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 section of this Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. 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.

Year Ended December 31, 2019 compared to December 31, 2018

For a comparison of our results of operations for the fiscal years ended December 31, 2019 and December 31, 2018, 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, 2019, filed with the SEC on February 24, 2020.

Overview

We are a leading innovator in treatments for atrial fibrillation (Afib) and left atrial appendage (LAA) management. We believe that we are currently the market leader in the surgical treatment of Afib. Our Isolator Synergy System is approvedby 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 radio frequency (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. The LARIAT® system is cleared for soft tissue ligation. Several of our products are currently being studied to expand labeling claims or to support indications specifically for the treatment of Afib. Many of our products 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. Certain products are also 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.

The challenging environment resulting from the COVID-19 pandemic adversely impacted our 2020 results of operations and financial condition. We experienced a significant decrease in demand for our products asnon-emergent procedures are being indeterminately deferred in order to preserve resources for COVID-19 patients and caregivers and to protect patients from potential exposure to COVID-19. In the second half of 2020, we began to see some hospitals resuming elective procedures although do not believe that most hospitals were operating at the same levels as they had historically. We continue to be impacted by the COVID-19 pandemic and believe the effect on the Company’s business differs by geography and procedure type.

We adjusted our operating plan and expect to continuously evaluate and as may be necessary, amend our operating plan as a result of the COVID-19 pandemic. We have elected to delay certain capital investments, and implemented other expense-reduction measures, including ceasing non-essential travel and conference activity, and suspending work on certain research and development projects. Adjustments to the operating plan did not include temporary or permanent reductions in headcount or to non-executive employee compensation. However, we are unable to ensure the operating plan adjustments we have made will be sufficient or sustained due to the inherent uncertainty of the unprecedented and rapidly evolving situation. We strengthened our liquidity position through a public offering and sale of our common stock. In May 2020, we completed an underwritten public offering of 4,574 shares of common stock and received net proceeds of $188,958.

Despite the challenging environment of the COVID-19 pandemic, we continued to build on our strategic initiatives of product innovation, investing in clinical science and providing training and education. Throughout 2020, we conducted several meetings with FDA as they review our PMA submission for the EPi-Sense system, and we continue to actively work with FDA to complete the regulatory process. In November 2020, we submitted our responses to FDA, seeking PMA approval of the EPi-Sense system for an indication for treatment of symptomatic, drug-refractory, long-standing persistent atrial fibrillation, when augmented with an endocardial ablation catheter. AtriCure is currently waiting for feedback from FDA. We also made meaningful progress on the aMAZE IDE trial, continuing twelve-month post treatment follow-up with patients. We have not yet experienced a significant delay in patient follow-up. In addition to the progress in clinical science initiatives, we are also progressing towards 510(k) clearance of the

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new ENCOMPASS® clamp and preparing for subsequent market launch. Our professional education and marketing teams have adapted to the pandemic by offering online and mobile trainings for physicians.

For the year ended December 31, 2020 we reported annual revenues of $206,531, a decrease of 10.5% when compared to our prior year. Our net loss for fiscal year 2020 was $48,155 as compared to $35,194 for fiscal year 2019, primarily as a result of our decrease in revenues as a result of the COVID-19 pandemic. See the “Results of Operations” section below for additional analysis of our 2020 results.

Results of Operations

Year Ended December 31, 2020 compared to December 31, 2019

The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of total revenue:

Year Ended December 31,

% of % of

Amount Revenue Amount Revenue

(dollars in thousands)

Operating expenses:

Revenue. Total revenue decreased 10.5% (10.7% on a constant currency basis) due to the deferral of non-emergent procedures as a result of the COVID-19 pandemic. Revenue from customers in the United States decreased $16,585, or 8.9%, and revenue from international customers decreased $7,691, or 17.1% (18.3% on a constant currency basis). Sales in the United States declined across all product categories. Open ablation sales decreased $4,806, or 6.0% minimally invasive (MIS) ablation sales decreased $9,195, or 26.4% and appendage management sales decreased $1,185, or 1.7%. The more severe decline in MIS ablation sales reflects the typically non-emergent nature of these procedures. However, both the AtriClip Flex·V® LAA Exclusion System (included in appendage management sales) and cryoSPHERE probe (included in open ablation sales) continued to grow in volume in 2020 despite the continued pressure of the COVID-19 pandemic. International revenue declined in both open ablation and MIS ablation products throughout our major European and Asia markets as a result of the global pandemic, offset by increases in the appendage management product line driven from increased volume of the AtriClip line.

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 decreased $3,250 driven primarily by reductions in sales. Partially offsetting the decline in cost of revenue from reduced sales are charges during the second quarter as a result of production volumes below normal operating levels and continued absorption of SentreHEART operations acquired in August 2019.

Research and development expenses. Research and development expenses increased $1,840, or 4.5%. The increase in research and development expenses is a result of $1,156 increase in share-based compensation and $777 increase in clinical activity primarily driven by the aMAZE IDE clinical trial. Increases in product development project costs offset declines in regulatory submissions and filing fees.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased $11,755, or 7.2%. Personnel costs decreased $14,726 due to a decline in variable compensation and travel as a result of decreased sales and travel restrictions. Trade show, marketing and meeting costs decreased $4,384 as activities moved to remote platforms. Other decreases in

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expenses included $3,840 of acquisition-related expenses, $1,179 of professional services fees, $533 in bad debt expense and $322 of recruiting fees. These decreases were offset by $6,000 expense recorded for the accrual of the value of the legal settlement with the former nContact stockholders, increase of $3,001 in share-based compensation and $4,559 fluctuation in the contingent consideration liability adjustment. See Note 12 – Commitments and Contingencies in the Consolidated Financial Statements for further discussion of the nContact legal settlement. See Note 3 – Fair Value in the Consolidated Financial Statements for further discussion of contingent consideration liabilities.

Other income and expense. Other income and expense consists primarily of net interest expense and foreign currency transaction gains and losses. Net interest expense was $3,784 for 2020 and $1,713 for 2019. Interest expense relates to 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 increase in net interest expense was driven by $1,297 lower interest income from lower investment yields and $774 increase in interest expense reflecting higher borrowings on the term loan due to the August 2019 amendment for the SentreHEART acquisition.

Liquidity and Capital Resources

As of December 31, 2020, we had cash, cash equivalents and investments of $258,396. All cash equivalents and investments and most of our operating cash are held in United States financial institutions. A minor portion of our cash is held in foreign banks for the operation of our international subsidiaries. Our outstanding debt was $60,000 and we had unused borrowing capacity of $8,750 under our revolving credit facility. We had net working capital of $257,600 and an accumulated deficit of $330,352 as of December 31, 2020.

Cash flows used in operating activities. We used $19,869 of net cash in operating activities during 2020, reflecting our net loss of $48,155 offset by $34,925 of non-cash expenses and a net decrease in cash used related to changes in operating assets and liabilities of $6,639. Non-cash expenses primarily included $22,642 in share-based compensation and $9,548 of depreciation and amortization. The net decrease in cash used related to changes in operating assets and liabilities was driven by the impact of COVID-19, including lower customer receivables from reduced sales volumes; increased investment in inventories to protect against potential future production disruptions; and lower payables and accrued liabilities from lower variable compensation and reduced operating activities.

Cash flows used in investing activities. We used $156,198 of net cash in investing activities during 2020, reflecting $151,739 investment activity in available-for-sale securities largely stemming from the proceeds of our May 2020 equity offering and investment of $5,259 in property and equipment to support our new product introductions and maintenance and expansion of our existing manufacturing and distribution facilities.

Cash flows provided by financing activities. We generated $189,392 of net cash from financing activities during 2020. This was primarily a result of the $188,958 net proceeds from the May 2020 public stock offering. Equity compensation plan activity included $10,835 proceeds from stock option exercises and $3,330 proceeds for the issuance of common stock under our employee stock purchase plan, offset by $13,029 shares repurchased for payment of taxes on stock awards.

Credit facility. Our Loan and Security Agreement with Silicon Valley Bank (SVB), as amended, (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. Our 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. Our 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 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, 2020, we had no borrowings under the revolving credit facility, and we had borrowing availability of $8,750. 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, 2020.

On February 8, 2021, the Company and SVB entered into an amendment to the Loan Agreement which modified conditions which allow the Company to request to defer the term loan principal payments an additional six months, commencing in September 2021, if such conditions are so satisfied. Subsequent to the amendment, the conditions were satisfied by the Company and the Company requested such deferral. As a result, borrowings outstanding under the existing term loan agreement have been classified to reflect the deferral of principal payments in the Consolidated Balance Sheet as of December 31, 2020.

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Our corporate headquarters lease agreement requires a $1,250 letter of credit which renews annually and remains outstanding as of December 31, 2020.

Uses of liquidity and capital resources. Our future capital requirements depend on a number of factors, including 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 cost 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; and possible acquisitions and joint ventures. Global economic turmoil, including the impact of the COVID-19 pandemic, has evolved rapidly over the past year and may continue to adversely impact our revenue, thus having an adverse impact on our operating results and financial condition. We continue to evaluate additional measures to maintain financial flexibility, and we will continue to closely monitor our liquidity and capital resources through the disruption caused by COVID-19.

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, depository 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. In May 2020, we completed a public offering of 4,574 shares of our common stock, and received net proceeds of $188,958 after underwriting discounts and commissions and offering costs.

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 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 SentreHEART merger agreement, 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 acquisition agreement and progress towards achievement of the related milestones.

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.

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Contractual Obligations and Commitments

The following table sets forth our approximate aggregate obligations at December 31, 2020 for future payments under contracts and other contingent commitments:

Less than More than

Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years

Restricted grants 656 656 — — —

_________________________

(1)Long-term debt represents principal repayments related to our term loan. See Note 10 – Indebtedness regarding applicable interest and fee payments.

(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 2020 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 SentreHEART acquisition. Subject to the terms and conditions of the SentreHEART merger agreement, such contingent consideration will be paid in AtriCure common stock and cash, up to a specified maximum number of shares. 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. We recognize revenue in an amount that reflects the consideration we expect to be entitled to in exchange for those devices when control of promised devices is transferred to customers. At contract inception, we assess the products promised in contracts with customers and identify a performance obligation for each promise to transfer to the customer a product that is distinct. Our 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

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the promise to transfer the products rather than as separate promises to customers. Products are sold primarily through our 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. We do 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 estimation of a provision for returns. We estimate the provision for sales returns and allowances using the expected value method based on historical experience and other factors that we believe could impact our expected returns, including defective or damaged products and invoice adjustments. In the normal course of business, we generally do not accept product returns unless a product is defective as manufactured, and we do not provide customers with the right to a refund.

Allowance for Credit Losses on Accounts Receivable—We evaluate the expected credit losses of accounts receivable, considering historical credit losses, current customer-specific information and other relevant factors when determining the allowance. An increase to the allowance for credit losses results in a corresponding increase in selling, general and administrative expenses. We charge off uncollectible receivables against the allowance when all attempts to collect the receivable have failed. Our history of write-offs 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 (FIFO) and consist of raw materials, work in process and finished goods. Our industry is characterized by rapid product development and frequent new product introductions. Uncertain timing of product approvals, variability in product launch strategies and variation in product use all impact inventory reserves for excess, obsolete and expired products. An increase to inventory reserves results in a corresponding increase in cost of revenue. Inventories are written off against the reserve when they are physically disposed.

Property and Equipment—We state property and equipment at cost less accumulated depreciation. Depreciation is computed using the straight-line method 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.

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.

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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.

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, 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 have recorded a valuation allowance against substantially all net deferred income tax assets as it is more-likely-than-not that the benefit of such deferred income tax assets will not be recognized in future periods.

We believe our critical accounting policies regarding revenue recognition, allowance for credit losses on accounts receivable, inventories, property and equipment, IPR&D intangible asset, goodwill, share-based employee compensation, 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.

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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 10.9% and 11.7% of the Company’s total revenue for the years ended December 31, 2020 and 2019. 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, 2020 and 2019, foreign currency transaction gains of $44 and $180 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 and agency obligations, 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.

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, 2020, $41,694 of the cash and cash equivalents balance was in excess of FDIC limits.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ATRICURE, INC. AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

Page

Financial Statements:

Report of Independent Registered Public Accounting Firm 44

Consolidated Balance Sheets 47

Consolidated Statements of Operations and Comprehensive Loss 48

Consolidated Statements of Stockholders’ Equity 49

Consolidated Statements of Cash Flows 50

Notes to Consolidated Financial Statements 51

Financial Statement Schedule:

Schedule II Valuation and Qualifying Accounts 73

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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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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 26, 2021, 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 Contingent Consideration Pursuant to the SentreHEART Merger Agreement - Refer to Note 3 to the financial statements

Critical Audit Matter Description

The Company has a contingent consideration arrangement of $184.8 million as of December 31, 2020 arising from the 2019 SentreHEART acquisition which obligates the Company to pay former shareholders of the acquired company certain amounts if specified future events occur or conditions are met, such as the achievement of certain regulatory or reimbursement milestones (“milestones”). The Company measured the liability associated with the contingent consideration arrangement 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”), are used in the determination of fair value of the contingent consideration arrangement and are not observable in the market, thus representing a Level 3 measurement within the fair value hierarchy. Given that the valuation of the contingent consideration arrangement 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.

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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 the contingent consideration arrangement included the following, among others:

We inquired of management and the Company’s clinical research personnel to understand each milestone and key assumptions, 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 contingent consideration arrangement, including consideration of the impact on assumptions from the COVID-19 pandemic.

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.

Valuation of the In Process Research and Development Intangible Asset Pursuant to the nContact Merger Agreement — Refer to Note 6 to the financial statements

Critical Audit Matter Description

The Company has an in process research and development (IPR&D) intangible asset arising from the 2015 nContact acquisition in the amount of $44.0 million. On at least an annual basis, the Company performs impairment testing on the IPR&D intangible asset, by comparing the carrying value to the estimated fair value. An impairment charge is required if the carrying value of the IPR&D intangible asset is in excess of the estimated fair value. Estimated fair value is measured using the excess earnings method and key cash flow assumptions, such as revenue growth rates, related profit margins, and obsolescence rates (“key cash flow assumptions”). Given that the determination of the estimated fair value of the IPR&D intangible asset required management to make significant estimates related to key cash flows assumptions, auditing these key cash flow assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the Company’s key assumptions used in the determination of the fair value of the IPR&D intangible asset arising from the 2015 nContact acquisition included the following, among others:

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 management’s estimates of key cash flow assumptions used in the valuation of the IPR&D intangible asset.

We evaluated whether the key cash flow assumptions used were reasonable by considering industry data and current market forecasts, including consideration of the effects of the COVID-19 pandemic, 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.

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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.

/s/ Deloitte & Touche LLP

Cincinnati, Ohio

February 26, 2021

We have served as the Company's auditor since 2002.

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ATRICURE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2020 and 2019

(In Thousands, Except Per Share Amounts)

Assets

Current assets:

Prepaid and other current assets 4,347 3,899

Operating lease right-of-use assets 1,914 4,032

Other noncurrent assets 440 705

Liabilities and Stockholders’ Equity

Current liabilities:

Other current liabilities and current maturities of debt and leases 8,417 2,218

Contingent consideration and other noncurrent liabilities 187,424 186,417

Commitments and contingencies (Note 12)

Stockholders’ Equity:

Accumulated other comprehensive income (loss) 312 (158)

Total Liabilities and Stockholders’ Equity $ 714,539 $ 557,880

See accompanying notes to consolidated financial statements.

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ATRICURE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

YEARS ENDED DECEMBER 31, 2020, 2019 and 2018

(In Thousands, Except Per Share Amounts)

Operating expenses:

Other income (expense):

Basic and diluted net loss per share $ (1.14) $ (0.94) $ (0.62)

Weighted average shares outstanding – basic and diluted 42,125 37,589 34,087

Comprehensive loss:

Unrealized (loss) gain on investments $ (46) $ 137 $ (31)

Foreign currency translation adjustment 516 (96) (202)

Other comprehensive income (loss) 470 41 (233)

See accompanying notes to consolidated financial statements.

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ATRICURE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2020, 2019, and 2018

(In Thousands)

Accumulated

Additional Other Total

Common Stock Paid-in Accumulated Comprehensive Stockholders’

Shares Amount Capital Deficit Income (Loss) Equity

Issuance of common stock under equity incentive plans 781 1 1,554 — — 1,555

Share-based employee compensation expense — — 16,495 — — 16,495

Other comprehensive loss — — — — (233) (233)

Issuance of common stock for SentreHEART acquisition 699 1 20,306 — — 20,307

Issuance of common stock under equity incentive plans 248 — (7,831) — — (7,831)

Share-based employee compensation expense — — 17,977 — — 17,977

Other comprehensive income — — — — 41 41

Share-based employee compensation expense — — 22,642 — — 22,642

Other comprehensive income — — — — 470 470

See accompanying notes to consolidated financial statements.

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ATRICURE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2020, 2019 and 2018

(In Thousands)

Cash flows from operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Amortization of deferred financing costs 509 375 515

Loss on disposal of property and equipment and impairment of assets 277 604 323

Amortization (accretion) of investments 1,236 (922) (362)

Change in fair value of contingent consideration (357) (4,916) (10,825)

Changes in operating assets and liabilities, net of amounts acquired:

Other noncurrent assets and liabilities 484 (962) 131

Cash flows from investing activities:

Proceeds from sale of property and equipment — 39 6

Proceeds from capital grant 800 — —

Cash paid for SentreHEART business combination — (17,240) —

Cash flows from financing activities:

Payments on debt and finance leases (667) (629) (1,755)

Shares repurchased for payment of taxes on stock awards (13,029) (9,033) (4,457)

Proceeds from economic incentive loan — 500 —

Effect of exchange rate changes on cash and cash equivalents 136 (163) (179)

Net increase (decrease) in cash and cash equivalents 13,461 (3,748) 10,422

Supplemental cash flow information:

Non-cash investing and financing activities:

Contingent consideration in business combinations — 171,300 —

Stock issuance in business combinations — 20,307 —

Share-settled portion of contingent consideration — — 6,279

Accrued purchases of property and equipment 298 1,053 348

Assets obtained in exchange for finance lease obligations 22 270 24

Finance lease early termination — — (6)

See accompanying notes to consolidated financial statements.

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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 and agency obligations, 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.

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, 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 Credit Losses on Accounts Receivable—The Company evaluates the expected credit losses of accounts receivable, considering historical credit losses, current customer-specific information and other relevant factors when determining the allowance. An increase to the allowance for credit losses results in a corresponding increase in selling, general and administrative expenses. The Company charges off uncollectible receivables against the allowance when all attempts to collect the receivable have failed. The Company’s history of write-offs has not been significant.

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. Uncertain timing of product approvals, variability in product launch strategies and variation in product use all impact inventory reserves for excess, obsolete and expired products. An increase to inventory reserves results in a corresponding increase in cost of revenue. Inventories are written off against the reserve when they are physically disposed.

Property and Equipment—Property and equipment is stated at cost less accumulated depreciation. Depreciation is 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.

Leases—The Company determines if an arrangement is a lease at inception of the contract. The Company applies the short-term lease recognition exemption, recognizing lease payments in profit or loss for leases that have a lease term of 12 months or less at commencement and do not include a purchase option whose exercise is reasonably certain. Operating leases are included in operating lease right-of-use (ROU) assets, other current liabilities and current maturities of debt and leases, and operating lease liabilities. Finance leases are included in property and equipment, other current liabilities and current maturities of debt and leases, and finance lease liabilities.

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are measured and recorded at the commencement date based on the present value of lease payments over the lease term. The operating lease ROU asset excludes lease incentives. The Company uses the implicit rate when readily determinable, however, most of the leases do not provide an implicit rate and therefore, the Company uses the incremental borrowing rate based on the information available at measurement. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. For real estate and equipment leases, the Company accounts for the lease and non-lease components as a single lease component. Additionally, the portfolio approach is applied to effectively account for the operating lease ROU assets and liabilities based on the term of the underlying lease. Lease expense is recognized on a straight-line basis over the lease term. See Note 11 for further discussion.

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 could result from the CONVERGE IDE and aMAZE IDE clinical trials. If the IPR&D project is abandoned or regulatory approvals are not obtained, the Company 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.

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 or more often if impairment indicators are present.

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 payroll taxes as a result of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), 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 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.

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. 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 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.

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

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 2,301, 3,623 and 3,869 stock options, restricted stock awards, restricted stock units and performance share awards as of December 31, 2020, 2019 and 2018 because they are anti-dilutive. Therefore, the number of shares calculated for basic net loss per share is also used for the diluted net loss per share calculation.

Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)—In addition to net losses, the comprehensive income/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):

Unrealized gains (losses) on investments

Balance at beginning of period $ 100 $ (37) $ (6)

Other comprehensive (loss) income before reclassifications (70) 137 (31)

Balance at end of period $ 54 $ 100 $ (37)

Foreign currency translation adjustment

Balance at beginning of period $ (258) $ (162) $ 40

Other comprehensive income (loss) before reclassifications 555 (277) (367)

Balance at end of period $ 258 $ (258) $ (162)

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, scientific and regulatory affairs.

Advertising Costs— The Company expenses advertising costs as incurred. Advertising expense was $655, $635 and $785 during the years ended December 31, 2020, 2019 and 2018.

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 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.

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

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 and agency obligations, accounts receivable, short-term other assets, accounts payable and accrued liabilities as Level 1. The carrying amounts of these assets and liabilities approximate their fair value due to their relatively short-term nature. Cash equivalents and investments in corporate bonds, repurchase agreements, commercial paper and asset-backed securities are classified as Level 2 within the fair value hierarchy. The fair value of fixed term debt is estimated by calculating the net present value of future debt payments at current market interest rates and is classified as Level 2. The book value of the Company’s fixed term debt approximates its fair value because the interest rate varies with market rates. Significant unobservable inputs with respect to the fair value measurements of the Level 3 contingent consideration liabilities are developed using Company data. See Note 3 – Fair Value for further information on fair value measurements.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued Accounting Standard Update (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 Company has applied the new requirements by calculating and recording an allowance for credit losses on trade receivables as of January 1, 2020. As a result of the adoption, the Company adjusted its allowance for credit losses on trade receivables; however, the adjustment did not have a material impact on its consolidated financial statements and related disclosures.

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 annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted, and applied prospectively. The Company has adopted this guidance as of January 1, 2020, and the adoption of this standard did not have a material impact on its consolidated financial statements and related disclosures.

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.

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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, 2020:

Quoted Prices

in Active Significant Significant

Markets for Other Other

Identical Observable Unobservable

Assets Inputs Inputs

(Level 1) (Level 2) (Level 3) Total

Assets:

U.S. government and agency obligations 45,399 — — 45,399

Liabilities:

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 Significant Significant

Markets for Other Other

Identical Observable Unobservable

Assets Inputs Inputs

(Level 1) (Level 2) (Level 3) Total

Assets:

U.S. government and agency obligations 8,539 — — 8,539

Liabilities:

There were no changes in the levels or methodology of measurement of financial assets and liabilities during the years ended December 31, 2020 and 2019.

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

Contingent Consideration. The Company has contingent consideration arrangements arising from the nContact and SentreHEART acquisitions.

Contingent consideration arrangements under the nContact merger agreement obligated the Company to pay former shareholders of nContact up to $50,000 for the completion of enrollment of the CONVERGE IDE trial (Trial Enrollment Milestone) and corresponding PMA approval by December 31, 2020 (Regulatory Milestone). nContact shareholders were also entitled to additional sales-based contingent consideration on revenue in excess of an annual growth rate of more than 25% over a specified baseline through 2019 (Commercial Milestone). No payments were made under the Commercial Milestone for calendar years 2016 through 2019 as revenues did not exceed the targets for these years. The Company completed patient enrollment on August 21, 2018, and cash payment of $1,221 and issuance of 232 shares of common stock was made to former nContact shareholders for the Trial Enrollment Milestone on September 20, 2018. No payments were made for the Regulatory Milestone as the Company did not obtain PMA approval from FDA for the Epi-Sense Guided Coagulation System as of December 31, 2020. Therefore, as of December 31, 2020, the terms of the contingent consideration arrangements under the nContact merger agreement expired and the underlying fair value is $0.

Contingent consideration arrangements under the SentreHEART merger agreement obligate the Company to pay former shareholders of SentreHEART for the following milestones, if achieved:

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 exclusion 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 American Medical Association approval of a Medicare Category 1 Current Procedural Terminology (CPT) Code. 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 6,322, representing total shares that may be issued in connection with the merger of 7,021 less 699 shares paid at closing. The maximum contingent consideration payable by AtriCure will not exceed $260,000.

The Company measures contingent consideration liabilities using unobservable inputs by applying the probability-weighted scenario method, an income approach. Various key assumptions, such as the probability and timing of achievement of the agreed milestones, 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, 2020:

Weighted average

Fair Value Valuation Technique Input Range by relative fair value

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 nContact contingent consideration was remeasured to $0 during 2020 and expired as of December 31, 2020 without meeting the regulatory milestone. The fair value of the SentreHEART contingent consideration was remeasured during 2020 resulting in an increase in fair value due to accretion and changes in estimates related to the forecasted timing of achievement of the milestones.

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

The following table represents the Company’s Level 3 fair value measurements using significant other unobservable inputs for acquisition-related contingent consideration for each of the years ended December 31:

Settlement of trial enrollment milestone — — (7,500)

Contingent consideration liabilities are classified as noncurrent liabilities primarily based on expected timing of payments and the Company expects to settle the majority of the milestone payments in stock.

4. INVESTMENTS

Investments as of December 31, 2020 consisted of the following:

Unrealized

Gains

Cost Basis (Losses) Fair Value

Investments as of December 31, 2019 consisted of the following:

Unrealized

Gains

Cost Basis (Losses) Fair Value

U.S. government and agency obligations 8,529 10 8,539

The Company has not experienced any significant realized gains or losses on its investments in the years ended December 31, 2020, 2019 and 2018.

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 IDE 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 a $768 adjustment received by the Company in November 2019. The merger

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agreement also provides for the Company to pay contingent consideration 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, fair value of $171,300 was recorded for the SentreHEART contingent consideration. See Note 3 for further details regarding the SentreHEART acquisition-related contingent consideration. 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, including the total number of shares that may be issued in connection with the merger. 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 fair value assigned to each class of 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 $ 20,307

Fair value of contingent consideration liabilities 171,300

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. Most assumptions are not observable in the market, and thus represent a Level 3 measurement within the fair value hierarchy. See Note 3 for discussion of unobservable inputs.

The following table summarizes the fair values of the assets acquired and the liabilities assumed based on the information that was available as of the acquisition date:

Current assets 328

Operating lease right-of-use asset 2,929

Property and equipment 94

Other assets 202

Total identifiable assets $ 87,971

Current liabilities $ 5,719

Operating lease liability 2,929

Total liabilities assumed $ 8,648

Net identifiable assets acquired $ 79,323

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. 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

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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:

Amortization

Term

Valuation (in years)

Developed technology $ 270 15

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 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 2019 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 $138 and $3,978 of acquisition-related costs in the years ended December 31, 2020 and 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.

Year Ended

December 31,

(unaudited)

Basic and diluted net loss per share $ (1.09) $ (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.

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6. INTANGIBLE ASSETS AND GOODWILL

The following table provides a summary of the Company’s intangible assets at December 31:

Estimated Accumulated Accumulated

Useful Life Cost Amortization Cost Amortization

Amortization expense related to intangible assets with definite lives, which excludes the IPR&D asset, was $1,682, $1,943 and $1,510 for the years ended December 31, 2020, 2019 and 2018.

Future amortization expense is projected as follows:

The Company expects to begin amortizing the $44,021 IPR&D asset that represents the fair value of the PMA approval from the CONVERGE IDE clinical trial in 2021.

The following table provides a summary of the Company’s goodwill, which is not amortized, but rather tested annually for impairment:

Additions —

7. INVENTORIES

Inventories consisted of the following at December 31:

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8. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31:

Generators and other capital equipment 1-3 years $ 18,669 $ 20,167

Computer and other office equipment 3 years 8,045 7,606

Machinery, equipment and vehicles 3-7 years 6,697 5,905

Equipment under finance leases 3-5 years 409 483

Property and equipment depreciation expense was $7,866, $7,423 and $7,244 for the years ended December 31, 2020, 2019 and 2018. Depreciation related to generators and other capital equipment was $2,503, $2,910 and $3,191 for fiscal years 2020, 2019 and 2018. As of December 31, 2020 and 2019, the net carrying value of generators and other capital equipment was $3,410 and $4,272.

9. ACCRUED LIABILITIES

Accrued liabilities consisted of the following at December 31:

Accrued payroll and employee-related expenses $ 8,576 $ 6,748

Accrued legal settlement 6,000 —

Accrued taxes and value-added taxes payable 1,256 1,658

Other accrued liabilities 406 59

10. INDEBTEDNESS

Credit Facility. The Company has a Loan and Security Agreement (Loan Agreement) with Silicon Valley Bank (SVB), which includes a $60,000 term loan and $20,000 revolving line of credit. 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 $495 accrued in the outstanding loan balance as of December 31, 2020. Additionally, the unamortized original financing costs related to the term loan of $393 are netted against the outstanding loan balance in the Consolidated Balance Sheets and are amortized ratably over the term of the Loan Agreement.

The revolving line of credit is subject to an annual facility fee of 0.15% 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. As of December 31, 2020, the Company had no borrowings under the revolving credit facility and had borrowing availability of $8,750. Financing costs related to the

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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.

On April 29, 2020, the Company and SVB entered into an amendment to the Loan Agreement which modified a covenant related to the Company’s liquidity ratio through the third quarter 2020 testing date and increased the early termination fees for both the term loan and revolving line of credit. The amendment was treated as a debt modification.

On February 8, 2021, the Company and SVB entered into an amendment to the Loan Agreement which modified conditions which allow the Company to request to defer the term loan principal payments an additional six months, commencing in September 2021, if such conditions were satisfied. Additionally, the covenant reporting requirements were modified. The amendment was treated as a debt modification. Subsequent to the amendment, the conditions were satisfied by the Company and the Company requested such deferral. As a result, borrowings outstanding under the existing term loan agreement have been classified to reflect the deferral of principal payments in the Consolidated Balance Sheet as of December 31, 2020.

Future principal payments of long-term debt are projected as follows:

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.

11. LEASES

The Company has operating and finance leases for corporate offices, manufacturing and warehouse facilities and computer equipment. The Company’s leases have remaining lease terms of one year to ten years. Options to renew or extend leases beyond their initial term have been excluded from measurement of the ROU assets and lease liabilities for the majority of leases as exercise is not reasonably certain.

The weighted average remaining lease term and the discount rate for the reporting periods is as follows:

Operating Leases

Weighted average remaining lease term (years) 3.2 3.5

Weighted average discount rate 5.68 % 5.94 %

Finance leases

Weighted average remaining lease term (years) 9.7 11.0

Weighted average discount rate 6.91 % 7.05 %

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, 2020.

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The components of lease expense are as follows:

Year Ended Year Ended

Finance lease cost:

Amortization of right-of-use assets 1,050 998

Interest on lease liabilities 844 872

Short term lease expense was not significant during the twelve months ended December 31, 2020 and 2019.

Supplemental cash flow information related to leases is as follows:

Year Ended Year Ended

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows for operating leases $ 1,236 $ 1,026

Operating cash flows for finance leases 844 872

Financing cash flows for finance leases 664 629

Right-of-use assets obtained in exchange for lease obligations:

Operating lease right-of-use asset obtained in business combination — 2,929

Early termination of operating lease 2,743 —

Supplemental balance sheet information related to leases is as follows:

Operating Leases

Operating lease right-of-use assets $ 1,914 $ 4,032

Other current liabilities and current maturities of debt and leases 927 1,465

Total operating lease liabilities $ 2,107 $ 4,261

Finance Leases

Other current liabilities and current maturities of debt and leases $ 823 $ 753

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Maturities of lease liabilities as of December 31, 2020 are as follows:

Operating Leases Finance Leases

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 2025, while the other agreement remains in effect the later of 2023 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 $2,596, $2,892 and $2,715 was recorded as part of cost of revenue for the years ended December 31, 2020, 2019 and 2018.

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.

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.

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 required 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 representatives 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 additional items and products that the Company has not included in its earnout statements. During February 2021, the Company entered into a settlement agreement with the former nContact stockholders requiring payment of $6,000. The Company has recorded the $6,000 settlement as a component of current liabilities as of December 31, 2020 as the underlying cause occurred prior to December 31, 2020.

13. REVENUE

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

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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 $1,192, $1,485 and $1,236 in 2020, 2019 and 2018.

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 estimation of a provision for returns. We estimate the provision for sales returns and allowances using the expected value method based on historical experience and other factors that we believe could impact our expected returns, including defective or damaged products and invoice adjustments. In the normal course of business, the Company generally does not accept product returns unless a product is defective as manufactured. The Company does not provide customers with the right to a refund.

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.

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 valuation allowance against substantially all its net deferred tax assets as it is more likely than not that the benefit of the deferred tax assets will not be recognized in future periods.

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(In Thousands, Except Per Share Amounts)

The Company’s provision for income taxes for each of the years ended December 31 is as follows:

Current Tax Expense

Deferred Tax Expense

Total deferred tax expense (12) 26 51

The detail of deferred tax assets and liabilities at December 31 is as follows:

Deferred tax assets (liabilities):

Research and development and AMT credit carryforwards, net 9,365 8,193

Property and equipment, net (1,315) (1,482)

Finance and operating lease liabilities 3,164 4,016

The Company has federal net operating loss carryforwards of $339,699 which have expirations between 2021 and 2037 and $116,485 which has no expiration. The Company has state and local net operating loss carryforwards of $301,983 with varying expirations from 2021 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 $9,365 which have expirations between 2022 and 2040. Additionally, the Company has foreign net operating loss carryforwards of approximately $49,714 which have expirations between 2021 and 2027. 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.

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(In Thousands, Except Per Share Amounts)

The Company’s 2020, 2019 and 2018 effective income tax rates differ from the federal statutory rate as follows:

The Company’s pre-tax book loss for domestic and international operations was $(43,218) and $(4,823) for 2020, $(28,002) and $(6,993) for 2019 and $(13,443) and $(7,468) for 2018.

The Company had undistributed earnings of foreign subsidiaries of approximately $235 at December 31, 2020. The Company does not consider these earnings as permanently reinvested and has determined that no current and deferred taxes are required on such amounts.

Federal, state and local tax returns of the Company are routinely subject to examination by various taxing authorities. Federal income tax returns for periods beginning in 2017 are open for examination. Generally, state and foreign income tax returns for periods beginning in 2016 are open for examination. However, taxing authorities have the ability to adjust net operating loss and tax credit carryforwards from years prior to these periods. The Company has not recognized certain tax benefits because of the uncertainty of realizing the entire value of the 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 2020, 2019 and 2018 is presented below:

Increases (decreases) for prior year tax positions 21 620 —

Increases (decreases) for current year tax positions — — —

Increases (decreases) related to settlements — — —

Decreases related to statute lapse — — —

For 2019, 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 that, if recognized, would affect the effective tax rate. The balance of unrecognized tax benefits at December 31, 2020 and 2019 includes $1,798 and $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, 2020.

15. CONCENTRATIONS

During 2020, 2019 and 2018, approximately 10.8%, 12.0% and 10.8% of the Company’s total net revenue was derived from its top ten customers. During 2020, 2019 and 2018 no individual customer accounted for more than 10% of the Company’s revenue.

As of December 31, 2020 and 2019, 13.0% and 16.5% 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, 2020 and 2019.

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(In Thousands, Except Per Share Amounts)

The Company maintains cash and cash equivalents balances at financial institutions which at times exceed FDIC limits. As of December 31, 2020, $41,694 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 2020, 2019 and 2018, 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 2020, 2019 and 2018 were $2,237, $1,915 and $1,560. 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 2020, 2019 or 2018. 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 $244, $248 and $243 in 2020, 2019 and 2018.

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 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, 2020, 12,899 shares of common stock had been reserved for issuance under the 2014 Plan and 1,932 shares were available for future grants.

Stock options, restricted stock awards, and restricted stock units granted generally vest at a rate of 33.3% on the first, second and third anniversaries of the grant date. Stock options 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.

In 2012 the Company granted 450 performance options to its President and Chief Executive Officer pursuant to his Employment Agreement. 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. As of December 31, 2020, all of the performance options vested. 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.

The Compensation Committee approved the grant of performance share awards to the Company’s Executive Leadership Team pursuant to the Company’s 2014 Plan. The form of award agreement for the PSAs (PSA Grant Form) provides, among other things, that each PSA that vests represents the right to receive one share of the Company’s common stock at the end of the performance period. With respect to the PSAs, the number of shares that vest and are issued to the recipient is based upon the Company’s performance as measured against the specified performance target at the end of the three-year performance period as determined by the Compensation Committee. Established threshold, target and maximum payout opportunities, which may range from 0% to 200% of the target amount, are used to calculate the number of shares that will be issuable when the award vests. Additionally, 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). 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.

In 2020, the Compensation Committee modified the methodology for measuring performance of the 2018, 2019, and 2020 performance awards. As a result of the modification which impacted the vesting conditions and performance measures related to the awards, the incremental compensation cost resulting from the modification is $4,162, of which $569 is reflected in the year ended December 31, 2020.

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(In Thousands, Except Per Share Amounts)

Activity under the plans during 2020 was as follows:

Weighted

Weighted Average

Number of Average Remaining Aggregate

Shares Exercise Contractual Intrinsic

Time-Based Stock Options Outstanding Price Term Value

Weighted Weighted

ATRC US Equity

ATRC · 10-K · period ended 2020-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ATRC US Equity☆

ATRC · 10-K · period ended 2020-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ATRC US Equity