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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
or
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 Number)
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 Select Market)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  
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 such shorter period that the registrant was required to file such reports) and (2) has been subject to such 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,” and “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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared and issued its audit report. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  
As of June 30, 2020, the last business day of Registrant’s most recently completed second fiscal quarter, there were 33,871,723 shares of Registrant’s common stock outstanding, and the aggregate market value of such shares held by non-affiliates of Registrant (based upon the closing sale price of such shares on the Nasdaq Global Select Market on June 30, 2020) was $739,080,996. Shares of Registrant’s common stock held by each executive officer and director and by each entity that owns 5% or more of Registrant’s outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
On February 19, 2021, the registrant had 33,874,074 shares of its common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Definitive Proxy Statement for the 2020 Annual Meeting of Stockholders or an amendment to this Annual Report on Form 10-K, to be filed with the Securities and Exchange Commission, are incorporated by reference into Part III of this Annual Report on Form 10-K.


Table of Contents
NATUS MEDICAL INCORPORATED
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM 1.
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ITEM 1B.
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Table of Contents
PART I 
ITEM 1.    Business
This Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 about Natus® Medical Incorporated (“Natus,” “we,” “us,” or “our”). These statements include, among other things, statements concerning our expectations, beliefs, plans, intentions, future operations, financial condition and prospects, and business strategies. The words “may,” “will,” “continue,” “estimate,” “project,” “intend,” “believe,” “expect,” “anticipate,” and other similar expressions generally identify forward-looking statements. Forward-looking statements in this Item 1 include, but are not limited to, statements regarding the effectiveness and advantages of our products, factors relating to demand for and economic advantages of our products, our plan to develop and acquire additional technologies, products or businesses, our marketing, technology enhancement, and product development strategies, our ability to complete all of our backlog orders, and the anticipated timing and effect of the implementation of our new organizational structure.
Forward-looking statements are not guarantees of future performance and are subject to substantial risks and uncertainties that could cause our actual results to differ materially from those that we predicted in the forward-looking statements. Investors should carefully review the information contained under the caption “Risk Factors” contained in Item 1A for a description of risks and uncertainties that could cause actual results to differ from those that we predicted. All forward-looking statements are based on information available to us on the date hereof, and we assume no obligation to update forward-looking statements, except as required by Federal Securities laws.
Natus® and other trademarks of ours appearing in this report are the intellectual property of Natus Medical Incorporated or one of its subsidiaries. .
Overview
Natus provides innovative healthcare solutions focused on the diagnosis and treatment of central nervous and sensory system disorders for patients of all ages.
Our broad product portfolio represents a heritage of innovation and leadership. Natus brands have been setting the standard for patient care for over eighty (80) years. Our products are trusted by medical professionals in university medical centers, public and private hospitals, physician offices, clinics, research laboratories, and other sites around the world. Improving quality of human life is at the core of our business.
We use our clinical expertise to support our customers' evolving needs with advanced products, continuing education and outstanding technical service. 
Natus provides product solutions for three end markets: Neuro, Newborn Care and Hearing & Balance.
On January 15, 2019, Natus announced the implementation of a new organizational structure designed to improve operational performance, increase our focus on innovation and increase profitability. We consolidated our three strategic business units, Neuro, Newborn Care, and Hearing & Balance into "One Natus". The initiative is designed to create a single, unified company with globally led operational teams in Sales & Marketing, Manufacturing, Research & Development, Quality, and General and Administrative functions. As part of our refocus on more profitable core medical device businesses, we exited non-core businesses which included Global Neuro-Diagnostic Services, the NeuroCom balance product line, and Medix. In January 2020 we announced we completed the transition of the Peloton hearing screening services business to an external provider, Pediatrix Medical Group, as part of the implementation of the new organizational structure.
Markets
Neuro — Includes products and services that provide diagnostic, therapeutic and surgical solutions in neurodiagnostics, neurocritical care and neurosurgery. Neuro's comprehensive neurodiagnostic solutions include electroencephalography (“EEG”) and long-term monitoring (“LTM”), Intensive Care Unit (“ICU”) monitoring, electromyography (“EMG”), sleep analysis or polysomnography (“PSG”), and intraoperative monitoring (“IOM”). These solutions enhance the diagnosis of neurological conditions such as epilepsy, sleep disorders and neuromuscular diseases. Neuro represents approximately 57% of total revenues.
Our neurocritical care solutions include management of traumatic brain injury by continuous monitoring of intracranial pressure (“ICP”) and cerebrospinal fluid (“CSF”) drainage, as well as cranial access kits for entry into the cranium. Our neurosurgical solutions such as valves, shunts and related treatment solutions for procedures involving hydrocephalus.
Newborn Care — Includes products and services for newborn care including hearing screening, brain monitoring, eye imaging, jaundice management, and various disposable newborn care supplies. Newborn Care represents approximately 25% of total revenues.
1

Table of Contents
Hearing & Balance — The Hearing portfolio includes products for hearing assessment and diagnostics, and hearing aid fitting, including computer-based audiological, otoneurologic and vestibular instrumentation for hearing care professionals. Our Balance portfolio provides diagnosis and assessment of vestibular and balance disorders. These solutions have a complete product and brand portfolio known for its sophisticated design technology in the hearing and balance assessment markets. Hearing & Balance represents approximately 18% of total revenues.
Neuro
Our Neuro portfolio is comprised of a comprehensive line of neurodiagnostic, neurocritical care, and neurosurgical products that are used by healthcare practitioners in the diagnosis and monitoring of neurological disorders. The environments in which these products are used include outpatient private practice facilities and inpatient hospital environments. Our products can be used throughout the continuum of care through diagnostic procedures and monitoring of patients during admissions, surgery, while under sedation, in post-operative care, and in intensive care units. Our Neuro products and services include:
Neurodiagnostic
Electroencephalography — Equipment, supplies and services used to monitor and visually display the electrical activity generated by the brain and other key physiological signals for both diagnosis and monitoring of neurological disorders in the hospital, research laboratory, clinician office and patient’s home.
Electromyography — Equipment and supplies used to measure electrical activity in nerves, muscles, and critical pathways includes EMG, nerve conduction and evoked potential functionality.
Polysomnography — Equipment and supplies used to measure a variety of respiratory and physiologic functions to assist in the diagnosis and monitoring of sleep disorders, such as insomnia and obstructive sleep apnea.
Intraoperative monitoring — Equipment and supplies used to monitor the functional integrity of certain neural structures (i.e. nerves, spinal cord and parts of the brain) during surgery. The goal of IOM is to provide real time guidance to the surgeon and anesthesiologist, which will reduce the risk to the patient during surgery.
Neurocritical Care
Intracranial pressure monitoring — Equipment and catheters used to monitor pressure in the cranium/brain and catheters to drain cerebrospinal fluid from the brain to aid in traumatic brain injury cases and hydrocephalus.
Cranial access kits — Convenient, pre-packaged sterile sets containing all necessary components for entry into the cranium, to monitor intracranial pressure and provide temporary drainage of CSF.
Neurosurgery
Shunts — Shunts are used to manage the drainage of cerebrospinal fluid from the brain to maintain appropriate levels of CSF when treating hydrocephalus.
Diagnostic EEG and Long-term Monitoring
We design, manufacture, and market a full line of instruments and supplies used to help diagnose the presence of seizure disorders and epilepsy, look for causes of confusion, evaluate head injuries, tumors, infections, degenerative diseases, and metabolic disturbances that affect the brain; and assist in surgical planning. This type of testing is also done to diagnose brain death in comatose patients. These systems and instruments work by detecting, amplifying, and recording the brain’s electrical impulses, as well as other physiological signals needed to support clinical findings. Routine clinical EEG recording is done by placing electrodes on a patient’s scalp over various areas of the brain to record and detect patterns of activity and specific types of electrical events. EEG technologists perform the tests, and neurologists, neurophysiologists and epileptologists review and interpret the results.
Routine outpatient clinical EEG testing is performed in hospital neurology laboratories, private physician offices, and in ambulatory settings such as the patient’s home, providing physicians with a clinical assessment of a patient’s condition. Long-term inpatient monitoring of EEG and video to monitor behavior (LTM) is used to determine complex treatment plans, and for patients with seizures that do not respond to conventional therapeutic approaches, surgical solutions may be appropriate. Patients suffering from severe head trauma and other acute conditions that may affect the brain are monitored in ICUs. In addition, research facilities use EEG equipment to conduct research on humans and laboratory animals.
Diagnostic Electroencephalograph Monitoring Product Lines
Our EEG diagnostic monitoring product lines for neurology consist of signal amplifiers, workstations to capture and store synchronized video and EEG data, and proprietary software. These products are typically used in concert, as part of an EEG “system” by the neurology/neurophysiology department of a hospital or clinic to assist in the diagnosis and monitoring of neurological conditions.
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NeuroWorks®; Nicolet®One.    Our EEG Systems include a broad range of products, from software licenses and ambulatory monitoring systems to advanced laboratory systems with multiple capabilities for EEG, ICU monitoring, long-term monitoring of up to 256 channels, as well as nursing stations to monitor patients and physician review stations with quantitative EEG analysis capabilities.
Stellate/Gotman Spike and Seizure; GridView; NicoletOne Trends.    Our proprietary spike and seizure detection algorithm detects, summarizes, and reports EEG events that save health-care professionals time by increasing the speed and accuracy of interpretation. GridView is a tool that allows the clinician to correlate EEG patterns with electrode contacts on a 3D view of the patient brain using magnetic resonance (“MR”) or computed tomography (“CT”) images, thus enabling the visualization and annotation of the brain surface and internal structures involved in the diagnosis of epilepsy. NicoletOne Trends provides a comprehensive set of EEG analysis algorithms that are used to generate compressed trends of large amounts of data to assist in the clinical evaluation and data review process.
Proprietary Signal Amplifiers.    Our proprietary signal amplifiers function as the interface between the patient and the computer. The headbox connects electrodes attached to the patient’s head to our EEG monitoring systems.
Nicolet Cortical Stimulator.    This product is our proprietary device that provides cortical stimulation to the brain during functional brain mapping either before or during surgery to help the surgeon protect the eloquent parts of the brain (parts of the brain that control speech, motor and sensory functionality). The device can be used as a standalone unit or with the fully integrated NicoletOne or NeuroWorks software that supports control of the device from the software, automated mapping and comprehensive report generation.
Supplies.    We also manufacture and market a full line of proprietary EEG electrodes and other supplies used in the electroencephalography field.
Electrodiagnostic Monitoring
Our electrodiagnostic systems include electromyography (EMG), nerve conduction (“NCS”), and evoked potential (“EP”) functionality. EMG and NCS involve the measurement of electrical activity of muscles and nerves both at rest and during contraction. Measuring the electrical activity in muscles and nerves can help diagnose diseases of the peripheral, central nervous system or musculature system. An electromyogram is performed to determine if there is any disease present that effects muscle tissue, nerves, or the junctions between nerve and muscle (neuromuscular junctions). An electromyogram can also be used to diagnose the cause of weakness, paralysis, and muscle twitching, and is also used as a primary diagnosis for carpal tunnel syndrome, which is the most frequently encountered peripheral compressive neuropathy. EMG is also used for clinical applications of botox to relieve muscle spasm and pain. We market both the clinical system and the needles used for these procedures.
Evoked brain potentials are elicited in response to a stimulus. These evoked potentials can come from the sensory pathways (such as hearing and visual) or from the motor pathways. An examination tests the integrity of these pathways including the associated area of the brain. Sophisticated amplifiers are required to recognize and average evoked potential EMG and NCS signals.
Electrodiagnostic Product Lines
Dantec Keypoint®.    The Dantec Keypoint G-4 and Focus EMG and EP family of products features amplifiers, stimulators, and strong signal quality. The Keypoint G4 is used for advanced neurodiagnostic applications such as single fiber EMG, visual and auditory evoked potentials, and in routine nerve conduction studies. The Keypoint Focus system is also available in a portable laptop configuration.
Dantec Clavis.    The Dantec Clavis device is a hand-held EMG stimulation device that provides muscle and nerve localization information to assist with medication and botox injections. In conjunction with the Bo-ject® or Myoject hypodermic needle and electrodes, physicians can better localize the site of the injection.
Nicolet EDX® family.    A hardware platform of amplifiers, base control units, stimulators and hand-held probes that are sold with Nicolet brand proprietary software. These mid- to high-end systems have full functionality, strong signal quality, and flexibility. They include EMG, NCS, EP’s, IOM and advanced data analysis features.
Nicolet VikingQuest.    An EMG system for the mid-range market. The device runs on our proprietary software.
Natus UltraPro.    This is an entry level product with add on capabilities that offers high quality data collection using the Dantec Keypoint amplifiers and the proprietary Natus EMG/EP software.
Supplies.    We also manufacture and market a full line of proprietary EMG needles and other supplies used in the electrodiagnostic field.
Diagnostic Polysomnography Monitoring
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Polysomnography (“PSG”), which involves the analysis of respiratory patterns, brain electrical activity and other physiological data, has proven critical for the diagnosis and treatment of sleep-related diseases such as apnea, insomnia, and narcolepsy. A full polysomnographic sleep study entails a whole-night recording of brain electrical activity, muscle movement, airflow, respiratory effort, oxygen levels, electrical activity of the heart, and other parameters. In some studies, patients are fitted with treatment devices using Positive Airway Pressure technology (“PAP”) during the sleep study and the proper settings for the treatment devices are determined. In many cases, the sleep study is performed in the patient’s home.
Diagnostic PSG Monitoring Product Lines
We market dedicated diagnostic PSG monitoring products that can be used individually or as part of a networked system for overnight sleep studies to assist in the diagnosis of sleep disorders. Additionally, we offer products that are specifically designed to be used in the patient’s home. Some of our EEG systems described above can also be configured to perform diagnostic PSG monitoring. These products include software licenses, ambulatory monitoring systems, and laboratory systems that combine multiple capabilities, including EEG monitoring, physician review stations, and quantitative PSG analysis capabilities.
Embla REMlogic, Sandman®; and Xltek SleepWorks®.    Our diagnostic PSG systems capture and store all data digitally. The systems enable users to specify rules and personal preferences to be used during analysis, summarizing the results graphically and incorporating them in detailed reports.
Proprietary Amplifiers.    Our data acquisition systems incorporate recent developments in superior amplifiers for sleep analysis. Our amplifiers are used in both hospitals and stand-alone clinics. In addition to exceptional signal quality, headboxes include various tools such as built-in oximeters and controls to allow the user to start and stop a study or perform electrode impedance testing either at the patient’s bedside or from the monitoring room.
Supplies.    We also market a broad line of supplies, disposable products and accessories for the PSG laboratory including the XactTrace® respiratory monitoring belts.
Intraoperative Monitoring
Intraoperative monitoring (“IOM”) is the use of electrophysiological methods such as EEG, EMG, and evoked potentials to monitor the functional integrity of certain neural structures (i.e. nerves, spinal cord and parts of the brain) during surgery. The purpose of IOM is to reduce the risk to the patient’s nervous system, and/or to provide functional guidance to the surgeon and anesthesiologist during surgery.
Diagnostic IOM Product Lines
Xltek Protektor.    The Protektor system is an IOM system that provides medical professionals with all information necessary to make immediate and critical surgical decisions. The system combines flexibility with multi-modality allowing full coverage of IOM techniques. The Protektor comes in 16 or 32 channel options.
Nicolet EDX.    These combo systems are used in IOM applications where a smaller number of channels is sufficient. This approach is primarily followed in international markets that utilize the integrated system approach that allows for the use of the system in EMG clinical applications as well as in IOM applications.
Neurocritical Care Products
Intracranial pressure and temperature provide insight into the health of the brain, especially in patients experiencing a traumatic brain injury, other traumatic, ischemic or hemorrhagic incidents, or a major neurosurgical procedure. A small hole is drilled into the cranium to allow insertion of a catheter that contains a pressure/temperature or pressure only transducer that allows continuous monitoring of brain temperature and/or pressure.
Camino® ICP Monitor. The Camino ICP Monitor is a compact, portable device that provides tools for continuously determining and monitoring intracranial pressure and intracranial temperature. It has a touch screen interface, physiological alarms, and can output data to either a patient bedside monitor or to remote media types via a USB drive. These systems are used in the intensive care unit (ICU) environment.
Camino Catheters. Camino catheters use either fiber optic or strain gauge technology to measure either pressure and temperature or just pressure. Camino catheters measure their respective values at the tip of the catheter, which eliminates the need for a fluid-filled system that uses an external transducer to measure pressure. The Camino Flex Ventricular Intracranial Pressure Monitoring Kit has a catheter that allows both the measurement of ICP and CSF drainage.
Natus EDS 3®. The EDS 3 is a CSF External Drainage System used to manage increased ICP by safely eliminating CSF from the ventricles of the brain or lumbar spine. This drainage can be performed continuously or intermittently. Clinical conditions that may require its use include trauma, stroke or an expansile lesion.
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Cranial Access Kits. Cranial Access Kits are convenient procedural kits that include all the instrumentation and items needed to access the subarachnoid space or the lateral ventricles of the brain. The kit is intended to be used with an external drainage and monitoring system in selected patients to reduce intracranial pressure, to provide temporary drainage of CSF, and to monitor ICP. The kit is a convenient, pre-packaged sterile set containing all necessary components for entry into the cranium and is available with or without drugs and with a variety of drill bits and instrumentation.
Neurosurgical Products
During brain surgery, the dura of the brain may need to be repaired or replaced. A dural graft is used to serve as a substitute for the surgical repair of dural defects. Moreover, brain surgery is performed to place shunts in the brain to help drain excess CSF either externally or into the body for reabsorption to help treat hydrocephalus.
DURAFORM. DURAFORM Dural Graft Implant is an absorbable collagen matrix to provide a soft, conforming, and easy to use dural substitute. This product is used in the operating room to provide repair of the dura mater and promote dural healing.
Shunts. Shunts are used in the operating room to provide solutions for hydrocephalus or brain trauma. Shunts are used to manage the drainage of cerebrospinal fluid from the brain to maintain appropriate levels of CSF when treating hydrocephalus.
Newborn Care
Our newborn care products and services are used by healthcare practitioners in the diagnosis and treatment of common medical ailments in newborn care. Our products are organized in eight modalities and include:
Newborn Hearing Screening — Products used to screen hearing in newborns.
Jaundice Management — Products used to treat jaundice, the single largest cause for hospital readmission of newborns in the U.S.
Newborn Brain Injury — Products used to diagnose the severity of brain injury, monitor the effectiveness of drug therapies, detect seizure activity and monitor general neurological status.
Eye Imaging — Systems and products used in the advanced science and practice of neonatal and pediatric retinal imaging.
Essentials — Products used in the everyday operation of neonatal intensive care unit (“NICU”) and well-baby nursery department within the hospital environment.
NICVIEW® — Live streaming video for families with babies in the NICU that enables family members and approved friends to see the new baby, 24/7, from anywhere in the world - from any Internet connected device, within a secured environment.
Newborn Hearing Screening
Hearing impairment is the most common treatable chronic disorder in newborns, affecting as many as five babies out of every 1,000 newborns. It is estimated that 20,000 hearing-impaired babies are born in the United States (“U.S.”) every year, and as many as 60,000 more in the rest of the developed world. Until the introduction of newborn hearing screening programs, screening was generally performed only on those newborns that had identifiable risk factors for hearing impairment. However, screening only those newborns with risk factors for hearing impairment overlooks approximately half of newborns with some level of hearing impairment.
Early identification of hearing impairment and early intervention has been shown to improve language development significantly. Undetected hearing impairment often results in the failure to learn, process spoken language, and speak.
Newborn Hearing Screening Techniques
The two traditional technologies used to screen newborns and infants for hearing impairment are auditory brainstem response and otoacoustic emissions.
Auditory brainstem response (“ABR”).    ABR technology is the most accurate and comprehensive method for screening and diagnosing hearing impairment. ABR technology is based on detecting the brain’s electrical impulses resulting from a specific auditory stimulus.
Otoacoustic emission (“OAE”).    OAEs are sounds created by the active biomechanical processes within the sensory cells of the cochlea. They occur both spontaneously and in response to acoustic stimuli. OAE screening uses a probe placed in the ear canal to deliver auditory stimuli and to measure the response of the sensory cells with a sensitive microphone.
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Newborn Hearing Screening Product Lines
Our newborn hearing screening product lines consist of the ALGO®, ABaer®, AuDX®, and Echo-Screen® newborn hearing screeners. These hearing screening products utilize proprietary signal detection technologies to provide accurate and non-invasive hearing screening for newborns and are designed to detect hearing loss at 30 or 35 dB nHL or higher. Each of these devices is designed to generate a PASS or REFER result.
ALGO 5 and 3i Newborn Hearing Screeners.    These Automated Auditory Brainstem Responses (“AABR”®) devices deliver thousands of soft audible clicks to the newborn’s ears through sound cables and disposable earphones connected to the instrument. Each click elicits an identifiable brain wave, which is detected by disposable electrodes placed on the head of the child and analyzed by the screening device. These devices use our proprietary AABR signal detection algorithm.
ABaer Newborn Hearing Screener.    The ABaer, which is a PC-based newborn hearing screening device, offers a combination of AABR, OAE, and diagnostic ABR technologies in one system.
Echo-Screen.    Our hand-held Echo-Screen products provide a choice or combination of proprietary ABR and OAE technologies that can also be used for children through adults. The Echo-Screen III device is a compact, multi-modality handheld hearing screener that is tightly integrated with audible Lite Hearing Screening Data Management.
Hearing Screening Supply Products
For infection control, accuracy, and ease of use, the supply products used with our newborn hearing screening devices are designed as single-use, disposable products. Each screening supply product is designed for a specific hearing screening technology.
ABR Screening Supply Kits.    Each ABR screen is carried out with single-use earphones and electrodes, which are alcohol and latex-free. The adhesives used in these supply products are specially formulated for use on the sensitive skin of newborns. To meet the needs of our customers we offer a variety of packaging options. Echo-Screen and ABaer offer the choice of either an earphone or use of ear tips for perform ABR screening.
OAE Supply Products.    Each OAE screen is carried out with single-use ear tips that are supplied in a variety of sizes and packaging options.
Jaundice Management
The American Academy of Pediatrics estimates that each year 60% of the approximately four million newborns in the U.S. become jaundiced. According to the Journal of the American Medical Association, neonatal jaundice is the single largest cause for hospital readmission of newborns in the U.S., and accounts for approximately 50% of readmissions. Because of the serious consequences of hyperbilirubinemia, the American Academy of Pediatrics recommends that all newborns be closely monitored for jaundice and that phototherapy is the standard of care for the treatment of hyperbilirubinemia. The guidelines further recommend that all nurseries have the necessary equipment to provide intensive phototherapy, and specifically recommend the use of the “blue” light as incorporated into our neoBLUE® products.
Jaundice Management Products
neoBLUE Product Family.    This product line consists of our neoBLUE Overhead, neoBLUE Compact and neoBLUE blanket devices, which utilize light emitting diodes (“LEDs”) to generate a high-intensity, narrow spectrum of blue light that is clinically proven to be most effective in the treatment of newborn jaundice. Our neoBLUE phototherapy devices emit significantly less ultraviolet light and heat than conventional phototherapy devices, reducing the risk of skin damage and dehydration for infants undergoing treatment. Because of the high intensity of these lights, the treatment time associated with phototherapy is reduced.
Newborn Brain Injury
For many years, newborn infants admitted to the NICU of a hospital have been routinely monitored for heart activity, temperature, respiration, oxygen saturation, and blood pressure. Recently it has also been considered important to monitor brain activity. A cerebral function monitor, utilizing amplitude-integrated EEGs (“aEEGs”), is a device for monitoring background neurological activity. Our simplified aEEG devices, introduced over ten years ago, are designed to be simple for use by nurses and neonatologists.
Newborn Brain Injury Products
Our newborn brain injury products record and display parameters that the neonatologist uses to assess and monitor neurological status in the newborn. These devices continuously monitor and record brain activity, aiding in the detection and treatment of hypoxic-ischemic encephalopathy ("HIE"), and seizures. The devices also monitor the effects of drugs and other therapies on brain activity and improve the accuracy of newborn neurological assessments. They are used with electrodes
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attached to the head of the newborn to acquire an EEG signal that is then filtered, compressed, and displayed graphically on the device or as a hardcopy printout. The monitors have touch screens for easy navigation and onscreen keyboards for data entry at the bedside.
Olympic Brainz Monitor.    The Olympic Brainz Monitor is our latest generation Cerebral Function Monitor. The device can be used in single-channel, two-channel or three-channel modes to continuously monitor and record brain activity.
Eye Imaging
Our RetCam® devices incorporate a camera combined with proprietary imaging software that are used to diagnose and monitor a range of ophthalmic maladies in premature infants. RetCam specializes in NICU ophthalmic imaging used in the detection of retinopathy of prematurity (ROP) and Retinoblastoma (RB) in newborns. ROP and RB are diseases of the retina that must be detected very early after birth and treated immediately, so the RetCam diagnostic camera is a fundamental tool in preventing vision loss and total blindness in infants.
Eye Imaging Products
RetCam images assist physicians in the evaluation of pediatric ocular disease, which have preserved the vision in thousands of infants. Each of the RetCam systems deliver objective and interpretable detail, allow image comparison over time, enable remote consultations, and provide reliable and defensible medico-legal documentation.
RetCam 3 & RetCam Envision. Full-featured imaging systems with a range of interchangeable lenses, Fluorescein Angiography module option.
RetCam Shuttle. Laptop-based system with a smaller cart and dual wheel casters for improved transportability.
RetCam Portable. Laptop-based version in a case for maximum portability.
Essentials
The Newborn Care Essentials products include such items as: Biliband® eye protectors, MiniMuffs® noise attenuators, NeatNick® heal lancets, Olympic Circumstraint, Olympic Papoose Boards, Olympic Smart Scales®, OraSwab, Save the Gonads x-ray protection devices and SugarPlum glucose lancets.
Live Video Streaming
Live video streaming offers parents and families secured access to a live video stream of their baby. For hospitals, the system offers a step into family centered care.
Live Video Steaming Products
NICVIEW and NICVIEW 2 are user-friendly, web-based video systems for real-time streaming on any online device via a standard downloadable app. Password-protected access ensures parents can view only their own child, with end-to-end encryption and SSL authentication. The video stream can be turned on/off and repositioned at will, so that NICU staff remain in control of the care process at all times.
Hearing & Balance
Our Hearing & Balance product portfolio provides hearing diagnostic, hearing aid fitting and balance instrumentation and software solutions to hearing and balance care professionals worldwide. For more than 50 years, we have helped hearing and balance care professionals succeed in improving the quality of life for their clients and patients by delivering expert knowledge, reliable solutions and services and trusted partnerships. We will continue this tradition and legacy as we develop, manufacture and market computer-based audiological, otoneurologic and vestibular instrumentation in the future.
    Our solutions portfolio covers key application areas within hearing assessment, hearing screening, hearing instrument fitting and balance assessment. Many of our hearing and balance care solutions have set precedent within the hearing care industry and are used by thousands of clinicians around the world.
As an independent provider of hearing care diagnostic solutions, we work closely with leading hearing aid manufacturers to develop new solutions within hearing assessment and hearing aid fitting.
Hearing Assessment
From otoacoustic emissions (OAE) and immittance screening to advanced audiological testing and 3D digital ear scanning, we offer a wide range of flexible devices and PC-based solutions that are designed to screen, test and assess patients of all ages. Our hearing assessment solutions offer a range of functionality to support basic audiometric testing to advanced tinnitus and pediatric hearing assessment. Our hearing care solutions help streamline the hearing screening and assessment
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process making it easier and convenient for the professional and the patient. We also manufacture and market a broad line of supplies and disposable products and accessories for hearing assessment.
Hearing Instrument Fitting and Verification
Hearing fitting solutions help professionals manage the entire hearing aid fitting process - from fitting and verifying the hearing aid to patient counseling and follow up. Used by hearing aid dispensers, audiologists and clinicians around the world, our fitting solutions support otoscopy, audiometry, hearing aid testing and programming, fitting and verification with wireless design and binaural fitting capability. Our fitting solutions are PC-based and supported by integrated audiometric software that helps to streamline the fitting process for greater efficiency and patient satisfaction. We also manufacturer and market a broad line of supplies and disposable products and accessories for hearing instrument fitting and verification.
3D Digital Ear Scanning
Hearing assessment solutions include the breakthrough 3D digital ear scanning solutions Otoscan® that gives hearing care professionals innovative ways to attract and convert more clients while delivering customized hearing care in an efficient way. Otoscan enables hearing care professionals to make digital impressions for custom in-the-ear pieces such as earmolds and hearing aids. The scanner solution applies breakthrough technology to transform images of the ear into 3D digital files that are uploaded to the cloud service, Otocloud®, for immediate use in production of custom products, delivering significant efficiency and quality gains in the production of hearing aids. Otocloud is a web-based portal supported by a dedicated Microsoft Azure server domain.
Balance Assessment
Professionals who evaluate patients with balance disorders use our vestibular diagnostic and ENG/VNG (electronystagmography/videonystamography) systems and services. These solutions are used by audiologists, otolaryngologists, otologists and neurologists for identifying auditory and vestibular abnormalities. Our balance care solutions are compact and include the world's first portable, gold standard video head impulse test (“vHIT”) and offer modular functionality to support vHIT, video frenzel, positional, oculomotor and SHIMP (suppression head impulse) testing. We also manufacture and market a broad line of supplies, disposable face cushions, and accessories for balance assessment.

Segment and Geographic Information
We determine our reportable segments by first identifying our operating segments, and then by assessing whether any components of these segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. Historically, our operating segments were based on three strategic business units. In January 2019, we announced the transition of our operating structure from three strategic business units to a single, unified company with globally-led operational teams in Sales and Marketing, Manufacturing, Research and Development, Quality, and General and Administrative functions.
We operate as one operating segment and one reportable segment, which provides healthcare products, and services focused on the diagnosis and treatment of central nervous and sensory system disorders for patients of all ages. Financial information is reviewed on a consolidated basis for purposes of making operating decisions and assessing financial performance. Consolidated financial information is accompanied by disaggregated information about revenues by end market and geographic region. We do not assess the performance of our end markets or geographic regions on measures of profit or loss, or asset-based metrics. We have disclosed the revenues for each of our end markets and geographic regions to provide the reader of the financial statements transparency into our operations.
Information regarding our revenues and long-lived assets in the U.S. and in countries outside the U.S. is contained in Note 20—Segment, Customer and Geographic Information of our Consolidated Financial Statements included in this report and is incorporated in this section by this reference.
Revenue by Product Market and Product Category
For the years ended December 31, 2020, 2019 and 2018, revenue from our product markets as a percent of total revenue was approximately as follows: 
 Year Ended December 31,
 202020192018
Neuro57 %58 %53 %
Newborn Care25 %22 %25 %
Hearing & Balance18 %20 %22 %
Total100 %100 %100 %
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We also look at revenue as either being generated from sales of Devices and Systems, which are generally non-recurring, or related Supplies and Services, which are generally recurring. The products that are attributable to these categories are described above. Revenue from Devices and Systems, Supplies and Services as a percent of total revenue for the years ending December 31, 2020, 2019 and 2018 is as follows: 
 Year Ended December 31,
 202020192018
Devices and Systems73 %74 %72 %
Supplies23 %22 %22 %
Services%%%
Total100 %100 %100 %
In 2020, 2019 and 2018, no single end-user customer comprised more than 10% of our revenue.
Backlog
In general, we do not manufacture our products against a backlog of orders and do not consider backlog to be a significant indicator of the level of annual future sales activity. Production and inventory levels are based on the level of incoming orders as well as projections of future demand. Therefore, we believe that backlog information is not meaningful to understanding our overall business and should not be considered a reliable indicator of our ability to achieve any particular level of revenue or financial performance.
Marketing and Sales
Marketing
Our marketing strategies differ by product market, incorporating market dynamics, trends and competition in the positioning, promotion and pricing of each product. The value proposition that we communicate is focused on the quality, clinical performance, and customer benefit. We invest in educating our customers worldwide about our products through trade conferences and direct presentations to healthcare professionals.
Domestic Direct and Distributor Sales
We sell our products in North America primarily through a direct sales organization. We believe this direct sales organization allows us to maintain a higher level of customer service and satisfaction than would otherwise be possible by other distribution methods. We also sell certain products under private label and distribution arrangements.
For the years ended December 31, 2020, 2019 and 2018, domestic revenue as a percent of total revenue was approximately as follows: 
 Year Ended December 31,
 202020192018
Domestic revenue60.7 %59.0 %56.7 %
International Direct and Distributor Sales
We sell some of our products outside the U.S. through direct sales channels in Australia, Canada, China, Denmark, France, Germany, Italy, the Netherlands, New Zealand, the Nordics (Finland, Sweden, Norway), Spain, and the United Kingdom; we sell other products in those regions and into more than 100 other countries through a distributor sales channel.
    For the years ended December 31, 2020, 2019 and 2018, international revenue as a percent of total revenue was approximately as follows: 
 Year Ended December 31,
 202020192018
International revenue39.3 %41.0 %43.3 %
We sell products to our distributors under substantially the same terms as sales through our direct sales channels. Terms of sales to international distributors are generally “ex works,” where title and risk of loss are assumed by the distributor at the shipping point. Distributors are generally given exclusive rights in their territories to purchase products from Natus and to resell to end users or sub-distributors in their respective markets. Our distributors typically perform marketing, sales, and technical support functions in their respective markets. Each distributor may sell Natus products to their customer directly, via other
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distributors or resellers, or both. We actively train our distributors in product marketing, selling, and technical service techniques.
Seasonality in Revenue
We experience seasonality in our revenue. Demand for our products is historically higher in the second half of the year compared to the first. Our seasonality results from the purchasing habits of our hospital-based customers, whose purchases are often governed by calendar year budgets.
Group Purchasing Organizations
More than 90% of the hospitals in the U.S. are members of group purchasing organizations (“GPO”s), which negotiate volume purchase agreements for member hospitals, group practices, and other clinics.
For the years ended December 31, 2020, 2019 and 2018, revenue from direct purchases under a GPO contract as a percent of total revenue was approximately as follows: 
 Year Ended December 31,
 202020192018
Direct purchases by GPO members22.5 %18.7 %13.3 %

Third-Party Reimbursement
In the U.S., healthcare providers generally rely on third-party payors, including private health insurance plans, federal Medicare, state Medicaid, and managed care organizations, to reimburse all or part of the cost of the procedures they perform. Third-party payors can affect the pricing or the relative attractiveness of our products by regulating the maximum amount of reimbursement these payors provide for services utilizing our products.
Customer Service and Support
We generally provide a one-year warranty on our medical device and system products. We also sell extended service agreements on our medical device and system products. Service, repair, and calibration services for our domestic customers are provided by Company-owned service centers and our field service specialists. Service for international customers is provided by a combination of Company-owned facilities and vendors on a contract basis.
Manufacturing
We procure a significant portion of the components used in our products from other manufacturers; however, we perform final assembly, testing, and packaging of many of the devices ourselves to control quality and manufacturing efficiency and we are the manufacturer of record. We also use contract manufacturers to manufacture some of our disposable supply and medical device products. We perform regular quality assessments of these contract manufacturers, which include on-site quality audits.
We purchase materials and components from qualified suppliers that are subject to our quality specifications and inspections. We conduct quality audits of our key suppliers, several of which are experienced in the supply of components to manufacturers of finished medical devices, or supplies for use with medical devices. Most of our purchased components are available from more than one supplier.
Our manufacturing, service, and repair facilities are subject to periodic inspection by local and foreign regulatory authorities. Our quality assurance system is subject to regulation by the U.S. Food and Drug Administration (“FDA”) and other government agencies. We are required to conduct our product design, testing, manufacturing, and control activities in conformance with the FDA’s quality system regulations and to maintain our documentation of these activities in a prescribed manner. In addition, our production facilities have received International Organization for Standardization (“ISO”) 13485 certification. ISO 13485 certification standards for quality operations have been developed to ensure that medical device companies meet the standards of quality on a worldwide basis. We have also received the EC Certificate pursuant to the European Union Medical Device Directive 93/42/EEC, which allows us to place a CE mark on our products.
Research and Development
We are committed to introducing new products and supporting current product offerings in our markets through a combination of internal as well as external efforts that are consistent with our corporate strategy.
Internal product development capabilities.    We believe the ability to develop innovative products is essential to providing our customers with new product offerings. We plan to leverage our core technologies by introducing product line extensions as well as new product offerings.
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Partnerships that complement our expertise.    We continue to seek strategic partners in order to develop products that may not otherwise be available to us. By taking advantage of our core competencies, we believe that we can bring acquired or distributed products to market in an efficient manner and leverage our distribution channels.
New opportunities through technology acquisition.    We continue to evaluate new, emerging, and complementary technologies in order to identify new product opportunities. With our knowledge of our current markets we believe that we can effectively develop acquired technologies into successful new products.
Proprietary Rights
We protect our intellectual property through a combination of patent, copyright, trade secret, and trademark laws. We attempt to protect our intellectual property rights by filing patent applications for new features and products we develop. We enter into confidentiality or license agreements with our employees, consultants, and corporate partners, and seek to control access to our intellectual property, distribution channels, documentation, and other proprietary information. However, we believe that these measures afford only limited protection.
The intellectual rights to some of the original patents for technology incorporated into our products are now in the public domain. However, we do not consider these patents, or any currently viable patent or related group of patents, to be of such importance that their expiration or termination would materially affect our business.
We capitalize the cost of purchased technology and intellectual property, as well as certain costs incurred in obtaining patent rights, and amortize these costs over the estimated economic lives of the related assets.
We have numerous registered trademarks and service marks. Our marks are pending or registered trademarks in the United States and several foreign countries. We intend to file for additional trademarks to strengthen our trademark rights, but we cannot be certain that our trademark applications will result in registration or that our trademarks will be enforceable.
Competition
We sell our products in competitive and rapidly evolving markets. We face competition from other companies in all of our product lines. Our competitors range from small privately-held companies to multinational corporations and their product offerings vary in scope and breadth. We do not believe that any single competitor is dominant in any of our product lines.
We derive a significant portion of our revenue from the sale of disposable supplies that are used with our medical devices. In the U.S., we sell our supply products in a mature market and we expect that our products could face increasing competition, including competitors offering lower prices, which could have an adverse effect on our revenue and profit margins.
We believe the principal factors that will draw clinicians and other buyers to our products, include:
The clinical performance of our products including the level of specificity, sensitivity, and reliability of the product;
Time required to obtain results with the product, such as to test for or treat a clinical condition;
Relative ease of use of the product;
Our level of expertise in these fields which produces the depth and breadth of the products features;
Quality of customer support for the product;
Internet connectivity and cyber-security of the product;
Frequency of product updates;
Extent of third-party reimbursement of the cost of the product or procedure;
Extent to which the products conform to standard of care guidelines; and
Price of the product.
We believe that our primary competitive strength relates to the clinical functionality and reliability of our products.
Government Regulation
FDA’s Premarket Clearance and Approval Requirements
Unless an exemption applies, the medical devices we sell in the United States, must first receive one of the following types of FDA premarket review authorizations under the Food, Drug, and Cosmetics Act, as amended:
Clearance via Section 510(k); or
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Premarket approval via Section 515 if the FDA has determined that the medical device in question poses a greater risk of injury.
FDA review-time goal for 510(k) applications are 90 days, but clearance may take longer. The process of obtaining premarket approval via Section 515 is much more costly, lengthy, and uncertain. FDA review-time goal for premarket approval applications are 320 days, but approval may take longer. We cannot be sure that the FDA will ever grant either 510(k) clearance or premarket approval for any product we propose to market in the United States.
The FDA decides whether a device must undergo either the 510(k) clearance or premarket approval process based upon statutory criteria. These criteria include the level of risk that the FDA perceives to be associated with the device and a determination of whether the product is a type of device that is substantially equivalent to devices that are already legally marketed. The FDA places devices deemed to pose relatively less risk in either Class I or Class II, which requires the manufacturer to submit a premarket notification requesting 510(k) clearance, unless an exemption applies. The premarket notification under Section 510(k) must demonstrate that the proposed device is substantially equivalent in intended use and in safety and effectiveness to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of premarket approval applications.
The FDA places devices deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed to be not substantially equivalent to a predicate device, in its Class III classification. The FDA requires these devices to undergo the premarket approval process via Section 515 in which the manufacturer must prove the safety and effectiveness of the device. A premarket approval application must provide extensive pre-clinical and clinical trial data.
The FDA may require results of clinical trials in support of a 510(k) submission and generally requires clinical trial results for a premarket approval application. In order to conduct a clinical trial on a significant-risk device, the FDA requires manufacturers to apply for and obtain, in advance, an investigational-device exemption. The investigational-device exemption application must be supported by appropriate data, such as animal and laboratory testing results. If the FDA and the Institutional Review Boards at the clinical trial sites approve the investigational-device exemption application for a significant-risk device, the manufacturer may begin the clinical trial. An investigational-device exemption approval provides for a specified clinical protocol, including the number of patients and study sites. If the manufacturer deems the product a non-significant risk device, the product will be eligible for more abbreviated investigational-device exemption requirements. If the Institutional Review Boards at the clinical trial sites concur with the non-significant risk determination, the manufacturer may begin the clinical trial.
Most of our products have been cleared by the FDA as Class II devices.
FDA Regulation
Numerous FDA regulatory requirements apply to our products. These requirements include:
FDA quality system regulations which require manufacturers to create, implement, and follow design, testing, control, documentation, and other quality assurance procedures;
Medical device reporting regulations, which require that manufacturers report to the FDA certain types of adverse and other events involving their products; and
FDA general prohibitions against promoting products for unapproved uses.
Class II and III devices may also be subject to special controls applied to them, such as performance standards, post-market surveillance, patient registries, and FDA guidelines that may not apply to Class I devices. We believe we are in compliance with applicable FDA guidelines, but we could be required to change our compliance activities or be subject to other special controls if the FDA changes existing regulations or adopts new requirements.
We are subject to inspection and market surveillance by the FDA to determine compliance with regulatory requirements. If the FDA finds that we have failed to adequately comply, the FDA can institute a wide variety of enforcement actions, including:
Issuance of a Form 483 citation;
Fines, injunctions, and civil penalties;
Recall or seizure of our products;
Issuance of public notices or warnings;
Imposition of operating restrictions, partial suspension, or total shutdown of production;
Refusal of our requests for 510(k) clearance or pre-market approval of new products;
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Withdrawal of 510(k) clearance or pre-market approval already granted; or
Criminal prosecution.
The FDA also has the authority to require us to repair or replace any misbranded or adulterated medical device manufactured or distributed by us.
Other Regulations
We also must comply with numerous additional federal, state, and local laws relating to matters such as safe working conditions, manufacturing practices, environmental protection, biohazards, fire hazard control, and hazardous substance disposal. We believe we are currently in compliance with such regulations.
Countries outside of the U.S. regulate medical devices in a manner similar to that of the FDA. Our manufacturing facilities are subject to audit and have been certified to be ISO 13485:2016, Medical Device Directive 93/42/EEC, and MDSAP compliant, which allows us to sell our products in Europe, Canada, and other territories around the world. All of our manufacturing facilities are subject to inspection by our notified bodies or other competent authorities, and in some cases without advance notice. We plan to seek approval to sell our products in additional countries, while maintaining our current approvals. The time and cost of obtaining new, and maintaining existing, market authorizations from countries outside of North America, and the requirements for licensing products in these countries may differ significantly from FDA requirements.
In 2017, the European Union ("EU") adopted the EU Medical Device Regulation (Council Regulations 2017/745) which imposes stricter requirements for the marketing and sale of medical devices, including new quality system and post-market surveillance requirements. The regulation has a three-year implementation period that has now been extended to May 2021 and will replace the existing directives on medical devices in the EU. After May 2021, medical devices marketed in the EU will require certification according to these new requirements, except that devices with valid CE certificates, issued pursuant to the Medical Device Directive before May 2021, may be placed on the market until 2024. Complying with this new regulation requires us to incur significant costs on product design history file remediation and transition. Failure to meet the requirements of the regulation could adversely impact our business in the European Union and other countries that utilize or rely on European Union requirements for medical device registrations.
Human Capital
Overview
As of December 31, 2020, we had over 1,420 full-time employees, including approximately 700 employees located outside the United States.
We are organized by function, which includes Commercial activities with 705 employees (including Sales, Service & Marketing), Manufacturing Operations with 285 employees, Engineering with 172 employees, General and Administrative with 164 employees, and Quality and Regulatory Affairs with 102 employees. Our gender distribution of our employees is 37% women and 63% men.
We believe the relationship with our employees is strong as evidenced by consistently strong results in our semi-annual engagement survey and a low voluntary turnover rate of 9%.
As a global company, Natus drives continuous improvement in the diversity and inclusivity of our people ecosystem - employees, partners, and board of directors. Natus has an outreach program to recruit and promote our job opportunities to a broad range of organizations and hundreds of job boards with the intent of developing a diverse pool of qualified candidates.
Natus is committed to providing an inclusive work environment free of discrimination or harassment of any kind and is supported by policies, training and communications. Natus has an open and robust support system for employees to address any issues, concerns or complaints. We provide management escalation paths, Human Resources support systems and a confidential ethics hotline that is monitored by the Corporate Compliance Officer and the Board of Directors. As part of our onboarding process, all employees must go through training on the Natus Policies & Procedures and attest to our company code of conduct which outlines the standards for appropriate conduct and behavior.
Our principal human capital objectives are to attract, retain, motivate, and reward our employees to achieve results for our customers and us. To achieve these objectives, our human capital programs seek to:
Support skill building and prepare our employees for management/leadership capability through continuous learning;
Reward our employees through competitive total rewards intended to motivate our employees and promote well-being;
Continuously identify opportunities for development through regular employee input and engagement; and
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Protect the safety, health and well-being of our employees around the world through implementing safety protocols.
Continuous learning
We provide internal training to employees globally and assigned based on role through our systematic learning platform. In addition, Natus provides extensive training resources to employees including an on-demand e-learning system with over 4,000 courses to support skill building in a wide variety of areas from technical/functional ability to management/leadership capability.
Total rewards
We strive to offer competitive equitable pay, comprehensive benefits and services that meet the varying needs of our employees. Our total rewards package includes market-competitive pay, paid time off, and other comprehensive and competitive global health and welfare benefits.
In 2020, we focused on adding wellness programs and services to encourage physical, mental and financial well-being. The principal purposes of our equity and cash incentive plans are to attract, retain, motivate and reward our employees to achieve results for our customers and Natus.
Employee input
We solicited employee feedback several times in 2020 to assess employee satisfaction, engagement, and identify opportunities for development. The overall employee survey response was positive with over 80% of our employees responding with high engagement levels relative to benchmarked companies. Employee feedback is also gathered through diverse employee roundtables and onboarding and exit surveys. We have also launched culture councils to help support, retain and attract employees. We recognize that a culture of inclusion makes us stronger. Providing appropriate forums where employees globally can share ideas and feedback is an important component of our diversity and inclusion efforts.
Health and safety
Protecting the safety, health, and well-being of our employees around the world is a key priority. Throughout the COVID-19 pandemic, we have remained focused on the health and safety of our employees by implementing new safety protocols. We provided personal protective equipment, required the wearing of masks globally, increased cleaning procedures and provided cleaning supplies.
In addition, we trained employees and increased communications, reconfigured our facilities to add space for physical distancing, implemented remote work where possible and enhanced our IT systems to facilitate working from home and improved cybersecurity.
Overall
Natus is a global company striving through our people, programs, processes and metrics to build a strong foundation to support and empower our diverse workforce and work environment where our employees can grow and thrive.
Executives
The following table lists our executive officers and their ages as of February 26, 2021: 
NameAgePosition(s)
Jonathan A. Kennedy50 President and Chief Executive Officer
B. Drew Davies55 Executive Vice President and Chief Financial Officer
D. Christopher Chung, M.D.
57 Vice President of Quality, Regulatory Affairs and Chief Medical Officer
Austin F. Noll, III
54 Executive Vice President and Chief Commercial Officer
Jonathan A. Kennedy has served as Chief Executive Officer, and as a member of the Board of Directors since July 2018. Mr. Kennedy joined Natus as Senior Vice President and Chief Financial Officer in April 2013 and was appointed Executive Vice President and Chief Financial Officer in September 2016. Before joining Natus, Mr. Kennedy was Senior Vice President and Chief Financial Officer of Intersil Corporation, a global semiconductor manufacturer, since 2009. Prior to that, he was Intersil’s Corporate Controller since 2005 and Director of Finance since 2004. Before joining Intersil, Mr. Kennedy held management roles in Finance and Information Technology with Alcon Inc. and Harris Corporation. He holds a Bachelor of Science degree in Business Administration and a Master of Science degree in Accounting from the University of Central Florida.
B. Drew Davies joined Natus as Executive Vice President and Chief Financial Officer in October 2018. Mr. Davies most recently served as Executive Vice President and Chief Financial Officer of Extreme Networks since June 2016. Before joining
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Natus, Mr. Davies served as Vice President and Corporate Controller at Marvell Semiconductor Inc. from December 2015 until May 2016. Prior to that, Mr. Davies was the Senior Vice President, Corporate Controller at Spansion, Inc. from August 2012 to December 2015. Prior to Spansion, Mr. Davies was Corporate Controller at Intersil Corporation from April 2009 to August 2012, and served as Operations Controller from March 2008 to April 2009. Mr. Davies also served as Chief Financial Officer of Nanoconduction, Inc. from March 2007 to March 2008, Director of Finance and Administration for STATSChipPac from September 1999 to March 2007, held various finance roles at Micron Custom Manufacturing Services from November 1992 to September 1999. Mr. Davies holds a Master of Business Administration degree from Santa Clara University and a Bachelor of Science, Business Accounting degree from the University of Idaho.
D. Christopher Chung, joined Natus in 2000 as the Medical Director. He has also served as Vice President of R&D and most recently since 2011 as Vice President Medical Affairs, Quality and Regulatory. From 2000 to 2007, Dr. Chung also served as a Pediatric Hospitalist at the California Pacific Medical Center in San Francisco providing patient care in the Neonatal Intensive Care Unit and Newborn Nursery. From 1997 to 2000, Dr. Chung trained as a pediatric resident at Boston Children’s Hospital and Harvard Medical School. From 1986 to 1993, Dr. Chung worked as an R&D engineer at Nellcor Incorporated, a medical device company that pioneered the development of pulse oximetry. Dr. Chung holds a Bachelor of Arts degree in Computer Mathematics from the University of Pennsylvania and a Doctor of Medicine degree from the Medical College of Pennsylvania-Hahnemann University School of Medicine. He is board certified in Pediatrics and is a Fellow of the American Academy of Pediatrics. Dr. Chung has also been awarded nine U.S. Patents in the medical device field.
Austin F. Noll, III currently Chief Commercial Officer, joined Natus in August 2012 as the Vice President and General Manager, Neuro. Prior to joining Natus, Mr. Noll served as the President and CEO of Simpirica Spine, a California-based start-up company that developed and commercialized a novel device for spinal stabilization. Prior to joining Simpirica Spine, Mr. Noll served as the President and CEO of NeoGuide Systems, a medical robotics company acquired by Intuitive Surgical. Prior to joining NeoGuide Systems, Mr. Noll held numerous management positions at Medtronic over a 13-year period, where he served as the Vice President and General Manager of the Powered Surgical Solutions and the Neurosurgery businesses. Before Medtronic, he held sales positions at C.R. Bard and Baxter Healthcare. He received a Bachelor of Science degree in Business Administration from Miami University and a Master of Business Administration degree from the University of Michigan.
Other Information
Natus was incorporated in California in May 1987 and reincorporated in Delaware in August 2000.
We maintain corporate offices at 6701 Koll Center Parkway Suite 120, Pleasanton, California 94566. Our telephone number is (925) 223-6700. We maintain a corporate website at www.natus.com. References to our website address do not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.
We make available, free of charge on our corporate website, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements, and all amendments to these reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act. We also show detail about stock trading by corporate insiders by providing access to SEC Forms 3, 4 and 5. This information may also be obtained from the SEC’s on-line database, which is located at www.sec.gov. Our common stock is traded on the Nasdaq Stock Market under the symbol “NTUS”.

Item 1A.    Risk Factors
Risks Related to the COVID-19 Pandemic
Our business has been and may continue to be negatively affected by the ongoing COVID-19 pandemic and any future outbreaks of disease.
Our operations and financial performance have and continue to be significantly affected by the ongoing global COVID-19 pandemic and the resulting volatility and uncertainty it has caused in the U.S. and international markets. On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and recommended containment and mitigation measures worldwide. On March 13, 2020, President Trump declared a National Emergency relating to the disease. The widespread infection in the U.S. and abroad has caused significant volatility and uncertainty in U.S. and international markets, which has produced an economic downturn that has disrupted and is expected to continue to disrupt our business.
National, state and local authorities have recommended social distancing and many have implemented quarantine, shelter-in-place, curfew and similar isolation measures, including government orders and other restrictions on the conduct of business operations. Such measures have had adverse impacts on the U.S. and foreign economies of uncertain severity and duration and have and may continue to negatively impact our ongoing operations, including our revenue, manufacturing and
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supply chain. For example, our business relies on continued investment and activity in the healthcare system, and as a result of the significant reduction, or in some cases elimination, of elective medical procedures and healthcare visits, as well as the deferring or cancelling of customer capital expenditure projects, we have seen a decline in revenue from our Supplies and Devices and Systems products. We have also experienced an increase in delayed payments compared to historical periods, which have impacted and may continue to impact, our cash flow and earnings. Spikes in the transmission of COVID-19 or a delay in the distribution of approved vaccines may lead to renewed or expanded shutdowns, curfews or other isolation measures and may result in further restriction on, and decreased demand for, elective medical procedures, which may adversely affect our business operations, financial position or consolidated cash flows.
In addition, we have experienced disruption and delays in parts of our direct and indirect supply chain. We have made investments in inventory to help mitigate against further potential supply chain interruptions. These investments include increased inventory and firm purchase orders beyond our typical timeframe in order to secure capacity at our key suppliers. We have experienced, and may continue to experience, increased costs as a result of excess inventory, which in turn has resulted, and may continue to result, in lower gross margins. In addition, our inventory management systems and related supply chain visibility tools were not designed to forecast manage supply of our products and product components under these unprecedented pandemic conditions, and as a result our forecasts could be inaccurate or our supply decisions could be incorrect. We may experience restricted stock availability or delays or difficulty sourcing certain products in the future, which could negatively impact us.
As a result of the ongoing COVID-19 pandemic, much of our workforce continues to operate under a temporary remote working model, which may result in us experiencing lower work efficiency and productivity, which in turn may adversely affect our business. As our employees work from home and access our systems remotely, we may be subject to heightened security and privacy risks, including the risks of cyberattacks and privacy incidents. Additionally, we have a number of employees who continue to work in our facilities or perform services at our customers' facilities who may be subject to heightened risks for COVID-19 exposure thus potentially impacting their health and future worker compensation claims against us. We may also be subject to lawsuits from employees and others exposed to COVID-19 at our facilities, which could involve large demands and substantial defense costs. Our professional and general liability insurance may not cover all claims against us. Furthermore, if any of our employees are unable to perform his or her duties for a period of time, including as the result of illness, our results of operations or financial condition could be adversely affected. Finally, the widespread pandemic has caused and is expected to continue to cause significant disruption of global financial markets, which may reduce or impair our ability to access capital, or access capital on terms that would be consistent with our expectations, temporarily during this period.
We cannot reasonably estimate the length or severity of the COVID-19 pandemic, including the potential for further mutation, or the related response, including the length of time it may take for normal economic and operating conditions to resume or the extent to which the disruption may materially impact our business, consolidated financial position, consolidated results of operations or consolidated cash flows. To the extent the COVID-19 pandemic continues to adversely affect our business operations, financial position or consolidated cash flows, it may also have the effect of heightening many of the other risks described here within.
Risks Related to Our Manufacturing and Supply Chain
Adverse economic conditions in markets in which we operate may harm our business.
Unfavorable changes in U.S. and international economic environments may adversely affect our business and financial results. Concerns over the economic stability, the level of U.S. national debt, currency fluctuations and volatility, the rate of growth of Japan, China, and other Asian economies, unemployment, the availability and cost of credit, inflation levels, trade relations, energy costs and geopolitical uncertainty have contributed to increased volatility and diminished expectations for the economy and the markets. During challenging economic times, and in tight credit markets, our customers may delay or reduce capital expenditures. This could result in reductions in sales of our products, longer sales cycles, difficulties in collection of accounts receivable, slower adoption of new technologies, and increased price competition, all of which could impact our results of operations and financial condition. In addition, we expect these factors will cause us to be more cautious in evaluating potential acquisition opportunities, which could hinder our ability to grow through acquisition while these conditions persist.
In addition, we are susceptible to risks related to the COVID-19 pandemic. In particular, the continued spread of COVID-19 globally could adversely affect our operations, including our manufacturing and supply chain and sales and marketing. Our direct and indirect supply chain relies on manufacturing at, and transportation of products and materials to and from, facilities located throughout the world, and is accordingly subject to disruption or product contamination. Additionally, our results of operations could be adversely affected to the extent that COVID-19 or any other epidemic harms our business or the economy in general either globally or in any region in which we do business. For example, our customers may delay, cancel or redirect planned capital expenditures in order to focus resources on COVID-19 or in response to economic disruption related to COVID-19. The extent to which COVID-19 will continue to affect our operations will depend on future developments,
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which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others, and could have an adverse effect on our business and financial condition.
Further, the U.S. federal government has called for, or enacted, substantial changes to healthcare, trade, fiscal, and tax policies, which may include changes to existing trade agreements and may have a significant impact on our operations. We cannot predict the impact, if any, that these changes could have on our business. If economic conditions worsen or new legislation is passed related to the healthcare system, trade, fiscal or tax policies, customer demand may not materialize to levels we require to achieve our anticipated financial results, which could have a material adverse effect on our business, financial condition and results of operations.
Uncertain credit markets and concerns regarding the availability of credit could impact consumer and customer demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers and creditors, including financial institutions. If the current situation continues to deteriorate or does not improve, our business could be negatively affected by factors such as reduced demand for our products resulting from a slow‑down or volatility in the general economy, supplier or customer disruptions and/or temporary interruptions in our ability to conduct day‑to‑day transactions through our financial intermediaries involving the payment to or collection of funds from our customers, vendors and suppliers.
Because we rely on distributors or sub-distributors to sell our products in most of our markets outside of the United States, our revenue could decline if our existing distributors reduce the volume of purchases from us, or if our relationship with any of these distributors is terminated.
We currently rely on our distributors or sub-distributors for a majority of our sales outside the United States. Some distributors also assist us with regulatory approvals and education of clinicians and government agencies. Our contracts with our distributors or sub-distributors do not assure us significant minimum purchase volume. If a contract with a distributor or sub-distributor is terminated for cause or by us for convenience, the distributor or sub-distributor will have no obligation to purchase products from us. We intend to continue our efforts to increase our sales in Europe, Asia, and other developed markets throughout the world. If we fail to sell our products through our international distributors, we would experience a decline in revenue unless we begin to sell our products directly in those markets. We cannot be certain that we will be able to attract new international distributors to market our products effectively or provide timely and cost-effective customer support and service. Even if we are successful in selling our products through new distributors, the rate of growth of our revenue could be harmed if our existing distributors do not continue to sell a large dollar volume of our products. None of our existing distributors are obligated to continue selling our products.
We may be subject to foreign laws governing our relationships with our international distributors. These laws may require us to make payments to our distributors if we terminate our relationship for any reason, including for cause. Some countries require termination payments under local law or legislation that may supersede our contractual relationship with the distributor. Any required payments would adversely affect our operating results.
If we lose our relationship with any supplier of key product components or our relationship with a supplier deteriorates or key components are not available in sufficient quantities, our manufacturing could be delayed and our business could suffer.
We contract with third parties for the supply of some of the components used in our products and the production of our disposable products. Some of our suppliers are not obligated to continue to supply us. We have relatively few sources of supply for some of the components used in our products and in some cases we rely entirely on sole-source suppliers. In addition, the lead-time involved in the manufacturing of some of these components can be lengthy and unpredictable. If our suppliers become unwilling or unable to supply us with components meeting our requirements, it might be difficult to establish additional or replacement suppliers in a timely manner, or at all. This would cause our product sales to be disrupted and our revenue and operating results to suffer.
Replacement or alternative sources might not be readily obtainable due to regulatory requirements and other factors applicable to our manufacturing operations. Incorporation of components from a new supplier into our products may require a new or supplemental filing with applicable regulatory authorities and clearance or approval of the filing before we could resume product sales. This process may take a substantial period of time, and we may not be able to obtain the necessary regulatory clearance or approval. This could create supply disruptions that would harm our product sales and operating results.
We have substantial international operations which are subject to numerous risks; if our international operations are not successful, our business will be adversely affected.
In 2020, approximately 39.3% of our sales were made outside the United States. We plan to expand our international sales and marketing efforts to increase sales of our products in foreign countries. We may not realize corresponding growth in revenue from growth in international unit sales, due to the lower average selling prices we receive on sales outside of the United States. Even if we are able to successfully expand our international selling efforts, we cannot be certain that we will be able to
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create or increase demand for our products outside of the United States. Our international operations are subject to other risks, which include:
The ongoing COVID-19 pandemic, which has caused disruptions in our and our distributors', vendors' and customers' respective operations, and any future outbreak of a contagious disease;
Impact of possible recessions in economies outside the United States;
Political and economic instability, including instability related to war and terrorist attacks and to political and diplomatic matters;
Adverse changes in tariffs and trade protection measures;
Difficulty in obtaining and maintaining foreign regulatory approval and complying with foreign regulations, including the EU Medical Device Regulation;
Contractual provisions governed by foreign law, such as local law rights to sales commissions by terminated distributors;
Decreased healthcare spending by foreign governments that would reduce international demand for our products;
Strengthening of the U.S. dollar relative to foreign currencies that could make our products less competitive because approximately half of our international sales are denominated in U.S. dollars;
Changes in capital and exchange controls affecting international trade;
Greater difficulty in accounts receivable collection and longer collection periods;
Difficulties of staffing and managing foreign operations;
Reduced protection for intellectual property rights in some countries and potentially conflicting intellectual property rights of third parties under the laws of various foreign jurisdictions;
Attitudes by clinicians, and cost reimbursement policies, towards use of disposable supplies that are potentially unfavorable to our business;
Complying with U.S. regulations that apply to international operations, including trade laws, the U.S. Foreign Corrupt Practices Act, and anti-boycott laws, as well as international laws such as the U.K. Bribery Act;
Loss of business through government tenders that are held annually in many cases; and
Potentially negative consequences from changes in tax laws, including legislative changes concerning taxation of income earned outside of the United States.
In particular, our international sales could be adversely affected by a strengthening of the U.S. dollar relative to other foreign currencies, which makes our products more costly to international customers for sales denominated in U.S. dollars.
Risks Related to Our Business and Operations
We previously identified a material weakness in our internal control over financial reporting in recent periods, and if we fail to maintain proper and effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act in the future, the accuracy and timeliness of our financial reporting may be adversely affected.
The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and disclosure controls and procedures quarterly. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act.
During the fourth quarter of 2019, we identified errors as part of closing our books and concluded that certain deficiencies existed in the Company’s internal control over financial reporting. Specifically, we did not have controls designed to identify and properly account for certain research and development activities related to an arrangement with a third party. Additionally, insufficient training provided to a new control operator and the design of one of our controls over payroll accounts contributed to an error in the period end accrual. The Company has concluded that these deficiencies could have resulted in a material misstatement of the consolidated financial statements that would not have been prevented or detected on a timely basis, and as such, these control deficiencies resulted in a material weakness in our internal control over financial reporting. We have made substantive changes to enhance our design of controls to identify and assess contracts that include research and development and to confirm the accuracy of the payroll accruals. Process updates focused on material weakness remediation were implemented early in 2020 and operated throughout the year. After completing the necessary year-end testing of the enhanced procedures, we concluded that the previously identified material weakness is remediated as of December 31, 2020. However, there can be no absolute assurance that these steps will be successful in preventing or detecting material misstatements in the consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. This material weakness is more fully described in Item 9A. Controls and
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Procedures-Management’s Report on Internal Control Over Financial Reporting. The existence of this material weakness and of any other ineffective controls over our financial reporting could result in one or more of the following:
Revision of previously filed financial statements;
Failure to meet our reporting obligations;
Loss of investor confidence; and
Negative impact on the trading price of our common stock.
In addition, we reported a material weakness in our internal control over financial reporting for the year ended December 31, 2018. In connection with a change in control owner, management identified an existing control that was not designed at a sufficient precision to adequately review our analysis of separate reporting units, which could have resulted in a material misstatement. We took steps to remediate this issue in 2018 and concluded the material weakness was remediated as of December 31, 2018. However, our current efforts to maintain an effective control environment may not be sufficient to prevent future material weaknesses or significant deficiencies from occurring or to promptly remediate any such future material weaknesses or significant deficiencies.
If other material weaknesses are identified in the future or we are not able to comply with the requirements of Section 404 in a timely manner, our reported financial results could be materially misstated or could be restated, we could receive an adverse opinion regarding our controls from our independent registered accounting firm and we could be subject to investigations or sanctions by regulatory authorities, which would require additional financial and management resources, and the market price of our stock could decline.
The United Kingdom's withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business and operations.
The U.K. exited from the European Union on January 31, 2020 (often referred to as “Brexit”). On December 24, 2020, the U.K. and the European Union entered into a trade and cooperation agreement (the “Trade and Cooperation Agreement”), which was applied on a provisional basis from January 1, 2021. While the economic integration does not reach the level that existed during the time the U.K. was a member state of the European Union, the Trade and Cooperation Agreement sets out preferential arrangements in areas such as trade in goods and in services, digital trade and intellectual property. Negotiations between the U.K. and the European Union are expected to continue in relation to the relationship between the U.K. and the European Union in certain other areas which are not covered by the Trade and Cooperation Agreement. The long term effects of Brexit will depend on the effects of the implementation and application of the Trade and Cooperation Agreement and any other relevant agreements between the U.K. and the European Union. It is still unclear what terms, if any, may be agreed within the U.K. and between the U.K. and other countries on many aspects of fiscal policy, cross-border trade and international relations, both in the final outcome and for any transitional period. The withdrawal of the U.K. from the European Union could potentially disrupt the free movement of goods, services and people between the U.K. and the European Union, including in Ireland where we have significant manufacturing operations, undermine bilateral cooperation in key geographic areas and significantly disrupt trade between the U.K. and the European Union or other nations as the U.K. pursues independent trade relations. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which European Union laws to replace or replicate. Because this is an unprecedented event, it is unclear what long-term economic, financial, trade and legal implications Brexit would have and how it would affect the regulation applicable to our business globally and in the region. Any of these developments, along with any political, economic and regulatory changes that may occur, could cause political and economic uncertainty in Europe and internationally and harm our business and financial results. The impact on Natus from Brexit will depend, in part, on the application of the Trade and Cooperation Agreement and the outcome of other tariff, trade, regulatory and other negotiations. Although Natus has not observed a material financial impact or identified any trends or potential changes to critical accounting estimates as a result of Brexit at this time we will continue to assess the impact of Brexit on our business and operations, and on accounting and reporting considerations. The effects of Brexit and the application of the Trade and Cooperation Agreement could adversely affect our business, financial condition or future results.
Our operating results may suffer because of our exposure to foreign currency exchange rate fluctuations.
Substantially all of our sales contracts with our U.S. based customers provide for payment in U.S. dollars. With the exception of our Canadian operations, substantially all of the revenue and expenses of our foreign subsidiaries are denominated in the applicable foreign currency for the countries in which they operate. To date we have executed only limited foreign currency contracts to hedge these currency risks. Our future revenue and expenses may be subject to volatility due to exchange rate fluctuations that could result in foreign exchange gains and losses associated with foreign currency transactions and the translation of assets and liabilities denominated in foreign currencies.
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Substantially all our sales from our U.S. operations to our international distributors provide for payment in U.S. dollars. A strengthening of the U.S. dollar relative to other foreign currencies could increase the effective cost of our products to our international distributors as their functional currency is typically not the U.S. dollar. This could have a potential adverse effect on our ability to increase or maintain average selling prices of our products to our foreign-based customers.
The interest rates on our revolving credit facility are priced using a spread over LIBOR.
LIBOR, the London interbank offered rate, is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We typically use LIBOR as a reference rate in our term loans such that the interest due to our creditors pursuant to a term loan extended to us is calculated using LIBOR. Most of our term loan agreements contain a stated minimum value for LIBOR.
Our credit facility permits interest on the outstanding principal balance to be calculated based on LIBOR. On July 27, 2017, the U.K. Financial Conduct Authority (the "FCA") announced that it will no longer require banks to submit rates for the calculation of LIBOR after June 2023, and the U.S. Federal Reserve and the Bank of England have begun publishing a Secured Overnight Funding Rate ("SOFR") and a reformed Sterling Overnight Index Average ("Sonia"), respectively, which are currently intended to serve as alternative reference rates to LIBOR. Considerable uncertainty exists around what will replace LIBOR and how it will be implemented. At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be implemented in the United Kingdom or elsewhere. Actions in the meantime, by the FCA, other regulators, or law enforcement agencies are expected to influence the method by which LIBOR is calculated. At this time, it is not possible to predict the effect of any such changes or any other reforms to LIBOR that may be enacted in the U.K. or elsewhere. Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect our indebtedness that bear interest at a floating rate determined by reference to LIBOR.
Future changes in technology or market conditions could result in adjustments to our recorded asset balance for intangible assets, including goodwill, resulting in additional charges that could significantly impact our operating results.
Our balance sheet includes significant intangible assets, including goodwill and other acquired intangible assets. The determination of related estimated useful lives and whether these assets are impaired involves significant judgment. Our ability to accurately predict future cash flows related to these intangible assets might be hindered by events over which we have no control. Due to the highly competitive nature of the medical device industry, new technologies could impair the value of our intangible assets if they create market conditions that adversely affect the competitiveness of our products. Further, declines in our market capitalization may be an indicator that our intangible assets or goodwill carrying values exceed their fair values which could lead to potential impairment charges that could impact our operating results. In the past we have recorded charges for goodwill impairment and impairments of our trade names.
We depend upon key employees in a competitive market for skilled personnel, and, without additional employees, we cannot grow or maintain profitability.
Our products and technologies are complex, and we depend substantially on the continued service of our senior management team. The loss of any of our key employees could adversely affect our business and slow our product development process. Our future success will depend, in part, on the continued service of our key management personnel, software engineers, and other research and development employees, and our ability to identify, hire, and retain additional personnel, including customer service, marketing, and sales staff. Demand for these skilled employees in our industry is very competitive due to the limited number of people available with the necessary technical skills and understanding of our product technologies. We may be unable to attract and retain personnel necessary for the development of our business.
We have experienced seasonality in the sale of our products.
We experience seasonality in our revenue. For example, our sales typically decline from the second half of our fiscal year to the first half of the fiscal year, due to patterns in the capital budgeting and purchasing cycles of our customers, many of which are government agencies, and the compensation arrangements of our direct sales employees, as those arrangements are tied to calendar-year sales plans. We anticipate that we will continue to experience seasonal fluctuations, which may lead to fluctuations in our quarterly operating results. We believe that you should not rely on our results of operations for interim periods as an indication of our expected results in any future period.
We make regular changes to our information systems that could disrupt our business and our financial results.
We continuously improve and plan to continue to improve our information systems to support the form, functionality, and scale of our business. These types of transitions frequently prove disruptive to the underlying business of an enterprise and may cause us to incur higher costs than we anticipate. Failure to manage a smooth transition to the new systems and the ongoing operations and support of the new systems could materially harm our business operations.
U.S. tax reform legislation could materially affect our business and financial condition.
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The Tax Cuts and Jobs Act (the “Tax Act”) was signed into law in December 2017. The new law made numerous changes to federal corporate tax law that we expect will impact our effective tax rate in future periods. The changes included in the Tax Act were broad and complex and included, among others, reducing the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limiting the tax deduction for interest expense to 30% of adjusted earnings, eliminating net operating loss carrybacks, imposing a one-time tax on offshore earnings at reduced rates regardless of whether they are repatriated, allowing immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. The final impacts of the Tax Act may differ from our current estimates, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates we have utilized to calculate the transition impacts.
Risks Related to Growth and Competition
Demand for some of our products depends on the capital spending policies of our customers, and changes in these policies could harm our business.
A majority of customers for our products are hospitals, physician offices, and clinics. Many factors, including public policy spending provisions, available resources, and economic cycles have a significant effect on the capital spending policies of these entities and the amount that they can spend on our equipment products. If budget resources limit the capital spending of our customers, they will be unlikely to either purchase any new equipment from us or upgrade to any of our newer equipment products. Lack of liquidity in credit markets and uncertainty about future economic conditions can have an adverse effect on the spending patterns of our customers. These factors can have a significant adverse effect on the demand for our products.
Our operating results may decline if we do not succeed in developing, acquiring, and marketing additional products or improving our existing products.
We intend to develop additional products and technologies, including enhancements of existing products, for the screening, detection, treatment, monitoring and tracking of common medical ailments. Developing new products and improving our existing products to meet the needs of current and future customers requires significant investments in research and development. Healthcare products typically receive regulatory approval based on data obtained in controlled clinical trials, which can be time consuming and expensive. Unfavorable or inconsistent clinical data from existing or future clinical trials may adversely affect our ability to secure marketing authorization for certain products. Furthermore, all results, even positive ones, are subject to the interpretation of FDA and other regulatory agencies. If we fail to sell new products, update existing products, or timely react to changes in technology, our operating results may decline as our existing products reach the end of their commercial life cycles.
Our business results depend on our ability to successfully manage ongoing organizational change and business transformation and achieve cost savings and operating efficiency initiatives.
Our financial goals assume a level of increased productivity. If we are unable to deliver these expected improvements, or continue to invest in business growth, or if the volume and nature of change require additional resources, our business operations and financial results could be materially and adversely impacted. Our ability to successfully manage and execute these initiatives and realize expected savings and benefits in the amounts and at the times anticipated is important to our business success. Any failure to do so, which could result from our inability to successfully execute organizational change and business transformation plans, changes in global or regional economic conditions, competition, changes in the industries in which we compete, unanticipated costs or charges, loss of key personnel and other factors described herein, could have a material adverse effect on our businesses, financial condition and results of operations.
At previous points in our past, our growth has depended substantially on the completion of acquisitions and we may not be able to complete or successfully capitalize on acquisitions of the same nature or relative size in the future to support a similar level of growth.
The acquisitions that we have completed have contributed to our growth in prior years. We have expended considerable effort in seeking to identify attractive acquisition candidates, and ultimately, to negotiate mutually agreeable acquisition terms. The market for attractive acquisitions is competitive and others with different strategic objectives or greater financial resources than we have may be better positioned than we are to acquire desirable targets. Further, we may not be able to negotiate acquisition terms with target companies that will allow us to achieve acceptable financial returns from the transaction.
If completed, the success of any acquisitions will depend, in part, on our ability to successfully combine and integrate the acquired business into our businesses and realize the anticipated benefits, including synergies, from the transaction. The integration of any acquired businesses may result in material challenges, including: the diversion of management's attention from ongoing business concerns and performance shortfalls at one or both of the companies; maintaining employee morale and retaining key management, sales and other employees; retaining existing business and operational relationships; the possibility
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of faulty assumptions underlying expectations regarding the integration process; consolidating corporate and administrative infrastructures and eliminating duplicative operations; unanticipated issues in integrating information technology, communications and other systems; and unforeseen costs, expenses and liabilities (including litigation related liabilities) associated with such acquisition.
If we fail in our efforts to educate clinicians, government agency personnel, and third-party payors about the effectiveness of our products, we may not achieve future sales growth.
It is critical to the success of our sales efforts that we educate a sufficient number of clinicians, hospital administrators, and government agencies about our products and the costs and benefits of their use. The commercial success of our products depends upon clinician, government agency, and other third-party payor confidence in the economic and clinical benefits of our products as well as their comfort with the efficacy, reliability, sensitivity and specificity of our products. We believe that clinicians will not use our products unless they determine, based on published peer-reviewed journal articles and experience, that our products provide an accurate and cost-effective alternative to other means of testing or treatment. Our customers may choose to use competitive products, which may be less expensive or may provide faster results than our devices. Clinicians are traditionally slow to adopt new products, testing practices and clinical treatments, partly because of perceived liability risks and the uncertainty of third-party reimbursement. If clinicians, government agencies and hospital administrators do not adopt our products, we may not maintain profitability. Factors that may adversely affect the medical community’s acceptance of our products include:
Publication of clinical study results that demonstrate a lack of efficacy or cost-effectiveness of our products;
Changing governmental and physician group guidelines;
Actual or perceived performance, quality, price, and total cost of ownership deficiencies of our products relative to other competitive products;
Our ability to maintain and enhance our existing relationships and to form new relationships with leading physicians, physician organizations, hospitals, state laboratory personnel, and third-party payors;
Changes in federal, state and third-party payor reimbursement policies for our products; and
Repeal of laws requiring universal newborn hearing screening and metabolic screening.
Sales to members under group purchasing agreements and sales to high volume purchasers may reduce our average selling prices, which could reduce our operating margins.
We have entered and expect in the future to enter into agreements with customers who purchase a high volume of our products. Our agreements with these customers may contain discounts from our normal selling prices and other special pricing considerations, which could cause our operating margins to decline. In addition, we have entered into agreements to sell our products to members of GPOs, which negotiate volume purchase prices for medical devices and supplies for member hospitals, group practices and other clinics. While we make sales directly to GPO members, the GPO members receive volume discounts from our normal selling price and may receive other special pricing considerations from us. Sales to members of all GPOs accounted for approximately 22.5%, 18.7% and 13.3% of our total revenue during 2020, 2019 and 2018, respectively. Certain other existing customers may be members of GPOs with which we do not have agreements. If we enter into agreements with new GPOs and some of our existing customers begin purchasing our products through those GPOs, our operating margins could decline.
Consolidation in the healthcare industry could have an adverse effect on our revenues and results of operations.
Many healthcare industry companies, including our customers and competitors, are consolidating to create new companies with greater market power. As the healthcare industry consolidates, competition to provide goods and services to our customers could become more intense. Our customers may try to use their market power to negotiate price concessions and our competitors may utilize their size and broad product lines to offer cheaper alternatives to our products. If we are forced to reduce our prices because of consolidation in the healthcare industry, our revenues would decrease and our consolidated earnings, financial condition, or cash flow would suffer.
Our markets are very competitive and in the United States we sell certain of our products in a mature market.
We face competition from other companies in all of our product lines. Our competitors range from small privately held companies to multinational corporations and their product offerings vary in scope and breadth. We do not believe that any single competitor is dominant in any of our product lines.
The markets for certain of our products in the United States, including the newborn hearing screening, EMG, and EEG monitoring markets, are mature and we are unlikely to see significant growth for such products in the United States. The market for newborn care products is affected by birthrates, and a declining U.S. birthrate has adversely affected our operating results in recent periods. In the United States we derive a significant portion of our revenue from the sale of disposable supplies. Our disposable supply products could face increasing competition, including competitors offering lower prices, which could have an adverse effect on our revenue and margins.
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Our competitors may have certain competitive advantages, which include the ability to devote greater resources to the development, promotion, and sale of their products. Consequently, we may need to increase our efforts, and related expenses for research and development, marketing, and selling to maintain or improve our position.
We expect recurring sales to our existing customers to generate a majority of our revenue in the future, and if our existing customers do not continue to purchase products from us, our revenue may decline.
If healthcare providers are not adequately reimbursed for procedures conducted with our devices or supplies, or if reimbursement policies change adversely, we may not be successful marketing and selling our products or technologies.
Clinicians, hospitals, and government agencies are unlikely to purchase our products if they are not adequately reimbursed for the procedures conducted with our devices or supplies. Unless a sufficient amount of conclusive, peer-reviewed clinical data about our products has been published, third-party payors, including insurance companies and government agencies, may refuse to provide reimbursement. Furthermore, even if reimbursement is provided, it may not be adequate to fully compensate the clinicians or hospitals. Some third-party payors may impose restrictions on the procedures for which they will provide reimbursement. If healthcare providers cannot obtain sufficient reimbursement from third-party payors for our products or the screenings conducted with our products, we may not achieve significant market acceptance of our products. Acceptance of our products in international markets will depend upon the availability of adequate reimbursement or funding within prevailing healthcare payment systems. Reimbursement, funding, and healthcare payment systems vary significantly by country. We may not obtain approvals for reimbursement in a timely manner or at all.
Adverse changes in reimbursement policies in general could harm our business. We are unable to predict changes in the reimbursement methods used by third-party healthcare payors, particularly those in countries and regions outside the United States. For example, some payors are moving toward a managed care system in which providers contract to provide comprehensive healthcare for a fixed cost per person. In a managed care system, the cost of our products may not be incorporated into the overall payment for patient care or there may not be adequate reimbursement for our products separate from reimbursement for other procedures.
Risks Related to Our Compliance and Regulatory Environment
Our ability to market and sell products depends upon receipt of domestic and foreign regulatory approval of our products and manufacturing operations. Our failure to obtain or maintain regulatory approvals and compliance could negatively affect our business.
Our products and manufacturing operations are subject to extensive regulation in the United States by the FDA and by similar regulatory agencies in other countries. Our products are classified as medical devices. Medical devices are subject to extensive regulation by the FDA pursuant to regulations that are wide ranging and govern, among other things: design and development; manufacturing and testing; labeling; storage and record keeping; advertising, promotion, marketing, sales distribution and export; and surveillance and reporting of deaths or serious injuries.
Unless an exemption applies, each medical device that we propose to market in the United States must first receive one of the following types of FDA premarket review authorizations:
Clearance via Section 510(k) of the Food, Drug, and Cosmetics Act of 1938, as amended; or
Premarket approval via Section 515 of the Food, Drug, and Cosmetics Act if the FDA has determined that the medical device in question poses a greater risk of injury.
The FDA will clear marketing of a medical device through the 510(k) process if it is demonstrated that the new product is substantially equivalent to other 510(k)-cleared products. The premarket approval application process is much more costly, lengthy and uncertain than the 510(k) process, and must be supported by extensive data from preclinical studies and human clinical trials. The FDA may not grant either 510(k) clearance or premarket approval for any product we propose to market. Further, any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design or manufacture, requires a new 510(k) clearance or, possibly, approval of a premarket approval application. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer’s decision. If the FDA requires us to seek 510(k) clearance or premarket approval for modification of a previously cleared product for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties. Further, our products could be subject to recall if the FDA determines, for any reason, that our products are not safe or effective.
Delays in receipt of, or failure to receive, clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements could adversely impact our operating results. If the FDA finds that we have failed to comply with these requirements, the FDA can institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions such as:
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Fines, injunctions and civil penalties;
Recall or seizure of our products;
Issuance of public notices or warnings;
Imposition of operating restrictions, partial suspension, or total shutdown of production;
Refusal of our requests for Section 510(k) clearance or premarket approval of new products;
Withdrawal of Section 510(k) clearance or premarket approvals already granted;
Criminal prosecution;
Domestic regulation of our products and manufacturing operations, other than that which is administered by the FDA, includes the Environmental Protection Act, the Occupational Safety and Health Act, and state and local counterparts to these Acts; or
Foreign governments and regulatory authorities have, and may continue to, propose and implement regulations that apply to our products and operations. For example, in 2017 the European Union adopted the EU Medical Device Regulation, which imposes stricter requirements for the marketing and sale of medical devices, including new quality system and post-market surveillance requirements once it is fully implemented in 2021. Penalties for regulatory non-compliance could be severe, including fines and revocation or suspension of a company's business license, mandatory price reductions, and criminal sanctions. Future laws and regulations may have a material adverse effect on our business.
Our business would be harmed if the FDA determines that we have failed to comply with applicable regulations governing the manufacture of our products and/or we do not pass an inspection.
We and our suppliers are required to demonstrate and maintain compliance with the FDA’s Quality System Regulation. The Quality System Regulation sets forth the FDA’s requirements for good manufacturing practices of medical devices and includes requirements for, among other things, the design, testing, production processes, controls, quality assurance, labeling, packaging, storage and shipping of such products. In addition, we and our suppliers must engage in extensive recordkeeping and reporting and must make available our manufacturing facility and records for periodic unscheduled inspections by federal, state and foreign agencies, including the FDA. We cannot assure you that we and our suppliers are or will continue to be in full compliance with the Quality System Regulation, nor that we will not encounter any manufacturing difficulties.
A failure by us or our third party suppliers and manufacturers to comply with applicable regulations or to adequately respond to any future compliance issues raised by the FDA could result in sanctions being imposed on us, including, among other things, fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delays, suspension or withdrawal of approvals, seizures or recalls of products and manufacturing restrictions, any of which could harm our business.
If we deliver products with defects, we may incur costs to repair and, possibly, recall that product and market acceptance of our products may decrease.
The manufacturing and marketing of our products involve an inherent risk of our delivering a defective product or products that do not otherwise perform as we expect. We may incur substantial expense to repair any such products and may determine to recall such a product, even if not required to do so under applicable regulations. Any such recall would be time consuming and expensive. Product defects or recalls may adversely affect our customers’ acceptance of the recalled and other of our products.
Our business may suffer if we are required to revise our labeling or promotional materials, or if the FDA takes an enforcement action against us for off-label uses.
We are prohibited by the FDA from promoting or advertising our medical device products for uses not within the scope of our clearances or approvals, or from making unsupported promotional claims about the benefits of our products. If the FDA determines that our claims are outside the scope of our clearances, or are unsupported, it could require us to revise our promotional claims or take enforcement action against us. If we were subject to such an action by the FDA, our sales could be delayed, our revenue could decline, and our reputation among clinicians could be harmed. Likewise, if we acquire new products, either through the purchase of products, technology assets, or businesses, that are subsequently deemed to have inadequate supporting data, we may be required to (i) obtain adequate data, which could be costly and impede our ability to market these products, or (ii) modify the labeling on these products, which could impair their marketability, as described above.
We are subject to data privacy laws and our failure to comply with them may require us to make significant changes to our products or incur penalties or other liabilities.
Our business relies on the secure electronic transmission, storage and hosting of sensitive information, including personally identifiable information (“PII”), personal health information, financial information, intellectual property and other sensitive information related to our customers and workforce. The collection, maintenance, protection, use, transmission, disclosure and disposal of certain personal information and the security of medical devices are regulated at the U.S. federal and state, international and industry levels. U.S. federal and state laws, such as the Health Insurance Portability and Accountability
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Act of 1996 (“HIPAA”), protect the confidentiality of certain patient health information, including patient medical records, and restrict the use and disclosure of patient health information. We sign business associate agreements with certain customers for which we perform services as business associates under HIPAA, and therefore we are directly subject to certain provisions of HIPAA that are applicable to business associates. Noncompliance with laws and regulations relating to privacy and security of personal information, including HIPAA, or with contractual obligations under any business associate agreement may lead to significant fines, civil and criminal penalties, or liabilities.  We also may be required to report breaches of protected health information that we experience. The U.S. Department of Health and Human Services (“HHS”), audits the compliance of business associates and enforces HIPAA privacy and security standards. HHS enforcement activity has become more significant over the last few years and HHS has signaled its intent to continue this trend.
In addition to the regulation of personal health information, a number of states have also adopted laws and regulations that may affect our privacy and data security practices for other kinds of PII, such as state laws that govern the use, disclosure and protection of personal information, such as social security numbers, or that are designed to protect credit card account data. State consumer protection laws, including the California Consumer Privacy Act of 2018 (“CCPA”), which became effective on January 1, 2020, may also establish privacy and security standards for use and management of PII, including information related to customers, suppliers and care providers. The CCPA provides individuals certain rights regarding the collection or processing of personal data related to California residents, which may restrict our ability to use personal data, of California residents. Failure to comply with the CCPA could result in penalties of up to $7,500 per violation. Moreover, a new privacy law, the California Privacy Rights Act (“CPRA”), which significantly modifies the CCPA, was recently approved by ballot initiative during the November 3, 2020 general election. There remains significant uncertainty regarding the timing and implementation of the CPRA, which may require us to incur additional expenditures to ensure compliance. Additionally, the Federal Trade Commission, and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination, and security of data. The burdens imposed by the CCPA and other similar laws that have been or may be enacted at the federal and state level may require us to modify our data processing practices and policies and to incur substantial expenditures in order to comply.
Outside the United States, we are impacted by the privacy and data security requirements at the international, national and regional level, and on an industry specific basis. We serve customers across the globe. Legal requirements in these countries relating to the collection, storage, handling and transfer of personal data and potentially intellectual property continue to evolve with increasingly strict enforcement regimes. More privacy and security laws and regulations are being adopted, and more are being enforced, with potential for significant financial penalties. In the European Union, increasingly stringent data protection and privacy rules that will have substantial impact on the use of patient data across the healthcare industry became effective in May 2018. The European Union General Data Protection Regulation (“GDPR”) applies uniformly across the European Union and to businesses in other countries that target European Union residents and includes, among other things, a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances and significant fines for non-compliance. The GDPR also requires companies processing personal data of individuals, including employees, residing in the European Union to comply with European Union privacy and data protection rules. Other international jurisdictions, have issued privacy laws that mirror many of the requirements of GDPR. As we expand our international operations, we may be required to expend significant time and resources to put in place additional mechanisms to ensure compliance with multiple data privacy laws. Failure to comply with these laws may result in significant fines and other administrative penalties and harm our business.
Compliance with these laws and regulations may require significant additional costs or changes in our business, which could adversely affect our results of operations or financial condition. Noncompliance with these laws and regulations could result in the imposition of fines and penalties or could result in significant civil and other liabilities. Additionally, the restrictions imposed by these laws and regulations may limit the use and adoption of our products, reduce overall demand for our products, require us to modify our data handling practices and impose additional costs and burdens.
An interruption in or breach of security of our information or manufacturing systems, including the occurrence of a cyber-incident or a vulnerability in our cybersecurity, or disclosure of private patient health information, may result in a loss of business or damage to our reputation.
We rely on communications, information and manufacturing systems to conduct our business. Any failure, interruption or cyber incident affecting these systems could result in failures or disruptions in our customer relationship management or product manufacturing. Similarly, there can be no assurance that our third-party collaborators, distributors and other contractors and consultants will be successful in protecting our data that is stored on their systems. A cyber incident is an intentional attack or an unintentional event that can include an unauthorized actor gaining access to our systems to disrupt operations, corrupt data, or steal confidential information. The occurrence of any failures, interruptions or cyber incidents could result in a loss of customer business or reputation and have a material effect on our business, financial condition, results of operations and cash flows. In addition, our products are used in customer networks transmitting a range of sensitive information and any actual or
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perceived exposure of our products used in customer networks to malicious software or cyber-attacks could adversely affect our business and results of operations.
In the course of performing our business we obtain, from time to time, confidential patient health information. For example, we may learn patient names and be exposed to confidential patient health information when we provide training on our products to our customers’ staff. Complying with federal and state privacy and security requirements imposes compliance related costs, subjects us to potential regulatory audits, and may restrict our business operations. These various laws may be subject to varying interpretations by courts and government agencies creating potentially complex compliance issues for our business. If we were to violate any of our legal obligations to safeguard any confidential patient health information or protected health information against improper use and disclosure, we could lose customers and be exposed to liability, and our reputation and business could be harmed. Concerns or allegations about our practices with regard to the privacy or security of personal health information or other privacy-related matters, even if unfounded, could damage our reputation and harm our business.
We are also subject to new U.S. laws as well as laws and regulations in foreign countries covering data privacy and other protection of health and employee information that may be more onerous than previous corresponding U.S. laws. These laws and regulations impose technical and organizational measures to ensure the security of personal data and may require that we notify regulatory agencies, individuals or the public about any data security breaches. In particular, in the United States, the newly passed CCPA imposes a private right of action with damages of up to $750 per person in the event of certain data breaches. Other states are considering similar laws. As these laws and regulations develop in the United States and we expand our international operations, we may be required to expend significant time and resources to put in place additional mechanisms to ensure compliance with multiple cybersecurity laws. Failure to comply with these laws may result in significant fines and other administrative penalties and harm our business, and could expose us to significant civil damages.
The FDA has issued guidance advising manufacturers to take cybersecurity risks into account in product design for connected medical devices and systems, to assure that appropriate safeguards are in place to reduce the risk of unauthorized access or modification to medical devices that contain software and reduce the risk of introducing threats into hospital systems that are connected to such devices. The FDA also issued guidance on post market management of cyber security in medical devices. Compliance with these requirements may require changes in business practices, complicate our operations, and add complexity and additional management and oversight needs. They also may complicate our clinical research activities, as well as product offerings that involve transmission or use of clinical data. Failure to comply with these laws could result in vulnerabilities that would make us susceptible to hackers and other cyber attacks, as well as fines or administrative penalties that, if imposed, would harm our business.
Healthcare reforms, changes in healthcare policies, and changes to third-party reimbursements for our products may affect demand for our products.
    Uncertainty in the U.S. healthcare system may influence the way our customers spend on medical devices, supplies, and services in the future. The U.S. Patient Protection and Affordable Care Act and the Healthcare and Education Reconciliation Act of 2010 (“ACA”) may be modified, repealed, or otherwise invalidated, in whole or in part. Future rulemakings could affect rebates, prices, or the rate of price increase for healthcare products and services. Cost-containing measures implemented by healthcare providers worldwide could harm our profitability. If we fail to effectively react to healthcare reforms, our business may be adversely affected.
Regulations related to “conflict minerals” may force us to incur additional expenses, may result in damage to our business reputation and may adversely impact our ability to conduct our business.
The Dodd‑Frank Wall Street Reform and Consumer Protection Act and the rules promulgated by the SEC thereunder require companies, including Natus, to disclose the existence in their products of certain metals, known as “conflict minerals,” which are metals mined from the Democratic Republic of the Congo and adjoining countries. These rules requires investigative efforts, which has and will continue to cause us to incur associated costs, could adversely affect the sourcing, availability and pricing of minerals used in our products and may cause reputational harm if we determine that certain of our components contain such conflict minerals or if we are unable to alter our processes or sources of supply to avoid using such materials, all of which could adversely impact sales of our products and results of operations.
If guidelines mandating universal newborn hearing screening do not continue to develop in foreign countries and governments do not mandate testing of all newborns as we anticipate, or if those guidelines have a long phase-in period, our sales of newborn hearing screening products may not achieve the revenue growth we have achieved in the past.
We estimate that approximately 95% of the children born in the United States are currently being tested for hearing impairment prior to discharge from the hospital. To date, there has been only limited adoption of newborn hearing screening prior to hospital discharge by foreign governments, and when newborn hearing screening programs are enacted by foreign governments there can be a phase-in period spanning several years. The widespread adoption of guidelines depends, in part, on our ability to educate foreign government agencies, neonatologists, pediatricians, third-party payors, and hospital administrators
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about the benefits of universal newborn hearing screening as well as the use of our products to perform the screening and monitoring. Our revenue from our newborn hearing screening product lines may not grow if foreign governments do not require universal newborn hearing screening prior to hospital discharge, if physicians or hospitals are slow to comply with those guidelines, or if governments provide for a lengthy phase-in period for compliance.
If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.
We could be subject to healthcare fraud regulation and enforcement by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include: (i) the federal healthcare programs Anti-Kickback Law, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as Medicare or Medicaid, (ii) federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, and which may apply to entities like us which provide coding and billing advice to customers, and/or (iii) state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, many of which differ from their federal counterparts in significant ways, thus complicating compliance efforts.
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.
Risks Related to our Intellectual Property and Potential Litigation
We may not be able to preserve the value of our intellectual property because we may not be able to protect access to it or we may lose our intellectual property rights due to expiration of our licenses or patents.
If we fail to protect our intellectual property rights or if our intellectual property rights do not adequately cover the technology we employ, other medical device companies could sell products with features similar to ours, and this could reduce demand for our products. We protect our intellectual property through a combination of patent, copyright, trade secret and trademark laws. Despite our efforts to protect our proprietary rights, others may attempt to copy or otherwise improperly obtain and use our products or technology. Policing unauthorized use of our technology is difficult and expensive, and we cannot be certain that the steps we have taken will prevent misappropriation. Our means of protecting our proprietary rights may be inadequate. Enforcing our intellectual property rights could be costly and time consuming and may divert our management’s attention and resources. Failing to enforce our intellectual property rights could also result in the loss of those rights.
Our operating results would suffer if we were subject to a protracted infringement claim.
The medical technology industry is characterized by a substantial amount of litigation and related administrative proceedings regarding patents and intellectual property rights. We expect that medical screening and diagnostic products may become increasingly subject to third-party infringement claims as the number of competitors in our industry grows and the functionality of products overlap. Third parties such as individuals, educational institutions, or other medical device companies may claim that we infringe their intellectual property rights. Any claims, with or without merit, could have any of the following negative consequences:
Result in costly litigation and damage awards;
Divert our management’s attention and resources;
Cause product shipment delays or suspensions; or
Require us to seek to enter into royalty or licensing agreements.
From time to time, we may be subject to cases based on third-party patent infringement claims. A successful claim of infringement against us from any current or future claim could result in a substantial damage award and materially harm our financial condition. Our failure or inability to license the infringed or similar technology, or design and build non-infringing products, could prevent us from selling our products and adversely affect our business and financial results.
We may also find it necessary to bring infringement actions against third parties to seek to protect our intellectual property rights. Litigation of this nature, even if successful, is often expensive and disruptive of our management’s attention, and in any event may not lead to a successful result relative to the resources dedicated to any such litigation.
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We license intellectual property rights from third parties and would be adversely affected if our licensors do not appropriately defend their proprietary rights or if we breach any of the agreements under which we license commercialization rights to products or technology from others.
We license rights from third parties for products and technology that are important to our business. If our licensors are unsuccessful in asserting and defending their proprietary rights, including patent rights and trade secrets, we may lose the competitive advantages we have through selling products that we license from third parties. Additionally, if it is found that our licensors infringe on the proprietary rights of others, we may be prohibited from marketing our existing products that incorporate those proprietary rights. Under our licenses, we are subject to commercialization and development, sublicensing, royalty, insurance and other obligations. If we fail to comply with any of these requirements, or otherwise breach a license agreement, the licensor may have the right to terminate the license in whole or to terminate the exclusive nature of the license.
Product liability suits against us could result in expensive and time consuming litigation, payment of substantial damages, and an increase in our insurance rates.
The sale and use of our products could lead to the filing of a product liability claim by someone claiming to have been injured using one of our products or claiming that one of our products failed to perform properly. A product liability claim could result in substantial damages and be costly and time consuming to defend, either of which could materially harm our business reputation or financial condition. Our product liability insurance may not protect our assets from the financial impact of defending a product liability claim. Any product liability claim brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing any coverage in the future.

ITEM 1B.    Unresolved Staff Comments.
None.
ITEM 2.    Properties
Our corporate headquarters is located in Pleasanton, California, in a facility covering 8,200 square feet pursuant to a lease that expires in January 2025.
We also utilize the following properties:
Company-owned Facilities:
62,400 square feet in Gort, Ireland, utilized substantially for manufacturing;
44,900 square feet in Oakville, Ontario, Canada, primarily utilized for research and development and technical support; and
6,400 square feet in Old Woking, England, utilized substantially for research and development.
Leased Facilities:
Following is a listing of our most significant leased properties; we have a number of smaller facilities under lease in various countries where we operate.
124,000 square feet in Middleton, Wisconsin, pursuant to a lease that expires in April 2024, that is primarily utilized for manufacturing, technical support, customer service, marketing and research and development;
65,000 square feet in Seattle, Washington, pursuant to a lease that expires in December 2021, that is utilized for research and development and general and administrative purposes;
52,000 square feet in Taastrup, Denmark, pursuant to a lease with the option to terminate with six months-notice beginning January 2022, that is utilized for manufacturing, research and development, marketing and sales, and general and administrative;
37,200 square feet in San Diego, California, pursuant to a lease that expires in June 2022, that is utilized substantially for manufacturing; and
25,100 square feet in Schaumburg, Illinois, pursuant to a lease that expires in November 2026, that is utilized substantially for marketing and sales.

ITEM 3.    Legal Proceedings
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We may from time to time become a party to various legal proceedings or claims that arise in the ordinary course of business. We are not currently involved in any legal or administrative proceedings that we believe are likely to have a material effect on our business, financial condition, or results of operations, although we cannot be assured of the outcome of such matters.

ITEM 4.    Mine Safety Disclosures
The disclosure required by this item is not applicable.

PART II
ITEM 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades on the Nasdaq Global Select Market under the symbol “NTUS”. The following table sets forth, for the periods indicated, the high and low sale price per share of our common stock, as reported on the Nasdaq Global Select Market. 
HighLow
Fiscal Year Ended December 31, 2020:
Fourth Quarter$21.98 $16.60 
Third Quarter22.99 16.38 
Second Quarter26.97 20.25 
First Quarter34.67 18.91 
Fiscal Year Ended December 31, 2019:
Fourth Quarter$34.89 $29.67 
Third Quarter32.85 22.25 
Second Quarter27.90 23.54 
First Quarter34.63 24.88 
As of February 19, 2021, there were 33,874,074 shares of our common stock issued and outstanding and held by approximately 115 stockholders of record. We estimate that there are approximately 11,470 beneficial owners of our common stock.
Dividends
We have never declared or paid cash dividends on our capital stock and do not anticipate paying any cash dividends in the foreseeable future.
Stock Performance Graph
The following information of Part II Item 5 is being furnished and shall not be deemed to be “soliciting material” or to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section, nor will it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate such information by reference thereto.
The following graph shows a comparison, from January 1, 2016 through December 31, 2020, of cumulative total return for our common stock, the Nasdaq Composite Index and the Standard & Poor’s 500 Health Care Equipment Index. Such returns are based on historical results and are not intended to suggest future performance. Data for the Nasdaq Composite Index and the Standard & Poor’s 500 Health Care Equipment Index assumes reinvestment of dividends.
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ntus-20201231_g1.jpg
 
201520162017201820192020
Natus Medical Inc.Return %(27.58)9.77 (10.92)(3.06)(39.25)
Cum $100.00 72.42 79.50 70.82 68.65 41.70 
NASDAQ Composite-Total ReturnsReturn %8.87 29.64 (2.84)36.69 44.92 
Cum $100.00 108.87 141.13 137.12 187.44 271.64 
S&P 500 Health Care Equipment IndexReturn %6.48 30.90 16.24 29.32 17.63 
Cum $100.00 106.48 139.38 162.02 209.52 246.47 

Purchases of Equity Securities by the Issuer

In December 2019, the Board of Directors approved a share repurchase program, which authorized the repurchase from time to time of up to a maximum of $50.0 million of our outstanding common stock. The program is scheduled to expire on December 12, 2021.
The following table provides information regarding repurchases of common stock for the year ended December 31, 2020.

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PeriodTotal Number of Shares PurchasedAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsApproximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2020 - January 31, 2020— $— — $50,000,000 
February 1, 2020 - February 29, 2020— $— — $50,000,000 
March 1, 2020 - March 31, 2020465,117 $22.53 465,117 $39,518,876 
April 1, 2020 - April 30, 2020— $— — $39,518,876 
May 1, 2020 - May 31, 2020— $— — $39,518,876 
June 1, 2020 - June 30, 2020— $— — $39,518,876 
July 1, 2020 - July 31, 2020— $— — $39,518,876 
August 1, 2020 - August 31, 2020— $— — $39,518,876 
September 1, 2020 - September 30, 2020— $— — $39,518,876 
October 1, 2020 - October 31, 2020— $— — $39,518,876 
November 1, 2020 - November 30, 2020— $— — $39,518,876 
December 1, 2020 - December 31, 2020— $— — $39,518,876 
Total465,117 $— 465,117 $39,518,876 

ITEM 6.    Selected Financial Data
The following tables set forth certain selected consolidated financial data for each of the years in the five-year period ended December 31, 2020, and is derived from the Consolidated Financial Statements of Natus Medical Incorporated and its subsidiaries. The Consolidated Financial Statements for each of the years in the three-year period ended December 31, 2020 are included elsewhere in this report. The selected consolidated balance sheet data as of December 31, 2018, 2017 and 2016 and the consolidated statements of operations data for the years ended December 31, 2017 and 2016 are derived from our Consolidated Financial Statements, which are not included in this report. The selected consolidated financial data set forth below is qualified in its entirety by, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report. 
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 Year ended December 31,
 20202019201820172016
 (in thousands, except per share amounts)
Consolidated Statement of Operations Data (a)(b):
Revenue$415,684 $495,175 $530,891 $500,970 $381,892 
Cost of revenue185,912 196,551 217,952 213,376 144,632 
Intangibles amortization13,241 6,916 8,924 6,380 2,327 
Gross profit216,531 291,708 304,015 281,214 234,933 
Operating expenses:
Marketing and selling107,282 129,109 136,680 126,166 84,834 
Research and development61,296 58,733 61,482 51,822 33,443 
General and administrative49,113 59,649 70,599 74,424 50,877 
Intangibles amortization15,224 15,144 22,585 19,171 8,983 
Restructuring3,809 44,739 37,231 914 1,536 
Total operating expense236,724 307,374 328,577 272,497 179,673 
Income from operations(20,193)(15,666)(24,562)8,717 55,260 
Other expense, net(1,872)(5,591)(7,698)(3,567)(357)
Income (loss) before provision (benefit) for income tax(22,065)(21,257)(32,260)5,150 54,903 
Provision (benefit) for income tax(5,452)(5,586)(9,325)25,443 12,309 
Net income (loss)$(16,613)$(15,671)$(22,935)$(20,293)$42,594 
Earnings (loss) per share:
Basic$(0.49)$(0.47)$(0.69)$(0.62)$1.31 
Diluted$(0.49)$(0.47)$(0.69)$(0.62)$1.29 
Weighted average shares used in the calculation of earnings per share:
Basic33,562 33,696 33,111 32,564 32,460 
Diluted33,562 33,696 33,111 32,564 33,056 

 December 31,
 20202019201820172016
 (in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents, and short-term investments$82,082 $63,297 $56,373 $88,950 $247,750 
Working capital125,950 126,928 152,329 213,491 325,858 
Total assets600,394 622,527 638,140 709,919 649,012 
Long-term debt (including current portion) and short-term borrowings55,840 54,665 104,474 154,283 140,000 
Total stockholders’ equity411,094 416,123 398,444 422,097 417,374 
(a)Results of operations and financial position of the businesses we have acquired are included from their acquisition dates as follows: NeuroQuest in March 2016, RetCam in July 2016, Otometrics in January 2017, Integra LifeSciences asset acquisition in October 2017, and Babybe in November 2020.
(b)Results of operations and financial position of the businesses we have divested or exited are not included from their exited dates as follows: GND in January 2019, Medix in April 2019, Neurocom in June 2019, Peloton in January 2020, and Sound Room in June 2020.
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ITEM 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Consolidated Financial Statements and the accompanying footnotes. MD&A includes the following sections:
Business
We are a leading provider of medical device solutions focused on the diagnosis and treatment of central nervous and sensory system disorders for patients of all ages.
Year 2020 Overview
Our consolidated revenue decreased by $79.5 million for the year ended December 31, 2020 compared to the year ended December 31, 2019. This decrease was driven by a decline in demand for our Neuro and Hearing and Balance products as a result of the COVID-19 global pandemic.
Net loss was $16.6 million, or $0.49 per share in the year ended December 31, 2020, compared with net loss of $15.7 million, or $0.47 per share in the prior year. This decrease in income was primarily driven by lower revenue resulting from the COVID-19 pandemic on global demand for our products and impairment of intangibles related to end of sale products partly offset by a reduction in operating expenses. While we experienced a net loss, we generated cash flow from operations of $34.4 million.
Reorganization
On January 15, 2019, Natus announced the implementation of a new organizational structure designed to improve operational performance, increase our focus on innovation and increase profitability. We consolidated our three business units, Neuro, Newborn Care and Hearing & Balance, formerly Otometrics, into “One Natus." This initiative was designed to create a single, unified company with globally led operational teams in Sales & Marketing, Manufacturing, R&D, Quality, and General and Administrative functions. We expect to continue to see increased transparency, efficiency and cross-functional collaboration across common technologies, processes and customer channels.
COVID-19 Update
Healthcare providers and patients continue to depend on our products and services every day. Our team members and partners are continuing to maintain our supply chain, manufacturing and delivery of our products and services. The health and welfare of our employees, our customers and our partners remain our top priority as we continue our business operations.
We have implemented safeguards in our facilities to protect team members, including social distancing practices, work from home and other measures consistent with specific regulatory requirements and guidance from health authorities. As an essential supplier of healthcare products and services, all of our manufacturing, engineering, sales and customer support functions remain fully operational and will continue to support customers with vital supplies, service and equipment. We have taken actions to reduce costs, including reducing travel and discretionary expenses. We will continue to prioritize spending to allow continued investment in products and services that are key elements of our stated strategy for profitable growth in the years ahead.
Impact to our supply chain
Many of our materials are single source and require lengthy qualification periods. Disruptions in our supply chain could negatively impact our ability to produce and supply our finished products. We have made strategic investments in inventory to help mitigate potential supply chain disruptions. These investments include increased inventory and firm purchase orders beyond our typical timeframe in order to secure capacity at our key suppliers. To date, we have not incurred any significant supply disruptions and we believe our suppliers are positioned well to provide us with the materials we need to meet our demand. The health and safety of our suppliers is also a priority for us and we have transitioned collaboration with our suppliers to online technology so that we can continue our business operations.
Liquidity
In 2019, we completed a restructuring of the Company and strengthened our balance sheet by generating over $60.0 million in cash from operations and paying down $55.0 million in debt. At the end of the first quarter of 2020 we drew an additional $60.0 million on our credit line as a precaution to ensure we have the necessary capital to continue to reliably serve our customers during an extended period of uncertainty. During the third quarter of 2020 we amended our Credit Agreement
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which extended the maturity date of the original agreement from September 23, 2021 to September 25, 2023, reduced the aggregate revolving credit facility from $225.0 million to $150.0 million, and amended certain covenants. During the year ended December 31, 2020, we repaid $58.0 million in debt and continued to maintain a strong cash position ending the period with $82.1 million in cash.
Some hospitals and clinics delayed payments for products and services and we have worked with our customers to arrange mutually acceptable payment terms during this uncertain time. Looking ahead, we expect revenues and margins to improve, but remain below historical levels. We see our customers adapting to the COVID environment with elective procedures resuming, which we believe will result in increased capital spending, improving our business for the foreseeable future.
While we believe that we have sufficient liquidity to operate the Company for the foreseeable future, should negative economic conditions persist for an extended period of time, we are evaluating additional measures we could take to improve our liquidity position.
Impact to fair-value of intangible assets
We have reviewed the assets on our balance sheet, particularly goodwill and significant intangible assets for indications of impairment related to COVID-19 and determined that there are no indicators of impairment at this time. The values of these assets are particularly sensitive to our market cap and the long term value of their cash flows. If these conditions change significantly, we may need to record an impairment to their value. However, any impairment charges would not require the use of cash and are excluded from the calculation of our debt covenants and therefore would not affect our ability to borrow under our existing credit line.
During the third quarter of 2020 we recorded an impairment charge of an acquired tradename and technology that lead to the decision to discontinue the sale of one of our products rather than continuing to invest in the product. See Note 6 to the Condensed Consolidated Financial Statements for additional discussion on this impairment charge.
Impact to our financial systems and internal control
To date, the COVID-19 pandemic has not had a material impact to our ability to operate our accounting and financial functions. We are staffed with approximately 150 dedicated finance, accounting and IT professionals. Our accounting and IT systems are maintained with third party support agreements and we have documented disaster recovery plans in place. Our finance, accounting and IT professionals are performing their normal functions while working from home with little to no on-site physical presence and with no changes to our internal controls. We are confident that we can operate in this manner for an extended period of time without disruption and without significant impact to our internal controls.
Travel restrictions and use of online technology
The global Natus team is geographically diverse with multiple small locations and hundreds of employees that typically work from home in normal circumstances. We use the latest collaboration technology and have been able to transition to a company-wide work from home model without major interruption. Our manufacturing, distribution and field service operations require physical presence of certain employees as their work requires them to handle our products. In these cases, we have made adjustments to shift size and schedule and limited access to these groups by non-related employees. Our field service technicians are following our customers' requirements for distancing practices but continue to provide service where needed. Our sales representatives also continue to provide services to customers, either remotely or in person, when practicable.
Travel restrictions have forced most customer and external partner collaboration to online technology. Using this technology has enabled us to continue operations without incident. However, in-person customer engagement as well as physical presence in laboratory settings is required for the long term success of our company and eventually, we will need to return to traditional forms of interaction.
Application of Critical Accounting Policies
We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In so doing, we must often make estimates and use assumptions that can be subjective and, consequently, our actual results could differ from those estimates. For any given individual estimate or assumption we make, there may also be other estimates or assumptions that are reasonable.
We believe that the following critical accounting policies require the use of significant estimates, assumptions, and judgments. The use of different estimates, assumptions, and judgments could have a material effect on the reported amounts of
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assets, liabilities, revenue, expenses, and related disclosures as of the date of the financial statements and during the reporting period.
Revenue recognition
Revenue is recognized when obligations under the terms of a contract with a customer are satisfied; generally this occurs with the transfer of control of devices, supplies, or services. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services.
For the majority of devices and supplies, we transfer control and recognize revenue when products ship from the warehouse to the customer. We generally do not provide rights of return on devices and supplies. Freight charges billed to customers are included in revenue and freight-related expenses are charged to cost of revenue.
Depending on the terms of the arrangement, we may also defer the recognition of a portion of the consideration received because we have to satisfy a future obligation (e.g. installation). Judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. Our estimate of SSP is a point estimate.  The estimate is calculated annually for each performance obligation that is not sold separately. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, the SSP is determined using information that may include market conditions and other observable inputs.
We sell separately-priced service contracts that extend maintenance coverages for both medical devices and data management systems beyond the base agreements to customers. The separately priced service contracts range from twelve (12) months to sixty (60) months. We receive payment at the inception of the contract and recognize revenue ratably over the service period.
For products containing embedded software, we determine the hardware and software components function together to deliver the products' essential functionality and are considered a combined performance obligation. Revenue recognition policies for sales of these products are substantially the same as for other tangible products.
Inventory Valuation
Inventories are carried at the lower of cost or net realizable value, with cost being determined using the first-in, first-out method. The carrying value of our inventory is reduced for any difference between cost and estimated net realizable value of the inventory. We determine net realizable value by evaluating ending inventories for excess quantities, obsolescence, and other factors that could impact our ability to consume inventory for its intended use. Our evaluation includes an analysis of historical sales by product, projections of future demand by product, and an analysis of obsolescence by product. Adjustments to the value of inventory establish a new cost basis and are considered permanent even if circumstances later suggest that increased carrying amounts are recoverable. If demand is higher than expected, we may sell inventory that had previously been written down.
Income Taxes
We account for income taxes under the assets and liability method, which requires the recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements carrying value of assets and liabilities and the tax basis of those assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We record net deferred tax assets to the extent it is more likely than not that the assets will be realized. The ultimate recovery of deferred tax assets is dependent upon the amount and timing of future taxable income and other factors such as the taxing jurisdiction in which the asset is to be recovered. A high degree of judgment is required to determine if, and the extent to which, valuation allowances should be recorded against deferred tax assets. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. Based on all available evidence, both positive and negative, and the weight of that evidence to the extent such evidence can be objectively verified, we determine whether it is more likely than not that all or a portion of the deferred tax assets will be realized. The main factors we consider include:
Cumulative earnings or losses in recent years, adjusted for certain nonrecurring items;
Expected earnings or losses in future years; and
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The availability, or lack thereof, of taxable income in prior carryback periods that would limit realization of the carryforward period associated with the deferred tax assets and liabilities
To the extent that we have recorded a valuation allowance on certain deferred tax assets that are determined to be realizable in the future, we adjust the valuation allowance which reduces the provision for income taxes.
We recognize the tax benefits of uncertain tax positions in the financial statements as defined in ASC Topic 740, Income Tax. In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record deferred income tax benefits for all tax years subject to examination based upon management's evaluation of the facts, circumstances and information available at the reporting date about the ability to realize the benefit of the deferred tax assets or tax positions. When the tax position is deemed more likely than not of being sustained, we recognize the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement as defined in ASC 740-10-05. For those income tax positions where it is not more likely than not that an income tax benefit will be sustained in the future, we do not recognize a deferred tax benefit in our financial statements. We record interest and penalties, net of any applicable tax benefit, related to income taxes, if any, as a component of the provision for income taxes when applicable.
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Results of Operations
The following table sets forth for the periods indicated selected consolidated statement of income data as a percentage of total revenue. Our historical operating results are not necessarily indicative of the results for any future period.
 
Percent of Revenue
Years Ended December 31,
202020192018
Revenue100.0 %100.0 %100.0 %
Cost of revenue44.7 %39.7 %41.1 %
Intangibles amortization3.2 %1.4 %1.7 %
Gross profit52.1 %58.9 %57.3 %
Operating expenses:
Marketing and selling25.8 %26.1 %25.7 %
Research and development14.7 %11.9 %11.6 %
General and administrative11.8 %12.0 %13.3 %
Intangibles amortization3.7 %3.1 %4.3 %
Restructuring0.9 %9.0 %7.0 %
Total operating expenses56.9 %62.1 %61.9 %
Income (loss) from operations(4.9)%(3.2)%(4.6)%
Other expense, net
(0.5)%(1.1)%(1.5)%
Income (loss) before provision (benefit) for income tax(5.3)%(4.3)%(6.1)%
Provision (benefit) for income tax expense(1.3)%(1.1)%(1.8)%
Net loss(4.0)%(3.2)%(4.3)%
Comparison of 2020 and 2019
Revenue 
 Years ended December 31,
 20202019Change
Neuro
Devices and Systems$179,881 $220,306 (18)%
Supplies56,275 66,059 (15)%
Services— 871 (100)%
Total Neuro Revenue236,156 287,236 (18)%
Newborn Care
Devices and Systems51,894 53,465 (3)%
Supplies36,174 38,264 (5)%
Services16,566 19,183 (14)%
Total Newborn Care Revenue104,634 110,912 (6)%
Hearing & Balance
Devices and Systems$70,711 $92,050 (23)%
Supplies4,183 4,977 (16)%
Services— — — %
Total Hearing & Balance Revenue74,894 97,027 (23)%
Total Revenue$415,684 $495,175 (16)%
For the year ended December 31, 2020, Neuro revenue decreased by 18% compared to the prior year. Devices and Systems revenue decreased by 18% and Supplies revenue decreased by 15% compared to the prior year due primarily to the impact of the global COVID-19 pandemic. Services revenue decreased 100% compared to the prior year due to our exit from the GND business in January 2019.
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For the year ended December 31, 2020, Newborn Care revenue decreased by 6% compared to the prior year. Devices and Systems revenue decreased by 3% and Supplies revenue decreased 5% compared to the prior year due to the impact of the COVID-19 pandemic. Services revenue decreased by 14% compared to the prior year primarily due to our exit from the Peloton business as of December 31, 2019 and was partly offset by the ramp up in activity under our agreement with Pediatrix over 2020.
For the year ended December 31, 2020, Hearing & Balance revenue decreased 23% compared to the prior year due to the impact of the COVID-19 pandemic.
Cost of Revenue and Gross Profit 
 Years ended December 31,
 20202019
Revenue$415,684 $495,175 
Cost of revenue185,912 196,551 
Intangibles amortization13,241 6,916 
Gross profit216,531 291,708 
Gross profit percentage52.1 %58.9 %
For the year ended December 31, 2020, our gross profit as a percentage of sales decreased by 6.8% compared to the prior year. This decrease was primarily attributable to lower revenue resulting from the COVID-19 pandemic, higher freight costs resulting from reduced cargo carrier capacity, and higher amortization relating to an impairment of a product line during 2020.
Operating Costs 
 Years ended December 31,
 20202019
Marketing and selling$107,282 $129,109 
Percentage of revenue25.8 %26.1 %
Research and development$61,296 $58,733 
Percentage of revenue14.7 %11.9 %
General and administrative$49,113 $59,649 
Percentage of revenue11.8 %12.0 %
Intangibles amortization$15,224 $15,144 
Percentage of revenue3.7 %3.1 %
Restructuring$3,809 $44,739 
Percentage of revenue0.9 %9.0 %
Marketing and Selling
Marketing and selling expenses decreased during the year ended December 31, 2020 as compared to the prior year. The decrease in expenses is mainly attributable to lower expenses due to COVID-19 which caused decreases in travel expense, tradeshow and other events, payroll, commissions, and service expenses.
Research and Development
Research and development expenses increased during the year ended December 31, 2020 compared to the prior year. The increase relates to higher project spend for Medical Device Regulation compliance, consulting and testing, and remediation partly offset by lower travel due to COVID-19 restrictions.
General and Administrative
General and administrative expenses decreased during the year ended December 31, 2020 compared to the prior year. This decrease was due to a reduction in consulting fees and outside services and utilities costs due to the global COVID-19 pandemic.
Intangibles Amortization
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Intangibles amortization remained flat for the year ended December 31, 2020 compared to the prior year as there was no change in intangibles classified as operating expenses.
Restructuring
Restructuring costs decreased during the year ended December 31, 2020 compared to the prior year. This decrease was driven by costs in 2019 that did not repeat in 2020. In 2019, we recorded an impairment related to the sale of Medix, which included the recognition of deferred foreign currency related adjustments in accumulated other comprehensive income, of $24.8 million, net of tax, and an adjustment of $4.6 million for assets with a book value in excess of their fair market value. The decrease was also driven by restructuring expenses incurred in 2019 related to exiting the GND and Peloton businesses.
Other Income (Expense), net
Other income (expense), net consists of interest income, interest expense, net currency exchange gains and losses, and other miscellaneous income and expense. We reported other expense, net of $1.9 million in the year ended December 31, 2020, compared to $5.6 million in the prior year. We reported $2.0 million of foreign currency exchange gains in the year ended December 31, 2020 versus $0.8 million of foreign currency losses in the prior year. Interest expense was $3.7 million in the year ended December 31, 2020 compared to $4.9 million in the prior year. The reduction in interest expense was driven by accelerated payments on our outstanding debt. Interest income was $11.0 thousand in the year ended December 31, 2020, compared to $0.3 million in the prior year.
Provision for Income Tax
The effective tax rate (“ETR”) for the year ended December 31, 2020 was 24.7% as compared to 26.3% for the prior year. Significant items that impact the effective tax rate are the change in geographic mix of income, adjustments and reversals of uncertain tax positions, and federal NOL carrybacks to prior years.
Comparison of 2019 and 2018
Revenue 
 Years ended December 31,
 20192018Change
Neuro
Devices and Systems$220,306 $200,762 10 %
Supplies66,059 67,025 (1)%
Services871 12,000 (93)%
Total Neuro Revenue287,236 279,787 %
Newborn Care
Devices and Systems53,465 72,807 (27)%
Supplies38,264 40,669 (6)%
Services19,183 20,396 (6)%
Total Newborn Care Revenue110,912 133,872 (17)%
Hearing & Balance
Devices and Systems92,050 110,597 (17)%
Supplies4,977 6,635 (25)%
Services— — — %
Total Hearing & Balance Revenue97,027 117,232 (17)%
Total Revenue$495,175 $530,891 (7)%
For the year ended December 31, 2019, Neuro revenue increased by 3% compared to the prior year. Devices and Systems revenue increased by 10% compared to the prior year due primarily to growth in EEG sales. Supplies revenue for 2019 decreased 1%, which was driven by declines in our international markets. Services revenue from GND decreased 93% compared to the prior year due to our exit from this business in January 2019.
For the year ended December 31, 2019, Newborn Care revenue decreased by 17% compared to the prior year. Devices and Systems revenue decreased by 27%. The decrease is primarily due to the divestiture of Medix, exit from our balance and mobility product line, and planned product line rationalization. Supplies revenue decreased 6% compared to the prior year related to divestiture of Medix business and product line rationalization. Services revenue decreased by 6% compared to the
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prior year primarily due to a lower collection per screen and decrease in screening volume on our Peloton hearing screening service, which was exited as of December 31, 2019.
For the year ended December 31, 2019, Hearing & Balance revenue decreased 17% compared to the prior year. Revenue from Devices and Systems decreased 17% and revenue from Supplies decreased 25% in 2019 compared to 2018. The overall decline in Hearing & Balance was driven by the impact of product rationalization and ship holds on some products.
Cost of Revenue and Gross Profit 
 Years ended December 31,
 20192018
Revenue$495,175 $530,891 
Cost of revenue196,551 217,952 
Intangibles amortization6,916 8,924 
Gross profit291,708 304,015 
Gross profit percentage58.9 %57.3 %
For the year ended December 31, 2019, our gross profit as a percentage of sales increased by 160 basis points compared to the prior year. This increase was primarily attributable to cost reductions in our operations overhead and our exit from lower margin businesses as a result of our corporate reorganization announced in January 2019 and a reduction in intangible amortization and restructuring costs incurred in 2018 related to business line exits.
Operating Costs 
 Years ended December 31,
 20192018
Marketing and selling$129,109 $136,680 
Percentage of revenue26.1 %25.7 %
Research and development$58,733 $61,482 
Percentage of revenue11.9 %11.6 %
General and administrative$59,649 $70,599 
Percentage of revenue12.0 %13.3 %
Intangibles Amortization$15,144 $22,585 
Percentage of revenue3.1 %4.3 %
Restructuring$44,739 $37,231 
Percentage of revenue9.0 %7.0 %
Marketing and Selling
Marketing and selling expenses as a percentage of revenue remained relatively flat in the year ended December 31, 2019 as compared to the prior year. The decrease in expense is mainly attributable to the benefits of our corporate reorganization initiated in January 2019.
Research and Development
Research and development expenses decreased during the year ended December 31, 2019 compared to the prior year. The decrease relates to lower compensation related expenses due to our corporate reorganization initiatives.
General and Administrative
General and administrative expenses decreased during the year ended December 31, 2019 compared to the prior year. This decrease was due to a reduction in employee expenses, consulting fees and travel expenses due to our corporate reorganization and exit from non-core businesses.
Intangibles Amortization
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Intangibles amortization decreased in the year ended December 31, 2019 compared to the prior year. The decrease is related to our restructuring initiatives, which included an impairment charge of $5.6 million in 2018 related to the end of life of our Bio-Logic core technology that did not recur in 2019.
Restructuring
Restructuring costs increased during the year ended December 31, 2019 compared to the prior year. This increase was driven by the restructuring initiatives announced in January 2019. We recorded an impairment related to the sale of Medix, which included the recognition of deferred foreign currency related adjustments in accumulated other comprehensive income, of $24.8 million, net of tax, and an adjustment of $4.6 million for assets with a book value in excess of their fair market value. The increase was also driven by restructuring expenses incurred related to exiting the GND business and our restructuring initiatives.
Other Income (Expense), net
Other income (expense), net consists of interest income, interest expense, net currency exchange gains and losses, and other miscellaneous income and expense. We reported other expense, net of $5.6 million in the year ended December 31, 2019, compared to $7.7 million in the prior year. We reported $0.8 million of foreign currency exchange losses in the year ended December 31, 2019 versus $0.8 million of foreign currency losses in the prior year. Interest expense was $4.9 million in the year ended December 31, 2019 compared to $6.8 million in the prior year. The reduction in interest expense was driven by accelerated payments on our outstanding debt. Interest income was $0.3 million in both the year ended December 31, 2019 and the prior year.
Provision for Income Tax
The effective tax rate (“ETR”) for the year ended December 31, 2019 was 26.3% as compared to 28.9% for the prior year. Significant items that impact the effective tax rate are the change in geographic mix of income, adjustments and reversals of uncertain tax positions and SAB 118 adjustments arising from the 2017 Tax Act that were recorded in 2018.

Liquidity and Capital Resources
Liquidity is our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments. In addition, liquidity includes the ability to obtain appropriate financing and to raise capital. Therefore, liquidity cannot be considered separately from capital resources that consist of our current funds and the potential to increase those funds in the future. We plan to use these resources in meeting our commitments and in achieving our business objectives.
We believe that our current cash and cash equivalents and any cash generated from operations will be sufficient to meet our ongoing operating requirements for the foreseeable future.
As of December 31, 2020, we had cash and cash equivalents outside the U.S. in certain of our foreign operations of $30.9 million. We intend to permanently reinvest this cash held by our foreign subsidiaries except for Excel-Tech and Natus Ireland subsidiaries, which we intend to repatriate. If, however, a portion of these permanently reinvested funds were needed and distributed to our operations in the United States, we may be subject to additional U.S. income taxes and foreign withholding taxes depending on facts and circumstances at the time of distribution. The amount of taxes due would depend on the amount and manner of repatriation, as well as the location from where the funds were repatriated.
On September 23, 2016, we entered into a Credit Agreement with JP Morgan Chase Bank (“JP Morgan”), Citibank, NA (“Citibank”) and Wells Fargo Bank, National Association (“Wells Fargo”). The Credit Agreement provides for an aggregate $150.0 million of secured revolving credit facility (the “Credit Facility”). On September 15, 2017, we exercised our right to increase the amount available under the facility by $75.0 million, bringing the aggregate revolving credit facility to $225.0 million. During the third quarter of 2020 we amended the terms of the Credit Agreement to extend the maturity of the original agreement and to reduce the aggregate value of revolving credit facility, and amend certain covenants. The amended Credit Agreement provides for an aggregate $150.0 million of secured revolving credit facility.
The Credit Agreement contains covenants, including covenants relating to maintenance of books and records, financial reporting and notification, compliance with laws, maintenance of properties and insurance, and limitations on guaranties, investments, issuance of debt, lease obligations and capital expenditures. The Credit Agreement provides for events of default, including failure to pay any principal or interest when due, failure to perform or observe covenants, bankruptcy or insolvency events and the occurrence of a material adverse effect. The Credit Agreement matures on September 25, 2023, at which time all principal amounts outstanding under the Credit Agreement will be due and payable. We have no other significant credit facilities. During the first quarter of 2020 we drew an additional $60.0 million on our credit line as a precaution to ensure we
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have the necessary capital to continue to reliably serve our customers during an extended period of uncertainty of which we have repaid $58.0 million during 2020. As of December 31, 2020 we had $57.0 million outstanding under the Credit Facility.
December 31, 2020December 31, 2019December 31, 2018
Cash, cash equivalents, and investments$82,082 $63,297 $56,373 
Debt55,840 54,665 104,474 
Working capital125,950 126,928 152,329 

 Year Ended
 December 31, 2020December 31, 2019December 31, 2018
Net cash provided by operating activities$34,426 $60,060 $33,020 
Net cash used in investing activities(12,606)(5,339)(8,389)
Net cash provided by (used in) financing activities(10,877)(48,532)(49,512)
Comparison of 2020, 2019, and 2018
During 2020 cash generated from operating activities of $34.4 million was the result of $16.6 million of net loss, non-cash adjustments to net loss of $49.6 million, and net cash outflows of $1.4 million from changes in operating assets and liabilities. The non-cash adjustments were $28.1 million of depreciation and amortization expense, $9.6 million from share-based compensation, $6.7 million of an impairment of intangible assets, $2.0 million of warranty reserves, $1.9 million of loss on commencement of sales-type leases, $1.4 million of non-cash lease expense, and $1.2 million of accounts receivable reserves, offset by deferred taxes of $1.6 million. Cash used in investing activities during the period was $12.6 million and consisted of cash used of $8.6 million to acquire other property and equipment, $2.0 million of an acquisition, and $2.0 million of equity method investments. Cash used in financing activities during the year ended December 31, 2020 was $10.9 million and consisted of repayments of $58.0 million of our outstanding debt under the Credit Facility, $10.5 million for repurchases of common stock under our share repurchase program, $2.0 million for taxes paid related to net share settlement of equity awards, $1.2 million of deferred debt issuance costs, $0.5 million of principal payments of financing lease liability, offset by proceeds from borrowing of $60.0 million and proceeds from stock option exercises and Employee Stock Purchase Program (“ESPP”) purchases of $1.3 million.
During 2019 cash generated from operating activities of $60.1 million was the result of $15.7 million of net loss, non-cash adjustments to net loss of $65.9 million, and net cash outflows of $9.9 million from changes in operating assets and liabilities. The non-cash adjustments were $30.7 million of depreciation and amortization expense, $24.6 million of impairment for the sale of Medix, $8.4 million from share-based compensation, $4.3 million of accounts receivable reserves, and $2.9 million of warranty reserves, offset by deferred taxes of $5.4 million. Cash used in investing activities during the period was $5.3 million and consisted of cash used to acquire other property and equipment. Cash used in financing activities during the year ended December 31, 2019 was $48.5 million and consisted of repayments of $50.0 million of our outstanding debt under the Credit Facility, $1.7 million for taxes paid related to net share settlement of equity awards, $0.5 million of principal payments of financing lease liability, offset by proceeds from stock option exercises and Employee Stock Purchase Program (“ESPP”) purchases of $3.6 million.
During 2018 cash generated from operating activities of $33.0 million was the result of $22.9 million of net loss, non-cash adjustments to net loss of $70.1 million, and net cash outflows of $14.1 million from changes in operating assets and liabilities. The non-cash adjustments were $33.9 million of depreciation and amortization expense, $17.1 million from share-based compensation, a $14.8 million goodwill impairment charge related to GND, $8.2 million from intangible impairments, $6.9 million of accounts receivable reserves, and $2.2 million of warranty reserves, offset by deferred taxes of $13.7 million. Cash used in investing activities during the period was $8.4 million and consisted primarily of cash used to acquire other property and equipment of $7.9 million. Cash used in financing activities during the year ended December 31, 2018 was $49.5 million and consisted of repayments of $50.0 million of our outstanding debt under the Credit Facility, $5.6 million for repurchases of common stock under our share repurchase program, $5.2 million for taxes paid related to net share settlement of equity awards, offset by proceeds from stock option exercises and Employee Stock Purchase Program purchases of $11.5 million.
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Future Liquidity
Our future liquidity and capital requirements will depend on numerous factors, including the:
Extent to which we make acquisitions;
Amount and timing of revenue;
Length and severity of business disruptions caused by COVID-19;
Extent to which our existing and new products gain market acceptance;
Cost and timing of product development efforts and the success of these development efforts;
Cost and timing of marketing and selling activities; and
Availability to borrow under line of credit arrangements and the availability of other means of financing.
Contractual Obligations
In the normal course of business, we enter into obligations and commitments that require future contractual payments. The commitments result primarily from purchase orders placed with contract vendors that manufacture some of the components used in our medical devices and related disposable supply products, purchase orders placed for employee benefits and outside services, as well as commitments for leased office space, leased equipment, and bank debt. The following table summarizes our contractual obligations and commercial commitments as of December 31, 2020 (in thousands): 
  Payments Due by Period
 TotalLess than
1 Year
1-3 Years4-5 YearsMore than
5 Years
Unconditional purchase obligations$39,566 $39,106 $460 $— $— 
Bank debt57,000 — 57,000 — — 
Interest payments2,419 1,493 926 — — 
Repatriation tax7,016 459 2,218 4,339 — 
Total$106,001 $41,058 $60,604 $4,339 $— 
Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding. Included in the purchase obligations category above are obligations related to purchase orders for inventory purchases under our standard terms and conditions and under negotiated agreements with vendors. We expect to receive consideration (products or services) for these purchase obligations. The purchase obligation amounts do not represent all anticipated purchases in the future, but represent only those items for which we are contractually obligated. The table above does not include obligations under employment agreements for services rendered in the ordinary course of business.
We have a Credit Agreement with JP Morgan Chase Bank, Citibank, and Wells Fargo which matures in 2023. We have recorded this obligation in the payments due in one to three years category in the table above based on the maturity date of the Agreement. As of December 31, 2020 we have classified $50.0 million out of the $57.0 million outstanding as short-term on our balance sheet due to our intent to repay this portion over the next twelve months.
We are not able to reasonably estimate the timing of any potential payments for uncertain tax positions under Accounting Standards Codification ("ASC") 740, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109. As a result, the preceding table excludes any potential future payments related to our ASC 740 liability for uncertain tax positions. See Note 18 of our Consolidated Financial Statements for further discussion on income taxes.
Quantitative and Qualitative Disclosures about Market Risk
    We are exposed to various market risks, including changes in foreign currency exchange rates and interest rates that could adversely affect our results of operations and financial condition. We are exposed to interest rate risk on our LIBOR-indexed floating-rate debt. We have entered into an interest rate swap agreement to effectively covert a portion of our floating-rate debt to a fixed-rate. The principal objective of the swap contract is to reduce the variability of future earnings and cash flows associated with our floating-rate debt. We do not hold or issue derivative instruments for trading or other speculative purposes.

Foreign Exchange Rate Risk
We develop products in the U.S, Canada, and Europe, and sell those products into more than 100 countries throughout the world. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Most of our sales in Europe and Asia are denominated in the U.S. Dollar and
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Euro, with a portion of our sales denominated in the Canadian dollar and British pound. As our sales in currencies other than the U.S. dollar increase, our exposure to foreign currency fluctuations may increase. We do not currently hold derivatives to hedge our exposure to foreign currency exchange rate fluctuations; however, we may choose to hedge our exposure in the future.
In addition, changes in exchange rates also may affect the end-user prices of our products compared to those of our foreign competitors, who may be selling their products based on local currency pricing. These factors may make our products less competitive in some countries.
All of the potential changes noted above are based on sensitivity analyses performed on our financial position as of December 31, 2020. Actual results may differ as our analysis of the effects of changes in interest rates does not account for, among other things, sales of securities prior to maturity and repurchase of replacement securities, the change in mix or quality of the investments in the portfolio, and changes in the relationship between short-term and long-term interest rates.
Interest Rate Risk
    In 2018, we entered into an interest rate swap agreement with a notional amount of $40.0 million, designated as a cash flow hedge, to hedge the variability of cash flows in interest payments associated with our floating-rate debt. This interest rate swap agreement matures in September 2021 and converts a portion of our LIBOR floating-Rate debt to fixed-rate debt. The fair value of the interest rate swap agreement is based upon inputs corroborated by observable market data. Changes in the fair value of the interest rate swap agreement are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity and are amortized to interest expense over the term of the related debt.
    As of December 31, 2020, accumulated other comprehensive income (loss) related to the interest rate swap agreement included a net unrealized loss of approximately $212 thousand, net of tax, which will be recognized in interest expense after the following 12 months, at the then current values on a pre-tax basis. See Note 12 to these Condensed Consolidated Financial Statements for additional discussion on our financial instruments and derivatives.
Interest Rate Risk Sensitivity Analysis
    Our remaining indebtedness is at variable rates of interest. Accordingly, changes in interest rates would impact our results of operations in future periods. Based on a sensitivity analysis on actual rates experienced during 2020, a hypothetical increase in interest rates of 50 basis points would have resulted in increased interest expense of $0.4 million during the year ended December 31, 2020.

Cautionary Information Regarding Forward Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 about Natus Medical Incorporated. Forward-looking statements can be identified by the words “expects”, “anticipates”, “believes”, “intends”, “estimates”, “plans”, “will”, “outlook” and similar expressions. Forward-looking statements are based on management's current plans, estimates, assumptions and projections, and speak only as of the date they are made. These forward-looking statements within Item 7 include, without limitation, statements regarding the impact of the COVID-19 pandemic on our business, the sufficiency of our current cash, cash equivalents and short-term investment balances, any cash generated from operations to meet our ongoing operating and capital requirements for the foreseeable future, outcomes of new product development, improved operations performance and profitability as the result of restructuring activities, and our intent to acquire additional technologies, products or businesses.
Forward-looking statements are not guarantees of future performance and are subject to substantial risks and uncertainties that could cause the actual results predicted in the forward-looking statements as well as our future financial condition and results of operations to differ materially from our historical results or currently anticipated results. Investors should carefully review the information contained under the caption “Risk Factors” contained in Item 1A of this report for a description of risks and uncertainties. All forward-looking statements are based on information available to us on the date hereof, and we assume no obligation to update forward-looking statements.
ITEM 7A.     Quantitative and Qualitative Disclosures About Market Risk
The information required by this Item is set forth in the section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk, and is incorporated by reference in this section.
ITEM 8.     Financial Statements and Supplementary Data
The Consolidated Financial Statements and Supplementary Data required by this Item are set forth where indicated in Item 15 of this report.
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Selected Quarterly Financial Data (Unaudited)
The following table presents our operating results for each of the eight quarters in the period ending December 31, 2020. The information for each of these quarters is unaudited and has been prepared on the same basis as our audited financial statements appearing elsewhere in this report.
In the opinion of our management all necessary adjustments, including normal recurring adjustments, have been included to present fairly the unaudited quarterly results when read in conjunction with our audited Consolidated Financial Statements and the related notes appearing elsewhere in this report. These operating results are not necessarily indicative of the results of any future period.

 Quarters Ended
 December 31, 2020September 30, 2020June 30, 2020March 31, 2020December 31, 2019September 30, 2019June 30, 2019March 31, 2019
 (in thousands, except per amounts)
Revenue$118,718 $102,803 $84,780 $109,383 $131,416 $123,463 $125,539 $114,757 
Cost of revenue51,247 47,160 42,573 44,933 49,259 48,389 52,393 46,509 
Intangibles amortization1,801 8,117 1,654 1,668 1,679 1,736 1,746 1,756 
Gross profit65,670 47,526 40,553 62,782 80,478 73,338 71,400 66,492 
Operating expenses:
Marketing and selling27,715 26,035 22,802 30,730 32,268 30,787 32,324 33,729 
Research and development14,722 14,670 14,336 17,569 17,567 14,447 13,324 13,394 
General and administrative12,359 12,384 11,187 13,182 15,261 15,394 12,691 16,306 
Intangibles amortization3,894 4,025 3,644 3,661 3,844 3,751 3,763 3,786 
Restructuring1,966 350 621 871 3,592 1,106 2,668 37,372 
Total operating expenses60,656 57,464 52,590 66,013 72,532 65,485 64,770 104,587 
Income (loss) from operations5,014 (9,938)(12,037)(3,231)7,946 7,853 6,630 (38,095)
Other income (expense), net1,326 (947)(757)(1,494)(670)(1,609)(1,200)(2,112)
Income (loss) before provision for (benefit from) income tax6,340 (10,885)(12,794)(4,725)7,276 6,244 5,430 (40,207)
Provision for (benefit from) income tax1,135 (1,569)(3,891)(1,128)4,266 (1,987)1,944 (9,809)
Net income (loss)$5,205 $(9,316)$(8,903)$(3,597)$3,010 $8,231 $3,486 $(30,398)
Earnings (loss) per share:
Basic$0.15 $(0.28)$(0.26)$(0.11)$0.09 $0.24 $0.10 $(0.90)
Diluted$0.15 $(0.28)$(0.26)$(0.11)$0.09 $0.24 $0.10 $(0.90)
Weighted average shares used in the calculation of net earnings (loss) per share:
Basic33,861 33,828 33,827 33,800 33,691 33,655 33,639 33,590 
Diluted33,903 33,828 33,827 33,800 33,829 33,738 33,690 33,590 


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ITEM 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.     Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the rules of the Securities and Exchange Commission, “disclosure controls and procedures” are controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud due to inherent limitations of internal controls. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Our management, with the participation of our chief executive officer and our chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our management, including our chief executive officer and chief financial officer, has concluded that our disclosure controls and procedures were effective as of December 31, 2020.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of the inherent limitations of any system of internal control. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses of judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper overriding of controls. As a result of such limitations, there is risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Based on our evaluation under the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, our management concluded that as of December 31, 2020 our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting.
Our independent registered public accounting firm, KPMG LLP, has audited the consolidated financial statements included in this Annual Report on Form 10-K and also audited the effectiveness of our internal control over financial reporting as of December 31, 2020. KPMG LLP’s report is included herein in Part II, Item 9A of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
During the year ended December 31, 2020, we made substantive changes to enhance our design of controls intended to identify and assess contracts that include research and development activities and added controls to ensure the accuracy of our payroll accruals. Specifically, we formalized a policy that provides guidance on proper identification, analysis and treatment of contracts that include research and development activities. The updated process includes coordination with our legal team to identify contracts that include terminology indicative of research and development components. The policy requires that management document conclusions on accounting treatment in supporting memos depending on materiality of the contract. Training was provided to relevant teams during the year to ensure the updated contract review policy is communicated,
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understood, and followed. We strengthened the control design for payroll accruals to require that specific additional review procedures be completed and to document results in a checklist format including reviewer signoff. These checklists were prepared and executed from the second and each quarter thereafter to year-end. In addition, we coordinated with our third-party payroll administrators to reduce risk of error by eliminating manual work as much as possible through updated mapping. Finally, we have implemented a process to monitor changes to our control operator responsible for key controls over financial reporting and implement a control to verify that appropriate training is provided to new control operators to mitigate this risk of change in our system of control. After completing our testing of the design and operating effectiveness of these new procedures, we concluded that we have remediated the previously identified material weakness as of December 31, 2020.

    
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Natus Medical Incorporated:
Opinion on Internal Control Over Financial Reporting
We have audited Natus Medical Incorporated and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes and financial statement schedule II: Valuation and Qualifying Accounts (collectively, the consolidated financial statements), and our report dated February 26, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
(signed) KPMG LLP
San Francisco, California
February 26, 2021

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ITEM 9B.    Other Information
None.

PART III
We will provide information that is responsive to this Part III in our Definitive Proxy Statement for our 2021 Annual Meeting of Stockholders (our “2021 Proxy Statement”) or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report. That information is incorporated into this Part III by reference.
ITEM 10.    Directors, Executive Officers, and Corporate Governance
We will provide certain other information that is responsive to this Item 10 in our 2021 Proxy Statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report. That information is incorporated into this Item 10 by reference.
Audit Committee and Audit Committee Financial Expert
The members of the Audit Committee of our Board of Directors are Ilan Daskal, Thomas J. Sullivan, and Alice D. Schroeder. Our Board of Directors has determined that Ilan Daskal is an audit committee financial expert as defined in Item 407(d) of Regulation S-K. All of the members of our audit committee are considered “independent” as the term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.
Code of Conduct and Ethics
We have a code of conduct and ethics that applies to all of our employees, including our principal executive officer, principal financial officer, and principal accounting officer or controller. This code of conduct and ethics is posted on our internet website. The internet address for our website is www.natus.com, and the code of conduct and ethics may be found in the “Governance” section of our “Investor” webpage.
We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding certain amendments to, or waivers from, provisions of this code of conduct and ethics by posting such information on our website, at the address and location specified above, or as otherwise required by The Nasdaq Stock Market.
ITEM 11.    Executive Compensation
We will provide information that is responsive to this Item 11 in our 2021 Proxy Statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report. That information is incorporated into this Item 11 by reference.
ITEM 12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
The following table sets forth information about the number of shares of common stock that can be issued under our 2018 Stock Awards Plan and our 2011 Employee Stock Purchase Plan as of December 31, 2020. 
Plan CategoryNumber of Securities
to be Issued upon
Exercise of
Outstanding
Options, Warrants,
Awards and Rights
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants,
Awards and Rights
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation Plans
(excluding securities
reflected in the first column)
Equity compensation plans approved by security holders544,030 $23.94 1,863,120 
Equity compensation plans not approved by security holders— — — 
Total544,030 23.94 1,863,120 
We will provide certain other information that is responsive to this Item 12 in our 2021 Proxy Statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report. That information is incorporated into this Item 12 by reference.
ITEM 13.     Certain Relationships and Related Transactions, and Director Independence
We will provide information that is responsive to this Item 13 in our 2021 Proxy Statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report. That information is incorporated into this Item 13 by reference.
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ITEM 14.     Principal Accounting Fees and Services
We will provide information that is responsive to this Item 14 in our 2021 Proxy Statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report. That information is incorporated into this Item 14 by reference.
PART IV 
ITEM 15.    Exhibits, Financial Statement Schedules
(a)(2) Financial Statement Schedule
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2020, 2019 and 2018
(In thousands) 
Balance at
Beginning
of Period
Additions
Charged to
Expense
DeductionsBalance
at End
of Period
Year ended December 31, 2020
Allowance for doubtful accounts$7,384 $1,190 $(2,361)$6,213 
Valuation allowance606 363  969 
Warranty reserve6,404 2,009 (3,218)5,195 
Year ended December 31, 2019
Allowance for doubtful accounts$6,960 $4,262 $(3,838)$7,384 
Valuation allowance637  (31)606 
Warranty reserve9,391 3,949 (6,936)6,404 
Year ended December 31, 2018
Allowance for doubtful accounts$8,978 $6,423 $(8,441)$6,960 
Valuation allowance5,862  (5,225)637 
Warranty reserve10,995 4,487 (6,091)9,391 
(a)(3) Exhibits 
    The Exhibits listed in the Index to Exhibits, which appears immediately following the signature page and is incorporated herein by reference, are filed as part of this 10-K.

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  Incorporated By Reference
Exhibit No.ExhibitFilingExhibit No.File No.File Date
3.1Natus Medical Incorporated Restated Certificate of Incorporation, as filed with the Delaware Secretary of State as of July 25, 2001S-13.1.1333-441388/18/2000
3.2Certificate of Amendment of the Amended and Restated Certificate of Incorporation, as filed with the Delaware Secretary of State as of September 12, 20128-K3.1 000-330019/13/2012
3.3Certificate of Amendment of the Amended and Restated Certificate of Incorporation, as filed with the Delaware Secretary of State as of June 5, 20198-K3.1 000-330016/7/2019
3.4Second Amended and Restated Bylaws of Natus Medical Incorporated8-K3.1 000-3300112/16/2019
4.1Specimen stock certificate for shares of common stock, par value $0.001 per shareS-1/A4.1 333-441382/9/2001
4.2Natus Medical Incorporated Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock8-A3.1.2000-330019/6/2002
4.3Description of Common Stock
10.1Form of Indemnification Agreement between Natus Medical Incorporated and each of its directors and officersS-110.1 333-441388/18/2000
10.1.1*2018 Equity Incentive Plan8-K10.1 000-3300112/18/2018
10.1.2*Form of Stock Option Awards Agreement under the 2018 Equity Incentive Plan8-K10.1.1000-3300112/18/2018
10.1.3*Form of Restricted Stock Award Agreement under the 2018 Equity Incentive Plan8-K10.1.2000-3300112/18/2018
10.1.4Form of Restricted Stock Unit Agreement under the 2018 Equity Incentive Plan8-K10.1.3000-3300112/18/2018
10.1.5*Form of Performance Stock Unit Agreement under the 2018 Equity Incentive Plan8-K10.1.4000-3300112/18/2018
10.2*Natus Medical Incorporated Amended and Restated 2000 Stock Awards Plan8-K10.1 000-330011/4/2006
10.2.1*Form of Option Agreement under the Amended and Restated 2000 Stock Awards PlanS-110.3.1333-441388/18/2000
10.2.2*Form of Restricted Stock Purchase Agreement under the Amended and Restated 2000 Stock Awards Plan10-Q10.2 000-330018/9/2006
10.2.3*Form of Restricted Stock Unit Agreement under the Amended and Restated 2000 Stock Awards Plan10-K10.2.3000-330013/14/2008
10.3*Natus Medical Incorporated 2000 Director Option Plan10-Q10.02 000-330015/9/2008
10.3.1*Form of Option Agreement under the 2000 Director Option PlanS-110.4.1333-441388/18/2000
10.4*Natus Medical Incorporated 2000 Supplemental Stock Option PlanS-110.15 333-441382/9/2001
10.4.1*Form of Option Agreement for 2000 Supplemental Stock Option PlanS-110.15.1333-441382/9/2001
10.5*Natus Medical Incorporated 2000 Employee Stock Purchase Plan and form of subscription agreement thereunder8-K10.2 000-330011/4/2006
10.6*[Amended] 2011 Stock Awards Plan14-A— 000-330014/20/2011

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  Incorporated By Reference
Exhibit No.ExhibitFilingExhibit No.File No.File Date
10.6.1*Form of Stock Option Award Agreement under the [Amended] 2011 Stock Plan10-Q10.1 000-3300111/7/2011
10.6.2*Form of Restricted Stock Award Purchase Agreement10-Q10.2 000-3300111/7/2011
10.6.3*Form of Restricted Stock Unit Agreement10-Q10.3 000-3300111/7/2011
10.7*2011 Employee Stock Purchase Plan14-A— 000-330014/20/2011
10.7.1*2011 Employee Stock Purchase Plan Subscription Agreement14-A— 000-330014/20/2011
10.8*Form of Employment Agreement between Natus Medical Incorporated and each of its executive officers other than its Chief Executive Officer and Chief Financial Officer10-K10.10 000-330013/10/2009
10.8.1*Form of Amendment to Employment Agreement between Natus Medical Incorporated and each of its executive officers other than its Chief Executive Officer and Chief Financial Officer10-K000-330013/16/2015
10.9*Amended employment agreement between Natus Medical Incorporated and its Chief Executive Officer, James B. Hawkins dated April 19, 20138-K99.1 000-330014/22/2013
10.10*Terms of Resignation between Natus Medical Incorporated and James B. Hawkins dated July 11, 201810-Q10.16 000-330018/8/2018
10.11Credit Agreement between Natus Medical Incorporated and CitiBank, NA dated October 9, 20158-K10.1 000-3300110/9/2015
10.12Agreement For the Acquisition of Medical Devices between Medix ICSA and the Ministry of Health of the Republic of Venezuela dated October 15, 201510-Q000-330012/29/2016
10.13Amendment to Agreement For the Acquisition of Medical Devices between Medix ICSA and the Ministry of Health of the Republic of Venezuela dated October 15, 201510-Q10.2 000-3300111/3/2016
10.14Credit Agreement, dated September 23, 2016, between the Company, JP Morgan Chase Bank, N.A. and Citibank, N.A.10-Q10.1 000-3300111/3/2016
10.15Master Purchase Agreement, dated September 25, 2016, between GN Hearing A/S, GN Nord A/S and the Company10-Q10.3 000-3300111/3/2016
10.16*Forms of Employment Agreement between Natus Medical Incorporated and Jonathan A. Kennedy dated August 24, 20188-K99.1 000-330018/29/2018
10.17*Form of Employment Agreement between Natus Medical Incorporated and Drew Davies dated October 1, 201810-Q10.18 000-3300111/8/2018
10.18Amendment to Credit Agreement, dated August 10, 2020, between the Company, JP Morgan Chase Bank, N.A. and Citibank, N.A.10-Q10.1 000-330019/30/2020
21.1Significant Subsidiaries of the Registrant
23.1Consent of Independent Registered Public Accounting Firm

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  Incorporated By Reference
Exhibit No.ExhibitFilingExhibit No.File No.File Date
24.1Power of Attorney (included on signature page)
31.1Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101The following financial information from Natus Medical Incorporated Annual Report on Form 10-K for the fiscal year ended December 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2020 and December 31, 2019, (ii) Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018 (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018, (v) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, 2019 and 2018, and (vi) the Notes to Consolidated Financial Statements.
104The cover page of the Annual Report on Form 10-K formatted in Inline XBRL (included in Exhibit 101).
 *    Indicates a management contract or compensatory plan or arrangement
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned thereunto duly authorized. 
NATUS MEDICAL INCORPORATED
By /s/    JONATHAN A. KENNEDY        
 Jonathan A. Kennedy
President and Chief Executive Officer
By /s/    B. DREW DAVIES        
 B. Drew Davies
Executive Vice President and Chief Financial Officer
Dated: February 26, 2021
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Jonathan A. Kennedy and B. Drew Davies and each of them acting individually, as his or her attorney-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacity and dates indicated: 
Signature  Title Date
/S/    JONATHAN A. KENNEDY
  President and Chief Executive Officer (Principal Executive Officer) February 26, 2021
(Jonathan A. Kennedy)
/S/    B. DREW DAVIES
  Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) February 26, 2021
(B. Drew Davies)
/S/    BARBARA R. PAUL
  Chairperson of the Board of Directors February 26, 2021
(Barbara R. Paul)
/S/    ILAN DASKAL
  Director February 26, 2021
(Ilan Daskal)
/S/    LISA W. HEINE
  Director February 26, 2021
(Lisa W. Heine)
/S/    JOSHUA H. LEVINE
  Director February 26, 2021
(Joshua H. Levine)
/S/    ALICE D. SCHROEDER
  Director February 26, 2021
(Alice D. Schroeder)
/S/    THOMAS J. SULLIVAN
  Director February 26, 2021
(Thomas J. Sullivan)

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NATUS MEDICAL INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Natus Medical Incorporated:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Natus Medical Incorporated and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes and financial statement schedule II: Valuation and Qualifying Accounts (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases as of January 1, 2019 due to the adoption of Financial Accounting Standards Board Accounting Standards Codification Topic 842, Leases, on a modified retrospective basis.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of net realizable value adjustments for excess or obsolete inventory
As discussed in Note 4 to the consolidated financial statements, the Company had inventory with a carrying value of $90.6 million at December 31, 2020, of which $75.7 million is classified as current and $14.9 million is classified as non-current. As discussed in Note 1 to the consolidated financial statements, the Company reduces the carrying value of inventory for any differences between its cost and estimated net realizable value. Net realizable value is estimated by evaluating ending inventories for excess quantities, obsolescence, and other factors that potentially impact the Company’s ability to consume its inventory. In making its estimate of net realizable value, the Company’s evaluation includes an analysis of historical sales by product, projections of future demand by product, and obsolescence by product.
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We identified the evaluation of net realizable value adjustments for excess or obsolete inventory as a critical audit matter. A high degree of auditor judgment was required in assessing the identification of the subset of inventory requiring net realizable value adjustments given the inherent uncertainty in projecting future demand and complexity involved in assessing the Company’s analysis of historical sales by product, projections of future demand, and assessment of obsolescence.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of an internal control related to the Company's identification of the subset of inventory requiring net realizable value adjustments. In evaluating potential excess inventory, we compared on-hand inventory to the Company's estimate of future inventory consumption. For certain products, we evaluated the estimate of future demand through an analysis of historical inventory sales by product and information obtained from the Company's manufacturing planning department. We obtained internal and external product inspection reports to identify inventory subject to remediation and evaluated the Company's assessment of obsolescence. We also compared the Company's estimate of net realizable value adjustments for identified excess or obsolete inventory to the prior period estimate and to actual inventory scrapping history.
Evaluation of the realizability of U.S. deferred tax assets
As discussed in Note 18 to the consolidated financial statements, at December 31, 2020, the Company had U.S. deferred tax assets of $25.1 million, net of $0.3 million federal and state valuation allowances. These deferred tax assets consist primarily of $3.4 million of federal and state net operating loss carryforwards, $5.1 million of federal and state R&D credit carryforwards, and $16.8 million related to deductible temporary differences. The Company records a net deferred tax asset to the extent it is more likely than not that the assets will be realized. After weighing all the positive and negative evidence, the Company concluded that it is more likely than not that the U.S. deferred tax assets will be realized except for a small portion, for which a $0.3 million valuation allowance was recorded. In reaching its conclusion, the Company considered the following items: cumulative three-year income or loss on an adjusted basis, current U.S. income (loss) before provision (benefit) for income tax and historical utilization of deferred tax assets, lengthy carryforward periods for deferred tax assets, and future sources of taxable income.
We identified the Company's evaluation of the realizability of U.S. deferred tax assets as a critical audit matter. A high degree of auditor judgment was required in evaluating all available positive and negative evidence, including forecasted future taxable income, in reaching a conclusion whether it is more likely than not that the assets will be realized. This is due to the inherent subjectivity involved in evaluating positive and negative evidence associated with the Company's cumulative earnings or losses in recent years, including the extent of adjustments required for certain nonrecurring items and impacts of the “One Natus” reorganization on the future operations of the Company.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of an internal control related to assessing the realizability of the U.S. deferred tax assets, which included the Company's evaluation of assumptions used to estimate forecasted future taxable income. We evaluated positive and negative evidence associated with certain nonrecurring items included in the Company's cumulative three-year income or loss and compared to underlying documentation. We performed a sensitivity analysis to assess the impact of reasonably possible changes in the forecasted future U.S. taxable income, including changes to the number of forecasted years used in the analysis, on the Company's determination of the ability to utilize the U.S. deferred tax assets. We compared the Company's estimated future U.S. taxable income to historical periods before and after the One Natus reorganization and considered the trend in taxable income under an actual and as adjusted for non-recurring items basis. We involved income tax professionals with specialized skills and knowledge, who assisted in evaluating the sources and amounts of permanent adjustments to U.S. income (loss) before provision (benefit) for income tax used in estimating future taxable income.

(signed) KPMG LLP
We have served as the Company's auditor since 2014.

San Francisco, California
February 26, 2021

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NATUS MEDICAL INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts) 
 December 31,
 20202019
ASSETS
Current assets:
Cash and cash equivalents$82,082 $63,297 
Accounts receivable, net of allowance for doubtful accounts of $6,213 and $7,38493,133 115,889 
Inventories75,650 71,368 
Prepaid expenses and other current assets20,837 19,195 
Total current assets271,702 269,749 
Property and equipment, net24,516 24,702 
Operating lease right-of-use assets11,669 15,046 
Intangible assets, net92,741 114,799 
Goodwill151,299 146,367 
Deferred income tax27,563 30,355 
Other assets20,904 21,509 
Total assets$600,394 $622,527 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$23,429 $27,253 
Current portion of long-term debt50,000 35,000 
Current portion of operating lease liabilities6,779 5,871 
Accrued liabilities44,236 54,451 
Deferred revenue21,308 20,246 
Total current liabilities145,752 142,821 
Long-term liabilities:
Other liabilities18,451 17,616 
Long-term debt5,840 19,665 
Operating lease liabilities 8,959 12,051 
Deferred income tax10,298 14,251 
Total liabilities189,300 206,404 
Commitments and contingencies (Note 21)
Stockholders’ equity:
Common stock, $0.001 par value; 120,000,000 shares authorized; shares issued and outstanding 33,911,703 in 2020 and 34,148,700 in 2019342,828 344,476 
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding in 2020 and in 2019  
Retained earnings71,309 87,922 
Accumulated other comprehensive loss(3,043)(16,275)
Total stockholders’ equity411,094 416,123 
Total liabilities and stockholders’ equity$600,394 $622,527 
The accompanying notes are an integral part of these Consolidated Financial Statements.
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NATUS MEDICAL INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts) 
 Years Ended December 31,
 202020192018
Revenue$415,684 $495,175 $530,891 
Cost of revenue185,912 196,551 217,952 
Intangibles amortization13,241 6,916 8,924 
Gross profit216,531 291,708 304,015 
Operating expenses:
Marketing and selling107,282 129,109 136,680 
Research and development61,296 58,733 61,482 
General and administrative49,113 59,649 70,599 
Intangibles amortization15,224 15,144 22,585 
Restructuring3,809 44,739 37,231 
Total operating expenses236,724 307,374 328,577 
Loss from operations(20,193)(15,666)(24,562)
Other expense, net(1,872)(5,591)(7,698)
Loss before provision (benefit) for income tax(22,065)(21,257)(32,260)
Provision (benefit) for income tax(5,452)(5,586)(9,325)
Net loss$(16,613)$(15,671)$(22,935)
Net loss per share:
Basic$(0.49)$(0.47)$(0.69)
Diluted$(0.49)$(0.47)$(0.69)
Weighted average shares used in the calculation of net loss per share:
Basic33,562 33,696 33,111 
Diluted33,562 33,696 33,111 
The accompanying notes are an integral part of these Consolidated Financial Statements.
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NATUS MEDICAL INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts) 

 Years Ended December 31,
 202020192018
Net loss(16,613)(15,671)(22,935)
Other comprehensive income (loss):
Foreign currency translation adjustment13,205 (1,576)(14,360)
Interest rate swap designated as a cash flow hedge27 (180)(77)
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 (See FN 23)
 24,845  
Total other comprehensive income (loss) 13,232 21,757 (14,437)
Comprehensive income (loss)$(3,381)$6,086 $(37,372)
The accompanying notes are an integral part of these Consolidated Financial Statements.


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NATUS MEDICAL INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts) 
 Common StockRetained
Earnings
Accumulated
Other
Comprehensive
Loss
Stockholders’
Equity
 SharesAmount
Balances, December 31, 201733,134,101 $316,577 $129,115 $(23,595)$422,097 
Cumulative-effect adjustment for ASU 2016-16— — (3,919)— (3,919)
Vesting of restricted stock units266 — — —  
Net issuance of restricted stock awards272,941 — — —  
Employee stock purchase plan63,649 1,700 — — 1,700 
Stock-based compensation expense— 17,003 — — 17,003 
Repurchase of company stock(173,545)(5,630)— — (5,630)
Taxes paid related to net share settlement of equity awards(160,700)(5,183)— — (5,183)
Exercise of stock options667,667 9,748 — — 9,748 
Other comprehensive loss— — — (14,437)(14,437)
Net loss— — (22,935)— (22,935)
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 awards175,833 — — —  
Employee stock purchase plan53,839 1,354 — — 1,354 
Stock-based compensation expense— 8,315 — — 8,315 
Taxes paid related to net share settlement of equity awards(51,784)(1,689)— — (1,689)
Exercise of stock options124,303 2,281 — — 2,281 
Other comprehensive income— — — 23,089 23,089 
Net loss— — (15,671)— (15,671)
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 awards204,057 — — —  
Employee stock purchase plan73,347 1,314 — — 1,314 
Stock-based compensation expense 9,527 — — 9,527 
Repurchase of company stock(465,117)(10,495)— — (10,495)
Taxes paid related to net share settlement of equity awards
(63,317)(1,994)— — (1,994)
Other comprehensive income— — — 13,232 13,232 
Net loss— — (16,613)— (16,613)
Balances, December 31, 202033,911,703 $342,828 $71,309 $(3,043)$411,094 
The accompanying notes are an integral part of these Consolidated Financial Statements.
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NATUS MEDICAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) 
 Year Ended December 31,
 202020192018
Operating activities:
Net loss$(16,613)$(15,671)$(22,935)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for losses on accounts receivable1,190 4,262 6,909 
Depreciation and amortization28,115 30,722 33,863 
Loss on commencement of sales-type leases1,881   
Loss on equity method investment adjustment133   
Loss on disposal of property and equipment268 449 746 
Impairment of intangible assets6,678  8,192 
Impairment charge for sale of entity 24,571  
Goodwill impairment charge  14,846 
Warranty reserve2,009 2,886 2,168 
Stock-based compensation9,566 8,352 17,051 
Non cash lease expense1,353   
Deferred taxes(1,577)(5,364)(13,714)
Changes in operating assets and liabilities, net of assets and liabilities acquired in acquisitions:
Accounts receivable17,651 7,139 (5,199)
Inventories1,939 7,185 (7,443)
Other assets(1,055)(2,486)(5,118)
Accounts payable(4,523)(1,367)4,105 
Accrued liabilities(13,427)(4,010)(2,527)
Deferred revenue838 3,392 2,076 
Net cash provided by operating activities34,426 60,060 33,020 
Investing activities:
Acquisition of businesses, net of cash acquired(1,997) 151 
Acquisition of property and equipment(8,609)(5,326)(7,875)
Acquisition of intangible assets (13)(665)
Purchases of equity investments(2,000)  
Net cash used in investing activities(12,606)(5,339)(8,389)
Financing activities:
Proceeds from stock option exercises and ESPP1,314 3,635 11,448 
Principal payments of financing lease liability(527)(478) 
Repurchase of company stock(10,495) (5,630)
Taxes paid related to net share settlement of equity awards(1,994)(1,689)(5,183)
Proceeds from long-term borrowings60,000   
Deferred debt issuance costs(1,175)  
Contingent consideration earn-out  (147)
Payments on borrowings(58,000)(50,000)(50,000)
Net cash used in financing activities(10,877)(48,532)(49,512)
Exchange rate effect on cash and cash equivalents7,842 735 (7,696)
Net increase (decrease) in cash and cash equivalents18,785 6,924 (32,577)
Cash and cash equivalents, beginning of year63,297 56,373 88,950 
Cash and cash equivalents, end of year$82,082 $63,297 $56,373 
Supplemental disclosure of cash flow information:
Cash paid for interest$3,110 $4,580 $6,169 
Cash paid for income taxes$6,825 $6,445 $9,247 
Non-cash investing activities:
Property and equipment included in accounts payable$(51)$69 $167 
Inventory transferred to property and equipment$1,303 $300 $1,211 
Transfer of leased assets to sales-type leases$4,107 $ $ 
 The accompanying notes are an integral part of these Consolidated Financial Statements.
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2020, 2019 and 2018
1—ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Natus Medical Incorporated (“we”, “our”, “us”) was incorporated in California in May 1987 and reincorporated in Delaware in August 2000. We are a leading provider of medical device solutions focused on the diagnosis and treatment of central nervous and sensory system disorders for patients of all ages. Product offerings include computerized neurodiagnostic systems for audiology, neurology, polysomnography, and neonatology, as well as newborn care products such as hearing screening systems, phototherapy devices for the treatment of newborn jaundice, software systems for managing and tracking disorders and diseases for public health laboratories, computer-based audiological, otoneurologic and vestibular instrumentation for hearing and balance care professionals.
Basis of Presentation and Principles of Consolidation
The accompanying Consolidated Financial Statements includes our accounts and accounts of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications to the prior periods have been made to conform to the current period presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities in the Consolidated Financial Statements and the reported amount of revenue and expenses during the reporting period. Such estimates include allowances for potentially uncollectible accounts receivable, valuation of inventory, intangible assets, goodwill, share-based compensation, valuation of deferred income taxes, reserves for warranty obligations, and the provision for income taxes including uncertain positions. Actual results could differ from those estimates.
Revenue recognition
Revenue is recognized when obligations under the terms of a contract with a customer are satisfied; generally this occurs with the transfer of control of devices, supplies, or services. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services.
For the majority of devices and supplies, we transfer control and recognize revenue when products ship from the warehouse to the customer. We generally do not provide rights of return on devices and supplies. Freight charges billed to customers are included in revenue and freight-related expenses are charged to cost of revenue.
Depending on the terms of the arrangement, we may also defer the recognition of a portion of the consideration received because we have to satisfy a future obligation (e.g. installation). Judgment is required to determine the standalone selling price for each distinct performance obligation. Our estimate of SSP is a point estimate.  The estimate is calculated annually for each performance obligation that is not sold separately. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, the SSP is determined using information that may include market conditions and other observable inputs.
We sell separately-priced service contracts that extend maintenance coverages for both medical devices and data management systems beyond the base agreements to customers. The separately priced service contracts range from 12 months to 60 months. We receive payment at the inception of the contract and recognize revenue ratably over the service period.
For products containing embedded software, we have determined that the hardware and software components function together to deliver the products' essential functionality and are considered a combined performance obligation. Revenue recognition policies for sales of these products are substantially the same as for other tangible products.
Inventory Valuation
Inventories are carried at the lower of cost or net realizable value, with cost being determined using the first-in, first-out method. The carrying value of our inventory is reduced for any difference between cost and estimated net realizable value of the inventory. We determine net realizable value by evaluating ending inventories for excess quantities, obsolescence, and other factors that could impact our ability to consume inventory for its intended use. Our evaluation includes an analysis of historical sales by product, projections of future demand by product, and an analysis of obsolescence by product. Adjustments to the
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
value of inventory establish a new cost basis and are considered permanent even if circumstances later suggest that increased carrying amounts are recoverable. If demand is higher than expected, we may sell inventory that had previously been written down.
Intangible assets
We amortize intangible assets with finite lives over the estimate of their useful lives. Any future changes that would limit their useful lives or any determination that these assets are carried at amounts greater than their estimated fair value could result in acceleration of amortization over a revised useful life.
We review intangible assets with indefinite lives for impairment on an annual basis and finite lives for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of the finite-lived intangible assets is assessed based on the estimated undiscounted future cash flows expected to result from the use and eventual disposition of the asset. If the undiscounted future cash flows are less than the carrying amount, the finite-lived intangible assets are considered to be impaired. The amount of the impairment loss, if any, is measured as the difference between the carrying amount of the asset and its fair value. We estimate the fair value of finite-lived intangible assets by using an income approach or, when available and appropriate, using a market approach.
Goodwill
Goodwill is not amortized but is subject to an annual impairment analysis, which is performed as of October 1st; this assessment is also performed whenever there is a change in circumstances that indicates the carrying value of goodwill may be impaired.
Goodwill is tested for impairment at the reporting unit level. In 2018 we had four reporting units for purposes of goodwill impairment testing. In early 2019 we announced the implementation of a new organizational structure which consolidated our three strategic business units, Neuro, Newborn Care and Hearing & Balance into “One Natus”. As a result of these organizational changes we have concluded we have one operating segment and one reporting unit for purposes of goodwill impairment testing in 2019 and 2020.
In accordance with accounting standards we perform a qualitative assessment to test goodwill for impairment prior to the performing the first step of the goodwill impairment process. Qualitative factors considered in this assessment include industry and market considerations, overall financial performance and other relevant events and factors affecting the reporting unit.
Prior to the adoption of ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) in 2019, which simplified the goodwill impairment test, if the fair value of a reporting unit was less than its carrying amount, we would perform a two-step impairment test on goodwill. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit to its carrying value, including goodwill. We use a projected discounted cash flow model to determine the fair value of a reporting unit. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test is not required. The second step, if required, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The fair value of a reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. If the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess.
Based on the qualitative assessment in 2020 and 2019, we determined the fair value of goodwill was more likely than not greater than its carrying amount, and no further analysis was needed.
Due to organizational changes announced in late 2018 our evaluation of our GND reporting unit, which was part of our Neuro business unit, was determined to be impaired. Prior to calculating the goodwill impairment loss, we analyzed the recoverability of GND long-lived assets (other than goodwill). As a result, we recorded a goodwill impairment charge of $14.8 million within restructuring expense on our income statement. There was no remaining goodwill in the GND reporting unit as of December 31, 2018.
In 2019 we elected to early adopt ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). The adoption of this standard eliminates the second step of the two-step impairment test described above and allows a Company to expense the difference between carrying amount in excess of the fair value of the reporting unit as a reduction in goodwill. The adoption of ASU 2017-04 did not have an impact on our consolidated financial statements as we concluded based on the qualitative assessment performed in 2019 and 2020 that the fair value of the reporting unit was more likely than not to be greater than its carrying amount, and no further analysis was needed.
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
Lessee Leases
We determine if an arrangement is a lease at inception of the lease. Right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term, and lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit borrowing rate, generally we use an incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at the lease commencement date. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to exclude or terminate the lease when it is reasonably certain that they will exercise that option. Lease expense for lease payments are recognized on a straight-line basis over the lease term.
Operating leases are included in operating lease ROU assets, accrued liabilities, and operating lease liabilities in our consolidated balance sheet. Finance leases are included in property and equipment, accrued liabilities, and other liabilities in the consolidated balance sheet.
We have lease agreements with lease and non-lease components, which are generally accounted for based on the type of asset. For real estate and telecom leases, we account for these components separately. For equipment leases, such as office equipment and vehicles, we account for the lease and non-lease components as a single lease component.
Lessor Leases
We determine if an arrangement is a lease at inception of the lease. We entered into a five-year non-cancelable exclusive supply agreement with a customer to provide hearing screening products which commenced on January 1, 2020. The agreement includes automatic renewal options for successive three-year periods. Notice of non-renewal must be provided to Natus at least twelve months prior to the end of the current term. The agreement does not contain any purchase options or residual value guarantees.
Pricing of the exclusive supply agreement is structured on a fee per baby screened basis. The per baby fee is inclusive of all products and services to be provided under the terms of the agreement which include hearing screening hardware, consumables required to complete each screen, and related maintenance. The pricing structure also includes a guaranteed minimum payment per unit per contract year for each unit of equipment supplied.
Sales-Type Leases
The guaranteed minimum payment for each unit of equipment supplied represents the fixed transaction price and is allocated to separate performance obligations, consisting of hardware products, consumables, and maintenance, proportionally based on the standalone selling price of each performance obligation. Standalone selling price is best evidenced by the price we charge for the good or service when selling it separately in similar circumstances to similar customers. Other than for the renewal of annual support services contracts, our products and services are not generally sold separately. We use an amount discounted from the list price as a best estimated selling price.
For sales-type leases, we recognize revenues for hearing screening hardware products at the net present value of their guaranteed minimum payment standalone selling price allocation upon delivery of the hardware. We recognize consumables and maintenance revenues associated with the sales-type leases over the term of the agreement on a weighted average as actual screens are performed. Upon commencement of a sales-type lease we derecognize the leased asset from our balance sheet and record it as cost of revenue in the condensed consolidated statements of operations.
Operating Leases
Under the terms of the exclusive supply agreement, hospitals where we were previously providing hearing screening services were provided the option to transition to the exclusive supply agreement. Hospitals which chose to transition continued to use their existing Natus hardware. Based on the remaining useful life of the existing hardware some of these leases were classified as operating leases.
For operating leases, rental income is recognized on a straight-line basis over the term of the associated lease. Leased assets classified as operating leases are carried at amortized cost net of accumulated depreciation in property and equipment, net on the condensed consolidated balance sheet. The depreciation expense of the leased assets is recognized on a straight-line basis over the useful life of the asset, and recorded in cost of revenue in the condensed consolidated statements of operations.
Based on the pricing structure and the predominance of non-lease components within the exclusive supply agreement, amounts pertaining to net investment in these leases, variable lease income, and operating lease income are immaterial to our financial statements.
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
Long lived assets
We continually monitor events and changes in circumstances that could indicate that carrying amounts of our long-lived assets, including property and equipment, intangible assets and leases, may not be recoverable. When such events or changes in circumstances occur, we will assess the recoverability by determining whether the carrying value of an asset group will be recovered through undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of the asset group, we will recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.
Liability for product warranties
We provide a warranty for products that is generally one year in length. In some cases, regulations may require us to provide repair or remediation beyond the typical warranty period. If any products contain defects, we may be required to incur additional repair and remediation costs. Service, repair and calibration services are provided by a combination of our owned facilities and vendors on a contract basis.
We accrue estimated product warranty costs at the time of sale based on historical experience. A warranty reserve is included in accrued liabilities for the expected future costs of servicing products. Additions to the reserve are based on management’s best estimate of probable liability. We consider a combination of factors including material and labor costs, regulatory requirements, and other judgments in determining the amount of the reserve. The reserve is reduced as costs are incurred to honor existing warranty and regulatory obligations.
Share-based compensation
We recognize share-based compensation expense associated with employee stock options under the single-option straight line method over the requisite service period, which is generally a four-year vesting period and ten-year contractual term pursuant to ASC Topic 718, Compensation-Stock Compensation. See Note 16 of the Consolidated Financial Statements.
For employee stock options, the value of each option is estimated on the date of grant using the Black-Scholes option pricing model, which was developed for use in estimating the value of freely traded options. Similar to other option pricing models, the Black-Scholes method requires the input of highly subjective assumptions, including stock price volatility. Changes in the subjective input assumptions can materially affect the estimated fair value of the employee stock options.
We recognize share-based compensation associated with Restricted Stock Awards (“RSA”) and Restricted Stock Units (“RSU”). RSAs and RSUs vest ratably over a three-year period for employees. RSAs and RSUs for executives vest over a four-year period; 25% on each of the annual anniversaries. RSAs and RSUs for non-employees (Board of Directors) vest over a one-year period; 100% on the first anniversary. The value is estimated based on the market value of Natus common stock on the date of issuance pursuant to ASC Topic 718, Compensation-Stock Compensation.
We grant market stock unit (“MSU”) awards to certain employees. We estimate the fair value of MSUs at the date of grant using a Monte Carlo simulation model and amortize those fair values over the requisite service period, which is generally three years. The Monte Carlo simulation model that we use to estimate the fair value of market-based MSUs at the date of grant incorporates into the valuation the possibility that the market condition may not be satisfied. Provided that the requisite service is rendered, the total fair value of the market-based MSUs, which is determined at the date of grant, must be recognized as compensation expense even if the market condition is not achieved. However, the number of shares that ultimately vest can vary significantly with the performance of the specified market criteria.
We also grant performance stock unit (“PSU”) awards to our CEO and CFO. These PSUs fully vest after a performance period and have separate performance goals than MSUs. We estimate fair value of performance stock unit awards based on the share price and other pertinent factors on the grant date. Compensation expense for performance stock unit awards are recognized on a straight-line basis over the requisite service period of the award when performance condition is probable to occur. We assess the achievement probability of the performance conditions each period and adjust compensation expense if necessary. Provided that the requisite service is rendered, the shares will become vested and payout will occur based on the outcome of the performance condition. Any unrecognized compensation cost shall be recognized when the award becomes vested.
We issue new shares of common stock upon the exercise of stock options and the vesting of RSAs, RSUs, MSUs, and PSUs.
Forfeitures of employee stock options and awards are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Share-based compensation expense is recorded net of estimated forfeitures, such that expense is recorded only for those share-based awards that are expected to vest.
Cash Equivalents
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
All highly liquid investments purchased with an original maturity or remaining maturity upon purchase of three months or less are classified as cash equivalents.
Allowance for Doubtful Accounts
We estimate the allowance for potentially uncollectible accounts receivable based on historical collection experience within the markets in which we operate and other customer-specific information, such as bankruptcy filings or customer liquidity problems. When all internal efforts have been exhausted to collect the receivable, it is written off and relieved from the reserve.
Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, investments, accounts receivable, and accounts payable. Cash is reported at its fair value on the balance sheet dates. The recorded carrying amounts of investments, accounts receivable and accounts payable approximate their fair values due to the short-term maturities.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed using the straight-line method over estimated useful lives of the respective assets, which are three to five years for office furniture and equipment, computer software and hardware, demonstration and loaned equipment, and 30 to 40 years for buildings. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. Land is not depreciated. Costs associated with acquiring and installing software to be used for internal purposes are capitalized and amortized on a straight-line basis over three years.
Research & Development Costs
Costs incurred in research and development are charged to operations as incurred.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements carrying value of assets and liabilities and the tax basis of those assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We record net deferred tax assets to the extent it is more likely than not that the assets will be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. To the extent that previously reserved deferred tax assets are estimated to be realizable, we adjust the valuation allowance which reduces the provision for income taxes.
We recognize the tax benefit of uncertain tax positions in the financial statements as defined in ASC Topic 740, Income Tax. When the tax position is deemed more likely than not of being sustained, we recognize the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement, as defined in ASC 740-10-05.
Foreign Currency
The functional currency of our subsidiaries outside of North America is generally the local currency of the country where the subsidiary is located. Accordingly, foreign currency translation adjustments relating to the translation of foreign subsidiary financial statements are included as a component of accumulated other comprehensive loss. We have recorded $13.2 million, $(1.6) million, and $(14.4) million of foreign currency translation gains (losses) for the years ended December 31, 2020, 2019 and 2018, respectively.
Gains and losses from transactions denominated in currencies other than the functional currencies are included in other income and expense. In 2020, 2019, and 2018, net foreign currency transaction gains (losses) were $2.0 million, $(0.8) million, and $(0.8) million, respectively. Foreign currency gains and losses result primarily from fluctuations in the exchange rate between the U.S. dollar, Canadian dollar, Euro, British pound, and Danish kroner.
Effective July 1, 2018, Argentina's economy is considered to be highly inflationary under U.S. GAAP since it has experienced a rate of general inflation in excess of 100% over the latest three-year period, based upon the cumulative inflation rates published by Center for Audit Quality (CAQ) SEC Regulations Committee and its International Practices Task Force
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
(IPTF). As a result, beginning July 1, 2018, the U.S. dollar is the functional currency for our subsidiary in Argentina, Medix I.C.S.A. (“Medix”). Accordingly, all gains and losses resulting from the translation of our Argentinian operations are required to be recorded directly in the statement of operations. Through June 30, 2018, prior to being designated as highly inflationary, currency translation adjustments of Medix's balance sheet are reflected in shareholders' equity as part of Accumulated Other Comprehensive Income; however subsequent to July 1, 2018, such adjustments are reflected in earnings. Currency adjustments recorded in earnings for Medix subsequent to July 1, 2018 represented a gain of $0.9 million.
We divested our wholly owned subsidiary, Medix, on April 2, 2019 via a stock sale. Included in the year ended December 31, 2019 is the impact of the sale of Medix, which was completed as of June 30, 2019, and the deferred foreign currency related translation adjustments previously in accumulated other comprehensive income have been released from the balance sheet along with the held for sale accrual (See Note 23 - Sale of a Certain Subsidiary).
Comprehensive Income
We break out the major components and report as a single total the change in net assets during the period as defined in ASC Topic 220, Comprehensive Income. The consolidated statement of comprehensive income (loss) has been separately stated from the consolidated statements of operations. Accumulated other comprehensive loss consists of translation gains and losses on foreign subsidiary financial statements, interest rate swap designated as a cash flow hedge, reclassifications from the adoption of ASU 2018-02, and reclassification of previously recorded deferred foreign currency related translation adjustment losses upon the divestiture of Medix.
Basic and Diluted Net Income per Share
We compute net income per share as defined in ASC Topic 260, Earnings per Share. Basic net income per share is based upon the weighted average number of common shares outstanding during the period. Diluted net income per share is based upon the weighted average number of common shares outstanding and dilutive common stock equivalents outstanding during the period. Common stock equivalents are options granted, shares of restricted stock, and shares of market stock issued under the stock awards plans and are calculated under the treasury stock method. Common equivalent shares from unexercised stock options and restricted stock are excluded from the computation when there is a loss as the effect is anti-dilutive, or if the exercise price of such options is greater than the average market price of the stock for the period.
Recently Adopted Accounting Pronouncements
    In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This standard requires lease assets and lease liabilities arising from operating leases to be presented in the statement of financial position. Qualitative along with specific quantitative disclosures are required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. In July 2018, FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which affects narrow aspects of the guidance issued in the amendments in Update 2016-02. In July 2018, the FASB also issued ASU 2018-11, Targeted Improvements. The amendments in ASU 2018-11 provide additional clarification and implementation guidance on certain aspects of the previously issued ASU 2016-02 and have the same effective and transition requirements as ASU 2016-02.
    The new standard provides a number of optional practical expedients in transition. We have elected the package of practical expedients, which permits an entity to not reassess prior conclusions about lease identification, lease classification and initial direct costs under the new standard. We have not elected the use-of-hindsight practical expedient or the practical expedient pertaining to land easements; the latter of which is not applicable to us. We made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. We will recognize those lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease term.
    The new standard became effective for us on January 1, 2019. We adopted the new standard using the modified retrospective transition method with the effective date as the date of initial application. Upon adoption, we recognized additional new lease assets of approximately $19.5 million and additional lease liabilities of approximately $22.3 million as of January 1, 2019. The standard did not materially affect consolidated net earnings. By electing the effective date as the date of initial application, financial performance has not been adjusted and the disclosures required under the new standard have not been provided for periods prior to January 1, 2019. See Significant Accounting Policies and Note 8 for additional discussion and disclosure.
    The adoption of the new standard did not impact our liquidity or debt-covenant compliance under its previous agreements.
    In June 2016, the FASB issued ASU 2016-13, Credit Losses (Topic 326). This update requires financial assets
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
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 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 both updates was effective beginning January 1, 2020. The adoption of ASU 2016-13 did not have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This update modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Because these amendments eliminate Step 2 from the goodwill impairment test, they should reduce the cost and complexity of evaluating goodwill for impairment. ASU 2017-04 is effective for our annual and any interim goodwill impairment tests performed on or after January 1, 2020. We elected to early adopt. The adoption of ASU 2017-04 did not have an impact on our consolidated financial statements.
    In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). This update permits a company to reclassify its disproportionate income tax effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) on items within accumulated other comprehensive income (“AOCI”) to retained earnings (termed “stranded tax effects”). Only the stranded tax effects resulting from the 2017 Act are eligible for reclassification. The ASU was effective for us on January 1, 2019. Upon adoption, we reclassified stranded tax effects resulting from the 2017 Act of $1.3 million, resulting in a decrease to AOCI and an increase to retained earnings as of January 1, 2019.
In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 813), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. This update amends Topic 820 to add, remove, and clarify disclosure requirements related to fair value measurement disclosure. For calendar year-end entities, the update was effective for annual periods beginning January 1, 2020, and interim periods within those fiscal years. The adoption of ASU 2018-13 did not have an 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 early adopted the ASU in the second quarter of 2020. Upon adoption, we recorded an additional income tax benefit of $0.9 million due to the elimination of the year-to-date loss limitation rules that limited the interim tax period tax benefit.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements. This update improves consistency by amending the Codification to include all disclosure guidance in appropriate disclosure sections. Also, the update clarifies application of various provisions in the Codification by amending and adding new headings, cross-referencing to other guidance, and refining or correcting terminology. ASU 202-10 was effective for annual period starting December 15, 2020. The adoption of this ASU did not have an impact on our consolidated financial statements.

2—REVENUE
    Contract assets 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 was primarily related to extended service contracts, installation, and training, for which the service fees are billed up-front. The associated deferred revenue is generally recognized ratably over the extended service period or when installation and training are complete.

The following table summarized the changes in the contract assets and contract liability balances for the year ended December 31, 2020 (in thousands):
Unbilled AR, December 31, 2019$2,667 
Additions173 
Transferred to Trade Receivable(915)
Unbilled AR, December 31, 2020$1,925 

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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
Deferred Revenue, December 31, 2019$24,808 
Additions19,763 
Revenue Recognized(18,848)
Deferred Revenue, December 31, 2020$25,723 
    At December 31, 2020, the contract assets of $1.9 million were included in accounts receivable in the consolidated balance sheet. At December 31, 2020, the short-term portion of the contract liability of $21.3 million and the long-term portion of $4.4 million were included in deferred revenue and other long-term liabilities respectively, in the consolidated balance sheet. As of December 31, 2020, we expect to recognize revenue associated with deferred revenue of approximately $21.3 million in 2021, $2.3 million in 2022, $1.2 million in 2023, $0.7 million in 2024, and $0.2 million thereafter.

3—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):
 December 31,
 20202019
Balance, beginning of period$7,384 $6,960 
Additions charged to expense1,190 4,262 
Write-offs charged against allowance(2,361)(3,838)
Balance, end of period$6,213 $7,384 

4—INVENTORIES
Inventories consist of (in thousands): 
 December 31,
 20202019
Raw materials and subassemblies$22,583 $37,259 
Work in process2,294 1,780 
Finished goods65,695 50,521 
Total Inventories90,572 89,560 
Less: Non-current Inventories(14,922)(18,192)
Inventories$75,650 $71,368 
Non-current inventory consists of service components used to repair products held by customers pursuant to warranty obligations and extended service contracts, including service components for products that we no longer sell, inventory purchased for lifetime buys, inventory built as a last-time build, and inventory that is turning at a slow rate. We believe that these inventories will be utilized for their intended purpose.

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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
5—PROPERTY AND EQUIPMENT
Property and equipment consist of (in thousands): 
 December 31,
 20202019
Land$1,792 $1,719 
Buildings7,365 6,943 
Leasehold improvements8,050 8,664 
Finance lease right-of-use assets2,555 2,377 
Office furniture and equipment22,148 22,819 
Computer software and hardware10,246 12,610 
Demonstration and loaned equipment3,086 11,621 
55,242 66,753 
Accumulated depreciation(30,726)(42,051)
Total$24,516 $24,702 
Depreciation expense of property and equipment was $6.2 million, $6.6 million, and $6.0 million in the years ending December 31, 2020, 2019 and 2018, respectively.

6—INTANGIBLE ASSETS
The following table summarizes the components of gross and net intangible asset balances (in thousands): 
 December 31, 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$112,138 (12,480)$(64,203)$35,455 $108,400 (6,035)$(55,408)$46,957 
Customer related94,526 (50)(51,247)43,229 90,351 (50)(40,527)49,774 
Trade names47,058 (3,677)(31,890)11,491 45,874 (3,237)(25,355)17,282 
Internally developed software13,281  (12,845)436 13,281  (12,606)675 
Patents2,810 (133)(2,677) 2,692 (133)(2,559) 
Service Agreements1,190  (1,119)71 1,190  (1,079)111 
Total definite-lived intangible assets271,003 (16,340)(163,981)90,682 261,788 (9,455)(137,534)114,799 
Intangible assets with indefinite lives:
Intellectual Property2,059  — 2,059   —  
Total intangible assets273,062 (16,340)(163,981)92,741 261,788 (9,455)(137,534)114,799 
Finite lived intangible assets are amortized over their weighted average lives, which are 13 years for technology, 13 years for patents, 10 years for customer-related intangibles, 7 years for trade names, 6 years for internally developed software, 2 years for service agreements, and 11 years weighted average in total.
Internally developed software consists of $11.1 million relating to costs incurred for development of internal use computer software and $2.2 million for development of software to be sold.
During the fourth quarter of 2018 we recorded an impairment charge related to intangible assets of $8.2 million. These impairments relate to end of life decisions for the core technology utilized in our Bio-logic products and our GND and Neurocom product lines. We acquired Bio-logic core technology as part of the acquisition of Bio-logic Systems Corp in 2006 and have maintained the technology since its acquisition. In 2018 we partnered with one of our contract manufacturers to develop and manufacture the next generation technology to be used in its Bio-logic products. The decision to develop this new technology resulted in an impairment of the originally acquired core technology of $5.6 million, which was recorded within intangibles amortization expense on our income statement.
On January 15, 2019, we announced the implementation of a new organizational structure, "One Natus." As a result of this new organizational structure, we announced we exited two of our non-core businesses, GND and Neurocom. The decision
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
to exit these non-core businesses resulted in the impairment of intangible assets of $2.6 million as of December 31, 2018. These impairments were the result of deterioration of expected future cash flows as compared to the carrying value of the assets. Impairments were determined by performing an undiscounted cash flow analysis on intangibles assets. The impairment charge for GND and Neurocom is recorded on our income statement within restructuring expense.
During the third quarter of 2020 we recorded an impairment charge related to intangible assets of $6.7 million of which $6.4 million was recorded within intangibles amortization within cost of revenue and $0.3 million was recorded within intangibles amortization within operating expense on our income statement. The impairment related to an end of life decision for an acquired tradename and technology at which time we made the decision to discontinue sales of the related product rather than continuing to invest in the product.
Amortization expense related to intangible assets with finite lives, including impairment charges described above, was as follows (in thousands): 
 Years Ended December 31,
 202020192018
Technology$13,417 $6,906 $14,100 
Customer related8,825 8,662 12,244 
Trade names6,182 6,111 6,736 
Internally developed software239 1,438 2,123 
Patents 60 84 
Service Agreements40 322 757 
Total amortization$28,703 $23,499 $36,044 
The amortization expense amounts shown above include internally developed software not held for sale of $0.2 million, $1.3 million, and $1.9 million for the years ended 2020, 2019, and 2018, respectively. The amortization expense for internally developed software not held for sale is recorded within our income statement as a general and administrative operating expense.
Expected annual amortization expense related to amortizable intangible assets is as follows (in thousands): 
2021$22,374 
202218,365 
202315,590 
202413,599 
202512,976 
Thereafter7,778 
Total expected amortization expense$90,682 
        
7—GOODWILL
The carrying amount of goodwill and the changes in those balances are as follows (in thousands): 
As of December 31, 2018$147,644 
Foreign currency translation(1,277)
As of December 31, 2019$146,367 
Purchase Accounting Adjustments1,207 
Foreign currency translation3,725 
As of December 31, 2020$151,299 

8—LEASES
    
Lessee Leases

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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
We have operating and finance leases for offices, warehouses, and certain equipment. The leases have remaining lease terms of one to eight years, some of which include options to extend the leases for up to ten years. Our leases do not have any residual value guarantees or any restrictions or covenants imposed by leases.

    Components of lease cost were as follows (in thousands):
 Year Ended 
 December 31,
 20202019
Operating lease cost$6,696 $6,823 
Finance lease cost:
Amortization of right-of-use assets (principal payments)395 466 
Interest on lease liabilities49 58 
Short-term lease cost7 51 
Variable lease cost2,541 2,836 
Sublease income(61)(179)
Total lease cost$9,627 $10,055 
    Supplemental cash flow information related to leases was as follows (in thousands):
 Year Ended 
 December 31,
 20202019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$13,979 $13,612 
Operating cash flows from finance leases32 42 
Financing cash flows from finance leases527 478 
Right-of-use assets obtained in exchange for lease obligations:
Operating leases3,290 2,697 
Finance leases337 300 

    Supplemental balance sheet information related to leases was as follows (in thousands):
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
 December 31, 2020December 31, 2019
Operating Leases
Operating lease right-of-use assets$11,669 $15,046 
Current portion of operating lease liabilities
$6,779 $5,871 
Operating lease liabilities8,959 12,051 
Total operating lease liabilities$15,738 $17,922 
Finance Leases
Property and equipment, gross$2,555 $2,377 
Accumulated amortization(1,705)(1,418)
Property and equipment, net$850 $959 
Accrued liabilities$414 $390 
Other liabilities446 599 
Total finance lease liabilities$860 $989 
Weighted Average Remaining Lease Term
Operating leases3.33 years3.75 years
Finance leases2.68 years2.92 years
Weighted Average Discount Rate
Operating leases5.4 %5.3 %
Finance leases5.1 %5.1 %

    As of December 31, 2020, future minimum lease payments included in the measurement of lease liabilities on the consolidated balance sheet, for the following five fiscal years and thereafter, were as follows (in thousands):
Year ending December 31, Operating LeasesFinance Leases
2021$6,206 $432 
20224,096 273 
20232,751 153 
20241,569 48 
2025665 11 
Thereafter695  
Total lease payments15,982 917 
Less imputed interest(244)(57)
Total$15,738 $860 

Lessor Leases

Pricing of our exclusive hearing screening supply agreement is structured on a fee per baby screened basis and includes a guaranteed minimum payment per unit per contract year for each unit of equipment supplied. We recognize revenues for the hardware products upon commencement of each lease at the net present value of their guaranteed minimum payment standalone selling price allocation. The remaining variable fees are recognized as revenue over the remaining lease term. The following table provides the profit recognized for sales-type leases at their commencement (net sales includes the initial allocation of fixed costs plus allocation of incremental variable fees and excludes the revenue associated with non-lease components associated with hearing screening supplies and maintenance that are recognized as revenue over the remaining lease term) for the year ended December 31, 2020 (in thousands):
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
 Year Ended 
 December 31,
 2020
Net Sales$2,226 
Cost of Sales4,107 
Gross Profit$(1,881)


The following table provides lease income related to variable lease payments on our sales-type leases not included in the measurement of the lease receivable for the year ended December 31, 2020 (in thousands):

 Year Ended 
 December 31,
 2020
Variable lease income$420 

The following table provides lease income on our operating leases for the year ended December 31, 2020 (in thousands):
 Year Ended 
 December 31,
 2020
Lease income on operating leases$291 

The receivables as a result of our sales-type leases are collateralized by the underlying equipment leased and consist of the following components at December 31, 2020 (in thousands):



 Year Ended 
 December 31,
 2020
Net minimum lease payments to be received$1,777 
Less: Unearned interest income portion 
Net investment in sales-type leases$1,777 
Less: Current portion(444)
Long-term net investment in sales-type leases$1,333 

As of December 31, 2020, future minimum lease payments and the reconciliation to net investment in sales-type leases reported on the consolidated balance sheet, for the following five fiscal years and thereafter, were as follows (in thousands):

Year Ended December 31,Sales-Type LeasesOperating Leases
2021444  
2022444  
2023444  
2024445  
2025  
Thereafter  
Total future minimum lease payments1,777  
Less: imputed interest  
Total$1,777 $ 
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018

9—ACCRUED LIABILITIES
Accrued liabilities consist of (in thousands): 
 December 31,
 20202019
Compensation and related benefits$20,409 $26,991 
Warranty reserve5,195 6,404 
Accrued federal, state, and local taxes
9,118 11,156 
Accrued amounts due to customers2,743 3,008 
Accrued professional fees3,699 2,083 
Accrued selling expenses311 507 
Self-funded insurance expense911 950 
Accrued travel123 224 
Other1,727 3,128 
Total$44,236 $54,451 

10—LONG-TERM OTHER LIABILITIES
Long-term other liabilities consist of (in thousands): 
 December 31,
 20202019
Long-term taxes payable$10,949 $12,330 
Non-current deferred revenue4,416 4,563 
CARES Act payroll tax payable1,354  
Long-term earnout payable1,286  
Finance lease liabilities446 599 
Other 124 
Total$18,451 $17,616 

11—DEBT AND CREDIT ARRANGEMENTS
We have a Credit Agreement with JP Morgan, Citibank and Wells Fargo. During the third quarter of 2020 we amended the terms of the Credit Agreement to extend the maturity date of the original agreement, reduce the aggregate value of the revolving facility, and amend certain covenants. The amended Credit Agreement provides for an aggregate $150 million of secured revolving credit facility. The Credit Agreement contains covenants relating to maintenance of books and records, financial reporting and notification, compliance with laws, maintenance of properties and insurance, and limitations on guaranties, investments, issuance of debt, lease obligations and capital expenditures, and is secured by virtually all of our assets. The Credit Agreement provides for events of default, including failure to pay any principal or interest when due, failure to perform or observe covenants, bankruptcy or insolvency events and the occurrence of a material adverse effect. We have no other significant credit facilities.
In addition to the customary restrictive covenants listed above, the Credit Agreement also contains financial covenants that require us to maintain a certain leverage ratio and fixed charge coverage ratio, each as defined in the Credit Agreement:
Leverage Ratio, as defined, to be no higher than 3.25 to 1.00.
Interest Coverage Ratio, as defined, to be at least 1.75 to 1.00 at all times.
As of December 31, 2020, we were in compliance with the Leverage Ratio and the Interest Coverage Ratio covenants as defined in the Credit Agreement.
As of December 31, 2020, we have $57.0 million outstanding under the Credit Agreement.
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
Pursuant to the terms of the Credit Agreement, the outstanding principal balance will bear interest at either (a) a fluctuating rate per annum equal to the Applicable Rate, as defined in the Credit Agreement, depending on the leverage ratio plus the higher of (i) the federal funds rate plus one-half of one percent per annum; (ii) the prime rate in effect on such a day; and (iii) the LIBOR rate plus one percent, or (b) a fluctuating rate per annum of LIBOR Rate plus the Applicable Rate, which ranges between 2.25% to 3.50%. The effective interest rate during the twelve months ended December 31, 2020 was 3.07%. The Credit Agreement matures on September 25, 2023, at which time all principal amounts outstanding under the Credit Agreement will be due and payable.

Long-term debt consists of (in thousands):
 December 31,
 20202019
Revolving credit facility$57,000 $55,000 
Debt issuance costs(1,160)(335)
Less: current portion of long-term debt50,000 35,000 
Total long-term debt$5,840 $19,665 
Maturities of long-term debt as of December 31, 2020 are as follows (in thousands):
 December 31,
 20202019
2021$ $55,000 
2022  
202357,000  
Thereafter  
Total$57,000 $55,000 
As of December 31, 2020, the carrying value of the total debt approximated fair market value.
12—FINANCIAL INSTRUMENTS AND DERIVATIVES
    We use interest rate swap derivative instruments to manage earnings and cash flow exposure resulting from changes in interest rates. These interest rate swaps apply a fixed interest rate on a portion of our expected LIBOR-indexed floating-rate borrowings. We held the following interest rate swaps as of December 31, 2020 (in thousands):


Hedged ItemCurrent Notional AmountDesignation DateEffective DateTermination DateFixed Interest RateFloating RateEstimated Fair Value
1-month USD LIBOR loan$40,000 May 31, 2018June 1, 2018September 23, 20212.611%1-month USD LIBOR$277 
Total interest rate derivatives designated as cash flow hedge$40,000 $277 

    We designated these derivative instruments as cash flow hedges. We assess the effectiveness of these derivative instruments and record the changes in the fair value of a derivative instrument designated as a cash flow hedge as unrealized gains or losses in accumulated other comprehensive income, net of tax. Once the hedged item affects earnings, the effective portion of any gain or loss will be reclassified to earnings. If the hedged cash flow does not occur, or if it becomes probable that it will not occur, we will reclassify the amount of any gain or loss on the related cash flow hedge to interest expense at that time.

    As of December 31, 2020, we expect that approximately $212 thousand of losses associated with the cash flow hedge, net of tax, could be reclassified from AOCI into earnings within the next twelve months.

13—RESERVE FOR PRODUCT WARRANTIES
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
We provide a warranty for products that is generally one year in length and in some cases, regulations may require us to provide repair or remediation beyond the typical warranty period. If any of the products contain defects, we may be required to incur additional repair and remediation costs. Service, repair and calibration services are provided by a combination of our owned facilities and vendors on a contract basis.
A warranty reserve is included in accrued liabilities for the expected future costs of servicing products. Additions to the reserve are based on management's best estimate of probable liability. We consider a combination of factors including material and labor costs, regulatory requirements, and other judgments in determining the amount of reserve. The reserve is reduced as costs are incurred to honor existing warranty and regulatory obligations.
As of December 31, 2020, we have accrued $5.2 million for product related warranties. The estimates we use in projecting future product warranty costs may prove to be incorrect. Any future determination that product warranty reserves are understated could result in increases to cost of sales and reductions in operating profits and results of operations.

14—STOCKHOLDERS’ EQUITY
Common Stock—We have 120,000,000 shares of common stock authorized at a par value or $0.001 per share. 
Preferred Stock—We have 10,000,000 shares of preferred stock authorized at a par value of $0.001 per share. In accordance with the terms of the amended and restated certificate of incorporation, the Board of Directors is authorized to provide for the issuance of one or more series of preferred stock, including increases or decreases to the series. The Board of Directors has the authority to set the rights, preferences, and terms of such shares. As of December 31, 2020, no shares of preferred stock were issued and outstanding.

15—EARNINGS PER SHARE
The components of basic and diluted EPS are as follows (in thousands, except per share amounts): 
 December 31,
202020192018
Net loss$(16,613)$(15,671)$(22,935)
Weighted average common shares33,562 33,696 33,111 
Dilutive effect of stock based awards   
Diluted Shares33,562 33,696 33,111 
Basic loss per share$(0.49)$(0.47)$(0.69)
Diluted loss per share$(0.49)$(0.47)$(0.69)
Shares excluded from calculation of diluted EPS66 104 343 

16—SHARE-BASED COMPENSATION
Share-Based Compensation Expense—We account for share-based compensation in accordance with ASC Topic 718, Compensation—Stock Compensation. Share-based compensation was recognized as follows in the consolidated statement of income (in thousands):
 December 31,
 202020192018
Cost of revenue$319 $264 $218 
Marketing and selling1,938 1,024 1,039 
Research and development1,099 800 801 
General and administrative6,171 6,227 14,945 
Total expense$9,527 $8,315 $17,003 
Stock Awards Plans—Natus' 2018 Stock Awards Plan (the “Plan”) provides for the granting of the following:
Incentive stock options to employees;
Non-statutory stock options to employees, directors and consultants;
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
Restricted stock awards and restricted stock units;
Market stock units;
Performance stock units;
Stock bonuses; and
Stock appreciation rights.
As of December 31, 2020, there were 1,863,120 shares available for future awards under the plan.
Under the Plan, stock options may be issued at not less than the fair market value of the common stock on the date of grant, as determined by the Board of Directors. Options issued under the Plan become exercisable as determined by the Board of Directors and expire no more than six years after the date of grant. Most options vest ratably over four years.
Stock Option Activity—Stock option activity under the stock awards plans for the year ended December 31, 2020 is summarized as follows:  
Number of
Shares
Weighted
Average
Exercise Price
Outstanding, December 31, 2019 (18,531 shares exercisable at a weighted average exercise price of $35.25 per share)74,089 $35.25 
Granted257,496 $20.68 
Exercised $ 
Forfeited $ 
Expired $ 
Outstanding, December 31, 2020 (37,062 shares exercisable at a weighted average exercise price of $35.25 per share)331,585 $ 
As of December 31, 2020, unrecognized compensation related to the unvested portion of stock options was approximately $1.8 million, which is expected to be recognized over a weighted average period of 3.9 years. The intrinsic value of options exercised, representing the difference between the closing stock price of common stock on the date of the exercise and the exercise price, in the years ended December 31, 2020, 2019 and 2018 was $0.0 million, $1.4 million, and $13.6 million, respectively.
As of December 31, 2020, there were: (i) 304,730 options vested and expected to vest with a weighted average exercise price of $24.15, an intrinsic value of $0.0 million, and a weighted average remaining contractual term of 8.4 years; and (ii) 37,062 options exercisable with a weighted average exercise price of $35.25, an intrinsic value of $0.0 million, and a weighted average remaining contractual term of 3.5 years.
Black-Scholes InputsThe fair value of option grants was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
 December 31,December 31,
 20202018
Weighted-average fair value of options granted$6.54 $11.03 
Expected life in years4.54.0
Risk-free interest rate0.2 %2.7 %
Expected volatility38 %35 %
Dividend yieldNoneNone
We did not grant any stock options during the years ended December 31, 2019.
The expected life of options is based primarily on historical share option exercise experience of the employees for options granted. All options are treated as a single group in the determination of expected life, as we do not currently expect substantially different exercise or post-vesting termination behavior among the employee population. The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant. Expected volatility is based primarily on historical volatility data of our common stock. We have no history or expectation of paying dividends on common stock.
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
Share-based compensation expense associated with options is based on awards ultimately expected to vest. At the time of an option grant, we estimate the expected future rate of forfeitures based on historical experience. These estimates are revised, if necessary, in subsequent periods if actual forfeiture rates differ from those estimates. If the actual forfeiture rate is lower than estimated we will record additional expense and if the actual forfeiture is higher than estimated we will record a recovery of prior expense.
Restricted Stock Awards ActivityThe following table summarizes the activity for restricted stock awards during the year ended December 31, 2020:  
SharesWeighted
Average
Grant
Date Fair
Value
Unvested at December 31, 2019339,762 $34.14 
Granted208,750 $29.74 
Vested(163,730)$33.89 
Forfeited(4,693)$33.44 
Unvested at December 31, 2020380,089 $31.84 
As of December 31, 2020, unrecognized compensation related to the unvested portion of stock awards was $6.9 million, which is expected to be recognized over a weighted average period of 2.2 years. The fair market value of outstanding restricted stock awards at December 31, 2020 was $7.6 million. For the restricted stock awards granted during the years ended December 31, 2020, 2019, 2018, the weighted average grant date fair values were $29.74, $31.53, and $37.22, respectively. The total grant date fair value of restricted stock awards vested during fiscal year 2020, 2019, and 2018 was $5.5 million, $4.7 million, and $12.9 million, respectively. For the restricted stock awards that vested during the years ended December 31, 2020, 2019, and 2018, the total intrinsic value was $4.8 million, $4.0 million, and $11.2 million, respectively.
Restricted Stock Units ActivityThe following table summarizes restricted stock units activity for the year ended December 31, 2020:  
SharesWeighted
Average
Grant
Date Fair
Value
Outstanding at December 31, 2019173,096 $38.62 
Awarded100,682 $35.42 
Released(14,033)$35.26 
Forfeited(47,144)$38.92 
Outstanding at December 31, 2020212,601 $37.27 
*Includes the PSUs and MSUs granted at the valuation date, which may be subject to additional awards or forfeitures depending on the outcome of the performance measures at the end of the performance period.
As of December 31, 2020, unrecognized compensation related to the unvested portion of stock units was $3.7 million, which is expected to be recognized over a weighted average period of 1.8 years. The aggregate intrinsic value of outstanding restricted stock units at December 31, 2020 was $4.3 million. For the restricted stock units granted during the years December 31, 2020, 2019, 2018, the weighted average grant date fair values were $35.42, $38.62, and $36.77, respectively. The total grant date fair value of restricted stock units vested during fiscal year 2020, 2019, and 2018 was $0.5 million, $1.4 thousand, and $10.0 million, respectively. For the restricted stock units that vested during the years ended December 31, 2020, 2019, and 2018, the total intrinsic value was $0.5 million, $1.3 million, and $8.7 thousand, respectively.
Employee Stock Purchase Plan—Under Natus' 2011 Employee Stock Purchase Plan (the “ESPP”), U.S. employees can elect to have salary withholdings of up to 15% of eligible compensation to a maximum of $10,625 per offering period, to purchase shares of common stock on April 30 and October 31 of each year. The purchase price for shares acquired under the ESPP is 85% of the fair market value on the last day of the offering period. As of December 31, 2020, there were 426,084 shares reserved for future issuance under the ESPP.
Because the ESPP does not have a “look back” feature, the compensation expense associated with the Plan is not measured by the use of the Black-Scholes pricing model, but rather by measuring the difference between the fair market value
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
of common stock on the last day of the offering period and the purchase price for the offering period, which is 85% of the fair market value. Compensation expense associated with the ESPP for the years ended December 31, 2020, 2019 and 2018, respectively, was $0.2 million, $0.2 million, and $0.3 million. 

17—OTHER INCOME (EXPENSE), NET
Other income (expense), net consists of (in thousands): 
 Years Ended December 31,
 202020192018
Interest income$11 $250 $334 
Interest expense(3,656)(4,941)(6,794)
Foreign currency gain (loss)1,988 (765)(800)
Other(215)(135)(438)
Total other expense, net$(1,872)$(5,591)$(7,698)

18—INCOME TAXES
Income (loss) before provision for income tax is as follows (in thousands): 
 Years Ended December 31,
 202020192018
U.S.$1,908 $(22,851)$(54,370)
Foreign(23,973)1,594 22,110 
Loss before provision for income tax$(22,065)$(21,257)$(32,260)

The components of income tax expense (benefit) for the years ended December 31, 2020, 2019 and 2018 (in thousands): 
 Years Ended December 31,
 202020192018
Current
U.S. Federal$(3,976)$(948)$(1,872)
U.S. State and local145 561 (59)
Non-U.S.1,241 8,386 5,732 
Total current tax expense (benefit)(2,590)7,999 3,801 
Deferred
U.S. Federal2,049 (7,491)(8,248)
U.S. State and local533 (816)(1,751)
Non-U.S.(5,444)(5,278)(3,127)
Total deferred tax benefit(2,862)(13,585)(13,126)
Total income tax benefit$(5,452)$(5,586)$(9,325)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities as of December 31, 2020 and 2019 are as follows (in thousands): 
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
 December 31,
 20202019
Deferred tax assets:
Net operating loss carryforwards$9,099 $3,035 
Credit carryforwards5,768 2,415 
Accruals deductible in different periods15,368 23,672 
Employee benefits1,016 1,554 
Operating leases3,967 4,643 
Total deferred tax assets35,218 35,319 
Valuation allowance(969)(606)
Total net deferred tax assets$34,249 $34,713 
Deferred tax liabilities:
Basis difference in fixed and intangible assets(13,214)(13,850)
Operating leases(2,970)(3,959)
Foreign earnings to be repatriated(800)(800)
Total deferred tax liabilities(16,984)(18,609)
Total net deferred tax assets$17,265 $16,104 
The income tax expense (benefit) in the accompanying statements of income differs from the provision calculated by applying the U.S. federal statutory income tax rate of 21% in 2020, 2019, and 2018 to income before taxes due to the following: 
 Years Ended December 31,
 202020192018
Federal statutory tax expense$(4,634)$(4,464)$(6,775)
State tax expense661 (300)(1,160)
Foreign taxes at rates less than U.S. rates1,050 (2,205)(1,071)
Equity compensation1,161 824 519 
Tax credits(1,641)(1,428)(2,021)
Uncertain tax position3,002 2,910 1,311 
Lapse of statute(2,718)(3,961)(1,214)
Repatriation tax net of foreign tax credits 172  
Federal NOL Carryback(1,621)  
Tax audits(224) 658 
Withholding taxes 1,107 1,185 
Global intangible low-taxed income net of foreign tax credits 1,601 2,326 
Return to provision(946)560 (1,417)
SAB 118 adjustments  (2,676)
Other458 (402)1,010 
Total expense (benefit)$(5,452)$(5,586)$(9,325)
At December 31, 2020, we had U.S. federal net operating loss carryforwards of $8.3 million, which will carryforward indefinitely. At December 31, 2020, we had U.S. state net operating loss carryforwards of $31.9 million, of which immaterial portions will begin to expire in 2021 and the majority have long carryforward periods ranging primarily from 10 years to indefinite. At December 31, 2020, we had U.S. federal R&D credit carryforwards of $4.3 million, which will begin to expire in 2038 and U.S. state R&D credit carryforwards of $0.9 million, which will begin to expire in 2021. At December 31, 2020, we had $0.1 million of U.S. foreign tax credit carryforwards that can be used to offset future U.S. tax liabilities related to foreign source taxable income. The foreign tax credits will start to expire in 2022.
At December 31, 2020, certain foreign subsidiaries had deferred tax assets attributable to net operating loss carryforwards as follows: $1.0 million in France, $2.4 million in Denmark, $1.3 million in Canada, $0.4 million in Ireland, and $0.7 million in Germany. These foreign net operating loss carryforwards, if not utilized to offset taxable income in future
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
periods, will begin to expire in various amounts beginning in 2026 with the most material amounts having long carryforward periods ranging from 20 years to indefinite.
A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Accordingly, valuation allowances of $1.0 million and $0.6 million were recorded at December 31, 2020 and 2019, respectively. The increase of $0.4 million in valuation allowance was primarily due to a valuation allowance recorded against certain U.S. state R&D credits and U.S. foreign tax credits, which are expected to expire before fully utilized.
The realizability of the deferred tax assets is primarily dependent on our ability to generate sufficient taxable income in future periods. We record net deferred tax assets to the extent it is more likely than not that the assets will be realized. The ultimate recovery of deferred tax assets is dependent upon the amount and timing of future taxable income and other factors such as the taxing jurisdiction in which the assets are to be recovered. A high degree of judgment is required to determine if, and the extent to which, valuation allowances should be recorded against deferred tax assets. In making such determinations, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. Based on all available evidence, both positive and negative, and the weight of that evidence to the extent such evidence can be objectively verified, we determine whether it is more likely than not that all or a portion of the deferred tax assets will be realized.
As of December 31, 2020, the balance sheet reflected U.S. deferred tax assets of $25.1 million, net of $0.3 million federal and state valuation allowances. These U.S. deferred tax assets consist primarily of $3.4 million of federal and state net operating loss carryforwards, $5.1 million of federal and state R&D credit carryforwards, and $16.8 million of deductible temporary differences. Detailed valuation allowance analysis was completed as required in ASC 740. After weighing all the positive and negative evidence we concluded that it is more likely than not that the U.S. deferred tax assets will be realized and there is no valuation allowance required, except for a small portion related to $0.2 million of state R&D credits and $0.1 million of U.S. foreign tax credits which we have concluded are not recoverable. The valuation allowance analysis primarily included considering the following items:
Cumulative three-year income or loss on an adjusted basis - We computed a three-year cumulative loss for Natus U.S. but have supported the conclusion no additional valuation allowance was required upon further analysis. The additional analysis resulted in three-year cumulative earnings after adjustments was made for certain one-time nonrecurring items. The one-time items were primarily driven by specific One Natus reorganization impacts which include certain product rationalizations.
Current U.S. income (loss) before provision (benefit) for income tax and historical utilization of deferred tax assets - Our ability to generate positive income before tax in 2020 following the One Natus reorganization and taking into account the impact of COVID-19 during the year was considered objectively verifiable positive evidence of the impact of One Natus reorganization on profitability. In addition, Natus U.S. has a history of using all its net operating losses and credit carryforwards.
Lengthy carryforward periods for deferred tax assets - The carryforward period for deferred tax assets, particularly U.S. federal and state net operating losses and R&D credit, in general are long (e.g. 20 years for R&D credit carryforwards) or indefinite (e.g. for federal net operating losses).
Future sources of taxable income - While more subjective and requiring an increased level of judgement, we forecasted future sources of taxable income which were determined sufficient to support the assertion that the deferred tax assets were more likely than not to be utilized in the future. Key judgments included in our forecast include the generation of a sufficient level of U.S. profit before tax on a prospective basis and the existence of reasonably predictable levels of permanent adjustments used in calculating taxable income over the forecast period. The assumptions used in our forecast of future taxable income were developed in considering the impact the One Natus reorganization has had on our trend in U.S. earnings. the generation of taxable income in the U.S. in 2020, and conservative expectations as to future results as our business recover from impacts of the COVID-19 pandemic.
The analysis of foreign deferred tax assets was also completed following the same principles. As such, it was concluded that the valuation allowance of $0.6 million recorded in 2019, that relates primarily to net operating losses and capital losses in Canada, should be retained in 2020 since the benefit is not expected to be realized. No valuation allowance was booked for the remaining foreign deferred tax assets as the benefits are expected to be realized in the lengthy carryforward periods.
There are no changes to the position on our permanent reinvestment of earnings from foreign operations. As of December 31, 2020, we intend to distribute all of the earnings from Excel-Tech and Natus Ireland in excess of their operational needs. We have recorded a deferred tax liability of $0.8 million accordingly for 5% Canadian withholding tax on the expected
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
Excel-Tech distribution to Natus Ireland. Natus Ireland has 0% withholding tax under domestic exemption and therefore, no liability has been recorded. We intend to permanently reinvest the earnings of remaining foreign subsidiaries. The other remaining foreign subsidiaries have both the intent and ability to indefinitely reinvest its undistributed earnings.
Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) is as follows (in thousands): 
Balance at January 1, 2018$7,017 
Increases for tax positions related to prior years526 
Increases for tax positions related to the current year699 
Decrease due to lapse of statutes of limitations(965)
Foreign exchange difference(50)
Balance at January 1, 2019$7,227 
Decreases for tax positions related to prior years(48)
Increases for tax positions related to the current year495 
Decrease due to lapse of statutes of limitations(3,763)
Foreign exchange difference6 
Balance at January 1, 2020$3,917 
Increases for tax positions related to prior years2,454 
Increases for tax positions related to the current year104 
Lapse of statutes of limitations(2,416)
Foreign exchange difference83 
Balance at December 31, 2020$4,142 
For the year ended December 31, 2020, our net unrecognized tax benefits increased by $0.2 million, resulting in a corresponding $0.2 million increase in income tax expense. The increase was primarily attributable to the increase in uncertain tax positions related to the current year in certain jurisdictions.
The unrecognized tax benefits for the tax years ended December 31, 2020, 2019 and 2018 were $4.1 million, $3.9 million and $7.2 million, respectively which include $3.8 million, $3.6 million and $6.5 million, respectively that would impact the effective tax rate if recognized.
We expect a range from zero to $0.2 million of unrecognized tax benefit that will impact the effective tax rate in the next 12 months due to the lapse of statute of limitations provided that no taxing authority conducts a new examination.
At December 31, 2020, 2019 and 2018, we had cumulatively accrued $0.5 million, $0.4 million, and $0.5 million for estimated interest and penalties related to uncertain tax positions. We record interest and penalties related to unrecognized tax positions as a component of income tax expense (benefit), which totaled approximately $130.0 thousand, $(80.0) thousand, and $(80.0) thousand for the years ended December 31, 2020, 2019, and 2018, respectively.
We are currently unaware of any uncertain tax positions that could result in significant additional payments, accruals, or other material deviation in this estimate over the next 12 months.
Our tax returns remain open to examination as follows: U.S. federal, 2016 through 2019; U.S. states, generally 2015 through 2019; and significant foreign jurisdictions, generally 2015 through 2019.

19—EMPLOYEE BENEFIT PLAN
We offer pre-tax and after-tax 401(k) savings plan options under which eligible U.S. employees may elect to have a portion of their salary deferred and contributed to the plan. Employer matching contributions are determined by management and are discretionary. Employer matching contributions were $3.2 million, $3.6 million, and $4.7 million respectively, in the years ended December 31, 2020, 2019, and 2018. For new hires, employer contributions vest ratably over the first two years of employment.

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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
20—SEGMENT, CUSTOMER, AND GEOGRAPHIC INFORMATION
We determine our reportable segments by first identifying our operating segments, and then by assessing whether any components of these segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. Historically, our operating segments were based on its three strategic business units. In January 2019 we announced the transition of our operating structure from three strategic business units to a single, unified company with globally led operational teams in Sales and Marketing, Manufacturing, Research and Development, Quality, and General and Administrative functions.
Following the reorganization, we operate as one operating segment and one reportable segment, which provides medical device solutions focused on the diagnosis and treatment of central nervous and sensory system disorders for patients of all ages. Financial information is reviewed on a consolidated basis for purposes of making operating decisions and assessing financial performance. Consolidated financial information is accompanied by disaggregated information about revenues by end market and geographic region. We do not assess the performance of our end markets or geographic regions on measures of profit or loss, or asset-based metrics. We have disclosed the revenues for each end market and geographic region to provide the reader of the financial statements transparency into our operations.
The following tables present revenue and long-lived asset information by end market and geographic region. Revenue is based on the destination of the shipments and long-lived assets are based on the physical location of the assets (in thousands):
 
 Years Ended December 31,
 202020192018
Consolidated Revenue:
United States$252,496 $292,400 $300,860 
Foreign countries163,188 202,775 230,031 
$415,684 $495,175 $530,891 
Revenue by End Market:
Neuro
Devices and Systems$179,881 $220,306 $200,762 
Supplies56,275 66,059 67,025 
Services 871 12,000 
Total Neuro Revenue$236,156 $287,236 $279,787 
Newborn Care
Devices and Systems$51,894 $53,465 $72,807 
Supplies36,174 38,264 40,669 
Services16,566 19,183 20,396 
Total Newborn Care Revenue$104,634 $110,912 $133,872 
Hearing & Balance
Devices and Systems$70,711 $92,050 $110,597 
Supplies4,183 4,977 6,635 
Total Hearing & Balance Revenue$74,894 $97,027 $117,232 
Total Revenue$415,684 $495,175 $530,891 
Long-lived asset information by geographic region is as follows (in thousands):
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Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
Years Ended December 31,
20202019
Property and equipment, net:
United States$10,998 $11,868 
Ireland6,716 5,732 
Canada3,775 4,140 
Denmark1,787 1,799 
Other foreign countries1,240 1,163 
$24,516 $24,702 
During the years ended December 31, 2020, 2019 and 2018, no single customer or foreign country contributed to more than 10% of revenue.

21—COMMITMENTS AND CONTINGENCIES
Purchase commitments—We have various purchase obligations for goods or services totaling $39.6 million at December 31, 2020, which are expected to be paid $39.1 million in 2021 and $0.5 million thereafter.
Legal matters—We currently are, and may from time to time become, a party to various legal proceedings or claims that arise in the ordinary course of business. Our managements reviews these matters if and when they arise and believes that the resolution of any such matters currently known will not have a material effect on our results of operations or financial position.

22—FAIR VALUE MEASUREMENTS
ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value is defined under ASC 820 as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes the following three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
Level 1—Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
On April 1, 2019, as part of the sale of our Argentinian subsidiary, Medix, we provided a loan to Medix for $2.2 million. This asset was measured at fair value less costs to sell as of December 31, 2019 and is classified as Level 3 asset. The loan is classified within other assets on our consolidated balance sheet. Subsequent changes in the fair value of the loan receivable are recorded within our income statement as an operating expense.
December 31, 2019AdditionsPaymentsAdjustmentsDecember 31, 2020
Other assets:
Loan receivable$1,906 $ $ $(1,180)$726 
Total$1,906 $ $ $(1,180)$726 
The derivative financial instruments described in Note 12 are measured at fair value on a recurring basis and are presented on the consolidated balance sheets at fair value. The table below presents the fair value of the derivative financial instruments as well as the classification on the consolidated balance sheet (in thousands):
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2019, 2018 and 2017
December 31, 2019AdditionsPaymentsAdjustmentsDecember 31, 2020
Liabilities:
Interest Rate Swap$313 $ $ $(36)$277 
Total$313 $ $ $(36)$277 
We estimate the fair value of the interest rate swaps by calculating the present value of the expected future cash flows of each swap. The calculation incorporated the contractual terms of the derivatives, observable market interest rates which are considered to be Level 2 inputs, and credit risk adjustments, if any, to reflect the counterpart's as well as our nonperformance risk. As of December 31, 2020, there have been no events of default under the interest rate swap agreement.
The following financial instruments are not measured at fair value on the consolidated balance sheet as of December 31, 2020 and 2019, but require disclosure of fair values: cash and cash equivalents, accounts receivable, and accounts payable. The carrying value of these financial instruments approximates fair values because of the relatively short maturity.
The carrying amount of our short-term and long-term debt approximates fair value based on Level 2 inputs since the debt carries a variable interest rate that is tied to the current LIBOR rate plus a spread.

23—SALE OF CERTAIN SUBSIDIARY
    We divested our wholly owned subsidiary, Medix, on April 2, 2019 via a stock sale to the local managing director, a related party. In exchange for the stock, we received $2.5 thousand in cash and provided Medix with a $2.2 million limited-recourse loan. The loan is secured by a real estate assets of Medix and repayment is conditional upon the sale of the real estate asset. The fair market value of the loan is assessed quarterly and adjusted as necessary to reflect any changes in market environment or the value of the building. See Note 22 to the Condensed Consolidated Financial Statements for fair market value of the loan receivable.

    The held for sale criteria under GAAP was met in the first quarter of 2019. As such, we completed an asset impairment analysis which resulted in the full impairment of all assets held for sale. We recognized an impairment loss of $24.6 million which included an accrual for the anticipated realization of deferred foreign currency related translation adjustments in accumulated other comprehensive income of $24.8 million, net of tax, and an adjustment of $4.6 million for assets with a book value in excess of their fair market value. Included in the year ended December 31, 2019 is the impact of the sale of Medix, which was completed as of June 30, 2019, and the deferred foreign currency related translation adjustments previously in accumulated other comprehensive income have been released from the balance sheet along with the held for sale accrual.

ITEM 16.    Form 10-K Summary
Not Applicable.

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Table of Contents
EXHIBIT INDEX 
  Incorporated By Reference
Exhibit No.ExhibitFilingExhibit No.File No.File Date
S-13.1.1333-441388/18/2000
8-K3.1 000-330019/13/2012
8-K3.1 000-330016/7/2019
8-K3.1 000-3300112/16/2019
S-1/A4.1 333-441382/9/2001
8-A3.1.2000-330019/6/2002
10-K4.3 000-3300112/31/2019
S-110.1 333-441388/18/2000
8-K10.1 000-3300112/18/2018
8-K10.1.1000-3300112/18/2018
8-K10.1.2000-3300112/18/2018
8-K10.1.3000-3300112/18/2018
8-K10.1.4000-3300112/18/2018
8-K10.1 000-330011/4/2006
S-110.3.1333-441388/18/2000
10-Q10.2 000-330018/9/2006
10-K10.2.3000-330013/14/2008
10-Q10.02 000-330015/9/2008
S-110.4.1333-441388/18/2000
S-110.15 333-441382/9/2001
S-110.15.1333-441382/9/2001



Table of Contents
  Incorporated By Reference
Exhibit No.ExhibitFilingExhibit No.File No.File Date
8-K10.2 000-330011/4/2006
14-A— 000-330014/20/2011
10-Q10.1 000-3300111/7/2011
10-Q10.2 000-3300111/7/2011
10-Q10.3 000-3300111/7/2011
14-A— 000-330014/20/2011
14-A— 000-330014/20/2011
10-K10.10 000-330013/10/2009
10-K000-330013/16/2015
8-K99.1 000-330014/22/2013
10-Q10.16 000-330018/8/2018
8-K10.1 000-3300110/9/2015
10-Q000-330012/29/2016
10-Q10.2 000-3300111/3/2016
10-Q10.1 000-3300111/3/2016
10-Q10.3 000-3300111/3/2016
8-K99.1 000-330018/29/2018
10-Q10.18 000-3300111/8/2018
10-Q10.1 000-330019/30/2020


Table of Contents

  Incorporated By Reference
Exhibit No.ExhibitFilingExhibit No.File No.File Date
101The following financial information from Natus Medical Incorporated Annual Report on Form 10-K for the fiscal year ended December 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2020 and December 31, 2019, (ii) Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018 (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018, (v) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, 2019 and 2018, and (vi) the Notes to Consolidated Financial Statements.
104The cover page of the Annual Report on Form 10-K formatted in Inline XBRL (included in Exhibit 101).

 *    Indicates a management contract or compensatory plan or arrangement