UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
FORM 10-K
_________________________________
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
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
Trading Symbol(s)
ATRC
Name of each exchange on which registered
NASDAQ
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
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
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 No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such
files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2
of the Exchange Act.
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer
Smaller Reporting Company Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act:
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
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, 2019, the last business day of the registrant’s most recently completed second fiscal quarter as reported on the NASDAQ Global Market, was $1,110.6 million.
Class
Common Stock, $.001 par value
Outstanding February 20, 2020
40,048,972
_________________________________
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
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
RELATED STOCKHOLDER MATTERS
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
INDEPENDENCE
PART IV
ITEM 15.
ITEM 16.
SIGNATURES
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
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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 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,” “see,” “should,” “will,” “would,” “could,” “can,” “may,” “future,” “predicts,” “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,
circumstances or developments that AtriCure expects, believes or anticipates will or may occur in the future. 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. 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. We undertake no, and hereby disclaim any and all, obligation to publicly update or revise any forward-
looking statements to reflect new information or future events or otherwise unless required by law.
(Dollar and share amounts referenced in this Part I are in thousands.)
PART I
ITEM 1. BUSINESS
Overview
We are a leading innovator in treatments for atrial fibrillation (Afib) and left atrial appendage (LAA) management. 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 beat rapidly, irregularly,
and in an uncoordinated fashion. As a result, blood in the atria may be in stasis, increasing the risk that a blood clot will form and
cause a stroke or other serious complications. In patients with Afib, a significant percentage of those clots can form inside of the LAA.
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 (paroxysmal) to being in Afib
continuously (persistent and long standing persistent). Afib often occurs in conjunction with other cardiovascular diseases, including
hypertension, congestive heart failure, left ventricular dysfunction, coronary artery disease and valvular disease.
Our products are used by physicians during both open-heart and minimally invasive procedures, either in conjunction with heart
surgery for other conditions (“concomitant” to such a procedure), or on a standalone basis. 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 long-standing 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 less invasive cardiac and thoracic procedures. Our cryoICE® cryosurgery product line offers a variety of cryoablation
devices for use in multiple types of cardiothoracic surgery. Our AtriClip® LAA Exclusion System is a device specifically designed to
exclude the heart’s left atrial appendage.
We believe that we are currently the market leader in the surgical treatment of Afib. Our Isolator Synergy System is approved
by FDA for the treatment of persistent and long-standing persistent Afib concomitant to other open-heart surgical procedures. All of
our other ablation devices are cleared for sale in the United States under FDA 510(k) clearances, including our other RF and
cryoablation products, which are indicated for the ablation of cardiac tissue and/or the treatment of cardiac arrhythmias. In addition,
certain of our cryoablation probes are cleared for managing pain by temporarily ablating peripheral nerves. Our AtriClip products are
510(k)-cleared with an indication for the exclusion of the LAA, performed under direct visualization and in conjunction with other
cardiac surgical procedures. Direct visualization, in this context, requires that the surgeon is able to see the heart directly, with or
without assistance from a camera, endoscope or other appropriate viewing technologies. The LARIAT® system is cleared for soft
tissue ligation and is currently being studied to support an indication of exclusion of the LAA in patients with persistent and long-
standing persistent Afib also undergoing a pulmonary vein isolation. We also offer reusable surgical instruments typically used in
cardiac valve replacement or repair. Our Isolator Synergy clamps, Isolator Synergy pens, Coolrail® linear pen, cryosurgery devices,
certain products of the AtriClip LAA Exclusion System, COBRA Fusion® Ablation System, NumerisTM System, the EPi-Sense®
Guided Coagulation System with VisiTrax® technology, and LARIAT Suture Delivery Device bear the CE mark and may be
commercially distributed throughout the member states of the European Union and other countries that comply with or mirror the
Medical Device Directive. Our Isolator Synergy clamps, Isolator Synergy pens, Coolrail linear pen, cryosurgery devices, and certain
1
products of the AtriClip LAA Exclusion System are available in select Asia-Pacific countries. 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.
We sell our products to medical centers through our direct sales force in the United States and in certain international markets,
such as Germany, France, the United Kingdom and the Benelux region. We also sell our products to distributors who in turn sell our
products to medical centers in other international markets. Our business is primarily transacted in U.S. Dollars with the exception of
transactions with our European customers, which are transacted primarily in the Euro or the British Pound.
Market Overview
Afib is the most commonly diagnosed sustained cardiac arrhythmia, and affects approximately 33 million people worldwide,
including six million in the United States. 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 structural heart disease or stroke. We believe that increasing awareness of Afib and improved
diagnostic screening will result in an increased number of patients diagnosed with Afib. Recently, there have been several new
diagnostic technologies introduced in the United States that allow for less invasive screening options, which should assist patients with
more proactive identification of 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 the incidence of Afib is increasing as the population ages in many geographies.
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. Over the past two decades, technology advancements have made surgical ablation more effective, repeatable
and available to cardiac surgeons around the world. Societal guideline changes from the Society of Thoracic Surgeons (STS), Heart
Rhythm Society (HRS), and American Associated of Thoracic Surgery (AATS) have Class I recommendations for surgical ablation,
meaning that it is a “recommended” treatment, no longer just “reasonable”, for patients who have structural heart disease and Afib.
These societal guidelines are reflective of the scientific evidence suggesting that surgical ablation is safe and effective for all structural
heart patients who also have Afib.
Of the patients undergoing open-heart surgery globally on an annual basis, we estimate that over 250,000 are potential
candidates for surgical ablation using our products. Today, we estimate that approximately 25% to 35% of those candidates are being
treated, but we believe many are not treated properly or fully. Of the population diagnosed with Afib, a large percentage of patients
are symptomatic and do not respond to pharmacological therapy. 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 multi-disciplinary (“hybrid”) Afib treatment using our products.
In addition, Afib is thought to be responsible for approximately 15% to 20% of the estimated 800,000 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.
Studies have also suggested that 90% of clots that cause strokes in patients who have Afib originate from within the LAA. Afib
accounts for billions of dollars in hospitalization-related and office visit costs in the United States each year. 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, both in patients who have Afib, but also in those who
do not have Afib but may be at increased risk of developing the disease in the future. We believe that our AtriClip system is safer,
more effective and easier to use than other products and techniques for excluding the LAA during cardiac surgery. Therefore, we
believe that the market for the AtriClip system represents a significant growth opportunity in the cardiac surgery market.
Cardiothoracic surgery involving an incision through the ribcage, typically referred to as thoracotomy access, can often times
result in post-operative pain and longer hospital recovery times as patients refrain from mobilizing their chest near the incision site.
Most cardiothoracic surgeons will employ a multi-modal pain management protocol that includes global and local pain management
techniques. Global techniques include epidural delivery of medication directly around the spinal cord, intravenous, or oral delivery of
opioid and non-opioid pain medications. Local, more focused, techniques include syringe injections between vertebrates and cryo
nerve block, the use of cryo-energy to temporarily ablate peripheral nerves. Cryo nerve block can be delivered using our cryoICE
cryoSPHERE® probe, which is specifically designed for cryo nerve block, as well as our cryoICE CRYO2 probe, one of the same
probes used to treat cardiac arrhythmias. Depending on the degree of invasiveness of the cardiothoracic surgery, physicians and their
nursing staff will take advantage of multiple modes of pain management. It is estimated that each year roughly 140,000 cardiac and
thoracic procedures are performed in the United States through thoracotomy access. Hospital recovery times can vary from two to
eight days depending on the procedure, operative complications associated with the procedure, pain management protocol, and other
factors. In recent years, opioids have come under heavy scrutiny due to their potential for long-term dependency, overdose and
possible death. The Center for Disease Control has reported over 42,000 deaths involving opioids in the United States in a single year,
and both federal and local governments in the United States have proposed and implemented new regulations to curb the opioid
overdose epidemic. It is also estimated that one in seven cardiothoracic surgical patients develops an unhealthy post-procedural
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addiction to prescription narcotics, making alternative, non-opioid pain management modalities, such as cryo nerve block,
increasingly important.
The AtriCure Solution and Products
We believe the surgical and catheter-based ablation devices currently marketed by our competition 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 severe forms of Afib or patients who have failed single or multiple catheter ablations. Our products
enable cardiothoracic surgeons to mimic all or portions of the cut and sew Maze procedure with faster, less invasive and less
technically challenging approaches. We have completed, and continue to invest in, clinical studies for the use of our ablation products
to treat Afib. 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 devices. The results of these studies have assessed efficacy, ease of
use and safety endpoints.
We also offer product lines for left atrial appendage management and open and minimally invasive cardiac tissue ablation.
Products for cardiac tissue ablation are characterized as either those that heat tissue using Radio Frequency (RF) energy to create the
tissue effects or those that cool tissue using cryo-thermal heat transfer to create the tissue effects. Our products fall into platforms each
consisting of disposable handpieces which connect to compact RF power generation sources or the cryoICE Box generator that we
generally place with our direct customers and sell to our distributors.
Products for open and minimally invasive ablation:
•
Isolator Synergy Clamps. Our Isolator Synergy System represents our primary product line and currently
generates the majority of our RF ablation-related revenue. All of our clamps are single-use disposables and have
jaws that close in a parallel fashion. We sell multiple configurations of our Isolator Synergy clamps with the
primary difference being the form of the clamping jaws. The parallel closure compresses tissue and evacuates the
blood and fluids from the energy pathway in order to make the ablation more effective. The Isolator Synergy
System is currently being evaluated under the DEEP AF IDE pivotal trial.
• Multifunctional Pens and Linear Ablation Devices. These devices are single-use disposable RF products that
come in multiple configurations which have different contact lengths and are powered by an RF generator. The
MAX Pen devices enable surgeons to evaluate cardiac arrhythmias, perform temporary cardiac pacing, sensing and
stimulation and ablate cardiac tissue with the same device. Surgeons are able to readily toggle back and forth
between these functions. The Coolrail device enables the user to make longer linear lines of ablation. Surgeons
generally use one or more of our pen and linear devices in combination with Isolator Synergy clamps.
Products for open ablation:
•
cryoICE Cryoablation System. The cryoICE cryoablation system is used in open ablation procedures and consists
of the cryoICE Box generator along with a single-use disposable probe. The primary differences between these
cryoablation probes is the form of the distal end. The cryoICE devices enables the user to make linear ablations of
varied lengths. Surgeons may utilize the cryoICE devices in combination with Isolator Synergy clamps or
independently. The ICE-AFIB clinical trial is studying the safety and efficacy of the cryoICE system for persistent
and long-standing persistent Afib treatment during concomitant on-pump cardiac surgery. The cryoSPHERE system
is used to apply cryo-energy to targeted intercostal peripheral nerves in the ribcage in order to provide temporary
pain relief. This technique, called cryo nerve block, is applied intra-operatively by the cardiothoracic surgeon and
results in temporary pain relief for up to 90 days after the procedure. Sensation typically returns to the affected
region of the chest after this period. Studies are ongoing to characterize the effects of cryo nerve block and further
refine the procedure.
Products for minimally invasive ablation:
•
EPi-Sense Guided Coagulation System with VisiTrax Technology. The EPi-Sense Guided Coagulation System
with VisiTrax technology utilizes monopolar energy for the coagulation of tissue. The Epi-Sense device is a single-
use disposable which is also capable of intra-operative cardiac signal sensing and recording when connected to an
external recording device. We are conducting the CONVERGE IDE clinical trial to evaluate the safety and efficacy
of the EPi-Sense Guided Coagulation System with VisiTrax technology to treat symptomatic persistent and long-
standing persistent Afib patients who are refractory or intolerant to at least one Class I and/or III anti-arrhythmic
drug.
Products for appendage management:
AtriClip System. The AtriClip System includes an implantable device (AtriClip) coupled to a single-use disposable
applier. The AtriClip is designed to exclude the left atrial appendage by mechanically clamping the appendage from the
outside of the heart, 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
3
available products and techniques for permanently excluding the left atrial appendage. These benefits compared to other
techniques include permanent exclusion and electrical isolation of the appendage. The AtriClip device comes in a variety
of lengths allowing the user to select a configuration specific to the patient and in two geometries (rectangular and “V”
shape). The appliers come in multiple forms tailored to specific procedural needs and with different deployment
mechanisms. The AtriClip System includes various combinations of AtriClips and appliers.
LARIAT System. The LARIAT System is a suture-based solution for soft-tissue closure and is compatible with a wide
range of anatomical shapes. The Lariat System includes a suture loop coupled to a single-use disposable applier. The loop
is designed to occlude the left atrial appendage by mechanically cinching the appendage from the outside of the heart,
eliminating blood flow between the left atrial appendage and the atrium while avoiding contact with circulating blood.
The product is currently being studied in the aMAZE clinical trial, the aim of which is to determine if the combination of
two percutaneous procedures, including using the LARIAT to exclude the left atrial appendage along with pulmonary
vein isolation using an endocardial catheter ablation device, may treat persistent or long-standing persistent atrial
fibrillation more effectively than pulmonary vein isolation alone.
In addition to the above product lines we also sell enabling technologies including our Lumitip™ dissectors, COBRA Fusion
Surgical Ablation System, the Fusion Magnetic Retriever System and a line of reusable cardiac surgery (valve) instruments. The
Lumitip dissector is used by surgeons to separate tissues to provide access to key anatomical structures that are targeted for ablation.
The COBRA Fusion Surgical Ablation System’s Versapolar technology combines bipolar temperature-controlled RF energy with
monopolar energy and incorporates a unique suction design to draw tissue in to assure stable contact and optimize ablation
performance. The Fusion Magnetic Retriever System™ allows access around key anatomical structures and facilitates positioning of
the Cobra Fusion Surgical Ablation System™. Cardiac surgery instruments are used during certain surgical procedures for repair or
replacement of 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 open-heart or minimally-invasive procedures that vary depending on the severity of the Afib symptoms and whether or
not the patient suffers from other forms of heart disease.
Alternative treatments to open-heart and minimally invasive procedures 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 drug 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, 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 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 a 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.
We do not promote our products specifically for Afib treatment in the United States, except for 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 concomitant procedures. 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 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.
For those patients with Afib who do not require a concomitant open-heart surgical procedure, surgeons have used our products
for minimally invasive Afib treatment procedures. These procedures have generally been performed through minimally invasive
4
incisions without the need to place patients on a heart-lung bypass machine. We do not currently have any products with FDA-
approved indications for the standalone treatment of Afib.
Certain physicians are combining various minimally invasive stand-alone epicardial ablation procedures (surgical ablation on
the outside of the heart) with endocardial ablation and mapping techniques (catheter ablation from the inside of the heart). These
combination procedures are often referred to as “hybrid” or “multi-disciplinary” approaches, in that both surgical ablation and catheter
ablations are performed. Sometimes, both procedures are performed on the same day or in the same hospital stay, where other times
they are performed days or weeks apart. Patient health condition, physician preference, hospital logistics and procedural room
availability influence the decision whether to perform hybrid ablations in a single or a staged setting. Physicians are reporting that they
are performing these procedures utilizing certain of our products to primarily treat patients who have non-paroxysmal forms of Afib.
Business Strategy
We are passionately focused on reducing the global Afib epidemic and healing the lives of those affected. Our strategy 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, global commercial expansion and clinical science investments. 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.
Invest in Clinical Science. We continue to invest in landmark clinical trials, including the CONVERGE, aMAZE and ICE-
AFIB IDE trials, to validate the long-term results of procedures using our products and to support applications to regulatory agencies
for expanded indications. We also make clinical research grants to support our product development efforts and expand the body of
clinical evidence.
Build Physician and Societal Relationships. We have formed consulting relationships with cardiothoracic surgeons,
cardiologists, electrophysiologists and thoracic surgeons who work with us to evaluate and develop our products. Additionally, we
have formed advisory boards made up of key opinion leaders in multiple specialties to oversee our training and clinical programs. We
are building these relationships to provide insight regarding treatment trends, input on future product direction and education for
providers involved in treating the disease.
We are partnering with leading surgical and cardiology societies to increase the awareness of Afib treatment options. In the past
three years, both the Society for Thoracic Surgeons and the Heart Rhythm Society have released new guidelines on the surgical
treatment of Afib in both open-heart and minimally-invasive settings.
Provide Training and Education. We have recruited and trained sales and physician education professionals to effectively
communicate to our customers the unique features and benefits of our technologies as they relate to their indications for use. Our
highly trained professionals meet with physicians at institutions around the world to provide education and technical training on the
features, benefits and safe-and-effective use 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 and long-
standing persistent Afib in patients undergoing open-heart surgery. We believe this training and education program has increased
awareness about the surgical treatment of Afib during open-heart procedures, and we will continue to make investments to serve our
physician customers. 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 Adoption of Our Minimally Invasive Products. We believe that the catalysts for expanded adoption of our minimally
invasive products include completing clinical trials, including the CONVERGE and DEEP AF IDE clinical trials, procedural
advancements, such as the hybrid or multi-disciplinary procedure, continued innovation and product development, and the publication
of additional scientific evidence supporting the safety and efficacy of hybrid treatments for persistent and long-standing persistent
Afib. We believe these efforts will help validate the successful, long-term use of our products for patients with persistent and long-
standing persistent Afib. We believe that ongoing research activities, including prospective clinical trials, new procedural techniques
and anticipated presentations and publications will create an increased demand for our minimally invasive products.
Evaluate Acquisition Opportunities. We expect to continue to be opportunistic with respect to acquisitions. We evaluate
acquisition opportunities on a variety of factors, including investment in clinical science, product innovation and strategic and
financial considerations.
Clinical Trials
In the United States, a significant risk device requires the prior submission of an application for an Investigational Device
Exemption (IDE) to FDA for approval before initiating a clinical trial. Clinical trials are required to support a pre-market approval
5
(PMA) and are sometimes required for 510(k) clearance. Some trials require a feasibility study followed by a pivotal trial. An IDE
supplement is a means of obtaining approval to initiate a pivotal trial following the conclusion of a feasibility trial. We are conducting
several clinical trials to validate the long-term results of procedures using our products and to support applications to regulatory
agencies for expanded indications. In addition, we also conduct various studies to gather clinical data regarding our products. Key
trials and studies are:
CONVERGE. We are conducting the CONVERGE IDE clinical trial to evaluate the safety and efficacy of the EPi-Sense
Guided Coagulation System with VisiTrax technology to treat symptomatic persistent and long-standing persistent Afib patients who
are refractory or intolerant to at least one Class I and/or III anti-arrhythmic drug. The trial provides for enrollment of up to 153
patients at 27 domestic medical centers and three international medical centers. Enrollment began in 2014 and was completed in
August 2018. The study protocol requires patient follow-up for twelve months post procedure for the primary effectiveness endpoint
assessment and long-term follow-up through five years. The final PMA module was submitted in late 2019. In September 2019, we
received approval for the Continued Access Protocol (CAP) for the CONVERGE study. The CAP is a single arm study of patients
undergoing hybrid ablation only and currently provides for initial enrollment of up to 30 patients at 27 domestic sites, with the
possibly of expanding the CAP study to enroll additional patients by submitting an IDE Supplement to FDA. Enrollment in the
CONVERGE CAP is expected to begin in early 2020.
aMAZE. In connection with our acquisition of SentreHEART, which we describe below, we are conducting the aMAZE IDE
clinical trial. aMAZE is an FDA-approved, prospective, multicenter, randomized controlled trial evaluating the LARIAT Suture
Delivery Device for LAA closure adjunctive to Pulmonary Vein Isolation (PVI) catheter ablation for the treatment of persistent and
long-standing persistent Afib. The objective of the aMAZE Trial is to demonstrate that using the LARIAT device for LAA closure,
plus a PVI ablation, will lead to a reduced incidence of recurrent Afib compared to PVI alone, with a favorable safety profile. The
aMAZE Trial provides enrollment of up to 600 patients at 65 sites with one-year follow up. Primary endpoint measures are freedom
from episodes of Afib greater than 30 seconds at one-year post treatment. Enrollment of 600 patients across 53 sites was completed in
December 2019. In January 2020, we received approval for a CAP for the aMAZE study. The aMAZE CAP provides for additional
patient enrollment of up to 85 patients at existing aMAZE trial sites, with the opportunity to further expand to 250 patients while the
pre-market application is under review. We acquired SentreHEART, a privately held developer of percutaneous left atrial appendage
management solutions sponsoring the aMAZE trial, in a merger on August 13, 2019.
ICE-AFIB. The ICE-AFIB clinical trial is designed to study the safety and efficacy of the cryoICE® system for persistent and
long-standing persistent Afib treatment during concomitant on-pump cardiac surgery. The trial provides for enrollment of up to 150
patients at up to 20 sites in the United States. We received IDE approval from FDA to proceed with the ICE-AFIB trial in November
2018. Enrollment began in February 2019 and remains ongoing.
ATLAS. The ATLAS study 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 with a postoperative Afib diagnosis and 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. Enrollment began in
February 2016 and ended in March 2018. Preliminary data was presented at the Heart Rhythm Society meeting in May 2019, and a
manuscript of the final results is being drafted for publication.
FROST. We have conducted a cryo nerve block study, which was a non-IDE randomized pilot study evaluating intraoperative
intercostal cryoanalgesia. The study involves treatment arm patients who received intercostal cryoanalgesia in conjunction with
standard post-operative pain management and control arm patients who receive standard post-operative pain management only. The
study provided for enrollment of up to 100 patients at five medical centers. Enrollment began in June 2016 and an interim data
analysis was completed when a total of 80 patients were enrolled in 2019. Enrollment was stopped following the interim analysis due
to early achievement of statistical significance. Results from the trial were presented at the Society of Thoracic Surgeons podium in
January 2020 and will be published in The Annals of Thoracic Surgery.
DEEP AF Pivotal Study. The DEEP AF IDE 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. The study began in 2014 and was paused during 2016-2017 due to
our work to mitigate the risk related to esophageal injury during the procedure. We are committed to patient safety, and we worked
collaboratively with FDA and obtained approval to resume enrollment in the trial in 2018. A total of 70 patients have been treated, and
we have FDA approval to enroll an additional 18 patients. We plan to seek approval to enroll the full cohort of 220 patients, pending
FDA’s review of additional safety data.
CEASE AF. We are also pursuing a non-IDE trial in Europe 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 at twelve sites.
Enrollment began in November 2015 and remains ongoing.
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Sales, Marketing and Medical Education
Our global sales and marketing efforts focus on educating physicians about our unique technologies and their technical benefits.
We only promote our products for uses described in their labeling as cleared or approved by the relevant regulatory agencies. We train
our sales force on the use of our products to the extent the products are cleared or approved.
Our sales team in the United States has approximately 160 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 a combination of independent
distributors and direct sales personnel. Our international sales team includes sales representatives focused on our direct markets, such
as Germany, France, the United Kingdom and the Benelux region. We also maintain a network of distributors in Asia, South America
and Canada, as well as certain countries in Europe, who market and sell our products. 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. Most of our competitors have 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 in the cardiac surgery market is Medtronic, plc, who provides similar products to ours that have been adopted by
physicians for the treatment of Afib and related conditions. Several other companies offer intracardiac catheter devices that are
commonly used by electrophysiologists to treat Afib. These catheter devices are FDA-approved to treat the paroxysmal form of Afib,
but they are not FDA indicated to treat persistent or long-standing persistent Afib. AtriCure’s Isolator Synergy System is the only
medical device that is FDA approved to treat Afib in a surgical setting, and the only medical device approved to treat persistent or
long-standing persistent Afib in a concomitant setting. AtriCure is monitoring other companies who are conducting clinical trials that
may support FDA approval of their devices to treat persistent and long-standing persistent Afib. We believe that our products compare
favorably against competing products during both open-heart and minimally invasive procedures, and that our products compare
favorably to intracardiac catheter devices when used to treat non-paroxysmal forms of Afib.
To compete effectively, we strive 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. In addition, we
invest heavily in training and education to ensure that our customers understand available devices, techniques, and approaches for
optimal treatment. We have encountered and expect to continue to encounter potential customers who prefer products offered by our
competitors.
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.
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, 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 (LAAM) is used during a concomitant open-heart procedure, Medicare’s hospital reimbursement
is based upon the patient’s primary structural heart surgical procedure. Therefore, any additional procedure concomitant to the primary
procedure would not receive incremental hospital payment. In contrast, sole therapy minimally invasive ablation or surgical LAAM
procedures typically are reimbursed under a general cardiac surgery MS-DRG. We believe hospital reimbursement rates for sole
therapy and concomitant therapy cardiac surgical ablation or LAAM are adequate to cover the cost of our products even when
multiple procedures are performed.
Physicians are reimbursed for their services separately under the Medicare Part B physician fee schedule. When performing a
surgical cardiac ablation with and without a concomitant open-heart procedure, surgeons report Current Procedural Terminology
(CPT) codes to receive a professional fee payment. Multiple CPT codes may be reported by a physician during a procedure if multiple
procedures are performed. There are category one CPT codes for both concomitant and standalone surgical Afib treatment. At this
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time, there are no category one CPT codes for the physician to report surgical LAAM. However, some providers utilize unlisted CPT
codes to obtain reimbursement in these situations.
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. In some cases, certain private payors adopt negative coverage
policies with respect to therapies involving our products. We engage a third-party reimbursement consultant that provides support to
our customers in the event of a coverage denial.
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 payors. In addition, some private third-party payors require that certain procedures or the use of certain products be
authorized in advance as a condition of reimbursement. In some countries, 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 altogether. 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 or pursuing specific reimbursement for utilization of our devices.
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 the European Union (EU) and other countries worldwide.
US Regulation:
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 FDA regulates the total
product lifecycle from early design, development and testing to support submissions for clearance or approval, to commercialization
activities, as well as post-market surveillance and reporting, including corrective actions, removals and recalls. Unless an exemption
applies, most medical devices distributed in the United States require either 510(k) clearance or PMA from FDA.
510(k) Clearance Pathway. To obtain 510(k) clearance, 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. Any
modification to a 510(k)-cleared device that would constitute a major change in its intended use, or a change in its design or
manufacture that could significantly affect the safety or effectiveness of the device, requires a new 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. A new PMA or PMA
supplement is required for significant modification to a PMA-approved device, including indicated use, manufacturing process,
labeling and design of a device that is approved through the premarket approval process.
Clinical Trials. Clinical trials are required to support a PMA and are sometimes required for 510(k) clearance. Clinical trials are
subject to extensive recordkeeping and reporting requirements. Our clinical trials must be conducted under the oversight of an
Institutional Review Board (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.
Educational Grants. FDA regulates 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. We seek to ensure that the activities we
support pursuant to our educational grants program are in accordance with FDA 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.
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Pervasive and Continuing Regulation. There are numerous regulatory requirements that apply after a product is cleared or
approved by FDA’s Quality System Regulation (QSR), including, but not limited to: labeling, advertising and promotion, assessing
the significance of change to devices, reporting of device modifications when necessary, monitoring the safety of the product, and
performing corrections and removals when necessary.
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. On occasion, promotional activities for FDA-regulated products can
be 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.
Fraud, Abuse and False Claims. We are directly and indirectly subject to various federal and state laws governing our
relationship with healthcare providers. In particular, the Anti-Kickback Statute is a criminal law that applies broadly and prohibits the
knowing and willful payment of remuneration to induce or reward patient referrals or the generation of business involving any item or
service payable by a Federal health care program. 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 consist
of the imposition of fines and penalties and can be significant. 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.
AtriCure is a member of the Advanced Medical Technology Association (AdvaMed), a voluntary United States trade
association 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 of Ethics for Interactions with Healthcare Professionals (the “AdvaMed Code”) by a medical device
manufacturer is voluntary, and while the Office of the Inspector General 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,
employee training programs, and relationships with medical professionals.
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, but the general trend is toward increasing regulation
and greater requirements for the manufacturer to provide more bench testing and clinical evidence.
Progressively, many countries that did not previously have medical device regulations have adopted them, and minimal
requirements previously in place are becoming more stringent worldwide. While some harmonization of global regulations has taken
hold, requirements continue to differ significantly. In China, for example, the product must first have approval in the country of
origin. In Japan and China, successful results from local product safety testing precedes submission of documentation to obtain
approval. In addition, regulatory agencies and authorities can halt distribution within the country or otherwise take action in
accordance with local laws.
Conformity Assessment Pathway. In the European Union, various directives regulate the design, manufacture and labeling of
medical devices, and more stringent conformity assessment requirements have been put in place with the 2017 Medical Device
Regulation, effective May 26, 2020 for all devices seeking CE mark after that date. The method for assessing conformity varies
depending on the type and class of the product, but typically 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 includes a review of documentation related to the device that is as extensive as the
documentation requirements that the US FDA requires for higher risk products. The notified body also audits the manufacturer’s
quality system and performs a detailed review of the 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.
Pervasive and Continuing Regulation. There are numerous regulatory requirements that apply after a product has been
approved by the notified body for CE marking, including, but not limited to: labeling, advertising and promotion, reporting of device
modifications, monitoring the safety of the product and performing corrections and removals when necessary, maintaining “state of
the art” requirements for the devices through compliance with standards, and obtaining recertification of the Quality System and
individual device certificates on a periodic basis.
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Intellectual Property
Protection of our intellectual property is a 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. 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.
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 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 proprietary information that may
not be patentable. With respect to proprietary information that is not patentable, we have chosen to rely on trade secret protection and
confidentiality agreements to protect our interests.
Manufacturing
We assemble, inspect, test and package the majority of our products at our facilities in Ohio and California, and our products are
sterilized by third parties. Purchased components are generally sourced from a single supplier, but alternatives to these suppliers are
available in the event this would be needed.
To minimize supply chain risks, we maintain inventory levels of components and raw materials specific to the respective part or
device. We assess tooling and equipment on an ongoing basis. 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.
We regularly audit our suppliers for compliance with our quality system requirements, the QSR and/or applicable ISO
standards. We are an FDA-registered medical device manufacturer and certified to ISO 13485:2016. In addition, we have successfully
participated in the Medical Device Single Audit Program (MDSAP) and have been certified accordingly. The MDSAP program is
recognized in Australia, Brazil, Canada, Europe, Japan and the United States.
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
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 MedTech Europe Codes. As such, they provide for payment of a fair market value fee only for legitimate
services 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 physicians in the United States are disclosed by us in annual reports submitted to CMS under the federal “Open
Payments” law. Amounts paid to physicians in certain other countries are also disclosed by us in reports submitted to various
governmental agencies in those countries, in accordance with the laws of the jurisdictions where those physicians reside or practice, or
where the payments are made.
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Employees
We had approximately 730 full-time employees as of January 31, 2020. 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 in good standing.
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 (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, Compensation, Nominating and Corporate Governance, Strategy and Compliance, Quality and Risk
Committees and our Code of Conduct are available on our website. In the event that we grant a waiver under our Code of Conduct to
any of our officers or directors or make any material amendments to the Code of Conduct, we will publish it on our website within
four business days. Information on our website is not deemed to be a part of this Form 10-K.
ITEM 1A. RISK FACTORS
Risks Relating To Our Business and Industry
We rely on our ablation and left atrial appendage management products as our primary sources of revenue. If we are not
successful in selling these products our operating results will be harmed.
Our ablation and our left atrial appendage management products generate the 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 treatments for Afib and managing the LAA.
Since we believe that physicians are using our ablation products largely for surgical treatment of Afib, if physicians do not use our
products to treat Afib, we would lose substantially all of our revenue. We may not be able to maintain or increase market acceptance
of our products for a number of reasons, including those set forth elsewhere in this “Risk Factors” section.
If our products do not achieve widespread market acceptance in the United States, our operating results will be harmed, and
we may not achieve or sustain 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. 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 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 physicians 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 incidents involving our products, other products related to those we sell or products or procedures
subject to our clinical trials could have a significant adverse effect on the overall acceptance of our products. If we encounter
difficulties growing the market for our products in the U.S., we may not be able to increase our revenue enough to achieve or sustain
profitability, and our business and operating results will be seriously harmed.
Competition from existing and new products and procedures may decrease our market share and may cause our revenue to
decline, and could adversely affect our operating results
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. There is no assurance
that our products will compete effectively against drugs, catheter-based ablation, implantable devices, other ablation systems, other
products or techniques to occlude the left atrial appendage, or other surgical Afib treatments, which may be more well-established
among physicians and hospitals. 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. In
addition, such other products or techniques may be sold or implemented at lower prices. Due to the size of the Afib and LAA
exclusion markets, and the unmet need for an Afib cure, 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. Companies also compete with us to attract qualified scientific and technical personnel as well
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as funding. Most of our competitors and potential competitors have greater financial, manufacturing, marketing and research and
development capabilities than we have and may obtain FDA approval or clearance for their products before we do. The introduction of
new products, procedures or clinical solutions, or of our competitors obtaining FDA approvals or clearances, may result in price
reductions, reduced margins, loss of market share, or may render our products obsolete, which could adversely affect our revenue and
future profitability.
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 which may be
caused by many factors, including natural disasters or other catastrophes, 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 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. See “The United Kingdom’s withdrawal from the European Union may have a negative effect on global economic
conditions, financial markets and out business.”
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 (PPACA), as amended, and other healthcare reform have a significant
impact on our business. The impact of the PPACA 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 PPACA impacted our business by requiring an excise tax on all U.S. medical device sales
beginning in January 2013 until suspended January 1, 2016 ; this excise tax was permanently repealed in December 2019. When in
effect, the increased tax burden from the PPACA impacted our results of operations and cash flows.
It is possible that legislation will be introduced and passed by Congress repealing the PPACA in whole or in part and signed into
law. Because of the continued uncertainty about the implementation or continued effectiveness of the PPACA, including the potential
for further legal challenges or repeal of that legislation, we cannot quantify or predict with any certainty the likely impact of the
PPACA or its repeal on our business model, prospects, financial condition or results of operations.
Any healthcare reforms enacted in the future may, like the PPACA, 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 PPACA and changes under any federal or state legislation adopted in the future.
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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 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:
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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 portion 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.
Compliance with developing European Union medical device regulation may limit our ability to maintain sales of our products
in European markets or to introduce new products into European markets.
Many foreign countries which we market or may market our products have regulatory bodies and restrictions similar to those of
FDA. International sales are subject to foreign government regulation, the requirements of which vary substantially from country to
country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA clearance and
the requirements may differ. In particular, marketing of medical devices in the EU is subject to compliance with the Medical Device
Directive 93/92/EEC (MDD). A medical device may be placed on the market within the EU only if it conforms to certain “essential
requirements” and bears the CE Mark. The most fundamental and essential requirement is that a medical device must be designed and
manufactured in such a way that it will not compromise the clinical condition or safety of patients, or the safety and health of users
and others. In addition, the device must achieve the essential performance intended by the manufacturer and be designed,
manufactured and packaged in a suitable manner.
Manufacturers must demonstrate that their devices conform to the relevant essential requirements through a conformity
assessment procedure. The nature of the assessment depends upon the classification of the device. The classification rules are mainly
based on three criteria: the length of time the device is in contact with the body, the degree of invasiveness and the extent to which the
device affects the anatomy. Conformity assessment procedures for all but the lowest risk classification of device involve a notified
body. Notified bodies are often private entities and are authorized or licensed to perform such assessments by government authorities.
Manufacturers usually have some flexibility to select a notified body for conformity assessment procedures for a particular class of
device and to reflect their circumstances, e.g., the likelihood that the manufacturer will make frequent modifications to its products.
Conformity assessment procedures require an assessment of available clinical evidence, literature data for the product and post-market
experience in respect of similar products already marketed. Notified bodies also may review the manufacturer’s quality systems. If
satisfied that the product conforms to the relevant essential requirements, the notified body issues a certificate of conformity, which
allows the general commercializing of a product in the EU. The product can also be subjected to local registration requirements
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depending on the country. We maintain CE Marking on all of our products that require such markings as well as local registrations as
required.
In May 2017, the EU adopted a new Medical Device Regulation (EU) 2017/745 (MDR), which will repeal and replace the MDD
with effect from May 26, 2020. The MDR clearly envisages, among other things, stricter controls of medical devices, including
strengthening of the conformity assessment procedures, increased expectations with respect to clinical data for devices and pre-market
regulatory review of high-risk devices. The MDR also envisages greater control over notified bodies and their standards, increased
transparency, more robust device vigilance requirements and clarification of the rules for clinical investigations. Under transitional
provisions, medical devices with notified body certificates issued under the MDD prior to May 26, 2020 may continue to be placed on
the market for the remaining validity of the certificate, until May 27, 2024 at the latest. After the expiry of any applicable transitional
period, only devices that have been CE marked under the MDR may be placed on the market in the EU. If we fail to comply with the
new MDR, we may not be able to continue to sell existing products in the EU or introduce new products for sale in the EU, either of
which could materially harm our results of operations and financial condition. See also, “The United Kingdom’s withdrawal from the
European Union may have a negative effect on global economic conditions, financial markets and our business.”
Our quarterly financial results are likely to fluctuate significantly because our sales prospects are uncertain.
Due to current worldwide economic conditions, natural disasters 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. These fluctuations may also affect our annual operating results and may cause those
results to fluctuate unexpectedly from year to year.
Surgeons may not commit enough time to sufficiently learn our products, and restrictions in our ability to train surgeons in
the use of our products could reduce the market acceptance of our products and in turn could reduce our revenue or result in
injuries to patients or other adverse events that could possibly lead to litigation that could harm us.
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. 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.
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. Our Isolator Synergy System is
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 FDA 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 that we will be able to maintain a consistent level of funding for these training programs or a
sufficient number of surgeons will become aware of training programs. 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.
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 most 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. 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. Similar restrictions exist outside of the U.S. There is no assurance 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.
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
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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. 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. 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, and the adoption of the use of our products may suffer and our business would be harmed.
Our clinical trials are typically time consuming, 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 the 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.
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, adverse patient and clinical outcomes 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 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 Federal Food, Drug and Cosmetic Act (FDCA). We also face
the risk that 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.
We are currently under investigation by the United States Department of Justice, and any adverse finding, allegation, or
exercise of enforcement or regulatory discretion by the DOJ could materially and adversely affect our business, financial
condition or results of operations.
As previously disclosed, on December 11, 2017, the Company received a Civil Investigative Demand (CID) from the U.S.
Department of Justice (DOJ) stating that it is investigating the Company to determine whether the Company has violated the False
Claims Act, relating to the promotion of certain medical devices related to the treatment of atrial fibrillation for off-label use and
submitted or caused to be submitted false claims to certain federal and state health care programs for medically unnecessary healthcare
services related to the treatment of Afib. The CID covers the period from January 2010 to December 2017 and requires the production
of documents and answers to written interrogatories. The Company had no knowledge of the investigation prior to receipt of the CID.
The Company maintains rigorous policies and procedures to promote compliance with the False Claims Act and other applicable
regulatory requirements. The Company provided the DOJ with documents and answers to the written interrogatories and is
cooperating with the investigation. However, the Company cannot predict when the investigation will be resolved, the outcome of the
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investigation or its potential impact on the Company. While the Company believes its practices are lawful, there can be no assurance
that the DOJ’s ongoing investigation or future exercise of its enforcement, regulatory, discretionary or other powers will not result in
findings or alleged violations of federal laws that could lead to enforcement actions, proceedings or litigation and the imposition of
damages, fines, penalties, restitution, other monetary liabilities, sanctions, settlements or changes to the Company’s business practices
or operations that could have a material adverse effect on the Company’s business, financial condition or results of operations or
eliminate altogether the Company’s ability to operate its business or on terms substantially similar to those on which it currently
operates.
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 are commonly encountered in
connection with surgical procedures. If products we sell are defectively designed, manufactured or labeled, contain inadequate
warnings, contain defective components, are misused or are associated with serious injuries or deaths, 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, and such amounts could be significant. Any product liability claim, with or without merit, could also 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
financial condition.
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
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.
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 revenue and 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.
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. 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 financial condition.
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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, or found to be inducing infringement by others, 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, or we may
be ordered to pay substantial damages to the patent holders. 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 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 physicians and hospitals or the lack of malpractice insurance
coverage due to the use of our products by physicians for an off-label indication may cause certain physicians or hospitals to
decide not to use our products and may damage our ability to maintain or grow 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 physicians 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 $35,194 in 2019, $21,137 in
2018 and $26,892 in 2017. As of December 31, 2019, we had an accumulated deficit of $282,197.
Our net losses have resulted principally from costs and expenses relating to sales, training and promotional efforts, research and
development, clinical trials, seeking regulatory clearances and approvals and general operating expenses. We expect to continue to
incur substantial expenditures and to potentially incur additional operating losses in the future as we further develop and
commercialize our products. 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 to be 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 twelve 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, along with the cash we expect to generate or use for
operations or access via our term loan and revolving line of credit will be sufficient to meet our projected capital requirements for at
least the next 12 months. Our Loan and Security Agreement with Silicon Valley Bank (SVB), as amended and restated effective
February 23, 2018 and as further amended December 28, 2018, and August 12, 2019 (the “Loan Agreement”), provides for a $60,000
term loan and $20,000 revolving line of credit. The term loan and revolving credit facility both mature in August 2024. According to
the Loan Agreement, principal payments on the term loan are to be made ratably commencing March 1, 2021 through the loan’s
maturity date of August 1, 2024. If we meet certain conditions, as specified by the agreement, the commencement of term loan
principal payments may be deferred by an additional six months. The term loan accrues interest at the greater of the Prime Rate and
5.00% plus 0.75%. As of December 31, 2019, we had outstanding borrowings under the term loan of $60,000. Borrowing availability
under the revolving credit facility is based on the lesser of $20,000 or a borrowing base calculation as defined by the Loan Agreement.
We may not draw on the revolving line of credit without SVB’s consent if the obligations in the aggregate under the Loan Agreement
would exceed $70,000 after the incurrence of such requested withdraw. The applicable interest rate on advances outstanding under the
revolving credit facility is the greater of the Prime Rate and 5.00%. The Loan Agreement also provides for certain prepayment and
early termination fees, as well as establishes a minimum liquidity covenant and includes other customary terms and conditions. As of
December 31, 2019, we had no borrowings under the revolving credit facility, and we had borrowing availability of $8,750.
The nContact acquisition also provided for contingent consideration to be paid upon attaining specified regulatory approval in
the coming year. Subject to the terms and conditions of the nContact merger agreement, such contingent consideration is paid in
AtriCure common stock and cash, with a requirement to make payments in AtriCure common stock first, up to a specified maximum
number of shares. 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 the holdings of
our existing stockholders.
We believe we have adhered to the nContact contract provisions that provide for contingent consideration if the conditions
described above are met. nContact representatives have disputed, and in the future may dispute our adherence to the contract and
pursue a claim for non-adherence which could involve complex legal and factual issues, the determination of which is often uncertain.
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Any such claim, 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, adverse publicity, the disruption of development and marketing
efforts, injury to our reputation and adversely impact our financial condition.
The SentreHEART acquisition provided for contingent consideration to be paid upon attaining specified clinical and
reimbursement milestones on or before December 31, 2026. All contingent consideration will be payable in a combination of cash and
stock, with the maximum number of shares that may be issued pursuant to the SentreHEART merger agreement limited to 19.9% of
AtriCure’s total shares outstanding as of the date of merger. The maximum contingent consideration payable by us will not exceed
$260,000. 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 SentreHEART shareholders to settle contingent consideration obligations would dilute the
holdings of our existing stockholders.
If we need to raise additional funds for any reason, 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 Loan Agreement.
Our Loan Agreement with SVB contains a minimum liquidity covenant and other customary terms and conditions. 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,
an obligation to repay all obligations in full and a right by SVB to exercise all remedies available to them. If we are unable to pay
those amounts, SVB could proceed against the collateral granted to it pursuant to the Loan Agreement, and we may in turn lose access
to our current source of borrowing availability.
Our federal tax net operating loss (NOL) and general business credit carryforwards generated or acquired may expire or will
be limited because we experienced an ownership change of more than 50 percent, which could result in greater future income
tax expense and adversely impact future cash flows.
On June 30, 2001, 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. Net operating losses generated prior to 2018 are
also subject to expiration under current IRS regulations. We have total federal income tax net operating loss and research and
development credit carryforwards that, if not used to reduce our taxable income, will begin to expire in 2021. We have generated or
acquired available net operating loss and research and development credit carryforwards of $340,079 and $8,168.
If our goodwill or other intangible assets become impaired, it could materially reduce the value of our assets and reduce our
net income or increase our net loss for the year in which the impairment occurs.
As of December 31, 2019, we had $234,781 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 record an impairment charge
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
impairment charge occurs and increase our accumulated deficit.
In Process Research and Development (IPR&D) valued at $126,321 was recorded as an intangible asset in connection with the
nContact and SentreHEART acquisitions. If we do not obtain the regulatory approvals that would confirm the technological feasibility
of the respective IPR&D projects, or if the IPR&D projects are abandoned for any other reason, we could have an impairment
adjustment of this asset that could require us to write off a portion or all of the recorded asset value. Additionally, and similar to
goodwill, if the IPR&D asset is deemed to be impaired (as a result of the estimated fair value being less than carrying value), we
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would be required to write off the impaired portion of the IPR&D asset. 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.
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 additional inventory of our products or component
parts. Managing our inventory levels is important to our cash position and results of operations and is 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 personnel and
information technology systems for inventory management to effectively manage accounting and financial functions, our personnel
and 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.
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 rely on single and limited source third-party vendors for the manufacture and sterilization of components used in our
products. For example, we rely on one vendor to manufacture several of our RF generators, as well as separate vendors to manufacture
our EPi-Sense Guided Coagulation System with VisiTrax technology and related RF generator. It would be a time consuming and
lengthy process to secure these products from an alternative supplier. We have significant concentrations with a limited number of
vendors. 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, sterilizers and suppliers also subjects us to risks that could harm our business, including:
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we may not be able to obtain adequate supply in a timely manner or on commercially reasonable terms;
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 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 facilities and the manufacturing facilities of any of our third-party component manufacturers, critical
suppliers or third-party sterilization facility are required to comply with FDA’s 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 facilities or the manufacturing facilities 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. FDA will typically review the facility’s written response and may re-inspect to determine the 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 FDA taking administrative or enforcement actions. Among
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these may be FDA’s issuance of a Warning Letter to a manufacturer, which informs the manufacturer that 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 FDA’s review of product applications and 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 financial condition.
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:
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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 may have
caused or contributed to a death or serious injury or, in the event of product malfunction, that if such malfunction were to recur, would
likely cause or contribute to a death or serious injury. There have been incidents, including patient deaths, which have occurred during
or following procedures using our products that we have not, and believe were not required to be, reported to FDA because we
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 us or
FDA 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 may 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 or supplemental 510(k) clearance or, possibly, submission and FDA approval of a PMA. FDA requires every medical
device company to make the determination as to whether a 510(k) must be filed, but FDA may review any medical device company’s
decision. We have made modifications to our products and concluded that such modifications did not require us to submit a 510(k).
FDA may not agree with our decisions regarding whether submissions were required.
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If FDA were to disagree with us and require us to submit a 510(k), PMA or a 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 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:
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state consumer protection, fraud and business practice laws, including the California Consumer Privacy Act
(“CCPA”), which became effective on January 1, 2020, which among other things, requires new disclosures to
California consumers and provides consumers new abilities to opt out of certain sales of personal information;
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 (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;
laws and regulations with respect to the collection, use, disclosure, transfer, and storage of personal data that we
may collect from our employees, consultants or in conjunction with clinical trials such as the General Data
Protection Regulation in the European Union;
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.
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. 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.
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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.
Any clinical data that is generated regarding our products may not be positive or consistent, 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 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 data
regarding the safety and efficacy of our products, such data could 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. Negative data would affect the use of our products and harm our business and prospects.
Adverse changes in payors’ policies toward coverage and reimbursement for surgical procedures 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 procedures 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 procedures could harm our business and reduce our revenue.
FDA does not regulate the practice of medicine. Physicians 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, these denials can
be overcome through an appeals process, but there is no guarantee of success in these cases.
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.
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. Foreign healthcare payors generally do not provide the same
level of reimbursement for sole-therapy minimally invasive procedures utilizing ablation devices and related products as payors in the
United States. 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 our devices
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.
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 and British Pound. 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.
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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.
Our manufacturing operations are primarily conducted at a single location in Ohio, while select products are manufactured in
California. While we take precautions at the Ohio location, we do not maintain a backup manufacturing facility, making us dependent
on the 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 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 maintain or increase our level of international revenue. 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 sales personnel. 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, and may adversely impact our sales.
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
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 key personnel. Our
officers and key employees, with the exception of our President and Chief Executive Officer, 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
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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 physicians that involve
procedure, product, market and clinical development. If any of these physicians 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 physician relationships
necessary to grow and expand our business and operations. If we fail to identify, attract, retain and motivate these highly skilled
personnel and physicians, 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:
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successfully identify targets for acquisition;
negotiate reasonable terms;
properly perform due diligence and determine 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 consummated three significant acquisitions since 2013 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
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.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary
business information and that of our customers, suppliers and business partners, and personally identifiable information of our
customers and employees in our data centers and on our networks. The secure processing, maintenance and transmission of this
information is critical to our operations and business strategy. Despite our security measures, our information technology and
infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such
breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any
such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the
privacy of personal information, regulatory penalties, disrupt our operations and the services we provide to customers, and damage our
reputation and cause a loss of confidence in our products and services, which could adversely affect our business, operating margins,
revenues and competitive position.
We also 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, human error or cyber incident, 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.
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We are subject to credit risk from our accounts receivable related to our sales, which include sales to countries outside the
United States that may experience economic turmoil.
The majority of our accounts receivable arise from sales in the United States. However, we also have significant receivable
balances from customers within the European Union and Asia. 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 operate in certain countries where economic conditions continue to present challenges to their businesses,
and, thus, could place the amounts due to us at risk. These distributors are owed amounts from public hospitals that are funded by their
governments. Adverse financial conditions in these countries may negatively affect the length of time that it will take us to collect
associated accounts receivable or impact the likelihood of ultimate collection.
The United Kingdom’s withdrawal from the European Union may have a negative effect on global economic conditions,
financial markets and our business.
In June 2016, a majority of voters in the United Kingdom elected to withdraw from the EU, in a national referendum, commonly
referred to as Brexit. In March 2017, the United Kingdom formally notified the EU of its intention to withdraw pursuant to Article 50
of the Lisbon Treaty. The United Kingdom left the EU on January 31, 2020, which has initiated an eleven-month transition period by
which the United Kingdom is to leave the single market and customs union. The withdrawal has created significant uncertainty about
the future relationship between the United Kingdom and the EU, including with respect to the laws and regulations that will apply as
the United Kingdom determines which EU laws to replace or replicate to facilitate the withdrawal. From a regulatory perspective, the
United Kingdom’s withdrawal gives rise to significant complexity and risks. Since the medical device regulatory framework in the
United Kingdom is derived from the EU Medical Devices Directive, the United Kingdom’s withdrawal could materially impact the
continued marketing of EU medical devices in the United Kingdom. Further, the withdrawal may also significantly delay the transport
of our products into the United Kingdom, which could adversely impact our sales.
Because of the continued uncertainty about the effects, implementation, or potential repeal of Brexit, we cannot quantify or
predict with any certainty the likely impact of Brexit or related legislation on our business model, prospects, financial condition or
results of operations. In the absence of a future trade deal, the United Kingdom’s trade with the EU and the rest of the world would be
subject to tariffs and duties set by the World Trade Organization. Additionally, the movement of goods and personnel between the
United Kingdom and the remaining member states of the EU will be subject to additional inspections and documentation checks,
leading to possible delays at ports of entry and departure. The withdrawal may result in significant changes to the trading relationship
between the United Kingdom and the EU. These changes to the trading relationship between the United Kingdom and EU would
likely result in increased cost of goods imported into and exported from the United Kingdom and may decrease the profitability of our
operations. Additional currency volatility could drive a weaker British pound, which could increase the cost of goods imported into
the United Kingdom and may decrease the profitability of our operations. A weaker British pound versus the U.S. dollar may also
cause local currency results of our operations to be translated into fewer U.S. dollars during a reporting period.
Additionally, we may face new regulations regarding trade, aviation, tax, security and employees, among others, in the United
Kingdom. Compliance with such regulations could be costly, negatively impacting our business, results of operations and financial
condition. Brexit could also adversely affect European and worldwide economic and market conditions and could contribute to
instability in global financial markets. With a range of outcomes still possible, the impact from Brexit remains uncertain and will
depend, in part, on the final outcome of tariff, trade, regulatory and other negotiations.
Our effective income tax rate may fluctuate, which may adversely affect our operations, earnings and earnings per share.
Our effective income tax rate is influenced by our projected profitability in the various taxing jurisdictions in which we operate.
The global nature of our business increases our tax risks. In addition, revenue authorities in many of the jurisdictions in which we
operate are known to have become more active in their tax collection activities. Changes in the distribution of profits and losses
among taxing jurisdictions may have a significant impact on our effective income tax rate, which in turn could have an adverse effect
on our net income and earnings per share. The application of tax laws in various taxing jurisdictions, including the United States, is
subject to interpretation, and tax authorities in various jurisdictions may have diverging and sometimes conflicting interpretations of
the application of tax laws. Changes in tax laws or tax rulings, in the United States or other tax jurisdictions in which we operate,
could materially impact our effective tax rate.
Factors that may affect our effective income tax rate include, but are not limited to:
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the requirement to exclude from our quarterly worldwide effective income tax calculations losses in jurisdictions
where no income tax benefit can be recognized;
actual and projected full year pre-tax income, including differences between actual and anticipated income before
taxes in various jurisdictions;
changes in tax laws, or in the interpretation or application of tax laws, in various taxing jurisdictions;
changes in the relative mix and staffing levels in various tax jurisdictions;
25
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audits or other challenges by taxing authorities; and
the establishment of valuation allowances against a portion or all of certain deferred income tax assets if we
determined that it is more likely than not that future income tax benefits will not be realized.
These changes may cause fluctuations in our effective income tax rate that could adversely affect our results of operations and
cause fluctuations in our earnings and earnings per share.
Governmental authorities may question our intercompany transfer pricing policies or change their laws in a manner that
could increase our effective tax rate or otherwise harm our business.
As a U.S. company doing business in international markets through subsidiaries, we are subject to foreign tax and intercompany
pricing laws, including those relating to the flow of funds between the parent and subsidiaries. Tax authorities in the United States and
in foreign markets closely monitor our corporate structure and how we account for intercompany fund transfers. If tax authorities
challenge our corporate structure, transfer pricing mechanisms or intercompany transfers, our operations may be negatively impacted
and our effective tax rate may increase. Tax rates vary from country to country and if regulators determine that our profits in one
jurisdiction should be increased, we might not be able to fully utilize all foreign tax credits that are generated, which would increase
our effective tax rate. Additionally, the Organization for Economic Cooperation and Development, or OECD, has issued certain
proposed guidelines regarding base erosion and profit sharing. Once these guidelines are formally adopted by the OECD, it is possible
that separate taxing jurisdictions may also adopt some form of these guidelines. In such case, we may need to change our approach to
intercompany transfer pricing in order to maintain compliance under the new rules. Our effective tax rate may increase or decrease
depending on the current location of global operations at the time of the change. Finally, we might not always be in compliance with
all applicable customs, exchange control, Value Added Tax and transfer pricing laws despite our efforts to be aware of and to comply
with such laws. In such case, we may need to adjust our operating procedures and our business could be adversely affected.
Due to the global nature of our business, we may be exposed to liabilities under the Foreign Corrupt Practices Act and various
other anti-corruption laws, and any allegation or determination that we violated these laws could have a material adverse
effect on our business.
We are required to comply with the FCPA, UK Bribery Act of 2010 and other U.S. and foreign anti-corruption laws, which
prohibit companies from engaging in bribery including corruptly or improperly offering, promising, or providing money or anything
else of value to foreign officials and certain other recipients. In addition, the FCPA imposes certain books, records and accounting
control obligations on public companies and other issuers. We operate in parts of the world in which corruption can be common and
compliance with anti-bribery laws may conflict with local customs and practices. Our global operations face the risk of unauthorized
payments or offers being made by employees, consultants, sales agents and other business partners outside of our control or without
our authorization. It is our policy to implement safeguards (including mandatory training) to prohibit these practices by our employees
and business partners with respect to our operations. However, irrespective of these safeguards, or as a result of monitoring
compliance with such safeguards, it is possible that we or certain other parties may discover or receive information at some point that
certain employees, consultants, sales agents, or other business partners may have engaged in corrupt conduct for which we might be
held responsible. Violations of the FCPA or other foreign anti-corruption laws may result in restatements of, or irregularities in, our
financial statements as well as severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively
affect our business, operating results and financial condition. In some cases, companies that violate the FCPA may be debarred by the
U.S. government and/or lose their U.S. export privileges. Changes in anti-corruption laws or enforcement priorities could also result in
increased compliance requirements and related costs which could adversely affect our business, financial condition and results of
operations. In addition, the U.S. or other governments may seek to hold us liable for successor liability FCPA violations or violations
of other anti-corruption laws committed by companies in which we invest or that we acquired or will acquire.
The impact of restrictive trade policies in the United States and the potential corresponding actions by other countries could
adversely affect our financial performance.
The U.S. federal government has recently implemented tariffs on certain products imported into the United States from China,
and the Chinese government has responded with retaliatory tariffs on certain products, including medical devices, exported from the
United States to China. We cannot predict whether the United States will implement additional trade restrictions with respect to China
or other countries and how such countries may respond to such trade restrictions. If these tariffs continue or are expanded, they may
make it more difficult to sell our products in China or other markets outside of the United States. Restrictive trade policies may also
harm the United States and global economies generally, which would adversely affect our business in a variety of ways, including
reducing the market for our products, causing a downturn in the trading price of our common stock, and restricting access to credit if
we seek it for future growth.
Our insurance may not cover all of our indemnification obligations and other liabilities associated with our operations.
We maintain insurance designed to provide coverage for ordinary risks associated with our operations and our ordinary
indemnification obligations, which we believe to be customary for our industry. The coverage provided by such insurance may not be
adequate for all claims we may make or may be contested by our insurance carriers. If our insurance is not adequate or available to
26
pay liabilities associated with our operations, or if we are unable to purchase adequate insurance at reasonable rates in the future, our
business, financial condition, results of operations or cash flows may be materially adversely impacted.
Shutdowns of the U.S. federal government could materially impair our business and financial condition.
Regulatory approval may be delayed for reasons beyond our control. For example, over the last several years the U.S.
government has shut down several times and certain regulatory agencies, such as the FDA, CMS and the SEC, have had to furlough
their government employees and stop critical activities. If a prolonged government shutdown or budget sequestration occurs, it could
significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material
adverse effect on our business. Further, in our operations as a public company, future government shutdowns could impact our ability
to communicate with the SEC on various topics, such as shareholder proposals, or to have our registration statements declared
effective, which could affect our ability to access the capital markets quickly.
An epidemic of the coronavirus disease is ongoing in China and other parts of the world and may adversely affect our
operations and financial condition.
An epidemic of the coronavirus disease is ongoing in China and other parts of the world. As the outbreak is still evolving, much
of its impact remains unknown. It is impossible to predict the effect and potential spread of the coronavirus in China and globally.
Should the coronavirus continue to spread or not be contained in China or other parts of the world, our business operations could be
delayed or interrupted. China has implemented travel bans to contain the coronavirus, and several countries have expanded screenings
of travelers. If bans are implemented and extended to other countries, our business operations could be adversely affected.
Risks Relating To Our Common Stock
The price and trading volume of our common stock may experience extreme fluctuations and our stockholders could lose some
or all of their 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:
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variations in our quarterly financial and operating results;
physician 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;
clinical trial results;
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;
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. 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 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 these particular companies. In the past, companies that experience volatility in the market price of their
27
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.
We may be obligated to issue additional shares of our common stock to the former stockholders of nContact and
SentreHEART as a result of our satisfaction of certain milestones set forth in the respective merger agreements, resulting in
dilution of our current stock ownership.
Under the terms of each of the nContact and SentreHEART merger agreements, we could issue additional shares of our common
stock, or make payments in cash, to the former stockholders of nContact and SentreHEART as contingent consideration upon our
satisfaction of milestones described in the merger agreements. The nContact merger agreement limits the total number of shares of
AtriCure common stock issued in connection with the acquisition to 5,660, of which 3,757 shares were issued at the closing of the
nContact acquisition on October 13, 2015 and 232 shares were issued and delivered to the former shareholders of nContact on
September 20, 2018 for satisfaction of the trial enrollment milestone. The SentreHEART merger agreement limits the total number of
shares of AtriCure common stock issued in connection with the acquisition to 7,021, of which 699 shares were issued at the closing of
the SentreHEART acquisition on August 13, 2019. Issuing additional shares of our common stock 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 acquisitions of nContact and SentreHEART, 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. Some of our directors and executive officers have entered into,
or may enter into, Rule 10b5-1 trading plans pursuant to which they may sell shares of our stock from time to time in the future.
Actual or potential sales by these insiders, including those under a pre-arranged Rule 10b5-1 trading plan, could be interpreted by the
market as an indication that the insider has lost confidence in our stock and adversely impact the market price of our stock.
Sales of common stock by us in a capital raising transaction may dilute stockholder 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 or reduce or pay in full our indebtedness. If
we raise funds by issuing equity securities, our stock price may decline and our existing stockholders may experience significant
dilution. Furthermore, we may enter into capital raising 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.
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 stockholders 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 a premium to the market price of common stock. These provisions include those:
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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 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.
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,
stockholders may lose an opportunity to realize a premium on shares of common stock or the market price of our common stock could
decline.
28
We do not expect to pay dividends in the foreseeable future. As a result, stockholders must rely on stock appreciation for any
return on 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, stockholders will have to rely on capital appreciation, if any, to earn a return on 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.
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.
We may fail to meet our publicly announced guidance or other expectations about our business and future operating results,
which could cause a decline in our stock price.
We provide financial guidance about our business and future operating results. In developing this guidance, our management
makes certain assumptions and judgments about our future operating performance, including projected hiring of sales professionals,
continued increase of our market share, and continued stability of the macro-economic environment in our key markets. Furthermore,
analysts and investors may develop and publish their own projections of our business, which may form a consensus about our future
performance. Our business results may vary significantly from such guidance or that consensus due to a number of factors, many of
which are outside of our control, and which could adversely affect our operations and operating results. Furthermore, if we make
downward revisions of our previously announced guidance, or if our publicly announced guidance of future operating results fails to
meet expectations of securities analysts, investors, or other interested parties, the market price of our common stock could decline.
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). The Exchange Act requires that we file annual,
quarterly and current reports with respect to our business and financial condition. 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,
and such rules and regulations require significant attention from management. Compliance with all of these laws, rules and regulations
may from time to time 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 Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over
financial reporting and management is required to evaluate the effectiveness of our internal control over financial reporting as of the
end of each fiscal year. In order to maintain the effectiveness of our disclosure controls and procedures and internal control over
financial reporting, significant resources and management oversight is required. If we are not successful in maintaining effective
internal control over financial reporting, there could be inaccuracies or omissions in the consolidated financial information we are
required to file with the Securities and Exchange Commission. Additionally, even if there are no inaccuracies or omissions, we will be
required to publicly disclose the conclusion of our management that our internal control over financial reporting or disclosure controls
and procedures are not effective. These events could cause investors to lose confidence in our reported financial information,
adversely impact our stock price, result in increased costs to remediate any deficiencies, or attract regulatory scrutiny or lawsuits that
could be costly to resolve and distract management’s attention.
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,
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 continue 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.
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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 manufacturing
functions. The Company also leases the following principal locations:
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Mason, Ohio – This location is primarily used for warehousing and distribution activities. The facility is
approximately 40,000 square feet.
Minneapolis, Minnesota – This location includes both administrative and product development space. The office is
approximately 27,500 square feet.
Redwood City, California – This location is primarily used for product development, research and development and
manufacturing activities for the LARIAT System and is approximately 19,500 square feet.
Amsterdam, Netherlands – This location is primarily for the administration of our European subsidiaries and is
approximately 9,000 square feet.
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 that arise in the ordinary course of business. See Note 12 – Commitments and Contingencies to our
Consolidated Financial Statements.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
30
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”. As of February 20, 2020, the closing
price of our common stock on the NASDAQ Global Market was $40.70 per share, and the number of stockholders of record was 91.
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, 2015 and ending on
December 31, 2019.
This graph assumes that $100.00 was invested on December 31, 2014 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
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
$
$
$
112.42 $
106.96 $
111.06 $
98.05 $
116.45 $
116.87 $
91.38 $
150.96 $
166.41 $
153.31 $
146.67 $
187.88 $
162.88
200.49
227.84
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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 operating results data for the years ended December 31, 2019, 2018 and 2017 and the financial position data as of
December 31, 2019 and 2018 are derived from our audited financial statements included in this Form 10-K. The operating results data
for the years ended December 31, 2016 and 2015 and the financial position data as of December 31, 2017, 2016 and 2015 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.
2019 (1)
2018 (2)
Year Ended December 31,
2017
(in thousands, except per share data)
2016
2015 (3)
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 leases
Stockholders’ equity
_________________________
$
$
$
$
$
230,807 $
170,335 $
73.8%
(35,194) $
(0.94) $
37,589
201,630 $
147,120 $
73.0%
(21,137) $
(0.62) $
34,087
174,716 $
126,163 $
72.2%
(26,892) $
(0.83) $
32,387
155,109 $
111,101 $
71.6%
(33,338) $
(1.05) $
31,609
129,755
92,875
71.6%
(27,212)
(0.97)
28,058
94,476 $
93,244
557,880
74,204
247,343
124,402 $
134,457
356,759
47,743
249,381
34,451 $
50,355
267,704
36,861
161,166
47,009 $
56,889
276,421
37,205
168,442
42,284
43,164
273,092
13,710
186,685
(1) We acquired SentreHEART for $208,847 on August 13, 2019. The acquisition is included in our Consolidated Balance Sheets
beginning August 13, 2019, and the results of operations are included in our Consolidated Statements of Operations and
Comprehensive Loss beginning with the period August 14, 2019 through December 31, 2019.
We adopted FASB ASC 842, “Leases” using the transition method provided by Accounting Standard Update (ASU ) 2018-11,
“Leases (Topic 842): Targeted Improvements” on January 1, 2019. Under this method, we applied the new requirements to
leases that existed as of January 1, 2019. As a result of the adoption, the Company recorded operating right-of-use assets and
operating lease liabilities of approximately $1,884 and $2,189 as of January 1, 2019.
(2) We adopted FASB ASC 606, “Revenue from Contracts with Customers” using the modified retrospective method effective
January 1, 2018. The adoption of ASC 606 did not have a material impact on the amount and timing of revenue recognized in
the Consolidated Financial Statements.
(3) We acquired nContact for $116,842 on October 13, 2015. The acquisition is included in our Consolidated Balance Sheets
beginning October 13, 2015, and the results of operations are included in our Consolidated Statements of Operations and
Comprehensive Loss beginning with the period October 14, 2015 through December 31, 2015.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollar and share 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 innovator in treatments for atrial fibrillation (Afib) and left atrial appendage (LAA) management. 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 beat rapidly, irregularly,
and in an uncoordinated fashion. As a result, blood in the atria may be in stasis, increasing the risk that a blood clot will form and
cause a stroke or other serious complications. In patients with Afib, a significant percentage of those clots can form inside of the LAA.
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 (paroxysmal) to being in Afib
continuously (persistent and long standing persistent). Afib often occurs in conjunction with other cardiovascular diseases, including
hypertension, congestive heart failure, left ventricular dysfunction, coronary artery disease and valvular disease.
We believe that we are currently the market leader in the surgical treatment of Afib. Our Isolator Synergy System is approved
by FDA for the treatment of persistent and long-standing persistent Afib concomitant to other open-heart surgical procedures. All of
our other ablation devices are cleared for sale in the United States under FDA 510(k) clearances, including our other RF and
cryoablation products, which are indicated for the ablation of cardiac tissue and/or the treatment of cardiac arrhythmias. In addition,
certain of our cryoablation probes are cleared for managing pain by temporarily ablating peripheral nerves. Our AtriClip products are
510(k)-cleared with an indication for the exclusion of the LAA, performed under direct visualization and in conjunction with other
cardiac surgical procedures. Direct visualization, in this context, requires that the surgeon is able to see the heart directly, with or
without assistance from a camera, endoscope or other appropriate viewing technologies. The LARIAT® system is cleared for soft
tissue ligation and is currently being studied to support an indication of exclusion of the LAA in patients with persistent and long-
standing persistent Afib also undergoing a pulmonary vein isolation. We also offer reusable surgical instruments typically used in
cardiac valve replacement or repair. Our Isolator Synergy clamps, Isolator Synergy pens, Coolrail® linear pen, cryosurgery devices,
certain products of the AtriClip LAA Exclusion System, COBRA Fusion® Ablation System, NumerisTM System, the EPi-Sense®
Guided Coagulation System with VisiTrax® technology, and LARIAT Suture Delivery Device bear the CE mark and may be
commercially distributed throughout the member states of the European Union and other countries that comply with or mirror the
Medical Device Directive. Our Isolator Synergy clamps, Isolator Synergy pens, Coolrail linear pen, cryosurgery devices, and certain
products of the AtriClip LAA Exclusion System are available in select Asia-Pacific countries. 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.
We sell our products to medical centers through our direct sales force in the United States and in certain international markets,
such as Germany, France, the United Kingdom and the Benelux region. We also sell our products to distributors who in turn sell our
products to medical centers in other international markets. Our business is primarily transacted in U.S. Dollars with the exception of
transactions with our European customers, which are transacted in the Euro or British Pound.
Throughout 2019, we continued to sustain our revenue growth and build on our strategic initiatives of product innovation,
investing in clinical science and providing training and education. In August 2019, we acquired SentreHEART with up-front payment
of approximately $40,000, plus additional consideration of up to $260,000 contingent on the achievement of clinical and
reimbursement milestones. The acquisition of SentreHEART significantly expands our addressable markets with a product designed
for electrophysiologists, broadens our LAA management portfolio and augments our commitment to clinical science with the aMAZE
trial. Enrollment in the aMAZE trial was completed in December 2019, and in early January 2020, we received approval for the
Continued Access Protocol (CAP) for the aMAZE study. In addition to the SentreHEART acquisition in 2019, we continued to focus
our efforts on the regulatory submissions for the CONVERGE trial and also received approval in September 2019 for a CAP for
CONVERGE.
For the year ended December 31, 2019 we reported annual revenues of $230,807, increasing 14.5% over the prior year, and
surpassed 200,000 AtriClip devices sold to date. In February 2019, we launched the cryoICE cryoSPHERE probe in the United States
and continued to build a dedicated team to demonstrate our commitment to innovation in Cryo Nerve Block Therapy. Our net loss for
fiscal year 2019 was $35,194 as compared to $21,137 for fiscal year 2018, primarily as a result of increased operating expenses related
to personnel costs due to increased headcount and variable compensation, incremental investments in clinical trials, product
33
development and physician training, as well as SentreHEART acquisition expenses, offset partially by improved gross margin. See the
“Results of Operations” section below for additional analysis of our 2019 results.
Results of Operations
Year Ended December 31, 2019 compared to December 31, 2018
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
Loss before income tax expense
Income tax expense
Net loss
Year Ended December 31,
2019
% of
Revenue
Amount
2018
% of
Revenue
Amount
$
$
230,807
60,472
170,335
41,230
162,227
203,457
(33,122)
(4,111)
2,398
(160)
(1,873)
(34,995)
199
(35,194)
(dollars in thousands)
100.0 % $
26.2
73.8
201,630
54,510
147,120
17.9
70.3
88.2
(14.4)
(1.8)
1.0
(0.1)
(0.8)
(15.2)
0.1
(15.2) % $
34,723
129,524
164,247
(17,127)
(4,607)
1,006
(183)
(3,784)
(20,911)
226
(21,137)
100.0 %
27.0
73.0
17.2
64.2
81.5
(8.5)
(2.3)
0.5
(0.1)
(1.9)
(10.4)
—
(10.5) %
Revenue. Total revenue increased 14.5% (15.2% on a constant currency basis). Revenue from customers in the United States
increased $23,683, or 14.6%, and revenue from international customers increased $5,494, or 13.9% (17.6% on a constant currency
basis). Sales in the United States grew across several key product categories. Open ablation sales increased $7,955, or 11.0% primarily
due to the positive impact of the CryoSPHERE device launch and continued volume increases for cardiac ablation devices. Minimally
invasive (MIS) ablation sales decreased $211, or 0.6%, reflecting a decline in Fusion product sales, partially offset by increases in
legacy RF ablation devices. Appendage management sales increased $15,275, or 28.9%, due to continued growth of the AtriClip
Flex·V® LAA Exclusion System, volume increases of the minimally invasive LAA Exclusion system and LARIAT System sales.
International growth results from increased volume in AtriClip and open ablation product sales, as well as increasing Epi-sense device
sales which partially offset a decline in all other minimally invasive RF ablation products. International revenue grew primarily in
China, the United Kingdom, Germany, Australia and Japan.
Revenue reported on a constant currency basis is a non-GAAP measure and is calculated by applying previous period foreign
currency (Euro) exchange rates, which are determined by the average daily Euro to Dollar exchange rate, to each of the comparable
periods. Revenue is analyzed on a constant currency basis to better measure the comparability of results between periods. Because
changes in foreign currency exchange rates have a non-operating impact on revenue, we believe that evaluating growth in revenue on
a constant currency basis provides an additional and meaningful assessment of revenue to both management and investors.
Cost of revenue and gross margin. Cost of revenue increased $5,962 and gross margin increased 0.8% to 73.8% in 2019.
Improvements in gross margin are reflective of operational improvements and lower production costs at our headquarters.
Additionally, there was a $628 decrease in share-based compensation in 2019 primarily due to the acceleration of vesting of restricted
stock awards in 2018.
Research and development expenses. Research and development expenses increased $6,507, or 18.7%. The increase in
research and development expense is comprised of $2,015 of personnel costs resulting from increased headcount and $1,059 in
clinical trial expenses driven by the aMAZE clinical trial enrollment. Other expense drivers include $1,353 higher consulting, product
development and regulatory expenses, $687 higher grant and research expenses, $433 increase in amortization expense, $387 higher
share-based compensation, and $573 increase in various operating costs.
Selling, general and administrative expenses. Selling, general and administrative expenses increased $32,703, or 25.2%,
primarily due to higher personnel expense of $14,902 resulting from increased headcount and variable compensation, $3,978 of
acquisition-related expenses, and $1,723 of share-based compensation. Additionally, there was a $5,909 lower reduction related to the
34
contingent consideration liability as compared to prior year (see Note 3 – Fair Value in the Consolidated Financial Statements). Other
expense drivers include a $2,805 rise in operating costs, including organization meetings, facility expenses, and dues and
subscriptions, $1,749 increase in marketing, training and tradeshow activities, $758 incremental legal, consulting and professional
fees, and $879 increase in software agreements and other information technology expenses.
Net interest expense. Net interest expense was $1,713 for 2019 and $3,601 for 2018. Interest expense is for outstanding
amounts associated with our term loan and finance lease obligations, as well as the amortization of financing costs. Interest income
reflects returns on our investments, including gains and losses on investments sold during the period. The decrease in net interest
expense was driven by $1,392 higher interest income as a result of a higher investment balance throughout 2019 as compared to 2018
and $496 decrease in interest expense reflecting a lower interest rate on the term loan in 2019.
Other income and expense. Other income and expense consists primarily of foreign currency transaction gains and losses.
Year Ended December 31, 2018 compared to December 31, 2017
For a comparison of our results of operations for the fiscal years ended December 31, 2018 and December 31, 2017, see “Part II,
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K
for the fiscal year ended December 31, 2018, filed with the SEC on March 1, 2019.
Liquidity and Capital Resources
As of December 31, 2019, the Company had cash, cash equivalents and investments of $94,476 and outstanding debt of
$60,000. We had unused borrowing capacity of $8,750 under our revolving credit facility. Most of our operating cash and all cash
equivalents and investments are held by United States financial institutions. We had net working capital of $93,244 and an
accumulated deficit of $282,197 as of December 31, 2019.
Cash flows used in operating activities. Net cash used in operating activities was $15,811 during 2019. The primary net uses
of cash for operating activities were as follows:
•
the net loss of $35,194, which contains $23,998 of non-cash expenses including
•
•
•
•
$17,977 in share-based compensation,
$9,366 of depreciation and amortization,
$1,355 of noncash lease expense and loss on disposal and impairment of assets,
offset by a decrease in fair value of contingent consideration of $4,916; and
•
a net decrease in cash used related to changes in operating assets and liabilities of $4,615, due primarily to the
following:
•
•
•
•
a $5,151 increase in all categories of inventories in anticipation of future growth;
a $3,201 increase in accounts receivable due primarily to increased sales;
a $2,790 increase in accounts payable from increased operating costs; and
a $3,108 increase in accrued liabilities reflecting increased accrued variable compensation and employee
costs.
Cash flows used in investing activities. Net cash used in investing activities was $2,147 during 2019. The primary uses of cash
were $17,240 cash paid in the acquisition of SentreHEART and $12,182 purchases of property and equipment, including the
expansion of our corporate headquarters and placement of generators with our customers. These uses of cash were offset by $27,236
of net sales and maturities of available-for-sale securities.
Cash flows provided by financing activities. Net cash provided by financing activities during 2019 was $14,373, which was
primarily proceeds from debt borrowings of $20,000, issuance of common stock under our employee stock purchase plan of $2,662,
and proceeds from stock option exercises of $1,202. These were partially offset by shares repurchased for payment of taxes on stock
awards of $9,033, and finance lease payments of $629.
Credit facility. The Company’s Loan and Security Agreement with Silicon Valley Bank (SVB), as amended, August 12, 2019
(Loan Agreement), provides for a $60,000 term loan and a $20,000 revolving line of credit. The term loan and revolving credit facility
both mature or expire, as applicable, on August 1, 2024. Principal payments on the term loan are to be made ratably commencing
March 1, 2021 through the loan’s maturity date. If the Company meets certain conditions, as specified in the Loan Agreement, the
commencement of the term loan principal payments may be deferred by an additional six months. The term loan accrues interest at the
greater of the Prime Rate or 5.00%, plus 0.75% and is subject to an additional 3.00% fee on the $60,000 term loan principal amount,
payable at maturity or upon acceleration or prepayment of the term loan. Borrowing availability under the revolving credit facility is
based on the lesser of $20,000 or a borrowing base calculation as defined by the Loan Agreement. Borrowing availability under the
35
revolving credit facility is further limited by a cap on total debt outstanding under the Loan Agreement, including outstanding letters
of credit, of $70,000. As of December 31, 2019, we had no borrowings under the revolving credit facility, and we had borrowing
availability of $8,750. The revolving line of credit is subject to an annual facility fee of 0.15% of the revolving line of credit, and any
borrowings bear interest at the greater of the Prime Rate or 5.00%. The Loan Agreement also provides for certain prepayment and
early termination fees only if the term loan is repaid before August 2024 and establishes a minimum liquidity ratio and dividend
restrictions, along with other customary terms and conditions. Specified assets have been pledged as collateral. We are in compliance
with the covenants of the Loan Agreement as of December 31, 2019.
In connection with the terms of our corporate headquarters lease agreement, a letter of credit in the amount of $1,250 was issued
to the landlord in October 2015. The letter of credit is renewed annually and remains outstanding as of December 31, 2019.
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 filings; 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;
payments made for acquisition-related earnouts; costs to expand our facilities to support continued growth; and possible future
acquisitions and joint ventures. Global economic turmoil may adversely impact our revenue, access to the capital markets or future
demand for our products.
We have on file with the SEC a shelf registration statement 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 expect to maintain the effectiveness of this shelf registration statement for the foreseeable 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 term loan and revolving line of credit, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next twelve months. The nContact transaction provides for contingent consideration to
be paid upon attaining specified regulatory approvals before January 2021. The SentreHEART acquisition provides for contingent
consideration to be paid upon PMA approval before December 2023 and CPT reimbursement before December 2026. Subject to the
terms and conditions of the nContact and SentreHEART merger agreements, such contingent consideration will be paid in AtriCure
common stock and cash, up to a specified maximum number of shares. Over the next twelve months, we do not expect our cash
requirements to include significant payments of contingent consideration based on terms of the respective acquisition agreements and
progress towards achievement of the related milestones. See the heading “Legal” in Note 12 for a description of an earnout objection
statement received from the nContact shareholder representative.
If our sources of cash are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt
securities or obtain a revised or additional credit facility. The sale of additional equity or convertible debt securities could result in
dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights
senior to those associated with our common stock and could contain covenants that would restrict our operations. Finally, our term
loan agreement and revolving line of credit require compliance with certain financial and other covenants. If we are unable to maintain
these financing arrangements, we may be required to reduce the scope of our planned research and development, clinical activities and
selling, training, education and marketing efforts.
36
Contractual Obligations and Commitments
The following table sets forth our approximate aggregate obligations at December 31, 2019 for future payments under contracts
and other contingent commitments:
Contractual Obligations
Long-term debt(1)
Finance leases(2)
Operating leases(3)
Royalty obligations(4)
Restricted grants
Total contractual obligations
_________________________
Total
60,000 $
17,937
4,688
2,895
726
86,246 $
$
$
Less than
1 year
1-3 years
3-5 years
More than
5 years
— $
1,597
1,465
2,895
726
6,683 $
32,195 $
3,225
2,515
—
—
37,935 $
27,805 $
3,316
708
—
—
31,829 $
—
9,799
—
—
—
9,799
(1)
Long-term debt represents principal repayments related to our term loan. Principal payments under the term loan commence on
March 1, 2021 and are made ratably until maturity in August 1, 2024. Interest on the term loan accrues at the greater of the
Prime Rate or 5.00%, plus 0.75% and is payable monthly over the term of the loan. In addition, the term loan is subject to an
additional 3.00% fee on the term loan principal, or $1,800, that is payable at maturity or upon acceleration or prepayment of the
term loan. Finally, we have a contractual obligation to pay interest on amounts drawn on the revolving credit facility.
(2)
Finance leases consist of principal and interest payments related to our Mason, Ohio headquarters and computer equipment. See
Note 11 – Leases.
(3) Represents lease commitments under various operating leases, primarily for office and warehouse space. See Note 11 – Leases.
(4) Represents obligations for royalty agreements ranging from 3% to 5% of specified product sales estimated using 2019 sales.
Royalty obligations beyond one year have not been included as payments are based on specified product sales and not estimable
at this time. See Note 12 – Commitments and Contingencies to our Consolidated Financial Statements.
We have contractual obligations for contingent consideration payments related to the nContact and SentreHEART acquisitions.
Subject to the terms and conditions of the nContact and SentreHEART merger agreements, such contingent consideration will be paid
in AtriCure common stock and cash, up to a specified maximum number of shares. The nContact contingent consideration expires on
December 31, 2020. The SentreHEART milestones expire on December 31, 2023 and December 31, 2026. See Note 3 – Fair Value.
Off-Balance-Sheet Arrangements
We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material
effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity, capital expenditures
or capital resources.
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, using 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 medical devices. The Company recognizes revenue in
an amount that reflects the consideration the Company expects to be entitled to in exchange for those devices when control of
promised devices is transferred to customers. At contract inception, the Company assesses the products promised in its contracts with
customers and identifies a performance obligation for each promise to transfer to the customer a product that is distinct. The
Company’s devices are distinct and represent performance obligations. These performance obligations are satisfied and revenue is
37
recognized at a point in time upon shipment or delivery of products. Sales of devices are categorized as follows: open ablation,
minimally invasive ablation, appendage management and valve tools. Shipping and handling activities performed after control over
products transfers to customers are considered activities to fulfill the promise to transfer the products rather than as separate promises
to customers. Products are sold primarily through a direct sales force and through distributors in certain international markets. Terms
of sale are generally consistent for both end-users and distributors, except that payment terms are generally net 30 days for end-users
and net 60 days for distributors, with limited exceptions. The Company does not maintain any post-shipping obligations to customers.
No installation, calibration or testing of products is performed by the Company subsequent to shipment in order to render products
operational.
We account for revenue in accordance with FASB ASC 606, “Revenue from Contracts with Customers”. Significant judgments
and estimates involved in the Company’s recognition of revenue include the determination of the timing of transfer of control of
products to customers and the estimation of a provision for returns. The Company considers the following indicators when
determining when control of the product transfers to customers: (i) the Company has a right to payment in accordance with the
shipping terms set forth in its contracts with customers; (ii) customers have legal title to products in accordance with shipping terms;
(iii) the Company transfers physical possession of products either when the Company presents the products to a third party carrier for
delivery to a customer (FOB shipping point) or when a customer receives the delivered goods (FOB destination); (iv) customers have
the significant risks and rewards of ownership of products; and (v) customers have accepted products in connection with contractual
shipping terms.
We maintain a provision for sales returns and allowances to account for expected returns of defective or damaged products,
products shipped in error and invoice adjustments. We adjust the provision using the expected value method 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,
customer-specific information and other relevant factors. We 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. If
circumstances change, our estimates of the collectability of amounts could be changed by a material amount. Our history of write-offs
against the allowance has not been significant.
Inventories—Our inventories are stated at the lower of cost or net realizable value based on the first-in, first-out cost method
and consist of raw materials, work in process and finished goods. Our industry is characterized by rapid product development and
frequent new product introductions. We estimate reserves for excess, expired and obsolete inventory on a quarterly basis which are
impacted by expiration of products, uncertain timing of product approvals, variability in product launch strategies and variation in
product use.
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 RF and cryo generators) that are placed with direct
customers that use our disposable products. These generators and other capital equipment are depreciated over a period of one to 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.
IPR&D Intangible Asset—In Process Research and Development (IPR&D) represents 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. IPR&D is accounted for as an indefinite-lived intangible asset until completion or abandonment of the IPR&D
project. Upon completion of the development project, the IPR&D will be amortized over its estimated useful life. The IPR&D asset
represents an estimate of the fair value of the PMA that may result from the CONVERGE IDE and aMAZE IDE clinical trials. We
review intangible assets for impairment annually on October 1, or more often if impairment indicators are present, using our best
estimates based on reasonable and supportable assumptions and projections of expected future cash flows. If the IPR&D project is
abandoned or regulatory approvals are not obtained, we may have a full or partial impairment charge related to the IPR&D, calculated
as the excess carrying value of the IPR&D assets over the estimated fair value.
Goodwill— Goodwill represents the excess of purchase price over the fair value of the net assets acquired in business
combinations. Our goodwill is accounted for in a single reporting unit representing the Company as a whole. We test goodwill for
impairment annually on October 1, or more often if impairment indicators are present. The impairment test requires a comparison of
the estimated fair value of the reporting unit to the carrying value of the assets and liabilities of that reporting unit. If the carrying
value of the reporting unit exceeds the fair value of the reporting unit, the carrying value of the reporting unit’s goodwill is reduced to
its fair value through an impairment charge to adjust the goodwill balance. The estimates of fair value and the determination of
reporting units requires management judgment.
38
Share-Based Employee Compensation—We account for share-based compensation for all share-based payment awards,
including stock options, restricted stock awards, restricted stock units, performance share awards, and stock purchases related to an
employee stock purchase plan, based on their estimated fair values. We estimate the fair value of time-based 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 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 value of the portion of the awards that is ultimately expected to vest is recognized as expense over the
requisite service periods in our Consolidated Statements of Operations and Comprehensive Loss.
We estimate the fair value of restricted stock awards, restricted stock units and performance share awards based upon the grant
date closing market price of our common stock. The estimated fair value of the performance share awards may be adjusted over the
performance period based on estimates of performance target achievement.
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, and expense is adjusted at the time of stock purchase.
Acquisition-Related Contingent Consideration—Contingent consideration arrangements obligate the Company to pay former
shareholders of acquired companies certain amounts if specified future events occur or conditions are met, such as the achievement of
certain regulatory milestones or reimbursement milestones. We measure such liabilities using unobservable inputs by applying the
probability-weighted scenario method. Various key assumptions, such as the probability and timing of achievement of the agreed
milestones 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 selling, general and administrative expenses.
Income Taxes—Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. We measure deferred income tax assets and liabilities using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred income tax assets and liabilities from changes 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 income 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 income tax assets on an annual basis to determine if valuation
allowances are required by considering all available evidence. Deferred income tax assets are realized by having sufficient future
taxable income to allow the related tax benefits to reduce taxes otherwise payable. The sources of taxable income that may be
available to realize the benefit of deferred tax assets are future reversals of existing taxable temporary differences, future taxable
income, exclusive of reversing temporary differences and carryforwards 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.
We believe our critical accounting policies regarding revenue recognition, allowance for doubtful accounts receivable,
inventories, property and equipment, IPR&D intangible asset, goodwill, share-based employee compensation, acquisition-related
contingent consideration and income 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
See Note 2 – Recent Accounting Pronouncements to our Consolidated Financial Statements for further information.
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Amounts referenced in this Item 7A are in thousands, except per share amounts.)
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 term loan and revolving credit facility
accrue at a variable rate based on the Prime Rate.
Products sold by AtriCure Europe, B.V. accounted for 11.7% and 12.5% of the Company’s total revenue for the years ended
December 31, 2019 and 2018. Since such revenue was primarily denominated in Euros or British Pounds, the Company is exposed to
exchange rate fluctuations between the Euro and the U.S. Dollar and between the British Pound and the Euro. For the years ended
December 31, 2019 and 2018, foreign currency transaction gains (losses) of $180 and $(183) were recorded primarily in connection
with settlements of the intercompany balances 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. The Euro to U.S. Dollar conversion rate fluctuations may impact our
reported revenue and expenses. In other international markets, the Company denominates sales in U.S. Dollars. If products are priced
in U.S. Dollars and competitors price their products in the local currency, 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 not transacted in U.S. Dollars.
The Company invests its cash primarily in money market accounts, repurchase agreements, U.S. government agencies and
securities, corporate bonds, asset-backed securities 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 equivalents 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, 2019, $28,096 of the cash and cash equivalents balance
was in excess of FDIC limits.
40
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
42
45
46
47
48
49
72
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of
AtriCure, Inc.
Mason, Ohio
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AtriCure, Inc. and subsidiaries (the "Company") as of
December 31, 2019 and 2018, 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, 2019, and the related notes and the schedule listed in the
Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally
accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal
Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 24, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical
audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the
critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they
relate.
Valuation of Acquisition-Related Contingent Consideration and In Process Research and Development Pursuant to the
SentreHEART Merger Agreement - Refer to Note 5 to the financial statements
Critical Audit Matter Description
The Company acquired 100% of the outstanding equity interests of SentreHEART on August 13, 2019 for an aggregate purchase price
of $208.8 million. The transaction was accounted for using the acquisition method of accounting for business combinations.
Auditing the Company’s accounting for the SentreHEART acquisition was complex due to the estimation uncertainty and key
assumptions involved in determining opening balance sheet fair values recorded for the acquisition-related contingent consideration
liability of $171.3 million and the in process research and development (IPR&D) intangible asset of $82.3 million.
The Company measured the liability associated with the acquisition-related contingent consideration at fair value, using unobservable
inputs by applying the probability-weighted scenario method. Various key assumptions, including the probability and timing of
achievement of regulatory or reimbursement milestones (“key assumptions”), were used in the determination of the opening balance
sheet fair value of the acquisition-related contingent consideration and are not observable in the market, thus representing Level 3
measurements within the fair value hierarchy.
The Company measured the IPR&D intangible asset at fair value, using the excess earnings method and key cash flow assumptions,
such as revenue growth rates, related profit margins and obsolescence rates (“cash flow assumptions”).
42
Given that the valuation of the acquisition-related contingent consideration is based on unobservable inputs and is sensitive to changes
in key assumptions, and the IPR&D asset required management to make significant estimates related to key cash flows assumptions,
audit procedures required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair
value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the assumptions impacting the fair value calculation of the acquisition-related contingent consideration
and IPR&D included the following, among others:
• Related to the valuation of the acquisition-related contingent consideration liability:
• We inquired of management and the Company’s clinical research personnel to understand each milestone and key
assumption, including current progress and any clinical results received to date.
• We tested the design and operating effectiveness of the Company’s internal controls over the valuation of the
acquisition-related contingent consideration liability, including management’s projections of key assumptions used in the
valuation.
• We evaluated management’s ability to accurately project the key assumptions by comparing actual progress to
management’s historical projections.
• We evaluated the reasonableness of the key assumptions by comparing them to (1) internal communications to
management and the Board of Directors and (2) information included in the Company’s external communications.
• We examined regulatory trends to consider the impact of changes in the regulatory environment on the key assumptions.
• We independently corroborated the reasonableness of the key assumptions by verifying the process and timing necessary
to achieve each milestone.
• Related to the valuation of the IPR&D intangible asset:
• We inquired of management and the Company’s commercial personnel to understand the key cash flow assumptions.
• We tested the design and operating effectiveness of the Company’s internal controls over the valuation of the IPR&D
intangible asset, including management’s controls over estimates used in determining the cash flow assumptions.
• We evaluated whether the cash flow assumptions used were reasonable by considering industry data and current market
forecasts, and whether such assumptions were consistent with evidence obtained in other areas of the audit.
• We evaluated management’s ability to accurately project the key cash flow assumptions by comparing actual progress to
management’s historical projections.
• With the assistance of our fair value specialists, we evaluated the reasonableness of the significant valuation assumptions
and calculations by:
Evaluating the excess earnings method,
Testing the reasonableness of the valuation assumptions utilized, including the discount rate, and
Testing the mathematical accuracy of the discounted cash flows used to determine the estimated fair value of
the IPR&D intangible asset.
Valuation of Acquisition-Related Contingent Consideration — Refer to Note 3 to the financial statements
Critical Audit Matter Description
The Company has acquisition-related contingent consideration arrangements totaling $185.2 million as of December 31, 2019 arising
from the nContact and SentreHEART acquisitions which obligate the Company to pay former shareholders of acquired companies
certain amounts if specified future events occur or conditions are met, such as the achievement of certain regulatory or reimbursement
milestones (“milestones”).
The Company measures the liability associated with these acquisition-related contingent consideration arrangements at fair value,
using unobservable inputs by applying the probability-weighted scenario method. Various key assumptions, including the probability
and timing of achievement of the milestones (“key assumptions”), are used in the determination of fair value of acquisition-related
contingent consideration arrangements and are not observable in the market, thus representing Level 3 measurements within the fair
value hierarchy.
Given that the valuation of the acquisition-related contingent consideration arrangements is based on unobservable inputs and is
sensitive to changes in the probability and timing of achievement of the milestones, auditing these key assumptions required a high
degree of auditor judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s key assumptions used in the determination of the fair value of acquisition-related
contingent consideration arrangements included the following, among others:
43
• We inquired of management and the Company’s clinical research personnel to understand each milestone and key assumption,
including current progress and any clinical results received to date.
• We tested the design and operating effectiveness of the Company’s internal controls over management’s estimates of key
assumptions used in the valuation of the acquisition-related contingent consideration arrangements.
• We evaluated management’s ability to accurately project the key assumptions by comparing actual progress to management’s
historical projections.
• We evaluated the reasonableness of the key assumptions by comparing them to (1) internal communications to management and
the Board of Directors and (2) information included in the Company’s external communications.
• We examined regulatory trends to consider the impact of changes in the regulatory environment on the key assumptions.
• We independently corroborated the reasonableness of the key assumptions by verifying the process and timing necessary to
achieve each milestone.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
February 24, 2020
We have served as the Company's auditor since 2002.
44
ATRICURE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2019 and 2018
(In Thousands, Except Per Share Amounts)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, less allowance for doubtful accounts of $1,124 and $547
Inventories
Prepaid and other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
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 debt and leases
Total current liabilities
Long-term debt
Finance lease liabilities
Operating lease liabilities
Contingent consideration and other noncurrent liabilities
Total Liabilities
Commitments and contingencies (Note 12)
Stockholders’ Equity:
$
$
$
2019
2018
28,483 $
53,318
28,046
29,414
3,899
143,160
32,646
4,032
12,675
129,881
234,781
705
557,880 $
14,948 $
32,750
2,218
49,916
59,634
11,774
2,796
186,417
310,537
32,231
92,171
25,195
22,484
2,592
174,673
27,080
—
—
49,254
105,257
495
356,759
9,659
25,840
4,717
40,216
35,571
12,172
—
19,419
107,378
Common stock, $0.001 par value, 90,000 shares authorized; 39,655 and 38,604 issued and
outstanding
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
40
529,658
(158)
(282,197)
247,343
557,880 $
39
496,544
(199)
(247,003)
249,381
356,759
$
See accompanying notes to consolidated financial statements.
45
ATRICURE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 2019, 2018 and 2017
(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 gain (loss) on investments
Foreign currency translation adjustment
Other comprehensive income (loss)
Net loss
Comprehensive loss, net of tax
$
2019
230,807 $
60,472
170,335
2018
201,630 $
54,510
147,120
2017
174,716
48,553
126,163
41,230
162,227
203,457
(33,122)
34,723
129,524
164,247
(17,127)
(4,111)
2,398
(160)
(34,995)
199
(35,194) $
(0.94) $
37,589
137 $
(96)
41
(35,194)
(35,153) $
(4,607)
1,006
(183)
(20,911)
226
(21,137) $
(0.62) $
34,087
(31) $
(202)
(233)
(21,137)
(21,370) $
34,144
116,998
151,142
(24,979)
(2,264)
227
138
(26,878)
14
(26,892)
(0.83)
32,387
15
487
502
(26,892)
(26,390)
$
$
$
$
See accompanying notes to consolidated financial statements.
46
ATRICURE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2019, 2018, and 2017
(In Thousands)
Balance—December 31, 2016
33,342 $
33 $
367,851 $
(198,974) $
(468) $
168,442
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Accumulated Comprehensive
Income (Loss)
Deficit
Total
Stockholders’
Equity
Issuance of common stock under equity
incentive plans
Issuance of common stock under employee
stock purchase plan
Share-based employee compensation expense
Other comprehensive income
Net loss
Balance—December 31, 2017
Issuance of common stock through public
offering
Issuance of common stock for settlement of
contingent consideration
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, 2018
Issuance of common stock for SentreHEART
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 income
Net loss
Balance—December 31, 2019
1,112
2
2,387
—
—
2,389
132
—
—
—
34,586 $
2,875
232
781
130
—
—
—
38,604 $
699
248
104
—
—
—
39,655 $
—
—
—
—
35 $
2,110
14,615
—
—
386,963 $
—
—
—
(26,892)
(225,866) $
3
—
1
—
—
—
—
39 $
1
—
—
—
—
—
40 $
82,870
6,279
1,554
—
—
—
2,383
16,495
—
—
496,544 $
—
—
—
(21,137)
(247,003) $
20,306
(7,831)
—
—
2,662
17,977
—
—
529,658 $
—
—
—
(35,194)
(282,197) $
—
—
502
—
34 $
—
—
—
—
—
(233)
—
(199) $
—
—
—
—
41
—
(158) $
2,110
14,615
502
(26,892)
161,166
82,873
6,279
1,555
2,383
16,495
(233)
(21,137)
249,381
20,307
(7,831)
2,662
17,977
41
(35,194)
247,343
See accompanying notes to consolidated financial statements.
47
ATRICURE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2019, 2018 and 2017
(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
Non-cash lease expense
Loss on disposal of property and equipment and impairment of assets
Realized loss (gain) from foreign exchange on intercompany transactions
(Accretion) amortization of investments
Provision for doubtful accounts
Change in fair value of contingent consideration
Payment of contingent consideration in excess of purchase accounting amount
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
Proceeds from sale of property and equipment
Cash paid for business combination
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Proceeds from sale of stock, net of offering costs of $229
Proceeds from debt borrowings
Payments on debt and finance leases
Payment of debt fees
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 contingent consideration liability previously established in purchase accounting
Proceeds from economic incentive loan
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 income taxes
Non-cash investing and financing activities:
Contingent consideration in business combinations
Stock issuance in business combinations
Share-settled portion of contingent consideration
Accrued purchases of property and equipment
Assets obtained in exchange for finance lease obligations
Finance lease early termination
2019
2018
2017
$
(35,194) $
(21,137) $
(26,892)
17,977
7,423
1,943
375
751
604
181
(922)
582
(4,916)
—
(3,201)
(5,151)
(1,199)
2,790
3,108
(962)
(15,811)
(73,249)
100,485
(12,182)
39
(17,240)
(2,147)
16,495
7,244
1,510
515
—
323
165
(362)
598
(10,825)
(96)
(2,837)
(146)
(367)
(2,398)
7,016
131
(4,171)
(106,588)
27,389
(6,211)
6
—
(85,404)
—
20,000
(629)
(329)
1,202
(9,033)
2,662
—
500
14,373
(163)
(3,748)
32,231
28,483 $
82,873
17,381
(1,755)
(1,136)
6,012
(4,457)
2,383
(1,125)
—
100,176
(179)
10,422
21,809
32,231 $
3,719 $
259
3,870 $
65
171,300
20,307
—
1,053
270
—
—
—
6,279
348
24
(6)
14,615
7,761
1,367
264
—
336
(173)
30
(172)
(4,078)
—
(1,464)
(4,477)
829
1,290
2,228
(408)
(8,944)
(16,455)
26,600
(6,384)
—
—
3,761
—
—
(1,689)
(50)
4,402
(2,013)
2,110
—
—
2,760
24
(2,399)
24,208
21,809
2,002
37
—
—
—
650
2
—
$
$
See accompanying notes to consolidated financial statements.
48
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business—The “Company” or “AtriCure” consists of AtriCure, Inc. and its wholly-owned subsidiaries. The
Company is a leading innovator in treatments for atrial fibrillation (Afib) and left atrial appendage (LAA) management and sells its
products to medical centers globally through its direct sales force and distributors.
Principles of Consolidation—The Consolidated Financial Statements include the accounts of AtriCure, Inc. and our wholly-
owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents—The Company considers highly liquid investments with maturities of three months or less at the
date of purchase as cash equivalents. Cash equivalents include demand deposits, money market funds and repurchase agreements on
deposit with certain financial institutions.
Investments—The Company makes investments primarily in U.S. Government agencies and securities, corporate bonds,
commercial paper and asset-backed securities and classifies all investments as available-for-sale. Investments with maturities of less
than one year are classified as short-term. Investments are recorded at fair value, with unrealized gains and losses recorded as
accumulated other comprehensive income (loss). Gains and losses are recognized using the specific identification method when
securities are sold and are included in interest income or expense.
Revenue Recognition—The Company recognizes revenue when control of promised goods is transferred to customers in an
amount that reflects the consideration the Company expects to be entitled to in exchange for those goods. This generally occurs upon
shipment of goods to customers. See Note 13 for further discussion on revenue.
Sales Returns and Allowances—The Company maintains a provision for potential returns of defective or damaged products,
products shipped in error and invoice adjustments. The Company adjusts the provision using the expected value method based on
historical experience. Increases to the provision result in a reduction of revenue, and the provision is included in accrued liabilities.
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, 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 expenses. The Company charges off uncollectible receivables against the
allowance when all attempts to collect the receivable have failed. The Company’s history of write-offs has not been significant.
Inventories—Inventories are stated at the lower of cost or net realizable value based on the first-in, first-out cost method 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. Inventory reserves for excess, obsolete and expired products are impacted by uncertain timing
of regulatory approvals, variability in product launch strategies and variation in product use. An increase to inventory reserves results
in a corresponding increase in cost of revenue. Inventories are written off against the reserve when they are physically disposed.
Property and Equipment—Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed
using the straight-line method over the estimated useful lives of assets (see Note 8). The Company reassesses the useful lives of
property and equipment at least annually and retires assets if they are no longer in service. Maintenance and repair costs are expensed
as incurred.
The Company’s RF and cryo generators are generally placed with customers served by our direct sales force. 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 and may change in a future period if the Company experiences changes in the usage of the equipment or
introduces new technologies. Depreciation related to generators and other capital equipment is recorded in cost of revenue.
The Company reviews property and equipment for impairment at least annually using its best estimates based on reasonable and
supportable assumptions and projections of expected future cash flows. Property and equipment impairments recorded by the
Company have not been significant.
Intangible Assets—Intangible assets with determinable useful lives are amortized on a straight-line basis over the estimated
periods benefited. The Company reassesses the useful lives of intangible assets annually.
Included in intangible assets is In Process Research and Development (IPR&D), representing the value of acquired technologies
which have not yet reached technological feasibility. The primary basis for determining the technological feasibility is obtaining
specific regulatory approvals. IPR&D is accounted for as an indefinite-lived intangible asset until completion or abandonment of the
IPR&D project. Upon completion of the development project, the IPR&D will be amortized over its estimated useful life. The IPR&D
assets represent estimates of the fair value of the pre-market approval (PMA) that may result from the CONVERGE IDE and aMAZE
49
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
IDE clinical trials. The Company reviews intangible assets for impairment using its best estimates based on reasonable and
supportable assumptions and projections of expected future cash flows. The Company performs impairment testing annually on
October 1. If the IPR&D project is abandoned or regulatory approvals are not obtained, we may have a full or partial impairment
charge related to the IPR&D, calculated as the excess carrying value of the IPR&D assets over the estimated fair value.
Goodwill—Goodwill represents the excess of purchase price over the fair value of the net assets acquired in business
combinations. The Company’s goodwill is accounted for in a single reporting unit representing the Company as a whole. The
Company tests goodwill for impairment annually on October 1, or more often if impairment indicators are present.
Contingent Consideration and other Noncurrent Liabilities—This balance consists of the contingent consideration recorded in
business combinations, as well as deferred revenues, asset retirement obligations and other contractual obligations. The contingent
consideration balance is included in noncurrent liabilities as such settlement is both required and expected to be made primarily in
shares of the Company’s common stock pursuant to the nContact merger agreement and SentreHEART merger agreement.
Other Income (Expense)—Other income (expense) consists of foreign currency transaction gains and losses generated by
settlements of intercompany balances denominated in Euros and invoices transacted in British Pounds.
Taxes— Deferred income 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 income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax
assets and liabilities from a change in tax rates is recognized in the period that includes the enactment date.
The Company’s estimate of the valuation allowance for deferred income tax assets requires significant estimates and judgments
about future operating results. Deferred income tax assets are reduced by valuation allowances if, based on the consideration of all
available evidence, it is more-likely-than-not that the deferred income tax asset will not be realized. Significant weight is given to
evidence that can be objectively verified. The Company evaluates deferred income tax assets on an annual basis to determine if
valuation allowances are required. Deferred income tax assets are realized by having sufficient future taxable income to allow the
related tax benefits to reduce taxes otherwise payable. The sources of taxable income that may be available to realize the benefit of
deferred income tax assets are future reversals of existing taxable temporary differences, future taxable income, exclusive of reversing
temporary differences and carryforwards, and tax planning strategies that are both prudent and feasible. In evaluating the need for a
valuation allowance, the existence of cumulative losses in recent years is significant objectively verifiable negative evidence that must
be overcome by objectively verifiable positive evidence to avoid the need to record a valuation allowance. The Company has recorded
a full valuation allowance against substantially all net deferred income tax assets as it is more-likely-than-not that the benefit of the
deferred income tax assets will not be recognized in future periods. The Tax Cut and Jobs Act (Tax Reform Act) allows companies an
election to reclassify the income tax effects of the Tax Reform Act on items within accumulated other comprehensive income (loss) to
retained earnings. The Company has not made this election due to its full valuation allowance.
Net Loss Per Share—Basic and diluted net loss per share is computed by dividing the net loss by the weighted average number
of common shares outstanding during the period. Since the Company has experienced net losses for all periods presented, net loss per
share excludes the effect of 3,623, 3,869 and 4,321 stock options, restricted stock awards, restricted stock units and performance share
awards as of December 31, 2019, 2018 and 2017 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.
50
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (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) income consisted of the following (net of tax):
Total accumulated other comprehensive (loss) income at beginning of period
Unrealized gains (losses) on investments
Balance at beginning of period
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive (loss) income
to other income
Balance at end of period
Foreign currency translation adjustment
Balance at beginning of period
Other comprehensive (loss) income before reclassifications
Amounts reclassified from accumulated other comprehensive (loss) income
to other income
Balance at end of period
Total accumulated other comprehensive (loss) income at end of period
2019
2018
2017
(199) $
34 $
(468)
(37) $
137
—
100 $
(162) $
(277)
181
(258) $
(158) $
(6) $
(31)
—
(37) $
40 $
(367)
165
(162) $
(199) $
(21)
15
—
(6)
(447)
660
(173)
40
34
$
$
$
$
$
$
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 of 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 expense was $635, $785 and $900
during the years ended December 31, 2019, 2018 and 2017.
Share-Based Compensation—The Company records share-based compensation for all share-based payment awards, including
stock options, restricted stock, performance shares and stock purchases related to an employee stock purchase plan, based on
estimated fair values.
The Company estimates the fair value of share-based payment awards on the date of grant. 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
Statements of Operations and Comprehensive Loss. The Company estimates forfeitures at the time of grant and revises them, 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 is affected by the Company’s stock price, as well as assumptions
regarding several 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 value of the portion of the awards
that is ultimately expected to vest is recognized as expense over the requisite service periods in the Consolidated Statements of
Operations and Comprehensive Loss. The Company estimates the fair value of restricted stock awards, restricted stock units and
performance share awards based upon the grant date closing market price of the Company’s common stock. The estimated fair value
of performance share awards may be adjusted over the performance period based on changes to estimates of performance target
achievement.
The Company also has an employee stock purchase plan (ESPP) which is available to all eligible employees as defined by the
plan document. Under the ESPP, shares of the Company’s common stock may be purchased at a discount. The Company estimates the
number of shares to be purchased under the ESPP at the beginning of each purchase period based upon the fair value of the stock at
the beginning of the purchase period using the Black-Scholes model and records estimated compensation expense during the period.
Expense is adjusted at the time of stock purchase.
Use of Estimates—The preparation of the financial statements in conformity with accounting principles generally accepted in
the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, 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 cash investments in U.S. government agencies and securities, accounts
receivable, short-term other assets, accounts payable and accrued liabilities as Level 1. The carrying amounts of these assets and
51
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
liabilities approximate their fair value due to their relatively short-term nature. Cash equivalents and investments in corporate bonds,
repurchase agreements, commercial paper and asset-backed securities are classified as Level 2 within the fair value hierarchy. The fair
value of fixed term debt is estimated by calculating the net present value of future debt payments at current market interest rates and is
classified as Level 2. The book value of the Company’s fixed term debt approximates its fair value because the interest rate varies
with market rates. Significant unobservable inputs with respect to the fair value measurements of the Level 3 contingent consideration
liabilities are developed using Company data. See Note 3 – Fair Value for further information on fair value measurements.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments” (ASU 2016-13). This guidance requires that financial assets measured at amortized costs, such as
trade receivables and contract assets, be presented net of expected credit losses, which may be estimated based on relevant information
such as historical experience, current conditions and future expectations for each pool of similar financial assets. The new guidance
requires enhanced disclosures related to the trade receivables and associated credit losses. The guidance is effective for interim and
annual periods beginning within 2020. The adoption of this guidance is expected to increase the level of disclosures related to the
Company’s trade receivables, however it is not expected to have a material impact on the Company’s consolidated financial
statements.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting
for Goodwill Impairment” (ASU 2017-04). The guidance removes the requirement to perform a hypothetical purchase price allocation
to measure goodwill impairment. Under ASU 2017-04, a goodwill impairment will be the amount by which a reporting unit’s carrying
value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance becomes effective for interim and annual
periods beginning within 2020, with early adoption permitted, and applied prospectively. The Company does not expect the adoption
of this standard to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820), Disclosure Framework – Changes to
the Disclosure Requirements for Fair Value Measurement” (ASU 2018-13). The amendments modify the disclosure requirements for
fair value measurements and are effective for all entities for interim and annual reporting periods beginning within 2020. Early
adoption of either the entire standard or only the provisions that eliminate or modify the requirements is permitted. The Company has
elected to early adopt the guidance, and the fair value measurement disclosures herein reflect the adoption of the provisions of ASU
2018-13 as of December 31, 2019.
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud
Computing Arrangement That Is a Service Contract” (ASU 2018-15). The amendments in this ASU align the requirements for
capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use
software license). The guidance in ASC 350-40 on internal-use software is applied when capitalizing implementation costs related to a
hosting arrangement that is a service contract and expense the capitalized implementation costs related to a hosting arrangement that is
a service contract over the hosting arrangement's term, presenting the expense in the same line item in the statement of operations and
comprehensive loss as that in which the fee associated with the hosting arrangement is presented. The amendments are effective for
interim and annual reporting periods beginning within 2020, with early adoption permitted. During 2019, the Company adopted this
standard prospectively, and has deferred eligible costs related to implementation of hosting arrangements within other current and
noncurrent assets. These costs are amortized in the same income statement line as the associated hosting subscription fees and
operating expenses. The adoption of ASU 2018-15 did not have a material impact on the Company’s consolidated financial
statements.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”
(2019-12). The amendment simplifies the accounting for income taxes by eliminating some exceptions to the general approach in ASC
740, Income Taxes. It also clarifies certain aspects of the existing guidance to promote more consistent application, among other
things. The guidance is effective for interim and annual reporting periods beginning within 2021 with early adoption permitted. The
Company has elected to early adopt the simplification guidance, and there is no impact on prior periods.
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 fair value hierarchy is based on three levels
of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:
•
•
•
Level 1—Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access
at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or
liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. The
valuation under this approach does not entail a significant degree of judgment.
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities. The valuation
technique for the Company’s Level 2 assets is based on quoted market prices for similar assets from observable
pricing sources at the reporting date.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair
value of the assets or liabilities. Unobservable inputs shall be used to measure fair value to the extent that
observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for
the asset or liability at the measurement date.
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, 2019:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobservable
Inputs
(Level 3)
— $
—
—
8,539
—
—
8,539 $
14,502 $
10,000
13,755
—
24,852
18,847
81,956 $
— $
—
—
—
—
—
— $
Total
14,502
10,000
13,755
8,539
24,852
18,847
90,495
— $
— $
— $
— $
185,157 $
185,157 $
185,157
185,157
Assets:
Money market funds
Repurchase agreements
Commercial paper
U.S. government agencies and securities
Corporate bonds
Asset-backed securities
Total assets
Liabilities:
Acquisition-related contingent consideration
Total liabilities
$
$
$
$
53
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value
on a recurring basis as of December 31, 2018:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobservable
Inputs
(Level 3)
Assets:
Money market funds
Commercial paper
U.S. government agencies and securities
Corporate bonds
Asset-backed securities
Total assets
Liabilities:
Acquisition-related contingent consideration
Total liabilities
$
$
$
— $
—
6,734
—
—
6,734 $
16,193 $
40,731
—
30,195
14,511
101,630 $
— $
—
—
—
—
— $
Total
16,193
40,731
6,734
30,195
14,511
108,364
—
— $
— $
— $
18,773 $
18,773 $
18,773
18,773
There were no changes in the levels or methodology of measurement of financial assets and liabilities during the years ended
December 31, 2019 and 2018.
Acquisition-Related Contingent Consideration. The Company has contingent consideration arrangements arising from the
nContact and SentreHEART acquisitions. Contingent consideration arrangements under the nContact merger agreement obligate the
Company to pay former shareholders of nContact for the following milestones, if achieved:
•
•
•
Regulatory Milestone – up to $42,500 upon the completion of the CONVERGE IDE clinical trial and receiving a
PMA from FDA for the EPi-Sense AF Guided Coagulation System and/or any other nContact product with an
indication for symptomatic persistent Afib or 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 milestone
contingent consideration is due within 30 days following the receipt of the related PMA approval.
Trial Enrollment Milestone – $7,500 upon completion of patient enrollment in the CONVERGE IDE clinical trial.
The Company completed patient enrollment on August 21, 2018, and payment was made to former nContact
shareholders on September 20, 2018.
Commercial Milestone – for calendar years 2016 through 2019, nContact revenues in excess of specified target
revenue amounts will result in contingent consideration equal to 1.5 times the revenues in excess of target.
Payments of contingent consideration when the commercial milestone is achieved are due within 65 days of each
calendar year end. No payments were made for calendar years 2016 through 2019 as revenues did not exceed the
targets for these years.
Subject to the terms and conditions of the merger agreement, all contingent consideration must be paid first in shares of
AtriCure common stock. The merger agreement limits the total number of shares of AtriCure common stock issued in connection with
the acquisition to 5,660, of which 3,757 shares were issued at closing of the nContact acquisition on October 13, 2015 and an
additional 232 shares were issued upon completion of the trial enrollment milestone in 2018.
Contingent consideration arrangements under the SentreHEART merger agreement obligate the Company to pay certain defined
amounts to former shareholders of SentreHEART if specified milestones are met related to the aMAZE IDE clinical trial, including
PMA approval, and reimbursement for the therapy involving SentreHEART’s devices. In connection with the acquisition of
SentreHEART on August 13, 2019, preliminary fair value of $171,300 was recorded for the SentreHEART contingent consideration.
See Note 5 for more details regarding the SentreHEART acquisition-related contingent consideration. Subject to the terms and
conditions of the SentreHEART merger agreement, all contingent consideration would be paid in cash and stock at the discretion of
the Company, subject to certain limitations, with the maximum number of shares that may be issued after closing limited to 7,021, of
54
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
which 699 shares were issued at closing of the SentreHEART acquisition on August 13, 2019. The maximum contingent consideration
payable by AtriCure will not exceed $260,000.
The Company measures contingent consideration liabilities using unobservable inputs by applying an income approach, such as
the discounted cash flow technique or the probability-weighted scenario method. Various key assumptions, such as the probability and
timing of achievement of the agreed milestones and projected revenues, 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.
The recurring Level 3 fair value measurements of the contingent consideration liabilities include the following significant
inputs as of December 31, 2019:
Fair Value
Valuation Technique
Input
Range
Weighted average
by relative fair value
Regulatory &
Commercialization-based
milestones
$
185,157 Probability-weighted
scenario approach
Discount rate
Projected month and
year of payment
5.56 %
June 2020 -
September 2025
5.56 %
n/a
Probability of payment
77.40 - 85.00 %
81.75 %
Contingent consideration liabilities are periodically remeasured. Changes in the discount rate, time until payment and
probabilities of payment may result in materially different fair value measurements. A decrease in the discount rate would result in a
higher fair value measurement, while a decrease in the probability of payment would result in a lower fair value measurement.
Movement in the forecasted timing of achievement to later in the milestone periods also causes a decrease in the fair value
measurement. Subsequent revisions in key assumptions, which impact the estimated fair value of contingent consideration liabilities
are recorded in selling, general and administrative expenses. The fair value of the nContact contingent consideration was remeasured
during 2019, resulting in a decrease in fair value due to actual 2019 revenues falling below the commercial milestone target and
changes in estimates related to the forecasted timing of achievement of the nContact regulatory milestone. The fair value of the
SentreHEART contingent consideration was remeasured during 2019 resulting in an increase in fair value due to accretion and
changes in the discount rate.
The following table represents the Company’s Level 3 fair value measurements using significant other unobservable inputs for
acquisition-related contingent consideration for each of the years ended December 31:
Beginning Balance – January 1
Amounts acquired
Settlement of trial enrollment milestone
Changes in fair value included in selling, general and administrative expenses
Ending Balance – December 31
2019
18,773 $
171,300
—
(4,916)
185,157 $
2018
37,098 $
—
(7,500)
(10,825)
18,773 $
2017
41,176
—
—
(4,078)
37,098
$
$
Contingent consideration liabilities are classified as noncurrent liabilities as the Company expects to settle the majority of the
milestone payments in stock. As of December 31, 2019, the Company estimates 15% of the nContact regulatory milestone, or
approximately $1,839 will be paid in cash during 2020.
4. INVESTMENTS
Investments as of December 31, 2019 consisted of the following:
Corporate bonds
U.S. government agencies and securities
Commercial paper
Asset-backed securities
Total
55
Cost Basis
$
$
24,796 $
8,529
13,755
18,813
65,893 $
Unrealized
Gains
(Losses)
56 $
10
—
34
100 $
Fair Value
24,852
8,539
13,755
18,847
65,993
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
Investments as of December 31, 2018 consisted of the following:
Corporate bonds
U.S. government agencies and securities
Commercial paper
Asset-backed securities
Total
Cost Basis
$
$
30,223 $
6,734
40,731
14,520
92,208 $
Unrealized
Gains
(Losses)
(28) $
—
—
(9)
(37) $
Fair Value
30,195
6,734
40,731
14,511
92,171
The Company has not experienced any significant realized gains or losses on its investments in the years ended December 31,
2019, 2018 and 2017.
5. BUSINESS COMBINATIONS
On August 13, 2019, the Company acquired 100% of the outstanding equity interests of SentreHEART. Founded in 2005 and
based in Redwood City, California, SentreHEART developed innovative technology for remote delivery of a suture for closure of
anatomic structures including the left atrial appendage (LAA). This technology is currently being studied in the aMAZE IDE clinical
trial, an FDA-approved, prospective, multicenter, randomized controlled trial. The objective of the aMAZE Trial is to demonstrate that
the LARIAT® device for LAA closure, plus a Pulmonary Vein Isolation (PVI) ablation, will lead to a reduced incidence of recurrent
Afib compared to PVI alone. Management believes the acquisition of SentreHEART will significantly expand the Company’s
addressable markets with a product designed for electrophysiologists, and the acquisition of SentreHEART deepens the Company’s
commitment to provide the broadest possible offering of ablation and LAA management solutions to patients and customers.
The total consideration paid to SentreHEART’s former shareholders at the acquisition date was $18,008 in cash and 699 shares
of AtriCure common stock valued at approximately $20,307. The cash paid at acquisition was subject to adjustment for net working
capital balances outside of a specified range, resulting in $768 adjustment paid to the Company in November 2019. The merger
agreement also provides for the Company to pay contingent consideration, as follows:
•
•
PMA Milestone – up to $140,000 upon receiving PMA from FDA for the LARIAT system with an approved
indication allowing commercial distribution in the United States for the closure of the LAA for treatment of atrial
fibrillation. The full contingent consideration amount is only received if PMA approval is received on or before
December 31, 2022. The potential contingent consideration is reduced by 4.17% (or one-twenty-fourth) each month
following December 2022 and is reduced to zero if the milestone is achieved after December 31, 2023. Payment of
$25,000 of the PMA milestone may be accelerated upon achievement of an Interim Success Milestone as defined by
the merger agreement.
CPT Reimbursement Milestone – up to $120,000 upon approval of a Medicare Category 1 Current Procedural
Terminology (CPT) Code by the American Medical Association. The full contingent consideration amount is only
received if approval of the CPT Code is received on or before December 31, 2025. The potential contingent
consideration is reduced by 4.17% (or one-twenty-fourth) each month following December 2025 and is reduced to
zero if the milestone is achieved after December 31, 2026.
Subject to the terms and conditions of the merger agreement, all contingent consideration would be paid in cash and stock at the
discretion of the Company, subject to certain limitations, with the maximum number of shares that may be issued after closing limited
to 7,021, of which 699 were paid at closing. The maximum contingent consideration payable by AtriCure will not exceed $260,000.
The Company accounted for the acquisition in accordance with ASC 805, “Accounting for Business Combinations”. The assets
acquired, liabilities assumed and the estimated contingent consideration obligations are recorded at their respective fair values as of
the date of acquisition. The process of estimating fair values of identifiable assets, certain intangible assets and assumed liabilities
requires significant assumptions and estimates. The judgments used to determine the estimated fair value assigned to each class of
56
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
assets acquired and liabilities assumed, as well as asset lives, can materially impact the amounts recorded and the Company’s results
of operations.
The components of the aggregate purchase price for the SentreHEART acquisition are as follows:
Fair value of AtriCure common stock issued at closing
Cash
Fair value of contingent consideration liabilities
Total purchase price
$
$
20,307
17,240
171,300
208,847
The fair value of the contingent consideration liabilities was determined by applying the probability-weighted scenario method.
Key assumptions in the valuation of the contingent consideration liabilities are based on management’s judgment and estimates and
include the probability of achievement of each of the milestones, timing of achievement and discount rates, reflecting the inherent
risks of achieving the respective milestones. Some assumptions are not observable in the market, and thus represent a Level 3
measurement within the fair value hierarchy. See Note 3 for disclosure of unobservable inputs.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed based on the
information that was available as of the acquisition date:
Inventories
Current assets
Operating lease right-of-use asset
Property and equipment
Intangible assets
Other assets
Total identifiable assets
Current liabilities
Operating lease liability
Total liabilities assumed
Net identifiable assets acquired
Goodwill
Total consideration
August 13, 2019
1,848
$
328
2,929
94
82,570
202
87,971
5,719
2,929
8,648
79,323
129,524
208,847
$
$
$
$
$
During the measurement period, the Company recorded adjustments for the fair value of consideration transferred, including
settlement of working capital, and the evaluation of certain tax attributes. As of December 31, 2019, the purchase price allocation has
not yet been finalized as the Company evaluates certain tax attributes of SentreHEART. Net deferred tax assets of $20,590 and
offsetting valuation allowances were also recognized at the 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 SentreHEART. At acquisition, SentreHEART had approximately $184,036 of federal
and state net operating loss carryforwards, which begin to expire in 2026 and $37,906 of federal net operating loss carryforwards
which have no expiration as a result of the Tax Reform Act. A portion of the net operating loss carryforwards 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 goodwill recorded is not deductible for tax purposes.
The valuation of the intangible assets acquired and related amortization periods are as follows:
Developed technology
IPR&D
Total
Amortization
Valuation
$
$
270
82,300
82,570
Term
(in years)
15
Indefinite
The fair value of the LARIAT developed technology was estimated using the relief-from-royalty method, an income approach.
The LARIAT developed technology asset is amortized on a straight-line basis over its estimated useful life. The IPR&D asset was
estimated using the excess earnings method, also an income approach. The IPR&D asset represents an estimate of the fair value of the
57
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
PMA approval from the in-process aMAZE IDE clinical trial and is accounted for as an indefinite-lived intangible asset until
completion or abandonment of the project.
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. 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 SentreHEART, including $1,280 of appendage management revenue and $8,505 of net loss, are
included in the Consolidated Statements of Operations and Comprehensive Loss beginning August 14, 2019. The Consolidated
Balance Sheet as of December 31, 2019 reflects the acquisition of SentreHEART. The Company recognized approximately $3,978 of
acquisition-related costs in the year ended December 31, 2019, consisting of legal, audit, tax and other due diligence expenses.
Acquisition-related costs are included in selling, general and administrative expenses.
The following supplemental pro forma information presents the financial results of the Company for the twelve months ended
December 31, 2019 and 2018 as if the acquisition of SentreHEART had occurred on January 1, 2018.
Revenue
Net loss
Basic and diluted net loss per share
Year Ended
December 31,
(unaudited)
$
2019
232,768 $
(40,970)
$
(1.09) $
2018
205,725
(42,959)
(1.23)
Certain pro forma adjustments have been made when calculating the amounts above to reflect the impact of the purchase
transaction, primarily consisting of the exclusion of SentreHEART’s interest expense incurred on debt paid off or converted to equity
in the acquisition, exclusion of fair value adjustments for SentreHEART’s derivative liabilities and preferred warrants settled as part
of the acquisition, adjustments for amortization of intangible assets with determinable lives and exclusion of contingent consideration
remeasurement. The Company also eliminated transaction expenses incurred by both AtriCure and SentreHEART. The 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, 2018, nor is it indicative of any future results. The pro forma information does not
include any adjustments for potential revenue enhancements, cost synergies or other operating efficiencies that could result from the
acquisition.
6. INTANGIBLE ASSETS AND GOODWILL
The following table provides a summary of the Company’s intangible assets at December 31:
2019
Technology
IPR&D
Total
Estimated
Useful Life
3-15 years $
Cost
11,691 $
126,321
138,012 $
$
Accumulated
Amortization
8,131 $
—
8,131 $
2018
Cost
12,250 $
44,021
56,271 $
Accumulated
Amortization
7,017
—
7,017
Amortization expense related to intangible assets with definite lives, which excludes the IPR&D asset, was $1,943, $1,510 and
$1,367 for the years ended December 31, 2019, 2018 and 2017. In 2018, the Company reduced the ten-year estimated useful life of the
Fusion technology asset by two years based on changes in estimated periods benefited. This change in estimate was applied
prospectively.
58
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
Future amortization expense is projected as follows:
2020
2021
2022
2023
2024
2025 and thereafter
Total
$
$
1,822
1,511
18
18
18
173
3,560
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, 2017
Additions
Net carrying amount as of December 31, 2018
Additions
Net carrying amount as of December 31, 2019
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:
Generators and other capital equipment
Building under finance lease
Computer and other office equipment
Machinery, equipment and vehicles
Furniture and fixtures
Leasehold improvements
Construction in progress
Land
Equipment under finance leases
Total
Less accumulated depreciation
Property and equipment, net
$
$
105,257
—
105,257
129,524
234,781
2019
11,126 $
1,260
17,028
29,414 $
2018
9,100
1,232
12,152
22,484
$
$
Estimated
Useful Life
1-3 years $
15 years
3 years
3-7 years
3-7 years
5-15 years
N/A
N/A
3-5 years
$
2019
20,167 $
14,250
7,606
5,905
5,009
6,078
5,708
502
483
65,708
(33,062)
32,646 $
2018
18,158
14,250
6,360
4,859
4,702
3,943
1,868
—
213
54,353
(27,273)
27,080
Property and equipment depreciation expense was $7,423, $7,244 and $7,761 for the years ended December 31, 2019, 2018 and
2017. Depreciation related to generators and other capital equipment was $2,910, $3,191 and $3,574 for the years ended 2019, 2018
and 2017. As of December 31, 2019 and 2018, the net carrying value of generators and other capital equipment was $4,272 and
$4,545.
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
Sales returns and allowances
Other accrued liabilities
Accrued taxes and value-added taxes payable
Accrued royalties
Total
10. INDEBTEDNESS
2019
10,840 $
8,734
6,748
3,979
59
1,658
732
32,750 $
2018
9,100
8,065
4,512
1,410
1,205
886
662
25,840
$
$
Credit Facility. The Company has a Loan and Security Agreement (Loan Agreement) with Silicon Valley Bank (SVB). The
Loan Agreement originally effective February 23, 2018 and modified December 28, 2018 was further modified and amended on
August 12, 2019 in connection with the SentreHEART acquisition. The Loan Agreement includes a $60,000 term loan and $20,000
revolving line of credit; however the total combined term loan and revolving line of credit outstanding under the Loan Agreement
cannot exceed $70,000 at any time prior to SVB’s consent. The term loan and revolving credit facility both mature or expire, as
applicable, on August 1, 2024.
Principal payments of the term loan are to be made ratably commencing March 1, 2021 through the loan’s maturity date. If the
Company meets certain conditions, as specified by the Loan Agreement, the commencement of term loan principal payments may be
deferred by an additional six months. The term loan accrues interest at the greater of the Prime Rate or 5.00%, plus 0.75% and is
subject to an additional 3.00% fee on the $60,000 term loan principal payable at maturity or upon acceleration or prepayment of the
term loan. The Company is accruing the 3.00% fee over the term of the Loan Agreement, with $135 accrued in the outstanding loan
balance as of December 31, 2019. Additionally, the original financing costs related to the term loan of $501 are netted against the
outstanding loan balance in the Consolidated Balance Sheets and amortized ratably over the term of the Loan Agreement. The August
2019 refinancing was treated as a debt modification.
The revolving line of credit is subject to an annual facility fee of 0.15% of the revolving line of credit, and any borrowings
thereunder bear interest at the greater of the Prime Rate or 5.00%. Borrowing availability under the revolving credit facility is based
on the lesser of $20,000 or a borrowing base calculation as defined by the Loan Agreement. The borrowing availability is also limited
to allow total debt outstanding under the Loan Agreement to not exceed $70,000 at any time prior to SVB’s consent and further
reduced by outstanding letters of credit (as specified). As of December 31, 2019, the Company had no borrowings under the revolving
credit facility and had borrowing availability of $8,750. Financing costs related to the revolving line of credit are included in other
assets in the Consolidated Balance Sheets and amortized ratably over the twelve-month period of the annual fee.
The Loan Agreement also provides for certain prepayment and early termination fees, as well as establishes a minimum
liquidity covenant and dividend restrictions, along with other customary terms and conditions. Specified assets have been pledged as
collateral.
Future principal payments of long-term debt are projected as follows:
2020
2021
2022
2023
2024
Total long-term debt, of which $60,000 is noncurrent
11. LEASES
$
$
—
14,634
17,561
17,561
10,244
60,000
The Company adopted the new lease guidance on January 1, 2019 using the transition method provided by ASU 2018-11,
“Leases (Topic 842): Targeted Improvements”. Under this method, the Company has applied the new requirements to leases that
existed as of January 1, 2019, rather than at the earliest comparative period presented in the financial statements. Prior periods are
presented under legacy ASC 840 lease guidance. As a result of the adoption, the Company recorded operating right-of-use assets and
60
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
operating lease liabilities of approximately $1,884 and $2,189 as of January 1, 2019. The difference between the initial operating
right-of-use asset and operating lease liability of $305 is accrued rent previously recognized under ASC 840.
The Company has operating and finance leases for corporate offices, manufacturing and warehouse facilities and computer
equipment. The Company has applied the practical expedient and does not separate lease components from nonlease components. The
Company has applied the short-term lease recognition exemption and recognizes lease payments in profit or loss for leases that have a
lease term of twelve months or less at commencement and do not include a renewal option whose exercise is reasonably certain. Short
term lease expense is not significant during the twelve months ended December 31, 2019.
The Company’s leases have remaining lease terms of one year to eleven years. Except for the operating lease acquired as part of
the SentreHEART acquisition, options to renew or extend leases beyond their initial term have been excluded from measurement of
the ROU assets and lease liabilities as exercise is not reasonably certain. The weighted average remaining lease term for operating
leases and finance leases is 3.5 years and 11.0 years as of December 31, 2019. The weighted average discount rate used to measure the
outstanding operating lease liabilities and finance lease liabilities is 5.9% and 7.0% as of December 31, 2019. In connection with the
terms of the Company’s corporate headquarters lease, a letter of credit for $1,250 was issued to the building lessor in October 2015.
The letter of credit is renewed annually and remains outstanding as of December 31, 2019.
The components of lease expense are as follows:
Operating lease cost
Finance lease cost:
Amortization of right-of-use assets
Interest on lease liabilities
Total finance lease cost
Supplemental cash flow information related to leases is as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Right-of-use assets obtained in exchange for lease obligations:
Operating Leases
Finance Leases
Operating lease right-of-use asset obtained in business combination
$
$
$
Twelve Months Ended
December 31, 2019
952
998
872
1,870
Twelve Months Ended
December 31, 2019
1,026
872
629
1,884
270
2,929
61
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
Supplemental balance sheet information related to leases is as follows:
December 31, 2019
Operating Leases
Operating lease right-of-use assets
Other current liabilities and current maturities of leases and long-term debt
Operating lease liabilities
Total operating lease liabilities
Finance Leases
Property and equipment, at cost
Accumulated depreciation
Property and equipment, net
Other current liabilities and current maturities of leases and long-term debt
Finance lease liabilities
Total finance lease liabilities
Maturities of lease liabilities as of December 31, 2019 are as follows:
$
$
$
$
$
$
2020
2021
2022
2023
2024
2025 and thereafter
Total payments
Less imputed interest
Total
Operating Leases
$
1,465 $
1,337
1,178
708
—
—
4,688 $
(427)
4,261 $
$
$
4,032
(1,465)
(2,796)
(4,261)
14,733
(4,197)
10,536
(753)
(11,774)
(12,527)
Finance Leases
1,597
1,602
1,623
1,646
1,670
9,799
17,937
(5,410)
12,527
12. COMMITMENTS AND CONTINGENCIES
Royalty Agreements. The Company has royalty agreements in place with terms that include payment of royalties of 3% to 5%
of specified product sales. One royalty agreement remains in effect through 2023, while the other agreement remains in effect the later
of 2025 or until expiration of the underlying patents or patent applications. Parties to the royalty agreements have the right at any time
to terminate the agreement immediately for cause. Royalty expense of $2,892, $2,715 and $2,323 was recorded as part of cost of
revenue for the years ended December 31, 2019, 2018 and 2017.
Purchase Agreements. The Company enters into standard purchase agreements with certain vendors in the ordinary course of
business, generally with terms that allow cancellation.
Legal. The Company may, from time to time, become a party to legal proceedings. Such matters are subject to many
uncertainties and to outcomes of which the financial impacts are not predictable with assurance and that may not be known for
extended periods of time. When management has assessed that a loss is probable and an amount can be reasonably estimated, the
Company records a liability in the Consolidated Financial Statements.
The Company received a Civil Investigative Demand (CID) from the U.S. Department of Justice (USDOJ) in December 2017
stating that it is investigating the Company to determine whether the Company has violated the False Claims Act, relating to the
promotion of certain medical devices related to the treatment of atrial fibrillation for off-label use and submitted or caused to be
submitted false claims to certain federal and state health care programs for medically unnecessary healthcare services related to the
treatment of atrial fibrillation. The CID covers the period from January 2010 to December 2017 and requires the production of
documents and answers to written interrogatories. The Company had no knowledge of the investigation prior to receipt of the CID.
The Company maintains rigorous policies and procedures to promote compliance with the False Claims Act and other applicable
regulatory requirements. The Company provided the USDOJ with documents and answers to the written interrogatories and is
cooperating with its investigation. However, the Company cannot predict when the investigation will be resolved, the outcome of the
investigation or its potential impact on the Company.
62
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
The Company acquired nContact Surgical, Inc. pursuant to a merger agreement dated October 4, 2015. The merger agreement
provides for contingent consideration or “earnout” to be paid upon attaining specified regulatory approvals and clinical and revenue
milestones. The merger agreement’s earnout provisions require the Company to deliver periodic earnout reports to a designated
representative of former nContact stockholders. In response to the reports delivered in and after February 2018, the Company
received letters from the representative purporting to serve as “earnout objection statements” (as that term is defined in the merger
agreement) and claim that for purposes of determining the commercial milestone payment, the Company should be including revenues
of certain products that the Company has not included in its earnout statements. The representative is seeking indemnification under
the merger agreement related to its claims. The Company has engaged with the representative regarding the earnout objection
statements and disputes the basis of the representative’s claims.
13. REVENUE
The Company adopted FASB ASC 606, “Revenue from Contracts with Customers” (ASC 606) using the modified retrospective
method effective January 1, 2018. The adoption of ASC 606 did not have a material impact on the amount and timing of revenue
recognized in the Consolidated Financial Statements.
Revenue is generated primarily from the sale of medical devices. The Company recognizes revenue in an amount that reflects
the consideration the Company expects to be entitled to in exchange for those devices when control of promised devices is transferred
to customers. At contract inception, the Company assesses the products promised in its contracts with customers and identifies a
performance obligation for each promise to transfer to the customer a product that is distinct. The Company’s devices are distinct and
represent performance obligations. These performance obligations are satisfied and revenue is recognized at a point in time upon
shipment or delivery of products. Sales of devices are categorized as follows: open ablation, minimally invasive ablation, appendage
management and valve tools. Shipping and handling activities performed after control over products transfers to customers are
considered activities to fulfill the promise to transfer the products rather than as separate promises to customers. Revenue includes
shipping and handling revenue of $1,485, $1,236 and $1,090 in 2019, 2018 and 2017.
Products are sold primarily through a direct sales force and through distributors in certain international markets. Terms of sale
are generally consistent for both end-users and distributors, except that payment terms are generally net 30 days for end-users and net
60 days for distributors, with limited exceptions. The Company does not maintain any post-shipping obligations to customers. No
installation, calibration or testing of products is performed by the Company subsequent to shipment in order to render products
operational.
Significant judgments and estimates involved in the Company’s recognition of revenue include the determination of the timing
of transfer of control of products to customers and the estimation of a provision for returns. The Company considers the following
indicators when determining when the control of products transfers to customers: (i) the Company has a right to payment in
accordance with the shipping terms set forth in its contracts with customers; (ii) customers have legal title to products in accordance
with shipping terms; (iii) the Company transfers physical possession of products either when the Company presents the products to a
third party carrier for delivery to a customer (FOB shipping point) or when a customer receives the delivered goods (FOB destination);
(iv) customers have the significant risks and rewards of ownership of products; and (v) customers have accepted products in
connection with contractual shipping terms.
In the normal course of business, the Company does not accept product returns unless a product is defective as manufactured.
The Company establishes estimated provisions for returns based on the expected value method considering historical experience. The
Company does not provide customers with the right to a refund. In connection with the acquisition of SentreHEART, the Company
recognized an allowance for sales returns and refunds of $2,240 for transition to ASC 606 to reflect SentreHEART’s historical refund
practices.
The Company expects to be entitled to the total consideration for the products ordered by customers as product pricing is fixed
according to the terms of customer contracts and payment terms are short. Payment terms fall within the one-year guidance for the
practical expedient which allows the Company to forgo adjustment of the promised amount of consideration for the effects of a
significant financing component. The Company excludes taxes assessed by governmental authorities on revenue-producing
transactions from the measurement of the transaction price.
Costs associated with product sales include commissions and royalties. Considering that product sales are performance
obligations in contracts that are satisfied at a point in time, commission expense associated with product sales and royalties paid based
on sales of certain products is incurred at that point in time rather than over time. Therefore, the Company applies the practical
expedient and recognizes commissions and royalties as expense when incurred because the expense is incurred at a point in time and
the amortization period is less than one year. Commissions are recorded as selling expense and royalties are recorded as cost of
revenue.
63
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
See Note 18 for disaggregated revenue by geographic area and by product category.
14. INCOME TAXES
The Company files federal, state, local 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 substantially all 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.
On December 22, 2017, H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution
on the Budget for Fiscal Year 2018” (the Tax Reform Act) was enacted and amends the Internal Revenue Code to reduce tax rates and
modify policies, credits and deductions for businesses. For businesses, U.S. GAAP requires resulting tax effects of accounting for the
Tax Reform Act to be recorded in the reporting period of enactment. On December 22, 2017, the SEC staff also issued Staff
Accounting Bulletin No. 118 (SAB 118) which allowed businesses to record provisional amounts in the application of U.S. GAAP
during a measurement period, not to extend beyond one year from the enactment of the Tax Reform Act, in situations when a
registrant did not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for
certain income tax effects of the Tax Reform Act. As of December 31, 2018, the Company completed our accounting for the tax
effects of enactment of the Tax Reform Act. The Tax Reform Act provided companies with the ability to elect to reclassify the income
tax effects of the Tax Cuts and Jobs Act on items within accumulated other comprehensive income (loss) to retained earnings. The
Company did not make this election due to its full valuation allowance.
The Company’s provision for income taxes for each of the years ended December 31 is as follows:
Current Tax Expense
Federal
State
Foreign
Total current tax expense
Deferred Tax Expense
Federal
State
Foreign
Change in valuation allowance
Total deferred tax expense
Total tax expense
2019
2018
2017
$
$
$
(26) $
34
165
173
(51) $
28
198
175
—
44
72
116
(7,655) $
(1,368)
(1,690)
10,739
26
199 $
(3,048) $
178
45
2,876
51
226 $
18,485
(1,337)
(2,241)
(15,009)
(102)
14
64
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
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
Deferred interest
Equity compensation
Accruals and reserves
Inventories
Intangible assets
Property and equipment, net
Finance and operating lease liabilities
Right-of-use assets
Other, net
Subtotal
Less valuation allowance
Total
2019
2018
$
111,000 $
8,193
909
8,233
3,513
1,007
(30,996)
(1,482)
4,016
(3,476)
287
101,204
(101,178)
$
26 $
68,563
6,206
774
4,750
802
726
(11,448)
(608)
—
—
135
69,900
(69,849)
51
The Company recorded $20,590 of net deferred tax assets and offsetting valuation allowances as part of the SentreHEART
acquisition.
The Company has federal net operating loss carryforwards of $340,079 which have expirations between 2021 and 2038 and
$80,101 which has no expiration as a result of the Tax Reform Act. The Company has state and local net operating loss carryforwards
of $260,924 with varying expirations from 2020 to 2040. A portion of the Company’s federal and state net operating loss
carryforwards are subject to certain limitations under Internal Revenue Code Sections 382 and 383. The Company has federal research
and development credit carryforwards of $8,168 which have expirations between 2023 and 2040. Additionally, the Company has
foreign net operating loss carryforwards of approximately $42,712 which have expirations between 2020 and 2028. On January 1,
2017, the Company adopted ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” and recognized $2,816 of
previously unrecognized deferred tax assets with a corresponding increase in its valuation allowance. On January 1, 2019 the
Company adopted ASC 842 and recognized $400 of operating lease liability deferred tax assets and $400 of offsetting right-of-use
asset deferred tax liabilities.
The Company’s 2019, 2018 and 2017 effective income tax rates differ from the federal statutory rate as follows:
Federal tax at statutory rate
Federal and Foreign tax rate change
Federal R&D credit
Federal deferred adjustment
Federal NOL adjustment for ASU
Valuation allowance
State income taxes
Foreign NOL rate change
Foreign tax rate differential
Permanent differences and other
Effective tax rate
2019
21.00 % $
1.40
2.53
3.28
—
(32.45)
4.02
(1.17)
(0.38)
1.17
(0.60) % $
(6,950)
(462)
(837)
(1,085)
—
10,739
(1,334)
388
126
(386)
199
2018
21.00 % $
(6.84)
4.39
(10.77)
—
(13.75)
(0.99)
(1.22)
(0.60)
7.70
(1.08) % $
(4,391)
1,430
(918)
2,253
—
2,876
206
256
125
(1,611)
226
34.00 %
2017
$
(109.68)
(0.40)
—
10.48
55.84
4.81
1.30
(2.45)
6.05
(0.05) %
$
(9,139)
29,480
107
—
(2,816)
(15,009)
(1,292)
(348)
658
(1,627)
14
The Company’s pre-tax book loss for domestic and international operations was $(28,002) and $(6,993) for 2019, $(13,443) and
$(7,468) for 2018 and $(19,409) and $(7,469) for 2017.
The Company had undistributed earnings of foreign subsidiaries of approximately $304 at December 31, 2019. The Company
does not consider these earnings as permanently reinvested and thus has recognized appropriate U.S. current and deferred taxes on
such amounts.
Federal, state and local tax returns of the Company are routinely subject to examination by various taxing authorities. Federal
income tax returns for periods beginning in 2016 are open for examination. Generally, state and foreign income tax returns for periods
beginning in 2015 are open for examination. However, taxing authorities have the ability to adjust net operating loss and tax credit
65
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
carryforwards from years prior to these periods. The Company has not recognized certain tax benefits because of the uncertainty of
realizing the entire value of the tax position taken on income tax returns upon review by the taxing authorities.
A reconciliation of the change in federal and state unrecognized tax benefits for 2019, 2018 and 2017 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
2019
2018
$
$
1,157 $
620
—
—
—
1,777 $
1,157 $
—
—
—
—
1,157 $
2017
3,175
(2,018)
—
—
—
1,157
The Internal Revenue Service completed its review of the Company’s 2014 federal income tax return in February 2017. In 2017,
the Company also completed a detailed analysis of R&D credit carryforwards for the tax years 2008 through 2016. As a result of this
analysis, as well as completion of the IRS audit of the 2014 credit, the Company has reduced both the R&D credit carryforward and
related unrecognized tax benefits by $2,018. The Company’s increase for prior year tax positions relates to uncertain income tax
benefits assumed pursuant to the SentreHEART acquisition. Historically, the Company did not have any interest and penalties accrued
for unrecognized income tax benefits as a result of offsetting net operating losses. The Company has accrued interest and penalties
associated with uncertain income tax benefits assumed pursuant to the SentreHEART acquisition as of December 31, 2019, and
recognized interest and penalties within income tax expense. The amount is not significant.
There are no amounts included in the balance of unrecognized tax benefits at December 31, 2018 and 2017 that, if recognized,
would affect the effective tax rate. The balance of unrecognized tax benefits at December 31, 2019 includes $1,777 of tax benefits
that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes and valuation allowance. The Company
does not expect that its unrecognized tax benefits for research credits will significantly change within twelve months of December 31,
2019.
15. CONCENTRATIONS
During 2019, 2018 and 2017, approximately 12.0%, 10.8% and 13.2% of the Company’s total net revenue was derived from its
top ten customers. During 2019, 2018 and 2017 no individual customer accounted for more than 10% of the Company’s revenue.
As of December 31, 2019 and 2018, 16.5% and 11.8% of the Company’s total accounts receivable balance was derived from its
top ten customers. No individual customer accounted for more than 10% of the Company’s accounts receivable as of December 31,
2019 and 2018.
The Company maintains cash and cash equivalents balances at financial institutions which at times exceed FDIC limits. As of
December 31, 2019, $28,096 of the cash and cash equivalents balance was in excess of the FDIC limits.
16. 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 2019, 2018 and 2017 the Company made matching contributions of 50% on the first 6% of employee
contributions to the 401(k) Plan. The Company’s matching contributions expensed during 2019, 2018 and 2017 were $1,915, $1,560
and $1,367. Additional amounts may be contributed to the 401(k) Plan at the discretion of the Company’s Board of Directors,
however, no such discretionary contributions were made during 2019, 2018 or 2017. The Company also provides retirement benefits
for employees of AtriCure Europe B.V. and other foreign subsidiaries. Total contributions to retirement plans for these employees
were $248, $243 and $205 in 2019, 2018 and 2017.
17. EQUITY COMPENSATION PLANS
The Company has two share-based incentive plans: the 2014 Stock Incentive Plan (2014 Plan) and the 2018 Employee Stock
Purchase Plan (ESPP).
Stock Incentive Plan
Under the 2014 Plan, the Board of Directors may grant incentive stock options to Company employees and may grant restricted
stock awards or restricted stock units (collectively RSAs), nonstatutory stock options, performance share awards (PSAs) or stock
appreciation rights to Company employees, directors and consultants. The administrator (the Compensation Committee of the Board
66
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
of Directors) has the authority to determine the terms of any awards, including the number of shares subject to each award, the
exercisability of the awards and the form of consideration. As of December 31, 2019, 11,999 shares of common stock had been
reserved for issuance under the 2014 Plan and 1,578 shares were available for future grants.
During 2019 and 2018, the Compensation Committee approved the grant of performance share awards to the Company’s named
executive officers and certain other executive employees pursuant to the Company’s 2014 Plan. The form of award agreement for the
PSAs (PSA Grant Form) provides, among other things, that (i) each PSA that vests represents the right to receive one share of the
Company’s common stock; (ii) the PSAs vest based on the Company achieving specified performance measurements over a
performance period of three years; (iii) the performance measurements include revenue CAGR as defined in the PSA Grant Form; (iv)
threshold, target and maximum payout opportunities established for the PSAs will be used to calculate the number of shares that will
be issuable when the award vests, which may range from 0% to 200% of the target amount; (v) any PSAs that are earned are
scheduled to vest and be settled in shares of the Company’s common stock at the end of the performance period; and (vi) all or a
portion of the PSAs may vest following a change of control or a termination of service by reason of death or disability (each as
described in greater detail in the PSA Grant Form).
With respect to the PSAs, the number of shares that vest and are issued to the recipient is based upon the Company’s
performance as measured against the specified targets at the end of the three-year performance period as determined by the
Compensation Committee. The Company estimated the fair value of the PSAs based on its closing stock price on the grant date and
will adjust compensation expense over the performance period based on its estimate of performance target achievement.
Stock options, restricted stock awards, and restricted stock units granted generally vest at a rate of 33.3% on the first, second
and third anniversaries of the grant date. Stock options granted prior to 2018 under the 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
prior to 2018 generally vest between one year and four years from the date of grant. Stock options generally expire ten years from the
date of grant.
Activity under the plans during 2019 was as follows:
Number of
Shares
Outstanding
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
1,582 $
42
(110)
(7)
1,507 $
1,503 $
1,392 $
13.83
28.77
10.91
30.48
14.38
14.35
13.55
4.25 $
4.24 $
3.90 $
27,340
27,319
26,398
RSA
Shares
Outstanding
Weighted
Average
Grant Date
Fair Value
18.19
30.12
18.44
18.02
21.76
PSA
Shares
Outstanding
Weighted
Average
Grant Date
Fair Value
17.71
30.77
—
—
26.34
90 $
174
—
—
264 $
1,746 $
435
(776)
(3)
1,402 $
Time-Based Stock Options
Outstanding at January 1, 2019
Granted
Exercised
Cancelled
Outstanding at December 31, 2019
Vested and expected to vest
Exercisable at December 31, 2019
Restricted Stock Awards and Performance Share Awards
Outstanding at January 1, 2019
Awarded
Released
Forfeited
Outstanding at December 31, 2019
67
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
Performance Stock Options
Outstanding at January 1, 2019
Granted
Exercised
Cancelled
Outstanding at December 31, 2019
Exercisable at December 31, 2019
Activity under the plans during 2018 was as follows:
Time-Based Stock Options
Outstanding at January 1, 2018
Granted
Exercised
Cancelled
Outstanding at December 31, 2018
Vested and expected to vest
Exercisable at December 31, 2018
Restricted Stock Awards and Performance Share Awards
Outstanding at January 1, 2018
Awarded
Released
Forfeited
Outstanding at December 31, 2018
Performance Stock Options
Outstanding at January 1, 2018
Granted
Exercised
Cancelled
Outstanding at December 31, 2018
Exercisable at December 31, 2018
Number of
Shares
Outstanding
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
450 $
—
—
—
450 $
350 $
13.48
—
—
—
13.48
13.48
3.45 $
3.45 $
8,566
6,662
Number of
Shares
Outstanding
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
2,026 $
52
(474)
(22)
1,582 $
1,574 $
1,419 $
13.30
26.05
12.70
18.14
13.83
13.78
12.99
5.02 $
5.00 $
4.63 $
26,587
26,525
24,991
RSA
Shares
Outstanding
Weighted
Average
Grant Date
Fair Value
18.22
18.71
18.87
17.97
18.19
PSA
Shares
Outstanding
Weighted
Average
Grant Date
Fair Value
—
17.71
—
—
17.71
— $
90
—
—
90 $
1,845 $
630
(638)
(91)
1,746 $
Number of
Shares
Outstanding
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
450 $
—
—
—
450 $
350 $
13.48
—
—
—
13.48
13.48
4.45 $
4.45 $
5,555
4,321
The total intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017 was $1,985, $5,343 and
$5,121. As a result of the Company’s full valuation allowance on its net deferred tax assets, no tax benefit was recognized related to
the stock option exercises. The exercise price per share of each option is equal to the fair market value of the underlying share on the
date of grant. For 2019, 2018 and 2017, $1,202, $6,012 and $4,402 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 2019, 2018
and 2017 was $23,479, $11,864 and $6,235. The Company issues registered shares of common stock to satisfy stock option exercises
and restricted stock grants.
68
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
The Company has awarded 450 performance options to its President and Chief Executive Officer. 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. A Monte Carlo simulation was performed to estimate the
fair values, vesting terms and vesting probabilities for each tranche of options. Expense calculated using these estimates was
recognized over the estimated vesting terms. As of December 31, 2017, compensation costs related to non-vested performance options
were fully recognized.
Employee Stock Purchase Plan
The ESPP is available to eligible employees as defined in the plan document. 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 may not
purchase a value of more than 3 shares during an offering period. As of December 31, 2019, there were 491 shares available for future
issuance under the ESPP.
Valuation and Expense Information Under FASB ASC 718
The following table summarizes share-based compensation expense related to employees, directors and consultants for 2019,
2018 and 2017. The expense was allocated as follows:
Cost of revenue
Research and development expenses
Selling, general and administrative expenses
Total
The expense by award type was allocated as follows:
Restricted Stock Awards & Time-Based Stock Options
Performance Share Awards
Performance Stock Options
ESPP
Total
2019
2018
$
$
917 $
2,374
14,686
17,977 $
1,545 $
1,987
12,963
16,495 $
2017
610
2,052
11,953
14,615
$
$
2019
13,922 $
3,254
—
801
17,977 $
2018
15,032 $
766
—
697
16,495 $
2017
13,908
—
43
664
14,615
As of December 31, 2019 there was $17,971 of unrecognized compensation costs related to non-vested stock options and
restricted stock arrangements ($997 relating to stock options and $16,974 relating to restricted stock). This cost is expected to be
recognized over a weighted-average period of 1.8 years for stock options and 1.7 years for restricted stock. As of December 31, 2019
there was $6,625 of unrecognized compensation costs related to non-vested performance share awards, and this cost is expected to be
recognized over a weighted-average period of 1.6 years.
In calculating compensation expense, the fair value of restricted stock awards, restricted stock units and performance share
awards is based on the market value of the Company’s stock on the date of the awards. The fair value of the options is estimated on
the grant date using the Black-Scholes model including the following assumptions:
Range of risk-free interest rate
Range of expected life of stock options (years)
Range of expected volatility of stock
Weighted-average volatility
Dividend yield
2019
1.43-2.64 %
5.13 to 5.69
40.00 - 42.00 %
40.87 %
0.00 %
2018
2017
2.31 - 3.01 %
5.14 to 5.71
41.00 - 42.00 %
41.51 %
0.00 %
1.75 - 2.12 %
5.21 to 5.76
43.00 - 48.00 %
44.50 %
0.00 %
The Company’s estimate of volatility is based solely on the Company’s trading history over the expected option life. The risk-
free interest rate assumption is based upon the U.S. treasury yield curve at the time of grant for the expected option life. The Company
estimates the expected terms of options using historical employee exercise behavior.
69
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
Based on the assumptions noted above, the weighted average estimated grant date fair value per share of the stock options,
restricted stock awards and performance share awards granted for 2019, 2018 and 2017 was as follows:
Stock options
Restricted stock awards
Performance share awards
$
2019
2018
2017
$
11.56
30.12
30.77
$
10.97
18.71
17.71
8.60
19.38
—
18. 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 globally. Management
considers all such sales to be part of a single operating 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:
United States
Europe
Asia
Other international
Total international
Total revenue
United States revenue by product type was as follows:
Open ablation
Minimally invasive ablation
Appendage management
Total ablation and appendage management
Valve tools
Total United States
International revenue by product type was as follows:
Open ablation
Minimally invasive ablation
Appendage management
Total ablation and appendage management
Valve tools
Total international
2019
185,829 $
27,929
15,976
1,073
44,978
230,807 $
2018
162,146 $
25,912
12,687
885
39,484
201,630 $
2017
138,387
21,901
13,616
812
36,329
174,716
$
$
2019
80,205 $
34,842
68,166
183,213
2,616
185,829 $
2018
72,250 $
35,053
52,891
160,194
1,952
162,146 $
2017
64,517
34,421
37,281
136,219
2,168
138,387
2019
24,945 $
8,349
11,476
44,770
208
44,978 $
2018
21,118 $
9,176
8,988
39,282
202
39,484 $
2017
20,718
8,007
7,251
35,976
353
36,329
$
$
$
$
The Company’s long-lived assets are located primarily in the United States, except for $1,228 as of December 31, 2019 and
$1,296 as of December 31, 2018, which are located primarily in Europe.
70
ATRICURE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In Thousands, Except Per Share Amounts)
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
March 31,
June 30,
2019
2018
2019
2018
September 30,
2019
2018
December 31,
2019
2018
For the Three Months Ended
Operating Results:
Revenue
Gross profit
Loss from operations
Net loss
Net loss per share (basic and diluted)
$
$
53,966 $
39,871
(5,320)
(5,635)
(0.15) $
46,994 $
34,503
(9,430)
(10,134)
(0.31) $
58,906 $
43,893
(3,839)
(4,101)
(0.11) $
51,802 $
38,079
958
(338)
(0.01) $
56,614 $
41,797
(8,637)
(9,362)
(0.25) $
49,941 $
35,948
(6,048)
(7,235)
(0.22) $
61,321 $
44,774
(15,326)
(16,096)
(0.42) $
52,893
38,590
(2,607)
(3,430)
(0.09)
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.
71
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Beginning
Balance
Additions
Expenses
Other (1)
Deductions
Ending
Balance
Reserve for sales returns and allowances
Year ended December 31, 2019
$
1,410 $
Year ended December 31, 2018
Year ended December 31, 2017
Allowance for inventory valuation
1,169 $
834 $
Year ended December 31, 2019
$
1,029 $
Year ended December 31, 2018
Year ended December 31, 2017
Valuation allowance for deferred tax assets
889 $
1,080 $
1,004 $
369 $
312 $
441 $
848 $
718 $
2,240 $
— $
— $
40 $
71 $
106 $
— $
— $
— $
360 $
578 $
1,195 $
3,979
1,410
1,169
1,517
1,029
889
Year ended December 31, 2019
$
69,849 $
10,739 $
20,590 $
— $
101,178
Year ended December 31, 2018
Year ended December 31, 2017
66,973 $
2,876 $
81,982 $
— $
— $
— $
— $
15,009 $
69,849
66,973
(1) In connection with the acquisition of SentreHEART, the Company recognized an allowance for sales returns and refunds of
for transition to ASC 606 to reflect SentreHEART’s historical refund practices, and recorded an offsetting valuation
allowance for deferred tax assets.
72
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
The Company’s management, with the participation of the President and Chief Executive Officer (the Principal Executive
Officer) and Senior Vice President and Chief Financial Officer (the Principal Accounting and Financial Officer), has evaluated the
effectiveness of the Company’s disclosure controls and procedures as defined in Rule 13(a) – 15(e) of the Securities Exchange Act of
1934 (Exchange Act), as of the end of the period covered by this report. Based on this 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 President and Chief Executive Officer and the Senior Vice President
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
In the ordinary course of business, we routinely enhance our information systems by either upgrading current systems or
implementing new ones. There were no changes in our internal control over financial reporting that occurred during the three months
ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our 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, 2019. 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, 2019.
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.
73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of
AtriCure, Inc.
Mason, Ohio
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of AtriCure, Inc. and subsidiaries (the “Company”) as of December 31,
2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated
Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated
February 24, 2020, expressed an unqualified opinion on those financial statements.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A 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 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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 policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
February 24, 2020
74
ITEM 9B. OTHER INFORMATION
Effective February 21, 2020, the Company’s Board of Directors re-constituted its committees as follows:
Audit: Sven A. Wehrwein (Chair), Mark R. Lanning, Daniel P. Florin, B. Kristine Johnson (Ms. Johnson’s service on the Audit
Committee will end effective April 1, 2020.)
Compensation: Mark R. Lanning (Chair), Mark A. Collar, B. Kristine Johnson, Karen N. Prange
Compliance, Quality and Risk: Regina E. Groves (Chair), Sven A. Wehrwein, Robert S. White, Daniel P. Florin
Nominating and Corporate Governance: Mark A. Collar (Chair), Scott W. Drake, Robert S. White, Karen N. Prange
Strategy: Robert S. White (Chair), Regina E. Groves, B. Kristine Johnson
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 2020 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of 2019 (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, 2019.
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)
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights (2)
(b)
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
(c)
3,623,588 $
—
3,623,588 $
14
—
14
1,577,687
—
1,577,687
(1) Represents outstanding stock options, restricted stock awards, performance stock options and performance shares as of
December 31, 2019.
(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 2005 Equity Incentive Plan and 2014 Stock Incentive Plan but exclude shares purchased
under our 2018 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.
75
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:
76
Exhibit No. Description
3.1
3.2
4.1
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#
14
21
23.1
31.1
31.2
32.1
32.2
Second Amended and Restated Certificate of Incorporation (incorporated by reference to our Current Report on Form
8-K, filed on May 27, 2016).
Fourth Amended and Restated Bylaws (incorporated by reference to our Current Report on Form 8-K filed on
February 16, 2017).
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
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).
AtriCure, Inc. 2018 Employee Stock Purchase Plan (Amended and Restated effective July 1, 2019 (incorporated by
reference to our Quarterly Report on Form 10-Q, filed on July 31, 2019).
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).
Loan and Security Agreement dated as of February 23, 2018 by and among Silicon Valley Bank, AtriCure, Inc.,
AtriCure, LLC, Endoscopic Technologies, LLC and nContact Surgical, LLC (incorporated by reference to our Current
Report on Form 8-K, filed on February 26, 2018).
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).
AtriCure, Inc. 2014 Stock Incentive Plan (Amended and Restated as of May 22, 2019) (incorporated by reference to
our Current Report on Form 8-K, filed on May 28, 2019).
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 July 31, 2019).
Form of Stock Option 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 July 31, 2019).
Form of Restricted Share Unit 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 July 31, 2019).
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).
Merger Agreement dated as of August 11, 2019 among SentreHEART, Inc., AtriCure, Inc., Stetson Merger Sub, Inc.,
Second Stetson Merger Sub, LLC and Shareholder Representative Services LLC, as Representative of SentreHEART
stockholders (incorporated by reference to our Current Report on Form 8-K filed August 12, 2019).
First Loan Modification Agreement dated December 28, 2018 among AtriCure, Inc., Silicon Valley Bank, the lenders
named therein, AtriCure, LLC, Endoscopic Technologies, LLC and nContact Surgical, LLC (incorporated by reference
to our Current Report on Form 8-K filed on January 3, 2019).
Second Amendment to Loan and Security Agreement dated August 12, 2019 among AtriCure, Inc., Silicon Valley
Bank, and the other parties named therein (incorporated by reference to our Current Report on Form 8-K, filed on
August 11, 2019).
Joinder and Third Amendment to Loan and Security Agreement dated September 27, 2019 (incorporated by reference
to our Quarterly Report on Form 10-Q, filed on October 31, 2019).
Form of Performance Share Award Grant
Code of Conduct (incorporated by reference to our Annual Report on Form 10-K filed on March 1, 2019).
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.
77
XBRL Instance Document
Exhibit No. Description
101.INS
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
104
Cover Page Interactive Data File
_________________________
# Compensatory plan or arrangement.
ITEM 16. FORM 10-K SUMMARY
Not provided.
78
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 24, 2020
Date: February 24, 2020
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
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 and M. Andrew Wade, her or his attorney-in-fact, with the power of substitution, for her or 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 she or he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, and any of them
or her 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 24, 2020.
Signature
/s/ Scott W. Drake
Scott W. Drake
/s/ Michael H. Carrel
Michael H. Carrel
/s/ M. Andrew Wade
M. Andrew Wade
/s/ Mark A. Collar
Mark A. Collar
/s/ Daniel P. Florin
Daniel P. Florin
/s/ Regina E. Groves
Regina E. Groves
/s/ B. Kristine Johnson
B. Kristine Johnson
/s/ Mark R. Lanning
Mark R. Lanning
/s/ Karen N. Prange
Karen N. Prange
/s/ Sven A. Wehrwein
Sven A. Wehrwein
/s/ Robert S. White
Robert S. White
Title(s)
Scott W. Drake
Chairman of the Board
Michael H. Carrel
Director, President and Chief Executive Officer
(Principal Executive Officer)
M. Andrew Wade
Chief Financial Officer
(Principal Accounting and Financial Officer)
Mark A. Collar
Director
Daniel P. Florin
Director
Regina E. Groves
Director
B. Kristine Johnson
Director
Mark R. Lanning
Director
Karen N. Prange
Director
Sven A. Wehrwein
Director
Robert S. White
Director
79
BR04963C-0420-10K