natus medical incorporated (ntus)

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-KýAnnual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December31, 2016OR¨Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period fromto.Commission file number: 000–33001NATUS professional MEDICAL INCORPORATED(Exact name of Registrant as specified in its charter)Delaware77–0154833(State or other jurisdiction ofincorporation or organization)(I.

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EmployerIdentification Number)6701 Koll Center Parkway, Suite 120, Pleasanton, CA 94566(Address of principal executive offices) (Zip Code)(925) 223-6700(Registrant's telephone number, including area code)Securities Registered Pursuant to Section12(b) of the Act:Title of each className of each exchange on which registeredCommon Stock, $0.001 par value per shareThe NASDAQ Stock Market LLC(Nasdaq Global Select Market)Securities Registered Pursuant to Section12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.YesýNo¨Indicate by check mark if the registrant is not required to file reports pursuant to Section13 or Section15(d) of the Act.
Yes¨NoýIndicate by check mark whether the registrant (1)has filed all reports required to be filed by Section13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2)has been subject to such requirements for the past 90days.YesýNo¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule405 of Regulation S-T (§232.405 of this chapter) during the preceding 12months (or for such shorter period that the registrant was required to submit and post such files).
YesýNo¨Indicate by check mark if disclosure of delinquent filers pursuant to Item405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form10-K.ýIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act:Large accelerated filerýAccelerated filer¨Non-accelerated filer¨Smaller reporting company¨(Do not check if a smaller reporting company)Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes¨NoýAs of June30, 2016, the last business day of Registrant's most recently completed second fiscal quarter, there were 32,942,199 shares of Registrant's common stock outstanding, and the aggregate market value of such shares held by non-affiliates of Registrant (based upon the closing sale price of such shares on the Nasdaq Global Select Market on June30, 2016) was $1,245,215,122. Shares of Registrant's common stock held by each executive officer and director and by each entity that owns 5% or more of Registrant's outstanding common stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive determination for other purposes.OnFebruary17, 2017, the registrant had 32,866,703 shares of its common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCEThe Registrant has incorporated by reference, into Part III of this Form 10-K, portions of its Proxy home Statement for the2017 Annual Meeting of Stockholders.
Table of ContentsNATUS MEDICAL INCORPORATEDANNUAL REPORT ON FORM 10-KTABLE OF CONTENTSPART IITEM1.BusinessITEM1A.Risk FactorsITEM1B.Unresolved Staff CommentsITEM 2.PropertiesITEM 3.Legal ProceedingsITEM 4.Mine Safety DisclosuresPART IIITEM 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesITEM 6.Selected Financial DataITEM 7.Management's Discussion and Analysis of Financial Condition and Results of OperationsITEM7A.
Quantitative and Qualitative Disclosures About Market RiskITEM 8.Financial Statements and Supplementary DataITEM 9A.Controls and ProceduresPART IIIITEM 10.Directors, Executive Officers and Corporate GovernanceITEM 11.
Executive CompensationITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersITEM 13.Certain Relationships and Related Transactions and Director IndependenceITEM 14.Principal Accountant Fees and ServicesPART IVITEM 15.
Exhibits and Financial Statement ScheduleSIGNATURESITEM 16.Form 10-K SummaryTable of ContentsPART IITEM 1.BusinessThis Annual Report on Form 10-K contains forward-looking statements within the meaning of Section27A of the Securities Act of 1933 and Section21E of the Securities Exchange Act of 1934 about Natus Medical security Incorporated ("Natus," "we," "us," or "our Company").
These statements include, among other things, statements concerning our expectations, beliefs, plans, intentions, future operations, financial condition and prospects, and business strategies. The words "may," "will," "continue," "estimate," "project," "intend," "believe," "expect," "anticipate," and other similar expressions generally identify forward-looking statements. Forward-looking statements in this Item1 include, but are not limited to, statements regarding the effectiveness and advantages of our products, factors relating to demand for and economic advantages of our products, our plan to develop and acquire additional technologies, products or businesses, our marketing, technology enhancement, and product development strategies, and our ability to complete all of our backlog orders.
Forward-looking statements are not guarantees of future performance and are subject to substantial risks and uncertainties that could cause our actual results to differ materially from those that we predicted in the forward-looking statements. Investors should carefully review the information contained under the caption "RiskFactors" contained in Item1A for a description of risks and uncertainties that could cause actual results to differ from those that we predicted. 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, except as required by Federal Securities laws.
"Natus" and other trademarks of ours appearing in this report are our property.OverviewNatus is a leading provider of newborn care and neurology healthcare products and services used for the screening, diagnosis, detection, treatment, monitoring and tracking of common medical home ailments in newborn care, hearing impairment, neurological dysfunction, epilepsy, sleep disorders, neuromuscular diseases and balance and mobility disorders.Product FamiliesWe are organized into two strategic business units, each with multiple product families:Neurology—Includes products and services for diagnostic electroencephalography ("EEG") and long term monitoring ("LTM"), Intensive Care Unit ("ICU") monitoring, electromyography ("EMG"), sleep analysis or polysomnography ("PSG"), intra-operative monitoring ("IOM"), and diagnostic and monitoring transcranial doppler ("TCD") ultrasound technology.
Additionally, Global Neuro-Diagnostic Services provides ambulatory EEG services with and without video in the patient's home.Newborn Care—Includes products and services for newborn care including hearing screening, brain injury, thermoregulation, jaundice management, and various disposable newborn care supplies, as well as products for diagnostic hearing assessment for children through adult populations, and products to diagnose and assist in treating balance and mobility disorders.In January 2017, we acquired a third strategic business unit with multiple product families:Otometrics—Includes products and services including computer-based audiological, otoneurologic and vestibular instrumentation and sound rooms for hearing and balance care professionals worldwide.
Otometrics has a complete product and brand portfolio known for its sophisticated design technology in the hearing and balance assessment markets. Global brands include Aurical®, ICS® and Madsen®.NeurologyOur neurology business unit represents a comprehensive line of products that are used by healthcare practitioners in the diagnosis and monitoring of neurological disorders of the central and peripheral nervous system, including outpatient private practice facilities and inpatient hospital environments including diagnostic procedures and monitoring of patients during admissions, surgery, while under sedation, in post-operative care, and in intensive care units.
Our neurology products and services include:Electroencephalography—Equipment, supplies and services used to monitor and visually display the electrical activity generated by the brain and other key physiological signals for both diagnosis and monitoring of neurological disorders in the hospital, research laboratory, clinician office and patient's home.Electromyography—Equipment and supplies used to measure electrical activity in nerves, muscles, and critical pathways includes EMG, nerve conduction and evoked potential functionality.Polysomnography—Equipment and supplies used to measure a variety of respiratory and physiologic functions to assist in the diagnosis and monitoring of sleep disorders, such as insomnia and obstructive sleep apnea, a condition that causes a person to stop breathing intermittently during sleep.
1Table of ContentsIntraoperative monitoring—Equipment and supplies used to monitor the functional integrity of certain neural structures (i.e. nerves, spinal cord and parts of the brain) during surgery. The goal of IOM is to provide real time guidance to the surgeon and anesthesiologist which will reduce the risk to the patient during surgery.
Transcranial Doppler—Equipment and supplies used to measure blood flow parameters such as velocity in key vascular structures in the brain. This vascular information is helpful in identifying strokes, infarcts and vasospasms.Diagnostic EEG and Long-term MonitoringWe design, manufacture, and market a full line of instruments and supplies used to help diagnose the presence of seizure disorders and epilepsy, look for causes of confusion, evaluate head injuries, tumors, infections, degenerative diseases, and metabolic disturbances that affect the brain, and assist in surgical planning.
This type of testing is also done to diagnose brain death in comatose patients. These systems and instruments work by detecting, amplifying, and recording the brain's electrical impulses, as well as other physiological signals needed to support clinical findings. Routine clinical EEG recording is done by placing electrodes on a patient's scalp over various areas of the brain to record and detect patterns of activity and specific types of electrical events.
EEG technologists perform the tests, and neurologists, neurophysiologists and epileptologists review and interpret the results.Routine outpatient clinical EEG testing is performed in hospital neurology laboratories, private physician offices, and in ambulatory settings such as the patient's home, providing physicians with a clinical assessment of a patient's condition. Long-term inpatient monitoring of EEG and behavior (LTM) is used to determine complex treatment plans, and for patients with seizures that do not respond to conventional therapeutic approaches, surgical solutions may be appropriate.
Patients suffering from severe head trauma and other acute conditions that may affect the brain are monitored in ICUs. In addition, research facilities use EEG equipment to conduct research on humans and laboratory animals.Global Neuro-Diagnostic Services ("GND") which we acquired in early 2015, provides in-home ambulatory EEG monitoring.
GND works with physicians and hospitals to provide superior care and testing services to its patients. Upon receiving a physician referral, GND provides program services in the patient's home, professional oversight throughout the study and preliminary report generation for physician review. GND has received accreditation by The Joint Commission as a home EEG testing services company and also has achieved the American Board of Registered Electroencephalographic and Evoked Potential Technologists (ABRET) Laboratory Accreditation in routine EEG services.
GND is a leader in EEG testing services because of our focus on meeting the most stringent quality standards and providing the highest quality patient care.Diagnostic Electroencephalograph Monitoring Product LinesOur EEG diagnostic monitoring product lines for neurology consist of signal amplifiers, workstations to capture and store synchronize video and EEG data, and proprietary software. These products are typically used in concert, as part of an EEG "system" by the neurology/neurophysiology department of a hospital or clinic to assist in the diagnosis and monitoring of neurological conditions.
NeuroWorks; Coherence; NicoletOne; Twin.
Our EEG Systems include a broad range of products, from software licenses and ambulatory monitoring systems to advanced laboratory systems with multiple capabilities for EEG, ICU monitoring, long-term monitoring of up to 256 channels, and physician review stations with quantitative EEG analysis capabilities.Stellate/Gotman Spike and Seizure; GridView; NicoletOne Trends.Our proprietary spike and seizure detection algorithm detects, summarizes, and reports EEG events that save health care professionals time by increasing the speed and accuracy of interpretation.
GridView is a tool that allows the clinician to correlate EEG patterns with electrode contacts on a 3D view of the patient brain using magnetic resonance ("MR") or computed tomography ("CT") images, thus enabling the visualization and annotation of the brain surface and internal structures involved in the diagnosis of epilepsy. NicoletOne Trends provides a comprehensive set of EEG analysis algorithms that are used to generate compressed trends of large amounts of data to assist in the clinical evaluation and data review process.Proprietary Signal Amplifiers.Our proprietary signal amplifiers function as the interface between the patient and the computer.
The headbox connects electrodes attached to the patient's head to our EEG monitoring systems. Our proprietary amplifier products are sold for a wide variety of applications under the following brand names: Xltek, Trex, EEG32U, EMU40EX, Brain Monitor, Quantum, Schwarzer EEG, Nicolet v32 and v44 models, C series and Nicolet Wireless 32- and 64- channel amplifiers.Nicolet Cortical Stimulator.This product is our proprietary device that provides cortical stimulation to the brain during functional brain mapping either before or during surgery to help the surgeon protect the eloquent parts of the brain.
The device can be used as a standalone unit or with the fully integrated NicoletOne software that supports control of the device from the software, automated mapping and comprehensive report generation.2Table of ContentsSupplies.We also manufacture and market a full line of proprietary EEG needles and other supplies used in the electroencephalography field.Global Neuro-Diagnostic Services. GND provides ambulatory EEG services with and without video in the patient's home.
Other services such as Remote Monitoring, ICU monitoring, Virtual EMU monitoring and Detailed Video EEG Technical Descriptions with cloud-based test results are also provided. Our services are specifically designed to partner with hospitals and physicians to improve efficiency, results, and turn-around time, and to reduce costs.Electrodiagnostic MonitoringOur electrodiagnostic systems include EMG, nerve conduction ("NCS"), and often evoked potential ("EP") functionality.
EMG and NCS involve the measurement of electrical activity of muscles and nerves both at rest and during contraction. Measuring the electrical activity in muscles and nerves can help diagnose diseases of the peripheral, central nervous system or musculature system. An electromyogram is done to determine if there is any disease present that effects muscle tissue, nerves, or the junctions between nerve and muscle (neuromuscular junctions).
An electromyogram can also be used to diagnose the cause of weakness, paralysis, and muscle twitching, and is also used as a primary diagnosis for carpal tunnel syndrome, which is the most frequently encountered peripheral compressive neuropathy. EMG is also used for clinical applications of botox to relieve muscle spasm and pain. We market both the clinical system and the needles used for these procedures.
In addition to EMG and NCS functionality, many of our Electrodiagnostic systems also include EP. Evoked potentials are elicited in response to a stimulus. These evoked potentials can come from the sensory pathways (such as hearing and visual) or from the motor pathways.
An examination tests the integrity of these pathways including the associated area of the brain. Sophisticated amplifiers are required to recognize and average evoked potential EMG and NCS signals.Electrodiagnostic Product LinesDantec Keypoint.
The Dantec Keypoint EMG and EP family of products features amplifiers, stimulators, and strong signal quality. The Keypoint is used for advanced neurodiagnostic applications such as single fiber EMG, visual and auditory evoked potentials, and in routine nerve conduction studies. The Keypoint system is also available in a portable laptop configuration.
Dantec Clavis.
The Dantec Clavis device is a hand-held EMG and current stimulation device that provides muscle and nerve localization information to assist with medication and botox injections. In conjunction with the Bo-ject hypodermic needle and electrodes, physicians can better localize the site of the injection.Nicolet EDX family.A hardware platform of amplifiers, base control units, stimulators and hand-held probes that are sold with Nicolet brand proprietary software.
These mid to high end systems have full functionality, strong signal quality, and flexibility. They include EMG, NCS, EP's, IOM and advanced data analysis features.Nicolet VikingQuest.An EMG system for the mid-range market. The device runs on our proprietary software.
Natus Neurology UltraPro.
This is a low to mid-level product that offers high quality data collection using the Dantec Keypoint amplifiers and the proprietary Natus EMG software.Supplies.We also manufacture and market a full line of proprietary EMG needles and other supplies used in the electrodiagnostic field.Diagnostic Polysomnography MonitoringPSG, which involves the analysis of respiratory patterns, brain electrical activity and other physiological data, has proven critical for the diagnosis and treatment of sleep-related diseases such as apnea, insomnia, and narcolepsy.
A full polysomnographic sleep study entails a whole-night recording of brain electrical activity, muscle movement, airflow, respiratory effort, oxygen levels, electrical activity of the heart, and other parameters. In some studies patients are fitted with treatment devices using Positive Airway Pressure technology ("PAP") during the sleep study and the proper settings for the treatment devices are determined. In many cases, the sleep study is performed in the patient's home.
Diagnostic PSG Monitoring Product LinesWe market dedicated diagnostic PSG monitoring products that can be used individually or as part of a networked system for overnight sleep studies to assist in the diagnosis of sleep disorders. Additionally we offer products that are specifically designed to be used in the patient's home. Some of our EEG systems described above can also be configured to perform diagnostic PSG monitoring.
These products include software licenses, ambulatory monitoring systems, and laboratory systems that combine multiple capabilities, including EEG monitoring, physician review stations, and quantitative PSG analysis capabilities.3Table of ContentsEmbla REMlogic, and Sandman; Xltek SleepWorks; Schwartzer Coherence; and Grass Twin.Our diagnostic PSG systems capture and store all data digitally.
The systems enable users to specify rules and personal preferences to be used during analysis, summarizing the results graphically and incorporating them in detailed reports.Proprietary Amplifiers.Our data acquisition systems incorporate recent developments in superior amplifiers for sleep analysis and are sold under brand names such as Embla and MPR, Xltek Trex and SleepWorks, and Schwarzer. Our amplifiers are used in both hospitals and stand-alone clinics.
In addition to exceptional signal quality, headboxes include various tools such as built-in oximeters and controls to allow the user to start and stop a study or perform electrode impedance testing either at the patient's bedside or from the monitoring room.Practice Management Software.Our Embla Enterprise Practice Management Software provides a solution for institutions as well as private labs and physicians for patient scheduling, inventory control, staff scheduling, data management, business reports and billing interfaces. Enterprise may be used in conjunction with many Natus PSG products.
PMSD.
PastuerMatic Sterile Dryers are used in hospital and clinic sleep laboratories to provide non-chemical sterilization of products used in sleep therapy.An environmentally friendly approach to disinfection, the PMSD products offer cost effective sterilization for sleep labs of all sizes.Supplies.We also market a broad line of supplies, disposable products and accessories for the PSG laboratory.
Intraoperative MonitoringIntraoperative monitoring ("IOM") is the use of electrophysiological methods such as EEG, EMG, and evoked potentials to monitor the functional integrity of certain neural structures (i.e. nerves, spinal cord and parts of the brain) during surgery. The purpose of IOM is to reduce the risk to the patient's nervous system, and/or to provide functional guidance to the surgeon and anesthesiologist during surgery.
Diagnostic IOM Product LinesXltek Protektor.The Protektor system is an IOM system that provides medical professionals with all information necessary to make immediate and critical surgical decisions. The system combines flexibility with multi-modality allowing full coverage of IOM techniques.
The Protektor comes in 16 or 32 channel options.Nicolet Endeavor.A dedicated multi-modality IOM system that offers complete flexibility in work flow and test protocols.Nicolet EDX.These combo systems are used in IOM applications where a smaller number of channels is sufficient.
This approach is primarily followed in international markets that utilize the integrated system approach that allows for the use of the system in EMG clinical applications as well as in IOM applications.Transcranial DopplerTranscranial Doppler is the use of Doppler ultrasound technology to measure blood flow parameters such as velocity in key vascular structures in the brain. A Doppler probe is held against a specific location on the head and the device displays the information in both visual and auditory formats.
This technology is used as preventative screening, diagnosis, and monitoring of various diseases and brain injuries such as stroke, embolism, reduced blood flow during surgery, and vasospasm.Transcranial Doppler ProductsSonara and Sonara Tek.The Sonara is an embedded system that is a self-contained unit that includes CPU, data display screen and speakers.
It uses proprietary software with a touch screen menu. Sonara Tek is a small portable device used with a laptop. Both models enable the uploading of images to the hospital information system.
Newborn CareOur newborn care business unit represents a line of products and services that are used by healthcare practitioners in the diagnosis and treatment of common medical ailments in newborn care, as well as other products used in newborn through adult populations, including hearing diagnostics and balance & mobility systems. Our products include:Newborn Hearing Screening—Products used to screen hearing in newborns.Newborn Brain Injury—Products used to diagnose the severity of brain injury, monitor the effectiveness of drug therapies, detect seizure activity and monitor general neurological status.
Thermoregulation—Products used to control the newborn environment including incubators and warmers.Jaundice Management—Products used to treat jaundice, the single largest cause for hospital readmission of newborns in the U.S.4Table of ContentsDiagnostic Hearing Assessment—Products used to screen for or diagnose hearing loss, or to identify abnormalities affecting the peripheral and central auditory nervous systems in patients of all ages.
Balance and Mobility—Systems to diagnose and assist in treating balance disorders in an evidence-based, multidisciplinary approach.Pediatric Ocular Imaging—Imaging systems and products used in the advanced science and practice of neonatal and pediatric retinal imaging.NicView—Streaming video for families with babies in the neonatal intensive care unit (NICU) that enables family members and approved friends to see the new baby, 24/7, from anywhere in the world - from any device.
Nursery Essentials—Products used in the everyday operation of a newborn intensive care unit ("NICU") and well-baby nursery department within the hospital environment. These products include such items as: Biliband eye protectors, GumDrop pacifiers, MiniMuffs noise attenuators, NeatNick heel lancets, neonatal oxygen hoods, Olympic Circumstraint, Olympic Papoose Boards, Olympic Smart Scales, Olympic Warmettes, OraSwab oral care products, Save the Gonads x-ray protection devices, SugarPlum glucose lancets, SunFish temperature probe covers and TootSweet sucrose solutions.Newborn Hearing ScreeningHearing impairment is the most common treatable chronic disorder in newborns, affecting as many as five babies out of every 1,000 newborns.
It is estimated that 20,000 hearing-impaired babies are born in the United States ("U.S.") every year, and as many as 60,000 more in the rest of the developed world. Until the introduction of universal newborn hearing screening programs, screening was generally performed only on those newborns that had identifiable risk factors for hearing impairment.
However, screening only those newborns with risk factors for hearing impairment overlooks approximately half of newborns with some level of hearing impairment.Early identification of hearing impairment and early intervention has been shown to improve language development significantly. Undetected hearing impairment often results in the failure to learn, process spoken language, and speak.
Newborn Hearing Screening TechniquesThe two traditional technologies used to screen newborns and infants for hearing impairment are auditory brainstem response and otoacoustic emissions.Auditory brainstem response ("ABR").ABR technology is the most accurate and comprehensive method for screening and diagnosing hearing impairment. ABR technology is based on detecting the brain's electric impulses resulting from a specific auditory stimulus.
Otoacoustic emission ("OAE").
OAEsare sounds created by the active biomechanical processes within the sensory cells of the cochlea. They occur both spontaneously and in response to acoustic stimuli. OAE screening uses a probe placed in the ear canal to deliver auditory stimuli and to measure the response of the sensory cells with a sensitive microphone.
Newborn Hearing Screening Product LinesOur newborn hearing screening product lines consist of the ALGO, ABaer, AuDX, and Echo-Screen newborn hearing screeners. These hearing screening products utilize proprietary signal detection technologies to provide accurate and non-invasive hearing screening for newborns and are designed to detect hearing loss at 30 or 35 dB nHL or higher. Each of these devices is designed to generate a PASS or REFER result.
ALGO 5 and 3i Newborn Hearing Screeners.
These AABR devices deliver thousands of soft audible clicks to the newborn's ears through sound cables and disposable earphones connected to the instrument. Each click elicits an identifiable brain wave, which is detected by disposable electrodes placed on the head of the child and analyzed by the screening device. These devices use our proprietary AABR signal detection algorithm.
ABaer Newborn Hearing Screener.
The ABaer, which is a PC-based newborn hearing screening device, offers a combination of AABR, OAE, and diagnostic ABR technologies in one system.Echo-Screen.Our hand-held Echo-Screen products provide a choice or combination of proprietary ABR and OAE technologies that can also be used for children through adults. The Echo-Screen III device is a compact, multi-modality handheld hearing screener that is tightly integrated with audible Lite Hearing Screening Data Management.
AuDX.
Our AuDX product is a hand-held OAE screening device that can be used for newborn hearing screening, as well as patients of all ages, from children through adults. AuDX devices record and analyze OAEs generated by the cochlea through sound cables and disposable ear probes inserted into the patient's ear canal. OAE technology is unable to detect hearing disorders affecting the neural pathways, such as auditory neuropathy.
5Table of ContentsHearing Screening Supply ProductsFor infection control, accuracy, and ease of use, the supply products used with our newborn hearing screening devices are designed as single-use, disposable products. Each screening supply product is designed for a specific hearing screening technology.ABR Screening Supply Kits.Each ABR screen is carried out with single-use earphones and electrodes, which are alcohol and latex-free.
The adhesives used in these supply products are specially formulated for use on the sensitive skin of newborns. To meet the needs of our customers we offer a variety of packaging options. Echo-Screen and ABaer offer the choice of either an earphone or use of ear tips for perform ABR screening.
OAE Supply Products.
Each OAE screen is carried out with single-use ear tips that are supplied in a variety of sizes and packaging options.Peloton Screening ServicesLaunched in early 2014, Peloton Screening Services is a nationwide service offering that provides hearing screening services to hospital-based customers.The platform of the program meets the objectives of today's healthcare environment by aligning with family centered care principals and Joint Committee on Infant Hearing (JCIH) recommendations.
Peloton provides all aspects of the program: equipment, supplies, professional oversight by nurses or audiologists, screening personnel,case management, quality review& oversight, and state data management reporting.Newborn Brain InjuryFor many years, newborn infants admitted to the NICU of a hospital have been routinely monitored for heart activity, temperature, respiration, oxygen saturation, and blood pressure. Recently it has also been considered important to monitor brain activity.
A cerebral function monitor, utilizing amplitude-integrated EEGs ("aEEGs"), is a device for monitoring background neurological activity. Our simplified aEEG devices introduced over ten years ago, allow neonatologists and nurses to set-up and interpret basic neurological traces without neurology oversight.Newborn Brain Injury ProductsOur newborn brain injury products record and display parameters that the neonatologist uses to assess and monitor neurological status in the newborn.
These devices continuously monitor and record brain activity, aiding in the detection and treatment of HIE and seizures. The devices also monitor the effects of drugs and other therapies on brain activity and improve the accuracy of newborn neurological assessments. They are used with electrodes attached to the head of the newborn to acquire an EEG signal that is then filtered, compressed, and displayed graphically on the device or as a hardcopy printout.
The monitors have touch screens for easy navigation and onscreen keyboards for data entry at the bedside.Olympic Brainz Monitor.The Olympic Brainz Monitor is our latest generation Cerebral Function Monitor. The device can be used in single-channel, two-channel or three-channel modes to continuously monitor and record brain activity.
ThermoregulationIncubators offer a controlled, consistent microenvironment for thermoregulation and humidification within a closed system to maintain skin integrity and body temperature.Thermoregulation productsIncubators.Our NatalCare incubators, including those used for transporting infants, provide high thermal performance with a double wall design, easy to use control panels and features such as improved weighing functionality with automatic centering and an electronic tilting mechanism. The easy to clean, smooth design, and choice of options make these customizable incubators appropriate for different use environments.
Jaundice ManagementThe American Academy of Pediatrics estimates that each year 60% of the approximately four million newborns in the U.S. become jaundiced. According to the Journal of the American Medical Association, neonatal jaundice is the single largest cause for hospital readmission of newborns in the U.S., and accounts for 50% of readmissions. Because of the serious consequences of hyperbilirubinemia, the American Academy of Pediatrics recommends that all newborns be closely monitored for jaundice and has called for the physician to determine the presence or absence of an abnormal rate of hemolysis to establish the appropriate treatment for the newborn.
In 2004, the American Academy of Pediatrics issued new guidelines for the treatment of jaundice in newborns. The guidelines recommend phototherapy as the standard of care for the treatment of hyperbilirubinemia in infants born at 35 weeks or more of gestation. The guidelines further highlight the need for "intense" phototherapy, and specifically recommend the use of the "blue" light treatment incorporated into our neoBLUE products.
6Table of ContentsJaundice Management ProductsneoBLUE Product Family.This product line consists of our neoBLUE, neoBLUE Mini, neoBLUE Cozy, neoBLUE Compact and neoBLUE blanket devices, which utilize light emitting diodes ("LEDs") to generate a high-intensity, narrow spectrum of blue light that is clinically proven to be most effective in the treatment of newborn jaundice. Our neoBLUE phototherapy devices emit significantly less ultraviolet light and heat than conventional phototherapy devices, reducing the risk of skin damage and dehydration for infants undergoing treatment.
Because of the high intensity of these lights, the treatment time associated with phototherapy is reduced.Medix MediLED Product Family.A full-size, free-standing LED phototherapy system and a MediLED mini light to be used on top of an incubator or attached to the Medix radiant warmer. The MediLED incorporates an array of blue and white LEDs, while the mini system utilizes blue "super LEDs" that provide high intensity phototherapy.
Diagnostic Hearing AssessmentWe design and manufacture a variety of products used to screen for or diagnose hearing loss, or to identify abnormalities affecting the peripheral and central auditory nervous systems in patients of all ages. The technology used in most of these systems is either electrodiagnostic in nature or measures a response from the cochlea known as an OAE.Diagnostic Hearing Assessment Product LinesOur diagnostic hearing assessment products consist of the Navigator Pro system, the Scout Sport portable diagnostic device, and the AuDX PRO.
Navigator PRO.
Our Navigator PRO for hearing assessment consists of a base system that is augmented by discrete software applications that enhance the system. The Navigator Pro System is a PC-based, configurable device that utilizes evoked potentials, which are electrical signals recorded from the central nervous system that appear in response to repetitive stimuli, such as a clicking noise. The evoked potentials are used to record and display human physiological data associated with auditory and hearing-related disorders.
The Navigator Pro System can be used for patients of all ages, from children to adults, including infants and geriatric patients. The device can be configured with additional proprietary software programs for various applications. These additional software programs include: MASTER, AEP, ABaer, and Scout.
Scout SPORT.
The Scout SPORT is a PC-based OAE system.
The ultra-portable Scout Sport can be carried from one computer to another to test in different locations. For office-based environments, the Scout Sport can be used with a dedicated notebook computer to create an independent portable system.AuDX PRO.The AuDX PRO is a hand-held OAE screening device with a large color display that can be used for patients of all ages.
The AuDX PRO records and analyzes OAEs generated by the cochlea through sound cables and disposable ear probes inserted into the patient's ear canal.Diagnostic Hearing Supply ProductsFor infection control, accuracy, and ease of use, most supply products used with our diagnostic hearing devices and systems are designed as single-use, disposable products. Each screening supply product is designed for a specific diagnostic hearing technology, and is similar in nature to our previously described OAE supply products for use in newborn hearing screening.
Balance and MobilityBalance is an ability to maintain the line of gravity of the body within the base of support with minimal postural sway. Maintaining balance requires coordination of input from multiple sensory systems including the vestibular (i.e. inner ear), somatosensory (i.e. touch, temperature, body position), and visual systems.
Balance disorders impact a large percentage of the population in all age ranges from children to adults. Common complaints include dizziness, vertigo, or an inability to walk or drive a vehicle, which can all lead to the curtailment of daily life activities. These symptoms are exacerbated in elderly patients and can result in falls, orthopedic injuries, and sometimes death.
Balance and Mobility ProductsOur principal balance and mobility products are sold under the Neurocom brand:EquiTest.Proprietary protocols in the EquiTest family of devices objectively quantify and differentiate among sensory, motor, and central adaptive impairments to balance control. This approach is commonly referred to as computerized dynamic posturography ("CDP").
CDP is complementary to clinical tests designed to localize and categorize pathological mechanisms of balance disorders in that it can identify and differentiate the functional impairments associated with the identified disorders.7Table of ContentsBalance Master.A family of devices providing objective assessment and retraining of the sensory and voluntary motor control of balance.VSR and VSR Sport.The VSR provides objective assessment of sensory and voluntary motor control of balance with visual biofeedback.
The VSR Sport is designed specifically for the athletic market as part of a concussion management program. It is portable, easy-to use and offers athletic trainers, sports medicine practitioners, and other sport professionals the data needed to make objective return-to-play decisions without relying on subjective evaluation.inVision.Our inVision device incorporates a set of proprietary diagnostic tests that quantify a patient's ability to maintain visual acuity and stable gaze while actively moving the head.
The objective information enables the clinician to assess the patient's ability to live and move safely in a dynamic world and to participate in daily-life functions such as driving, walking through a grocery store, or actively engaging in family activities.RetCamOur RetCam devices incorporate a camera combined with proprietary imaging software that are used to diagnose and monitor a range of ophthalmic maladies in premature infants. RetCam is the market leader in NICU ophthalmic imaging used in the detection of retinopathy of prematurity in newborns.
The RetCam system is a mobile, hand-held wide-field ophthalmic digital imaging system for the hospital and clinic that enables the capture of brilliant, full color digital images and videos that can be used for immediate assessment of the pediatric retina and the adult or pediatric anterior chamber. The digital images can also be sent electronically to an ophthalmologist for immediate interpretation. RetCam imaging provides the ophthalmologist with the ability to manage a patient through photographic documentation of the disease, communication with the parents of a child, follow-up using longitudinal comparisons and consultations through second opinions when warranted.
There are three different RetCam systems available; RetCam 3 which has an optional module for fluorescein angiography, RetCam Shuttle which allows the RetCam to be easily transported between hospitals and clinics and the RetCam Portable which allows easy transport from one location to another.Segment and Geographic InformationWe operate in one reportable segment, which we have presented as the aggregation of our neurology and newborn care product families. Within this reportable segment we are organized on the basis of the healthcare products and services we provide which are used for the screening, detection, treatment, monitoring and tracking of common medical ailments in newborn care, hearing impairment, neurological dysfunction, epilepsy, and sleep disorders.
Our end-user customer base includes hospitals, clinics, laboratories, physicians, nurses, audiologists, and governmental agencies. Most of our international sales are to distributors, who in turn resell our products to end users or sub-distributors.Information regarding our sales and long-lived assets in the U.
S.
and in countries outside the U.
S.
is contained inNote 19—Segment, Customer and Geographic Information of our Consolidated Financial Statements included in this report and is incorporated in this section by this reference.Revenue by Product Family and Product CategoryFor the years endedDecember31, 2016,2015 and2014, revenue from our product families as a percent of total revenue was approximately as follows:YearEndedDecember31,201620152014Neurology62%63%65%Newborn Care38%37%35%Total100%100%100%We also look at revenue as either being generated from sales of Devices and Systems, which are generally non-recurring, or related Supplies and Services, which are generally recurring. The products that are attributable to these categories are described above.
Revenue from Devices and Systems, Supplies and Services as a percent of total revenue for the years endingDecember31, 2016,2015 and2014 is as follows:8Table of ContentsYearEndedDecember31,201620152014Devices and Systems63%64%68%Supplies28%29%30%Services9%7%2%Total100%100%100%In2016,2015 and2014, no single end-user customer comprised more than 10% of our revenue.BacklogFor the years endedDecember31, 2016,2015 and2014, backlog was approximately as follows (in thousands):Year Ended December31,201620152014Backlog$10,555$9,359$12,429Marketing and SalesMarketingOur marketing strategy differentiates our products by their level of quality, performance, and customer benefit. We educate customers worldwide about our products through:Trade conference exhibits; andDirect presentations to healthcare professionals.
Domestic Direct and Distributor SalesWe sell our products in North America primarily through a direct sales organization. We believe this direct sales organization allows us to maintain a higher level of customer service and satisfaction than would otherwise be possible by other distribution methods. We also sell certain products under private label and distribution arrangements.
For the years endedDecember31, 2016,2015 and2014, domestic revenue as a percent of total revenue was approximately as follows:YearEndedDecember31,201620152014Domestic revenue65.6%64.4%60.6%International Direct and Distributor SalesWe sell some of our products outside the U.S. through direct sales channels in Canada, France, Germany, Denmark, and parts of Latin America; we sell other products in those regions and into more than 100 other countries through a distributor sales channel.
For the years endedDecember31, 2016,2015 and2014, international revenue as a percent of total revenue was approximately as follows:YearEndedDecember31,201620152014International revenue34.4%35.6%39.4%We sell products to our distributors under substantially the same terms as sales through our direct sales channels. Terms of sales to international distributors are generally EXW, reflecting that goods are shipped "ex works," in which title and risk of loss are assumed by the distributor at the shipping point.
Distributors are generally given exclusive rights in their territories to purchase products from Natus and to resell to end users or sub distributors. Our distributors typically perform marketing, sales, and technical support functions in their respective markets. Each distributor may sell Natus products to their customer directly, via other distributors or resellers, or both.
We actively train our distributors in product marketing, selling, and technical service techniques.Seasonality in Revenue9Table of ContentsWe experience seasonality in our revenue. Demand for our products is historically higher in the second half of the year compared to the first.
Our seasonality results from the purchasing habits of our hospital-based customers, whose purchases are often governed by calendar year budgets.Group Purchasing OrganizationsMore than 90% of the hospitals in the U.S. are members of group purchasing organizations ("GPO"s), which negotiate volume purchase agreements for member hospitals, group practices, and other clinics.
For the years endedDecember31, 2016,2015 and2014, direct purchases by GPO members as a percent of revenue were approximately as follows:YearEndedDecember31,201620152014Direct purchases by GPO members12.3%9.3%9.1%Third-Party ReimbursementIn the U.S., healthcare providers generally rely on third-party payors, including private health insurance plans, federal Medicare, state Medicaid, and managed care organizations, to reimburse all or part of the cost of the procedures they perform. Third-party payors can affect the pricing or the relative attractiveness of our products by regulating the maximum amount of reimbursement these payors provide for services utilizing our products.
In addition, our Peloton hearing screening service and GND services are dependent on third-party payors to reimburse us for services provided.Customer Service and SupportWe generally provide a one-year warranty on our medical device products. We also sell extended service agreements on our medical device products.
Service, repair, and calibration services for our domestic customers are provided by Company-owned service centers and our field service specialists. Service for international customers is provided by a combination of Company-owned facilities and vendors on a contract basis.ManufacturingOther companies manufacture a significant portion of the components used in our products; however, we perform final assembly, testing, and packaging of many of the devices ourselves to control quality and manufacturing efficiency.
We also use contract vendors to manufacture some of our disposable supply and medical device products. We perform regular quality assessments of these vendors, which include on-site quality audits.We purchase materials and components from qualified suppliers that are subject to our quality specifications and inspections.
We conduct quality audits of our key suppliers, several of which are experienced in the supply of components to manufacturers of finished medical devices, or supplies for use with medical devices. Most of our purchased components are available from more than one supplier.Our manufacturing, service, and repair facilities are subject to periodic inspection by local and foreign regulatory authorities.
Our quality assurance system is subject to regulation by the U.S. Food and Drug Administration ("FDA") and other government agencies. We are required to conduct our product design, testing, manufacturing, and control activities in conformance with the FDA's quality system regulations and to maintain our documentation of these activities in a prescribed manner.
In addition, our production facilities have received International Organization for Standardization ("ISO") 13485 certification. ISO 13485 certification standards for quality operations have been developed to ensure that medical device companies meet the standards of quality on a worldwide basis. We have also received the EC Certificate pursuant to the European Union Medical Device Directive 93/42/EEC, which allows us to place a CE mark on our products.
Research and DevelopmentWe are committed to introducing new products and supporting current product offerings in our markets through a combination of internal as well as external efforts that are consistent with our corporate strategy.Internal product development capabilities.We believe that product development capabilities are essential to provide our customers with new product offerings.
We plan to leverage our core technologies by introducing product line extensions as well as new product offerings.Partnerships that complement our expertise.We continue to seek strategic partners in order to develop products that may not otherwise be available to us.
By taking advantage of our core competencies, we believe that we can bring products to market in an efficient manner and leverage our distribution channels.10Table of ContentsNew opportunities through technology acquisition.We continue to evaluate new, emerging, and complementary technologies in order to identify new product opportunities.
With our knowledge of our current markets we believe that we can effectively develop technologies into successful new products.Our research and development expenses were $33.4 million or 8.8% of total revenue in2016, $30.4 million or 8.1% of total revenue in2015, and $30.1 million or 8.5% of total revenue in2014.Proprietary RightsWe protect our intellectual property through a combination of patent, copyright, trade secret, and trademark laws.
We attempt to protect our intellectual property rights by filing patent applications for new features and products we develop. We enter into confidentiality or license agreements with our employees, consultants, and corporate partners, and seek to control access to our intellectual property, distribution channels, documentation, and other proprietary information. However, we believe that these measures afford only limited protection.
The intellectual rights to some of the original patents for technology incorporated into our products are now in the public domain. However, we do not consider these patents, or any currently viable patent or related group of patents, to be of such importance that their expiration or termination would materially affect our business.We capitalize the cost of purchased technology and intellectual property, as well as certain costs incurred in obtaining patent rights, and amortize these costs over the estimated economic lives of the related assets.
We have several registered trademarks and service marks. Our marks are pending or registered trademarks in the United States and several foreign countries. We intend to file for additional trademarks to strengthen our trademark rights, but we cannot be certain that our trademark applications will result in registration or that our trademarks will be enforceable.
CompetitionWe sell our products in competitive and rapidly evolving markets. We face competition from other companies in all of our product lines. Our competitors range from small privately-held companies to multinational corporations and their product offerings vary in scope and breadth.
We do not believe that any single competitor is dominant in any of our product lines.We derive a significant portion of our revenue from the sale of disposable supplies that are used with our medical devices. In the U.S., we sell our supply products in a mature market and we expect that our products could face increasing competition, including competitors offering lower prices, which could have an adverse effect on our revenue and profit margins.
We believe the principal factors that will draw clinicians and other buyers to our products, include:Level of specificity, sensitivity, and reliability of the product;Time required to obtain results with the product, such as to test for or treat a clinical condition;Relative ease of use of the product;Depth and breadth of the products features;Quality of customer support for the product;Frequency of product updates;Extent of third-party reimbursement of the cost of the product or procedure;Extent to which the products conform to standard of care guidelines; andPrice of the product.We believe that our primary competitive strength relates to the functionality and reliability of our products. Different competitors may have competitive advantages in one or more of the categories listed above and they may be able to devote greater resources to the development, promotion, and sale of their products.
Government RegulationFDA's Premarket Clearance and Approval RequirementsUnless an exemption applies, the medical devices we sell in the United States, with the exception of some disposable products, must first receive one of the following types of FDA premarket review authorizations under the Food, Drug, and Cosmetics Act, as amended:Clearance via Section510(k); or11Table of ContentsPremarket approval via Section515 if the FDA has determined that the medical device in question poses a greater risk of injury.The FDA's 510(k) clearance process usually takes from three to 12 months, but can take longer. The process of obtaining premarket approval via Section515 is much more costly, lengthy, and uncertain.
Premarket approval generally takes from one to three years, but can take longer. We cannot be sure that the FDA will ever grant either 510(k) clearance or premarket approval for any product we propose to market in the United States.The FDA decides whether a device must undergo either the 510(k) clearance or premarket approval process based upon statutory criteria.
These criteria include the level of risk that the FDA perceives to be associated with the device and a determination of whether the product is a type of device that is substantially equivalent to devices that are already legally marketed. The FDA places devices deemed to pose relatively less risk in either Class I or Class II, which requires the manufacturer to submit a premarket notification requesting 510(k) clearance, unless an exemption applies. The premarket notification under Section510(k) must demonstrate that the proposed device is substantially equivalent in intended use and in safety and effectiveness to a previously cleared 510(k) device or a device that was in commercial distribution before May28, 1976 for which the FDA has not yet called for the submission of premarket approval applications.
The FDA places devices deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed to be not substantially equivalent to a predicate device, in its Class III classification. The FDA requires these devices to undergo the premarket approval process via Section515 in which the manufacturer must prove the safety and effectiveness of the device. A premarket approval application must provide extensive pre-clinical and clinical trial data.
The FDA may require results of clinical trials in support of a 510(k) submission and generally requires clinical trial results for a premarket approval application. In order to conduct a clinical trial on a significant-risk device, the FDA requires manufacturers to apply for and obtain, in advance, an investigational-device exemption. The investigational-device exemption application must be supported by appropriate data, such as animal and laboratory testing results.
If the FDA and the Institutional Review Boards at the clinical trial sites approve the investigational-device exemption application for a significant-risk device, the manufacturer may begin the clinical trial. An investigational-device exemption approval provides for a specified clinical protocol, including the number of patients and study sites. If the manufacturer deems the product a non-significant risk device, the product will be eligible for more abbreviated investigational-device exemption requirements.
If the Institutional Review Boards at the clinical trial sites concur with the non-significant risk determination, the manufacturer may begin the clinical trial.Most of our products have been cleared by the FDA as Class II devices. Some of our disposable products and newborn care products, such as our neonatal headshields and oxygen delivery systems, have received FDA clearance as Class I devices.
FDA RegulationNumerous FDA regulatory requirements apply to our products. These requirements include:FDA quality system regulations which require manufacturers to create, implement, and follow design, testing, control, documentation, and other quality assurance procedures;Medical device reporting regulations, which require that manufacturers report to the FDA certain types of adverse and other events involving their products; andFDA general prohibitions against promoting products for unapproved uses.Class II and III devices may also be subject to special controls applied to them, such as performance standards, post-market surveillance, patient registries, and FDA guidelines that may not apply to Class I devices.
We believe we are in compliance with applicable FDA guidelines, but we could be required to change our compliance activities or be subject to other special controls if the FDA changes existing regulations or adopts new requirements.We are subject to inspection and market surveillance by the FDA to determine compliance with regulatory requirements. If the FDA finds that we have failed to adequately comply, the FDA can institute a wide variety of enforcement actions, including:Issuance of a Form 483 citation;Fines, injunctions, and civil penalties;Recall or seizure of our products;Issuance of public notices or warnings;Imposition of operating restrictions, partial suspension, or total shutdown of production;Refusal of our requests for 510(k) clearance or pre-market approval of new products;Withdrawal of 510(k) clearance or pre-market approval already granted; or12Table of ContentsCriminal prosecution.
The FDA also has the authority to require us to repair, replace, or refund the cost of any medical device manufactured or distributed by us.Other RegulationsWe also must comply with numerous additional federal, state, and local laws relating to matters such as safe working conditions, manufacturing practices, environmental protection, biohazards, fire hazard control, and hazardous substance disposal. We believe we are currently in compliance with such regulations.
Countries outside of the U.
S.
regulate medical devices in a manner similar to that of the FDA. Our manufacturing facilities are subject to audit and have been certified to be ISO 13485:2003, Medical Device Directive 93/42/EEC, and CMDCAS compliant, which allows us to sell our products in Canada, Europe, and other territories around the world. Our manufacturing facilities in North America are subject to ISO 13485 inspections by our notified body, British Standards Institution Management Systems, and by other notified bodies outside of North America.
We plan to seek approval to sell our products in additional countries, while maintaining our current approvals. The time and cost of obtaining new, and maintaining existing, market authorizations from countries outside of North America, and the requirements for licensing products in these countries may differ significantly from FDA requirements.EmployeesOnDecember31, 2016, we had approximately 1,160 full time employees worldwide.
In Argentina, some of our production employees are represented by labor unions and our employees in Germany have established a works council. We have not experienced any work stoppages, and we consider our relations with our employees to be good.Executive OfficersThe following table lists our executive officers and their ages as ofFebruary24, 2017:NameAgeP2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this