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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 June 30, 2020
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 000-33001
 
NATUS MEDICAL INCORPORATED
(Exact name of registrant as specified in its charter)
 
 
Delaware 77-0154833
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
6701 Koll Center Parkway, Suite 120, Pleasanton, CA 94566
(Address of principal executive offices) (Zip Code)
(925) 223-6700
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par value per shareNTUSThe Nasdaq Stock Market LLC
(The Nasdaq Global Market)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” or an “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large Accelerated Filer   Accelerated Filer 
Non-accelerated Filer 
  
  Smaller reporting company 
  Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
The number of issued and outstanding shares of the registrant’s Common Stock, $0.001 par value, as of July 29, 2020 was 33,871,367.


Table of Contents
NATUS MEDICAL INCORPORATED
TABLE OF CONTENTS
Page No.

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PART I.    FINANCIAL INFORMATION
Item 1.    Financial Statements
NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share amounts)
June 30, 2020December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents$84,878  $63,297  
Accounts receivable, net of allowance for doubtful accounts of $7,539 in 2020 and $7,384 in 201989,230  115,889  
Inventories83,589  71,368  
Prepaid expenses and other current assets21,059  19,195  
Total current assets278,756  269,749  
Property and equipment, net26,673  24,702  
Operating lease right-of-use assets12,926  15,046  
Intangible assets, net103,984  114,799  
Goodwill145,917  146,367  
Deferred income tax30,204  30,355  
Other assets22,346  21,509  
Total assets$620,806  $622,527  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$31,654  $27,253  
Current portion of long-term debt35,000  35,000  
Accrued liabilities38,857  54,451  
Deferred revenue21,186  20,246  
Current portion of operating lease liabilities5,533  5,871  
Total current liabilities132,230  142,821  
Other liabilities16,851  17,616  
Operating lease liabilities10,224  12,051  
Long-term debt, net of current portion51,761  19,665  
Deferred income tax14,267  14,251  
Total liabilities225,333  206,404  
Stockholders’ equity:
Common stock, $0.001 par value, 120,000,000 shares authorized; shares issued and outstanding 33,871,723 in 2020 and 34,148,700 in 2019337,338  344,476  
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding in 2020 and 2019    
Retained earnings75,422  87,922  
Accumulated other comprehensive loss(17,287) (16,275) 
Total stockholders’ equity395,473  416,123  
Total liabilities and stockholders’ equity$620,806  $622,527  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
 Three Months Ended
June 30,
Six Months Ended
June 30,
 2020201920202019
Revenue$84,780  $125,539  $194,163  $240,296  
Cost of revenue42,573  52,393  87,506  98,903  
Intangibles amortization1,654  1,746  3,322  3,502  
Gross profit40,553  71,400  103,335  137,891  
Operating expenses:
Marketing and selling22,802  32,324  53,532  66,054  
Research and development14,336  13,324  31,905  26,718  
General and administrative11,187  12,691  24,368  28,996  
Intangibles amortization3,644  3,763  7,305  7,549  
Restructuring621  2,668  1,492  40,040  
Total operating expenses52,590  64,770  118,602  169,357  
Income (loss) from operations(12,037) 6,630  (15,267) (31,466) 
Other expense, net(757) (1,200) (2,251) (3,312) 
Income (loss) before provision for (benefit from) income tax(12,794) 5,430  (17,518) (34,778) 
Provision for (benefit from) income taxes(3,891) 1,944  (5,018) (7,865) 
Net income (loss)(8,903) $3,486  $(12,500) $(26,913) 
Net income (loss) per share:
Basic$(0.26) $0.10  $(0.37) $(0.80) 
Diluted$(0.26) $0.10  $(0.37) $(0.80) 
Weighted average shares used in the calculation of net loss per share:
Basic33,827  33,639  33,624  33,630  
Diluted33,827  33,690  33,624  33,630  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands, except per share amounts)
 Three Months Ended
June 30,
Six Months Ended
June 30,
 2020201920202019
Net income (loss)$(8,903) $3,486  $(12,500) $(26,913) 
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment3,116  1,567  (902) (230) 
Interest rate swap designated as a cash flow hedge65  (131) (110) (209) 
Reclassification of stranded tax effects upon adoption of ASU 2018-02      (1,332) 
Reclassification of deferred foreign currency related adjustments related to the sale of Medix  24,845    24,845  
Other comprehensive income (loss), net of tax3,181  26,281  (1,012) 23,074  
Comprehensive income (loss)(5,722) 29,767  (13,512) (3,839) 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Table of Contents
NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
(in thousands, except per share amounts)

 Common StockRetained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Stockholders’
Equity
 SharesAmount
Balances, December 31, 201934,148,700  $344,476  $87,922  $(16,275) $416,123  
Vesting of restricted stock units14,033  —  —  —  —  
Net issuance of restricted stock awards162,212  —  —  —  —  
Stock-based compensation expense—  2,198  —  —  2,198  
Repurchase of company stock(465,117) (10,495) —  —  (10,495) 
Taxes paid related to net share settlement of equity awards(57,695) (1,883) —  —  (1,883) 
Other comprehensive loss—  —  —  (4,193) (4,193) 
Net loss—  —  (3,597) —  (3,597) 
Balances, March 31, 202033,802,133  $334,296  $84,325  $(20,468) $398,153  
Net issuance of restricted stock awards40,483  —  —  —  —  
Employee stock purchase plan30,955  658  —  —  658  
Stock-based compensation expense—  2,427  —  —  2,427  
Taxes paid related to net share settlement of equity awards(1,848) (43) —  —  (43) 
Other comprehensive income—  —  —  3,181  3,181  
Net loss—  —  (8,903) —  (8,903) 
Balances, June 30, 202033,871,723  $337,338  $75,422  $(17,287) $395,473  



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Table of Contents
 Common StockRetained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Stockholders’
Equity
 SharesAmount
Balances, December 31, 201833,804,379  $334,215  $102,261  $(38,032) $398,444  
Reclassification of stranded tax effects for ASU 2018-02—  —  1,332  (1,332)   
Vesting of restricted stock units42,130  —  —  —  —  
Net issuance of restricted stock awards139,718  —  —  —  —  
Stock-based compensation expense—  2,432  —  —  2,432  
Repurchase of company stock    —  —    
Taxes paid related to net share settlement of equity awards(47,767) (1,567) —  —  (1,567) 
Exercise of stock options16,617  268  —  —  268  
Other comprehensive loss—  —  —  (1,875) (1,875) 
Net loss—  —  (30,398) —  (30,398) 
Balances, March 31, 201933,955,077  $335,348  $73,195  $(41,239) $367,304  
Net issuance of restricted stock awards5,762  —  —  —  —  
Employee stock purchase plan31,879  725  —  —  725  
Stock-based compensation expense—  1,987  —  —  1,987  
Taxes paid related to net share settlement of equity awards(274) (7) —  —  (7) 
Exercise of stock options47,786  682  —  —  682  
Other comprehensive income—  —  —  26,281  26,281  
Net income—  —  3,486  —  3,486  
Balances, June 30, 201934,040,230  $338,735  $76,681  $(14,958) $400,458  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 Six Months Ended
June 30,
 20202019
Operating activities:
Net loss$(12,500) $(26,913) 
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for losses on accounts receivable3,044  4,260  
Depreciation and amortization13,677  15,427  
Loss on disposal of property and equipment22  482  
Warranty reserve1,280  1,677  
Share-based compensation4,664  4,462  
Loss on commencement of sales-type leases1,095    
Impairment charge for sale of entity  24,571  
Changes in operating assets and liabilities:
Accounts receivable25,152  15,870  
Inventories(11,194) (2,106) 
Prepaid expenses and other assets(4,066) (10,383) 
Accounts payable4,324  (3,215) 
Accrued liabilities(16,343) (2,620) 
Deferred revenue302  2,739  
Deferred income tax155  (205) 
Net cash provided by operating activities9,612  24,046  
Investing activities:
Purchase of property and equipment(6,927) (2,919) 
Purchase of intangible assets  (13) 
Net cash used in investing activities(6,927) (2,932) 
Financing activities:
Proceeds from stock option exercises and Employee Stock Purchase Program purchases658  1,674  
Repurchase of common stock(10,495)   
Taxes paid related to net share settlement of equity awards(1,926) (1,573) 
Principal payments of financing lease liability(242) (265) 
Proceeds from borrowings60,000    
Payments on borrowings(28,000) (25,000) 
Net cash provided by (used in) financing activities19,995  (25,164) 
Exchange rate changes effect on cash and cash equivalents(1,099) (314) 
Net increase (decrease) in cash and cash equivalents21,581  (4,364) 
Cash and cash equivalents, beginning of period63,297  56,373  
Cash and cash equivalents, end of period$84,878  $52,009  
Supplemental disclosure of cash flow information:
Cash paid for interest$1,561  $3,071  
Cash paid for income taxes$4,667  $5,328  
Non-cash investing activities:
Property and equipment included in accounts payable$(13) $35  
Inventory transferred to property and equipment$525  $589  
Transfer of leased assets to sales-type leases$2,365  $  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1 - Basis of Presentation and Significant Accounting Policies
The accompanying interim condensed consolidated financial statements of Natus Medical Incorporated (“we,” “us,” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Except where noted below within Note 1, the accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.
Interim financial reports are prepared in accordance with the rules and regulations of the Securities and Exchange Commission; accordingly, the reports do not include all of the information and notes required by GAAP for annual financial statements. The interim financial information is unaudited, and reflects all normal adjustments that are, in the opinion of management, necessary for the fair presentation of our financial position, results of operations, and cash flows for the interim periods presented. We have made certain reclassifications to the prior period to conform to current period presentation. The consolidated balance sheet as of December 31, 2019 was derived from audited financial statements but does not include all disclosures required by GAAP. The accompanying financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.
Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The accompanying condensed consolidated financial statements include our accounts and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Impact of COVID-19 on Our Financial Statements
The global spread and unprecedented impact of COVID-19 is complex and rapidly-evolving. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended extensive containment and mitigation measures worldwide. The outbreak has reached all of the regions in which we do business, and governmental authorities around the world have implemented numerous measures attempting to contain and mitigate the effects of the virus, including travel bans and restrictions, border closings, quarantines, shelter-in-place orders, shutdowns, limitations or closures of non-essential businesses, school closures, and social distancing requirements. The global spread of COVID-19 and actions taken in response to the virus have negatively affected workforces, customers, consumer confidence, financial markets, employment rates, consumer spending, credit markets and housing demand, caused significant economic and business disruption, volatility and financial uncertainty, and led to a significant economic downturn, including in the markets where we operate.
We have assessed various accounting estimates and other matters, including those that require consideration of forecasted financial information, in context of the unknown future impacts of COVID-19 using information that is reasonably available to us at this time. The accounting estimates and other matters we assessed include, but were not limited to, our allowance for doubtful accounts, inventory and warranty reserves, stock-based compensation, goodwill and other long-lived assets, financial assets, valuation allowances for tax assets and revenue recognition. While based on our current assessment of these estimates there was not a material impact to our consolidated financial statements as of and for the quarter ended June 30, 2020, as additional information becomes available to us, our future assessment of these estimates, including our expectations at the time regarding the duration, scope and severity of the pandemic, as well as other factors, could materially and adversely impact our consolidated financial statements in future reporting periods.

Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Credit Losses (Topic 326). This update requires financial assets measured at amortized cost, such as trade receivables and contract assets, to be presented net of expected credit losses, which may be estimated based on relevant information such as historical experience, current conditions, and
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future expectation for each pool of similar financial assets. The new guidance requires enhanced disclosures related to trade receivables and associated credit losses. In May 2019, the FASB issued ASU 2019-05 which provides targeted transition relief guidance intended to increase comparability of financial statement information. The guidance for these pronouncements became effective on January 1, 2020. The adoption of ASU 2016-13 did not have a material impact on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Tax. This update includes removal of certain exceptions to the general principles of ASC 740, Income taxes, and simplification in several other areas such as accounting for franchise tax (or similar tax) that is partially based on income. We have early adopted the ASU in the second quarter of the current fiscal year. As a result, we recorded an additional income tax benefit of $0.9 million due to the elimination of the year-to-date loss limitation rule that limited the interim period tax benefit.

2 - Revenue
        Unbilled accounts receivable (“AR”) for the periods presented primarily represent the difference between revenue recognized based on the relative selling price of the related performance obligations and the contractual billing terms in the arrangements. Deferred revenue for the periods presented primarily relates to extended service contracts, installation, and training, for which the service fees are billed in advance. The associated deferred revenue is generally recognized ratably over the extended service period or when installation and training are complete.
The following table summarizes the changes in the unbilled AR and deferred revenue balances for the six months ended June 30, 2020 (in thousands):

Unbilled AR, December 31, 2019$2,667  
Additions104  
Transferred to trade receivable(1,479) 
Unbilled AR, June 30, 2020$1,292  

Deferred revenue, December 31, 2019$24,808  
Additions13,548  
Revenue recognized(13,260) 
Deferred revenue, June 30, 2020$25,096  

        At June 30, 2020, the short-term portion of deferred revenue of $21.2 million and the long-term portion of $3.9 million were included in deferred revenue and other long-term liabilities respectively, in the consolidated balance sheet. As of June 30, 2020, we expect to recognize revenue associated with deferred revenue of approximately $13.9 million in 2020, $8.4 million in 2021, $1.4 million in 2022, $0.8 million in 2023, and $0.6 million thereafter.

3 - Earnings Per Share
The components of basic and diluted EPS, and shares excluded from the calculation of diluted loss per share because the effect would have been anti-dilutive, are as follows (in thousands, except per share amounts):

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Three Months Ended
June 30,
Six Months Ended
June 30,
2020201920202019
Net income (loss)$(8,903) $3,486  $(12,500) $(26,913) 
Weighted average common shares33,827  33,639  33,624  33,630  
Dilutive effect of stock based awards  51      
Diluted shares33,827  33,690  33,624  33,630  
Basic earnings (loss) per share$(0.26) $0.10  $(0.37) $(0.80) 
Diluted earnings (loss) per share$(0.26) $0.10  $(0.37) $(0.80) 
Shares excluded from calculation of diluted EPS28    70  103  

4 - Allowance for Doubtful Accounts

We estimate the lifetime allowance for doubtful, potentially uncollectible, accounts receivable upon their inception based on historical collection experience within the markets in which we operate, customer-specific information such as bankruptcy filings or customer liquidity problems, current conditions, and reasonable and supportable forecasts about the future.
Our allowance for doubtful accounts is presented as a reduction to accounts receivable on our consolidated balance sheet. When all internal efforts have been exhausted to collect the receivable, it is written off and relieved from the reserve.
The details of activity in allowance for doubtful accounts are as follows (in thousands):
Three Months Ended
June 30,
Six Months Ended
June 30,
2020201920202019
Balance, beginning of period$7,292  $7,451  $7,384  $6,960  
Additions charged to expense1,480  2,463  3,044  4,260  
Write-offs charged against allowance(238) (816) (795) (1,542) 
Recoveries of amounts previously written off(995) (519) (2,094) (1,099) 
Balance, end of period$7,539  $8,579  $7,539  $8,579  

5 - Inventories
Inventories consist of the following (in thousands):
June 30, 2020December 31, 2019
Raw materials and subassemblies$34,318  $37,259  
Work in process2,306  1,780  
Finished goods63,901  50,521  
Total inventories100,525  89,560  
Less: Non-current inventories(16,936) (18,192) 
Inventories, current$83,589  $71,368  

As of June 30, 2020 and December 31, 2019, we have classified $16.9 million and $18.2 million, respectively, of inventories as other assets. This inventory consists primarily of service components used to repair products held by customers pursuant to warranty obligations and extended service contracts, including service components for products we no longer sell, inventory purchased for lifetime buys, and inventory that is turning over at a slow rate. We believe these inventories will be utilized for their intended purpose.

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6 – Intangible Assets
The following table summarizes the components of gross and net intangible asset balances (in thousands):
 June 30, 2020December 31, 2019
 Gross
Carrying
Amount
Accumulated
Impairment
Accumulated
Amortization
Net Book
Value
Gross
Carrying
Amount
Accumulated
Impairment
Accumulated
Amortization
Net Book
Value
Intangible assets with definite lives:
Technology$108,377  $(6,035) $(58,826) $43,516  $108,400  $(6,035) $(55,408) $46,957  
Customer related90,177  (50) (44,628) 45,499  90,351  (50) (40,527) 49,774  
Trade names45,901  (3,245) (28,316) 14,340  45,874  (3,237) (25,355) 17,282  
Internally developed software13,281    (12,743) 538  13,281    (12,606) 675  
Patents2,697  (133) (2,564)   2,692  (133) (2,559)   
Service agreements1,190    (1,099) 91  1,190    (1,079) 111  
Definite-lived intangible assets$261,623  $(9,463) $(148,176) $103,984  $261,788  $(9,455) $(137,534) $114,799