##### 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 April 4, 2009
 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)
 (763) 553-7736
 Not Applicable
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ
  Common Stock, $.01 par value
    
    71,699,265 shares




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##### 



TABLE OF CONTENTS
 Page(s)PART I.
    
    FINANCIAL INFORMATIONITEM 1.
    
    Financial Statements (Unaudited):Consolidated Balance Sheets as of April 4, 2009 and
December 31, 2008
    
    
    3Consolidated Statements of Operations for the
quarterly periods ended April 4, 2009 and March
29, 2008
    
    
    4Consolidated Statements of Cash Flow for the
quarterly periods ended April 4, 2009 and March
29, 2008
    
    
    5Notes to Consolidated Financial Statements
    
    
    6  12ITEM 2.
    
    Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    13  20ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    20  21ITEM 4.
    
    Controls and Procedures
    
    
    21PART II.
    
    OTHER INFORMATIONITEM 1.
    
    Legal Proceedings
    
    
    22  23ITEM 1A.
    
    Risk Factors
    
    
    23ITEM 6.
    
    Exhibits
    
    
    23SIGNATURES
    
    
    
    
    
    
    24EXHIBIT INDEX
    
    
    
    
    
    
    25EX-10.2EX-10.3EX-12.1EX-31.1EX-31.2EX-32.1EX-32.2
  2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 
 ATS Medical, Inc.
Consolidated Balance Sheets
 April 4,
    
    
    December 31,2009
    
    
    2008(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    17,422
    
    
    $
    20,895Accounts receivable, net
    
    
    15,095
    
    
    
    14,532Inventories, net
    
    
    21,169
    
    
    
    20,208Prepaid expenses
    
    
    1,796
    
    
    
    958Total current assets
    
    
    55,482
    
    
    
    56,593Leasehold improvements, furniture and equipment, net
    
    
    6,838
    
    
    
    7,031Goodwill
    
    
    17,016
    
    
    
    17,016Other intangible assets
    
    
    31,327
    
    
    
    32,115Other assets
    
    
    1,956
    
    
    
    2,226Total assets
    
    $
    112,619
    
    
    $
    114,981Liabilities and shareholders equityCurrent liabilities:Current maturities of bank notes payable
    
    $
    2,646
    
    
    $
    2,646Accounts payable
    
    
    4,203
    
    
    
    4,054Accrued compensation
    
    
    2,593
    
    
    
    3,537Payable to CryoCath Technologies, Inc.
    
    
    1,954
    
    
    
    1,910Payable to CarboMedics, Inc.
    
    
    4,500
    
    
    
    4,500Other accrued liabilities
    
    
    2,747
    
    
    
    2,257Total current liabilities
    
    
    18,643
    
    
    
    18,904Convertible senior notes payable, net of unamortized discounts
and bifurcated derivatives of $4,837 at April 4, 2009 and
$4,867 at December 31, 2008
    
    
    17,563
    
    
    
    17,533Bank notes payable
    
    
    3,087
    
    
    
    3,969Shareholders equity:Common stock, $.01 par value:Authorized shares  150,000,000
Issued and outstanding shares- 71,561,302 at April 4, 2009
and 71,077,458 at December 31, 2008
    
    
    716
    
    
    
    711Additional paid-in capital
    
    
    226,232
    
    
    
    225,657Accumulated deficit
    
    
    (153,587
    )
    
    
    (151,916
    )Accumulated other comprehensive income (loss)
    
    
    (35
    )
    
    
    123Total shareholders equity
    
    
    73,326
    
    
    
    74,575Total liabilities and shareholders equity
    
    $
    112,619
    
    
    $
    114,981
 The accompanying notes are an integral part of the consolidated financial statements.
 3




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ATS Medical, Inc.
 Consolidated Statements of Operations
 (Unaudited)
 Quarter endedApril 4,
    
    
    March 29,2009
    
    
    2008Net sales
    
    $
    18,403
    
    
    $
    14,845Cost of goods sold
    
    
    6,130
    
    
    
    5,897Gross profit
    
    
    12,273
    
    
    
    8,948Operating expenses:Sales and marketing
    
    
    7,501
    
    
    
    6,487Research and development
    
    
    2,044
    
    
    
    2,206General and administrative
    
    
    2,476
    
    
    
    3,004Amortization of intangibles
    
    
    788
    
    
    
    891Total operating expenses
    
    
    12,809
    
    
    
    12,588Operating loss
    
    
    (536
    )
    
    
    (3,640
    )Net interest expense
    
    
    (719
    )
    
    
    (619
    )Other income (expense), net
    
    
    (353
    )
    
    
    1,918Net loss before income taxes
    
    
    (1,608
    )
    
    
    (2,341
    )Income tax expense
    
    
    (63
    )
    
    
    (70
    )Net loss
    
    
    ($1,671
    )
    
    
    ($2,411
    )Net loss per share:Basic and diluted
    
    
    ($0.02
    )
    
    
    ($0.04
    )Weighted average number of shares outstanding:Basic and diluted
    
    
    71,262
    
    
    
    59,739
 The accompanying notes are an integral part of the consolidated financial statements.
 4




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ATS Medical, Inc.
Consolidated Statements of Cash Flow
(Unaudited)
 Quarter endedApril 4,
    
    
    March 29,2009
    
    
    2008Operating activities:Net loss
    
    
    ($1,671
    )
    
    
    ($2,411
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,254
    
    
    
    1,496Stock-based compensation expense
    
    
    484
    
    
    
    327Deferred income taxes
    
    
    61
    
    
    
    48Non-cash interest expense
    
    
    216
    
    
    
    155Change in value of warrant liability and derivative liability
bifurcated from
convertible senior notes
    
    
    (9
    )
    
    
    (1,535
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (699
    )
    
    
    (288
    )Inventories
    
    
    (1,184
    )
    
    
    (483
    )Prepaid expenses
    
    
    (873
    )
    
    
    127Accounts payable and accrued expenses
    
    
    51
    
    
    
    68Net cash used in operating activities
    
    
    (2,370
    )
    
    
    (2,496
    )Investing activities:Purchases of short-term investments
    
    
    
    
    
    
    (938
    )Maturities of short-term investments
    
    
    
    
    
    
    3,419Purchases of leasehold improvements, furniture and equipment
    
    
    (286
    )
    
    
    (488
    )Net cash provided by (used in) investing activities
    
    
    (286
    )
    
    
    1,993Financing activities:Payments on bank notes payable
    
    
    (882
    )
    
    
    Net proceeds from issuance of common stock
    
    
    96
    
    
    
    51Other
    
    
    37
    
    
    
    29Net cash provided by (used in) financing activities
    
    
    (749
    )
    
    
    80Effect of foreign exchange rate changes on cash
    
    
    (68
    )
    
    
    161Decrease in cash and cash equivalents
    
    
    (3,473
    )
    
    
    (262
    )Cash and cash equivalents at beginning of period
    
    
    20,895
    
    
    
    10,480Cash and cash equivalents at end of period
    
    $
    17,422
    
    
    $
    10,218
 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. Stock-Based Compensation and Equity Plans
 Stock-Based Compensation
 Share-Based Payment
  Quarter endedApril 4,
    
    March 29,(in thousands, except per share data)
    
    2009
    
    2008Stock compensation expense included in:Sales and marketing expenses
    
    $
    271
    
    
    $
    192Research and development expenses
    
    
    71
    
    
    
    General and administrative expenses
    
    
    142
    
    
    
    135Total stock compensation expense
    
    $
    484
    
    
    $
    327Stock compensation expense per share
    
    $
    0.01
    
    
    $
    0.01
   6




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Equity Plans
   WeightedStock Options Outstanding
    
    
    
    
    
    
    
    
    
    Average OptionUnder the Plans
    
    Non-Plan
    
    
    
    
    
    Exercise PriceISO
    
    Non-ISO
    
    Options
    
    Total
    
    Per ShareOutstanding at December 31,
2008
    
    
    642,650
    
    
    
    299,000
    
    
    
    1,493,200
    
    
    
    2,434,850
    
    
    $
    2.89Options granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options canceled
    
    
    (21,000
    )
    
    
    
    
    
    
    
    
    
    
    (21,000
    )
    
    
    3.08Outstanding at April 4, 2009
    
    
    621,650
    
    
    
    299,000
    
    
    
    1,493,200
    
    
    
    2,413,850
    
    
    $
    2.89
   WeightedWeighted Average
    
    AverageNumber of
    
    Award Date
    
    RemainingShares
    
    Fair Value
    
    Contractual TermOutstanding (unvested ) at December 31, 2008
    
    
    3,391,743
    
    
    $
    2.00
    
    
    2.14 yearsAwards granted
    
    
    1,594,430
    
    
    
    2.13Awards vested
    
    
    (454,721
    )
    
    
    1.93Awards forfeited
    
    
    (32,725
    )
    
    
    1.75Outstanding (unvested) at April 4, 2009
    
    
    4,498,727
    
    
    $
    2.05
    
    
    2.40 years
  Note 3. Private Placements of Common Stock
   7




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Quarter ended(in thousands)
    
    March 29, 2008Warrant liability balance at beginning of period
    
    $
    3,913Change in valuation gain included in other income
    
    
    (1,520
    )Warrant liability balance at end of period
    
    $
    2,393
  Note 4. Inventories
  April 4,
    
    December 31,2009
    
    2008Raw materials
    
    $
    4,418
    
    
    $
    4,712Work-in-process
    
    
    5,910
    
    
    
    4,880Finished goods
    
    
    11,541
    
    
    
    11,416Total inventories
    
    
    21,869
    
    
    
    21,008Less: non-current inventories
    
    
    (700
    )
    
    
    (800
    )Inventories, net
    
    $
    21,169
    
    
    $
    20,208
  Note 5. Comprehensive Income (Loss)
  Note 6. Intangible Assets
 Goodwill and Other Intangible Assets,
 8




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Note 7. Long-Term Debt
 Convertible Senior Notes Payable
  Accounting for Derivative Instruments and Hedging Activities,
  Quarter ended(in thousands)
    
    April 4, 2009
    
    March 29, 2008Derivative liability balance at beginning of period
    
    $
    90
    
    
    $
    141Change in valuation gain included in other income
    
    
    (9
    )
    
    
    (15
    )Derivative liability balance at end of period
    
    $
    81
    
    
    $
    126
  Bank Notes Payable
     9




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Subordinated Credit Agreement
    Note 8. Income Taxes
  Note 9. Fair Value Measurements
 Fair Value Measurements.
  10




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
    
    Level 1  quoted prices in active markets for identical assets and liabilities.
    
    Level 2  observable inputs other than quoted prices in active markets for identical
assets and liabilities.
    
    Level 3  unobservable inputs in which there is little or no market data available,
which require the reporting entity to develop its own assumptions.
   Note 10. Recently Issued Accounting Pronouncements
 Business Combinations
 11. Litigation
 Abbey Litigation
  11




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12




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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. 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, 2008. 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
   .
    13




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Critical Accounting Policies and Estimates
   14




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Results of Operations
  Quarter ended April 4 (March 29)Increase (Decrease)(in thousands)
    
    2009
    
    2008
    
    $
    
    %Net sales
    
    $
    18,403
    
    
    $
    14,845
    
    
    $
    3,558
    
    
    
    24.0
    %Cost of goods sold
    
    
    6,130
    
    
    
    5,897
    
    
    
    233
    
    
    
    4.0
    %Gross profit
    
    
    12,273
    
    
    
    8,948
    
    
    
    3,325
    
    
    
    37.2
    %Operating expenses:Sales and marketing
    
    
    7,501
    
    
    
    6,487
    
    
    
    1,014
    
    
    
    15.6
    %Research and development
    
    
    2,044
    
    
    
    2,206
    
    
    
    (162
    )
    
    
    (7.3
    )%General and administrative
    
    
    2,476
    
    
    
    3,004
    
    
    
    (528
    )
    
    
    (17.6
    )%Amortization of intangibles
    
    
    788
    
    
    
    891
    
    
    
    (103
    )
    
    
    (11.6
    )%Total operating expenses
    
    
    12,809
    
    
    
    12,588
    
    
    
    221
    
    
    
    1.8
    %Operating loss
    
    
    (536
    )
    
    
    (3,640
    )
    
    
    (3,104
    )
    
    
    (85.3
    )%Net interest expense
    
    
    (719
    )
    
    
    (619
    )
    
    
    100
    
    
    
    16.2
    %Other income (expense), net
    
    
    (353
    )
    
    
    1,918
    
    
    
    (2,271
    )
    
    
    (118.4
    )%Net loss before income taxes
    
    
    (1,608
    )
    
    
    (2,341
    )
    
    
    (733
    )
    
    
    (31.3
    )%Income tax expense
    
    
    (63
    )
    
    
    (70
    )
    
    
    (7
    )
    
    
    (10.0
    )%Net loss
    
    
    ($1,671
    )
    
    
    ($2,411
    )
    
    $
    (740
    )
    
    
    (30.7
    )%
  Quarter endedApril 4 (March 29)2009
    
    2008Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    33.3
    %
    
    
    39.7
    %Gross profit
    
    
    66.7
    %
    
    
    60.3
    %Operating expenses:Sales and marketing
    
    
    40.8
    %
    
    
    43.7
    %Research and development
    
    
    11.1
    %
    
    
    14.9
    %General and administrative
    
    
    13.5
    %
    
    
    20.2
    %Amortization of intangibles
    
    
    4.3
    %
    
    
    6.0
    %Total operating expenses
    
    
    69.6
    %
    
    
    84.8
    %Operating loss
    
    
    (2.9
    )%
    
    
    (24.5
    )%Net interest income (expense)
    
    
    (3.9
    )%
    
    
    (4.2
    )%Other income (expense), net
    
    
    (1.9
    )%
    
    
    12.9
    %Net loss before income taxes
    
    
    (8.7
    )%
    
    
    (15.8
    )%Income tax expense
    
    
    (0.3
    )%
    
    
    (0.5
    )%Net loss
    
    
    (9.1
    )%
    
    
    (16.2
    )%
 15




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Net Sales.
 Quarter ended April 4 (March 29)Increase(in thousands)
    
    2009
    
    2008
    
    $
    
    %United States
    
    $
    7,932
    
    
    $
    5,830
    
    
    $
    2,102
    
    
    
    36.1
    %Outside United States
    
    
    10,471
    
    
    
    9,015
    
    
    
    1,456
    
    
    
    16.2
    %Total
    
    $
    18,403
    
    
    $
    14,845
    
    
    $
    3,558
    
    
    
    24.0
    %
  Quarter endedApril 4 (March 29)2009
    
    2008United States
    
    
    43.1
    %
    
    
    39.3
    %Outside United States
    
    
    56.9
    %
    
    
    60.7
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  Quarter ended April 4 (March 29)Increase (Decrease)(in thousands)
    
    2009
    
    2008
    
    $
    
    %Heart valve therapy
    
    $
    13,245
    
    
    $
    10,681
    
    
    $
    2,564
    
    
    
    24.0
    %Surgical arrhythmia
    
    
    4,904
    
    
    
    3,848
    
    
    
    1,056
    
    
    
    27.4
    %Surgical tools and accessories
    
    
    254
    
    
    
    316
    
    
    
    (62
    )
    
    
    (19.6
    )%Total
    
    $
    18,403
    
    
    $
    14,845
    
    
    $
    3,558
    
    
    
    24.0
    %
    16




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Cost of Goods Sold and Gross Profit.
   Sales and Marketing.
  Research and Development.
 General and Administrative.
  17




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Amortization of Intangibles.
 Net Interest Expense .
  Other Income (Expense)
 Quarter ended April 4 (March 29):(in thousands)
    
    2009
    
    2008Alta warrant liability gain
    
    $
    
    
    
    $
    1,520Convertible Senior Notes derivative liability gain
    
    
    9
    
    
    
    15Net realized foreign currency transaction gain (loss)
    
    
    (229
    )
    
    
    247Unrealized foreign currency gain (loss) related to short-term
intercompany balances with foreign subsidiaries
    
    
    (133
    )
    
    
    136Net other income (expense)
    
    $
    (353
    )
    
    $
    1,918
  .
  Income Taxes
  18




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Net Loss.
 Liquidity and Capital Resources
  Operating Activities.
 Investing Activities.
 Financing Activities.
    19




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Cash Management
   Off-Balance Sheet Arrangements
  
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
  20




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ITEM 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  21




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PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
 Abbey Litigation
    22




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ITEM 1A. Risk Factors
  
 ITEM 6. Exhibits
 3.1
    
    Third 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 quarterly period ended June
28, 2008).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
    
    ATS Medical, Inc. 2009 Management Incentive Compensation Plan (Incorporated by reference to
Exhibit 99.2 to the Companys Current Report on Form 8-K filed on February 23, 2009).10.2
    
    Form of Incentive Stock Option Agreement for option grants made under the Companys 2000
Stock Incentive Plan beginning April 2009.10.3
    
    Form of Non-Qualified Stock Option Agreement for option grants made under the Companys 2000
Stock Incentive Plan beginning April 2009.12.1
    
    Computation of Ratio of Earnings to Fixed Charges.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).
 23




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SIGNATURES
  Date: May 13, 2009
    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) 24




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EXHIBIT INDEX
 ExhibitNumber
    
    Description3.1
    
    Third 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 quarterly period ended June 28, 2008).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
    
    ATS Medical, Inc. 2009 Management Incentive Compensation Plan (Incorporated by reference to Exhibit 99.2 to
the Companys Current Report on Form 8-K filed on February 23, 2009).10.2
    
    Form of Incentive Stock Option Agreement for option grants made under the Companys 2000 Stock Incentive Plan
beginning April 2009.10.3
    
    Form of Non-Qualified Stock Option Agreement for option grants made under the Companys 2000 Stock Incentive
Plan beginning April 2009.12.1
    
    Computation of Ratio of Earnings to Fixed Charges.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)
 25