UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, ~~2021~~2022


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

For the transition period from to

Commission file number: 000-33001

NATUS MEDICAL INCORPORATED

(Exact name of registrant as specified in its charter)


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

~~6701 Koll Center Parkway, Suite 120, Pleasanton, CA 94566~~3150 Pleasant View Road, Middleton, WI 53562

(Address of principal executive offices) (Zip Code)

~~(925) 223-6700~~(608) 829-8500

(Registrant’s telephone number, including area code)

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


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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

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

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-accelerated Filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

The number of issued and outstanding shares of the registrant’s Common Stock, $0.001 par value, as of April ~~30, 2021~~29, 2022 was ~~34,078,412~~34,585,114.

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 March 31, ~~2021~~2022 and December 31, 20 20 2021 (unaudited)	3

	Condensed Consolidated Statements of Operations for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021 (unaudited)	4

	Condensed Consolidated Statements of Comprehensive ~~Loss~~Income (Loss) for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021 (unaudited)	5

	Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 31,, 2022 and 2021 ~~and~~ ~~2020~~ (unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 ~~and~~ ~~2020~~ (unaudited)	7

	Notes to Condensed Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1719

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2728

Item 4.	Controls and Procedures	2728

PART II.	OTHER INFORMATION	2829

Item 1.	Legal Proceedings	2829

Item 1A.	Risk Factors	2829

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2831

Item 5.	Other Information	2831

Item 6.	Exhibits	2831

Signatures		2932

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share amounts)


		March 31, 2021		December 31, 2020			March 31, 2022		December 31, 2021
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	80,549	$	82,082	Cash and cash equivalents	$	84,285	$	75,595

Accounts receivable, net of allowance for doubtful accounts of $6,085 in 2021 and $6,213 in 2020		91,326		93,133
Accounts receivable, net of allowance for doubtful accounts of $4,977 in 2022 and $5,271 in 2021						Accounts receivable, net of allowance for doubtful accounts of $4,977 in 2022 and $5,271 in 2021	103,714		111,760
Inventories	Inventories	69,467		75,650		Inventories	72,238		67,745
Prepaid expenses and other current assets	Prepaid expenses and other current assets	24,477		20,837		Prepaid expenses and other current assets	26,531		22,191

Total current assets	Total current assets	265,819		271,702		Total current assets	286,768		277,291
Property and equipment, net	Property and equipment, net	23,282		24,516		Property and equipment, net	21,391		21,783
Operating lease right-of-use assets	Operating lease right-of-use assets	10,776		11,669		Operating lease right-of-use assets	8,027		9,288
Intangible assets, net	Intangible assets, net	85,001		92,741		Intangible assets, net	59,815		65,513
Goodwill	Goodwill	149,761		151,299		Goodwill	148,304		148,657
Deferred income tax	Deferred income tax	26,321		27,563		Deferred income tax	23,548		23,161
Other assets	Other assets	20,408		20,904		Other assets	20,230		18,595
Total assets	Total assets	$	581,368	$	600,394	Total assets	$	568,083	$	564,288
LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	24,486	$	23,429	Accounts payable	$	34,342	$	36,405
Current portion of long-term debt		36,523		50,000

Accrued liabilities	Accrued liabilities	45,792		44,236		Accrued liabilities	47,185		48,135
Deferred revenue	Deferred revenue	23,669		21,308		Deferred revenue	26,846		25,097
Current portion of operating lease liabilities	Current portion of operating lease liabilities	6,006		6,779		Current portion of operating lease liabilities	4,482		4,964

Total current liabilities	Total current liabilities	136,476		145,752		Total current liabilities	112,855		114,601
Other liabilities	Other liabilities	17,864		18,451		Other liabilities	17,128		17,237
Operating lease liabilities	Operating lease liabilities	8,181		8,959		Operating lease liabilities	5,755		6,567
Long-term debt, net of current portion		0		5,840

Deferred income tax	Deferred income tax	9,915		10,298		Deferred income tax	1,451		1,133
Total liabilities	Total liabilities	172,436		189,300		Total liabilities	137,189		139,538
Stockholders’ equity:	Stockholders’ equity:					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
Common stock, $0.001 par value, 120,000,000 shares authorized; shares issued and outstanding 34,576,100 in 2022 and 34,225,682 in 2021						Common stock, $0.001 par value, 120,000,000 shares authorized; shares issued and outstanding 34,576,100 in 2022 and 34,225,682 in 2021	359,319		353,737
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding in 2022 and 2021						Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding in 2022 and 2021	—		—
Retained earnings	Retained earnings	73,705		71,309		Retained earnings	86,389		84,486
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(9,469)		(3,043)		Accumulated other comprehensive loss	(14,814)		(13,473)
Total stockholders’ equity	Total stockholders’ equity	408,932		411,094		Total stockholders’ equity	430,894		424,750
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	581,368	$	600,394	Total liabilities and stockholders’ equity	$	568,083	$	564,288

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

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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)


		Three Months Ended March 31,				Three Months Ended March 31,
		2021		2020				2022		2021
Revenue	Revenue	$	114,927	$	109,383		Revenue	$	119,793	$	114,927
Cost of revenue	Cost of revenue	46,688		44,933			Cost of revenue	52,781		46,688
Intangibles amortization	Intangibles amortization	1,751		1,668			Intangibles amortization	1,600		1,751
Gross profit	Gross profit	66,488		62,782			Gross profit	65,412		66,488
Operating expenses:	Operating expenses:						Operating expenses:
Marketing and selling	Marketing and selling	28,971		30,730			Marketing and selling	29,551		28,971
Research and development	Research and development	14,040		17,569			Research and development	13,224		14,040
General and administrative	General and administrative	14,855		13,182			General and administrative	12,807		14,855
Intangibles amortization	Intangibles amortization	3,897		3,661			Intangibles amortization	3,598		3,897
Restructuring	Restructuring	205		871			Restructuring	2,051		205
Total operating expenses	Total operating expenses	61,968		66,013			Total operating expenses	61,231		61,968
Income (loss) from operations		4,520		(3,231)
Income from operations							Income from operations	4,181		4,520
Other expense, net	Other expense, net	(1,656)		(1,494)			Other expense, net	(807)		(1,656)
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:
Income before provision for income tax							Income before provision for income tax	3,374		2,864
Provision for income taxes							Provision for income taxes	1,471		468
Net income							Net income	$	1,903	$	2,396
Net income per share:							Net income per share:
Basic	Basic	$	0.07	$	(0.11)		Basic	$	0.06	$	0.07
Diluted	Diluted	$	0.07	$	(0.11)		Diluted	$	0.06	$	0.07
Weighted average shares used in the calculation of net income (loss) per share:
Weighted average shares used in the calculation of net income per share:							Weighted average shares used in the calculation of net income per share:
Basic	Basic	33,611		33,800			Basic	34,119		33,611
Diluted	Diluted	33,782		33,800			Diluted	34,276		33,782

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

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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(in thousands, except per share amounts)
Three Months Ended
March 31,
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)


	Three Months Ended March 31,
	2022		2021
Net income	$	1,903	$	2,396
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	(1,341)		(6,494)
Interest rate swap designated as a cash flow hedge	—		68



Other comprehensive income (loss), net of tax	(1,341)		(6,426)
Comprehensive income (loss)	$	562	$	(4,030)

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

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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(unaudited)

(in thousands, except per share amounts)


		Common 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, 2020		33,911,703	$	342,828	$	71,309	$	(3,043)	$	411,094
Balances, December 31, 2021											Balances, December 31, 2021	34,225,682	$	353,737	$	84,486	$	(13,473)	$	424,750

Vesting of restricted stock units	Vesting of restricted stock units	19,650	—		—		—		—		Vesting of restricted stock units	33,794	—		—		—		—
Net issuance of restricted stock awards	Net issuance of restricted stock awards	222,899	—		—		—		—		Net issuance of restricted stock awards	164,760	—		—		—		—

Stock-based compensation expense	Stock-based compensation expense	—	3,018		—		—		3,018		Stock-based compensation expense	—	2,619		—		—		2,619

Taxes paid related to net share settlement of equity awards	Taxes paid related to net share settlement of equity awards	(57,357)	(1,150)		—		—		(1,150)		Taxes paid related to net share settlement of equity awards	(51,482)	(1,228)		—		—		(1,228)

Exercise of stock options											Exercise of stock options	203,346	4,191		—		—		4,191
Other comprehensive loss	Other comprehensive loss	—	—		—		(6,426)		(6,426)		Other comprehensive loss	—	—		—		(1,341)		(1,341)
Net income	Net income	—	—		2,396		—		2,396		Net income	—	—		1,903		—		1,903
Balances, March 31, 2021		34,096,895	$	344,696	$	73,705	$	(9,469)	$	408,932
Balances, March 31, 2022											Balances, March 31, 2022	34,576,100	$	359,319	$	86,389	$	(14,814)	$	430,894

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


		Common 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	Net issuance of restricted stock awards	162,212	—		—		—		—		Net issuance of restricted stock awards	222,899	—		—		—		—

Stock-based compensation expense	Stock-based compensation expense	—	2,198		—		—		2,198		Stock-based compensation expense	—	3,018		—		—		3,018
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	(57,695)	(1,883)		—		—		(1,883)		Taxes paid related to net share settlement of equity awards	(57,357)	(1,150)		—		—		(1,150)

Other comprehensive loss	Other comprehensive loss	—	—		—		(4,193)		(4,193)		Other comprehensive loss	—	—		—		(6,426)		(6,426)
Net loss	Net loss	—	—		(3,597)		—		(3,597)		Net loss	—	—		2,396		—		2,396
Balances, March 31, 2020		33,802,133	$	334,296	$	84,325	$	(20,468)	$	398,153
Balances, March 31, 2021											Balances, March 31, 2021	34,096,895	$	344,696	$	73,705	$	(9,469)	$	408,932

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

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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


		Three Months Ended March 31,					Three Months Ended March 31,
		2021		2020			2022		2021
Operating activities:	Operating activities:					Operating activities:
Net income (loss)		$	2,396	$	(3,597)
Adjustments to reconcile net loss to net cash provided by operating activities:
Net income						Net income	$	1,903	$	2,396
Adjustments to reconcile net income to net cash provided by operating activities:						Adjustments to reconcile net income to net cash provided by operating activities:
Provision for losses on accounts receivable	Provision for losses on accounts receivable	101		522		Provision for losses on accounts receivable	87		101

Depreciation and amortization	Depreciation and amortization	7,257		6,994		Depreciation and amortization	6,673		7,257
Loss on disposal of property and equipment	Loss on disposal of property and equipment	8		42		Loss on disposal of property and equipment	30		8
Warranty reserve	Warranty reserve	341		704		Warranty reserve	1,363		341
Share-based compensation	Share-based compensation	3,114		2,291		Share-based compensation	2,619		3,114
Loss on commencement of sales-type leases	Loss on commencement of sales-type leases	6		295		Loss on commencement of sales-type leases	—		6
Loss on equity method investment	Loss on equity method investment	136		0		Loss on equity method investment	192		136
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable	Accounts receivable	4,962		15,612		Accounts receivable	8,803		4,962
Inventories	Inventories	4,139		(3,443)		Inventories	(6,132)		4,139
Prepaid expenses and other assets	Prepaid expenses and other assets	(4,028)		(1,060)		Prepaid expenses and other assets	(4,752)		(4,028)
Accounts payable	Accounts payable	1,303		6,038		Accounts payable	(1,957)		1,303
Accrued liabilities	Accrued liabilities	1,172		(9,329)		Accrued liabilities	(1,762)		1,172
Deferred revenue	Deferred revenue	2,732		2,190		Deferred revenue	1,949		2,732
Deferred income tax	Deferred income tax	1,064		103		Deferred income tax	(119)		1,064

Net cash provided by operating activities	Net cash provided by operating activities	24,703		17,362		Net cash provided by operating activities	8,897		24,703
Investing activities:	Investing activities:					Investing activities:

Purchase of property and equipment	Purchase of property and equipment	(731)		(3,575)		Purchase of property and equipment	(1,062)		(731)

Purchase of equity method investments						Purchase of equity method investments	(572)		—

Net cash used in investing activities	Net cash used in investing activities	(731)		(3,575)		Net cash used in investing activities	(1,634)		(731)
Financing activities:	Financing activities:					Financing activities:
Proceeds from stock option exercises and Employee Stock Purchase Program purchases						Proceeds from stock option exercises and Employee Stock Purchase Program purchases	4,191		—

Repurchase of common stock		0		(10,495)
Taxes paid related to net share settlement of equity awards	Taxes paid related to net share settlement of equity awards	(1,150)		(1,883)		Taxes paid related to net share settlement of equity awards	(1,228)		(1,150)
Principal payments of financing lease liability	Principal payments of financing lease liability	(125)		(133)		Principal payments of financing lease liability	(447)		(125)

Proceeds from borrowings		0		60,000

Payments on borrowings	Payments on borrowings	(20,000)		(15,000)		Payments on borrowings	—		(20,000)
Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	(21,275)		32,489		Net cash provided by (used in) financing activities	2,516		(21,275)
Exchange rate changes effect on cash and cash equivalents	Exchange rate changes effect on cash and cash equivalents	(4,230)		(2,557)		Exchange rate changes effect on cash and cash equivalents	(1,089)		(4,230)
Net increase (decrease) in cash and cash equivalents	Net increase (decrease) in cash and cash equivalents	(1,533)		43,719		Net increase (decrease) in cash and cash equivalents	8,690		(1,533)
Cash and cash equivalents, beginning of period	Cash and cash equivalents, beginning of period	82,082		63,297		Cash and cash equivalents, beginning of period	75,595		82,082
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	80,549	$	107,016	Cash and cash equivalents, end of period	$	84,285	$	80,549
Supplemental disclosure of cash flow information:	Supplemental disclosure of cash flow information:					Supplemental disclosure of cash flow information:
Cash paid for interest	Cash paid for interest	$	513	$	637	Cash paid for interest	$	114	$	513
Cash paid for income taxes	Cash paid for income taxes	$	(320)	$	3,492	Cash paid for income taxes	$	1,066	$	(320)
Non-cash investing activities:	Non-cash investing activities:					Non-cash investing activities:
Property and equipment included in accounts payable	Property and equipment included in accounts payable	$	39	$	131	Property and equipment included in accounts payable	$	32	$	39
Inventory transferred to property and equipment	Inventory transferred to property and equipment	$	94	$	196	Inventory transferred to property and equipment	$	291	$	94
Transfer of leased assets to sales-type leases	Transfer of leased assets to sales-type leases	$	13	$	663	Transfer of leased assets to sales-type leases	$	—	$	13

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

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NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1 - Basis of Presentation and Significant Accounting Policies

The accompanying interim condensed consolidated financial statements of Natus Medical Incorporated (“we,” “us,” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Except where noted below within Note 1, the accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

Interim financial reports are prepared in accordance with the rules and regulations of the Securities and Exchange Commission; accordingly, the reports do not include all of the information and notes required by GAAP for annual financial statements. The interim financial information is unaudited, and reflects all normal adjustments that are, in the opinion of management, necessary for the fair presentation of our financial position, results of operations, and cash flows for the interim periods presented. We have made certain reclassifications to the prior period to conform to current period presentation. The consolidated balance sheet as of December 31, ~~2020~~2021 was derived from audited financial statements but does not include all disclosures required by GAAP. The accompanying financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

Operating results for the three months ended March 31, ~~2021~~2022 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021.~~2022. The accompanying condensed consolidated financial statements include our accounts and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

~~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 months ended 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

None.

2 - Revenue

Unbilled accounts receivable (“AR”) for the periods presented primarily represent the difference between revenue recognized based on the relative selling price of the related performance obligations and the contractual billing terms in the arrangements. Deferred revenue for the periods presented primarily relates to extended service contracts, installation, and training, for which the service fees are billed in advance. The associated deferred revenue is generally recognized ratably over the extended service period or when installation and training are complete.

The following table summarizes the changes in the unbilled AR and deferred revenue balances for the three months ended March 31, ~~2021~~2022 (in thousands):


Unbilled AR, December 31, ~~2020~~2021	$	~~1,925~~252
Additions	691,535
Transferred to trade receivable	~~(8)~~(31)
Unbilled AR, March 31, ~~2021~~2022	$	~~1,986~~1,756


Deferred revenue, December 31, ~~2020~~2021	$	~~25,723~~30,097
Additions	~~11,032~~11,844
Revenue recognized	~~(8,332)~~(9,912)
Deferred revenue, March 31, ~~2021~~2022	$	~~28,423~~32,029

At March 31, ~~2021,~~2022, the short-term portion of deferred revenue of ~~$23.7~~$26.8 million and the long-term portion of ~~$4.7~~

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$5.2 million are included in deferred revenue and other long-term liabilities, respectively, in the consolidated balance sheet. As of March 31, ~~2021,~~2022, we expect to recognize revenue associated with deferred revenue of approximately ~~$20.1 million in 2021, $5.5~~$22.8 million in 2022, ~~$1.5~~$6.3 million in 2023, ~~$0.9~~$1.7 million in 2024, $0.6 million in 2025, and ~~$0.4~~$0.6 million thereafter.

3 - Earnings Per Share

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


		Three Months Ended March 31,				Three Months Ended March 31,
		2021		2020				2022		2021
Net income (loss)		$	2,396	$	(3,597)
Net income							Net income	$	1,903	$	2,396
Weighted average common shares	Weighted average common shares	33,611		33,800			Weighted average common shares	34,119		33,611
Dilutive effect of stock based awards	Dilutive effect of stock based awards	171		0			Dilutive effect of stock based awards	157		171
Diluted shares	Diluted shares	33,782		33,800			Diluted shares	34,276		33,782
Basic earnings per share	Basic earnings per share	$	0.07	$	(0.11)		Basic earnings per share	$	0.06	$	0.07
Diluted earnings per share	Diluted earnings per share	$	0.07	$	(0.11)		Diluted earnings per share	$	0.06	$	0.07
Shares excluded from calculation of diluted EPS	Shares excluded from calculation of diluted EPS	0		85			Shares excluded from calculation of diluted EPS	—		—

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
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


	Three Months Ended March 31,
	2022		2021
Balance, beginning of period	$	5,271	$	6,213
Additions charged to expense	87		101
Write-offs charged against allowance	(361)		(229)

Balance, end of period	$	4,997	$	6,085

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5 - Inventories

Inventories consist of the following (in thousands):


		March 31, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Raw materials and subassemblies	Raw materials and subassemblies	$	18,874	$	22,583	Raw materials and subassemblies	$	25,092	$	20,750
Work in process	Work in process	3,327		2,294		Work in process	2,739		2,825
Finished goods	Finished goods	61,977		65,695		Finished goods	59,011		57,836
Total inventories	Total inventories	84,178		90,572		Total inventories	86,842		81,411
Less: Non-current inventories	Less: Non-current inventories	(14,711)		(14,922)		Less: Non-current inventories	(14,604)		(13,666)
Inventories, current	Inventories, current	$	69,467	$	75,650	Inventories, current	$	72,238	$	67,745

As of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, we have classified ~~$14.7~~$14.6 million and ~~$14.9~~$13.7 million, respectively, of inventories as other assets. This inventory consists primarily of service components used to repair products held by customers pursuant to warranty obligations and extended service contracts, including service components for products we no longer sell, inventory purchased for lifetime buys, and inventory that is turning over at a slow rate. We believe these inventories will be utilized for their intended purpose.

~~6 – Intangible Assets~~

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6 – Intangible Assets

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


		March 31, 2021								December 31, 2020									March 31, 2022								December 31, 2021
		Gross Carrying Amount		Accumulated Impairment		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Impairment		Accumulated Amortization		Net Book Value			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:	Intangible assets with definite lives:																	Intangible assets with definite lives:
Technology	Technology	$	110,356	$	(12,458)	$	(65,079)	$	32,819	$	112,138	$	(12,480)	$	(64,203)	$	35,455	Technology	$	99,288	$	(6,033)	$	(67,934)	$	25,321	$	99,920	$	(6,039)	$	(66,679)	$	27,202
Customer related	Customer related	92,411		(50)		(52,499)		39,862		94,526		(50)		(51,247)		43,229		Customer related	89,260		(50)		(58,913)		30,297		89,794		(50)		(57,133)		32,611
Trade names	Trade names	46,481		(3,592)		(33,047)		9,842		47,058		(3,677)		(31,890)		11,491		Trade names	45,442		(3,235)		(38,302)		3,905		45,593		(3,260)		(36,960)		5,373
Internally developed software	Internally developed software	13,281		0		(12,895)		386		13,281		0		(12,845)		436		Internally developed software	13,281		—		(13,010)		271		13,281		—		(12,985)		296
Patents	Patents	2,748		(133)		(2,615)		0		2,810		(133)		(2,677)		0		Patents	2,688		(133)		(2,555)		—		2,705		(133)		(2,572)		—
Service agreements	Service agreements	1,190		0		(1,129)		61		1,190		0		(1,119)		71		Service agreements	800		—		(779)		21		800		—		(769)		31
Definite-lived intangible assets	Definite-lived intangible assets	$	266,467	$	(16,233)	$	(167,264)	$	82,970	$	271,003	$	(16,340)	$	(163,981)	$	90,682	Definite-lived intangible assets	$	250,759	$	(9,451)	$	(181,493)	$	59,815	$	252,093	$	(9,482)	$	(177,098)	$	65,513
Intangible assets with indefinite lives:	Intangible assets with indefinite lives:																	Intangible assets with indefinite lives:
Intellectual Property	Intellectual Property	$	2,031	$	0	$	—	$	2,031	$	2,059	$	0	$	—	$	2,059	Intellectual Property	$	1,993	$	(1,993)	$	—	$	—	$	2,004	$	(2,004)	$	—	$	—
Total intangible assets	Total intangible assets	$	268,498	$	(16,233)	$	(167,264)	$	85,001	$	273,062	$	(16,340)	$	(163,981)	$	92,741	Total intangible assets	$	252,752	$	(11,444)	$	(181,493)	$	59,815	$	254,097	$	(11,486)	$	(177,098)	$	65,513

Finite-lived intangible assets are amortized over their weighted average lives, which are 14 years for technology, 10 years for customer related intangibles, 7 years for trade names, 6 years for internally developed software, 13 years for patents, 2 years for service agreements and 11 years weighted average in total.

Internally developed software consists of $11.1 million relating to costs incurred for development of internal use computer software and $2.2 million for development of software to be sold.

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


		Three Months Ended March 31,				Three Months Ended March 31,
		2021		2020				2022		2021
Technology	Technology	$	1,795	$	1,712		Technology	$	1,629	$	1,795
Customer related	Customer related	2,360		2,140			Customer related	2,116		2,360
Trade names	Trade names	1,483		1,466			Trade names	1,443		1,483
Internally developed software	Internally developed software	50		69			Internally developed software	24		50

Service agreements	Service agreements	$	10	$	10		Service agreements	10		10
Total amortization	Total amortization	$	5,698	$	5,397		Total amortization	$	5,222	$	5,698

The amortization expense amounts shown above include internally developed software not held for sale of $24 thousand and $24 thousand for the three months ended March 31, ~~2021~~2022 and March 31, ~~2020,~~2021, respectively, which is recorded within our income statement as a general and administrative operating expense. The amortization expense amounts shown above include internally developed software held for sale of ~~$26 thousand~~zero and ~~$45~~$26 thousand for the three

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months ended March 31, ~~2021~~2022 and March 31, ~~2020,~~2021, 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):


Nine months ending December 31, 2021		$	16,276
2022		17,940
Nine months ending December 31, 2022				Nine months ending December 31, 2022	$	12,301
2023	2023	15,169		2023	14,748
2024	2024	13,233		2024	12,866
2025	2025	12,619		2025	12,261
2026	2026	2,422		2026	2,398
2027				2027	2,267
Thereafter	Thereafter	5,311		Thereafter	2,974
Total expected amortization expense	Total expected amortization expense	$	82,970	Total expected amortization expense	$	59,815

7 – Goodwill

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


December 31, ~~2020~~2021	$	~~151,299~~148,657

Foreign currency translation	~~(1,538)~~(353)
March 31, ~~2021~~2022	$	~~149,761~~148,304

8 - Property and Equipment, net

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


	March 31, 2022		December 31, 2021
Land	$	1,781	$	1,782
Buildings	7,209		7,238
Leasehold improvements	7,729		7,722
Finance lease right-of-use assets	2,037		2,356
Equipment and furniture	21,121		20,637
Computer software and hardware	11,566		11,308
Demonstration and loaned equipment	4,424		4,050
	55,867		55,093
Accumulated depreciation	(34,476)		(33,310)
Total	$	21,391	$	21,783

Depreciation expense of property and equipment, net was approximately ~~$1.6~~$1.5 million and ~~$1.7~~$1.6 million for the three months ended March 31, ~~2021~~2022 and March 31, ~~2020,~~2021, respectively.

9 - Reserve for Product Warranties

We provide a warranty for products that is generally one year in length. In some cases, regulations may require us to provide repair or remediation beyond the typical warranty period. If any of the products contain defects, we may incur additional repair and remediation costs. Service, repair and calibration services are provided by a combination of our owned facilities and vendors on a contract basis.

We accrue estimated product warranty costs at the time of sale based on historical experience. A warranty reserve is included in accrued liabilities for the expected future costs of servicing products. Additions to the reserve are based on management’s best estimate of probable liability. We consider a combination of factors including

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material and labor costs, regulatory requirements, and other judgments in determining the amount of the reserve. The reserve is reduced as costs are incurred to honor existing warranty and regulatory obligations.

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As of March 31, ~~2021,~~2022, we have accrued ~~$4.8~~$6.4 million for product related warranties. Our estimate of these costs is primarily based upon the number of units outstanding that may require repair and costs associated with shipping.

The details of activity in the warranty reserve are as follows (in thousands):
Three Months Ended
March 31,
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


	Three Months Ended March 31,
	2022		2021
Balance, beginning of period	$	6,042	$	5,195

Additions and adjustments charged to expense	1,363		341
Utilizations	(958)		(740)


Balance, end of period	$	6,447	$	4,796

Our estimate of future product warranty costs may vary from actual product warranty costs, and any variance from estimates could impact our cost of sales, operating profits and results of operations.

10 - Share-Based Compensation

As of March 31, ~~2021,~~2022, we have 21 active share-based compensation ~~plans,~~plan, the ~~2018~~2021 Equity Incentive ~~Plan and the 2011 Employee Stock Purchase~~ Plan.

The terms of all awards granted during the three months ended March 31, ~~2021~~2022 and the methods for determining grant-date fair value of the awards are consistent with those described in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

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


	Three Months Ended March 31,
	2022		2021
Cost of revenue	$	113	$	100
Marketing and selling	612		640
Research and development	195		355
General and administrative	1,699		1,923

Total	$	2,619	$	3,018

As of March 31, ~~2021,~~2022, unrecognized compensation expense related to the unvested portion of stock options and other stock awards was approximately ~~$20.2~~$21.9 million, which is expected to be recognized over a weighted average period of ~~2.6~~2.4 years.

~~11 - Other Income (Expense), net~~

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

Three Months Ended
March 31,
2021 2020
Interest income $ 3 $ 24
Interest expense (766) (717)
Foreign currency loss (731) (801)
Other expense (162) 0
Total other (expense), net $ (1,656) $ (1,494)

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11 - Other Expense, net

Other expense, net consists of (in thousands):


	Three Months Ended March 31,
	2022		2021
Interest income	$	3	$	3
Interest expense	(267)		(766)
Foreign currency loss	(307)		(731)
Other expense	(236)		(162)
Total other expense, net	$	(807)	$	(1,656)

12 - Income Taxes

Our tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete events arising in each respective quarter. During each interim period, we update the estimated annual effective tax rate which is subject to significant volatility due to several factors, including our ability to accurately predict the income ~~(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.

We recorded income tax expense of ~~$0.5~~$1.5 million and ~~income tax benefit of $1.1~~$0.5 million for the three months ended March 31, ~~2021~~2022 and March 31, ~~2020,~~2021, respectively. The effective tax rate was ~~16.4%~~43.6% and ~~23.9%~~16.4% for the three months ended March 31, ~~2021~~2022 and March 31, ~~2020,~~2021, respectively. The ~~decrease~~increase in the effective tax rate for the three months ended March 31, ~~2021~~2022 compared with the three months ended March 31, ~~2020,~~2021, is primarily attributable to ~~changes~~a tax law change in ~~mix~~effect from January 1, 2022 that requires the capitalization of ~~income among jurisdictions with varying~~research and experimental costs under IRC Section 174 and directly increased the Company's Subpart F inclusion. The approximate impact of the change in the estimated tax ~~rates and discrete items.~~rate due to all impacts from IRC Section 174 resulted in a $0.01 reduction in the GAAP earnings per share. Other significant factors impacting the current period effective tax rate included the benefit of Federal and California research and development credits, offset by global intangible low taxed income inclusions (“GILTI”) that was also impacted by IRC Section 174, and non-deductible executive compensation expenses. Factors impacting the effective rate for the three months ended March 31, 2021, include the benefit of Federal and California research and development credits, favorable discrete items for the carryback of losses, partially offset by non-deductible executive compensation expenses, and other discrete events.

Under the Tax Cut and Jobs Act (the “Act”) enacted on December 22, 2017, research and experimental (“R&E”) expenditures under IRC Section 174 incurred for tax years beginning after December 31, 2021 must be capitalized and amortized ratably over five or fifteen years for tax purposes, depending on where the research activities are conducted, U.S. or foreign respectively. Although there is proposed legislation that would defer the capitalization requirement to later years, we have no assurance that IRC Section 174 will be repealed or otherwise modified.

We recorded no ~~changes~~change related to unrecognized tax benefits for the three months ended March 31, ~~2021.~~2022. Within the next twelve months, it is possible that the uncertain tax positions may change with a range of approximately 0zero to ~~$0.2~~$0.8 million. Our tax returns remain open to examination as follows: U.S Federal, 2018 through 2021, U.S. states, 2017 through ~~2020, U.S. states, 2016 through 2020,~~2021, and significant foreign jurisdictions, generally ~~2016~~2017 through ~~2020.~~2021.

13 - Debt and Credit Arrangements

We have a Credit Agreement with JP Morgan Chase Bank ("JP Morgan"), Citibank, NA (“Citibank”), and Wells Fargo Bank, National Association (“Wells Fargo”). During the third quarter of 2020 we amended the terms of the Credit Agreement to extend the maturity date of the original agreement, reduce the aggregate value of the revolving facility, and amend certain covenants. The amended Credit Agreement provides for an aggregate $150.0 million of secured revolving credit facility. The Credit Agreement contains covenants, including covenants relating

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to maintenance of books and records, financial reporting and notification, compliance with laws, maintenance of properties and insurance, and limitations on guaranties, investments, issuance of debt, lease obligations and capital expenditures, and is secured by virtually all of our assets. The Credit Agreement provides for events of default, including failure to pay any principal or interest when due, failure to perform or observe covenants, bankruptcy or insolvency events and the occurrence of the event has a material adverse effect. We have no other significant credit facilities. As of March 31, 2022, no amounts were outstanding under the Credit Agreement.

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

•Leverage Ratio, as defined, to be no higher than 3.25 to 1.00.

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

~~At 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 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 $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 three~~

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~~months ended March 31, 2021 was 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 March 31, 2021, we have classified the full outstanding debt balance of $37.0 million 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

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

March 31, 2021 December 31, 2020
2021 $ 0 $ 0
2022 0 0
2023 37,000 57,000
Thereafter 0 0
Total $ 37,000 $ 57,000

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

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 $ 187
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 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 March 31, 2021, we estimate that approximately $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~~to screen, diagnose, and treat disorders affecting the ~~diagnosis~~brain, neural pathways, and ~~treatment of central~~eight sensory nervous ~~and sensory system disorders for patients of all ages.~~

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systems.

End-user customer base includes hospitals, clinics, laboratories, physicians, audiologists, and governmental agencies. Most of our international sales are to distributors who resell products to end users or sub-distributors.

The following tables present revenue by end market and geographic region and long-lived asset information by geographic region. Revenue is based on the destination of the shipments and long-lived assets are based on the physical location of the assets (in thousands):


		Three Months Ended March 31,				Three Months Ended March 31,
		2021		2020				2022		2021
Consolidated Revenue:	Consolidated Revenue:						Consolidated Revenue:
United States	United States	$	67,772	$	68,338		United States	$	69,970	$	67,772
International	International	47,155		41,045			International	49,823		47,155
Total	Total	$	114,927	$	109,383		Total	$	119,793	$	114,927

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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March 31, 2021 December 31, 2020
Property and equipment, net:
United States $ 10,115 $ 10,998
Ireland 6,647 6,716
Canada 3,713 3,775
Denmark 1,613 1,787
Other countries 1,194 1,240
Total $ 23,282 $ 24,516


	Three Months Ended March 31,
	2022		2021
Revenue by End Market:
Brain Products:
Devices and Systems	$	37,807	$	37,293
Supplies	6,291		5,486
Services	7,290		5,705
Total Brain Revenue	51,388		48,484
Neural Pathway Products:
Devices and Systems	9,657		8,832
Supplies	9,531		8,751
Services	204		257
Total Neural Pathways Revenue	19,392		17,840
Sensory Nervous Systems Products:
Devices and Systems	23,342		21,292
Supplies	8,473		8,143
Services	5,858		6,097
Total Sensory Nervous Systems Revenue	37,673		35,532
Other Products:
Devices and Systems	5,025		7,067
Supplies	2,781		2,898
Services	3,534		3,106
Total Other Revenue	11,340		13,071
Total Revenue	$	119,793	$	114,927


	March 31, 2022		December 31, 2021
Property and equipment, net:
United States	$	9,635	$	9,642
Ireland	6,131		6,223
Canada	3,546		3,594
Denmark	1,078		1,262

Other foreign countries	1,001		1,062
Total	$	21,391	$	21,783

During the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, no single customer and no country outside the United States contributed more than 10% of our consolidated revenue.

1615 - 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.

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Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

The 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 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 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, 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 March 31, ~~2021~~2022 and December 31, ~~2020~~2021 but require disclosure of their fair values: cash and cash equivalents, accounts receivable, and accounts payable. The carrying value of these financial instruments approximates fair values because of their relatively short maturity.

16 - Subsequent Events

As previously announced, on April 17, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Prince Parent Inc., a Delaware corporation (“Parent”), and Prince Mergerco Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”), providing for, among other things, the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent.

Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of common stock, par value $0.001 per share, of the Company (“Company Common Stock”) outstanding as of immediately prior to the Effective Time (other than any shares of Company Common Stock held in treasury, held by Parent, Merger Sub or their respective subsidiaries or as to which appraisal rights have been perfected in accordance with the Delaware General Corporation Law, but including each share of Company Restricted Stock (as defined below)) will be cancelled and extinguished and automatically converted into the right to receive cash in an amount equal to $33.50, without interest thereon (the “Per Share Price”).

Pursuant to the Merger Agreement, at the Effective Time:

•except as set forth below with respect to Employee Interim Awards (as defined below), each share of Company Common Stock subject to vesting restrictions or a risk of forfeiture (“Company Restricted Stock”) outstanding as of immediately prior to the Effective Time, whether vested or unvested and whether or not granted pursuant to any of the Company’s equity plans (“Company Stock Plans”), will be cancelled and converted into and will become a right to receive an amount in cash, without interest and subject to any required tax withholding, equal to the Per Share Price;

•except as set forth below with respect to Employee Interim Awards or as set forth in the CEO Retention Agreement (as defined below), each restricted stock unit in respect of shares of Company Common Stock (each, a “Company Restricted Stock Unit”) outstanding as of immediately prior to the Effective Time, whether vested or unvested and whether or not granted pursuant to any Company Stock Plan, will be cancelled and be converted into and will become a right to receive an amount in cash, without interest and subject to any required tax withholding, equal to (i) the amount of the Per Share Price; multiplied by (ii) (1) with respect to Company Restricted Stock Units that are only subject to time-vesting requirements, the total number of shares of Company Common Stock subject to such Company Restricted Stock Unit, and (2) with respect to Company Restricted Stock Units that are subject to time- and performance-vesting requirements, the total number of shares of Company Common Stock determined to be performance vested with the performance goals deemed achieved at maximum levels and with the remaining time-vesting requirements deemed satisfied;

•any Company Restricted Stock and Company Restricted Stock Units granted after the date of the Merger Agreement, other than awards that may be granted to non-employee directors after the date of the Merger Agreement (such awards, “Employee Interim Awards”), that are outstanding as of immediately prior to the Effective Time, whether vested or unvested and whether or not granted pursuant to any Company Stock Plan, will be treated at the Effective Time in the manner set forth above, provided that any applicable

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performance goals will be deemed achieved at target levels, rather than at maximum, and the number of shares subject to such Employee Interim Awards that will vest at the Effective Time will be prorated to reflect the portion of the applicable vesting period that has elapsed from the date of grant until the Effective Time (rather than vesting in full), and the remaining unvested portion of any Employee Interim Awards will be forfeited at the Effective Time;

•each option (or portion thereof) to purchase a share of Company Common Stock (a “Company Option”) that is outstanding as of immediately prior to the Effective Time, whether vested or unvested and whether or not granted pursuant to any Company Stock Plan, and that has an exercise price per share less than the Per Share Price (each, an “In-the-Money Company Option”) will be cancelled and converted into and will become a right to receive an amount in cash, without interest and subject to any required tax withholding, equal to (i) the amount of the Per Share Price (less the exercise price per share attributable to such Company Option), multiplied by (ii) the total number of shares of Company Common Stock that are issuable upon the full exercise of such Company Option; and

•each Company Option that is not an In-the-Money Company Option will be cancelled without any cash payment being made in respect thereof.

The consummation of the Merger (the “Closing”) is subject to certain customary closing conditions, including, but not limited to, the: (i) adoption of the Merger Agreement by the holders of a majority of the outstanding shares of Company Common Stock; (ii) expiration or termination of any waiting periods applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and certain other applicable foreign antitrust laws and foreign direct investment laws of certain other jurisdictions; and (iii) absence of any law or order restraining, enjoining or otherwise prohibiting the Merger. The Merger is not subject to any financing condition.

The transaction is expected to close in the third quarter of 2022, although there can be no assurance that the Merger will occur by that date, subject to customary closing conditions, including approval by the Company's stockholders and receipt of regulatory approvals. If the Merger Agreement is terminated by the Company in order for the Company to enter concurrently into an alternative acquisition agreement with respect to a Superior Proposal (as defined in the Merger Agreement), (i) prior to May 22, 2022 (the “Cut-Off Date”), the Company will be obligated to pay to Parent a one-time fee equal to $19,753,676 in cash or (ii) after the Cut-Off Date, the Company will be obligated to pay Parent a one-time fee equal to $39,507,352 in cash. The Company also expects to incur costs, expenses, and fees for professional services and other transaction costs in connection with the Merger. If the transaction closes, Natus will become a private company and Natus shares will no longer be listed on any public market.

To encourage the continued retention of the Company's President and Chief Executive Officer, Thomas J. Sullivan, following the Closing, in connection with entering into the Merger Agreement, Parent required Mr. Sullivan to enter into a retention agreement, dated as of April 17, 2022, with Parent and the Company (the “CEO Retention Agreement”).

Pursuant to the CEO Retention Agreement, Mr. Sullivan agreed that, notwithstanding the treatment of Company Restricted Stock Units set forth in the Merger Agreement (as described above), he would not receive payments in respect of his Company Restricted Stock Units that are market stock units (“MSUs”) based on deemed achievement of performance goals at maximum levels. Instead, Mr. Sullivan's MSUs will be deemed attained at the level of performance actually achieved through the Closing based on the Per Share Price (which is approximately 143.4% of target, in the case of MSUs granted to Mr. Sullivan in December 2021, and 139.6% of target, in the case of MSUs granted to Mr. Sullivan in January 2022), consistent with the level of return to the Company's stockholders pursuant to the Merger Agreement. The consequence to Mr. Sullivan will be a reduction by over $3.0 million in the amount of gross proceeds that he otherwise was entitled to receive and would have received in respect of his MSUs.

Furthermore, pursuant to the CEO Retention Agreement, Mr. Sullivan agreed that an amount equal to $6.0 million (the “Retention Payment”) payable to him at the Effective Time in respect of his Company Restricted Stock Units would not become payable at the Effective Time and, instead, would become payable 50% on the six-month anniversary of the Closing and 50% on the one-year anniversary of the Closing, subject to his continued

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employment with the Company until the relevant retention date. If Mr. Sullivan's employment is terminated by the Company without cause, by Mr. Sullivan with good reason, or due to his death or disability, any then-unpaid portion of the Retention Payment shall be paid to him upon his termination (subject to, in the case of a termination by the Company without cause or by Mr. Sullivan for good reason, his execution and non-revocation of a release of claims). If Mr. Sullivan's employment terminates for any other reason prior to the relevant retention date, he will immediately forfeit all portions of the Retention Payment that relate to a future retention date. Mr. Sullivan's right to receive the Retention Payment is further subject to his continued compliance with certain restrictive covenants.

At the Effective Time, all other amounts payable to Mr. Sullivan in respect of his Company Restricted Stock and Company Restricted Stock Units will become payable in accordance with the Merger Agreement, as described above.

The CEO Retention Agreement was signed at the same time the Merger Agreement was signed, but if the Merger Agreement is terminated and the Closing does not occur, it will automatically become null and void.

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

Overview

The following Management Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) supplements the MD&A in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. MD&A should be read in conjunction with our condensed consolidated financial statements and accompanying footnotes, the risk factors referred to in Part II, Item 1A of this report, our Annual Report filed on Form 10-K for the year ended December 31, ~~2020~~2021 and the cautionary information regarding forward-looking statements at the end of this section.

Our Business

We are recognized by healthcare providers as a leading ~~provider~~source for solutions to screen, diagnose, and treat disorders of ~~medical device~~the brain, neural pathways, and sensory nervous systems. Our service and education complement hardware, advanced software and algorithms, and consumables that provide stimulus, acquire and monitor physiological signals and capture how the body responds, enabling clinicians worldwide to improve patient outcomes and quality of life.

End Markets

We provide innovative healthcare solutions in four product portfolios: Brain, Neural Pathways, Sensory Nervous System and Other.

•Brain - This product portfolio includes solutions focused on diagnosing, monitoring and treating disorders specific to the ~~diagnosis~~brain, which include areas of neurodiagnostics and ~~treatment of central nervous~~neurocritical care. Key neurodiagnostic product lines in this portfolio include electroencephalography (EEG) used in epilepsy monitoring 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,~~polysomnography (PSG) used to diagnose sleep disorders. Key neurocritical care product lines provide access through the cranium to the brain, monitor intracranial pressure and ~~neurosurgery. Neuro's comprehensive neurodiagnostic solutions include electroencephalography~~temperature, and ~~long-term monitoring, Intensive Care Unit monitoring, electromyography, sleep analysis or polysomnography, and intraoperative monitoring. These solutions enhance the diagnosis~~provide therapeutic drainage of ~~neurological conditions such as epilepsy, sleep disorders and neuromuscular diseases. Our neurocritical care solutions include management~~cerebrospinal fluid in cases of traumatic brain injury, hemorrhagic stroke, and hydrocephalus. This portfolio is comprised of well-known brands in the industry, including Nicolet®, Xltek®, Olympic®, Embla®, Grass®, Natus Quantum®, Trex™ and Camino®.

•Neural Pathways - Focused on nerve and muscle disorders, the Neural Pathways portfolio uses electromyography (EMG) and nerve conduction studies (NCS) testing. These product lines help diagnose neuromuscular diseases, such as myasthenia gravis, movement disorders, such as dystonia and Parkinson's disease, and peripheral neuropathies, carpal tunnel syndrome and pinched nerves. Our portfolio is comprised of well-known brands in the industry, including Nicolet®, Dantec®, UltraPro™ and Natus Elite™.

•Sensory Nervous System - This product portfolio focuses on hearing and balance disorders and pediatric eye imaging. Multiple clinical needs across hearing screening and diagnosis are addressed by ~~continuous~~this portfolio, including newborn hearing screening, hearing assessment and diagnostics and hearing aid fitting. A

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~~monitoring~~comprehensive list of ~~intracranial pressure and cerebrospinal fluid drainage, as well as cranial access kits for entry into~~balance tests helps in the ~~cranium. Our neurosurgical solutions include items~~diagnosis of vestibular disorders, such as ~~valves, shunts~~dizziness and ~~related treatment solutions for procedures involving hydrocephalus.~~vertigo. Eye imaging is used to diagnose and monitor retinopathy of prematurity to help prevent blindness in premature babies. Natus products are sold under trusted brand names, including ALGO®, RetCam®, Aurical®, Bio-logic®, Madsen® and Otoscan®.

•~~Newborn Care~~ Other - ~~Includes~~The products ~~and services~~in this portfolio do not directly fit within the Brain, Neural Pathways or Sensory Nervous System portfolio. These solutions span eight product lines, including phototherapy for jaundice management, video streaming of newborns in the NICU, data management for newborn care ~~including hearing screening, brain monitoring, eye imaging, jaundice management,~~ and ~~various disposable newborn care supplies.~~

•~~Hearing & Balance - The Hearing~~a full range of shunts and valves for neurosurgical applications, among others. This portfolio includes ~~products for hearing assessment~~several well-known brands, such as neoBLUE®, NICVIEW®, Vac-Pac® and diagnostics, and hearing aid fitting, including computer-based audiological, otoneurologic and vestibular 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.Neometrics®.

Segment and Geographic Information

We operate as one operating segment and one reportable segment, which provides healthcare products, and services focused on solutions to screen, diagnose, and treat disorders affecting the ~~diagnosis~~brain, neural pathways, and ~~treatment of central~~eight sensory nervous ~~and sensory system disorders for patients of all ages.~~systems. Financial information is reviewed on a consolidated basis for purposes of making operating decisions and assessing financial performance. Consolidated financial information is accompanied by disaggregated information about revenues by end market and geographic region. We do not ~~asses~~assess the performance of our end markets or geographic regions on measures of profit or loss, or asset-based metrics. We have disclosed the revenues for each of our end markets and geographic regions to provide the reader of the financial statements transparency into our operations.

Information regarding our revenues and long-lived assets in the U.S. and in countries outside the U.S. is contained in Note 1514 – 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, ~~2020.~~2021. Revenue from Devices and Systems, Supplies, and Services, as a percent of total revenue for the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, is as follows:


		Three Months Ended March 31,				Three Months Ended March 31,
		2021		2020				2022		2021
Devices and Systems	Devices and Systems	75	%	72	%		Devices and Systems	63	%	65	%
Supplies	Supplies	22	%	25	%		Supplies	23	%	22	%
Services	Services	3	%	3	%		Services	14	%	13	%
Total	Total	100	%	100	%		Total	100	%	100	%

~~2021~~2022 First Quarter Overview

Our business and operating results are driven in part by worldwide economic conditions. Our revenue is significantly dependent on both capital spending by hospitals in the United States and healthcare spending by ministries of health outside the United States. While we have no direct exposure to Russia and Ukraine, we are monitoring any broader economic impact from the current crisis, especially on commodities.

We experienced an increase in demand ~~particularly~~ in ~~Asia Pacific~~the United States and Europe, during the first quarter compared to the same period in the prior ~~year as recovery from the COVID-19 pandemic continues.~~year. Our consolidated revenue for the first quarter ended March 31, ~~2021~~2022 was ~~$114.9~~$119.8 million compared to ~~$109.4~~$114.9 million in the first quarter of the previous year, an increase of ~~$5.5~~$4.9 million.

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Our net income was ~~$2.4~~$1.9 million or ~~$0.07~~$0.06 per diluted share in the three months ended March 31, ~~2021,~~2022, compared with net ~~loss~~income of ~~$3.6~~$2.4 million or ~~$0.11~~$0.07 per diluted share in the same period in ~~2020.~~2021. The ~~increase~~decrease in net

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income ~~was the result of higher revenue~~is due to ~~the recovery from impact~~lower gross margin and higher tax provision due to enactment of ~~COVID-19, in particular in international markets for Neuro products,~~IRC Section 174, partly offset by increased revenue 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.~~operating expenses.

COVID-19 Update

Healthcare providers and patients continue to depend on our products and services every day. Our team members and partners are continuing to maintain our supply chain, manufacturing and delivery of our products and services. The health and welfare of our employees, our customers and our partners remain our top priority as we continue our business operations.

We have implemented safeguards in our facilities to protect team members, including social distancing practices, work from home and other measures consistent with specific regulatory requirements and guidance from health authorities. As an essential supplier of healthcare products and services, all of our manufacturing, engineering and customer support functions remain fully operational and will continue to support customers with vital supplies, service and equipment. Supply chain delays and constraints, as well as cost increases for semiconductors, have impacted our ability to ship products in the last few quarters. We ~~have taken actions~~are working with our suppliers to reduce ~~costs, including reducing travel~~constraints by providing forecasts further into the future and ~~discretionary expenses. We will continue to prioritize spending to allow continued investment in products~~closely monitoring and ~~services that are key elements of our stated strategy for profitable growth~~communicating changes in the ~~years ahead.~~forecast, however we remain uncertain of when the supply chain will stabilize.

Impact to our supply chain

Many of our materials are single source and require lengthy qualification periods. Disruptions in our supply chain could negatively impact our ability to produce and supply our finished products. We ~~have made strategic investments~~continue to experience some extended lead times and delays in ~~inventory to help mitigate potential supply chain disruptions. These investments include increased inventory~~receiving supplies 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~~finished goods which impacted revenue this period. We are positioned well to provide us with the materials we need to meet our demand. 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 collaborationworking closely with our suppliers to ~~online technology so that we can continue our business operations.~~

~~Liquidity~~

In the first quarter of 2020 we drew $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 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,manage orders and amended certain covenants. During the three months ended Mach 31, 2021, we repaid $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 $80.5 million in cash.

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. We have seen revenues and margins improve since the onset of the pandemic. We continue to see our customers adapting to the COVID environment, which we believe will result in increased capital spending and continue to improve our business 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 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 subsidiesproactively resolve delays in the ~~same manner as an offset~~materials we require 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~~meet 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 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.

~~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 success of our company and eventually, we will need to return to traditional forms of interaction.demand.

Application of Critical Accounting ~~Policies~~Estimates

We prepare our financial statements in accordance with accounting principles generally accepted in the United States of ~~America.~~America (“GAAP”). In so doing, we must often make estimates and use assumptions that can be subjective and, consequently, our actual results could differ from those estimates. For any given individual estimate or assumption we make, there may also be other estimates or assumptions that are reasonable. Our estimates are based on our historical experience and a variety of other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates, assumptions, and judgements on a regular basis.

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

•~~Revenue recognition~~judgments to have a full understanding of our financial statements:

•Inventory valuation

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~~Table~~By their nature, these estimates and judgements are subject to an inherent degree of ~~Contents~~

•~~Income Taxes~~

uncertainty. The use of different estimates, assumptions, orand 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~~estimates are described in more detail in our Annual Report on Form ~~10-K~~10-

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K for the year ended December 31, ~~2020,~~2021, under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Recent Developments

On April 17, 2022, we entered into an Agreement Plan of Merger (the “Merger Agreement”) with Prince Parent Inc., a Delaware corporation (“Parent”), and Prince Mergerco Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”), providing for, among other things, the merger of Merger Sub with and into Natus (the “Merger”), with Natus surviving the Merger as a wholly owned subsidiary of Parent. Under the terms of the Merger Agreement, the Company's stockholders will receive $33.50 in cash for each share of common stock they hold on the closing date of the Merger. The transaction is expected to close in the third quarter of 2022, subject to customary closing conditions, including, but not limited to, the: (i) adoption of the Merger Agreement by the holders of a majority of the outstanding shares of Company Common Stock, (ii) expiration or termination of any waiting periods applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and certain other applicable foreign antitrust laws and foreign direct investment laws of certain other jurisdictions; and (iii) absence of any law or order restraining, enjoining or otherwise prohibiting the Merger. The Merger is not subject to any financing condition. There can be no assurance that the proposed Merger will be consummated.

Results of Operations

The following table sets forth selected consolidated statement of operations data as a percentage of total revenue for the periods indicated:


		Three Months Ended March 31,				Three Months Ended March 31,
		2021		2020				2022		2021
Revenue	Revenue	100.0	%	100.0	%		Revenue	100.0	%	100.0	%
Cost of revenue	Cost of revenue	40.6	%	41.1	%		Cost of revenue	44.1	%	40.6	%
Intangibles amortization	Intangibles amortization	1.5	%	1.5	%		Intangibles amortization	1.3	%	1.5	%
Gross profit	Gross profit	57.9	%	57.4	%		Gross profit	54.6	%	57.9	%
Operating expenses:	Operating expenses:						Operating expenses:
Marketing and selling	Marketing and selling	25.2	%	28.1	%		Marketing and selling	24.7	%	25.2	%
Research and development	Research and development	12.2	%	16.1	%		Research and development	11.0	%	12.2	%
General and administrative	General and administrative	12.9	%	12.1	%		General and administrative	10.7	%	12.9	%
Intangibles amortization	Intangibles amortization	3.4	%	3.3	%		Intangibles amortization	3.0	%	3.4	%
Restructuring	Restructuring	0.2	%	0.8	%		Restructuring	1.7	%	0.2	%
Total operating expenses	Total operating expenses	53.9	%	60.4	%		Total operating expenses	51.1	%	53.9	%
Income (loss) from operations		4.0	%	(3.0)	%
Income from operations							Income from operations	3.5	%	4.0	%
Other expense, net	Other expense, net	(1.4)	%	(1.4)	%		Other expense, net	(0.7)	%	(1.4)	%
Income (loss) before provision for income tax		2.6	%	(4.4)	%
Provision for (benefit from) income taxes		0.4	%	(1.0)	%
Net income (loss)		2.2	%	(3.4)	%
Income before provision for income tax							Income before provision for income tax	2.8	%	2.6	%
Provision for income taxes							Provision for income taxes	1.2	%	0.4	%
Net income							Net income	1.6	%	2.2	%

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Revenues

The following table shows revenue by products during the three months ended March 31, ~~2021~~2022 and March 31, ~~2020~~2021 (in thousands):


		Three Months Ended March 31,						Three Months Ended March 31,
		2021		2020		Change				2022		2021		Change
Neuro Products
Devices and Systems		$	53,341	$	49,426	8	%
Supplies		15,714		15,924		(1)	%

Total Neuro Revenue		69,055		65,350		6	%
Newborn Care Products
Brain Products:									Brain Products:
Devices and Systems	Devices and Systems	13,772		11,124		24	%		Devices and Systems	$	37,807	$	37,293	1	%
Supplies	Supplies	8,403		9,691		(13)	%		Supplies	6,291		5,486		15	%
Services	Services	3,764		3,417		10	%		Services	7,290		5,705		28	%
Total Newborn Care Revenue		25,939		24,232		7	%
Hearing & Balance Products
Total Brain Revenue									Total Brain Revenue	51,388		48,484		6	%
Neural Pathway Products:									Neural Pathway Products:
Devices and Systems	Devices and Systems	18,771		18,560		1	%		Devices and Systems	9,657		8,832		9	%
Supplies	Supplies	1,162		1,241		(6)	%		Supplies	9,531		8,751		9	%

Total Hearing & Balance Revenue		19,933		19,801		1	%
Services									Services	204		257		(21)	%
Total Neural Pathways Revenue									Total Neural Pathways Revenue	19,392		17,840		9	%
Sensory Nervous Systems Products:									Sensory Nervous Systems Products:
Devices and Systems									Devices and Systems	23,342		21,292		10	%
Supplies									Supplies	8,473		8,143		4	%
Services									Services	5,858		6,097		(4)	%
Total Sensory Nervous Systems Revenue									Total Sensory Nervous Systems Revenue	37,673		35,532		6	%
Other Products:									Other Products:
Devices and Systems									Devices and Systems	5,025		7,067		(29)	%
Supplies									Supplies	2,781		2,898		(4)	%
Services									Services	3,534		3,106		14	%
Total Other Revenue									Total Other Revenue	11,340		13,071		(13)	%
Total Revenue	Total Revenue	$	114,927	$	109,383	5	%		Total Revenue	$	119,793	$	114,927	4	%

For the three months ended March 31, ~~2021, Neuro~~2022, Brain revenue increased by 6% compared to the same period last year driven by higher sales of ~~Neuro~~ devices and supplies, particularly in our international markets combined with strength in backlog from 2020. Revenue from Neuro supplies was down slightly from the same period last year due to lower shipments of Neurocritical Care products.EEG.

For the three months ended March 31, ~~2021, Newborn Care~~2022, Neural Pathways revenue increased by 9% compared to the same period last year due to an increase in both device and supplies revenue.

For the three months ended March 31, 2022, Sensory Nervous Systems revenue increased by 6% compared to the same period last year due ~~mainly~~ to ~~the sale of NICVIEW~~increased demand for our devices ~~which had been on ship hold during the same period last year, higher~~and supplies, particularly in our Digital Eye Imaging & 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.Fitting products.

For the three months ended March 31, ~~2021, Hearing & Balance~~2022, Other revenue ~~remained flat~~decreased by 13% compared to the same period last year ~~with an increase~~mostly due to a large one-time order in ~~device sales partly offset by a slight decline~~the first quarter of 2021 for our NicView products that did not repeat in ~~supplies revenue.~~the first quarter of 2022.

Revenue from domestic sales ~~decreased~~increased to ~~$67.8~~$70.0 million for the three months ended March 31, ~~2021~~2022 compared to ~~$68.3~~$67.8 million in the three months ended March 31, ~~2020.~~2021. The ~~decrease in domestic revenue~~increase was ~~mainly due to the impact of the COVID-19 pandemic on~~driven by improved demand for ~~supplies.~~our Brain, Neural Pathways and Sensory Nervous Systems products.

Revenue from international sales increased to $49.8 million for the three months ended March 31, 2022 compared to $47.2 million for the three months ended March 31, ~~2021 compared to $41.0 million for the three months ended March 31, 2020.~~2021. The increase was driven by ~~recovery in~~improved demand ~~mainly for~~by our ~~Neuro products, following the impact of the COVID-19 pandemic in the same period last year.~~Brain, Neural Pathways and Sensory Nervous Systems products.

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Cost of Revenue and Gross Profit

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


		Three Months Ended March 31,						Three Months Ended March 31,
		2021			2020					2022			2021
Revenue	Revenue	$	114,927		$	109,383			Revenue	$	119,793		$	114,927
Cost of revenue	Cost of revenue	46,688			44,933				Cost of revenue	52,781			46,688
Intangibles amortization	Intangibles amortization	1,751			1,668				Intangibles amortization	1,600			1,751
Gross profit	Gross profit	66,488			62,782				Gross profit	65,412			66,488
Gross profit percentage	Gross profit percentage	57.9		%	57.4		%		Gross profit percentage	54.6		%	57.9		%

For the three months ended March 31, ~~2021,~~2022, gross profit as a percentage of revenue ~~increased 0.5%~~decreased 3.3% compared to the same period in the prior year. The ~~increase~~decrease was ~~due to higher revenue and lower operations overhead spend partly offset~~mainly driven by higher supply chain costs in procuring semiconductors for our products and the costs of freight, and ~~contract manufacturer fees.~~we expect this trend will continue throughout the year.

Operating Costs

Operating costs consist of (in thousands):


		Three Months Ended March 31,						Three Months Ended March 31,
		2021			2020					2022			2021
Marketing and selling	Marketing and selling	$	28,971		$	30,730			Marketing and selling	$	29,551		$	28,971
Percentage of revenue	Percentage of revenue	25.2		%	28.1		%		Percentage of revenue	24.7		%	25.2		%
Research and development	Research and development	$	14,040		$	17,569			Research and development	$	13,224		$	14,040
Percentage of revenue	Percentage of revenue	12.2		%	16.1		%		Percentage of revenue	11.0		%	12.2		%
General and administrative	General and administrative	$	14,855		$	13,182			General and administrative	$	12,807		$	14,855
Percentage of revenue	Percentage of revenue	12.9		%	12.1		%		Percentage of revenue	10.7		%	12.9		%
Intangibles amortization	Intangibles amortization	$	3,897		$	3,661			Intangibles amortization	$	3,598		$	3,897
Percentage of revenue	Percentage of revenue	3.4		%	3.3		%		Percentage of revenue	3.0		%	3.4		%
Restructuring	Restructuring	$	205		$	871			Restructuring	$	2,051		$	205
Percentage of revenue	Percentage of revenue	0.2		%	0.8		%		Percentage of revenue	1.7		%	0.2		%

Marketing and Selling

Marketing and selling expenses ~~decreased~~increased for the three months ended March 31, ~~2021.~~2022. The ~~reduction~~increase was primarily driven by ~~lower~~higher travel ~~and tradeshow~~ expenses ~~due~~resulting from increased commercial activity compared to the ~~impact of COVID-19 restrictions partly offset by an increase in commissions expense related to higher revenue in the current quarter.~~same periods last year.

Research and Development

Research and development expenses decreased slightly during the three months ended March 31, ~~2021~~2022 compared to the same ~~period~~periods in ~~2020.~~2021. The decrease is the result of ~~activities in 2020 which did not recur in 2021 related~~lower project spend due to remediation 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.timing.

General and Administrative

General and administrative expense during the three months ended March 31, ~~2021 increased~~2022 decreased when compared to the same ~~period~~periods in the prior year. This ~~increase~~decrease was due to ~~higher~~lower stock compensation and ~~incentive compensation, partly offset by a reduction in~~lower outside ~~service expenses.~~services spending.

Intangibles Amortization

Intangibles amortization remained relatively flat during the three months ended March 31, 2022 as compared to the same periods in 2021 due to currency exchange fluctuations.

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~~Intangibles amortization remained flat~~Restructuring

Restructuring expenses increased during the three months ended March 31, ~~2021 as~~2022 compared to the same ~~period~~periods in ~~2020.~~

~~Restructuring~~

~~Restructuring expenses decreased during the three months ended March 31, 2021 compared to the same period in 2020.~~2021. The ~~decrease in the three months ended March 31, 2021~~increase was primarily driven by ~~lower~~higher severance costs ~~and costs incurred as the result of exiting the Peloton business in 2020, which did not recur in 2021.~~incurred.

Other Expense, net

Other expense, net consists of investment income, interest expense, net currency exchange gains and losses, and other miscellaneous income and expense. For the three months ended March 31, ~~2021~~2022 we reported ~~$1.7~~$0.8 million of other expense compared to ~~$1.5~~$1.7 million of other expense for the same period in ~~2020.~~2021. The ~~increase in~~decrease during the three months was due to less interest expense ~~was driven by an equity method investment adjustment.~~and currency exchange fluctuations.

Provision for ~~(Benefit from)~~ Income Tax

We recorded ~~an expense from~~ income tax expense of ~~$0.5~~$1.5 million and ~~a benefit for income tax of $1.1~~$0.5 million for the three months ended March 31, ~~2021~~2022 and March 31, ~~2020,~~2021, respectively. The effective tax rate was ~~16.4%~~43.6% and ~~23.9%~~16.4% for the three months ended March 31, ~~2021~~2022 and March 31, ~~2020,~~2021, respectively. The ~~decrease~~increase in the effective tax rate for the three months ended March 31, ~~2021~~2022 compared with the three months ended March 31, ~~2020,~~2021, is primarily attributable to ~~changes~~a tax law change in ~~mix~~effect from January 1, 2022 that requires the capitalization of ~~income among jurisdictions with varying~~research and experimental costs under IRC Section 174 and directly increased the Company's Subpart F inclusion. The approximate impact of the change in the estimated tax ~~rates and discrete items.~~rate due to all impacts from IRC Section 174 resulted in a $0.01 reduction in the GAAP earnings per share. Other significant factors impacting the current period effective tax rate included the benefit of Federal and California research and development credits, offset by global intangible low taxed income inclusions (“GILTI”) that was also impacted by IRC Section 174, and non-deductible executive compensation expenses. Factors impacting the effective rate for the three months ended March 31, 2021, include the benefit of Federal and California research and development credits, favorable discrete items for the carryback of losses, partially offset by non-deductible executive compensation expenses, and other discrete events.

We recorded no ~~changes~~change related to unrecognized tax benefits for the three months ended March 31, ~~2021.~~2022. Within the next twelve months, it is possible that the uncertain tax positions may change with a range of approximately zero to ~~$0.2~~$0.8 million. Our tax returns remain open to examination as follows: U.S Federal, 2018 through 2021, U.S. states, 2017 through ~~2020, U.S. states, 2016 through 2020,~~2021, and significant foreign jurisdictions, generally ~~2016~~2017 through ~~2020.~~2021.

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Liquidity and Capital Resources

Liquidity and capital resources consist of (in thousands):


		March 31, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Cash and cash equivalents	Cash and cash equivalents	$	80,549	$	82,082	Cash and cash equivalents	$	84,285	$	75,595

Working capital	Working capital	129,343		125,950		Working capital	173,913		162,690


		Three Months Ended March 31,					Three Months Ended March 31,
		2021		2020			2022		2021
Net cash provided by operating activities	Net cash provided by operating activities	$	24,703	$	17,362	Net cash provided by operating activities	$	8,897	$	24,703
Net cash used in investing activities	Net cash used in investing activities	(731)		(3,575)		Net cash used in investing activities	(1,634)		(731)
Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	(21,275)		32,489		Net cash provided by (used in) financing activities	2,516		(21,275)

We believe that our current cash and cash equivalents and any cash generated from operations will be sufficient to meet our ongoing operating requirements for the foreseeable future.

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As of March 31, ~~2021,~~2022, we had cash and cash equivalents outside the U.S. in certain of our international subsidiaries of ~~$50.2~~$56.1 million, primarily in Canada and Ireland. We intend to permanently reinvest the cash held by our international subsidiaries except for Excel Tech Corporation and Natus Manufacturing Limited, which we intend to repatriate. A net deferred tax liability has been recorded for the potential future repatriation. If, however, a portion of permanently reinvested funds were needed for and distributed to our operations in the United States, we would be subject to additional U.S. income taxes and foreign withholding taxes depending on facts and circumstances at the time of distribution. The amount of taxes due would depend on the amount and manner of repatriation, as well as the country from which the funds were repatriated.

We have a Credit Agreement with JP Morgan, Citibank, and Wells Fargo. During the third quarter of 2020 we amended the terms of the Credit Agreement to extend the maturity of the original agreement, reduce the aggregate value of the revolving credit facility, and amend certain covenants. The amended Credit Agreement provides for an aggregate $150.0 million of secured revolving credit facility. The Credit Agreement contains covenants, including covenants relating to maintenance of books and records, financial reporting and notification, compliance with laws, maintenance of properties and insurance, and limitations on guaranties, investments, issuance of debt, lease obligations and capital expenditures, and is secured by virtually all of our assets. The Credit Agreement provides for events of default, including failure to pay any principal or interest when due, failure to perform or observe covenants, bankruptcy or insolvency events and the occurrence of the event has a material adverse effect. The Credit Agreement matures on September 25, 2023, at which time all principal amounts outstanding under the Credit Agreement will be due and payable. We have no other significant credit facilities. 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 March 31, ~~2021, we had $37.0 million~~2022, no amounts were outstanding under the Credit ~~Facility.~~Agreement.

During the three months ended March 31, 2022 cash provided by operating activities of $8.9 million was the result of $1.9 million of net income, non-cash adjustments to net income of $11.0 million which was primarily driven by an adjustment for depreciation and amortization of $6.7 million, and net cash outflows of $4.0 million from changes in operating assets and liabilities primarily resulting from reductions in accounts receivable and increases in inventory. Cash used in investing activities during the period was $1.6 million consisting of $1.1 million to acquire other property and equipment, $0.6 million for purchase of equity method investments. Cash provided by financing activities during the three months ended March 31, 2022 was $2.5 million and consisted of $4.2 million stock option exercises offset by $1.2 million for taxes paid related to net share settlement of equity awards and $0.4 million for principal payments of financing lease liability.

During the three months ended March 31, 2021 cash provided by operating activities of $24.7 million was the result of $2.4 million of net income, non-cash adjustments to net income of $11.0 million which was primarily driven by an adjustment for depreciation and amortization of $7.3 million, and net cash inflows of $11.3 million from changes in operating assets and liabilities primarily driven by reductions in accounts receivable and inventory. Cash used in investing activities during the period was $0.7 million to acquire other property and equipment. Cash

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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 $17.4 million was the result of $3.6 million of net loss, non-cash adjustments to net loss of $10.8 million, and net cash inflows of $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 $7.0 million. Cash used in investing activities during the period was $3.6 million to acquire other property and equipment. Cash provided by financing activities during the three months ended March 31, 2020 was $32.5 million and consisted of proceeds from borrowing of $60.0 million offset by repayment on borrowing of $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, and $0.1 million for principal payments of financing lease liability.

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;

•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.

Contractual Obligations

~~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, purchase orders placed for employee benefits and outside services, as well as commitments for leased office space, leased equipment, and bank debt. ~~The following table summarizes our contractual obligations and commercial commitments as~~

As of 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 $ 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 $ —

2022, we have unconditional purchase obligations of $120.7 million that payments are due within the next year and $84.9 million due within one to three years. 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~~amount does not represent all anticipated purchases in the future, but represent only those items for which we are contractually obligated. ~~The table above~~This 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 March 31, ~~2021,~~2022, we have ~~classified the full outstanding debt balance of $37.0 million as short-term on our balance sheet due to our intent to repay this portion over the next twelve months.~~

~~The~~ estimated interest payments ~~noted above~~of $1.0 million due less than one year and $0.6 million due within one to three years. These interest payments 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~~of our Consolidated Financial Statements for ~~additional~~further discussion on ~~our~~ debt and credit arrangements.

As of March 31, 2022, we have $5.7 million of tax obligation relating to repatriation tax. The repatriation tax is a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017 due to the enactment in December 2017 of the Tax Act.

We are not able to reasonably estimate the timing of any potential payments for uncertain tax positions under ~~ASC~~Accounting Standards Codification (“ASC”) 740, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109,~~. As a result, the preceding table excludes~~therefore contractual obligations exclude any potential ~~future~~tax payments related to our ASC 740 liability for uncertain ~~tax~~ positions. See Note ~~18 in~~12 of our ~~Annual Report filed on Form 10-K for the year ended December 31, 2020~~Consolidated Financial Statements for further discussion on income ~~taxes and repatriation tax.~~taxes.

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. Forward-looking

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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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plans, estimates, assumptions and projections, and speak only as of the date they are made. These forward-looking statements within Item 2 include, without limitation, statements regarding our ability to consummate the proposed Merger, and the timing, costs and any benefits of such transaction, the impact of COVID-19 pandemic on our 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 various market risks, including changes in foreign currency exchange rates and interest ~~rate risk on~~rates that could adversely affect our ~~LIBOR-indexed floating-rate debt. We have entered into an interest rate swap agreement to effectively covert a portion~~results of ~~our floating-rate debt to a fixed-rate. The principal objective of the swap contract is to reduce the variability of future earnings~~operations and ~~cash flows associated with our floating-rate debt.~~financial condition. 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, ~~2020~~2021 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.

Our 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 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 and our chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of 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 effective at a reasonable assurance level as of March 31, ~~2021.~~2022.

Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting during the first quarter of ~~2021,~~2022, 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~~reasonably likely to materially affect, our internal control over financial reporting.

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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

~~A description of~~The following updates the ~~risks associated with our business, financial condition and results of operations is set forth~~risk factors previously reported in Part 1, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020.~~ 2021.

Risks Related to the Merger

The Company is subject to business uncertainties, litigation risk and contractual restrictions while the Merger is pending, which may adversely affect our business, financial condition and results of operations.

Uncertainty about the effect of the proposed Merger on our employees, customers, and other parties may have an adverse effect on our business, financial condition and results of operation regardless of whether the proposed Merger is completed. These risks to our business include the following, all of which could be exacerbated by a delay in the completion of the proposed Merger:

•the impairment of our ability to attract, retain, and motivate our employees, including key personnel;

•the diversion of significant management time and resources towards the completion of the proposed Merger;

•difficulties maintaining relationships with customers, suppliers, and other business partners;

•delays or deferments of certain business decisions by our customers, suppliers, and other business partners;

•the inability to pursue alternative business opportunities or make appropriate changes to our business because the Merger Agreement requires us to use reasonable best efforts to conduct our business in the ordinary course of business and not engage in certain kinds of transactions prior to the completion of the proposed Merger;

•litigation relating to the proposed Merger and the costs related thereto; and

•the incurrence of significant costs, expenses, and fees for professional services and other transaction costs in connection with the proposed Merger.

Failure to consummate the proposed Merger within the expected timeframe or at all could negatively impact the price of our common stock, as well as our business, financial condition and results of operations.

There ~~have been~~can be no assurance that the proposed Merger will be consummated. The consummation of the proposed Merger is subject to certain closing conditions, including, among other things, the adoption of the Merger Agreement and the Merger by the Company's stockholders at a special meeting of stockholders convened for such purpose, the receipt of specified antitrust and foreign direct investment approvals and the absence of legal restraints and prohibitions against the Merger and the other transactions contemplated by the Merger Agreement. The obligation of each party to consummate the Merger is also conditioned upon the other party's representations and warranties being true and correct to the extent specified in the Merger Agreement and the other party having performed in all material respects its obligations under the Merger Agreement. There can be no assurance that these and other conditions to closing will be satisfied in a timely manner or at all.

The Merger Agreement also includes customary termination provisions for both the Company and Parent, subject, in certain circumstances, to the payment by the Company of a termination fee of as much as $39,507,352. If we are required to make this payment, doing so may negatively impact the price of our common stock, as well as our business, financial condition and results of operations.

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There can be no assurance that a remedy will be available to us in the event of a breach of the Merger Agreement by Parent or its affiliates or that we will wholly or partially recover for any damages incurred by us in connection with the proposed Merger. A failed transaction may result in negative publicity and a negative impression of us among our customers or in the investment community or business community generally. Further, any disruptions to our business resulting from the announcement and pendency of the proposed Merger, including any adverse changes in our relationships with our customers, partners, suppliers and employees, could continue or accelerate in the event of a failed transaction. In addition, if the proposed Merger is not completed, and there are no other parties willing and able to acquire the Company at a price of $33.50 per share or higher, on terms acceptable to us, the share price of our common stock will likely decline to the extent that the current market price of our common stock reflects an assumption that the proposed Merger will be completed. Also, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger, for which we will have received little or no benefit if the proposed Merger is not completed. Many of these fees and costs will be payable by us even if the proposed Merger is not completed and may relate to activities that we would not have undertaken other than to complete the proposed Merger.

The Company's ability to complete the Merger is subject to certain closing conditions and the receipt of consents and approvals from government entities which may impose conditions that could adversely affect the Company or cause the Merger to be abandoned.

The Merger Agreement contains certain closing conditions, including, among others, the adoption of the Merger Agreement and the Merger by the Company's stockholders at a special meeting of stockholders convened for such purpose and the absence of legal restraints and prohibitions against the Merger and the other transactions contemplated by the Merger Agreement. The Company cannot provide any assurance that the conditions to the consummation of the Merger will be satisfied or waived, or will not result in the abandonment or delay of the Merger.

In addition, the Merger is conditioned on the expiration or termination of any waiting periods applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and certain other applicable foreign antitrust laws and foreign direct investment laws of certain other jurisdictions. The granting of these regulatory approvals could involve the imposition of additional conditions on the closing of the Merger. The imposition of such conditions or the failure or delay to obtain regulatory approvals could have the effect of delaying completion of the Merger or of imposing additional costs or limitations on the Company or may result in the failure to close the Merger. The regulatory approvals may not be received at all, may not be received in a timely fashion, or may contain conditions on the completion of the Merger.

Risks Related to Our Business and Operations

The ongoing conflict between Russia and Ukraine has impacted our results of operations and could create or exacerbate certain risks we face to our business, financial condition and results of operations.

Russia's invasion of Ukraine and the global response, including the imposition of financial and economic sanctions by the United States and other countries, has created supply constraints that have impacted, and may continue to impact, our results of operations and could create or exacerbate risks facing our business. In addition, the uncertain nature, magnitude, and duration of hostilities stemming from ~~such description.~~the conflict in Ukraine, including the potential effects of sanctions limitations, retaliatory cyberattacks on the world economy and markets, have contributed to increased market volatility and uncertainty, which could have an adverse impact on macroeconomic factors that affect our business and operations. Although we do not presently expect the impacts of the ongoing conflict on our operating results to be material, certain risks that we have identified in our Annual Report on Form 10-K for the year ended December 31, 2021 may be exacerbated. For example, a prolonged or intensified conflict could result in acute shortages of raw materials and price inflation on transportation costs, materials, and energy which in turn may adversely impact our supply chain. An escalation of geopolitical tensions due to the ongoing conflict, including increased sanctions or restrictions on global trade, could also result in further supply chain disruptions, reduced customer demand, state-sponsored cyberattacks as well as increased volatility in the financial markets, all of which could have an adverse impact on our business and operations. These and other risks are described more fully in our Annual Report on Form 10-K for the year ended December 31, 2021.

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Table of Contents

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

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+

Part-time Employment Agreement, dated as April 2, 2022, by and between the Company and Dong-Chune Christopher Chung

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 March 31, ~~2021,~~2022, 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 March 31, ~~2021,~~2022, formatted in Inline XBRL (included as Exhibit 101).

Indicates management contract or compensatory plan or arrangements

~~-28-~~-31-

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:

May ~~7, 2021~~6, 2022

By:

/s/ ~~Jonathan A. Kennedy~~Thomas J. Sullivan

~~Jonathan A. Kennedy~~Thomas J. Sullivan
President and Chief Executive Officer
(Principal Executive Officer)

Dated:

May ~~7, 2021~~6, 2022

By:

/s/ B. Drew Davies

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

~~-29-~~-32-


	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


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


			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	$	—