By Thomas Lee

ATS Medical Inc. (NSDQ:ATSI) stock has been a dog for quite a while, never rising above $5 a share since 2004 after posting a high of $20 a share nine years ago. But some investors stand to profit handsomely from Medtronic Inc.’s (NYSE:MDT) proposed $370 million acquisition of the company.

In 2007, ATS Medical, desperate for cash, sold stock to San Francisco venture capital firm Alta Partners for $16.4 million, according to documents filed with the Securities & Exchange Commission.

The deal included a warrant for Alta to buy an additional 1.96 million shares of stock at $1.65 per share, which it did. At the time, ATS stock was trading around $2.30 a share. Based on Medtronic’s offer of $4 a share, Alta stands to land $7.84 million, earning it a nice profit of $4.64 million.

The following year, ATS borrowed money from board member Theodore Skokos. In return Skokos received a warrant to purchase 245,098 shares at $2.04 a share, which means Skokos could see a $480,3922 profit from the Medtronic deal.

A few months later, Essex Woodlands Health Ventures in Palo Alto, Calif., paid $20 million to acquire stock and related warrants, which allowed the venture firm to purchase 1 million shares at $2.475 a share. Medtronic’s acquisition could net Essex a profit of $1.5 million based on that warrant.

Some analysts say ATS Medical’s perpetual cash crunch forced stock sales that diluted returns for existing investors. The company lost money every year for each of the last five years, dropping $28 million alone in 2006.

The diluted pool also relegated the company’s stock price to single digits, even though it sold quality technology at double-digit rates. There are 70 million outstanding shares of ATS Medical, a huge number when you consider the company’s overall market value of $313 million.