ntus-20210930

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-33001

NATUS MEDICAL INCORPORATED

(Exact name of registrant as specified in its charter)


Delaware						77-0154833
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

6701 Koll Center Parkway, Suite 120, Pleasanton, CA 94566

(Address of principal executive offices) (Zip Code)

(925) 223-6700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	NTUS	The Nasdaq Stock Market LLC
		(The Nasdaq Global Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” or an “emerging growth company” in Rule 12b-2 of the Exchange Act.:

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-accelerated Filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of issued and outstanding shares of the registrant’s Common Stock, $0.001 par value, as of October 29, 2021 was 34,152,317.

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NATUS MEDICAL INCORPORATED

TABLE OF CONTENTS


		Page No.
PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 (unaudited)	3

	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020 (unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2021 and 2020 (unaudited)	5

	Condensed Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2021 and 2020 (unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (unaudited)	8

	Notes to Condensed Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27

Item 4.	Controls and Procedures	27

PART II.	OTHER INFORMATION	28

Item 1.	Legal Proceedings	28

Item 1A.	Risk Factors	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 5.	Other Information	29

Item 6.	Exhibits	30

Signatures		31

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share amounts)


	September 30, 2021		December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	68,779	$	82,082

Accounts receivable, net of allowance for doubtful accounts of $5,980 in 2021 and $6,213 in 2020	97,370		93,133
Inventories	71,545		75,650
Prepaid expenses and other current assets	23,977		20,837

Total current assets	261,671		271,702
Property and equipment, net	22,837		24,516
Operating lease right-of-use assets	9,946		11,669
Intangible assets, net	73,602		92,741
Goodwill	149,293		151,299
Deferred income tax	26,296		27,563
Other assets	17,606		20,904
Total assets	$	561,251	$	600,394
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	28,322	$	23,429
Current portion of long-term debt	—		50,000
Accrued liabilities	44,575		44,236
Deferred revenue	25,737		21,308
Current portion of operating lease liabilities	5,167		6,779

Total current liabilities	103,801		145,752
Other liabilities	17,732		18,451
Operating lease liabilities	7,370		8,959
Long-term debt, net of current portion	—		5,840
Deferred income tax	9,826		10,298
Total liabilities	138,729		189,300
Stockholders’ equity:
Common stock, $0.001 par value, 120,000,000 shares authorized; shares issued and outstanding 34,152,623 in 2021 and 33,911,703 in 2020	350,457		342,828
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding in 2021 and 2020	—		—
Retained earnings	82,742		71,309
Accumulated other comprehensive loss	(10,677)		(3,043)
Total stockholders’ equity	422,522		411,094
Total liabilities and stockholders’ equity	$	561,251	$	600,394

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue	$	113,877	$	102,803	$	344,782	$	296,966
Cost of revenue	44,487		47,160		139,019		134,665
Intangibles amortization	1,642		8,117		5,126		11,440
Gross profit	67,748		47,526		200,637		150,861
Operating expenses:
Marketing and selling	28,260		26,035		86,719		79,567
Research and development	14,267		14,670		42,556		46,574
General and administrative	12,853		12,384		40,316		36,754
Intangibles amortization	3,681		4,025		11,497		11,330
Restructuring	142		350		469		1,842
Total operating expenses	59,203		57,464		181,557		176,067
Income (loss) from operations	8,545		(9,938)		19,080		(25,206)
Other expense, net	(1,048)		(947)		(3,355)		(3,198)
Income (loss) before provision for (benefit from) income tax	7,497		(10,885)		15,725		(28,404)
Provision for (benefit from) income taxes	1,924		(1,569)		4,292		(6,588)
Net income (loss)	$	5,573	$	(9,316)	$	11,433	$	(21,816)
Net income (loss) per share:
Basic	$	0.17	$	(0.28)	$	0.34	$	(0.65)
Diluted	$	0.16	$	(0.28)	$	0.34	$	(0.65)
Weighted average shares used in the calculation of net income (loss) per share:
Basic	33,638		33,828		33,649		33,577
Diluted	33,865		33,828		33,877		33,577

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(in thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income (loss)	$	5,573	$	(9,316)	$	11,433	$	(21,816)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	(3,517)		6,915		(7,844)		6,013
Interest rate swap designated as a cash flow hedge	—		68		119		(42)


Reclassification of losses on interest rate swap designated as a cash flow hedge	—		—		91		—
Other comprehensive income (loss), net of tax	(3,517)		6,983		(7,634)		5,971
Comprehensive income (loss)	$	2,056	$	(2,333)	$	3,799	$	(15,845)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(unaudited)

(in thousands, except per share amounts)


	Common Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Stockholders’ Equity
	Shares	Amount
Balances, December 31, 2020	33,911,703	$	342,828	$	71,309	$	(3,043)	$	411,094

Vesting of restricted stock units	19,650	—		—		—		—
Net issuance of restricted stock awards	222,899	—		—		—		—

Stock-based compensation expense	—	3,018		—		—		3,018

Taxes paid related to net share settlement of equity awards	(57,357)	(1,150)		—		—		(1,150)

Other comprehensive loss	—	—		—		(6,426)		(6,426)
Net income	—	—		2,396		—		2,396
Balances, March 31, 2021	34,096,895	$	344,696	$	73,705	$	(9,469)	$	408,932

Net issuance of restricted stock awards	10,573	—		—		—		—
Employee stock purchase plan	28,158	612		—		—		612
Stock-based compensation expense	—	2,604		—		—		2,604

Taxes paid related to net share settlement of equity awards	(3,520)	(94)		—		—		(94)

Other comprehensive income	—	—		—		2,309		2,309
Net income	—	—		3,464		—		3,464
Balances, June 30, 2021	34,132,106	$	347,818	$	77,169	$	(7,160)	$	417,827

Net issuance of restricted stock awards	20,934	—		—		—		—

Stock-based compensation expense	—	2,649		—		—		2,649

Taxes paid related to net share settlement of equity awards	(417)	(10)		—		—		(10)

Other comprehensive loss	—	—		—		(3,517)		(3,517)
Net income	—	—		5,573		—		5,573
Balances, September 30, 2021	34,152,623	$	350,457	$	82,742	$	(10,677)	$	422,522

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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	Common Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Stockholders’ Equity
	Shares	Amount
Balances, December 31, 2019	34,148,700	$	344,476	$	87,922	$	(16,275)	$	416,123

Vesting of restricted stock units	14,033	—		—		—		—
Net issuance of restricted stock awards	162,212	—		—		—		—

Stock-based compensation expense	—	2,198		—		—		2,198
Repurchase of company stock	(465,117)	(10,495)		—		—		(10,495)
Taxes paid related to net share settlement of equity awards	(57,695)	(1,883)		—		—		(1,883)

Other comprehensive loss	—	—		—		(4,193)		(4,193)
Net loss	—	—		(3,597)		—		(3,597)
Balances, March 31, 2020	33,802,133	$	334,296	$	84,325	$	(20,468)	$	398,153

Net issuance of restricted stock awards	40,483	—		—		—		—
Employee stock purchase plan	30,955	658		—		—		658
Stock-based compensation expense	—	2,427		—		—		2,427

Taxes paid related to net share settlement of equity awards	(1,848)	(43)		—		—		(43)

Other comprehensive income	—	—		—		3,181		3,181
Net loss	—	—		(8,903)		—		(8,903)
Balances, June 30, 2020	33,871,723	$	337,338	$	75,422	$	(17,287)	$	395,473

Net issuance of restricted stock awards	(856)	—		—		—		—

Stock-based compensation expense	—	2,337		—		—		2,337

Taxes paid related to net share settlement of equity awards	(480)	(10)		—		—		(10)

Other comprehensive income	—	—		—		6,983		6,983
Net loss	—	—		(9,316)		—		(9,316)
Balances, September 30, 2020	33,870,387	$	339,665	$	66,106	$	(10,304)	$	395,467

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Nine Months Ended September 30,
	2021		2020
Operating activities:
Net income (loss)	$	11,433	$	(21,816)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for losses on accounts receivable	273		1,158
Impairment of intangible assets	—		6,678
Depreciation and amortization	21,337		20,989
(Gain) loss on disposal of property and equipment	(1,516)		149
Warranty reserve	1,523		1,129
Share-based compensation	8,271		7,059
Loss on commencement of sales-type leases	3		1,861
Loss on equity method investment	443		—
Changes in operating assets and liabilities:
Accounts receivable	(428)		30,367
Inventories	3,655		(6,417)
Prepaid expenses and other assets	(3,878)		(11,078)
Accounts payable	5,229		(19)
Accrued liabilities	(822)		(13,844)
Deferred revenue	4,629		(941)
Deferred income tax	1,060		1,826

Net cash provided by operating activities	51,212		17,101
Investing activities:

Purchase of property and equipment	(2,949)		(7,617)


Purchase of equity method investments	(1,000)		—
Proceeds from sale of property and equipment	2,674		—
Net cash used in investing activities	(1,275)		(7,617)
Financing activities:
Proceeds from stock option exercises and Employee Stock Purchase Program purchases	612		658

Repurchase of common stock	—		(10,495)
Taxes paid related to net share settlement of equity awards	(1,254)		(1,936)
Principal payments of financing lease liability	(326)		(415)

Proceeds from borrowings	—		60,000
Deferred debt issuance costs	—		(1,175)
Payments on borrowings	(57,000)		(48,000)
Net cash used in financing activities	(57,968)		(1,363)
Exchange rate changes effect on cash and cash equivalents	(5,272)		3,118
Net increase (decrease) in cash and cash equivalents	(13,303)		11,239
Cash and cash equivalents, beginning of period	82,082		63,297
Cash and cash equivalents, end of period	$	68,779	$	74,536
Supplemental disclosure of cash flow information:
Cash paid for interest	$	1,065	$	2,605
Cash paid for income taxes	$	3,172	$	6,489
Non-cash investing activities:
Property and equipment included in accounts payable	$	41	$	(59)
Inventory transferred to property and equipment	$	805	$	899
Transfer of leased assets to sales-type leases	$	13	$	4,063

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1 - Basis of Presentation and Significant Accounting Policies

The accompanying interim condensed consolidated financial statements of Natus Medical Incorporated (“we,” “us,” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Except where noted below within Note 1, the accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.

Interim financial reports are prepared in accordance with the rules and regulations of the Securities and Exchange Commission; accordingly, the reports do not include all of the information and notes required by GAAP for annual financial statements. The interim financial information is unaudited, and reflects all normal adjustments that are, in the opinion of management, necessary for the fair presentation of our financial position, results of operations, and cash flows for the interim periods presented. We have made certain reclassifications to the prior period to conform to current period presentation. The consolidated balance sheet as of December 31, 2020 was derived from audited financial statements but does not include all disclosures required by GAAP. The accompanying financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.

Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The accompanying condensed consolidated financial statements include our accounts and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Impact of COVID-19 on Our Financial Statements

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended extensive containment and mitigation measures worldwide. Since that time, we established what we believe are the necessary protocols to operate safely in our manufacturing facilities, virtually engage with customers and suppliers and work remotely when possible. Our businesses continue to recover as sales in our Neuro and Newborn Care business have returned to pre-pandemic levels. Sales for our Hearing & Balance business, which are more concentrated in Europe, have partially recovered but remain below pre-pandemic levels.

Various government programs have been established to provide financial relief for businesses affected by COVID-19 including the Canada Emergency Wage Subsidy ("CEWS") and Canada Emergency Rent Subsidy ("CERS") under the COVID-19 Economic Response Plan in Canada. We received $3.9 million for payroll subsidies under CEWS and CERS during the nine months ended September 30, 2021. Our policy is to account for these subsidies in the same manner as an offset to the expense they relate to in the period in which we are reasonably assured to receive payment. For the nine months ended September 30, 2021 we recognized reductions of $0.5 million in cost of sales, $1.6 million in marketing and selling expense, $1.6 million in research and development expense, and $0.2 million in general and administrative expense in the condensed consolidated statements of operations for these subsidies. As of September 30, 2021 we have collected all amounts recorded and continue to seek additional relief as applicable.

We have assessed various accounting estimates and other matters, including those that require consideration of forecasted financial information, in context of the unknown future impacts of COVID-19 using information that is reasonably available to us at this time. The accounting estimates and other matters we assessed include, but were not limited to, our allowance for doubtful accounts, inventory and warranty reserves, stock-based compensation, goodwill and other long-lived assets, financial assets, valuation allowances for tax assets and revenue recognition. While based on our current assessment of these estimates there was not a material impact to our consolidated financial statements as of and for the three and nine months ended September 30, 2021, as additional information becomes available to us, our future assessment of these estimates, including our expectations at the time regarding

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the duration, scope and severity of the pandemic, as well as other factors, could materially and adversely impact our consolidated financial statements in future reporting periods.

Recently Adopted Accounting Pronouncements

In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842): Lessors-Certain Leases with Variable Lease Payments. This update addresses stakeholders' concerns by amending the lease classification requirements for lessors to align them with practice under Topic 840. Lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if the lease would have been classified as a sales-type lease or a direct financing lease in accordance with 842-10-25-2 through 25-3 and the lessors would have otherwise recognized a day-one loss. ASU 2021-05 is effective for fiscal years beginning after December 15, 2021. We have early adopted the ASU on a prospective basis in the third quarter of the current fiscal year. The adoption of ASU 2021-05 did not have an impact on our consolidated financial statements.

2 - Revenue

Unbilled accounts receivable (“AR”) for the periods presented primarily represent the difference between revenue recognized based on the relative selling price of the related performance obligations and the contractual billing terms in the arrangements. Deferred revenue for the periods presented primarily relates to extended service contracts, installation, and training, for which the service fees are billed in advance. The associated deferred revenue is generally recognized ratably over the extended service period or when installation and training are complete.

The following table summarizes the changes in the unbilled AR and deferred revenue balances for the nine months ended September 30, 2021 (in thousands):


Unbilled AR, December 31, 2020	$	1,925
Additions	145
Transferred to trade receivable	(350)
Unbilled AR, September 30, 2021	$	1,720


Deferred revenue, December 31, 2020	$	25,723
Additions	22,089
Revenue recognized	(17,535)
Deferred revenue, September 30, 2021	$	30,277

At September 30, 2021, the short-term portion of deferred revenue of $25.7 million and the long-term portion of $4.6 million are included in deferred revenue and other long-term liabilities, respectively, in the consolidated balance sheet. As of September 30, 2021, we expect to recognize revenue associated with deferred revenue of approximately $10.5 million in 2021, $15.9 million in 2022, $2.1 million in 2023, $1.2 million in 2024, and $0.6 million thereafter.

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3 - Earnings Per Share

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income (loss)	$	5,573	$	(9,316)	$	11,433	$	(21,816)
Weighted average common shares	33,638		33,828		33,649		33,577
Dilutive effect of stock based awards	227		—		228		—
Diluted shares	33,865		33,828		33,877		33,577
Basic earnings (loss) per share	$	0.17	$	(0.28)	$	0.34	$	(0.65)
Diluted earnings (loss) per share	$	0.16	$	(0.28)	$	0.34	$	(0.65)
Shares excluded from calculation of diluted EPS	—		13		—		61

4 - Allowance for Doubtful Accounts

We estimate the lifetime allowance for doubtful, potentially uncollectible, accounts receivable upon their inception based on historical collection experience within the markets in which we operate, customer-specific information such as bankruptcy filings or customer liquidity problems, current conditions, and reasonable and supportable forecasts about the future.

Our allowance for doubtful accounts is presented as a reduction to accounts receivable on our consolidated balance sheet. When all internal efforts have been exhausted to collect the receivable, it is written off and relieved from the reserve.

The details of activity in allowance for doubtful accounts are as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Balance, beginning of period	$	6,130	$	7,539	$	6,213	$	7,384
Additions charged to expense	(14)		209		273		1,158
Write-offs charged against allowance	(136)		(1,079)		(506)		(1,873)

Balance, end of period	$	5,980	$	6,669	$	5,980	$	6,669

5 - Inventories

Inventories consist of the following (in thousands):


	September 30, 2021		December 31, 2020
Raw materials and subassemblies	$	21,349	$	22,583
Work in process	2,746		2,294
Finished goods	59,535		65,695
Total inventories	83,630		90,572
Less: Non-current inventories	(12,085)		(14,922)
Inventories, current	$	71,545	$	75,650

As of September 30, 2021 and December 31, 2020, we have classified $12.1 million and $14.9 million, respectively, of inventories as other assets. This inventory consists primarily of service components used to repair products held by customers pursuant to warranty obligations and extended service contracts, including service

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components for products we no longer sell, inventory purchased for lifetime buys, and inventory that is turning over at a slow rate. We believe these inventories will be utilized for their intended purpose.

6 – Intangible Assets

The following table summarizes the components of gross and net intangible asset balances (in thousands):


	September 30, 2021								December 31, 2020
	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	$	109,885	$	(12,453)	$	(68,245)	$	29,187	$	112,138	$	(12,480)	$	(64,203)	$	35,455
Customer related	91,907		(50)		(56,703)		35,154		94,526		(50)		(51,247)		43,229
Trade names	46,348		(3,575)		(35,895)		6,878		47,058		(3,677)		(31,890)		11,491
Internally developed software	13,281		—		(12,961)		320		13,281		—		(12,845)		436
Patents	2,735		(133)		(2,602)		—		2,810		(133)		(2,677)		—
Service agreements	1,190		—		(1,149)		41		1,190		—		(1,119)		71
Definite-lived intangible assets	$	265,346	$	(16,211)	$	(177,555)	$	71,580	$	271,003	$	(16,340)	$	(163,981)	$	90,682
Intangible assets with indefinite lives:
Intellectual Property	$	2,022	$	—	$	—	$	2,022	$	2,059	$	—	$	—	$	2,059
Total intangible assets	$	267,368	$	(16,211)	$	(177,555)	$	73,602	$	273,062	$	(16,340)	$	(163,981)	$	92,741

Finite-lived intangible assets are amortized over their weighted average lives, which are 14 years for technology, 10 years for customer related intangibles, 7 years for trade names, 6 years for internally developed software, 13 years for patents, 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.

Amortization expense related to intangible assets with definite lives was as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Technology	$	1,686	$	8,162	$	5,259	$	11,572
Customer related	2,168		2,204		6,904		6,468
Trade names	1,459		1,767		4,431		4,700
Internally developed software	24		51		116		188

Service agreements	10		10		30		30
Total amortization	$	5,347	$	12,194	$	16,740	$	22,958

The amortization expense amounts shown above include internally developed software not held for sale of $24 thousand and $72 thousand for the three and nine months ended September 30, 2021, respectively, which is recorded within our income statement as a general and administrative operating expense. The amortization expense amounts shown above include internally developed software held for sale of zero and $44 thousand for the three and

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nine months ended September 30, 2021, respectively, which is recorded within our income statement as cost of goods sold.

Expected amortization expense related to definite-lived amortizable intangible assets is as follows (in thousands):


Three months ending December 31, 2021	$	5,300
2022	17,837
2023	15,066
2024	13,144
2025	12,532
2026	2,414
Thereafter	5,287
Total expected amortization expense	$	71,580

7 – Goodwill

The carrying amount of goodwill and the changes in the balance are as follows (in thousands):


December 31, 2020	$	151,299

Foreign currency translation	(2,006)
September 30, 2021	$	149,293

8 - Property and Equipment, net

Property and equipment, net consist of the following (in thousands):


	September 30, 2021		December 31, 2020
Land	$	1,785	$	1,792
Buildings	7,244		7,365
Leasehold improvements	7,695		8,050
Finance lease right-of-use assets	2,432		2,555
Equipment and furniture	20,821		22,148
Computer software and hardware	11,035		10,246
Demonstration and loaned equipment	3,849		3,086
	54,861		55,242
Accumulated depreciation	(32,024)		(30,726)
Total	$	22,837	$	24,516

Depreciation expense of property and equipment, net was approximately $1.5 million and $4.5 million for the three and nine months ended September 30, 2021, respectively, and approximately $1.9 million and $5.2 million for the three and nine months ended September 30, 2020, respectively.

9 - Reserve 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 of the products contain defects, we may 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

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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.

As of September 30, 2021, we have accrued $4.5 million for product related warranties. Our estimate of these costs is primarily based upon the number of units outstanding that may require repair and costs associated with shipping.

The details of activity in the warranty reserve are as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Balance, beginning of period	$	4,802	$	5,683	$	5,195	$	6,404

Additions and adjustments charged to expense	509		(151)		1,523		1,129
Utilizations	(798)		(684)		(2,205)		(2,685)


Balance, end of period	$	4,513	$	4,848	$	4,513	$	4,848

Our estimate of future product warranty costs may vary from actual product warranty costs, and any variance from estimates could impact our cost of sales, operating profits and results of operations.

10 - Share-Based Compensation

As of September 30, 2021, we have one active share-based compensation plan, the 2021 Equity Incentive Plan.

The terms of all awards granted during the nine months ended September 30, 2021 and the methods for determining grant-date fair value of the awards are consistent with those described in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.

Details of share-based compensation expense are as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Cost of revenue	$	93	$	79	$	294	$	229
Marketing and selling	511		475		1,677		1,424
Research and development	342		275		1,055		798
General and administrative	1,703		1,507		5,245		4,511

Total	$	2,649	$	2,336	$	8,271	$	6,962

As of September 30, 2021, unrecognized compensation expense related to the unvested portion of stock options and other stock awards was approximately $16.0 million, which is expected to be recognized over a weighted average period of 2.0 years.

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11 - Other Expense, net

Other expense, net consists of (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Interest income	$	81	$	(25)	$	85	$	7
Interest expense	(332)		(1,107)		(1,655)		(2,800)
Foreign currency gain (loss)	(568)		273		(1,288)		(311)
Other expense	(229)		(88)		(497)		(94)
Total other expense, net	$	(1,048)	$	(947)	$	(3,355)	$	(3,198)

12 - Income Taxes

Our tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete events arising in each respective quarter. During each interim period, we update the estimated annual effective tax rate which is subject to significant volatility due to several factors, including our ability to accurately predict the income (loss) before provision for income taxes in multiple jurisdictions, the effects of acquisitions, the integration of those acquisitions, and changes in tax law. In circumstances where we are unable to predict income (loss) in multiple jurisdictions, the actual year to date effective tax rate may be the best estimate of the annual effective tax rate for purposes of determining the interim provision for income tax.

We recorded income tax expense of $1.9 million and $4.3 million for the three and nine months ended September 30, 2021, respectively. The effective tax rate was 25.7% and 27.3% for the three and nine months ended September 30, 2021, respectively. We recorded a benefit from income tax of $1.6 million and $6.6 million for the three and nine months ended September 30, 2020, respectively. The effective tax rate was 14.4% and 23.2% for the three and nine months ended September 30, 2020, respectively. The increase in the effective tax rate for the three months ended September 30, 2021 compared with the three months ended September 30, 2020, is primarily attributable to changes in distribution of income and loss among jurisdictions with varying tax rates. Other significant factors impacting the current period effective tax rate included Federal and California research and development credits, non-deductible executive compensation expenses, and other discrete events.

We recorded no change related to unrecognized tax benefits for the three months ended September 30, 2021. Within the next twelve months, it is possible that the uncertain tax positions may change with a range of approximately zero to $0.2 million. Our tax returns remain open to examination as follows: U.S Federal, 2017 through 2020, U.S. states, 2016 through 2020, and significant foreign jurisdictions, generally 2016 through 2020.

13 - Debt and Credit Arrangements

We have a Credit Agreement with JP Morgan Chase Bank ("JP Morgan"), Citibank, NA (“Citibank”), and Wells Fargo Bank, National Association (“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 $150.0 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, 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 the event has a material adverse effect. We have no other significant credit facilities. As of September 30, 2021, no amounts were outstanding under the Credit Agreement.

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:

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•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.

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 our 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 Credit Agreement matures on September 25, 2023, at which time all principal amounts outstanding under the Credit Agreement will be due and payable.

As of June 30, 2021, we have discontinued our interest rate swap derivative. There are no amounts outstanding under our Credit Agreement and the termination date of the hedge was September 23, 2021. Upon the discontinuation of the hedge relationship, we have reclassified the unrealized gains or losses recorded in accumulated other comprehensive income (“AOCI”) to earnings.

14 - Segment, Customer and Geographic Information

We operate in one reportable segment in which we provide medical device solutions focused on the diagnosis and treatment of central nervous and sensory system disorders for patients of all ages.

End-user customer base includes hospitals, clinics, laboratories, physicians, audiologists, and governmental agencies. Most of our international sales are to distributors who resell products to end users or sub-distributors.

The following tables present revenue by end market and geographic region and long-lived asset information by 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):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Consolidated Revenue:
United States	$	72,114	$	63,553	$	210,624	$	183,181
International	41,763		39,250		134,158		113,785
Total	$	113,877	$	102,803	$	344,782	$	296,966


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue by End Market:
Neuro Products
Devices and Systems	$	54,289	$	44,354	$	161,761	$	126,956
Supplies	15,758		14,427		47,982		40,723

Total Neuro Revenue	70,047		58,781		209,743		167,679
Newborn Care Products
Devices and Systems	11,768		11,800		39,484		36,823
Supplies	8,387		9,231		24,973		27,856
Services	4,319		4,679		12,129		12,181
Total Newborn Care Revenue	24,474		25,710		76,586		76,860
Hearing & Balance Products
Devices and Systems	18,069		17,267		54,610		49,426
Supplies	1,287		1,045		3,843		3,001

Total Hearing & Balance Revenue	19,356		18,312		58,453		52,427
Total Revenue	$	113,877	$	102,803	$	344,782	$	296,966

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	September 30, 2021		December 31, 2020
Property and equipment, net:
United States	$	10,197	$	10,998
Ireland	6,356		6,716
Canada	3,698		3,775
Denmark	1,459		1,787

Other countries	1,127		1,240
Total	$	22,837	$	24,516

During the three and nine months ended September 30, 2021 and 2020, no single customer and no country outside the United States contributed more than 10% of our consolidated revenue.

15 - 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.

During the third quarter of 2021, we sold vacant land located in Canada for $1.6 million resulting in a gain of $0.7 million. Also during this period, we sold a building located in the United Kingdom for $1.1 million resulting in a gain of $0.8 million. The gain on disposal of these assets is reported in general and administrative expense in the condensed consolidated statements of operations. The book value of these assets was in other current assets on the accompanying condensed consolidated balance sheet.

The following financial instruments are not measured at fair value on our consolidated balance sheet as of September 30, 2021 and December 31, 2020 but require disclosure of their fair values: cash and cash equivalents, accounts receivable, and accounts payable. The carrying value of these financial instruments approximates fair values because of their relatively short maturity.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The following Management Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) supplements the MD&A in our Annual Report on Form 10-K for the year ended December 31, 2020. MD&A should be read in conjunction with our condensed consolidated financial statements and accompanying footnotes, the risk factors referred to in Part II, Item 1A of this report, our Annual Report filed on Form 10-K for the year ended December 31, 2020 and the cautionary information regarding forward-looking statements at the end of this section.

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Our 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.

End Markets

Our products address the below end 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 and long-term monitoring, Intensive Care Unit monitoring, electromyography, sleep analysis or polysomnography, and intraoperative monitoring. These solutions enhance the diagnosis of neurological conditions such as epilepsy, sleep disorders and neuromuscular diseases. Our neurocritical care solutions include management of traumatic brain injury by continuous monitoring of intracranial pressure and cerebrospinal fluid drainage, as well as cranial access kits for entry into the cranium. Our neurosurgical solutions include items such as valves, shunts, and related treatment solutions for procedures involving hydrocephalus, as well as grids and strips used during surgical epilepsy cases.

•Newborn Care - Includes products and services for newborn care including hearing screening, brain monitoring, eye imaging, jaundice management, infant monitoring devices, and various disposable newborn care supplies.

•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.

Segment and Geographic Information

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 14 – Segment, Customer and Geographic Information of our condensed consolidated financial statements included in this report and is incorporated in this section by reference.

Revenue by Product Category

We generate our revenue from sales of Devices and Systems, which are generally non-recurring, and from related Supplies and Services, which are generally recurring. The products that are attributable to these categories are described in our Annual Report on Form 10-K for the year ended December 31, 2020. Revenue from Devices and Systems, Supplies, and Services, as a percent of total revenue for the three and nine months ended September 30, 2021 and 2020, is as follows:

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Devices and Systems	74	%	71	%	74	%	72	%
Supplies	22	%	24	%	22	%	24	%
Services	4	%	5	%	4	%	4	%
Total	100	%	100	%	100	%	100	%

2021 Third Quarter Overview

Our business and operating results are driven in part by worldwide economic conditions. Our revenue is significantly dependent on both capital spending by hospitals in the United States and healthcare spending by ministries of health outside the United States.

We experienced an increase in demand in the United States and Europe, during the third quarter compared to the same period in the prior year as recovery from the COVID-19 pandemic continues. Our consolidated revenue for the third quarter ended September 30, 2021 was $113.9 million compared to $102.8 million in the third quarter of the previous year, an increase of $11.1 million.

Our net income was $5.6 million or $0.16 per diluted share in the three months ended September 30, 2021, compared with net loss of $9.3 million or $0.28 per share in the same period in 2020. The increase in net income was the result of higher revenue, in particular for Neuro products, partly offset by higher expenses due to increase in commissions and travel compared to the same period last year as sales activity increased and impact of required paid time-off in 2020 not repeating in 2021.

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 and customer support functions remain fully operational and will continue to support customers with vital supplies, service and equipment. 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 continue to experience some extended lead times and delays in receiving supplies and finished goods which impacted revenue this period. We are working closely with our suppliers to manage orders and proactively resolve delays in the materials we require to meet our demand.

Liquidity

In the first quarter of 2020 we drew $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 of which $43.0 million was repaid by December 31, 2020. During the third quarter of 2020 we amended our Credit Agreement 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 2021, we repaid the full outstanding debt balance of $57.0 million under our Credit Agreement and continued to maintain a strong cash position ending the period with $68.8 million in cash.

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As a result of the COVID-19 pandemic, some hospitals and clinics delayed payments for products and services and we have worked with our customers to arrange mutually acceptable payment terms during these uncertain times. We have seen revenues and margins improve since the onset of the pandemic. We continue to see our customers adapting to the COVID environment, which we believe will result in increased capital spending and continue to improve our business in 2021. As of the date of this filing, uncertainty continues to exist concerning the impact and duration of the COVID-19 pandemic, including the emergence of variant strains of the virus, such as the Delta variant.

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 further enhance our liquidity position.

Government Grants

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 capitalization 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.

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.

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 returning and becoming more frequent over the course of 2021.

Application of Critical Accounting Policies

We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America. 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:

•Revenue recognition

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•Inventory valuation

•Income Taxes

The use of different estimates, assumptions, or judgments could have a material effect on the reported amounts of assets, liabilities, revenue, expenses, and related disclosures as of the date of the financial statements and during the reporting period. These critical accounting policies are described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2020, under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations

The following table sets forth selected consolidated statement of operations data as a percentage of total revenue for the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenue	39.1	%	45.9	%	40.3	%	45.3	%
Intangibles amortization	1.4	%	7.9	%	1.5	%	3.9	%
Gross profit	59.5	%	46.2	%	58.2	%	50.8	%
Operating expenses:
Marketing and selling	24.8	%	25.3	%	25.2	%	26.8	%
Research and development	12.5	%	14.3	%	12.3	%	15.7	%
General and administrative	11.3	%	12.0	%	11.7	%	12.4	%
Intangibles amortization	3.2	%	3.9	%	3.3	%	3.8	%
Restructuring	0.1	%	0.3	%	0.1	%	0.6	%
Total operating expenses	51.9	%	55.8	%	52.6	%	59.3	%
Income (loss) from operations	7.6	%	(9.6)	%	5.6	%	(8.5)	%
Other expense, net	(0.9)	%	(0.9)	%	(1.0)	%	(1.1)	%
Income (loss) before provision for (benefit from) income tax	6.7	%	(10.5)	%	4.6	%	(9.6)	%
Provision for (benefit from) income taxes	1.7	%	(1.5)	%	1.2	%	(2.2)	%
Net income (loss)	5.0	%	(9.0)	%	3.4	%	(7.4)	%

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Revenues

The following table shows revenue by products during the three and nine months ended September 30, 2021 and September 30, 2020 (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021		2020		Change		2021		2020		Change
Neuro Products
Devices and Systems	$	54,289	$	44,354	22	%	$	161,761	$	126,956	27	%
Supplies	15,758		14,427		9	%	47,982		40,723		18	%

Total Neuro Revenue	70,047		58,781		19	%	209,743		167,679		25	%
Newborn Care Products
Devices and Systems	11,768		11,800		—	%	39,484		36,823		7	%
Supplies	8,387		9,231		(9)	%	24,973		27,856		(10)	%
Services	4,319		4,679		(8)	%	12,129		12,181		—	%
Total Newborn Care Revenue	24,474		25,710		(5)	%	76,586		76,860		—	%
Hearing & Balance Products
Devices and Systems	18,069		17,267		5	%	54,610		49,426		10	%
Supplies	1,287		1,045		23	%	3,843		3,001		28	%

Total Hearing & Balance Revenue	19,356		18,312		6	%	58,453		52,427		11	%
Total Revenue	$	113,877	$	102,803	11	%	$	344,782	$	296,966	16	%

For the three months ended September 30, 2021, Neuro revenue increased by 19% compared to the same period last year driven by higher sales of devices and supplies.

For the three months ended September 30, 2021, Newborn Care revenue decreased by 5% compared to the same period last year due mainly to a decrease in sales of Hearing Screening supplies internationally and lower revenue from our agreement with Pediatrix due to lower births.

For the three months ended September 30, 2021, Hearing & Balance revenue increased by 6% compared to the same period last year due to increased demand for our devices and supplies.

For the nine months ended September 30, 2021, Neuro revenue increased by 25% compared to the same period last year due to recovery from the impact of the COVID-19 pandemic in 2020 in both our domestic and international markets.

For the nine months ended September 30, 2021, Newborn Care revenue remained stable compared to the same period last year. The change was due mainly to higher services revenue from our agreement with Pediatrix, higher Hearing Screening device sales, and higher Eye Imaging device sales, partly offset by decreases in Hearing Screening supplies and Phototherapy devices due to lower births and lower services revenue from Neometrics.

For the nine months ended September 30, 2021, Hearing & Balance revenue increased by 11% compared to the same period last year as the business recovered from the impact of the COVID-19 pandemic in 2020.

Revenue from domestic sales increased to $72.1 million for the three months ended September 30, 2021 compared to $63.6 million in the three months ended September 30, 2020. The increase was driven by improved demand, mainly for our Neuro products.

Revenue from international sales increased to $41.8 million for the three months ended September 30, 2021 compared to $39.3 million for the three months ended September 30, 2020. The increase was driven by improved demand, mainly for our Neuro and Hearing & Balances products.

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Cost of Revenue and Gross Profit

Cost of revenue and gross profit consists of (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Revenue	$	113,877		$	102,803		$	344,782		$	296,966
Cost of revenue	44,487			47,160			139,019			134,665
Intangibles amortization	1,642			8,117			5,126			11,440
Gross profit	67,748			47,526			200,637			150,861
Gross profit percentage	59.5		%	46.2		%	58.2		%	50.8		%

For the three and nine months ended September 30, 2021, gross profit as a percentage of revenue increased 13.3% and 7.4% compared to the same period in the prior year, respectively. The increase was due to higher revenue, lower operations overhead and a higher mix of revenue from our Neuro business.

Operating Costs

Operating costs consist of (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Marketing and selling	$	28,260		$	26,035		$	86,719		$	79,567
Percentage of revenue	24.8		%	25.3		%	25.2		%	26.8		%
Research and development	$	14,267		$	14,670		$	42,556		$	46,574
Percentage of revenue	12.5		%	14.3		%	12.3		%	15.7		%
General and administrative	$	12,853		$	12,384		$	40,316		$	36,754
Percentage of revenue	11.3		%	12.0		%	11.7		%	12.4		%
Intangibles amortization	$	3,681		$	4,025		$	11,497		$	11,330
Percentage of revenue	3.2		%	3.9		%	3.3		%	3.8		%
Restructuring	$	142		$	350		$	469		$	1,842
Percentage of revenue	0.1		%	0.3		%	0.1		%	0.6		%

Marketing and Selling

Marketing and selling expenses increased for the three and nine months ended September 30, 2021. The increase was primarily driven by higher commissions on increased revenues and travel expenses resulting from increased commercial activity compared to the same periods last year. In addition, the benefit of required paid time-off during the three and nine months ended September 30, 2020 was not repeated in the current year.

Research and Development

Research and development expenses decreased slightly during the three and nine months ended September 30, 2021 compared to the same periods in 2020. The decrease is the result of lower project spend due to timing partly offset by the benefit of required paid-time off during the three and nine months ended September 30, 2020 was not repeated in the current year.

General and Administrative

General and administrative expense during the three and nine months ended September 30, 2021 increased when compared to the same periods in the prior year. This increase was due to higher stock compensation and consulting fees offset by gains on disposal of property and equipment.

Intangibles Amortization

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Intangibles amortization remained relatively flat during the three and nine months ended September 30, 2021 as compared to the same periods in 2020 due to currency exchange fluctuations.

Restructuring

Restructuring expenses decreased during the three and nine months ended September 30, 2021 compared to the same periods in 2020. The decrease was primarily driven by lower severance costs and costs incurred as the result of exiting the Peloton business in 2020, which did not recur in 2021.

Other Expense, net

Other expense, net consists of investment income, interest expense, net currency exchange gains and losses, and other miscellaneous income and expense. For the three months ended September 30, 2021 we reported $1.0 million of other expense compared to $0.9 million of other expense for the same period in 2020. For the nine months ended September 30, 2021 we reported $3.4 million of other expense compared to $3.2 million of other expense for the same period in 2020. The increase during the three and nine months was due to currency exchange fluctuations offset by less interest expense.

Provision for (Benefit from) Income Tax

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Liquidity and Capital Resources

Liquidity and capital resources consist of (in thousands):


	September 30, 2021		December 31, 2020
Cash and cash equivalents	$	68,779	$	82,082

Working capital	157,870		125,950


	Nine Months Ended September 30,
	2021		2020
Net cash provided by operating activities	$	51,212	$	17,101
Net cash used in investing activities	(1,275)		(7,617)
Net cash used in financing activities	(57,968)		(1,363)

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 September 30, 2021, we had cash and cash equivalents outside the U.S. in certain of our international subsidiaries of $33.6 million, primarily in Canada and Ireland. We intend to permanently reinvest the cash held by our international subsidiaries except for Excel Tech Corporation and Natus Manufacturing Limited, which we intend to repatriate. A net deferred tax liability has been recorded for the potential future repatriation. If, however, a portion of permanently reinvested funds were needed for and distributed to our operations in the United States, we would 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 country from which the funds were repatriated.

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 of the original agreement, reduce the aggregate value of the 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, 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 the event has 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. As of September 30, 2021, no amounts were outstanding under the Credit Agreement.

During the nine months ended September 30, 2021 cash provided by operating activities of $51.2 million was the result of $11.4 million of net income, non-cash adjustments to net income of $30.3 million which was primarily driven by an adjustment for depreciation and amortization of $21.3 million, and net cash inflows of $9.4 million from changes in operating assets and liabilities. Cash used in investing activities during the period was $1.3 million consisting of $2.9 million to acquire other property and equipment, $1.0 million for purchase of equity method investments offset by $2.7 million of proceeds from disposal of assets held for sale. Cash used in financing activities during the nine months ended September 30, 2021 was $58.0 million and consisted of repayment on borrowing of $57.0 million, $1.3 million for taxes paid related to net share settlement of equity awards, $0.3 million for principal payments of financing lease liability offset by Employee Stock Purchase Program (“ESPP”) purchases of $0.6 million.

During the nine months ended September 30, 2020 cash provided by operating activities of $17.1 million was the result of $21.8 million of net loss, non-cash adjustments to net loss of $39.0 million, and net cash outflows of $0.1 million from changes in operating assets and liabilities. The non-cash adjustment to net loss was primarily driven by depreciation and amortization of $21.0 million. Cash used in investing activities during the period was

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$7.6 million to acquire other property and equipment. Cash used in financing activities during the nine months ended September 30, 2020 was $1.4 million and consisted of proceeds from borrowing of $60.0 million and ESPP purchases of $0.7 million offset by repayment on borrowing of $48.0 million, $10.5 million for repurchases of common stock under our share repurchase program, $1.9 million for taxes paid related to net share settlement of equity awards, and $0.4 million for principal payments of financing lease liability.

Our future liquidity and capital requirements will depend on numerous factors, including the:

•Extent to which we make acquisitions;

•Amount and timing of revenue;

•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 of borrowings under line of credit arrangements and the availability of other means of financing.

Commitments and Contingencies

In the normal course of business, we enter into obligations and commitments that require future contractual payments. The commitments result primarily from firm, non-cancellable purchase orders placed with contract vendors that manufacture some of the components used in our medical devices and related disposable supply products, as well as commitments for leased office space, and bank debt. The following table summarizes our contractual obligations and commercial commitments as of September 30, 2021 (in thousands):


			Payments Due by Period
	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Unconditional purchase obligations	$	163,850	$	139,670	$	24,180	$	—	$	—
Interest payments	2,387		1,152		1,235		—
Repatriation tax	5,677		170		3,212		2,295		—
Total	$	171,914	$	140,992	$	28,627	$	2,295	$	—

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.

The interest payments noted above are an estimate of expected interest payments but could vary materially based on the timing of future loan draws and payments. See Note 13 to the unaudited Condensed Consolidated Financial Statements for additional discussion on our debt and credit arrangements.

We are not able to reasonably estimate the timing of any potential payments for uncertain tax positions under 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 in our Annual Report filed on Form 10-K for the year ended December 31, 2020 for further discussion on income taxes and repatriation tax.

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Recently Issued Accounting Pronouncements

None.

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 other 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 2 include, without limitation, statements regarding the impact of 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” referred to in Part II, 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 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to interest rate risk on our LIBOR-indexed floating-rate debt. Please refer to Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" included in our Annual Report on Form 10-K for the ended December 31, 2020 for a more complete discussion on the market risks we encounter.

ITEM 4. 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 at a reasonable assurance level as of September 30, 2021.

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Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting during the third quarter of 2021, which were identified in connection with management's evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

We currently are, and may from time to time become, a party to various other legal proceedings or claims that arise in the ordinary course of business. Our management 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.

ITEM 1A. Risk Factors

The following updates the risk factors previously reported in Part 1, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

The ability of suppliers to deliver parts, components and manufacturing equipment to our manufacturing facilities, and our ability to manufacture without disruption, could affect our global business performance.

We source components and materials to manufacture our products from a limited number of suppliers, resulting in our product supply being subject to such suppliers' lead times, volume constraints and increasing costs. We have experienced and may continue to experience extended lead times and product unavailability due to factory disruptions or closures as well as delays and unanticipated costs associated with the supply of our products, including expedite fees and air freight charges to mitigate delays in product supply, particularly in light of the COVID-19 pandemic. We also expect continued shortages and/or delay of critical components and related services as a result of growing demand in the industry or other sectors. For example, the global semiconductor supply shortage has and may continue to result in lower availability, longer lead times, increased prices for such components and increased competition for logistics services. Our supply chain operations span several geographies globally, and we are heavily dependent upon third party logistics and transportation services to deliver our products to customers. We have experienced and expect to continue to experience increased competition for and disruptions in logistics and transportation services due to transportation backlogs and labor shortages, which have resulted in longer lead times, increased prices and surcharges and increased investments in resources and higher overall costs to manage our supply chain logistics. Extended lead times and shortages could impair our ability to meet our customer requirements, require us to pay higher prices or incur expedite fees, which would harm our business and negatively impact our gross margin and results of operations.

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. In October 2021, we identified a cyber incident that resulted in the unauthorized access to certain personal data, including the personal data of certain of our current and former employees. We are not aware of any evidence that any patient data was accessed, and the breach has not materially impacted our operations. However,

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the occurrence of any future 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 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.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 5. Other Information

None

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ITEM 6. Exhibits

(a)Exhibits

Incorporated By Reference

Exhibit
No.

Exhibit

Filing

Exhibit
No.

File Date

Filed
Herewith

31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification 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

101

The following materials from Natus Medical Incorporated's Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements.

104

The cover page from Natus Medical Incorporated's Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL (included as Exhibit 101).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NATUS MEDICAL INCORPORATED

Dated:

November 5, 2021

By:

/s/ Jonathan A. Kennedy

Jonathan A. Kennedy
President and Chief Executive Officer
(Principal Executive Officer)

Dated:

November 5, 2021

By:

/s/ B. Drew Davies

B. Drew Davies
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)

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