cardiac tissue, including our Isolator® Synergy Ablation System, the first and only surgical device approved by the United States Food and Drug Administration (FDA) for the treatment of persistent and longstanding persistent forms of Afib in patients undergoing certain open concomitant procedures. We also offer a variety of minimally invasive ablation devices and access tools to facilitate the growing trend in less invasive cardiac and thoracic surgery. Our cryoICE® cryosurgery product line offers a variety of cryoablation devices. Our AtriClip® Left Atrial Appendage Exclusion System is the most widely sold device worldwide specifically designed to occlude the heart’s left atrial appendage (LAA). We believe cardiothoracic surgeons are adopting our ablation and LAA management (LAAM) devices for the treatment of Afib and reduction of Afib-related complications such as stroke. Cardiothoracic surgeons have adopted our radiofrequency (RF) ablation and cryoablation systems to treat Afib in an estimated 195,000 patients since 2004, and we believe that we are currently the market leader in the surgical treatment of Afib. Our products are utilized by cardiothoracic surgeons during both open-heart and minimally invasive surgical procedures, either on a concomitant or sole-therapy basis. During a concomitant procedure, the surgeon ablates cardiac tissue and/or excludes the left atrial appendage, secondary, or concomitant, to a primary cardiac procedure such as a valve repair or replacement or coronary artery bypass graft (CABG). Our Isolator Synergy System, which includes our Isolator Synergy clamps, RF generator and related switchbox, is approved by FDA for the treatment of persistent and long-standing persistent Afib concomitant to other open-heart surgical procedures such as coronary artery bypass grafting and/or valve replacement or repair. To date, none of our other products have been approved by FDA specifically for the treatment of Afib. Our 510(k)-cleared RF and cryo ablation products are indicated for the ablation of cardiac tissue and/or treatment of cardiac arrhythmias. In addition, our cryoICE probe is cleared for blocking pain by temporarily ablating peripheral nerves. Our AtriClip products are 510(k)-cleared with an indication for occlusion of the LAA, under direct visualization, concomitant to other open cardiac surgical procedures. We recently acquired nContact Surgical, Inc. (nContact™), a leader in minimally invasive technology for epicardial ablation. We also have a line of reusable surgical instruments typically used for cardiac valve replacement or repair. We anticipate that substantially all of our revenue for the foreseeable future will relate to products we currently sell, or are in the process of developing, which surgeons use to ablate cardiac tissue, to exclude the left atrial appendage, to perform mitral and aortic valve replacement and repair and/or to ablate peripheral nerves during cardiothoracic surgery. Afib affects approximately 1% of the population in the United States. It is the most common cardiac arrhythmia, or irregular heartbeat, encountered in clinical practice and accounts for more doctor visits and hospital days than any other cardiac arrhythmia. When a patient is in Afib, abnormal electrical impulses cause the atria, or upper chambers of the heart, to fibrillate, or quiver, at rapid rates of 400 to 600 beats per minute. As a result, blood in the atria may become static, increasing the risk that a blood clot will form and cause a stroke or other serious complications. Symptoms of Afib may include heart palpitations, dizziness, fatigue and shortness of breath, and these symptoms may be debilitating and life threatening in some cases. Patients often progress from being in Afib intermittently to being in Afib continuously. Afib often occurs in conjunction with other cardiovascular diseases, including hypertension, congestive heart failure, left ventricular dysfunction, coronary artery disease and valvular disease. In the United States of America we sell our products to medical centers through our direct sales force. AtriCure Europe, B.V., our wholly-owned subsidiary incorporated and based in the Netherlands, markets and sells our products throughout Europe and the Middle East. In certain markets, such as Germany, France, the United Kingdom and the Benelux region, sales are made directly to medical centers, with the remaining sales being made through distributors. In other international markets we sell our products to 1 distributors who in turn sell them to end users. Our business is primarily transacted in U.S. Dollars with the exception of transactions with our European subsidiary which are transacted in Euros or British Pounds. AtriCure, Inc. was incorporated in the State of Delaware on October 31, 2000 in connection with a spin-off transaction from Enable Medical Corporation (Enable) in which shares of our common stock were distributed to Enable shareholders. The spin-off was intended to allow us to focus on the development of products designed to treat Afib and to raise capital for that purpose, while Enable continued its broader research and manufacturing activities. On August 5, 2005, we completed an initial public offering of our common stock. On August 10, 2005, we acquired Enable Medical Corporation, the manufacturer of our Isolator clamps, which are an essential part of our Isolator Synergy System. On December 31, 2013, we acquired Endoscopic Technologies, Inc. (Estech®), a medical device company focused primarily on RF ablation products used in cardiothoracic surgery. On October 13, 2015, we acquired nContact, a medical device company focused primarily on minimally invasive epicardial ablation products. We have two operating subsidiaries: (i) AtriCure Europe, B.V., a company incorporated under the laws of the Netherlands in December 2005 and (ii) AtriCure, LLC, a limited liability company organized under the laws of Delaware in October 2012. Market Overview Afib is the most commonly diagnosed sustained cardiac arrhythmia, and affects more than 30 million people worldwide, including more than five million in the United States. According to data from the Framingham Heart Study, a study originally undertaken by the National Heart Institute (now known as the National Heart, Lung and Blood Institute), it is estimated that the incidence of Afib doubles with each decade of an adult’s life. At age 40, remaining lifetime risk for Afib is 26% for men and 23% for women. Afib is an under-diagnosed condition due in large part to the fact that patients with Afib often have mild or no symptoms and their Afib is only diagnosed when they seek treatment for an associated condition, such as a stroke or heart disease. We believe that increasing awareness of Afib and improved diagnostic screening will result in an increased number of patients diagnosed with Afib. Also, since the prevalence of Afib increases with age, there will likely be an increase in the number of diagnosed Afib patients in the United States as the population ages. We believe that the same trends in the United States apply globally, as in many geographies incidence of Afib is increasing as the population ages. Afib is a condition that doctors often find difficult to treat and, historically, there has been no widely accepted long-term cure for Afib. This difficulty is exacerbated with more serious forms of Afib, which are typically classified as “persistent” and “long- standing persistent” Afib. Doctors typically begin treating Afib with drugs, which are often ineffective, not well-tolerated and may be associated with serious side effects, including the risk of bleeding. Patients who cannot effectively be treated with drugs may be candidates to undergo catheter-based procedures to treat their Afib. To perform a catheter ablation, an electrophysiologist inserts a flexible catheter into the inside of the heart, typically through the femoral vein. Catheter-based procedures, especially for more serious forms of Afib, are generally not indicated for patients with persistent or long-standing persistent Afib because they are often technically challenging and can be associated with serious complications. Multiple clinical studies have shown that catheter ablation for the more serious forms of Afib produces inconsistent results. Implantable devices, such as pacemakers and defibrillators, are sometimes used to reduce the frequency and symptoms of Afib although they are not designed to treat the underlying disease. In the past, an open-heart surgical procedure known as the “cut and sew Maze” was used to treat Afib, but this procedure has not been widely adopted because it is technically challenging, highly invasive and involves long recovery times. Of the patients undergoing open-heart surgery globally, we estimate that over 250,000 are potential candidates for surgical ablation using our products. Today, we estimate that approximately 25-30% of those candidates are being treated in one form or another, but many of these are not treated properly or fully. Of the population diagnosed with Afib, a large percentage of these patients are symptomatic and do not respond to drug therapy or are intolerant to the drugs used to treat Afib. Additionally, there is a large population of patients who have no other underlying cardiac disease but who suffer from serious forms of Afib. Many of these patients fail traditional therapies, and thus we believe could benefit from a minimally invasive or hybrid Afib treatment using our products. In addition, Afib is thought to be responsible for approximately 15% to 20% of the estimated 700,000 strokes that occur annually in the United States. According to the American Heart Association, the risk of stroke is five times higher in people with Afib. Approximately 35% of Afib patients will have a stroke in their lifetime, and Afib-related strokes tend to be severe. Studies suggest that 25% of people who have an Afib-related stroke die within the first thirty days following their stroke and more than 40% are permanently bedridden. Afib accounts for $6,700,000 in hospitalization-related costs in the United States each year and an estimated $5,000 in office visits annually. Indirect costs, such as the management of Afib-related strokes, are believed to be significant. Because of the risk of stroke, and the significant cost burden on the healthcare system, more and more surgeons are routinely addressing the LAA in procedures performed to treat Afib. In addition, current practice guidelines state that the LAA should be excluded or removed, when possible, during cardiac surgery in patients at risk of developing postoperative Afib. We believe that our AtriClip system is safer, more effective and easier to use than other products and techniques for excluding the LAA, and, because of this, we believe that the market for the AtriClip system is large and represents a significant growth opportunity. 2 The AtriCure Solution and Products Competing surgical and catheter-based ablation devices are not ideal for safely, rapidly and reliably creating lesions that completely and permanently block the abnormal electrical impulses that cause Afib, particularly for patients with more chronic forms of Afib or patients who have failed single or multiple catheter ablations. Our products, including our Isolator Synergy System, enable cardiac surgeons to mimic the cut and sew Maze procedure but with a faster, less invasive and less technically challenging approach. Our clinical studies for the use of our products to treat Afib are ongoing. Leading cardiothoracic surgeons and electrophysiologists, including those who serve or who have served as consultants to us, have published results of initial clinical studies utilizing our Isolator Synergy System. The results of these studies are promising in terms of efficacy, ease of use and safety. We have two primary product lines for cardiac tissue ablation and a product line for left atrial appendage exclusion: Product lines for cardiac tissue ablation: 1.) Radio Frequency Ablation Devices. Our Isolator Synergy System and related RF devices, such as our multifunctional pens, represent our primary product line and generate a substantial majority of our revenue. Physicians use the Isolator Synergy System and related RF devices in both open and minimally invasive procedures. These devices primarily consist of the following products: • • • • • • • • • • • Isolator Synergy and Isolator Synergy Access® Clamps. We sell multiple configurations of our Isolator Synergy clamps. One configuration is optimized for ablation during open-heart procedures and others for minimally invasive procedures. All of our clamps are single-use disposables and have jaws that close in a parallel fashion. The parallel closure compresses tissue and evacuates the blood and fluids from the energy pathway in order to make the ablation more effective. Isolator Synergy Ablation and Sensing Unit (ASU). The ASU is a compact generator that delivers bipolar radio frequency energy to our Isolator Synergy clamps, pens and the Coolrail® linear ablation device. We generally place our ASU with our direct customers and sell it to our distributors. AtriCure Switch Box (ASB). Our ASB is a compact switch box which provides the technology needed for the dual pulsing electrodes in our Isolator Synergy clamps as well as the ability to connect and toggle between our multiple RF devices. We generally place our ASB with our direct customers and sell it to our distributors. Isolator Multifunctional Pens. Isolator multifunctional pens are disposable RF devices that come in two configurations—one that makes linear ablations and one that makes spot ablations. The pens enable surgeons to evaluate cardiac arrhythmias, perform temporary cardiac pacing, sensing, and stimulation and ablate cardiac tissue with the same device. When the multifunctional pens are used with the ASB, surgeons are able to toggle back and forth between temporary pacing, sensing, stimulation and ablation. Surgeons generally use one or more of our pen devices in combination with Isolator Synergy clamps during both minimally invasive and open-heart procedures. Coolrail Linear Ablation Device. Our Coolrail linear ablation device is a disposable linear RF ablation device designed to allow physicians to create an expanded cardiac ablation lesion set during minimally invasive procedures. We believe physicians are using our Coolrail device during minimally invasive procedures in order to improve long-term results for patients who have non-paroxysmal forms of Afib. COBRA Fusion® Surgical Ablation System. The COBRA Fusion Surgical Ablation System’s Versapolar™ technology combines bipolar temperature-controlled radio frequency (TCRF) energy control with monopolar energy. The COBRA Fusion System also incorporates a unique suction design that draws tissue into the device to create consistent, full thickness lesions without arresting and opening the heart. Physicians use these devices in both open and minimally invasive procedures. Electrosurgical Unit (ESU). The ESU is a compact power generator for use with COBRA Fusion ablation products. We generally place our ESU with our direct customers and sell it to our distributors. AFfirm® Bipolar Pacing Probe. The AFfirm Bipolar Pacing Probe is used to test lesions created in surgically treating the patient’s arrhythmia. EPi-Sense® Guided Coagulation System with VisiTrax® Technology. The EPi-Sense Guided Coagulation System with VisiTrax technology is intended for the coagulation of cardiac tissue using RF energy using thoracoscopic, endoscopic and laparoscopic surgical techniques. It may be used for temporary cardiac signal sensing and recording during surgery when connected to an external recording device. Cannula. The minimally invasive SUBTLE® approach utilizes the Cannula as an access device and conduit for the ablation device and endoscope to enable a closed chest endoscopic approach. This allows surgeons direct visualization while ablating on the posterior of the heart. nContact RF Generator. The nContact RF generator is a compact power generator for use with EPi-Sense Guided Coagulation System with VisiTrax technology. We generally place the nContact RF generator with our direct customers and sell it to our distributors. 3 2.) cryoICE Cryoablation System. The cryoICE cryoablation system consists of the cryoICE BOX generator along with a range of cryoICE single use and reusable cryosurgery probes. The cryoICE cryoablation system is used to ablate cardiac tissue for the treatment of cardiac arrhythmias and to provide temporary pain relief to thoracic surgery patients via ablation of peripheral nerves. The probes come in a variety of configurations, with the primary difference being flexibility of the distal end of the probe. This flexibility provides for a variety of use cases covering both open and minimally invasive surgery. Product line for left atrial appendage management: AtriClip System. The AtriClip system is designed to exclude the left atrial appendage by mechanically clamping the appendage from the outside, eliminating blood flow between the left atrial appendage and the atrium while avoiding contact with circulating blood. We believe that the AtriClip system is potentially safer, more effective and easier to use than other available products and techniques for permanently excluding the left atrial appendage. The AtriClip portfolio includes a range of devices with different size clips, as well as different applier lengths and deployment features. These different configurations allow for a variety of uses covering both open and minimally invasive surgery. In addition to the above product lines we also sell enabling technologies including our Lumitip™ dissectors and the Estech line of reusable cardiac surgery instruments. The Lumitip dissector is used by surgeons to separate tissues to provide access to key anatomical structures that are targeted for ablation. The Estech cardiac surgery instruments are used during surgical procedures for repair or replacement of certain heart valves. Current Afib Treatment Alternatives Physicians usually begin treating Afib patients with a variety of drugs intended to prevent blood clots, control heart rate or restore the heart to normal sinus rhythm. If a patient’s Afib cannot be adequately controlled with drug therapy, doctors may perform one of several procedures that vary depending on the severity of the Afib symptoms and whether or not the patient suffers from other forms of heart disease. A 2014 report of the American College of Cardiology/American Heart Association Task Force on Practice Guidelines and the Heart Rhythm Society set forth guidelines for the management of patients with Afib. The guidelines state: • • An Afib surgical ablation procedure is reasonable for selected patients with Afib undergoing cardiac surgery for other indications; A stand-alone Afib surgical ablation procedure may be reasonable for selected patients with highly symptomatic Afib not well managed with other approaches. Treatment alternatives include: • • • Drugs. Pharmaceutical options called anti-arrhythmics are available to treat Afib. Depending on a patient’s severity of the disease and heart condition, physicians typically administer these medications in a hospital setting with continuous monitoring. If the patient goes back into a normal rhythm, the physician will often prescribe a similar anti-arrhythmic to try to prevent a recurrence of Afib. The effectiveness of drug therapy varies based on the patient population and the drug being prescribed, among other factors. Often times, pharmaceuticals to thin the blood (anti-coagulants) are prescribed due to the increased risk of stroke for patients who also have Afib. Implantable Devices. Implantable devices, such as defibrillators and pacemakers, can be effective in reducing the symptoms and frequency of Afib episodes, but neither device is intended to treat Afib. Patients may continue to experience the adverse effects of Afib as well as some of the symptoms and complications, including dizziness, fatigue, palpitations and stroke, because the Afib continues. Catheter Ablation. Catheter ablation is an ablation procedure that is typically performed by an electrophysiologist. The ablations are made from the inside of the heart using a flexible catheter. The heart is reached via a blood vessel, most commonly through the femoral vein. In proportion to the prevalence of Afib, only a small number of catheter-based Afib treatments are performed each year in the United States. With the exception of the Isolator Synergy System, which may be promoted according to its FDA-approved indication for patients with persistent and long-standing persistent Afib undergoing certain open-heart procedures, we do not promote our products specifically for Afib. Nevertheless, physicians have adopted our products for use in open-heart and minimally invasive procedures for the treatment of Afib. During elective open-heart surgical procedures, such as bypass or valve surgery, cardiothoracic surgeons use our ablation systems to treat patients with a pre-existing history of Afib. Surgeons report that ablation using our products generally adds approximately 20 to 30 minutes to an open-heart surgical procedure. Surgeons use our products to perform cardiac procedures that may vary depending on the length of time a patient has been diagnosed with Afib and whether the patient’s Afib is intermittent, known as paroxysmal, or more continuous (non-paroxysmal), which is typically further classified as persistent, long-standing persistent or permanent. Patients who have been diagnosed with Afib for a longer duration and have non-paroxysmal forms of Afib generally receive more extensive ablation procedures than patients who have been diagnosed with Afib for a shorter duration or who have paroxysmal Afib. Additionally, during an open-heart procedure, physicians may use our AtriClip system to exclude the left atrial appendage, which has been reported to add less than one minute to a procedure. 4 For those patients with Afib who do not require a concomitant open-heart surgical procedure, surgeons have used our Isolator clamps and related products for minimally invasive Afib treatment procedures. These procedures have generally been performed through minimally invasive incisions without the need to place patients on a heart-lung bypass machine. Surgeons have reported that the procedure takes approximately two to four hours and that the average hospitalization period has typically been two to five days. Similar to the open-heart surgical procedure, patients who have non-paroxysmal forms of Afib generally require an expanded lesion set that mimics the cut and sew Maze procedure. Our multifunctional pens are often used during these procedures to enable physicians to perform additional ablations. Physicians are performing an emerging minimally invasive stand-alone, staged procedure which combines epicardial (surgical) ablation (ablation on the outside of the heart) with endocardial ablation and mapping techniques (from the inside of the heart). This procedure involves having the epicardial procedure performed on the first day of hospitalization and the catheter ablation and mapping performed at a later time. Physicians are reporting that they are performing this procedure, also known as a hybrid procedure, utilizing certain of our products to primarily treat patients who have non-paroxysmal forms of Afib. Business Strategy Our mission is to expand the treatment options for patients who suffer from Afib or have a high risk of stroke through the continued development of our technologies and expansion of our product offerings. The key elements of our strategy include: New Product Innovation. Our product development pipeline includes projects which extend and improve our existing products, as well as research and development projects for new technologies. We plan to continue to develop new and innovative products, including those that allow us to enter new market opportunities or expand our growth in existing markets. Our product development and growth plans include continued innovation to expand on both new and existing market opportunities through either leveraging our existing product platform or developing entirely new products to serve new markets. Invest in Clinical Trials. We continue to invest in landmark clinical trials to validate the long term results of procedures using our products and to support applications to regulatory agencies for expanded indications. Provide Training and Education. We have recruited and trained sales and education professionals who have strong backgrounds in the medical device industry to effectively communicate to doctors the unique features and benefits of our technologies as they relate to their indications for use. Our highly trained sales and education professionals meet with doctors at leading institutions around the world to provide education and technical training on the features and benefits of our products. With the approval of our Isolator Synergy System for the treatment of non-paroxysmal Afib, we instituted a program to train providers on the use of the Isolator Synergy System to treat persistent Afib in patients undergoing open-heart surgery. We believe this training and education program has increased and will continue to increase awareness about the surgical treatment of Afib during open-heart procedures. We also provide medical information on our products in response to information requests from physicians, and we have provided educational grants to institutions that have facilitated the education of doctors concerning the treatment of Afib, including the use of our products as an Afib treatment alternative. As a result of the educational process, we believe that awareness of our technologies is growing and will result in the increased use of our products. Expand International Markets and Enter into New Markets. Sales to international customers represented 21% of our total revenue for 2015. Many of the international markets in which we do business are underpenetrated markets which present high growth opportunities for our products. Further, we plan to continue to evaluate expansion opportunities in new geographic markets and capitalize on new product introductions. Engage with Key Opinion Leaders. We have formed consulting relationships with cardiothoracic surgeons who work with us to evaluate and develop our products. Additionally, we have formed advisory boards made up of key opinion leaders (KOLs) in cardiac surgery and other specialties to oversee our surgical training and clinical programs. We are also building relationships with physicians in other specialties, including electrophysiology, interventional cardiology and general thoracic surgery who are involved in the treatment of patients with Afib and thus will provide insight regarding treatment trends, input on future product direction and education for other specialties involved in treating the disease. Leverage Product Portfolio, Labeling and Cross-Selling Opportunities. We believe we have the most comprehensive offering of cardiac ablation and left atrial appendage exclusion products in the market. We plan to leverage our leading product portfolio to facilitate cross-selling of our products as well as to drive market share gains through competitive account conversions. Expand Adoption of Our Minimally Invasive Products. We believe that the catalysts for expanded adoption of our minimally invasive products include procedural advancements, such as the hybrid procedure, and the publication of peer-reviewed articles, which we believe will help validate the successful, long-term use of our products for patients with Afib. We believe that ongoing research activities, including clinical trials, new procedural techniques and anticipated presentations and publications will create an increased demand for our minimally invasive products. 5 Evaluate Acquisition Opportunities. In the past two years, we have acquired two companies that we believe further expand our ability to establish a platform for long-term revenue growth. We expect to continue to be opportunistic with respect to acquisitions where it makes strategic and financial sense. Clinical Trials The December 2011 FDA approval of our Isolator Synergy System included the requirement to implement a 350-patient post- approval study (PAS). The PAS was designed to evaluate the long-term safety and efficacy of our Isolator Synergy System in the treatment of persistent and long-standing persistent Afib in patients undergoing open-heart procedures. Enrollment in the trial was completed in October 2014 with 365 patients at 40 medical centers. We expect to release preliminary data from the study in early 2016, with a complete report expected to be published in 2017. We conducted the Dual Epicardial Endocardial Persistent Atrial Fibrillation (Staged DEEP AF) Feasibility clinical trial to evaluate use of the Isolator Synergy System for the treatment of Afib in a two-part procedure where a minimally invasive surgical ablation procedure is performed first, and an intracardiac catheter mapping and ablation procedure is then performed on a different day during the same hospitalization. Enrollment in the Staged DEEP AF Feasibility trial was completed during the fourth quarter of 2013, with 30 patients enrolled at six medical centers. We submitted an Investigational Device Exemption (IDE) application for the Staged DEEP AF pivotal trial to FDA in May 2014. The Staged DEEP AF pivotal trial evaluates the safety and efficacy of the Isolator Synergy System when used in a staged approach, where a minimally invasive surgical ablation procedure is first performed, and the patient undergoes the intracardiac catheter procedure approximately 90-120 days later. FDA approval to enroll up to 220 subjects at 23 domestic medical centers and two international medical centers was received during the third quarter of 2014. Enrollment began during the first quarter of 2015, and there are currently 30 patients enrolled and twelve sites initiated. We also conducted a Stroke Feasibility clinical trial with the AtriClip System. The trial evaluates the initial procedural safety and efficacy of the AtriClip System for stroke prophylaxis (prevention of stroke) in patients with non-valvular Afib in whom long term oral anticoagulation therapy is medically contraindicated. We had approval to enroll up to 30 patients at seven medical centers during the course of the trial. Enrollment began in the first quarter of 2014 and involved twelve patients. A Pre-Submission Meeting was held with FDA during the first quarter of 2015 to discuss the early termination of enrollment in the Stroke Feasibility clinical trial and proceeding to the pivotal trial. FDA has approved the termination of the feasibility study at twelve enrolled subjects. The pivotal trial design is under discussion with FDA. We are in the beginning stages of our ATLAS study, which is a non-IDE randomized pilot study evaluating outcomes of patients with risk factors for developing postoperative Afib as well as risk of bleeding on oral anticoagulation. There are two types of patients subject to this study: those receiving prophylactic exclusion of the left atrial appendage with the AtriClip device concomitant to cardiac surgery and those with a postoperative Afib diagnosis who are medically managed. At full capacity, we expect to enroll approximately 2,000 patients at up to twenty sites. We began enrollment in February 2016, and there is currently one patient enrolled and two sites initiated. We are in the beginning stages of our cryoanalgesia study (FROST), which is a non-IDE randomized pilot study evaluating whether intraoperative intercostal cryoanalgesia in conjunction with standard of care provides improved analgesic efficacy in patients undergoing unilateral thoracotomy cardiac procedures as compared to current standard of care. The study will involve treatment arm subjects who will receive intercostal cryoanalgesia in conjunction with standard post-operative pain management and control arm subjects who will receive standard post-operative pain management only. At full capacity, we expect to enroll 100 patients at up to five sites. We have initiated one site and expect to begin enrollment in the first quarter of 2016. We are also pursuing a non-IDE trial in Europe, CEASE AF, to compare staged hybrid ablation treatment (minimally invasive surgical ablation procedure is first performed and the patient undergoes the intracardiac catheter procedure approximately 91-180 days later) versus catheter ablation alone. We expect the study to have an enrollment of approximately 210 patients across ten sites. There are currently three patients enrolled and six sites initiated. With the acquisition of nContact, we are conducting the CONVERGE IDE clinical trial. The CONVERGE pivotal trial evaluates the safety and efficacy of the nContact EPi-Sense Guided Coagulation System with VisiTrax technology to treat symptomatic persistent Afib patients who are refractory or intolerant to at least one Class I and/or III anti-arrhythmic drug. We have FDA approval to enroll up to 153 subjects at fifteen domestic medical centers and two international medical centers. Enrollment began during the first quarter of 2014, and there are currently 39 patients enrolled and thirteen domestic sites initiated. Sales, Marketing and Medical Education Our global sales and marketing efforts focus on educating doctors about our unique technologies and their technical benefits. We only promote our products for uses described in their regulatory agency approved or cleared labeling. We train our sales force on the use of our products to treat Afib to the extent the products are cleared for the treatment of Afib. 6 Our sales team in the United States has approximately 112 employees supporting approximately 53 sales territories. We select our sales personnel based on their expertise, sales experience and reputation in the medical device industry, and their knowledge of cardiac surgery procedures and technologies. We market and sell our products in selected markets outside of the United States through independent distributors and through our European subsidiary which includes a combination of independent distributors and direct sales personnel. During 2015 and 2014 sales to customers outside of the United States accounted for 21% and 25% of our total revenue, respectively. We have a network of distributors outside of the United States who market and sell our products. They are located primarily in Europe, Asia, South America and Canada. Our international sales team includes sales representatives who sell to customers in markets we sell directly to, such as Germany, France, the United Kingdom and the Benelux region. We continue to evaluate opportunities for further expansion into markets outside of the United States. Competition Our industry is competitive, subject to change and significantly affected by new product introductions and other activities of industry participants. Many of our competitors have significantly greater financial and human resources than we do and have established reputations with our target customers, as well as worldwide distribution channels that are more established and developed than ours. Our primary competitor is Medtronic, plc. We and our competitors provide products that have been adopted by doctors for the treatment of Afib and related conditions. Several of our competitors offer intracardiac catheter devices that are commonly used by electrophysiologists to treat Afib. Some of these catheter devices are FDA-approved to treat the paroxysmal form of Afib, but they are not FDA-approved to treat persistent or long-standing persistent Afib. AtriCure’s Isolator Synergy System is the only medical device FDA approved to treat Afib in a surgical setting, and the only medical device approved to treat persistent or long-standing persistent Afib in any form. We believe that our products compare favorably against competing products that are commonly used for the surgical treatment of Afib during both open-heart and sole-therapy minimally invasive procedures, although we cannot assume that we will be able to continue to do so in the future or that new devices that perform better than our products will not be introduced. We also believe that our products compare favorably to intracardiac catheter devices when used to treat non-paroxysmal forms of Afib. Further, we believe our AtriClip system is superior to all other medical devices indicated for exclusion of the left atrial appendage. Due to the size of the Afib and left atrial appendage exclusion markets, and the unmet need for an Afib cure, competitors have dedicated and will continue to dedicate significant resources to develop and market their products. New product developments that could compete with us more effectively are likely because the Afib treatment and left atrial appendage exclusion markets are characterized by extensive research efforts and technological progress. Existing or new competitors may develop technologies and products that are safer, more effective, easier to use or less expensive than our products. To compete effectively, we have to demonstrate that our products are an attractive alternative to other treatments by differentiating our products on the basis of safety, efficacy, performance, ease of use, reputation, service and price. We have encountered and expect to continue to encounter potential customers who prefer products offered by our competitors. Competitive pressures may result in price reductions and reduced gross profit margins for our products over time. Technological advances may render our products obsolete or uneconomical. Third-Party Reimbursement Payment for patient care in the United States is generally made by third-party payors. These payors include private insurers and government insurance programs, such as Medicare and Medicaid. The Medicare program, the largest single payor in the United States, is a federal health benefit program administered by the Centers for Medicare and Medicaid Services (CMS), and covers certain medical care items and services for eligible beneficiaries, such as individuals over 65 years old, as well as chronically disabled individuals. Reimbursement under Part A of the Medicare program includes hospitals and other institutional services, while Medicare Part B covers physician services. Because Medicare beneficiaries comprise a large percentage of the populations for which our products are used, and private insurers may follow the coverage and payment policies for Medicare, Medicare’s coding, coverage and payment policies for cardiothoracic surgical procedures are significant to our business. Medicare’s Part A program pays hospitals for inpatient services, such as cardiothoracic surgery, under the Inpatient Prospective Payment System (IPPS), which provides a predetermined payment based on the patient’s discharge diagnoses and surgical procedure(s). Discharge diagnoses are grouped into Medicare Severity Diagnosis Related Groupings (MS-DRG). There are several cardiac surgery MS-DRGs associated with the surgical treatment of Afib, with and without a concomitant open-heart procedure. When an ablation device and/or LAA exclusion device is used during a concomitant open-heart procedure, Medicare’s hospital reimbursement is based upon the patient’s primary surgical procedure. Reimbursement for sole-therapy minimally invasive Afib ablation treatment is also influenced by the patient’s severity of illness. We believe hospital reimbursement rates for sole therapy and concomitant therapy cardiac surgical tissue ablation are adequate to cover the cost of our products. Medicare’s coding, coverage, and payment policies are subject to change. As a result, the continuance of current coverage, coding or payment determinations cannot be guaranteed, and any change may have an adverse impact on our business. 7 Doctors are reimbursed for their services separately under the Medicare Part B physician fee schedule. When surgically performing a cardiac ablation with and without a concomitant open-heart procedure, surgeons report Current Procedural Terminology (CPT) codes to receive a professional fee. Surgeons have a choice of CPT codes to report sole-therapy and concomitant therapy cardiac tissue ablation. At this time, there are no CPT codes for the physician to report surgical exclusion of the left atrial appendage. In addition to the Medicare program, many private payors look to CMS policies as a guideline in setting their coverage policies and payment amounts. The current coverage policies of these private payors may differ from the Medicare program, and payment rates may be higher, lower, or the same as the Medicare program. If CMS or other agencies decrease or limit reimbursement payments to doctors and hospitals, this may negatively impact our business. Additionally, some private payors do not follow the Medicare guidelines and those payors may reimburse only a portion of the cost of cardiac ablation, or not at all. Physicians, in combination with their professional organizations and societies, are responding and working to secure reimbursement for the procedure to the extent the payor has denied reimbursement. FDA does not regulate the practice of medicine. Doctors may use our products in circumstances where they deem it medically appropriate, such as for the treatment of Afib or the reduction in stroke risk, even though FDA may not have approved or cleared our products to be marketed specifically for those indications. Some payors may deem the use of our products for indications not specifically approved or cleared by FDA to be experimental and, as such, may deny coverage or payment. Often times, these denials can be overcome through an appeals process, but there is no guarantee of success in these cases. Outside of the United States, third-party reimbursement varies widely by geography and by the type of therapy in which our devices are used. For example, even though a new medical device may have been approved for commercial distribution, we may find limited demand for the device until coverage and sufficient reimbursement levels have been obtained from governmental and private third-party payers. In addition, some private third-party payers require that certain procedures or the use of certain products be authorized in advance as a condition of reimbursement. In certain markets outside of the United States, cost containment initiatives and health care reforms include initiatives like governmental reviews of reimbursement rate benchmarks, which may significantly reduce reimbursement for procedures using our medical devices or deny coverage for those procedures. We are actively working to pursue market access initiatives in certain geographies, which includes applying for new reimbursement for therapies in which our devices are being used. Government Regulation Our products are medical devices and are subject to regulation in the United States by FDA and other federal agencies, and by comparable authorities in other countries. All of our products marketed in the United States have been cleared by FDA pursuant to section 510(k) of the Food, Drug & Cosmetic Act (FDCA). In addition, our Isolator Synergy System received Pre-Market Approval from FDA in December 2011 for the treatment of patients with persistent and long-standing persistent Afib concomitant to another open-heart surgical procedure such as coronary artery bypass grafting (CABG) or cardiac valve replacement or repair. The Isolator Synergy System was previously 510(k) cleared for the ablation of cardiac tissue, and continues to be marketed in the United States under both the 510(k) clearance and premarket approval (PMA). Our RF clamps have 510(k) clearance for the ablation of cardiac tissue. Our multifunctional pen and multifunctional linear pen have 510(k) clearance for temporary pacing, sensing, stimulating and recording during the evaluation of cardiac arrhythmias, and for the ablation of cardiac tissue. Our cryoablation products have 510(k) clearance for the treatment of cardiac arrhythmias. Our CRYO2 probes received an additional 510(k) clearance in December 2014 for blocking pain by temporarily ablating peripheral nerves. The Lumitip dissector is 510(k) cleared for use in the dissection of soft tissues during general, ear, nose and throat, thoracic, urological and gynecological surgical procedures. The AtriClip system is 510(k) cleared for occlusion of the left atrial appendage under direct visualization in conjunction with other open cardiac surgical procedures. The COBRA Fusion Ablation System is 510(k) cleared to ablate cardiac tissue and for temporary cardiac pacing, sensing, recording and stimulation during the evaluation of cardiac arrhythmias. The AFfirm Bipolar Pacing Probe is 510(k) cleared to provide transient cardiac pacing or recording for the assessment of electrical isolation/conduction block of ablation lesions in the surgical treatment of arrhythmias. The EPi-Sense Guided Coagulation System with VisiTrax technology has 510(k) clearance for coagulation of cardiac tissue using RF energy using thoracoscopic, endoscopic, and laparoscopic surgical techniques, and temporary cardiac signal sensing and recording during surgery when connected to an external recording device. FDA regulations govern nearly all of the activities that we perform, or that are performed on our behalf, to ensure that medical products distributed domestically or exported internationally are safe and effective for their intended uses. The activities that FDA regulates include the following: • • • • • • product design, development and manufacture; product safety, testing, labeling and storage; pre-clinical testing in animals and in the laboratory; clinical investigations in humans; premarketing clearance or approval; record keeping and document retention procedures; 8 • • • • • advertising and promotion; the import and export of products; product marketing, sales and distribution; post-marketing surveillance and medical device reporting, including reporting of deaths, serious injuries, device malfunctions or other adverse events; and corrective actions, removals and recalls. FDA’s Premarket Clearance and Approval Requirements. Unless an exemption applies, most medical devices distributed commercially in the United States will require either 510(k) clearance or PMA from FDA. Other premarket pathways, such as the humanitarian device exemption (HDE) or a request for classification under section 513(a)(1) of the FDCA, commonly known as a de novo request, are also available in certain situations. Medical devices are classified into one of three classes—Class I, Class II, or Class III—depending on the degree of risk and the level of control necessary to assure the safety and effectiveness of each medical device. Devices deemed to pose lower risks are placed in either Class I or II. While most Class I devices are exempt from the requirement to submit a 510(k) notification requesting clearance to commercially distribute the device, most Class II devices are subject to the 510(k) premarket notification process. Devices deemed by FDA to pose the greatest risk, such as life-sustaining, life- supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device or predicate device, are generally placed in Class III, requiring submission of a PMA supported by clinical trial data. 510(k) Clearance Pathway. When 510(k) clearance is required, we must submit a notification to FDA demonstrating that our proposed device is substantially equivalent to a predicate device, i.e., a previously cleared and legally marketed 510(k) device or a device that was in commercial distribution before May 28, 1976 for which FDA has not yet called for the submission of a PMA. FDA is required to respond to a 510(k) notification within 90 days of submission, but the response may be a request for additional information or data, including clinical data. As a practical matter, 510(k) clearance often takes significantly longer than 90 days and may take up to a year or more. If FDA determines that the device, or its intended use, is not substantially equivalent to a previously cleared device or use, the device is automatically placed into Class III, requiring the submission of a PMA. Any modification to a 510(k)-cleared device that would constitute a major change in its intended use, design or manufacture, requires a new 510(k) clearance or, possibly, in connection with safety and effectiveness, approval of a PMA. FDA requires every manufacturer to make the determination regarding a new 510(k) submission in the first instance, but FDA may review any manufacturer’s decision. We have made modifications to elements of our products which we believe did not require us to seek additional 510(k) clearance. Premarket Approval Pathway. A PMA must be submitted to FDA if the device cannot be cleared through the 510(k) process and is not otherwise exempt. A PMA must be supported by extensive data, including but not limited to technical, preclinical, clinical, manufacturing and labeling, to demonstrate the safety and effectiveness of the device for its intended use. After a PMA is submitted and FDA has determined that the application is sufficiently complete to permit a substantive review, FDA will accept the application for filing. FDA has 180 days to review an “accepted” PMA, although the review of an application generally occurs over a significantly longer period of time and can take up to several years. During this review period, FDA may request additional information or clarification of the information already provided. Also, an advisory panel of experts from outside FDA may be convened to review and evaluate the application and provide recommendations to FDA as to the approvability of the device. In addition, FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with quality system regulations. Any approvals we receive may be limited in scope or may be contingent upon further post-approval study commitments or other conditions. New PMAs or PMA supplements are required for significant modification to the device, including indicated use, manufacturing process, labeling and design of a device that is approved through the premarket approval process. PMA supplements often require submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel. Clinical Trials. Clinical trials are required to support a PMA and are sometimes required for 510(k) clearance. In the United States, clinical trials for a significant risk device require the prior submission of an application for an IDE to FDA for approval. An IDE application must be submitted before initiating a new clinical study. Some trials require a feasibility study followed by a pivotal trial. An IDE supplement is utilized as a means of obtaining approval to initiate a pivotal trial following the conclusion of a feasibility trial. IDE applications must be supported by appropriate data, such as animal and laboratory testing results, and any available data on human clinical experience, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The animal and laboratory testing must meet FDA’s good laboratory practice requirements. The IDE and any IDE supplement for a new trial must be approved in advance by FDA. Clinical trials for significant risk devices may not begin until the IDE application is approved by FDA and each center’s Institutional Review Board (IRB) overseeing the welfare of the research subjects and responsible for that particular clinical trial. If the product is considered a non-significant risk device under FDA regulations, only the center’s IRB approval is required. Under its regulations, the agency responds to an IDE application (amendment or supplement) for a new trial within 30 days. FDA may approve the IDE unconditionally, grant an approval with certain conditions, or identify deficiencies that must be addressed prior to the approval of the study. It is common for FDA to 9 require additional information before approving an IDE, and thus final FDA approval on a submission commonly extends beyond the initial 30 days. FDA may also require that a small-scale feasibility study be conducted before a pivotal trial may commence. In a feasibility trial, FDA limits the number of patients and centers that may participate. Feasibility trials are typically structured to obtain information on safety and to evaluate the clinical efficacy to determine the number of subjects required to demonstrate statistical significance in a pivotal trial. Clinical trials are subject to extensive recordkeeping and reporting requirements. Our clinical trials must be conducted under the oversight of an IRB for the relevant clinical trial sites and must comply with FDA regulations, including, but not limited to, those relating to current good clinical practices. We are also required to obtain the written informed consent of patients in form and substance that complies with both FDA requirements and state and federal privacy and human subject protection regulations. We, FDA or the IRB may suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA approval to market the product in the United States. Similarly, in Europe, the clinical study must be approved by a local ethics committee and, in some cases, including studies with high-risk devices, by the ministry of health in the applicable country. Educational Grants. FDA regulates manufacturers of medical devices and, in particular, the promotion of medical devices by manufacturers. FDA does not regulate the practice of medicine or the conduct or content of medical education conducted by third parties. Manufacturers may provide financial support for such third-party medical education programs in the form of educational grants intended to offset the cost of such programs. If the manufacturer controls or unduly influences the content of such programs, FDA considers those programs to be promotional activities by the manufacturer and thus subject to FDA regulation including promotional restrictions. FDA considers several factors in determining whether an educational event or activity is independent from the substantive influence of the device manufacturer, including, but not necessarily limited to, the following: • • • • • whether the intent of the funded activity is to present clearly defined educational content, free from commercial influence or bias; whether the third-party grant recipient and not the manufacturer has maintained control over selecting the faculty, speakers, audience, activity content and materials; whether the program focuses on a single product of the manufacturer without a discussion of other relevant existing competitive products or treatment options; whether there was meaningful disclosure to the audience, at the time of the program, regarding the manufacturer’s funding of the program, any significant relationships between the provider, presenters, or speakers and the supporting manufacturer and whether any unapproved uses will be discussed; and whether there are legal, business, or other relationships between the supporting manufacturer and the provider or its employees that could permit the supporting manufacturer to exert influence over the content of the program. We seek to ensure that the activities we support pursuant to our educational grants program are in accordance with these criteria for independent educational activities. However, we cannot provide an assurance that FDA or other government authorities would view the programs we have supported as being independent. Pervasive and Continuing Regulation. There are numerous regulatory requirements that apply after a product is cleared or approved. These include: • • • • • • • FDA’s Quality System Regulation (QSR) which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process; labeling regulations and FDA prohibitions against the false or misleading promotion or the promotion of products for uncleared, unapproved or off-label use or indication; requirements to obtain clearance or approval of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use; medical device reporting regulations which require that manufacturers comply with reporting requirements of FDA and report if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur; post-approval restrictions or conditions, including post-approval study commitments; post-market surveillance regulations which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device; and requirements to issue notices of correction or removal, or conduct market withdrawals or recalls where quality or other issues arise. 10 Under FDA’s MedWatch regulation, we must submit a Medical Device Report (MDR) to FDA within 30 days whenever we receive information that reasonably suggests that one of our products may have caused or contributed to a death or serious injury, or that one of our products malfunctioned in a manner which, if the malfunction were to recur, could cause or contribute to a death or serious injury. Our products are often used to treat very ill patients in highly complex surgeries, only a small portion of which may involve our products, and it is frequently difficult to determine whether our products caused or contributed to a patient injury or death that occurred during or after the procedure. If we are unable to determine whether our product caused or contributed to a death or serious injury in the particular case, or that a malfunction of the type reported would not cause death or serious injury, we submit an MDR on the case. Other incidents, including serious injuries or deaths, which occurred during procedures utilizing our products and that are not the subject of MDRs, may occur either because we are not aware of those incidents or because our investigation determined that the incident did not involve a malfunction of an AtriCure device and/or that an AtriCure device did not cause or contribute to a serious injury or death. In addition to FDA regulation, the advertising and promotion of medical devices are also regulated by the Federal Trade Commission and by state regulatory and enforcement authorities. Recently, some promotional activities for FDA-regulated products have been the subject of enforcement action brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the Federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. We have registered with FDA as a medical device manufacturer and listed our devices. FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by FDA and our Notified Body to determine our compliance with the QSR, the European Union’s Medical Device Directive (MDD) and other regulations, and these inspections may include the manufacturing facilities of our suppliers. Failure by us or by our suppliers to comply with applicable regulatory requirements can result in enforcement action by FDA or other federal or state authorities, which may include any of the following sanctions, among others: • • • • • • • warning letters, fines, injunctions, consent decrees and civil penalties; customer notifications, repair, replacement, refunds, recall or seizure of our products; operating restrictions, partial suspension or total shutdown of production; suspension or termination of our clinical trials; refusing our requests for 510(k) clearance or premarket approval of new products, new intended uses or modifications to existing products; withdrawing 510(k) clearance or premarket approvals that have already been granted; and criminal prosecution. Fraud, Abuse and False Claims. We are directly and indirectly subject to various federal and state laws governing our relationship with healthcare providers and pertaining to healthcare fraud and abuse, including anti-kickback laws. In particular, the federal healthcare program Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for or recommending a good or service for which payment may be made in whole or part under federal healthcare programs, such as the Medicare and Medicaid programs. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. In implementing the statute, the Office of Inspector General of the U.S. Department of Health and Human Services (OIG) has issued a series of regulations, known as the “safe harbors.” These safe harbors set forth provisions that, if all their applicable requirements are met, will assure healthcare providers and other parties that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable element of a safe harbor may result in increased scrutiny by government enforcement authorities, such as the OIG. The Federal False Claims Act (FCA) imposes civil liability on any person or entity that submits, or causes the submission of, a false or fraudulent claim to the United States Government. Damages under the FCA can be significant and consist of the imposition of fines and penalties. The FCA also allows a private individual or entity with knowledge of past or present fraud against the federal government to sue on behalf of the government to recover the civil penalties and treble damages. The U.S. Department of Justice, or DOJ, on behalf of the government, has previously alleged that the marketing and promotional practices of pharmaceutical and medical device manufacturers included the off-label promotion of products or the payment of prohibited kickbacks to doctors violated the FCA resulting in the submission of improper claims to federal and state healthcare entitlement programs such as Medicaid. In certain cases, manufacturers have entered into criminal and civil settlements with the federal government under which they entered into plea agreements, paid substantial monetary amounts and entered into corporate integrity agreements that require, among other things, substantial reporting and remedial actions going forward. 11 The Advanced Medical Technology Association (AdvaMed) is one of the primary voluntary United States trade associations for medical device manufacturers. This association has established guidelines and protocols for medical device manufacturers in their relationships with healthcare professionals on matters including research and development, product training and education, grants and charitable contributions, support of third-party educational conferences, and consulting arrangements. Adoption of the AdvaMed Code by a medical device manufacturer is voluntary, and while the OIG and other federal and state healthcare regulatory agencies encourage its adoption and may look to the AdvaMed Code, they do not view adoption of the AdvaMed Code as proof of compliance with applicable laws. We have adopted the AdvaMed Code and incorporated its principles in our standard operating procedures, sales force training programs, and relationships with doctors. Key to the underlying principles of the AdvaMed Code is the need to focus the relationships between manufacturers and healthcare professionals on matters of training, education and scientific research, and limit payments between manufacturers and healthcare professionals to fair market value for legitimate services provided and payment of modest meal, travel and other expenses for a healthcare professional under limited circumstances. We have incorporated these principles into our relationships with healthcare professionals under our consulting agreements, payment of travel and lodging expenses, grant making procedures and sponsorship of third-party conferences. In addition, we have conducted training sessions for employees on these principles. However, we cannot provide any assurance that regulatory or enforcement authorities will view these arrangements as being in compliance with applicable laws. Regulation Outside of the United States. Sales of medical devices outside of the United States are subject to foreign governmental regulations which vary substantially from country to country. The time required to obtain certification or approval by a foreign country may be longer or shorter than that required for FDA clearance or approval and the requirements may be different. In the European Union, various directives and voluntary standards regulate the design, manufacture and labeling of medical devices. Devices may only be placed on the market in the European Union if they comply with the essential requirements of a relevant directive and bear the CE mark. Manufacturers must demonstrate that their devices comply with the relevant essential requirements through a conformity assessment procedure. The method for assessing conformity varies depending on the type and class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a notified body, an independent and neutral institution appointed by a country to conduct the conformity assessment. This third-party assessment will include a review of documentation relating to the device and may consist of an audit of the manufacturer’s quality system and specific testing of the manufacturer’s device. Successful completion of a conformity assessment procedure allows a manufacturer to issue a declaration of conformity with the requirements of the relevant directive and affix the CE mark to the device. Devices that bear the CE mark may be commercially distributed throughout the member states of the European Union and other countries that comply with or mirror the medical device directives. A notified body has granted us a certificate of compliance with the International Organization for Standardization, (ISO) 13485:2003 Quality Management System. Compliance with this standard establishes the presumption that our quality system conforms with the essential requirements or the relevant directive. We have successfully completed the conformity assessment procedure and affixed the CE Mark to our Isolator Synergy clamps, allowing us to commercialize those clamps in the European Union for the treatment of cardiac arrhythmias, including Afib. Our Isolator Synergy pens, Coolrail linear pen and Isolator Synergy Access clamps are CE Marked to ablate soft tissue. Our Isolator linear pen is CE marked to ablate cardiac tissue and temporarily pace, sense, record, and stimulate during evaluation of cardiac arrhythmias. Our cryosurgery devices are CE Marked for the treatment of cardiac arrhythmias. Our AtriClip LAA Exclusion System is CE marked for occlusion of the heart's left atrial appendage. Our COBRA Fusion Ablation System is CE marked for the treatment of cardiac arrhythmias, such as Afib, by coagulating cardiac tissue involved in the conduction of the arrhythmia. The COBRA Fusion System is also intended for use in the treatment of Afib, by ablating cardiac tissue involved in the conduction of the arrhythmia and to provide transient cardiac pacing, sensing, recording and stimulation for the assessment of electrical isolation / conduction block of ablation lesions in the surgical treatment of arrhythmias. The AFfirm Bipolar Pacing Probe is CE marked to provide transient cardiac pacing or recording for the assessment of electrical isolation / conduction block of ablation lesions in the surgical treatment of cardiac arrhythmias. The Numeris System and the EPi-Sense Guided Coagulation System with VisiTrax technology have CE mark with an indication for the coagulation of cardiac tissue using RF energy during cardiac surgery for the treatment of arrhythmias including Afib or atrial flutter. Intellectual Property Protection of our intellectual property is a strategic priority for our business and we rely on a combination of patent, copyright, trademark and trade secret laws to protect our interests. Our ability to protect and use our intellectual property rights in the continued development and commercialization of our technologies and products, operate without infringing the proprietary rights of others, and prevent others from infringing our proprietary rights is important to our continued success. We will be able to protect our products and technologies from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents, trademarks or copyrights or are effectively maintained as trade secrets, know-how or other proprietary information. We hold numerous issued United States and international patents. We also have multiple pending United States and international patent applications. We seek patent protection relating to technologies and products we develop in both the United States and in selected foreign countries. While we own much of our intellectual property, including patents, patent applications, trademarks, trade secrets, know-how and proprietary information, we also license patents and related technology of importance to the commercialization of our products. For example, to continue developing and commercializing our current and future products, we may license intellectual property from commercial or academic entities to obtain the rights to technology that is required for our research, development and commercialization activities. 12 All of our employees and technical consultants are required to execute confidentiality agreements in connection with their employment and consulting relationships with us. We also generally require them to agree to disclose and assign to us all inventions conceived in connection with their relationship with us. We cannot provide any assurance that employees and consultants will abide by the confidentiality or assignment terms of these agreements. Despite measures taken to protect our intellectual property, unauthorized parties might copy aspects of our products or obtain and use information that we regard as proprietary. We devote significant resources to obtaining patents and other intellectual property and protecting our other proprietary information. If valid and enforceable, these patents may give us a means of blocking competitors from using infringing technology to compete directly with our products. We also have certain proprietary trade secrets that may not be patentable or for which we have chosen to maintain secrecy rather than file for patent protection. With respect to proprietary know-how that is not patentable, we have chosen to rely on trade secret protection and confidentiality agreements to protect our interests. Manufacturing We manufacture a majority of the disposable and implantable products we sell and generally purchase items that would be deemed capital equipment, including the ASU, ASB, ESU, nContact RF generator and ORLab® cardiac monitoring system. We assemble, inspect, test and package the majority of our products at our facility in Ohio, and our products are sterilized by third parties. Purchased components are generally available from more than one supplier. However, some products, such as our ASU, ASB, ESU and nContact RF generator, are critical components of our RF ablation lines and there are relatively few alternative sources of supply available. We generally carry a six-month supply of these products. However, obtaining a replacement supplier for the ASU, ASB, ESU or nContact RF generator, if required, may not be accomplished quickly or at all and could involve significant additional costs. Generally, our suppliers have no contractual obligations to supply us, and we are not contractually obligated to purchase any of our supplies from them. Order quantities and lead times for components purchased from outside suppliers are based on our forecasts derived from historical demand and anticipated future demand. Lead times may vary significantly depending on the size of the order, time required to fabricate and test the components, specific supplier requirements and current market demand for the components and subassemblies. To date, we have not experienced significant delays in obtaining any of our components. There are no unique or proprietary processes required in manufacturing our components. We generally do not have contractual obligations that preclude us from developing products or sourcing components from new suppliers. We and our component suppliers are required to manufacture our products in compliance with FDA’s Quality System Regulation (QSR) and International Organization for Standardization standard 13485 (ISO 13485). The QSR and ISO 13485 regulate the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. FDA enforces the QSR through periodic inspections that may be announced or unannounced and may include the manufacturing facilities of our suppliers. Our failure or the failure of our suppliers to maintain compliance with the QSR could result in the shutdown of our manufacturing operations or the recall of our products, which would have a material adverse effect on our business. In the event that one of our suppliers fails to maintain compliance with our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result. We also could be subjected to injunctions, product seizures, or civil or criminal penalties. We regularly audit our suppliers for compliance with QSR and applicable ISO standards. We have been an FDA-registered medical device manufacturer since November 2002. We obtained our CE Mark in June of 2002, and our quality systems and facility practices are certified to ISO 13485:2003; MDD 93/42/EEC, or CE Mark, and CMDCAS, or Canadian regulations. We believe that we are currently in good standing with FDA. Our current quality system is developed to comply with QSR and ISO standards. We are subject to numerous federal, state and local laws relating to such matters as laboratory practices, the experimental use of animals, the use and disposal of hazardous or potentially hazardous substances, safe working conditions, manufacturing practices, environmental protection and fire hazard control. We may incur significant costs to comply with those laws and regulations now or in the future, but, as we currently believe we are in compliance with such laws and regulations, we do not expect that continued compliance will have a material impact on our business. Consulting Relationships We have developed consulting relationships with scientists and physicians throughout the world to support our research and development, clinical and training and education programs. We work closely with these thought leaders to understand unmet needs and emerging applications for the treatment of Afib. Our physician consulting agreements are intended to satisfy the requirements of the personal services “Safe Harbor” regulation as well as the AdvaMed and Eucomed Codes. As such, they provide for payment of a fair market value fee only for legitimate services actually rendered to us. We do not expect or require the consultant to utilize or promote our products, and consultants are required to disclose their relationship with us as appropriate, such as when publishing an article in which one of our products is discussed. Amounts paid to U.S. physicians are disclosed by us in annual reports submitted to CMS under the federal “Open Payments” law and implementing regulations and under similar U.S. state and international laws, rules and regulations. 13 Employees We had approximately 430 full-time employees as of January 31, 2016. None of the employees were represented by a labor union or covered by a collective bargaining agreement. We have never experienced any employment-related work stoppages and consider our employee relations to be good although we cannot provide any assurance that we will not experience such work stoppages in the future. Available Information Our principal executive offices are located at 7555 Innovation Way, Mason, Ohio and our telephone number is 513-755-4100. We are subject to the reporting requirements under the Securities Exchange Act of 1934. Consequently, we are required to file reports and information with the Securities and Exchange Commission, or SEC, including reports on the following forms: Form 10-K, Form 10-Q, Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. These reports and other information concerning us may be accessed through the SEC’s website at http://www.sec.gov. You may also find, free of charge, on our website at http://www.atricure.com, electronic copies of our Form 10-Ks, Form 10-Qs, Form 8- Ks, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Such filings are placed on our website as soon as reasonably practicable after they are filed or furnished, as the case may be, with the SEC. Our charters for our Audit, Strategy, Compensation and Nominating and Corporate Governance Committees and our Code of Ethics are available on our website. In the event that we grant a waiver under our Code of Ethics to any of our officers and directors, we will publish it on our website. Information contained in any of our websites is not deemed to be a part of this Form 10-K. ITEM 1A. RISK FACTORS Risks Relating To Our Business If our products do not achieve widespread market acceptance in the United States, our operating results will be harmed and we may not achieve profitability. Our success will depend, in large part, on the medical community’s acceptance of our principal products in the United States, which is the largest revenue market in the world for medical devices. The U.S. medical community’s acceptance of our products will depend upon our ability to demonstrate the safety and efficacy, advantages, long-term clinical performance and cost-effectiveness of our products as compared to other products. In addition, acceptance of products for the treatment of Afib is dependent upon, among other factors, the level of screening for Afib general awareness and education of the medical community about the surgical treatment of Afib and the existence, effectiveness and, in particular, the safety of our products. Market acceptance and adoption of our products for the treatment of Afib also depends on the level of health insurer (including Medicare) reimbursement to doctors and hospitals for the use of our products. We cannot predict whether the U.S. medical community will accept our products or, if accepted, the extent of their use. Negative publicity resulting from isolated incidents involving our products or other products related to those we sell could have a significant adverse effect on the overall acceptance of our products. If we encounter difficulties developing a market for our products in the United States, we may not be able to increase our revenue enough to achieve profitability, and our business and operating results will be seriously harmed. We rely on our ablation, ablation-related and AtriClip products as our primary sources of revenue. If we are not successful in selling these products, or if these products become obsolete, our operating results will be harmed. Our ablation and ablation-related products, along with our left atrial appendage clip products, generate a large majority of our revenue. We expect that sales of these products will continue to account for a majority of our revenue for the foreseeable future and that our future revenue will depend on the increasing acceptance by the medical community of our products as a standard surgical treatment of Afib during open-heart surgical procedures and as a sole-therapy minimally invasive procedure. We may not be able to maintain or increase market acceptance of our products for a number of additional reasons, including those set forth elsewhere in this “Risk Factors” section. In addition, our products may become obsolete prior to the end of their anticipated useful lives or we may introduce new products or next-generation products prior to the end of the useful life of a prior generation, either of which may require us to dispose of existing inventory and related capital equipment and/or write off their value or accelerate their depreciation. Since we believe that doctors are using our ablation and ablation-related products only for the surgical treatment of Afib, if doctors do not use our products to treat Afib, we would lose substantially all of our revenue. Worldwide economic conditions may reduce demand for procedures using our products or otherwise result in adverse implications on our business, operating results and financial condition. General worldwide economic conditions may deteriorate due to the effects of, among other developments, general credit market crises, collateral effects on the finance and banking industries, concerns about inflation, slower economic activity, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns. We are unable to predict the extent to which current or future worldwide economic conditions may impact our business. Specifically, because many procedures using our products are elective, they can be deferred by patients. In addition, patients may not be as willing under current 14 or future economic conditions to take time off from work or spend their money on deductibles and co-payments often required in connection with the procedures that use our products. Beyond patient demand, any current or future deterioration in worldwide economic conditions, including in particular their effects on the credit and capital markets, may have other adverse implications for our business. For example, our customers’ ability to borrow money from their existing lenders or to obtain credit from other sources to purchase our products may be impaired resulting in a decrease in sales. Although we maintain allowances for estimated losses resulting from the inability of our customers to make required payments, we cannot guarantee that we will accurately predict the loss rates we will experience, especially given any continuing turmoil in the worldwide economy. A significant change in the liquidity or financial condition of our customers could cause unfavorable trends in our receivable collections and additional allowances may be required, which could adversely affect our operating results. Further, given the economic and political challenges facing Eurozone countries, concerns have been raised regarding the stability and suitability of the Euro as a single currency. The failure of the Euro as a single currency could adversely affect our operating results. Healthcare costs have risen significantly over the past decade. There have been and may continue to be proposals by legislators, regulators and third-party payors to keep, contain or reduce healthcare costs. The continuing efforts of governments, insurance companies and other payors of healthcare costs to contain or reduce these costs, combined with closer scrutiny of such costs, could lead to patients being unable to obtain approval for payment from these third-party payors. The cost containment measures that healthcare providers are instituting both in the U.S. and internationally could harm our business. Some healthcare providers in the U.S. have adopted or are considering a managed care system in which the providers contract to provide comprehensive healthcare for a fixed cost per person. Healthcare providers may attempt to control costs by authorizing fewer elective surgical procedures or by requiring the use of the least expensive devices possible, which could adversely affect the demand for our products or the price at which we can sell our products. Some healthcare providers have sought to consolidate and create new companies with greater market power, including hospitals. As the healthcare industry consolidates, competition to provide products and services has become and will continue to become more intense. This has resulted and likely will continue to result in greater pricing pressures and the exclusion of certain suppliers from important marketing segments. We face significant uncertainty in the industry due to government healthcare reform. The U.S. Patient Protection and Affordable Care Act (Patient Act), as amended, as well as other healthcare reform have a significant impact on our business. The impact of the Patient Act on the healthcare industry is extensive and includes, among other things, the federal government assuming a larger role in the healthcare system, expanding healthcare coverage of United States citizens and mandating basic healthcare benefits. The Patient Act impacted our business by requiring an excise tax on all U.S. medical device sales beginning in January 2013. In December 2015, the U.S. government approved the suspension of the excise tax on medical device sales beginning January 1, 2016 through December 31, 2017. The increased tax burden significantly impacts our results of operations and cash flows. Any healthcare reforms enacted in the future may, like the Patient Act, be phased in over a number of years but, if enacted, could reduce our revenue, increase our costs or require us to revise the ways in which we conduct business or put us at risk for loss of business. In addition, our results of operations, financial position and cash flows could be materially adversely affected by changes under the Patient Act and changes under any federal or state legislation adopted in the future. Our quarterly financial results are likely to fluctuate significantly because our sales prospects are uncertain. Due to current worldwide economic conditions and other factors discussed in this “Risk Factors” section which may impact our sales results, our quarterly operating results are difficult to predict and may fluctuate significantly from quarter to quarter or from prior year to current year periods, particularly because our sales prospects are uncertain. These fluctuations may also affect our annual operating results and may cause those results to fluctuate unexpectedly from year to year. Restrictions in our ability to train surgeons in the use of our products could reduce the market acceptance of our products or result in injuries to patients or other adverse events that could possibly lead to litigation that could harm us or could reduce our revenue. It is critical to the success of our sales efforts to ensure that there are a sufficient number of surgeons familiar with, trained on and proficient in the use of our products. While we train providers in the safe and effective use of our products, we do not train them to use any of our products specifically to treat Afib unless the product is FDA-approved specifically for the treatment of Afib. In December 2011 our Isolator Synergy System was approved for the treatment of persistent and long standing persistent forms of Afib concomitant to open heart bypass graft or valve replacement surgery. The procedure using our Isolator Synergy System in this manner is known as the MAZE IV™ procedure. Following approval, we instituted a program to train all new and existing users of the Isolator Synergy System in the MAZE IV procedure. We also make available training on the safe and effective use of our other products consistent with their FDA approved or cleared indications. We cannot assure you that a sufficient number of surgeons will become aware of training programs or that surgeons will dedicate the time, funds and energy necessary to obtain training for themselves or to train others in the use of our products. 15 Surgeons may not commit enough time to sufficiently learn our products. In order for surgeons to learn to use our products, they must attend structured training sessions in order to familiarize themselves with the products and they must be committed to learning the technology. Further, surgeons must utilize the technology on a regular basis to ensure they maintain the skill set necessary to use the products. Continued market acceptance could be delayed by lack of surgeon willingness to attend training sessions, by the time required to complete this training or by state or institutional restrictions on our ability to provide training. An inability to train a sufficient number of surgeons to generate adequate demand for our products could have a material adverse impact on our financial condition and cash flow. Our marketing strategy is dependent on collaboration with physician “thought leaders.” Our research and development efforts and our marketing strategy depend heavily on obtaining support, physician training assistance and collaboration from highly regarded physicians at leading commercial and research hospitals, particularly in the U.S. and Europe. If we are unable to gain and/or maintain such support, training services and collaboration, or if the reputation or standing of these physicians is impaired or otherwise adversely affected, our ability to market our products and, as a result, our financial condition, results of operations and cash flow could be materially and adversely affected. Unless and until we obtain additional FDA approval for our products, we will not be able to promote many of them to treat Afib or to prevent stroke, and our ability to maintain and grow our business could be harmed. Although our Isolator Synergy System received FDA approval for the treatment of some forms of Afib in certain procedures, we have not received FDA clearance or approval to promote our other products for the treatment of Afib or the prevention of stroke including our recently acquired EPi-Sense Guided Coagulation System with VisiTrax technology. See “Business—Government Regulation.” Unless and until we obtain FDA clearance or approval for the use of our products to treat Afib or prevent stroke, we, and others acting on our behalf, may not claim in the U.S. that our products are safe and effective for such uses or otherwise promote them for such uses. We cannot assure you that future clearances or approvals of our products will be granted or that current or future clearances or approvals will not be withdrawn. Failure to obtain a clearance or approval or loss of an existing clearance or approval, could hurt our ability to maintain and grow our business. Unless and until we are able to complete the clinical trials required to support future submissions to the FDA, and unless and until the data generated by such trials supports the use of our products as safe and effective for the treatment of Afib or reduction in stroke risk, we may not be able to secure additional FDA approvals and our ability to maintain and grow our business could be harmed. In order to obtain additional FDA approvals to promote our products for the treatment of Afib or reduction in stroke risk, we will need to demonstrate in clinical trials that our products are safe and effective for such use. Development of sufficient and appropriate clinical protocols to demonstrate quality, safety and efficacy may be required and we may not adequately develop such protocols to support approval. We cannot assure you that any of our clinical trials will be completed in a timely manner or successfully or that the results obtained will be acceptable to FDA. In addition, if the results obtained from our clinical trials, any other clinical studies, or clinical or commercial experience indicate that any of our products are not safe or effective, or not as safe or effective as other treatment options, FDA may not approve our products for the treatment of Afib or reduction in stroke risk, adoption of the use of our products may suffer and our business would be harmed. Our clinical trials are typically time consuming and expensive and the outcome uncertain. Delays in patient enrollment or failure of patients to consent or continue to participate in a clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of our products or result in the failure of the clinical trial. Conducting successful clinical studies may require the enrollment of large numbers of clinical sites and patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depends on many factors, including the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators, support staff, and proximity of patients to clinical sites and ability to comply with the eligibility and exclusion criteria for participation in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of our products or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable risks or discomforts. Patients may also not participate in our clinical trials if they choose to participate in contemporaneous clinical trials of competitive products or they can obtain the treatment without participating in our trial through physicians who use the product off-label. We may experience unfavorable publicity relating to our business and our industry. This publicity could have a negative impact on our ability to attract and retain customers, our sales, clinical studies involving our products, our reputation and our stock price. We may experience a negative impact on our business from newspaper articles or other media reports relating to, among other things, our compliance with FDA regulations for medical device reporting and concerns over disclosure of financial relationships between us and certain of our consultants who are involved with clinical studies and the publication of articles concerning our 16 products. We believe that such publicity would potentially have a negative impact on our clinical studies, business, results of operations and financial condition or cause other adverse effects, including a decline in the price of our stock. We may be subject to fines, penalties, injunctions and other sanctions if we are deemed to be promoting the use of our products for unapproved, or off-label, uses. Our business and future growth depend on the continued use of our products for the treatment of Afib or prevention of stroke. Unless the products are approved or cleared by FDA specifically for the treatment of Afib or prevention of stroke, we may not make claims about the safety or effectiveness of our products for such uses. These limitations present a material risk that FDA or other federal or state law enforcement authorities could determine that the nature and scope of our sales, marketing and/or support activities, though designed to comply with all FDA requirements, constitute the promotion of our products for an unapproved use in violation of the FDCA. We also face the risk that the FDA or other governmental authorities might pursue enforcement based on past activities that we have discontinued or changed, including sales activities, arrangements with institutions and doctors, educational and training programs and other activities. Investigations concerning the promotion of unapproved uses and related issues, are typically expensive, disruptive and burdensome and generate negative publicity. If our promotional activities are found to be in violation of the law, we may face significant fines and penalties and may be required to substantially change our sales, promotion, grant and educational activities. There is also a possibility that we could be enjoined from selling some or all of our products for any unapproved use. In addition, as a result of an enforcement action against us or our executive officers, we could be excluded from participation in government healthcare programs such as Medicare and Medicaid. The use of products we sell may result in injuries or other adverse events that lead to product liability suits, which could be costly to our business or our customers’ businesses. The use of products we sell may result in a variety of serious complications, including damage to the heart, internal bleeding, death or other adverse events, potentially leading to product liability claims. Serious complications, including death, are commonly encountered in connection with the surgical treatment of Afib. If products we sell are defectively designed, manufactured or labeled, contain inadequate warnings, contain defective components or are misused, we may become subject to costly litigation by our customers or their patients. We carry product liability insurance that is limited in scope and amount and may not be adequate to fully protect us against product liability claims. We could be required to pay damages that exceed our insurance coverage. Any product liability claim, with or without merit, could result in an increase in our product insurance rates or our inability to secure coverage on reasonable terms, if at all. Even in the absence of a claim, our insurance rates may rise in the future. Any product liability claim, even a meritless or unsuccessful one, would be time-consuming and expensive to defend and could result in the diversion of our management’s attention from our business and result in adverse publicity, withdrawal of clinical trial participants, injury to our reputation and loss of revenue. Any of these events could negatively affect our earnings and financial condition. Competition from existing and new products and procedures may decrease our market share and cause our revenue to decline. The medical device industry, including the market for the treatment of Afib, is highly competitive, subject to rapid technological change and significantly affected by new product introductions and promotional activities of its participants. We cannot assure you that our products will compete effectively against drugs, catheter-based ablation, implantable devices, other ablation systems, other products or techniques to exclude the left atrial appendage, or other surgical Afib treatments, which may be more well-established among doctors and hospitals. We anticipate that new or existing competitors may develop competing products, procedures and/or clinical solutions. There are few barriers to prevent new entrants or existing competitors from developing products to compete directly with ours. Some companies also compete with us to attract qualified scientific and technical personnel as well as funding. Some of our competitors have greater financial, manufacturing, marketing and research and development capabilities than we have or may obtain FDA approval for the use of their products before we do. The introduction of new products, procedures, clinical solutions or our competitors obtaining FDA approvals may result in price reductions, reduced margins or loss of market share and may render our products obsolete, which could adversely affect our net revenue and future profitability. Our intellectual property rights may not provide meaningful commercial protection for our products, which could enable third-parties to use our technology or methods, or very similar technology or methods, and could reduce our ability to compete. Our success depends significantly on our ability to protect our proprietary rights to the technologies used in our products. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Our patent applications may not issue as patents at all or in a form that will be advantageous to us. Our issued patents and those that may be issued in the future may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related products. Although we have taken steps to protect our intellectual property and proprietary technology, we cannot assure you that third-parties will not be able to design around our patents or, if they do infringe upon our technology, that we will be successful in or will have sufficient 17 resources to pursue a claim of infringement against those third-parties. We believe that third-parties may have developed or are developing products that could infringe upon our patent rights. Any pursuit of an infringement claim by us may involve substantial expense or diversion of management attention. In addition, although we have generally entered into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, investigators and advisors, such agreements may be breached, may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements. Additionally, as is common in the medical device industry, some of these individuals were previously employed at other medical equipment or biotechnology companies, including our competitors. Although no claims are currently pending against us, we may be subject to claims that these individuals or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. Foreign countries generally do not allow patents to cover methods for performing surgical procedures. If our intellectual property does not provide significant protection against foreign or domestic competition, our competitors could compete more directly with us, which could result in a decrease in our market share. All of these factors may harm our competitive position. The medical device industry is characterized by extensive litigation and administrative proceedings over patent and other intellectual property rights and any litigation or claim against us may cause us to incur substantial costs, could place a significant strain on our financial resources, divert the attention of management from our business and harm our reputation. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Any patent dispute, even one without merit or an unsuccessful one, would be time-consuming and expensive to defend and could result in the diversion of our management’s attention from our business and result in adverse publicity, the disruption of development and marketing efforts, injury to our reputation and loss of revenue. Litigation also puts our patent applications at risk of being rejected and our patents at risk of being invalidated or interpreted narrowly, and may provoke third parties to assert claims against us. Any of these events could negatively affect our earnings and financial condition. In the event of a patent dispute, if a third-party’s patents were upheld as valid and enforceable and we were found to be infringing, we could be prevented from selling our products unless we were able to obtain a license to use technology or ideas covered by such patent or are able to redesign our system to avoid infringement. A license may not be available at all or on terms acceptable to us, and we may not be able to redesign our products to avoid any infringement. Modification of our products or development of new products could require us to conduct additional clinical trials and to revise our filings with the FDA and other regulatory bodies, which would be time-consuming and expensive. If we are not successful in obtaining a license or redesigning our products, we may be unable to sell our products and our business could suffer. The increase in cost of medical malpractice premiums to doctors and hospitals or the lack of malpractice insurance coverage due to the use of our products by doctors for an off-label indication may cause certain doctors or hospitals to decide not to use our products and may damage our ability to grow and maintain the market for our products. Insurance carriers have been raising premiums charged for medical malpractice insurance due, at least in part, to increased risks associated with off-label procedures, including higher damage awards for successful plaintiffs. Insurance carriers may continue to raise premiums or they may deny malpractice coverage for procedures performed using products such as ours on an off-label basis. If this trend continues or worsens, our revenue may fall as doctors or hospitals decide against purchasing our products due to the cost or unavailability of insurance coverage. We have a history of net losses and we may never become profitable. We have incurred net losses each year since our inception, including, most recently, net losses of $27,212 in 2015, $16,211 in 2014 and $11,462 in 2013. As of December 31, 2015, we had an accumulated deficit of $165,636. Our net losses have resulted principally from costs and expenses relating to sales and promotional efforts, research and development, seeking regulatory clearances and approvals and general operating expenses. We expect to continue to make substantial expenditures and to potentially incur additional operating losses in the future as we further develop and commercialize our products, including completing clinical trials and seeking regulatory clearances and approvals. If sales of our products do not continue to grow as we anticipate, we will not be able to achieve profitability. Our expansion efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. Our losses have had, and are expected to continue to have, an adverse impact on our working capital, total assets and accumulated deficit. Our capital needs after the next 12 months are uncertain and we may need to raise additional funds in the future and such funds may not be available on acceptable terms, if at all. We believe that our current cash, cash equivalents and investments, including additional cash generated from public offerings of common stock in January 2013 and February 2014 along with the cash we expect to generate or use for operations or access via our revolving credit facility will be sufficient to meet our projected capital requirements for at least the next 12 months. The January 2013 common stock offering generated $26,872 in net proceeds through the issuance of 3,996,250 shares, and the February 2014 common 18 stock offering generated $65,830 in net proceeds through the issuance of 3,660,525 shares. Our current loan agreement with Silicon Valley Bank (SVB), as amended, includes a $15,000 revolving credit facility. Our borrowing ability under the revolving credit facility is based on a specified formula using working capital as the basis for availability and is limited to $15,000. Based on our current borrowing base, we have availability of $14,559. Future borrowing availability for this amount is not guaranteed. The revolving credit facility is secured by specified assets, including intellectual property. The revolving credit facility matures on April 30, 2018. Our recent acquisition of nContact provides for up to $50,000 of contingent consideration to be paid upon attaining specified regulatory approvals and clinical and revenue milestones over the next five years, as well as contingent consideration equal to 1.5 times nContact revenues in excess of specified revenue targets from 2016 through 2019. Subject to the terms and conditions of the nContact merger agreement, such contingent consideration can be paid in cash and AtriCure common stock. Over the next twelve months, we do not expect our cash requirements to include significant payments of contingent consideration based on terms of the acquisition agreement and related milestones. Significant changes to the estimated consideration to be paid could result in a substantial increase in liabilities for contingent consideration and our accumulated deficit, and reduce our net income or increase our net loss for the year in which the changes occur, which could contribute to difficulty in raising additional funds. The issuance of our stock to nContact shareholders to settle contingent consideration obligations would dilute our existing stockholders. If we need to raise additional funds, we cannot be certain that such funds will be available to us on acceptable terms, if at all. Furthermore, if we issue equity securities to raise additional funds, our existing stockholders will experience dilution, and if we issue equity or debt securities, such securities may have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish potentially valuable rights to our future products or proprietary technologies, or grant licenses on terms that are not favorable to us. If we cannot raise funds on acceptable terms, we may not be able to expand our operations, develop new products, take advantage of future opportunities or respond to competitive pressures or unanticipated customer requirements. We may be unable to comply with the covenants of our credit facility. Our revolving credit facility contains covenants that include, among others, covenants that limit our ability to dispose of assets, enter into mergers or acquisitions, incur indebtedness, incur liens, pay dividends or make distributions on our capital stock, make investments or loans, and enter into certain affiliate transactions, in each case subject to customary exceptions for a credit facility of this size and type. Additional covenants apply when we have outstanding borrowings under the revolving loan facility or when we achieve specific covenant milestones. The occurrence of an event of default could result in an increase to the applicable interest rate by 3.0%, an acceleration of all obligations under the revolving credit facility, an obligation to repay all obligations in full, and a right by SVB to exercise all remedies available to it under the revolving credit facility and related agreements including any Guaranty or Guarantor Security Agreement. If we are unable to pay those amounts, SVB could proceed against the collateral granted to it pursuant to the revolving credit facility, and we may in turn lose access to our current source of borrowing availability. Our federal tax net operating loss and general business credit carryforwards generated prior to the initial public offering of our common stock will be limited or may expire, which could result in greater future income tax expense and adversely impact future cash flows because we experienced an ownership change of more than 50 percent upon the initial public offering of our common stock. Additionally, we acquired net operating losses through acquisitions which may be limited or may expire. In connection with our initial public offering in August 2005, we experienced an ownership change as defined by Section 382 of the Internal Revenue Code of 1986. Section 382 imposes limitations (Section 382 limitation) on a company’s ability to use net operating loss and general business credit carryforwards if a company experiences a more-than-50-percent ownership change over a three-year testing period. Additionally, in connection with acquisitions, additional acquired NOLs are also subject to Section 382 limitation. The Section 382 limitations could limit the availability of our net operating loss and general business credit carryforwards to offset any future taxable income, which may increase our future income tax expense and adversely impact future cash flows. We have total federal income tax net operating loss and general business credit carryforwards that, if not utilized to reduce our taxable income, will begin to expire in 2021. We have generated or acquired available net operating loss and general business credit carryforwards of $182,971 and $4,388, respectively, which, if not utilized to reduce our taxable income, will begin to expire in 2019. We rely upon single and limited source third-party suppliers and third-party logistics providers, making us vulnerable to supply problems and price fluctuations which could harm our business. We currently rely on single and limited source third-party vendors for the manufacture of many of the components used in our products. For example, we rely on one vendor to manufacture our ASU, ESU and ASB, as well as separate vendors to manufacture our COBRA Fusion Surgical Ablation Systems, EPi-Sense Guided Coagulation System with VisiTrax technology, nContact RF generators and ORLab™. It would be a time consuming and lengthy process to secure these products from an alternative supplier. In addition, in some cases there are relatively few alternative sources of supply for certain other components that are critical to our products. We also rely on a third party to handle our warehousing and logistics functions for European and Middle Eastern markets on our behalf. Our reliance on outside manufacturers and suppliers also subjects us to risks that could harm our business, including: • we may not be able to obtain adequate supply in a timely manner or on commercially reasonable terms; 19 • • • • we may have difficulty timely locating and qualifying alternative suppliers; switching components may require product redesign and new submissions to FDA which could significantly delay production or, if FDA refuses to approve the changes, completely eliminate our ability to manufacture or sell our products; our suppliers manufacture products for a range of customers, and fluctuations in demand for the products those suppliers manufacture for others may affect their ability to deliver components to us in a timely manner; and our suppliers may encounter financial hardships unrelated to our demand for components, which could inhibit their ability to fulfill our orders and meet our requirements. Identifying and qualifying additional or replacement suppliers for any of the components used in our products or a replacement warehousing and logistics provider, if required, may not be accomplished quickly and could involve significant additional costs. Any interruption or delay in the supply of components, materials or warehousing and logistics, or our inability to obtain components or materials from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders or switch to competitive products and could therefore have a material adverse effect on our business, financial condition and results of operations. If our goodwill or other intangible assets become impaired, it could materially reduce the value of our assets and increase our net loss for the year in which the write-off occurs. As of December 31, 2015, we had $105,257 in goodwill related to acquisitions, which represents the purchase price we paid in excess of the fair value of the net assets we acquired. The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 350, “Goodwill and Other Intangible Assets” requires that goodwill be tested for impairment at least annually (absent any impairment indicators). The testing includes comparing the fair value of each reporting unit with its carrying value. We estimate fair value using several valuation methods, including discounted cash flows, market multiples and market capitalization. Impairment adjustments, if any, are required to be recognized as operating expenses. We may have future impairment adjustments to our recorded goodwill. Any finding that the value of our goodwill has been impaired would require us to write off the impaired portion, which could materially reduce the value of our assets and reduce our net income or increase our net loss for the year in which the write off occurs and increase our accumulated deficit, which could contribute to difficulty in raising additional funds. In Process Research and Development (IPR&D) valued at $44,021 was recorded as an intangible asset a result of the nContact acquisition. If we do not obtain the regulatory approvals that would confirm the technological feasibility of the IPR&D project, or if the IPR&D project is abandoned for any other reason, we would have an impairment adjustment to this asset that would require us to write it off. This would materially reduce the value of our assets and reduce our net income or increase our net loss for the year in which the write off occurs and increase our accumulated deficit, which could contribute to difficulty in raising additional funds. An inability to forecast future revenue or estimate life cycles of products may result in inventory-related charges that would negatively affect our gross margins and results of operations. To mitigate the risk of supply interruptions, we may choose to maintain excess inventory of our products or component parts. Managing our inventory levels is important to our cash position and results of operations and is more challenging in the current economic environment. As we grow and expand our product offerings, managing our inventory levels becomes more difficult, particularly as we expand into new product areas and bring product enhancements to market. While we rely on our information technology systems for inventory management to effectively manage accounting and financial functions, our information technology systems may fail to adequately perform these functions or may experience an interruption. An excessive amount of inventory reduces our cash available for operations and may result in excess or obsolete materials. Conversely, inadequate inventory levels may make it difficult for us to meet customer product demand, resulting in decreased revenue. An inability to forecast future revenue or estimated life cycles of products may result in inventory-related charges that would negatively affect our gross margins and results of operations and increase our accumulated deficit, any of which could contribute to difficulty in raising additional funds. If we or our third-party vendors fail to comply with extensive FDA regulations relating to the manufacturing of our products or any component part, we may be subject to fines, injunctions and penalties, and our ability to commercially distribute and sell our products may be hurt. Our manufacturing facility and the manufacturing facility of any of our third-party component manufacturers, critical suppliers or third-party sterilization facility are required to comply with FDA’s Quality System regulation (QSR) which sets forth minimum standards for the procedures, execution and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of the products we sell. FDA may evaluate our compliance with the QSR, among other ways, through periodic announced or unannounced inspections which could disrupt our operations and interrupt our manufacturing. If in conducting an inspection of our manufacturing facility or the manufacturing facility of any of our third-party component manufacturers, critical suppliers or third-party sterilization facility, an FDA investigator observes conditions or practices believed to violate the QSR, the investigator may document their observations on a Form FDA-483 that is issued at the conclusion of the inspection. A manufacturer that receives an FDA-483 may respond in writing and explain any corrective actions taken in response to the inspectional observations. The FDA will typically review the facility’s written response and may re-inspect to determine the 20 facility’s compliance with the QSR and other applicable regulatory requirements. Failure to take adequate and timely corrective actions to remedy objectionable conditions listed on an FDA-483 could result in the FDA taking administrative or enforcement actions. Among these may be the FDA’s issuance of a Warning Letter to a manufacturer, which informs it that the FDA considers the observed violations to be of “regulatory significance” that, if not corrected, could result in further enforcement action. FDA enforcement actions, which include seizure, injunction and criminal prosecution, could result in total or partial suspension of a facility’s production and/or distribution, product recalls, fines, suspension of the FDA’s review of product applications and the FDA’s issuance of adverse publicity. Thus, an adverse inspection could force a shutdown of our manufacturing operations or a recall of our products. Adverse inspections could also delay FDA approval of our products and could have an adverse effect on our production, sales and profitability. We and any of our third-party vendors may also encounter other problems during manufacturing including failure to follow specific protocols and procedures, equipment malfunction and environmental factors, any of which could delay or impede our ability to meet demand. The manufacture of our product also subjects us to risks that could harm our business, including problems relating to the sterilization of our products or facilities and errors in manufacturing components that could negatively affect the efficacy or safety of our products or cause delays in shipment of our products. Any interruption or delay in the manufacture of the product or any of its components could impair our ability to meet the demand of our customers and cause them to cancel orders or switch to competitive products and could, therefore, have a material adverse effect on our business, financial condition and results of operations. If we fail to comply with the extensive FDA regulations relating to our business, we may be subject to fines, injunctions and penalties and our ability to commercially distribute and promote our products may be hurt. Our products are classified by FDA as medical devices and, as such, are subject to extensive regulation in the United States by FDA and numerous other federal, state and foreign governmental authorities. FDA regulations, guidance, notices and other issuances specific to medical devices are broad and regulate numerous aspects of our business. Compliance with FDA, state and other regulations can be complex, expensive and time-consuming. FDA and other authorities have broad enforcement powers. Furthermore, changes in the applicable governmental regulations could prevent further commercialization of our products and technologies and could materially harm our business. If a serious failure to comply with applicable regulatory requirements was determined, it could result in enforcement action by FDA or other state or federal agencies, including the DOJ, which may include any of the following sanctions, among others: • • • • • • • warning letters, fines, injunctions, consent decrees and civil penalties; repair, replacement, refunds, recall or seizure of our products; operating restrictions, partial suspension or total shutdown of production; suspension or termination of our clinical trials; refusing or delaying our pending requests for 510(k) clearance or PMAs, new intended uses or modifications to existing products; withdrawing 510(k) clearance or PMAs that have already been granted; and criminal prosecution. If any of these events were to occur, we could lose customers and our production, product sales, business, results of operations and financial condition would be harmed. We are also subject to medical device reporting regulations that require us to file reports with FDA if our products reasonably are the cause of or contribute to an adverse event, death, serious injury or, in the event of product malfunction, that if it were to recur, would likely cause or contribute to a death or serious injury. We have a history of submitting medical device reports to FDA involving our products, including patient deaths, which were categorized as outcomes based on physician judgment, not on the failure of our devices. There have also been other incidents, including patient deaths, which have occurred during procedures using our products that we have not, and believe were not required to be, reported to FDA because we and our physician consultants determined that our products did not cause or contribute to the outcomes in these incidents. If FDA disagrees with us, however, and determines that we should have submitted reports for these adverse events, we could be subject to significant regulatory fines or other penalties. In addition, the number of medical device reports we make, or the magnitude of the problems reported, could cause FDA or us to terminate or modify our clinical trials or recall or cease the sale of our products, and could hurt commercial acceptance of our products and harm our reputation with customers. Modifications to our products may require new clearances or approvals or require us to cease promoting or to recall the modified products until such clearances or approvals are obtained and FDA may not agree with our conclusions regarding whether new clearances or approvals were required. Any modification to a 510(k)-cleared device that would constitute a change in its intended use, design or manufacture, could require a new 510(k) clearance or procedure or, possibly, submission and FDA approval of a PMA. FDA requires every medical 21 device company to make the determination as to whether a new 510(k) is to be filed, but FDA may review any medical device company’s decision. We have made modifications to our products but do not believe such modifications required us to submit an additional 510(k). FDA may not agree with our decisions regarding whether new clearances or approvals were required. If FDA were to disagree with us and require us to submit a new 510(k), PMA or a different type of PMA supplement for then existing modifications, we could be required to cease promoting or to recall the modified product until we obtain clearance or approval. In addition, we could be subject to significant regulatory fines or other penalties. Furthermore, our products could be subject to recall if FDA determines, for any reason, that our products are not safe or effective or that appropriate regulatory submissions were not made. Delays in receipt or failure to receive clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements, could reduce our sales, profitability and future growth prospects. We will spend considerable time and money complying with federal, state and foreign regulations in addition to FDA regulations, and, if we are unable to fully comply with such regulations, we could face substantial penalties. We are subject to extensive regulation by the federal government and foreign countries in which we conduct business. The laws that affect our ability to operate our business in addition to the FDCA and FDA regulations include, but are not limited to, the following: • • • • • • • • state consumer protection, fraud and business practice laws; the Federal Anti-Kickback Statute, which prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce either the referral of an individual, or furnishing or arranging for a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid Programs; the Federal False Claims Act, which prohibits submitting a false claim or causing of the submission of a false claim to the government; Medicare laws and regulations that prescribe the requirements for coverage and payment, including the amount of such payment, and laws prohibiting false claims for reimbursement under Medicare and Medicaid; state laws that prohibit the practice of medicine by non-doctors and by doctors not licensed in a particular state, and fee- splitting arrangements between doctors and non-doctors, as well as state law equivalents to the Anti-Kickback Statute and the Stark Law, which may not be limited to government-reimbursed items; federal and state healthcare fraud and abuse laws or laws protecting the privacy of patient medical information, including the Health Insurance Portability and Accountability Act, or HIPAA, which protects medical records and other personal health information by limiting their use and disclosure, giving individuals the right to access, amend and seek accounting reasonably necessary to accomplish the intended purpose; the Federal Trade Commission Act and similar laws regulating advertising and consumer protection; and similar and other regulations outside the United States. Healthcare fraud and abuse regulations are complex, and even minor, inadvertent irregularities can potentially give rise to claims that a law has been violated. Any violations of these laws could result in a material adverse effect on our business, financial condition and results of operations. For example, if we were found to be in violation of the Federal False Claims Act, we would likely face significant fines and penalties and would likely be required to change substantially our sales, promotion, grant and educational activities. There is also a possibility that we could face an injunction that would prohibit in whole or in part our current business activities, and, as a result of enforcement actions against us or our senior officers, we could be excluded from participation in government healthcare programs such as Medicare and Medicaid. If there is a change in law, regulation or administrative or judicial interpretations, we may have to change our business practices or our existing business practices could be challenged as unlawful, which could have a material adverse effect on our business, financial condition and results of operations. If our past or present operations are found to be in violation of any of the laws described above or the other governmental regulations to which we, our distributors or our customers are subject, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines, exclusion from Medicare, Medicaid and other government programs and the curtailment or restructuring of our operations. If we are required to obtain permits or licensure under these laws that we do not already possess, we may become subject to substantial additional regulation or incur significant expense. Any penalties, damages, fines, curtailment or restructuring of our operations would adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully or clearly interpreted by the regulatory authorities or the courts, and their provisions are subject to a variety of interpretations and additional legal or regulatory change. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business and damage our reputation. 22 Adverse changes in payors’ policies toward coverage and reimbursement for surgical Afib treatment would harm our ability to promote and sell our products. Third-party payors are increasingly exerting pressure on medical device companies to reduce their prices. Even to the extent that the use of our products is reimbursed by private payors and governmental payors, adverse changes in payors’ policies toward coverage and reimbursement for surgical Afib treatment would also harm our ability to promote and sell our products. Payors continue to review their policies and can, without notice, deny coverage for treatments that include the use of our products. Because each third- party payor individually approves coverage and reimbursement, obtaining these approvals may be time-consuming and costly. In addition, third-party payors may require us to provide scientific and clinical support for the use of our products. Adverse changes in coverage and reimbursement for surgical Afib treatment could harm our business and reduce our revenue. We have traditionally had limited long-term clinical data regarding the safety and efficacy of our products. Any long-term data that is generated may not be positive or consistent with our limited short-term data, which would affect the rate at which our products are adopted by the medical community. Important factors upon which the efficacy of our products will be measured include long-term data on the number of patients that experience Afib or stroke following treatment with our products and the number of patients that have serious complications resulting from ablations or LAA occlusion using our products. While we believe we are now well-positioned to provide sufficient long-term data regarding the safety and efficacy of our products going forward, such data could, nevertheless, identify unexpected safety issues. We cannot provide any assurance that the data collected during our clinical trials will be compelling to the medical community because it may not be scientifically meaningful and may not demonstrate that procedures utilizing our products are an attractive option when compared against data from alternative procedures and products. In addition, the long-term effects of ablation procedures and left atrial appendage exclusion are not well-known. Negative long-term data would affect the use of our products and harm our business and prospects. We sell our products outside of the United States and we are subject to various regulatory and other risks relating to international operations, which could harm our international revenue and profitability. Doing business outside of the United States exposes us to risks distinct from those we face in our domestic operations. For example, our operations outside of the United States are subject to different regulatory requirements in each jurisdiction where we operate or have sales. Our failure, or the failure of our distributors, to comply with current or future foreign regulatory requirements, or the assertion by foreign authorities that we or our distributors have failed to comply, could result in adverse consequences, including enforcement actions, fines and penalties, recalls, cessation of sales, civil and criminal prosecution, and the consequences could be disproportionate to the relative contribution of our international operations to our results of operations. Moreover, if political or economic conditions deteriorate in these countries, or if any of these countries are affected by a natural disaster or other catastrophe, our ability to conduct our international operations or collect on international accounts receivable could be limited and our costs could be increased, which could negatively affect our operating results. Engaging in business outside of the United States inherently involves a number of other difficulties and risks, including, but not limited to: • • • • • • • • • • export restrictions and controls relating to technology; pricing pressure that we may experience internationally; difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; political and economic instability; consequences arising from natural disasters and other similar catastrophes, such as hurricanes, tornados, earthquakes, floods and tsunamis; potentially adverse tax consequences, tariffs and other trade barriers; the need to hire additional personnel to promote our products outside of the United States; international terrorism and anti-American sentiment; fluctuations in exchange rates for future sales denominated in foreign currency, which represent a majority of our sales outside of the United States; and difficulty in obtaining and enforcing intellectual property rights. In addition, our business practices in foreign countries must comply with U.S. laws, including the Foreign Corrupt Practices Act (FCPA). We have a compliance program in place designed to reduce the likelihood of potential violations of the FCPA and other U.S. and foreign anti-bribery and anti-corruption laws. If violations were to occur, they could subject us to fines and other penalties as well as increased compliance costs. Our exposure to each of these risks may increase our costs and require significant management attention. We cannot assure you that one or more of these factors will not harm our business. 23 Fluctuations in foreign currency exchange rates could result in declines in our reported sales and results of operations. Because some of our international sales are denominated in local currencies and not in U.S. Dollars, our reported sales and earnings are subject to fluctuations in foreign currency exchange rates, primarily the Euro. We translate results of transactions denominated in local currencies into U.S. Dollars using market conversion rates applicable to the period in which the transaction is reported. As a result, changes in exchange rates during a period can unpredictably and adversely affect our consolidated operating results and our asset and liability balances, even if the underlying value of the item in its original currency has not changed. At present, we do not hedge our exposure to foreign currency fluctuations. As a result, sales and expenses occurring in the future that are denominated in foreign currencies may be translated into U.S. Dollars at less favorable rates, resulting in reduced revenues and earnings. Our manufacturing operations are primarily conducted at a single location, and any disruption at our manufacturing facility could increase our expenses and decrease our revenue. Most of our manufacturing operations are conducted at a single location in Ohio. While we take precautions at this location, we do not maintain a backup manufacturing facility, making us dependent on our current facility for the continued operation of our business. A natural or other disaster could damage or destroy our manufacturing equipment and cause substantial delays in our manufacturing operations, which could lead to additional expense and decreased revenue due to lack of supply. The insurance we maintain may not be adequate to cover our losses in any particular case. With or without insurance, damage to our facility or our other property, due to a natural disaster or casualty event, could have a material adverse effect on our business, financial condition and results of operations. We rely on independent distributors to market and sell our products in certain markets outside of the United States, and a failure of our independent distributors to successfully market our products in these markets or any disruption in their ability to do so may adversely impact our sales. We depend on third-party distributors to sell our products in certain markets outside of the United States and if these distributors do not perform, we may be unable to increase or maintain our level of international revenue. Over the long term, we intend to continue to grow our business outside of the United States, and to do so we will need to attract additional distributors or hire direct sales personnel to expand the territories in which we sell our products. Independent distributors may terminate their relationship with us or devote insufficient sales efforts to our products. We are not able to control our independent distributors, and they may not be successful in implementing our marketing plans. In addition, many of our independent distributors outside of the United States initially obtain and maintain foreign regulatory approval for sale of our products in their respective countries. Our failure to maintain our relationships with our independent distributors outside of the United States, or our failure to recruit and retain additional skilled independent distributors in these locations, could have an adverse effect on our operations. Turnover among our independent distributors, even if replaced, may adversely affect our short-term financial results while we transition to new independent distributors or direct personnel. Fluctuations in foreign currency exchange rates including, in particular, any strengthening of the U.S. dollar may cause our independent sales distributors to seek longer payment terms to offset the higher prices they are paying in local currency for our products. The ability of these third-party distributors to market and sell our products could also be adversely affected by unexpected events, including, but not limited to, power failures, nuclear events, natural or other disasters and war or terrorist activities. In addition, in light of the worldwide economic crisis, the ability of our distributors to borrow money from their existing lenders or to obtain credit from other sources to purchase our products may be impaired or our distributors could experience a significant change in their liquidity or financial condition, all of which could impair their ability to distribute our products and eventually lead to distributor turnover. If coverage and adequate levels of reimbursement from governmental and third-party payors outside of the United States are not attained and maintained, sales of our products outside of the United States may decrease and we may fail to achieve or maintain significant sales outside of the United States. Our revenue generated from sales outside of the United States is also dependent upon the availability of coverage and reimbursement within prevailing foreign healthcare payment systems. In general, foreign healthcare payors do not provide reimbursement for sole-therapy minimally invasive procedures utilizing ablation devices and related products. In addition, healthcare cost containment efforts similar to those we face in the United States are prevalent in many of the other countries in which we sell our products, and these efforts are expected to continue. To the extent that the use of ablation devices such as our Isolator Synergy clamps has historically received reimbursement under a foreign healthcare payment system, such reimbursement, if any, has typically been significantly less than the reimbursement provided in the United States. If coverage and adequate levels of reimbursement from governmental and third-party payors outside of the United States are not obtained and maintained, sales of our products outside of the United States may decrease and we may fail to achieve or maintain significant sales outside of the United States. If we fail to properly manage our anticipated growth, our business could suffer. We may experience periods of rapid growth and expansion, which could place a significant strain on our personnel, information technology systems and other resources. In particular, the increase in our direct sales force requires significant management and other 24 supporting resources. Any failure by us to manage our growth effectively could have an adverse effect on our ability to achieve our development and commercialization goals. To achieve our revenue goals, we must successfully increase production output as required by customer demand. In the future, we may experience difficulties in increasing production, including problems with production yields and quality control, component supply and shortages of qualified personnel. These problems could result in delays in product availability and increases in expenses. Any such delay or increased expense could adversely affect our ability to generate revenues. Future growth will also impose significant added responsibilities on management, including the need to identify, recruit, train and integrate additional employees. In addition, rapid and significant growth will place a strain on our administrative and operational infrastructure. In order to manage our operations and growth, we will need to continue to improve our operational and management controls, reporting and information technology systems and financial internal control procedures. If we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy and our operating results and business could suffer. We depend on our officers and other skilled and experienced personnel to operate our business effectively. If we are not able to retain our current employees or recruit additional qualified personnel, our business will suffer and our future revenue and profitability will be impaired. We are highly dependent on the skills and experience of our President and Chief Executive Officer, Michael H. Carrel, and certain other officers and key employees. We do not have any insurance in the event of the death or disability of our key personnel. Our officers and key employees, with the exception of our President and Chief Executive Officer and Senior Vice President, Operations and Quality, do not have employment agreements and they may terminate their employment and work elsewhere without notice and without cause or good reason. Currently we have non-compete agreements with our officers and other employees. Due to the specialized knowledge of each of our officers with respect to our products and our operations and the limited pool of people with relevant experience in the medical device field, the loss of service of one or more of these individuals could significantly affect our ability to operate and manage our business. The announcement of the loss of one or more of our key personnel could negatively affect our stock price. We depend on our scientific and technical personnel for successful product development and innovation, which are critical to the success of our business. In addition, to succeed in the implementation of our business strategy, our management team must rapidly execute our sales strategy, obtain expanded FDA clearances and approvals, achieve market acceptance for our products and further develop products, while managing anticipated growth by implementing effective planning, manufacturing and operating processes. Managing this growth will require us to attract and retain additional management and technical personnel. We rely primarily on direct sales employees to sell our products in the United States and failure to adequately train them in the use and benefits of our products will prevent us from achieving our market share and revenue growth goals. We have key relationships with doctors that involve procedure, product, market and clinical development. If any of these doctors end their relationship with us, our business could be negatively impacted. We cannot assure you that we will be able to attract and retain the personnel and doctor relationships necessary to grow and expand our business and operations. If we fail to identify, attract, retain and motivate these highly skilled personnel and doctors, we may be unable to continue our development and sales activities. Our business growth strategy involves the potential for significant acquisitions, which involve risks and difficulties in integrating potential acquisitions and may adversely affect our business, results of operations and financial condition. All acquisitions involve inherent uncertainties, which may include, among other things, our ability to: • • • • • successfully identify targets for acquisition; negotiate reasonable terms; properly perform due diligence and determine all the significant risks associated with a particular acquisition; properly evaluate target company management capabilities; and successfully transition and integrate the acquired company into our business and achieve the desired performance. We may acquire businesses with unknown liabilities, contingent liabilities or internal control deficiencies. We have plans and procedures in place to conduct reviews of potential acquisition candidates for compliance with applicable regulations and laws prior to acquisition. Despite these efforts, realization of any of these liabilities or deficiencies may increase our expenses, adversely affect our financial position through the initiation, pendency or outcome of litigation or otherwise, or cause us to fail to meet our public financial reporting obligations. We have recently consummated two significant acquisitions, and in the future may continue to invest a substantial amount of capital in acquisitions. We continue to evaluate potential acquisition opportunities to support, strengthen and grow our business. There can be no assurance that we will be able to locate suitable acquisition candidates, acquire possible acquisition candidates, acquire such candidates on commercially reasonable terms, or integrate acquired businesses successfully in the future. In addition, any 25 governmental review or investigation of our proposed acquisitions, such as by the Federal Trade Commission, may impede, limit or prevent us from proceeding with an acquisition. Future acquisitions may require us to incur additional debt and contingent liabilities, which may adversely affect our business, results of operations and financial condition. The process of integrating acquired businesses into our existing operations may result in operating, contract and supply chain difficulties, such as the failure to retain customers or management personnel. Such difficulties may divert significant financial, operational and managerial resources from our existing operations and make it more difficult to achieve our operating and strategic objectives. Disruptions of critical information systems or material breaches in the security of our systems could harm our business, customer relations and financial condition. We rely in part on information technology to store information, interface with customers, maintain financial accuracy, secure our data and accurately produce our financial statements. If our information technology systems do not effectively and securely collect, store, process and report relevant data for the operation of our business, whether due to equipment malfunction or constraints, software deficiencies or human error, our ability to effectively plan, forecast and execute our business plan and comply with applicable laws and regulations would be materially impaired. Any such impairment could have a material adverse effect on our results of operations, financial condition and the timeliness with which we report our operating results. We are subject to credit risk from our accounts receivable related to our product sales, which include sales within European countries that are currently experiencing economic turmoil. The majority of our accounts receivable arise from product sales in the United States. However, we also have significant receivable balances from customers within the European Union, Asia and other countries. Our accounts receivable in the United States are primarily due from public and private hospitals. Our accounts receivable outside the United States are primarily due from public and private hospitals and from independent distributors. Our historical write-offs of accounts receivable have not been significant. We monitor the financial performance and credit worthiness of our customers so that we can properly assess and respond to changes in their credit profile. Our independent distributors and sub-dealers operate in certain countries where economic conditions continue to present challenges to their businesses, and, thus, could place in risk the amounts due to us from them. These distributors are owed amounts from public hospitals that are funded by their governments. Adverse financial conditions in these countries may continue, thus negatively affecting the length of time that it will take us to collect associated accounts receivable or impact the likelihood of ultimate collection. Compliance with environmental laws and regulations may be expensive. Failure to comply with environmental laws and regulations could subject us to significant liability. Our manufacturing operations and research and development activities involve the use of biological materials and hazardous substances and are subject to a variety of federal, state and local environmental laws and regulations relating to the storage, use, discharge, disposal, remediation of and human exposure to hazardous substances. Our research and development and manufacturing operations may produce biological waste materials, such as animal tissues and certain chemical waste. These operations are permitted by regulatory authorities, and the resultant waste materials are disposed of in compliance with environmental laws and regulations. Compliance with these laws and regulations may be expensive, and non-compliance could result in substantial liabilities. In addition, we cannot completely eliminate the risk of accidental contamination or injury to third parties from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed any applicable insurance coverage we may have. In addition, our manufacturing operations may result in the release, discharge, emission or disposal of hazardous substances that could cause us to incur substantial liabilities, including costs for investigation and remediation. Risks Relating To Our Common Stock The price and trading volume of our common stock may experience extreme fluctuations and you could lose some or all of your investment. Because we operate within the medical device segment of the healthcare industry, our stock price is likely to be volatile. The market price of our common stock may have and has had a history of substantial fluctuation due to a variety of factors, including, but not limited to: • • • • • • doctor and patient acceptance of the surgical treatment of Afib or exclusion of the LAA using our products; adverse regulatory developments with respect to our products, such as recalls, new regulatory requirements, changes in regulatory requirements or guidance and timing of regulatory clearances and approvals for new products; coverage and reimbursement determinations for our products and the related procedures; the timing of orders received; delays or interruptions in manufacturing or shipping of our products; pricing of our products; 26 • • • • • • • • • • media reports, publications or announcements about products or new innovations that could compete with our products or about the medical device product segment in general; investigations, claims or allegations by regulatory agencies, such as the Department of Justice and Financial Industry Regulatory Authority; market conditions or trends related to the medical device and healthcare industries or the market in general; additions to or departures of our key personnel; disputes, litigation or other developments relating to proprietary rights, including patents, and our ability to obtain patent protection for our technologies; changes in financial estimates, investors’ perceptions or recommendations by securities analysts; variations in our quarterly financial and operating results; failure to achieve or maintain an effective healthcare compliance environment; changes in accounting principles; and failure to achieve and maintain an effective internal control environment. These factors, some of which are not within our control, may cause the price of our stock to fluctuate substantially. If our quarterly or annual operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price could drop suddenly and significantly. We believe the quarterly and annual comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance. The market prices of the securities of medical device companies, particularly companies like ours without consistent product revenue and earnings, have been highly volatile and are likely to remain highly volatile in the future. This volatility has often been unrelated to the operating performance of particular companies. These market prices generally are not sustainable and are highly volatile. In the past, companies that experience volatility in the market price of their securities have often faced securities class action litigation. Whether or not meritorious, litigation brought against us could result in substantial costs, divert our management’s attention and resources and harm our ability to grow our business. Sales of common stock by us in a capital raising transaction may dilute your ownership of common stock and cause a decline in the market price of our common stock. We may need to raise capital in the future to fund our operations or new initiatives. If we raise funds by issuing equity securities, our stock price may decline and our existing shareholders may experience significant dilution. Furthermore, we may enter into financing transactions at prices that represent a substantial discount to market price. A negative reaction by investors and securities analysts to any sale of our equity securities could result in a decline in the trading price of our common stock. In January 2013 we raised funds through a public offering of 3,996,250 shares of common stock. In December 2013 we issued 2,126,343 shares of common stock in order to finance the acquisition of Estech. In February 2014 we raised funds through a public offering of 3,660,525 shares of common stock. In October 2015 we issued 3,757,028 shares of common stock in order to finance the acquisition of nContact. Anti-takeover provisions in our amended and restated certificate of incorporation and amended and restated bylaws and under Delaware law could inhibit a change in control or a change in management that you consider favorable. Provisions in our certificate of incorporation and bylaws could delay or prevent a change of control or change in management that would provide you with a premium to the market price of your common stock. These provisions include those: • • • • • • authorizing the issuance without further approval of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt; prohibiting cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; limiting the ability to remove directors; limiting the ability of stockholders to call special meetings of stockholders; prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of stockholders; and establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. In addition, Section 203 of the Delaware General Corporation Law limits business combination transactions with 15% stockholders that have not been approved by our board of directors. These provisions and others could make it difficult for a third party to acquire us, or for members of our board of directors to be replaced, even if doing so would be beneficial to our stockholders. 27 Because our board of directors is responsible for appointing the members of our management team, these provisions could, in turn, affect any attempt to replace the current management team. If a change of control or change in management is delayed or prevented, you may lose an opportunity to realize a premium on your shares of common stock or the market price of our common stock could decline. We do not expect to pay dividends in the foreseeable future. As a result, you must rely on stock appreciation for any return on your investment. We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends will also depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Accordingly, you will have to rely on capital appreciation, if any, to earn a return on your investment in our common stock. Furthermore, pursuant to our credit facility, we are currently subject to restrictions on our ability to pay dividends and we may in the future become subject to other contractual restrictions on, or prohibitions against, the payment of dividends. We may be obligated to issue additional shares of our common stock to the former stockholders of nContact as a result of our satisfaction of certain milestones set forth in the merger agreement with nContact and the other parties thereto, resulting in stock ownership dilution. Under the terms of the merger agreement with nContact and the other parties thereto, we agreed to issue additional shares of our common stock, or make payments in cash, to the former stockholders of nContact as contingent consideration upon our satisfaction of milestones described in the merger agreement. Issuing additional shares of our common stock to the former stockholders of nContact in satisfaction of contingent consideration dilutes the ownership interests of holders of our common stock on the dates of such issuances. If we are unable to realize the strategic, operational and financial benefits anticipated from our acquisition of nContact, our stockholders may experience dilution of their ownership interests in our company upon any such future issuances of shares of our common stock without receiving any commensurate benefit. The sale of material amounts of common stock could encourage short sales by third parties and depress the price of our common stock. As a result, our stockholders may lose all or part of their investment. The downward pressure on our stock price caused by the sale of a significant number of shares of our common stock or the perception that such sales could occur by any of our significant stockholders could cause our stock price to decline, thus allowing short sellers of our stock an opportunity to take advantage of any decrease in the value of our stock. The presence of short sellers in our common stock may further depress the price of our common stock. Securities analysts may not continue, or additional securities analysts may not initiate, coverage for our common stock or may issue negative reports. This may have a negative impact on the market price of our common stock. Several securities analysts provide research coverage of our common stock. Some analysts have already published statements that do not portray our technology, products or procedures using our products in a positive light and others may do so in the future. If we are unable to educate those who publicize such reports about the benefits we believe our business provides, or if one or more of the analysts who elects to cover us downgrades our stock, our stock price would likely decline rapidly. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline. The trading market for our common stock may be affected in part by the research and reports that industry or financial analysts publish about us or our business. If sufficient securities analysts do not cover our common stock, the lack of research coverage may adversely affect the market price of our common stock. It may be difficult for companies such as ours, with smaller market capitalizations, to attract and maintain sufficient independent financial analysts that will cover our common stock. This could have a negative effect on the market price of our stock. The requirements of being a public company may strain our resources and distract management. As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (Exchange Act), and the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act). We are also subject to certain provisions of the Dodd- Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight is required. While the Dodd-Frank Act requires the SEC to adopt certain rules and regulations relating to our public disclosures, corporate governance and executive compensation, among other things, we expect such rules and regulations will require significant attention from management. Compliance with all of these laws, rules and regulations may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. The SEC has adopted rules regarding the disclosure of the use of conflict minerals (commonly referred to as tantalum, tin, tungsten and gold) which are mined from the Democratic Republic of the Congo (DRC) and neighboring countries. Under the rules, 28 we are required to disclose the procedures we employ to determine the sourcing of such minerals and metals produced from those minerals. The requirements require due diligence efforts and could affect the sourcing of components used in our products. If the conflict minerals included in our products are found to be sourced from the DRC or surrounding countries, we may take actions to change materials or product designs to reduce the possibility that our purchase of conflict minerals may fund armed groups in the region. These actions could add engineering and other costs to the manufacture of our products. We expect to incur costs in the investigation of the origin of the conflict minerals used in our products and in the reporting of the findings of our investigation. Our reputation may suffer if we have included conflict minerals in our products that are found to have funded armed groups in the DRC region. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES The Company maintains its headquarters in Mason, Ohio in a leased facility totaling approximately 92,000 square feet. The facility contains the Company’s administrative, regulatory, engineering, product development, distribution and some manufacturing functions. The monthly rent for this space is $113. The Company also has manufacturing functions located in leased facilities totaling approximately 55,900 square feet in West Chester, Ohio. The monthly rent for the West Chester facilities is $36. All West Chester leases will expire at various times through September 2017. The Company also maintains the following locations: • Minneapolis, Minnesota – This location includes both administrative and product development space. The office is approximately 16,600 square feet with monthly rent of $7. The lease will expire in September 2021. • • San Ramon, California – This location is primarily used for research and development activities and is approximately 3,800 square feet with monthly rent of $7. The lease will expire in December 2019. Amsterdam, Netherlands – This location is primarily for the administration of our European subsidiary. The monthly rent for this space is $19, and the lease will expire in January 2021. • Morrisville, North Carolina – This location was the corporate headquarters for nContact, and approximates 10,100 square feet. Monthly rent under this lease, which expires in December 2019, is approximately $8. The Company believes that its existing facilities are adequate to meet its immediate needs and that suitable additional space will be available in the future on commercially reasonable terms as needed. ITEM 3. LEGAL PROCEEDINGS The Company is not party to any material pending or threatened litigation. We may from time to time become a party to additional legal proceedings. See Note 11 – Commitments and Contingencies to our Consolidated Financial Statements. ITEM 4. MINE SAFETY DISCLOSURES Not applicable 29 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Common Stock Market Price Our common stock is traded on the NASDAQ Global Market under the symbol “ATRC.” The following table sets forth the high and low closing sales price of our common stock for 2015 and 2014: 2015 First Quarter Second Quarter Third Quarter Fourth Quarter 2014 First Quarter Second Quarter Third Quarter Fourth Quarter Price Range High Low 21.88 $ 25.02 $ 27.93 $ 22.66 $ 17.40 19.96 19.93 17.69 Price Range High Low 22.18 $ 19.25 $ 18.47 $ 19.96 $ 18.03 14.19 14.43 13.64 $ $ $ $ $ $ $ $ As of February 22, 2016, the closing price of our common stock on the NASDAQ Global Market was $17.34 per share, and the number of stockholders of record was 86. Dividend Policy The Company has not declared or paid any dividends on its capital stock since incorporation. Furthermore, pursuant to the revolving credit facility terms, the Company is subject to certain restrictions on its ability to pay dividends. The Company currently expects to retain future earnings, if any, for use in the operation and expansion of the business and does not anticipate paying any cash dividends in the foreseeable future. 30 Performance Graph The following graph compares the cumulative total stockholder return on our common stock with the cumulative total return of the NASDAQ Composite and the NASDAQ Medical Equipment Index for the period beginning on January 1, 2011 and ending on December 31, 2015. * This graph assumes that $100.00 was invested on December 31, 2010 in our common stock, the NASDAQ Composite Index and the NASDAQ Medical Equipment Index, and that all dividends are reinvested. No dividends have been declared or paid on our common stock. Stock performance shown in the above chart for our common stock is historical and should not be considered indicative of future price performance. AtriCure, Inc. NASDAQ Composite NASDAQ Medical Equipment 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 $ $ $ 108.08 $ 100.53 $ 115.55 $ 67.19 $ 116.92 $ 128.17 $ 181.89 $ 166.19 $ 151.89 $ 194.35 $ 188.78 $ 175.17 $ 218.50 199.95 190.80 31 ITEM 6. SELECTED FINANCIAL DATA The following table reflects selected financial data derived from our Consolidated Financial Statements for each of the last five years. The statement of operations data for the years ended December 31, 2015, 2014 and 2013 and the balance sheet data as of December 31, 2015 and 2014 are derived from our audited financial statements included in this Form 10-K. The statement of operations data for the years ended December 31, 2012 and 2011 and the balance sheet data as of December 31, 2013, 2012 and 2011 are derived from our audited financial statements not included in this Form 10-K. Historical results are not necessarily indicative of future results. The selected financial data set forth below should be read in conjunction with our financial statements, the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10- K. Operating Results: Revenue Gross profit Gross margin Net loss Basic and diluted net loss per share Weighted average shares outstanding Financial Position: Cash, cash equivalents and investments Working capital Total assets Long-term debt and capital leases Stockholders’ equity _________________________ 2015 (1) 2014 Year Ended December 31, 2013 (2) 2012 2011 (in thousands, except per share data) $ $ 129,755 $ 92,875 71.6% (27,212) (0.97) 28,058 107,454 $ 75,750 70.5% (16,211) (0.61) 26,374 81,889 $ 59,563 72.7% (11,462) (0.56) 20,431 42,284 $ 43,164 273,092 13,710 186,685 68,543 $ 67,865 158,404 74 132,538 34,125 $ 25,774 111,947 4,412 72,604 70,247 $ 50,014 71.2% (7,534) (0.47) 16,190 12,000 $ 16,334 32,431 6,407 12,500 64,402 46,996 73.0% (5,456) (0.35) 15,672 14,183 20,384 33,859 4,926 15,615 (1) We acquired nContact for $116.8 million on October 13, 2015. The acquisition is included in our Consolidated Balance Sheet beginning October 13, 2015, and the results of operations are included in our Consolidated Statement of Operations and Comprehensive Loss for the period October 14, 2015 through December 31, 2015. (2) We acquired Estech for $39.7 million on December 31, 2013. The acquisition is included in our Consolidated Balance Sheet as of December 31, 2013. 32 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts referenced in this Item 7 are in thousands, except per share amounts.) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and notes thereto contained in Item 8, “Financial Statements and Supplementary Data,” to provide an understanding of our results of operations, financial condition and cash flows. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under Item 1A “Risk Factors,” the cautionary statement regarding forward-looking statements at the beginning of Part I and elsewhere in this Form 10-K. Overview We are a leading atrial fibrillation (Afib) solutions partner providing innovative products, professional education and support for clinical science to reduce the economic and social burden of Afib. We have several product lines for the ablation of cardiac tissue. Our primary ablation product line, which accounts for a majority of our revenue, is the Isolator Synergy™ System, a bipolar radio frequency (RF) ablation generator, switch box and associated single use devices. We also offer a cryosurgery product line, including both reusable and single use cryoablation devices. Our AtriClip® Left Atrial Appendage Exclusion System (AtriClip system) is the most widely implanted left atrial appendage management (LAAM) device worldwide. We believe cardiothoracic surgeons are adopting our ablation and LAAM devices for the treatment of Afib and prevention of stroke. Cardiothoracic surgeons have adopted our radiofrequency (RF) ablation and cryoablation systems to treat Afib in an estimated 195,000 patients since 2004, and we believe that we are currently the market leader in the surgical treatment of Afib. Our products are utilized by cardiothoracic surgeons during both open-heart and minimally invasive surgical procedures, either on a concomitant or sole-therapy basis. During a concomitant procedure, the surgeon ablates cardiac tissue and/or excludes the left atrial appendage, secondary, or concomitant, to a primary cardiac procedure such as a valve repair or replacement or coronary artery bypass graft (CABG). Our Isolator Synergy System, which includes our Isolator Synergy clamps, RF generator and related switchbox, is approved by FDA for the treatment of persistent and long-standing persistent Afib concomitant to other open-heart surgical procedures such as coronary artery bypass grafting and/or valve replacement or repair. To date, none of our other products have been approved or cleared by FDA specifically for the treatment of Afib. Our 510(k)-cleared RF and cryo ablation products are indicated for the ablation of cardiac tissue and/or treatment of cardiac arrhythmias. In addition, our cryoICE® probe is cleared for blocking pain by temporarily ablating peripheral nerves. Our AtriClip products are 510(k)-cleared with an indication for occlusion of the LAA, under direct visualization, concomitant to other open cardiac surgical procedures. We recently acquired nContact, a leader in minimally invasive technology for epicardial ablation. We also have a line of reusable surgical instruments typically used for cardiac valve replacement or repair. We anticipate that substantially all of our revenue for the foreseeable future will relate to products we currently sell, or are in the process of developing, which surgeons use to ablate cardiac tissue, to exclude the left atrial appendage, to perform mitral and aortic valve replacement and repair and/or to ablate peripheral nerves during cardiothoracic surgery. In the United States we sell our products to medical centers through our direct sales force. AtriCure Europe, B.V., our wholly- owned subsidiary incorporated and based in the Netherlands, markets and sells our products throughout Europe and the Middle East. In certain markets, such as Germany, France, the United Kingdom and the Benelux region, sales are made directly to medical centers, with the remaining sales being made through distributors. In other international markets we sell our products to distributors who in turn sell them to end users. Our business is primarily transacted in U.S. Dollars with the exception of transactions with our European subsidiary which are transacted in Euros or British Pounds. In September 2015 we announced the launch of the cryoFORM™ cryoablation probe in Europe, which offers increased probe flexibility to adapt to a variety of surgical ablation procedures. This offering adds to the cryoICE™ family of ablation products which are used in the cryosurgical treatment of cardiac arrhythmias. The cryoFORM™ probe builds off of our core strengths in cryoablation technology, leveraging such important features as thermal capacity to remove heat and active defrost, which allows the probe to be safely and quickly detached while maintaining the tissue’s frozen state. Building upon those strengths, the new probe offers increased flexibility, allowing the surgeon to more easily manipulate and apply the device and conform to challenging anatomies. On October 13, 2015 we acquired nContact Surgical, Inc. (nContact) pursuant to a merger agreement. The transaction consideration consists of an upfront payment of 3,757 shares of AtriCure common stock and approximately $7,581 in cash. The transaction also includes up to $50,000 in additional contingent consideration based on completion of enrollment of the CONVERGE IDE trial and PMA approval before December 31, 2020. Additionally, nContact shareholders are entitled to additional sales-based contingent consideration on revenue in excess of an annual growth rate of more than 25% through 2019. Subject to the terms and conditions of the merger agreement, all contingent consideration can be paid in cash and AtriCure common stock. The product portfolio acquired includes innovative devices that provide for less invasive ablation options for the treatment of cardiac arrhythmias. 33 Results of Operations Year Ended December 31, 2015 compared to December 31, 2014 The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of total revenue: Revenue Cost of revenue Gross profit Operating expenses: Research and development expenses Selling, general and administrative expenses Total operating expenses Loss from operations Other income (expense): Interest expense Interest income Other Other (expense) income Loss before income tax expense Income tax expense Net loss Year Ended December 31, 2015 2014 Amount 129,755 36,880 92,875 25,742 93,853 119,595 (26,720) (292) 190 (354) (456) (27,176) (36) (27,212) $ $ % of Revenue Amount (dollars in thousands) 100.0 % $ 28.4 71.6 19.8 72.3 92.2 (20.6) (0.2) 0.1 (0.3) (0.4) (21.0) — (21.0) % $ 107,454 31,704 75,750 18,600 73,510 92,110 (16,360) (305) 96 391 182 (16,178) (33) (16,211) % of Revenue 100.0 % 29.5 70.5 — 17.3 68.4 85.7 (15.2) — (0.3) 0.1 0.3 0.1 (15.1) — (15.1) % Revenue. Total revenue increased 20.8% (23.8% on a constant currency basis), from $107,454 in 2014 to $129,755 in 2015. Constant currency basis amounts are calculated by applying previous period foreign currency exchange rates to each of the comparable periods. Revenue from sales to customers in the United States increased $22,009, or 27.4%, and revenue from sales to international customers increased $292, or 1.1% (12.9% on a constant currency basis). The increase in sales to customers in the United States was primarily due to increased sales of ablation-related open-heart products of $8,879, increased sales of ablation-related minimally invasive (MIS) products of $5,514 and increased sales of the AtriClip system of $7,702. The increase in MIS sales was partially influenced by the nContact acquisition closed in the fourth quarter of 2015. The increase in international revenue was primarily due to an increase in sales in Asia, the Benelux region and the United Kingdom, across all applicable product lines, which offset the decline in the Euro-Dollar exchange rate between years and weakness in a few distributor markets. Cost of revenue and gross margin. Cost of revenue increased $5,176, from $31,704 in 2014 to $36,880 in 2015. As a percentage of revenue, cost of revenue decreased from 29.5% for the year ended December 31, 2014 to 28.4% for the year ended December 31, 2015. Gross margin for 2015 and 2014 was 71.6% and 70.5%, respectively. The increase in gross margin was primarily due to the heavier U.S. sales mix and the elimination of certain Estech transition costs recorded in 2014, partially offset by heavier loaner generator depreciation, a decrease in the Euro-Dollar exchange rate and a slight increase in scrap and obsolescence related primarily to non-core or Estech products during 2015. Research and development expenses. Research and development expenses increased $7,142, or 38.4%, from $18,600 in 2014 to $25,742 in 2015. The increase in expense was primarily due to a $3,162 increase in product development, regulatory and clinical personnel expense, a $1,884 increase in product development project expense and a $436 increase in share-based compensation expense. Selling, general and administrative expenses. Selling, general and administrative expenses increased $20,343, or 27.7%, from $73,510 in 2014 to $93,853 in 2015. The increase was primarily due to the favorable impact of the $8,032 fair value adjustment of Estech contingent consideration recorded during 2014, a $6,053 increase in personnel expense and a $1,571 increase in training and related expenses, as well as $2,489 in transaction costs recorded in connection with the acquisition of nContact during 2015. The increase is partially offset by $3,207 of transaction, transition and severance expense related to the acquisition of Estech recorded during 2014. Net interest income (expense). Net interest expense was $102 for 2015 and $209 for 2014. Net interest expense in 2014 primarily represents interest on the Silicon Valley Bank (SVB) term loan paid during 2014, prior to the repayment of the debt in 34 March 2014. Interest expense associated with capital lease obligations and the amortization of financing costs are included in net interest expense in both 2015 and 2014. Other income and expense. Other income and expense consists primarily of foreign currency transaction gains and losses, grant income and non-employee option gains and losses related to the fair market value change for fully vested options outstanding for consultants, which are accounted for as free-standing derivatives. Net other (expense) income for 2015 and 2014 totaled $(354) and $391, respectively. Year Ended December 31, 2014 compared to December 31, 2013 The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of total revenue: Revenue Cost of revenue Gross profit Operating expenses: Research and development expenses Selling, general and administrative expenses Total operating expenses Loss from operations Other income (expense): Interest expense Interest income Other Other income (expense) Loss before income tax expense Income tax expense Net loss Year Ended December 31, 2014 2013 Amount $ 107,454 31,704 75,750 18,600 73,510 92,110 (16,360) (305) 96 391 182 (16,178) (33) (16,211) $ % of Revenue Amount (dollars in thousands) 100.0 % $ 29.5 70.5 — 17.3 68.4 85.7 (15.2) — (0.3) 0.1 0.3 0.1 (15.1) — (15.1) % $ 81,889 22,326 59,563 13,440 57,014 70,454 (10,891) (566) 16 (3) (553) (11,444) (18) (11,462) % of Revenue 100.0 % 27.3 72.7 — 16.4 69.6 86.0 (13.3) — (0.7) — — (0.7) (14.0) — (14.0) % Revenue. Total revenue increased 31.2% (31.4% on a constant currency basis), from $81,889 in 2013 to $107,454 in 2014. Constant currency basis amounts are calculated by applying previous period foreign currency exchange rates to each of the comparable periods. Revenue from sales to customers in the United States increased $17,892, or 28.7%, and revenue from sales to international customers increased $7,673, or 39.2% (39.8% on a constant currency basis). The increase in sales to customers in the United States was primarily due to increased sales of ablation-related open-heart products of $6,819 and increased sales of the AtriClip system of $5,855. The increase in international revenue was primarily due to an increase in sales in Europe and Asia, across all product lines. Revenue from both the United States and Europe was positively impacted by the addition of products from the Estech acquisition. Cost of revenue and gross margin. Cost of revenue increased $9,378, from $22,326 in 2013 to $31,704 in 2014. As a percentage of revenue, cost of revenue increased from 27.3% for the year ended December 31, 2013 to 29.5% for the year ended December 31, 2014. Gross margin for 2014 and 2013 was 70.5% and 72.7%, respectively. The decrease in gross margin was primarily due to an increased mix of international sales, which carry lower gross margins, an increase in costs related to the acquired Estech products, an increase in nonrecurring expense of approximately $344 associated with the transition of the Estech business and increased capital equipment placement. Research and development expenses. Research and development expenses increased $5,160, from $13,440 in 2013 to $18,600 in 2014. Approximately $559 of the increase was due to nonrecurring expenses related to the transition of the Estech business. The remaining increase in expense was primarily due to a $3,870 increase in product development, regulatory, clinical and quality personnel expense, a $1,306 increase in clinical trial spending and a $1,201 increase in intangible asset amortization offset by a $2,496 decrease in clinical affairs consulting. Selling, general and administrative expenses. Selling, general and administrative expenses increased $16,496, or 28.9%, from $57,014 in 2013 to $73,510 in 2014. Approximately $3,207 of the increase was due to nonrecurring transaction, transition and severance expense related to the acquisition of Estech. An offset to selling, general and administrative expense of $8,032 was recognized due to the fair value adjustment of the Estech contingent consideration. The remaining increase was primarily due to an 35 $11,652 increase in sales, marketing, training and administrative headcount and an increase in sales, marketing and training expenditures. Net interest expense. Net interest expense was $209 for 2014 and $550 for 2013. Net interest expense primarily represents interest expense related to amounts outstanding on our term loan, amortization of debt issuance costs and expense related to the payoff of our term loan. Other income and expense. Other income and expense consists primarily of foreign currency transaction gains and losses, grant income and non-employee option gains and losses related to the fair market value change for fully vested options outstanding for consultants, which are accounted for as free-standing derivatives. Net other income (expense) for 2014 and 2013 totaled $391 and ($3), respectively. Liquidity and Capital Resources As of December 31, 2015 we had cash, cash equivalents and investments of $42,284 and no borrowings under short-term or long-term debt arrangements, resulting in a net cash position of $42,284. We had unused borrowing capacity of $14,559 under our revolving credit facility. Most of our cash is held by United States financial institutions. We had net working capital of $43,164 and an accumulated deficit of $165,636 as of December 31, 2015. Cash flows used in operating activities. Net cash used in operating activities was $7,842 during 2015. The primary net uses of cash for operating activities were as follows: • • the net loss of $27,212, offset by $16,767 of non-cash expenses, including $8,997 in share-based compensation and $6,278 in depreciation and amortization; and a net increase in cash used related to changes in operating assets and liabilities of $2,603, due primarily to the following: • • • an increase in accounts receivable of $900, due primarily to the timing of sales during 2015; an increase in inventory of $2,950, due primarily to increased inventory levels in support of anticipated revenue growth and the move to a new corporate headquarters building; and a $7,083 increase in accounts payable and accrued liabilities due primarily to increased headcount and related personnel costs in 2015 and the timing of payments, including variable compensation payments. Cash flows used in investing activities. Net cash used in investing activities was $10,501 during 2015. The primary uses of cash for investing activities were $7,581 of cash paid in the acquisition of nContact, $7,545 related to the purchase of equipment, which included the placement of our RF and cryo generators with our customers, as well as approximately $5,900 related to funding building improvements and the purchase of furniture, fixtures and other property associated with the Mason facility. There was an increase in the property under the build-to-suit obligation for our Mason facility of $10,552 during 2015. Capital expenditures associated with our Mason facility are largely expected to be non-recurring in nature. The uses of cash were partially offset by sources of cash from investing activities of $21,077 in maturities and sales of available-for-sale securities net of purchases of available-for- sale securities. Cash flows provided by financing activities. Net cash provided by financing activities during 2015 was $13,961, which was primarily due to increases in a build-to-suit obligation of $10,552, proceeds from stock option exercises of $2,703, proceeds from the issuance of common stock under our employee stock purchase plan of $1,539 and proceeds from an economic incentive loan of $340, partially offset by shares repurchased for payment of taxes on stock awards of $782, capital lease payments and debt fees. Credit facility. The Company’s Loan and Security Agreement with SVB, as amended, restated, and modified (Loan Agreement) provides for a revolving credit facility under which we may borrow a maximum of $15,000. Borrowing availability under the revolving credit facility is based on the lesser of $15,000 or a borrowing base calculation as defined by the Loan Agreement. As of December 31, 2015 we had no borrowings under the revolving credit facility, and we had borrowing availability of $14,559. The applicable borrowing rate on the revolving facility is the prime rate during a period when we meet the requirements for Streamline Period, which are based on available cash and amounts drawn under the credit facility, and prime plus 1.25% at all other times. The revolving credit facility expires on April 30, 2018. The Loan Agreement contains covenants that include, among others, covenants that limit our ability to dispose of assets, enter into mergers or acquisitions, incur indebtedness, incur liens, pay dividends or make distributions on our capital stock, make investments or loans, and enter into certain affiliate transactions, in each case subject to customary exceptions for a credit facility of this size and type. Additional covenants apply when we have outstanding borrowings under the revolving credit facility or when we hold less than $20,000 in cash and investments with SVB. Financial covenants under the credit facility include a minimum EBITDA and a minimum liquidity ratio. Further, a minimum fixed charge ratio applies when specific covenant milestones are achieved. None of the covenants must be applied as of December 31, 2015. The occurrence of an event of default could result in an increase to the applicable interest rate by 3.0%, an acceleration of all obligations under the Loan Agreement, an obligation to repay all obligations in full and a right by SVB to exercise all remedies available to it under the Loan Agreement and related agreements including the Guaranty and Security Agreement. Specified assets have been pledged as collateral. 36 We had an outstanding letter of credit of €75 issued to our European subsidiary’s corporate credit card provider which was due to expire on June 30, 2015. The letter of credit was cancelled in June 2015. In connection with the terms of our Mason facility lease, a letter of credit in the amount of $1,250 was issued to the landlord of our Mason facility in October 2015 and remains outstanding as of December 31, 2015. Uses of liquidity and capital resources. Our future capital requirements depend on a number of factors, including the rate of market acceptance of our current and future products, the resources we devote to developing and supporting our products, future expenses to expand and support our sales and marketing efforts, costs relating to changes in regulatory policies or laws that affect our operations and costs of filing, costs associated with clinical trials and securing regulatory approval for new products, costs associated with acquiring and integrating businesses, costs associated with prosecuting, defending and enforcing our intellectual property rights and possible acquisitions and joint ventures. Global economic turmoil may adversely impact our revenue, access to the capital markets or future demand for our products. In January 2014 we filed a shelf registration statement with the SEC which allows us to sell any combination of senior or subordinated debt securities, common stock, preferred stock, warrants, depositary shares and units in one or more offerings should we choose to do so in the future. In February 2014 we sold 3,660,525 shares of common stock under the shelf registration which resulted in net proceeds of approximately $65,830. The unissued and unsold securities remaining on this registration statement were removed and withdrawn from registration in November 2015. In November 2015 we filed a shelf registration statement with the SEC which allows us to sell any combination of senior or subordinated debt securities, common stock, preferred stock, warrants, depositary shares and units in one or more offerings should we choose to do so in the future. We believe that our current cash, cash equivalents and investments, along with the cash we expect to generate or use for operations or access via our revolving credit facility, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. Such cash needs over the next twelve months include incremental operating and integration costs resulting from the acquisition of nContact in October 2015. The transaction provides for contingent consideration to be paid upon attaining specified regulatory approvals and clinical and revenue milestones over the next five years. Subject to the terms and conditions of the nContact merger agreement, such contingent consideration can be paid in cash and AtriCure common stock. Over the next twelve months, we do not expect our cash requirements to include significant payments of contingent consideration based on terms of the acquisition agreement and related milestones. Contractual Obligations and Commitments The following table sets forth our approximate aggregate obligations at December 31, 2015 for future payments under contracts and other contingent commitments: Contractual Obligations Capital leases(1) Operating leases(2) Royalty obligations(3) Restricted grants Total contractual obligations _________________________ Total 23,110 $ 3,865 1,572 329 28,876 $ $ $ Less than 1 year 1-3 years 3-5 years 1,417 $ 934 1,572 329 4,252 $ 2,864 $ 1,387 — — 4,251 $ 2,935 1,293 — — 4,228 (1) Capital leases consist of principal and interest payments related to a building and computer equipment. The rent payments related to our new headquarters building in Mason, Ohio are included in these amounts. See Note 10 – Indebtedness to our Consolidated Financial Statements. (2) Represents lease commitments under various operating leases. (3) Represents obligations for royalty agreements ranging from 0.75% to 5% of specified product sales estimated using 2015 sales. See Note 11 – Commitments and Contingencies to our Consolidated Financial Statements. We have contractual obligations for contingent consideration payments related to the nContact acquisition. The timing of the payments and amount payable in cash is not determinable as of December 31, 2015. See Note 5 – Business Combinations to our Consolidated Financial Statements. Off-Balance-Sheet Arrangements As of December 31, 2015 we had operating lease agreements that were not recorded on the Consolidated Balance Sheets. Operating leases are utilized in the normal course of business. 37 Inflation Inflation has not had a significant impact on our historical operations and we do not expect it to have a significant impact on our results of operations or financial condition in the foreseeable future. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses, and disclosures of contingent assets and liabilities at the date of the financial statements. On a periodic basis, we evaluate our estimates, including those related to sales returns and allowances, accounts receivable, inventories and share-based compensation. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates under different assumptions or conditions. We have described our significant accounting policies in Note 1 – Description of Business and Summary of Significant Accounting Policies to our consolidated financial statements included in this Form 10-K. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Revenue Recognition—Revenue is generated primarily from the sale of our disposable surgical devices. Pursuant to our standard terms of sale, revenue is recognized when title to the goods and risk of loss transfers to customers and there are no remaining obligations that will affect customers’ final acceptance of the sale. Generally, our standard terms of sale define the transfer of title and risk of loss to occur upon shipment to the respective customer. We generally do not maintain any post-shipping obligations to the recipients of the products. No installation, calibration or testing of this equipment is performed by AtriCure subsequent to shipment to the customer in order to render it operational. Shipping and handling revenues and cost of freight for shipments made to customers is included in revenue and cost of revenue, respectively. Sales and other value-added taxes collected from customers and remitted to governmental authorities are excluded from revenue. We sell our products primarily through a direct sales force and through a wholly- owned subsidiary, AtriCure Europe, B.V. Terms of sale are generally consistent for both end-users and distributors except that payment terms are generally net 30 days for end-users and net 60 days for distributors with limited exceptions. We account for revenue in accordance with FASB ASC 605, “Revenue Recognition” (ASC 605). We determine the timing of revenue recognition based upon factors such as passage of title, installation, payment terms and ability to return products. We recognize revenue when all of the following criteria are met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured. We maintain a provision for sales returns and allowances to account for potential returns of defective or damaged products, products shipped in error and invoice adjustments. We estimate such provision quarterly based primarily on a specific identification basis, in addition to estimating a general reserve based on historical experience. Allowance for Doubtful Accounts Receivable—We evaluate the collectability of accounts receivable to determine the appropriate reserve for doubtful accounts. In determining the amount of the reserve, we consider the aging of account balances, historical credit losses, customer-specific information and other relevant factors. We periodically review accounts receivable and adjust the allowance based on current circumstances and charge off uncollectible receivables against the allowance when all attempts to collect the receivable have failed. Our history of write-offs against the allowance has not been significant. Inventories—Our inventories are stated at the lower of cost or market using approximate costs based on the first-in, first-out cost method (FIFO) and consist of raw materials, work in process and finished goods. We estimate and record our inventory reserve quarterly based on product usage for excess, slow moving and obsolete inventory as well as for inventory with a carrying value in excess of its net realizable value. Our industry is characterized by rapid product development and frequent new product introductions. Uncertain timing of product approvals, variability in product launch strategies and variation in product utilization all impact excess and obsolete inventory. Property and Equipment—We state property and equipment at cost less accumulated depreciation. Depreciation is computed using the straight-line method for financial reporting purposes and applied over the estimated useful lives of the assets. Included in property and equipment are generators and other capital equipment (such as our switchbox units and cryosurgical consoles) that are placed with direct customers that use our disposable products. These generators and other capital equipment are depreciated over a period of three years, which approximates their useful lives, and such depreciation is included in cost of revenue. We estimate the useful lives of this equipment based on anticipated usage by our customers and the timing and impact of our expected new technology rollouts. To the extent we experience changes in the usage of this equipment or the introductions of new technologies, the estimated useful lives of this equipment may change in a future period. Intangible Assets—Intangible assets with a definite life are amortized on a straight-line basis over the estimated periods benefitted. Included in intangible assets is In Process Research and Development (IPR&D). We define IPR&D as the value of 38 acquired technology which has not yet reached technological feasibility. The primary basis for determining the technological feasibility is obtaining specific regulatory approvals. The estimated fair value of IPR&D acquired in a business combination is capitalized as an indefinite-lived intangible asset until completion or abandonment of the IPR&D project. Upon completion of the development project, the IPR&D is amortized over its estimated useful life. If the IPR&D project is abandoned, the related IPR&D asset would be written off. The estimated fair value of IPR&D is determined using an income approach model. We review intangible assets for impairment using our 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. We test goodwill for impairment annually on November 30, or more often if impairment indicators are present. Our goodwill is accounted for in a single reporting unit representing the Company as a whole. Share-Based Employee Compensation—We account for share-based compensation for all employee share-based payment awards, including stock options, restricted stock, and stock purchases related to an employee stock purchase plan, based on their estimated fair values. We estimate the fair value of options on the date of grant using the Black-Scholes option pricing model (Black- Scholes model). Our determination of fair value of share-based payment awards is affected by our stock price, as well as assumptions regarding a number of highly complex and subjective variables. These variables include but are not limited to our expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. The fair value of our market- based performance option grants is estimated at the date of grant using a Monte-Carlo simulation. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statement of Operations. The expense has been reduced for estimated forfeitures. We estimate the fair value of restricted stock awards based upon the grant date closing market price of our common stock. Our determination of fair value is affected by our stock price as well as assumptions regarding the number of shares expected to vest. We also have an employee stock purchase plan (ESPP) which is available to all eligible employees as defined by the plan document. Under the ESPP, shares of our common stock may be purchased at a discount. We estimate the number of shares to be purchased under the ESPP at the beginning of the purchase period and calculate estimated compensation expense using the Black- Scholes model based upon the fair value of the stock at the beginning of the purchase period. Compensation expense is recognized over each purchase period. We have historically issued stock options to non-employee consultants as a form of compensation for services provided to us. Because the options require settlement by our delivery of registered shares and because the tax withholding provisions in the awards allow the options to be partially net-cash settled, these options, when vested, are no longer eligible for equity classification and are, thus, subsequently accounted for as derivative liabilities under FASB ASC 815, “Derivatives and Hedging” (ASC 815), until the awards are ultimately either exercised or forfeited. Accordingly, the vested non-employee options are classified as liabilities, and their fair value is remeasured using the Black-Scholes model at each reporting period. Acquisition-Related Contingent Consideration—Contingent consideration arrangements obligate the Company to pay former shareholders of an acquired entity certain amounts if specified future events occur or conditions are met, such as the achievement of certain technological milestones or the achievement of targeted revenue milestones. We measure such liabilities using unobservable inputs, applying the income approach, such as the discounted cash flow technique or the probability-weighted scenario method. Various key assumptions, including the probability of achievement of the agreed milestones, projected revenues from acquisitions, and the discount rate, are used in the determination of fair value of contingent consideration arrangements and are not observable in the market. Subsequent revisions to key assumptions, which impact the estimated fair value of contingent consideration liabilities, are reflected in the Consolidated Statements of Operations and Comprehensive Loss. Taxes—Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred 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 tax assets and liabilities from a change in tax rates is recognized in the period that includes the enactment date. Our estimate of the valuation allowance for deferred tax assets requires us to make significant estimates and judgments about our future operating results. Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more-likely-than-not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be objectively verified. We evaluate deferred tax assets on a quarterly basis to determine if valuation allowances are required by considering all available evidence. Deferred 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 tax assets are future reversals of existing taxable temporary differences, future taxable income, exclusive of reversing temporary differences and carryforwards, taxable income in carry-back years and tax planning strategies that are both prudent and feasible. In evaluating whether to record a valuation allowance, the applicable accounting standards deem that the existence of cumulative losses in recent years is a significant piece of objectively verifiable negative evidence that must be overcome by 39 objectively verifiable positive evidence to avoid the need to record a valuation allowance. We have recorded a full valuation allowance against our 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. We believe our critical accounting policies regarding revenue recognition, allowance for uncollectible accounts receivable, inventories, property and equipment, intangible assets, goodwill, share-based employee compensation, acquisition-related contingent consideration and taxes affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. We base our judgments and estimates on historical experience, current conditions and other reasonable factors. Recent Accounting Pronouncements In May 2014 the FASB issued a final standard on revenue from contracts with customers. The standard, issued as FASB ASU 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09), outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. In July 2015 the FASB decided to defer the effective date of ASU 2014-09 for entities reporting under accounting principles generally accepted in the United States of America (U.S. GAAP) from interim and annual reporting periods beginning after December 15, 2016 to interim and annual reporting periods beginning after December 15, 2017 and allow early adoption as of the original effective date. A full retrospective or modified retrospective approach may be taken to adopt the guidance in the ASU. The Company is evaluating the impact of the provisions of ASU 2014-09 on its consolidated financial position, results of operations and related disclosures. In 2015 the FASB issued ASU 2015-10, “Technical Corrections and Improvements” (ASU 2015-10), which amends a wide range of topics in the FASB Accounting Standards Codification. The amendments make minor corrections or minor improvements to the Codification. The amendments in ASU 2015-10 that require transition guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments are effective upon the issuance of ASU 2015-10. The Company has reviewed the amendments in ASU 2015-10 and has determined that the new guidance does not have a material impact on the Company’s financial reporting. In July 2015 the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory” (ASU 2015-11), which requires entities to measure most inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. ASU 2015-11 is effective prospectively for annual periods beginning after December 15, 2016 and interim periods therein. Early application is permitted. The Company is reviewing the provisions of ASU 2015-11 and expects that the new guidance will not have a material impact on the Company’s financial reporting. In August 2015 the FASB issued ASU 2015-15, “Interest – Imputation of Interest” (ASU 2015-15), which clarifies the Security and Exchange Commission staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements given the lack of guidance on this topic in ASU 2015-03. ASU 2015-15 was effective upon issuance. The Company has determined that the new guidance does not have a material impact on its financial reporting. In September 2015 the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (ASU 2015-16), which simplifies the accounting for measurement-period adjustments. Under ASU 2015-16, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 also requires acquirers to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, and must be applied prospectively to adjustments to provisional amounts that occur after the effective date. Early adoption is permitted for financial statements that have not been issued. The Company will consider the new guidance in its accounting and financial reporting for acquisitions. In November 2015 the FASB issued ASU 2015-17, “Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes” (ASU 2015-17), which requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. Also, companies will no longer allocate valuation allowances between current and noncurrent deferred tax assets because those allowances also will be classified as noncurrent. ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for financial statements that have not been issued. The Company is evaluating the impact of the provisions of ASU 2015-17 on its consolidated financial position and related disclosures. In January 2016 the FASB issued ASU 2016-01,  “Financial Instruments — Overall — Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01), which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the 40 fair value of financial instruments. The Company is evaluating the impact of ASU 2016-01 on its consolidated financial position and related disclosures. In February 2016 the FASB issued ASU 2016-02, “Leases” (ASU 2016-02) which requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. The Company will review the provisions of ASU 2016-02 to determine the impact on its consolidated financial position and related disclosures. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Amounts referenced in this Item 7A are in thousands, except per share amounts.) The Company has financial instruments accounted for as free-standing derivatives related to certain of the Company’s share- based payment arrangements that are outside the scope of FASB ASC 718 and are subject to FASB ASC 815, which requires fully vested stock options held by certain non-employee consultants to be accounted for as liability awards until these awards are exercised or forfeited. The fair value of these awards is remeasured at each reporting period until the awards are settled or expire. The Company is exposed to the volatility of the market price of its stock. Expense (income) recorded based on the remeasurement of these options was approximately $57, ($183) and $272 for 2015, 2014 and 2013, respectively. As of December 31, 2015, all non-employee stock options had been exercised. The Company is exposed to various market risks, which include potential losses arising from adverse changes in market rates and prices, such as foreign exchange fluctuations and changes in interest rates. Interest on the revolving loan will accrue at the prime rate during a Streamline Period and prime plus 1.25% during a Non-Streamline Period (as defined in the Loan Agreement). For the years ended December 31, 2015 and 2014, products sold by AtriCure Europe, B.V. accounted for 12.8% and 16.2%, respectively, of the Company’s total revenue. Since such revenue was primarily denominated in Euros, the Company is exposed to exchange rate fluctuations between the Euro and the U.S. Dollar, as well as exchange rate fluctuations between the British Pound and the Euro. For the years ended December 31, 2015 and 2014, foreign currency transaction losses of $339 and $523, respectively, were recorded primarily in connection with partial settlements of the intercompany receivable balance with the subsidiary and invoices transacted in British Pounds. For revenue denominated in Euros, if there is an increase in the rate at which Euros are exchanged for U.S. Dollars, it will require more Euros to equal a specified amount of U.S. Dollars than before the rate increase. In such cases, and if products are priced in Euros, the Company will receive less in U.S. Dollars than was received before the rate increase went into effect. If products are priced in U.S. Dollars and competitors price their products in Euros, an increase in the relative strength of the U.S. Dollar could result in the Company’s price not being competitive in a market where business is transacted in Euros. The Euro to U.S. Dollar conversion rate fluctuations may impact our reported revenue and expenses. The Company invests its cash primarily in money market accounts, U.S. government agencies and securities, corporate bonds and commercial paper. Although the Company believes its cash to be invested in a conservative manner, with cash preservation being the primary investment objective, the value of the securities held will fluctuate with changes in the financial markets including, among other things, changes in interest rates, credit quality and general volatility. This risk is managed by investing in high quality investment grade securities with short-term maturities. Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalent balances and investments in corporate bonds. Certain of AtriCure’s cash and cash equivalents balances exceed FDIC insured limits or are invested in money market accounts with investment banks that are not FDIC insured. The Company places its cash and cash equivalents in what it believes to be credit-worthy financial institutions. As of December 31, 2015, $23,608 of the cash and cash equivalents balance was in excess of the FDIC limits. 41 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ATRICURE, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Financial Statements: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations and Comprehensive Loss Consolidated Statements of Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Financial Statement Schedule: Schedule II Valuation and Qualifying Accounts Page 43 44 45 46 47 48 70 42 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of AtriCure, Inc. and subsidiaries Mason, Ohio We have audited the accompanying consolidated balance sheets of AtriCure, Inc. and subsidiaries (the "Company") as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of AtriCure, Inc. and subsidiaries at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 29, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting. /s/ Deloitte & Touche LLP Cincinnati, Ohio February 29, 2016 43 ATRICURE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2015 and 2014 (In Thousands, Except Per Share Amounts) Assets Current assets: Cash and cash equivalents Short-term investments Accounts receivable, less allowance for doubtful accounts of $136 and $68, respectively Inventories Other current assets Total current assets Property and equipment, net Long-term investments Intangible assets, net Goodwill Other noncurrent assets Total Assets Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Accrued liabilities Other current liabilities and current maturities of capital leases Total current liabilities Capital leases Other noncurrent liabilities Total Liabilities Commitments and contingencies (Note 11) Stockholders’ Equity: $ $ $ 2015 2014 23,764 $ 10,814 19,409 17,659 3,106 74,752 31,279 7,706 53,775 105,257 323 273,092 $ 28,384 31,265 17,558 14,257 2,044 93,508 11,552 8,894 8,878 35,386 186 158,404 12,744 $ 18,394 450 31,588 13,710 41,109 86,407 7,621 14,041 3,981 25,643 74 149 25,866 Common stock, $0.001 par value, 90,000 shares authorized and 32,274 and 27,580 issued and outstanding, respectively Additional paid-in capital Accumulated other comprehensive loss Accumulated deficit Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity 32 352,900 (611) (165,636) 186,685 273,092 $ 28 271,282 (348) (138,424) 132,538 158,404 $ See accompanying notes to consolidated financial statements. 44 ATRICURE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS YEARS ENDED DECEMBER 31, 2015, 2014 and 2013 (In Thousands, Except Per Share Amounts) Revenue Cost of revenue Gross profit Operating expenses: Research and development expenses Selling, general and administrative expenses Total operating expenses Loss from operations Other income (expense): Interest expense Interest income Other Loss before income tax expense Income tax expense Net loss Basic and diluted net loss per share Weighted average shares outstanding – basic and diluted Comprehensive loss: Unrealized gains (losses) on investments Foreign currency translation adjustment Other comprehensive loss Net loss Comprehensive loss $ 2015 129,755 $ 36,880 92,875 2014 107,454 $ 31,704 75,750 2013 81,889 22,326 59,563 25,742 93,853 119,595 (26,720) 18,600 73,510 92,110 (16,360) (292) 190 (354) (27,176) (36) (27,212) $ (0.97) $ (305) 96 391 (16,178) (33) (16,211) $ (0.61) $ 28,058 26,374 $ $ $ 15 $ (48) $ (278) (263) (27,212) (27,475) $ (161) (209) (16,211) (16,420) $ $ 13,440 57,014 70,454 (10,891) (566) 16 (3) (11,444) (18) (11,462) (0.56) 20,431 (7) (209) (216) (11,462) (11,678) See accompanying notes to consolidated financial statements. 45 ATRICURE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2015, 2014, and 2013 (In Thousands) Balance—December 31, 2012 Issuance of common stock through public offering Issuance of common stock for Estech acquisition Issuance of common stock under equity incentive plans Issuance of common stock under employee stock purchase plan Share-based employee compensation expense Other comprehensive loss Net loss Balance—December 31, 2013 Issuance of common stock through public offering Issuance of common stock under equity incentive plans Issuance of common stock under employee stock purchase plan Reclassification of non-employee option liability Share-based employee compensation expense Other comprehensive loss Net loss Balance—December 31, 2014 Issuance of common stock for nContact acquisition Issuance of common stock under equity incentive plans Issuance of common stock under employee stock purchase plan Reclassification of non-employee option liability Share-based employee compensation expense Other comprehensive loss Net loss Common Stock Shares Amount Additional Paid-in Capital Accumulated Comprehensive Income (Loss) Deficit Accumulated Other Total Stockholders’ Equity 16,896 $ 3,996 2,126 17 $ 4 2 123,157 $ 26,868 39,718 119 — 1,320 111 — — — 23,248 3,661 — — — — 23 4 790 3,080 — — 194,933 65,826 (110,751) $ — — — — — — (11,462) (122,213) — 77 $ — — 12,500 26,872 39,720 — 1,320 — — (216) — (139) — 790 3,080 (216) (11,462) 72,604 65,830 586 1 1,585 — — 1,586 85 — — — — 27,580 3,757 — — — — — 28 3 1,320 47 7,571 — — 271,282 68,985 — — — — (16,211) (138,424) — — — — (209) — (348) — 1,320 47 7,571 (209) (16,211) 132,538 68,988 850 1 1,920 — — 1,921 87 — — — — — — — — — 32 $ 1,539 177 8,997 — — 352,900 $ — — — — (27,212) (165,636) $ — — — (263) — (611) $ 1,539 177 8,997 (263) (27,212) 186,685 Balance—December 31, 2015 32,274 $ See accompanying notes to consolidated financial statements. 46 ATRICURE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2015, 2014 and 2013 (In Thousands) Cash flows from operating activities: Net loss Adjustments to reconcile net loss to net cash used in operating activities: Share-based compensation expense Depreciation Amortization of intangible assets Amortization of deferred financing costs Loss (gain) on disposal of property and equipment Realized loss from foreign exchange on intercompany transactions Amortization/accretion on investments Change in allowance for doubtful accounts Change in fair value of contingent consideration Other Changes in operating assets and liabilities, net of amounts acquired: Accounts receivable Inventories Other current assets Accounts payable Accrued liabilities Other noncurrent assets and liabilities Net cash used in operating activities Cash flows from investing activities: Purchases of available-for-sale securities Sales and maturities of available-for-sale securities Purchases of property and equipment Increases in property under build-to-suit obligation Proceeds from sale of property and equipment Cash acquired through Estech business combination Cash paid for nContact business combination Net cash used in investing activities Cash flows from financing activities: Proceeds from sale of stock, net of offering costs of $0, $257 and $212, respectively Payments on debt and capital leases Proceeds from build-to-suit obligation Proceeds from economic incentive loan Payment of debt fees and premium on retirement of debt Proceeds from stock option exercises Shares repurchased for payment of taxes on stock awards Proceeds from issuance of common stock under employee stock purchase plan Payment of stock issuance fees Net cash provided by financing activities Effect of exchange rate changes on cash and cash equivalents Net (decrease) increase in cash and cash equivalents Cash and cash equivalents—beginning of period Cash and cash equivalents—end of period Supplemental cash flow information: Cash paid for interest Cash paid for taxes Non-cash investing and financing activities: Accrued purchases of property and equipment Assets acquired through capital lease Capital lease asset early termination Stock issuance in business combinations Contingent consideration in business combinations 47 2015 2014 2013 $ (27,212) $ (16,211) $ (11,462) 8,997 4,975 1,303 61 276 434 577 144 — — (900) (2,950) (928) 4,013 3,070 298 (7,842) (19,525) 40,602 (13,445) (10,552) — — (7,581) (10,501) 7,571 3,353 1,421 113 118 544 500 (34) (8,032) 95 (4,168) (4,343) 307 (944) (1,847) (43) (21,600) (41,107) 19,614 (5,508) (3,699) 77 — — (30,623) — (263) 10,552 340 (62) 2,703 (782) 1,539 (66) 13,961 (238) (4,620) 28,384 23,764 $ 65,830 (6,382) 3,699 — (181) 1,916 (331) 1,320 — 65,871 (156) 13,492 14,892 28,384 $ 232 $ 20 115 $ 146 1,277 50 — 69,054 40,207 547 47 38 — — $ $ 3,080 2,008 12 115 (6) — 49 (14) — — (1,248) (2,288) (1,257) 1,445 4,114 230 (5,222) (21,243) 6,200 (2,864) — 48 3,708 — (14,151) 26,872 (2,055) — — (99) 1,718 (398) 790 — 26,828 (316) 7,139 7,753 14,892 473 30 282 68 24 39,720 8,032 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Per Share Amounts) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of the Business— AtriCure, Inc. was incorporated in the State of Delaware on October 31, 2000. The “Company” or “AtriCure” consists of AtriCure, Inc. and its wholly owned subsidiaries. The Company is an innovator in surgical treatments for atrial fibrillation (Afib) and left atrial appendage management (LAAM). The Company sells its products to medical centers globally through a direct sales force and distributors. Principles of Consolidation— The Consolidated Financial Statements include the accounts of the Company, AtriCure, LLC, the Company’s wholly-owned subsidiary organized in the State of Delaware, Endoscopic Technologies, LLC, the Company’s wholly- owned subsidiary organized in the State of Delaware, nContact Surgical, LLC, the Company’s wholly-owned subsidiary organized in the State of Delaware and AtriCure Europe, B.V. (AtriCure Europe), the Company’s wholly-owned subsidiary incorporated in the Netherlands. 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 acquisition as cash equivalents in the accompanying Consolidated Financial Statements. Investments—The Company places its investments primarily in U.S. Government agencies and securities, corporate bonds and commercial paper. The Company classifies all investments as available-for-sale. Investments with maturities of 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). The Company recognizes gains and losses when these securities are sold using the specific identification method and includes them in interest income or expense in the Consolidated Statements of Operations and Comprehensive Loss. Revenue Recognition—The Company accounts for revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605, “Revenue Recognition” (ASC 605). The Company recognizes revenue when all of the following criteria are met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured. Pursuant to the Company’s standard terms of sale, revenue is recognized when title to the goods and risk of loss transfers to customers and there are no remaining obligations that will affect the customers’ final acceptance of the sale. Generally, the Company’s standard terms of sale define the transfer of title and risk of loss to occur upon shipment to the respective customer. The Company generally does not maintain any post-shipping obligations to the recipients of the products. No installation, calibration or testing of products is performed by the Company subsequent to shipment to the customer in order to render it operational. Revenue includes shipping and handling revenue of $1,056, $952 and $786 in 2015, 2014 and 2013, respectively. Cost of freight for shipments made to customers is included in cost of revenue. Sales and other value-added taxes collected from customers and remitted to governmental authorities are excluded from revenue. The Company sells its products primarily through a direct sales force, with certain international markets sold through distributors. Terms of sale are generally consistent for both end-users and distributors except that payment terms are generally net 30 days for end-users and net 60 days for distributors with limited exceptions. Sales Returns and Allowances—The Company maintains a provision for sales returns and allowances to account for potential returns of defective or damaged products, products shipped in error and invoice adjustments. The Company estimates such provision on a quarterly basis based primarily on a specific identification basis, in addition to estimating a general reserve based on historical experience. Increases to the provision result in a reduction of revenue. The provision is included in accrued liabilities in the Consolidated Balance Sheets. Allowance for Doubtful Accounts Receivable—The Company evaluates the collectability of accounts receivable to determine the appropriate reserve for doubtful accounts. In determining the amount of the reserve, the Company considers aging of account balances, historical credit losses, customer-specific information and other relevant factors. An increase to the allowance for doubtful accounts results in a corresponding increase in selling, general and administrative expense. The Company reviews accounts receivable and adjusts the allowance based on current circumstances and charges off uncollectible receivables against the allowance when all attempts to collect the receivable have failed. The Company’s history of write-offs against the allowance has not been significant. Inventories—Inventories are stated at the lower of cost or market using approximate costs based on the first-in, first-out cost method (FIFO) and consist of raw materials, work in process and finished goods. The Company’s industry is characterized by rapid product development and frequent new product introductions. Uncertain timing of product approvals, variability in product launch strategies and variation in product utilization all impact excess and obsolete inventory. An inventory allowance based on product usage is estimated and recorded quarterly for excess, slow moving and obsolete inventory, as well as for inventory with a carrying value in excess of its net realizable value. An increase to the inventory reserve allowance results in a corresponding increase in cost of revenue. Write-offs are recorded when a product is destroyed. The Company’s history of write-offs against the reserve has not been significant. 48 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) Property and Equipment—Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method of depreciation for financial reporting purposes and applied over the estimated useful lives of the assets. The estimated useful life by major asset category is the following: generators and other capital equipment, machinery, equipment and vehicles is three to seven years, computer and other office equipment is three years, furniture and fixtures is three to seven years and leasehold improvements and equipment under capital leases are the shorter of their useful life or remaining lease term. The Company reassesses the useful lives of property and equipment annually, and assets are retired if they are no longer in service. Maintenance and repair costs are expensed as incurred. Generators and other capital equipment (such as the Company’s switchbox units and cryosurgical consoles) are placed with direct customers that use the Company’s disposable products. Depreciation of such assets is included in cost of revenue. The estimated useful lives of this equipment are based on anticipated usage by customers and the timing and impact of expected new technology rollouts by the Company. To the extent the Company experiences changes in the usage of this equipment or introduces new technologies, the estimated useful lives of this equipment may change in a future period. The Company reviews property and equipment for impairment using its best estimates based on reasonable and supportable assumptions and projections. Intangible Assets—Intangible assets with determinable useful lives are amortized on a straight-line basis over the estimated periods benefited. Included in intangible assets is In Process Research and Development (IPR&D). The Company defines IPR&D as the value of acquired technology which has not yet reached technological feasibility. The primary basis for determining the technological feasibility is obtaining specific regulatory approvals. The estimated fair value of IPR&D acquired in a business combination is capitalized as an indefinite-lived intangible asset until completion or abandonment of the IPR&D project. Upon completion of the development project, the IPR&D is amortized over its estimated useful life. If the IPR&D project is abandoned, the related IPR&D asset would be written off. The estimated fair value of IPR&D was determined using an income approach model. At December 31, 2015, IPR&D represented an estimate of the fair value of the PMA approval that could result from the CONVERGE IDE clinical trial (see Note 5 – Business Combinations). The Company reviews intangible assets for impairment using its best estimates based on reasonable and supportable assumptions and projections. Goodwill—Goodwill represents the excess of purchase price over the fair value of the net assets acquired in business combinations. The Company tests goodwill for impairment annually on November 30, or more often if impairment indicators are present. The Company’s goodwill is accounted for in a single reporting unit representing the Company as a whole. Other Current Liabilities and Current Maturities of Capital Leases—As of December 31, 2014, other current liabilities consisted of a financing obligation related to the construction of the Company’s new headquarters. Current maturities of capital leases consist of capital lease obligations with maturities of less than one year (see Note 10 – Indebtedness). Other Noncurrent Liabilities—Other noncurrent liabilities include contingent consideration recorded in business combinations (see Note 5 – Business Combinations), as well as long-term deferred revenues and other contractual obligations. Other Income (Loss)—Other income (loss) consists primarily of foreign currency transaction gains and losses, grant income and non-employee option gains and losses related to the fair market value change for fully vested options outstanding for consultants which are accounted for as free-standing derivatives. The Company recorded foreign currency transaction (losses) gains of ($339), ($523) and $269 for the years ended December 31, 2015, 2014 and 2013, respectively, primarily in connection with settlements of its intercompany balances with AtriCure Europe and invoices transacted in British Pounds. The Company periodically is awarded grants to support research and development activities or education activities. The Company recognizes grant income when the funds are earned. The Company recorded grant income of $35, $731 and $0 during 2015, 2014 and 2013, respectively. The Company historically issued stock options to non-employee consultants as a form of compensation for services provided to the Company. Because the non-employee options require settlement by the Company’s delivery of registered shares and because the tax withholding provisions in the awards allow the options to be partially net-cash settled, these options, when vested, are no longer eligible for equity classification and are, thus, subsequently accounted for as derivative liabilities under FASB ASC 815, “Derivatives and Hedging” (ASC 815) until the awards are ultimately either exercised or forfeited. Accordingly, the vested non-employee options are classified as liabilities and remeasured at fair value through earnings at each reporting period. All vested non-employee options 49 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) have been exercised as of December 31, 2015. During the years ended December 31, 2015, 2014 and 2013, $57, $183 and ($272), respectively, of (expense) income was recorded as a result of the remeasurement of the fair value of these fully vested stock options. Taxes— Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred 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 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 tax assets requires it to make significant estimates and judgments about its future operating results. Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more-likely-than-not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be objectively verified. The Company evaluates deferred tax assets on a quarterly basis to determine if valuation allowances are required by considering all available evidence. Deferred 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 tax assets are future reversals of existing taxable temporary differences, future taxable income, exclusive of reversing temporary differences and carryforwards, taxable income in carry-back years and tax planning strategies that are both prudent and feasible. In evaluating whether to record a valuation allowance, the applicable accounting standards deem that the existence of cumulative losses in recent years is a significant piece of objectively verifiable negative evidence that must be overcome by objectively verifiable positive evidence to avoid the need to record a valuation allowance. The Company has recorded a full valuation allowance against 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. A provision of The Patient Protection and Affordable Care Act enacted in 2010, as amended (Patient Act), requires manufacturers of medical devices to pay an excise tax on all U.S. medical device sales. The Company’s expense related to the medical device excise tax, which was recorded in cost of revenue, was $667, $592 and $417 for the years ended December 31, 2015, 2014 and 2013, respectively. In December 2015, the U.S. government approved the suspension of the excise tax on medical device sales beginning January 1, 2016 through December 31, 2017. Net Loss Per Share—Basic and diluted net loss per share is computed in accordance with FASB ASC 260 “Earnings Per Share” (ASC 260) 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 4,255, 3,772 and 2,721 stock options and restricted stock shares as of December 31, 2015, 2014, and 2013, respectively, because they are anti-dilutive. Therefore, the number of shares calculated for basic net loss per share is also used for the diluted net loss per share calculation. Comprehensive Loss and Accumulated Other Comprehensive Loss—In addition to net losses, the comprehensive loss includes foreign currency translation adjustments and unrealized gains and losses on investments. Accumulated other comprehensive loss consisted of the following: Total accumulated other comprehensive (loss) income at beginning of period Unrealized (losses) gains on investments Balance at beginning of period Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income (loss) to other income Balance at end of period Foreign currency translation adjustment Balance at beginning of period Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income (loss) to other income Balance at end of period Total accumulated other comprehensive loss at end of period 50 2015 2014 2013 $ (348) $ (139) $ (54) $ 15 — (39) $ (6) $ (48) — (54) $ 77 1 (7) — (6) (294) $ 156 (133) $ 362 (434) (572) $ (611) $ (523) (294) $ (348) $ 76 (478) 269 (133) (139) $ $ $ $ $ ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) Research and Development Costs— Research and development costs are expensed as incurred. These costs include compensation and other internal and external costs associated with the development and research related to new and existing products or concepts, preclinical studies, clinical trials, healthcare compliance and regulatory affairs. Advertising Costs— The Company expenses advertising costs as incurred. Advertising costs were not significant during the years ended December 31, 2015, 2014 and 2013, respectively. Share-Based Compensation—The Company follows FASB ASC 718 “Compensation-Stock Compensation” (ASC 718) to record share-based compensation for all employee share-based payment awards, including stock options, restricted stock and stock purchases related to an employee stock purchase plan, based on estimated fair values. The Company’s share-based compensation expense recognized under ASC 718 for the years ended December 31, 2015, 2014 and 2013 was $8,997, $7,571 and $3,080, respectively, on a before and after tax basis. FASB ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statement of Operations and Comprehensive Loss. The expense has been reduced for estimated forfeitures. FASB ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates the fair value of time-based options on the date of grant using the Black-Scholes option-pricing model (Black-Scholes model). The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price, as well as assumptions regarding a number of subjective variables. These variables include but are not limited to the Company’s expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. The fair value of market-based performance option grants is estimated at the date of grant using a Monte-Carlo simulation. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Consolidated Statement of Operations and Comprehensive Loss. The Company estimates the fair value of restricted stock based upon the grant date closing market price of the Company’s common stock. The Company’s determination of fair value is affected by the Company’s stock price as well as assumptions regarding the number of shares expected to be granted. The Company also has an employee stock purchase plan (ESPP) which is available to all eligible employees as defined by the plan document. Under the ESPP, shares of the Company’s common stock may be purchased at a discount. The Company estimates the number of shares to be purchased under the ESPP and records compensation expense based upon the fair value of the stock at the beginning of the purchase period using the Black-Scholes model. Use of Estimates—The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Fair Value Disclosures— The Company classifies and records cash and investments in U.S. government agencies and securities as Level 1 within the fair value hierarchy. Accounts receivable, short-term other assets, accounts payable and accrued liabilities are also classified as Level 1. The carrying amounts of these assets and liabilities approximate their fair value due to their relatively short- term nature. Cash equivalents and investments in commercial paper are classified as Level 2 within the fair value hierarchy (see Note 3 – Fair Value for further information). Significant unobservable inputs with respect to the fair value measurement of the Level 3 non- employee stock options and contingent consideration liabilities are developed using Company data. When an input is changed, the corresponding valuation models are updated and the results are analyzed for reasonableness. 2. RECENT ACCOUNTING PRONOUNCEMENTS In May 2014 the FASB issued a final standard on revenue from contracts with customers. The standard, issued as FASB ASU 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09), outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. In July 2015 the FASB decided to defer the effective date of ASU 2014-09 for entities reporting under U.S. GAAP from interim and annual reporting periods beginning after December 15, 2016 to interim and annual reporting periods beginning after December 15, 2017 and allow early adoption as of the original effective date. A full retrospective or modified retrospective approach may be taken to adopt the guidance in the ASU. The Company is evaluating the impact of the provisions of ASU 2014-09 on its consolidated financial position, results of operations and related disclosures. 51 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) In 2015 the FASB issued ASU 2015-10, “Technical Corrections and Improvements” (ASU 2015-10), which amends a wide range of topics in the FASB Accounting Standards Codification. The amendments make minor corrections or minor improvements to the Codification. The amendments in ASU 2015-10 that require transition guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments are effective upon the issuance of ASU 2015-10. The Company has reviewed the amendments in ASU 2015-10 and has determined that the new guidance does not have a material impact on the Company’s financial reporting. In July 2015 the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory” (ASU 2015-11), which requires entities to measure most inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. ASU 2015-11 is effective prospectively for annual periods beginning after December 15, 2016 and interim periods therein. Early application is permitted. The Company is reviewing the provisions of ASU 2015-11 and expects that the new guidance will not have a material impact on the Company’s financial reporting. In August 2015 the FASB issued ASU 2015-15, “Interest – Imputation of Interest” (ASU 2015-15), which clarifies the Security and Exchange Commission staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements given the lack of guidance on this topic in ASU 2015-03. ASU 2015-15 was effective upon issuance. The Company has determined that the new guidance does not have a material impact on its financial reporting. In September 2015 the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (ASU 2015-16), which simplifies the accounting for measurement-period adjustments. Under ASU 2015-16, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 also requires acquirers to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, and must be applied prospectively to adjustments to provisional amounts that occur after the effective date. Early adoption is permitted for financial statements that have not been issued. The Company will consider the new guidance in its accounting and financial reporting for acquisitions. In November 2015 the FASB issued ASU 2015-17, “Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes” (ASU 2015-17), which requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. Also, companies will no longer allocate valuation allowances between current and noncurrent deferred tax assets because those allowances also will be classified as noncurrent. ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for financial statements that have not been issued. The Company is evaluating the impact of the provisions of ASU 2015-17 on its consolidated financial position and related disclosures. In January 2016 the FASB issued ASU 2016-01, “Financial Instruments — Overall — Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01), which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The Company is evaluating the impact of ASU 2016-01 on its consolidated financial position and related disclosures. In February 2016 the FASB issued ASU 2016-02, “Leases” (ASU 2016-02) which requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. The Company will review the provisions of ASU 2016-02 to determine the impact on its consolidated financial position and related disclosures. 52 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) 3. FAIR VALUE FASB ASC 820, “Fair Value Measurements and Disclosures” (ASC 820), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy 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 which are the following: • • • Level 1—Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. The valuation under this approach does not entail a significant degree of judgment. 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 fair value of the Company’s Level 3 derivative instruments (non-employee stock options) are estimated on the grant date using the Black-Scholes model, and they are revalued at the end of each reporting period using the Black-Scholes model. The fair value of the Company’s Level 3 contingent consideration liabilities was estimated on the respective acquisition dates of Endoscopic Technologies, Inc. (Estech) and nContact Surgical, Inc. (nContact), and is revalued at the end of each subsequent reporting period (see Note 5 – Business Combinations for further information). In accordance with ASC 820, 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, 2015: Assets: Money market funds U.S. government agencies and securities Corporate bonds Total assets Liabilities: Acquisition-related contingent consideration Total liabilities Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) Total $ $ $ $ — $ 1,590 — 1,590 $ 18,572 $ — 16,930 35,502 $ — $ — — — $ 18,572 1,590 16,930 37,092 — $ — $ — $ — $ 40,207 $ 40,207 $ 40,207 40,207 53 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) In accordance with ASC 820, 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, 2014: Assets: Money market funds Commercial paper U.S. government agencies and securities Corporate bonds Total assets Liabilities: Derivative instruments Total liabilities Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) Total $ $ $ $ — $ — 3,022 — 3,022 $ 23,692 $ 1,800 — 35,337 60,829 $ — $ — — — — $ 23,692 1,800 3,022 35,337 63,851 — $ — $ — $ — $ 120 $ 120 $ 120 120 There were no changes in the levels or methodology of measurement of financial assets and liabilities during the twelve months ended December 31, 2015 and 2014. Derivative Instruments. Vested non-employee options historically issued by the Company are accounted for as derivative liabilities and remeasured at fair value through earnings at each reporting period until exercised or forfeited. All vested non-employee options have been exercised as of December 31, 2015. In accordance with ASC 820, the following table represents the Company’s Level 3 fair value measurements using significant other unobservable inputs for derivative instruments as of December 31: Beginning Balance – January 1 Total (gains) losses included in earnings Exercises Reclassification from equity to liability when fully vested Ending Balance – December 31 2015 2014 2013 $ $ 120 $ 57 (177) — — $ 350 $ (183) (47) — 120 $ 78 272 — — 350 Acquisition-Related Contingent Consideration. Contingent consideration arrangements obligate the Company to pay former shareholders of an acquired entity if specified future events occur or conditions are met, such as the achievement of certain technological milestones or the achievement of targeted revenue milestones. The Company measures such liabilities using unobservable inputs, applying the income approach, such as the discounted cash flow technique or the probability-weighted scenario method. Various key assumptions, such as the probability of achievement of the agreed milestones, projected revenues from acquisitions and the discount rate, are used in the determination of fair value of contingent consideration arrangements and are not observable in the market, thus representing a Level 3 measurement within the fair value hierarchy. Subsequent revisions to key assumptions, which impact the estimated fair value of contingent consideration liabilities, are reflected in the Consolidated Statements of Operations and Comprehensive Loss. The Company acquired Estech on December 31, 2013. The aggregate consideration paid to Estech shareholders included up to $26,000 of contingent consideration to be paid based on the achievement of certain performance-based milestones in 2014 and 2015. The fair value of the Estech contingent consideration was determined to be $0, $0 and $8,032 as of December 31, 2015, 2014 and 2013, respectively. The Company acquired nContact on October 13, 2015. The aggregate consideration paid to nContact shareholders includes up to $50,000 in contingent consideration based on completion of enrollment of the CONVERGE IDE trial and corresponding PMA approval by December 31, 2020. nContact shareholders are entitled to additional sales-based contingent consideration on revenue in excess of an annual growth rate of more than 25% through 2019. The total fair value of the nContact contingent consideration was determined to be $40,207 as of both the acquisition date and December 31, 2015. 54 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) The following table represents the company’s Level 3 fair value measurements using significant other unobservable inputs for acquisition-related contingent consideration as of December 31: Beginning Balance – January 1 Amounts acquired Transfers in (out) of Level 3 Changes in fair value included in earnings Ending Balance – December 31 4. INVESTMENTS Investments as of December 31, 2015 consisted of the following: Corporate bonds U.S. government agencies and securities Total Investments as of December 31, 2014 consisted of the following: Corporate bonds U.S. government agencies and securities Commercial paper Total 2015 2014 2013 $ $ — $ 40,207 — — 40,207 $ 8,032 $ — — (8,032) — $ — 8,032 — — 8,032 Cost Basis $ 16,963 $ 1,596 $ 18,559 $ Unrealized Gains (Losses) (33) $ (6) (39) $ Fair Value 16,930 1,590 18,520 Cost Basis $ 35,389 $ 3,024 1,800 $ 40,213 $ Unrealized Gains (Losses) (52) $ (2) — (54) $ Fair Value 35,337 3,022 1,800 40,159 The Company has not experienced any significant realized gains or losses on its investments in the periods presented in the Consolidated Statements of Operations and Comprehensive Loss. Long term investments held by the Company have maturities between one and two years at both December 31, 2015 and 2014. 5. BUSINESS COMBINATIONS nContact Surgical, Inc. (nContact). On October 13, 2015 the Company completed its acquisition of nContact, pursuant to a merger agreement (Agreement) under which the Company acquired 100% of the outstanding equity interests of nContact. Incorporated in 2004 and based in Morrisville, North Carolina, nContact developed and marketed a portfolio of innovative devices that provide for less invasive ablation options for the treatment of cardiac arrhythmias. The company’s technology is used in the Convergent procedure, a multi-disciplinary therapy in which a closed-chest surgical epicardial ablation is performed, and then complemented by an endocardial catheter ablation performed by an electrophysiologist. The CONVERGE IDE clinical trial is currently being conducted and is the first head-to-head study to evaluate the Convergent procedure versus catheter ablation in patients with persistent Afib. AtriCure’s management believes the acquisition of nContact will expand and strengthen the Company’s presence in the Afib market, reinforce the Company’s commitment to clinical science, and provide improved market access and additional collaboration opportunities with cardiac surgeons and electrophysiologists. The combination of the two companies expands AtriCure’s addressable market with the addition of proven technology that treats an under-served population of patients, complements the Company’s current product portfolio and minimally invasive (MIS) intellectual property portfolio, accelerates and sustains the Company’s revenue growth rate, and drives continued margin expansion and worldwide operating leverage opportunities. The total consideration paid to nContact’s former shareholders at acquisition date was 3,757 shares of AtriCure common stock, valued at $69,054 at the closing of the transaction, and $7,581 in cash. Although the cash paid at acquisition was subject to adjustment 55 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) for net working capital balances outside of a specified range, no such adjustment was made as a result of the final net working capital delivered. In addition, the Agreement provides for the Company to pay contingent consideration, as follows: • Trial Enrollment Milestone— $7,500 upon completion of patient enrollment of the CONVEGE IDE clinical trial. Such payment is due on or before 30 days following enrollment of the final patient. • Regulatory Milestone— up to $42,500 upon the completion of the CONVERGE IDE clinical trial and receiving approval of a premarket approval (PMA) by the FDA for the EPi-Sense-AF Guided Coagulation System and/or any other nContact product with an indication for symptomatic persistent Afib or a similar or related indication. The full contingent consideration amount of $42,500 is only earned if such regulatory approvals are received on or before January 1, 2020. The potential contingent consideration is reduced by 8.33% (or one-twelfth) each month following January 2020, and is reduced to zero if the regulatory milestone is achieved after December 31, 2020. Any payment of the regulatory contingent consideration is due on or before 30 days following the receipt of the related PMA approval. • Commercial Milestone— for the calendar years 2016 through 2019, nContact revenues in excess of specified target revenue amounts, which approximate 25% annual revenue growth, will result in contingent consideration equal to 1.5 times the revenues in excess of target. Payments of contingent consideration under the annual commercial milestones are due within 65 days of each calendar year end. Subject to the terms and conditions of the Agreement, all contingent consideration can be paid in cash and AtriCure common stock. The Agreement limits the total number of shares of AtriCure common stock issued in connection with the acquisition to 5,660. The Company accounted for the acquisition in accordance with FASB ASC 805, “Accounting for Business Combinations”. The assets acquired, liabilities assumed and the estimated future contingent consideration obligation were recorded at their respective fair values as of the date of acquisition. The process for estimating fair values of identifiable intangible assets and certain tangible assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s results of operations. The components of the aggregate purchase price for the nContact acquisition were as follows: Fair value of AtriCure common stock issued at closing Cash Fair value of contingent consideration liabilities Total purchase price $ $ 69,054 7,581 40,207 116,842 The fair value of contingent consideration liabilities was determined by applying an income valuation approach, including the discounted cash flow technique probability-weighted scenario method. Key assumptions in the valuation of contingent consideration liabilities are based on management’s judgment and estimates, and include the probability of achievement of each of the milestones, projected revenues from the acquisition, and the discount rates, which ranged from 3% to 14%, reflecting the inherent risks of achieving the respective milestones. These assumptions are not observable in the market, thus represent a Level 3 measurement within the fair value hierarchy. 56 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) As of December 31, 2015, the purchase price allocation has not yet been finalized as the Company evaluates certain tax attributes of nContact. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed on the acquisition date: Accounts receivable Inventories Other current assets Property and equipment Intangible assets Other assets Total identifiable assets Accounts payable Accrued liabilities Total liabilities assumed Net identifiable assets acquired Goodwill Total consideration October 13, 2015 1,450 682 166 311 46,200 7 48,816 256 1,589 1,845 46,971 69,871 116,842 $ $ $ $ $ $ The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available as of the acquisition date. Deferred tax assets and liabilities were also recognized at acquisition date for the future tax consequences attributable to differences between the above financial statement carrying amounts of existing assets and liabilities and their respective tax bases and acquired operating loss and tax credit carryforwards of nContact. At acquisition, nContact had approximately $59,000 of net operating loss carryforwards, which begin to expire in 2025 and are subject to certain limitations under Internal Revenue Code Section 382. The Company recorded a full valuation allowance against the net deferred tax assets at acquisition. The valuation of the intangible assets acquired and related amortization periods are as follows: SUBTLE access technology IPR&D Total Amortization Term (in years) 5 Valuation $ $ 2,179 44,021 46,200 The fair value of the SUBTLE access technology and IPR&D both were estimated using an income approach. Under this method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. The Company believes that the level and timing of cash flows related to each asset appropriately reflects market participant assumptions, and such cash flows were discounted at rates considered appropriate given the inherent risks associated with each type of intangible asset. The SUBTLE access technology asset is amortized on a straight-line basis over its estimated useful life. The IPR&D asset, which is accounted for as an indefinite-lived intangible asset until completion or abandonment of the project, represents an estimate of the fair value of the PMA approval from the in-process CONVERGE IDE clinical trial. Upon completion of this development project, the IPR&D is amortized over its estimated useful life. If the IPR&D project is abandoned, the related IPR&D asset would be written off. The Company recorded the excess of the aggregate purchase price over the estimated fair values of the identifiable net assets acquired as goodwill. Goodwill is primarily attributable to the benefits the Company expects to realize by enhancing its product offering and addressable markets, thereby contributing to an expanded revenue base and improved margins. None of the goodwill recorded in the acquisition is deductible for income tax purposes. As discussed in Note 1, the Company accounts for goodwill in a single reporting unit representing the Company as a whole. The operating results of nContact, including $2,192 of revenue, are included in the Consolidated Statements of Operations and Comprehensive Loss beginning October 14, 2015. The Consolidated Balance Sheet as of December 31, 2015 reflects the acquisition of nContact. The Company recognized approximately $2,489 of acquisition-related costs that were expensed during 2015. The costs consisted of $1,767 for investment bank fees and expenses and $722 for legal, audit, tax and other costs. These costs are included in selling, general and administrative expenses in the accompanying Consolidated Statements of Operations and Comprehensive Loss. 57 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) The following supplemental pro forma information presents the financial results of the Company for the years ended December 31, 2015 and 2014 as if the acquisition of nContact had occurred on January 1, 2014. Revenue Net loss Basic and diluted net loss per share Year Ended December 31, (unaudited) $ 2015 137,882 $ (30,745) (0.99) 2014 115,979 (21,438) (0.71) Certain pro forma adjustments have been made when calculating the amounts above to reflect the impact of the purchase transaction, primarily consisting of inclusion of amortization of intangible assets with determinable lives and exclusion of nContact’s interest expense incurred on debt paid off in the acquisition. The Company also eliminated transaction expenses incurred by both AtriCure and nContact. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on January 1, 2014, nor are they indicative of any future results. The pro forma information does not include any adjustment for potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisition. Endoscopic Technologies, Inc. (Estech). On December 31, 2013, the Company completed its acquisition of Estech. The aggregate consideration paid to Estech shareholders included up to $26,000 of contingent consideration to be paid based on the achievement of certain performance-based milestones in 2014 and 2015. The fair value of the contingent consideration was estimated using an expected present value approach to estimate an expected value. The Company recorded $8,032 in contingent consideration at acquisition, and, based on results during 2014, reduced the value of the contingent consideration to $0 at December 31, 2014. The $8,032 adjustment was recorded as a reduction of selling, general and administrative expenses in the accompanying 2014 Consolidated Statement of Operations and Comprehensive Loss. At December 31, 2015, the Company’s liability for the Estech contingent consideration remains at $0 based on the final analysis of actual results against the specified milestones in 2014 and 2015. 6. INTANGIBLE ASSETS AND GOODWILL The following table provides a summary of the Company’s intangible assets at December 31: Non-compete agreement Fusion technology Clamp & probe technology Estech trade name SUBTLE access technology IPR&D Total $ $ 100 $ 9,242 829 208 2,179 44,021 56,579 $ 100 $ 1,848 552 208 96 — 2,804 $ 100 $ Accumulated Amortization 93 924 276 208 — — 1,501 9,242 829 208 — — 10,379 $ 2015 Accumulated Amortization Cost Cost 2014 For the years ended December 31, 2015, 2014 and 2013, amortization expense related to intangible assets with definite lives was $1,303, $1,421 and $12, respectively. The IPR&D asset is not amortized until the completion of the project. Future amortization expense related to intangible assets with definite lives is projected as follows: 2016 2017 2018 2019 2020 2021 and thereafter Total 58 $ $ 1,644 1,367 1,367 1,367 1,235 2,774 9,754 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) 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, 2013 Additions Net carrying amount as of December 31, 2014 Additions Net carrying amount as of December 31, 2015 7. INVENTORIES Inventories consisted of the following at December 31: Raw materials Work in process Finished goods Inventories 8. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31: Building under capital lease Generators and other capital equipment Computer and other office equipment Furniture and fixtures Machinery, equipment and vehicles Leasehold improvements Construction in progress Equipment under capital leases Total Less accumulated depreciation Property and equipment, net $ $ 35,386 — 35,386 69,871 105,257 2015 2014 6,159 $ 974 10,526 17,659 $ 4,429 1,397 8,431 14,257 $ $ 2015 14,250 $ 10,041 4,303 3,211 2,551 2,151 1,978 212 38,697 (7,418) 31,279 $ 2014 — 8,578 2,436 488 2,604 329 4,642 162 19,239 (7,687) 11,552 $ $ Property and equipment depreciation expense was $4,975, $3,353 and $2,008 for the years ended December 31, 2015, 2014 and 2013, respectively. Depreciation related to generators and other capital equipment was $2,944, $2,172 and $1,251 in 2015, 2014 and 2013, respectively. As of December 31, 2015 and 2014, the net carrying amount of generators and other capital equipment was $5,447 and $4,141, respectively. Included in construction in progress as of December 31, 2014 are $4,234 of costs related to the construction of the Company’s new headquarters building, which were placed in service and transferred to Building under capital lease in 2015 (see Note 10 – Indebtedness). 59 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) 9. ACCRUED LIABILITIES Accrued liabilities consisted of the following at December 31: Accrued bonus Accrued commissions Accrued payroll and employee-related expenses Accrued taxes and value-added taxes payable Other accrued liabilities Accrued royalties Sales returns allowance Accrued non-employee stock options Total 10. INDEBTEDNESS 2015 2014 6,088 $ 6,061 4,021 912 723 382 207 — 18,394 $ 4,915 4,477 2,281 1,272 399 442 135 120 14,041 $ $ Bank Credit Facility. The Company has a debt agreement (Loan Agreement) with Silicon Valley Bank (SVB). The Loan Agreement, as amended, restated and modified, includes a $15,000 revolving credit facility which matures on April 30, 2018. Borrowing availability under the revolving credit facility is based on the lesser of $15,000 or a borrowing base calculation as defined by the Loan Agreement. As of December 31, 2015, the Company had no borrowings under the revolving credit facility and had borrowing availability of $14,559. The applicable interest rate is 3.5%. Effective March 31, 2015, the Company and SVB entered into an Eighth Loan Modification Agreement (Loan Modification Agreement) which sets forth certain amendments to the Company’s credit facility. The Loan Modification Agreement provides for (i) an increase in the limit of outstanding letters of credit from $1,000 to $2,000, (ii) an extension of the revolving line maturity date from April 30, 2016 to April 30, 2018 and (iii) modifications to certain covenants and other terms of the Loan Agreement. The Loan Agreement, as amended restated and modified, contains covenants that include, among others, covenants that limit the Company’s ability to dispose of assets, enter into mergers or acquisitions, incur indebtedness, incur liens, pay dividends or make distributions on the Company’s capital stock, make investments or loans, and enter into certain affiliate transactions, in each case subject to customary exceptions for a credit facility of this size and type. Additional covenants apply when the Company has outstanding borrowings under the revolving credit facility or when the Company holds less than $20,000 in cash and investments with SVB. Financial covenants under the credit facility include a minimum EBITDA and a minimum liquidity ratio. Further, a minimum fixed charge ratio applies when the Company achieves specific covenant milestones. None of the covenants must be applied as of December 31, 2015. The occurrence of an event of default could result in an increase to the applicable interest rate by 3.0%, an acceleration of all obligations under the Loan Agreement, an obligation of the Company to repay all obligations in full and a right by SVB to exercise all remedies available to it under the Loan Agreement and related agreements including any Guaranty or Guarantor Security Agreement. Specified assets have been pledged as collateral. As of December 31, 2015, the Company has an outstanding letter of credit of $1,250 related to the Company’s new headquarters lease in Mason, Ohio. The letter of credit may be reduced or removed entirely based on the Company’s future financial performance, as specified in the lease agreement. As of December 31, 2014 the Company had an outstanding letter of credit of €75 issued to its European subsidiary’s corporate credit card program provider which was due to expire on June 30, 2015. The letter of credit was cancelled in June 2015. Capital Lease Obligations. As of December 31, 2015 the Company had capital leases for its corporate headquarters building and computer equipment that expire at various terms through 2030. In August 2014 the Company and LM-VP AtriCure, LLC (Landlord), a third party unrelated to the Company, entered into a new building lease (Mason Lease) in order to re-locate its headquarters and West Chester, Ohio facilities to a building constructed on Innovation Way in Mason, Ohio and occupied exclusively by the Company. Construction of the approximately 92 square-foot building was substantially completed and the lease term began in October 2015. The term of the Mason Lease is fifteen years with three separate five-year renewal options, at the Company’s option. The amount of initial annual base rent of $1,353 is payable in monthly installments and is subject to a 2% increase each year during the initial term of the agreement. Upon each renewal, the amount of rent payable will be agreed upon by the Company and Landlord or, if not so agreed upon, by an appraiser. 60 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) Under the Mason Lease, the Company is responsible for paying real estate taxes, insurance, utilities, operating expenses, and most building repairs and maintenance. The Company was also responsible for paying the first $750 of construction related tenant improvement costs, as well as amounts in excess of the estimated total cost of construction, as defined by the Mason Lease. The Company was deemed the owner of the project during the construction period. As a result, project costs incurred during construction the building were included in property and equipment and the corresponding financing obligation was included in other current liabilities in the Consolidated Balance Sheet as of December 31, 2014. An increase in purchases of building under construction and proceeds from the construction financing obligation are also included in the Consolidated Statement of Cash Flows. At the completion of construction, the Company evaluated the lease agreement under guidance in FASB ASC 840, “Leases”, and included the current and noncurrent portions of the Mason Lease obligation within capital leases and the value of the underlying asset in Property and Equipment in the Consolidated Balance Sheet as of December 31, 2015. The cost of the leased assets, both building and computer equipment, under lease at December 31, 2015 was $14,462. The assets are depreciated over their estimated useful lives, which equal the terms of the respective leases. Accumulated amortization on the capital leases was $349 at December 31, 2015. Future maturities on capital lease obligations are projected as follows: 2016 2017 2018 2019 2020 2021 and thereafter Total payments Imputed interest Net capital lease obligations, of which $450 is current and $13,710 is noncurrent $ $ $ 1,417 1,425 1,439 1,457 1,478 15,894 23,110 (8,950) 14,160 11. COMMITMENTS AND CONTINGENCIES Lease Commitments. The Company leases certain office, manufacturing and warehouse facilities and equipment under noncancelable operating leases that expire at various terms through 2021. Future minimum lease payments under non-cancelable operating leases are projected as follows: 2016 2017 2018 2019 2020 2021 and thereafter Total $ $ 934 663 724 737 556 251 3,865 Rent expense was approximately $1,515, $1,331 and $870 in 2015, 2014, and 2013, respectively. Royalty Agreements. The Company has certain royalty agreements in place with terms that include payment of royalties based on product revenue from sales of specified current products. The royalty agreements have effective dates as early as 2003 and terms ranging from three years to at least twenty years. The royalties range from 0.75% to 5% of specified product sales. One of the agreements includes minimum quarterly payments of $50 through 2015 and a maximum of $2,000 in total royalties over the term of the agreement. Parties to the royalty agreements have the right at any time to terminate the agreement immediately for cause. Royalty expense of $1,799, $1,322 and $962 was recorded as part of cost of revenue for the years ended December 31, 2015, 2014 and 2013, respectively. Purchase Agreements. The Company enters into standard purchase agreements with certain vendors in the ordinary course of business. Outstanding commitments at December 31, 2015 were not significant. Legal. The Company is not party to any material pending or threatened litigation, except for the matter described below. The Company may, from time to time, become a party to additional legal proceedings. 61 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) Department of Justice Investigation In October 2008 the Company received a letter from the Department of Justice (DOJ) informing the Company that it was conducting an investigation for potential False Claims Act (FCA) and common law violations relating to its surgical ablation devices. The Company cooperated with the investigation and operated its business in the ordinary course during the investigation. In December 2009 the Company reached a tentative settlement with the DOJ to resolve the investigation and recorded a liability. The settlement was finalized pursuant to the preliminary terms in February 2010, and the resulting settlement agreement definitively resolved all claims related to the DOJ investigation. The Company did not admit nor will it admit to any wrongdoing in connection with the settlement. The Company completed making payments totaling $4,350 (including interest) in 2014 and has no remaining financial liability. In June 2015 the Company received confirmation from the Office of Inspector General that the Company had satisfactorily completed all obligations under the five-year Corporate Integrity Agreement entered into in 2010. 12. INCOME TAXES The Company files federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. Income taxes are computed using 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 has recorded a full valuation allowance against 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. Tax credits are accounted for as a reduction of income taxes in the year in which the credit originates. The Company does not expect any significant unrecognized tax benefits to arise over the next twelve months. The detail of deferred tax assets and liabilities at December 31 is as follows: Deferred tax assets (liabilities): Net operating loss carryforward Research and development and AMT credit carryforwards, net Equity compensation Accruals and reserves Inventories Intangible assets Property and equipment, net Other, net Subtotal Less valuation allowance Total The Company’s provision for income taxes is as follows: 2015 2014 $ 78,178 $ 5,677 6,618 539 1,310 (16,953) (1,740) 53 73,682 (73,682) $ — $ 49,921 4,799 4,497 536 669 (149) (760) 41 59,554 (59,554) — Current income tax expense Deferred tax benefit Increase in valuation allowance Total income tax expense 2015 2014 2013 $ 36 $ 33 $ (8,507) 8,507 (5,306) 5,306 $ 36 $ 33 $ 18 (3,728) 3,728 18 The Company has a federal net operating loss carryforward of $205,278 which will begin to expire in 2021 and state net operating loss carryforwards of $136,323 which have varying expirations ranging from five years to twenty years. At December 31, 2015 there were $5,790 of unrecognized deferred tax assets that arose from tax deductions for equity compensation in excess of compensation recognized for financial reporting during years when net operating losses were created. Additional paid in capital will be increased if such deferred tax assets are realized and reduce current tax payable. 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 also has a foreign net operating loss carryforward of approximately $17,919 of which $970 expires in 2016. Additionally, the Company has a federal research and development credit carryforward of $5,575 which will begin to expire in 2022. 62 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) The Company’s 2015, 2014 and 2013 effective income tax rates differ from the federal statutory rate as follows: Federal tax at statutory rate Federal R&D credit Valuation allowance State income taxes Foreign NOL rate change Foreign tax rate differential Other Effective tax rate 2015 34.00 % $ 3.23 (31.30) 1.38 (2.02) (1.99) (3.43) (0.13) % $ (9,240) (878) 8,507 (375) 549 542 931 36 2014 34.00 % $ 2.32 (32.80) 2.68 (4.29) (2.83) 0.72 (0.20) % $ (5,501) (374) 5,306 (433) 694 458 (117) 33 34.00 % 2013 $ 3.35 (29.63) 0.04 2.47 (1.60) (8.79) (0.16) % $ (3,891) (383) 3,391 (5) (283) 183 1,006 18 The Company’s pre-tax book loss for domestic and international operations was ($21,157) and ($6,019), respectively, for 2015, ($11,085) and ($5,093), respectively, for 2014 and ($9,409) and ($2,035), respectively, for 2013. The Company has not had to accrue any interest and penalties related to unrecognized income tax benefits as a result of offsetting of net operating losses. However, if the situation occurs, the Company will recognize interest and penalties within the income tax expense line in the Consolidated Statements of Operations and Comprehensive Loss and within the related tax liability line in the Consolidated Balance Sheets. Federal, state, and local tax returns of the Company are routinely subject to examination by various taxing authorities. Federal and foreign income tax returns for periods beginning in 2012 are open for examination. However, taxing authorities have the ability to adjust 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 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 2015, 2014 and 2013 is presented below: Balance at the beginning of the year Increases (decreases) for prior year tax positions Increases (decreases) for current year tax positions Increases (decreases) related to settlements Decreases related to statute lapse Balance at the end of the year 2015 2014 2013 $ $ 1,982 $ — — — — 1,982 $ 1,982 $ — — — — 1,982 $ — 1,982 — — — 1,982 There are no amounts included in the balance of unrecognized tax benefits at December 31, 2015, 2014 and 2013 that, if recognized, would affect the effective tax rate. Included in the balance of unrecognized tax benefits at December 31, 2015 are $1,982 of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes and valuation allowance. There are no accrued interest and penalties associated with the unrecognized tax benefit. The Company does not anticipate that there will be any significant adjustments to its recorded unrecognized tax benefits in the next twelve months. 13. CONCENTRATIONS During fiscal 2015, 2014 and 2013 approximately 12.9%, 13.6% and 20.4%, respectively, of the Company’s total net revenue was derived from its top ten customers. During 2015, 2014 and 2013 no individual customer accounted for more than 10% of the Company’s revenue. No individual customer accounted for more than 10% of the Company’s accounts receivable as of December 31, 2015 and 2014. The Company maintains cash and cash equivalents balances at financial institutions which at times exceed FDIC limits. As of December 31, 2015, $23,608 of the cash and cash equivalents balance was in excess of the FDIC limits. 14. EMPLOYEE BENEFIT PLANS The Company sponsors the AtriCure, Inc. 401(k) Plan (401(k) Plan), a defined contribution plan covering substantially all U.S. employees of the Company. Eligible employees may contribute pre-tax annual compensation up to specified maximums under the Internal Revenue Code. During 2015, 2014 and 2013 the Company made matching contributions of 50% of the first 6% of employee 63 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) contributions to the 401(k) Plan. The Company’s matching contributions expensed during 2015, 2014 and 2013 were $1,007, $807 and $606, respectively. Additional amounts may be contributed to the 401(k) Plan at the discretion of the Company’s board of directors. No such discretionary contributions were made during 2015, 2014 or 2013. The Estech 401(k) plan acquired by the Company through its acquisition of Estech was rolled into the 401(k) Plan during 2014. The Company also provides retirement benefits for AtriCure Europe employees. Total contributions to retirement plans for AtriCure Europe employees were $133, $176 and $176 in 2015, 2014 and 2013, respectively. 15. EQUITY COMPENSATION PLANS The Company has several share-based incentive plans: the 2005 Equity Incentive Plan (2005 Plan), the Amended and Restated 2014 Stock Incentive Plan (2014 Plan) and the 2008 Employee Stock Purchase Plan (ESPP). 2005 Plan and 2014 Plan The Company granted awards under the 2005 Plan until the 2014 Annual Meeting of Stockholders at which stockholders adopted the 2014 Plan. Pursuant to its terms, the 2014 Plan supersedes and replaces the 2005 Plan. Under the 2014 Plan, the Board of Directors may grant incentive stock options to employees and any parent or subsidiary’s employees, and may grant nonstatutory stock options, restricted stock or stock appreciation rights to employees, directors and consultants of the Company and any parent or subsidiary’s employees, directors and consultants. The administrator (currently the Compensation Committee of the Board of Directors) has the power 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. Options granted under the plans generally expire ten years from the date of grant. Options granted from the 2005 Plan and 2014 Plan generally vest at a rate of 25% on the first anniversary date of the grant and ratably each month thereafter over the following three years. Restricted stock awards granted under the 2005 Plan and 2014 Plan generally vest 25% annually over four years from the date of grant. As of December 31, 2015, 8,949 shares of common stock had been reserved for issuance under the 2014 Plan. The shares authorized for issuance under the 2014 Plan include (a) shares reserved but unissued under the 2001 Plan as of August 10, 2005, (b) shares returned to the 2001 Plan as the result of the termination of options or the repurchase of shares issued under such plan, (c) shares reserved but unissued under the 2005 Plan as of May 14, 2014 and (d) 1,300 additional shares authorized under the 2014 Plan. As of December 31, 2015 there were 1,372 shares available for future grants under the plans. 64 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) Activity under the plans during 2015 was as follows: Number of Shares Outstanding 2,762 $ 228 (13) (243) 2,734 $ 2,660 $ 1,862 $ Number of Shares Outstanding 560 $ 648 (2) (135) 1,071 $ Weighted Average Exercise Price 10.93 21.10 15.17 11.10 11.75 11.57 9.94 Weighted Average Grant Date Fair Value 16.33 17.82 17.76 15.78 17.30 Number of Shares Outstanding Weighted Average Exercise Price 13.48 — — — 13.48 13.48 450 $ — — — 450 $ 250 $ Weighted Average Remaining Contractual Term Aggregate Intrinsic Value 6.15 $ 6.09 $ 5.28 $ 29,331 28,974 23,263 Weighted Average Remaining Contractual Term Aggregate Intrinsic Value 7.46 $ 7.46 $ 4,034 2,241 Time-Based Stock Options Outstanding at January 1, 2015 Granted Cancelled or forfeited Exercised Outstanding at December 31, 2015 Vested and expected to vest Exercisable at December 31, 2015 Restricted Stock Outstanding at January 1, 2015 Awarded Forfeited Released Outstanding at December 31, 2015 Performance Stock Options Outstanding at January 1, 2015 Granted Cancelled or forfeited Exercised Outstanding at December 31, 2015 Exercisable at December 31, 2015 65 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) Activity under the plans during 2014 was as follows: Time-Based Stock Options Outstanding at January 1, 2014 Granted Cancelled or forfeited Exercised Outstanding at December 31, 2014 Vested and expected to vest Exercisable at December 31, 2014 Restricted Stock Outstanding at January 1, 2014 Awarded Forfeited Released Outstanding at December 31, 2014 Performance Stock Options Outstanding at January 1, 2014 Granted Cancelled or forfeited Exercised Outstanding at December 31, 2014 Exercisable at December 31, 2014 Number of Shares Outstanding Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value 2,423 $ 603 (49) (215) 2,762 $ 2,660 $ 1,516 $ 8.61 19.54 10.65 8.94 10.93 10.81 8.85 6.54 $ 6.46 $ 4.86 $ 25,335 24,697 16,836 Number of Shares Outstanding Weighted Average Grant Date Fair Value 7.75 20.25 9.15 8.79 16.33 248 $ 391 (1) (78) 560 $ Number of Shares Outstanding Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value 225 $ 225 — — 450 $ 250 $ 5.91 21.04 — — 13.48 13.48 8.50 $ 8.50 $ 3,161 1,756 The total intrinsic value of options exercised during the years ended December 31, 2015, 2014 and 2013 was $2,740, $2,311 and $951, respectively. As a result of the Company’s tax position, no tax benefit was recognized related to the stock option exercises. For 2015, 2014 and 2013, $2,703, $1,916 and $1,718, respectively, in cash proceeds were included in the Company’s Consolidated Statements of Cash Flows as a result of the exercise of stock options. The total fair value of restricted stock vested during 2015, 2014 and 2013 was $2,767, $1,434 and $1,442, respectively. The exercise price per share of each option is equal to the fair market value of the underlying share on the date of grant. The Company issues registered shares of common stock to satisfy stock option exercises and restricted stock grants. The Company recognized expense related to time-based stock options and restricted stock for 2015, 2014, and 2013 of $8,072, $5,383 and $2,489, respectively. As of December 31, 2015 there was $21,181 of unrecognized compensation costs related to non- vested stock option and restricted stock arrangements ($7,375 relating to stock options and $13,806 relating to restricted stock). This cost is expected to be recognized over a weighted-average period of 2.0 years for stock options and 2.6 years for restricted stock. The Company awarded 225 performance options to its new President and Chief Executive Officer (CEO) when he joined the Company in November 2012, and an additional 225 performance options were awarded to the CEO in January 2014. The options expire ten years from the date of grant and vest in increments of 25 shares when the volume adjusted weighted average closing price of the common stock of the Company as reported by NASDAQ (or any other exchange on which the common stock of the Company is listed) for 30 consecutive days equals or exceeds each of $10.00 per share, $12.50 per share, $15.00 per share, $17.50 per share, $20.00 per share, $25.00 per share, $30.00 per share, $35.00 per share and $40.00 per share. In accordance with FASB ASC 718, a Monte Carlo simulation was performed for both grants to estimate the fair values, vesting terms and vesting probabilities for each 66 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) tranche of options. Expense calculated using these estimates is being recorded over the estimated vesting terms. The Company recognized expense related to the performance options during 2015, 2014 and 2013 of $546, $1,767 and $272, respectively. As of December 31, 2015 there was $313 of unrecognized compensation costs related to non-vested performance options. This cost is expected to be recognized over a weighted-average period of 0.25 to 2.05 years. Employee Stock Purchase Plan (ESPP) During 2008 the Company established the Employee Stock Purchase Plan which is available to eligible employees as defined in the ESPP. Under the ESPP, shares of the Company’s common stock may be purchased at a discount (currently 15%) of the lesser of the closing price of the Company’s common stock on the first trading day or the last trading day of the offering period. The offering period (currently six months) and the offering price are subject to change. Participants may not purchase more than $25 of the Company’s common stock in a calendar year and, effective January 1, 2014, may not purchase a value of more than 3 shares during an offering period. Beginning on January 1, 2009 and on the first day of each fiscal year thereafter during the term of the ESPP, the number of shares available for sale under the ESPP shall be increased by the lesser of (i) two percent (2%) of the Company’s outstanding shares of common stock as of the close of business on the last business day of the prior calendar year, not to exceed 600 shares, or (ii) a lesser amount determined by the Board of Directors. At December 31, 2015 there were 491 shares available for future issuance under the ESPP. Share-based compensation expense with respect to the ESPP was $379, $421 and $319 for 2015, 2014 and 2013, respectively. Valuation and Expense Information Under FASB ASC 718 The following table summarizes share-based compensation expense related to employee share-based compensation under FASB ASC 718 for 2015, 2014 and 2013. This expense was allocated as follows: Cost of revenue Research and development expenses Selling, general and administrative expenses Total 2015 2014 2013 $ $ 416 $ 1,373 7,208 8,997 $ 335 $ 937 6,299 7,571 $ 246 230 2,604 3,080 In calculating compensation expense, the fair value of the options is estimated on the grant date using the Black-Scholes model including the following assumptions: Risk-free interest rate Expected life of option (years) Expected volatility of stock Weighted-average volatility Dividend yield 2015 2014 2013 1.30 - 1.96 % 5.20 to 6.89 1.56 - 2.12 % 5.31 to 6.72 0.75 - 2.29 % 5.38 to 7.14 46.00 - 67.00 % 47.00 - 70.00 % 69.19 % 0.00 % 54.75 % 0.00 % 69.00 % 69.00 % 0.00 % The Company’s estimate of volatility is based solely on the Company’s trading history. 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. The fair value of restricted stock awards is based on the market value of the Company’s stock on the date of the awards. Based on the assumptions noted above, the weighted average estimated grant date fair value per share of the stock options and restricted stock granted for 2015, 2014 and 2013 was as follows: Stock options Restricted stock 2015 2014 2013 $ 11.12 17.82 $ 12.33 20.25 $ 5.70 9.35 In calculating compensation expense for performance options, the fair value of the options is estimated on the grant date using a Monte Carlo simulation including the following assumptions: 67 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) Strike price Contractual term (years) Expected volatility of stock Interest rate Dividend yield 2015 2014 2013 $ 5.91 - 21.04 10.00 $ 5.91 - 21.04 10.00 $ 60.50 - 69.60 % 60.50 - 69.60 % 1.75 - 2.73 % 0.00 % 1.75 - 2.73 % 0.00 % 5.91 10.00 69.60 % 1.75 % 0.00 % The contractual term assumes that the performance options issued to the CEO of the Company in 2012 and 2014 will be held until expiration. Expected volatility is estimated based on the Company’s trading history. The expected rate of return assumption is based upon the U.S. treasury yield curve at the time of grant for the expected option life. Based on the assumptions noted above, the estimated grant date fair value per share of the performance options granted were as follows: Tranche 1 Tranche 2 Tranche 3 Tranche 4 Tranche 5 Tranche 6 Tranche 7 Tranche 8 Tranche 9 $ Price Target Fair Value of 2012 Grant Fair Value of 2014 Grant $ 10.00 12.50 15.00 17.50 20.00 25.00 30.00 35.00 40.00 $ 4.32 4.30 4.27 4.23 4.19 4.10 4.01 3.92 3.83 14.74 14.74 14.74 14.74 14.73 14.73 14.71 14.67 14.61 16. SEGMENT AND GEOGRAPHIC INFORMATION The Company evaluates reporting segments in accordance with FASB ASC 280, “Segment Reporting”. The Company develops, manufactures, and sells devices designed primarily for the surgical ablation of cardiac tissue and systems designed for the exclusion of the left atrial appendage. These devices are developed and marketed to a broad base of medical centers in the United States and internationally. Management considers all such sales to be part of a single reportable segment. Revenue attributed to geographic areas is based on the location of the customers to whom products are sold. Revenue by geographic area was as follows: Revenue: United States Europe Asia Other international Total international Total revenue 2015 2014 2013 $ $ 102,212 $ 17,180 9,510 853 27,543 129,755 $ 80,203 $ 18,163 8,552 536 27,251 107,454 $ 62,311 11,384 7,665 529 19,578 81,889 68 ATRICURE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In Thousands, Except Per Share Amounts) Domestic revenue by product type was as follows: Revenue: Open-heart ablation Minimally invasive ablation AtriClip Total ablation and AtriClip Valve tools Total domestic International revenue by product type was as follows: Revenue: Open-heart ablation Minimally invasive ablation AtriClip Total ablation and AtriClip Valve tools Total international 2015 2014 2013 $ $ 53,541 $ 21,564 24,377 99,482 2,730 102,212 $ 44,662 $ 16,050 16,675 77,387 2,816 80,203 $ 37,843 13,648 10,820 62,311 — 62,311 2015 2014 2013 $ $ 16,287 $ 7,964 2,868 27,119 424 27,543 $ 16,445 $ 7,881 2,158 26,484 767 27,251 $ 13,064 5,354 1,160 19,578 — 19,578 The majority of the Company’s long-lived assets are located in the United States. 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Operating Results: Revenue Gross profit Loss from operations Net loss March 31, June 30, September 30, December 31, 2015 2014 2015 2014 2015 2014 2015 2014 For the Three Months Ended $ 29,886 $ 24,847 $ 32,583 $ 26,514 $ 31,423 $ 26,678 $ 35,863 $ 29,415 21,735 17,657 23,117 18,781 22,478 18,892 25,545 20,420 (5,144) (5,266) (7,925) (7,709) (4,819) (4,891) (2,853) (2,692) (6,127) (6,141) (803) (10,630) (466) (10,914) (4,779) (5,344) Net loss per share (basic and diluted) $ (0.19) $ (0.31) $ (0.18) $ (0.10) $ (0.22) $ (0.02) $ (0.36) $ (0.20) Amounts may not sum to consolidated totals for the full year due to rounding. Basic and diluted net loss per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly per share amounts will not necessarily equal the total for the year. 69 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Reserve for sales returns and allowances Year ended December 31, 2015 Year ended December 31, 2014 Year ended December 31, 2013 Allowance for inventory valuation Year ended December 31, 2015 Year ended December 31, 2014 Year ended December 31, 2013 Valuation allowance for deferred tax assets Year ended December 31, 2015 Year ended December 31, 2014 Year ended December 31, 2013 Beginning Balance Additions Deductions Ending Balance $ $ $ 135 $ 105 105 522 $ 782 267 78 $ 34 — 720 $ 441 921 6 $ 4 — 399 $ 701 406 207 135 105 843 522 782 59,554 $ 54,211 31,685 14,128 $ 5,343 22,526 — $ — — 73,682 59,554 54,211 70 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934 (Exchange Act), as of the end of the period covered by this report. Our management, including the Chief Executive Officer and Chief Financial Officer, supervised and participated in the evaluation. Based on the evaluation, we concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s forms and rules, and the material information relating to the Company is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that control objectives are met. Because of inherent limitations in all control systems, no evaluation of controls can provide assurance that all control issues and instances of fraud, if any, within a company will be detected. Additionally, controls can be circumvented by individuals, by collusion of two or more people or by management override. Over time, controls can become inadequate because of changes in conditions or the degree of compliance may deteriorate. Further, the design of any system of controls is based in part upon assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions. Because of the inherent limitations in any cost-effective control system, misstatements due to errors or fraud may occur and not be detected. Changes in Internal Control over Financial Reporting There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Management’s Annual Report on Internal Control Over Financial Reporting The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. Management’s assessment excluded the internal control over financial reporting at nContact, which was acquired on October 13, 2015. No matter how well designed, because of inherent limitations in all control systems, internal control over financial reporting may not prevent or detect misstatements should they occur. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the control procedures may deteriorate. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on such assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2015. Deloitte & Touche LLP, the Company’s independent registered public accounting firm has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of its audit, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting. The attestation report can be found on the following page as part of this Item 9A. 71 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of AtriCure, Inc. and subsidiaries Mason, Ohio We have audited the internal control over financial reporting of AtriCure, Inc. and subsidiaries (the "Company") as of December 31, 2015, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management's Annual Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at nContact Surgical, Inc., which was acquired on October 13, 2015 and whose financial statements constitute 1.7 % and 1.3% of net and total assets, respectively, 1.7% of revenues, and approximately 4% of net loss of the consolidated financial statement amounts as of and for the year ended December 31, 2015. Accordingly, our audit did not include the internal control over financial reporting at nContact Surgical, Inc. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2015 of the Company and our report dated February 29, 2016 expressed an unqualified opinion on those financial statements and financial statement schedule. /s/ Deloitte & Touche LLP Cincinnati, Ohio February 29, 2016 72 ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this Item is incorporated by reference to the definitive proxy statement for our 2016 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of 2015 (the “Proxy Statement”). ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table summarizes information about our equity compensation plans as of December 31, 2015. Plan Category Equity compensation plans approved by security holders (3) Equity compensation plans not approved by security holders Total _________________________ Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) Weighted-average exercise price of outstanding options, warrants and rights (2) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (a) (b) (c) 4,255,243 $ — 4,255,243 $ 12 — 12 1,371,596 — 1,371,596 (1) Represents outstanding stock options and restricted stock as of December 31, 2015. (2) The weighted average exercise price is calculated without taking into account restricted stock that will become issuable, without any cash consideration or other payment, as vesting requirements are achieved. (3) Amounts include awards under our 2001 Stock Option Plan, 2005 Equity Incentive Plan and 2014 Stock Incentive Plan but exclude shares purchased under our 2008 Employee Stock Purchase Plan. The remaining information required by this Item is incorporated by reference to the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this Item is incorporated by reference to the Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item is incorporated by reference to the Proxy Statement. 73 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (1) The financial statements required by Item 15(a) are filed in Item 8 of this Form 10-K. (2) The financial statement schedules required by Item 15(a) are filed in Item 8 of this Form 10-K. (3) The following exhibits are included in this Form 10-K or incorporated by reference in this Form 10-K: Exhibit No. Description 3.1 3.2 3.3 4.2 10.1# 10.2# 10.3# 10.4# 10.5# 10.6# 10.7# 10.8# 10.9# 10.10 10.11 10.12 10.13 10.14 10.15 10.16 Amended and Restated Certificate of Incorporation (incorporated by reference to our Registration Statement on Form S- 1 (Registration No. 333-124197), filed on April 20, 2005). Second Amended and Restated Bylaws (incorporated by reference to our Registration Statement on Form S-1 (Registration No. 333-124197) filed on April 20, 2005). Third Amended and Restated Bylaws (incorporated by reference to our Registration Statement on Form S-1 (Registration No. 333-124197) filed on April 20, 2005). Warrant to purchase AtriCure, Inc. common stock issued to Silicon Valley Bank on May 1, 2009 (incorporated by reference to our Quarterly Report on Form 10-Q, filed on August 10, 2009). 2001 Stock Option Plan (incorporated by reference to Amendment No. 1 to our Registration Statement on Form S-1 (Registration No. 333-124197), filed on June 14, 2005). Agreement, dated as of July 18, 2006, by and between AtriCure, Inc. and the Cleveland Clinic (incorporated by reference to our Current Report on Form 8-K, filed on July 20, 2006). Amendment No. 1, dated as of December 1, 2008, to Agreement dated as of July 18, 2006 by and between AtriCure, Inc. and the Cleveland Clinic (incorporated by reference to our Annual Report on Form 10-K filed on March 16, 2009). Amendment No. 2, effective as of December 28, 2009, to Agreement dated as of July 18, 2006 by and between AtriCure, Inc. and the Cleveland Clinic (incorporated by reference to our Annual Report on Form 10-K filed on March 30, 2010). Employment Agreement, dated as of January 16, 2012, between AtriCure, Inc. and Andrew L. Lux (incorporated by reference to our Current Report on Form 8-K, filed on January 17, 2012). Employment Agreement, dated as of November 1, 2012, between AtriCure, Inc. and Michael H. Carrel (incorporated by reference to our Current Report on Form 8-K, filed on November 1, 2012). 2005 Equity Incentive Plan, as amended on September 19, 2007 and on March 6, 2013 (incorporated by reference to our Annual Report on Form 10-K filed on March 8, 2013). 2008 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Form S-8 Registration Statement (File No. 333-152013) filed on June 30, 2008). Form of Change in Control Agreement between AtriCure and AtriCure Executive Officers (incorporated by reference to our Annual Report on Form 10-K filed on March 8, 2013). Amended and Restated Loan and Security Agreement, dated as of September 13, 2010, between Silicon Valley Bank and AtriCure, Inc. (incorporated by reference to our Current Report on Form 8-K, filed on September 17, 2010). First Loan Modification Agreement, dated as of March 15, 2011, between Silicon Valley Bank and AtriCure, Inc. (incorporated by reference to our Current Report on Form 8-K, filed on March 16, 2011). Second Loan Modification Agreement, dated as of February 2, 2012, between Silicon Valley Bank and AtriCure, Inc. (incorporated by reference to our Current Report on Form 8-K, filed on February 2, 2012). Third Loan Modification Agreement, dated as of May 31, 2012, between Silicon Valley Bank and AtriCure, Inc. (incorporated by reference to our Current Report on Form 8-K, filed on June 4, 2012). Fourth Loan Modification Agreement, dated as of September 26, 2012, between Silicon Valley Bank and AtriCure, Inc. (incorporated by reference to our Current Report on Form 8-K, filed on September 28, 2012). Joinder and Fifth Loan Modification Agreement, dated as of January 30, 2013, between Silicon Valley Bank and AtriCure, Inc. (incorporated by reference to our Current Report on Form 8-K, filed on January 31, 2013). Joinder and Sixth Loan Modification Agreement, dated as of March 29, 2013, between Silicon Valley Bank and AtriCure, Inc. (incorporated by reference to our Current Report on Form 8-K, filed on March 29, 2013). 74 Exhibit No. Description 10.17 10.18 10.19 10.20# 10.21# 10.22# 10.23# 10.24 21 23.1 31.1 31.2 32.1 32.2 Joinder and Seventh Loan Modification Agreement, dated as of April 30, 2014, between Silicon Valley Bank and AtriCure, Inc. (incorporated by reference to our Quarterly Report on Form 10-Q, filed on April 30, 2014). Eighth Loan Modification Agreement, dated as of March 31, 2015, between Silicon Valley Bank and AtriCure, Inc. (incorporated by reference to our Current Report on Form 8-K, filed on April 2, 2015). Lease Agreement Dated August 20, 2014 between LM-VP AtriCure, LLC, as Landlord, and AtriCure, Inc., as Tenant (incorporated by reference to our Current Report on Form 8-K, filed on August 25, 2014). Amended and Restated AtriCure, Inc. 2014 Stock Incentive Plan (incorporated by reference to our Quarterly Report on Form 10-Q, filed on October 31, 2014). Form of Restricted Stock Award Agreement under the Amended and Restated AtriCure, Inc. 2014 Stock Incentive Plan (incorporated by reference to our Quarterly Report on Form 10-Q, filed on October 31, 2014). Form of Stock Option Award Agreement for Executive Officers under the Amended and Restated AtriCure, Inc. 2014 Stock Incentive (incorporated by reference to our Quarterly Report on Form 10-Q, filed on October 31, 2014). Form of Stock Option Award Agreement for Non-Employee Directors under the Amended and Restated AtriCure, Inc. 2014 Stock Incentive Plan (incorporated by reference to our Quarterly Report on Form 10-Q, filed on October 31, 2014). Merger Agreement dated as of October 4, 2015 among nContact Surgical, Inc., AtriCure, Inc., Portal Merger Sub, Inc., Second Portal Merger Sub, LLC and WRYP Stockholder Services, LLC, as Representative of nContact stockholders (incorporated by reference to our Current Report on Form 8-K, filed on October 5, 2015). Subsidiaries of the Registrant. Consent of Deloitte & Touche LLP. Rule 13a-14(a) Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Rule 13a-14(a) Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification pursuant to 18 U.S.C. Section 1350 by the Chief Executive Officer, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certification pursuant to 18 U.S.C. Section 1350 by the Chief Financial Officer, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document _________________________ # Compensatory plan or arrangement. 75 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed on our behalf by the undersigned, thereunto duly authorized. SIGNATURES Date: February 29, 2016 Date: February 29, 2016 AtriCure, Inc. (REGISTRANT) /s/ Michael H. Carrel Michael H. Carrel President and Chief Executive Officer (Principal Executive Officer) /s/ M. Andrew Wade M. Andrew Wade Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael H. Carrel, his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, and any of them or his substitute or substitutes, may do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities indicated on February 29, 2016. Signature /s/ Richard M. Johnston Richard M. Johnston /s/ Michael H. Carrel Michael H. Carrel /s/ M. Andrew Wade M. Andrew Wade /s/ Mark A. Collar Mark A. Collar /s/ Scott W. Drake Scott W. Drake /s/ Michael D. Hooven Michael D. Hooven /s/ Elizabeth D. Krell Elizabeth D. Krell /s/ Mark R. Lanning Mark R. Lanning /s/ Karen P. Robards Karen P. Robards /s/ Robert S. White Robert S. White Title(s) Richard M. Johnston Chairman of the Board Michael H. Carrel Director, President and Chief Executive Officer (Principal Executive Officer) M. Andrew Wade Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) Mark A. Collar Director Scott W. Drake Director Michael D. Hooven Director Elizabeth D. Krell Director Mark R. Lanning Director Karen P. Robards Director Robert S. White Director 76 Exhibit No. Description EXHIBIT INDEX 3.1 3.2 3.3 4.1 4.2 10.1# 10.2# 10.3# 10.4# 10.5# 10.6# 10.7# 10.8# 10.9# 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 Amended and Restated Certificate of Incorporation (incorporated by reference to our Registration Statement on Form S- 1 (Registration No. 333-124197), filed on April 20, 2005). Second Amended and Restated Bylaws (incorporated by reference to our Registration Statement on Form S-1 (Registration No. 333-124197) filed on April 20, 2005). Third Amended and Restated Bylaws (incorporated by reference to our Registration Statement on Form S-1 (Registration No. 333-124197) filed on April 20, 2005). Specimen common stock certificate (incorporated by reference to Amendment No. 2 to our Registration Statement on Form S-1 (Registration No. 333-124197), filed on July 7, 2005). Warrant to purchase AtriCure, Inc. common stock issued to Silicon Valley Bank on May 1, 2009 (incorporated by reference to our Quarterly Report on Form 10-Q, filed on August 10, 2009). 2001 Stock Option Plan (incorporated by reference to Amendment No. 1 to our Registration Statement on Form S-1 (Registration No. 333-124197), filed on June 14, 2005). Agreement, dated as of July 18, 2006, by and between AtriCure, Inc. and the Cleveland Clinic (incorporated by reference to our Current Report on Form 8-K, filed on July 20, 2006). Amendment No. 1, dated as of December 1, 2008, to Agreement dated as of July 18, 2006 by and between AtriCure, Inc. and the Cleveland Clinic (incorporated by reference to our Annual Report on Form 10-K filed on March 16, 2009). Amendment No. 2, effective as of December 28, 2009, to Agreement dated as of July 18, 2006 by and between AtriCure, Inc. and the Cleveland Clinic (incorporated by reference to our Annual Report on Form 10-K filed on March 30, 2010). Employment Agreement, dated as of January 16, 2012, between AtriCure, Inc. and Andrew L. Lux (incorporated by reference to our Current Report on Form 8-K, filed on January 17, 2012). Employment Agreement, dated as of November 1, 2012, between AtriCure, Inc. and Michael H. Carrel (incorporated by reference to our Current Report on Form 8-K, filed on November 1, 2012). 2005 Equity Incentive Plan, as amended on September 19, 2007 and on March 6, 2013 (incorporated by reference to our Annual Report on Form 10-K filed on March 8, 2013). 2008 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Form S-8 Registration Statement (File No. 333-152013) filed on June 30, 2008). Form of Change in Control Agreement between AtriCure and AtriCure Executive Officers (incorporated by reference to our Annual Report on Form 10-K filed on March 8, 2013). Amended and Restated Loan and Security Agreement, dated as of September 13, 2010, between Silicon Valley Bank and AtriCure, Inc. (incorporated by reference to our Current Report on Form 8-K, filed on September 17, 2010). First Loan Modification Agreement, dated as of March 15, 2011, between Silicon Valley Bank and AtriCure, Inc. (incorporated by reference to our Current Report on Form 8-K, filed on March 16, 2011). Second Loan Modification Agreement, dated as of February 2, 2012, between Silicon Valley Bank and AtriCure, Inc. (incorporated by reference to our Current Report on Form 8-K, filed on February 2, 2012). Third Loan Modification Agreement, dated as of May 31, 2012, between Silicon Valley Bank and AtriCure, Inc. (incorporated by reference to our Current Report on Form 8-K, filed on June 4, 2012). Fourth Loan Modification Agreement, dated as of September 26, 2012, between Silicon Valley Bank and AtriCure, Inc. (incorporated by reference to our Current Report on Form 8-K, filed on September 28, 2012). Joinder and Fifth Loan Modification Agreement, dated as of January 30, 2013, between Silicon Valley Bank and AtriCure, Inc. (incorporated by reference to our Current Report on Form 8-K, filed on January 31, 2013). Joinder and Sixth Loan Modification Agreement, dated as of March 29, 2013, between Silicon Valley Bank and AtriCure, Inc. (incorporated by reference to our Current Report on Form 8-K, filed on March 29, 2013). Joinder and Seventh Loan Modification Agreement, dated as of April 30, 2014, between Silicon Valley Bank and AtriCure, Inc. (incorporated by reference to our Quarterly Report on Form 10-Q, filed on April 30, 2014). Eighth Loan Modification Agreement, dated as of March 31, 2015, between Silicon Valley Bank and AtriCure, Inc. (incorporated by reference to our Current Report on Form 8-K, filed on April 2, 2015). 77 Exhibit No. Description 10.19 10.20# 10.21# 10.22# 10.23# 10.24 21 23.1 31.1 31.2 32.1 32.2 Lease Agreement Dated August 20, 2014 between LM-VP AtriCure, LLC, as Landlord, and AtriCure, Inc., as Tenant (incorporated by reference to our Current Report on Form 8-K, filed on August 25, 2014). Amended and Restated AtriCure, Inc. 2014 Stock Incentive Plan (incorporated by reference to our Quarterly Report on Form 10-Q, filed on October 31, 2014). Form of Restricted Stock Award Agreement under the Amended and Restated AtriCure, Inc. 2014 Stock Incentive Plan (incorporated by reference to our Quarterly Report on Form 10-Q, filed on October 31, 2014). Form of Stock Option Award Agreement for Executive Officers under the Amended and Restated AtriCure, Inc. 2014 Stock Incentive (incorporated by reference to our Quarterly Report on Form 10-Q, filed on October 31, 2014). Form of Stock Option Award Agreement for Non-Employee Directors under the Amended and Restated AtriCure, Inc. 2014 Stock Incentive Plan (incorporated by reference to our Quarterly Report on Form 10-Q, filed on October 31, 2014). Merger Agreement dated as of October 4, 2015 among nContact Surgical, Inc., AtriCure, Inc., Portal Merger Sub, Inc., Second Portal Merger Sub, LLC and WRYP Stockholder Services, LLC, as Representative of nContact stockholders (incorporated by reference to our Current Report on Form 8-K, filed on October 5, 2015). Subsidiaries of the Registrant. Consent of Deloitte & Touche LLP. Rule 13a-14(a) Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Rule 13a-14(a) Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification pursuant to 18 U.S.C. Section 1350 by the Chief Executive Officer, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certification pursuant to 18 U.S.C. Section 1350 by the Chief Financial Officer, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document _________________________ # Compensatory plan or arrangement. 78 CORPORATE INFORMATION BOARD OF DIRECTORS Richard M. Johnston Chairman of the Board Retired Member, Camden Partners Holdings, LLC Michael H. Carrel AtriCure, Inc. Mark A. Collar Retired Division President The Procter & Gamble Co. Scott W. Drake Spectranetics Corp. Michael D. Hooven Enable Injections, LLC Elizabeth D. Krell, Ph.D. JK Consultants Mark R. Lanning Frisch’s Restaurants Karen P. Robards Robards & Company, LLC Robert S. White Entellus Medical MANAGEMENT Michael H. Carrel President and Chief Executive Officer M. Andrew Wade Senior Vice President and Chief Financial Officer Douglas J. Seith Chief Operating Officer Tonya Austin Vice President, Human Resources Karl Dahlquist Vice President, Legal and Regulatory and Chief Compliance Officer David Francischelli Vice President, Research & Development Andrew L. Lux, Ph. D. Senior Vice President, Operations and Quality Justin Noznesky Senior Vice President, Marketing and Business Development Michael Rogge Vice President, Professional Education and Scientific Affairs Shana Zink Vice President, Clinical Affairs INVESTOR RELATIONS CONTACT M. Andrew Wade Senior Vice President and Chief Financial Officer ANNUAL MEETING May 25, 2016 9:00 a.m. (EST) AtriCure, Inc. 7555 Innovation Way Mason, Ohio 45040 CORPORATE HEADQUARTERS AtriCure, Inc. 7555 Innovation Way Mason, Ohio 45040 T 513.755.4100 F 513.755.4108 www.atricure.com FORWARD LOOKING STATEMENTS Our public communications and other reports may contain “forward-looking statements”—that is, statements related to future events within the meaning of the Private Securities Litigation Reform Act of 1995. In this context, forward-looking statements often address our expected future business, financial performance, financial condition and results of operations, and often contain words such as “intends,” “estimates,” “anticipates,” “hopes,” “projects,” “plans,” “expects,” “seek,” “believes,” “should,” “will,” “would,” “target,” and similar expressions and the negative versions thereof. Such statements are based only upon current expectations of AtriCure. Any forward-looking statement speaks only as of the date made. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to differ materially from those expressed or implied. Forward- looking statements include statements that address activities, events or developments that AtriCure expects, believes or anticipates will or may occur in the future, such as earnings estimates (including projections and guidance), other predictions of financial performance, launches by AtriCure of new products and market acceptance of AtriCure’s products. Forward-looking statements are based on AtriCure’s experience and perception of current conditions, trends, expected future developments and other factors it believes are appropriate under the circumstances and are subject to numerous risks and uncertainties, many of which are beyond AtriCure’s control. These risks and uncertainties include the rate and degree of market acceptance of AtriCure’s products, AtriCure’s ability to develop and market new and enhanced products, AtriCure’s ability to retain and attract key employees, the timing of and ability to obtain and maintain regulatory clearances and approvals for its products, the timing of and ability to obtain reimbursement of procedures utilizing AtriCure’s products, AtriCure’s ability to continue to be in compliance with applicable U.S. federal and state and foreign government laws and regulations, AtriCure’s ability to consummate acquisitions or, if consummated, to successfully integrate acquired businesses into AtriCure’s operations, AtriCure’s ability to recognize the benefits of acquisitions, including potential synergies and cost savings, failure of an acquisition or acquired company to achieve its plans and objectives generally, risk that proposed or consummated acquisitions may disrupt operations or pose difficulties in employee retention or otherwise affect financial or operating results, AtriCure’s ability to raise the capital that may be required to accomplish the foregoing, competition from existing and new products and procedures, including the development of drug or catheter-based technologies, or AtriCure’s ability to effectively react to other risks and uncertainties described from time to time in AtriCure’s SEC filings, such as fluctuation of quarterly financial results, fluctuations in exchange rates for future sales denominated in foreign currency, which represent a majority of AtriCure’s sales outside of the United States, reliance on third party manufacturers and suppliers, litigation or other proceedings, government regulation and stock price volatility. AtriCure does not guarantee any forward-looking statement, and actual results may differ materially from those projected. AtriCure undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. A further list and description of risks, uncertainties and other matters can be found in our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. Our public communications and other reports may contain forward-looking projected financial information that is based on current estimates and forecasts. Actual results could differ materially. FORM 10-K Our Annual Report on Form 10-K is available on the internet by accessing AtriCure’s website at www.atricure.com. A copy of the Company’s most recent Form 10-K, as filed with the US Securities and Exchange Commission, or SEC, (including consolidated financial statements and the notes and schedules thereto), will be provided to stockholders upon written request to the Company’s Investor Relations Contact. A T R I C U R E ® 2 0 1 5 A N N U A L R E P O R T 7555 Innovation Way Mason, Ohio 45040 513.755.4100 www.atricure.com NASDAQ:ATRC MKT-1998A-G 

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