NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1 - Basis of Presentation and Significant Accounting Policies
The accompanying interim condensed consolidated financial statements of Natus Medical Incorporated (“we,” “us,” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Except where noted below within Note 1, the accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Interim financial reports are prepared in accordance with the rules and regulations of the Securities and Exchange Commission; accordingly, the reports do not include all of the information and notes required by GAAP for annual financial statements. The interim financial information is unaudited, and reflects all normal adjustments that are, in the opinion of management, necessary for the fair presentation of our financial position, results of operations, and cash flows for the interim periods presented. We have made certain reclassifications to the prior period to conform to current period presentation. The consolidated balance sheet as of December 31, 2021 was derived from audited financial statements but does not include all disclosures required by GAAP. The accompanying financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The accompanying condensed consolidated financial statements include our accounts and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Recently Adopted Accounting Pronouncements
None.
2 - Revenue
Unbilled accounts receivable (“AR”) for the periods presented primarily represent the difference between revenue recognized based on the relative selling price of the related performance obligations and the contractual billing terms in the arrangements. Deferred revenue for the periods presented primarily relates to extended service contracts, installation, and training, for which the service fees are billed in advance. The associated deferred revenue is generally recognized ratably over the extended service period or when installation and training are complete.
The following table summarizes the changes in the unbilled AR and deferred revenue balances for the three months ended March 31, 2022 (in thousands):
| | | | | |
Unbilled AR, December 31, 2021 | $ | 252 | |
Additions | 1,535 | |
Transferred to trade receivable | (31) | |
Unbilled AR, March 31, 2022 | $ | 1,756 | |
| | | | | |
Deferred revenue, December 31, 2021 | $ | 30,097 | |
Additions | 11,844 | |
Revenue recognized | (9,912) | |
Deferred revenue, March 31, 2022 | $ | 32,029 | |
At March 31, 2022, the short-term portion of deferred revenue of $26.8 million and the long-term portion of
$5.2 million are included in deferred revenue and other long-term liabilities, respectively, in the consolidated balance sheet. As of March 31, 2022, we expect to recognize revenue associated with deferred revenue of approximately $22.8 million in 2022, $6.3 million in 2023, $1.7 million in 2024, $0.6 million in 2025, and $0.6 million thereafter.
3 - Earnings Per Share
The components of basic and diluted EPS, and shares excluded from the calculation of diluted loss per share because the effect would have been anti-dilutive, are as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Net income | $ | 1,903 | | | $ | 2,396 | | | | | |
Weighted average common shares | 34,119 | | | 33,611 | | | | | |
Dilutive effect of stock based awards | 157 | | | 171 | | | | | |
Diluted shares | 34,276 | | | 33,782 | | | | | |
Basic earnings per share | $ | 0.06 | | | $ | 0.07 | | | | | |
Diluted earnings per share | $ | 0.06 | | | $ | 0.07 | | | | | |
Shares excluded from calculation of diluted EPS | — | | | — | | | | | |
4 - Allowance for Doubtful Accounts
We estimate the lifetime allowance for doubtful, potentially uncollectible, accounts receivable upon their inception based on historical collection experience within the markets in which we operate, customer-specific information such as bankruptcy filings or customer liquidity problems, current conditions, and reasonable and supportable forecasts about the future.
Our allowance for doubtful accounts is presented as a reduction to accounts receivable on our consolidated balance sheet. When all internal efforts have been exhausted to collect the receivable, it is written off and relieved from the reserve.
The details of activity in allowance for doubtful accounts are as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 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 | | | | | |
5 - Inventories
Inventories consist of the following (in thousands): | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Raw materials and subassemblies | $ | 25,092 | | | $ | 20,750 | |
Work in process | 2,739 | | | 2,825 | |
Finished goods | 59,011 | | | 57,836 | |
Total inventories | 86,842 | | | 81,411 | |
Less: Non-current inventories | (14,604) | | | (13,666) | |
Inventories, current | $ | 72,238 | | | $ | 67,745 | |
As of March 31, 2022 and December 31, 2021, we have classified $14.6 million and $13.7 million, respectively, of inventories as other assets. This inventory consists primarily of service components used to repair products held by customers pursuant to warranty obligations and extended service contracts, including service components for products we no longer sell, inventory purchased for lifetime buys, and inventory that is turning over at a slow rate. We believe these inventories will be utilized for their intended purpose.
6 – Intangible Assets
The following table summarizes the components of gross and net intangible asset balances (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
Intangible assets with definite lives: | | | | | | | | | | | | | | | |
Technology | $ | 99,288 | | | $ | (6,033) | | | $ | (67,934) | | | $ | 25,321 | | | $ | 99,920 | | | $ | (6,039) | | | $ | (66,679) | | | $ | 27,202 | |
Customer related | 89,260 | | | (50) | | | (58,913) | | | 30,297 | | | 89,794 | | | (50) | | | (57,133) | | | 32,611 | |
Trade names | 45,442 | | | (3,235) | | | (38,302) | | | 3,905 | | | 45,593 | | | (3,260) | | | (36,960) | | | 5,373 | |
Internally developed software | 13,281 | | | — | | | (13,010) | | | 271 | | | 13,281 | | | — | | | (12,985) | | | 296 | |
Patents | 2,688 | | | (133) | | | (2,555) | | | — | | | 2,705 | | | (133) | | | (2,572) | | | — | |
Service agreements | 800 | | | — | | | (779) | | | 21 | | | 800 | | | — | | | (769) | | | 31 | |
Definite-lived intangible assets | $ | 250,759 | | | $ | (9,451) | | | $ | (181,493) | | | $ | 59,815 | | | $ | 252,093 | | | $ | (9,482) | | | $ | (177,098) | | | $ | 65,513 | |
Intangible assets with indefinite lives: | | | | | | | | | | | | | | | |
Intellectual Property | $ | 1,993 | | | $ | (1,993) | | | $ | — | | | $ | — | | | $ | 2,004 | | | $ | (2,004) | | | $ | — | | | $ | — | |
Total intangible assets | $ | 252,752 | | | $ | (11,444) | | | $ | (181,493) | | | $ | 59,815 | | | $ | 254,097 | | | $ | (11,486) | | | $ | (177,098) | | | $ | 65,513 | |
Finite-lived intangible assets are amortized over their weighted average lives, which are 14 years for technology, 10 years for customer related intangibles, 7 years for trade names, 6 years for internally developed software, 13 years for patents, 2 years for service agreements and 11 years weighted average in total.
Internally developed software consists of $11.1 million relating to costs incurred for development of internal use computer software and $2.2 million for development of software to be sold.
Amortization expense related to intangible assets with definite lives was as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Technology | $ | 1,629 | | | $ | 1,795 | | | | | |
Customer related | 2,116 | | | 2,360 | | | | | |
Trade names | 1,443 | | | 1,483 | | | | | |
Internally developed software | 24 | | | 50 | | | | | |
| | | | | | | |
Service agreements | 10 | | | 10 | | | | | |
Total amortization | $ | 5,222 | | | $ | 5,698 | | | | | |
The amortization expense amounts shown above include internally developed software not held for sale of $24 thousand and $24 thousand for the three months ended March 31, 2022 and March 31, 2021, respectively, which is recorded within our income statement as a general and administrative operating expense. The amortization expense amounts shown above include internally developed software held for sale of zero and $26 thousand for the three
months ended March 31, 2022 and March 31, 2021, respectively, which is recorded within our income statement as cost of goods sold.
Expected amortization expense related to definite-lived amortizable intangible assets is as follows (in thousands): | | | | | |
Nine months ending December 31, 2022 | $ | 12,301 | |
2023 | 14,748 | |
2024 | 12,866 | |
2025 | 12,261 | |
2026 | 2,398 | |
2027 | 2,267 | |
Thereafter | 2,974 | |
Total expected amortization expense | $ | 59,815 | |
7 – Goodwill
The carrying amount of goodwill and the changes in the balance are as follows (in thousands): | | | | | |
December 31, 2021 | $ | 148,657 | |
| |
Foreign currency translation | (353) | |
March 31, 2022 | $ | 148,304 | |
8 - Property and Equipment, net
Property and equipment, net consist of the following (in thousands): | | | | | | | | | | | |
| March 31, 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 $1.5 million and $1.6 million for the three months ended March 31, 2022 and March 31, 2021, respectively.
9 - Reserve for Product Warranties
We provide a warranty for products that is generally one year in length. In some cases, regulations may require us to provide repair or remediation beyond the typical warranty period. If any of the products contain defects, we may incur additional repair and remediation costs. Service, repair and calibration services are provided by a combination of our owned facilities and vendors on a contract basis.
We accrue estimated product warranty costs at the time of sale based on historical experience. A warranty reserve is included in accrued liabilities for the expected future costs of servicing products. Additions to the reserve are based on management’s best estimate of probable liability. We consider a combination of factors including
material and labor costs, regulatory requirements, and other judgments in determining the amount of the reserve. The reserve is reduced as costs are incurred to honor existing warranty and regulatory obligations.
As of March 31, 2022, we have accrued $6.4 million for product related warranties. Our estimate of these costs is primarily based upon the number of units outstanding that may require repair and costs associated with shipping.
The details of activity in the warranty reserve are as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 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, 2022, we have one active share-based compensation plan, the 2021 Equity Incentive Plan.
The terms of all awards granted during the three months ended March 31, 2022 and the methods for determining grant-date fair value of the awards are consistent with those described in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Details of share-based compensation expense are as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 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, 2022, unrecognized compensation expense related to the unvested portion of stock options and other stock awards was approximately $21.9 million, which is expected to be recognized over a weighted average period of 2.4 years.
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 before provision for income taxes in multiple jurisdictions, the effects of acquisitions, the integration of those acquisitions, and changes in tax law. In circumstances where we are unable to predict income in multiple jurisdictions, the actual year to date effective tax rate may be the best estimate of the annual effective tax rate for purposes of determining the interim provision for income tax.
We recorded income tax expense of $1.5 million and $0.5 million for the three months ended March 31, 2022 and March 31, 2021, respectively. The effective tax rate was 43.6% and 16.4% for the three months ended March 31, 2022 and March 31, 2021, respectively. The increase in the effective tax rate for the three months ended March 31, 2022 compared with the three months ended March 31, 2021, is primarily attributable to a tax law change in effect from January 1, 2022 that requires the capitalization of research and experimental costs under IRC Section 174 and directly increased the Company's Subpart F inclusion. The approximate impact of the change in the estimated tax rate due to all impacts from IRC Section 174 resulted in a $0.01 reduction in the GAAP earnings per share. Other significant factors impacting the current period effective tax rate included the benefit of Federal and California research and development credits, offset by global intangible low taxed income inclusions (“GILTI”) that was also impacted by IRC Section 174, and non-deductible executive compensation expenses. Factors impacting the effective rate for the three months ended March 31, 2021, include the benefit of Federal and California research and development credits, favorable discrete items for the carryback of losses, partially offset by non-deductible executive compensation expenses, and other discrete events.
Under the Tax Cut and Jobs Act (the “Act”) enacted on December 22, 2017, research and experimental (“R&E”) expenditures under IRC Section 174 incurred for tax years beginning after December 31, 2021 must be capitalized and amortized ratably over five or fifteen years for tax purposes, depending on where the research activities are conducted, U.S. or foreign respectively. Although there is proposed legislation that would defer the capitalization requirement to later years, we have no assurance that IRC Section 174 will be repealed or otherwise modified.
We recorded no change related to unrecognized tax benefits for the three months ended March 31, 2022. Within the next twelve months, it is possible that the uncertain tax positions may change with a range of approximately zero to $0.8 million. Our tax returns remain open to examination as follows: U.S Federal, 2018 through 2021, U.S. states, 2017 through 2021, and significant foreign jurisdictions, generally 2017 through 2021.
13 - Debt and Credit Arrangements
We have a Credit Agreement with JP Morgan Chase Bank ("JP Morgan"), Citibank, NA (“Citibank”), and Wells Fargo Bank, National Association (“Wells Fargo”). During the third quarter of 2020 we amended the terms of the Credit Agreement to extend the maturity date of the original agreement, reduce the aggregate value of the revolving facility, and amend certain covenants. The amended Credit Agreement provides for an aggregate $150.0 million of secured revolving credit facility. The Credit Agreement contains covenants, including covenants relating
to maintenance of books and records, financial reporting and notification, compliance with laws, maintenance of properties and insurance, and limitations on guaranties, investments, issuance of debt, lease obligations and capital expenditures, and is secured by virtually all of our assets. The Credit Agreement provides for events of default, including failure to pay any principal or interest when due, failure to perform or observe covenants, bankruptcy or insolvency events and the occurrence of the event has a material adverse effect. We have no other significant credit facilities. As of March 31, 2022, no amounts were outstanding under the Credit Agreement.
In addition to the customary restrictive covenants listed above, the Credit Agreement also contains financial covenants that require us to maintain a certain leverage ratio and fixed charge coverage ratio, each as defined in the Credit Agreement:
•Leverage Ratio, as defined, to be no higher than 3.25 to 1.00.
•Interest Coverage Ratio, as defined, to be at least 1.75 to 1.00 at all times.
Pursuant to the terms of the Credit Agreement, the outstanding principal balance will bear interest at either (a) a fluctuating rate per annum equal to the Applicable Rate, as defined in the Credit Agreement, depending on our leverage ratio plus the higher of (i) the federal funds rate plus one-half of one percent per annum; (ii) the prime rate in effect on such a day; and (iii) the LIBOR rate plus one percent, or (b) a fluctuating rate per annum of LIBOR Rate plus the Applicable Rate, which ranges between 2.25% to 3.50%. The Credit Agreement matures on September 25, 2023, at which time all principal amounts outstanding under the Credit Agreement will be due and payable.
14 - Segment, Customer and Geographic Information
We operate in one reportable segment in which we provide medical device solutions to screen, diagnose, and treat disorders affecting the brain, neural pathways, and eight sensory nervous systems.
End-user customer base includes hospitals, clinics, laboratories, physicians, audiologists, and governmental agencies. Most of our international sales are to distributors who resell products to end users or sub-distributors.
The following tables present revenue by end market and geographic region and long-lived asset information by geographic region. Revenue is based on the destination of the shipments and long-lived assets are based on the physical location of the assets (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Consolidated Revenue: | | | | | | | |
United States | $ | 69,970 | | | $ | 67,772 | | | | | |
International | 49,823 | | | 47,155 | | | | | |
Total | $ | 119,793 | | | $ | 114,927 | | | | | |
| | | | | | | | | | | | | | | |
| 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, 2022 and 2021, no single customer and no country outside the United States contributed more than 10% of our consolidated revenue.
15 - Fair Value Measurements
ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value is defined under ASC 820 as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes the following three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
The following financial instruments are not measured at fair value on our consolidated balance sheet as of March 31, 2022 and December 31, 2021 but require disclosure of their fair values: cash and cash equivalents, accounts receivable, and accounts payable. The carrying value of these financial instruments approximates fair values because of their relatively short maturity.
16 - Subsequent Events
As previously announced, on April 17, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Prince Parent Inc., a Delaware corporation (“Parent”), and Prince Mergerco Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”), providing for, among other things, the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent.
Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of common stock, par value $0.001 per share, of the Company (“Company Common Stock”) outstanding as of immediately prior to the Effective Time (other than any shares of Company Common Stock held in treasury, held by Parent, Merger Sub or their respective subsidiaries or as to which appraisal rights have been perfected in accordance with the Delaware General Corporation Law, but including each share of Company Restricted Stock (as defined below)) will be cancelled and extinguished and automatically converted into the right to receive cash in an amount equal to $33.50, without interest thereon (the “Per Share Price”).
Pursuant to the Merger Agreement, at the Effective Time:
•except as set forth below with respect to Employee Interim Awards (as defined below), each share of Company Common Stock subject to vesting restrictions or a risk of forfeiture (“Company Restricted Stock”) outstanding as of immediately prior to the Effective Time, whether vested or unvested and whether or not granted pursuant to any of the Company’s equity plans (“Company Stock Plans”), will be cancelled and converted into and will become a right to receive an amount in cash, without interest and subject to any required tax withholding, equal to the Per Share Price;
•except as set forth below with respect to Employee Interim Awards or as set forth in the CEO Retention Agreement (as defined below), each restricted stock unit in respect of shares of Company Common Stock (each, a “Company Restricted Stock Unit”) outstanding as of immediately prior to the Effective Time, whether vested or unvested and whether or not granted pursuant to any Company Stock Plan, will be cancelled and be converted into and will become a right to receive an amount in cash, without interest and subject to any required tax withholding, equal to (i) the amount of the Per Share Price; multiplied by (ii) (1) with respect to Company Restricted Stock Units that are only subject to time-vesting requirements, the total number of shares of Company Common Stock subject to such Company Restricted Stock Unit, and (2) with respect to Company Restricted Stock Units that are subject to time- and performance-vesting requirements, the total number of shares of Company Common Stock determined to be performance vested with the performance goals deemed achieved at maximum levels and with the remaining time-vesting requirements deemed satisfied;
•any Company Restricted Stock and Company Restricted Stock Units granted after the date of the Merger Agreement, other than awards that may be granted to non-employee directors after the date of the Merger Agreement (such awards, “Employee Interim Awards”), that are outstanding as of immediately prior to the Effective Time, whether vested or unvested and whether or not granted pursuant to any Company Stock Plan, will be treated at the Effective Time in the manner set forth above, provided that any applicable
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
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.