##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 Commission File Number: 0-18602
 ATS MEDICAL, INC.
  Minnesota
    
    41-1595629(State or Other Jurisdiction of
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)3905 Annapolis Lane N., Suite 105Minneapolis, Minnesota
    
    55447(Address of Principal Executive Offices)
    
    (Zip Code)
 (Registrants Telephone Number, Including Area Code)
 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
  þ o
  o þ o
  o þ




---



##### 



TABLE OF CONTENTS
 Page(s)PART I. FINANCIAL INFORMATIONITEM 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of September 30, 2007
and December 31, 2006
    
    
    3Consolidated Statements of Operations for the
three and nine months ended September 30, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flow for the
nine months ended September 30, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6 - 15ITEM 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    16 - 24ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24ITEM 4. Controls and Procedures
    
    
    24 - 25PART II. OTHER INFORMATIONITEM 1 Legal Proceedings
    
    
    26 - 27ITEM 1A. Risk Factors
    
    
    27 - 32ITEM 6. Exhibits
    
    
    32 - 33SIGNATURES
    
    
    34EXHIBIT INDEX
    
    
    35Certification of the Principal Executive OfficerCertification of the Principal Financial OfficerCertification of the Principal Executive OfficerCertification of the Principal Financial Officer
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 ATS Medical, Inc.
 
 Consolidated Balance Sheets
  September 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    16,826
    
    
    $
    4,612Short-term investments
    
    
    58
    
    
    
    6,092Accounts receivable, net
    
    
    11,008
    
    
    
    11,677Other receivables
    
    
    178
    
    
    
    Inventories
    
    
    18,264
    
    
    
    18,782Prepaid expenses
    
    
    1,084
    
    
    
    1,175Total current assets
    
    
    47,418
    
    
    
    42,338Leasehold improvements, furniture and equipment, net
    
    
    8,171
    
    
    
    8,213Goodwill
    
    
    15,191
    
    
    
    5,092Other intangible assets
    
    
    36,414
    
    
    
    28,063Other assets
    
    
    1,776
    
    
    
    2,134Total assets
    
    $
    108,970
    
    
    $
    85,840Liabilities and shareholders equityCurrent liabilities:Accounts payable
    
    $
    3,272
    
    
    $
    3,183Accrued compensation
    
    
    1,466
    
    
    
    2,589Accrued distributor liabilities
    
    
    1,269
    
    
    
    1,024Other accrued liabilities
    
    
    1,347
    
    
    
    1,433Current maturities of bank notes payable
    
    
    1,843
    
    
    
    1,133Warrant liability
    
    
    3,132
    
    
    
    Total current liabilities
    
    
    12,329
    
    
    
    9,362Bank notes payable
    
    
    6,757
    
    
    
    1,194Payable to CryoCath Technologies, Inc.
    
    
    1,702
    
    
    
    Convertible senior notes payable, net of unamortized
discounts and bifurcated derivatives of $4,980 and
$5,006 at September 30, 2007 and December 31, 2006
    
    
    17,420
    
    
    
    17,394Shareholders equity:Common stock, $.01 par value:Authorized shares - 100,000,000
Issued and outstanding shares- 59,305,768 and 40,320,487
at September 30, 2007 and December 31, 2006
    
    
    593
    
    
    
    403Additional paid-in capital
    
    
    195,844
    
    
    
    166,411Accumulated other comprehensive income
    
    
    741
    
    
    
    645Accumulated deficit
    
    
    (126,416
    )
    
    
    (109,569
    )Total shareholders equity
    
    
    70,762
    
    
    
    57,890Total liabilities and shareholders equity
    
    $
    108,970
    
    
    $
    85,840
 The accompanying notes are an integral part of the consolidated financial statements.
 3




---



##### Table of Contents



ATS Medical, Inc.
 
 Consolidated Statements of Operations
 (Unaudited)
  Three months ended September 30,
    
    

Nine months ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    12,157
    
    
    $
    9,122
    
    
    $
    35,370
    
    
    $
    29,709Cost of goods sold
    
    
    5,313
    
    
    
    3,894
    
    
    
    15,411
    
    
    
    14,302Gross profit
    
    
    6,844
    
    
    
    5,228
    
    
    
    19,959
    
    
    
    15,407Operating expenses:Sales and marketing
    
    
    5,540
    
    
    
    5,287
    
    
    
    17,448
    
    
    
    15,233Research and development
    
    
    1,815
    
    
    
    528
    
    
    
    5,373
    
    
    
    1,370Acquired in-process research
and development
    
    
    
    
    
    
    14,400
    
    
    
    3,500
    
    
    
    14,400General and administrative
    
    
    2,209
    
    
    
    2,067
    
    
    
    7,318
    
    
    
    6,288Amortization of intangibles
    
    
    802
    
    
    
    
    
    
    
    1,631
    
    
    
    Intangible asset impairment
    
    
    
    
    
    
    
    
    
    
    755
    
    
    
    Total operating expenses
    
    
    10,366
    
    
    
    22,282
    
    
    
    36,025
    
    
    
    37,291Operating loss
    
    
    (3,522
    )
    
    
    (17,054
    )
    
    
    (16,066
    )
    
    
    (21,884
    )Net interest expense
    
    
    (515
    )
    
    
    (446
    )
    
    
    (1,267
    )
    
    
    (1,235
    )Other income, net
    
    
    727
    
    
    
    245
    
    
    
    486
    
    
    
    1,525Net loss
    
    $
    (3,310
    )
    
    $
    (17,255
    )
    
    $
    (16,847
    )
    
    $
    (21,594
    )Net loss per share:Basic and diluted
    
    $
    (0.06
    )
    
    $
    (0.55
    )
    
    $
    (0.33
    )
    
    $
    (0.69
    )Weighted average number of
shares outstanding:Basic and diluted
    
    
    59,224
    
    
    
    31,358
    
    
    
    50,290
    
    
    
    31,256
 The accompanying notes are an integral part of the consolidated financial statements.
 4




---



##### Table of Contents



ATS Medical, Inc.
 
 Consolidated Statements of Cash Flow
 (Unaudited)
  Nine months ended September 30,2007
    
    
    2006Operating activitiesNet loss
    
    $
    (16,847
    )
    
    $
    (21,594
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization
    
    
    3,174
    
    
    
    1,317Loss on disposal of equipment
    
    
    
    
    
    
    26Stock compensation expense
    
    
    1,175
    
    
    
    794Acquired in-process research and development
    
    
    3,500
    
    
    
    14,400Impairment of intangibles
    
    
    755
    
    
    
    Non-cash interest expense
    
    
    385
    
    
    
    350Change in value of warrant liability and convertible senior notes derivatives
    
    
    (208
    )
    
    
    (1,525
    )Changes in operating assets and liabilities, net of acquisitions:Accounts receivable
    
    
    1,093
    
    
    
    (844
    )Inventories
    
    
    1,049
    
    
    
    2,609Prepaid expenses
    
    
    91
    
    
    
    121Accounts payable and accrued expenses
    
    
    (1,635
    )
    
    
    (873
    )Other
    
    
    
    
    
    
    (113
    )Net cash used in operating activities
    
    
    (7,468
    )
    
    
    (5,332
    )Investing activitiesPurchase of assets from CryoCath Technologies, Inc.
    
    
    (21,074
    )
    
    
    Purchases of short-term investments
    
    
    
    
    
    
    (7,725
    )Maturities of short-term investments
    
    
    6,034
    
    
    
    8,179Business acquisition costs, net of cash acquired
    
    
    (1,807
    )
    
    
    (555
    )Payments for technology and distribution licenses
    
    
    (202
    )
    
    
    (210
    )Purchases of leasehold improvements, furniture and equipment
    
    
    (617
    )
    
    
    (485
    )Other
    
    
    (36
    )
    
    
    Net cash used in investing activities
    
    
    (17,702
    )
    
    
    (796
    )Financing activitiesAdvances on bank notes payable
    
    
    8,600
    
    
    
    1,500Repayments of bank notes payable
    
    
    (2,327
    )
    
    
    (625
    )Net proceeds from sales of common stock and warrants
    
    
    31,210
    
    
    
    178Other
    
    
    116
    
    
    
    Net cash provided by financing activities
    
    
    37,599
    
    
    
    1,053Effect of exchange rate changes
    
    
    (215
    )
    
    
    150Increase (decrease) in cash and cash equivalents
    
    
    12,214
    
    
    
    (4,925
    )Cash and cash equivalents at beginning of period
    
    
    4,612
    
    
    
    16,620Cash and cash equivalents at end of period
    
    $
    16,826
    
    
    $
    11,695Significant non-cash transactionsIssuance of common stock for acquisition of intangible assets
    
    $
    500
    
    
    
    Assumption of liabilities in connection with asset acquisition
    
    
    2,429
    
    
    
    License agreement intangible asset tendered in asset acquisition
    
    
    1,765
    
    
    
    
 The accompanying notes are an integral part of the consolidated financial statements.
 5




---



##### Table of Contents



ATS Medical, Inc.
 
 Notes to Consolidated Financial Statements
 (Unaudited)
 Note 1. Basis of Presentation
    Note 2. Common Stock
 Stock-Based Compensation
 Share-Based Payment,
  WeightedStock Options Outstanding
    
    
    
    
    
    
    
    
    
    
    Average OptionUnder the Plans
    
    
    Non-Plan
    
    
    
    
    
    
    Exercise PriceISO
    
    
    Non-ISO
    
    
    Options
    
    
    Total
    
    
    Per ShareBalance at December 31, 2006
    
    
    917,625
    
    
    
    299,000
    
    
    
    2,532,700
    
    
    
    3,749,325
    
    
    $
    2.94Options exercised
    
    
    (21,500
    )
    
    
    
    
    
    
    (377,000
    )
    
    
    (398,500
    )
    
    
    1.04Options canceled
    
    
    (117,375
    )
    
    
    
    
    
    
    (223,750
    )
    
    
    (341,125
    )
    
    
    3.93Balance at September 30, 2007
    
    
    778,750
    
    
    
    299,000
    
    
    
    1,931,950
    
    
    
    3,009,700
    
    
    $
    3.08
  6




---



##### Table of Contents



Options Outstanding at
    
    
    Options Exercisable atSeptember 30, 2007:
    
    
    September 30, 2007:Weighted
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    Average
    
    
    
    
    
    
    AverageRange of
    
    
    Number
    
    
    Remaining
    
    Exercise
    
    
    Number
    
    
    ExerciseExercise Prices
    
    
    Outstanding
    
    
    Contractual Life
    
    Price
    
    
    Exercisable
    
    
    Price$
    0.37 $0.46
    
    
    
    505,000
    
    
    5.13 years
    
    $
    0.40
    
    
    
    505,000
    
    
    $
    0.400.51    2.51
    
    
    
    674,250
    
    
    5.46 years
    
    
    1.65
    
    
    
    674,250
    
    
    
    1.652.70    3.60
    
    
    
    524,200
    
    
    6.05 years
    
    
    3.29
    
    
    
    516,700
    
    
    
    3.283.64    3.80
    
    
    
    625,750
    
    
    6.10 years
    
    
    3.74
    
    
    
    625,750
    
    
    
    3.743.99    6.38
    
    
    
    522,000
    
    
    5.33 years
    
    
    4.78
    
    
    
    522,000
    
    
    
    4.788.19    9.88
    
    
    
    158,500
    
    
    2.85 years
    
    
    8.74
    
    
    
    158,500
    
    
    
    8.74$
    0.37 $9.88
    
    
    
    3,009,700
    
    
    5.48 years
    
    $
    3.08
    
    
    
    3,002,200
    
    
    $
    3.08
   Weighted
    
    
    WeightedAverage
    
    
    AverageNumber of
    
    
    Award Date
    
    
    RemainingShares
    
    
    Fair Value
    
    
    Contractual TermUnvested at December 31, 2006
    
    
    1,169,522
    
    
    $
    2.83
    
    
    2.03 yearsAwards granted
    
    
    1,058,130
    
    
    
    1.67
    
    
    
    Awards vested
    
    
    (363,555
    )
    
    
    2.84
    
    
    
    Awards forfeited
    
    
    (233,217
    )
    
    
    2.55
    
    
    
    Unvested at September 30, 2007
    
    
    1,630,880
    
    
    $
    2.12
    
    
    3.73 years
   Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Stock compensation expense included in:Sales and marketing expenses
    
    $
    314
    
    
    $
    209
    
    
    $
    687
    
    
    $
    465General and administrative expenses
    
    
    238
    
    
    
    125
    
    
    
    488
    
    
    
    329Total stock compensation expense
    
    $
    552
    
    
    $
    334
    
    
    $
    1,175
    
    
    $
    794Stock compensation expense per share
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.03
 7




---



##### Table of Contents



2007
    
    
    2006First Quarter
    
    
    9.26
    %
    
    
    11.85
    %Second Quarter
    
    
    8.97
    %
    
    
    10.14
    %Third Quarter
    
    
    8.50
    %
    
    
    9.57
    %
   Private Placements
    Note 3. Acquisitions
 Acquisition of Assets from CryoCath Technologies, Inc.
 ®
 8




---



##### Table of Contents



Purchase Price.
  Cash paid
    
    $
    21,074License payments made under prior Distribution and Agent Agreements
    
    
    1,765Non-contingent cash payment to be made (discounted to present value)
    
    
    1,663Acquisition-related costs
    
    
    1,807Total preliminary purchase price
    
    $
    26,309
 Preliminary Purchase Price Allocation.
 Current assets
    
    $
    951Fixed assets
    
    
    761Definite-lived intangible assets subject to amortization
    
    
    11,800Goodwill
    
    
    10,063Acquired in-process research and development
    
    
    3,500Current liabilities
    
    
    (766
    )Total preliminary purchase price allocation
    
    $
    26,309
  Weighted AverageAmount
    
    
    Amortization(in thousands)
    
    Assigned
    
    
    PeriodDefinite-lived intangible assets:Existing technology  core
    
    $
    4,400
    
    
    16 yearsExisting technology  developed
    
    
    5,600
    
    
    5 yearsDistributor relationships
    
    
    1,500
    
    
    12 yearsProduct trademarks
    
    
    300
    
    
    10 yearsTotal definite-lived intangible assets
    
    $
    11,800
    
    
    10 yearsGoodwill
    
    $
    10,063Acquired in-process research and
development
    
    $
    3,500
  9




---



##### Table of Contents



Acquisition of 3F Therapeutics, Inc.
   Pro Forma Results of Operations
   10




---



##### Table of Contents



Three months(in thousands, except
    
    endedper share data)
    
    September 30,
    
    
    Nine months ended September 30,2006
    
    
    2007
    
    
    2006Net sales
    
    $
    10,955
    
    
    $
    39,734
    
    
    $
    35,524License revenue
    
    
    3,650
    
    
    
    
    
    
    
    11,031Total revenue
    
    $
    14,605
    
    
    $
    39,734
    
    
    $
    46,555Net loss
    
    $
    (4,196
    )
    
    $
    (13,077
    )
    
    $
    (9,680
    )Net loss per share  basic
and diluted
    
    $
    (0.08
    )
    
    $
    (0.23
    )
    
    $
    (0.19
    )
    Note 4. Inventories
  September 30,
    
    
    December 31,(in thousands)
    
    2007
    
    
    2006Raw materials
    
    $
    3,741
    
    
    $
    4,615Work-in-process
    
    
    2,826
    
    
    
    2,948Finished goods
    
    
    11,697
    
    
    
    11,219$
    18,264
    
    
    $
    18,782
 Note 5. Comprehensive Income (Loss)
  Note 6. Intangible Assets
 Indefinite-lived Intangibles and Impairment Policy
 Goodwill and Other Intangible Assets,
 11




---



##### Table of Contents



Intangible Asset Impairment
  Change in Status of Indefinite-lived Intangible Asset
  Intangible Asset Purchases
    Note 7. Long-Term Debt
 Convertible Senior Notes Payable
  Accounting for Derivative Instruments and Hedging Activities,
 12




---



##### Table of Contents



Bank Notes Payable
      Note 8. Recently Issued Accounting Pronouncements
 Fair Value
Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities Accounting for Certain Investments in
Debt and Equity
Securities
 13




---



##### Table of Contents



Note 9. Litigation
 Abbey Litigation
    CarboMedics Litigation
  14




---



##### Table of Contents



15




---



##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 This document contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Words such as may, expect, believe, anticipate or
estimate identify such forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, and actual results may differ materially from those expressed
in such forward-looking statements. Some of the factors that could cause such material differences
are identified in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2006 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. We undertake no
obligation to correct or update any forward-looking statements, whether as a result of new
information, future events or otherwise. You are advised, however, to consult any future
disclosures we make on related subjects in future filings with the SEC.
 Executive Overview
   ® .
  ® ®
   16




---



##### Table of Contents



®
 ®
 Critical Accounting Policies and Estimates
  17




---



##### Table of Contents



Results of Operations
  Three months ended September 30,

    
    Nine months ended September 30,Increase (Decrease)
    
    
    
    
    
    
    
    
    
    
    Increase (Decrease)(In thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %Net sales
    
    $
    12,157
    
    
    $
    9,122
    
    
    $
    3,035
    
    
    
    33.3
    %
    
    $
    35,370
    
    
    $
    29,709
    
    
    $
    5,661
    
    
    
    19.1
    %Cost of goods sold
    
    
    5,313
    
    
    
    3,894
    
    
    
    1,419
    
    
    
    36.4
    %
    
    
    15,411
    
    
    
    14,302
    
    
    
    1,109
    
    
    
    7.8
    %Gross profit
    
    
    6,844
    
    
    
    5,228
    
    
    
    1,616
    
    
    
    30.9
    %
    
    
    19,959
    
    
    
    15,407
    
    
    
    4,552
    
    
    
    29.5
    %Operating expenses:Sales and marketing
    
    
    5,540
    
    
    
    5,287
    
    
    
    253
    
    
    
    4.8
    %
    
    
    17,448
    
    
    
    15,233
    
    
    
    2,215
    
    
    
    14.5
    %Research and development
    
    
    1,815
    
    
    
    528
    
    
    
    1,287
    
    
    
    243.8
    %
    
    
    5,373
    
    
    
    1,370
    
    
    
    4,003
    
    
    
    292.2
    %Acquired in-process R & D
    
    
    
    
    
    
    14,400
    
    
    
    (14,400
    )
    
    
    (100.0
    )%
    
    
    3,500
    
    
    
    14,400
    
    
    
    (10,900
    )
    
    
    (75.7
    )%General and administrative
    
    
    2,209
    
    
    
    2,067
    
    
    
    142
    
    
    
    6.9
    %
    
    
    7,318
    
    
    
    6,288
    
    
    
    1,030
    
    
    
    16.4
    %Amortization of intangibles
    
    
    802
    
    
    
    
    
    
    
    802
    
    
    
    
    
    
    
    1,631
    
    
    
    
    
    
    
    1,631
    
    
    
    Impairment of intangibles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    755
    
    
    
    
    
    
    
    755
    
    
    
    Total operating expenses
    
    
    10,366
    
    
    
    22,282
    
    
    
    (11,916
    )
    
    
    (53.5
    )%
    
    
    36,025
    
    
    
    37,291
    
    
    
    (1,266
    )
    
    
    (3.4
    )%Operating loss
    
    
    (3,522
    )
    
    
    (17,054
    )
    
    
    (13,532
    )
    
    
    (79.3
    )%
    
    
    (16,066
    )
    
    
    (21,884
    )
    
    
    (5,818
    )
    
    
    (26.6
    )%Net interest expense
    
    
    (515
    )
    
    
    (446
    )
    
    
    69
    
    
    
    15.5
    %
    
    
    (1,267
    )
    
    
    (1,235
    )
    
    
    32
    
    
    
    2.6
    %Other income, net
    
    
    727
    
    
    
    245
    
    
    
    482
    
    
    
    196.7
    %
    
    
    486
    
    
    
    1,525
    
    
    
    (1,039
    )
    
    
    (68.1
    )%Net loss
    
    $
    (3,310
    )
    
    $
    (17,255
    )
    
    $
    (13,945
    )
    
    
    (80.8
    )%
    
    $
    (16,847
    )
    
    $
    (21,594
    )
    
    $
    (4,747
    )
    
    
    (22.0
    )%
  Three months ended
    
    
    Nine months endedSeptember 30,

    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    43.7
    %
    
    
    42.7
    %
    
    
    43.6
    %
    
    
    48.1
    %Gross profit
    
    
    56.3
    %
    
    
    57.3
    %
    
    
    56.4
    %
    
    
    51.9
    %Operating expenses:Sales and marketing
    
    
    45.6
    %
    
    
    58.0
    %
    
    
    49.3
    %
    
    
    51.3
    %Research and development
    
    
    14.9
    %
    
    
    5.8
    %
    
    
    15.2
    %
    
    
    4.6
    %Acquired in-process R & D
    
    
    0.0
    %
    
    
    157.9
    %
    
    
    9.9
    %
    
    
    48.5
    %General and administrative
    
    
    18.2
    %
    
    
    22.7
    %
    
    
    20.7
    %
    
    
    21.2
    %Amortization of intangibles
    
    
    6.6
    %
    
    
    0.0
    %
    
    
    4.6
    %
    
    
    0.0
    %Impairment of intangibles
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    2.1
    %
    
    
    0.0
    %Total operating expenses
    
    
    85.3
    %
    
    
    244.3
    %
    
    
    101.9
    %
    
    
    125.5
    %Operating loss
    
    
    (29.0
    )%
    
    
    (187.0
    )%
    
    
    (45.4
    )%
    
    
    (73.7
    )%Net interest expense
    
    
    (4.2
    )%
    
    
    (4.9
    )%
    
    
    (3.6
    )%
    
    
    (4.2
    )%Other income, net
    
    
    6.0
    %
    
    
    2.7
    %
    
    
    1.4
    %
    
    
    5.1
    %Net loss
    
    
    (27.2
    )%
    
    
    (189.2
    )%
    
    
    (47.6
    )%
    
    
    (72.7
    )%
 18




---



##### Table of Contents



Net Sales.
 Three months ended September 30,

    
    Nine months ended September 30,Increase
    
    
    
    
    
    
    
    
    
    
    Increase(In thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %United States and
Canada
    
    $
    5,130
    
    
    $
    3,799
    
    
    $
    1,331
    
    
    
    35.0
    %
    
    $
    13,511
    
    
    $
    11,859
    
    
    $
    1,652
    
    
    
    13.9
    %Outside U. S. and
Canada
    
    
    7,027
    
    
    
    5,323
    
    
    
    1,704
    
    
    
    32.0
    %
    
    
    21,859
    
    
    
    17,850
    
    
    
    4,009
    
    
    
    22.5
    %Total
    
    $
    12,157
    
    
    $
    9,122
    
    
    $
    3,035
    
    
    
    33.3
    %
    
    $
    35,370
    
    
    $
    29,709
    
    
    $
    5,661
    
    
    
    19.1
    %
  Three months ended
    
    
    Nine months endedSeptember 30,
    

    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006United States and
Canada
    
    
    42.2
    %
    
    
    41.6
    %
    
    
    38.2
    %
    
    
    39.9
    %Outside U. S. and
Canada
    
    
    57.8
    %
    
    
    58.4
    %
    
    
    61.8
    %
    
    
    60.1
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  Three months ended September 30,
    

    Nine months ended September 30,Increase
    
    
    
    
    
    
    
    
    
    
    Increase(In thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %Heart valve therapy
    
    $
    8,451
    
    
    $
    7,962
    
    
    $
    489
    
    
    
    6.1
    %
    
    $
    28,220
    
    
    $
    26,222
    
    
    $
    1,998
    
    
    
    7.6
    %Surgical arrhythmia therapy
    
    
    3,295
    
    
    
    999
    
    
    
    2,296
    
    
    
    229.8
    %
    
    
    6,113
    
    
    
    3,212
    
    
    
    2,901
    
    
    
    90.3
    %Surgical tools and accessories
    
    
    411
    
    
    
    161
    
    
    
    250
    
    
    
    155.3
    %
    
    
    1,037
    
    
    
    275
    
    
    
    762
    
    
    
    277.1
    %Total
    
    $
    12,157
    
    
    $
    9,122
    
    
    $
    3,035
    
    
    
    33.3
    %
    
    $
    35,370
    
    
    $
    29,709
    
    
    $
    5,661
    
    
    
    19.1
    %
   19




---



##### Table of Contents



Cost of Goods Sold and Gross Profit.
    Sales and Marketing.
  Research and Development.
 Acquired
In-Process R & D.
 20




---



##### Table of Contents



General and Administrative.
  Amortization of Intangibles.
 Impairment of Intangibles
 Net Interest Expense . Financing
Activities
  Net Other Income
 21




---



##### Table of Contents



Accounting for Derivative
Instruments and Hedging Activities.
  Income Taxes
 Net Loss.
 Liquidity and Capital Resources
  Operating Activities.
 Investing Activities.
 22




---



##### Table of Contents



Financing Activities.
     23




---



##### Table of Contents



Cash Management
   Off-Balance Sheet Arrangements
  
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
     
 ITEM 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  24




---



##### Table of Contents



Changes in Internal Control over Financial Reporting
  25




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
 Abbey Litigation
    26




---



##### Table of Contents



CarboMedics Litigation
   
 ITEM 1A. Risk Factors
   We currently rely on the ATS mechanical heart valve as our primary source of revenue. If we are
not successful in selling this product, our operating results will be harmed.
  The anticipated benefits associated with our recent acquisitions may not be realized.
  27




---



##### Table of Contents



We may have difficulty integrating recently acquired businesses and may incur substantial costs in
connection with the integration process.
  
    
    our current lack of expertise and experience in manufacturing the CryoCath products
because we did not acquire any employees from CryoCath in connection with the
acquisition of the surgical cryoablation business of CryoCath;
    
    costs and delays in implementing manufacturing systems and procedures in connection
with the acquisition of the CryoCath assets;
    
    difficulties in transitioning manufacturing from the CryoCath facilities into our
corporate facility;
    
    difficulties retaining and integrating management and other key employees of 3F in
connection with the 3F acquisition;
    
    challenges associated with integrating the acquired businesss products and
operations into our facility and business;
    
    diversion of management resources from the business of the combined company and
integration activities;
    
    reduction or loss of customer sales due to the potential for market confusion,
hesitation and delay; and
    
    difficulty in combining distribution arrangements for the combined companys
products and services.
   We have a history of net losses. If we do not have net income in the future, we may be unable to
continue our operations.
  28




---



##### Table of Contents



Purchase accounting treatment of the merger with 3F and acquisition of the surgical cryoablation
assets of CryoCath could result in net losses for the foreseeable future.
  If we do not receive shareholder approval to issue an equity warrant to Alta in exchange for their
cash warrant, our cash balances may be insufficient to settle the cash liability upon exercise, we
may need to raise additional equity or incur debt to settle this liability and our earnings may be
adversely affected.
  The acquisition of the surgical cryoablation assets of CryoCath may result in a loss of customers
and suppliers.
  29




---



##### Table of Contents



We license patented technology and other proprietary rights from CarboMedics. If these agreements
are breached or terminated, our right to manufacture the ATS mechanical heart valve could be
terminated.
  Because we have limited manufacturing experience with some of our products, we may not realize the
expected cost savings related to manufacturing our own products. In addition, we could experience
production delays and significant additional costs.
  
    
    production yields;
    
    quality control;
    
    per unit manufacturing costs;
    
    shortages of qualified personnel; and
    
    compliance with FDA and international regulations and requirements regarding good
manufacturing practices.
  We are reliant upon CryoCath for the supply of products of our surgical cryoablation business.
  30




---



##### Table of Contents



Our business could be seriously harmed if third-party payers do not reimburse the costs for our
heart valve.
   We may face product liability claims, which could result in losses in excess of our insurance
coverage and which could negatively affect our ability to attract and retain customers.
  We may encounter litigation that could have a material impact on our business.
   31




---



##### Table of Contents



We are subject to extensive governmental regulation, which is costly, time consuming and can
subject us to unanticipated delays or could ultimately preclude us from marketing and selling our
products.
  
    
    obtain the approval of the FDA or international regulatory authorities where our
products are not yet marketed;
    
    after obtaining approval or clearance of the FDA or international regulatory
authorities, maintain the approval of the FDA and international regulatory authorities
to continue selling and manufacturing our heart valves;
    
    satisfy content requirements for all of our labeling, sales and promotional
materials;
    
    comply with manufacturing and reporting requirements; and
    
    undergo rigorous inspections by these agencies.
    
 ITEM 6. Exhibits
 2.1***
    
    Agreement and Plan of Merger, dated as of January 23, 2006, by and among ATS Medical, Inc.,
Seabiscuit Acquisition Corp.; 3F Therapeutics, Inc.; and Boyd D. Cox, as Stockholder
Representative (Incorporated by reference to Exhibit 10.1of the Companys Current Report on
Form 8-K filed on January 26, 2006)
 2.2
    
    Amendment No. 1 to Agreement and Plan of Merger, dated as of June 13, 2006, by and among ATS
Medical, Inc., Seabiscuit Acquisition Corp., 3F Therapeutics, Inc. and Boyd D. Cox, as
stockholder representative (Incorporated by reference to Exhibit 2.1 to the Companys Current
Report on Form 8-K filed on June 19, 2006)
 2.3
    
    Amendment No. 2 to Agreement and Plan of Merger, dated as of August 10, 2006, by and among
the Company, Seabiscuit Acquisition Corp., 3F Therapeutics, Inc. and Boyd D. Cox, as
stockholder representative (Incorporated by reference to Exhibit 2.1 to the Companys Current
Report on Form 8-K filed on August 15, 2006)
 32




---



##### Table of Contents



2.4
    
    Escrow Agreement, effective as of September 29, 2006, by and among the Company, Boyd D. Cox,
as stockholder representative and Wells Fargo Bank, N.A., (Incorporated by reference to
Exhibit 2.4 to the Companys Annual Report on Form 10-K for the year ended December 31, 2006)
 2.5***
    
    Option and Asset Purchase Agreement, dated as of May 31, 2005, by and among ATS Medical,
Inc., em Vascular, Inc., Keith L. March, M.D., John Havek, Walter L. Sembrowich and James E.
Shapland II, (Incorporated by reference to Exhibit 2.5 to the Companys Annual Report on Form
10-K for the year ended December 31, 2006)
 2.6
    
    Letter Amendment, dated as of November 29, 2006, to the Option and Asset Purchase Agreement,
dated as of May 31, 2005, by and among ATS Medical, Inc., em Vascular, Inc., Keith L. March,
M.D., John Havek, Walter L. Sembrowich and James E. Shapland II, (Incorporated by reference to
Exhibit 2.6 to the Companys Annual Report on Form 10-K for the year ended December 31, 2006)
 2.7***
    
    Asset Purchase Agreement dated June 18, 2007 by and between ATS Medical, Inc. and CryoCath
Technologies Inc. (Incorporated by reference to Exhibit 2.1 to the Companys Current Report on
Form 8-K filed on June 25, 2007)
 3.1
    
    Second Restated Articles of Incorporation of ATS Medical, Inc. (Incorporated by reference to
Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30,
2006)
 3.2
    
    Bylaws of the Company, as amended February 13, 2007 (Incorporated by reference to Exhibit
10.2 to the Companys Current Report on Form 8-K filed on February 20, 2007)
 4.1
    
    Specimen certificate for shares of Common Stock of the Company (Incorporated by reference to
Exhibit 4.1 to the Companys Annual Report on Form 10-K for the year ended December 31, 1997)
 31.1
    
    Certification of Principal Executive Officer pursuant to Rules 13a-15(e)/15d-15(e) of the
Securities Exchange Act, as amended (Section 302 Certification)
 31.2
    
    Certification of Principal Financial Officer pursuant to Rules 13a-15(e)/15d-15(e) of the
Securities Exchange Act, as amended (Section 302 Certification)
 32.1
    
    Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350 (Section
906 Certification)
 32.2
    
    Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 (Section
906 Certification)
 
 ***
    
    Certain Exhibits and Schedules have been omitted but will be provided supplementally to the
Securities and Exchange Commission upon request. 33




---



##### Table of Contents



SIGNATURES
  Date:      November 8, 2007
    ATS MEDICAL, INC.By:
    /s/ Michael D. DaleMichael D. DaleChief Executive Officer
(Duly Authorized Officer)By:
    /s/ Michael R. KramerMichael R. KramerChief Financial Officer
(Principal Financial Officer) 34




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description2.1***
    
    Agreement and Plan of Merger, dated as of January 23, 2006, by and among ATS Medical, Inc., Seabiscuit
Acquisition Corp.; 3F Therapeutics, Inc.; and Boyd D. Cox, as Stockholder Representative (Incorporated by
reference to Exhibit 10.1of the Companys Current Report on Form 8-K filed on January 26, 2006)2.2
    
    Amendment No. 1 to Agreement and Plan of Merger, dated as of June 13, 2006, by and among ATS Medical, Inc.,
Seabiscuit Acquisition Corp., 3F Therapeutics, Inc. and Boyd D. Cox, as stockholder representative
(Incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K filed on June 19, 2006)2.3
    
    Amendment No. 2 to Agreement and Plan of Merger, dated as of August 10, 2006, by and among the Company,
Seabiscuit Acquisition Corp., 3F Therapeutics, Inc. and Boyd D. Cox, as stockholder representative
(Incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K filed on August 15,
2006)2.4
    
    Escrow Agreement, effective as of September 29, 2006, by and among the Company, Boyd D. Cox, as stockholder
representative and Wells Fargo Bank, N.A., (Incorporated by reference to Exhibit 2.4 to the Companys Annual
Report on Form 10-K for the year ended December 31, 2006)2.5***
    
    Option and Asset Purchase Agreement, dated as of May 31, 2005, by and among ATS Medical, Inc., em Vascular,
Inc., Keith L. March, M.D., John Havek, Walter L. Sembrowich and James E. Shapland II, (Incorporated by
reference to Exhibit 2.5 to the Companys Annual Report on Form 10-K for the year ended December 31, 2006)2.6
    
    Letter Amendment, dated as of November 29, 2006, to the Option and Asset Purchase Agreement, dated as of May
31, 2005, by and among ATS Medical, Inc., em Vascular, Inc., Keith L. March, M.D., John Havek, Walter L.
Sembrowich and James E. Shapland II, (Incorporated by reference to Exhibit 2.6 to the Companys Annual Report
on Form 10-K for the year ended December 31, 2006)2.7***
    
    Asset Purchase Agreement dated June 18, 2007 by and between ATS Medical, Inc. and CryoCath Technologies Inc.
(Incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K filed on June 25, 2007)3.1
    
    Second Restated Articles of Incorporation of ATS Medical, Inc. (Incorporated by reference to Exhibit 3.1 to
the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)3.2
    
    Bylaws of the Company, as amended February 13, 2007 (Incorporated by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K filed on February 20, 2007)4.1
    
    Specimen certificate for shares of Common Stock of the Company (Incorporated by reference to Exhibit 4.1 to
the Companys Annual Report on Form 10-K for the year ended December 31, 1997)31.1
    
    Certification of the Principal Executive Officer pursuant to Rules 13a-15(e)/15d-15(e) of the Securities
Exchange Act, as amended (Section 302 Certification)31.2
    
    Certification of the Principal Financial Officer pursuant to Rules 13a-15(e)/15d-15(e) of the Securities
Exchange Act, as amended (Section 302 Certification)32.1
    
    Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 Certification)32.2
    
    Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 Certification)***   Certain Exhibits and Schedules have been omitted but will be provided supplementally to the Securities and
Exchange Commission upon           request.
 35