ntus-20200630

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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 June 30, 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 July 29, 2020 was 33,871,367.

Table of Contents

NATUS MEDICAL INCORPORATED

TABLE OF CONTENTS


		Page No.
PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of June 30 , 2020 and December 31, 2019 (unaudited)	3

	Condensed Consolidated Statements of Operations for the three and six months ended June 3 0 , 2020 and 2019 (unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income (Loss ) for the three and six months ended June 30 , 2020 and 2019 (unaudited)	5

	Condensed Consolidated Statements of Stockholders' Equity for the three and six months ended June 30 , 2020 and 2019 (unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30 , 2020 and 2019 (unaudited)	8

	Notes to Condensed Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29

Item 4.	Controls and Procedures	29

PART II.	OTHER INFORMATION	31

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 5.	Other Information	32

Item 6.	Exhibits	32

Signatures			33

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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)


	June 30, 2020		December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	84,878	$	63,297

Accounts receivable, net of allowance for doubtful accounts of $7,539 in 2020 and $7,384 in 2019	89,230		115,889
Inventories	83,589		71,368
Prepaid expenses and other current assets	21,059		19,195

Total current assets	278,756		269,749
Property and equipment, net	26,673		24,702
Operating lease right-of-use assets	12,926		15,046
Intangible assets, net	103,984		114,799
Goodwill	145,917		146,367
Deferred income tax	30,204		30,355
Other assets	22,346		21,509
Total assets	$	620,806	$	622,527
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	31,654	$	27,253
Current portion of long-term debt	35,000		35,000
Accrued liabilities	38,857		54,451
Deferred revenue	21,186		20,246
Current portion of operating lease liabilities	5,533		5,871

Total current liabilities	132,230		142,821
Other liabilities	16,851		17,616
Operating lease liabilities	10,224		12,051
Long-term debt, net of current portion	51,761		19,665
Deferred income tax	14,267		14,251
Total liabilities	225,333		206,404
Stockholders’ equity:
Common stock, $0.001 par value, 120,000,000 shares authorized; shares issued and outstanding 33,871,723 in 2020 and 34,148,700 in 2019	337,338		344,476
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding in 2020 and 2019	—		—
Retained earnings	75,422		87,922
Accumulated other comprehensive loss	(17,287)		(16,275)
Total stockholders’ equity	395,473		416,123
Total liabilities and stockholders’ equity	$	620,806	$	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 June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Revenue	$	84,780	$	125,539	$	194,163	$	240,296
Cost of revenue	42,573		52,393		87,506		98,903
Intangibles amortization	1,654		1,746		3,322		3,502
Gross profit	40,553		71,400		103,335		137,891
Operating expenses:
Marketing and selling	22,802		32,324		53,532		66,054
Research and development	14,336		13,324		31,905		26,718
General and administrative	11,187		12,691		24,368		28,996
Intangibles amortization	3,644		3,763		7,305		7,549
Restructuring	621		2,668		1,492		40,040
Total operating expenses	52,590		64,770		118,602		169,357
Income (loss) from operations	(12,037)		6,630		(15,267)		(31,466)
Other expense, net	(757)		(1,200)		(2,251)		(3,312)
Income (loss) before provision for (benefit from) income tax	(12,794)		5,430		(17,518)		(34,778)
Provision for (benefit from) income taxes	(3,891)		1,944		(5,018)		(7,865)
Net income (loss)	(8,903)		$	3,486	$	(12,500)	$	(26,913)
Net income (loss) per share:
Basic	$	(0.26)	$	0.10	$	(0.37)	$	(0.80)
Diluted	$	(0.26)	$	0.10	$	(0.37)	$	(0.80)
Weighted average shares used in the calculation of net loss per share:
Basic	33,827		33,639		33,624		33,630
Diluted	33,827		33,690		33,624		33,630

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

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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(in thousands, except per share amounts)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Net income (loss)	$	(8,903)	$	3,486	$	(12,500)	$	(26,913)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	3,116		1,567		(902)		(230)
Interest rate swap designated as a cash flow hedge	65		(131)		(110)		(209)
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	—		24,845		—		24,845
Other comprehensive income (loss), net of tax	3,181		26,281		(1,012)		23,074
Comprehensive income (loss)	(5,722)		29,767		(13,512)		(3,839)

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

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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(unaudited)

(in thousands, except per share amounts)


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

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

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

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

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

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

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

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	Common Stock					Retained Earnings		Accumulated Other Comprehensive Income (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 loss	—	—		—		(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

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	—	—		3,486		—		3,486
Balances, June 30, 2019	34,040,230	$	338,735	$	76,681	$	(14,958)	$	400,458

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,
	2020		2019
Operating activities:
Net loss	$	(12,500)	$	(26,913)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for losses on accounts receivable	3,044		4,260

Depreciation and amortization	13,677		15,427
Loss on disposal of property and equipment	22		482
Warranty reserve	1,280		1,677
Share-based compensation	4,664		4,462
Loss on commencement of sales-type leases	1,095		—
Impairment charge for sale of entity	—		24,571
Changes in operating assets and liabilities:
Accounts receivable	25,152		15,870
Inventories	(11,194)		(2,106)
Prepaid expenses and other assets	(4,066)		(10,383)
Accounts payable	4,324		(3,215)
Accrued liabilities	(16,343)		(2,620)
Deferred revenue	302		2,739
Deferred income tax	155		(205)

Net cash provided by operating activities	9,612		24,046
Investing activities:

Purchase of property and equipment	(6,927)		(2,919)
Purchase of intangible assets	—		(13)


Net cash used in investing activities	(6,927)		(2,932)
Financing activities:
Proceeds from stock option exercises and Employee Stock Purchase Program purchases	658		1,674

Repurchase of common stock	(10,495)		—
Taxes paid related to net share settlement of equity awards	(1,926)		(1,573)
Principal payments of financing lease liability	(242)		(265)

Proceeds from borrowings	60,000		—

Payments on borrowings	(28,000)		(25,000)
Net cash provided by (used in) financing activities	19,995		(25,164)
Exchange rate changes effect on cash and cash equivalents	(1,099)		(314)
Net increase (decrease) in cash and cash equivalents	21,581		(4,364)
Cash and cash equivalents, beginning of period	63,297		56,373
Cash and cash equivalents, end of period	$	84,878	$	52,009
Supplemental disclosure of cash flow information:
Cash paid for interest	$	1,561	$	3,071
Cash paid for income taxes	$	4,667	$	5,328
Non-cash investing activities:
Property and equipment included in accounts payable	$	(13)	$	35
Inventory transferred to property and equipment	$	525	$	589
Transfer of leased assets to sales-type leases	$	2,365	$	—

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 and six months ended June 30, 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 June 30, 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.

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 losses, which may be estimated based on relevant information such as historical experience, current conditions, and

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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 these pronouncements became effective on January 1, 2020. The adoption of ASU 2016-13 did not have a material impact on our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Tax. This update includes removal of certain exceptions to the general principles of ASC 740, Income taxes, and simplification in several other areas such as accounting for franchise tax (or similar tax) that is partially based on income. We have early adopted the ASU in the second quarter of the current fiscal year. As a result, we recorded an additional income tax benefit of $0.9 million due to the elimination of the year-to-date loss limitation rule that limited the interim period tax benefit.

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, 2020 (in thousands):


Unbilled AR, December 31, 2019	$	2,667
Additions	104
Transferred to trade receivable	(1,479)
Unbilled AR, June 30, 2020	$	1,292


Deferred revenue, December 31, 2019	$	24,808
Additions	13,548
Revenue recognized	(13,260)
Deferred revenue, June 30, 2020	$	25,096

At June 30, 2020, the short-term portion of deferred revenue of $21.2 million and the long-term portion of $3.9 million were included in deferred revenue and other long-term liabilities respectively, in the consolidated balance sheet. As of June 30, 2020, we expect to recognize revenue associated with deferred revenue of approximately $13.9 million in 2020, $8.4 million in 2021, $1.4 million in 2022, $0.8 million in 2023, and $0.6 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 June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Net income (loss)	$	(8,903)	$	3,486	$	(12,500)	$	(26,913)
Weighted average common shares	33,827		33,639		33,624		33,630
Dilutive effect of stock based awards	—		51		—		—
Diluted shares	33,827		33,690		33,624		33,630
Basic earnings (loss) per share	$	(0.26)	$	0.10	$	(0.37)	$	(0.80)
Diluted earnings (loss) per share	$	(0.26)	$	0.10	$	(0.37)	$	(0.80)
Shares excluded from calculation of diluted EPS	28		—		70		103

4 - Allowance for Doubtful Accounts

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

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

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Balance, beginning of period	$	7,292	$	7,451	$	7,384	$	6,960
Additions charged to expense	1,480		2,463		3,044		4,260
Write-offs charged against allowance	(238)		(816)		(795)		(1,542)
Recoveries of amounts previously written off	(995)		(519)		(2,094)		(1,099)
Balance, end of period	$	7,539	$	8,579	$	7,539	$	8,579

5 - Inventories

Inventories consist of the following (in thousands):


	June 30, 2020		December 31, 2019
Raw materials and subassemblies	$	34,318	$	37,259
Work in process	2,306		1,780
Finished goods	63,901		50,521
Total inventories	100,525		89,560
Less: Non-current inventories	(16,936)		(18,192)
Inventories, current	$	83,589	$	71,368

As of June 30, 2020 and December 31, 2019, we have classified $16.9 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):


	June 30, 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	$	108,377	$	(6,035)	$	(58,826)	$	43,516	$	108,400	$	(6,035)	$	(55,408)	$	46,957
Customer related	90,177		(50)		(44,628)		45,499		90,351		(50)		(40,527)		49,774
Trade names	45,901		(3,245)		(28,316)		14,340		45,874		(3,237)		(25,355)		17,282
Internally developed software	13,281		—		(12,743)		538		13,281		—		(12,606)		675
Patents	2,697		(133)		(2,564)		—		2,692		(133)		(2,559)		—
Service agreements	1,190		—		(1,099)		91		1,190		—		(1,079)		111
Definite-lived intangible assets	$	261,623	$	(9,463)	$	(148,176)	$	103,984	$	261,788	$	(9,455)	$	(137,534)	$	114,799