AtriCure, Inc. (ATRC)

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

(Dollar and share amounts referenced in this Item 7 are in thousands, except per share amounts.)

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying Consolidated Financial Statements and notes thereto contained in Item 8, “Financial Statements and Supplementary Data,” to provide an understanding of our results of operations, financial condition and cash flows. This section of this Form 10-K generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. 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, 2023 compared to December 31, 2022

For a comparison of our results of operations for the years ended December 31, 2023 and December 31, 2022, 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, 2023, filed with the SEC on February 16, 2024.

Overview

We are a leading innovator in treatments for atrial fibrillation, left atrial appendage management and post-operative pain management. Our ablation and left atrial appendage management products are used by physicians during both open-heart and minimally invasive procedures. In open-heart procedures, the physician is performing heart surgery for other conditions, and our products are used in conjunction with (or “concomitant” to) such a procedure. Minimally invasive procedures are performed on a standalone basis, and often include multi-disciplinary or “hybrid” approaches, combining surgical procedures using AtriCure ablation and LAAM products with catheter ablation procedures performed by electrophysiologists. Our pain management devices are used by physicians to freeze nerves during cardiothoracic or thoracic surgical procedures. 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, Germany, France, the United Kingdom, the Benelux region, Australia and Canada. We also sell our products to distributors who in turn sell our products to medical centers in other markets. Our business is primarily transacted in U.S. Dollars; direct international sales transactions are transacted in Euros, British Pounds, Australian Dollars or Canadian Dollars.

In 2024, we realized significant global revenue growth and continued our strategic initiatives of product innovation, clinical science and physician education and training to expand awareness and adoption. Our worldwide revenues for the year ended December 31, 2024 of $465,307 was an increase of 16.5% over the prior year driven by growing adoption across key product lines as well as new product launches. Historically there have been limited competitors in our key markets, but new entrants are marketing and developing competing products, procedures, and/or clinical solutions that may cause variability in our results.

Highlights of the strategic and operational advancements in 2024 include:

PRODUCT INNOVATION. We continue to invest in research and development of new products and pursue regulatory approvals to market and sell globally across all franchises.

•Open. Upon receiving regulatory approval during the third quarter of 2024, we began selling the EnCompass clamp in CE-marked countries in the European Union, representing a significant expansion of our open ablation franchise products in Europe.

•Minimally invasive. In the first half of 2024, FDA granted 510(k) clearance for EPi-Ease, our Hybrid access device to facilitate guide-wire delivery, vacuum application and endoscope insertion. During the third quarter, FDA granted 510(k) clearance for our EnCapture clamp, the newest in our line of Isolator Synergy Ablation System clamps, with enhanced geometry and features to facilitate engagement with intended cardiac tissue.

•Pain management. During the second quarter of 2024, we launched the cryoSPHERE+ cryoablation probe for pain management in the United States. The cryoSPHERE+ device leverages new technology that minimizes thermal loss by focusing energy at the ball tip, allowing for a reduction in freeze time by 25%. Further, the cryoSPHERE MAX probe was launched during the fourth quarter of 2024 and features a larger ball tip designed

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to optimize Cryo Nerve Block therapy. This new probe reduces freeze times by 50% when compared to the first generation cryoSPHERE cryoablation probe, and over 30% when compared to the cryoSPHERE+ probe.

•Appendage management. We launched the AtriClip FLEX-Mini device in the United States during the third quarter of 2024. The AtriClip FLEX-Mini sets a new standard as the smallest profile for surgical LAA device on the market and builds upon the proven technology of our AtriClip platform, with ease of use and design simplicity that offers enhanced access and increased visibility for physicians. We also obtained additional international regulatory approvals for our AtriClip platform during the third quarter. In China, we received approval to market and sell several models of our AtriClip Left Atrial Appendage Exclusion System from the National Medical Products Administration (NMPA) of China. In CE-marked countries in Europe, we received expanded indication for the AtriClip for use in patients at high risk of thromboembolism for whom left atrial appendage exclusion is warranted.

Throughout 2024, we received several additional CE Mark certifications under the European Union Medical Device Regulation (EU MDR). As of December 31, 2024, substantially all of our products were cleared under EU MDR. During the fourth quarter of 2024, we entered into an exclusive licensing agreement with a third-party to co-develop and commercialize equipment incorporating pulsed field ablation. See Note 3 - Asset Acquisition for additional information.

CLINICAL SCIENCE. We invest in studies to expand labeling claims, support various indications for our products and publish clinical data for therapies and procedures involving our products. During 2024, we supported the publication of 19 articles and 17 congress abstracts featuring clinical studies with our product.

LeAAPS. The Left Atrial Appendage Exclusion for Prophylactic Stroke Reduction (LeAAPS) IDE clinical trial is designed to evaluate the effectiveness of prophylactic LAA exclusion using the AtriClip LAA Exclusion System for the prevention of ischemic stroke or systemic arterial embolism in cardiac surgery patients without pre-operative AF diagnosis who are at risk for these events. This prospective, multicenter, randomized trial evaluates safety at 30 days post-procedure to demonstrate no increased risk with LAA exclusion during cardiac surgery, and efficacy over a minimum follow-up of five years post procedure. The trial provides for enrollment of up to 6,500 subjects at up to 250 sites worldwide. In January 2023, the first patient was enrolled in the trial, and we ended 2024 with over 4,200 patients enrolled. Site initiation and enrollment is ongoing.

BoxX-NoAF. The EnCompass clamp and the AtriClip in Box Lesion and Left Atrial Appendage EXclusion Procedure for the Prevention of New Onset of Atrial Fibrillation (BoxX-NoAF) IDE trial will evaluate the impact of concomitant ablation and LAA exclusion in non-AF patients for the reduction of post-operative AF (POAF) and Clinical AF. This prospective, multi-center, multi-national randomized trial evaluates safety at 30 days post-procedure for POAF and secondary effectiveness for Clinical AF through three years. The trial provides for enrollment of up to 960 subjects. During the fourth quarter of 2024, FDA approved the trial protocol. We expect site initiation to begin by the end of 2025.

TRAINING. Our professional education and marketing teams conduct a variety of virtual and in-person training programs for physicians and other healthcare professionals. These training methods ensure access to continuing education and awareness of our products and related procedures. During 2023, we launched new training courses for Advanced Practice Providers, pain management in pectus procedures, as well as a best practice course for developing arrhythmia programs, with a primary focus on Hybrid therapies. These trainings allow for collaborative, hands-on engagement with our physician partners and other healthcare professionals. Additionally, our professional education courses continue to be enhanced by the use of simulation models or synthetic cadavers, known as CADets. These reusable CADets provide a sustainable alternative to the use of cadaver specimens, in addition to increasing the efficiencies of education and more cost effective training alternatives. In 2024, we continue to innovate physician training to improve accessibility and efficiency for our physician partners. We are currently piloting the use of live streaming to enable remote proctoring and case observation.

SOCIETY GUIDELINES. In 2024, the European Society of Cardiology (ESC) released Guidelines for Management of Atrial Fibrillation developed in collaboration with European Association of Cardio-Thoracic Surgery (EACTS), in which they upgraded LAAM to the highest Class 1 recommendation. During 2023, the American College of Cardiology (ACC), American Heart Association (AHA), American College of Clinical Pharmacy (ACCP) and HRS released Guidelines for Diagnosis and Management of Atrial Fibrillation, and upgraded LAAM to the highest recommendation of Class 1 and included Hybrid AF Therapy as a Class 2 recommendation. All major cardiac societal guidelines now include a Class 1 recommendation for surgical management of the left atrial appendage. These societal guidelines are reflective of the scientific evidence suggesting that surgical and hybrid ablation is safe and effective for patients who have Afib.

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Results of Operations

Year Ended December 31, 2024 compared to December 31, 2023

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

Revenue. The following table sets forth, for the periods indicated, our revenue by product type and geography expressed as dollar amounts and the corresponding change in such revenues between periods, in both dollars and percentages:

Worldwide revenue increased 16.5% as reported and on a constant currency basis. We experienced growth in all key product lines as a result of deepening market penetration, continuing physician adoption and new product launches. International revenue increased 25.6% as reported and on a constant currency basis, across all franchises and major geographic regions, while key products contributing to the increase in revenue in the United States were:

•EnCompass clamp in open ablation,

•cryoSPHERE probes for post-operative pain management and

•AtriClip® Flex⋅V® for appendage management.

Revenue reported on a constant currency basis is a non-GAAP measure calculated by applying previous period foreign currency exchange rates, which are determined by the average daily 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.

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Cost of revenue and gross margin. Cost of revenue increased $18,908 primarily reflecting higher sales volumes. Gross margin decreased by 55 basis points driven by less favorable geographic and product mix, as well as an increase in product costs.

Research and development expenses. Research and development expenses increased $22,263, or 30.1%. During 2024, we entered into an exclusive licensing agreement requiring upfront cash payment of $12,000 for the acquired in-process research and development (IPR&D), which was included in research and development expenses in 2024. See Note 3 – Asset Acquisition for further information. Expansion of product development, regulatory and clinical teams resulted in additional headcount-related costs (including travel and share-based compensation) of $6,773. Clinical trial expenses increased $4,801 due to increased trial activity driven by our LeAAPS clinical trial. These increases were partially offset by a $1,606 decrease in product development project spend and regulatory approval costs as several new products were brought to market in 2024, including cryoSPHERE+ and AtriClip FLEX-Mini.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $38,221, or 15.1%. Personnel costs, including travel and share-based compensation, increased $27,384 as a result of growth in headcount and variable compensation. Operational growth drove $2,156 additional professional services, IT and corporate costs along with $2,079 additional marketing and meeting activities. Finally, the increase reflects a $4,412 non-recurring net gain in 2023 related to legal settlements. See Note 11 – Commitments and Contingencies for related discussion.

Other income and expense. During 2024, the Company recognized a loss on debt extinguishment of $1,362. See Note 9 - Indebtedness for related discussion. The remaining activity consists primarily of net interest expense and net foreign currency transaction losses.

Liquidity and Capital Resources

As of December 31, 2024, we had cash and cash equivalents of $122,721 and unused borrowing capacity of approximately $61,885 under our existing credit agreement. All cash equivalents 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 $194,402 and an accumulated deficit of $401,755 as of December 31, 2024.

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 and periodic updates to the plan. Our principal cash requirements include costs of operations, capital expenditures, debt service costs and other contractual obligations. Our future capital requirements depend on a number of factors, including, without limitation: market acceptance of our current and future products; investments in working capital; costs to develop and support our products, including professional training, clinical trials and contractual development costs; costs to expand and support our sales and marketing efforts; operating and filing costs required by regulatory policies or laws; costs for clinical trials and to secure regulatory approval for new products; costs to prosecute, defend and enforce our intellectual property rights; costs to defend against and/or resolve litigation or claims against us; maintenance and enhancements to our information systems and security; and possible acquisitions and joint ventures, including potential business integration costs. We continue to evaluate additional measures to maintain financial flexibility, and we will continue to closely monitor macroeconomic conditions including, but not limited to, inflationary pressures, changing interest rates, and fluctuations in currency exchange rates that may impact our liquidity and access to capital resources.

Credit facility. On January 5, 2024, we entered into an asset-based credit agreement with JPMorgan Chase Bank, N.A. as Administrative Agent, JPMorgan Chase Bank, N.A. and Silicon Valley Bank, a division of First-Citizen Bank and Trust Company, as Joint Lead Arrangers and Joint Bookrunners (Credit Agreement) that provides for a $125,000 asset-based revolving credit facility (ABL Facility), with an option to increase the revolving commitment by an additional $40,000. A portion of the ABL facility, limited to $5,000, is available for the issuance of letters of credit. The Credit Agreement has a three-year term and expires January 5, 2027. Amounts available to be drawn from time to time under the ABL Facility are determined by calculating the applicable borrowing base, which is based upon applicable percentages of the values of eligible accounts receivable, eligible inventory, eligible liquid assets, less reserves as determined by the Administrative Agent, all as specified in the Credit Agreement. The borrowings bear interest at a rate per annum equal to, at the Company's election: (i) an alternate base rate (ABR) plus an applicable margin or (ii) an adjusted term secured overnight financing rate (SOFR) plus an applicable margin. The proceeds of the ABL Facility were used to terminate the Company’s indebtedness under the prior loan agreement with Silicon Valley Bank. As of December 31, 2024, our outstanding debt was $61,865 and we had unused borrowing availability of approximately $61,885.

Our corporate headquarters lease requires a $1,250 letter of credit which renews annually and remains outstanding as of December 31, 2024.

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For additional information on the terms and conditions, as well as applicable interest and fee payments, see Note 9 – Indebtedness.

Capital Expenditures. We incur capital expenditures on an ongoing basis to continue investment in our growth and our ability to better serve our customers. In recent years, we have expanded the manufacturing and engineering facilities in our Mason, Ohio campus and expect to continue to invest in facilities to support our growth.

Other Contractual Obligations. Our future obligations include both current and long-term obligations. In 2022, the Company entered into a clinical trial management agreement for the LeAAPS clinical trial. The terms of the agreement require payments upon achievement of various enrollment and project milestones over the estimated ten-year term, yet the agreement may be terminated early for any reason. Furthermore, we incur additional variable costs, including pass through costs from clinical trial sites. We expect to disburse between $14,000 and $17,000 of fixed and variable costs based on estimated achievement of milestone payments, site initiation and trial enrollment within the next twelve months.

In 2024, we entered into an exclusive licensing agreement to co-develop and commercialize equipment incorporating PFA technology. The agreement requires that we pay additional contingent consideration in cash upon achievement of specified developmental and regulatory approval milestones within defined periods over the ten-year term. We expect to disburse between $6,000 and $10,000 based on estimated achievement of milestone payments within the next twelve months. For additional information, see Note 3 – Asset Acquisition.

We have operating and finance leases primarily for our offices, manufacturing and warehouse facilities and automobiles. Our finance leases consist primarily of principal and interest payments related to our Mason, Ohio headquarters building. As of December 31, 2024, current finance lease obligations are $1,186 and long-term obligations are $7,281. Our operating leases for office and warehouse space includes current obligations of $1,619 and long-term obligations of $4,579 as of December 31, 2024. For additional information, see Note 10 – Leases.

We have a contractual obligation for a contingent consideration payment under the SentreHEART merger agreement that would be paid in AtriCure common stock and cash, up to a specified maximum number of shares. As of December 31, 2024, we believe the likelihood of payment is remote, and the estimated fair value of the contingent consideration is $0. See Note 2 – Fair Value.

Sources of liquidity. We believe that our current cash and cash equivalents, along with the cash we expect to generate or use for operations or access via our Credit Agreement, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. However, we have a shelf registration statement on file with the SEC 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 Credit Agreement requires compliance with certain financial and other covenants. If we are unable to maintain these financing arrangements, we may be required to reduce the scope of our planned research and development, clinical activities and selling, training, education and marketing efforts.

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

Cash flows provided by operating activities. Net cash provided by operating activities increased $7,720 in 2024 as compared to 2023. While operating results declined $14,260, this decline was driven primarily by an increase in adjustments to income and changes in non-cash expenses as well as the acquisition of in-process research and development for $12,000. Changes in non-cash expenses include $4,677 increase in share-based compensation, $3,920 increase in depreciation & amortization and $1,362 loss on extinguishment of debt. Cash used in working capital remained flat year over year due to moderating investments in inventory in 2024, offset by higher annual variable compensation due to improved operating performance.

Cash flows provided by investing activities. Net cash provided by investing activities increased by $8,417 in 2024 compared to 2023. This increase is attributable to a $18,000 decrease in cash paid for acquisitions year over year, offset by a $10,147 decrease in maturities of available-for-sale securities.

Cash flows used in financing activities. Net cash used in financing activities increased by $3,571 in 2024 compared to 2023, driven by $1,686 payment for extinguishment of debt and financing fees, net of borrowings, and a $1,491 decrease in proceeds from stock option exercises and the employee stock purchase plan.

Inflation

Inflationary pressures may have an adverse impact on our results of operations or financial condition in the foreseeable future. Inflation has impacted our operating costs throughout 2024 and 2023. Continued increases in our cost of revenue may affect our ability to maintain our gross margin if selling prices of our products do not increase commensurately, while continued increases in our operating expenses may adversely affect our operating results and the ability to make discretionary investments. We will continue to monitor the impact of inflation on our cost of revenue and operating expenses.

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.

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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 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 are not obligated to 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 sales all impact inventory reserves for excess, obsolete and expired products. An increase to inventory reserves results in a corresponding increase in cost of revenue. Inventories are written off against the reserve when they are physically disposed.

Share-Based Employee Compensation—We estimate the fair value of performance share awards with a performance condition initially 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.

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 along with 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 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 carryforward years and tax planning strategies that are both prudent and feasible. In evaluating the need for a valuation allowance, the existence of cumulative losses in recent years is significant objectively verifiable negative evidence that must be overcome by objectively-verifiable positive evidence to avoid the need for a valuation allowance. 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 1 – Description of Business and Summary of Significant Accounting Policies to the Consolidated Financial Statements in Item 8 of Part II for more information regarding recent accounting pronouncements.

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.)

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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 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. 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, 2022 compared to December 31, 2021

For a comparison of our results of operations for the years ended December 31, 2022 and December 31, 2021, 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, 2022, filed with the SEC on February 22, 2023.

Overview

We are a leading innovator in treatments for atrial fibrillation (Afib), left atrial appendage (LAA) management and post-operative pain management. Our ablation and left atrial appendage management (LAAM) products are used by physicians during both open-heart and minimally invasive procedures. In open-heart procedures, the physician is performing heart surgery for other conditions, and our products are used in conjunction with (or “concomitant” to) such a procedure. Minimally invasive procedures are performed on a standalone basis, and often include multi-disciplinary or “hybrid” approaches, combining surgical procedures using AtriCure ablation and LAAM products with catheter ablation procedures performed by electrophysiologists. Our pain management devices are used by physicians to freeze nerves during cardiothoracic or thoracic surgical procedures. 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, Germany, France, the United Kingdom, the Benelux region, Australia and Canada. We also sell our products to distributors who in turn sell our products to medical centers in other markets. Our business is primarily transacted in U.S. Dollars; direct international sales transactions are transacted in Euros, British Pounds, Australian Dollars or Canadian Dollars.

In 2023, we realized significant global revenue growth and continued our strategic initiatives of product innovation, clinical science and expanding physician awareness and adoption through superior training and education. Our worldwide revenues for the year ended December 31, 2023 of $399,245 was an increase of 20.8% over the prior year driven by growing adoption across key product lines. Historically there have been limited competitors in our key markets, but we have begun to see more entrants that may cause variability in 2024 results. Highlights of the strategic and operational advancements in 2023 include:

PRODUCT INNOVATION. We received final labeling approval for the next generation EPi-Sense ST device and began a limited launch evaluation in the fourth quarter of 2022, followed by full product launch in the second quarter of 2023. In October 2023, we received clearance for our next generation cryoSPHERE probe for pain management and expect to launch in the first quarter of 2024. Additionally, we completed several 510k submissions to FDA for new products in development. We also continue to make significant progress on European Medical Device Regulation (EU MDR) clearance submissions for our products. As of the second quarter of 2023, all of our products have been submitted to our notified body under EU MDR. These activities are in addition to several research and development programs currently underway.

CLINICAL SCIENCE. We continue to invest in studies to expand labeling claims, support various indications for our products and gather clinical data regarding our products.

LeAAPS. The Left Atrial Appendage Exclusion for Prophylactic Stroke Reduction (LeAAPS) IDE clinical trial is designed to evaluate the effectiveness of prophylactic LAA exclusion using the AtriClip LAA Exclusion System for the prevention of ischemic stroke or systemic arterial embolism in cardiac surgery patients without pre-operative AF diagnosis who are at risk for these events. This prospective, multicenter, randomized trial evaluates safety at 30 days post-procedure to demonstrate no increased risk with LAA exclusion during cardiac surgery, and efficacy over a minimum follow-up of five years post procedure. The trial provides for enrollment of up to 6,500 subjects at up to 250 sites worldwide. In January 2023, the first patient was enrolled in the trial, and we ended 2023 with nearly 1,400 patients enrolled. Site initiation and enrollment is ongoing.

ICE-AFIB. Trial enrollment was completed in the second quarter of 2023 for the ICE-AFIB clinical trial, which is designed to study the safety and efficacy of our cryoICE® system for persistent and long-standing persistent Afib treatment during concomitant on-pump cardiac surgery. The trial provided for enrollment of up to 150 patients at up to 20 sites in the United States. Patient follow-up for twelve months post ablation required by the study protocol remains ongoing.

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CEASE-AF. During the second quarter of 2023, results from our CEASE-AF trial were presented at the European Heart Rhythm Association meeting. CEASE-AF is a prospective, multi-center randomized control trial for persistent and long-standing persistent Afib treatment that demonstrated superior freedom from atrial arrhythmias for staged hybrid ablation compared to endocardial catheter ablation.

DEEP AF. During the fourth quarter of 2023, 12-month follow-up results of enrolled patients from our DEEP AF IDE trial were presented at the American Heart Association meeting. The DEEP AF IDE pivotal trial evaluated the safety and efficacy of the AtriCure Bipolar System when used in a staged approach where a minimally invasive surgical ablation procedure is first performed. The patient undergoes the endocardial catheter procedure approximately 91-120 days later. The results from this single arm study for persistent and long-standing persistent Afib treatment demonstrated superior freedom from atrial arrhythmias for staged hybrid ablation compared to a pre-specified performance goal.

TRAINING. Our professional education and marketing teams conduct virtual and in-person training programs for physicians and healthcare professionals. These training methods ensure invaluable access to continuing education and awareness of our products and related procedures. During 2023, we launched new training courses for Advanced Practice Providers, pain management in pectus procedures, as well as a best practice course for developing arrhythmia programs, with a primary focus on Hybrid therapies. These trainings allow for collaborative, hands-on engagement with our physician partners and other healthcare professionals. Additionally, our professional education courses continue to benefit from use of inanimate models or synthetic cadavers, known as CADets. These reusable CADets provide a sustainable alternative to the use of animals or cadavers, in addition to reducing spend on training programs.

SOCIETY GUIDELINES. In 2023, the American College of Cardiology (ACC), American Heart Association (AHA), American College of Clinical Pharmacy (ACCP), and HRS released Guidelines for Diagnosis and Management of Atrial Fibrillation, and they upgraded Left Atrial Appendage Management to the highest recommendation of Class 1 and now include Hybrid AF™ Therapy as a Class 2 recommendation. These societal guidelines are reflective of the scientific evidence suggesting that surgical and hybrid ablation is safe and effective for patients who have Afib.

Results of Operations

Year Ended December 31, 2023 compared to December 31, 2022

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

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Revenue. The following table sets forth, for the periods indicated, our revenue by product type and geography expressed as dollar amounts and the corresponding change in such revenues between periods, in both dollars and percentages:

Worldwide revenue increased 20.8% (20.6% on a constant currency basis). In the United States, we experienced growth in all key product lines as a result of deepening market penetration and expanding physician adoption. Key products contributing to the increase in revenue in the United States were:

•the ENCOMPASS® clamp in open ablation,

•Hybrid AF™ Therapy procedures using the EPi-Sense System in minimally invasive ablation,

•the cryoSPHERE® probe for post-operative pain management and

•the AtriClip® Flex⋅V® for appendage management.

International revenue increased 23.5% (22.1% on a constant currency basis), across all franchises and major geographic regions.

Revenue reported on a constant currency basis is a non-GAAP measure calculated by applying previous period foreign currency exchange rates, which are determined by the average daily 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 $14,436 primarily reflecting higher sales volumes. The gross margin increase of 80 basis points was driven by favorable production efficiencies, partially offset by less favorable geographic and product mix.

Research and development expenses. Research and development expenses increased $16,578, or 28.9%. Expansion of product development, regulatory and clinical teams resulted in $7,413 of additional personnel costs, including variable compensation and share-based compensation. Clinical trial expenses increased $6,667 due to strong enrollment activity in the LeAAPS clinical trial throughout the year. Additionally, our expanding product pipeline and domestic and international regulatory submissions drove a $2,389 increase in spending.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $21,866, or 9.5%. Personnel costs increased $26,971 as a result of growth in headcount, variable compensation and share-based compensation. Trade shows and marketing activities increased $1,538 and other administrative and operating expenses increased $2,274 as compared to the prior year. This increase was offset by a $4,019 decrease in training costs as a result of growing efficiencies and enhancements to our global training programs and a net gain of $4,412 from non-recurring legal settlements during the first half of 2023. Legal settlement activity included a $7,500 gain from proceeds on a legal matter settled during the first quarter of 2023, partially offset by a $3,088 charge for settlement of an intellectual property matter during the second quarter of 2023. See Note 10 – Commitments and Contingencies for further information.

Other income and expense. Other income and expense consists primarily of net interest expense and net foreign currency transaction losses. Net interest expense was $3,133 for 2023 and $2,992 for 2022.

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Liquidity and Capital Resources

As of December 31, 2023, we had cash, cash equivalents and investments of $137,285 and borrowing capacity of approximately $28,750 under the SVB Credit Facility. As a result of the new asset-based credit agreement with JPMorgan Chase Bank, N.A. entered into on January 5, 2024, unused borrowing availability increased to approximately $61,885 (see Note 8 – Indebtedness for related discussion). 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 $191,677 and an accumulated deficit of $357,057 as of December 31, 2023.

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 and periodic updates to the plan. Our principal cash requirements include costs of operations, capital expenditures, debt service costs and other contractual obligations. Our future capital requirements depend on a number of factors, including, without limitation: market acceptance of our current and future products; investments in working capital; costs to develop and support our products, including professional training; costs 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; costs to prosecute, defend and enforce our intellectual property rights; maintenance and enhancements to our information systems and security; and possible acquisitions and joint ventures, including potential business integration costs. We continue to evaluate additional measures to maintain financial flexibility, and we will continue to closely monitor macroeconomic conditions including, but not limited to, inflationary pressures, rising interest rates, and fluctuations in currency exchange rates that may impact our liquidity and access to capital resources.

Credit facility. As of December 31, 2023, we had a Loan and Security Agreement with Silicon Valley Bank (SVB), (SVB Loan Agreement). The SVB 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 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. We had unused borrowing capacity of approximately $28,750 under our revolving credit facility.

As of January 5, 2024, we entered into an asset-based credit agreement with JPMorgan Chase Bank, N.A. as Administrative Agent, JPMorgan Chase Bank, N.A. and Silicon Valley Bank, a division of First-Citizen Bank and Trust Company, as Joint Lead Arrangers and Joint Bookrunners (Credit Agreement) that provides for a $125,000 asset-based revolving credit facility (ABL Facility), with an option to increase the revolving commitment by an additional $40,000. A portion of the ABL facility, limited to $5,000, is available for the issuance of letters of credit. The Credit Agreement has a three-year term and expires January 5, 2027. Amounts available to be drawn from time to time under the ABL Facility are determined by calculating the applicable borrowing base, which is based upon applicable percentages of the values of eligible accounts receivable, eligible inventory, eligible liquid assets, less reserves as determined by the Administrative Agent, all as specified in the Credit Agreement. The borrowings bear interest at a rate per annum equal to, at the Company's election: (i) an alternate base rate (ABR) plus an applicable margin or (ii) an adjusted term secured overnight financing rate (SOFR) plus an applicable margin. At the time of closing, the Company borrowed $61,865 and had unused borrowing availability of approximately $61,885. The proceeds of the ABL Facility were used to terminate the Company’s indebtedness under the SVB Loan Agreement. As a result of the new Credit Agreement, the $60,000 borrowings outstanding under the SVB Loan Agreement as of December 31, 2023 are classified as noncurrent in the Consolidated Balance Sheet.

Our corporate headquarters lease agreement requires a $1,250 letter of credit which renews annually and remains outstanding as of December 31, 2023.

For additional information on the terms and conditions, as well as applicable interest and fee payments, see Note 8 – Indebtedness.

Capital Expenditures. We incur capital expenditures on an ongoing basis to continue investment in our growth and our ability to better serve our customers. Throughout 2021 through 2023, we continued expansion and renovation of our manufacturing and engineering facilities in our Mason, Ohio campus.

Other Contractual Obligations. Our future obligations include both current and long-term obligations. In 2022, the Company entered into a clinical trial management agreement for the LeAAPS clinical trial. The terms of the agreement require we make milestone payments upon achievement of various enrollment and project milestones over the estimated ten-year term, yet the agreement may be terminated early for any reason. Furthermore, we incur additional variable costs, including pass through costs from clinical trial sites. We expect to disburse between $14,000 and $17,000 of fixed and

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variable costs based on estimated achievement of milestone payments, site initiation and trial enrollment within the next twelve months.

We have operating and finance leases primarily for our corporate offices, manufacturing and warehouse facilities and automobiles. Our finance leases consist primarily of principal and interest payments related to our Mason, Ohio headquarters building. As of December 31, 2023, we have current finance lease obligations of $1,086 and long-term obligations of $8,061. Our operating leases for office and warehouse space includes current obligations of $1,447 and long-term obligations of $3,307. For additional information, see Note 9 – Leases.

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. As of December 31, 2023, we believe the likelihood of payment is remote, and the estimated fair value of the contingent consideration is $0. See Note 2 – 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 Credit Agreement, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. However, 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 Credit Agreement requires 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:

Cash flows provided by (used in) operating activities. Net cash provided by operating activities increased $26,625 in 2023 as compared to 2022, largely reflecting the improvement in operating results of $16,028 driven by higher sales, improvements to gross and operating margin and a net gain from legal settlements. Cash used for working capital remained relatively flat year over year, with increased investment in inventories largely offset by increased accruals for annual variable compensation payments due to improved operating performance.

Cash flows provided by investing activities. Net cash provided by investing activities decreased by $22,189 in 2023 compared to 2022, reflecting the $30,000 acquisition of intellectual property, partially offset by a $4,883 decrease in purchases of property and equipment following our 2022 manufacturing facilities expansion and $2,928 increase in net maturities of available-for-sale securities.

Cash flows used in financing activities. Net cash from financing activities increased by $7,027 in 2023 compared to 2022, reflecting savings of $5,644 due to fewer shares repurchased at a lower value for payment of taxes on stock awards and an increase of $1,536 of proceeds from the employee stock purchase plan and stock option exercise activity.

Inflation

Inflationary pressures may have an adverse impact on our results of operations or financial condition in the foreseeable future. Inflation has impacted our operating costs throughout 2023 and 2022. Continued increases in our cost of revenue may affect our ability to maintain our gross margin if the selling prices of our products do not increase commensurately, while continued increases in our operating expenses may adversely affect our operating results and the

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ability to make discretionary investments. We will continue to monitor the impact of inflation on our cost of revenue and operating expenses.

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 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 are not obligated to 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 sales all impact inventory reserves for excess, obsolete and expired products. An increase to inventory reserves results in a corresponding increase in cost of revenue. Inventories are written off against the reserve when they are physically disposed.

Share-Based Employee Compensation—We estimate the fair value of performance share awards with a performance condition initially 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.

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 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 carryforward years and tax planning strategies that are both prudent and feasible. In evaluating the need for a valuation allowance, the existence of cumulative losses in recent years is

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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 1 – Description of Business and Summary of Significant Accounting Policies to the Consolidated Financial Statements in Item 8 of Part II for more information regarding recent accounting pronouncements.

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

(Dollar and share amounts referenced in this Item 7 are in thousands, except per share amounts.)

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying Consolidated Financial Statements and notes thereto contained in Item 8, “Financial Statements and Supplementary Data,” to provide an understanding of our results of operations, financial condition and cash flows. This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. 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, 2021 compared to December 31, 2020

For a comparison of our results of operations for the years ended December 31, 2021 and December 31, 2020, 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, 2021, filed with the SEC on February 17, 2022.

Overview

We are a leading innovator in treatments for atrial fibrillation (Afib), left atrial appendage (LAA) management and post-operative pain management. Our ablation and left atrial appendage management (LAAM) products are used by physicians during both open-heart and minimally invasive procedures. In open-heart procedures, physicians are typically performing heart surgery for other conditions, and our products are used in conjunction with (or “concomitant” to) such a procedure. Minimally invasive procedures are performed on a standalone basis, and often include multi-disciplinary or “hybrid” approaches, combining surgical procedures using AtriCure ablation and AtriCure LAAM products with catheter ablation procedures performed by an electrophysiologist. Our pain management device is used by physicians to freeze nerves during cardiothoracic or thoracic surgical procedures. 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, Australia and the Benelux region. We also sell our products to distributors who in turn sell our products to medical centers in Japan, China and other international markets. Our business is primarily transacted in U.S. Dollars; direct sales transactions outside the United States are transacted in Euros, British Pounds or Australian Dollars.

During 2022, we continued to experience variability in demand for our products as non-emergent procedures were deferred in order to preserve resources for COVID-19 patients and caregivers, and hospital staffing was impacted by the pandemic and related factors. Beginning in the second quarter, many regions began to stabilize with overall improvements in procedure volume. We expect some variability to continue as we operate in many geographic regions with diverse restrictions that are impacted as new variants of the virus emerge and hospital staffing constraints continue to impact allocation of resources. Despite the challenging environment resulting from the pandemic, we reported annual revenues of $330,379 for the year ended December 31, 2022, an increase of 20.4% when compared to our prior year as a result of growing adoption across key product lines. We continue to build on our strategic initiatives of product innovation, investing in clinical science and providing superior training and education.

PRODUCT INNOVATION. In April 2022, we launched our EnCompass® clamp, following the July 2021 510(k) clearance for ablation of cardiac tissue during cardiac surgery. The EnCompass clamp marks innovation in our core open ablation market, and is expected to drive deeper penetration of cardiac surgery procedures. During September 2022, we received final labeling approval for the next generation EPi-Sense ST device and began a limited launch evaluation in the fourth quarter.

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.

HEAL-IST. In February 2022, FDA approved the protocol for the Hybrid Epicardial and Endocardial Sinus Node Sparing Ablation Therapy for Inappropriate Sinus Tachycardia (IST) clinical trial (HEAL-IST). The HEAL-IST clinical trial is designed to study the safety and efficacy of a hybrid sinus node sparing ablation procedure using the Isolator Synergy Surgical Ablation System for the treatment of symptomatic, drug refractory or drug intolerant IST. The trial is a

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prospective, multicenter, single arm trial that evaluates safety 30 days post-procedure and evaluates primary effectiveness of freedom from IST (as specified) at 12 months post-procedure. The trial provides for enrollment of up to 142 patients at up to 40 sites in the United States, United Kingdom and European Union. The first patient enrollment in the trial occurred in June 2022; site initiation and enrollment is ongoing.

LeAAPS. In April 2022, FDA approved the protocol for the Left Atrial Appendage Exclusion for Prophylactic Stroke Reduction (LeAAPS) IDE clinical trial. The trial is designed to evaluate the effectiveness of prophylactic LAA exclusion using the AtriClip LAA Exclusion System for the prevention of ischemic stroke or systemic arterial embolism in cardiac surgery patients without pre-operative AF diagnosis who are at risk for these events. This prospective, multicenter, randomized trial evaluates safety at 30 days post-procedure to demonstrate no increased risk with LAA exclusion during cardiac surgery, and efficacy over a minimum follow-up of five years post procedure. The trial provides for enrollment of up to 6,500 subjects at up to 250 sites worldwide. In January 2023, we announced first patient enrollment in the trial; site initiation and enrollment is ongoing.

TRAINING. Our professional education and marketing teams conduct virtual, in-person and mobile training for physicians and healthcare professionals, as well as our sales teams. Our training methods ensure invaluable access to continuing education and awareness of our products and related procedures. The 2021 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. Our Advanced Hybrid Ablation Training Courses are co-sponsored by the Heart Rhythm Society (HRS).

Results of Operations

Year Ended December 31, 2022 compared to December 31, 2021

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

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Revenue. The following table sets forth, for the periods indicated, our revenue by product type and geography expressed as dollar amounts and the corresponding change in such revenues between periods, in both dollars and percentages:

Worldwide revenue increased 20.4% (21.8% on a constant currency basis). Throughout the United States market, cardiac surgery volumes recovered and product adoption continued. Our Isolator Synergy System continued to generate the majority of our ablation-related revenue. Key drivers of growth included the AtriClip® Flex-V® device within the appendage management franchise, the cryoSPHERE® probe for pain management, and the 2022 launch of the EnCompass clamp in open ablation. Minimally invasive ablation sales decreased as declines in legacy product sales outpaced growth in Hybrid AF therapy procedures using the EPi-Sense system. International revenue increased 17.7% (25.7% on a constant currency basis) throughout our major European and Asia markets. Similar to the Unites States, International revenue growth was driven by appendage management, open ablation and pain management products, while minimally invasive ablation sales declined due to reduction in revenues from legacy products exceeding the growth in Hybrid AF therapy procedures using the EPi-Sense system.

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 $15,970 primarily reflecting revenue growth. The gross margin decrease of approximately 60 basis points was driven by inflationary and supply chain pressures and a shift in product mix to lower margin products, partially offsetting the benefit from higher volume.

Research and development expenses. Research and development expenses increased $8,831, or 18.2%. We expanded our product development, regulatory and clinical teams throughout 2022, resulting in additional $4,551 personnel costs including variable compensation, travel and share-based compensation. Product development project spend increased $1,053 as we continue to evolve our product pipeline. Clinical activities, regulatory submissions and consulting expenses, including compliance with EU MDR, drove $1,944 incremental costs, while amortization expense increased $820 following the April 2021 PMA of the CONVERGE IDE clinical trial. See Note 4 of the Consolidated Financial Statements for further discussion.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $26,623, or 13.0%. Higher headcount and rising travel expenses contributed $18,575 increase in personnel costs. Our commitment to physician training and return to in-person meetings, trade shows and marketing activities drove a $5,007 increase in expenses as compared to the prior year. Other administrative and operating expenses increased $3,114, largely for legal activity and information technology costs.

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 2 of the Consolidated Financial Statements for further discussion.

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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 4 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 $2,992 for 2022 and $4,452 for 2021. The decrease in net interest expense was driven by higher interest income from funds received for interest on past due trade receivables.

Liquidity and Capital Resources

As of December 31, 2022, we had cash, cash equivalents and investments of $172,622 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 $156,822 and an accumulated deficit of $326,619 as of December 31, 2022.

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 and periodic updates to the plan. Our future capital requirements depend on a number of factors, including, without limitation: market acceptance of our current and future products; costs to develop and support our products, including clinical evidence needs; future expenses to expand and support our sales, training 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; legal defense costs; costs to prosecute, defend and enforce our intellectual property rights; and possible acquisitions and joint ventures, including potential business integration costs. 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 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, 2022, our outstanding debt was $60,000, of which $3,333 is classified as current and $56,667 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 8 - Indebtedness.

Our corporate headquarters lease agreement requires a $1,250 letter of credit which renews annually and remains outstanding as of December 31, 2022.

Capital Expenditures. We incur capital expenditures on an ongoing basis to continue investment in our growth and our ability to better serve our customers. Throughout 2021 and 2022, we expanded our manufacturing operations as we completed the renovation of an additional facility of our Mason, Ohio campus.

Other Contractual Obligations. Our future obligations include both current and long-term obligations. In December 2022, the Company entered into a clinical trial management agreement for the LeAAPS clinical trial. The terms of the agreement require we make milestone payments upon achievement of various enrollment and project milestones over the estimated ten year term, yet the agreement may be terminated early for any reason. Furthermore, we will incur additional variable costs, including pass through costs from clinical trial sites. We expect to disburse between $6,000 and $9,000 of fixed and variable costs based on estimated achievement of milestone payments, site initiation and trial enrollment within the next twelve months. We have operating and finance leases primarily for our corporate offices, manufacturing and warehouse facilities, as well as computer equipment. Our finance leases consist primarily of principal and interest payments related to our Mason, Ohio headquarters. As of December 31, 2022, we have current finance lease obligations of $992 and long-term obligations of $9,147. Our operating leases for office and warehouse space includes current obligations of $1,147 and long-term obligations of $3,095. For additional information, see Note 9 - Leases. We additionally maintain a license agreement with terms that require royalty payments of 5% of specified product sales. See Note 10 - 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, 2022, we believe the likelihood of payment is remote, and the estimated fair value of the contingent consideration is $0. See Note 2 – Fair Value.

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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. However, 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:

Cash flows used in operating activities. Net cash used in operating activities increased $8,361 in 2022 as compared to 2021, largely reflecting the improvement in operating results after non-cash charges of $5,673 offset by an increase in cash needs for working capital and other assets and liabilities of $14,034. Working capital fluctuations are primarily due to the $11,237 reduction in accrued liabilities from higher annual variable compensation payments in 2022 due to improved operating performance in 2021 versus 2020, as well as an increase of $3,031 from our investment in inventories.

Cash flows provided by investing activities. Net cash provided by investing activities increased by $20,502 in 2022 compared to 2021, reflecting higher net sales and maturities of available-for-sale securities of $27,630, offset by an increase of $7,128 for the purchase of property and equipment primarily for the expansion of our manufacturing facilities.

Cash flows used in financing activities. Net cash from financing activities decreased by $583 in 2022 compared to 2021, driven by $1,171 reduced debt fee payments, offset by an $505 increase in net cash used in equity compensation plan activity. Lower stock performance contributed to less proceeds from stock option exercise activity and fewer shares repurchased for payment of taxes for stock awards offset with slight increases in employee stock purchase plan activity.

Inflation

Inflationary pressures may have an adverse impact on our results of operations or financial condition in the foreseeable future. Inflation has impacted our operating costs throughout 2022. Continued increases in our cost of revenue may effect our ability to maintain our gross margin if the selling prices of our products do not increase commensurately, while continued increases in our operating expenses may adversely effect our operating results and the ability to make discretionary investments. We will continue to monitor the impact of inflation on our cost of revenue and operating expenses.

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

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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 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.

Share-Based Employee Compensation—We estimate the fair value of performance share awards with a performance condition initially 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.

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 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 carryforward years and tax planning strategies that are both prudent and feasible. In evaluating the need for a valuation allowance, the existence of cumulative losses in recent years is significant objectively verifiable negative evidence that must be overcome by objectively-verifiable positive evidence to avoid the need for a valuation allowance. 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 1 – Description of Business and Summary of Significant Accounting Policies to the Consolidated Financial Statements in Item 8 of Part II for more information regarding recent accounting pronouncements.

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® Synergy™ 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 CONVERGE™ 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:

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:

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.