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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, 2022
 
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.)
3150 Pleasant View Road, Middleton, WI 53562
(Address of principal executive offices) (Zip Code)
(608) 829-8500
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par value per shareNTUSThe 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, 2022 was 34,585,114.


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NATUS MEDICAL INCORPORATED
TABLE OF CONTENTS
Page No.

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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, 2022December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents$84,285 $75,595 
Accounts receivable, net of allowance for doubtful accounts of $4,977 in 2022 and $5,271 in 2021
103,714 111,760 
Inventories72,238 67,745 
Prepaid expenses and other current assets26,531 22,191 
Total current assets286,768 277,291 
Property and equipment, net21,391 21,783 
Operating lease right-of-use assets8,027 9,288 
Intangible assets, net59,815 65,513 
Goodwill148,304 148,657 
Deferred income tax23,548 23,161 
Other assets20,230 18,595 
Total assets$568,083 $564,288 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$34,342 $36,405 
Accrued liabilities47,185 48,135 
Deferred revenue26,846 25,097 
Current portion of operating lease liabilities4,482 4,964 
Total current liabilities112,855 114,601 
Other liabilities17,128 17,237 
Operating lease liabilities5,755 6,567 
Deferred income tax1,451 1,133 
Total liabilities137,189 139,538 
Stockholders’ equity:
Common stock, $0.001 par value, 120,000,000 shares authorized; shares issued and outstanding 34,576,100 in 2022 and 34,225,682 in 2021
359,319 353,737 
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding in 2022 and 2021
  
Retained earnings86,389 84,486 
Accumulated other comprehensive loss(14,814)(13,473)
Total stockholders’ equity430,894 424,750 
Total liabilities and stockholders’ equity$568,083 $564,288 
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,
 20222021
Revenue$119,793 $114,927 
Cost of revenue52,781 46,688 
Intangibles amortization1,600 1,751 
Gross profit65,412 66,488 
Operating expenses:
Marketing and selling29,551 28,971 
Research and development13,224 14,040 
General and administrative12,807 14,855 
Intangibles amortization3,598 3,897 
Restructuring2,051 205 
Total operating expenses61,231 61,968 
Income from operations4,181 4,520 
Other expense, net(807)(1,656)
Income before provision for income tax3,374 2,864 
Provision for income taxes1,471 468 
Net income$1,903 $2,396 
Net income per share:
Basic$0.06 $0.07 
Diluted$0.06 $0.07 
Weighted average shares used in the calculation of net income per share:
Basic34,119 33,611 
Diluted34,276 33,782 
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
March 31,
 20222021
Net income$1,903 $2,396 
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment(1,341)(6,494)
Interest rate swap designated as a cash flow hedge 68 
Other comprehensive income (loss), net of tax(1,341)(6,426)
Comprehensive income (loss)$562 $(4,030)
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 StockRetained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Stockholders’
Equity
 SharesAmount
Balances, December 31, 202134,225,682 $353,737 $84,486 $(13,473)$424,750 
Vesting of restricted stock units33,794 — — — — 
Net issuance of restricted stock awards164,760 — — — — 
Stock-based compensation expense— 2,619 — — 2,619 
Taxes paid related to net share settlement of equity awards(51,482)(1,228)— — (1,228)
Exercise of stock options203,346 4,191 — — 4,191 
Other comprehensive loss— — — (1,341)(1,341)
Net income— — 1,903 — 1,903 
Balances, March 31, 202234,576,100 $359,319 $86,389 $(14,814)$430,894 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 Common StockRetained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Stockholders’
Equity
 SharesAmount
Balances, December 31, 202033,911,703 $342,828 $71,309 $(3,043)$411,094 
Vesting of restricted stock units19,650 — — — — 
Net issuance of restricted stock awards222,899 — — — — 
Stock-based compensation expense— 3,018 — — 3,018 
Taxes paid related to net share settlement of equity awards(57,357)(1,150)— — (1,150)
Other comprehensive loss— — — (6,426)(6,426)
Net loss— — 2,396 — 2,396 
Balances, March 31, 202134,096,895 $344,696 $73,705 $(9,469)$408,932 
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,
 20222021
Operating activities:
Net income$1,903 $2,396 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for losses on accounts receivable87 101 
Depreciation and amortization6,673 7,257 
Loss on disposal of property and equipment30 8 
Warranty reserve1,363 341 
Share-based compensation2,619 3,114 
Loss on commencement of sales-type leases 6 
Loss on equity method investment192 136 
Changes in operating assets and liabilities:
Accounts receivable8,803 4,962 
Inventories(6,132)4,139 
Prepaid expenses and other assets(4,752)(4,028)
Accounts payable(1,957)1,303 
Accrued liabilities(1,762)1,172 
Deferred revenue1,949 2,732 
Deferred income tax(119)1,064 
Net cash provided by operating activities8,897 24,703 
Investing activities:
Purchase of property and equipment(1,062)(731)
Purchase of equity method investments(572) 
Net cash used in investing activities(1,634)(731)
Financing activities:
Proceeds from stock option exercises and Employee Stock Purchase Program purchases4,191  
Taxes paid related to net share settlement of equity awards(1,228)(1,150)
Principal payments of financing lease liability(447)(125)
Payments on borrowings (20,000)
Net cash provided by (used in) financing activities2,516 (21,275)
Exchange rate changes effect on cash and cash equivalents(1,089)(4,230)
Net increase (decrease) in cash and cash equivalents8,690 (1,533)
Cash and cash equivalents, beginning of period75,595 82,082 
Cash and cash equivalents, end of period$84,285 $80,549 
Supplemental disclosure of cash flow information:
Cash paid for interest$114 $513 
Cash paid for income taxes$1,066 $(320)
Non-cash investing activities:
Property and equipment included in accounts payable$32 $39 
Inventory transferred to property and equipment$291 $94 
Transfer of leased assets to sales-type leases$ $13 
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, 2021.
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, 2021 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, 2021.
Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The accompanying condensed consolidated financial statements include our accounts and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Recently Adopted Accounting Pronouncements
None.

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, 2022 (in thousands):
Unbilled AR, December 31, 2021$252 
Additions1,535 
Transferred to trade receivable(31)
Unbilled AR, March 31, 2022$1,756 
Deferred revenue, December 31, 2021$30,097 
Additions11,844 
Revenue recognized(9,912)
Deferred revenue, March 31, 2022$32,029 

    At March 31, 2022, the short-term portion of deferred revenue of $26.8 million and the long-term portion of
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$5.2 million are included in deferred revenue and other long-term liabilities, respectively, in the consolidated balance sheet. As of March 31, 2022, we expect to recognize revenue associated with deferred revenue of approximately $22.8 million in 2022, $6.3 million in 2023, $1.7 million in 2024, $0.6 million in 2025, 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):
Three Months Ended
March 31,
20222021
Net income$1,903 $2,396 
Weighted average common shares34,119 33,611 
Dilutive effect of stock based awards157 171 
Diluted shares34,276 33,782 
Basic earnings per share$0.06 $0.07 
Diluted earnings per share$0.06 $0.07 
Shares excluded from calculation of diluted EPS  

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
March 31,
20222021
Balance, beginning of period$5,271 $6,213 
Additions charged to expense87 101 
Write-offs charged against allowance(361)(229)
Balance, end of period$4,997 $6,085 

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5 - Inventories
Inventories consist of the following (in thousands):
March 31, 2022December 31, 2021
Raw materials and subassemblies$25,092 $20,750 
Work in process2,739 2,825 
Finished goods59,011 57,836 
Total inventories86,842 81,411 
Less: Non-current inventories(14,604)(13,666)
Inventories, current$72,238 $67,745 
As of March 31, 2022 and December 31, 2021, we have classified $14.6 million and $13.7 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, 2022December 31, 2021
 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$99,288 $(6,033)$(67,934)$25,321 $99,920 $(6,039)$(66,679)$27,202 
Customer related89,260 (50)(58,913)30,297 89,794 (50)(57,133)32,611 
Trade names45,442 (3,235)(38,302)3,905 45,593 (3,260)(36,960)5,373 
Internally developed software13,281  (13,010)271 13,281  (12,985)296 
Patents2,688 (133)(2,555) 2,705 (133)(2,572) 
Service agreements800  (779)21 800  (769)31 
Definite-lived intangible assets$250,759 $(9,451)$(181,493)$59,815 $252,093 $(9,482)$(177,098)$65,513 
Intangible assets with indefinite lives:
Intellectual Property$1,993 $(1,993)$— $ $2,004 $(2,004)$— $ 
Total intangible assets$252,752 $(11,444)$(181,493)$59,815 $254,097 $(11,486)$(177,098)$65,513 

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,
 20222021
Technology$1,629 $1,795 
Customer related2,116 2,360 
Trade names1,443 1,483 
Internally developed software24 50 
Service agreements10 10 
Total amortization$5,222 $5,698 

The amortization expense amounts shown above include internally developed software not held for sale of $24 thousand and $24 thousand for the three months ended March 31, 2022 and March 31, 2021, respectively, which is recorded within our income statement as a general and administrative operating expense. The amortization expense amounts shown above include internally developed software held for sale of zero and $26 thousand for the three
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months ended March 31, 2022 and March 31, 2021, respectively, which is recorded within our income statement as cost of goods sold.
Expected amortization expense related to definite-lived amortizable intangible assets is as follows (in thousands):
Nine months ending December 31, 2022$12,301 
202314,748 
202412,866 
202512,261 
20262,398 
20272,267 
Thereafter2,974 
Total expected amortization expense$59,815 

7 – Goodwill
The carrying amount of goodwill and the changes in the balance are as follows (in thousands):
December 31, 2021$148,657 
Foreign currency translation(353)
March 31, 2022$148,304 

8 - Property and Equipment, net
Property and equipment, net consist of the following (in thousands):
March 31, 2022December 31, 2021
Land$1,781 $1,782 
Buildings7,209 7,238 
Leasehold improvements7,729 7,722 
Finance lease right-of-use assets2,037 2,356 
Equipment and furniture21,121 20,637 
Computer software and hardware11,566 11,308 
Demonstration and loaned equipment4,424 4,050 
55,867 55,093 
Accumulated depreciation(34,476)(33,310)
Total$21,391 $21,783 
Depreciation expense of property and equipment, net was approximately $1.5 million and $1.6 million for the three months ended March 31, 2022 and March 31, 2021, respectively.

9 - Reserve for Product Warranties
We provide a warranty for products that is generally one year in length. In some cases, regulations may require us to provide repair or remediation beyond the typical warranty period. If any of the products contain defects, we may incur additional repair and remediation costs. Service, repair and calibration services are provided by a combination of our owned facilities and vendors on a contract basis.
We accrue estimated product warranty costs at the time of sale based on historical experience. A warranty reserve is included in accrued liabilities for the expected future costs of servicing products. Additions to the reserve are based on management’s best estimate of probable liability. We consider a combination of factors including
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material and labor costs, regulatory requirements, and other judgments in determining the amount of the reserve. The reserve is reduced as costs are incurred to honor existing warranty and regulatory obligations.
As of March 31, 2022, we have accrued $6.4 million for product related warranties. Our estimate of these costs is primarily based upon the number of units outstanding that may require repair and costs associated with shipping.
The details of activity in the warranty reserve are as follows (in thousands):
 Three Months Ended
March 31,
 20222021
Balance, beginning of period$6,042 $5,195 
Additions and adjustments charged to expense1,363 341 
Utilizations(958)(740)
Balance, end of period$6,447 $4,796 

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, 2022, we have one active share-based compensation plan, the 2021 Equity Incentive Plan.
The terms of all awards granted during the three months ended March 31, 2022 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, 2021.
Details of share-based compensation expense are as follows (in thousands):
 Three Months Ended
March 31,
 20222021
Cost of revenue$113 $100 
Marketing and selling612 640 
Research and development195 355 
General and administrative1,699 1,923 
Total$2,619 $3,018 

As of March 31, 2022, unrecognized compensation expense related to the unvested portion of stock options and other stock awards was approximately $21.9 million, which is expected to be recognized over a weighted average period of 2.4 years.

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11 - Other Expense, net
Other expense, net consists of (in thousands):
 Three Months Ended
March 31,
 20222021
Interest income$3 $3 
Interest expense(267)(766)
Foreign currency loss(307)(731)
Other expense(236)(162)
Total other expense, net$(807)$(1,656)

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 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 in multiple jurisdictions, the actual year to date effective tax rate may be the best estimate of the annual effective tax rate for purposes of determining the interim provision for income tax.
We recorded income tax expense of $1.5 million and $0.5 million for the three months ended March 31, 2022 and March 31, 2021, respectively. The effective tax rate was 43.6% and 16.4% for the three months ended March 31, 2022 and March 31, 2021, respectively. The increase in the effective tax rate for the three months ended March 31, 2022 compared with the three months ended March 31, 2021, is primarily attributable to a tax law change in effect from January 1, 2022 that requires the capitalization of research and experimental costs under IRC Section 174 and directly increased the Company's Subpart F inclusion. The approximate impact of the change in the estimated tax rate due to all impacts from IRC Section 174 resulted in a $0.01 reduction in the GAAP earnings per share. Other significant factors impacting the current period effective tax rate included the benefit of Federal and California research and development credits, offset by global intangible low taxed income inclusions (“GILTI”) that was also impacted by IRC Section 174, and non-deductible executive compensation expenses. Factors impacting the effective rate for the three months ended March 31, 2021, include the benefit of Federal and California research and development credits, favorable discrete items for the carryback of losses, partially offset by non-deductible executive compensation expenses, and other discrete events.
Under the Tax Cut and Jobs Act (the “Act”) enacted on December 22, 2017, research and experimental (“R&E”) expenditures under IRC Section 174 incurred for tax years beginning after December 31, 2021 must be capitalized and amortized ratably over five or fifteen years for tax purposes, depending on where the research activities are conducted, U.S. or foreign respectively. Although there is proposed legislation that would defer the capitalization requirement to later years, we have no assurance that IRC Section 174 will be repealed or otherwise modified.
We recorded no change related to unrecognized tax benefits for the three months ended March 31, 2022. Within the next twelve months, it is possible that the uncertain tax positions may change with a range of approximately zero to $0.8 million. Our tax returns remain open to examination as follows: U.S Federal, 2018 through 2021, U.S. states, 2017 through 2021, and significant foreign jurisdictions, generally 2017 through 2021.

13 - Debt and Credit Arrangements
    We have a Credit Agreement with JP Morgan Chase Bank ("JP Morgan"), Citibank, NA (“Citibank”), and Wells Fargo Bank, National Association (“Wells Fargo”). During the third quarter of 2020 we amended the terms of the Credit Agreement to extend the maturity date of the original agreement, reduce the aggregate value of the revolving facility, and amend certain covenants. The amended Credit Agreement provides for an aggregate $150.0 million of secured revolving credit facility. The Credit Agreement contains covenants, including covenants relating
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to maintenance of books and records, financial reporting and notification, compliance with laws, maintenance of properties and insurance, and limitations on guaranties, investments, issuance of debt, lease obligations and capital expenditures, and is secured by virtually all of our assets. The Credit Agreement provides for events of default, including failure to pay any principal or interest when due, failure to perform or observe covenants, bankruptcy or insolvency events and the occurrence of the event has a material adverse effect. We have no other significant credit facilities. As of March 31, 2022, no amounts were outstanding under the Credit Agreement.
    In addition to the customary restrictive covenants listed above, the Credit Agreement also contains financial covenants that require us to maintain a certain leverage ratio and fixed charge coverage ratio, each as defined in the Credit Agreement:
Leverage Ratio, as defined, to be no higher than 3.25 to 1.00.
Interest Coverage Ratio, as defined, to be at least 1.75 to 1.00 at all times.
    Pursuant to the terms of the Credit Agreement, the outstanding principal balance will bear interest at either (a) a fluctuating rate per annum equal to the Applicable Rate, as defined in the Credit Agreement, depending on our leverage ratio plus the higher of (i) the federal funds rate plus one-half of one percent per annum; (ii) the prime rate in effect on such a day; and (iii) the LIBOR rate plus one percent, or (b) a fluctuating rate per annum of LIBOR Rate plus the Applicable Rate, which ranges between 2.25% to 3.50%. The Credit Agreement matures on September 25, 2023, at which time all principal amounts outstanding under the Credit Agreement will be due and payable.

14 - Segment, Customer and Geographic Information
We operate in one reportable segment in which we provide medical device solutions to screen, diagnose, and treat disorders affecting the brain, neural pathways, and eight sensory nervous systems.
End-user customer base includes hospitals, clinics, laboratories, physicians, audiologists, and governmental agencies. Most of our international sales are to distributors who resell products to end users or sub-distributors.
The following tables present revenue by end market and geographic region and long-lived asset information by geographic region. Revenue is based on the destination of the shipments and long-lived assets are based on the physical location of the assets (in thousands):
 Three Months Ended
March 31,
 20222021
Consolidated Revenue:
United States$69,970 $67,772 
International49,823 47,155 
Total$119,793 $114,927 
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 Three Months Ended
March 31,
 20222021
Revenue by End Market:
Brain Products:
Devices and Systems$37,807 $37,293 
Supplies6,291 5,486 
Services7,290 5,705 
Total Brain Revenue51,388 48,484 
Neural Pathway Products:
Devices and Systems9,657 8,832 
Supplies9,531 8,751 
Services204 257 
Total Neural Pathways Revenue19,392 17,840 
Sensory Nervous Systems Products:
Devices and Systems23,342 21,292 
Supplies8,473 8,143 
Services5,858 6,097 
Total Sensory Nervous Systems Revenue37,673 35,532 
Other Products:
Devices and Systems5,025 7,067 
Supplies2,781 2,898 
Services3,534 3,106 
Total Other Revenue11,340 13,071 
Total Revenue$119,793 $114,927 
March 31, 2022December 31, 2021
Property and equipment, net:
United States$9,635 $9,642 
Ireland6,131 6,223 
Canada3,546 3,594 
Denmark1,078 1,262 
Other foreign countries1,001 1,062 
Total$21,391 $21,783 

During the three months ended March 31, 2022 and 2021, no single customer and no country outside the United States contributed more than 10% of our consolidated revenue.

15 - Fair Value Measurements
ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value is defined under ASC 820 as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes the following three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
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Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
The following financial instruments are not measured at fair value on our consolidated balance sheet as of March 31, 2022 and December 31, 2021 but require disclosure of their fair values: cash and cash equivalents, accounts receivable, and accounts payable. The carrying value of these financial instruments approximates fair values because of their relatively short maturity.

16 - Subsequent Events

As previously announced, on April 17, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Prince Parent Inc., a Delaware corporation (“Parent”), and Prince Mergerco Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”), providing for, among other things, the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent.
Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of common stock, par value $0.001 per share, of the Company (“Company Common Stock”) outstanding as of immediately prior to the Effective Time (other than any shares of Company Common Stock held in treasury, held by Parent, Merger Sub or their respective subsidiaries or as to which appraisal rights have been perfected in accordance with the Delaware General Corporation Law, but including each share of Company Restricted Stock (as defined below)) will be cancelled and extinguished and automatically converted into the right to receive cash in an amount equal to $33.50, without interest thereon (the “Per Share Price”).
Pursuant to the Merger Agreement, at the Effective Time:
except as set forth below with respect to Employee Interim Awards (as defined below), each share of Company Common Stock subject to vesting restrictions or a risk of forfeiture (“Company Restricted Stock”) outstanding as of immediately prior to the Effective Time, whether vested or unvested and whether or not granted pursuant to any of the Company’s equity plans (“Company Stock Plans”), will be cancelled and converted into and will become a right to receive an amount in cash, without interest and subject to any required tax withholding, equal to the Per Share Price;
except as set forth below with respect to Employee Interim Awards or as set forth in the CEO Retention Agreement (as defined below), each restricted stock unit in respect of shares of Company Common Stock (each, a “Company Restricted Stock Unit”) outstanding as of immediately prior to the Effective Time, whether vested or unvested and whether or not granted pursuant to any Company Stock Plan, will be cancelled and be converted into and will become a right to receive an amount in cash, without interest and subject to any required tax withholding, equal to (i) the amount of the Per Share Price; multiplied by (ii) (1) with respect to Company Restricted Stock Units that are only subject to time-vesting requirements, the total number of shares of Company Common Stock subject to such Company Restricted Stock Unit, and (2) with respect to Company Restricted Stock Units that are subject to time- and performance-vesting requirements, the total number of shares of Company Common Stock determined to be performance vested with the performance goals deemed achieved at maximum levels and with the remaining time-vesting requirements deemed satisfied;
any Company Restricted Stock and Company Restricted Stock Units granted after the date of the Merger Agreement, other than awards that may be granted to non-employee directors after the date of the Merger Agreement (such awards, “Employee Interim Awards”), that are outstanding as of immediately prior to the Effective Time, whether vested or unvested and whether or not granted pursuant to any Company Stock Plan, will be treated at the Effective Time in the manner set forth above, provided that any applicable
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performance goals will be deemed achieved at target levels, rather than at maximum, and the number of shares subject to such Employee Interim Awards that will vest at the Effective Time will be prorated to reflect the portion of the applicable vesting period that has elapsed from the date of grant until the Effective Time (rather than vesting in full), and the remaining unvested portion of any Employee Interim Awards will be forfeited at the Effective Time;
each option (or portion thereof) to purchase a share of Company Common Stock (a “Company Option”) that is outstanding as of immediately prior to the Effective Time, whether vested or unvested and whether or not granted pursuant to any Company Stock Plan, and that has an exercise price per share less than the Per Share Price (each, an “In-the-Money Company Option”) will be cancelled and converted into and will become a right to receive an amount in cash, without interest and subject to any required tax withholding, equal to (i) the amount of the Per Share Price (less the exercise price per share attributable to such Company Option), multiplied by (ii) the total number of shares of Company Common Stock that are issuable upon the full exercise of such Company Option; and
each Company Option that is not an In-the-Money Company Option will be cancelled without any cash payment being made in respect thereof.

The consummation of the Merger (the “Closing”) is subject to certain customary closing conditions, including, but not limited to, the: (i) adoption of the Merger Agreement by the holders of a majority of the outstanding shares of Company Common Stock; (ii) expiration or termination of any waiting periods applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and certain other applicable foreign antitrust laws and foreign direct investment laws of certain other jurisdictions; and (iii) absence of any law or order restraining, enjoining or otherwise prohibiting the Merger. The Merger is not subject to any financing condition.
The transaction is expected to close in the third quarter of 2022, although there can be no assurance that the Merger will occur by that date, subject to customary closing conditions, including approval by the Company's stockholders and receipt of regulatory approvals. If the Merger Agreement is terminated by the Company in order for the Company to enter concurrently into an alternative acquisition agreement with respect to a Superior Proposal (as defined in the Merger Agreement), (i) prior to May 22, 2022 (the “Cut-Off Date”), the Company will be obligated to pay to Parent a one-time fee equal to $19,753,676 in cash or (ii) after the Cut-Off Date, the Company will be obligated to pay Parent a one-time fee equal to $39,507,352 in cash. The Company also expects to incur costs, expenses, and fees for professional services and other transaction costs in connection with the Merger. If the transaction closes, Natus will become a private company and Natus shares will no longer be listed on any public market.
To encourage the continued retention of the Company's President and Chief Executive Officer, Thomas J. Sullivan, following the Closing, in connection with entering into the Merger Agreement, Parent required Mr. Sullivan to enter into a retention agreement, dated as of April 17, 2022, with Parent and the Company (the “CEO Retention Agreement”).
Pursuant to the CEO Retention Agreement, Mr. Sullivan agreed that, notwithstanding the treatment of Company Restricted Stock Units set forth in the Merger Agreement (as described above), he would not receive payments in respect of his Company Restricted Stock Units that are market stock units (“MSUs”) based on deemed achievement of performance goals at maximum levels. Instead, Mr. Sullivan's MSUs will be deemed attained at the level of performance actually achieved through the Closing based on the Per Share Price (which is approximately 143.4% of target, in the case of MSUs granted to Mr. Sullivan in December 2021, and 139.6% of target, in the case of MSUs granted to Mr. Sullivan in January 2022), consistent with the level of return to the Company's stockholders pursuant to the Merger Agreement. The consequence to Mr. Sullivan will be a reduction by over $3.0 million in the amount of gross proceeds that he otherwise was entitled to receive and would have received in respect of his MSUs.
Furthermore, pursuant to the CEO Retention Agreement, Mr. Sullivan agreed that an amount equal to $6.0 million (the “Retention Payment”) payable to him at the Effective Time in respect of his Company Restricted Stock Units would not become payable at the Effective Time and, instead, would become payable 50% on the six-month anniversary of the Closing and 50% on the one-year anniversary of the Closing, subject to his continued
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employment with the Company until the relevant retention date. If Mr. Sullivan's employment is terminated by the Company without cause, by Mr. Sullivan with good reason, or due to his death or disability, any then-unpaid portion of the Retention Payment shall be paid to him upon his termination (subject to, in the case of a termination by the Company without cause or by Mr. Sullivan for good reason, his execution and non-revocation of a release of claims). If Mr. Sullivan's employment terminates for any other reason prior to the relevant retention date, he will immediately forfeit all portions of the Retention Payment that relate to a future retention date. Mr. Sullivan's right to receive the Retention Payment is further subject to his continued compliance with certain restrictive covenants.
At the Effective Time, all other amounts payable to Mr. Sullivan in respect of his Company Restricted Stock and Company Restricted Stock Units will become payable in accordance with the Merger Agreement, as described above.
The CEO Retention Agreement was signed at the same time the Merger Agreement was signed, but if the Merger Agreement is terminated and the Closing does not occur, it will automatically become null and void.

ITEM 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The following Management Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) supplements the MD&A in our Annual Report on Form 10-K for the year ended December 31, 2021. MD&A should be read in conjunction with our condensed consolidated financial statements and accompanying footnotes, the risk factors referred to in Part II, Item 1A of this report, our Annual Report filed on Form 10-K for the year ended December 31, 2021 and the cautionary information regarding forward-looking statements at the end of this section.
Our Business
We are recognized by healthcare providers as a leading source for solutions to screen, diagnose, and treat disorders of the brain, neural pathways, and sensory nervous systems. Our service and education complement hardware, advanced software and algorithms, and consumables that provide stimulus, acquire and monitor physiological signals and capture how the body responds, enabling clinicians worldwide to improve patient outcomes and quality of life.
End Markets
We provide innovative healthcare solutions in four product portfolios: Brain, Neural Pathways, Sensory Nervous System and Other.
Brain - This product portfolio includes solutions focused on diagnosing, monitoring and treating disorders specific to the brain, which include areas of neurodiagnostics and neurocritical care. Key neurodiagnostic product lines in this portfolio include electroencephalography (EEG) used in epilepsy monitoring and polysomnography (PSG) used to diagnose sleep disorders. Key neurocritical care product lines provide access through the cranium to the brain, monitor intracranial pressure and temperature, and provide therapeutic drainage of cerebrospinal fluid in cases of traumatic brain injury, hemorrhagic stroke, and hydrocephalus. This portfolio is comprised of well-known brands in the industry, including Nicolet®, Xltek®, Olympic®, Embla®, Grass®, Natus Quantum®, Trex™ and Camino®.
Neural Pathways - Focused on nerve and muscle disorders, the Neural Pathways portfolio uses electromyography (EMG) and nerve conduction studies (NCS) testing. These product lines help diagnose neuromuscular diseases, such as myasthenia gravis, movement disorders, such as dystonia and Parkinson's disease, and peripheral neuropathies, carpal tunnel syndrome and pinched nerves. Our portfolio is comprised of well-known brands in the industry, including Nicolet®, Dantec®, UltraPro™ and Natus Elite™.
Sensory Nervous System - This product portfolio focuses on hearing and balance disorders and pediatric eye imaging. Multiple clinical needs across hearing screening and diagnosis are addressed by this portfolio, including newborn hearing screening, hearing assessment and diagnostics and hearing aid fitting. A
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comprehensive list of balance tests helps in the diagnosis of vestibular disorders, such as dizziness and vertigo. Eye imaging is used to diagnose and monitor retinopathy of prematurity to help prevent blindness in premature babies. Natus products are sold under trusted brand names, including ALGO®, RetCam®, Aurical®, Bio-logic®, Madsen® and Otoscan®.
Other - The products in this portfolio do not directly fit within the Brain, Neural Pathways or Sensory Nervous System portfolio. These solutions span eight product lines, including phototherapy for jaundice management, video streaming of newborns in the NICU, data management for newborn care and a full range of shunts and valves for neurosurgical applications, among others. This portfolio includes several well-known brands, such as neoBLUE®, NICVIEW®, Vac-Pac® and Neometrics®.
Segment and Geographic Information
We operate as one operating segment and one reportable segment, which provides healthcare products, and services focused on solutions to screen, diagnose, and treat disorders affecting the brain, neural pathways, and eight sensory nervous systems. Financial information is reviewed on a consolidated basis for purposes of making operating decisions and assessing financial performance. Consolidated financial information is accompanied by disaggregated information about revenues by end market and geographic region. We do not assess the performance of our end markets or geographic regions on measures of profit or loss, or asset-based metrics. We have disclosed the revenues for each of our end markets and geographic regions to provide the reader of the financial statements transparency into our operations.
Information regarding our revenues and long-lived assets in the U.S. and in countries outside the U.S. is contained in Note 14 – Segment, Customer and Geographic Information of our condensed consolidated financial statements included in this report and is incorporated in this section by reference.
Revenue by Product Category
We generate our revenue from sales of Devices and Systems, which are generally non-recurring, and from related Supplies and Services, which are generally recurring. The products that are attributable to these categories are described in our Annual Report on Form 10-K for the year ended December 31, 2021. Revenue from Devices and Systems, Supplies, and Services, as a percent of total revenue for the three months ended March 31, 2022 and 2021, is as follows:
 Three Months Ended
March 31,
 20222021
Devices and Systems63 %65 %
Supplies23 %22 %
Services14 %13 %
Total100 %100 %
2022 First Quarter Overview
Our business and operating results are driven in part by worldwide economic conditions. Our revenue is significantly dependent on both capital spending by hospitals in the United States and healthcare spending by ministries of health outside the United States. While we have no direct exposure to Russia and Ukraine, we are monitoring any broader economic impact from the current crisis, especially on commodities.
We experienced an increase in demand in the United States and Europe, during the first quarter compared to the same period in the prior year. Our consolidated revenue for the first quarter ended March 31, 2022 was $119.8 million compared to $114.9 million in the first quarter of the previous year, an increase of $4.9 million.
Our net income was $1.9 million or $0.06 per diluted share in the three months ended March 31, 2022, compared with net income of $2.4 million or $0.07 per diluted share in the same period in 2021. The decrease in net
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income is due to lower gross margin and higher tax provision due to enactment of IRC Section 174, partly offset by increased revenue and lower operating expenses.
COVID-19 Update
Healthcare providers and patients continue to depend on our products and services every day. Our team members and partners are continuing to maintain our supply chain, manufacturing and delivery of our products and services. The health and welfare of our employees, our customers and our partners remain our top priority as we continue our business operations.
We have implemented safeguards in our facilities to protect team members, including social distancing practices, work from home and other measures consistent with specific regulatory requirements and guidance from health authorities. As an essential supplier of healthcare products and services, all of our manufacturing, engineering and customer support functions remain fully operational and will continue to support customers with vital supplies, service and equipment. Supply chain delays and constraints, as well as cost increases for semiconductors, have impacted our ability to ship products in the last few quarters. We are working with our suppliers to reduce constraints by providing forecasts further into the future and closely monitoring and communicating changes in the forecast, however we remain uncertain of when the supply chain will stabilize.
Impact to our supply chain
Many of our materials are single source and require lengthy qualification periods. Disruptions in our supply chain could negatively impact our ability to produce and supply our finished products. We continue to experience some extended lead times and delays in receiving supplies and finished goods which impacted revenue this period. We are working closely with our suppliers to manage orders and proactively resolve delays in the materials we require to meet our demand.
Application of Critical Accounting Estimates
We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In so doing, we must often make estimates and use assumptions that can be subjective and, consequently, our actual results could differ from those estimates. For any given individual estimate or assumption we make, there may also be other estimates or assumptions that are reasonable. Our estimates are based on our historical experience and a variety of other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates, assumptions, and judgements on a regular basis.
We believe that the following critical accounting estimates require the use of significant assumptions and judgments to have a full understanding of our financial statements:
Inventory valuation
By their nature, these estimates and judgements are subject to an inherent degree of uncertainty. The use of different estimates, assumptions, and judgments could have a material effect on the reported amounts of assets, liabilities, revenue, expenses, and related disclosures as of the date of the financial statements and during the reporting period. These critical accounting estimates are described in more detail in our Annual Report on Form 10-
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K for the year ended December 31, 2021, under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Recent Developments
On April 17, 2022, we entered into an Agreement Plan of Merger (the “Merger Agreement”) with Prince Parent Inc., a Delaware corporation (“Parent”), and Prince Mergerco Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”), providing for, among other things, the merger of Merger Sub with and into Natus (the “Merger”), with Natus surviving the Merger as a wholly owned subsidiary of Parent. Under the terms of the Merger Agreement, the Company's stockholders will receive $33.50 in cash for each share of common stock they hold on the closing date of the Merger. The transaction is expected to close in the third quarter of 2022, subject to customary closing conditions, including, but not limited to, the: (i) adoption of the Merger Agreement by the holders of a majority of the outstanding shares of Company Common Stock, (ii) expiration or termination of any waiting periods applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and certain other applicable foreign antitrust laws and foreign direct investment laws of certain other jurisdictions; and (iii) absence of any law or order restraining, enjoining or otherwise prohibiting the Merger. The Merger is not subject to any financing condition. There can be no assurance that the proposed Merger will be consummated.
Results of Operations
The following table sets forth selected consolidated statement of operations data as a percentage of total revenue for the periods indicated:
 Three Months Ended
March 31,
 20222021
Revenue100.0 %100.0 %
Cost of revenue44.1 %40.6 %
Intangibles amortization1.3 %1.5 %
Gross profit54.6 %57.9 %
Operating expenses:
Marketing and selling24.7 %25.2 %
Research and development11.0 %12.2 %
General and administrative10.7 %12.9 %
Intangibles amortization3.0 %3.4 %
Restructuring1.7 %0.2 %
Total operating expenses51.1 %53.9 %
Income from operations3.5 %4.0 %
Other expense, net(0.7)%(1.4)%
Income before provision for income tax2.8 %2.6 %
Provision for income taxes1.2 %0.4 %
Net income1.6 %2.2 %
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Revenues
The following table shows revenue by products during the three months ended March 31, 2022 and March 31, 2021 (in thousands):
 Three Months Ended
March 31,
 20222021Change
Brain Products:
Devices and Systems$37,807 $37,293 %
Supplies6,291 5,486 15 %
Services7,290 5,705 28 %
Total Brain Revenue51,388 48,484 %
Neural Pathway Products:
Devices and Systems9,657 8,832 %
Supplies9,531 8,751 %
Services204 257 (21)%
Total Neural Pathways Revenue19,392 17,840 %
Sensory Nervous Systems Products:
Devices and Systems23,342 21,292 10 %
Supplies8,473 8,143 %
Services5,858 6,097 (4)%
Total Sensory Nervous Systems Revenue37,673 35,532 %
Other Products:
Devices and Systems5,025 7,067 (29)%
Supplies2,781 2,898 (4)%
Services3,534 3,106 14 %
Total Other Revenue11,340 13,071 (13)%
Total Revenue$119,793 $114,927 %
For the three months ended March 31, 2022, Brain revenue increased by 6% compared to the same period last year driven by higher sales of devices and supplies, particularly in EEG.
For the three months ended March 31, 2022, Neural Pathways revenue increased by 9% compared to the same period last year due to an increase in both device and supplies revenue.
For the three months ended March 31, 2022, Sensory Nervous Systems revenue increased by 6% compared to the same period last year due to increased demand for our devices and supplies, particularly in our Digital Eye Imaging & Hearing Fitting products.
For the three months ended March 31, 2022, Other revenue decreased by 13% compared to the same period last year mostly due to a large one-time order in the first quarter of 2021 for our NicView products that did not repeat in the first quarter of 2022.
Revenue from domestic sales increased to $70.0 million for the three months ended March 31, 2022 compared to $67.8 million in the three months ended March 31, 2021. The increase was driven by improved demand for our Brain, Neural Pathways and Sensory Nervous Systems products.
Revenue from international sales increased to $49.8 million for the three months ended March 31, 2022 compared to $47.2 million for the three months ended March 31, 2021. The increase was driven by improved demand by our Brain, Neural Pathways and Sensory Nervous Systems products.
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Cost of Revenue and Gross Profit
Cost of revenue and gross profit consists of (in thousands):
 Three Months Ended
March 31,
 20222021
Revenue$119,793 $114,927 
Cost of revenue52,781 46,688 
Intangibles amortization1,600 1,751 
Gross profit65,412 66,488 
Gross profit percentage54.6 %57.9 %
For the three months ended March 31, 2022, gross profit as a percentage of revenue decreased 3.3% compared to the same period in the prior year. The decrease was mainly driven by higher supply chain costs in procuring semiconductors for our products and the costs of freight, and we expect this trend will continue throughout the year.
Operating Costs
Operating costs consist of (in thousands):
 Three Months Ended
March 31,
 20222021
Marketing and selling$29,551 $28,971 
Percentage of revenue24.7 %25.2 %
Research and development$13,224 $14,040 
Percentage of revenue11.0 %12.2 %
General and administrative$12,807 $14,855 
Percentage of revenue10.7 %12.9 %
Intangibles amortization$3,598 $3,897 
Percentage of revenue3.0 %3.4 %
Restructuring$2,051 $205 
Percentage of revenue1.7 %0.2 %

Marketing and Selling
Marketing and selling expenses increased for the three months ended March 31, 2022. The increase was primarily driven by higher travel expenses resulting from increased commercial activity compared to the same periods last year.
Research and Development
Research and development expenses decreased slightly during the three months ended March 31, 2022 compared to the same periods in 2021. The decrease is the result of lower project spend due to timing.
General and Administrative
General and administrative expense during the three months ended March 31, 2022 decreased when compared to the same periods in the prior year. This decrease was due to lower stock compensation and lower outside services spending.
Intangibles Amortization
Intangibles amortization remained relatively flat during the three months ended March 31, 2022 as compared to the same periods in 2021 due to currency exchange fluctuations.
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Restructuring
Restructuring expenses increased during the three months ended March 31, 2022 compared to the same periods in 2021. The increase was primarily driven by higher severance costs incurred.
Other Expense, net
Other expense, net consists of investment income, interest expense, net currency exchange gains and losses, and other miscellaneous income and expense. For the three months ended March 31, 2022 we reported $0.8 million of other expense compared to $1.7 million of other expense for the same period in 2021. The decrease during the three months was due to less interest expense and currency exchange fluctuations.
Provision for Income Tax
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 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 in multiple jurisdictions, the actual year to date effective tax rate may be the best estimate of the annual effective tax rate for purposes of determining the interim provision for income tax.
We recorded income tax expense of $1.5 million and $0.5 million for the three months ended March 31, 2022 and March 31, 2021, respectively. The effective tax rate was 43.6% and 16.4% for the three months ended March 31, 2022 and March 31, 2021, respectively. The increase in the effective tax rate for the three months ended March 31, 2022 compared with the three months ended March 31, 2021, is primarily attributable to a tax law change in effect from January 1, 2022 that requires the capitalization of research and experimental costs under IRC Section 174 and directly increased the Company's Subpart F inclusion. The approximate impact of the change in the estimated tax rate due to all impacts from IRC Section 174 resulted in a $0.01 reduction in the GAAP earnings per share. Other significant factors impacting the current period effective tax rate included the benefit of Federal and California research and development credits, offset by global intangible low taxed income inclusions (“GILTI”) that was also impacted by IRC Section 174, and non-deductible executive compensation expenses. Factors impacting the effective rate for the three months ended March 31, 2021, include the benefit of Federal and California research and development credits, favorable discrete items for the carryback of losses, partially offset by non-deductible executive compensation expenses, and other discrete events.
Under the Tax Cut and Jobs Act (the “Act”) enacted on December 22, 2017, research and experimental (“R&E”) expenditures under IRC Section 174 incurred for tax years beginning after December 31, 2021 must be capitalized and amortized ratably over five or fifteen years for tax purposes, depending on where the research activities are conducted, U.S. or foreign respectively. Although there is proposed legislation that would defer the capitalization requirement to later years, we have no assurance that IRC Section 174 will be repealed or otherwise modified.
We recorded no change related to unrecognized tax benefits for the three months ended March 31, 2022. Within the next twelve months, it is possible that the uncertain tax positions may change with a range of approximately zero to $0.8 million. Our tax returns remain open to examination as follows: U.S Federal, 2018 through 2021, U.S. states, 2017 through 2021, and significant foreign jurisdictions, generally 2017 through 2021.
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Liquidity and Capital Resources
Liquidity and capital resources consist of (in thousands):
March 31, 2022December 31, 2021
Cash and cash equivalents$84,285 $75,595 
Working capital173,913 162,690 
 Three Months Ended
March 31,
 20222021
Net cash provided by operating activities$8,897 $24,703 
Net cash used in investing activities(1,634)(731)
Net cash provided by (used in) financing activities2,516 (21,275)
We believe that our current cash and cash equivalents and any cash generated from operations will be sufficient to meet our ongoing operating requirements for the foreseeable future.
As of March 31, 2022, we had cash and cash equivalents outside the U.S. in certain of our international subsidiaries of $56.1 million, primarily in Canada and Ireland. We intend to permanently reinvest the cash held by our international subsidiaries except for Excel Tech Corporation and Natus Manufacturing Limited, which we intend to repatriate. A net deferred tax liability has been recorded for the potential future repatriation. If, however, a portion of permanently reinvested funds were needed for and distributed to our operations in the United States, we would be subject to additional U.S. income taxes and foreign withholding taxes depending on facts and circumstances at the time of distribution. The amount of taxes due would depend on the amount and manner of repatriation, as well as the country from which the funds were repatriated.
We have a Credit Agreement with JP Morgan, Citibank, and Wells Fargo. During the third quarter of 2020 we amended the terms of the Credit Agreement to extend the maturity of the original agreement, reduce the aggregate value of the revolving credit facility, and amend certain covenants. The amended Credit Agreement provides for an aggregate $150.0 million of secured revolving credit facility. The Credit Agreement contains covenants, including covenants relating to maintenance of books and records, financial reporting and notification, compliance with laws, maintenance of properties and insurance, and limitations on guaranties, investments, issuance of debt, lease obligations and capital expenditures, and is secured by virtually all of our assets. The Credit Agreement provides for events of default, including failure to pay any principal or interest when due, failure to perform or observe covenants, bankruptcy or insolvency events and the occurrence of the event has a material adverse effect. The Credit Agreement matures on September 25, 2023, at which time all principal amounts outstanding under the Credit Agreement will be due and payable. We have no other significant credit facilities. As of March 31, 2022, no amounts were outstanding under the Credit Agreement.
During the three months ended March 31, 2022 cash provided by operating activities of $8.9 million was the result of $1.9 million of net income, non-cash adjustments to net income of $11.0 million which was primarily driven by an adjustment for depreciation and amortization of $6.7 million, and net cash outflows of $4.0 million from changes in operating assets and liabilities primarily resulting from reductions in accounts receivable and increases in inventory. Cash used in investing activities during the period was $1.6 million consisting of $1.1 million to acquire other property and equipment, $0.6 million for purchase of equity method investments. Cash provided by financing activities during the three months ended March 31, 2022 was $2.5 million and consisted of $4.2 million stock option exercises offset by $1.2 million for taxes paid related to net share settlement of equity awards and $0.4 million for principal payments of financing lease liability.
During the three months ended March 31, 2021 cash provided by operating activities of $24.7 million was the result of $2.4 million of net income, non-cash adjustments to net income of $11.0 million which was primarily driven by an adjustment for depreciation and amortization of $7.3 million, and net cash inflows of $11.3 million from changes in operating assets and liabilities primarily driven by reductions in accounts receivable and inventory. Cash used in investing activities during the period was $0.7 million to acquire other property and equipment. Cash