5. BUSINESS COMBINATION

On December 31, 2013 the Company completed its acquisition of Endoscopic Technologies, Inc. (“Estech”). The Company acquired 100% of the outstanding common and preferred shares and voting interest of Estech. The total consideration paid to Estech’s former shareholders in the acquisition was $34,000, paid through the issuance of 2,126,343 shares of AtriCure common stock with a value of $15.99 per share. The share value was calculated using the volume-weighted average share price of the ten days prior to the date of the signing of the merger agreement. Based on the Company’s closing stock price of $18.68 on December 31, 2013, the value of the 2,126,343 shares issued was $39,720 at the closing of the merger.

In addition, there is contingent consideration related to an earnout calculation that provides for the Company to pay Estech shareholders up to $26,000 based on future performance of minimally invasive (“MIS”) sales with a fair value of $8,032. The earnout calculation is based on the achievement of performance-based milestones. The milestones are a payment equal to $3,000 upon the achievement of Combined MIS Revenue of at least 90% of the 2014 Combined MIS Revenue Target or the 2015 Combined Revenue Company, a scaled payment of up to $2,500 based on achieving Combined MIS Revenue of between 90% and 98% of the 2014 Combined MIS Revenue Target or the 2015 Combined MIS Revenue Target, a scaled payment of up to $2,500 based on achieving Combined MIS Revenue of between 98% and 100% of the 2014 Combined MIS Revenue Target or the 2015 Combined Revenue Company and a scaled payment of up to $5,000 based on achieving Combined MIS Revenue of between 100% and 125% of the 2014 Combined MIS Revenue Target or the 2015 Combined Revenue Company. The Company has the option to make the payment related to the achievement of at least 90% of the 2014 Combined MIS Revenue Target or the 2015 Combined Revenue Company in cash or through the issuance of AtriCure common stock. The other payments may only be made in cash. The fair value of the earnout calculation was estimated using an expected present value approach to estimate an expected value, which, in statistical terms, is the weighted average of a discrete random variable’s possible values with the respective probabilities as the weights.

Estech was incorporated in 1996 and has been operating since that time developing and marketing a broad portfolio of innovative medical devices and disposables that enable cardiac surgeons worldwide to perform a variety of traditional and minimally invasive surgical procedures. AtriCure’s management believes the acquisition of Estech will expand the Company’s presence and reinforce its commitment to the atrial fibrillation market. The combination of the two companies enhances the Company’s leadership and intellectual property position across surgical ablation and epicardial left atrial appendage closure and accelerates the availability of broader surgical ablation offerings through the combination of Estech’s sales and marketing and research and development capabilities worldwide under the AtriCure umbrella.

The acquisition was accounted for in accordance with FASB ASC 805, “Accounting for Business Combinations” (“ASC 805”). The acquisition method of accounting was used to account for the acquisition. Under the acquisition method of accounting, the purchase price is required to be allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values. Any purchase price in excess of the fair market value of the acquired tangible and intangible assets is required to be allocated to goodwill in our consolidated balance sheet as of the end of the period in which the acquisition closed. The process for estimating the fair values of identifiable intangible assets and certain tangible assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s results of operations.

The operating results of Estech will be included in the Consolidated Statements of Operations and Comprehensive Loss beginning January 1, 2014. The Consolidated Balance Sheet as of December 31, 2013 reflects the acquisition of Estech.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed on the acquisition date:


	December 31, 2013
Cash and cash equivalents	$	3,708
Accounts receivable, net		2,378
Inventories		2,156
Other current assets		271
Property and equipment, net		1,026
Intangible assets, net		10,279
Other assets		51

Total identifiable assets	$	19,869

Accounts payable	$	1,761
Accrued liabilities		5,742

Total liabilities assumed	$	7,503

Net identifiable assets acquired	$	12,366
Goodwill		35,386

Total consideration	$	47,752

The above estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed. The Company believes that information provides a reasonable basis for estimating the fair values but the Company is waiting for additional information necessary to finalize those amounts, particularly with respect to the estimated fair value of intangible assets, deferred revenue, deferred taxes and goodwill. The potential for measurement period adjustments related to the acquired assets and assumed liabilities exists based on AtriCure’s continuing review of all matters related to the acquisition. Such changes could be significant. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.

The valuation of the intangible assets acquired and related amortization periods are as follows:


	Valuation		Amortization Term (in years)
Fusion technology	$	9,242	10
Clamp and probe technology		829	3
Estech trade name		208	1

Total	$	10,279

The fair value of the Fusion technology was estimated using a discounted present value income approach. Under this method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To calculate fair value, the Company used cash flows discounted at rates considered appropriate given the inherent risks associated with each type of intangible asset. The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions. The fair values of the clamp and probe technology and the Estech trade name were estimated using a present value income approach based on royalty savings. Under this method, the fair value is equal to the present value of after-tax royalty savings plus the present value of the tax amortization benefit attributable to the intangible assets over their useful lives. The intangible assets will be amortized over their useful lives using the straight-line method.

The Company recognized $1,207 of Estech acquisition-related costs that were expensed during 2013. These costs are included in selling, general and administrative expenses in the accompanying Consolidated Statements of Operations and Comprehensive Loss and are comprised of the following items:


Bank fees and expenses	$	509
Legal, audit, tax and other costs		698

Total	$	1,207

The following supplemental pro forma information presents the financial results as if the acquisition of Estech had occurred on January 1, 2012 for the years ended December 31, 2013 and 2012. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on January 1, 2012, nor are they indicative of any future results.


	Year Ended December 31, (unaudited)
	2013			2012
Revenue	$	93,846		$	81,954
Net loss		(21,161	)		(19,031	)
Basic and diluted net loss per share		(0.91	)		(1.04	)

These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Estech to reflect factually supportable adjustments that give effect to events that are directly attributable to the Estech acquisition.