UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended ~~September 30, 2020~~March 31, 2021


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

For the transition period from to

Commission file number: 000-33001

NATUS MEDICAL INCORPORATED

(Exact name of registrant as specified in its charter)


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

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

(Address of principal executive offices) (Zip Code)

(925) 223-6700

(Registrant’s telephone number, including area code)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	NTUS	The Nasdaq Stock Market LLC
		(The Nasdaq Global Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the

registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” or an “emerging growth company” in Rule 12b-2 of the Exchange Act.:

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-accelerated Filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of issued and outstanding shares of the registrant’s Common Stock, $0.001 par value, as of ~~October 28, 2020~~April 30, 2021 was ~~33,867,567~~34,078,412.

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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~20 20 (unaudited)	3

	Condensed Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019~~2020 (unaudited)	4

	Condensed Consolidated Statements of Comprehensive ~~Income (Loss)~~Loss for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019~~2020 (unaudited)	5

	Condensed Consolidated Statements of Stockholders' Equity for the three ~~and nine~~ months ended ~~September 30,~~March 31 , 2021 and 2020 ~~and 2019~~ (unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ (unaudited)	87

	Notes to Condensed Consolidated Financial Statements (unaudited)	98

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1917

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2927

Item 4.	Controls and Procedures	2927

PART II.	OTHER INFORMATION	3028

Item 1.	Legal Proceedings	3028

Item 1A.	Risk Factors	3028

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3128

Item 5.	Other Information	3228

Item 6.	Exhibits	3228

Signatures		3329

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share amounts)

September 30, 2020 December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents $ 74,536 $ 63,297
Accounts receivable, net of allowance for doubtful accounts of $6,669 in 2020 and $7,384 in 2019 84,107 115,889
Inventories 80,135 71,368
Prepaid expenses and other current assets 27,740 19,195
Total current assets 266,518 269,749
Property and equipment, net 24,245 24,702
Operating lease right-of-use assets 11,960 15,046
Intangible assets, net 94,030 114,799
Goodwill 147,716 146,367
Deferred income tax 28,749 30,355
Other assets 23,672 21,509
Total assets $ 596,890 $ 622,527
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 27,597 $ 27,253
Current portion of long-term debt 40,000 35,000
Accrued liabilities 39,034 54,451
Deferred revenue 20,034 20,246
Current portion of operating lease liabilities 5,343 5,871
Total current liabilities 132,008 142,821
Other liabilities 19,574 17,616
Operating lease liabilities 9,358 12,051
Long-term debt, net of current portion 25,697 19,665
Deferred income tax 14,786 14,251
Total liabilities 201,423 206,404
Stockholders’ equity:
Common stock, $0.001 par value, 120,000,000 shares authorized; shares issued and outstanding 33,870,387 in 2020 and 34,148,700 in 2019 339,665 344,476
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding in 2020 and 2019 0 0
Retained earnings 66,106 87,922
Accumulated other comprehensive loss (10,304) (16,275)
Total stockholders’ equity 395,467 416,123
Total liabilities and stockholders’ equity $ 596,890 $ 622,527


	March 31, 2021		December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	80,549	$	82,082

Accounts receivable, net of allowance for doubtful accounts of $6,085 in 2021 and $6,213 in 2020	91,326		93,133
Inventories	69,467		75,650
Prepaid expenses and other current assets	24,477		20,837

Total current assets	265,819		271,702
Property and equipment, net	23,282		24,516
Operating lease right-of-use assets	10,776		11,669
Intangible assets, net	85,001		92,741
Goodwill	149,761		151,299
Deferred income tax	26,321		27,563
Other assets	20,408		20,904
Total assets	$	581,368	$	600,394
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	24,486	$	23,429
Current portion of long-term debt	36,523		50,000
Accrued liabilities	45,792		44,236
Deferred revenue	23,669		21,308
Current portion of operating lease liabilities	6,006		6,779

Total current liabilities	136,476		145,752
Other liabilities	17,864		18,451
Operating lease liabilities	8,181		8,959
Long-term debt, net of current portion	0		5,840
Deferred income tax	9,915		10,298
Total liabilities	172,436		189,300
Stockholders’ equity:
Common stock, $0.001 par value, 120,000,000 shares authorized; shares issued and outstanding 34,096,895 in 2021 and 33,911,703 in 2020	344,696		342,828
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding in 2021 and 2020	0		0
Retained earnings	73,705		71,309
Accumulated other comprehensive loss	(9,469)		(3,043)
Total stockholders’ equity	408,932		411,094
Total liabilities and stockholders’ equity	$	581,368	$	600,394

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
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019
Revenue $ 102,803 $ 123,463 $ 296,966 $ 363,759
Cost of revenue 47,160 48,389 134,665 147,291
Intangibles amortization 8,117 1,736 11,440 5,237
Gross profit 47,526 73,338 150,861 211,231
Operating expenses:
Marketing and selling 26,035 30,787 79,567 96,841
Research and development 14,670 14,447 46,574 41,166
General and administrative 12,384 15,394 36,754 44,390
Intangibles amortization 4,025 3,751 11,330 11,300
Restructuring 350 1,106 1,842 41,147
Total operating expenses 57,464 65,485 176,067 234,844
Income (loss) from operations (9,938) 7,853 (25,206) (23,613)
Other expense, net (947) (1,609) (3,198) (4,921)
Income (loss) before benefit from income tax (10,885) 6,244 (28,404) (28,534)
Benefit from income taxes (1,569) (1,987) (6,588) (9,852)
Net income (loss) (9,316) $ 8,231 $ (21,816) $ (18,682)
Net income (loss) per share:
Basic $ (0.28) $ 0.24 $ (0.65) $ (0.55)
Diluted $ (0.28) $ 0.24 $ (0.65) $ (0.55)
Weighted average shares used in the calculation of net income (loss) per share:
Basic 33,828 33,655 33,577 33,666
Diluted 33,828 33,738 33,577 33,666


	Three Months Ended March 31,
	2021		2020
Revenue	$	114,927	$	109,383
Cost of revenue	46,688		44,933
Intangibles amortization	1,751		1,668
Gross profit	66,488		62,782
Operating expenses:
Marketing and selling	28,971		30,730
Research and development	14,040		17,569
General and administrative	14,855		13,182
Intangibles amortization	3,897		3,661
Restructuring	205		871
Total operating expenses	61,968		66,013
Income (loss) from operations	4,520		(3,231)
Other expense, net	(1,656)		(1,494)
Income (loss) before benefit from income tax	2,864		(4,725)
Provision for (benefit from) income taxes	468		(1,128)
Net income (loss)	$	2,396	$	(3,597)
Net income (loss) per share:
Basic	$	0.07	$	(0.11)
Diluted	$	0.07	$	(0.11)
Weighted average shares used in the calculation of net income (loss) per share:
Basic	33,611		33,800
Diluted	33,782		33,800

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
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019
Net income (loss) $ (9,316) $ 8,231 $ (21,816) $ (18,682)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment 6,915 (6,181) 6,013 (6,411)
Interest rate swap designated as a cash flow hedge 68 (27) (42) (236)
Reclassification of stranded tax effects upon adoption of ASU 2018-02 0 0 0 (1,332)
Reclassification of deferred foreign currency related adjustments related to the sale of Medix 0 0 0 24,845
Other comprehensive income (loss), net of tax 6,983 (6,208) 5,971 16,866
Comprehensive income (loss) (2,333) 2,023 (15,845) (1,816)


	Three Months Ended March 31,
	2021		2020
Net income (loss)	$	2,396	$	(3,597)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment	(6,494)		(4,018)
Interest rate swap designated as a cash flow hedge	68		(175)


Other comprehensive loss, net of tax	(6,426)		(4,193)
Comprehensive loss	(4,030)		(7,790)

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			Common Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Stockholders’ Equity
		Shares	Amount									Shares	Amount
Balances, December 31, 2019		34,148,700	$	344,476	$	87,922	$	(16,275)	$	416,123
Balances, December 31, 2020											Balances, December 31, 2020	33,911,703	$	342,828	$	71,309	$	(3,043)	$	411,094

Vesting of restricted stock units	Vesting of restricted stock units	14,033	—		—		—		—		Vesting of restricted stock units	19,650	—		—		—		—
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

Net issuance of restricted stock awards	Net issuance of restricted stock awards	(856)	—		—		—		—		Net issuance of restricted stock awards	222,899	—		—		—		—

Stock-based compensation expense	Stock-based compensation expense	—	2,337		—		—		2,337		Stock-based compensation expense	—	3,018		—		—		3,018

Taxes paid related to net share settlement of equity awards	Taxes paid related to net share settlement of equity awards	(480)	(10)		—		—		(10)		Taxes paid related to net share settlement of equity awards	(57,357)	(1,150)		—		—		(1,150)

Other comprehensive income		—	—		—		6,983		6,983
Net loss		—	—		(9,316)				(9,316)
Balances, September 30, 2020		33,870,387	$	339,665	$	66,106	$	(10,304)	$	395,467
Other comprehensive loss											Other comprehensive loss	—	—		—		(6,426)		(6,426)
Net income											Net income	—	—		2,396		—		2,396
Balances, March 31, 2021											Balances, March 31, 2021	34,096,895	$	344,696	$	73,705	$	(9,469)	$	408,932

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~~Table of Contents~~


		Common Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Stockholders’ Equity			Common Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Stockholders’ Equity
		Shares	Amount									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)		0
Balances, December 31, 2019											Balances, December 31, 2019	34,148,700	$	344,476	$	87,922	$	(16,275)	$	416,123

Vesting of restricted stock units	Vesting of restricted stock units	42,130	—		—		—		—		Vesting of restricted stock units	14,033	—		—		—		—
Net issuance of restricted stock awards	Net issuance of restricted stock awards	139,718	—		—		—		—		Net issuance of restricted stock awards	162,212	—		—		—		—

Stock-based compensation expense	Stock-based compensation expense	—	2,432		—		—		2,432		Stock-based compensation expense	—	2,198		—		—		2,198
Repurchase of company stock	Repurchase of company stock	0	0		—		—		0		Repurchase of company stock	(465,117)	(10,495)		—		—		(10,495)
Taxes paid related to net share settlement of equity awards	Taxes paid related to net share settlement of equity awards	(47,767)	(1,567)		—		—		(1,567)		Taxes paid related to net share settlement of equity awards	(57,695)	(1,883)		—		—		(1,883)
Exercise of stock options		16,617	268		—		—		268

Other comprehensive loss	Other comprehensive loss	—	—		—		(1,875)		(1,875)		Other comprehensive loss	—	—		—		(4,193)		(4,193)
Net loss	Net loss	—	—		(30,398)		—		(30,398)		Net loss	—	—		(3,597)		—		(3,597)
Balances, March 31, 2019		33,955,077	$	335,348	$	73,195	$	(41,239)	$	367,304
Balances, March 31, 2020											Balances, March 31, 2020	33,802,133	$	334,296	$	84,325	$	(20,468)	$	398,153

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

Net issuance of restricted stock awards		27,025	—		—		—		—

Stock-based compensation expense		—	1,851		—		—		1,851

Taxes paid related to net share settlement of equity awards		(754)	(22)		—		—		(22)
Exercise of stock options		23,800	519		—		—		519
Other comprehensive loss		—	—		—		(6,208)		(6,208)
Net income		—	—		8,231		—		8,231
Balances, September 30, 2019		34,090,301	$	341,083	$	84,912	$	(21,166)	$	404,829

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

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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

Nine Months Ended
September 30,
2020 2019
Operating activities:
Net loss $ (21,816) $ (18,682)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for losses on accounts receivable 1,158 3,934
Impairment of intangible assets 6,678 0
Depreciation and amortization 20,989 22,946
Loss on disposal of property and equipment 149 482
Warranty reserve 1,129 2,588
Share-based compensation 7,059 6,377
Loss on commencement of sales-type leases 1,861 0
Impairment charge for sale of entity 0 24,571
Changes in operating assets and liabilities:
Accounts receivable 30,367 14,850
Inventories (6,417) (2,074)
Prepaid expenses and other assets (11,078) (9,527)
Accounts payable (19) 2,076
Accrued liabilities (13,844) 1,073
Deferred revenue (941) 2,371
Deferred income tax 1,826 (3,072)
Net cash provided by operating activities 17,101 47,913
Investing activities:
Purchase of property and equipment (7,617) (3,872)
Purchase of intangible assets 0 (13)
Net cash used in investing activities (7,617) (3,885)
Financing activities:
Proceeds from stock option exercises and Employee Stock Purchase Program purchases 658 2,193
Repurchase of common stock (10,495) 0
Taxes paid related to net share settlement of equity awards (1,936) (1,596)
Principal payments of financing lease liability (415) (404)
Proceeds from borrowings 60,000 0
Deferred debt issuance costs (1,175) 0
Payments on borrowings (48,000) (35,000)
Net cash used in financing activities (1,363) (34,807)
Exchange rate changes effect on cash and cash equivalents 3,118 (2,532)
Net increase in cash and cash equivalents 11,239 6,689
Cash and cash equivalents, beginning of period 63,297 56,373
Cash and cash equivalents, end of period $ 74,536 $ 63,062
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,605 $ 3,727
Cash paid for income taxes $ 6,489 $ 4,169
Non-cash investing activities:
Property and equipment included in accounts payable $ (59) $ 15
Inventory transferred to property and equipment $ 899 $ 205
Transfer of leased assets to sales-type leases $ 4,063 $ 0


	Three Months Ended March 31,
	2021		2020
Operating activities:
Net income (loss)	$	2,396	$	(3,597)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for losses on accounts receivable	101		522

Depreciation and amortization	7,257		6,994
Loss on disposal of property and equipment	8		42
Warranty reserve	341		704
Share-based compensation	3,114		2,291
Loss on commencement of sales-type leases	6		295
Loss on equity method investment	136		0
Changes in operating assets and liabilities:
Accounts receivable	4,962		15,612
Inventories	4,139		(3,443)
Prepaid expenses and other assets	(4,028)		(1,060)
Accounts payable	1,303		6,038
Accrued liabilities	1,172		(9,329)
Deferred revenue	2,732		2,190
Deferred income tax	1,064		103

Net cash provided by operating activities	24,703		17,362
Investing activities:

Purchase of property and equipment	(731)		(3,575)



Net cash used in investing activities	(731)		(3,575)
Financing activities:


Repurchase of common stock	0		(10,495)
Taxes paid related to net share settlement of equity awards	(1,150)		(1,883)
Principal payments of financing lease liability	(125)		(133)

Proceeds from borrowings	0		60,000

Payments on borrowings	(20,000)		(15,000)
Net cash provided by (used in) financing activities	(21,275)		32,489
Exchange rate changes effect on cash and cash equivalents	(4,230)		(2,557)
Net increase (decrease) in cash and cash equivalents	(1,533)		43,719
Cash and cash equivalents, beginning of period	82,082		63,297
Cash and cash equivalents, end of period	$	80,549	$	107,016
Supplemental disclosure of cash flow information:
Cash paid for interest	$	513	$	637
Cash paid for income taxes	$	(320)	$	3,492
Non-cash investing activities:
Property and equipment included in accounts payable	$	39	$	131
Inventory transferred to property and equipment	$	94	$	196
Transfer of leased assets to sales-type leases	$	13	$	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.~~2020.

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~~2020 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.~~2020.

Operating results for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2020.~~2021. 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.

Various government programs have been established to provide financial relief for businesses affected by COVID-19 including the Canada Emergency Wage Subsidy ("CEWS") under the COVID-19 Economic Response Plan in Canada. We received $2.9 million for payroll subsidies under CEWS during the three months ended March 31, 2021. Our policy is to account for these subsidies in the same manner as an offset to the expense they relate to in the period in which we are reasonably assured to receive payment. For the three months ended March 31, 2021 we recognized reductions of $0.4 million in cost of sales, $1.3 million in marketing and selling expense, and $1.2 million in research and development expense in the condensed consolidated statements of operations for these subsidies. No payroll subsidies were received or recognized under CEWS in prior periods. As of March 31, 2021 we have collected all amounts recorded and continue to seek additional relief as applicable.

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

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financial statements as of and for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, 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 early adopted the ASU in the second quarter of the current fiscal year. We early adopted the ASU in the second quarter of 2020. As a result, we recorded an additional income tax benefit of $0.9 million in the second quarter of 2020 due to the elimination of the year-to-date loss limitation rule that limited the interim period tax benefit.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 ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 (in thousands):


Unbilled AR, December 31, ~~2019~~2020	$	~~2,667~~1,925
Additions	~~123~~69
Transferred to trade receivable	~~(919)~~(8)
Unbilled AR, ~~September 30, 2020~~March 31, 2021	$	~~1,871~~1,986


Deferred revenue, December 31, ~~2019~~2020	$	~~24,808~~25,723
Additions	~~15,824~~11,032
Revenue recognized	~~(16,740)~~(8,332)
Deferred revenue, ~~September 30, 2020~~March 31, 2021	$	~~23,892~~28,423

At ~~September 30, 2020,~~March 31, 2021, the short-term portion of deferred revenue of ~~$20.0~~$23.7 million and the long-term portion of ~~$3.9~~$4.7 million ~~were~~are included in deferred revenue and other long-term liabilities, respectively, in the consolidated balance sheet. As of ~~September 30, 2020,~~March 31, 2021, we expect to recognize revenue associated with deferred revenue of approximately ~~$7.6 million in 2020, $13.1~~$20.1 million in 2021, ~~$1.7~~$5.5 million in 2022, ~~$1.0~~$1.5 million in 2023, $0.9 million in 2024, and ~~$0.5~~$0.4 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 September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Net income (loss)	Net income (loss)	$	(9,316)	$	8,231	$	(21,816)	$	(18,682)	Net income (loss)	$	2,396	$	(3,597)
Weighted average common shares	Weighted average common shares	33,828		33,655		33,577		33,666		Weighted average common shares	33,611		33,800
Dilutive effect of stock based awards	Dilutive effect of stock based awards	0		83		0		0		Dilutive effect of stock based awards	171		0
Diluted shares	Diluted shares	33,828		33,738		33,577		33,666		Diluted shares	33,782		33,800
Basic earnings (loss) per share		$	(0.28)	$	0.24	$	(0.65)	$	(0.55)
Diluted earnings (loss) per share		$	(0.28)	$	0.24	$	(0.65)	$	(0.55)
Basic earnings per share										Basic earnings per share	$	0.07	$	(0.11)
Diluted earnings per share										Diluted earnings per share	$	0.07	$	(0.11)
Shares excluded from calculation of diluted EPS	Shares excluded from calculation of diluted EPS	13		0		61		105		Shares excluded from calculation of diluted EPS	0		85

4 - Allowance for Doubtful Accounts

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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
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019
Balance, beginning of period $ 7,539 $ 8,579 $ 7,384 $ 6,960
Additions charged to expense 209 711 1,158 3,934
Write-offs charged against allowance (1,079) (243) (1,873) (1,847)
Balance, end of period $ 6,669 $ 9,047 $ 6,669 $ 9,047


	Three Months Ended March 31,
	2021		2020
Balance, beginning of period	$	6,213	$	7,384
Additions charged to expense	101		522
Write-offs charged against allowance	(229)		(614)

Balance, end of period	$	6,085	$	7,292

5 - Inventories

Inventories consist of the following (in thousands):

September 30, 2020 December 31, 2019
Raw materials and subassemblies $ 31,484 $ 37,259
Work in process 2,656 1,780
Finished goods 63,180 50,521
Total inventories 97,320 89,560
Less: Non-current inventories (17,185) (18,192)
Inventories, current $ 80,135 $ 71,368


	March 31, 2021		December 31, 2020
Raw materials and subassemblies	$	18,874	$	22,583
Work in process	3,327		2,294
Finished goods	61,977		65,695
Total inventories	84,178		90,572
Less: Non-current inventories	(14,711)		(14,922)
Inventories, current	$	69,467	$	75,650

As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, we have classified ~~$17.2~~$14.7 million and ~~$18.2~~$14.9 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.

6 – Intangible Assets

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

September 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 $ 110,139 $ (12,459) $ (61,380) $ 36,300 $ 108,400 $ (6,035) $ (55,408) $ 46,957
Customer related 92,178 (50) (47,737) 44,391 90,351 (50) (40,527) 49,774
Trade names 46,437 (3,595) (30,071) 12,771 45,874 (3,237) (25,355) 17,282
Internally developed software 13,281 0 (12,794) 487 13,281 0 (12,606) 675
Patents 2,750 (133) (2,617) 0 2,692 (133) (2,559) 0
Service agreements 1,190 0 (1,109) 81 1,190 0 (1,079) 111
Definite-lived intangible assets $ 265,975 $ (16,237) $ (155,708) $ 94,030 $ 261,788 $ (9,455) $ (137,534) $ 114,799


	March 31, 2021								December 31, 2020
	Gross Carrying Amount		Accumulated Impairment		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Impairment		Accumulated Amortization		Net Book Value
Intangible assets with definite lives:
Technology	$	110,356	$	(12,458)	$	(65,079)	$	32,819	$	112,138	$	(12,480)	$	(64,203)	$	35,455
Customer related	92,411		(50)		(52,499)		39,862		94,526		(50)		(51,247)		43,229
Trade names	46,481		(3,592)		(33,047)		9,842		47,058		(3,677)		(31,890)		11,491
Internally developed software	13,281		0		(12,895)		386		13,281		0		(12,845)		436
Patents	2,748		(133)		(2,615)		0		2,810		(133)		(2,677)		0
Service agreements	1,190		0		(1,129)		61		1,190		0		(1,119)		71
Definite-lived intangible assets	$	266,467	$	(16,233)	$	(167,264)	$	82,970	$	271,003	$	(16,340)	$	(163,981)	$	90,682
Intangible assets with indefinite lives:
Intellectual Property	$	2,031	$	0	$	—	$	2,031	$	2,059	$	0	$	—	$	2,059
Total intangible assets	$	268,498	$	(16,233)	$	(167,264)	$	85,001	$	273,062	$	(16,340)	$	(163,981)	$	92,741

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.

In the third quarter of 2020 we recorded an impairment charge related to intangible assets of $6.7 million of which $6.4 million was recorded within intangibles amortization within cost of revenue and $0.3 million was recorded within intangibles amortization within operating expenses on the Company's income statement. The impairment relates to an end of life decision for an acquired tradename and technology. During the third quarter of 2020, the Company made the decision to discontinue sales of the related product rather than continuing to invest in the product.

Amortization expense related to intangible assets with definite lives was as follows (in thousands):


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Technology	Technology	$	8,162	$	1,719	$	11,572	$	5,186	Technology	$	1,795	$	1,712
Customer related	Customer related	2,204		2,159		6,468		6,509		Customer related	2,360		2,140
Trade names	Trade names	1,767		1,487		4,700		4,476		Trade names	1,483		1,466
Internally developed software	Internally developed software	51		359		188		1,369		Internally developed software	50		69
Patents		0		20		0		60

Service agreements	Service agreements	$	10	$	102	30		307		Service agreements	$	10	$	10
Total amortization	Total amortization	$	12,194	$	5,846	$	22,958	$	17,907	Total amortization	$	5,698	$	5,397

The amortization expense amounts shown above include internally developed software not held for sale of $24 thousand and ~~$72~~$24 thousand for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and March 31, 2020, 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 ~~$27~~$26 thousand and ~~$116~~$45 thousand for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and March 31, 2020, respectively, which is recorded within our income statement as cost of goods sold.

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Expected amortization expense related to definite-lived amortizable intangible assets is as follows (in thousands):

Three months ending December 31, 2020 $ 5,264
2021 20,186
2022 16,765
2023 15,806
2024 13,877
2025 13,261
Thereafter 8,871
Total expected amortization expense $ 94,030


Nine months ending December 31, 2021	$	16,276
2022	17,940
2023	15,169
2024	13,233
2025	12,619
2026	2,422
Thereafter	5,311
Total expected amortization expense	$	82,970

7 – Goodwill

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


December 31, ~~2019~~2020	$	~~146,367~~151,299

Foreign currency translation	~~1,349~~ (1,538)
~~September 30, 2020~~March 31, 2021	$	~~147,716~~149,761

8 - Property and Equipment, net

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

September 30, 2020 December 31, 2019
Land $ 1,728 $ 1,719
Buildings 7,061 6,943
Leasehold improvements 7,997 8,664
Finance lease right-of-use assets 2,423 2,377
Equipment and furniture 24,184 22,819
Computer software and hardware 14,404 12,610
Demonstration and loaned equipment 3,006 11,621
60,803 66,753
Accumulated depreciation (36,558) (42,051)
Total $ 24,245 $ 24,702


	March 31, 2021		December 31, 2020
Land	$	1,786	$	1,792
Buildings	7,144		7,365
Leasehold improvements	7,378		8,050
Finance lease right-of-use assets	2,512		2,555
Equipment and furniture	20,581		22,148
Computer software and hardware	10,257		10,246
Demonstration and loaned equipment	3,175		3,086
	52,833		55,242
Accumulated depreciation	(29,551)		(30,726)
Total	$	23,282	$	24,516

Depreciation expense of property and equipment was approximately ~~$1.9~~$1.6 million and ~~$5.2~~$1.7 million for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and March 31, 2020, ~~and approximately $1.7 million and $5.3 million for the three and nine months ended September 30, 2019.~~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 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.

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As of ~~September 30, 2020,~~March 31, 2021, we have accrued $4.8 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.

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

Three Months Ended
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019
Balance, beginning of period $ 5,683 $ 8,076 $ 6,404 $ 9,391
Additions charged to expense 215 911 1,494 3,159
Utilizations (684) (1,560) (2,684) (4,543)
Changes in estimate related to product remediation activities (366) 0 (366) (571)
Divestiture adjustments 0 0 0 (9)
Balance, end of period $ 4,848 $ 7,427 $ 4,848 $ 7,427


	Three Months Ended March 31,
	2021		2020
Balance, beginning of period	$	5,195	$	6,404

Additions charged to expense	341		704
Utilizations	(740)		(1,271)


Balance, end of period	$	4,796	$	5,837

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 ~~September 30, 2020,~~March 31, 2021, we have 2 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 ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 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.~~2020.

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

Three Months Ended
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019
Cost of revenue $ 79 $ 37 $ 229 $ 193
Marketing and selling 475 270 1,424 773
Research and development 275 161 798 600
General and administrative 1,507 1,384 4,511 4,705
Total $ 2,336 $ 1,852 $ 6,962 $ 6,271


	Three Months Ended March 31,
	2021		2020
Cost of revenue	$	100	$	75
Marketing and selling	640		469
Research and development	355		254
General and administrative	1,923		1,400

Total	$	3,018	$	2,198

As of ~~September 30, 2020,~~March 31, 2021, unrecognized compensation expense related to the unvested portion of stock options and other stock awards was approximately ~~$13.0~~$20.2 million, which is expected to be recognized over a weighted average period of ~~2.0~~2.6 years.

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11 - Other Income (Expense), net

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Interest income	Interest income	$	(25)	$	93	$	7	$	239	Interest income	$	3	$	24
Interest expense	Interest expense	(1,107)		(1,172)		(2,800)		(4,167)		Interest expense	(766)		(717)
Foreign currency gain (loss)		273		(397)		(311)		(860)
Foreign currency loss										Foreign currency loss	(731)		(801)
Other expense	Other expense	(88)		(133)		(94)		(133)		Other expense	(162)		0
Total other expense, net		$	(947)	$	(1,609)	$	(3,198)	$	(4,921)
Total other (expense), net										Total other (expense), net	$	(1,656)	$	(1,494)

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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.

~~In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Tax. This update includes removal~~We recorded income tax expense of ~~certain exceptions to the general principles of ASC 740, Income taxes,~~$0.5 million and simplification in several other areas such as accounting for franchise tax (or similar tax) that is partially based on income. We early adopted the ASU in the second quarter of 2020. As a result, we recorded an additional income tax benefit of ~~$0.9 million in the second quarter of 2020 due to the elimination of the year-to-date loss limitation rule that limited the interim period tax benefit.~~

~~We recorded a benefit from income tax of $1.6 million and $6.6~~$1.1 million for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and March 31, 2020, respectively. The effective tax rate was ~~14.4%~~16.4% and ~~23.2%~~23.9% for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and March 31, 2020, respectively.

We recorded a benefit from income tax of $2.0 million and $9.9 million for the three and nine months ended September 30, 2019, respectively. The effective tax rate was (31.8)% and 34.5% for the three and nine months ended September 30, 2019, respectively.

The decrease in the effective tax rate for the three months ended ~~September 30, 2020~~March 31, 2021 compared with the three months ended ~~September 30, 2019~~March 31, 2020, is primarily attributable to changes in ~~distribution~~mix of income among jurisdictions with varying tax ~~rates. The decrease in~~rates and discrete items. Other significant factors impacting the current period effective tax rate ~~for the nine months ended September 30, 2020 compared with the nine months ended September 30, 2019 is primarily attributable to the tax accounting effects of the sale of Medix~~ included ~~in the nine months ended September 30, 2019. Other significant factors that impact the effective tax rate are~~Federal and California research and development credits and non-deductible executive compensation expenses.

We recorded ~~an increase of $1.8 million~~no changes related to unrecognized tax benefits for the three ~~and nine~~ months ended ~~September 30, 2020.~~March 31, 2021. Within the next twelve months, it is possible that the uncertain tax ~~benefit~~positions may change with a range of approximately 0 to ~~$2.4~~$0.2 million. Our tax returns remain open to examination as follows: U.S Federal, 2017 through 2020, U.S. states, 2016 through ~~2019, U.S. states, 2015 through 2019,~~2020, and significant foreign jurisdictions, generally ~~2015~~2016 through ~~2019.~~

For the three and nine months ended September 30, 2020, we have included our best estimate of the impact of 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.2020.

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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 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.

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.

At ~~September 30, 2020,~~March 31, 2021, 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 September 30, 2020,~~uncertainty of which $43.0 million was repaid by December 31, 2020. During the first quarter of 2021, we repaid $20.0 million of our outstanding debt and at March 31, 2021, we had ~~$67.0~~$37.0 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 2.25% to 3.50%. The effective interest rate during the ~~nine~~ three

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months ended ~~September 30, 2020~~March 31, 2021 was ~~3.04%~~3.05%. The Credit Agreement matures on September 25, 2023, at which time all principal amounts outstanding under the Credit Agreement will be due and payable. As of ~~September 30, 2020,~~March 31, 2021, we have classified ~~$40.0~~the full outstanding debt balance of $37.0 million ~~of the $67.0 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, 2021		December 31, 2020
Revolving credit facility	$	37,000	$	57,000
Debt issuance costs	(477)		(1,160)
Less: current portion of long-term debt	36,523		50,000
Total long-term debt	$	0	$	5,840

September 30, 2020 December 31, 2019
Revolving credit facility $ 67,000 $ 55,000
Debt issuance costs (1,303) (335)
Less: current portion of long-term debt 40,000 35,000
Total long-term debt $ 25,697 $ 19,665

Maturities of long-term debt as of ~~September 30, 2020~~March 31, 2021 are as follows (in thousands):


		September 30, 2020		December 31, 2019			March 31, 2021		December 31, 2020
2020		$	0	$	0
2021	2021	0		55,000		2021	$	0	$	0
2022	2022	0		0		2022	0		0
2023						2023	37,000		57,000
Thereafter	Thereafter	67,000		0		Thereafter	0		0
Total	Total	$	67,000	$	55,000	Total	$	37,000	$	57,000

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As of ~~September 30, 2020,~~March 31, 2021, 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 ~~September 30, 2020~~March 31, 2021 (in thousands):

Hedged Item

Current Notional Amount

Designation Date

Effective Date

Termination Date

Fixed Interest Rate

Floating Rate

Estimated Fair Value

Hedged Item

Current Notional Amount

Designation Date

Effective Date

Termination Date

Fixed Interest Rate

Floating Rate

Estimated Fair Value

1-month USD LIBOR Loan

15,000

May 31, 2018

June 1, 2018

September 23, 2021

2.611%

1-month USD LIBOR

369

1-month USD LIBOR Loan

15,000

May 31, 2018

June 1, 2018

September 23, 2021

2.611%

1-month USD LIBOR

187

Total interest rate derivatives designated as cash flow hedge

15,000

369

Total interest rate derivatives designated as cash flow hedge

15,000

187

We have designated these derivative instruments as cash flow hedges. We assess the effectiveness of these derivative instruments and ~~records~~record the change in the fair value of a derivative instrument designated as a cash flow hedge as unrealized gains or losses in accumulated other comprehensive income (“AOCI”), net of tax. Once the hedged item affects earnings, the effective portion of any gain or loss will be reclassified to earnings. If the hedged cash flow does not occur, or if it becomes probable that it will not occur, we will reclassify the amount of any gain or loss on the related cash flow hedge to interest expense at that time.

As of ~~September 30, 2020,~~March 31, 2021, we estimate that approximately ~~$280.0~~$142.0 thousand of losses associated with the cash flow hedge, net of tax, could be reclassified from AOCI into earnings within the next twelve months.

15 - Segment, Customer and Geographic Information

We operate in 1 reportable segment in which we provide medical device solutions focused on the diagnosis and treatment of central nervous and sensory system disorders for patients of all ages.

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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 September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Consolidated Revenue:	Consolidated Revenue:									Consolidated Revenue:
United States	United States	$	63,553	$	73,553	$	183,181	$	213,055	United States	$	67,772	$	68,338
International	International	39,250		49,910		113,785		150,704		International	47,155		41,045
Total	Total	$	102,803	$	123,463	$	296,966	$	363,759	Total	$	114,927	$	109,383


	Three Months Ended March 31,
	2021		2020
Revenue by End Market:
Neuro Products
Devices and Systems	$	53,341	$	49,426
Supplies	15,714		15,924

Total Neuro Revenue	69,055		65,350
Newborn Care Products
Devices and Systems	13,772		11,124
Supplies	8,403		9,691
Services	3,764		3,417
Total Newborn Care Revenue	25,939		24,232
Hearing & Balance Products
Devices and Systems	18,771		18,560
Supplies	1,162		1,241

Total Hearing & Balance Revenue	19,933		19,801
Total Revenue	$	114,927	$	109,383

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Three Months Ended
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019
Revenue by End Market:
Neuro Products
Devices and Systems $ 44,309 $ 55,460 $ 126,957 $ 155,726
Supplies 14,427 16,732 40,723 49,582
Services 0 0 0 871
Total Neuro Revenue 58,736 72,192 167,680 206,179
Newborn Care Products
Devices and Systems 11,800 12,487 36,708 39,747
Supplies 9,231 9,864 27,856 28,844
Services 4,679 4,654 12,181 14,514
Total Newborn Care Revenue 25,710 27,005 76,745 83,105
Hearing & Balance Products
Devices and Systems 17,312 23,092 49,540 70,795
Supplies 1,045 1,174 3,001 3,680
Total Hearing & Balance Revenue 18,357 24,266 52,541 74,475
Total Revenue $ 102,803 $ 123,463 $ 296,966 $ 363,759


		September 30, 2020		December 31, 2019			March 31, 2021		December 31, 2020
Property and equipment, net:	Property and equipment, net:					Property and equipment, net:
United States	United States	$	11,569	$	11,868	United States	$	10,115	$	10,998
Ireland	Ireland	6,014		5,732		Ireland	6,647		6,716
Canada	Canada	3,855		4,140		Canada	3,713		3,775
Denmark	Denmark	1,761		1,799		Denmark	1,613		1,787

Other countries	Other countries	1,046		1,163		Other countries	1,194		1,240
Total	Total	$	24,245	$	24,702	Total	$	23,282	$	24,516

During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ no single customer orand no country outside the United States contributed more than 10% of our consolidated revenue.

16 - 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

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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.

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 derivative financial instruments described in Note 14 are measured at fair value on a recurring basis and are presented on the consolidated balance sheets at fair value. We estimate the fair value of the interest rate swaps

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by calculating the present value of the expected future cash flows of each swap. The calculation incorporates the contractual terms of the derivatives, observable market interest rates which are considered to be Level 2 inputs, and credit risk adjustments, if any, to reflect the counterpart's as well as our nonperformance risk. As of ~~September 30, 2020,~~March 31, 2021, there have been no events of default under the interest rate swap agreement. The table below presents the fair value of the derivative financial instruments as well as the classification on the consolidated balance sheet (in thousands):

December 31, 2019 Additions Payments Adjustments September 30, 2020
Liabilities:
Interest rate swap $ 313 $ 0 $ 0 $ 56 $ 369
Total $ 313 $ 0 $ 0 $ 56 $ 369


	December 31, 2020		Additions		Payments		Adjustments		March 31, 2021
Liabilities:
Interest rate swap	$	277	$	0	$	0	$	(90)	$	187
Total	$	277	$	0	$	0	$	(90)	$	187

The following financial instruments are not measured at fair value on our consolidated balance sheet as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 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.

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, ~~2019.~~2020. 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, ~~2019~~2020 and the cautionary information regarding forward-looking statements at the end of this section.

Our Business

We are a leading provider of medical device solutions focused on the diagnosis and treatment of central nervous and sensory system disorders for patients of all ages.

End Markets

Our products address the below end markets:

•Neuro - Includes products and services that provide diagnostic, therapeutic and surgical solutions in neurodiagnostics, neurocritical care and neurosurgery. Neuro's comprehensive neurodiagnostic solutions include electroencephalography and long-term monitoring, Intensive Care Unit monitoring, electromyography, sleep analysis or polysomnography, and ~~intra-operative~~intraoperative monitoring. These solutions enhance the diagnosis of neurological conditions such as epilepsy, sleep disorders and neuromuscular diseases. Our neurocritical care solutions include management of traumatic brain injury by continuous

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monitoring of intracranial pressure and cerebrospinal fluid drainage, as well as cranial access kits for entry into the cranium. Our neurosurgical solutions include items such as valves, shunts and related treatment solutions for procedures involving hydrocephalus.

•Newborn Care - Includes products and services for newborn care including hearing screening, brain monitoring, eye imaging, jaundice management, and various disposable newborn care supplies.

•Hearing & Balance - The Hearing portfolio includes products for hearing assessment and diagnostics, and hearing aid fitting, including computer-based audiological, ~~and~~ otoneurologic and vestibular ~~instrumentation.~~instrumentation for hearing care professionals. Our Balance portfolio provides diagnosis and assessment of vestibular and balance disorders. These solutions have a complete product and brand portfolio known for its sophisticated design technology in the hearing and balance assessment markets.

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Segment and Geographic Information

We operate as one operating segment and one reportable segment, which provides healthcare products, and services focused on the diagnosis and treatment of central nervous and sensory system disorders for patients of all ages. 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 asses 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 15 – 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, ~~2019.~~2020. Revenue from Devices and Systems, Supplies, and Services, as a percent of total revenue for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ is as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Devices and Systems	Devices and Systems	71	%	74	%	73	%	73	%	Devices and Systems	75	%	72	%
Supplies	Supplies	24	%	22	%	24	%	23	%	Supplies	22	%	25	%
Services	Services	5	%	4	%	3	%	4	%	Services	3	%	3	%
Total	Total	100	%	100	%	100	%	100	%	Total	100	%	100	%

~~2020 Third~~2021 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.

We experienced ~~a significant decline~~an increase in demand, particularly in ~~the U.S.~~Asia Pacific and Europe, during the ~~third~~first quarter compared to the same period in the prior year as ~~a result of~~recovery from the COVID-19 ~~pandemic.~~pandemic continues. Our consolidated revenue for the ~~third~~first quarter ended ~~September 30, 2020~~March 31, 2021 was ~~$102.8~~$114.9 million compared to ~~$123.5~~$109.4 million in the ~~third~~first quarter of the previous year, ~~a decrease~~an increase of ~~$20.7~~$5.5 million.

Our net loss was $9.3 million or $0.28 per share in the three months ended September 30, 2020, compared with net income of $8.2 million or $0.24 per diluted share in the same period in 2019. The net loss was driven mainly by lower revenue resulting from the impact of the COVID-19 pandemic on global demand for our products and impairment of intangibles related to end of sale products.

We are encouraged by the rate of business recovery during the third quarter ended September 30, 2020 as compared to the second quarter ended June 30, 2020. Our consolidated revenue increased $18.0 million during the third quarter of 2020 to $102.8 million compared to $84.8 million in the second quarter ended June 30, 2020.

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Our net income was $2.4 million or $0.07 per diluted share in the three months ended March 31, 2021, compared with net loss of $3.6 million or $0.11 per share in the same period in 2020. The increase in net income was the result of higher revenue due to the recovery from impact of COVID-19, in particular in international markets for Neuro products, and lower expenses compared to the prior year, driven by the timing of engineering project spend and the benefit of COVID-19 payroll relief received in Canada.

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. We have taken actions to reduce costs, including reducing travel and discretionary expenses. We will continue to prioritize spending to allow continued investment in products and services that are key elements of our stated strategy for profitable growth in the years ahead.

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 have made strategic investments in inventory to help mitigate potential supply chain disruptions. These investments include increased inventory and firm purchase orders beyond our typical timeframe in order to secure capacity at our key suppliers. To date, we have not incurred any significant supply disruptions and we believe our suppliers are positioned well to provide us with the materials we need to meet our demand. ~~Going into the fourth quarter, supply~~Supply appears to be stable, which could allow for the reduction of inventory levels in future quarters. The health and safety of our suppliers is also a priority for us and we have transitioned collaboration with our suppliers to online technology so that we can continue our business operations.

Liquidity

In ~~2019, we completed a restructuring of the Company and strengthened our balance sheet by generating over $60.0 million in cash from operations and paying down $55.0 million in debt. At the end of~~ 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.~~uncertainty of which $43.0 million was repaid by December 31, 2020. During the third quarter of 2020 we amended our Credit Agreement which extended the maturity date of the original agreement from September 23, 2021 to September 25, 2023, reduced the aggregate revolving credit facility from $225.0 million to $150.0 million, and amended certain covenants. During the ~~nine~~three months ended ~~September 30, 2020,~~Mach 31, 2021, we repaid ~~$48.0~~$20.0 million in debt, reducing the amount outstanding under the Credit Agreement to $37.0 million, and continued to maintain a strong cash position ending the period with ~~$74.5~~$80.5 million in cash.

~~Some~~As a result of the COVID-19 pandemic, some hospitals and clinics delayed payments for products and services and we have worked with our customers to arrange mutually acceptable payment terms during this uncertain time. ~~Looking ahead, we expect~~We have seen revenues and margins to improve ~~compared~~since the onset of the pandemic. We continue to ~~the third quarter, but remain below historical levels. We~~ see our customers adapting to the COVID environment, ~~with elective procedures resuming,~~ which we believe will result in increased capital spending ~~improving~~and continue to improve our business ~~for the remainder of 2020.~~in 2021.

While we believe that we have sufficient liquidity to operate the Company for the foreseeable future should negative economic conditions persist for an extended period of time, we are evaluating additional measures we could take to ~~improve~~further enhance our liquidity position.

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Government Grants

Various government programs have been announced to provide financial relief for businesses affected by COVID-19 including the CEWS under the COVID-19 Economic Response Plan in Canada. We received $2.9 million for payroll subsidies under CEWS during the three months ended March 31, 2021. Our policy is to account for these subsidies in the same manner as an offset to the expense they relate to in the period in which we are reasonably assured to receive payment. For the three months ended March 31, 2021 we recognized reductions of $0.4 million of cost of sales, $1.3 million of marketing and selling expense, and $1.2 million of research and development expense in the condensed consolidated statements of operations for these subsidies. No payroll subsidies were received or recognized under CEWS in prior periods. As of March 31, 2021 we have collected all amounts recorded and continue to seek additional relief as applicable.

Impact to fair-value of intangible assets

We have reviewed the assets on our balance sheet, particularly goodwill and significant intangible assets for indications of impairment related to COVID-19 and determined that there are no indicators of impairment at this time. The values of these assets are particularly sensitive to our market cap and the ~~long term~~long-term value of their cash flows. If these conditions change significantly, we may need to record an impairment to their value. However, any impairment charges would not require the use of cash and are excluded from the calculation of our debt covenants and, therefore, would not affect our ability to borrow under our existing credit line.

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During the third quarter of 2020 we made the decision to discontinue the sale of one of our products rather than continuing to invest in the product which resulted in the impairment of an acquired tradename and technology. See Note 6 to the unaudited Condensed Consolidated Financial Statements for additional discussion on this impairment charge.

Impact to our financial systems and internal controls

To date, the COVID-19 pandemic has not had a material impact to our ability to operate our accounting and financial functions. We are staffed with approximately 150 dedicated finance, accounting and IT professionals. Our accounting and IT systems are maintained with third party support agreements and we have documented disaster recovery plans in place. Our finance, accounting and IT professionals are performing their normal functions while working from home with little to no physical presence and with no changes to our internal controls. We are confident that we can operate in this manner for an extended period of time without disruption and without significant impact to our internal controls.

Travel restrictions and use of online technology

The global Natus team is geographically diverse with multiple small locations and hundreds of employees that typically work from home in normal circumstances. We use the latest collaboration technology and have been able to transition to a company-wide work from home model without major interruption. Our manufacturing, distribution and field service operations require physical presence of certain employees as their work requires them to handle our products. In these cases, we have made adjustments to shift size and schedule and limited access to these groups by non-related employees. Our field service technicians are following our customers' requirements for distancing practices but continue to provide service where needed.

Travel restrictions have forced most customer and external partner collaboration to online technology. Using this technology has enabled us to continue operations without incident. However, in-person customer engagement as well as physical presence in laboratory settings is required for the ~~long term~~long-term success of our company and eventually, we will need to return to traditional forms of interaction.

Application of Critical Accounting Policies

We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America. 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.

We believe that the following critical accounting policies require the use of significant estimates, assumptions, and judgments:

•Revenue recognition

•~~Acquisition accounting~~Inventory valuation

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•~~Inventory valuation~~Income Taxes

The use of different estimates, assumptions, or 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 policies are described in more detail in our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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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 September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Revenue	Revenue	100.0	%	100.0	%	100.0	%	100.0	%	Revenue	100.0	%	100.0	%
Cost of revenue	Cost of revenue	45.9	%	39.2	%	45.3	%	40.4	%	Cost of revenue	40.6	%	41.1	%
Intangibles amortization	Intangibles amortization	7.9	%	1.4	%	3.9	%	1.4	%	Intangibles amortization	1.5	%	1.5	%
Gross profit	Gross profit	46.2	%	59.4	%	50.8	%	58.2	%	Gross profit	57.9	%	57.4	%
Operating expenses:	Operating expenses:									Operating expenses:
Marketing and selling	Marketing and selling	25.3	%	24.9	%	26.8	%	26.6	%	Marketing and selling	25.2	%	28.1	%
Research and development	Research and development	14.3	%	11.7	%	15.7	%	11.3	%	Research and development	12.2	%	16.1	%
General and administrative	General and administrative	12.0	%	12.5	%	12.4	%	12.2	%	General and administrative	12.9	%	12.1	%
Intangibles amortization	Intangibles amortization	3.9	%	3.0	%	3.8	%	3.1	%	Intangibles amortization	3.4	%	3.3	%
Restructuring	Restructuring	0.3	%	0.9	%	0.6	%	11.3	%	Restructuring	0.2	%	0.8	%
Total operating expenses	Total operating expenses	55.8	%	53.0	%	59.3	%	64.5	%	Total operating expenses	53.9	%	60.4	%
Income (loss) from operations	Income (loss) from operations	(9.6)	%	6.4	%	(8.5)	%	(6.3)	%	Income (loss) from operations	4.0	%	(3.0)	%
Other expense, net	Other expense, net	(0.9)	%	(1.2)	%	(1.1)	%	(1.5)	%	Other expense, net	(1.4)	%	(1.4)	%
Income (loss) before benefit from income tax		(10.5)	%	5.2	%	(9.6)	%	(7.8)	%
Benefit from income taxes		(1.5)	%	(1.6)	%	(2.2)	%	(2.7)	%
Income (loss) before provision for income tax										Income (loss) before provision for income tax	2.6	%	(4.4)	%
Provision for (benefit from) income taxes										Provision for (benefit from) income taxes	0.4	%	(1.0)	%
Net income (loss)	Net income (loss)	(9.0)	%	6.8	%	(7.4)	%	(5.1)	%	Net income (loss)	2.2	%	(3.4)	%

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Revenues

The following table shows revenue by products during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and March 31, 2020 ~~and September 30, 2019~~ (in thousands):


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
		2020		2019		Change		2020		2019		Change			2021		2020		Change
Neuro Products	Neuro Products													Neuro Products
Devices and Systems	Devices and Systems	$	44,309	$	55,460	(20)	%	$	126,957	$	155,726	(18)	%	Devices and Systems	$	53,341	$	49,426	8	%
Supplies	Supplies	14,427		16,732		(14)	%	40,723		49,582		(18)	%	Supplies	15,714		15,924		(1)	%
Services		—		—		—	%	—		871		(100)	%

Total Neuro Revenue	Total Neuro Revenue	58,736		72,192		(19)	%	167,680		206,179		(19)	%	Total Neuro Revenue	69,055		65,350		6	%
Newborn Care Products	Newborn Care Products													Newborn Care Products
Devices and Systems	Devices and Systems	11,800		12,487		(6)	%	36,708		39,747		(8)	%	Devices and Systems	13,772		11,124		24	%
Supplies	Supplies	9,231		9,864		(6)	%	27,856		28,844		(3)	%	Supplies	8,403		9,691		(13)	%
Services	Services	4,679		4,654		1	%	12,181		14,514		(16)	%	Services	3,764		3,417		10	%
Total Newborn Care Revenue	Total Newborn Care Revenue	25,710		27,005		(5)	%	76,745		83,105		(8)	%	Total Newborn Care Revenue	25,939		24,232		7	%
Hearing & Balance Products	Hearing & Balance Products													Hearing & Balance Products
Devices and Systems	Devices and Systems	17,312		23,092		(25)	%	49,540		70,795		(30)	%	Devices and Systems	18,771		18,560		1	%
Supplies	Supplies	1,045		1,174		(11)	%	3,001		3,680		(18)	%	Supplies	1,162		1,241		(6)	%

Total Hearing & Balance Revenue	Total Hearing & Balance Revenue	18,357		24,266		(24)	%	52,541		74,475		(29)	%	Total Hearing & Balance Revenue	19,933		19,801		1	%
Total Revenue	Total Revenue	$	102,803	$	123,463	(17)	%	$	296,966	$	363,759	(18)	%	Total Revenue	$	114,927	$	109,383	5	%

For the three months ended ~~September 30, 2020,~~March 31, 2021, Neuro revenue ~~decreased~~increased by ~~19%~~6% compared to the same period last ~~year.~~year driven by higher sales of Neuro devices in our international markets combined with strength in backlog from 2020. Revenue from ~~sales of both~~ Neuro ~~Devices and Systems and Neuro Supplies decreased~~supplies was down slightly from the same period last year due to ~~slowing demand attributed to impact~~lower shipments of ~~the COVID-19 pandemic.~~

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Neurocritical Care products.

For the three months ended ~~September 30, 2020,~~March 31, 2021, Newborn Care revenue ~~decreased~~increased by 5%6% compared to the same period last ~~year. The decrease in Newborn Care revenue was~~year due mainly to the exit from our Peloton business in 2019 and the impact of non-repeated tender business in 2019. These declines were partially offset by increases relating to our supply agreement with Pediatrix and salessale of NICVIEW devices, which had been on ship hold during the same period last ~~year.~~year, higher Hearing Screening device sales, and higher services revenue from our agreement with Pediatrix. These increases were partly offset by decreases in Hearing Screening supplies and Phototherapy devices due to lower births.

For the three months ended ~~September 30, 2020,~~March 31, 2021, Hearing & Balance revenue ~~decreased by 24%~~remained flat compared to the same period last ~~year. The decrease~~year with an increase in ~~revenue was driven by the impact of the COVID-19 pandemic on demand.~~

~~For the nine months ended September 30, 2020, Neuro revenue decreased by 19% compared to the same period last year. Revenue from~~device sales of Neuro Devices and Systems and Neuro Supplies decreased by 18% driven by a drop in demand related to the COVID-19 pandemic. Revenue from Services decreased by 100% due to the exit of GND, our ambulatory EEG services business, as of January 31, 2019.

For the nine months ended September 30, 2020, Newborn Care revenue decreased by 8% compared to the same period last year. The decrease in Newborn Care revenue was due to the exit from our Neurocom, Medix, and Peloton businesses in 2019 and the impact of non-repeated tender business in 2019, partly offset by ~~an increase resulting from our supply agreement with Pediatrix and release of the ship hold on NICVIEW devices~~a slight decline in ~~the current year.~~

For the nine months ended September 30, 2020, Hearing & Balance revenue decreased by 29% compared to the same period last year. The decrease in revenue was driven by the impact of the COVID-19 pandemic on demand.supplies revenue.

Revenue from domestic sales decreased to ~~$63.6~~$67.8 million for the three months ended ~~September 30, 2020~~March 31, 2021 compared to ~~$73.6~~$68.3 million in the three months ended ~~September 30, 2019.~~March 31, 2020. The decrease in domestic revenue was mainly due to the impact of the COVID-19 pandemic on ~~demand.~~demand for supplies.

Revenue from international sales ~~decreased~~increased to ~~$39.3~~$47.2 million for the three months ended ~~September 30, 2020~~March 31, 2021 compared to ~~$49.9~~$41.0 million for the three months ended ~~September 30, 2019.~~March 31, 2020. The ~~reduction~~increase was driven by recovery in demand, mainly for our Neuro products, following the impact of the COVID-19 pandemic ~~on demand~~ in ~~our international markets.~~the same period last year.

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Cost of Revenue and Gross Profit

Cost of revenue and gross profit consists of (in thousands):


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
		2020			2019			2020			2019				2021			2020
Revenue	Revenue	$	102,803		$	123,463		$	296,966		$	363,759		Revenue	$	114,927		$	109,383
Cost of revenue	Cost of revenue	47,160			48,389			134,665			147,291			Cost of revenue	46,688			44,933
Intangibles amortization	Intangibles amortization	8,117			1,736			11,440			5,237			Intangibles amortization	1,751			1,668
Gross profit	Gross profit	47,526			73,338			150,861			211,231			Gross profit	66,488			62,782
Gross profit percentage	Gross profit percentage	46.2		%	59.4		%	50.8		%	58.1		%	Gross profit percentage	57.9		%	57.4		%

For the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, gross profit as a percentage of revenue ~~decreased 13.2% and 7.4%, respectively,~~increased 0.5% compared to the same period in the prior year. The ~~decrease~~increase was due to ~~lower~~higher revenue and ~~higher other costs of revenue for freight, both driven by the impact of COVID-19, inventory related adjustments, and impairment of intangibles related to end of sale products,~~lower operations overhead spend partly offset by ~~a decrease in operations overhead expense.~~higher costs for freight and contract manufacturer fees.

Operating Costs

Operating costs consist of (in thousands):

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		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
		2020			2019			2020			2019				2021			2020
Marketing and selling	Marketing and selling	$	26,035		$	30,787		$	79,567		$	96,841		Marketing and selling	$	28,971		$	30,730
Percentage of revenue	Percentage of revenue	25.3		%	24.9		%	26.8		%	26.6		%	Percentage of revenue	25.2		%	28.1		%
Research and development	Research and development	$	14,670		$	14,447		$	46,574		$	41,166		Research and development	$	14,040		$	17,569
Percentage of revenue	Percentage of revenue	14.3		%	11.7		%	15.7		%	11.3		%	Percentage of revenue	12.2		%	16.1		%
General and administrative	General and administrative	$	12,384		$	15,394		$	36,754		$	44,390		General and administrative	$	14,855		$	13,182
Percentage of revenue	Percentage of revenue	12.0		%	12.5		%	12.4		%	12.2		%	Percentage of revenue	12.9		%	12.1		%
Intangibles amortization	Intangibles amortization	$	4,025		$	3,751		$	11,330		$	11,300		Intangibles amortization	$	3,897		$	3,661
Percentage of revenue	Percentage of revenue	3.9		%	3.0		%	3.8		%	3.1		%	Percentage of revenue	3.4		%	3.3		%
Restructuring	Restructuring	$	350		$	1,106		$	1,842		$	41,147		Restructuring	$	205		$	871
Percentage of revenue	Percentage of revenue	0.3		%	0.9		%	0.6		%	11.3		%	Percentage of revenue	0.2		%	0.8		%

Marketing and Selling

Marketing and selling expenses decreased for the three ~~and nine~~ months ended ~~September 30, 2020.~~March 31, 2021. The reduction was primarily driven by ~~exiting the GND, Peloton and Medix businesses in 2019, lower commissions due to lower revenue, and~~ lower travel and tradeshow expenses due to the impact of COVID-19 ~~restrictions.~~restrictions partly offset by an increase in commissions expense related to higher revenue in the current quarter.

Research and Development

Research and development expenses ~~increased~~decreased during the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 compared to the same period in ~~2019.~~2020. The ~~increase~~decrease is ~~due mainly~~the result of activities in 2020 which did not recur in 2021 related to ~~higher spend to support~~ remediation ~~activities~~ and projects to comply with the European Union's adoption of the Medical Device Regulation which imposes stricter requirements for the marketing and sale of medical devices, including new quality system and post-market surveillance requirements.

General and Administrative

General and administrative expense during the three ~~and nine~~ months ended ~~September 30, 2020 decreased~~March 31, 2021 increased when compared to the same period in the prior year. This ~~decrease~~increase was due to higher stock compensation and incentive compensation, partly offset by a reduction in outside service ~~expenses related to our exit from the GND and Peloton businesses and other organization changes as well as lower bad debt expense related to exiting the Peloton business as of December 31, 2019.~~expenses.

Intangibles Amortization

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Intangibles amortization remained flat during the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 as compared to the same period in ~~2019.~~2020.

Restructuring

Restructuring expenses decreased during the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 compared to the same period in ~~2019.~~2020. The decrease in the three months ended ~~September 30, 2020~~March 31, 2021 was primarily driven by lower severance costs and costs incurred as the ~~costs incurred~~result of exiting the Peloton business in ~~2019 related to our One Natus initiative that~~2020, which did not ~~repeat~~recur in the current year. For the nine months ended September 30, 2020, the decrease was primarily due to an impairment recorded related to the sale of Medix which included the recognition of deferred foreign currency related adjustments in accumulated other comprehensive income of $24.8 million, net of tax, and an adjustment of $4.6 million for assets with a book value in excess of their fair market value. We do not currently project that restructuring expenses related to COVID-19 will have an impact on the business.2021.

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 ~~September 30, 2020~~March 31, 2021 we reported ~~$0.9~~$1.7 million of other expense compared to ~~$1.6~~$1.5 million of other expense for the same period in ~~2019.~~2020. The ~~decrease~~increase in expense was driven by ~~foreign currency fluctuations.~~

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an equity method investment adjustment.

Provision for (Benefit from) Income Tax

We recorded ~~a benefit~~an expense from income tax of ~~$1.6~~$0.5 million and ~~$6.6~~a benefit for income tax of $1.1 million for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and March 31, 2020, respectively. The effective tax rate was ~~14.4%~~16.4% and ~~23.2%~~23.9% for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and March 31, 2020, respectively.

We recorded ~~an increase of $1.8 million~~no changes related to unrecognized tax benefits for the three ~~and nine~~ months ended ~~September 30, 2020.~~March 31, 2021. Within the next twelve months, it is possible that the uncertain tax ~~benefit~~positions may change with a range of approximately zero to ~~$2.4~~$0.2 million. Our tax returns remain open to examination as follows: U.S Federal, 2017 through 2020, U.S. states, 2016 through ~~2019, U.S. states, 2015 through 2019,~~2020, and significant foreign jurisdictions, generally ~~2015~~2016 through ~~2019.~~

2020.

Liquidity and Capital Resources

Liquidity and capital resources consist of (in thousands):


	March 31, 2021		December 31, 2020
Cash and cash equivalents	$	80,549	$	82,082

Working capital	129,343		125,950

September 30, 2020 December 31, 2019
Cash and cash equivalents $ 74,536 $ 63,297
Working capital 134,510 126,928


		Nine Months Ended September 30,					Three Months Ended March 31,
		2020		2019			2021		2020
Net cash provided by operating activities	Net cash provided by operating activities	$	17,101	$	47,913	Net cash provided by operating activities	$	24,703	$	17,362
Net cash used in investing activities	Net cash used in investing activities	(7,617)		(3,885)		Net cash used in investing activities	(731)		(3,575)
Net cash used in financing activities		(1,363)		(34,807)
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	(21,275)		32,489

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.

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As of ~~September 30, 2020,~~March 31, 2021, we had cash and cash equivalents outside the U.S. in certain of our international subsidiaries of ~~$31.3~~$50.2 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. 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. As of ~~September 30, 2020,~~March 31, 2021, we had ~~$67.0~~$37.0 million outstanding under the Credit Facility.

During the ~~nine~~three months ended ~~September 30,~~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 used in financing activities during the three months ended March 31, 2021 was $21.3 million and consisted of repayment on borrowing of $20.0 million, $1.2 million for taxes paid related to net share settlement of equity awards, and $0.1 million for principal payments of financing lease liability.

During the three months ended March 31, 2020 cash provided by operating activities of ~~$17.1~~$17.4 million was the result of ~~$21.8~~$3.6 million of net loss, non-cash adjustments to net loss of ~~$39.0~~$10.8 million, and net cash ~~outflows~~inflows of ~~$0.1~~$10.1 million from changes in operating assets and liabilities. The non-cash adjustment to net loss was primarily driven by depreciation and amortization of ~~$21.0~~$7.0 million. Cash used in investing activities during the period was ~~$7.6~~$3.6 million to acquire other property and equipment. Cash ~~used in~~provided by financing activities during the ~~nine~~three months ended ~~September 30,~~March 31, 2020 was ~~$1.4~~$32.5 million and consisted of proceeds from borrowing of $60.0 million ~~and Employee Stock Purchase Program (“ESPP”) purchases of $0.7 million~~ offset by repayment on borrowing of ~~$48.0~~$15.0 million, $10.5 million for repurchases of common stock under our share repurchase program, $1.9 million for taxes paid related to net share settlement of equity awards, ~~$1.2 million for deferred debt issuance costs,~~ and ~~$0.4~~$0.1 million for principal payments of financing lease liability.

During the nine months ended September 30, 2019 cash provided by operating activities of $47.9 million was the result of $18.7 million of net loss, non-cash adjustments to net loss of $60.9 million, and net cash inflows of $5.7 million from changes in operating assets and liabilities. The non-cash adjustment to net loss was driven by an impairment recorded related to the held for sale status of Medix of $24.6 million and depreciation and amortization of $22.9 million. Cash used in investing activities during the period was $3.9 million to acquire other property and equipment. Cash used in financing activities during the nine months ended September 30, 2019 was $34.8 million and consisted of repayment on borrowing of $35.0 million, $1.6 million for taxes paid related to net share settlement of equity awards, and $0.4 million for principal payments of financing lease liability, offset by stock option exercises and ESPP purchases of $2.2 million.

Our future liquidity and capital requirements will depend on numerous factors, including the:

•Extent to which we make acquisitions;

•Amount and timing of revenue;

•Length and severity of business disruptions caused by COVID-19;

•Extent to which our existing and new products gain market acceptance;

•Cost and timing of product development efforts and the success of these development efforts;

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•Cost and timing of marketing and selling activities; and

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•Availability of borrowings under line of credit arrangements and the availability of other means of financing.

Commitments and Contingencies

In the normal course of business, we enter into obligations and commitments that require future contractual payments. The commitments result primarily from firm, non-cancellable purchase orders placed with contract vendors that manufacture some of the components used in our medical devices and related disposable supply products, as well as commitments for leased office space, and bank debt. The following table summarizes our contractual obligations and commercial commitments as of ~~September 30, 2020~~March 31, 2021 (in thousands):

Payments Due by Period
Total Less than
1 Year 1-3 Years 3-5 Years More than
5 Years
Unconditional purchase obligations $ 41,915 $ 41,714 $ 201 $ — $ —
Bank debt 67,000 — 67,000 — —
Interest payments 3,458 2,254 1,204 —
Repatriation tax 7,016 459 2,218 4,339 —
Total $ 119,389 $ 44,427 $ 70,623 $ 4,339 $ —


			Payments Due by Period
	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Unconditional purchase obligations	$	48,682	$	46,418	$	2,264	$	—	$	—
Bank debt	37,000		—		37,000		—		—
Interest payments	2,137		1,224		913		—
Repatriation tax	6,552		311		2,111		4,130		—
Total	$	94,371	$	47,953	$	42,288	$	4,130	$	—

Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding. Included in the purchase obligations category above are obligations related to purchase orders for inventory purchases under our standard terms and conditions and under negotiated agreements with vendors. We expect to receive consideration (products or services) for these purchase obligations. The purchase obligation amounts do not represent all anticipated purchases in the future but represent only those items for which we are contractually obligated. The table above does not include obligations under employment agreements for services rendered in the ordinary course of business.

Our Credit Agreement with JP Morgan, Citibank, and Wells Fargo matures in 2023. We have recorded this obligation in the payments due in one to three years category in the table above based on the maturity date of the Agreement. As of ~~September 30, 2020,~~March 31, 2021, we have classified ~~$40.0~~the full outstanding debt balance of $37.0 million ~~out of the $67.0 million outstanding~~ as short-term on our balance sheet due to our intent to repay this portion over the next twelve months.

The interest payments noted above are an estimate of expected interest payments but could vary materially based on the timing of future loan draws and payments. See Note 13 to the unaudited Condensed Consolidated Financial Statements for additional discussion on our debt and credit arrangements.

We are not able to reasonably estimate the timing of any potential payments for uncertain tax positions under ASC 740, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109. As a result, the preceding table excludes any potential future payments related to our ASC 740 liability for uncertain tax positions. See Note 18 in our Annual Report filed on Form 10-K for the year ended December 31, ~~2019~~2020 for further discussion on income taxes and repatriation tax.

Recently Issued Accounting Pronouncements

None.

Cautionary Information Regarding Forward Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 about Natus Medical Incorporated. ~~These~~Forward-looking statements can be identified by the words “expects,” “anticipates,” “believes,” “intends,” “estimates,” “plans,” “will,” “outlook” and other similar expressions. Forward-looking statements are based on management's current

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~~include, among other things,~~plans, estimates, assumptions and projections, and speak only as of the date they are made. These forward-looking statements concerning our expectations, beliefs, plans, intentions, future operations, financial condition and prospects, and business strategies. The words “may,” “will,” “continue,” “estimate,” “project,” “intend,” “believe,” “expect,” “anticipate,” and other similar expressions generally identify forward-looking statements. Forward-looking statements in thiswithin Item 2 include, without limitation, statements regarding the impact of COVID-19 pandemic on our ~~ability to capitalize on improving market conditions,~~business, the sufficiency of our current cash, cash equivalents and short-term investment balances, any cash generated from operations to meet our ongoing operating and capital requirements for the foreseeable future, outcomes of new product development, improved operations performance and profitability as the result of restructuring activities, and our intent to acquire additional technologies, products or businesses.

Forward-looking statements are not guarantees of future performance and are subject to substantial risks and uncertainties that could cause the actual results predicted in the forward-looking statements as well as our future financial condition and results of operations to differ materially from our historical results or currently anticipated results. Investors should carefully review the information contained under the caption “Risk Factors” referred to in Part II, Item 1A of this report for a description of risks and uncertainties. All forward-looking statements are based on information available to us on the date hereof, and we assume no obligation to update forward-looking statements.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to interest rate risk on our LIBOR-indexed floating-rate debt. We have entered into an interest rate swap agreement to effectively covert a portion of our floating-rate debt to a fixed-rate. The principal objective of the swap contract is to reduce the variability of future earnings and cash flows associated with our floating-rate debt. Please refer to Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" included in our Annual Report on Form 10-K for the ended December 31, ~~2019~~2020 for a more complete discussion on the market risks we encounter.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the rules of the Securities and Exchange Commission, “disclosure controls and procedures” are controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

AsOur management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud due to inherent limitations of ~~December 31, 2019, our~~internal controls. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Our management, with the participation of our ~~Chief Executive Officer~~chief executive officer and ~~Chief Financial Officer,~~our chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of ~~that period.~~the period covered by this report. Based on that evaluation, our management, including our chief executive officer and chief financial officer, has concluded that our disclosure controls and procedures were ~~not~~ effective at a reasonable assurance level as of ~~December~~March 31, ~~2019. That conclusion was based on the material weakness in our internal control over financial reporting further described below.~~

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

The material weakness identified by our management related to immaterial errors that indicated certain deficiencies existed in the Company's internal control over financial reporting. Specifically, we did not have controls designed to identify and properly account for certain research and development activities related to an arrangement with a third party. Additionally, insufficient training provided to a new control operator and the design of one of our controls over payroll accounts contributed to an error in the period end accrual. The Company

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concluded that these deficiencies could have resulted in a material misstatement of the consolidated financial statements that would not have been prevented or detected on a timely basis, and as such, these control deficiencies resulted in a material weakness in internal control over financial reporting as of December 31, 2019.

As of September 30, 2020, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were not effective as of September 30, 2020 due to the material weakness described above that has not yet been remediated.2021.

Changes in Internal Control over Financial Reporting

~~Other than the actions taken as described below under “Remediation Efforts to Address Material Weakness”, there~~There were no changes in the Company's internal control over financial reporting during the ~~third~~first quarter of ~~2020,~~2021, which were identified in connection with management's evaluation required by paragraph (d) of Rules 13a-15

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and 15d-15 under the Exchange Act, that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

~~Remediation Effort to Address Material Weakness~~

To remediate the material weakness in our internal control over financial reporting described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, we made substantive changes to enhance our design of controls intended to identify and assess contracts that include research and development activities and to aid in confirming the accuracy of our payroll accounts. Specifically, we formalized a policy that provides guidance on proper identification, analysis and treatment of contracts that include research and development activities. Proper identification includes coordination with our legal team to flag contracts that include terminology indicative of research and development components. The policy requires that management document conclusions on accounting treatment in supporting memos depending on materiality of the contract. We provided training to relevant teams in the second quarter to ensure the policy is communicated, understood and followed. We strengthened the control design for payroll accounts to require that specific review procedures be completed and to formalize the results of required review procedures in a checklist format including reviewer signoff. These checklists were prepared and executed during the second and third quarters. We coordinated with our third party payroll administrators to build efficiency in our payroll reporting process with the goal of reducing manual work. The intent of this project is to free up the payroll accounting reviewers and enable them to focus more on material review items and continue our methodology of continuous improvement and risk reduction. Additionally, we have implemented a process to monitor changes to our control operator responsible for key controls over financial reporting and implement a control to verify that appropriate training is provided to new control operators to mitigate this risk of change in our system of control. With the oversight of senior management and our audit committee, we have begun taking the above steps. While our remediation efforts are in process, they have not been completed. There can be no assurances that these steps will be successful in fully remediating the material weakness.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

We currently are, and may from time to time become, a party to various other legal proceedings or claims that arise in the ordinary course of business. Our management reviews these matters if and when they arise and believes that the resolution of any such matters currently known will not have a material effect on our results of operations or financial position.

ITEM 1A. Risk Factors

~~The following updates~~A description of the ~~risk factors previously reported in Part 1, Item 1A “Risk Factors” of our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2020:~~

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~~Our business has been and may continue to be negatively affected by the ongoing COVID-19 pandemic and any future outbreaks of disease.~~

Our operations and financial performance have and continue to be significantly affected by the ongoing global COVID-19 pandemic and the resulting volatility and uncertainty it has caused in the U.S. and international markets. On March 11, 2020, the WHO declared the COVID-19 outbreak a pandemic and recommended containment and mitigation measures worldwide. On March 13, 2020, President Trump declared a National Emergency relating to the disease. The widespread infection in the U.S. and abroad has caused significant volatility and uncertainty in U.S. and international markets, which could result in a prolonged economic downturn that has disrupted and is expected to continue to disrupt our business.

National, state and local authorities have recommended social distancing and many have implemented quarantine, shelter-in-place, curfew and similar isolation measures, including government orders and other restrictions on the conduct of business operations. Such measures have had adverse impacts on the U.S. and foreign economies of uncertain severity and duration and have and may continue to negatively impact our ongoing operations, including our revenue, manufacturing and supply chain. For example,risks associated with our business, ~~relies on continued investment~~financial condition and activity in the healthcare system, and as a result of the significant reduction, or in some cases elimination, of elective medical procedures and healthcare visits, as well as the deferring or cancelling of customer capital expenditure projects, we have seen a decline in revenue from our Supplies and Devices and Systems products. We have also experienced an increase in delayed payments compared to historical periods, which have impacted and may continue to impact, our cash flow and earnings.

In addition, we have experienced disruption and delays in parts of our direct and indirect supply chain. We have made investments in inventory to help mitigate against further potential supply chain interruptions. These investments include increased inventory and firm purchase orders beyond our typical timeframe in order to secure capacity at our key suppliers. We have experienced, and may continue to experience, increased costs as a result of excess inventory, which in turn has resulted, and may continue to result, in lower gross margins. In addition, our inventory management systems and related supply chain visibility tools may be inadequate to enable us to forecast accurately and effectively manage supply of our products and product components. We may experience restricted stock availability or delays or difficulty sourcing certain products in the future, which could negatively impact us.

As a result of the ongoing COVID-19 outbreak, much of our workforce continues to operate under a temporary remote working model, which may result in us experiencing lower work efficiency and productivity, which in turn may adversely affect our business. As our employees work from home and access our systems remotely, we may be subject to heightened security and privacy risks, including the risks of cyber attacks and privacy incidents. Additionally, we have a number of employees who continue to work in our facilities or perform services at our customers' facilities who may be subject to heightened risks for COVID-19 exposure thus potentially impacting their health and future worker compensation claims against us. We may also be subject to lawsuits from employees and others exposed to COVID-19 at our facilities, which could involve large demands and substantial defense costs. Our professional and general liability insurance may not cover all claims against us. Furthermore, if any of our employees are unable to perform his or her duties for a period of time, including as the result of illness, our results of operations ~~or financial condition could be adversely affected. Finally, the widespread pandemic has caused and~~ is expected to continue to cause significant disruption of global financial markets, which may reduce or impair our ability to access capital, or access capital on terms that would be consistent with our expectations, temporarily during this period.

We cannot reasonably estimate the length or severity of the COVID-19 pandemic or the related response, including the length of time it may take for normal economic and operating conditions to resume or the extent to which the disruption may materially impact our business, consolidated financial position, consolidated results of operations or consolidated cash flows. To the extent the COVID-19 pandemic continues to adversely affect our business operations, financial position or consolidated cash flows, it may also have the effect of heightening many of the other risks described in the other disclosures, including the risk factors containedset forth in Part 1, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2019.~~2020. There have been no material changes in our risks from such description.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~-31-~~

~~Table of Contents~~

None.

ITEM 5. Other Information

None

ITEM 6. Exhibits

(a)Exhibits

Incorporated By Reference

Exhibit
No.

Exhibit

Filing

Exhibit
No.

File Date

Filed
Herewith

~~10.1~~

~~Amendment to Credit Agreement, dated August 10, 2020, between the Company, JP Morgan Chase Bank, N.A. and Citibank, N.A.~~

31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

The following materials from Natus Medical Incorporated's Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2020,~~March 31, 2021, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements.

104

The cover page from Natus Medical Incorporated's Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2020,~~March 31, 2021, formatted in Inline XBRL (included as Exhibit 101).

~~-32-~~-28-

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NATUS MEDICAL INCORPORATED

Dated:

~~November 4, 2020~~May 7, 2021

By:

/s/ Jonathan A. Kennedy

Jonathan A. Kennedy
President and Chief Executive Officer
(Principal Executive Officer)

Dated:

~~November 4, 2020~~May 7, 2021

By:

/s/ B. Drew Davies

B. Drew Davies
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)

~~-33-~~-29-


Three months ending December 31, 2020	$	5,264
2021	20,186
2022	16,765
2023	15,806
2024	13,877
2025	13,261
Thereafter	8,871
Total expected amortization expense	$	94,030