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Table of Contents

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

 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
 
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)
 
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  

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)

The number of issued and outstanding shares of the registrant’s Common Stock, $0.001 par value, as of July 31, 2019 was 34,069,328.


Table of Contents

NATUS MEDICAL INCORPORATED
TABLE OF CONTENTS
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

-2-

Table of Contents

PART I.    FINANCIAL INFORMATION
Item 1.    Financial Statements
NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share amounts)
 
June 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
52,009

 
$
56,373

Accounts receivable, net of allowance for doubtful accounts of $8,579 in 2019 and $6,960 in 2018
106,934

 
127,041

Inventories
78,275

 
79,736

Prepaid expenses and other current assets
28,022

 
22,625

Total current assets
265,240

 
285,775

Property and equipment, net
26,547

 
22,913

Operating lease right-of-use assets
17,217

 

Intangible assets, net
126,985

 
139,453

Goodwill
147,740

 
147,644

Deferred income tax
19,187

 
22,639

Other assets
25,084

 
19,716

Total assets
$
628,000

 
$
638,140

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
25,235

 
$
28,805

Current portion of long-term debt
35,000

 
35,000

Accrued liabilities
51,605

 
52,568

Deferred revenue
19,861

 
17,073

Current portion of operating lease liabilities
5,960

 

Total current liabilities
137,661

 
133,446

Long-term liabilities:
 
 
 
Other liabilities
21,237

 
19,845

Operating lease liabilities
14,326

 

Long-term debt, net
44,570

 
69,474

Deferred income tax
8,649

 
16,931

Total liabilities
226,443

 
239,696

Stockholders’ equity:
 
 
 
Common stock, $0.001 par value, 120,000,000 shares authorized; shares issued and outstanding 34,040,230 in 2019 and 33,804,379 in 2018
338,735

 
334,215

Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding in 2019 and 2018

 

Retained earnings
77,780

 
102,261

Accumulated other comprehensive loss
(14,958
)
 
(38,032
)
Total stockholders’ equity
401,557

 
398,444

Total liabilities and stockholders’ equity
$
628,000

 
$
638,140

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

-3-

Table of Contents

NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
$
125,539

 
$
130,653

 
$
240,296

 
$
259,261

Cost of revenue
52,164

 
52,897

 
98,534

 
108,266

Intangibles amortization
1,746

 
2,717

 
3,502

 
4,305

Gross profit
71,629

 
75,039

 
138,260

 
146,690

Operating expenses:
 
 
 
 
 
 
 
Marketing and selling
32,236

 
33,401

 
65,966

 
69,273

Research and development
12,769

 
15,616

 
25,827

 
31,059

General and administrative
12,691

 
23,721

 
28,995

 
41,169

Intangibles amortization
3,763

 
4,151

 
7,549

 
8,957

Restructuring
2,668

 
1,938

 
40,040

 
2,750

Total operating expenses
64,127

 
78,827

 
168,377

 
153,208

Income (loss) from operations
7,502

 
(3,788
)
 
(30,117
)
 
(6,518
)
Other expense, net
(1,200
)
 
(2,398
)
 
(3,312
)
 
(4,218
)
Income (loss) before provision for (benefit from) income tax
6,302

 
(6,186
)
 
(33,429
)
 
(10,736
)
Provision for (benefit from) income tax
2,114

 
(3,609
)
 
(7,616
)
 
(5,009
)
Net income (loss)
4,188

 
$
(2,577
)
 
$
(25,813
)
 
$
(5,727
)
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.12

 
$
(0.08
)
 
$
(0.77
)
 
$
(0.17
)
Diluted
$
0.12

 
$
(0.08
)
 
$
(0.77
)
 
$
(0.17
)
Weighted average shares used in the calculation of net income (loss) per share:
 
 
 
 
 
 
 
Basic
33,639

 
32,859

 
33,630

 
32,809

Diluted
33,690

 
32,859

 
33,630

 
32,809

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

-4-

Table of Contents

NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands, except per share amounts)

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
4,188

 
$
(2,577
)
 
$
(25,813
)
 
$
(5,727
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
1,436

 
(13,253
)
 
(439
)
 
(9,636
)
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 Footnote 17 - Sale of Certain Subsidiary Assets)
24,845

 

 
24,845

 

Other comprehensive income (loss), net of tax
26,281

 
(13,253
)
 
23,074

 
(9,636
)
Comprehensive income (loss)
30,469

 
(15,830
)
 
(2,739
)
 
(15,363
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


-5-

Table of Contents

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
Loss
 
Stockholders’
Equity
 
Shares
 
Amount
 
Balances, December 31, 2018
33,804,379

 
$
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 units
42,130

 

 

 

 

Net issuance of restricted stock awards
139,718

 

 

 

 

Stock-based compensation expense

 
2,432

 

 

 
2,432

Taxes paid related to net share settlement of equity awards
(47,767
)
 
(1,567
)
 

 

 
(1,567
)
Exercise of stock options
16,617

 
268

 

 

 
268

Other comprehensive loss

 

 

 
(1,875
)
 
(1,875
)
Net loss

 

 
(30,001
)
 

 
(30,001
)
Balances, March 31, 2019
33,955,077

 
$
335,348

 
$
73,592

 
$
(41,239
)
 
$
367,701

Vesting of restricted stock units

 

 

 

 

Net issuance of restricted stock awards
5,762

 

 

 

 

Employee stock purchase plan
31,879

 
725

 

 

 
725

Stock-based compensation expense

 
1,987

 

 

 
1,987

Repurchase of company stock

 

 

 

 

Taxes paid related to net share settlement of equity awards
(274
)
 
(7
)
 

 

 
(7
)
Exercise of stock options
47,786

 
682

 

 

 
682

Other comprehensive income

 

 

 
26,281

 
26,281

Net income

 

 
4,188

 

 
4,188

Balances, June 30, 2019
34,040,230

 
$
338,735

 
$
77,780

 
$
(14,958
)
 
$
401,557


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
Loss
 
Stockholders’
Equity
 
Shares
 
Amount
 
Balances, December 31, 2017
33,134,101

 
$
316,577

 
$
129,115

 
$
(23,595
)
 
$
422,097

Cumulative-effect adjustment for ASU 2016-16

 

 
(3,919
)
 

 
(3,919
)
Vesting of restricted stock units
100

 

 

 

 

Net issuance of restricted stock awards
239,649

 

 

 

 

Stock-based compensation expense

 
2,361

 

 

 
2,361

Repurchase of company stock
(147,893
)
 
(4,736
)
 

 

 
(4,736
)
Taxes paid related to net share settlement of equity awards
(600
)
 
(19
)
 

 

 
(19
)
Exercise of stock options
46,173

 
577

 

 

 
577

Other comprehensive income

 

 

 
3,617

 
3,617

Net loss

 

 
(3,148
)
 

 
(3,148
)
Balances, March 31, 2018
33,271,530

 
$
314,760

 
$
122,048

 
$
(19,978
)
 
$
416,830

Vesting of restricted stock units
166

 

 

 

 

Net issuance of restricted stock awards
21,599

 

 

 

 

Employee stock purchase plan
30,971

 
870

 

 

 
870

Stock-based compensation expense

 
3,219

 

 

 
3,219

Repurchase of company stock
(25,652
)
 
(893
)
 

 

 
(893
)
Taxes paid related to net share settlement of equity awards
(8,627
)
 
(306
)
 

 

 
(306
)
Exercise of stock options
300,350

 
3,645

 

 

 
3,645

Other comprehensive income

 

 

 
(13,253
)
 
(13,253
)
Net loss

 

 
(2,577
)
 

 
(2,577
)
Balances, June 30, 2018
33,590,337

 
$
321,295

 
$
119,471

 
$
(33,231
)
 
$
407,535


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


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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Six Months Ended 
 June 30,
 
2019
 
2018
Operating activities:
 
 
 
Net loss
$
(25,813
)
 
$
(5,727
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Provision for losses on accounts receivable
960

 
4,089

Depreciation and amortization
15,427

 
16,694

Loss on disposal of property and equipment
482

 
160

Warranty reserve
1,677

 
975

Share-based compensation
4,462

 
5,632

Impairment charge for sale of entity
24,571

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
19,170

 
2,064

Inventories
(2,475
)
 
(2,483
)
Prepaid expenses and other assets
(11,060
)
 
(15,141
)
Accounts payable
(3,517
)
 
(364
)
Accrued liabilities
(2,620
)
 
3,414

Deferred revenue
2,739

 
1,687

Deferred income tax
44

 
326

Net cash provided by operating activities
24,047

 
11,326

Investing activities:
 
 
 
Acquisition of businesses, net of cash acquired

 
151

Purchase of property and equipment
(2,919
)
 
(3,387
)
Purchase of intangible assets
(13
)
 
(298
)
Net cash used in investing activities
(2,932
)
 
(3,534
)
Financing activities:
 
 
 
Proceeds from stock option exercises and Employee Stock Purchase Program purchases
1,674

 
5,092

Repurchase of common stock

 
(5,630
)
Taxes paid related to net share settlement of equity awards
(1,573
)
 
(326
)
Principal payments of financing lease liability
(265
)
 

Payment of contingent consideration related to a business combination

 
(147
)
Payments on borrowings
(25,000
)
 
(35,000
)
Net cash used in financing activities
(25,164
)
 
(36,011
)
Exchange rate changes effect on cash and cash equivalents
(315
)
 
(5,823
)
Net decrease in cash and cash equivalents
(4,364
)
 
(34,042
)
Cash and cash equivalents, beginning of period
56,373

 
88,950

Cash and cash equivalents, end of period
$
52,009

 
$
54,908

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
3,071

 
$
2,966

Cash paid for income taxes
$
5,328

 
$
7,234

Non-cash investing activities:
 
 
 
Property and equipment included in accounts payable
$
35

 
$
93

Inventory transferred to property and equipment
$
589

 
$
293

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 (“Natus,” or the “Company”) 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
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. The Company has made certain reclassifications to the prior period to conform to current period presentation. The consolidated balance sheet as of December 31, 2018 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Recent 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. The Company 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. The Company has not elected the use-of-hindsight practical expedient or the practical expedient pertaining to land easements; the latter of which is not applicable to the Company. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet. The Company 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 the Company on January 1, 2019. The Company adopted the new standard using the modified retrospective transition method with the effective date as the date of initial application. Upon adoption, the Company 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 14 for additional discussion and disclosure.
The adoption of the new standard did not impact the Company's liquidity or debt-covenant compliance under its current agreements.

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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. Instead an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. ASU 2017-04 is effective for the Company's annual and any interim goodwill impairment tests performed on or after January 1, 2020. The Company elected to early adopt. The adoption of ASU 2017-04 did not have an impact on the Company's 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 “2017 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 is effective for the Company on January 1, 2019. Upon adoption, the Company reclassified its 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.
Recent Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Credit Losses (Topic 326). This update requires financial assets measured at amortized cost, such as trade receivables and contract assets, to be presented net of expected credit losses, which may be estimated based on relevant information such as historical experience, current conditions, and future expectation for each pool of similar financial asset. 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 of these is effective beginning January 1, 2020. The Company is evaluating the impact, if any, that these pronouncements will have on its consolidated financial statements.
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 will be effective for annual periods beginning January 1, 2020, and interim periods within those fiscal years. Early adoption of the amendments is permitted, including adoption in any interim period. As the standard relates only to disclosures, the Company does not expect the adoption to have a material impact on the consolidated financial statements and is still evaluating if it will early adopt.
Significant Accounting Policies
Leases
The Company determines 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 the Company's leases do not provide an implicit borrowing rate, generally the Company uses 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. The Company uses the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The Company's 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 the Company's consolidated balance sheet. Finance leases are included in property and equipment, accrued liabilities, and other liabilities in the consolidated balance sheet.

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The Company has 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, the Company accounts for these components separately. For equipment leases, such as office equipment and vehicles, the Company accounts for the lease and non-lease components as a single lease component.
Assets and Liabilities Held for Sale
The Company considers assets and liabilities to be held for sale when all of the following criteria are met:
Management approves and commits to a formal plan to sell the asset or disposal group;
The assets or disposal group is available for immediate sale in its present condition;
An active program to locate a buyer and other actions required to complete the sale have been initiated;
The sale of the asset or disposal group is expected to be completed within one year;
The asset or disposal group is being actively marketed for sale at a price that is reasonable in relation to the current fair value; and
It is unlikely that significant changes will be made to the plan.
Assets held for sale are not depreciated. Upon designation of the asset or disposal group as held for sale, the Company records the asset or disposal group at the lower of its carrying value or its estimated fair value, less estimated costs of sale. The Company considers deferrals accumulated in other comprehensive income, including cumulative currency translation adjustments, in the total carrying value of the disposal group in accordance with GAAP. Any loss resulting from this measurement is recognized on the Company's income statement as a restructuring operating expense in the period in which the held for sale criteria are met and gains, if any are not recognized until the date of sale. The Company assesses the fair value of assets held for sale less any costs to sell each reporting period it remains classified as held for sale and reports any reduction in fair value as an adjustment to the carrying value of the assets held for sale.
    
2 - Revenue
Unbilled accounts receivable (“AR”) for the periods presented primarily represent the difference between revenue recognized based on the relative selling price of the related performance obligations and the contractual billing terms in the arrangements. Deferred revenue for the periods presented primarily relates to extended service contracts, installation, and training, for which the service fees are billed in advance. The associated deferred revenue is generally recognized ratably over the extended service period or when installation and training are complete.

The following table summarizes the changes in the unbilled AR and deferred revenue balances for the six months ended June 30, 2019 (in thousands):
Unbilled AR, December 31, 2018
$
3,012

Additions
420

Transferred to Trade Receivable
(667
)
Unbilled AR, June 30, 2019
$
2,765

Deferred Revenue, December 31, 2018
$
21,410

Additions
14,242

Revenue Recognized
(11,502
)
Deferred Revenue, June 30, 2019
$
24,150


At June 30, 2019, the short-term portion of deferred revenue of $19.9 million and the long-term portion of $4.3 million were included in deferred revenue and other long-term liabilities respectively, in the consolidated balance sheet. As of June 30, 2019, the Company expects to recognize revenue associated with deferred revenue of

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approximately $12.8 million in 2019, $8.3 million in 2020, $1.5 million in 2021, $0.9 million in 2022, and $0.7 million thereafter.

3 - Earnings Per Share
The components of basic and diluted EPS are as follows (in thousands, except per share amounts):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
4,188

 
$
(2,577
)
 
$
(25,813
)
 
$
(5,727
)
Weighted average common shares
33,639

 
32,859

 
33,630

 
32,809

Dilutive effect of stock based awards
51

 

 

 

Diluted Shares
33,690

 
32,859

 
33,630

 
32,809

Basic income (loss) per share
$
0.12

 
$
(0.08
)
 
$
(0.77
)
 
$
(0.17
)
Diluted income (loss) per share
$
0.12

 
$
(0.08
)
 
$
(0.77
)
 
$
(0.17
)
Shares excluded from calculation of diluted EPS

 
382

 
103

 
387



4 - Inventories
Inventories consist of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
Raw materials and subassemblies
$
34,310

 
$
31,459

Work in process
2,603

 
2,424

Finished goods
62,650

 
63,932

Total inventories
99,563

 
97,815

Less: Non-current inventories
(21,288
)
 
(18,079
)
Inventories, current
$
78,275

 
$
79,736


As of June 30, 2019 and December 31, 2018, the Company has classified $21.3 million and $18.1 million, respectively, of inventories as other assets. This inventory consists primarily of service components used to repair products held by customers pursuant to warranty obligations and extended service contracts, including service components for products the Company no longer sells, inventory purchased for lifetime buys, and inventory that is turning over at a slow rate. The Company believes these inventories will be utilized for their intended purpose.

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

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June 30, 2019
 
December 31, 2018
 
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
$
110,516

 
$
(6,636
)
 
$
(53,225
)
 
$
50,655

 
$
111,198

 
$
(6,768
)
 
$
(50,046
)
 
$
54,384

Customer related
99,050

 
(50
)
 
(44,523
)
 
54,477

 
99,440

 
(1,961
)
 
(38,574
)
 
58,905

Trade names
47,047

 
(3,831
)
 
(22,714
)
 
20,502

 
47,217

 
(4,397
)
 
(19,250
)
 
23,570

Internally developed software
16,282

 

 
(15,179
)
 
1,103

 
16,264

 

 
(14,164
)
 
2,100

Patents
2,953

 
(132
)
 
(2,801
)
 
20

 
2,718

 
(133
)
 
(2,524
)
 
61

Service Agreements
1,190

 

 
(962
)
 
228

 
1,190

 

 
(757
)
 
433

Definite-lived intangible assets
$
277,038

 
$
(10,649
)
 
$
(139,404
)
 
$
126,985

 
$
278,027

 
$
(13,259
)
 
$
(125,315
)
 
$
139,453


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, 12 years for patents, 2 years for service agreements and 11 years weighted average in total.
Internally developed software consists of $14.1 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 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Technology
$
1,729

 
$
2,558

 
$
3,467

 
$
4,378

Customer related
2,167

 
2,302

 
4,350

 
5,183

Trade names
1,491

 
1,456

 
2,989

 
3,082

Internally developed software
506

 
528

 
1,010

 
1,058

Patents
20

 
22

 
40

 
43

Service Agreements
$
103

 
$
486

 
205

 
486

Total amortization
$
6,016

 
$
7,352

 
$
12,061

 
$
14,230


The amortization expense amounts shown above include internally developed software not held for sale of $0.5 million and $1.0 million for the three and six months ended June 30, 2019, respectively which is recorded within the Company's income statement as a general and administrative operating expense.

Expected amortization expense related to amortizable intangible assets is as follows (in thousands):
Six months ending December 31, 2019
$
11,333

2020
21,805

2021
20,918

2022
17,473

2023
16,500

2024
14,592

Thereafter
24,364

Total expected amortization expense
$
126,985



6 – Goodwill

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The carrying amount of goodwill and the changes in the balance are as follows (in thousands):
December 31, 2018
$
147,644

Foreign currency translation
96

June 30, 2019
$
147,740



7 - Property and Equipment, net
Property and equipment, net consist of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
Land
$
1,720

 
$
1,828

Buildings
6,778

 
7,036

Leasehold improvements
7,616

 
4,649

Finance lease right-of-use assets
2,955

 

Equipment and furniture
23,725

 
23,487

Computer software and hardware
12,635

 
12,803

Demonstration and loaned equipment
12,201

 
12,843

 
67,630

 
62,646

Accumulated depreciation
(41,083
)
 
(39,733
)
Total
$
26,547

 
$
22,913


Depreciation expense of property and equipment was approximately $1.8 million and $3.3 million for the three and six months ended June 30, 2019 and approximately $1.4 million and $2.4 million for the three and six months ended June 30, 2018.

8 - Reserve for Product Warranties
The Company provides a warranty for products that is generally one year in length, but in some cases regulations may require us to provide repair or remediation beyond the typical warranty period. If any of the products contain defects, the Company may incur additional repair and remediation costs. Service for domestic customers is provided by Company-owned service centers that perform all service, repair, and calibration services. Service for international customers is provided by a combination of Company-owned facilities, vendors on a contract basis, and distributors.
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. The Company considers 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 servicing is performed to honor existing warranty and regulatory obligations.
As of June 30, 2019, the Company has accrued $8.1 million for product related warranties, which includes $2.9 million of estimated costs to bring certain products into regulatory compliance. The Company's 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):

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Table of Contents

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Balance, beginning of period
$
8,225

 
$
9,068

 
$
9,391

 
$
10,995

Additions charged to expense
1,639

 
2,100

 
2,248

 
2,335

Utilizations
(1,473
)
 
(255
)
 
(2,983
)
 
(1,057
)
Changes in estimate related to product remediation activities
(315
)
 

 
(571
)
 
(1,360
)
Divestiture adjustments

 

 
(9
)
 

Balance, end of period
$
8,076

 
$
10,913

 
$
8,076

 
$
10,913


The Company's estimates 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.

9 - Share-Based Compensation
As of June 30, 2019, the Company has two active share-based compensation plans, the 2018 Equity Incentive Plan and the 2011 Employee Stock Purchase Plan.
In January 2019, the Company granted market stock unit (“MSU”) awards to certain employees. These MSUs fully vest on December 31, 2021 and have separate market performance goals than the performance stock unit (“PSU”) awards the Company grants. Each MSU represents the right to one share of common stock. The actual number of MSUs which will be eligible to vest will be based on the performance of Natus' stock price over the vesting period. The maximum number of MSUs which will be eligible to vest are 200% of the MSUs initially granted. A Monte Carlo simulation model was used to estimate the fair value of the MSUs as of their grant date. This model simulates the stock price movements of the Company using certain assumptions, including the stock price of the company.
The terms of all other awards granted during the six months ended June 30, 2019 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, 2018.
Details of share-based compensation expense are as follows (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Cost of revenue
$
89

 
$
71

 
$
156

 
$
139

Marketing and selling
209

 
199

 
439

 
396

Research and development
258

 
272

 
503

 
549

General and administrative
1,431

 
2,728

 
3,321

 
4,548

Total
$
1,987

 
$
3,270

 
$
4,419

 
$
5,632


As of June 30, 2019, unrecognized compensation expense related to the unvested portion of stock options and other stock awards was approximately $13.5 million, which is expected to be recognized over a weighted average period of 2.5 years.


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Table of Contents

10 - Other Income (Expense), net
Other income (expense), net consists of (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Interest income
$
127

 
$
(5
)
 
$
147

 
$
5

Interest expense
(1,468
)
 
(1,641
)
 
(2,995
)
 
(3,601
)
Foreign currency gain (loss)
134

 
(838
)
 
(463
)
 
(234
)
Other expense
7

 
86

 
(1
)
 
(388
)
Total other expense, net
$
(1,200
)
 
$
(2,398
)
 
$
(3,312
)
 
$
(4,218
)


11 - Income Taxes
The Company's 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, the Company updates the estimated annual effective tax rate which is subject to significant volatility due to several factors, including the Company's 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 the Company is 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.
The Company recorded an expense from income tax of $2.1 million and a benefit from income tax of $7.6 million for the three and six months ended June 30, 2019, respectively. The effective tax rate was 33.5% and 22.8% for the three and six months ended June 30, 2019, respectively. Of the $7.6 million benefit from income tax recorded for the six months ended June 30, 2019, $8.2 million relates to the tax accounting effects of the sale of Medix.
The Company recorded a benefit for income tax of $3.6 million and $5.0 million for the three and six months ended June 30, 2018, respectively. The effective tax rate was 58.3% and 46.7% for the three and six months ended June 30, 2018, respectively.
The decrease in the effective tax rate for the three and six months ended June 30, 2019 compared with the three and six months ended June 30, 2018 is primarily attributable to the tax accounting effects of the sale of Medix. The Company's effective tax rate for the three and six months ended June 30, 2019 differed from the federal statutory rate of 21% primarily due to the tax accounting effects of the sale of Medix. Other significant factors that impact the effective tax rate are Federal and California research and development credits, non-deductible executive compensation expenses, and inclusions related to global intangible low-taxed income.
The Company recorded $0.2 million of net tax expense related to unrecognized tax benefits for the three and six months ended June 30, 2019, primarily due to the increase in uncertain tax positions related to the prior year. Within the next twelve months, it is possible that the uncertain tax benefit may change with a range of approximately zero to $3.8 million. The Company's tax returns remain open to examination as follows: U.S Federal, 2015 through 2018, U.S. states, 2014 through 2018, and significant foreign jurisdictions, generally 2014 through 2018.

12 - Debt and Credit Arrangements
The Company has 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 $225.0 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

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obligations and capital expenditures, and is secured by virtually all of the Company's 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 Company has no other significant credit facilities.

In addition to the customary restrictive covenants listed above, the Credit Agreement also contains financial covenants that require the Company 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 2.75 to 1.00.
Interest Coverage Ratio, as defined, to be at least 1.75 to 1.00 at all times.

At June 30, 2019, the Company was in compliance with the Leverage Ratio and the Interest Coverage Ratio covenants as defined in the Credit Agreement.
    
At June 30, 2019, the Company had $80.0 million outstanding under the Credit Agreement.

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 1.75% to 2.75%. The effective interest rate during the six months ended June 30, 2019 was 4.74%. The Credit Agreement matures on September 23, 2021, at which time all principal amounts outstanding under the Credit Agreement will be due and payable. As of June 30, 2019, we have classified $35.0 million of the $80.0 million outstanding as short-term on our balance sheet due to our intent to repay this portion over the next twelve months.

Long-term debt consists of (in thousands):

 
June 30, 2019
 
December 31, 2018
Revolving credit facility
$
80,000

 
$
105,000

Debt issuance costs
(430
)
 
(526
)
Less: current portion of long-term debt
35,000

 
35,000

Total long-term debt
$
44,570

 
$
69,474


Maturities of long-term debt as of June 30, 2019 are as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
2019
$

 
$

2020

 

2021
80,000

 
105,000

Thereafter

 

Total
$
80,000

 
$
105,000

As of June 30, 2019, the carrying value of total debt approximated fair market value.

13 - Financial Instruments and Derivatives
The Company uses interest rate swap derivative instruments to reduce earnings volatility and manage cash flow exposure resulting from changes in interest rates. These interest rate swaps apply a fixed interest rate on a portion of the Company's expected LIBOR-indexed floating-rate borrowings. The Company held the following interest rate swaps as of June 30, 2019 (in thousands):


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Hedged Item
Current Notional Amount
Designation Date
Effective Date
Termination Date
Fixed Interest Rate
Floating Rate
Estimated Fair Value
1-month USD LIBOR Loan
$
25,000

May 31, 2018
June 1, 2018
September 23, 2021
2.611%
1-month USD LIBOR
$
384

Total interest rate derivatives designated as cash flow hedge
$
25,000

 
 
 
 
 
$
384



The Company designated these derivative instruments as cash flow hedges. The Company assesses the effectiveness of these derivative instruments and records the change in the fair value of a derivative instrument designated as a cash flow hedge as unrealized gains or losses in accumulated other compr