ntus-20200331

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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 March 31, 2020


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

For the transition period from to

Commission file number: 000-33001

NATUS MEDICAL INCORPORATED

(Exact name of registrant as specified in its charter)


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

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

(Address of principal executive offices) (Zip Code)

(925) 223-6700

(Registrant’s telephone number, including area code)

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

Title of each 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 April 29, 2020 was 33,802,042.

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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 March 31, 2020 and December 31, 201 9 (unaudited)	3

	Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019 (unaudited)	4

	Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2020 and 2019 (unaudited)	5

	Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2020 and 2019 (unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited)	7

	Notes to Condensed Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28

Item 4.	Controls and Procedures	28

PART II.	OTHER INFORMATION	29

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 5.	Other Information	30

Item 6.	Exhibits	30

Signatures			32

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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)


	March 31, 2020		December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	107,016	$	63,297

Accounts receivable, net of allowance for doubtful accounts of $7,291 in 2020 and $7,384 in 2019	101,219		115,889
Inventories	74,808		71,368
Prepaid expenses and other current assets	19,671		19,195

Total current assets	302,714		269,749
Property and equipment, net	26,267		24,702
Operating lease right-of-use assets	14,198		15,046
Intangible assets, net	108,346		114,799
Goodwill	145,028		146,367
Deferred income tax	30,176		30,355
Other assets	20,741		21,509
Total assets	$	647,470	$	622,527
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	33,284	$	27,253
Current portion of long-term debt	35,000		35,000
Accrued liabilities	45,255		54,451
Deferred revenue	22,823		20,246
Current portion of operating lease liabilities	5,727		5,871

Total current liabilities	142,089		142,821
Long-term liabilities:
Other liabilities	17,268		17,616
Operating lease liabilities	11,212		12,051
Long-term debt, net of current portion	64,713		19,665
Deferred income tax	14,035		14,251
Total liabilities	249,317		206,404
Stockholders’ equity:
Common stock, $0.001 par value, 120,000,000 shares authorized; shares issued and outstanding 33,802,133 in 2020 and 34,148,700 in 2019	334,296		344,476
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding in 2020 and 2019	—		—
Retained earnings	84,325		87,922
Accumulated other comprehensive loss	(20,468)		(16,275)
Total stockholders’ equity	398,153		416,123
Total liabilities and stockholders’ equity	$	647,470	$	622,527

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

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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)


	Three Months Ended March 31,
	2020		2019
Revenue	$	109,383	$	114,757
Cost of revenue	44,933		46,509
Intangibles amortization	1,668		1,756
Gross profit	62,782		66,492
Operating expenses:
Marketing and selling	30,730		33,729
Research and development	17,569		13,394
General and administrative	13,182		16,306
Intangibles amortization	3,661		3,786
Restructuring	871		37,372
Total operating expenses	66,013		104,587
Loss from operations	(3,231)		(38,095)
Other expense, net	(1,494)		(2,112)
Loss before provision for income tax benefit	(4,725)		(40,207)
Benefit from income taxes	(1,128)		(9,809)
Net loss	(3,597)		$	(30,398)
Net loss per share:
Basic	$	(0.11)	$	(0.90)
Diluted	$	(0.11)	$	(0.90)
Weighted average shares used in the calculation of net loss per share:
Basic	33,800		33,590
Diluted	33,800		33,590

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 LOSS

(unaudited)

(in thousands, except per share amounts)


	Three Months Ended March 31,
	2020		2019
Net loss	$	(3,597)	$	(30,398)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment	(4,018)		(1,797)
Interest rate swap designated as a cash flow hedge	(175)		(78)
Reclassification of stranded tax effects upon adoption of ASU 2018-02	—		(1,332)

Other comprehensive loss, net of tax	(4,193)		(3,207)
Comprehensive loss	(7,790)		(33,605)

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, 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


	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
Repurchase of company stock	—	—		—		—		—
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 income	—	—		—		(1,875)		(1,875)
Net loss	—	—		(30,398)		—		(30,398)
Balances, March 31, 2019	33,955,077	$	335,348	$	73,195	$	(41,239)	$	367,304

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)


	Three Months Ended March 31,
	2020		2019
Operating activities:
Net loss	$	(3,597)	$	(30,398)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for losses on accounts receivable	1,564		1,797
Loss on commencement of sales-type leases	295		—
Depreciation and amortization	6,994		7,711
Loss on disposal of property and equipment	42		179
Warranty reserve	704		354
Share-based compensation	2,291		2,554

Impairment charge for sale of entity	—		24,571
Changes in operating assets and liabilities:
Accounts receivable	14,570		14,358
Inventories	(3,443)		(4,476)
Prepaid expenses and other assets	(1,060)		(7,367)
Accounts payable	6,038		(3,436)
Accrued liabilities	(9,329)		(1,319)
Deferred revenue	2,190		1,982
Deferred income tax	103		(17)

Net cash provided by operating activities	17,362		6,493
Investing activities:

Purchase of property and equipment	(3,575)		(2,461)



Net cash used in investing activities	(3,575)		(2,461)
Financing activities:
Proceeds from stock option exercises and Employee Stock Purchase Program purchases	—		268

Repurchase of common stock	(10,495)		—
Taxes paid related to net share settlement of equity awards	(1,883)		(1,567)
Principal payments of financing lease liability	(133)		(165)

Proceeds from borrowings	60,000		—

Payments on borrowings	(15,000)		(5,000)
Net cash provided by (used in) financing activities	32,489		(6,464)
Exchange rate changes effect on cash and cash equivalents	(2,557)		(518)
Net increase (decrease) in cash and cash equivalents	43,719		(2,950)
Cash and cash equivalents, beginning of period	63,297		56,373
Cash and cash equivalents, end of period	$	107,016	$	53,423
Supplemental disclosure of cash flow information:
Cash paid for interest	$	637	$	1,347
Cash paid for income taxes	$	3,492	$	1,224
Non-cash investing activities:
Property and equipment included in accounts payable	$	131	$	141
Inventory transferred to property and equipment	$	196	$	143
Transfer of leased assets to sales-type leases	$	663	$	—

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

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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1 - Basis of Presentation and Significant Accounting Policies

The accompanying interim condensed consolidated financial statements of Natus Medical Incorporated (“we,” “us,” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Except where noted below within Note 1, the accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Interim financial reports are prepared in accordance with the rules and regulations of the Securities and Exchange Commission; accordingly, the reports do not include all of the information and notes required by GAAP for annual financial statements. The interim financial information is unaudited, and reflects all normal adjustments that are, in the opinion of management, necessary for the fair presentation of our financial position, results of operations, and cash flows for the interim periods presented. We have made certain reclassifications to the prior period to conform to current period presentation. The consolidated balance sheet as of December 31, 2019 was derived from audited financial statements but does not include all disclosures required by GAAP. The accompanying financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The accompanying condensed consolidated financial statements include our accounts and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Impact of COVID-19 on Our Financial Statements

The global spread and unprecedented impact of COVID-19 is complex and rapidly-evolving. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended extensive containment and mitigation measures worldwide. The outbreak has reached all of the regions in which we do business, and governmental authorities around the world have implemented numerous measures attempting to contain and mitigate the effects of the virus, including travel bans and restrictions, border closings, quarantines, shelter-in-place orders, shutdowns, limitations or closures of non-essential businesses, school closures, and social distancing requirements. The global spread of COVID-19 and actions taken in response to the virus have negatively affected workforces, customers, consumer confidence, financial markets, employment rates, consumer spending, credit markets and housing demand, caused significant economic and business disruption, volatility and financial uncertainty, and led to a significant economic downturn, including in the markets where we operate.

We have assessed various accounting estimates and other matters, including those that require consideration of forecasted financial information, in context of the unknown future impacts of COVID-19 using information that is reasonably available to us at this time. The accounting estimates and other matters we assessed include, but were not limited to, our allowance for doubtful accounts, inventory and warranty reserves, stock-based compensation, goodwill and other long-lived assets, financial assets, valuation allowances for tax assets and revenue recognition. While based on our current assessment of these estimates there was not a material impact to our consolidated financial statements as of and for the quarter ended March 31, 2020, as additional information becomes available to us, our future assessment of these estimates, including our expectations at the time regarding the duration, scope and severity of the pandemic, as well as other factors, could materially and adversely impact our consolidated financial statements in future reporting periods. For further information, refer to Part II - Item 1A - "Risk Factors" of this 10-Q.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Credit Losses (Topic 326). This update requires financial assets measured at amortized cost, such as trade receivables and contract assets, to be presented net of expected credit

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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 was effective beginning January 1, 2020. The adoption of ASU 2016-13 did not have a material impact 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 is 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. The adoption of ASU 2018-13 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 three months ended March 31, 2020 (in thousands):


Unbilled AR, December 31, 2019	$	2,667
Additions	106
Transferred to trade receivable	(153)
Unbilled AR, March 31, 2020	$	2,620


Deferred Revenue, December 31, 2019	$	24,808
Additions	10,575
Revenue recognized	(8,362)
Deferred Revenue, March 31, 2020	$	27,021

At March 31, 2020, the short-term portion of deferred revenue of $22.8 million and the long-term portion of $4.2 million were included in deferred revenue and other long-term liabilities respectively, in the consolidated balance sheet. As of March 31, 2020, we expect to recognize revenue associated with deferred revenue of approximately $19.3 million in 2020, $5.3 million in 2021, $1.3 million in 2022, $0.8 million in 2023, and $0.3 million thereafter.

3 - Earnings Per Share

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

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	Three Months Ended March 31,
	2020		2019
Net loss	$	(3,597)	$	(30,398)
Weighted average common shares	33,800		33,590
Dilutive effect of stock based awards	—		—
Diluted Shares	33,800		33,590
Basic loss per share	$	(0.11)	$	(0.90)
Diluted loss per share	$	(0.11)	$	(0.90)
Shares excluded from calculation of diluted EPS	85		119

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 for the three months ended March 31, 2020 (in thousands):


	Three Months Ended March 31,
	2020		2019
Balance, beginning of period	$	7,384	$	6,960
Additions charged to expense	1,564		1,797
Write-offs charged against allowance	(557)		(726)
Recoveries of amounts previously written off	(1,100)		(580)
Balance, end of period	$	7,291	$	7,451

5 - Inventories

Inventories consist of the following (in thousands):


	March 31, 2020		December 31, 2019
Raw materials and subassemblies	$	35,516	$	37,259
Work in process	2,270		1,780
Finished goods	54,186		50,521
Total inventories	91,972		89,560
Less: Non-current inventories	(17,164)		(18,192)
Inventories, current	$	74,808	$	71,368

As of March 31, 2020 and December 31, 2019, we have classified $17.2 million and $18.2 million, respectively, of inventories as other assets. This inventory consists primarily of service components used to repair products held by customers pursuant to warranty obligations and extended service contracts, including service components for products we no longer sell, inventory purchased for lifetime buys, and inventory that is turning over at a slow rate. We believe these inventories will be utilized for their intended purpose.

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6 – Intangible Assets

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


	March 31, 2020														December 31, 2019
	Gross Carrying Amount		Accumulated Impairment		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Impairment		Accumulated Amortization		Net Book Value
Intangible assets with definite lives:
Technology	$	107,716	$	(6,029)	$	(56,827)	$	44,860	$	108,400	$	(6,035)	$	(55,408)	$	46,957
Customer related	89,191		(50)		(42,071)		47,070		90,351		(50)		(40,527)		49,774
Trade names	45,644		(3,214)		(26,722)		15,708		45,874		(3,237)		(25,355)		17,282
Internally developed software	13,281		—		(12,674)		607		13,281		—		(12,606)		675
Patents	2,675		(133)		(2,542)		—		2,692		(133)		(2,559)		—
Service agreements	1,190		—		(1,089)		101		1,190		—		(1,079)		111
Definite-lived intangible assets	$	259,697	$	(9,426)	$	(141,925)	$	108,346	$	261,788	$	(9,455)	$	(137,534)	$	114,799

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 March 31,
	2020		2019
Technology	$	1,712	$	1,738
Customer related	2,140		2,183
Trade names	1,466		1,498
Internally developed software	69		504
Patents	—		20
Service agreements	$	10	$	102
Total amortization	$	5,397	$	6,045

The amortization expense amounts shown above include internally developed software not held for sale of $24.0 thousand and $459.0 thousand for the three months ended March 31, 2020 and March 31, 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):

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Nine months ending December 31, 2020	$	16,062
2021	20,540
2022	17,153
2023	16,199
2024	14,333
2025	13,676
Thereafter	10,383
Total expected amortization expense	$	108,346

7 – Goodwill

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


December 31, 2019	$	146,367

Foreign currency translation	(1,339)
March 31, 2020	$	145,028

8 - Property and Equipment, net

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


	March 31, 2020		December 31, 2019
Land	$	1,719	$	1,719
Buildings	6,878		6,943
Leasehold improvements	8,697		8,664
Finance lease right-of-use assets	2,548		2,377
Equipment and furniture	23,496		22,819
Computer software and hardware	13,750		12,610
Demonstration and loaned equipment	11,871		11,621
	68,959		66,753
Accumulated depreciation	(42,692)		(42,051)
Total	$	26,267	$	24,702

Depreciation expense of property and equipment was approximately $1.7 million for the three months ended March 31, 2020 and approximately $1.5 million for the three months ended March 31, 2019.

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 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 March 31, 2020, we have accrued $5.8 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.

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


	Three Months Ended March 31,
	2020		2019
Balance, beginning of period	$	6,404	$	9,391

Additions charged to expense	704		609
Utilizations	(1,271)		(1,511)
Changes in estimate related to product remediation activities	—		(255)
Divestiture adjustments	—		(9)
Balance, end of period	$	5,837	$	8,225

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 March 31, 2020, we have two active share-based compensation plans, the 2018 Equity Incentive Plan and the 2011 Employee Stock Purchase Plan.

In January 2020, we granted performance stock unit (“PSU”) awards to our CEO and CFO. These PSUs fully vest on December 31, 2022 and have separate performance goals than the previously granted market stock units. We estimate fair value of performance stock unit awards based on the share price and other pertinent factors on the grant date. Compensation expense for performance stock unit awards are recognized on a straight-line basis over the requisite service period of the award based on expected achievement of the performance condition. Provided that the requisite service is rendered, the shares will become vested and payout will occur based on the outcome of the performance condition. Any unrecognized compensation cost shall be recognized when the award becomes vested.

The terms of all other awards granted during the three months ended March 31, 2020 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, 2019.

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


	Three Months Ended March 31,
	2020		2019
Cost of revenue	$	75	$	67
Marketing and selling	469		245
Research and development	254		230
General and administrative	1,400		1,890

Total	$	2,198	$	2,432

As of March 31, 2020, unrecognized compensation expense related to the unvested portion of stock options and other stock awards was approximately $16.4 million, which is expected to be recognized over a weighted average period of 2.4 years.

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11 - Other Income (Expense), net

Other income (expense), net consists of (in thousands):


	Three Months Ended March 31,
	2020		2019
Interest income	$	24	$	20
Interest expense	(717)		(1,527)
Foreign currency loss	(801)		(598)
Other expense	—		(7)
Total other expense, net	$	(1,494)	$	(2,112)

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. For the three months ended March 31, 2020, we have included our best estimate of the impact of the COVID-19 pandemic to the estimated annual effective tax rate. Our estimated annual effective tax rate could be impacted by any changes in facts and circumstances or new information related to the COVID-19 pandemic.

We recorded a benefits from income tax of $1.1 million and $9.8 million for the three months ended March 31, 2020 and March 31, 2019, respectively. The effective tax rate was 23.9% and 24.4% for the three months ended March 31, 2020 and March 31, 2019 respectively. Of the $9.8 million benefit from income tax recorded for the three months ended March 31, 2019, $8.2 million relates to the tax accounting effects of the sale of Medix.

The decrease in the effective tax rate for the three months ended March 31, 2020 compared with the three months ended March 31, 2019 is primarily attributable to changes in distribution of income among jurisdictions with varying tax rates. 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.

We recorded no changes related to unrecognized tax benefits for the three months ended March 31, 2020. Within the next twelve months, it is possible that the uncertain tax benefit may change with a range of approximately zero to $2.4 million. Our tax returns remain open to examination as follows: U.S Federal, 2016 through 2019, U.S. states, 2015 through 2019, and significant foreign jurisdictions, generally 2015 through 2019.

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”). 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 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.

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In addition to the customary restrictive covenants listed above, the Credit Agreement also contains financial covenants that require us to maintain a certain leverage ratio and fixed charge coverage ratio, each as defined in the Credit Agreement:

•Leverage Ratio, as defined, to be no higher than 2.75 to 1.00.

•Interest Coverage Ratio, as defined, to be at least 1.75 to 1.00 at all times.

At March 31, 2020, we were in compliance with the Leverage Ratio and the Interest Coverage Ratio covenants as defined in the Credit Agreement.

During the first quarter of 2020 we drew an additional $60.0 million on our credit line as a precaution to ensure we have the necessary capital to continue to reliably serve our customers during an extended period of uncertainty. At March 31, 2020, we had $100.0 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 three months ended March 31, 2020 was 3.64%. 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 March 31, 2020, we have classified $35.0 million of the $100.0 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):


	March 31, 2020		December 31, 2019
Revolving credit facility	$	100,000	$	55,000
Debt issuance costs	(287)		(335)
Less: current portion of long-term debt	35,000		35,000
Total long-term debt	$	64,713	$	19,665

Maturities of long-term debt as of March 31, 2020 are as follows (in thousands):


	March 31, 2020		December 31, 2019
2020	$	—	$	—
2021	100,000		55,000
2022	—		—
Thereafter	—		—
Total	$	100,000	$	55,000

As of March 31, 2020, the carrying value of total debt approximated fair market value.

14 - Financial Instruments and Derivatives

We use 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 our expected LIBOR-indexed floating-rate borrowings. We held the following interest rate swaps as of March 31, 2020 (in thousands):

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