##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2007
 Commission File Number: 0-18602
 ATS MEDICAL, INC.
  Minnesota
(State or other jurisdiction of 
incorporation or organization)
    
    41-1595629
(I.R.S. Employer Identification No.)3905 Annapolis Lane N., Suite 105
Minneapolis, Minnesota
(Address of principal executive offices)
    
    55447
(Zip Code)
   
  þ o
  o þ o
  o þ
  Common Stock, $.01 par value
    
    59,185,872 shares




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##### 



TABLE OF CONTENTS
 Page(s)PART I.
    
    FINANCIAL INFORMATIONITEM 1.
    
    Financial Statements (Unaudited)Consolidated Balance Sheets as of June 30, 2007
and December 31, 2006
    
    
    3Consolidated Statements of Operations for the
three and six months ended June 30, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows for the
six months ended June 30, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6 - 14ITEM 2.
    
    Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    15 - 23ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    23ITEM 4.
    
    Controls and Procedures
    
    
    23PART II.
    
    OTHER INFORMATIONITEM 1
    
    Legal Proceedings
    
    
    24 - 25ITEM 1A.
    
    Risk Factors
    
    
    25 - 29ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    30ITEM 6.
    
    Exhibits
    
    
    31 - 32SIGNATURES
    
    33EXHIBIT INDEX
    
    34 - 352007 ATS Medical Management Incentive Compensation PlanSection 302 Certification of Principal Executive OfficerSection 302 Certification of Principal Financial OfficerSection 906 Certification of Principal Executive OfficerSection 906 Certification of Principal Financial Officer
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 
 ATS Medical, Inc.
 Consolidated Balance Sheets
  June 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    17,774
    
    
    $
    4,612Short-term investments
    
    
    1,868
    
    
    
    6,092Accounts receivable, net
    
    
    11,441
    
    
    
    11,677Other receivables
    
    
    578
    
    
    
    Inventories
    
    
    18,378
    
    
    
    18,782Prepaid expenses
    
    
    1,124
    
    
    
    1,175Total current assets
    
    
    51,163
    
    
    
    42,338Leasehold improvements, furniture and equipment, net
    
    
    8,386
    
    
    
    8,213Goodwill
    
    
    15,929
    
    
    
    5,092Other intangible assets
    
    
    37,037
    
    
    
    28,063Other assets
    
    
    1,912
    
    
    
    2,134Total assets
    
    $
    114,427
    
    
    $
    85,840Liabilities and shareholders equityCurrent liabilities:Accounts payable
    
    $
    5,388
    
    
    $
    3,183Accrued compensation
    
    
    2,054
    
    
    
    2,589Accrued distributor liabilities
    
    
    822
    
    
    
    1,024Other accrued liabilities
    
    
    1,586
    
    
    
    1,433Current maturities of bank notes payable
    
    
    1,229
    
    
    
    1,133Warrant liability
    
    
    3,541
    
    
    
    Total current liabilities
    
    
    14,620
    
    
    
    9,362Bank notes payable
    
    
    7,371
    
    
    
    1,194Payable to CryoCath Technologies, Inc.
    
    
    1,663
    
    
    
    Convertible senior notes payable, net of unamortized
discounts and bifurcated derivatives of $4,974 and
$5,006 at June 30, 2007 and December 31, 2006
    
    
    17,426
    
    
    
    17,394Shareholders equity:Common stock, $.01 par value:Authorized shares  100,000,000
Issued and outstanding shares- 59,098,372 and
40,320,487
at June 30, 2007 and December 31, 2006
    
    
    591
    
    
    
    403Additional paid-in capital
    
    
    195,155
    
    
    
    166,411Accumulated other comprehensive income
    
    
    707
    
    
    
    645Accumulated deficit
    
    
    (123,106
    )
    
    
    (109,569
    )Total shareholders equity
    
    
    73,347
    
    
    
    57,890Total liabilities and shareholders equity
    
    $
    114,427
    
    
    $
    85,840
 The accompanying notes are an integral part of the consolidated financial statements.
 3




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##### Table of Contents



ATS Medical, Inc.
 Consolidated Statements of Operations
 (Unaudited)
  Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    12,417
    
    
    $
    10,857
    
    
    $
    23,213
    
    
    $
    20,587Cost of goods sold
    
    
    5,545
    
    
    
    5,410
    
    
    
    10,098
    
    
    
    10,408Gross profit
    
    
    6,872
    
    
    
    5,447
    
    
    
    13,115
    
    
    
    10,179Operating expenses:Sales and marketing
    
    
    5,992
    
    
    
    5,112
    
    
    
    11,908
    
    
    
    9,946Research and development
    
    
    1,901
    
    
    
    437
    
    
    
    3,558
    
    
    
    842Acquired in-process research
and development
    
    
    3,500
    
    
    
    
    
    
    
    3,500
    
    
    
    General and administrative
    
    
    2,460
    
    
    
    2,279
    
    
    
    5,109
    
    
    
    4,221Amortization of intangibles
    
    
    414
    
    
    
    
    
    
    
    829
    
    
    
    Intangible asset impairment
    
    
    755
    
    
    
    
    
    
    
    755
    
    
    
    Total operating expenses
    
    
    15,022
    
    
    
    7,828
    
    
    
    25,659
    
    
    
    15,009Operating loss
    
    
    (8,150
    )
    
    
    (2,381
    )
    
    
    (12,544
    )
    
    
    (4,830
    )Net interest expense
    
    
    (307
    )
    
    
    (478
    )
    
    
    (752
    )
    
    
    (789
    )Changes in value of derivative liability
bifurcated from convertible senior
notes
and in value of warrant liability
    
    
    (260
    )
    
    
    95
    
    
    
    (241
    )
    
    
    1,280Net loss
    
    
    ($8,717
    )
    
    
    ($2,764
    )
    
    
    ($13,537
    )
    
    
    ($4,339
    )Net loss per share:Basic and diluted
    
    
    ($0.18
    )
    
    
    ($0.09
    )
    
    
    ($0.30
    )
    
    
    ($0.14
    )Weighted average number of shares
outstanding:Basic and diluted
    
    
    49,406
    
    
    
    31,225
    
    
    
    45,749
    
    
    
    31,206
 The accompanying notes are an integral part of the consolidated financial statements.
 4




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##### Table of Contents



ATS Medical, Inc.
 Consolidated Statements of Cash Flow
 (Unaudited)
  Six months ended June 30,2007
    
    
    2006Operating activitiesNet loss
    
    
    ($13,537
    )
    
    
    ($4,339
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization
    
    
    1,813
    
    
    
    875Loss on disposal of equipment
    
    
    
    
    
    
    5Stock compensation expense
    
    
    623
    
    
    
    460Acquired in-process research and development
    
    
    3,500
    
    
    
    Impairment of intangibles
    
    
    755
    
    
    
    Non-cash interest expense
    
    
    230
    
    
    
    234Change in value of warrant liability and derivative
liability bifurcated from convertible senior notes
    
    
    241
    
    
    
    (1,280
    )Changes in operating assets and liabilities, net of acquisitions:Accounts receivable
    
    
    232
    
    
    
    (2,241
    )Inventories
    
    
    808
    
    
    
    2,237Prepaid expenses
    
    
    51
    
    
    
    (1,453
    )Accounts payable and accrued expenses
    
    
    856
    
    
    
    (1,489
    )Other
    
    
    
    
    
    
    (107
    )Net cash used in operating activities
    
    
    (4,428
    )
    
    
    (7,098
    )Investing activitiesPurchase of assets from CryoCath Technologies, Inc.
    
    
    (23,655
    )
    
    
    Purchases of short-term investments
    
    
    
    
    
    
    (3,802
    )Maturities of short-term investments
    
    
    4,224
    
    
    
    4,217Payments for technology and distribution licenses
    
    
    (23
    )
    
    
    (210
    )Purchases of leasehold improvements, furniture and equipment
    
    
    (273
    )
    
    
    (178
    )Other
    
    
    (52
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    (19,779
    )
    
    
    27Financing activitiesAdvances on bank notes payable
    
    
    8,600
    
    
    
    1,500Repayments of bank notes payable
    
    
    (2,327
    )
    
    
    (417
    )Net proceeds from sales of common stock and warrants
    
    
    31,071
    
    
    
    101Other
    
    
    114
    
    
    
    Net cash provided by financing activities
    
    
    37,458
    
    
    
    1,184Effect of exchange rate changes
    
    
    (89
    )
    
    
    120Increase (decrease) in cash and cash equivalents
    
    
    13,162
    
    
    
    (5,767
    )Cash and cash equivalents at beginning of period
    
    
    4,612
    
    
    
    16,620Cash and cash equivalents at end of period
    
    $
    17,774
    
    
    $
    10,853Significant 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




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ATS Medical, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
 Note 1. Basis of Presentation
    Note 2. Common Stock
 Stock-Based Compensation
 Share-Based Payment,
  Weighted AverageStock Options Outstanding
    
    
    
    
    
    
    
    
    
    OptionUnder the Plans
    
    
    
    
    
    
    
    
    
    Exercise PriceISO
    
    Non-ISO
    
    Non-Plan Options
    
    Total
    
    Per ShareBalance at December 31, 2006
    
    
    917,625
    
    
    
    299,000
    
    
    
    2,532,700
    
    
    
    3,749,325
    
    
    $
    2.94Options exercised
    
    
    (8,250
    )
    
    
    
    
    
    
    (302,000
    )
    
    
    (310,250
    )
    
    
    0.93Options canceled
    
    
    (104,875
    )
    
    
    
    
    
    
    (98,750
    )
    
    
    (203,625
    )
    
    
    3.97Balance at June 30, 2007
    
    
    804,500
    
    
    
    299,000
    
    
    
    2,131,950
    
    
    
    3,235,450
    
    
    $
    3.07
  6




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##### Table of Contents



Options Exercisable atOptions Outstanding at
    
    June 30, 2007:June 30, 2007:
    
    
    
    
    
    WeightedWeighted Average
    
    Weighted Average
    
    
    
    
    
    AverageRange of
    
    Number
    
    Remaining
    
    Exercise
    
    Number
    
    ExerciseExercise Prices
    
    Outstanding
    
    Contractual Life
    
    Price
    
    Exercisable
    
    Price$0.37$0.51
    
    
    575,250
    
    
    5.38 years
    
    $
    0.41
    
    
    
    575,250
    
    
    $
    0.410.52   2.51
    
    
    697,250
    
    
    5.75 years
    
    
    1.75
    
    
    
    697,250
    
    
    
    1.752.70   3.60
    
    
    624,200
    
    
    6.17 years
    
    
    3.29
    
    
    
    616,700
    
    
    
    3.293.64   3.80
    
    
    628,750
    
    
    6.35 years
    
    
    3.74
    
    
    
    628,750
    
    
    
    3.743.99   6.38
    
    
    548,000
    
    
    5.62 years
    
    
    4.83
    
    
    
    548,000
    
    
    
    4.838.19   9.88
    
    
    162,000
    
    
    3.10 years
    
    
    8.74
    
    
    
    162,000
    
    
    
    8.74$0.37$9.88
    
    
    3,235,450
    
    
    5.73 years
    
    $
    3.07
    
    
    
    3,227,950
    
    
    $
    3.07
   WeightedWeighted Average
    
    AverageNumber of
    
    Award Date
    
    RemainingShares
    
    Fair Value
    
    Contractual TermUnvested at December 31, 2006
    
    
    1,169,522
    
    
    $
    2.83
    
    
    2.03 yearsAwards granted
    
    
    877,391
    
    
    
    1.65
    
    
    
    Awards vested
    
    
    (245,000
    )
    
    
    3.10
    
    
    
    Awards forfeited
    
    
    (84,967
    )
    
    
    2.85
    
    
    
    Unvested at June 30, 2007
    
    
    1,716,946
    
    
    $
    2.19
    
    
    2.27 years
   Three months
    
    Six monthsended June 30,
    
    ended June 30,(in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Stock compensation expense included in:Sales and marketing expenses
    
    $
    186
    
    
    $
    158
    
    
    $
    373
    
    
    $
    256General and administrative expenses
    
    
    121
    
    
    
    103
    
    
    
    250
    
    
    
    204Total stock compensation expense
    
    $
    307
    
    
    $
    261
    
    
    $
    623
    
    
    $
    460Stock compensation expense per share
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02
  2007
    
    2006First Quarter
    
    
    9.26
    %
    
    
    11.85
    %Second Quarter
    
    
    8.97
    %
    
    
    10.14
    %
 7




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##### Table of Contents



Private Placements
    Note 3. Acquisition of Assets from CryoCath Technologies, Inc.
 ®
  Purchase Price
  8




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##### Table of Contents



Cash paid at closing
    
    $
    22,000License payments made under prior Distribution and Agent Agreements
    
    
    1,765Non-contingent cash payment to be made (discounted to present value)
    
    
    1,663Estimated acquisition-related costs
    
    
    1,655Total preliminary purchase price
    
    $
    27,083
 Preliminary Purchase Price Allocation
  Current assets
    
    $
    951Fixed assets
    
    
    761Definite-lived intangible assets subject to amortization
    
    
    11,800Goodwill
    
    
    10,837Acquired in-process research and development
    
    
    3,500Current liabilities
    
    
    (766
    )Total preliminary purchase price allocation
    
    $
    27,083
  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
    
    $
    10,837Acquired in-process research
and development
    
    $
    3,500
   9




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##### Table of Contents



Note 4. Acquisition of 3F Therapeutics, Inc.
   Pro Forma Results of Operations
  Three months
    
    
    Six monthsended
    
    
    ended(in thousands, except per share data)
    
    June 30, 2006
    
    
    June 30, 2006Net sales
    
    $
    10,892
    
    
    $
    20,665License revenue
    
    
    3,690
    
    
    
    7,381Total revenue
    
    $
    14,582
    
    
    $
    28,046Net loss
    
    $
    (2,147
    )
    
    $
    (4,201
    )Net loss per share  basic and diluted
    
    $
    (0.05
    )
    
    $
    (0.10
    )
   10




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##### Table of Contents



Note 5. Inventories
  June 30,
    
    
    December 31,(in thousands)
    
    2007
    
    
    2006Raw materials
    
    $
    4,002
    
    
    
    $4,615Work-in-process
    
    
    3,246
    
    
    
    2,948Finished goods
    
    
    11,130
    
    
    
    11,219$
    18,378
    
    
    
    $18,782
 Note 6. Comprehensive Income (Loss)
  Note 7. Intangible Assets
 Indefinite-lived Intangibles and Impairment Policy
 Goodwill and Other Intangible Assets,
 Intangible Asset Impairment
  Change in Status of Indefinite-lived Intangible Asset
  Intangible Asset Purchases
  11




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Note 8. Long-Term Debt
 Convertible Senior Notes Payable
  Accounting for Derivative Instruments and Hedging Activities,
  Bank Notes Payable
    12




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Note 9. 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
 Note 10. Litigation
 Abbey Litigation
   13




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CarboMedics Litigation
   14




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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
   ® .
   ® ®
  15




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®
 ®
 Critical Accounting Policies and Estimates
  16




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##### Table of Contents



Results of Operations
  Three months ended June 30,
    
    Six months ended June 30,Increase (Decrease)
    
    
    
    
    
    
    
    
    
    Increase (Decrease)(In thousands)
    
    2007
    
    2006
    
    $
    
    %
    
    2007
    
    2006
    
    $
    
    %Net sales
    
    $
    12,417
    
    
    $
    10,857
    
    
    $
    1,560
    
    
    
    14.4
    %
    
    $
    23,213
    
    
    $
    20,587
    
    
    $
    2,626
    
    
    
    12.8
    %Cost of goods sold
    
    
    5,545
    
    
    
    5,410
    
    
    
    135
    
    
    
    2.5
    %
    
    
    10,098
    
    
    
    10,408
    
    
    
    (310
    )
    
    
    (3.0
    )%Gross profit
    
    
    6,872
    
    
    
    5,447
    
    
    
    1,425
    
    
    
    26.2
    %
    
    
    13,115
    
    
    
    10,179
    
    
    
    2,936
    
    
    
    28.8
    %Operating expenses:Sales and marketing
    
    
    5,992
    
    
    
    5,112
    
    
    
    880
    
    
    
    17.2
    %
    
    
    11,908
    
    
    
    9,946
    
    
    
    1,962
    
    
    
    19.7
    %Research and development
    
    
    1,901
    
    
    
    437
    
    
    
    1,464
    
    
    
    335.0
    %
    
    
    3,558
    
    
    
    842
    
    
    
    2,716
    
    
    
    322.6
    %Acquired in-process R & D
    
    
    3,500
    
    
    
    
    
    
    
    3,500
    
    
    
    
    
    
    
    3,500
    
    
    
    
    
    
    
    3,500
    
    
    
    General and administrative
    
    
    2,460
    
    
    
    2,279
    
    
    
    181
    
    
    
    7.9
    %
    
    
    5,109
    
    
    
    4,221
    
    
    
    888
    
    
    
    21.0
    %Amortization of intangibles
    
    
    414
    
    
    
    
    
    
    
    414
    
    
    
    
    
    
    
    829
    
    
    
    
    
    
    
    829
    
    
    
    Impairment of intangibles
    
    
    755
    
    
    
    
    
    
    
    755
    
    
    
    
    
    
    
    755
    
    
    
    
    
    
    
    755
    
    
    
    Total operating expenses
    
    
    15,022
    
    
    
    7,828
    
    
    
    7,194
    
    
    
    91.9
    %
    
    
    25,659
    
    
    
    15,009
    
    
    
    10,650
    
    
    
    71.0
    %Operating loss
    
    
    (8,150
    )
    
    
    (2,381
    )
    
    
    5,769
    
    
    
    242.3
    %
    
    
    (12,544
    )
    
    
    (4,830
    )
    
    
    7,714
    
    
    
    159.7
    %Net interest expense
    
    
    (307
    )
    
    
    (478
    )
    
    
    (171
    )
    
    
    (35.8
    )%
    
    
    (752
    )
    
    
    (789
    )
    
    
    (37
    )
    
    
    (4.7
    )%Change in value of derivative
liability bifurcated from
convertible senior notes
    
    
    (260
    )
    
    
    95
    
    
    
    (355
    )
    
    
    (373.7
    )%
    
    
    (241
    )
    
    
    1,280
    
    
    
    (1,521
    )
    
    
    (118.8
    )%Net loss
    
    
    ($8,717
    )
    
    
    ($2,764
    )
    
    $
    5,953
    
    
    
    215.4
    %
    
    
    ($13,537
    )
    
    
    ($4,339
    )
    
    $
    9,198
    
    
    
    212.0
    %
  Three months ended
    
    Six months endedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    44.7
    %
    
    
    49.8
    %
    
    
    43.5
    %
    
    
    50.6
    %Gross profit
    
    
    55.3
    %
    
    
    50.2
    %
    
    
    56.5
    %
    
    
    49.4
    %Operating expenses:Sales and marketing
    
    
    48.3
    %
    
    
    47.1
    %
    
    
    51.3
    %
    
    
    48.3
    %Research and development
    
    
    15.3
    %
    
    
    4.0
    %
    
    
    15.3
    %
    
    
    4.1
    %Acquired in-process R & D
    
    
    28.2
    %
    
    
    0.0
    %
    
    
    15.1
    %
    
    
    0.0
    %General and administrative
    
    
    19.8
    %
    
    
    21.0
    %
    
    
    22.0
    %
    
    
    20.5
    %Amortization of intangibles
    
    
    3.3
    %
    
    
    0.0
    %
    
    
    3.6
    %
    
    
    0.0
    %Impairment of intangibles
    
    
    6.1
    %
    
    
    0.0
    %
    
    
    3.3
    %
    
    
    0.0
    %Total operating expenses
    
    
    121.0
    %
    
    
    72.1
    %
    
    
    110.5
    %
    
    
    72.9
    %Operating loss
    
    
    (65.6
    )%
    
    
    (21.9
    )%
    
    
    (54.0
    )%
    
    
    (23.5
    )%Net interest income (expense)
    
    
    (2.5
    )%
    
    
    (4.4
    )%
    
    
    (3.2
    )%
    
    
    (3.8
    )%Change in value of derivative
liability bifurcated from
convertible senior notes
    
    
    (2.1
    )%
    
    
    0.9
    %
    
    
    (1.0
    )%
    
    
    6.2
    %Net loss
    
    
    (70.2
    )%
    
    
    (25.5
    )%
    
    
    (58.3
    )%
    
    
    (21.1
    )%
 17




---



##### Table of Contents



Net Sales.
 Three months ended June 30,
    
    Six months ended June 30,Increase (Decrease)
    
    
    
    
    
    
    
    
    
    Increase (Decrease)(In thousands)
    
    2007
    
    2006
    
    $
    
    %
    
    2007
    
    2006
    
    $
    
    %United States and
Canada
    
    $
    4,074
    
    
    $
    4,166
    
    
    
    ($ 92
    )
    
    
    (2.2
    )%
    
    $
    8,381
    
    
    $
    8,060
    
    
    $
    321
    
    
    
    4.0
    %Outside U. S. and
Canada
    
    
    8,343
    
    
    
    6,691
    
    
    
    1,652
    
    
    
    24.7
    %
    
    
    14,832
    
    
    
    12,527
    
    
    
    2,305
    
    
    
    18.4
    %Total
    
    $
    12,417
    
    
    $
    10,857
    
    
    $
    1,560
    
    
    
    14.4
    %
    
    $
    23,213
    
    
    $
    20,587
    
    
    $
    2,626
    
    
    
    12.8
    %
  Three months ended
    
    Six months endedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006United States and
Canada
    
    
    32.8
    %
    
    
    38.4
    %
    
    
    36.1
    %
    
    
    39.2
    %Outside U. S. and
Canada
    
    
    67.2
    %
    
    
    61.6
    %
    
    
    63.9
    %
    
    
    60.8
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  Three months ended June 30,
    
    Six months ended June 30,Increase
    
    
    
    
    
    
    
    
    
    Increase(In thousands)
    
    2007
    
    2006
    
    $
    
    %
    
    2007
    
    2006
    
    $
    
    %Heart valve therapy
    
    $
    10,780
    
    
    $
    9,632
    
    
    $
    1,148
    
    
    
    11.9
    %
    
    $
    19,771
    
    
    $
    18,259
    
    
    $
    1,512
    
    
    
    8.3
    %Surgical arrhythmia
    
    
    1,341
    
    
    
    1,156
    
    
    
    185
    
    
    
    16.0
    %
    
    
    2,819
    
    
    
    2,214
    
    
    
    605
    
    
    
    27.3
    %Surgical tools and accessories
    
    
    296
    
    
    
    69
    
    
    
    227
    
    
    
    329.0
    %
    
    
    623
    
    
    
    114
    
    
    
    509
    
    
    
    446.5
    %Total
    
    $
    12,417
    
    
    $
    10,857
    
    
    $
    1,560
    
    
    
    14.4
    %
    
    $
    23,213
    
    
    $
    20,587
    
    
    $
    2,626
    
    
    
    12.8
    %
    18




---



##### Table of Contents



Cost of Goods Sold and Gross Profit.
   Sales and Marketing.
  Research and Development.
 Acquired In-process R & D.
 19




---



##### Table of Contents



General and Administrative.
  Amortization of Intangibles.
 Impairment of Intangibles
 Net Interest Income (Expense ).
 Change in Value of Warrant Liability and Derivative Liability Bifurcated from Convertible Senior
Notes
 20




---



##### Table of Contents



Accounting for Derivative Instruments and Hedging Activities.
 Income Taxes
 Net Loss.
 Liquidity and Capital Resources
  Operating Activities.
 Investing Activities.
   Financing Activities.
 21




---



##### Table of Contents



Cash Management
   22




---



##### Table of Contents



Off-Balance Sheet Arrangements
  
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
     
 ITEM 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  23




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
 Abbey Litigation
    CarboMedics Litigation
  24




---



##### Table of Contents



ITEM 1A. Risk Factors
   We currently rely on the ATS 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.
  We may have difficulty integrating recently acquired businesses and may incur substantial costs in
connection with the integration process.
  25




---



##### Table of Contents




    
    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.
   26




---



##### 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.
  Because we lack manufacturing experience, 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.
  27




---



##### Table of Contents




    
    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 assets.
  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.
  28




---



##### Table of Contents



We may encounter litigation that could have a material impact on our business.
  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.
    29




---



##### Table of Contents



ITEM 4. Submission of Matters to a Vote of Security Holders
  1)
    
    The election of five directors to our Board of Directors to hold office for the ensuing year
and until their successors are elected and qualified;
 2)
    
    An amendment to the 2000 Stock Incentive Plan to increase the number of shares of common
stock of the Company available for awards granted under the Plan by 2,000,000 shares; and
 3)
    
    The ratification of the selection of Grant Thornton LLP as the Companys independent
registered public accounting firm for the year ending December 31, 2007.
  BrokerFor
    
    Withhold
    
    Against
    
    Abstain
    
    Non-VotesElection of Directors:Michael D. Dale
    
    
    32,454,132
    
    
    
    420,060
    
    
    
    
    
    
    
    
    
    
    
    Steven M. Anderson
    
    
    32,478,980
    
    
    
    395,212
    
    
    
    
    
    
    
    
    
    
    
    Robert E. Munzenrider
    
    
    32,507,714
    
    
    
    366,478
    
    
    
    
    
    
    
    
    
    
    
    Eric W. Sivertson
    
    
    32,416,029
    
    
    
    458,163
    
    
    
    
    
    
    
    
    
    
    
    Theodore C. Skokos
    
    
    32,437,410
    
    
    
    436,782Amendment to 2000 Stock Incentive Plan
    
    
    15,307,110
    
    
    
    
    
    
    
    2,529,800
    
    
    
    125,307
    
    
    
    14,911,975Ratification of Grant Thornton LLP
    
    
    32,281,006
    
    
    
    
    
    
    
    515,017
    
    
    
    78,168
    
    
    
    
 30




---



##### Table of Contents



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)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)10.1
    
    Letter Agreement, dated June 7, 2007, by and among Endocare, Inc., CryoCath Technologies Inc.
and ATS Medical, Inc. (Incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed on June 25, 2007)10.2
    
    License Agreement, dated June 28, 2007, by and between ATS Acquisition Corp. and CryoCath
Technologies Inc. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report
on Form 8-K filed on July 5, 2007)10.3
    
    Manufacturing Agreement, dated June 28, 2007, by and between ATS Acquisition Corp. and
CryoCath Technologies Inc. (Incorporated by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K filed on July 5, 2007)10.4
    
    Termination Agreement, dated June 28, 2007, by and between ATS Medical, Inc. and CryoCath
Technologies Inc. (Incorporated by reference to Exhibit 10.3 to the Companys Current Report
on Form 8-K filed on July 5, 2007)
 31




---



##### Table of Contents



10.5
    
    Common Stock and Warrant Purchase Agreement, dated as of June 19, 2007, by and between ATS
Medical, Inc. and Alta Partners VIII, L.P. (Incorporated by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K filed on June 25, 2007)10.6
    
    Warrant, dated June 28, 2007, issued by ATS Medical, Inc. to Alta Partners VIII, L.P.
(Incorporated by reference to Exhibit 10.4 to the Companys Current Report on Form 8-K filed
on July 5, 2007)10.7
    
    Registration Rights Agreement, dated June 28, 2007, by and between ATS Medical, Inc. and Alta
Partners VIII, L.P. (Incorporated by reference to Exhibit 10.5 to the Companys Current Report
on Form 8-K filed on July 5, 2007)10.8
    
    Amendment, dated June 18, 2007, to the Loan and Security Agreement between Silicon Valley
Bank and the Company dated July 28, 2004 (Incorporated by reference to Exhibit 10.3 to the
Companys Current Report on Form 8-K filed on June 25, 2007)10.9
    
    2007 ATS Medical Management Incentive Compensation Plan31.1
    
    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. 32




---



##### Table of Contents



SIGNATURES
  Date:  August 9, 2007
    ATS MEDICAL, INC.By:
    /s/ Michael D. DaleMichael D. Dale, Chief Executive Officer(Duly Authorized Officer)By:
    /s/ Michael R. KramerMichael R. Kramer, Chief Financial Officer(Principal Financial Officer) 33




---



##### 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)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)10.1
    
    Letter Agreement, dated June 7, 2007, by and among Endocare, Inc., CryoCath Technologies Inc. and ATS Medical,
Inc. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on June 25,
2007)10.2
    
    License Agreement, dated June 28, 2007, by and between ATS Acquisition Corp. and CryoCath Technologies Inc.
(Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on July 5, 2007)10.3
    
    Manufacturing Agreement, dated June 28, 2007, by and between ATS Acquisition Corp. and CryoCath Technologies
Inc. (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on July 5,
2007)10.4
    
    Termination Agreement, dated June 28, 2007, by and between ATS Medical, Inc. and CryoCath Technologies Inc.
(Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on July 5, 2007)
 34




---



##### Table of Contents



ExhibitNumber
    
    Description10.5
    
    Common Stock and Warrant Purchase Agreement, dated as of June 19, 2007, by and between ATS Medical, Inc. and
Alta Partners VIII, L.P. (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form
8-K filed on June 25, 2007)10.6
    
    Warrant, dated June 28, 2007, issued by ATS Medical, Inc. to Alta Partners VIII, L.P. (Incorporated by
reference to Exhibit 10.4 to the Companys Current Report on Form 8-K filed on July 5, 2007)10.7
    
    Registration Rights Agreement, dated June 28, 2007, by and between ATS Medical, Inc. and Alta Partners VIII,
L.P. (Incorporated by reference to Exhibit 10.5 to the Companys Current Report on Form 8-K filed on July 5,
2007)10.8
    
    Amendment, dated June 18, 2007, to the Loan and Security Agreement between Silicon Valley Bank and the Company
dated July 28, 2004 (Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K
filed on June 25, 2007)10.9
    
    2007 ATS Medical Management Incentive Compensation Plan31.1
    
    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