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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
or
For the transition period from to
Commission file number: 000-33001
NATUS MEDICAL INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
77-0154833
(I.R.S. Employer
Identification 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 Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Common Stock, $0.001 par value per share
NTUS
Name of each exchange on which registered
The Nasdaq Stock Market LLC
(The Nasdaq Global Select Market)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past
90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange
Act:
Large Accelerated Filer
Non-accelerated filer
☒
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared and issued its audit report.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2020, the last business day of Registrant’s most recently completed second fiscal quarter, there were 33,871,723 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 June 30, 2020) was $739,080,996. 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.
On February 19, 2021, the registrant had 33,874,074 shares of its common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Definitive Proxy Statement for the 2020 Annual Meeting of Stockholders or an amendment to this Annual Report on Form 10-K, to be
filed with the Securities and Exchange Commission, are incorporated by reference into Part III of this Annual Report on Form 10-K.
Table of Contents
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
NATUS MEDICAL INCORPORATED
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accounting Fees and Services
PART IV
ITEM 15.
SIGNATURES
ITEM 16.
Exhibits, Financial Statement Schedules
Form 10-K Summary
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ITEM 1. Business
PART I
This Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 about Natus® Medical Incorporated (“Natus,” “we,” “us,” or “our”). 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 Item 1 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, our ability to complete all of our backlog orders, and the anticipated timing and effect of the implementation of our new organizational structure.
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 “Risk Factors”
contained in Item 1A 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 the intellectual property of Natus Medical Incorporated or one of its subsidiaries. .
Overview
Natus provides innovative healthcare solutions focused on the diagnosis and treatment of central nervous and sensory system disorders for patients of all ages.
Our broad product portfolio represents a heritage of innovation and leadership. Natus brands have been setting the standard for patient care for over eighty (80) years. Our
products are trusted by medical professionals in university medical centers, public and private hospitals, physician offices, clinics, research laboratories, and other sites around
the world. Improving quality of human life is at the core of our business.
We use our clinical expertise to support our customers' evolving needs with advanced products, continuing education and outstanding technical service.
Natus provides product solutions for three end markets: Neuro, Newborn Care and Hearing & Balance.
On January 15, 2019, Natus announced the implementation of a new organizational structure designed to improve operational performance, increase our focus on
innovation and increase profitability. We consolidated our three strategic business units, Neuro, Newborn Care, and Hearing & Balance into "One Natus". The initiative is
designed to create a single, unified company with globally led operational teams in Sales & Marketing, Manufacturing, Research & Development, Quality, and General and
Administrative functions. As part of our refocus on more profitable core medical device businesses, we exited non-core businesses which included Global Neuro-Diagnostic
Services, the NeuroCom balance product line, and Medix. In January 2020 we announced we completed the transition of the Peloton hearing screening services business to an
external provider, Pediatrix Medical Group, as part of the implementation of the new organizational structure.
Markets
Neuro — Includes products and services that provide diagnostic, therapeutic and surgical solutions in neurodiagnostics, neurocritical care and neurosurgery. Neuro's
comprehensive neurodiagnostic solutions include electroencephalography (“EEG”) and long-term monitoring (“LTM”), Intensive Care Unit (“ICU”) monitoring,
electromyography (“EMG”), sleep analysis or polysomnography (“PSG”), and intraoperative monitoring (“IOM”). These solutions enhance the diagnosis of neurological
conditions such as epilepsy, sleep disorders and neuromuscular diseases. Neuro represents approximately 57% of total revenues.
Our neurocritical care solutions include management of traumatic brain injury by continuous monitoring of intracranial pressure (“ICP”) and cerebrospinal fluid (“CSF”)
drainage, as well as cranial access kits for entry into the cranium. Our neurosurgical solutions such as valves, shunts and related treatment solutions for procedures involving
hydrocephalus.
Newborn Care — Includes products and services for newborn care including hearing screening, brain monitoring, eye imaging, jaundice management, and various disposable
newborn care supplies. Newborn Care represents approximately 25% of total revenues.
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Hearing & Balance — The Hearing portfolio includes products for hearing assessment and diagnostics, and hearing aid fitting, including computer-based audiological,
otoneurologic and vestibular instrumentation for hearing care professionals. Our Balance portfolio provides diagnosis and assessment of vestibular and balance disorders. These
solutions have a complete product and brand portfolio known for its sophisticated design technology in the hearing and balance assessment markets. Hearing & Balance
represents approximately 18% of total revenues.
Neuro
Our Neuro portfolio is comprised of a comprehensive line of neurodiagnostic, neurocritical care, and neurosurgical products that are used by healthcare practitioners in the
diagnosis and monitoring of neurological disorders. The environments in which these products are used include outpatient private practice facilities and inpatient hospital
environments. Our products can be used throughout the continuum of care through diagnostic procedures and monitoring of patients during admissions, surgery, while under
sedation, in post-operative care, and in intensive care units. Our Neuro products and services include:
Neurodiagnostic
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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.
Intraoperative 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.
Neurocritical Care
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Intracranial pressure monitoring — Equipment and catheters used to monitor pressure in the cranium/brain and catheters to drain cerebrospinal fluid from the brain to
aid in traumatic brain injury cases and hydrocephalus.
Cranial access kits — Convenient, pre-packaged sterile sets containing all necessary components for entry into the cranium, to monitor intracranial pressure and provide
temporary drainage of CSF.
Neurosurgery
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Shunts — Shunts are used to manage the drainage of cerebrospinal fluid from the brain to maintain appropriate levels of CSF when treating hydrocephalus.
Diagnostic EEG and Long-term Monitoring
We 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 video to monitor 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.
Diagnostic Electroencephalograph Monitoring Product Lines
Our EEG diagnostic monitoring product lines for neurology consist of signal amplifiers, workstations to capture and store synchronized 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.
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NeuroWorks®; Nicolet®One. 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, as well as nursing stations to monitor patients 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.
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 (parts of the brain that control speech, motor and sensory functionality). The device can be
used as a standalone unit or with the fully integrated NicoletOne or NeuroWorks software that supports control of the device from the software, automated mapping
and comprehensive report generation.
Supplies. We also manufacture and market a full line of proprietary EEG electrodes and other supplies used in the electroencephalography field.
Electrodiagnostic Monitoring
Our electrodiagnostic systems include electromyography (EMG), nerve conduction (“NCS”), and 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 performed 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.
Evoked brain 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 Lines
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Dantec Keypoint®. The Dantec Keypoint G-4 and Focus EMG and EP family of products features amplifiers, stimulators, and strong signal quality. The Keypoint
G4 is used for advanced neurodiagnostic applications such as single fiber EMG, visual and auditory evoked potentials, and in routine nerve conduction studies. The
Keypoint Focus system is also available in a portable laptop configuration.
Dantec Clavis. The Dantec Clavis device is a hand-held EMG stimulation device that provides muscle and nerve localization information to assist with medication
and botox injections. In conjunction with the Bo-ject® or Myoject 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 UltraPro. This is an entry level product with add on capabilities that offers high quality data collection using the Dantec Keypoint amplifiers and the
proprietary Natus EMG/EP software.
Supplies. We also manufacture and market a full line of proprietary EMG needles and other supplies used in the electrodiagnostic field.
Diagnostic Polysomnography Monitoring
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Polysomnography (“PSG”), 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 Lines
We 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.
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Embla REMlogic, Sandman®; and Xltek SleepWorks®. 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. 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.
Supplies. We also market a broad line of supplies, disposable products and accessories for the PSG laboratory including the XactTrace® respiratory monitoring
belts.
Intraoperative Monitoring
Intraoperative 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 Lines
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Xltek 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 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.
Neurocritical Care Products
Intracranial pressure and temperature provide insight into the health of the brain, especially in patients experiencing a traumatic brain injury, other traumatic, ischemic or
hemorrhagic incidents, or a major neurosurgical procedure. A small hole is drilled into the cranium to allow insertion of a catheter that contains a pressure/temperature or
pressure only transducer that allows continuous monitoring of brain temperature and/or pressure.
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Camino® ICP Monitor. The Camino ICP Monitor is a compact, portable device that provides tools for continuously determining and monitoring intracranial pressure
and intracranial temperature. It has a touch screen interface, physiological alarms, and can output data to either a patient bedside monitor or to remote media types via
a USB drive. These systems are used in the intensive care unit (ICU) environment.
Camino Catheters. Camino catheters use either fiber optic or strain gauge technology to measure either pressure and temperature or just pressure. Camino catheters
measure their respective values at the tip of the catheter, which eliminates the need for a fluid-filled system that uses an external transducer to measure pressure. The
Camino Flex Ventricular Intracranial Pressure Monitoring Kit has a catheter that allows both the measurement of ICP and CSF drainage.
Natus EDS 3®. The EDS 3 is a CSF External Drainage System used to manage increased ICP by safely eliminating CSF from the ventricles of the brain or lumbar
spine. This drainage can be performed continuously or intermittently. Clinical conditions that may require its use include trauma, stroke or an expansile lesion.
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Cranial Access Kits. Cranial Access Kits are convenient procedural kits that include all the instrumentation and items needed to access the subarachnoid space or the
lateral ventricles of the brain. The kit is intended to be used with an external drainage and monitoring system in selected patients to reduce intracranial pressure, to
provide temporary drainage of CSF, and to monitor ICP. The kit is a convenient, pre-packaged sterile set containing all necessary components for entry into the
cranium and is available with or without drugs and with a variety of drill bits and instrumentation.
Neurosurgical Products
During brain surgery, the dura of the brain may need to be repaired or replaced. A dural graft is used to serve as a substitute for the surgical repair of dural defects.
Moreover, brain surgery is performed to place shunts in the brain to help drain excess CSF either externally or into the body for reabsorption to help treat hydrocephalus.
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DURAFORM. DURAFORM Dural Graft Implant is an absorbable collagen matrix to provide a soft, conforming, and easy to use dural substitute. This product is used
in the operating room to provide repair of the dura mater and promote dural healing.
Shunts. Shunts are used in the operating room to provide solutions for hydrocephalus or brain trauma. Shunts are used to manage the drainage of cerebrospinal fluid
from the brain to maintain appropriate levels of CSF when treating hydrocephalus.
Newborn Care
Our newborn care products and services are used by healthcare practitioners in the diagnosis and treatment of common medical ailments in newborn care. Our products
are organized in eight modalities and include:
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Newborn Hearing Screening — Products used to screen hearing in newborns.
Jaundice Management — Products used to treat jaundice, the single largest cause for hospital readmission of newborns in the U.S.
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.
Eye Imaging — Systems and products used in the advanced science and practice of neonatal and pediatric retinal imaging.
Essentials — Products used in the everyday operation of neonatal intensive care unit (“NICU”) and well-baby nursery department within the hospital environment.
NICVIEW® — Live streaming video for families with babies in the NICU that enables family members and approved friends to see the new baby, 24/7, from
anywhere in the world - from any Internet connected device, within a secured environment.
Newborn Hearing Screening
Hearing 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 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 Techniques
The 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 electrical impulses resulting from a specific auditory stimulus.
Otoacoustic emission (“OAE”). OAEs are 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.
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Newborn Hearing Screening Product Lines
Our 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.
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ALGO 5 and 3i Newborn Hearing Screeners. These Automated Auditory Brainstem Responses (“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.
Hearing Screening Supply Products
For 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.
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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.
Jaundice Management
The 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 approximately 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 that phototherapy is the standard of care for the treatment of hyperbilirubinemia. The guidelines further recommend that all nurseries have the necessary equipment
to provide intensive phototherapy, and specifically recommend the use of the “blue” light as incorporated into our neoBLUE® products.
Jaundice Management Products
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neoBLUE Product Family. This product line consists of our neoBLUE Overhead, 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.
Newborn Brain Injury
For 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, are designed to be simple for use by nurses and neonatologists.
Newborn Brain Injury Products
Our 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 hypoxic-ischemic encephalopathy ("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
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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.
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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.
Eye Imaging
Our 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 specializes in NICU ophthalmic imaging used in the detection of retinopathy of prematurity (ROP) and Retinoblastoma (RB) in newborns. ROP and
RB are diseases of the retina that must be detected very early after birth and treated immediately, so the RetCam diagnostic camera is a fundamental tool in preventing vision
loss and total blindness in infants.
Eye Imaging Products
RetCam images assist physicians in the evaluation of pediatric ocular disease, which have preserved the vision in thousands of infants. Each of the RetCam systems
deliver objective and interpretable detail, allow image comparison over time, enable remote consultations, and provide reliable and defensible medico-legal documentation.
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•
RetCam 3 & RetCam Envision. Full-featured imaging systems with a range of interchangeable lenses, Fluorescein Angiography module option.
RetCam Shuttle. Laptop-based system with a smaller cart and dual wheel casters for improved transportability.
RetCam Portable. Laptop-based version in a case for maximum portability.
Essentials
The Newborn Care Essentials products include such items as: Biliband® eye protectors, MiniMuffs® noise attenuators, NeatNick® heal lancets, Olympic Circumstraint,
Olympic Papoose Boards, Olympic Smart Scales®, OraSwab, Save the Gonads x-ray protection devices and SugarPlum glucose lancets.
Live Video Streaming
Live video streaming offers parents and families secured access to a live video stream of their baby. For hospitals, the system offers a step into family centered care.
Live Video Steaming Products
NICVIEW and NICVIEW 2 are user-friendly, web-based video systems for real-time streaming on any online device via a standard downloadable app. Password-
protected access ensures parents can view only their own child, with end-to-end encryption and SSL authentication. The video stream can be turned on/off and repositioned at
will, so that NICU staff remain in control of the care process at all times.
Hearing & Balance
Our Hearing & Balance product portfolio provides hearing diagnostic, hearing aid fitting and balance instrumentation and software solutions to hearing and balance care
professionals worldwide. For more than 50 years, we have helped hearing and balance care professionals succeed in improving the quality of life for their clients and patients by
delivering expert knowledge, reliable solutions and services and trusted partnerships. We will continue this tradition and legacy as we develop, manufacture and market
computer-based audiological, otoneurologic and vestibular instrumentation in the future.
Our solutions portfolio covers key application areas within hearing assessment, hearing screening, hearing instrument fitting and balance assessment. Many of our hearing
and balance care solutions have set precedent within the hearing care industry and are used by thousands of clinicians around the world.
As an independent provider of hearing care diagnostic solutions, we work closely with leading hearing aid manufacturers to develop new solutions within hearing
assessment and hearing aid fitting.
Hearing Assessment
From otoacoustic emissions (OAE) and immittance screening to advanced audiological testing and 3D digital ear scanning, we offer a wide range of flexible devices and
PC-based solutions that are designed to screen, test and assess patients of all ages. Our hearing assessment solutions offer a range of functionality to support basic audiometric
testing to advanced tinnitus and pediatric hearing assessment. Our hearing care solutions help streamline the hearing screening and assessment
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process making it easier and convenient for the professional and the patient. We also manufacture and market a broad line of supplies and disposable products and accessories
for hearing assessment.
Hearing Instrument Fitting and Verification
Hearing fitting solutions help professionals manage the entire hearing aid fitting process - from fitting and verifying the hearing aid to patient counseling and follow up.
Used by hearing aid dispensers, audiologists and clinicians around the world, our fitting solutions support otoscopy, audiometry, hearing aid testing and programming, fitting
and verification with wireless design and binaural fitting capability. Our fitting solutions are PC-based and supported by integrated audiometric software that helps to streamline
the fitting process for greater efficiency and patient satisfaction. We also manufacturer and market a broad line of supplies and disposable products and accessories for hearing
instrument fitting and verification.
3D Digital Ear Scanning
Hearing assessment solutions include the breakthrough 3D digital ear scanning solutions Otoscan® that gives hearing care professionals innovative ways to attract and
convert more clients while delivering customized hearing care in an efficient way. Otoscan enables hearing care professionals to make digital impressions for custom in-the-ear
pieces such as earmolds and hearing aids. The scanner solution applies breakthrough technology to transform images of the ear into 3D digital files that are uploaded to the
cloud service, Otocloud®, for immediate use in production of custom products, delivering significant efficiency and quality gains in the production of hearing aids. Otocloud is
a web-based portal supported by a dedicated Microsoft Azure server domain.
Balance Assessment
Professionals who evaluate patients with balance disorders use our vestibular diagnostic and ENG/VNG (electronystagmography/videonystamography) systems and
services. These solutions are used by audiologists, otolaryngologists, otologists and neurologists for identifying auditory and vestibular abnormalities. Our balance care solutions
are compact and include the world's first portable, gold standard video head impulse test (“vHIT”) and offer modular functionality to support vHIT, video frenzel, positional,
oculomotor and SHIMP (suppression head impulse) testing. We also manufacture and market a broad line of supplies, disposable face cushions, and accessories for balance
assessment.
Segment and Geographic Information
We determine our reportable segments by first identifying our operating segments, and then by assessing whether any components of these segments constitute a
business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. Historically, our
operating segments were based on three strategic business units. In January 2019, we announced the transition of our operating structure from three strategic business units to a
single, unified company with globally-led operational teams in Sales and Marketing, Manufacturing, Research and Development, Quality, and General and Administrative
functions.
We operate as one operating segment and one reportable segment, which provides healthcare products, and services focused on the diagnosis and treatment of central
nervous and sensory system disorders for patients of all ages. Financial information is reviewed on a consolidated basis for purposes of making operating decisions and
assessing financial performance. Consolidated financial information is accompanied by disaggregated information about revenues by end market and geographic region. We do
not assess the performance of our end markets or geographic regions on measures of profit or loss, or asset-based metrics. We have disclosed the revenues for each of our end
markets and geographic regions to provide the reader of the financial statements transparency into our operations.
Information regarding our revenues and long-lived assets in the U.S. and in countries outside the U.S. is contained in Note 20—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 Market and Product Category
For the years ended December 31, 2020, 2019 and 2018, revenue from our product markets as a percent of total revenue was approximately as follows:
Neuro
Newborn Care
Hearing & Balance
Total
2020
Year Ended December 31,
2019
2018
57 %
25 %
18 %
100 %
58 %
22 %
20 %
100 %
53 %
25 %
22 %
100 %
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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 ending December 31, 2020, 2019 and 2018 is as follows:
Devices and Systems
Supplies
Services
Total
2020
Year Ended December 31,
2019
2018
73 %
23 %
4 %
100 %
74 %
22 %
4 %
100 %
72 %
22 %
6 %
100 %
In 2020, 2019 and 2018, no single end-user customer comprised more than 10% of our revenue.
Backlog
In general, we do not manufacture our products against a backlog of orders and do not consider backlog to be a significant indicator of the level of annual future sales
activity. Production and inventory levels are based on the level of incoming orders as well as projections of future demand. Therefore, we believe that backlog information is
not meaningful to understanding our overall business and should not be considered a reliable indicator of our ability to achieve any particular level of revenue or financial
performance.
Marketing and Sales
Marketing
Our marketing strategies differ by product market, incorporating market dynamics, trends and competition in the positioning, promotion and pricing of each product. The
value proposition that we communicate is focused on the quality, clinical performance, and customer benefit. We invest in educating our customers worldwide about our
products through trade conferences and direct presentations to healthcare professionals.
Domestic Direct and Distributor Sales
We 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 ended December 31, 2020, 2019 and 2018, domestic revenue as a percent of total revenue was approximately as follows:
Domestic revenue
International Direct and Distributor Sales
2020
Year Ended December 31,
2019
2018
60.7 %
59.0 %
56.7 %
We sell some of our products outside the U.S. through direct sales channels in Australia, Canada, China, Denmark, France, Germany, Italy, the Netherlands, New
Zealand, the Nordics (Finland, Sweden, Norway), Spain, and the United Kingdom; we sell other products in those regions and into more than 100 other countries through a
distributor sales channel.
For the years ended December 31, 2020, 2019 and 2018, international revenue as a percent of total revenue was approximately as follows:
International revenue
2020
Year Ended December 31,
2019
2018
39.3 %
41.0 %
43.3 %
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
“ex works,” where 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 in their respective markets. 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
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distributors or resellers, or both. We actively train our distributors in product marketing, selling, and technical service techniques.
Seasonality in Revenue
We 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 Organizations
More 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 ended December 31, 2020, 2019 and 2018, revenue from direct purchases under a GPO contract as a percent of total revenue was approximately as follows:
Direct purchases by GPO members
Third-Party Reimbursement
2020
Year Ended December 31,
2019
2018
22.5 %
18.7 %
13.3 %
In 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.
Customer Service and Support
We generally provide a one-year warranty on our medical device and system products. We also sell extended service agreements on our medical device and system
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.
Manufacturing
We procure a significant portion of the components used in our products from other manufacturers; however, we perform final assembly, testing, and packaging of many
of the devices ourselves to control quality and manufacturing efficiency and we are the manufacturer of record. We also use contract manufacturers to manufacture some of our
disposable supply and medical device products. We perform regular quality assessments of these contract manufacturers, 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 Development
We 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 the ability to develop innovative products is essential to providing our customers with new product offerings.
We plan to leverage our core technologies by introducing product line extensions as well as new product offerings.
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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 acquired or distributed products to market in an efficient manner and leverage our distribution channels.
New 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 acquired technologies into successful new products.
Proprietary Rights
We 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 numerous 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.
Competition
We 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:
•
•
•
•
•
•
•
•
•
•
The clinical performance of our products including the 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;
Our level of expertise in these fields which produces the depth and breadth of the products features;
Quality of customer support for the product;
Internet connectivity and cyber-security of 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; and
Price of the product.
We believe that our primary competitive strength relates to the clinical functionality and reliability of our products.
Government Regulation
FDA’s Premarket Clearance and Approval Requirements
Unless an exemption applies, the medical devices we sell in the United States, must first receive one of the following types of FDA premarket review authorizations
under the Food, Drug, and Cosmetics Act, as amended:
•
Clearance via Section 510(k); or
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•
Premarket approval via Section 515 if the FDA has determined that the medical device in question poses a greater risk of injury.
FDA review-time goal for 510(k) applications are 90 days, but clearance may take longer. The process of obtaining premarket approval via Section 515 is much more
costly, lengthy, and uncertain. FDA review-time goal for premarket approval applications are 320 days, but approval may 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 Section 510(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 May 28,
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 Section 515 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.
FDA Regulation
Numerous 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; and
•
FDA 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;
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• Withdrawal of 510(k) clearance or pre-market approval already granted; or
•
Criminal prosecution.
The FDA also has the authority to require us to repair or replace any misbranded or adulterated medical device manufactured or distributed by us.
Other Regulations
We 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 13485:2016, Medical Device Directive 93/42/EEC, and MDSAP compliant, which allows us to sell our products in Europe, Canada, and other territories around the
world. All of our manufacturing facilities are subject to inspection by our notified bodies or other competent authorities, and in some cases without advance notice. 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.
In 2017, the European Union ("EU") adopted the EU Medical Device Regulation (Council Regulations 2017/745) which imposes stricter requirements for the marketing
and sale of medical devices, including new quality system and post-market surveillance requirements. The regulation has a three-year implementation period that has now been
extended to May 2021 and will replace the existing directives on medical devices in the EU. After May 2021, medical devices marketed in the EU will require certification
according to these new requirements, except that devices with valid CE certificates, issued pursuant to the Medical Device Directive before May 2021, may be placed on the
market until 2024. Complying with this new regulation requires us to incur significant costs on product design history file remediation and transition. Failure to meet the
requirements of the regulation could adversely impact our business in the European Union and other countries that utilize or rely on European Union requirements for medical
device registrations.
Human Capital
Overview
As of December 31, 2020, we had over 1,420 full-time employees, including approximately 700 employees located outside the United States.
We are organized by function, which includes Commercial activities with 705 employees (including Sales, Service & Marketing), Manufacturing Operations with 285
employees, Engineering with 172 employees, General and Administrative with 164 employees, and Quality and Regulatory Affairs with 102 employees. Our gender distribution
of our employees is 37% women and 63% men.
We believe the relationship with our employees is strong as evidenced by consistently strong results in our semi-annual engagement survey and a low voluntary turnover
rate of 9%.
As a global company, Natus drives continuous improvement in the diversity and inclusivity of our people ecosystem - employees, partners, and board of directors. Natus
has an outreach program to recruit and promote our job opportunities to a broad range of organizations and hundreds of job boards with the intent of developing a diverse pool
of qualified candidates.
Natus is committed to providing an inclusive work environment free of discrimination or harassment of any kind and is supported by policies, training and
communications. Natus has an open and robust support system for employees to address any issues, concerns or complaints. We provide management escalation paths, Human
Resources support systems and a confidential ethics hotline that is monitored by the Corporate Compliance Officer and the Board of Directors. As part of our onboarding
process, all employees must go through training on the Natus Policies & Procedures and attest to our company code of conduct which outlines the standards for appropriate
conduct and behavior.
Our principal human capital objectives are to attract, retain, motivate, and reward our employees to achieve results for our customers and us. To achieve these objectives,
our human capital programs seek to:
•
•
•
Support skill building and prepare our employees for management/leadership capability through continuous learning;
Reward our employees through competitive total rewards intended to motivate our employees and promote well-being;
Continuously identify opportunities for development through regular employee input and engagement; and
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•
Protect the safety, health and well-being of our employees around the world through implementing safety protocols.
Continuous learning
We provide internal training to employees globally and assigned based on role through our systematic learning platform. In addition, Natus provides extensive training
resources to employees including an on-demand e-learning system with over 4,000 courses to support skill building in a wide variety of areas from technical/functional ability to
management/leadership capability.
Total rewards
We strive to offer competitive equitable pay, comprehensive benefits and services that meet the varying needs of our employees. Our total rewards package includes
market-competitive pay, paid time off, and other comprehensive and competitive global health and welfare benefits.
In 2020, we focused on adding wellness programs and services to encourage physical, mental and financial well-being. The principal purposes of our equity and cash
incentive plans are to attract, retain, motivate and reward our employees to achieve results for our customers and Natus.
Employee input
We solicited employee feedback several times in 2020 to assess employee satisfaction, engagement, and identify opportunities for development. The overall employee
survey response was positive with over 80% of our employees responding with high engagement levels relative to benchmarked companies. Employee feedback is also gathered
through diverse employee roundtables and onboarding and exit surveys. We have also launched culture councils to help support, retain and attract employees. We recognize that
a culture of inclusion makes us stronger. Providing appropriate forums where employees globally can share ideas and feedback is an important component of our diversity and
inclusion efforts.
Health and safety
Protecting the safety, health, and well-being of our employees around the world is a key priority. Throughout the COVID-19 pandemic, we have remained focused on the
health and safety of our employees by implementing new safety protocols. We provided personal protective equipment, required the wearing of masks globally, increased
cleaning procedures and provided cleaning supplies.
In addition, we trained employees and increased communications, reconfigured our facilities to add space for physical distancing, implemented remote work where
possible and enhanced our IT systems to facilitate working from home and improved cybersecurity.
Overall
Natus is a global company striving through our people, programs, processes and metrics to build a strong foundation to support and empower our diverse workforce and
work environment where our employees can grow and thrive.
Executives
The following table lists our executive officers and their ages as of February 26, 2021:
Name
Jonathan A. Kennedy
B. Drew Davies
D. Christopher Chung, M.D.
Austin F. Noll, III
Age
Position(s)
50 President and Chief Executive Officer
55 Executive Vice President and Chief Financial Officer
57 Vice President of Quality, Regulatory Affairs and Chief Medical Officer
54 Executive Vice President and Chief Commercial Officer
Jonathan A. Kennedy has served as Chief Executive Officer, and as a member of the Board of Directors since July 2018. Mr. Kennedy joined Natus as Senior Vice
President and Chief Financial Officer in April 2013 and was appointed Executive Vice President and Chief Financial Officer in September 2016. Before joining Natus,
Mr. Kennedy was Senior Vice President and Chief Financial Officer of Intersil Corporation, a global semiconductor manufacturer, since 2009. Prior to that, he was Intersil’s
Corporate Controller since 2005 and Director of Finance since 2004. Before joining Intersil, Mr. Kennedy held management roles in Finance and Information Technology with
Alcon Inc. and Harris Corporation. He holds a Bachelor of Science degree in Business Administration and a Master of Science degree in Accounting from the University of
Central Florida.
B. Drew Davies joined Natus as Executive Vice President and Chief Financial Officer in October 2018. Mr. Davies most recently served as Executive Vice President and
Chief Financial Officer of Extreme Networks since June 2016. Before joining
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Natus, Mr. Davies served as Vice President and Corporate Controller at Marvell Semiconductor Inc. from December 2015 until May 2016. Prior to that, Mr. Davies was the
Senior Vice President, Corporate Controller at Spansion, Inc. from August 2012 to December 2015. Prior to Spansion, Mr. Davies was Corporate Controller at Intersil
Corporation from April 2009 to August 2012, and served as Operations Controller from March 2008 to April 2009. Mr. Davies also served as Chief Financial Officer of
Nanoconduction, Inc. from March 2007 to March 2008, Director of Finance and Administration for STATSChipPac from September 1999 to March 2007, held various finance
roles at Micron Custom Manufacturing Services from November 1992 to September 1999. Mr. Davies holds a Master of Business Administration degree from Santa Clara
University and a Bachelor of Science, Business Accounting degree from the University of Idaho.
D. Christopher Chung, joined Natus in 2000 as the Medical Director. He has also served as Vice President of R&D and most recently since 2011 as Vice President
Medical Affairs, Quality and Regulatory. From 2000 to 2007, Dr. Chung also served as a Pediatric Hospitalist at the California Pacific Medical Center in San Francisco
providing patient care in the Neonatal Intensive Care Unit and Newborn Nursery. From 1997 to 2000, Dr. Chung trained as a pediatric resident at Boston Children’s Hospital
and Harvard Medical School. From 1986 to 1993, Dr. Chung worked as an R&D engineer at Nellcor Incorporated, a medical device company that pioneered the development of
pulse oximetry. Dr. Chung holds a Bachelor of Arts degree in Computer Mathematics from the University of Pennsylvania and a Doctor of Medicine degree from the Medical
College of Pennsylvania-Hahnemann University School of Medicine. He is board certified in Pediatrics and is a Fellow of the American Academy of Pediatrics. Dr. Chung has
also been awarded nine U.S. Patents in the medical device field.
Austin F. Noll, III currently Chief Commercial Officer, joined Natus in August 2012 as the Vice President and General Manager, Neuro. Prior to joining Natus, Mr. Noll
served as the President and CEO of Simpirica Spine, a California-based start-up company that developed and commercialized a novel device for spinal stabilization. Prior to
joining Simpirica Spine, Mr. Noll served as the President and CEO of NeoGuide Systems, a medical robotics company acquired by Intuitive Surgical. Prior to joining NeoGuide
Systems, Mr. Noll held numerous management positions at Medtronic over a 13-year period, where he served as the Vice President and General Manager of the Powered
Surgical Solutions and the Neurosurgery businesses. Before Medtronic, he held sales positions at C.R. Bard and Baxter Healthcare. He received a Bachelor of Science degree in
Business Administration from Miami University and a Master of Business Administration degree from the University of Michigan.
Other Information
Natus was incorporated in California in May 1987 and reincorporated in Delaware in August 2000.
We maintain corporate offices at 6701 Koll Center Parkway Suite 120, Pleasanton, California 94566. Our telephone number is (925) 223-6700. We maintain a corporate
website at www.natus.com. References to our website address do not constitute incorporation by reference of the information contained on the website, and the information
contained on the website is not part of this document.
We make available, free of charge on our corporate website, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-
K, Proxy Statements, and all amendments to these reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and
Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act. We also show detail about stock trading by corporate insiders by providing access to
SEC Forms 3, 4 and 5. This information may also be obtained from the SEC’s on-line database, which is located at www.sec.gov. Our common stock is traded on the Nasdaq
Stock Market under the symbol “NTUS”.
Item 1A. Risk Factors
Risks Related to the COVID-19 Pandemic
Our business has been and may continue to be negatively affected by the ongoing COVID-19 pandemic and any future outbreaks of disease.
Our operations and financial performance have and continue to be significantly affected by the ongoing global COVID-19 pandemic and the resulting volatility and
uncertainty it has caused in the U.S. and international markets. On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and
recommended containment and mitigation measures worldwide. On March 13, 2020, President Trump declared a National Emergency relating to the disease. The widespread
infection in the U.S. and abroad has caused significant volatility and uncertainty in U.S. and international markets, which has produced an economic downturn that has
disrupted and is expected to continue to disrupt our business.
National, state and local authorities have recommended social distancing and many have implemented quarantine, shelter-in-place, curfew and similar isolation
measures, including government orders and other restrictions on the conduct of business operations. Such measures have had adverse impacts on the U.S. and foreign
economies of uncertain severity and duration and have and may continue to negatively impact our ongoing operations, including our revenue, manufacturing and
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supply chain. For example, our business relies on continued investment and activity in the healthcare system, and as a result of the significant reduction, or in some cases
elimination, of elective medical procedures and healthcare visits, as well as the deferring or cancelling of customer capital expenditure projects, we have seen a decline in
revenue from our Supplies and Devices and Systems products. We have also experienced an increase in delayed payments compared to historical periods, which have impacted
and may continue to impact, our cash flow and earnings. Spikes in the transmission of COVID-19 or a delay in the distribution of approved vaccines may lead to renewed or
expanded shutdowns, curfews or other isolation measures and may result in further restriction on, and decreased demand for, elective medical procedures, which may adversely
affect our business operations, financial position or consolidated cash flows.
In addition, we have experienced disruption and delays in parts of our direct and indirect supply chain. We have made investments in inventory to help mitigate against
further potential supply chain interruptions. These investments include increased inventory and firm purchase orders beyond our typical timeframe in order to secure capacity at
our key suppliers. We have experienced, and may continue to experience, increased costs as a result of excess inventory, which in turn has resulted, and may continue to result,
in lower gross margins. In addition, our inventory management systems and related supply chain visibility tools were not designed to forecast manage supply of our products
and product components under these unprecedented pandemic conditions, and as a result our forecasts could be inaccurate or our supply decisions could be incorrect. We may
experience restricted stock availability or delays or difficulty sourcing certain products in the future, which could negatively impact us.
As a result of the ongoing COVID-19 pandemic, much of our workforce continues to operate under a temporary remote working model, which may result in us
experiencing lower work efficiency and productivity, which in turn may adversely affect our business. As our employees work from home and access our systems remotely, we
may be subject to heightened security and privacy risks, including the risks of cyberattacks and privacy incidents. Additionally, we have a number of employees who continue to
work in our facilities or perform services at our customers' facilities who may be subject to heightened risks for COVID-19 exposure thus potentially impacting their health and
future worker compensation claims against us. We may also be subject to lawsuits from employees and others exposed to COVID-19 at our facilities, which could involve large
demands and substantial defense costs. Our professional and general liability insurance may not cover all claims against us. Furthermore, if any of our employees are unable to
perform his or her duties for a period of time, including as the result of illness, our results of operations or financial condition could be adversely affected. Finally, the
widespread pandemic has caused and is expected to continue to cause significant disruption of global financial markets, which may reduce or impair our ability to access
capital, or access capital on terms that would be consistent with our expectations, temporarily during this period.
We cannot reasonably estimate the length or severity of the COVID-19 pandemic, including the potential for further mutation, or the related response, including the
length of time it may take for normal economic and operating conditions to resume or the extent to which the disruption may materially impact our business, consolidated
financial position, consolidated results of operations or consolidated cash flows. To the extent the COVID-19 pandemic continues to adversely affect our business operations,
financial position or consolidated cash flows, it may also have the effect of heightening many of the other risks described here within.
Risks Related to Our Manufacturing and Supply Chain
Adverse economic conditions in markets in which we operate may harm our business.
Unfavorable changes in U.S. and international economic environments may adversely affect our business and financial results. Concerns over the economic stability, the
level of U.S. national debt, currency fluctuations and volatility, the rate of growth of Japan, China, and other Asian economies, unemployment, the availability and cost of
credit, inflation levels, trade relations, energy costs and geopolitical uncertainty have contributed to increased volatility and diminished expectations for the economy and the
markets. During challenging economic times, and in tight credit markets, our customers may delay or reduce capital expenditures. This could result in reductions in sales of our
products, longer sales cycles, difficulties in collection of accounts receivable, slower adoption of new technologies, and increased price competition, all of which could impact
our results of operations and financial condition. In addition, we expect these factors will cause us to be more cautious in evaluating potential acquisition opportunities, which
could hinder our ability to grow through acquisition while these conditions persist.
In addition, we are susceptible to risks related to the COVID-19 pandemic. In particular, the continued spread of COVID-19 globally could adversely affect our
operations, including our manufacturing and supply chain and sales and marketing. Our direct and indirect supply chain relies on manufacturing at, and transportation of
products and materials to and from, facilities located throughout the world, and is accordingly subject to disruption or product contamination. Additionally, our results of
operations could be adversely affected to the extent that COVID-19 or any other epidemic harms our business or the economy in general either globally or in any region in
which we do business. For example, our customers may delay, cancel or redirect planned capital expenditures in order to focus resources on COVID-19 or in response to
economic disruption related to COVID-19. The extent to which COVID-19 will continue to affect our operations will depend on future developments,
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which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of
COVID-19 and the actions to contain COVID-19 or treat its impact, among others, and could have an adverse effect on our business and financial condition.
Further, the U.S. federal government has called for, or enacted, substantial changes to healthcare, trade, fiscal, and tax policies, which may include changes to existing
trade agreements and may have a significant impact on our operations. We cannot predict the impact, if any, that these changes could have on our business. If economic
conditions worsen or new legislation is passed related to the healthcare system, trade, fiscal or tax policies, customer demand may not materialize to levels we require to achieve
our anticipated financial results, which could have a material adverse effect on our business, financial condition and results of operations.
Uncertain credit markets and concerns regarding the availability of credit could impact consumer and customer demand for our products, as well as our ability to manage
normal commercial relationships with our customers, suppliers and creditors, including financial institutions. If the current situation continues to deteriorate or does not
improve, our business could be negatively affected by factors such as reduced demand for our products resulting from a slow‑down or volatility in the general economy,
supplier or customer disruptions and/or temporary interruptions in our ability to conduct day‑to‑day transactions through our financial intermediaries involving the payment to
or collection of funds from our customers, vendors and suppliers.
Because we rely on distributors or sub-distributors to sell our products in most of our markets outside of the United States, our revenue could decline if our existing
distributors reduce the volume of purchases from us, or if our relationship with any of these distributors is terminated.
We currently rely on our distributors or sub-distributors for a majority of our sales outside the United States. Some distributors also assist us with regulatory approvals
and education of clinicians and government agencies. Our contracts with our distributors or sub-distributors do not assure us significant minimum purchase volume. If a contract
with a distributor or sub-distributor is terminated for cause or by us for convenience, the distributor or sub-distributor will have no obligation to purchase products from us. We
intend to continue our efforts to increase our sales in Europe, Asia, and other developed markets throughout the world. If we fail to sell our products through our international
distributors, we would experience a decline in revenue unless we begin to sell our products directly in those markets. We cannot be certain that we will be able to attract new
international distributors to market our products effectively or provide timely and cost-effective customer support and service. Even if we are successful in selling our products
through new distributors, the rate of growth of our revenue could be harmed if our existing distributors do not continue to sell a large dollar volume of our products. None of our
existing distributors are obligated to continue selling our products.
We may be subject to foreign laws governing our relationships with our international distributors. These laws may require us to make payments to our distributors if we
terminate our relationship for any reason, including for cause. Some countries require termination payments under local law or legislation that may supersede our contractual
relationship with the distributor. Any required payments would adversely affect our operating results.
If we lose our relationship with any supplier of key product components or our relationship with a supplier deteriorates or key components are not available in sufficient
quantities, our manufacturing could be delayed and our business could suffer.
We contract with third parties for the supply of some of the components used in our products and the production of our disposable products. Some of our suppliers are
not obligated to continue to supply us. We have relatively few sources of supply for some of the components used in our products and in some cases we rely entirely on sole-
source suppliers. In addition, the lead-time involved in the manufacturing of some of these components can be lengthy and unpredictable. If our suppliers become unwilling or
unable to supply us with components meeting our requirements, it might be difficult to establish additional or replacement suppliers in a timely manner, or at all. This would
cause our product sales to be disrupted and our revenue and operating results to suffer.
Replacement or alternative sources might not be readily obtainable due to regulatory requirements and other factors applicable to our manufacturing operations.
Incorporation of components from a new supplier into our products may require a new or supplemental filing with applicable regulatory authorities and clearance or approval of
the filing before we could resume product sales. This process may take a substantial period of time, and we may not be able to obtain the necessary regulatory clearance or
approval. This could create supply disruptions that would harm our product sales and operating results.
We have substantial international operations which are subject to numerous risks; if our international operations are not successful, our business will be adversely
affected.
In 2020, approximately 39.3% of our sales were made outside the United States. We plan to expand our international sales and marketing efforts to increase sales of our
products in foreign countries. We may not realize corresponding growth in revenue from growth in international unit sales, due to the lower average selling prices we receive on
sales outside of the United States. Even if we are able to successfully expand our international selling efforts, we cannot be certain that we will be able to
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create or increase demand for our products outside of the United States. Our international operations are subject to other risks, which include:
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The ongoing COVID-19 pandemic, which has caused disruptions in our and our distributors', vendors' and customers' respective operations, and any future outbreak
of a contagious disease;
Impact of possible recessions in economies outside the United States;
Political and economic instability, including instability related to war and terrorist attacks and to political and diplomatic matters;
Adverse changes in tariffs and trade protection measures;
Difficulty in obtaining and maintaining foreign regulatory approval and complying with foreign regulations, including the EU Medical Device Regulation;
Contractual provisions governed by foreign law, such as local law rights to sales commissions by terminated distributors;
Decreased healthcare spending by foreign governments that would reduce international demand for our products;
Strengthening of the U.S. dollar relative to foreign currencies that could make our products less competitive because approximately half of our international sales are
denominated in U.S. dollars;
Changes in capital and exchange controls affecting international trade;
Greater difficulty in accounts receivable collection and longer collection periods;
Difficulties of staffing and managing foreign operations;
Reduced protection for intellectual property rights in some countries and potentially conflicting intellectual property rights of third parties under the laws of various
foreign jurisdictions;
Attitudes by clinicians, and cost reimbursement policies, towards use of disposable supplies that are potentially unfavorable to our business;
Complying with U.S. regulations that apply to international operations, including trade laws, the U.S. Foreign Corrupt Practices Act, and anti-boycott laws, as well as
international laws such as the U.K. Bribery Act;
Loss of business through government tenders that are held annually in many cases; and
Potentially negative consequences from changes in tax laws, including legislative changes concerning taxation of income earned outside of the United States.
In particular, our international sales could be adversely affected by a strengthening of the U.S. dollar relative to other foreign currencies, which makes our products more
costly to international customers for sales denominated in U.S. dollars.
Risks Related to Our Business and Operations
We previously identified a material weakness in our internal control over financial reporting in recent periods, and if we fail to maintain proper and effective internal
control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act in the future, the accuracy and timeliness of our financial reporting may be
adversely affected.
The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and disclosure controls
and procedures quarterly. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to
report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act.
During the fourth quarter of 2019, we identified errors as part of closing our books and concluded that certain deficiencies existed in the Company’s internal control over
financial reporting. Specifically, we did not have controls designed to identify and properly account for certain research and development activities related to an arrangement
with a third party. Additionally, insufficient training provided to a new control operator and the design of one of our controls over payroll accounts contributed to an error in the
period end accrual. The Company has concluded that these deficiencies could have resulted in a material misstatement of the consolidated financial statements that would not
have been prevented or detected on a timely basis, and as such, these control deficiencies resulted in a material weakness in our internal control over financial reporting. We
have made substantive changes to enhance our design of controls to identify and assess contracts that include research and development and to confirm the accuracy of the
payroll accruals. Process updates focused on material weakness remediation were implemented early in 2020 and operated throughout the year. After completing the necessary
year-end testing of the enhanced procedures, we concluded that the previously identified material weakness is remediated as of December 31, 2020. However, there can be no
absolute assurance that these steps will be successful in preventing or detecting material misstatements in the consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. This material weakness is more fully described in
Item 9A. Controls and
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Procedures-Management’s Report on Internal Control Over Financial Reporting. The existence of this material weakness and of any other ineffective controls over our financial
reporting could result in one or more of the following:
• Revision of previously filed financial statements;
• Failure to meet our reporting obligations;
• Loss of investor confidence; and
• Negative impact on the trading price of our common stock.
In addition, we reported a material weakness in our internal control over financial reporting for the year ended December 31, 2018. In connection with a change in
control owner, management identified an existing control that was not designed at a sufficient precision to adequately review our analysis of separate reporting units, which
could have resulted in a material misstatement. We took steps to remediate this issue in 2018 and concluded the material weakness was remediated as of December 31, 2018.
However, our current efforts to maintain an effective control environment may not be sufficient to prevent future material weaknesses or significant deficiencies from occurring
or to promptly remediate any such future material weaknesses or significant deficiencies.
If other material weaknesses are identified in the future or we are not able to comply with the requirements of Section 404 in a timely manner, our reported financial
results could be materially misstated or could be restated, we could receive an adverse opinion regarding our controls from our independent registered accounting firm and we
could be subject to investigations or sanctions by regulatory authorities, which would require additional financial and management resources, and the market price of our stock
could decline.
The United Kingdom's withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business and
operations.
The U.K. exited from the European Union on January 31, 2020 (often referred to as “Brexit”). On December 24, 2020, the U.K. and the European Union entered into a
trade and cooperation agreement (the “Trade and Cooperation Agreement”), which was applied on a provisional basis from January 1, 2021. While the economic integration
does not reach the level that existed during the time the U.K. was a member state of the European Union, the Trade and Cooperation Agreement sets out preferential
arrangements in areas such as trade in goods and in services, digital trade and intellectual property. Negotiations between the U.K. and the European Union are expected to
continue in relation to the relationship between the U.K. and the European Union in certain other areas which are not covered by the Trade and Cooperation Agreement. The
long term effects of Brexit will depend on the effects of the implementation and application of the Trade and Cooperation Agreement and any other relevant agreements
between the U.K. and the European Union. It is still unclear what terms, if any, may be agreed within the U.K. and between the U.K. and other countries on many aspects of
fiscal policy, cross-border trade and international relations, both in the final outcome and for any transitional period. The withdrawal of the U.K. from the European Union could
potentially disrupt the free movement of goods, services and people between the U.K. and the European Union, including in Ireland where we have significant manufacturing
operations, undermine bilateral cooperation in key geographic areas and significantly disrupt trade between the U.K. and the European Union or other nations as the U.K.
pursues independent trade relations. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which
European Union laws to replace or replicate. Because this is an unprecedented event, it is unclear what long-term economic, financial, trade and legal implications Brexit would
have and how it would affect the regulation applicable to our business globally and in the region. Any of these developments, along with any political, economic and regulatory
changes that may occur, could cause political and economic uncertainty in Europe and internationally and harm our business and financial results. The impact on Natus from
Brexit will depend, in part, on the application of the Trade and Cooperation Agreement and the outcome of other tariff, trade, regulatory and other negotiations. Although Natus
has not observed a material financial impact or identified any trends or potential changes to critical accounting estimates as a result of Brexit at this time we will continue to
assess the impact of Brexit on our business and operations, and on accounting and reporting considerations. The effects of Brexit and the application of the Trade and
Cooperation Agreement could adversely affect our business, financial condition or future results.
Our operating results may suffer because of our exposure to foreign currency exchange rate fluctuations.
Substantially all of our sales contracts with our U.S. based customers provide for payment in U.S. dollars. With the exception of our Canadian operations, substantially
all of the revenue and expenses of our foreign subsidiaries are denominated in the applicable foreign currency for the countries in which they operate. To date we have executed
only limited foreign currency contracts to hedge these currency risks. Our future revenue and expenses may be subject to volatility due to exchange rate fluctuations that could
result in foreign exchange gains and losses associated with foreign currency transactions and the translation of assets and liabilities denominated in foreign currencies.
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Substantially all our sales from our U.S. operations to our international distributors provide for payment in U.S. dollars. A strengthening of the U.S. dollar relative to
other foreign currencies could increase the effective cost of our products to our international distributors as their functional currency is typically not the U.S. dollar. This could
have a potential adverse effect on our ability to increase or maintain average selling prices of our products to our foreign-based customers.
The interest rates on our revolving credit facility are priced using a spread over LIBOR.
LIBOR, the London interbank offered rate, is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference
for setting the interest rate on loans globally. We typically use LIBOR as a reference rate in our term loans such that the interest due to our creditors pursuant to a term loan
extended to us is calculated using LIBOR. Most of our term loan agreements contain a stated minimum value for LIBOR.
Our credit facility permits interest on the outstanding principal balance to be calculated based on LIBOR. On July 27, 2017, the U.K. Financial Conduct Authority (the
"FCA") announced that it will no longer require banks to submit rates for the calculation of LIBOR after June 2023, and the U.S. Federal Reserve and the Bank of England have
begun publishing a Secured Overnight Funding Rate ("SOFR") and a reformed Sterling Overnight Index Average ("Sonia"), respectively, which are currently intended to serve
as alternative reference rates to LIBOR. Considerable uncertainty exists around what will replace LIBOR and how it will be implemented. At this time, it is not possible to
predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be implemented in the United Kingdom or
elsewhere. Actions in the meantime, by the FCA, other regulators, or law enforcement agencies are expected to influence the method by which LIBOR is calculated. At this
time, it is not possible to predict the effect of any such changes or any other reforms to LIBOR that may be enacted in the U.K. or elsewhere. Uncertainty as to the nature of
such potential changes, alternative reference rates or other reforms may adversely affect our indebtedness that bear interest at a floating rate determined by reference to LIBOR.
Future changes in technology or market conditions could result in adjustments to our recorded asset balance for intangible assets, including goodwill, resulting in
additional charges that could significantly impact our operating results.
Our balance sheet includes significant intangible assets, including goodwill and other acquired intangible assets. The determination of related estimated useful lives and
whether these assets are impaired involves significant judgment. Our ability to accurately predict future cash flows related to these intangible assets might be hindered by events
over which we have no control. Due to the highly competitive nature of the medical device industry, new technologies could impair the value of our intangible assets if they
create market conditions that adversely affect the competitiveness of our products. Further, declines in our market capitalization may be an indicator that our intangible assets or
goodwill carrying values exceed their fair values which could lead to potential impairment charges that could impact our operating results. In the past we have recorded charges
for goodwill impairment and impairments of our trade names.
We depend upon key employees in a competitive market for skilled personnel, and, without additional employees, we cannot grow or maintain profitability.
Our products and technologies are complex, and we depend substantially on the continued service of our senior management team. The loss of any of our key employees
could adversely affect our business and slow our product development process. Our future success will depend, in part, on the continued service of our key management
personnel, software engineers, and other research and development employees, and our ability to identify, hire, and retain additional personnel, including customer service,
marketing, and sales staff. Demand for these skilled employees in our industry is very competitive due to the limited number of people available with the necessary technical
skills and understanding of our product technologies. We may be unable to attract and retain personnel necessary for the development of our business.
We have experienced seasonality in the sale of our products.
We experience seasonality in our revenue. For example, our sales typically decline from the second half of our fiscal year to the first half of the fiscal year, due to
patterns in the capital budgeting and purchasing cycles of our customers, many of which are government agencies, and the compensation arrangements of our direct sales
employees, as those arrangements are tied to calendar-year sales plans. We anticipate that we will continue to experience seasonal fluctuations, which may lead to fluctuations
in our quarterly operating results. We believe that you should not rely on our results of operations for interim periods as an indication of our expected results in any future
period.
We make regular changes to our information systems that could disrupt our business and our financial results.
We continuously improve and plan to continue to improve our information systems to support the form, functionality, and scale of our business. These types of
transitions frequently prove disruptive to the underlying business of an enterprise and may cause us to incur higher costs than we anticipate. Failure to manage a smooth
transition to the new systems and the ongoing operations and support of the new systems could materially harm our business operations.
U.S. tax reform legislation could materially affect our business and financial condition.
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The Tax Cuts and Jobs Act (the “Tax Act”) was signed into law in December 2017. The new law made numerous changes to federal corporate tax law that we expect will
impact our effective tax rate in future periods. The changes included in the Tax Act were broad and complex and included, among others, reducing the corporate tax rate from a
top marginal rate of 35% to a flat rate of 21%, limiting the tax deduction for interest expense to 30% of adjusted earnings, eliminating net operating loss carrybacks, imposing a
one-time tax on offshore earnings at reduced rates regardless of whether they are repatriated, allowing immediate deductions for certain new investments instead of deductions
for depreciation expense over time, and modifying or repealing many business deductions and credits. The final impacts of the Tax Act may differ from our current estimates,
possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any
changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates we have utilized to calculate the
transition impacts.
Risks Related to Growth and Competition
Demand for some of our products depends on the capital spending policies of our customers, and changes in these policies could harm our business.
A majority of customers for our products are hospitals, physician offices, and clinics. Many factors, including public policy spending provisions, available resources, and
economic cycles have a significant effect on the capital spending policies of these entities and the amount that they can spend on our equipment products. If budget resources
limit the capital spending of our customers, they will be unlikely to either purchase any new equipment from us or upgrade to any of our newer equipment products. Lack of
liquidity in credit markets and uncertainty about future economic conditions can have an adverse effect on the spending patterns of our customers. These factors can have a
significant adverse effect on the demand for our products.
Our operating results may decline if we do not succeed in developing, acquiring, and marketing additional products or improving our existing products.
We intend to develop additional products and technologies, including enhancements of existing products, for the screening, detection, treatment, monitoring and tracking
of common medical ailments. Developing new products and improving our existing products to meet the needs of current and future customers requires significant investments
in research and development. Healthcare products typically receive regulatory approval based on data obtained in controlled clinical trials, which can be time consuming and
expensive. Unfavorable or inconsistent clinical data from existing or future clinical trials may adversely affect our ability to secure marketing authorization for certain products.
Furthermore, all results, even positive ones, are subject to the interpretation of FDA and other regulatory agencies. If we fail to sell new products, update existing products, or
timely react to changes in technology, our operating results may decline as our existing products reach the end of their commercial life cycles.
Our business results depend on our ability to successfully manage ongoing organizational change and business transformation and achieve cost savings and operating
efficiency initiatives.
Our financial goals assume a level of increased productivity. If we are unable to deliver these expected improvements, or continue to invest in business growth, or if the
volume and nature of change require additional resources, our business operations and financial results could be materially and adversely impacted. Our ability to successfully
manage and execute these initiatives and realize expected savings and benefits in the amounts and at the times anticipated is important to our business success. Any failure to do
so, which could result from our inability to successfully execute organizational change and business transformation plans, changes in global or regional economic conditions,
competition, changes in the industries in which we compete, unanticipated costs or charges, loss of key personnel and other factors described herein, could have a material
adverse effect on our businesses, financial condition and results of operations.
At previous points in our past, our growth has depended substantially on the completion of acquisitions and we may not be able to complete or successfully capitalize on
acquisitions of the same nature or relative size in the future to support a similar level of growth.
The acquisitions that we have completed have contributed to our growth in prior years. We have expended considerable effort in seeking to identify attractive acquisition
candidates, and ultimately, to negotiate mutually agreeable acquisition terms. The market for attractive acquisitions is competitive and others with different strategic objectives
or greater financial resources than we have may be better positioned than we are to acquire desirable targets. Further, we may not be able to negotiate acquisition terms with
target companies that will allow us to achieve acceptable financial returns from the transaction.
If completed, the success of any acquisitions will depend, in part, on our ability to successfully combine and integrate the acquired business into our businesses and
realize the anticipated benefits, including synergies, from the transaction. The integration of any acquired businesses may result in material challenges, including: the diversion
of management's attention from ongoing business concerns and performance shortfalls at one or both of the companies; maintaining employee morale and retaining key
management, sales and other employees; retaining existing business and operational relationships; the possibility
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of faulty assumptions underlying expectations regarding the integration process; consolidating corporate and administrative infrastructures and eliminating duplicative
operations; unanticipated issues in integrating information technology, communications and other systems; and unforeseen costs, expenses and liabilities (including litigation
related liabilities) associated with such acquisition.
If we fail in our efforts to educate clinicians, government agency personnel, and third-party payors about the effectiveness of our products, we may not achieve future sales
growth.
It is critical to the success of our sales efforts that we educate a sufficient number of clinicians, hospital administrators, and government agencies about our products and
the costs and benefits of their use. The commercial success of our products depends upon clinician, government agency, and other third-party payor confidence in the economic
and clinical benefits of our products as well as their comfort with the efficacy, reliability, sensitivity and specificity of our products. We believe that clinicians will not use our
products unless they determine, based on published peer-reviewed journal articles and experience, that our products provide an accurate and cost-effective alternative to other
means of testing or treatment. Our customers may choose to use competitive products, which may be less expensive or may provide faster results than our devices. Clinicians
are traditionally slow to adopt new products, testing practices and clinical treatments, partly because of perceived liability risks and the uncertainty of third-party
reimbursement. If clinicians, government agencies and hospital administrators do not adopt our products, we may not maintain profitability. Factors that may adversely affect
the medical community’s acceptance of our products include:
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Publication of clinical study results that demonstrate a lack of efficacy or cost-effectiveness of our products;
Changing governmental and physician group guidelines;
Actual or perceived performance, quality, price, and total cost of ownership deficiencies of our products relative to other competitive products;
Our ability to maintain and enhance our existing relationships and to form new relationships with leading physicians, physician organizations, hospitals, state
laboratory personnel, and third-party payors;
Changes in federal, state and third-party payor reimbursement policies for our products; and
Repeal of laws requiring universal newborn hearing screening and metabolic screening.
Sales to members under group purchasing agreements and sales to high volume purchasers may reduce our average selling prices, which could reduce our operating
margins.
We have entered and expect in the future to enter into agreements with customers who purchase a high volume of our products. Our agreements with these customers may
contain discounts from our normal selling prices and other special pricing considerations, which could cause our operating margins to decline. In addition, we have entered into
agreements to sell our products to members of GPOs, which negotiate volume purchase prices for medical devices and supplies for member hospitals, group practices and other
clinics. While we make sales directly to GPO members, the GPO members receive volume discounts from our normal selling price and may receive other special pricing
considerations from us. Sales to members of all GPOs accounted for approximately 22.5%, 18.7% and 13.3% of our total revenue during 2020, 2019 and 2018, respectively.
Certain other existing customers may be members of GPOs with which we do not have agreements. If we enter into agreements with new GPOs and some of our existing
customers begin purchasing our products through those GPOs, our operating margins could decline.
Consolidation in the healthcare industry could have an adverse effect on our revenues and results of operations.
Many healthcare industry companies, including our customers and competitors, are consolidating to create new companies with greater market power. As the healthcare
industry consolidates, competition to provide goods and services to our customers could become more intense. Our customers may try to use their market power to negotiate
price concessions and our competitors may utilize their size and broad product lines to offer cheaper alternatives to our products. If we are forced to reduce our prices because
of consolidation in the healthcare industry, our revenues would decrease and our consolidated earnings, financial condition, or cash flow would suffer.
Our markets are very competitive and in the United States we sell certain of our products in a mature market.
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.
The markets for certain of our products in the United States, including the newborn hearing screening, EMG, and EEG monitoring markets, are mature and we are
unlikely to see significant growth for such products in the United States. The market for newborn care products is affected by birthrates, and a declining U.S. birthrate has
adversely affected our operating results in recent periods. In the United States we derive a significant portion of our revenue from the sale of disposable supplies. Our disposable
supply products could face increasing competition, including competitors offering lower prices, which could have an adverse effect on our revenue and margins.
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Our competitors may have certain competitive advantages, which include the ability to devote greater resources to the development, promotion, and sale of their
products. Consequently, we may need to increase our efforts, and related expenses for research and development, marketing, and selling to maintain or improve our position.
We expect recurring sales to our existing customers to generate a majority of our revenue in the future, and if our existing customers do not continue to purchase products
from us, our revenue may decline.
If healthcare providers are not adequately reimbursed for procedures conducted with our devices or supplies, or if reimbursement policies change adversely, we may not be
successful marketing and selling our products or technologies.
Clinicians, hospitals, and government agencies are unlikely to purchase our products if they are not adequately reimbursed for the procedures conducted with our devices
or supplies. Unless a sufficient amount of conclusive, peer-reviewed clinical data about our products has been published, third-party payors, including insurance companies and
government agencies, may refuse to provide reimbursement. Furthermore, even if reimbursement is provided, it may not be adequate to fully compensate the clinicians or
hospitals. Some third-party payors may impose restrictions on the procedures for which they will provide reimbursement. If healthcare providers cannot obtain sufficient
reimbursement from third-party payors for our products or the screenings conducted with our products, we may not achieve significant market acceptance of our products.
Acceptance of our products in international markets will depend upon the availability of adequate reimbursement or funding within prevailing healthcare payment systems.
Reimbursement, funding, and healthcare payment systems vary significantly by country. We may not obtain approvals for reimbursement in a timely manner or at all.
Adverse changes in reimbursement policies in general could harm our business. We are unable to predict changes in the reimbursement methods used by third-party
healthcare payors, particularly those in countries and regions outside the United States. For example, some payors are moving toward a managed care system in which providers
contract to provide comprehensive healthcare for a fixed cost per person. In a managed care system, the cost of our products may not be incorporated into the overall payment
for patient care or there may not be adequate reimbursement for our products separate from reimbursement for other procedures.
Risks Related to Our Compliance and Regulatory Environment
Our ability to market and sell products depends upon receipt of domestic and foreign regulatory approval of our products and manufacturing operations. Our failure to
obtain or maintain regulatory approvals and compliance could negatively affect our business.
Our products and manufacturing operations are subject to extensive regulation in the United States by the FDA and by similar regulatory agencies in other countries. Our
products are classified as medical devices. Medical devices are subject to extensive regulation by the FDA pursuant to regulations that are wide ranging and govern, among
other things: design and development; manufacturing and testing; labeling; storage and record keeping; advertising, promotion, marketing, sales distribution and export; and
surveillance and reporting of deaths or serious injuries.
Unless an exemption applies, each medical device that we propose to market in the United States must first receive one of the following types of FDA premarket review
authorizations:
•
•
Clearance via Section 510(k) of the Food, Drug, and Cosmetics Act of 1938, as amended; or
Premarket approval via Section 515 of the Food, Drug, and Cosmetics Act if the FDA has determined that the medical device in question poses a greater risk of injury.
The FDA will clear marketing of a medical device through the 510(k) process if it is demonstrated that the new product is substantially equivalent to other 510(k)-cleared
products. The premarket approval application process is much more costly, lengthy and uncertain than the 510(k) process, and must be supported by extensive data from
preclinical studies and human clinical trials. The FDA may not grant either 510(k) clearance or premarket approval for any product we propose to market. Further, any
modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design or
manufacture, requires a new 510(k) clearance or, possibly, approval of a premarket approval application. The FDA requires every manufacturer to make this determination in
the first instance, but the FDA may review any manufacturer’s decision. If the FDA requires us to seek 510(k) clearance or premarket approval for modification of a previously
cleared product for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until
we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties. Further, our products could be subject to recall if the FDA determines, for
any reason, that our products are not safe or effective.
Delays in receipt of, or failure to receive, clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future
regulatory requirements could adversely impact our operating results. If the FDA finds that we have failed to comply with these requirements, the FDA can institute a wide
variety of enforcement actions, ranging from a public warning letter to more severe sanctions such as:
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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 Section 510(k) clearance or premarket approval of new products;
•
•
•
•
•
• Withdrawal of Section 510(k) clearance or premarket approvals already granted;
•
•
Criminal prosecution;
Domestic regulation of our products and manufacturing operations, other than that which is administered by the FDA, includes the Environmental Protection Act, the
Occupational Safety and Health Act, and state and local counterparts to these Acts; or
Foreign governments and regulatory authorities have, and may continue to, propose and implement regulations that apply to our products and operations. For example, in
2017 the European Union adopted the EU Medical Device Regulation, which imposes stricter requirements for the marketing and sale of medical devices, including new quality
system and post-market surveillance requirements once it is fully implemented in 2021. Penalties for regulatory non-compliance could be severe, including fines and revocation
or suspension of a company's business license, mandatory price reductions, and criminal sanctions. Future laws and regulations may have a material adverse effect on our
business.
Our business would be harmed if the FDA determines that we have failed to comply with applicable regulations governing the manufacture of our products and/or we do
not pass an inspection.
We and our suppliers are required to demonstrate and maintain compliance with the FDA’s Quality System Regulation. The Quality System Regulation sets forth the
FDA’s requirements for good manufacturing practices of medical devices and includes requirements for, among other things, the design, testing, production processes, controls,
quality assurance, labeling, packaging, storage and shipping of such products. In addition, we and our suppliers must engage in extensive recordkeeping and reporting and must
make available our manufacturing facility and records for periodic unscheduled inspections by federal, state and foreign agencies, including the FDA. We cannot assure you that
we and our suppliers are or will continue to be in full compliance with the Quality System Regulation, nor that we will not encounter any manufacturing difficulties.
A failure by us or our third party suppliers and manufacturers to comply with applicable regulations or to adequately respond to any future compliance issues raised by
the FDA could result in sanctions being imposed on us, including, among other things, fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing
approval of our products, delays, suspension or withdrawal of approvals, seizures or recalls of products and manufacturing restrictions, any of which could harm our business.
If we deliver products with defects, we may incur costs to repair and, possibly, recall that product and market acceptance of our products may decrease.
The manufacturing and marketing of our products involve an inherent risk of our delivering a defective product or products that do not otherwise perform as we expect.
We may incur substantial expense to repair any such products and may determine to recall such a product, even if not required to do so under applicable regulations. Any such
recall would be time consuming and expensive. Product defects or recalls may adversely affect our customers’ acceptance of the recalled and other of our products.
Our business may suffer if we are required to revise our labeling or promotional materials, or if the FDA takes an enforcement action against us for off-label uses.
We are prohibited by the FDA from promoting or advertising our medical device products for uses not within the scope of our clearances or approvals, or from making
unsupported promotional claims about the benefits of our products. If the FDA determines that our claims are outside the scope of our clearances, or are unsupported, it could
require us to revise our promotional claims or take enforcement action against us. If we were subject to such an action by the FDA, our sales could be delayed, our revenue
could decline, and our reputation among clinicians could be harmed. Likewise, if we acquire new products, either through the purchase of products, technology assets, or
businesses, that are subsequently deemed to have inadequate supporting data, we may be required to (i) obtain adequate data, which could be costly and impede our ability to
market these products, or (ii) modify the labeling on these products, which could impair their marketability, as described above.
We are subject to data privacy laws and our failure to comply with them may require us to make significant changes to our products or incur penalties or other liabilities.
Our business relies on the secure electronic transmission, storage and hosting of sensitive information, including personally identifiable information (“PII”), personal
health information, financial information, intellectual property and other sensitive information related to our customers and workforce. The collection, maintenance, protection,
use, transmission, disclosure and disposal of certain personal information and the security of medical devices are regulated at the U.S. federal and state, international and
industry levels. U.S. federal and state laws, such as the Health Insurance Portability and Accountability
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Act of 1996 (“HIPAA”), protect the confidentiality of certain patient health information, including patient medical records, and restrict the use and disclosure of patient health
information. We sign business associate agreements with certain customers for which we perform services as business associates under HIPAA, and therefore we are directly
subject to certain provisions of HIPAA that are applicable to business associates. Noncompliance with laws and regulations relating to privacy and security of personal
information, including HIPAA, or with contractual obligations under any business associate agreement may lead to significant fines, civil and criminal penalties, or liabilities.
We also may be required to report breaches of protected health information that we experience. The U.S. Department of Health and Human Services (“HHS”), audits the
compliance of business associates and enforces HIPAA privacy and security standards. HHS enforcement activity has become more significant over the last few years and HHS
has signaled its intent to continue this trend.
In addition to the regulation of personal health information, a number of states have also adopted laws and regulations that may affect our privacy and data security
practices for other kinds of PII, such as state laws that govern the use, disclosure and protection of personal information, such as social security numbers, or that are designed to
protect credit card account data. State consumer protection laws, including the California Consumer Privacy Act of 2018 (“CCPA”), which became effective on January 1,
2020, may also establish privacy and security standards for use and management of PII, including information related to customers, suppliers and care providers. The CCPA
provides individuals certain rights regarding the collection or processing of personal data related to California residents, which may restrict our ability to use personal data, of
California residents. Failure to comply with the CCPA could result in penalties of up to $7,500 per violation. Moreover, a new privacy law, the California Privacy Rights Act
(“CPRA”), which significantly modifies the CCPA, was recently approved by ballot initiative during the November 3, 2020 general election. There remains significant
uncertainty regarding the timing and implementation of the CPRA, which may require us to incur additional expenditures to ensure compliance. Additionally, the Federal Trade
Commission, and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination, and
security of data. The burdens imposed by the CCPA and other similar laws that have been or may be enacted at the federal and state level may require us to modify our data
processing practices and policies and to incur substantial expenditures in order to comply.
Outside the United States, we are impacted by the privacy and data security requirements at the international, national and regional level, and on an industry specific
basis. We serve customers across the globe. Legal requirements in these countries relating to the collection, storage, handling and transfer of personal data and potentially
intellectual property continue to evolve with increasingly strict enforcement regimes. More privacy and security laws and regulations are being adopted, and more are being
enforced, with potential for significant financial penalties. In the European Union, increasingly stringent data protection and privacy rules that will have substantial impact on
the use of patient data across the healthcare industry became effective in May 2018. The European Union General Data Protection Regulation (“GDPR”) applies uniformly
across the European Union and to businesses in other countries that target European Union residents and includes, among other things, a requirement for prompt notice of data
breaches to data subjects and supervisory authorities in certain circumstances and significant fines for non-compliance. The GDPR also requires companies processing personal
data of individuals, including employees, residing in the European Union to comply with European Union privacy and data protection rules. Other international jurisdictions,
have issued privacy laws that mirror many of the requirements of GDPR. As we expand our international operations, we may be required to expend significant time and
resources to put in place additional mechanisms to ensure compliance with multiple data privacy laws. Failure to comply with these laws may result in significant fines and other
administrative penalties and harm our business.
Compliance with these laws and regulations may require significant additional costs or changes in our business, which could adversely affect our results of operations or
financial condition. Noncompliance with these laws and regulations could result in the imposition of fines and penalties or could result in significant civil and other liabilities.
Additionally, the restrictions imposed by these laws and regulations may limit the use and adoption of our products, reduce overall demand for our products, require us to
modify our data handling practices and impose additional costs and burdens.
An interruption in or breach of security of our information or manufacturing systems, including the occurrence of a cyber-incident or a vulnerability in our cybersecurity,
or disclosure of private patient health information, may result in a loss of business or damage to our reputation.
We rely on communications, information and manufacturing systems to conduct our business. Any failure, interruption or cyber incident affecting these systems could
result in failures or disruptions in our customer relationship management or product manufacturing. Similarly, there can be no assurance that our third-party collaborators,
distributors and other contractors and consultants will be successful in protecting our data that is stored on their systems. A cyber incident is an intentional attack or an
unintentional event that can include an unauthorized actor gaining access to our systems to disrupt operations, corrupt data, or steal confidential information. The occurrence of
any failures, interruptions or cyber incidents could result in a loss of customer business or reputation and have a material effect on our business, financial condition, results of
operations and cash flows. In addition, our products are used in customer networks transmitting a range of sensitive information and any actual or
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perceived exposure of our products used in customer networks to malicious software or cyber-attacks could adversely affect our business and results of operations.
In the course of performing our business we obtain, from time to time, confidential patient health information. For example, we may learn patient names and be exposed
to confidential patient health information when we provide training on our products to our customers’ staff. Complying with federal and state privacy and security requirements
imposes compliance related costs, subjects us to potential regulatory audits, and may restrict our business operations. These various laws may be subject to varying
interpretations by courts and government agencies creating potentially complex compliance issues for our business. If we were to violate any of our legal obligations to
safeguard any confidential patient health information or protected health information against improper use and disclosure, we could lose customers and be exposed to liability,
and our reputation and business could be harmed. Concerns or allegations about our practices with regard to the privacy or security of personal health information or other
privacy-related matters, even if unfounded, could damage our reputation and harm our business.
We are also subject to new U.S. laws as well as laws and regulations in foreign countries covering data privacy and other protection of health and employee information
that may be more onerous than previous corresponding U.S. laws. These laws and regulations impose technical and organizational measures to ensure the security of personal
data and may require that we notify regulatory agencies, individuals or the public about any data security breaches. In particular, in the United States, the newly passed CCPA
imposes a private right of action with damages of up to $750 per person in the event of certain data breaches. Other states are considering similar laws. As these laws and
regulations develop in the United States and we expand our international operations, we may be required to expend significant time and resources to put in place additional
mechanisms to ensure compliance with multiple cybersecurity laws. Failure to comply with these laws may result in significant fines and other administrative penalties and
harm our business, and could expose us to significant civil damages.
The FDA has issued guidance advising manufacturers to take cybersecurity risks into account in product design for connected medical devices and systems, to assure that
appropriate safeguards are in place to reduce the risk of unauthorized access or modification to medical devices that contain software and reduce the risk of introducing threats
into hospital systems that are connected to such devices. The FDA also issued guidance on post market management of cyber security in medical devices. Compliance with these
requirements may require changes in business practices, complicate our operations, and add complexity and additional management and oversight needs. They also may
complicate our clinical research activities, as well as product offerings that involve transmission or use of clinical data. Failure to comply with these laws could result in
vulnerabilities that would make us susceptible to hackers and other cyber attacks, as well as fines or administrative penalties that, if imposed, would harm our business.
Healthcare reforms, changes in healthcare policies, and changes to third-party reimbursements for our products may affect demand for our products.
Uncertainty in the U.S. healthcare system may influence the way our customers spend on medical devices, supplies, and services in the future. The U.S. Patient Protection and
Affordable Care Act and the Healthcare and Education Reconciliation Act of 2010 (“ACA”) may be modified, repealed, or otherwise invalidated, in whole or in part. Future
rulemakings could affect rebates, prices, or the rate of price increase for healthcare products and services. Cost-containing measures implemented by healthcare providers
worldwide could harm our profitability. If we fail to effectively react to healthcare reforms, our business may be adversely affected.
Regulations related to “conflict minerals” may force us to incur additional expenses, may result in damage to our business reputation and may adversely impact our ability
to conduct our business.
The Dodd‑Frank Wall Street Reform and Consumer Protection Act and the rules promulgated by the SEC thereunder require companies, including Natus, to disclose the
existence in their products of certain metals, known as “conflict minerals,” which are metals mined from the Democratic Republic of the Congo and adjoining countries. These
rules requires investigative efforts, which has and will continue to cause us to incur associated costs, could adversely affect the sourcing, availability and pricing of minerals
used in our products and may cause reputational harm if we determine that certain of our components contain such conflict minerals or if we are unable to alter our processes or
sources of supply to avoid using such materials, all of which could adversely impact sales of our products and results of operations.
If guidelines mandating universal newborn hearing screening do not continue to develop in foreign countries and governments do not mandate testing of all newborns as
we anticipate, or if those guidelines have a long phase-in period, our sales of newborn hearing screening products may not achieve the revenue growth we have achieved in
the past.
We estimate that approximately 95% of the children born in the United States are currently being tested for hearing impairment prior to discharge from the hospital. To
date, there has been only limited adoption of newborn hearing screening prior to hospital discharge by foreign governments, and when newborn hearing screening programs are
enacted by foreign governments there can be a phase-in period spanning several years. The widespread adoption of guidelines depends, in part, on our ability to educate foreign
government agencies, neonatologists, pediatricians, third-party payors, and hospital administrators
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about the benefits of universal newborn hearing screening as well as the use of our products to perform the screening and monitoring. Our revenue from our newborn hearing
screening product lines may not grow if foreign governments do not require universal newborn hearing screening prior to hospital discharge, if physicians or hospitals are slow
to comply with those guidelines, or if governments provide for a lengthy phase-in period for compliance.
If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.
We could be subject to healthcare fraud regulation and enforcement by both the federal government and the states in which we conduct our business. The laws that may
affect our ability to operate include: (i) the federal healthcare programs Anti-Kickback Law, which prohibits, among other things, persons from knowingly and willfully
soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or
recommendation of, any good or service for which payment may be made under federal healthcare programs such as Medicare or Medicaid, (ii) federal false claims laws which
prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party
payors that are false or fraudulent, and which may apply to entities like us which provide coding and billing advice to customers, and/or (iii) state law equivalents of each of the
above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, many
of which differ from their federal counterparts in significant ways, thus complicating compliance efforts.
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties,
including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our
operations could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that
their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur
significant legal expenses and divert our management’s attention from the operation of our business.
Risks Related to our Intellectual Property and Potential Litigation
We may not be able to preserve the value of our intellectual property because we may not be able to protect access to it or we may lose our intellectual property rights due to
expiration of our licenses or patents.
If we fail to protect our intellectual property rights or if our intellectual property rights do not adequately cover the technology we employ, other medical device
companies could sell products with features similar to ours, and this could reduce demand for our products. We protect our intellectual property through a combination of patent,
copyright, trade secret and trademark laws. Despite our efforts to protect our proprietary rights, others may attempt to copy or otherwise improperly obtain and use our products
or technology. Policing unauthorized use of our technology is difficult and expensive, and we cannot be certain that the steps we have taken will prevent misappropriation. Our
means of protecting our proprietary rights may be inadequate. Enforcing our intellectual property rights could be costly and time consuming and may divert our management’s
attention and resources. Failing to enforce our intellectual property rights could also result in the loss of those rights.
Our operating results would suffer if we were subject to a protracted infringement claim.
The medical technology industry is characterized by a substantial amount of litigation and related administrative proceedings regarding patents and intellectual property
rights. We expect that medical screening and diagnostic products may become increasingly subject to third-party infringement claims as the number of competitors in our
industry grows and the functionality of products overlap. Third parties such as individuals, educational institutions, or other medical device companies may claim that we
infringe their intellectual property rights. Any claims, with or without merit, could have any of the following negative consequences:
•
•
•
•
Result in costly litigation and damage awards;
Divert our management’s attention and resources;
Cause product shipment delays or suspensions; or
Require us to seek to enter into royalty or licensing agreements.
From time to time, we may be subject to cases based on third-party patent infringement claims. A successful claim of infringement against us from any current or future
claim could result in a substantial damage award and materially harm our financial condition. Our failure or inability to license the infringed or similar technology, or design
and build non-infringing products, could prevent us from selling our products and adversely affect our business and financial results.
We may also find it necessary to bring infringement actions against third parties to seek to protect our intellectual property rights. Litigation of this nature, even if
successful, is often expensive and disruptive of our management’s attention, and in any event may not lead to a successful result relative to the resources dedicated to any such
litigation.
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We license intellectual property rights from third parties and would be adversely affected if our licensors do not appropriately defend their proprietary rights or if we breach
any of the agreements under which we license commercialization rights to products or technology from others.
We license rights from third parties for products and technology that are important to our business. If our licensors are unsuccessful in asserting and defending their
proprietary rights, including patent rights and trade secrets, we may lose the competitive advantages we have through selling products that we license from third parties.
Additionally, if it is found that our licensors infringe on the proprietary rights of others, we may be prohibited from marketing our existing products that incorporate those
proprietary rights. Under our licenses, we are subject to commercialization and development, sublicensing, royalty, insurance and other obligations. If we fail to comply with
any of these requirements, or otherwise breach a license agreement, the licensor may have the right to terminate the license in whole or to terminate the exclusive nature of the
license.
Product liability suits against us could result in expensive and time consuming litigation, payment of substantial damages, and an increase in our insurance rates.
The sale and use of our products could lead to the filing of a product liability claim by someone claiming to have been injured using one of our products or claiming that
one of our products failed to perform properly. A product liability claim could result in substantial damages and be costly and time consuming to defend, either of which could
materially harm our business reputation or financial condition. Our product liability insurance may not protect our assets from the financial impact of defending a product
liability claim. Any product liability claim brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing any
coverage in the future.
ITEM 1B. Unresolved Staff Comments.
None.
ITEM 2. Properties
Our corporate headquarters is located in Pleasanton, California, in a facility covering 8,200 square feet pursuant to a lease that expires in January 2025.
We also utilize the following properties:
Company-owned Facilities:
•
•
•
62,400 square feet in Gort, Ireland, utilized substantially for manufacturing;
44,900 square feet in Oakville, Ontario, Canada, primarily utilized for research and development and technical support; and
6,400 square feet in Old Woking, England, utilized substantially for research and development.
Leased Facilities:
Following is a listing of our most significant leased properties; we have a number of smaller facilities under lease in various countries where we operate.
•
•
•
•
•
124,000 square feet in Middleton, Wisconsin, pursuant to a lease that expires in April 2024, that is primarily utilized for manufacturing, technical support, customer
service, marketing and research and development;
65,000 square feet in Seattle, Washington, pursuant to a lease that expires in December 2021, that is utilized for research and development and general and
administrative purposes;
52,000 square feet in Taastrup, Denmark, pursuant to a lease with the option to terminate with six months-notice beginning January 2022, that is utilized for
manufacturing, research and development, marketing and sales, and general and administrative;
37,200 square feet in San Diego, California, pursuant to a lease that expires in June 2022, that is utilized substantially for manufacturing; and
25,100 square feet in Schaumburg, Illinois, pursuant to a lease that expires in November 2026, that is utilized substantially for marketing and sales.
ITEM 3. Legal Proceedings
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We may from time to time become a party to various legal proceedings or claims that arise in the ordinary course of business. We are not currently involved in any legal
or administrative proceedings that we believe are likely to have a material effect on our business, financial condition, or results of operations, although we cannot be assured of
the outcome of such matters.
ITEM 4. Mine Safety Disclosures
The disclosure required by this item is not applicable.
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades on the Nasdaq Global Select Market under the symbol “NTUS”. The following table sets forth, for the periods indicated, the high and low sale
price per share of our common stock, as reported on the Nasdaq Global Select Market.
PART II
Fiscal Year Ended December 31, 2020:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fiscal Year Ended December 31, 2019:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
$
$
High
Low
21.98 $
22.99
26.97
34.67
34.89 $
32.85
27.90
34.63
16.60
16.38
20.25
18.91
29.67
22.25
23.54
24.88
As of February 19, 2021, there were 33,874,074 shares of our common stock issued and outstanding and held by approximately 115 stockholders of record. We estimate
that there are approximately 11,470 beneficial owners of our common stock.
Dividends
We have never declared or paid cash dividends on our capital stock and do not anticipate paying any cash dividends in the foreseeable future.
Stock Performance Graph
The following information of Part II Item 5 is being furnished and shall not be deemed to be “soliciting material” or to be “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section, nor will it be deemed incorporated by reference into any filing under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate such information by reference
thereto.
The following graph shows a comparison, from January 1, 2016 through December 31, 2020, of cumulative total return for our common stock, the Nasdaq Composite
Index and the Standard & Poor’s 500 Health Care Equipment Index. Such returns are based on historical results and are not intended to suggest future performance. Data for the
Nasdaq Composite Index and the Standard & Poor’s 500 Health Care Equipment Index assumes reinvestment of dividends.
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Natus Medical Inc.
NASDAQ Composite-Total Returns
S&P 500 Health Care Equipment Index
Return %
Cum $
Return %
Cum $
Return %
Cum $
Purchases of Equity Securities by the Issuer
2015
2016
2017
2018
2019
2020
100.00
100.00
100.00
(27.58)
72.42
8.87
108.87
6.48
106.48
9.77
79.50
29.64
141.13
30.90
139.38
(10.92)
70.82
(2.84)
137.12
16.24
162.02
(3.06)
68.65
36.69
187.44
29.32
209.52
(39.25)
41.70
44.92
271.64
17.63
246.47
In December 2019, the Board of Directors approved a share repurchase program, which authorized the repurchase from time to time of up to a maximum of $50.0
million of our outstanding common stock. The program is scheduled to expire on December 12, 2021.
The following table provides information regarding repurchases of common stock for the year ended December 31, 2020.
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Period
January 1, 2020 - January 31, 2020
February 1, 2020 - February 29, 2020
March 1, 2020 - March 31, 2020
April 1, 2020 - April 30, 2020
May 1, 2020 - May 31, 2020
June 1, 2020 - June 30, 2020
July 1, 2020 - July 31, 2020
August 1, 2020 - August 31, 2020
September 1, 2020 - September 30, 2020
October 1, 2020 - October 31, 2020
November 1, 2020 - November 30, 2020
December 1, 2020 - December 31, 2020
Total
ITEM 6. Selected Financial Data
Total Number of Shares
Purchased
Average Price Paid per
Share
—
—
465,117
—
—
—
—
—
—
—
—
—
465,117
$
$
$
$
$
$
$
$
$
$
$
$
$
—
—
22.53
—
—
—
—
—
—
—
—
—
—
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
—
—
465,117
—
—
—
—
—
—
—
—
—
465,117
Approximate Dollar
Value of Shares that May
Yet Be Purchased
Under the Plans or
Programs
$
$
$
$
$
$
$
$
$
$
$
$
$
50,000,000
50,000,000
39,518,876
39,518,876
39,518,876
39,518,876
39,518,876
39,518,876
39,518,876
39,518,876
39,518,876
39,518,876
39,518,876
The following tables set forth certain selected consolidated financial data for each of the years in the five-year period ended December 31, 2020, and is derived from the
Consolidated Financial Statements of Natus Medical Incorporated and its subsidiaries. The Consolidated Financial Statements for each of the years in the three-year period
ended December 31, 2020 are included elsewhere in this report. The selected consolidated balance sheet data as of December 31, 2018, 2017 and 2016 and the consolidated
statements of operations data for the years ended December 31, 2017 and 2016 are derived from our Consolidated Financial Statements, which are not included in this report.
The selected consolidated financial data set forth below is qualified in its entirety by, and should be read in conjunction with, the Consolidated Financial Statements and Notes
thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.
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2020
2019
Year ended December 31,
2018
(in thousands, except per share amounts)
2017
2016
Consolidated Statement of Operations Data (a)(b):
Revenue
Cost of revenue
Intangibles amortization
Gross profit
Operating expenses:
Marketing and selling
Research and development
General and administrative
Intangibles amortization
Restructuring
Total operating expense
Income from operations
Other expense, net
Income (loss) before provision (benefit) for income tax
Provision (benefit) for income tax
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
$
$
$
$
415,684 $
185,912
13,241
216,531
107,282
61,296
49,113
15,224
3,809
236,724
(20,193)
(1,872)
(22,065)
(5,452)
(16,613) $
(0.49) $
(0.49) $
495,175 $
196,551
6,916
291,708
129,109
58,733
59,649
15,144
44,739
307,374
(15,666)
(5,591)
(21,257)
(5,586)
(15,671) $
(0.47) $
(0.47) $
530,891 $
217,952
8,924
304,015
136,680
61,482
70,599
22,585
37,231
328,577
(24,562)
(7,698)
(32,260)
(9,325)
(22,935) $
(0.69) $
(0.69) $
500,970 $
213,376
6,380
281,214
126,166
51,822
74,424
19,171
914
272,497
8,717
(3,567)
5,150
25,443
(20,293) $
(0.62) $
(0.62) $
Weighted average shares used in the calculation of earnings per share:
Basic
Diluted
33,562
33,562
33,696
33,696
33,111
33,111
32,564
32,564
381,892
144,632
2,327
234,933
84,834
33,443
50,877
8,983
1,536
179,673
55,260
(357)
54,903
12,309
42,594
1.31
1.29
32,460
33,056
2020
2019
December 31,
2018
(in thousands)
2017
2016
Consolidated Balance Sheet Data:
Cash, cash equivalents, and short-term investments
Working capital
Total assets
Long-term debt (including current portion) and short-term
borrowings
Total stockholders’ equity
$
82,082 $
63,297 $
56,373 $
88,950 $
125,950
600,394
55,840
411,094
126,928
622,527
54,665
416,123
152,329
638,140
104,474
398,444
213,491
709,919
154,283
422,097
247,750
325,858
649,012
140,000
417,374
(a) Results of operations and financial position of the businesses we have acquired are included from their acquisition dates as follows: NeuroQuest in March 2016,
RetCam in July 2016, Otometrics in January 2017, Integra LifeSciences asset acquisition in October 2017, and Babybe in November 2020.
(b) Results of operations and financial position of the businesses we have divested or exited are not included from their exited dates as follows: GND in January 2019,
Medix in April 2019, Neurocom in June 2019, Peloton in January 2020, and Sound Room in June 2020.
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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Consolidated
Financial Statements and the accompanying footnotes. MD&A includes the following sections:
Business
We are a leading provider of medical device solutions focused on the diagnosis and treatment of central nervous and sensory system disorders for patients of all ages.
Year 2020 Overview
Our consolidated revenue decreased by $79.5 million for the year ended December 31, 2020 compared to the year ended December 31, 2019. This decrease was driven by
a decline in demand for our Neuro and Hearing and Balance products as a result of the COVID-19 global pandemic.
Net loss was $16.6 million, or $0.49 per share in the year ended December 31, 2020, compared with net loss of $15.7 million, or $0.47 per share in the prior year. This
decrease in income was primarily driven by lower revenue resulting from the COVID-19 pandemic on global demand for our products and impairment of intangibles related to
end of sale products partly offset by a reduction in operating expenses. While we experienced a net loss, we generated cash flow from operations of $34.4 million.
Reorganization
On January 15, 2019, Natus announced the implementation of a new organizational structure designed to improve operational performance, increase our focus on
innovation and increase profitability. We consolidated our three business units, Neuro, Newborn Care and Hearing & Balance, formerly Otometrics, into “One Natus." This
initiative was designed to create a single, unified company with globally led operational teams in Sales & Marketing, Manufacturing, R&D, Quality, and General and
Administrative functions. We expect to continue to see increased transparency, efficiency and cross-functional collaboration across common technologies, processes and
customer channels.
COVID-19 Update
Healthcare providers and patients continue to depend on our products and services every day. Our team members and partners are continuing to maintain our supply
chain, manufacturing and delivery of our products and services. The health and welfare of our employees, our customers and our partners remain our top priority as we continue
our business operations.
We have implemented safeguards in our facilities to protect team members, including social distancing practices, work from home and other measures consistent with
specific regulatory requirements and guidance from health authorities. As an essential supplier of healthcare products and services, all of our manufacturing, engineering, sales
and customer support functions remain fully operational and will continue to support customers with vital supplies, service and equipment. We have taken actions to reduce
costs, including reducing travel and discretionary expenses. We will continue to prioritize spending to allow continued investment in products and services that are key elements
of our stated strategy for profitable growth in the years ahead.
Impact to our supply chain
Many of our materials are single source and require lengthy qualification periods. Disruptions in our supply chain could negatively impact our ability to produce and
supply our finished products. We have made strategic investments in inventory to help mitigate potential supply chain disruptions. These investments include increased
inventory and firm purchase orders beyond our typical timeframe in order to secure capacity at our key suppliers. To date, we have not incurred any significant supply
disruptions and we believe our suppliers are positioned well to provide us with the materials we need to meet our demand. The health and safety of our suppliers is also a
priority for us and we have transitioned collaboration with our suppliers to online technology so that we can continue our business operations.
Liquidity
In 2019, we completed a restructuring of the Company and strengthened our balance sheet by generating over $60.0 million in cash from operations and paying down
$55.0 million in debt. At the end of the first quarter of 2020 we drew an additional $60.0 million on our credit line as a precaution to ensure we have the necessary capital to
continue to reliably serve our customers during an extended period of uncertainty. During the third quarter of 2020 we amended our Credit Agreement
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which extended the maturity date of the original agreement from September 23, 2021 to September 25, 2023, reduced the aggregate revolving credit facility from $225.0
million to $150.0 million, and amended certain covenants. During the year ended December 31, 2020, we repaid $58.0 million in debt and continued to maintain a strong cash
position ending the period with $82.1 million in cash.
Some hospitals and clinics delayed payments for products and services and we have worked with our customers to arrange mutually acceptable payment terms during this
uncertain time. Looking ahead, we expect revenues and margins to improve, but remain below historical levels. We see our customers adapting to the COVID environment with
elective procedures resuming, which we believe will result in increased capital spending, improving our business for the foreseeable future.
While we believe that we have sufficient liquidity to operate the Company for the foreseeable future, should negative economic conditions persist for an extended period
of time, we are evaluating additional measures we could take to improve our liquidity position.
Impact to fair-value of intangible assets
We have reviewed the assets on our balance sheet, particularly goodwill and significant intangible assets for indications of impairment related to COVID-19 and
determined that there are no indicators of impairment at this time. The values of these assets are particularly sensitive to our market cap and the long term value of their cash
flows. If these conditions change significantly, we may need to record an impairment to their value. However, any impairment charges would not require the use of cash and are
excluded from the calculation of our debt covenants and therefore would not affect our ability to borrow under our existing credit line.
During the third quarter of 2020 we recorded an impairment charge of an acquired tradename and technology that lead to the decision to discontinue the sale of one of
our products rather than continuing to invest in the product. See Note 6 to the Condensed Consolidated Financial Statements for additional discussion on this impairment charge.
Impact to our financial systems and internal control
To date, the COVID-19 pandemic has not had a material impact to our ability to operate our accounting and financial functions. We are staffed with approximately 150
dedicated finance, accounting and IT professionals. Our accounting and IT systems are maintained with third party support agreements and we have documented disaster
recovery plans in place. Our finance, accounting and IT professionals are performing their normal functions while working from home with little to no on-site physical presence
and with no changes to our internal controls. We are confident that we can operate in this manner for an extended period of time without disruption and without significant
impact to our internal controls.
Travel restrictions and use of online technology
The global Natus team is geographically diverse with multiple small locations and hundreds of employees that typically work from home in normal circumstances. We
use the latest collaboration technology and have been able to transition to a company-wide work from home model without major interruption. Our manufacturing, distribution
and field service operations require physical presence of certain employees as their work requires them to handle our products. In these cases, we have made adjustments to shift
size and schedule and limited access to these groups by non-related employees. Our field service technicians are following our customers' requirements for distancing practices
but continue to provide service where needed. Our sales representatives also continue to provide services to customers, either remotely or in person, when practicable.
Travel restrictions have forced most customer and external partner collaboration to online technology. Using this technology has enabled us to continue operations
without incident. However, in-person customer engagement as well as physical presence in laboratory settings is required for the long term success of our company and
eventually, we will need to return to traditional forms of interaction.
Application of Critical Accounting Policies
We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In so doing, we must often
make estimates and use assumptions that can be subjective and, consequently, our actual results could differ from those estimates. For any given individual estimate or
assumption we make, there may also be other estimates or assumptions that are reasonable.
We believe that the following critical accounting policies require the use of significant estimates, assumptions, and judgments. The use of different estimates,
assumptions, and judgments could have a material effect on the reported amounts of
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assets, liabilities, revenue, expenses, and related disclosures as of the date of the financial statements and during the reporting period.
Revenue recognition
Revenue is recognized when obligations under the terms of a contract with a customer are satisfied; generally this occurs with the transfer of control of devices, supplies,
or services. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services.
For the majority of devices and supplies, we transfer control and recognize revenue when products ship from the warehouse to the customer. We generally do not provide
rights of return on devices and supplies. Freight charges billed to customers are included in revenue and freight-related expenses are charged to cost of revenue.
Depending on the terms of the arrangement, we may also defer the recognition of a portion of the consideration received because we have to satisfy a future obligation
(e.g. installation). Judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. Our estimate of SSP is a point estimate. The
estimate is calculated annually for each performance obligation that is not sold separately. In instances where SSP is not directly observable, such as when we do not sell the
product or service separately, the SSP is determined using information that may include market conditions and other observable inputs.
We sell separately-priced service contracts that extend maintenance coverages for both medical devices and data management systems beyond the base agreements to
customers. The separately priced service contracts range from twelve (12) months to sixty (60) months. We receive payment at the inception of the contract and recognize
revenue ratably over the service period.
For products containing embedded software, we determine the hardware and software components function together to deliver the products' essential functionality and
are considered a combined performance obligation. Revenue recognition policies for sales of these products are substantially the same as for other tangible products.
Inventory Valuation
Inventories are carried at the lower of cost or net realizable value, with cost being determined using the first-in, first-out method. The carrying value of our inventory is
reduced for any difference between cost and estimated net realizable value of the inventory. We determine net realizable value by evaluating ending inventories for excess
quantities, obsolescence, and other factors that could impact our ability to consume inventory for its intended use. Our evaluation includes an analysis of historical sales by
product, projections of future demand by product, and an analysis of obsolescence by product. Adjustments to the value of inventory establish a new cost basis and are
considered permanent even if circumstances later suggest that increased carrying amounts are recoverable. If demand is higher than expected, we may sell inventory that had
previously been written down.
Income Taxes
We account for income taxes under the assets and liability method, which requires the recognition of deferred tax assets and liabilities for expected future tax
consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences
between the financial statements carrying value of assets and liabilities and the tax basis of those assets and liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment
date.
We record net deferred tax assets to the extent it is more likely than not that the assets will be realized. The ultimate recovery of deferred tax assets is dependent upon the
amount and timing of future taxable income and other factors such as the taxing jurisdiction in which the asset is to be recovered. A high degree of judgment is required to
determine if, and the extent to which, valuation allowances should be recorded against deferred tax assets. In making such determination, we consider all available positive and
negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.
Based on all available evidence, both positive and negative, and the weight of that evidence to the extent such evidence can be objectively verified, we determine whether it is
more likely than not that all or a portion of the deferred tax assets will be realized. The main factors we consider include:
•
•
Cumulative earnings or losses in recent years, adjusted for certain nonrecurring items;
Expected earnings or losses in future years; and
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•
The availability, or lack thereof, of taxable income in prior carryback periods that would limit realization of the carryforward period associated with the
deferred tax assets and liabilities
To the extent that we have recorded a valuation allowance on certain deferred tax assets that are determined to be realizable in the future, we adjust the valuation allowance
which reduces the provision for income taxes.
We recognize the tax benefits of uncertain tax positions in the financial statements as defined in ASC Topic 740, Income Tax. In the ordinary course of business, there
is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record deferred income tax benefits for all tax years subject to
examination based upon management's evaluation of the facts, circumstances and information available at the reporting date about the ability to realize the benefit of the
deferred tax assets or tax positions. When the tax position is deemed more likely than not of being sustained, we recognize the largest amount of tax benefit that is greater than
50 percent likely of being ultimately realized upon settlement as defined in ASC 740-10-05. For those income tax positions where it is not more likely than not that an income
tax benefit will be sustained in the future, we do not recognize a deferred tax benefit in our financial statements. We record interest and penalties, net of any applicable tax
benefit, related to income taxes, if any, as a component of the provision for income taxes when applicable.
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Results of Operations
The following table sets forth for the periods indicated selected consolidated statement of income data as a percentage of total revenue. Our historical operating results
are not necessarily indicative of the results for any future period.
Revenue
Cost of revenue
Intangibles amortization
Gross profit
Operating expenses:
Marketing and selling
Research and development
General and administrative
Intangibles amortization
Restructuring
Total operating expenses
Income (loss) from operations
Other expense, net
Income (loss) before provision (benefit) for income tax
Provision (benefit) for income tax expense
Net loss
Comparison of 2020 and 2019
Revenue
Neuro
Devices and Systems
Supplies
Services
Total Neuro Revenue
Newborn Care
Devices and Systems
Supplies
Services
Total Newborn Care Revenue
Hearing & Balance
Devices and Systems
Supplies
Services
Total Hearing & Balance Revenue
Total Revenue
Percent of Revenue
Years Ended December 31,
2019
2020
2018
100.0 %
44.7 %
3.2 %
52.1 %
25.8 %
14.7 %
11.8 %
3.7 %
0.9 %
56.9 %
(4.9)%
(0.5)%
(5.3)%
(1.3)%
(4.0)%
100.0 %
39.7 %
1.4 %
58.9 %
26.1 %
11.9 %
12.0 %
3.1 %
9.0 %
62.1 %
(3.2)%
(1.1)%
(4.3)%
(1.1)%
(3.2)%
100.0 %
41.1 %
1.7 %
57.3 %
25.7 %
11.6 %
13.3 %
4.3 %
7.0 %
61.9 %
(4.6)%
(1.5)%
(6.1)%
(1.8)%
(4.3)%
Years ended December 31,
2020
2019
Change
$
$
$
179,881 $
56,275
—
236,156
51,894
36,174
16,566
104,634
70,711 $
4,183
—
74,894
415,684 $
220,306
66,059
871
287,236
53,465
38,264
19,183
110,912
92,050
4,977
—
97,027
495,175
(18)%
(15)%
(100)%
(18)%
(3)%
(5)%
(14)%
(6)%
(23)%
(16)%
— %
(23)%
(16)%
For the year ended December 31, 2020, Neuro revenue decreased by 18% compared to the prior year. Devices and Systems revenue decreased by 18% and Supplies
revenue decreased by 15% compared to the prior year due primarily to the impact of the global COVID-19 pandemic. Services revenue decreased 100% compared to the prior
year due to our exit from the GND business in January 2019.
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For the year ended December 31, 2020, Newborn Care revenue decreased by 6% compared to the prior year. Devices and Systems revenue decreased by 3% and
Supplies revenue decreased 5% compared to the prior year due to the impact of the COVID-19 pandemic. Services revenue decreased by 14% compared to the prior year
primarily due to our exit from the Peloton business as of December 31, 2019 and was partly offset by the ramp up in activity under our agreement with Pediatrix over 2020.
For the year ended December 31, 2020, Hearing & Balance revenue decreased 23% compared to the prior year due to the impact of the COVID-19 pandemic.
Cost of Revenue and Gross Profit
Revenue
Cost of revenue
Intangibles amortization
Gross profit
Gross profit percentage
$
Years ended December 31,
2020
2019
$
415,684
185,912
13,241
216,531
495,175
196,551
6,916
291,708
52.1 %
58.9 %
For the year ended December 31, 2020, our gross profit as a percentage of sales decreased by 6.8% compared to the prior year. This decrease was primarily attributable to
lower revenue resulting from the COVID-19 pandemic, higher freight costs resulting from reduced cargo carrier capacity, and higher amortization relating to an impairment of a
product line during 2020.
Operating Costs
Marketing and selling
Percentage of revenue
Research and development
Percentage of revenue
General and administrative
Percentage of revenue
Intangibles amortization
Percentage of revenue
Restructuring
Percentage of revenue
Marketing and Selling
$
$
$
$
$
Years ended December 31,
2020
107,282
25.8 %
61,296
14.7 %
49,113
11.8 %
15,224
3.7 %
3,809
0.9 %
$
$
$
$
$
2019
129,109
26.1 %
58,733
11.9 %
59,649
12.0 %
15,144
3.1 %
44,739
9.0 %
Marketing and selling expenses decreased during the year ended December 31, 2020 as compared to the prior year. The decrease in expenses is mainly attributable to
lower expenses due to COVID-19 which caused decreases in travel expense, tradeshow and other events, payroll, commissions, and service expenses.
Research and Development
Research and development expenses increased during the year ended December 31, 2020 compared to the prior year. The increase relates to higher project spend for
Medical Device Regulation compliance, consulting and testing, and remediation partly offset by lower travel due to COVID-19 restrictions.
General and Administrative
General and administrative expenses decreased during the year ended December 31, 2020 compared to the prior year. This decrease was due to a reduction in consulting
fees and outside services and utilities costs due to the global COVID-19 pandemic.
Intangibles Amortization
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Intangibles amortization remained flat for the year ended December 31, 2020 compared to the prior year as there was no change in intangibles classified as operating
expenses.
Restructuring
Restructuring costs decreased during the year ended December 31, 2020 compared to the prior year. This decrease was driven by costs in 2019 that did not repeat in 2020.
In 2019, we recorded an impairment related to the sale of Medix, which included the recognition of deferred foreign currency related adjustments in accumulated other
comprehensive income, of $24.8 million, net of tax, and an adjustment of $4.6 million for assets with a book value in excess of their fair market value. The decrease was also
driven by restructuring expenses incurred in 2019 related to exiting the GND and Peloton businesses.
Other Income (Expense), net
Other income (expense), net consists of interest income, interest expense, net currency exchange gains and losses, and other miscellaneous income and expense. We
reported other expense, net of $1.9 million in the year ended December 31, 2020, compared to $5.6 million in the prior year. We reported $2.0 million of foreign currency
exchange gains in the year ended December 31, 2020 versus $0.8 million of foreign currency losses in the prior year. Interest expense was $3.7 million in the year ended
December 31, 2020 compared to $4.9 million in the prior year. The reduction in interest expense was driven by accelerated payments on our outstanding debt. Interest income
was $11.0 thousand in the year ended December 31, 2020, compared to $0.3 million in the prior year.
Provision for Income Tax
The effective tax rate (“ETR”) for the year ended December 31, 2020 was 24.7% as compared to 26.3% for the prior year. Significant items that impact the effective tax
rate are the change in geographic mix of income, adjustments and reversals of uncertain tax positions, and federal NOL carrybacks to prior years.
Comparison of 2019 and 2018
Revenue
Neuro
Devices and Systems
Supplies
Services
Total Neuro Revenue
Newborn Care
Devices and Systems
Supplies
Services
Total Newborn Care Revenue
Hearing & Balance
Devices and Systems
Supplies
Services
Total Hearing & Balance Revenue
Total Revenue
Years ended December 31,
2019
2018
Change
$
$
220,306 $
66,059
871
287,236
53,465
38,264
19,183
110,912
92,050
4,977
—
97,027
495,175 $
200,762
67,025
12,000
279,787
72,807
40,669
20,396
133,872
110,597
6,635
—
117,232
530,891
10 %
(1) %
(93) %
3 %
(27) %
(6) %
(6) %
(17) %
(17) %
(25) %
— %
(17) %
(7) %
For the year ended December 31, 2019, Neuro revenue increased by 3% compared to the prior year. Devices and Systems revenue increased by 10% compared to the
prior year due primarily to growth in EEG sales. Supplies revenue for 2019 decreased 1%, which was driven by declines in our international markets. Services revenue from
GND decreased 93% compared to the prior year due to our exit from this business in January 2019.
For the year ended December 31, 2019, Newborn Care revenue decreased by 17% compared to the prior year. Devices and Systems revenue decreased by 27%. The
decrease is primarily due to the divestiture of Medix, exit from our balance and mobility product line, and planned product line rationalization. Supplies revenue decreased 6%
compared to the prior year related to divestiture of Medix business and product line rationalization. Services revenue decreased by 6% compared to the
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prior year primarily due to a lower collection per screen and decrease in screening volume on our Peloton hearing screening service, which was exited as of December 31, 2019.
For the year ended December 31, 2019, Hearing & Balance revenue decreased 17% compared to the prior year. Revenue from Devices and Systems decreased 17% and
revenue from Supplies decreased 25% in 2019 compared to 2018. The overall decline in Hearing & Balance was driven by the impact of product rationalization and ship holds
on some products.
Cost of Revenue and Gross Profit
Revenue
Cost of revenue
Intangibles amortization
Gross profit
Gross profit percentage
$
Years ended December 31,
2019
2018
$
495,175
196,551
6,916
291,708
530,891
217,952
8,924
304,015
58.9 %
57.3 %
For the year ended December 31, 2019, our gross profit as a percentage of sales increased by 160 basis points compared to the prior year. This increase was primarily
attributable to cost reductions in our operations overhead and our exit from lower margin businesses as a result of our corporate reorganization announced in January 2019 and a
reduction in intangible amortization and restructuring costs incurred in 2018 related to business line exits.
Operating Costs
Marketing and selling
Percentage of revenue
Research and development
Percentage of revenue
General and administrative
Percentage of revenue
Intangibles Amortization
Percentage of revenue
Restructuring
Percentage of revenue
Marketing and Selling
$
$
$
$
$
Years ended December 31,
2019
129,109
26.1 %
58,733
11.9 %
59,649
12.0 %
15,144
3.1 %
44,739
9.0 %
$
$
$
$
$
2018
136,680
25.7 %
61,482
11.6 %
70,599
13.3 %
22,585
4.3 %
37,231
7.0 %
Marketing and selling expenses as a percentage of revenue remained relatively flat in the year ended December 31, 2019 as compared to the prior year. The decrease in
expense is mainly attributable to the benefits of our corporate reorganization initiated in January 2019.
Research and Development
Research and development expenses decreased during the year ended December 31, 2019 compared to the prior year. The decrease relates to lower compensation related
expenses due to our corporate reorganization initiatives.
General and Administrative
General and administrative expenses decreased during the year ended December 31, 2019 compared to the prior year. This decrease was due to a reduction in employee
expenses, consulting fees and travel expenses due to our corporate reorganization and exit from non-core businesses.
Intangibles Amortization
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Intangibles amortization decreased in the year ended December 31, 2019 compared to the prior year. The decrease is related to our restructuring initiatives, which
included an impairment charge of $5.6 million in 2018 related to the end of life of our Bio-Logic core technology that did not recur in 2019.
Restructuring
Restructuring costs increased during the year ended December 31, 2019 compared to the prior year. This increase was driven by the restructuring initiatives announced in
January 2019. We recorded an impairment related to the sale of Medix, which included the recognition of deferred foreign currency related adjustments in accumulated other
comprehensive income, of $24.8 million, net of tax, and an adjustment of $4.6 million for assets with a book value in excess of their fair market value. The increase was also
driven by restructuring expenses incurred related to exiting the GND business and our restructuring initiatives.
Other Income (Expense), net
Other income (expense), net consists of interest income, interest expense, net currency exchange gains and losses, and other miscellaneous income and expense. We
reported other expense, net of $5.6 million in the year ended December 31, 2019, compared to $7.7 million in the prior year. We reported $0.8 million of foreign currency
exchange losses in the year ended December 31, 2019 versus $0.8 million of foreign currency losses in the prior year. Interest expense was $4.9 million in the year ended
December 31, 2019 compared to $6.8 million in the prior year. The reduction in interest expense was driven by accelerated payments on our outstanding debt. Interest income
was $0.3 million in both the year ended December 31, 2019 and the prior year.
Provision for Income Tax
The effective tax rate (“ETR”) for the year ended December 31, 2019 was 26.3% as compared to 28.9% for the prior year. Significant items that impact the effective tax
rate are the change in geographic mix of income, adjustments and reversals of uncertain tax positions and SAB 118 adjustments arising from the 2017 Tax Act that were
recorded in 2018.
Liquidity and Capital Resources
Liquidity is our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments. In addition, liquidity includes the ability to
obtain appropriate financing and to raise capital. Therefore, liquidity cannot be considered separately from capital resources that consist of our current funds and the potential to
increase those funds in the future. We plan to use these resources in meeting our commitments and in achieving our business objectives.
We believe that our current cash and cash equivalents and any cash generated from operations will be sufficient to meet our ongoing operating requirements for the
foreseeable future.
As of December 31, 2020, we had cash and cash equivalents outside the U.S. in certain of our foreign operations of $30.9 million. We intend to permanently reinvest this
cash held by our foreign subsidiaries except for Excel-Tech and Natus Ireland subsidiaries, which we intend to repatriate. If, however, a portion of these permanently reinvested
funds were needed and distributed to our operations in the United States, we may be subject to additional U.S. income taxes and foreign withholding taxes depending on facts
and circumstances at the time of distribution. The amount of taxes due would depend on the amount and manner of repatriation, as well as the location from where the funds
were repatriated.
On September 23, 2016, we entered into a Credit Agreement with JP Morgan Chase Bank (“JP Morgan”), Citibank, NA (“Citibank”) and Wells Fargo Bank, National
Association (“Wells Fargo”). The Credit Agreement provides for an aggregate $150.0 million of secured revolving credit facility (the “Credit Facility”). On September 15,
2017, we exercised our right to increase the amount available under the facility by $75.0 million, bringing the aggregate revolving credit facility to $225.0 million. During the
third quarter of 2020 we amended the terms of the Credit Agreement to extend the maturity of the original agreement and to reduce the aggregate value of revolving credit
facility, and amend certain covenants. The amended Credit Agreement provides for an aggregate $150.0 million of secured revolving credit facility.
The Credit Agreement contains covenants, including covenants relating to maintenance of books and records, financial reporting and notification, compliance with laws,
maintenance of properties and insurance, and limitations on guaranties, investments, issuance of debt, lease obligations and capital expenditures. 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 a material adverse effect. The Credit Agreement matures on September 25, 2023, at which time all principal amounts outstanding under the Credit Agreement will
be due and payable. We have no other significant credit facilities. During the first quarter of 2020 we drew an additional $60.0 million on our credit line as a precaution to
ensure we
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have the necessary capital to continue to reliably serve our customers during an extended period of uncertainty of which we have repaid $58.0 million during 2020. As of
December 31, 2020 we had $57.0 million outstanding under the Credit Facility.
Cash, cash equivalents, and investments
Debt
Working capital
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Comparison of 2020, 2019, and 2018
$
$
December 31, 2020
December 31, 2019
December 31, 2018
82,082 $
55,840
125,950
63,297 $
54,665
126,928
56,373
104,474
152,329
December 31, 2020
Year Ended
December 31, 2019
December 31, 2018
34,426 $
(12,606)
(10,877)
60,060 $
(5,339)
(48,532)
33,020
(8,389)
(49,512)
During 2020 cash generated from operating activities of $34.4 million was the result of $16.6 million of net loss, non-cash adjustments to net loss of $49.6 million, and
net cash outflows of $1.4 million from changes in operating assets and liabilities. The non-cash adjustments were $28.1 million of depreciation and amortization expense, $9.6
million from share-based compensation, $6.7 million of an impairment of intangible assets, $2.0 million of warranty reserves, $1.9 million of loss on commencement of sales-
type leases, $1.4 million of non-cash lease expense, and $1.2 million of accounts receivable reserves, offset by deferred taxes of $1.6 million. Cash used in investing activities
during the period was $12.6 million and consisted of cash used of $8.6 million to acquire other property and equipment, $2.0 million of an acquisition, and $2.0 million of
equity method investments. Cash used in financing activities during the year ended December 31, 2020 was $10.9 million and consisted of repayments of $58.0 million of our
outstanding debt under the Credit Facility, $10.5 million for repurchases of common stock under our share repurchase program, $2.0 million for taxes paid related to net share
settlement of equity awards, $1.2 million of deferred debt issuance costs, $0.5 million of principal payments of financing lease liability, offset by proceeds from borrowing of
$60.0 million and proceeds from stock option exercises and Employee Stock Purchase Program (“ESPP”) purchases of $1.3 million.
During 2019 cash generated from operating activities of $60.1 million was the result of $15.7 million of net loss, non-cash adjustments to net loss of $65.9 million, and
net cash outflows of $9.9 million from changes in operating assets and liabilities. The non-cash adjustments were $30.7 million of depreciation and amortization expense, $24.6
million of impairment for the sale of Medix, $8.4 million from share-based compensation, $4.3 million of accounts receivable reserves, and $2.9 million of warranty reserves,
offset by deferred taxes of $5.4 million. Cash used in investing activities during the period was $5.3 million and consisted of cash used to acquire other property and equipment.
Cash used in financing activities during the year ended December 31, 2019 was $48.5 million and consisted of repayments of $50.0 million of our outstanding debt under the
Credit Facility, $1.7 million for taxes paid related to net share settlement of equity awards, $0.5 million of principal payments of financing lease liability, offset by proceeds
from stock option exercises and Employee Stock Purchase Program (“ESPP”) purchases of $3.6 million.
During 2018 cash generated from operating activities of $33.0 million was the result of $22.9 million of net loss, non-cash adjustments to net loss of $70.1 million, and
net cash outflows of $14.1 million from changes in operating assets and liabilities. The non-cash adjustments were $33.9 million of depreciation and amortization expense,
$17.1 million from share-based compensation, a $14.8 million goodwill impairment charge related to GND, $8.2 million from intangible impairments, $6.9 million of accounts
receivable reserves, and $2.2 million of warranty reserves, offset by deferred taxes of $13.7 million. Cash used in investing activities during the period was $8.4 million and
consisted primarily of cash used to acquire other property and equipment of $7.9 million. Cash used in financing activities during the year ended December 31, 2018 was $49.5
million and consisted of repayments of $50.0 million of our outstanding debt under the Credit Facility, $5.6 million for repurchases of common stock under our share
repurchase program, $5.2 million for taxes paid related to net share settlement of equity awards, offset by proceeds from stock option exercises and Employee Stock Purchase
Program purchases of $11.5 million.
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Future Liquidity
Our future liquidity and capital requirements will depend on numerous factors, including the:
•
•
•
•
•
•
•
Extent to which we make acquisitions;
Amount and timing of revenue;
Length and severity of business disruptions caused by COVID-19;
Extent to which our existing and new products gain market acceptance;
Cost and timing of product development efforts and the success of these development efforts;
Cost and timing of marketing and selling activities; and
Availability to borrow under line of credit arrangements and the availability of other means of financing.
Contractual Obligations
In the normal course of business, we enter into obligations and commitments that require future contractual payments. The commitments result primarily from purchase
orders placed with contract vendors that manufacture some of the components used in our medical devices and related disposable supply products, purchase orders placed for
employee benefits and outside services, as well as commitments for leased office space, leased equipment, and bank debt. The following table summarizes our contractual
obligations and commercial commitments as of December 31, 2020 (in thousands):
Unconditional purchase obligations
Bank debt
Interest payments
Repatriation tax
Total
Total
Less than
1 Year
Payments Due by Period
1-3 Years
4-5 Years
More than
5 Years
$
$
39,566 $
57,000
2,419
7,016
106,001 $
39,106 $
—
1,493
459
41,058 $
460 $
57,000
926
2,218
60,604 $
— $
—
—
4,339
4,339 $
—
—
—
—
—
Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding. Included in the purchase obligations category
above are obligations related to purchase orders for inventory purchases under our standard terms and conditions and under negotiated agreements with vendors. We expect to
receive consideration (products or services) for these purchase obligations. The purchase obligation amounts do not represent all anticipated purchases in the future, but
represent only those items for which we are contractually obligated. The table above does not include obligations under employment agreements for services rendered in the
ordinary course of business.
We have a Credit Agreement with JP Morgan Chase Bank, Citibank, and Wells Fargo which matures in 2023. We have recorded this obligation in the payments due in
one to three years category in the table above based on the maturity date of the Agreement. As of December 31, 2020 we have classified $50.0 million out of the $57.0 million
outstanding as short-term on our balance sheet due to our intent to repay this portion over the next twelve months.
We are not able to reasonably estimate the timing of any potential payments for uncertain tax positions under Accounting Standards Codification ("ASC") 740,
Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109. As a result, the preceding table excludes any potential future payments related to our
ASC 740 liability for uncertain tax positions. See Note 18 of our Consolidated Financial Statements for further discussion on income taxes.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to various market risks, including changes in foreign currency exchange rates and interest rates that could adversely affect our results of operations and
financial condition. We are exposed to interest rate risk on our LIBOR-indexed floating-rate debt. We have entered into an interest rate swap agreement to effectively covert a
portion of our floating-rate debt to a fixed-rate. The principal objective of the swap contract is to reduce the variability of future earnings and cash flows associated with our
floating-rate debt. We do not hold or issue derivative instruments for trading or other speculative purposes.
Foreign Exchange Rate Risk
We develop products in the U.S, Canada, and Europe, and sell those products into more than 100 countries throughout the world. As a result, our financial results could
be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Most of our sales in Europe and Asia are
denominated in the U.S. Dollar and
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Euro, with a portion of our sales denominated in the Canadian dollar and British pound. As our sales in currencies other than the U.S. dollar increase, our exposure to foreign
currency fluctuations may increase. We do not currently hold derivatives to hedge our exposure to foreign currency exchange rate fluctuations; however, we may choose to
hedge our exposure in the future.
In addition, changes in exchange rates also may affect the end-user prices of our products compared to those of our foreign competitors, who may be selling their
products based on local currency pricing. These factors may make our products less competitive in some countries.
All of the potential changes noted above are based on sensitivity analyses performed on our financial position as of December 31, 2020. Actual results may differ as our
analysis of the effects of changes in interest rates does not account for, among other things, sales of securities prior to maturity and repurchase of replacement securities, the
change in mix or quality of the investments in the portfolio, and changes in the relationship between short-term and long-term interest rates.
Interest Rate Risk
In 2018, we entered into an interest rate swap agreement with a notional amount of $40.0 million, designated as a cash flow hedge, to hedge the variability of cash
flows in interest payments associated with our floating-rate debt. This interest rate swap agreement matures in September 2021 and converts a portion of our LIBOR floating-
Rate debt to fixed-rate debt. The fair value of the interest rate swap agreement is based upon inputs corroborated by observable market data. Changes in the fair value of the
interest rate swap agreement are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity and are amortized to interest expense
over the term of the related debt.
As of December 31, 2020, accumulated other comprehensive income (loss) related to the interest rate swap agreement included a net unrealized loss of approximately
$212 thousand, net of tax, which will be recognized in interest expense after the following 12 months, at the then current values on a pre-tax basis. See Note 12 to these
Condensed Consolidated Financial Statements for additional discussion on our financial instruments and derivatives.
Interest Rate Risk Sensitivity Analysis
Our remaining indebtedness is at variable rates of interest. Accordingly, changes in interest rates would impact our results of operations in future periods. Based on a
sensitivity analysis on actual rates experienced during 2020, a hypothetical increase in interest rates of 50 basis points would have resulted in increased interest expense of $0.4
million during the year ended December 31, 2020.
Cautionary Information Regarding Forward Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
about Natus Medical Incorporated. Forward-looking statements can be identified by the words “expects”, “anticipates”, “believes”, “intends”, “estimates”, “plans”, “will”,
“outlook” and similar expressions. Forward-looking statements are based on management's current plans, estimates, assumptions and projections, and speak only as of the
date they are made. These forward-looking statements within Item 7 include, without limitation, statements regarding the impact of the COVID-19 pandemic on our business,
the sufficiency of our current cash, cash equivalents and short-term investment balances, any cash generated from operations to meet our ongoing operating and capital
requirements for the foreseeable future, outcomes of new product development, improved operations performance and profitability as the result of restructuring activities, and
our intent to acquire additional technologies, products or businesses.
Forward-looking statements are not guarantees of future performance and are subject to substantial risks and uncertainties that could cause the actual results predicted
in the forward-looking statements as well as our future financial condition and results of operations to differ materially from our historical results or currently anticipated
results. Investors should carefully review the information contained under the caption “Risk Factors” contained in Item 1A of this report for a description of risks and
uncertainties. All forward-looking statements are based on information available to us on the date hereof, and we assume no obligation to update forward-looking statements.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this Item is set forth in the section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Quantitative and Qualitative Disclosures About Market Risk, and is incorporated by reference in this section.
ITEM 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements and Supplementary Data required by this Item are set forth where indicated in Item 15 of this report.
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Selected Quarterly Financial Data (Unaudited)
The following table presents our operating results for each of the eight quarters in the period ending December 31, 2020. The information for each of these quarters is
unaudited and has been prepared on the same basis as our audited financial statements appearing elsewhere in this report.
In the opinion of our management all necessary adjustments, including normal recurring adjustments, have been included to present fairly the unaudited quarterly results
when read in conjunction with our audited Consolidated Financial Statements and the related notes appearing elsewhere in this report. These operating results are not
necessarily indicative of the results of any future period.
December 31,
2020
September 30,
2020
June 30, 2020 March 31, 2020
December 31,
2019
September 30,
2019
June 30, 2019 March 31, 2019
Quarters Ended
Revenue
Cost of revenue
Intangibles amortization
Gross profit
Operating expenses:
Marketing and selling
Research and development
General and administrative
Intangibles amortization
Restructuring
Total operating expenses
Income (loss) from operations
Other income (expense), net
Income (loss) before provision for (benefit
from) income tax
Provision for (benefit from) income tax
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Weighted average shares used in the
calculation of net earnings (loss) per share:
$
$
$
$
(in thousands, except per amounts)
118,718 $
51,247
1,801
65,670
102,803 $
47,160
8,117
47,526
84,780 $
42,573
1,654
40,553
109,383 $
44,933
1,668
62,782
131,416 $
49,259
1,679
80,478
123,463 $
48,389
1,736
73,338
125,539 $
52,393
1,746
71,400
27,715
14,722
12,359
3,894
1,966
60,656
5,014
1,326
26,035
14,670
12,384
4,025
350
57,464
(9,938)
(947)
22,802
14,336
11,187
3,644
621
52,590
(12,037)
(757)
30,730
17,569
13,182
3,661
871
66,013
(3,231)
(1,494)
6,340
1,135
5,205 $
(10,885)
(1,569)
(9,316) $
(12,794)
(3,891)
(8,903) $
(4,725)
(1,128)
(3,597) $
0.15 $
0.15 $
(0.28) $
(0.28) $
(0.26) $
(0.26) $
(0.11) $
(0.11) $
32,268
17,567
15,261
3,844
3,592
72,532
7,946
(670)
7,276
4,266
3,010 $
0.09 $
0.09 $
30,787
14,447
15,394
3,751
1,106
65,485
7,853
(1,609)
32,324
13,324
12,691
3,763
2,668
64,770
6,630
(1,200)
6,244
(1,987)
8,231 $
5,430
1,944
3,486 $
0.24 $
0.24 $
0.10 $
0.10 $
(0.90)
(0.90)
114,757
46,509
1,756
66,492
33,729
13,394
16,306
3,786
37,372
104,587
(38,095)
(2,112)
(40,207)
(9,809)
(30,398)
Basic
Diluted
33,861
33,903
33,828
33,828
33,827
33,827
33,800
33,800
33,691
33,829
33,655
33,738
33,639
33,690
33,590
33,590
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ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the rules of the Securities and Exchange Commission, “disclosure controls and procedures” are controls and other procedures that are designed to ensure that
information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and
communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal control over
financial reporting will prevent all errors and all fraud due to inherent limitations of internal controls. Because of such limitations, there is a risk that material misstatements will
not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting
process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Our management, with the participation of our chief executive officer and our chief financial officer, has evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based on that evaluation, our management, including our chief executive officer and chief financial officer, has
concluded that our disclosure controls and procedures were effective as of December 31, 2020.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act.
A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of the inherent limitations of any system of
internal control. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses of judgment and breakdowns
resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper overriding of controls. As a result of such limitations,
there is risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are
known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Based on our evaluation under the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission, our management concluded that as of December 31, 2020 our internal control over financial reporting was effective to provide reasonable assurance
regarding the reliability of financial reporting.
Our independent registered public accounting firm, KPMG LLP, has audited the consolidated financial statements included in this Annual Report on Form 10-K and also
audited the effectiveness of our internal control over financial reporting as of December 31, 2020. KPMG LLP’s report is included herein in Part II, Item 9A of this Annual
Report on Form 10-K.
Changes in Internal Control over Financial Reporting
During the year ended December 31, 2020, we made substantive changes to enhance our design of controls intended to identify and assess contracts that include research
and development activities and added controls to ensure the accuracy of our payroll accruals. Specifically, we formalized a policy that provides guidance on proper
identification, analysis and treatment of contracts that include research and development activities. The updated process includes coordination with our legal team to identify
contracts that include terminology indicative of research and development components. The policy requires that management document conclusions on accounting treatment in
supporting memos depending on materiality of the contract. Training was provided to relevant teams during the year to ensure the updated contract review policy is
communicated,
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understood, and followed. We strengthened the control design for payroll accruals to require that specific additional review procedures be completed and to document results in
a checklist format including reviewer signoff. These checklists were prepared and executed from the second and each quarter thereafter to year-end. In addition, we coordinated
with our third-party payroll administrators to reduce risk of error by eliminating manual work as much as possible through updated mapping. Finally, we have implemented a
process to monitor changes to our control operator responsible for key controls over financial reporting and implement a control to verify that appropriate training is provided to
new control operators to mitigate this risk of change in our system of control. After completing our testing of the design and operating effectiveness of these new procedures,
we concluded that we have remediated the previously identified material weakness as of December 31, 2020.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Natus Medical Incorporated:
Opinion on Internal Control Over Financial Reporting
We have audited Natus Medical Incorporated and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the
Company as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of
the years in the three-year period ended December 31, 2020, and the related notes and financial statement schedule II: Valuation and Qualifying Accounts (collectively, the
consolidated financial statements), and our report dated February 26, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
(signed) KPMG LLP
San Francisco, California
February 26, 2021
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ITEM 9B. Other Information
None.
PART III
We will provide information that is responsive to this Part III in our Definitive Proxy Statement for our 2021 Annual Meeting of Stockholders (our “2021 Proxy
Statement”) or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report. That information is incorporated
into this Part III by reference.
ITEM 10. Directors, Executive Officers, and Corporate Governance
We will provide certain other information that is responsive to this Item 10 in our 2021 Proxy Statement or in an amendment to this Annual Report not later than 120
days after the end of the fiscal year covered by this Annual Report. That information is incorporated into this Item 10 by reference.
Audit Committee and Audit Committee Financial Expert
The members of the Audit Committee of our Board of Directors are Ilan Daskal, Thomas J. Sullivan, and Alice D. Schroeder. Our Board of Directors has determined
that Ilan Daskal is an audit committee financial expert as defined in Item 407(d) of Regulation S-K. All of the members of our audit committee are considered “independent” as
the term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.
Code of Conduct and Ethics
We have a code of conduct and ethics that applies to all of our employees, including our principal executive officer, principal financial officer, and principal accounting
officer or controller. This code of conduct and ethics is posted on our internet website. The internet address for our website is www.natus.com, and the code of conduct and
ethics may be found in the “Governance” section of our “Investor” webpage.
We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding certain amendments to, or waivers from, provisions of this code of conduct and
ethics by posting such information on our website, at the address and location specified above, or as otherwise required by The Nasdaq Stock Market.
ITEM 11. Executive Compensation
We will provide information that is responsive to this Item 11 in our 2021 Proxy Statement or in an amendment to this Annual Report not later than 120 days after the
end of the fiscal year covered by this Annual Report. That information is incorporated into this Item 11 by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
The following table sets forth information about the number of shares of common stock that can be issued under our 2018 Stock Awards Plan and our 2011 Employee
Stock Purchase Plan as of December 31, 2020.
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of Securities
to be Issued upon
Exercise of
Outstanding
Options, Warrants,
Awards and Rights
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants,
Awards and Rights
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation Plans
(excluding securities
reflected in the first column)
$
544,030
—
544,030
23.94
—
23.94
1,863,120
—
1,863,120
We will provide certain other information that is responsive to this Item 12 in our 2021 Proxy Statement or in an amendment to this Annual Report not later than 120
days after the end of the fiscal year covered by this Annual Report. That information is incorporated into this Item 12 by reference.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
We will provide information that is responsive to this Item 13 in our 2021 Proxy Statement or in an amendment to this Annual Report not later than 120 days after the
end of the fiscal year covered by this Annual Report. That information is incorporated into this Item 13 by reference.
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Table of Contents
ITEM 14. Principal Accounting Fees and Services
We will provide information that is responsive to this Item 14 in our 2021 Proxy Statement or in an amendment to this Annual Report not later than 120 days after the
end of the fiscal year covered by this Annual Report. That information is incorporated into this Item 14 by reference.
ITEM 15. Exhibits, Financial Statement Schedules
(a)(2) Financial Statement Schedule
PART IV
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2020, 2019 and 2018
(In thousands)
Year ended December 31, 2020
Allowance for doubtful accounts
Valuation allowance
Warranty reserve
Year ended December 31, 2019
Allowance for doubtful accounts
Valuation allowance
Warranty reserve
Year ended December 31, 2018
Allowance for doubtful accounts
Valuation allowance
Warranty reserve
(a)(3) Exhibits
Balance at
Beginning
of Period
Additions
Charged to
Expense
Deductions
Balance
at End
of Period
$
$
$
7,384 $
606
6,404
6,960 $
637
9,391
8,978 $
5,862
10,995
1,190 $
363
2,009
4,262 $
—
3,949
6,423 $
—
4,487
(2,361) $
—
(3,218)
(3,838) $
(31)
(6,936)
(8,441) $
(5,225)
(6,091)
6,213
969
5,195
7,384
606
6,404
6,960
637
9,391
The Exhibits listed in the Index to Exhibits, which appears immediately following the signature page and is incorporated herein by reference, are filed as part of this 10-K.
50
Exhibit
Filing
Exhibit No.
File No.
File Date
Incorporated By Reference
3.1.1
333-44138
8/18/2000
000-33001
9/13/2012
000-33001
6/7/2019
Table of Contents
Exhibit No.
3.1
3.2
3.3
3.4
4.1
4.2
4.3
10.1
10.1.1*
10.1.2*
10.1.3*
10.1.4
10.1.5*
10.2*
10.2.1*
10.2.2*
10.2.3*
10.3*
10.3.1*
10.4*
10.4.1*
10.5*
10.6*
Natus Medical Incorporated Restated Certificate of
Incorporation, as filed with the Delaware Secretary of State
as of July 25, 2001
Certificate of Amendment of the Amended and Restated
Certificate of Incorporation, as filed with the Delaware
Secretary of State as of September 12, 2012
Certificate of Amendment of the Amended and Restated
Certificate of Incorporation, as filed with the Delaware
Secretary of State as of June 5, 2019
Second Amended and Restated Bylaws of Natus Medical
Incorporated
Specimen stock certificate for shares of common stock, par
value $0.001 per share
Natus Medical Incorporated Certificate of Designation of
Rights, Preferences and Privileges of Series A Participating
Preferred Stock
Description of Common Stock
Form of Indemnification Agreement between Natus
Medical Incorporated and each of its directors and officers
2018 Equity Incentive Plan
Form of Stock Option Awards Agreement under the 2018
Equity Incentive Plan
Form of Restricted Stock Award Agreement under the 2018
Equity Incentive Plan
Form of Restricted Stock Unit Agreement under the 2018
Equity Incentive Plan
Form of Performance Stock Unit Agreement under the 2018
Equity Incentive Plan
Natus Medical Incorporated Amended and Restated 2000
Stock Awards Plan
Form of Option Agreement under the Amended and
Restated 2000 Stock Awards Plan
Form of Restricted Stock Purchase Agreement under the
Amended and Restated 2000 Stock Awards Plan
Form of Restricted Stock Unit Agreement under the
Amended and Restated 2000 Stock Awards Plan
Natus Medical Incorporated 2000 Director Option Plan
Form of Option Agreement under the 2000 Director Option
Plan
Natus Medical Incorporated 2000 Supplemental Stock
Option Plan
Form of Option Agreement for 2000 Supplemental Stock
Option Plan
Natus Medical Incorporated 2000 Employee Stock
Purchase Plan and form of subscription agreement
thereunder
[Amended] 2011 Stock Awards Plan
S-1
8-K
8-K
8-K
S-1/A
8-A
S-1
8-K
8-K
8-K
8-K
8-K
8-K
S-1
10-Q
10-K
10-Q
S-1
S-1
S-1
8-K
14-A
51
3.1
3.1
3.1
4.1
000-33001
333-44138
3.1.2
000-33001
10.1
10.1
10.1.1
10.1.2
10.1.3
10.1.4
10.1
10.3.1
10.2
10.2.3
10.02
10.4.1
10.15
333-44138
000-33001
000-33001
000-33001
000-33001
000-33001
000-33001
333-44138
000-33001
000-33001
000-33001
333-44138
333-44138
10.15.1
333-44138
10.2
000-33001
12/16/2019
2/9/2001
9/6/2002
8/18/2000
12/18/2018
12/18/2018
12/18/2018
12/18/2018
12/18/2018
1/4/2006
8/18/2000
8/9/2006
3/14/2008
5/9/2008
8/18/2000
2/9/2001
2/9/2001
1/4/2006
—
000-33001
4/20/2011
Table of Contents
Exhibit No.
10.6.1*
10.6.2*
10.6.3*
10.7*
10.7.1*
10.8*
10.8.1*
10.9*
10.10*
10.11
10.12
10.13
10.14
10.15
10.16*
10.17*
10.18
21.1
23.1
Exhibit
Filing
Exhibit No.
File No.
File Date
Incorporated By Reference
10-Q
10-Q
10-Q
14-A
14-A
10-K
10-K
8-K
10-Q
8-K
10-Q
10-Q
10-Q
10-Q
8-K
10-Q
10-Q
10.1
10.2
10.3
—
—
000-33001
000-33001
000-33001
000-33001
000-33001
10.10
000-33001
11/7/2011
11/7/2011
11/7/2011
4/20/2011
4/20/2011
3/10/2009
000-33001
3/16/2015
99.1
000-33001
4/22/2013
10.16
10.1
10.2
10.1
10.3
99.1
10.18
10.1
000-33001
000-33001
000-33001
8/8/2018
10/9/2015
2/29/2016
000-33001
11/3/2016
000-33001
11/3/2016
000-33001
000-33001
000-33001
000-33001
11/3/2016
8/29/2018
11/8/2018
9/30/2020
Form of Stock Option Award Agreement under the
[Amended] 2011 Stock Plan
Form of Restricted Stock Award Purchase Agreement
Form of Restricted Stock Unit Agreement
2011 Employee Stock Purchase Plan
2011 Employee Stock Purchase Plan Subscription
Agreement
Form of Employment Agreement between Natus Medical
Incorporated and each of its executive officers other than
its Chief Executive Officer and Chief Financial Officer
Form of Amendment to Employment Agreement between
Natus Medical Incorporated and each of its executive
officers other than its Chief Executive Officer and Chief
Financial Officer
Amended employment agreement between Natus Medical
Incorporated and its Chief Executive Officer, James B.
Hawkins dated April 19, 2013
Terms of Resignation between Natus Medical
Incorporated and James B. Hawkins dated July 11, 2018
Credit Agreement between Natus Medical Incorporated
and CitiBank, NA dated October 9, 2015
Agreement For the Acquisition of Medical Devices
between Medix ICSA and the Ministry of Health of the
Republic of Venezuela dated October 15, 2015
Amendment to Agreement For the Acquisition of Medical
Devices between Medix ICSA and the Ministry of Health
of the Republic of Venezuela dated October 15, 2015
Credit Agreement, dated September 23, 2016, between the
Company, JP Morgan Chase Bank, N.A. and Citibank,
N.A.
Master Purchase Agreement, dated September 25, 2016,
between GN Hearing A/S, GN Nord A/S and the Company
Forms of Employment Agreement between Natus Medical
Incorporated and Jonathan A. Kennedy dated August 24,
2018
Form of Employment Agreement between Natus Medical
Incorporated and Drew Davies dated October 1, 2018
Amendment to Credit Agreement, dated August 10, 2020,
between the Company, JP Morgan Chase Bank, N.A. and
Citibank, N.A.
Significant Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting
Firm
52
Table of Contents
Exhibit No.
24.1
31.1
31.2
32.1
101
104
Exhibit
Filing
Exhibit No.
File No.
File Date
Incorporated By Reference
Power of Attorney (included on signature page)
Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
The following financial information from Natus Medical
Incorporated Annual Report on Form 10-K for the fiscal year
ended December 31, 2020, formatted in XBRL (eXtensible
Business Reporting Language): (i) Consolidated Balance
Sheets as of December 31, 2020 and December 31, 2019, (ii)
Consolidated Statements of Operations for the years ended
December 31, 2020, 2019 and 2018, (iii) Consolidated
Statements of Comprehensive Income for the years ended
December 31, 2020, 2019 and 2018 (iv) Consolidated
Statements of Cash Flows for the years ended December 31,
2020, 2019 and 2018, (v) Consolidated Statements of
Stockholders’ Equity for the years ended December 31, 2020,
2019 and 2018, and (vi) the Notes to Consolidated Financial
Statements.
The cover page of the Annual Report on Form 10-K
formatted in Inline XBRL (included in Exhibit 101).
* Indicates a management contract or compensatory plan or arrangement
53
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed
on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
NATUS MEDICAL INCORPORATED
By
By
/s/ JONATHAN A. KENNEDY
Jonathan A. Kennedy
President and Chief Executive Officer
/s/ B. DREW DAVIES
B. Drew Davies
Executive Vice President and Chief Financial Officer
Dated: February 26, 2021
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Jonathan A. Kennedy and B. Drew
Davies and each of them acting individually, as his or her attorney-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the
registrant and in the capacity and dates indicated:
Signature
Title
Date
/S/ JONATHAN A. KENNEDY
(Jonathan A. Kennedy)
/S/ B. DREW DAVIES
(B. Drew Davies)
/S/ BARBARA R. PAUL
(Barbara R. Paul)
/S/ ILAN DASKAL
(Ilan Daskal)
/S/ LISA W. HEINE
(Lisa W. Heine)
/S/ JOSHUA H. LEVINE
(Joshua H. Levine)
/S/ ALICE D. SCHROEDER
(Alice D. Schroeder)
/S/ THOMAS J. SULLIVAN
(Thomas J. Sullivan)
President and Chief Executive Officer (Principal Executive Officer)
February 26, 2021
Executive Vice President & Chief Financial Officer (Principal Financial and
Accounting Officer)
Chairperson of the Board of Directors
Director
Director
Director
Director
Director
54
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
Table of Contents
NATUS MEDICAL INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-1
Page
F-2
F-4
F-5
F-6
F-7
F-8
F-9
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Natus Medical Incorporated:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Natus Medical Incorporated and subsidiaries (the Company) as of December 31, 2020 and 2019, the related
consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31,
2020, and the related notes and financial statement schedule II: Valuation and Qualifying Accounts (collectively, the consolidated financial statements). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its
operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over
financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated February 26, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control
over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases as of January 1, 2019 due to the adoption of Financial
Accounting Standards Board Accounting Standards Codification Topic 842, Leases, on a modified retrospective basis.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to
be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken
as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which
they relate.
Evaluation of net realizable value adjustments for excess or obsolete inventory
As discussed in Note 4 to the consolidated financial statements, the Company had inventory with a carrying value of $90.6 million at December 31, 2020, of which
$75.7 million is classified as current and $14.9 million is classified as non-current. As discussed in Note 1 to the consolidated financial statements, the Company reduces
the carrying value of inventory for any differences between its cost and estimated net realizable value. Net realizable value is estimated by evaluating ending inventories
for excess quantities, obsolescence, and other factors that potentially impact the Company’s ability to consume its inventory. In making its estimate of net realizable
value, the Company’s evaluation includes an analysis of historical sales by product, projections of future demand by product, and obsolescence by product.
F-2
Table of Contents
We identified the evaluation of net realizable value adjustments for excess or obsolete inventory as a critical audit matter. A high degree of auditor judgment was
required in assessing the identification of the subset of inventory requiring net realizable value adjustments given the inherent uncertainty in projecting future demand
and complexity involved in assessing the Company’s analysis of historical sales by product, projections of future demand, and assessment of obsolescence.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of an internal
control related to the Company's identification of the subset of inventory requiring net realizable value adjustments. In evaluating potential excess inventory, we
compared on-hand inventory to the Company's estimate of future inventory consumption. For certain products, we evaluated the estimate of future demand through an
analysis of historical inventory sales by product and information obtained from the Company's manufacturing planning department. We obtained internal and external
product inspection reports to identify inventory subject to remediation and evaluated the Company's assessment of obsolescence. We also compared the Company's
estimate of net realizable value adjustments for identified excess or obsolete inventory to the prior period estimate and to actual inventory scrapping history.
Evaluation of the realizability of U.S. deferred tax assets
As discussed in Note 18 to the consolidated financial statements, at December 31, 2020, the Company had U.S. deferred tax assets of $25.1 million, net of $0.3 million
federal and state valuation allowances. These deferred tax assets consist primarily of $3.4 million of federal and state net operating loss carryforwards, $5.1 million of
federal and state R&D credit carryforwards, and $16.8 million related to deductible temporary differences. The Company records a net deferred tax asset to the extent it
is more likely than not that the assets will be realized. After weighing all the positive and negative evidence, the Company concluded that it is more likely than not that
the U.S. deferred tax assets will be realized except for a small portion, for which a $0.3 million valuation allowance was recorded. In reaching its conclusion, the
Company considered the following items: cumulative three-year income or loss on an adjusted basis, current U.S. income (loss) before provision (benefit) for income tax
and historical utilization of deferred tax assets, lengthy carryforward periods for deferred tax assets, and future sources of taxable income.
We identified the Company's evaluation of the realizability of U.S. deferred tax assets as a critical audit matter. A high degree of auditor judgment was required in
evaluating all available positive and negative evidence, including forecasted future taxable income, in reaching a conclusion whether it is more likely than not that the
assets will be realized. This is due to the inherent subjectivity involved in evaluating positive and negative evidence associated with the Company's cumulative earnings
or losses in recent years, including the extent of adjustments required for certain nonrecurring items and impacts of the “One Natus” reorganization on the future
operations of the Company.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of an internal
control related to assessing the realizability of the U.S. deferred tax assets, which included the Company's evaluation of assumptions used to estimate forecasted future
taxable income. We evaluated positive and negative evidence associated with certain nonrecurring items included in the Company's cumulative three-year income or loss
and compared to underlying documentation. We performed a sensitivity analysis to assess the impact of reasonably possible changes in the forecasted future U.S. taxable
income, including changes to the number of forecasted years used in the analysis, on the Company's determination of the ability to utilize the U.S. deferred tax assets. We
compared the Company's estimated future U.S. taxable income to historical periods before and after the One Natus reorganization and considered the trend in taxable
income under an actual and as adjusted for non-recurring items basis. We involved income tax professionals with specialized skills and knowledge, who assisted in
evaluating the sources and amounts of permanent adjustments to U.S. income (loss) before provision (benefit) for income tax used in estimating future taxable income.
(signed) KPMG LLP
We have served as the Company's auditor since 2014.
San Francisco, California
February 26, 2021
F-3
Table of Contents
ASSETS
Current assets:
NATUS MEDICAL INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
2020
2019
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $6,213 and $7,384
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Intangible assets, net
Goodwill
Deferred income tax
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Current portion of long-term debt
Current portion of operating lease liabilities
Accrued liabilities
Deferred revenue
Total current liabilities
Long-term liabilities:
Other liabilities
Long-term debt
Operating lease liabilities
Deferred income tax
Total liabilities
Commitments and contingencies (Note 21)
Stockholders’ equity:
Common stock, $0.001 par value; 120,000,000 shares authorized; shares issued and outstanding 33,911,703 in 2020 and
34,148,700 in 2019
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding in 2020 and in 2019
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
$
82,082 $
93,133
75,650
20,837
271,702
24,516
11,669
92,741
151,299
27,563
20,904
600,394 $
23,429 $
50,000
6,779
44,236
21,308
145,752
18,451
5,840
8,959
10,298
189,300
342,828
—
71,309
(3,043)
411,094
600,394 $
63,297
115,889
71,368
19,195
269,749
24,702
15,046
114,799
146,367
30,355
21,509
622,527
27,253
35,000
5,871
54,451
20,246
142,821
17,616
19,665
12,051
14,251
206,404
344,476
—
87,922
(16,275)
416,123
622,527
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-4
Table of Contents
NATUS MEDICAL INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Revenue
Cost of revenue
Intangibles amortization
Gross profit
Operating expenses:
Marketing and selling
Research and development
General and administrative
Intangibles amortization
Restructuring
Total operating expenses
Loss from operations
Other expense, net
Loss before provision (benefit) for income tax
Provision (benefit) for income tax
Net loss
Net loss per share:
Basic
Diluted
Weighted average shares used in the calculation of net loss per share:
Basic
Diluted
2020
Years Ended December 31,
2019
2018
$
$
$
$
415,684 $
185,912
13,241
216,531
107,282
61,296
49,113
15,224
3,809
236,724
(20,193)
(1,872)
(22,065)
(5,452)
(16,613) $
(0.49) $
(0.49) $
33,562
33,562
495,175 $
196,551
6,916
291,708
129,109
58,733
59,649
15,144
44,739
307,374
(15,666)
(5,591)
(21,257)
(5,586)
(15,671) $
(0.47) $
(0.47) $
33,696
33,696
530,891
217,952
8,924
304,015
136,680
61,482
70,599
22,585
37,231
328,577
(24,562)
(7,698)
(32,260)
(9,325)
(22,935)
(0.69)
(0.69)
33,111
33,111
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-5
Table of Contents
NATUS MEDICAL INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
Net loss
Other comprehensive income (loss):
2020
Years Ended December 31,
2019
2018
(16,613)
(15,671)
(22,935)
Foreign currency translation adjustment
Interest rate swap designated as a cash flow hedge
Reclassification of stranded tax effects upon adoption of ASU 2018-02
Reclassification of deferred foreign currency related adjustments related to the sale of
Medix (See FN 23)
Total other comprehensive income (loss)
Comprehensive income (loss)
$
13,205
27
—
—
13,232
(3,381) $
(1,576)
(180)
(1,332)
24,845
21,757
6,086 $
(14,360)
(77)
—
—
(14,437)
(37,372)
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-6
Table of Contents
NATUS MEDICAL INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
Common Stock
Shares
Amount
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Stockholders’
Equity
Balances, December 31, 2017
Cumulative-effect adjustment for ASU 2016-16
Vesting of restricted stock units
Net issuance of restricted stock awards
Employee stock purchase plan
Stock-based compensation expense
Repurchase of company stock
Taxes paid related to net share settlement of equity awards
Exercise of stock options
Other comprehensive loss
Net loss
Balances, December 31, 2018
Reclassification of stranded tax effects for ASU 2018-02
Vesting of restricted stock units
Net issuance of restricted stock awards
Employee stock purchase plan
Stock-based compensation expense
Taxes paid related to net share settlement of equity awards
Exercise of stock options
Other comprehensive income
Net loss
Balances, December 31, 2019
Vesting of restricted stock units
Net issuance of restricted stock awards
Employee stock purchase plan
Stock-based compensation expense
Repurchase of company stock
Taxes paid related to net share settlement of equity awards
Other comprehensive income
Net loss
Balances, December 31, 2020
33,134,101 $
—
266
272,941
63,649
—
(173,545)
(160,700)
667,667
—
—
33,804,379 $
—
42,130
175,833
53,839
—
(51,784)
124,303
—
—
34,148,700 $
14,033
204,057
73,347
—
(465,117)
(63,317)
—
—
33,911,703 $
316,577 $
—
—
—
1,700
17,003
(5,630)
(5,183)
9,748
—
—
334,215 $
—
—
—
1,354
8,315
(1,689)
2,281
—
—
344,476 $
—
—
1,314
9,527
(10,495)
(1,994)
—
—
342,828 $
129,115 $
(3,919)
—
—
—
—
—
—
—
—
(22,935)
102,261 $
1,332
—
—
—
—
—
—
—
(15,671)
87,922 $
—
—
—
—
—
—
—
(16,613)
71,309 $
(23,595) $
—
—
—
—
—
—
—
—
(14,437)
—
(38,032) $
(1,332)
—
—
—
—
—
—
23,089
—
(16,275) $
—
—
—
—
—
—
13,232
—
(3,043) $
422,097
(3,919)
—
—
1,700
17,003
(5,630)
(5,183)
9,748
(14,437)
(22,935)
398,444
—
—
—
1,354
8,315
(1,689)
2,281
23,089
(15,671)
416,123
—
—
1,314
9,527
(10,495)
(1,994)
13,232
(16,613)
411,094
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-7
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NATUS MEDICAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for losses on accounts receivable
Depreciation and amortization
Loss on commencement of sales-type leases
Loss on equity method investment adjustment
Loss on disposal of property and equipment
Impairment of intangible assets
Impairment charge for sale of entity
Goodwill impairment charge
Warranty reserve
Stock-based compensation
Non cash lease expense
Deferred taxes
Changes in operating assets and liabilities, net of assets and liabilities acquired in acquisitions:
Accounts receivable
Inventories
Other assets
Accounts payable
Accrued liabilities
Deferred revenue
Net cash provided by operating activities
Investing activities:
Acquisition of businesses, net of cash acquired
Acquisition of property and equipment
Acquisition of intangible assets
Purchases of equity investments
Net cash used in investing activities
Financing activities:
Proceeds from stock option exercises and ESPP
Principal payments of financing lease liability
Repurchase of company stock
Taxes paid related to net share settlement of equity awards
Proceeds from long-term borrowings
Deferred debt issuance costs
Contingent consideration earn-out
Payments on borrowings
Net cash used in financing activities
Exchange rate effect on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
Non-cash investing activities:
Property and equipment included in accounts payable
Inventory transferred to property and equipment
Transfer of leased assets to sales-type leases
2020
Year Ended December 31,
2019
2018
$
(16,613) $
(15,671) $
(22,935)
1,190
28,115
1,881
133
268
6,678
—
—
2,009
9,566
1,353
(1,577)
17,651
1,939
(1,055)
(4,523)
(13,427)
838
34,426
(1,997)
(8,609)
—
(2,000)
(12,606)
1,314
(527)
(10,495)
(1,994)
60,000
(1,175)
—
(58,000)
(10,877)
7,842
18,785
63,297
82,082 $
3,110 $
6,825 $
(51) $
1,303 $
4,107 $
4,262
30,722
—
—
449
—
24,571
—
2,886
8,352
—
(5,364)
7,139
7,185
(2,486)
(1,367)
(4,010)
3,392
60,060
—
(5,326)
(13)
—
(5,339)
3,635
(478)
—
(1,689)
—
—
—
(50,000)
(48,532)
735
6,924
56,373
63,297 $
4,580 $
6,445 $
69 $
300 $
— $
6,909
33,863
—
—
746
8,192
—
14,846
2,168
17,051
—
(13,714)
(5,199)
(7,443)
(5,118)
4,105
(2,527)
2,076
33,020
151
(7,875)
(665)
—
(8,389)
11,448
—
(5,630)
(5,183)
—
—
(147)
(50,000)
(49,512)
(7,696)
(32,577)
88,950
56,373
6,169
9,247
167
1,211
—
$
$
$
$
$
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-8
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2020, 2019 and 2018
1—ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Natus Medical Incorporated (“we”, “our”, “us”) was incorporated in California in May 1987 and reincorporated in Delaware in August 2000. We are a leading provider
of medical device solutions focused on the diagnosis and treatment of central nervous and sensory system disorders for patients of all ages. Product offerings include
computerized neurodiagnostic systems for audiology, neurology, polysomnography, and neonatology, as well as newborn care products such as hearing screening systems,
phototherapy devices for the treatment of newborn jaundice, software systems for managing and tracking disorders and diseases for public health laboratories, computer-based
audiological, otoneurologic and vestibular instrumentation for hearing and balance care professionals.
Basis of Presentation and Principles of Consolidation
The accompanying Consolidated Financial Statements includes our accounts and accounts of our wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation. Certain reclassifications to the prior periods have been made to conform to the current period presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities in the Consolidated Financial
Statements and the reported amount of revenue and expenses during the reporting period. Such estimates include allowances for potentially uncollectible accounts receivable,
valuation of inventory, intangible assets, goodwill, share-based compensation, valuation of deferred income taxes, reserves for warranty obligations, and the provision for
income taxes including uncertain positions. Actual results could differ from those estimates.
Revenue recognition
Revenue is recognized when obligations under the terms of a contract with a customer are satisfied; generally this occurs with the transfer of control of devices, supplies,
or services. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services.
For the majority of devices and supplies, we transfer control and recognize revenue when products ship from the warehouse to the customer. We generally do not provide
rights of return on devices and supplies. Freight charges billed to customers are included in revenue and freight-related expenses are charged to cost of revenue.
Depending on the terms of the arrangement, we may also defer the recognition of a portion of the consideration received because we have to satisfy a future obligation
(e.g. installation). Judgment is required to determine the standalone selling price for each distinct performance obligation. Our estimate of SSP is a point estimate. The estimate
is calculated annually for each performance obligation that is not sold separately. In instances where SSP is not directly observable, such as when we do not sell the product or
service separately, the SSP is determined using information that may include market conditions and other observable inputs.
We sell separately-priced service contracts that extend maintenance coverages for both medical devices and data management systems beyond the base agreements to
customers. The separately priced service contracts range from 12 months to 60 months. We receive payment at the inception of the contract and recognize revenue ratably over
the service period.
For products containing embedded software, we have determined that the hardware and software components function together to deliver the products' essential
functionality and are considered a combined performance obligation. Revenue recognition policies for sales of these products are substantially the same as for other tangible
products.
Inventory Valuation
Inventories are carried at the lower of cost or net realizable value, with cost being determined using the first-in, first-out method. The carrying value of our inventory is
reduced for any difference between cost and estimated net realizable value of the inventory. We determine net realizable value by evaluating ending inventories for excess
quantities, obsolescence, and other factors that could impact our ability to consume inventory for its intended use. Our evaluation includes an analysis of historical sales by
product, projections of future demand by product, and an analysis of obsolescence by product. Adjustments to the
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
value of inventory establish a new cost basis and are considered permanent even if circumstances later suggest that increased carrying amounts are recoverable. If demand is
higher than expected, we may sell inventory that had previously been written down.
Intangible assets
We amortize intangible assets with finite lives over the estimate of their useful lives. Any future changes that would limit their useful lives or any determination that
these assets are carried at amounts greater than their estimated fair value could result in acceleration of amortization over a revised useful life.
We review intangible assets with indefinite lives for impairment on an annual basis and finite lives for impairment whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable. Recoverability of the finite-lived intangible assets is assessed based on the estimated undiscounted future cash flows
expected to result from the use and eventual disposition of the asset. If the undiscounted future cash flows are less than the carrying amount, the finite-lived intangible assets are
considered to be impaired. The amount of the impairment loss, if any, is measured as the difference between the carrying amount of the asset and its fair value. We estimate the
fair value of finite-lived intangible assets by using an income approach or, when available and appropriate, using a market approach.
Goodwill
Goodwill is not amortized but is subject to an annual impairment analysis, which is performed as of October 1st; this assessment is also performed whenever there is a
change in circumstances that indicates the carrying value of goodwill may be impaired.
Goodwill is tested for impairment at the reporting unit level. In 2018 we had four reporting units for purposes of goodwill impairment testing. In early 2019 we
announced the implementation of a new organizational structure which consolidated our three strategic business units, Neuro, Newborn Care and Hearing & Balance into “One
Natus”. As a result of these organizational changes we have concluded we have one operating segment and one reporting unit for purposes of goodwill impairment testing in
2019 and 2020.
In accordance with accounting standards we perform a qualitative assessment to test goodwill for impairment prior to the performing the first step of the goodwill
impairment process. Qualitative factors considered in this assessment include industry and market considerations, overall financial performance and other relevant events and
factors affecting the reporting unit.
Prior to the adoption of ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) in 2019, which simplified the goodwill impairment test, if the fair value of a
reporting unit was less than its carrying amount, we would perform a two-step impairment test on goodwill. The first step of the goodwill impairment test, used to identify
potential impairment, compares the fair value of a reporting unit to its carrying value, including goodwill. We use a projected discounted cash flow model to determine the fair
value of a reporting unit. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the
impairment test is not required. The second step, if required, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The fair
value of a reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a
business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. If the carrying amount of the reporting unit’s goodwill exceeds its
implied fair value, an impairment charge is recognized in an amount equal to that excess.
Based on the qualitative assessment in 2020 and 2019, we determined the fair value of goodwill was more likely than not greater than its carrying amount, and no further
analysis was needed.
Due to organizational changes announced in late 2018 our evaluation of our GND reporting unit, which was part of our Neuro business unit, was determined to be
impaired. Prior to calculating the goodwill impairment loss, we analyzed the recoverability of GND long-lived assets (other than goodwill). As a result, we recorded a goodwill
impairment charge of $14.8 million within restructuring expense on our income statement. There was no remaining goodwill in the GND reporting unit as of December 31,
2018.
In 2019 we elected to early adopt ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). The adoption of this standard eliminates the second step of the two-step
impairment test described above and allows a Company to expense the difference between carrying amount in excess of the fair value of the reporting unit as a reduction in
goodwill. The adoption of ASU 2017-04 did not have an impact on our consolidated financial statements as we concluded based on the qualitative assessment performed in
2019 and 2020 that the fair value of the reporting unit was more likely than not to be greater than its carrying amount, and no further analysis was needed.
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Lessee Leases
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
We determine if an arrangement is a lease at inception of the lease. Right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term, and
lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based
on the present value of lease payments over the lease term. As most of our leases do not provide an implicit borrowing rate, generally we use an incremental borrowing rate
based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at the lease commencement date. We use the implicit rate when
readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to exclude or
terminate the lease when it is reasonably certain that they will exercise that option. Lease expense for lease payments are recognized on a straight-line basis over the lease term.
Operating leases are included in operating lease ROU assets, accrued liabilities, and operating lease liabilities in our consolidated balance sheet. Finance leases are
included in property and equipment, accrued liabilities, and other liabilities in the consolidated balance sheet.
We have lease agreements with lease and non-lease components, which are generally accounted for based on the type of asset. For real estate and telecom leases, we
account for these components separately. For equipment leases, such as office equipment and vehicles, we account for the lease and non-lease components as a single lease
component.
Lessor Leases
We determine if an arrangement is a lease at inception of the lease. We entered into a five-year non-cancelable exclusive supply agreement with a customer to provide
hearing screening products which commenced on January 1, 2020. The agreement includes automatic renewal options for successive three-year periods. Notice of non-renewal
must be provided to Natus at least twelve months prior to the end of the current term. The agreement does not contain any purchase options or residual value guarantees.
Pricing of the exclusive supply agreement is structured on a fee per baby screened basis. The per baby fee is inclusive of all products and services to be provided under
the terms of the agreement which include hearing screening hardware, consumables required to complete each screen, and related maintenance. The pricing structure also
includes a guaranteed minimum payment per unit per contract year for each unit of equipment supplied.
Sales-Type Leases
The guaranteed minimum payment for each unit of equipment supplied represents the fixed transaction price and is allocated to separate performance obligations,
consisting of hardware products, consumables, and maintenance, proportionally based on the standalone selling price of each performance obligation. Standalone selling price is
best evidenced by the price we charge for the good or service when selling it separately in similar circumstances to similar customers. Other than for the renewal of annual
support services contracts, our products and services are not generally sold separately. We use an amount discounted from the list price as a best estimated selling price.
For sales-type leases, we recognize revenues for hearing screening hardware products at the net present value of their guaranteed minimum payment standalone selling
price allocation upon delivery of the hardware. We recognize consumables and maintenance revenues associated with the sales-type leases over the term of the agreement on a
weighted average as actual screens are performed. Upon commencement of a sales-type lease we derecognize the leased asset from our balance sheet and record it as cost of
revenue in the condensed consolidated statements of operations.
Operating Leases
Under the terms of the exclusive supply agreement, hospitals where we were previously providing hearing screening services were provided the option to transition to the
exclusive supply agreement. Hospitals which chose to transition continued to use their existing Natus hardware. Based on the remaining useful life of the existing hardware
some of these leases were classified as operating leases.
For operating leases, rental income is recognized on a straight-line basis over the term of the associated lease. Leased assets classified as operating leases are carried at
amortized cost net of accumulated depreciation in property and equipment, net on the condensed consolidated balance sheet. The depreciation expense of the leased assets is
recognized on a straight-line basis over the useful life of the asset, and recorded in cost of revenue in the condensed consolidated statements of operations.
Based on the pricing structure and the predominance of non-lease components within the exclusive supply agreement, amounts pertaining to net investment in these
leases, variable lease income, and operating lease income are immaterial to our financial statements.
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Table of Contents
Long lived assets
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
We continually monitor events and changes in circumstances that could indicate that carrying amounts of our long-lived assets, including property and equipment,
intangible assets and leases, may not be recoverable. When such events or changes in circumstances occur, we will assess the recoverability by determining whether the carrying
value of an asset group will be recovered through undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of the asset
group, we will recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.
Liability 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 products contain defects, we may be required to 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.
Share-based compensation
We recognize share-based compensation expense associated with employee stock options under the single-option straight line method over the requisite service period,
which is generally a four-year vesting period and ten-year contractual term pursuant to ASC Topic 718, Compensation-Stock Compensation. See Note 16 of the Consolidated
Financial Statements.
For employee stock options, the value of each option is estimated on the date of grant using the Black-Scholes option pricing model, which was developed for use in
estimating the value of freely traded options. Similar to other option pricing models, the Black-Scholes method requires the input of highly subjective assumptions, including
stock price volatility. Changes in the subjective input assumptions can materially affect the estimated fair value of the employee stock options.
We recognize share-based compensation associated with Restricted Stock Awards (“RSA”) and Restricted Stock Units (“RSU”). RSAs and RSUs vest ratably over a
three-year period for employees. RSAs and RSUs for executives vest over a four-year period; 25% on each of the annual anniversaries. RSAs and RSUs for non-employees
(Board of Directors) vest over a one-year period; 100% on the first anniversary. The value is estimated based on the market value of Natus common stock on the date of issuance
pursuant to ASC Topic 718, Compensation-Stock Compensation.
We grant market stock unit (“MSU”) awards to certain employees. We estimate the fair value of MSUs at the date of grant using a Monte Carlo simulation model and
amortize those fair values over the requisite service period, which is generally three years. The Monte Carlo simulation model that we use to estimate the fair value of market-
based MSUs at the date of grant incorporates into the valuation the possibility that the market condition may not be satisfied. Provided that the requisite service is rendered, the
total fair value of the market-based MSUs, which is determined at the date of grant, must be recognized as compensation expense even if the market condition is not achieved.
However, the number of shares that ultimately vest can vary significantly with the performance of the specified market criteria.
We also grant performance stock unit (“PSU”) awards to our CEO and CFO. These PSUs fully vest after a performance period and have separate performance goals than
MSUs. We estimate fair value of performance stock unit awards based on the share price and other pertinent factors on the grant date. Compensation expense for performance
stock unit awards are recognized on a straight-line basis over the requisite service period of the award when performance condition is probable to occur. We assess the
achievement probability of the performance conditions each period and adjust compensation expense if necessary. Provided that the requisite service is rendered, the shares will
become vested and payout will occur based on the outcome of the performance condition. Any unrecognized compensation cost shall be recognized when the award becomes
vested.
We issue new shares of common stock upon the exercise of stock options and the vesting of RSAs, RSUs, MSUs, and PSUs.
Forfeitures of employee stock options and awards are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial
estimates. Share-based compensation expense is recorded net of estimated forfeitures, such that expense is recorded only for those share-based awards that are expected to vest.
Cash Equivalents
F-12
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
All highly liquid investments purchased with an original maturity or remaining maturity upon purchase of three months or less are classified as cash equivalents.
Allowance for Doubtful Accounts
We estimate the allowance for potentially uncollectible accounts receivable based on historical collection experience within the markets in which we operate and other
customer-specific information, such as bankruptcy filings or customer liquidity problems. When all internal efforts have been exhausted to collect the receivable, it is written off
and relieved from the reserve.
Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, investments, accounts receivable, and accounts payable. Cash is reported at its fair value on the balance sheet
dates. The recorded carrying amounts of investments, accounts receivable and accounts payable approximate their fair values due to the short-term maturities.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed using the straight-line method over estimated useful lives of
the respective assets, which are three to five years for office furniture and equipment, computer software and hardware, demonstration and loaned equipment, and 30 to 40 years
for buildings. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. Land is not depreciated. Costs associated with acquiring and
installing software to be used for internal purposes are capitalized and amortized on a straight-line basis over three years.
Research & Development Costs
Costs incurred in research and development are charged to operations as incurred.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences
between the financial statements carrying value of assets and liabilities and the tax basis of those assets and liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment
date.
We record net deferred tax assets to the extent it is more likely than not that the assets will be realized. In making such determination, we consider all available positive
and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial
operations. To the extent that previously reserved deferred tax assets are estimated to be realizable, we adjust the valuation allowance which reduces the provision for income
taxes.
We recognize the tax benefit of uncertain tax positions in the financial statements as defined in ASC Topic 740, Income Tax. When the tax position is deemed more
likely than not of being sustained, we recognize the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement, as defined in
ASC 740-10-05.
Foreign Currency
The functional currency of our subsidiaries outside of North America is generally the local currency of the country where the subsidiary is located. Accordingly, foreign
currency translation adjustments relating to the translation of foreign subsidiary financial statements are included as a component of accumulated other comprehensive loss. We
have recorded $13.2 million, $(1.6) million, and $(14.4) million of foreign currency translation gains (losses) for the years ended December 31, 2020, 2019 and 2018,
respectively.
Gains and losses from transactions denominated in currencies other than the functional currencies are included in other income and expense. In 2020, 2019, and 2018,
net foreign currency transaction gains (losses) were $2.0 million, $(0.8) million, and $(0.8) million, respectively. Foreign currency gains and losses result primarily from
fluctuations in the exchange rate between the U.S. dollar, Canadian dollar, Euro, British pound, and Danish kroner.
Effective July 1, 2018, Argentina's economy is considered to be highly inflationary under U.S. GAAP since it has experienced a rate of general inflation in excess of
100% over the latest three-year period, based upon the cumulative inflation rates published by Center for Audit Quality (CAQ) SEC Regulations Committee and its
International Practices Task Force
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Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
(IPTF). As a result, beginning July 1, 2018, the U.S. dollar is the functional currency for our subsidiary in Argentina, Medix I.C.S.A. (“Medix”). Accordingly, all gains and
losses resulting from the translation of our Argentinian operations are required to be recorded directly in the statement of operations. Through June 30, 2018, prior to being
designated as highly inflationary, currency translation adjustments of Medix's balance sheet are reflected in shareholders' equity as part of Accumulated Other Comprehensive
Income; however subsequent to July 1, 2018, such adjustments are reflected in earnings. Currency adjustments recorded in earnings for Medix subsequent to July 1, 2018
represented a gain of $0.9 million.
We divested our wholly owned subsidiary, Medix, on April 2, 2019 via a stock sale. Included in the year ended December 31, 2019 is the impact of the sale of Medix,
which was completed as of June 30, 2019, and the deferred foreign currency related translation adjustments previously in accumulated other comprehensive income have been
released from the balance sheet along with the held for sale accrual (See Note 23 - Sale of a Certain Subsidiary).
Comprehensive Income
We break out the major components and report as a single total the change in net assets during the period as defined in ASC Topic 220, Comprehensive Income. The
consolidated statement of comprehensive income (loss) has been separately stated from the consolidated statements of operations. Accumulated other comprehensive loss
consists of translation gains and losses on foreign subsidiary financial statements, interest rate swap designated as a cash flow hedge, reclassifications from the adoption of ASU
2018-02, and reclassification of previously recorded deferred foreign currency related translation adjustment losses upon the divestiture of Medix.
Basic and Diluted Net Income per Share
We compute net income per share as defined in ASC Topic 260, Earnings per Share. Basic net income per share is based upon the weighted average number of common
shares outstanding during the period. Diluted net income per share is based upon the weighted average number of common shares outstanding and dilutive common stock
equivalents outstanding during the period. Common stock equivalents are options granted, shares of restricted stock, and shares of market stock issued under the stock awards
plans and are calculated under the treasury stock method. Common equivalent shares from unexercised stock options and restricted stock are excluded from the computation
when there is a loss as the effect is anti-dilutive, or if the exercise price of such options is greater than the average market price of the stock for the period.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This standard requires lease assets and lease liabilities arising from operating leases to be
presented in the statement of financial position. Qualitative along with specific quantitative disclosures are required by lessees and lessors to meet the objective of enabling
users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December
15, 2018 including interim periods within those fiscal years. In July 2018, FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which affects narrow
aspects of the guidance issued in the amendments in Update 2016-02. In July 2018, the FASB also issued ASU 2018-11, Targeted Improvements. The amendments in ASU
2018-11 provide additional clarification and implementation guidance on certain aspects of the previously issued ASU 2016-02 and have the same effective and transition
requirements as ASU 2016-02.
The new standard provides a number of optional practical expedients in transition. We have elected the package of practical expedients, which permits an entity to not
reassess prior conclusions about lease identification, lease classification and initial direct costs under the new standard. We have not elected the use-of-hindsight practical
expedient or the practical expedient pertaining to land easements; the latter of which is not applicable to us. We made an accounting policy election to keep leases with an initial
term of 12 months or less off of the balance sheet. We will recognize those lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease
term.
The new standard became effective for us on January 1, 2019. We adopted the new standard using the modified retrospective transition method with the effective date as the
date of initial application. Upon adoption, we recognized additional new lease assets of approximately $19.5 million and additional lease liabilities of approximately $22.3
million as of January 1, 2019. The standard did not materially affect consolidated net earnings. By electing the effective date as the date of initial application, financial
performance has not been adjusted and the disclosures required under the new standard have not been provided for periods prior to January 1, 2019. See Significant Accounting
Policies and Note 8 for additional discussion and disclosure.
The adoption of the new standard did not impact our liquidity or debt-covenant compliance under its previous agreements.
In June 2016, the FASB issued ASU 2016-13, Credit Losses (Topic 326). This update requires financial assets
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Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
measured at amortized cost, such as trade receivables and contract assets, to be presented net of expected credit losses, which may be estimated based on relevant information
such as historical experience, current conditions, and future expectation for each pool of similar financial assets. The new guidance requires enhanced disclosures related to
trade receivables and associated credit losses. In May 2019, the FASB issued ASU 2019-05 which provides targeted transition relief guidance intended to increase
comparability of financial statement information. The guidance for both updates was effective beginning January 1, 2020. The adoption of ASU 2016-13 did not have a material
impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This update modifies the concept of impairment from the condition
that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value.
An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and
liabilities as if that reporting unit had been acquired in a business combination. Because these amendments eliminate Step 2 from the goodwill impairment test, they should
reduce the cost and complexity of evaluating goodwill for impairment. ASU 2017-04 is effective for our annual and any interim goodwill impairment tests performed on or after
January 1, 2020. We elected to early adopt. The adoption of ASU 2017-04 did not have an impact on our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). This update permits a company to reclassify its
disproportionate income tax effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) on items within accumulated other comprehensive income (“AOCI”) to retained
earnings (termed “stranded tax effects”). Only the stranded tax effects resulting from the 2017 Act are eligible for reclassification. The ASU was effective for us on January 1,
2019. Upon adoption, we reclassified stranded tax effects resulting from the 2017 Act of $1.3 million, resulting in a decrease to AOCI and an increase to retained earnings as of
January 1, 2019.
In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 813), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value
Measurement. This update amends Topic 820 to add, remove, and clarify disclosure requirements related to fair value measurement disclosure. For calendar year-end entities,
the update was effective for annual periods beginning January 1, 2020, and interim periods within those fiscal years. The adoption of ASU 2018-13 did not have an impact on
our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Tax. This update includes removal of certain
exceptions to the general principles of ASC 740, Income taxes, and simplification in several other areas such as accounting for franchise tax (or similar tax) that is partially
based on income. We early adopted the ASU in the second quarter of 2020. Upon adoption, we recorded an additional income tax benefit of $0.9 million due to the elimination
of the year-to-date loss limitation rules that limited the interim tax period tax benefit.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements. This update improves consistency by amending the Codification to include all
disclosure guidance in appropriate disclosure sections. Also, the update clarifies application of various provisions in the Codification by amending and adding new headings,
cross-referencing to other guidance, and refining or correcting terminology. ASU 202-10 was effective for annual period starting December 15, 2020. The adoption of this ASU
did not have an impact on our consolidated financial statements.
2—REVENUE
Contract assets 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 was primarily related to extended service contracts, installation, and
training, for which the service fees are billed up-front. The associated deferred revenue is generally recognized ratably over the extended service period or when installation and
training are complete.
The following table summarized the changes in the contract assets and contract liability balances for the year ended December 31, 2020 (in thousands):
Unbilled AR, December 31, 2019
Additions
Transferred to Trade Receivable
Unbilled AR, December 31, 2020
$
$
2,667
173
(915)
1,925
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
Deferred Revenue, December 31, 2019
Additions
Revenue Recognized
Deferred Revenue, December 31, 2020
$
$
24,808
19,763
(18,848)
25,723
At December 31, 2020, the contract assets of $1.9 million were included in accounts receivable in the consolidated balance sheet. At December 31, 2020, the short-term
portion of the contract liability of $21.3 million and the long-term portion of $4.4 million were included in deferred revenue and other long-term liabilities respectively, in the
consolidated balance sheet. As of December 31, 2020, we expect to recognize revenue associated with deferred revenue of approximately $21.3 million in 2021, $2.3 million in
2022, $1.2 million in 2023, $0.7 million in 2024, and $0.2 million thereafter.
3—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):
Balance, beginning of period
Additions charged to expense
Write-offs charged against allowance
Balance, end of period
4—INVENTORIES
Inventories consist of (in thousands):
Raw materials and subassemblies
Work in process
Finished goods
Total Inventories
Less: Non-current Inventories
Inventories
December 31,
2020
2019
7,384 $
1,190
(2,361)
6,213 $
6,960
4,262
(3,838)
7,384
December 31,
2020
2019
22,583 $
2,294
65,695
90,572
(14,922)
75,650 $
37,259
1,780
50,521
89,560
(18,192)
71,368
$
$
$
$
Non-current inventory consists of service components used to repair products held by customers pursuant to warranty obligations and extended service contracts,
including service components for products that we no longer sell, inventory purchased for lifetime buys, inventory built as a last-time build, and inventory that is turning at a
slow rate. We believe that these inventories will be utilized for their intended purpose.
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
5—PROPERTY AND EQUIPMENT
Property and equipment consist of (in thousands):
Land
Buildings
Leasehold improvements
Finance lease right-of-use assets
Office furniture and equipment
Computer software and hardware
Demonstration and loaned equipment
Accumulated depreciation
Total
December 31,
2020
2019
1,792 $
7,365
8,050
2,555
22,148
10,246
3,086
55,242
(30,726)
24,516 $
1,719
6,943
8,664
2,377
22,819
12,610
11,621
66,753
(42,051)
24,702
$
$
Depreciation expense of property and equipment was $6.2 million, $6.6 million, and $6.0 million in the years ending December 31, 2020, 2019 and 2018, respectively.
6—INTANGIBLE ASSETS
The following table summarizes the components of gross and net intangible asset balances (in thousands):
December 31, 2020
December 31, 2019
Gross
Carrying
Amount
Accumulated
Impairment
Accumulated
Amortization
Net Book
Value
Gross
Carrying
Amount
Accumulated
Impairment
Accumulated
Amortization
Net Book
Value
$
Intangible assets with definite lives:
Technology
Customer related
Trade names
Internally developed software
Patents
Service Agreements
Total definite-lived intangible assets
Intangible assets with indefinite lives:
Intellectual Property
Total intangible assets
112,138
94,526
47,058
13,281
2,810
1,190
271,003
2,059
273,062
$
(12,480)
(50)
(3,677)
—
(133)
—
(16,340)
—
(16,340)
$
(64,203)
(51,247)
(31,890)
(12,845)
(2,677)
(1,119)
(163,981)
—
(163,981)
$
35,455
43,229
11,491
436
—
71
90,682
2,059
92,741
108,400
90,351
45,874
13,281
2,692
1,190
261,788
—
261,788
$
(6,035)
(50)
(3,237)
—
(133)
—
(9,455)
—
(9,455)
$
(55,408)
(40,527)
(25,355)
(12,606)
(2,559)
(1,079)
(137,534)
—
(137,534)
46,957
49,774
17,282
675
—
111
114,799
—
114,799
Finite lived intangible assets are amortized over their weighted average lives, which are 13 years for technology, 13 years for patents, 10 years for customer-related
intangibles, 7 years for trade names, 6 years for internally developed software, 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.
During the fourth quarter of 2018 we recorded an impairment charge related to intangible assets of $8.2 million. These impairments relate to end of life decisions for the
core technology utilized in our Bio-logic products and our GND and Neurocom product lines. We acquired Bio-logic core technology as part of the acquisition of Bio-logic
Systems Corp in 2006 and have maintained the technology since its acquisition. In 2018 we partnered with one of our contract manufacturers to develop and manufacture the
next generation technology to be used in its Bio-logic products. The decision to develop this new technology resulted in an impairment of the originally acquired core
technology of $5.6 million, which was recorded within intangibles amortization expense on our income statement.
On January 15, 2019, we announced the implementation of a new organizational structure, "One Natus." As a result of this new organizational structure, we announced
we exited two of our non-core businesses, GND and Neurocom. The decision
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
to exit these non-core businesses resulted in the impairment of intangible assets of $2.6 million as of December 31, 2018. These impairments were the result of deterioration of
expected future cash flows as compared to the carrying value of the assets. Impairments were determined by performing an undiscounted cash flow analysis on intangibles
assets. The impairment charge for GND and Neurocom is recorded on our income statement within restructuring expense.
During the third quarter of 2020 we recorded an impairment charge related to intangible assets of $6.7 million of which $6.4 million was recorded within intangibles
amortization within cost of revenue and $0.3 million was recorded within intangibles amortization within operating expense on our income statement. The impairment related to
an end of life decision for an acquired tradename and technology at which time we made the decision to discontinue sales of the related product rather than continuing to invest
in the product.
Amortization expense related to intangible assets with finite lives, including impairment charges described above, was as follows (in thousands):
Technology
Customer related
Trade names
Internally developed software
Patents
Service Agreements
Total amortization
2020
Years Ended December 31,
2019
2018
$
$
13,417 $
8,825
6,182
239
—
40
28,703 $
6,906 $
8,662
6,111
1,438
60
322
23,499 $
14,100
12,244
6,736
2,123
84
757
36,044
The amortization expense amounts shown above include internally developed software not held for sale of $0.2 million, $1.3 million, and $1.9 million for the years
ended 2020, 2019, and 2018, respectively. The amortization expense for internally developed software not held for sale is recorded within our income statement as a general
and administrative operating expense.
Expected annual amortization expense related to amortizable intangible assets is as follows (in thousands):
2021
2022
2023
2024
2025
Thereafter
Total expected amortization expense
7—GOODWILL
The carrying amount of goodwill and the changes in those balances are as follows (in thousands):
As of December 31, 2018
Foreign currency translation
As of December 31, 2019
Purchase Accounting Adjustments
Foreign currency translation
As of December 31, 2020
8—LEASES
Lessee Leases
F-18
$
$
22,374
18,365
15,590
13,599
12,976
7,778
90,682
$
$
$
147,644
(1,277)
146,367
1,207
3,725
151,299
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
We have operating and finance leases for offices, warehouses, and certain equipment. The leases have remaining lease terms of one to eight years, some of which
include options to extend the leases for up to ten years. Our leases do not have any residual value guarantees or any restrictions or covenants imposed by leases.
Components of lease cost were as follows (in thousands):
Operating lease cost
Finance lease cost:
Amortization of right-of-use assets (principal payments)
Interest on lease liabilities
Short-term lease cost
Variable lease cost
Sublease income
Total lease cost
Supplemental cash flow information related to leases was as follows (in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
Finance leases
Supplemental balance sheet information related to leases was as follows (in thousands):
F-19
$
$
$
Year Ended
December 31,
2020
2019
6,696
$
395
49
7
2,541
(61)
9,627
$
6,823
466
58
51
2,836
(179)
10,055
Year Ended
December 31,
2020
2019
$
13,979
32
527
3,290
337
13,612
42
478
2,697
300
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
Operating Leases
Operating lease right-of-use assets
Current portion of operating lease liabilities
Operating lease liabilities
Total operating lease liabilities
Finance Leases
Property and equipment, gross
Accumulated amortization
Property and equipment, net
Accrued liabilities
Other liabilities
Total finance lease liabilities
Weighted Average Remaining Lease Term
Operating leases
Finance leases
Weighted Average Discount Rate
Operating leases
Finance leases
$
$
$
$
$
$
$
December 31, 2020
December 31, 2019
$
$
$
$
$
$
$
11,669
6,779
8,959
15,738
2,555
(1,705)
850
414
446
860
3.33 years
2.68 years
5.4 %
5.1 %
15,046
5,871
12,051
17,922
2,377
(1,418)
959
390
599
989
3.75 years
2.92 years
5.3 %
5.1 %
As of December 31, 2020, future minimum lease payments included in the measurement of lease liabilities on the consolidated balance sheet, for the following five fiscal
years and thereafter, were as follows (in thousands):
Year ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less imputed interest
Total
Lessor Leases
Operating Leases
Finance Leases
$
$
6,206 $
4,096
2,751
1,569
665
695
15,982
(244)
15,738 $
432
273
153
48
11
—
917
(57)
860
Pricing of our exclusive hearing screening supply agreement is structured on a fee per baby screened basis and includes a guaranteed minimum payment per unit per
contract year for each unit of equipment supplied. We recognize revenues for the hardware products upon commencement of each lease at the net present value of their
guaranteed minimum payment standalone selling price allocation. The remaining variable fees are recognized as revenue over the remaining lease term. The following table
provides the profit recognized for sales-type leases at their commencement (net sales includes the initial allocation of fixed costs plus allocation of incremental variable fees and
excludes the revenue associated with non-lease components associated with hearing screening supplies and maintenance that are recognized as revenue over the remaining lease
term) for the year ended December 31, 2020 (in thousands):
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
Net Sales
Cost of Sales
Gross Profit
Year Ended
December 31,
2020
$
$
2,226
4,107
(1,881)
The following table provides lease income related to variable lease payments on our sales-type leases not included in the measurement of the lease receivable for the
year ended December 31, 2020 (in thousands):
Variable lease income
Year Ended
December 31,
2020
$
420
The following table provides lease income on our operating leases for the year ended December 31, 2020 (in thousands):
Lease income on operating leases
Year Ended
December 31,
2020
$
291
The receivables as a result of our sales-type leases are collateralized by the underlying equipment leased and consist of the following components at December 31,
2020 (in thousands):
Net minimum lease payments to be received
Less: Unearned interest income portion
Net investment in sales-type leases
Less: Current portion
Long-term net investment in sales-type leases
Year Ended
December 31,
2020
1,777
—
1,777
(444)
1,333
$
$
$
As of December 31, 2020, future minimum lease payments and the reconciliation to net investment in sales-type leases reported on the consolidated balance sheet, for
the following five fiscal years and thereafter, were as follows (in thousands):
Year Ended December 31,
2021
2022
2023
2024
2025
Thereafter
Total future minimum lease payments
Less: imputed interest
Total
Sales-Type Leases
Operating Leases
444
444
444
445
—
—
1,777
—
1,777 $
—
—
—
—
—
—
—
—
—
$
F-21
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
9—ACCRUED LIABILITIES
Accrued liabilities consist of (in thousands):
Compensation and related benefits
Warranty reserve
Accrued federal, state, and local taxes
Accrued amounts due to customers
Accrued professional fees
Accrued selling expenses
Self-funded insurance expense
Accrued travel
Other
Total
10—LONG-TERM OTHER LIABILITIES
Long-term other liabilities consist of (in thousands):
Long-term taxes payable
Non-current deferred revenue
CARES Act payroll tax payable
Long-term earnout payable
Finance lease liabilities
Other
Total
December 31,
2020
2019
20,409 $
5,195
9,118
2,743
3,699
311
911
123
1,727
44,236 $
December 31,
2020
2019
10,949 $
4,416
1,354
1,286
446
—
18,451 $
26,991
6,404
11,156
3,008
2,083
507
950
224
3,128
54,451
12,330
4,563
—
—
599
124
17,616
$
$
$
$
11—DEBT AND CREDIT ARRANGEMENTS
We have a Credit Agreement with JP Morgan, Citibank and Wells Fargo. During the third quarter of 2020 we amended the terms of the Credit Agreement to extend the
maturity 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 million of secured revolving credit facility. The Credit Agreement contains 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 a material adverse effect. We have no other significant credit facilities.
In addition to the customary restrictive covenants listed above, the Credit Agreement also contains financial covenants that require us to maintain a certain leverage ratio
and fixed charge coverage ratio, each as defined in the Credit Agreement:
• Leverage Ratio, as defined, to be no higher than 3.25 to 1.00.
• Interest Coverage Ratio, as defined, to be at least 1.75 to 1.00 at all times.
As of December 31, 2020, we were in compliance with the Leverage Ratio and the Interest Coverage Ratio covenants as defined in the Credit Agreement.
As of December 31, 2020, we have $57.0 million outstanding under the Credit Agreement.
F-22
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
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 the leverage ratio plus the higher of (i) the federal funds rate plus one-half of one percent per annum; (ii) the prime rate in
effect on such a day; and (iii) the LIBOR rate plus one percent, or (b) a fluctuating rate per annum of LIBOR Rate plus the Applicable Rate, which ranges between 2.25% to
3.50%. The effective interest rate during the twelve months ended December 31, 2020 was 3.07%. The Credit Agreement matures on September 25, 2023, at which time all
principal amounts outstanding under the Credit Agreement will be due and payable.
Long-term debt consists of (in thousands):
Revolving credit facility
Debt issuance costs
Less: current portion of long-term debt
Total long-term debt
Maturities of long-term debt as of December 31, 2020 are as follows (in thousands):
2021
2022
2023
Thereafter
Total
December 31,
2020
2019
57,000 $
(1,160)
50,000
5,840 $
December 31,
2020
2019
— $
—
57,000
—
57,000 $
55,000
(335)
35,000
19,665
55,000
—
—
—
55,000
$
$
$
$
As of December 31, 2020, the carrying value of the total debt approximated fair market value.
12—FINANCIAL INSTRUMENTS AND DERIVATIVES
We use interest rate swap derivative instruments to manage earnings and cash flow exposure resulting from changes in interest rates. These interest rate swaps apply a fixed
interest rate on a portion of our expected LIBOR-indexed floating-rate borrowings. We held the following interest rate swaps as of December 31, 2020 (in thousands):
Hedged Item
1-month USD LIBOR loan
Total interest rate derivatives designated
as cash flow hedge
$
$
Current
Notional
Amount
Designation Date
Effective Date
Termination Date
Fixed Interest
Rate
40,000
May 31, 2018
June 1, 2018
September 23, 2021
2.611%
40,000
Floating Rate
1-month USD
LIBOR
Estimated Fair
Value
$
$
277
277
We designated these derivative instruments as cash flow hedges. We assess the effectiveness of these derivative instruments and record the changes in the fair value of a
derivative instrument designated as a cash flow hedge as unrealized gains or losses in accumulated other comprehensive income, net of tax. Once the hedged item affects
earnings, the effective portion of any gain or loss will be reclassified to earnings. If the hedged cash flow does not occur, or if it becomes probable that it will not occur, we will
reclassify the amount of any gain or loss on the related cash flow hedge to interest expense at that time.
As of December 31, 2020, we expect that approximately $212 thousand of losses associated with the cash flow hedge, net of tax, could be reclassified from AOCI into
earnings within the next twelve months.
13—RESERVE FOR PRODUCT WARRANTIES
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
We provide a warranty for products that is generally one year in length and 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 be required to 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.
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
reserve. The reserve is reduced as costs are incurred to honor existing warranty and regulatory obligations.
As of December 31, 2020, we have accrued $5.2 million for product related warranties. The estimates we use in projecting future product warranty costs may prove to be
incorrect. Any future determination that product warranty reserves are understated could result in increases to cost of sales and reductions in operating profits and results of
operations.
14—STOCKHOLDERS’ EQUITY
Common Stock—We have 120,000,000 shares of common stock authorized at a par value or $0.001 per share.
Preferred Stock—We have 10,000,000 shares of preferred stock authorized at a par value of $0.001 per share. In accordance with the terms of the amended and restated
certificate of incorporation, the Board of Directors is authorized to provide for the issuance of one or more series of preferred stock, including increases or decreases to the
series. The Board of Directors has the authority to set the rights, preferences, and terms of such shares. As of December 31, 2020, no shares of preferred stock were issued and
outstanding.
15—EARNINGS PER SHARE
The components of basic and diluted EPS are as follows (in thousands, except per share amounts):
Net loss
Weighted average common shares
Dilutive effect of stock based awards
Diluted Shares
Basic loss per share
Diluted loss per share
Shares excluded from calculation of diluted EPS
16—SHARE-BASED COMPENSATION
2020
December 31,
2019
2018
(16,613) $
33,562
—
33,562
(0.49) $
(0.49) $
66
(15,671) $
33,696
—
33,696
(0.47) $
(0.47) $
104
(22,935)
33,111
—
33,111
(0.69)
(0.69)
343
$
$
$
Share-Based Compensation Expense—We account for share-based compensation in accordance with ASC Topic 718, Compensation—Stock Compensation. Share-
based compensation was recognized as follows in the consolidated statement of income (in thousands):
Cost of revenue
Marketing and selling
Research and development
General and administrative
Total expense
2020
December 31,
2019
2018
$
$
319 $
1,938
1,099
6,171
9,527 $
264 $
1,024
800
6,227
8,315 $
218
1,039
801
14,945
17,003
Stock Awards Plans—Natus' 2018 Stock Awards Plan (the “Plan”) provides for the granting of the following:
•
•
Incentive stock options to employees;
Non-statutory stock options to employees, directors and consultants;
F-24
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
•
Restricted stock awards and restricted stock units;
• Market stock units;
•
•
•
Performance stock units;
Stock bonuses; and
Stock appreciation rights.
As of December 31, 2020, there were 1,863,120 shares available for future awards under the plan.
Under the Plan, stock options may be issued at not less than the fair market value of the common stock on the date of grant, as determined by the Board of Directors.
Options issued under the Plan become exercisable as determined by the Board of Directors and expire no more than six years after the date of grant. Most options vest ratably
over four years.
Stock Option Activity—Stock option activity under the stock awards plans for the year ended December 31, 2020 is summarized as follows:
Outstanding, December 31, 2019 (18,531 shares exercisable at a weighted average exercise price of $35.25 per share)
Granted
Exercised
Forfeited
Expired
Outstanding, December 31, 2020 (37,062 shares exercisable at a weighted average exercise price of $35.25 per share)
Number of
Shares
Weighted
Average
Exercise Price
74,089 $
257,496 $
— $
— $
— $
331,585 $
35.25
20.68
—
—
—
—
As of December 31, 2020, unrecognized compensation related to the unvested portion of stock options was approximately $1.8 million, which is expected to be
recognized over a weighted average period of 3.9 years. The intrinsic value of options exercised, representing the difference between the closing stock price of common stock
on the date of the exercise and the exercise price, in the years ended December 31, 2020, 2019 and 2018 was $0.0 million, $1.4 million, and $13.6 million, respectively.
As of December 31, 2020, there were: (i) 304,730 options vested and expected to vest with a weighted average exercise price of $24.15, an intrinsic value of $0.0 million,
and a weighted average remaining contractual term of 8.4 years; and (ii) 37,062 options exercisable with a weighted average exercise price of $35.25, an intrinsic value of $0.0
million, and a weighted average remaining contractual term of 3.5 years.
Black-Scholes Inputs—The fair value of option grants was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
Weighted-average fair value of options granted
Expected life in years
Risk-free interest rate
Expected volatility
Dividend yield
December 31,
2020
December 31,
2018
$
6.54
$
11.03
4.5
0.2 %
38 %
4.0
2.7 %
35 %
None
None
We did not grant any stock options during the years ended December 31, 2019.
The expected life of options is based primarily on historical share option exercise experience of the employees for options granted. All options are treated as a single
group in the determination of expected life, as we do not currently expect substantially different exercise or post-vesting termination behavior among the employee population.
The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant. Expected volatility is based
primarily on historical volatility data of our common stock. We have no history or expectation of paying dividends on common stock.
F-25
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
Share-based compensation expense associated with options is based on awards ultimately expected to vest. At the time of an option grant, we estimate the expected future
rate of forfeitures based on historical experience. These estimates are revised, if necessary, in subsequent periods if actual forfeiture rates differ from those estimates. If the
actual forfeiture rate is lower than estimated we will record additional expense and if the actual forfeiture is higher than estimated we will record a recovery of prior expense.
Restricted Stock Awards Activity—The following table summarizes the activity for restricted stock awards during the year ended December 31, 2020:
Unvested at December 31, 2019
Granted
Vested
Forfeited
Unvested at December 31, 2020
Weighted
Average
Grant
Date Fair
Value
34.14
29.74
33.89
33.44
31.84
Shares
339,762 $
208,750 $
(163,730) $
(4,693) $
380,089 $
As of December 31, 2020, unrecognized compensation related to the unvested portion of stock awards was $6.9 million, which is expected to be recognized over a
weighted average period of 2.2 years. The fair market value of outstanding restricted stock awards at December 31, 2020 was $7.6 million. For the restricted stock awards
granted during the years ended December 31, 2020, 2019, 2018, the weighted average grant date fair values were $29.74, $31.53, and $37.22, respectively. The total grant date
fair value of restricted stock awards vested during fiscal year 2020, 2019, and 2018 was $5.5 million, $4.7 million, and $12.9 million, respectively. For the restricted stock
awards that vested during the years ended December 31, 2020, 2019, and 2018, the total intrinsic value was $4.8 million, $4.0 million, and $11.2 million, respectively.
Restricted Stock Units Activity—The following table summarizes restricted stock units activity for the year ended December 31, 2020:
Outstanding at December 31, 2019
Awarded
Released
Forfeited
Outstanding at December 31, 2020
Weighted
Average
Grant
Date Fair
Value
38.62
35.42
35.26
38.92
37.27
Shares
173,096 $
100,682 $
(14,033) $
(47,144) $
212,601 $
*Includes the PSUs and MSUs granted at the valuation date, which may be subject to additional awards or forfeitures depending on the outcome of the performance
measures at the end of the performance period.
As of December 31, 2020, unrecognized compensation related to the unvested portion of stock units was $3.7 million, which is expected to be recognized over a
weighted average period of 1.8 years. The aggregate intrinsic value of outstanding restricted stock units at December 31, 2020 was $4.3 million. For the restricted stock units
granted during the years December 31, 2020, 2019, 2018, the weighted average grant date fair values were $35.42, $38.62, and $36.77, respectively. The total grant date fair
value of restricted stock units vested during fiscal year 2020, 2019, and 2018 was $0.5 million, $1.4 thousand, and $10.0 million, respectively. For the restricted stock units that
vested during the years ended December 31, 2020, 2019, and 2018, the total intrinsic value was $0.5 million, $1.3 million, and $8.7 thousand, respectively.
Employee Stock Purchase Plan—Under Natus' 2011 Employee Stock Purchase Plan (the “ESPP”), U.S. employees can elect to have salary withholdings of up to 15%
of eligible compensation to a maximum of $10,625 per offering period, to purchase shares of common stock on April 30 and October 31 of each year. The purchase price for
shares acquired under the ESPP is 85% of the fair market value on the last day of the offering period. As of December 31, 2020, there were 426,084 shares reserved for future
issuance under the ESPP.
Because the ESPP does not have a “look back” feature, the compensation expense associated with the Plan is not measured by the use of the Black-Scholes pricing
model, but rather by measuring the difference between the fair market value
F-26
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
of common stock on the last day of the offering period and the purchase price for the offering period, which is 85% of the fair market value. Compensation expense associated
with the ESPP for the years ended December 31, 2020, 2019 and 2018, respectively, was $0.2 million, $0.2 million, and $0.3 million.
17—OTHER INCOME (EXPENSE), NET
Other income (expense), net consists of (in thousands):
Interest income
Interest expense
Foreign currency gain (loss)
Other
Total other expense, net
18—INCOME TAXES
Income (loss) before provision for income tax is as follows (in thousands):
U.S.
Foreign
Loss before provision for income tax
2020
Years Ended December 31,
2019
2018
11 $
(3,656)
1,988
(215)
(1,872) $
250 $
(4,941)
(765)
(135)
(5,591) $
334
(6,794)
(800)
(438)
(7,698)
2020
Years Ended December 31,
2019
2018
1,908 $
(23,973)
(22,065) $
(22,851) $
1,594
(21,257) $
(54,370)
22,110
(32,260)
$
$
$
$
The components of income tax expense (benefit) for the years ended December 31, 2020, 2019 and 2018 (in thousands):
Current
U.S. Federal
U.S. State and local
Non-U.S.
Total current tax expense (benefit)
Deferred
U.S. Federal
U.S. State and local
Non-U.S.
Total deferred tax benefit
Total income tax benefit
2020
Years Ended December 31,
2019
2018
$
$
(3,976) $
145
1,241
(2,590)
2,049
533
(5,444)
(2,862)
(5,452) $
(948) $
561
8,386
7,999
(7,491)
(816)
(5,278)
(13,585)
(5,586) $
(1,872)
(59)
5,732
3,801
(8,248)
(1,751)
(3,127)
(13,126)
(9,325)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of deferred tax assets and liabilities as of December 31, 2020 and 2019 are as follows (in thousands):
F-27
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
Deferred tax assets:
Net operating loss carryforwards
Credit carryforwards
Accruals deductible in different periods
Employee benefits
Operating leases
Total deferred tax assets
Valuation allowance
Total net deferred tax assets
Deferred tax liabilities:
Basis difference in fixed and intangible assets
Operating leases
Foreign earnings to be repatriated
Total deferred tax liabilities
Total net deferred tax assets
December 31,
2020
2019
$
$
$
9,099 $
5,768
15,368
1,016
3,967
35,218
(969)
34,249 $
(13,214)
(2,970)
(800)
(16,984)
17,265 $
3,035
2,415
23,672
1,554
4,643
35,319
(606)
34,713
(13,850)
(3,959)
(800)
(18,609)
16,104
The income tax expense (benefit) in the accompanying statements of income differs from the provision calculated by applying the U.S. federal statutory income tax rate
of 21% in 2020, 2019, and 2018 to income before taxes due to the following:
Federal statutory tax expense
State tax expense
Foreign taxes at rates less than U.S. rates
Equity compensation
Tax credits
Uncertain tax position
Lapse of statute
Repatriation tax net of foreign tax credits
Federal NOL Carryback
Tax audits
Withholding taxes
Global intangible low-taxed income net of foreign tax credits
Return to provision
SAB 118 adjustments
Other
Total expense (benefit)
2020
Years Ended December 31,
2019
2018
$
$
(4,634) $
661
1,050
1,161
(1,641)
3,002
(2,718)
—
(1,621)
(224)
—
—
(946)
—
458
(5,452) $
(4,464) $
(300)
(2,205)
824
(1,428)
2,910
(3,961)
172
—
—
1,107
1,601
560
—
(402)
(5,586) $
(6,775)
(1,160)
(1,071)
519
(2,021)
1,311
(1,214)
—
—
658
1,185
2,326
(1,417)
(2,676)
1,010
(9,325)
At December 31, 2020, we had U.S. federal net operating loss carryforwards of $8.3 million, which will carryforward indefinitely. At December 31, 2020, we had U.S.
state net operating loss carryforwards of $31.9 million, of which immaterial portions will begin to expire in 2021 and the majority have long carryforward periods ranging
primarily from 10 years to indefinite. At December 31, 2020, we had U.S. federal R&D credit carryforwards of $4.3 million, which will begin to expire in 2038 and U.S. state
R&D credit carryforwards of $0.9 million, which will begin to expire in 2021. At December 31, 2020, we had $0.1 million of U.S. foreign tax credit carryforwards that can be
used to offset future U.S. tax liabilities related to foreign source taxable income. The foreign tax credits will start to expire in 2022.
At December 31, 2020, certain foreign subsidiaries had deferred tax assets attributable to net operating loss carryforwards as follows: $1.0 million in France, $2.4 million
in Denmark, $1.3 million in Canada, $0.4 million in Ireland, and $0.7 million in Germany. These foreign net operating loss carryforwards, if not utilized to offset taxable
income in future
F-28
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NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
periods, will begin to expire in various amounts beginning in 2026 with the most material amounts having long carryforward periods ranging from 20 years to indefinite.
A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Accordingly, valuation
allowances of $1.0 million and $0.6 million were recorded at December 31, 2020 and 2019, respectively. The increase of $0.4 million in valuation allowance was primarily due
to a valuation allowance recorded against certain U.S. state R&D credits and U.S. foreign tax credits, which are expected to expire before fully utilized.
The realizability of the deferred tax assets is primarily dependent on our ability to generate sufficient taxable income in future periods. We record net deferred tax assets
to the extent it is more likely than not that the assets will be realized. The ultimate recovery of deferred tax assets is dependent upon the amount and timing of future taxable
income and other factors such as the taxing jurisdiction in which the assets are to be recovered. A high degree of judgment is required to determine if, and the extent to which,
valuation allowances should be recorded against deferred tax assets. In making such determinations, we consider all available positive and negative evidence, including future
reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. Based on all available evidence,
both positive and negative, and the weight of that evidence to the extent such evidence can be objectively verified, we determine whether it is more likely than not that all or a
portion of the deferred tax assets will be realized.
As of December 31, 2020, the balance sheet reflected U.S. deferred tax assets of $25.1 million, net of $0.3 million federal and state valuation allowances. These U.S.
deferred tax assets consist primarily of $3.4 million of federal and state net operating loss carryforwards, $5.1 million of federal and state R&D credit carryforwards, and
$16.8 million of deductible temporary differences. Detailed valuation allowance analysis was completed as required in ASC 740. After weighing all the positive and negative
evidence we concluded that it is more likely than not that the U.S. deferred tax assets will be realized and there is no valuation allowance required, except for a small portion
related to $0.2 million of state R&D credits and $0.1 million of U.S. foreign tax credits which we have concluded are not recoverable. The valuation allowance analysis
primarily included considering the following items:
•
•
•
•
Cumulative three-year income or loss on an adjusted basis - We computed a three-year cumulative loss for Natus U.S. but have supported the conclusion no
additional valuation allowance was required upon further analysis. The additional analysis resulted in three-year cumulative earnings after adjustments was
made for certain one-time nonrecurring items. The one-time items were primarily driven by specific One Natus reorganization impacts which include certain
product rationalizations.
Current U.S. income (loss) before provision (benefit) for income tax and historical utilization of deferred tax assets - Our ability to generate positive income
before tax in 2020 following the One Natus reorganization and taking into account the impact of COVID-19 during the year was considered objectively
verifiable positive evidence of the impact of One Natus reorganization on profitability. In addition, Natus U.S. has a history of using all its net operating losses
and credit carryforwards.
Lengthy carryforward periods for deferred tax assets - The carryforward period for deferred tax assets, particularly U.S. federal and state net operating losses
and R&D credit, in general are long (e.g. 20 years for R&D credit carryforwards) or indefinite (e.g. for federal net operating losses).
Future sources of taxable income - While more subjective and requiring an increased level of judgement, we forecasted future sources of taxable income which
were determined sufficient to support the assertion that the deferred tax assets were more likely than not to be utilized in the future. Key judgments included in
our forecast include the generation of a sufficient level of U.S. profit before tax on a prospective basis and the existence of reasonably predictable levels of
permanent adjustments used in calculating taxable income over the forecast period. The assumptions used in our forecast of future taxable income were
developed in considering the impact the One Natus reorganization has had on our trend in U.S. earnings. the generation of taxable income in the U.S. in 2020,
and conservative expectations as to future results as our business recover from impacts of the COVID-19 pandemic.
The analysis of foreign deferred tax assets was also completed following the same principles. As such, it was concluded that the valuation allowance of $0.6 million
recorded in 2019, that relates primarily to net operating losses and capital losses in Canada, should be retained in 2020 since the benefit is not expected to be realized. No
valuation allowance was booked for the remaining foreign deferred tax assets as the benefits are expected to be realized in the lengthy carryforward periods.
There are no changes to the position on our permanent reinvestment of earnings from foreign operations. As of December 31, 2020, we intend to distribute all of the
earnings from Excel-Tech and Natus Ireland in excess of their operational needs. We have recorded a deferred tax liability of $ 0.8 million accordingly for 5% Canadian
withholding tax on the expected
F-29
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
Excel-Tech distribution to Natus Ireland. Natus Ireland has 0% withholding tax under domestic exemption and therefore, no liability has been recorded. We intend to
permanently reinvest the earnings of remaining foreign subsidiaries. The other remaining foreign subsidiaries have both the intent and ability to indefinitely reinvest its
undistributed earnings.
Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) is as follows (in thousands):
Balance at January 1, 2018
Increases for tax positions related to prior years
Increases for tax positions related to the current year
Decrease due to lapse of statutes of limitations
Foreign exchange difference
Balance at January 1, 2019
Decreases for tax positions related to prior years
Increases for tax positions related to the current year
Decrease due to lapse of statutes of limitations
Foreign exchange difference
Balance at January 1, 2020
Increases for tax positions related to prior years
Increases for tax positions related to the current year
Lapse of statutes of limitations
Foreign exchange difference
Balance at December 31, 2020
$
$
$
$
7,017
526
699
(965)
(50)
7,227
(48)
495
(3,763)
6
3,917
2,454
104
(2,416)
83
4,142
For the year ended December 31, 2020, our net unrecognized tax benefits increased by $0.2 million, resulting in a corresponding $0.2 million increase in income tax
expense. The increase was primarily attributable to the increase in uncertain tax positions related to the current year in certain jurisdictions.
The unrecognized tax benefits for the tax years ended December 31, 2020, 2019 and 2018 were $4.1 million, $3.9 million and $7.2 million, respectively which include
$3.8 million, $3.6 million and $6.5 million, respectively that would impact the effective tax rate if recognized.
We expect a range from zero to $0.2 million of unrecognized tax benefit that will impact the effective tax rate in the next 12 months due to the lapse of statute of
limitations provided that no taxing authority conducts a new examination.
At December 31, 2020, 2019 and 2018, we had cumulatively accrued $0.5 million, $0.4 million, and $0.5 million for estimated interest and penalties related to uncertain
tax positions. We record interest and penalties related to unrecognized tax positions as a component of income tax expense (benefit), which totaled approximately $130.0
thousand, $(80.0) thousand, and $(80.0) thousand for the years ended December 31, 2020, 2019, and 2018, respectively.
We are currently unaware of any uncertain tax positions that could result in significant additional payments, accruals, or other material deviation in this estimate over the
next 12 months.
Our tax returns remain open to examination as follows: U.S. federal, 2016 through 2019; U.S. states, generally 2015 through 2019; and significant foreign jurisdictions,
generally 2015 through 2019.
19—EMPLOYEE BENEFIT PLAN
We offer pre-tax and after-tax 401(k) savings plan options under which eligible U.S. employees may elect to have a portion of their salary deferred and contributed to the
plan. Employer matching contributions are determined by management and are discretionary. Employer matching contributions were $3.2 million, $3.6 million, and $4.7
million respectively, in the years ended December 31, 2020, 2019, and 2018. For new hires, employer contributions vest ratably over the first two years of employment.
F-30
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
20—SEGMENT, CUSTOMER, AND GEOGRAPHIC INFORMATION
We determine our reportable segments by first identifying our operating segments, and then by assessing whether any components of these segments constitute a
business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. Historically, our
operating segments were based on its three strategic business units. In January 2019 we announced the transition of our operating structure from three strategic business units to
a single, unified company with globally led operational teams in Sales and Marketing, Manufacturing, Research and Development, Quality, and General and Administrative
functions.
Following the reorganization, we operate as one operating segment and one reportable segment, which provides medical device solutions focused on the diagnosis and
treatment of central nervous and sensory system disorders for patients of all ages. Financial information is reviewed on a consolidated basis for purposes of making operating
decisions and assessing financial performance. Consolidated financial information is accompanied by disaggregated information about revenues by end market and geographic
region. We do not assess the performance of our end markets or geographic regions on measures of profit or loss, or asset-based metrics. We have disclosed the revenues for
each end market and geographic region to provide the reader of the financial statements transparency into our operations.
The following tables present revenue and long-lived asset information by end market and 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):
Consolidated Revenue:
United States
Foreign countries
Revenue by End Market:
Neuro
Devices and Systems
Supplies
Services
Total Neuro Revenue
Newborn Care
Devices and Systems
Supplies
Services
Total Newborn Care Revenue
Hearing & Balance
Devices and Systems
Supplies
Total Hearing & Balance Revenue
Total Revenue
Long-lived asset information by geographic region is as follows (in thousands):
F-31
2020
Years Ended December 31,
2019
2018
252,496 $
163,188
415,684 $
179,881 $
56,275
—
236,156 $
51,894 $
36,174
16,566
104,634 $
70,711 $
4,183
74,894 $
415,684 $
292,400 $
202,775
495,175 $
220,306 $
66,059
871
287,236 $
53,465 $
38,264
19,183
110,912 $
92,050 $
4,977
97,027 $
495,175 $
300,860
230,031
530,891
200,762
67,025
12,000
279,787
72,807
40,669
20,396
133,872
110,597
6,635
117,232
530,891
$
$
$
$
$
$
$
$
$
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2020, 2019 and 2018
Property and equipment, net:
United States
Ireland
Canada
Denmark
Other foreign countries
Years Ended December 31,
2019
2020
$
$
10,998 $
6,716
3,775
1,787
1,240
24,516 $
11,868
5,732
4,140
1,799
1,163
24,702
During the years ended December 31, 2020, 2019 and 2018, no single customer or foreign country contributed to more than 10% of revenue.
21—COMMITMENTS AND CONTINGENCIES
Purchase commitments—We have various purchase obligations for goods or services totaling $39.6 million at December 31, 2020, which are expected to be paid
$39.1 million in 2021 and $0.5 million thereafter.
Legal matters—We currently are, and may from time to time become, a party to various legal proceedings or claims that arise in the ordinary course of business. Our
managements reviews these matters if and when they arise and believes that the resolution of any such matters currently known will not have a material effect on our results of
operations or financial position.
22—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.
On April 1, 2019, as part of the sale of our Argentinian subsidiary, Medix, we provided a loan to Medix for $2.2 million. This asset was measured at fair value less costs
to sell as of December 31, 2019 and is classified as Level 3 asset. The loan is classified within other assets on our consolidated balance sheet. Subsequent changes in the fair
value of the loan receivable are recorded within our income statement as an operating expense.
Other assets:
Loan receivable
Total
December 31, 2019
Additions
Payments
Adjustments
December 31, 2020
$
$
1,906
1,906
$
$
—
—
$
$
—
—
$
$
(1,180)
(1,180)
$
$
726
726
The derivative financial instruments described in Note 12 are measured at fair value on a recurring basis and are presented on the consolidated balance sheets at fair value.
The table below presents the fair value of the derivative financial instruments as well as the classification on the consolidated balance sheet (in thousands):
F-32
Table of Contents
NATUS MEDICAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Years Ended December 31, 2019, 2018 and 2017
Liabilities:
Interest Rate Swap
Total
December 31, 2019
Additions
Payments
Adjustments
December 31, 2020
$
$
313
313
$
$
—
—
$
$
—
—
$
$
(36)
(36)
$
$
277
277
We estimate the fair value of the interest rate swaps by calculating the present value of the expected future cash flows of each swap. The calculation incorporated the
contractual terms of the derivatives, observable market interest rates which are considered to be Level 2 inputs, and credit risk adjustments, if any, to reflect the counterpart's as
well as our nonperformance risk. As of December 31, 2020, there have been no events of default under the interest rate swap agreement.
The following financial instruments are not measured at fair value on the consolidated balance sheet as of December 31, 2020 and 2019, but require disclosure of fair
values: cash and cash equivalents, accounts receivable, and accounts payable. The carrying value of these financial instruments approximates fair values because of the
relatively short maturity.
The carrying amount of our short-term and long-term debt approximates fair value based on Level 2 inputs since the debt carries a variable interest rate that is tied to the
current LIBOR rate plus a spread.
23—SALE OF CERTAIN SUBSIDIARY
We divested our wholly owned subsidiary, Medix, on April 2, 2019 via a stock sale to the local managing director, a related party. In exchange for the stock, we received $2.5
thousand in cash and provided Medix with a $2.2 million limited-recourse loan. The loan is secured by a real estate assets of Medix and repayment is conditional upon the sale
of the real estate asset. The fair market value of the loan is assessed quarterly and adjusted as necessary to reflect any changes in market environment or the value of the
building. See Note 22 to the Condensed Consolidated Financial Statements for fair market value of the loan receivable.
The held for sale criteria under GAAP was met in the first quarter of 2019. As such, we completed an asset impairment analysis which resulted in the full impairment of all
assets held for sale. We recognized an impairment loss of $24.6 million which included an accrual for the anticipated realization of deferred foreign currency related translation
adjustments in accumulated other comprehensive income of $24.8 million, net of tax, and an adjustment of $4.6 million for assets with a book value in excess of their fair
market value. Included in the year ended December 31, 2019 is the impact of the sale of Medix, which was completed as of June 30, 2019, and the deferred foreign currency
related translation adjustments previously in accumulated other comprehensive income have been released from the balance sheet along with the held for sale accrual.
ITEM 16. Form 10-K Summary
Not Applicable.
F-33
EXHIBIT INDEX
Exhibit
Filing
Exhibit No.
File No.
File Date
Incorporated By Reference
3.1.1
333-44138
8/18/2000
000-33001
9/13/2012
000-33001
6/7/2019
Table of Contents
Exhibit No.
3.1
3.2
3.3
3.4
4.1
4.2
4.3
10.1
10.1.1*
10.1.2*
10.1.3*
10.1.4
10.1.5*
10.2*
10.2.1*
10.2.2*
10.2.3*
10.3*
10.3.1*
10.4*
10.4.1*
Natus Medical Incorporated Restated Certificate of
Incorporation, as filed with the Delaware Secretary of State
as of July 25, 2001
Certificate of Amendment of the Amended and Restated
Certificate of Incorporation, as filed with the Delaware
Secretary of State as of September 12, 2012
Certificate of Amendment of the Amended and Restated
Certificate of Incorporation, as filed with the Delaware
Secretary of State as of June 5, 2019
Second Amended and Restated Bylaws of Natus Medical
Incorporated
Specimen stock certificate for shares of common stock, par
value $0.001 per share
Natus Medical Incorporated Certificate of Designation of
Rights, Preferences and Privileges of Series A Participating
Preferred Stock
Description of Common Stock
Form of Indemnification Agreement between Natus
Medical Incorporated and each of its directors and officers
2018 Equity Incentive Plan
Form of Stock Option Awards Agreement under the 2018
Equity Incentive Plan
Form of Restricted Stock Award Agreement under the
2018 Equity Incentive Plan
Form of Restricted Stock Unit Agreement under the 2018
Equity Incentive Plan
Form of Performance Stock Unit Agreement under the
2018 Equity Incentive Plan
Natus Medical Incorporated Amended and Restated 2000
Stock Awards Plan
Form of Option Agreement under the Amended and
Restated 2000 Stock Awards Plan
Form of Restricted Stock Purchase Agreement under the
Amended and Restated 2000 Stock Awards Plan
Form of Restricted Stock Unit Agreement under the
Amended and Restated 2000 Stock Awards Plan
Natus Medical Incorporated 2000 Director Option Plan
Form of Option Agreement under the 2000 Director Option
Plan
Natus Medical Incorporated 2000 Supplemental Stock
Option Plan
Form of Option Agreement for 2000 Supplemental Stock
Option Plan
S-1
8-K
8-K
8-K
S-1/A
8-A
10-K
S-1
8-K
8-K
8-K
8-K
8-K
8-K
S-1
10-Q
10-K
10-Q
S-1
S-1
S-1
3.1
3.1
3.1
4.1
000-33001
333-44138
3.1.2
000-33001
4.3
10.1
10.1
10.1.1
10.1.2
10.1.3
10.1.4
10.1
10.3.1
10.2
10.2.3
10.02
10.4.1
10.15
000-33001
333-44138
000-33001
000-33001
000-33001
000-33001
000-33001
000-33001
333-44138
000-33001
000-33001
000-33001
333-44138
333-44138
10.15.1
333-44138
12/16/2019
2/9/2001
9/6/2002
12/31/2019
8/18/2000
12/18/2018
12/18/2018
12/18/2018
12/18/2018
12/18/2018
1/4/2006
8/18/2000
8/9/2006
3/14/2008
5/9/2008
8/18/2000
2/9/2001
2/9/2001
Exhibit
Filing
Exhibit No.
File No.
File Date
Incorporated By Reference
000-33001
1/4/2006
Table of Contents
Exhibit No.
10.5*
10.6*
10.6.1*
10.6.2*
10.6.3*
10.7*
10.7.1*
10.8*
10.8.1*
10.9*
10.10*
10.11
10.12
10.13
10.14
10.15
10.16*
10.17*
10.18
21.1
Natus Medical Incorporated 2000 Employee Stock
Purchase Plan and form of subscription agreement
thereunder
[Amended] 2011 Stock Awards Plan
Form of Stock Option Award Agreement under the
[Amended] 2011 Stock Plan
Form of Restricted Stock Award Purchase Agreement
Form of Restricted Stock Unit Agreement
2011 Employee Stock Purchase Plan
2011 Employee Stock Purchase Plan Subscription
Agreement
Form of Employment Agreement between Natus Medical
Incorporated and each of its executive officers other than
its Chief Executive Officer and Chief Financial Officer
Form of Amendment to Employment Agreement between
Natus Medical Incorporated and each of its executive
officers other than its Chief Executive Officer and Chief
Financial Officer
Amended employment agreement between Natus Medical
Incorporated and its Chief Executive Officer, James B.
Hawkins dated April 19, 2013
Terms of Resignation between Natus Medical
Incorporated and James B. Hawkins dated July 11, 2018
Credit Agreement between Natus Medical Incorporated
and CitiBank, NA dated October 9, 2015
Agreement For the Acquisition of Medical Devices
between Medix ICSA and the Ministry of Health of the
Republic of Venezuela dated October 15, 2015
Amendment to Agreement For the Acquisition of Medical
Devices between Medix ICSA and the Ministry of Health
of the Republic of Venezuela dated October 15, 2015
Credit Agreement, dated September 23, 2016, between the
Company, JP Morgan Chase Bank, N.A. and Citibank,
N.A.
Master Purchase Agreement, dated September 25, 2016,
between GN Hearing A/S, GN Nord A/S and the
Company
Forms of Employment Agreement between Natus Medical
Incorporated and Jonathan A. Kennedy dated August 24,
2018
Form of Employment Agreement between Natus Medical
Incorporated and Drew Davies dated October 1, 2018
Amendment to Credit Agreement, dated August 10, 2020,
between the Company, JP Morgan Chase Bank, N.A. and
Citibank, N.A.
Significant Subsidiaries of the Registrant
8-K
14-A
10-Q
10-Q
10-Q
14-A
14-A
10-K
10-K
8-K
10-Q
8-K
10-Q
10-Q
10-Q
10-Q
8-K
10-Q
10-Q
10.2
—
10.1
10.2
10.3
—
—
000-33001
000-33001
000-33001
000-33001
000-33001
000-33001
4/20/2011
11/7/2011
11/7/2011
11/7/2011
4/20/2011
4/20/2011
3/10/2009
10.10
000-33001
000-33001
3/16/2015
99.1
000-33001
4/22/2013
10.16
10.1
10.2
10.1
10.3
99.1
10.18
10.1
000-33001
000-33001
000-33001
8/8/2018
10/9/2015
2/29/2016
000-33001
11/3/2016
000-33001
11/3/2016
000-33001
11/3/2016
000-33001
8/29/2018
000-33001
000-33001
11/8/2018
9/30/2020
Filing
Exhibit No.
File No.
File Date
Incorporated By Reference
Table of Contents
Exhibit No.
23.1
24.1
31.1
31.2
32.1
101
104
Exhibit
Consent of Independent Registered Public Accounting Firm
Power of Attorney (included on signature page)
Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
The following financial information from Natus Medical
Incorporated Annual Report on Form 10-K for the fiscal year
ended December 31, 2020, formatted in XBRL (eXtensible
Business Reporting Language): (i) Consolidated Balance
Sheets as of December 31, 2020 and December 31, 2019, (ii)
Consolidated Statements of Operations for the years ended
December 31, 2020, 2019 and 2018, (iii) Consolidated
Statements of Comprehensive Income for the years ended
December 31, 2020, 2019 and 2018 (iv) Consolidated
Statements of Cash Flows for the years ended December 31,
2020, 2019 and 2018, (v) Consolidated Statements of
Stockholders’ Equity for the years ended December 31, 2020,
2019 and 2018, and (vi) the Notes to Consolidated Financial
Statements.
The cover page of the Annual Report on Form 10-K
formatted in Inline XBRL (included in Exhibit 101).
* Indicates a management contract or compensatory plan or arrangement
Natus Medical Incorporated
Natus Manufacturing Limited
Natus Medical Denmark ApS
Excel-Tech Corp.
SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT
STATE or JURISDICTION
of INCORPORATION
Delaware
Ireland
Denmark
Canada
EXHIBIT 21.1
PERCENT of
OWNERSHIP
100 %
100 %
100 %
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Natus Medical Incorporated:
We consent to the incorporation by reference in the registration statements (Nos. 333‑65584, 333-133657, 333-174702, and 333-229314) on Form S-8
and registration statements (Nos. 333-133480, 333-150503, and 333-171489) on Form S-3 of Natus Medical Incorporated of our reports dated
February 26, 2021, with respect to the consolidated balance sheets of Natus Medical Incorporated as of December 31, 2020 and 2019, the related
consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period
ended December 31, 2020, and the related notes and financial statement schedule, and the effectiveness of internal control over financial reporting as of
December 31, 2020, which reports appear in the December 31, 2020 annual report on Form 10‑K of Natus Medical Incorporated.
San Francisco, California
February 26, 2021
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jonathan A. Kennedy, certify that:
1. I have reviewed this report on Form 10-K of Natus Medical Incorporated, (the "Registrant");
2. 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 report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter
(the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control
over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s
auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial
reporting.
Date:
February 26, 2021
/s/ Jonathan A. Kennedy
Jonathan A. Kennedy
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, B. Drew Davies, certify that:
1. I have reviewed this report on Form 10-K of Natus Medical Incorporated, (the "Registrant");
2. 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 report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter
(the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control
over financial reporting; and
5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s
auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial
reporting.
Date:
February 26, 2021
/s/ B. Drew Davies
B. Drew Davies
Executive Vice President
and Chief Financial Officer
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO TITLE 18, UNITED STATES CODE, SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of Natus Medical Incorporated (the “Company”) on Form 10-K for the year ended December 31, 2020 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Jonathan A. Kennedy, President and Chief Executive Officer of the Company, certify, pursuant to Title 18, United
States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Jonathan A. Kennedy
Print Name: Jonathan A. Kennedy
Title: President and Chief Executive Officer
February 26, 2021
Date:
In connection with the Annual Report of Natus Medical Incorporated (the “Company”) on Form 10-K for the year ended December 31, 2020 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, B. Drew Davies, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to Title 18,
United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ B. Drew Davies
Print Name: B. Drew Davies
Title: Executive Vice President and Chief Financial Officer
Date:
February 26, 2021