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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 September 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)

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 30, 2019 was 34,090,315.


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)
 
September 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
63,062

 
$
56,373

Accounts receivable, net of allowance for doubtful accounts of $9,047 in 2019 and $6,960 in 2018
108,964

 
127,041

Inventories
75,107

 
79,736

Prepaid expenses and other current assets
27,735

 
22,625

Total current assets
274,868

 
285,775

Property and equipment, net
25,095

 
22,913

Operating lease right-of-use assets
16,059

 

Intangible assets, net
119,008

 
139,453

Goodwill
146,144

 
147,644

Deferred income tax
21,955

 
22,639

Other assets
25,984

 
19,716

Total assets
$
629,113

 
$
638,140

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
30,096

 
$
28,805

Current portion of long-term debt
35,000

 
35,000

Accrued liabilities
56,657

 
52,568

Deferred revenue
19,242

 
17,073

Current portion of operating lease liabilities
5,901

 

Total current liabilities
146,896

 
133,446

Long-term liabilities:
 
 
 
Other liabilities
20,200

 
19,845

Operating lease liabilities
13,112

 

Long-term debt, net
34,618

 
69,474

Deferred income tax
8,129

 
16,931

Total liabilities
222,955

 
239,696

Stockholders’ equity:
 
 
 
Common stock, $0.001 par value, 120,000,000 shares authorized; shares issued and outstanding 34,090,301 in 2019 and 33,804,379 in 2018
341,083

 
334,215

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

 

Retained earnings
86,241

 
102,261

Accumulated other comprehensive loss
(21,166
)
 
(38,032
)
Total stockholders’ equity
406,158

 
398,444

Total liabilities and stockholders’ equity
$
629,113

 
$
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
Revenue
$
123,463

 
$
130,638

 
$
363,759

 
$
389,900

Cost of revenue
48,706

 
51,583

 
147,240

 
159,849

Intangibles amortization
1,736

 
1,930

 
5,237

 
6,235

Gross profit
73,021

 
77,125

 
211,282

 
223,816

Operating expenses:
 
 
 
 
 
 
 
Marketing and selling
30,848

 
33,200

 
96,813

 
102,474

Research and development
14,114

 
15,127

 
39,941

 
46,186

General and administrative
15,113

 
15,799

 
44,108

 
56,966

Intangibles amortization
3,751

 
4,477

 
11,300

 
13,434

Restructuring
1,106

 
11,432

 
41,147

 
14,182

Total operating expenses
64,932

 
80,035

 
233,309

 
233,242

Income (loss) from operations
8,089

 
(2,910
)
 
(22,027
)
 
(9,426
)
Other expense, net
(1,609
)
 
(726
)
 
(4,921
)
 
(4,944
)
Income (loss) before provision for (benefit from) income tax
6,480

 
(3,636
)
 
(26,948
)
 
(14,370
)
Provision for (benefit from) income tax
(1,981
)
 
1,940

 
(9,596
)
 
(3,069
)
Net income (loss)
8,461

 
$
(5,576
)
 
$
(17,352
)
 
$
(11,301
)
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.25

 
$
(0.17
)
 
$
(0.52
)
 
$
(0.34
)
Diluted
$
0.25

 
$
(0.17
)
 
$
(0.52
)
 
$
(0.34
)
Weighted average shares used in the calculation of net income (loss) per share:
 
 
 
 
 
 
 
Basic
33,655

 
33,321

 
33,666

 
32,982

Diluted
33,738

 
33,321

 
33,666

 
32,982

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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
8,461

 
$
(5,576
)
 
$
(17,352
)
 
$
(11,301
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(6,181
)
 
(2,411
)
 
(6,411
)
 
(12,046
)
Interest rate swap designated as a cash flow hedge
(27
)
 
99

 
(236
)
 
98

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

 

Other comprehensive income (loss), net of tax
(6,208
)
 
(2,312
)
 
16,866

 
(11,948
)
Comprehensive income (loss)
2,253

 
(7,888
)
 
(486
)
 
(23,249
)
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, 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

Net issuance of restricted stock awards
5,762

 

 

 

 

Employee stock purchase plan
31,879

 
725

 

 

 
725

Stock-based compensation expense

 
1,987

 

 

 
1,987

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

 

 
(7
)
Exercise of stock 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

Net issuance of restricted stock awards
27,025

 

 

 

 

Stock-based compensation expense

 
1,851

 

 

 
1,851

Taxes paid related to net share settlement of equity awards
(754
)
 
(22
)
 

 

 
(22
)
Exercise of stock options
23,800

 
519

 

 

 
519

Other comprehensive income

 

 

 
(6,208
)
 
(6,208
)
Net income

 

 
8,461

 
 
 
8,461

Balances, September 30, 2019
34,090,301

 
$
341,083

 
$
86,241

 
$
(21,166
)
 
$
406,158


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

Net issuance of restricted stock awards
2,595

 

 

 

 

Stock-based compensation expense

 
9,737

 

 

 
9,737

Taxes paid related to net share settlement of equity awards
(151,163
)
 
(4,848
)
 

 

 
(4,848
)
Exercise of stock options
313,745

 
5,423

 

 

 
5,423

Other comprehensive income

 

 

 
(2,312
)
 
(2,312
)
Net loss

 

 
(5,576
)
 

 
(5,576
)
Balances, September 30, 2018
33,755,514

 
$
331,607

 
$
113,895

 
$
(35,543
)
 
$
409,959


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,
 
2019
 
2018
Operating activities:
 
 
 
Net loss
$
(17,352
)
 
$
(11,301
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Provision for losses on accounts receivable
1,494

 
5,871

Depreciation and amortization
22,946

 
25,652

Loss on disposal of property and equipment
482

 
410

Warranty reserve
2,588

 
73

Share-based compensation
6,377

 
15,446

Impairment charge for sale of entity
24,571

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
17,290

 
2,955

Inventories
(2,074
)
 
(5,183
)
Prepaid expenses and other assets
(10,643
)
 
(14,398
)
Accounts payable
1,607

 
(3,799
)
Accrued liabilities
1,073

 
968

Deferred revenue
2,371

 
1,745

Deferred income tax
(2,817
)
 
517

Net cash provided by operating activities
47,913

 
18,956

Investing activities:
 
 
 
Acquisition of businesses, net of cash acquired

 
151

Purchase of property and equipment
(3,872
)
 
(5,127
)
Purchase of intangible assets
(13
)
 
(637
)
Net cash used in investing activities
(3,885
)
 
(5,613
)
Financing activities:
 
 
 
Proceeds from stock option exercises and Employee Stock Purchase Program purchases
2,193

 
10,515

Repurchase of common stock

 
(5,629
)
Taxes paid related to net share settlement of equity awards
(1,596
)
 
(5,173
)
Principal payments of financing lease liability
(404
)
 

Payment of contingent consideration related to a business combination

 
(147
)
Payments on borrowings
(35,000
)
 
(40,000
)
Net cash used in financing activities
(34,807
)
 
(40,434
)
Exchange rate changes effect on cash and cash equivalents
(2,532
)
 
(7,419
)
Net increase (decrease) in cash and cash equivalents
6,689

 
(34,510
)
Cash and cash equivalents, beginning of period
56,373

 
88,950

Cash and cash equivalents, end of period
$
63,062

 
$
54,440

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
3,727

 
$
4,426

Cash paid for income taxes
$
4,169

 
$
7,946

Non-cash investing activities:
 
 
 
Property and equipment included in accounts payable
$
15

 
$
82

Inventory transferred to property and equipment
$
205

 
$
754

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, 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. We have 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 our Annual Report on Form 10-K for the year ended December 31, 2018.
Operating results for the three and nine months ended September 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 our accounts and our 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. We have elected the package of practical expedients, which permits an entity to not reassess prior conclusions about lease identification, lease classification and initial direct costs under the new standard. We have not elected the use-of-hindsight practical expedient or the practical expedient pertaining to land easements; the latter of which is not applicable to us. We made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet. We will recognize those lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease term.
The new standard became effective for us on January 1, 2019. We adopted the new standard using the modified retrospective transition method with the effective date as the date of initial application. Upon adoption, we recognized additional new lease assets of approximately $19.5 million and additional lease liabilities of approximately $22.3 million as of January 1, 2019. The standard did not materially affect consolidated net earnings. By electing the effective date as the date of initial application, financial performance has not been adjusted and the disclosures required under the new standard have not been provided for periods prior to January 1, 2019. See Significant Accounting Policies and Note 14 for additional discussion and disclosure.
The adoption of the new standard did not impact our 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 our annual and any interim goodwill impairment tests performed on or after January 1, 2020. We elected to early adopt. The adoption of ASU 2017-04 did not have an impact on our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). This update permits a company to reclassify its disproportionate income tax effects of the Tax Cuts and Jobs Act of 2017 (the “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 was effective for us as of January 1, 2019. Upon adoption, we 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 assets. The new guidance requires enhanced disclosures related to trade receivables and associated credit losses. In May 2019, the FASB issued ASU 2019-05 which provides targeted transition relief guidance intended to increase comparability of financial statement information. The guidance for both of these is effective beginning January 1, 2020. We are evaluating the impact, if any, that these pronouncements will have on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 820), 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, we do not expect the adoption to have a material impact on our consolidated financial statements.
Significant Accounting Policies
Leases
We determine if an arrangement is a lease at inception of the lease. Right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term, and lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit borrowing rate, generally we use an incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at the lease commencement date. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to exclude or terminate the lease when it is reasonably certain that they will exercise that option. Lease expense for lease payments are recognized on a straight-line basis over the lease term.
Operating leases are included in operating lease ROU assets, accrued liabilities, and operating lease liabilities in our consolidated balance sheet. Finance leases are included in property and equipment, accrued liabilities, and other liabilities in the consolidated balance sheet.

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We have lease agreements with lease and non-lease components, which are generally accounted for based on the type of asset. For real estate and telecom leases, we account for these components separately. For equipment leases, such as office equipment and vehicles, we account for the lease and non-lease components as a single lease component.
Assets and Liabilities Held for Sale
We consider 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, we record the asset or disposal group at the lower of its carrying value or its estimated fair value, less estimated costs of sale. We consider 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 our 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. We assess 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 nine months ended September 30, 2019 (in thousands):
Unbilled AR, December 31, 2018
$
3,012

Additions
235

Transferred to Trade Receivable
(687
)
Unbilled AR, September 30, 2019
$
2,560

Deferred Revenue, December 31, 2018
$
21,410

Additions
16,589

Revenue Recognized
(14,246
)
Deferred Revenue, September 30, 2019
$
23,753


At September 30, 2019, the short-term portion of deferred revenue of $19.2 million and the long-term portion of $4.5 million were included in deferred revenue and other long-term liabilities respectively, in the consolidated balance sheet. As of September 30, 2019, we expect to recognize revenue associated with deferred revenue of approximately $7.2 million in 2019, $12.6 million in 2020, $1.9 million in 2021, $1.0 million in 2022,

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and $1.0 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
8,461

 
$
(5,576
)
 
$
(17,352
)
 
$
(11,301
)
Weighted average common shares
33,655

 
33,321

 
33,666

 
32,982

Dilutive effect of stock based awards
83

 

 

 

Diluted Shares
33,738

 
33,321

 
33,666

 
32,982

Basic income (loss) per share
$
0.25

 
$
(0.17
)
 
$
(0.52
)
 
$
(0.34
)
Diluted income (loss) per share
$
0.25

 
$
(0.17
)
 
$
(0.52
)
 
$
(0.34
)
Shares excluded from calculation of diluted EPS

 
230

 
105

 
407



4 - Inventories
Inventories consist of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
Raw materials and subassemblies
$
40,464

 
$
31,459

Work in process
2,629

 
2,424

Finished goods
54,857

 
63,932

Total inventories
97,950

 
97,815

Less: Non-current inventories
(22,843
)
 
(18,079
)
Inventories, current
$
75,107

 
$
79,736


As of September 30, 2019 and December 31, 2018, we have classified $22.8 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 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.

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

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Table of Contents

 
September 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
$
109,075

 
$
(6,619
)
 
$
(54,404
)
 
$
48,052

 
$
111,198

 
$
(6,768
)
 
$
(50,046
)
 
$
54,384

Customer related
97,440

 
(50
)
 
(46,100
)
 
51,290

 
99,440

 
(1,961
)
 
(38,574
)
 
58,905

Trade names
46,605

 
(3,774
)
 
(24,035
)
 
18,796

 
47,217

 
(4,397
)
 
(19,250
)
 
23,570

Internally developed software
16,524

 

 
(15,780
)
 
744

 
16,264

 

 
(14,164
)
 
2,100

Patents
2,664

 
(133
)
 
(2,531
)
 

 
2,718

 
(133
)
 
(2,524
)
 
61

Service Agreements
1,190

 

 
(1,064
)
 
126

 
1,190

 

 
(757
)
 
433

Definite-lived intangible assets
$
273,498

 
$
(10,576
)
 
$
(143,914
)
 
$
119,008

 
$
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, 13 years for patents, 2 years for service agreements and 11 years weighted average in total.
Internally developed software consists of $14.3 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,
 
2019
 
2018
 
2019
 
2018
Technology
$
1,719

 
$
2,028

 
$
5,186

 
$
6,405

Customer related
2,159

 
2,596

 
6,509

 
7,779

Trade names
1,487

 
1,553

 
4,476

 
4,635

Internally developed software
359

 
545

 
1,369

 
1,603

Patents
20

 
20

 
60

 
64

Service Agreements
$
102

 
$
165

 
307

 
651

Total amortization
$
5,846

 
$
6,907

 
$
17,907

 
$
21,137


The amortization expense amounts shown above include internally developed software not held for sale of $0.2 million and $1.2 million for the three and nine months ended September 30, 2019, respectively which is recorded within our income statement as a general and administrative operating expense.

Expected amortization expense related to definite-lived amortizable intangible assets is as follows (in thousands):
Three months ending December 31, 2019
$
5,378

2020
21,455

2021
20,568

2022
17,134

2023
16,164

2024
14,300

Thereafter
24,009

Total expected amortization expense
$
119,008




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

Foreign currency translation
(1,500
)
September 30, 2019
$
146,144



7 - Property and Equipment, net
Property and equipment, net consist of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
Land
$
1,718

 
$
1,828

Buildings
6,629

 
7,036

Leasehold improvements
8,479

 
4,649

Finance lease right-of-use assets
2,884

 

Equipment and furniture
22,820

 
23,487

Computer software and hardware
12,315

 
12,803

Demonstration and loaned equipment
12,074

 
12,843

 
66,919

 
62,646

Accumulated depreciation
(41,824
)
 
(39,733
)
Total
$
25,095

 
$
22,913


Depreciation expense of property and equipment was approximately $1.6 million and $4.9 million for the three and nine months ended September 30, 2019 and approximately $2.0 million and $4.4 million for the three and nine months ended September 30, 2018.

8 - Reserve for Product Warranties
We provide 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, we may incur additional repair and remediation costs. Service for domestic customers is provided by our service centers that perform all service, repair, and calibration services. Service for international customers is provided by a combination of our 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. We consider a combination of factors including material and labor costs, regulatory requirements, and other judgments in determining the amount of the reserve. The reserve is reduced as servicing is performed to honor existing warranty and regulatory obligations.
As of September 30, 2019, we have accrued $7.4 million for product related warranties, which includes $2.4 million of estimated costs to bring certain products into regulatory compliance. 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):

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Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
Balance, beginning of period
$
8,076

 
$
10,913

 
$
9,391

 
$
10,995

Additions charged to expense
911

 
792

 
3,159

 
3,127

Utilizations
(1,560
)
 
(945
)
 
(4,543
)
 
(2,003
)
Changes in estimate related to product remediation activities

 
(1,695
)
 
(571
)
 
(3,054
)
Divestiture adjustments

 

 
(9
)
 

Balance, end of period
$
7,427

 
$
9,065

 
$
7,427

 
$
9,065


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.

9 - Share-Based Compensation
As of September 30, 2019, we have two active share-based compensation plans, the 2018 Equity Incentive Plan and the 2011 Employee Stock Purchase Plan.
In January 2019, we 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 we grant. 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 our 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 our stock price movements using certain assumptions, including our stock price.
The terms of all other awards granted during the nine months ended September 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
Cost of revenue
$
37

 
$
42

 
$
193

 
$
181

Marketing and selling
161

 
207

 
600

 
603

Research and development
270

 
278

 
773

 
827

General and administrative
1,384

 
1,056

 
4,705

 
4,895

Restructuring

 
8,231

 

 
8,940

Total
$
1,852

 
$
9,814

 
$
6,271

 
$
15,446


As of September 30, 2019, unrecognized compensation expense related to the unvested portion of stock options and other stock awards was approximately $12.3 million, which is expected to be recognized over a weighted average period of 2.1 years.


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Table of Contents

10 - Other Income (Expense), net
Other income (expense), net consists of (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
Interest income
$
93

 
$
318

 
$
239

 
$
324

Interest expense
(1,172
)
 
(1,649
)
 
(4,167
)
 
(5,250
)
Foreign currency gain (loss)
(397
)
 
572

 
(860
)
 
337

Other expense
(133