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.)

Changes from Prior Periodic Reports

In November 2020, the SEC issued Release No. 33-10890, "Management's Discussion and Analysis, Selected Financial Data and Supplementary Financial Information" which became fully effective on August 9, 2021. This release was adopted to modernize, simplify and enhance certain financial disclosure requirements in Regulation S-K. Specifically, the SEC eliminated the requirement for selected financial data, only requiring quarterly disclosure when there are retrospective changes affecting comprehensive income, and amending Management's Discussion and Analysis ("MD&A") to, among other things, eliminate the requirement of the contractual obligations table. Information on our contractual obligations is still disclosed in the narrative within Item 7 of Part II of this report.

These changes are required for any annual period subsequent to the effective date of August 9, 2021. As such, we have adopted these changes in this report.

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 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. 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, 2020 compared to December 31, 2019

For a comparison of our results of operations for the years ended December 31, 2020 and December 31, 2019, 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 year ended December 31, 2020, filed with the SEC on February 26, 2021.

Overview

We are a leading innovator in treatments for atrial fibrillation (Afib), left atrial appendage (LAA) management and post-operative pain. We believe that we are currently the market leader in the surgical treatment of Afib. Our Isolator® SynergyTM Ablation System is approved by the United States Food and Drug Administration (FDA) for the treatment of persistent and long-standing persistent Afib concomitant to other open-heart surgical procedures. The EPi-Sense® System is approved by FDA to treat patients with long-standing persistent Afib. 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, or Cryo Nerve Block therapy. Further, certain cryoablation probes are approved for the ablation of the intercostal nerves to temporarily block pain in adolescents aged 12 or older. Our AtriClip® LAA Exclusion System products are 510(k)-cleared with an indication for the exclusion of the LAA, performed under direct visualization and in conjunction with other cardiac surgical procedures. Direct visualization, in this context, requires that the surgeon is able to see the heart directly, with or without assistance from a camera, endoscope or other appropriate viewing technologies. In July 2021, we received 510(k) clearance for the new ENCOMPASS® clamp to ablate cardiac tissue during surgery. The LARIAT® system is cleared under the 510(k) process 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. Our Isolator Synergy clamps, Isolator Synergy pens, Coolrail® linear pen, cryoablation devices, cryoSPHERE® probe, certain products of the AtriClip LAA Exclusion System, COBRA Fusion® Ablation System, the EPi-Sense® system and LARIAT Suture Delivery Device bear the CE mark and may be commercially distributed throughout the member states of the European Union and other countries that comply with or mirror the Medical Device Directive. Our Isolator Synergy clamps, Isolator Synergy pens, Coolrail linear pen, cryoablation devices and certain products of the AtriClip LAA Exclusion System are available in select Asia-Pacific countries. We anticipate that substantially all of our revenue for the foreseeable future will relate to products we currently sell or are in the process of developing.

We sell our products to medical centers through our direct sales force in the United States and in certain international markets, such as Germany, France, the United Kingdom and the Benelux region. We also sell our products to distributors who in turn sell our products to medical centers in other international markets. Our business is primarily transacted in U.S.

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Dollars with the exception of transactions with our European and United Kingdom customers, which are transacted primarily in the Euro or the British Pound.

Throughout 2020 and periods of 2021, we experienced a significant decrease in demand for our products as non-emergent procedures were being indeterminately deferred in order to preserve resources for COVID-19 patients and caregivers. While we saw many regions stabilize during 2021 with improvements in procedure volumes, there continues to be variability throughout our markets and uncertainty as variants of the virus emerge. For the year ended December 31, 2021, we reported annual revenues of $274,329, an increase of 32.8% when compared to our prior year. We can make no assurance regarding any future level of demand for our products, and COVID-19 may adversely impact our results of operations and financial condition.

We are continuing to serve our customers while taking every precaution to provide a safe work environment for our employees and customers. Field-based sales and clinical employees continue to support cases, using technology to engage with customers in virtual settings when physical access is restricted. We are maintaining manufacturing and fulfillment operations to continue providing products to our customers. We continue to modify our remote working protocols and evaluate hybrid work models for our office-based employees, and we will take further actions in the best interests of our employees or as required by law.

Despite the challenging environment resulting from the pandemic, we continue to build on our strategic initiatives of product innovation, investing in clinical science and providing superior training and education.

PRODUCT INNOVATION. In July 2021, we received 510(k) clearance for the new ENCOMPASS® clamp, and we have initiated a limited product launch. The ENCOMPASS clamp marks innovation in our core open ablation market, and is expected to drive deeper penetration of cardiac surgery procedures. During 2021, our cryoSPHERE probe for Cryo Nerve Block was approved for CE marking.

CLINICAL SCIENCE. We continue to invest in studies to expand labeling claims, support indications for the treatment of Afib and other arrhythmias and stroke, and gather clinical data regarding our products.

In January 2021, we announced 510(k) clearance of additional labeling claims for Cryo Nerve Block therapy to include the treatment of adolescent patients (12-21 years of age).

In April 2021, we received PMA approval of the EPi-Sense System for treatment of symptomatic, drug-refractory, long-standing persistent atrial fibrillation, when augmented with an endocardial ablation catheter. We believe the Convergent procedure, or Hybrid AF therapy, provides the only compelling treatment option for a large and vastly underpenetrated patient population. The CONVERGETM trial demonstrated superiority in the hybrid therapy arm compared to endocardial catheter ablation alone. In patients diagnosed with long-standing persistent Afib, the hybrid therapy arm showed a 29% absolute difference in efficacy at 12 months (78% relative improvement) and an absolute difference of 35% at 18 months (110% relative improvement). There was also a 33% absolute difference in Afib burden reduction in favor of the Hybrid AF therapy at 12 months, which increased to 37% at 18 months.

In July 2021, we were informed that data from the aMAZE clinical trial did not achieve statistical superiority. Specifically, while the trial met the safety endpoint, the trial did not meet the primary efficacy endpoint. As a result, we identified indicators of impairment for the related IPR&D asset that represented an estimate of the fair value of the PMA that could have resulted from the aMAZE clinical trial and recorded an impairment charge of $82,300. Additionally, the contingent consideration arrangements arising from the SentreHEART acquisition include success-based milestone payments. We assessed the projected probability of payment during the contractual achievement periods to be remote, resulting in no remaining fair value. The $184,800 change in fair value of the contingent consideration was credited to operating expenses in 2021.

TRAINING. Our professional education and marketing teams have adapted to the pandemic by conducting online and mobile trainings for physicians and our sales team. These adaptations expanded our training methods and ensured invaluable access to continuing education and awareness of our products and related procedures. The recent FDA approval of the EPi-Sense System has enabled us to educate and train physicians on the benefits of Hybrid AF therapy in treating long-standing persistent Afib patients. The first of several training courses were offered beginning in June 2021.

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Results of Operations

Year Ended December 31, 2021 compared to December 31, 2020

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 (benefit) expenses:

Change in fair value of contingent consideration (184,800) (67.4) (357) (0.2)

Intangible asset impairment 82,300 30.0 — —

Revenue. Total revenue increased 32.8% (32.4% on a constant currency basis) reflecting a recovery of cardiac surgery procedure volumes during 2021 from the significant impact of COVID-19 during 2020 within each franchise and across our key markets globally, as well as further adoption of our products. Revenue from customers in the United States increased $59,887, or 35.4%, across all product categories. Open ablation sales increased $18,496, or 24.5%, primarily as a result of increased adoption of our Cryo Nerve Block therapy as well as volume increases in legacy products. Minimally invasive (MIS) ablation sales increased $13,733, or 53.5%, reflecting the rebound in elective procedures in 2021, as well as Hybrid AF therapy procedure growth from the PMA approval of the EPi-Sense System in late April 2021. Appendage management sales increased $27,587, or 41.2% due to volume growth in the AtriClip Flex·V® and AtriClip Pro·V® devices and other AtriClip products. International revenue increased $7,911, or 21.2% (19.1% on a constant currency basis) throughout our major European and Asia markets. International revenues increased from both ablation and appendage management product sales due to a lessening impact of COVID-19 in 2021.

Revenue reported on a constant currency basis is a non-GAAP measure and is calculated by applying previous period foreign currency (Euro) exchange rates, which are determined by the average daily Euro to Dollar exchange rate, to each of the comparable periods. Revenue is analyzed on a constant currency basis to better measure the comparability of results between periods. Because changes in foreign currency exchange rates have a non-operating impact on revenue, we believe that evaluating growth in revenue on a constant currency basis provides an additional and meaningful assessment of revenue to both management and investors.

Cost of revenue and gross margin. Cost of revenue increased $11,247 primarily reflecting revenue growth. The gross margin improvement of 270 basis points was driven by our return to normal production activity in 2021, leverage from higher revenue and favorable geographic and product mix, offset by inventory management charges related to the LARIAT system.

Research and development expenses. Research and development expenses increased $5,436, or 12.6%. Personnel costs, including variable compensation, travel and share-based compensation, increased $6,289 as a result of additional headcount as we continued to expand our product development, regulatory and clinical teams throughout 2021. Commencement of amortization of the technology asset related to the PMA resulting from the CONVERGE IDE clinical

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trial drove increased depreciation and amortization expenses of $1,221. Offsetting these increases were decreases in product development project costs of $997 and clinical trial costs of $806.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $53,820, or 35.7%. Personnel costs increased $47,161 due to an increase in headcount, variable and share-based compensation, as well as a return in travel expenses. During 2021, quarantine and travel restrictions lifted, allowing for more live events. This, along with additional training activities upon the CONVERGE PMA approval in April 2021, drove an increase in training expenses of $5,754, while tradeshow and marketing activities increased $1,322 as compared to the prior year. Other expense drivers include a $1,769 rise in operating costs, including organization meetings, facility expenses and dues and subscriptions; a $1,776 increase in professional services fees, corporate costs and consulting fees; $1,717 of additional legal expenses and a $958 increase in product samples and demos expense. These increases were offset in part by a decrease of $6,000 recorded in the prior year for the accrual of the value of the legal settlement with the former nContact stockholders. See Note 11 – Commitments and Contingencies in the Consolidated Financial Statements for further discussion of the nContact legal settlement.

Change in fair value of contingent consideration. The credit to operating expenses during the year ended December 31, 2021 reflects a change in the forecasted timing and probability of achievement of the regulatory and reimbursement milestones related to the aMAZE clinical trial. See Note 3 of the Consolidated Financial Statements for further discussion.

Impairment of intangible assets. During the year ended December 31, 2021, the Company recorded an impairment charge for the IPR&D asset associated with the aMAZE PMA. See Note 5 of the Consolidated Financial Statements for further discussion.

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 $4,452 for 2021 and $3,784 for 2020. 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 lower interest income from lower investment yields and a lower investment balance.

Liquidity and Capital Resources

As of December 31, 2021, we had cash, cash equivalents and investments of $223,428 and borrowing capacity of approximately $28,750. 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 to support our international operations. We had net working capital of $139,631 and an accumulated deficit of $280,153 as of December 31, 2021.

Uses of liquidity and capital resources. Our executive officers and Board of Directors review our funding sources and future capital requirements in connection with our annual operating plan. Our future capital requirements depend on a number of factors, including market acceptance of our current and future products; costs to develop and support our products, including professional training; future expenses to expand and support our sales and marketing efforts; operating and filing costs relating to changes in regulatory policies or laws; costs for clinical trials and to secure regulatory approval for new products; business integration costs; costs to prosecute, defend and enforce our intellectual property rights; and possible acquisitions and joint ventures. We continue to evaluate additional measures to maintain financial flexibility, and we will continue to closely monitor our liquidity and capital resources through the recovery from, and any further disruptions caused by COVID-19. Our principal cash requirements include costs of operations, capital expenditures, debt service costs and other contractual obligations.

Credit facility. Our Loan and Security Agreement with Silicon Valley Bank (SVB), as amended, (Loan Agreement), provides for a $60,000 term loan, with an option to make available an additional $30,000 in term loan borrowings, and a $30,000 revolving line of credit. The Loan Agreement has a five year term, beginning November 1, 2021 and expires November 2026. The term loan accrues interest at the Prime Rate plus 1.25% and is subject to an additional 3.00% fee on the term loan principal amount at maturity. Principal payments are to be made ratably commencing 24 months after the inception of the loan through the loan's maturity date. At the option of the Company, the commencement of term loan principal payments may be extended an additional twelve months. As of December 31, 2021, our outstanding debt was $60,000 and is classified as noncurrent. We had unused borrowing capacity of approximately $28,750 under our revolving credit facility. For additional information on the terms and conditions, as well as applicable interest and fee payments, see Note 9 - Indebtedness.

Our corporate headquarters lease agreement requires a $1,250 letter of credit which renews annually and remains outstanding as of December 31, 2021.

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Capital Expenditures. As we continue to invest in our growth and our ability to better serve our customers, we recently purchased a building for additional manufacturing capacity. We have committed to funding the renovation and estimate the remaining costs of the construction project to be approximately $3,800 over the next twelve months. We incur other capital expenditures on an ongoing basis.

Other Contractual Obligations. Our future obligations include both current and long-term obligations. We have operating and finance leases for our corporate offices, manufacturing and warehouse facilities, as well as computer equipment. Our finance leases consist of principal and interest payments related to our Mason, Ohio headquarters and computer equipment. As of December 31, 2021, we have current finance lease obligations of $895 and long-term obligations of $10,082. Our operating leases for office and warehouse space includes current obligations of $861 and long-term obligations of $4,068. For additional information, see Note 10 - Leases. We additionally maintain royalty agreements with terms that require royalty payments of 3% to 5% of specified product sales. See Note 11 - Commitments and Contingencies for information about the terms. 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 would 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. As of December 31, 2021, the estimated fair value of the contingent consideration is $0. See Note 3 – Fair Value.

Sources of liquidity. 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. We have on file with the SEC a shelf registration statement which allows us to sell any combination of 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 the shelf registration statement for the foreseeable future.

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 would 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.

Historical Cash Flow Activity.The following table summarizes our consolidated cash flow activities:

Years Ended December 31,

(dollars in thousands)

Cash flows used in operating activities.Net cash used in operating activities decreased $6,089 in 2021 as compared to 2020, largely reflecting recovery from the impact of COVID-19. While customer receivables increased from higher sales volumes, our investment in inventories increased from 2020 and our accounts payable balance grew as a result of increasing operating costs. Finally, based on higher variable compensation and the timing of payment, accrued liabilities increased over 2020.

Cash flows provided by investing activities. Net cash provided by investing activities increased by $179,702 in 2021 as compared to 2020, reflecting a $184,996 increase in net sales and maturities of available-for-sale securities, offset by an increase of $4,494 for the investment in property and equipment to support our new product introductions and construction costs for the renovation of a recently purchased building to expand our manufacturing capabilities.

Cash flows used in financing activities.Net cash from financing activities decreased by $197,034 in 2021 as compared to 2020, driven primarily by $188,958 in net proceeds generated from the May 2020 public stock offering. Net cash used in equity compensation plan activity increased $6,791 primarily due to the increase in shares repurchased for payment of taxes on stock awards and decrease in proceeds from stock option exercises. The remaining increase in cash used in financing activities was a result of an increase in payment of debt fees.

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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. We have monitored and will continue to monitor the components of cost of revenue and operating expenses for the potential impact of inflation.

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. 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 involve a significant level of estimation uncertainty and judgments that are reasonably likely to have a material impact on our Consolidated Financial Statements. We base our judgments and estimates on historical experience, current conditions and other reasonable factors. Actual results could differ from those estimates under different assumptions or conditions.

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. 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.

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.

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 converted to a technology asset and amortized over its estimated useful life. In July 2021, we were informed that data from the aMAZE clinical trial did not achieve statistical superiority. As a result, we identified impairment indicators for the IPR&D asset that represented an estimate of the fair value of the PMA that could result from the aMAZE clinical trial and recorded an impairment charge of $82,300.

Share-Based Employee Compensation—We estimate the fair value of performance share awards with a performance condition based on the closing stock price on the date of grant assuming the performance goal will be achieved. Such performance share awards have specified performance targets based on the compound annual growth rate (CAGR) of our revenue over a three-year performance period. With respect to these performance share awards, the number of shares that vest and are issued to the recipient is based upon revenue performance over the performance period. We may adjust the expense over the performance period based on changes to estimates of performance target achievement. If such goals are not met or service is not rendered for the requisite service period, no compensation cost is recognized, and any recognized compensation cost from prior periods will be reversed.

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 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

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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. 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 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 a 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 taxable income, future reversals of existing taxable temporary differences, taxable income in prior carryback years and tax planning strategies that are both prudent and feasible. In evaluating the need for a valuation allowance, the existence of cumulative losses in recent years is significant objectively verifiable negative evidence that must be overcome by objectively-verifiable positive evidence to avoid the need for a valuation allowance. Our valuation allowance offsets 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.

Recent Accounting Pronouncements

See Note 2 – Recent Accounting Pronouncements to our Consolidated Financial Statements for further information.

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 9.9% and 10.9% of the Company’s total revenue for 2021 and 2020. 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 2021 and 2020, foreign currency transaction gains of $387 and $44 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, 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 it has invested in a conservative manner, with cash preservation being the primary investment objective, the value of the securities held will fluctuate with changes in 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, cash equivalents and investments in corporate bonds. Certain of AtriCure’s cash and cash equivalents 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, 2021, $43,404 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 (PCAOB ID No. 34) 44

Consolidated Balance Sheets 46

Consolidated Statements of Operations and Comprehensive Income (Loss) 47

Consolidated Statements of Stockholders’ Equity 48

Consolidated Statements of Cash Flows 49

Notes to Consolidated Financial Statements 50

Financial Statement Schedule:

Schedule II Valuation and Qualifying Accounts 70

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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, 2021 and 2020, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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 17, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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Valuation of Performance Share Awards with a Market Condition - Refer to Note 16 to the financial statements

Critical Audit Matter Description

Performance share awards (PSAs) granted in 2021 have two equally weighted performance targets measured at the end of the three-year performance period: (i) the Company's revenue compound annual growth rate, a performance condition; and (ii) relative total shareholder return (TSR), a market condition. The performance and market condition payouts are determined independently.

The number of PSAs with a market condition that vest and are issued to the recipient is based upon the Company's TSR relative to the TSR of the selected peer group at the end of the three-year performance period. A Monte Carlo simulation was performed to estimate the fair value on the date of grant, with associated share-based compensation expense recognized over the requisite service period as the employee renders service.

The determination of the fair value on the date of grant is affected by the Company and the peer group's stock price, as defined by the award agreement, at the beginning of the service period and grant date, the expected volatility of the Company and peer group's stock price over the performance period and the correlation coefficient of the daily returns for the Company and peer group over the performance period.

Given the level of judgment involved by management, including the use of a specialist, to determine the grant date fair value of the PSAs with a market condition, audit procedures required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the Company's determination of the grant date fair value of the PSAs with a market condition included the following, among others:

•We inquired of management of the key valuation assumptions and the Monte Carlo simulation methodology used in the determination of the grant date fair value of the PSAs.

•We tested the design and operating effectiveness of the Company's internal controls over the determination of the grant date fair value of the PSAs.

•We tested the accuracy of the data used in measuring the awards by agreeing the underlying inputs, such as grant date, share price, and vesting conditions, among others, back to source documents, such as compensation committee minutes or PSA agreements.

•With the assistance of our fair value specialists, we evaluated management's valuation of PSAs with a market condition by:

▪Evaluating the Monte Carlo simulation methodology and the reasonableness of the valuation assumptions, including the risk-free interest rate, expected volatility, and the correlation coefficients.

▪Independently calculating a fair value estimate for the market condition PSAs using the underlying PSA agreement and independently calculated valuation inputs.

/s/ Deloitte & Touche LLP

Cincinnati, Ohio

February 17, 2022

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

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ATRICURE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2021 and 2020

(In Thousands, Except Per Share Amounts)

Assets

Current assets:

Accounts receivable, less allowance for credit losses of $1,096 33,021 23,146

Prepaid and other current assets 5,001 4,347

Operating lease right-of-use assets 4,761 1,914

Other noncurrent assets 955 440

Liabilities and Stockholders’ Equity

Current liabilities:

Other current liabilities and current maturities of debt and leases 1,756 8,417

Contingent consideration and other noncurrent liabilities 1,220 187,424

Commitments and contingencies (Note 11)

Stockholders’ Equity:

Accumulated other comprehensive (loss) income (948) 312

Total Liabilities and Stockholders’ Equity $ 615,312 $ 714,539

See accompanying notes to consolidated financial statements.

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ATRICURE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

YEARS ENDED DECEMBER 31, 2021, 2020 and 2019

(In Thousands, Except Per Share Amounts)

Operating expenses (benefit):

Intangible asset impairment (Note 5) 82,300 — —

Other income (expense):

Net income (loss) per share:

Basic net income (loss) per share $ 1.11 $ (1.14) $ (0.94)

Diluted net income (loss) per share $ 1.09 $ (1.14) $ (0.94)

Weighted average shares outstanding:

Comprehensive (loss) income:

Unrealized (loss) gain on investments $ (941) $ (46) $ 137

Foreign currency translation adjustment (319) 516 (96)

Other comprehensive (loss) income (1,260) 470 41

See accompanying notes to consolidated financial statements.

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ATRICURE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2021, 2020, and 2019

(In Thousands)

Shares Amount

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

Issuance of common stock under equity incentive plans 589 1 (9,837) — — (9,836)

Issuance of common stock under employee stock purchase plan 81 — 4,181 — — 4,181

Share-based employee compensation expense — — 28,078 — — 28,078

Other comprehensive loss — — — — (1,260) (1,260)

See accompanying notes to consolidated financial statements.

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ATRICURE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2021, 2020 and 2019

(In Thousands)

Cash flows from operating activities:

Amortization of deferred financing costs 759 509 375

Amortization (accretion) of investments 2,482 1,236 (922)

Change in fair value of contingent consideration (184,800) (357) (4,916)

Intangible asset impairment 82,300 — —

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

Other noncurrent assets and liabilities (2,766) 484 (962)

Cash flows from investing activities:

Proceeds from sale of property and equipment — — 39

Proceeds from capital grant — 800 —

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

Net cash provided by (used in) investing activities 23,504 (156,198) (2,147)

Cash flows from financing activities:

Proceeds from sale of stock, net of offering costs of $218 — 188,958 —

Payments on debt and finance leases (5,816) (667) (629)

Proceeds from economic incentive loan — — 500

Effect of exchange rate changes on cash and cash equivalents (372) 136 (163)

Net increase (decrease) in cash and cash equivalents 1,710 13,461 (3,748)

Supplemental cash flow information:

Cash paid for income taxes, net of refunds 190 217 259

Non-cash investing and financing activities:

Contingent consideration in business combinations — — 171,300

Stock issuance in business combinations — — 20,307

Accrued purchases of property and equipment 1,552 298 1,053

Assets obtained in exchange for finance lease obligations — 22 270

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 surgical treatments and therapies for atrial fibrillation (Afib), left atrial appendage (LAA) management and post-operative pain management and sells its products to medical centers globally through its direct sales force and distributors.

Principles of Consolidation—The Consolidated Financial Statements include the accounts of AtriCure, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Reclassification—During 2021, the Company changed the presentation of its consolidated statement of operations and comprehensive income (loss) to separately disclose the change in contingent consideration, previously reported in selling, general and administrative expenses. Amounts for comparative prior years have been reclassified to conform to the current period presentation. This reclassification had no impact on previously reported net loss or financial position.

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 financial institutions.

Investments—The Company invests primarily in government and agency obligations, corporate bonds, commercial paper and asset-backed securities and classifies all investments as available-for-sale. Investments maturing in less than one year are classified as short-term investments. Investments are recorded at fair value, with unrealized gains and losses recorded as accumulated other comprehensive income (loss). Gains and losses are recognized using the specific identification method when securities are sold and are included in interest income.

Revenue Recognition—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 12 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 reduce revenue, and the provision is included in accrued liabilities.

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

Inventories—Inventories are stated at the lower of cost or net realizable value based on the first-in, first-out cost method (FIFO) and consist of raw materials, work in process and finished goods. The Company’s industry is characterized by rapid product development and frequent new product introductions. Uncertain timing of regulatory approvals, variability in product launch strategies and variation in product 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 determined using the straight-line method over the estimated useful lives of assets (see Note 7). Maintenance and repair costs are expensed as incurred. The Company assesses the useful lives of property and equipment at least annually and retires assets no longer in use. The Company reviews property and equipment for impairment at least annually using its best estimates based on reasonable and supportable assumptions and expected future cash flows. Property and equipment impairment has not been significant.

The Company’s radiofrequency and cryo generators are generally placed with customers that use the Company’s disposable products. The estimated useful lives of generators are based on anticipated usage by customers and may change

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

in future periods with changes in usage or introduction of new technology. Depreciation related to generators and other capital equipment is recorded in cost of revenue.

Leases—The Company leases office, manufacturing and warehouse facilities and computer equipment under leases that qualify as either financing or operating leases, as determined at the inception of the lease arrangement. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make payments under the lease. Lease assets and liabilities are measured and recorded at the commencement date based on the present value of payments over the lease term.

Lease assets and liabilities include lease incentives and options to extend or terminate when it is reasonably certain the Company will exercise that option. The Company uses the implicit rate when readily determinable; however, as most leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at measurement. The Company also 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 an option to extend the lease whose exercise is reasonably certain. 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 for the operating leases based on the terms of the underlying leases.

Operating leases are included in operating lease right-of-use (ROU) assets and operating lease liabilities, while finance leases are included in property and equipment and finance lease liabilities. The short-term portions of both lease liabilities are included in other current liabilities and current maturities of debt and leases. Operating lease expense is recognized on a straight-line basis over the lease term. See Note 10 for further discussion.

Intangible Assets—Intangible assets with determinable useful lives are amortized on a straight-line basis over the estimated periods benefited. Intangible assets include In Process Research and Development (IPR&D), representing the value of technology acquired in business combinations that 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, IPR&D will be converted to a technology asset and amortized over its estimated useful life. Due to the nature of IPR&D projects, the Company may experience future delays or failures to obtain approvals or market clearances, or may discontinue or abandon the project, all of which may impact the estimated fair value of the IPR&D project. As a result, the Company may have a full or partial impairment charge related to the IPR&D, determined as the excess carrying value of the IPR&D asset over the estimated fair value.

The Company reviews intangible assets at least annually for impairment using its best estimates based on reasonable and supportable assumptions and projections. The Company performs impairment testing annually on October 1 or more often if impairment indicators are present.

Through April 2021, the IPR&D asset included an estimate of the fair value of the pre-market approval (PMA) that could result from the CONVERGE IDE and aMAZE IDE clinical trials. The Company received PMA approval for CONVERGE on April 28, 2021 and began amortizing the $44,021 technology asset over an estimated fifteen year life. During the year ended December 31, 2021, the Company identified indicators of impairment for the IPR&D asset that represented an estimate of the fair value of the PMA that could result from the aMAZE clinical trial. As a result of the analysis performed, the Company recorded an impairment loss of $82,300. See Note 3 for further discussion.

Goodwill—Goodwill represents the excess of purchase price over the fair value of the net assets acquired in business combinations. The Company’s goodwill is accounted for in a single reporting unit representing the Company as a whole. The Company performs impairment testing annually on October 1 or more often if impairment indicators are present.

Contingent Consideration and Other Noncurrent Liabilities—This balance consists of asset retirement obligations and other contractual obligations. The balance in prior periods also includes contingent consideration from business combinations, as well as deferred payroll taxes as a result of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The contingent consideration balance is included in noncurrent liabilities as any settlement is 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 primarily of foreign currency transaction gains and losses generated by settlements of intercompany balances denominated in Euros and customer invoices transacted in British Pounds.

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

Income Taxes—Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities from a change in tax rates is recognized in the period that includes the enactment date.

The Company’s estimate of the valuation allowance for deferred income tax assets requires significant estimates and judgments about future operating results. Deferred income tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more-likely-than-not that a deferred income tax asset will not be realized. Significant weight is given to evidence that can be objectively verified. The Company evaluates deferred income tax assets on an annual basis to determine if valuation allowances are required by considering all available evidence. Deferred income tax assets are realized by having sufficient future taxable income to allow the related tax benefits to reduce taxes otherwise payable. The sources of taxable income that may be available to realize the benefit of deferred income tax assets are future taxable income, future reversals of existing taxable temporary differences, taxable income in prior carryback years and tax planning strategies that are both prudent and feasible. In evaluating the need for a valuation allowance, the existence of cumulative losses in recent years is significant objectively-verifiable negative evidence that must be overcome by objectively-verifiable positive evidence to avoid the need for a valuation allowance. The Company's valuation allowance offsets substantially all net deferred income tax assets as it is more-likely-than-not that the benefit of the deferred income tax assets will not be recognized in future periods. The Company has not reclassified income tax effects of the Tax Cuts and Jobs Act within accumulated other comprehensive income (loss) to retained earnings due to its full valuation allowance.

Earnings Per Share—Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflects net income available to common stockholders divided by the weighted average number of common shares outstanding during the period and any dilutive common share equivalents, including shares issuable upon the vesting of restricted stock awards and restricted stock units, exercise of stock options as well as shares issuable under the Company's employee stock purchase plan (ESPP).

Year Ended December 31,

Effect of dilutive securities 973 — —

Basic net income (loss) per common share $ 1.11 $ (1.14) $ (0.94)

Diluted net income (loss) per common share $ 1.09 $ (1.14) $ (0.94)

The computation of diluted earnings per share in the year ended December 31, 2021 excludes 404 shares because the effect would be anti-dilutive. For the years ended December 31, 2020 and 2019, the number of shares calculated for basic net loss per share is also used for the diluted net loss per share calculation, and net loss per share excludes the effect of 2,301 and 3,623 shares because the effect would be anti-dilutive.

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)—In addition to net income (loss), the comprehensive income (loss) includes foreign currency translation adjustments and unrealized gains (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 $ 54 $ 100 $ (37)

Other comprehensive (loss) income before reclassifications (941) (70) 137

Balance at end of period $ (887) $ 54 $ 100

Foreign currency translation adjustment

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

Other comprehensive (loss) income before reclassifications (768) 555 (277)

Balance at end of period $ (61) $ 258 $ (258)

Research and Development Costs—Research and development costs are expensed as incurred. These costs include compensation and other internal and external costs associated with the development and research of new and existing products or concepts, preclinical studies, clinical trials and related regulatory activities, as well as amortization of technology assets.

Advertising Costs—The Company expenses advertising costs as incurred. Advertising expense was $907, $655 and $635 during the years ended December 31, 2021, 2020 and 2019.

Share-Based Compensation—The Company recognizes share-based compensation expense for all share-based payment awards, including stock options, restricted stock awards, restricted stock units, performance share awards (PSAs) and stock purchases related to an employee stock purchase plan, based on estimated fair values. The value of the portion of an award that is ultimately expected to vest, net of estimated forfeitures, is recognized as expense over the service period. The Company estimates forfeitures at the time of grant and revises them, as necessary, in subsequent periods as 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 the fair value is affected by the Company’s stock price as well as several subjective assumptions, such as the Company’s expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. The Company estimates the fair value of restricted stock awards and restricted stock units based upon the grant date closing market price of the Company’s common stock.

The Company estimates the fair value of PSAs with a performance condition based on the closing stock price on the date of grant assuming the performance target will be achieved and may adjust expense over the performance period based on changes to estimates of performance target achievement. If such targets are not met or service is not rendered for the requisite service period, no compensation cost is recognized, and any recognized compensation cost in prior periods will be reversed. For PSAs with a market condition, a Monte Carlo simulation is performed to estimate the fair value on the date of grant, and compensation cost is recognized over the requisite service period as the employee renders service, even if the market condition is not satisfied. The Company’s determination of the fair value is affected by the Company and peer group stock price, as defined by the award agreement, at the beginning of the service period and grant date, the expected volatility of the Company and peer group’s stock price over the performance period and the correlation coefficient of the daily returns for the Company and peer group over the performance period.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

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 purchase period. Expense is adjusted at the time of stock purchase.

Use of Estimates—The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including intangible assets, contingent assets and liabilities and the reported amounts of revenue and expense during the reporting period. Estimates are based on historical experience, where applicable, and other assumptions believed to be reasonable by management. Actual results could differ from those estimates.

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 November 2021, the FASB issued Accounting Standard Update (ASU) 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance” (ASU 2021-10). This guidance requires business entities to provide certain disclosures when they have received government assistance and use a grant or contribution accounting model by analogy to other accounting guidance. The guidance becomes effective for annual reporting periods beginning after December 15, 2021. The Company does not expect the adoption of this standard to 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, 2021:

Assets:

Government and agency obligations 32,690 — — 32,690

Liabilities:

Contingent consideration $ — $ — $ — $ —

Total 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, 2020:

Assets:

Government and agency obligations 45,399 — — 45,399

Liabilities:

There were no changes in the levels or methodology of measurement of financial assets and liabilities during the years ended December 31, 2021 and 2020.

Contingent Consideration. The Company's contingent consideration arrangements arising from the SentreHEART acquisition obligate the Company to pay certain defined amounts to former shareholders of SentreHEART if specified milestones are met related to the aMAZE IDE clinical trial, including PMA approval and reimbursement for the therapy involving SentreHEART's devices, as follows:

•PMA Milestone – up to $140,000 upon receiving PMA from FDA for the LARIAT system with an approved indication allowing commercial distribution in the United States for the 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

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 SentreHEART merger agreement, all contingent consideration would be paid in cash and stock at the discretion of the Company, subject to certain minimums and 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 significant to 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. Contingent consideration liabilities are periodically measured, with changes in the estimated fair value reflected in operating expenses. Changes in the discount rate, projected time until payment and probability 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 would cause a decrease in the fair value measurement.

In July 2021, the Company was informed that data from the aMAZE clinical trial did not achieve statistical superiority. Specifically, while the trial met the safety endpoint, the trial did not meet the primary effectiveness endpoint. As the contingent consideration arrangements were success-based milestone payments, the fair value of the SentreHEART contingent consideration was remeasured as of September 30, 2021 resulting in a decrease in fair value due to changes in estimates related to both the forecasted timing and probability of achievement of the regulatory and reimbursement milestones. Accordingly, the Company recorded a credit to operating expenses of $184,800 reflecting the change in fair value of the contingent consideration. The Company has assessed the projected probability of payment during the contractual achievement periods to be remote, resulting in no remaining fair value as of December 31, 2021.

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:

Amounts acquired $ — $ — $ 171,300

Changes in fair value of contingent consideration (184,800) (357) (4,916)

As of December 31, 2020, the terms of the contingent consideration arrangements under the nContact merger agreement expired.

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

4. INVESTMENTS

Investments as of December 31, 2021 consisted of the following:

Cost Basis UnrealizedGains(Losses) Fair Value

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

Cost Basis UnrealizedGains(Losses) Fair Value

The Company has not experienced any significant realized gains or losses on its investments in the years ended December 31, 2021, 2020 and 2019.

5. INTANGIBLE ASSETS AND GOODWILL

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

EstimatedUseful Life Cost Accumulated Amortization Cost Accumulated Amortization

Following PMA approval of the EPi-Sense® System in the second quarter 2021, the related IPR&D asset with a value of $44,021 was determined to have a finite useful life. The intangible asset is now included in technology assets and amortized over an estimated fifteen year life.

As a result of data from the aMAZE clinical trial not achieving statistical superiority, the Company identified indicators of impairment for the IPR&D asset that represents an estimate of the fair value of the PMA that could result from the aMAZE clinical trial. During the third quarter 2021, an impairment test was performed using estimates based on reasonable and supportable assumptions and projections of expected future cash flows, and the Company recorded an impairment charge of $82,300, reducing the carrying value of the aMAZE IPR&D asset to $0 as of December 31, 2021. This impairment charge is reflected as a component of operating expenses.

Amortization expense of intangible assets with definite lives, which excludes IPR&D assets, was $2,907, $1,682 and $1,943 for the years ended December 31, 2021, 2020 and 2019.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

Future amortization expense is projected as follows:

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

Additions —

6. INVENTORIES

Inventories consisted of the following at December 31:

7. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31:

Generators and related equipment 1 - 3 years $ 20,175 $ 18,669

Computer, software and office equipment 3 - 5 years 7,762 8,045

Equipment under finance leases 3 - 5 years 380 409

Property and equipment depreciation expense was $7,534, $7,866 and $7,423 for the years ended December 31, 2021, 2020 and 2019. Depreciation related to generators and other capital equipment was $2,327, $2,503 and $2,910 for

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

fiscal years 2021, 2020 and 2019. As of December 31, 2021 and 2020, the net carrying value of generators and other capital equipment was $3,637 and $3,410.

8. ACCRUED LIABILITIES

Accrued liabilities consisted of the following at December 31:

Accrued compensation and employee-related expenses $ 30,990 $ 17,730

Accrued taxes and value-added taxes payable 1,452 1,256

Other accrued liabilities 470 406

Accrued legal settlement 10 6,000

9. INDEBTEDNESS

Credit Facility. The Company has a Loan and Security Agreement, as amended and modified effective February 8, 2021 and as further amended November 1, 2021 (Loan Agreement) with Silicon Valley Bank (SVB). The Loan Agreement includes a $60,000 term loan, with an option to make available an additional $30,000 in term loan borrowings, and a $30,000 revolving line of credit. The Loan Agreement has a five year term, expiring November 2026.

Principal payments under the Loan Agreement are to be made ratably commencing 24 months after inception through the loan's maturity date. At the option of the Company, the commencement of term loan principal payments may be extended an additional twelve months. The term loan accrues interest at the Prime Rate plus 1.25% and is subject to an additional 3.00% fee on the term loan principal amount at maturity. The Company is accruing the 3.00% fee over the term of the Loan Agreement, with $60 included in the outstanding loan balance as of December 31, 2021. Additionally, the unamortized original financing costs related to the term loan of $319 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 0.20% of the revolving line of credit, and any borrowings thereunder bear interest at the Prime Rate. Borrowing availability under the revolving credit facility is based on the lesser of $30,000 or a borrowing base calculation as defined by the Loan Agreement. As of December 31, 2021, the Company had no borrowings under the revolving credit facility and had borrowing availability of approximately $28,750. Financing costs related to the revolving line of credit are included in other assets in the Consolidated Balance Sheets and amortized ratably over the twelve-month period of the annual fee.

The Loan Agreement also provides for certain prepayment and early termination fees, as well as establishes a minimum liquidity covenant and dividend restrictions, along with other customary terms and conditions. Specified assets have been pledged as collateral.

Future maturities of long-term debt, excluding the term loan final fee, are projected as follows:

Total long-term debt, of which $60,000 is noncurrent $ 60,000

10. LEASES

The Company has operating and finance leases for offices, manufacturing and warehouse facilities and computer equipment. The Company’s leases have remaining lease terms of one to nine years. Options to renew or extend leases

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

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 are as follows:

As of As of As of

Operating Leases

Weighted average remaining lease term (years) 3.6 3.2 3.5

Weighted average discount rate 4.69 % 5.68 % 5.94 %

Finance leases

Weighted average remaining lease term (years) 8.6 9.7 11.0

Weighted average discount rate 6.91 % 6.91 % 7.05 %

A letter of credit for $1,250 was issued to the lessor of the Company's corporate headquarters building in October 2015, which is renewed annually and remains outstanding as of December 31, 2021.

The components of lease expense are as follows:

Year Ended Year Ended Year Ended

Finance lease cost:

Short term lease expense was not significant for the twelve months ended December 31, 2021, 2020 and 2019.

Supplemental cash flow information related to leases was as follows:

Year Ended Year Ended Year Ended

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

Operating cash flows for operating leases $ 998 $ 1,236 $ 1,026

Operating cash flows for finance leases 620 844 872

Financing cash flows for finance leases 792 664 629

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 —

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

Supplemental balance sheet information related to leases was as follows:

Operating Leases

Operating lease right-of-use assets $ 4,761 $ 1,914

Other current liabilities and current maturities of debt and leases 861 927

Total operating lease liabilities $ 4,929 $ 2,107

Finance Leases

Property and equipment, net $ 8,491 $ 9,412

Other current liabilities and current maturities of debt and leases $ 895 $ 823

Maturities of lease liabilities as of December 31, 2021 were as follows:

Operating Leases Finance Leases

11. COMMITMENTS AND CONTINGENCIES

Royalty Agreements. The Company has royalty agreements in place with terms that include payments of 3% to 5% of specified product sales. One royalty agreement remains in effect through 2025, while the other agreement remains in effect until the later of 2023 or 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 $3,124, $2,596 and $2,892 was recorded for the years ended December 31, 2021, 2020 and 2019.

Purchase Agreements. The Company enters into standard purchase agreements with suppliers in the ordinary course of business, generally with terms that allow cancellation. The Company is committed to funding renovation of a recently purchased building for additional manufacturing capacity. Approximately $3,800 of construction costs remain committed and outstanding.

Legal. The Company may, from time to time, become a party to legal proceedings. Such matters are subject to many uncertainties and to outcomes of which the financial impacts are not predictable with assurance and that may not be known for extended periods of time. A liability is established once management determines a loss is probable and an amount can be reasonably estimated.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

The Company received a Civil Investigative Demand (CID) from the U.S. Department of Justice (USDOJ) in December 2017 stating that it is investigating the Company to determine whether the Company has violated the False Claims Act, relating to the promotion of certain medical devices related to the treatment of atrial fibrillation for off-label use and submitted or caused to be submitted false claims to certain federal and state health care programs for medically unnecessary healthcare services related to the treatment of atrial fibrillation. The CID covers the period from January 2010 to December 2017 and required the production of documents and answers to written interrogatories. The Company had no knowledge of the investigation prior to receipt of the CID. The Company maintains rigorous policies and procedures to promote compliance with the False Claims Act and other applicable regulatory requirements. The Company provided the USDOJ with documents and answers to the written interrogatories. In March 2021, USDOJ informed the Company that its investigation was based on a lawsuit brought on behalf of the United States and the various state and local government under the qui tam provisions of federal and certain state and local False Claims Acts. Although the USDOJ and all of the state and local governments declined to intervene, the relator continues to pursue the case. The Company is vigorously contesting the case, however, it is not possible to predict when this matter may be resolved or what impact, if any, the outcome of this matter might have on our consolidated financial position, results of operations or cash flows.

The Company acquired nContact Surgical, Inc. pursuant to a merger agreement dated October 4, 2015. The merger agreement provided 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 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, and has made substantially all of the settlement payment as of December 31, 2021.

12. 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 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 $1,354, $1,192 and $1,485 in the years ended December 31, 2021, 2020 and 2019.

Products are sold primarily through a direct sales force and through distributors in certain international markets. Terms of sale are generally consistent for both end-users and distributors, except that payment terms are generally net 30 days for end-users and net 60 days for distributors, with some exceptions. The Company does not maintain any post-shipping obligations to customers. No installation, calibration or testing of products is performed 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. The Company estimates the provision for sales returns and allowances using the expected value method based on historical experience and other factors that the Company believes could impact its 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

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 included in selling expense while royalties are included in cost of revenue.

See Note 17 for disaggregated revenue by geographic area and by product category.

13. INCOME TAXES

The Company files federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. The Company uses the asset and liability method in accordance with FASB ASC 740, “Income Taxes”, under which deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. Deferred taxes are measured using provisions of currently enacted tax laws. A valuation allowance against deferred tax assets is recorded when it is more likely than not that such assets will not be fully realized. The Company's valuation allowance offsets substantially all its net deferred tax assets as it is more likely than not that the benefit of the deferred tax assets will not be recognized in future periods.

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

Current Tax Expense

Federal $ — $ (26) $ (26)

Deferred Tax Expense

Total deferred tax expense 21 (12) 26

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

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

Deferred tax assets (liabilities):

Research and development credit carryforwards 11,269 9,365

Finance and operating lease liabilities 3,700 3,164

The Company has federal net operating loss carryforwards of $336,792 which expire between 2022 and 2037 and $175,883 which has no expiration. The Company has state and local net operating loss carryforwards of $344,968 which expire between 2022 to 2041. 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 $11,269 which expire between 2022 and 2041. Additionally, the Company has foreign net operating loss carryforwards of approximately $50,817 which expire between 2022 and 2027.

The Company’s 2021, 2020 and 2019 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 $55,666 and $(5,279) for 2021, $(43,218) and $(4,823) for 2020 and $(28,002) and $(6,993) for 2019.

The Company had undistributed earnings of foreign subsidiaries of approximately $290 at December 31, 2021. 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 2018 are open for examination. Generally, state and foreign income tax returns for periods beginning in 2017 are open for examination. However, taxing authorities have the ability to audit net operating loss and tax credit carryforwards from years prior to these periods. The Company has not recognized certain tax benefits because of the uncertainty of realizing the entire value of the tax position taken on income tax returns upon review by the taxing authorities.

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

A reconciliation of the change in federal and state unrecognized tax benefits for 2021, 2020 and 2019 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 — — —

The increase in unrecognized tax benefits in 2019 relates to uncertain income tax benefits assumed pursuant to the SentreHEART acquisition. Historically, the Company has not incurred any significant interest and penalties for unrecognized income tax benefits as a result of offsetting net operating losses. Interest and penalties associated with uncertain income tax benefits assumed pursuant to the SentreHEART acquisition were recognized as part of purchase accounting. The amount is not significant.

The balance of unrecognized tax benefits at December 31, 2021, 2020 and 2019 includes $1,798, $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, 2021.

14. CONCENTRATIONS

During 2021, 2020 and 2019, approximately 10.5%, 10.8% and 12.0% of the Company’s total net revenue was derived from its top ten customers. During 2021, 2020 and 2019 no individual customer accounted for more than 10% of the Company’s revenue.

As of December 31, 2021 and 2020, 16.0% and 13.0% 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, 2021 and 2020.

The Company maintains cash and cash equivalents balances at financial institutions which at times exceed FDIC limits. As of December 31, 2021, $43,404 of the cash and cash equivalents balance was in excess of the FDIC limits.

15. EMPLOYEE BENEFIT PLANS

The Company sponsors the AtriCure, Inc. 401(k) Plan (401(k) Plan), a defined contribution plan covering substantially all U.S. employees of the Company. Eligible employees may contribute pre-tax annual compensation up to specified maximums under the Internal Revenue Code. During the year ended December 31, 2021, 2020 and 2019, the Company made matching contributions of 50% on the first 6% of employee contributions to the 401(k) Plan. The Company’s matching contributions in 2021, 2020 and 2019 were $2,651, $2,237 and $1,915. Additional amounts may be contributed to the 401(k) Plan at the discretion of the Company’s Board of Directors, however, no such discretionary contributions were made in 2021, 2020 or 2019. 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 $349, $244 and $248 in 2021, 2020 and 2019.

16. 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 Compensation

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

Committee of the Board of Directors, as the administrator of the 2014 Plan, has the authority to determine the terms of any awards, including the number of shares subject to each award, the exercisability of the awards and the form of consideration. As of December 31, 2021, 12,899 shares of common stock had been reserved for issuance under the 2014 Plan and 1,505 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 generally expire ten years from the date of grant. Performance 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 specified amounts. 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 award agreements for the PSAs provide that each PSA that vests represents the right to receive one share of the Company’s common stock at the end of the performance period. With respect to the PSAs, the number of shares that vest and are issued to the recipient is based upon the Company’s performance with respect to specified targets at the end of the three year performance period. Payout opportunities range from 0% to 100% of the target amount for awards granted prior to 2021, while awards granted in 2021 have payout opportunities ranging from 0% to 200% of the target amount. These ranges are used to determine the number of shares that will be issuable when the award vests. 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. PSAs granted prior to 2021 have performance targets based on the Company’s revenue compound annual growth rate (CAGR) over the three year performance period. PSAs granted in 2021 have two equally weighted performance targets measured at the end of the three year performance period: (i) the Company’s revenue CAGR; and (ii) relative total shareholder return (TSR). TSR is measured against the Nasdaq Health Care Index constituents and the 20-trading-day average stock price prior to the end of the performance period over the 20-trading-day average stock price prior to the beginning of the performance period. The performance and market condition payouts will be determined independently and accumulated to determine the total payout for the three year performance period, subject to the maximum payout defined in the PSA agreements.

Activity under the plans during 2021 was as follows:

Weighted

Weighted Average

Number of Average Remaining Aggregate

Shares Exercise Contractual Intrinsic

Time-Based Stock Options Outstanding Price Term Value

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ATRICURE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

Weighted Weighted

RSA Average PSA Average

Shares Grant Date Shares Grant Date

Weighted

Weighted Average

Number of Average Remaining Aggregate

Shares Exercise Contractual Intrinsic

Performance Stock Options Outstanding Price Term Value

Granted — —

Cancelled — —

Outstanding at December 31, 2021 — $ — 0 $ —

Exercisable at December 31, 2021 — $ — 0 $ —

The total intrinsic value of options exercised during the years ended December 31, 2021, 2020 and 2019 was $27,318, $29,594 and $1,985. As a result of the Company’s full valuation allowance on its net deferred tax assets, no tax benefit was recognized related to the stock option exercises. The exercise price per share of each option is equal to the fair market value of the underlying share on the date of grant. For 2021, 2020 and 2019, $8,175, $10,835 and $1,202 in cash proceeds from the exercise of stock options were included in the Consolidated Statements of Cash Flows. The total fair value of restricted stock vested during 2021, 2020 and 2019 was $40,510, $34,200 and $23,479. The total fair value of performance share awards vested during 2021 and 2020 was $8,165 and $4,003. The Company issues registered shares of common stock to satisfy stock option exercises and restricted stock and performance award grants.

Employee Stock Purchase Plan

Under the ESPP, shares of the Company’s common stock may be purchased at a discount (15%) to the lesser of the closing price of the Company’s common stock on the first or last trading day of the offering period. The offering period (currently six months) and the offering price are subject to change. Participants may not purchase a value of more than $25 of the Company’s common stock in a calendar year and may not purchase a value of more than 3 shares during an offering period. As of December 31, 2021, there were 305 shares available for future issuance under the ESPP.

Valuation and Expense Information Under FASB ASC 718

The following table summarizes share-based compensation expense related to employees, directors and consultants for 2021, 2020 and 2019. The expense was allocated as follows:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

The expense by award type was allocated as follows:

Restricted Stock Awards & Time-Based Stock Options $ 18,727 $ 18,612 $ 13,922

In 2020, the Compensation Committee modified the methodology for measuring performance of the 2018, 2019 and 2020 performance awards. The modification to vesting conditions and performance measures resulted in incremental compensation cost of $2,856 and $569 during 2021 and 2020.

As of December 31, 2021 there was $21,687 of unrecognized compensation costs related to non-vested stock options and restricted stock arrangements ($2,341 relating to stock options and $19,346 relating to restricted stock). This cost is expected to be recognized over a weighted-average period of 2.2 years for stock options and 1.8 years for restricted stock. As of December 31, 2021 there was $10,301 of unrecognized compensation costs related to non-vested performance share awards, and this cost is expected to be recognized over a weighted-average period of 1.8 years.

In determining compensation expense, the fair value of restricted stock awards, restricted stock units and performance share awards with a performance condition is based on the market value of the Company’s stock on the grant date of the awards or subsequent modification (as applicable).

The fair value of options is estimated on the grant date using the Black-Scholes model and includes the following assumptions:

Range of expected life of stock options (years) 5.3 to 5.7 5.2 to 5.7 5.1 to 5.7

The Company’s estimate of volatility is based solely on the Company’s trading history over the expected option life. The risk-free interest rate assumption is based upon the U.S. treasury yield curve at the time of grant for the expected option life. The Company estimates the expected terms of options using historical employee exercise behavior.

The fair value of performance share awards with a market condition is estimated on the grant date using a Monte Carlo simulation and includes the following assumptions:

Expected term (years) 2.8

Company volatility 42.10%

Peer group average volatility 91.00%

Peer group average correlation 31.50%

Risk-free interest rate 0.20%

Dividend yield 0.00%

The expected term is estimated as the remaining performance period at the grant date. Expected volatility is estimated based on the Company and peer group's daily trading prices, adjusted for dividends and stock splits over the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In Thousands, Except Per Share Amounts)

remaining performance period. The risk-free interest rate is based upon the US Constant Maturity yield curve at the time of grant for the expected term of the performance share awards.

Based on the assumptions noted above, the weighted average estimated grant date fair value per share of the stock options, restricted stock awards and performance share awards granted for 2021, 2020 and 2019 was as follows:

17. SEGMENT AND GEOGRAPHIC INFORMATION

The Company evaluates reporting segments in accordance with FASB ASC 280, “Segment Reporting”. The Company develops, manufactures and sells devices designed primarily for the surgical ablation of cardiac tissue, systems designed for the exclusion of the left atrial appendage and devices designed to block pain by temporarily ablating peripheral nerves. These devices are developed and marketed to a broad base of medical centers globally. Management considers all such sales to be part of a single operating segment. Revenue attributed to customer geographic locations is as follows:

United States revenue by product type is as follows:

International revenue by product type is as follows:

The Company’s long-lived assets are located in the United States, except for $1,399 as of December 31, 2021 and $1,693 as of December 31, 2020 located primarily in Europe.

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SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

Additions

BeginningBalance Costs and Expenses Other (1) Deductions EndingBalance

Reserve for sales returns and allowances

Allowance for inventory valuation

Valuation allowance for deferred tax assets

(1)In connection with the acquisition of SentreHEART, the Company recognized an allowance for sales returns and refunds for transition to ASC 606 to reflect SentreHEART’s historical refund practices and recorded a valuation allowance to offset the acquired net deferred tax assets.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the President and Chief Executive Officer (the Principal Executive Officer) and Chief Financial Officer (the Principal Accounting and Financial Officer), has evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rule 13(a) – 15(e) of the Securities Exchange Act of 1934 (Exchange Act), as of the end of the period covered by this report. Based on this evaluation, we concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s forms and rules, and the material information relating to the Company is accumulated and communicated to management, including the President and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that control objectives are met. Because of inherent limitations in all control systems, no evaluation of controls can provide assurance that all control issues and instances of fraud, if any, within a company will be detected. Additionally, controls can be circumvented by individuals, by collusion of two or more people or by management override. Over time, controls can become inadequate because of changes in conditions or the degree of compliance may deteriorate. Further, the design of any system of controls is based in part upon assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions. Because of the inherent limitations in any cost-effective control system, misstatements due to errors or fraud may occur and not be detected.

Changes in Internal Control over Financial Reporting

In the ordinary course of business, we routinely enhance our information systems by either upgrading current systems or implementing new ones. There were no changes in our internal control over financial reporting that occurred during the three months ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Annual Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. No matter how well designed, because of inherent limitations in all control systems, internal control over financial reporting may not prevent or detect misstatements should they occur. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the control procedures may deteriorate. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on such assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2021.

Deloitte & Touche LLP, the Company’s independent registered public accounting firm, has audited the Consolidated Financial Statements included in this Annual Report on Form 10-K and, as part of its audit, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of

AtriCure, Inc.

Mason, Ohio

ATRC US Equity

ATRC · 10-K · period ended 2021-12-31

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

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

ITEM 9A. CONTROLS AND PROCEDURES

ATRC US Equity☆

ATRC · 10-K · period ended 2021-12-31

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

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

ITEM 9A. CONTROLS AND PROCEDURES

ATRC US Equity