Unless the context otherwise requires, references
herein to “we,” “us,” “our” or “group” are to EDAP TMS S.A. and its consolidated
subsidiaries and references herein to the “Company,” “EDAP” or “EDAP TMS” are to EDAP TMS S.A.
We prepare our consolidated financial statements
in conformity with United States generally accepted accounting principles (‘‘U.S. GAAP’’). In this annual
report, references to ‘‘euro’’ or ‘‘€’’ are to the legal currency of the countries
of the European Monetary Union, including the Republic of France, and references to ‘‘dollars,’’ ‘‘U.S.
dollars’’ or ‘‘$’’ are to the legal currency of the United States of America. Solely for the
convenience of the reader, this annual report contains translations of certain euro amounts into dollars at specified rates. These
translations should not be construed as representations that the euro amounts actually represent such dollar amounts or could be
converted into dollars at those rates. See Item 11, ‘‘Quantitative and Qualitative Disclosures about Market Risk’’
for a discussion of the effects of fluctuations in currency exchange rates on the Company.
The following are registered trademarks of the
Company in the United States: EDAP TMS
®
& associated logo, EDAP
®
, Ablatherm
®
,
Ablasonic
®
, Ablapak
®
, Sonolith i-sys
®
, Sonolith i-move
®
, Focal.One
®
.
This annual report also makes references to trade names and trademarks of companies other than the Company.
This annual report includes certain forward-looking
statements within the meaning of Section 27A of the U.S. Securities Act of 1933 (the “Securities Act”) or Section 21E
of the U.S. Securities Exchange Act of 1934 (the “Exchange Act”), which may be identified by words such as ‘‘believe,’’
‘‘plan,’’ ‘‘intend,’’ “should,” ‘‘estimate,’’
‘‘expect’’ and ‘‘anticipate’’ or similar expressions, which reflect our views about
future events and financial performance. Forward-looking statements involve inherent known and unknown risks and uncertainties
including matters not yet known to us or not currently considered material by us. Actual events or results may differ materially
from those expressed or implied in such forward-looking statements as a result of various factors that may be beyond our control.
Factors that could affect future results or cause actual events or results to differ materially from those expressed or implied
in forward-looking statements include, but are not limited to:
You should also consider the information contained
in Item 3, ‘‘Key Information—Risk Factors’’ and Item 5, ‘‘Operating and Financial Review
and Prospects,’’ or further discussion of the risks and uncertainties that may cause such differences to occur. Forward-looking
statements speak only as of the date they are made. Other than required by law, we do not undertake any obligation to update them
in light of new information or future developments.
PART I
Item 1. Identity of Directors, Senior Management and Advisors
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
Selected Financial Data
The following table sets forth selected consolidated
financial data for the periods indicated. This information is qualified by and should be read in conjunction with the consolidated
financial statements and the Notes thereto included in Part III of this annual report, as well as Item 5, ‘‘Operating
and Financial Review and Prospects.’’ The selected balance sheet data as of December 31, 2018 and 2017 and the selected
income statement data for the years ended December 31, 2018, 2017 and 2016 set forth below have been derived from our consolidated
financial statements included in this annual report. Our consolidated financial statements have been prepared in accordance with
U.S. GAAP. To date, we have not been required, and presently are not required under French law, to prepare consolidated financial
statements under French GAAP or IFRS, nor have we done so.
Year Ended and at December
31,
In thousands of euro, except per share data in euro
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
INCOME STATEMENT DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
39,183
|
|
|
|
35,746
|
|
|
|
35,611
|
|
|
|
32,253
|
|
|
|
26,785
|
|
Totalsales
|
|
|
39,163
|
|
|
|
35,686
|
|
|
|
35,579
|
|
|
|
32,218
|
|
|
|
26,252
|
|
Gross profit
|
|
|
16,917
|
|
|
|
14,808
|
|
|
|
16,411
|
|
|
|
13,785
|
|
|
|
11,201
|
|
Operating expenses
|
|
|
(18,232
|
)
|
|
|
(16,835
|
)
|
|
|
(16,019
|
)
|
|
|
(13,298
|
)
|
|
|
(12,937
|
)
|
Income (loss) from operations
|
|
|
(1,315
|
)
|
|
|
(2,027
|
)
|
|
|
392
|
|
|
|
488
|
|
|
|
(1,736
|
)
|
Basic Income (loss) from operations per common share
|
|
|
(0.05
|
)
|
|
|
(0.07
|
)
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
(0.07
|
)
|
Diluted Income (loss) from operations per common share
|
|
|
(0.05
|
)
|
|
|
(0.07
|
)
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
(0.07
|
)
|
Income (loss) before income taxes
|
|
|
20
|
|
|
|
(294
|
)
|
|
|
4,444
|
|
|
|
(907
|
)
|
|
|
(396
|
)
|
Income tax (expense) benefit
|
|
|
(358
|
)
|
|
|
(388
|
)
|
|
|
(602
|
)
|
|
|
(759
|
)
|
|
|
(116
|
)
|
Net income (loss)
|
|
|
(338
|
)
|
|
|
(681
|
)
|
|
|
3,842
|
|
|
|
(1,667
|
)
|
|
|
(512
|
)
|
Basic earnings (loss) per share
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
0.14
|
|
|
|
(0.07
|
)
|
|
|
(0.02
|
)
|
Diluted earnings (loss) per share
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
0.13
|
|
|
|
(0.07
|
)
|
|
|
(0.02
|
)
|
Dividends per share
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Basic weighted average shares outstanding
|
|
|
28,997,866
|
|
|
|
28,961,928
|
|
|
|
27,823,313
|
|
|
|
25,021,966
|
|
|
|
23,601,428
|
|
Diluted weighted average shares outstanding
|
|
|
28,997,866
|
|
|
|
28,961,928
|
|
|
|
29,365,583
|
|
|
|
25,021,966
|
|
|
|
23,601,428
|
|
BALANCE SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
40,376
|
|
|
|
39,574
|
|
|
|
40,502
|
|
|
|
32,992
|
|
|
|
26,575
|
|
Property and equipment, net
|
|
|
4,208
|
|
|
|
3,682
|
|
|
|
2,770
|
|
|
|
2,123
|
|
|
|
2,122
|
|
Total assets
|
|
|
48,740
|
|
|
|
46,897
|
|
|
|
46,591
|
|
|
|
38,581
|
|
|
|
32,154
|
|
Total current liabilities
|
|
|
16,812
|
|
|
|
16,134
|
|
|
|
15,010
|
|
|
|
16,271
|
|
|
|
12,158
|
|
Capital lease obligations, less current portion
|
|
|
852
|
|
|
|
528
|
|
|
|
313
|
|
|
|
294
|
|
|
|
355
|
|
Long-term debt, less current portion
|
|
|
1,339
|
|
|
|
834
|
|
|
|
3,665
|
|
|
|
4,798
|
|
|
|
2,434
|
|
Common stock, €0.13 par value; 29,368,394 shares issued and 28,997,866 shares outstanding; at December 31, 2018 and 2017 respectively
|
|
|
3,818
|
|
|
|
3,818
|
|
|
|
3,783
|
|
|
|
3,348
|
|
|
|
3,282
|
|
Total shareholders’ equity
|
|
|
24,964
|
|
|
|
25,158
|
|
|
|
24,451
|
|
|
|
14,430
|
|
|
|
15,141
|
|
|
(1)
|
No dividends were paid with respect to fiscal years 2014 through 2017 and subject to approval of
the annual shareholders’ meeting to be held in 2018 the Company does not anticipate paying any dividend with respect to fiscal
year 2018. See Item 8, ‘‘Financial Information — Dividends and Dividend Policy.’’
|
RISK FACTORS
In addition to the other information contained
in this annual report, the following risk factors should be carefully considered in evaluating us and our business. These statements
are intended to highlight the material risk factors that may cause actual financial, business, research or operating results to
differ materially from expectations disclosed in this annual report. See also factors disclosed under “Cautionary statement
on forward-looking information”.
Risks Relating to Our Business
We have a history of operating losses and it is uncertain
whether we can reach profitability in the future.
Although we achieved operational profitability
in 2015 and 2016, we have incurred operating losses in 2018 and 2017 and in each previous fiscal year prior to 2015, since 1998.
We expect that our marketing, selling and research and development expenses will increase as we attempt to develop and commercialize
our lithotripsy and particularly our HIFU devices. We may not, however, generate a sufficient level of revenue to offset these
expenses and may not be able to adjust spending in a timely manner to respond to any unanticipated decline in revenue. We cannot
guarantee that we will realize sufficient revenue to reach profitability in the future. See Item 5, ‘‘Operating and
Financial Review and Prospects.’’
Our future revenue growth and income depend, among other things,
on the success of our HIFU technology.
Our Extracorporeal Shockwave Lithotripsy (“ESWL”)
line of products competes in a mature market that has experienced overall declining unit sales prices in recent years. We depend
on the success of our HIFU technology for future revenue growth and net income. In particular, we are dependent on the successful
development and commercialization of other product lines, such as medical devices based on HIFU, particularly but not limited to
the Ablatherm and the Focal One, to generate significant additional revenues and achieve and sustain profitability in the future.
Although we are particularly dependent on the
success of our HIFU technology to grow our business, other revenues, generated by our Urology Devices and Services (“UDS”)
division and directly linked to the distribution of other complementary products on behalf of medical companies, continue to increase
significantly and contribute to our revenue growth. While we believe that our UDS division can successfully pursue the marketing
of its worldwide distribution platform, any termination of distribution commitments from such medical third parties could have
a material adverse effect on our business, financial condition or results of operations. See “—Item 4, “Information
on the Company—UDS Division— UDS Division Services and Distribution.”
We utilize distributors for our sales abroad, which subjects
us to a number of risks that could harm our business.
We have developed strategic relationships with
a number of distributors for sales and service of our devices in certain foreign countries where we are not directly represented
by a subsidiary. If these relationships are terminated and not replaced, our revenues and/or ability to market or service our devices
in the related territories could be adversely affected. Our distributors’ actions may affect our ability to effectively market
our devices in certain foreign countries if, for example, a distributor holds the regulatory authorizations in such countries and
causes, by action or inaction, the suspension of such regulatory authorizations or sanctions for non-compliance. It may be difficult,
expensive, and time consuming for us to re-establish market access or regulatory compliance in such case. Moreover, our distributors
must be in compliance with anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, and other local laws prohibiting
corrupt payments to governmental officials or to customers and we may not be able to trace or be kept informed of such corruption.
In addition, we may be named as a defendant in lawsuits against our distributors related to sales or service of our devices performed
by these distributors. See our risk factor below “
We face a significant risk of exposure to product liability claims in
the event that the use of our products results in personal injury or death.
”
We operate in a highly regulated industry and our future success
depends on obtaining and maintaining government regulatory approval of our products, which we may not receive or be able to maintain
or which may be delayed for a significant period of time.
Government regulation significantly impacts
the development and marketing of our products, particularly in the United States, EU and Japan. We are regulated in each of our
major markets with respect to preclinical and clinical testing, manufacturing, labeling, distribution, sale, marketing, advertising
and promotion of our products. To market and sell products, we are required to obtain approval or clearance from the relevant regulatory
agencies, including the FDA with respect to the United States. In that respect, the FDA may not act favorably or quickly in its
review of our submissions, or we may encounter significant difficulties in our efforts to obtain FDA clearance or approval, all
of which could delay or preclude the sale of new products in the U.S. In the European Union, the regulation of medical devices
is being updated -the European Medical Device Regulation (“MDR”) and will be effective as of 2020 imposing stricter
requirements on the conformity assessment and the commercialization of our products. An MDR gap analysis is currently being performed
in preparation of MDR transition within the expected timelines. During transition period, regulatory actions are being implemented
to ensure our devices continue to be distributed on European and international markets after May 2020.
The process of applying for regulatory approval
is often lengthy and requires the expenditure of substantial resources. Further, there can be no assurance that we will receive
the required approvals for our products from the required regulatory authorities or, if we do receive the required approvals, that
we will receive them on a timely basis, on the conditions and for the indications we seek, or that we will otherwise be able to
satisfy the conditions of such approval, if any.
Even if regulatory approval to market a product
is granted, it may include limitations on the indicated uses for which the product may be marketed. Failure to comply with regulatory
requirements can result in fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecutions. Regulatory policy may change and additional government regulations may be established that
could prevent or delay regulatory approval of our products. Any delay, failure to receive regulatory approval or the loss of previously
received approvals could have a material adverse effect on our business, financial condition and results of operations. For more
information on the regulation of our business, see Item 4, ‘‘Information on the Company—Government Regulation’’
and “Information on the Company—HIFU Division—HIFU Division Clinical and Regulatory Status.”
Moreover, we may also be required to abandon
previous strategies for regulatory approval, despite having made significant financial and time investments, or refocus our efforts
on alternative regulatory strategies, resulting in increased costs and efforts of management, without any guarantee of success,
which could materially adversely affect our business, financial condition and results of operations.
Furthermore, we are also subject to healthcare
laws and regulations pertaining to physician payment transparency, privacy and regulations. These regulations include, but are
not limited to (i) the U.S. federal Health Insurance Portability and Accountability Act (“HIPAA”) of 1996, as amended
by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare
transactions and protects the security and privacy of protected health information; (ii) the U.S. federal Physician Payment Sunshine
Act (the “Sunshine Act”), which requires manufacturers of medical devices for which payment is available under Medicare,
Medicaid, to report annually to the Centers for Medicare & Medicaid Services (“CMS”) information related to payments
or other “transfers of value” made to physicians, (iii) two main sets of laws enacted in France about transparency
requirements: “The French Anti-Gift Law” which regulates the provision of gifts, discounts and other incentives to
physicians and the “Loi Bertrand” which imposes disclosure obligations on companies relating to benefits and remunerations
granted to, and agreements concluded with, physicians. Any failure to comply with these regulations may have a material adverse
effect on our business, financial condition and results of operations.
Finally, changes to regulatory policy or the
adoption of additional statutes or regulations that affect our business could impose substantial additional costs or otherwise
have a material adverse effect on our business, financial condition and results of operations.
Our clinical trials related to products using HIFU technology
may not be successful and we may not be able to obtain regulatory approvals necessary for commercialization of all of our HIFU
products.
Before obtaining regulatory approvals for
the commercial sale of any of our devices under development, we must demonstrate through preclinical testing and clinical trials
that the device is safe and effective for use in each indication. Product development, including pre-clinical studies and clinical
trials is a long, expensive and uncertain process, and is subject to delays and failures at any stage. We or the relevant regulatory
authorities may suspend or terminate clinical trials at any time and regulating agencies may even refuse to grant exemptions to
pursue clinical trials. The results from preclinical testing and early clinical trials may not predict the results that will be
obtained in large scale clinical trials. Companies can suffer significant setbacks in advanced clinical trials, even after promising
results in earlier trials. Furthermore, data obtained from a trial can be insufficient to demonstrate that our products are safe,
effective, and marketable. The commencement, continuation or completion of any of our clinical trials may be delayed or halted,
or inadequate to support approval of an application to regulatory authorities for numerous reasons including, but not limited to:
|
·
|
that regulatory authorities do not approve a clinical trial protocol or a clinical trial, or place
a clinical trial on hold, discussions with regulatory authorities to improve our clinical protocols may prove difficult and lengthy;
See Item 4, ‘‘Information on the Company—HIFU Division Clinical and Regulatory Status.’’
|
|
·
|
slower than expected rates of patient recruitment and enrolment;
|
|
·
|
inability to adequately monitor patient during or after treatment;
|
|
·
|
failure of patients to complete the clinical trial;
|
|
·
|
prevalence and severity of adverse events and other unforeseen safety issues;
|
|
·
|
third-party organizations not performing data collection and analysis in a timely and accurate
manner;
|
|
·
|
governmental and regulatory delays or changes in regulatory requirements, policies or guidelines;
|
|
·
|
the interim or final results of a clinical trial are inconclusive or unfavorable as to safety or
efficacy; and
|
|
·
|
that regulatory authorities conclude that our trial design is inadequate to demonstrate safety
and efficacy.
|
The data we collect from our current clinical
trials, our pre-clinical studies and other clinical trials may not be sufficient to support requested regulatory approval. Additionally,
certain regulatory authorities may disagree with our interpretation of the data from our pre-clinical studies and clinical trials,
or may find the clinical trial design, conduct or results inadequate to prove safety or efficacy, and may require us to pursue
additional pre-clinical studies or clinical trials, which would increase costs and could further delay the approval of our products.
If we are unable to demonstrate the safety and efficacy of our products in our clinical trials, we will be unable to obtain regulatory
approval to market our products.
Our HIFU devices that have not received regulatory
approval may not prove to be effective or safe in clinical trials or may not be approved by the appropriate regulatory authorities.
If our HIFU devices do not prove to be effective and safe in clinical trials to the satisfaction of the relevant regulatory authorities,
our business, financial condition and results of operations could be materially adversely affected.
The commercial success of our products depends on whether
procedures performed by those products are eligible for reimbursement approved by national health authorities and third-party payers.
Our success depends, among other things, on
the extent to which reimbursement can be obtained from healthcare payers for procedures performed with our products. In the United
States, we are dependent upon favorable decisions by CMS for Medicare reimbursement, individual managed care organizations, private
insurers and other payers. These decisions may be revised from time to time, which could negatively affect reimbursement for procedures
performed using our devices. In May 2017, CMS granted a C-code for the use of HIFU for prostate tissue ablation, effective July
1
st
, 2017. This C-code covers hospital practical fees. We are currently in discussion with private insurers to advance
on the reimbursement of HIFU procedures for prostate tissue ablation. Outside the United States, and in particular in the European
Union and Japan, third-party reimbursement is generally conditioned upon decisions by national health authorities. In the European
Union, there is no harmonized procedure for obtaining reimbursement and, consequently, we must seek regulatory approval in each
Member State. Procedures performed with our HIFU devices are not reimbursed in the European Union with the exception of Italy,
Germany, in the United Kingdom (where procedures are partially reimbursed by either public healthcare systems or private insurers
and in France under certain conditions). On April 18, 2014, the French healthcare government authorities announced the reimbursement
of prostate cancer treatment procedures using HIFU as part of a specific process (“Forfait Innovation”) to further
validate breakthrough therapies and to accelerate their related reimbursement process based on clinical trials and data registries.
HIFU patients are still being treated and entered into the dedicated registry. Under this specific process, French healthcare government
authorities will review the clinical data gathered following this decision in view of granting definitive reimbursement for HIFU.
However, we cannot guarantee that a definitive reimbursement code will finally be granted.
Lithotripsy procedures currently are reimbursed
by public healthcare systems in the European Union, in Japan and in the United States. However, a decision in any of those countries
to modify reimbursement policies for these procedures could have a material adverse effect on our business, financial conditions
and results of operations. For example, in April 2016, the Japanese authorities decided to stop reimbursing lithotripters’
disposables (electrodes) necessary to perform a lithotripsy procedure. This decision had and will have a material effect on our
current and future sales of lithotripsy disposables in Japan.
We cannot assure investors that additional reimbursement
approvals will be obtained in the near future. If reimbursement for our products is unavailable, limited in scope or amount, or
if pricing is set at unsatisfactory levels, and if we fail to establish or maintain a certain level of reimbursement or full reimbursement
from healthcare payers or governments and private healthcare payers’ policies change, it could have a material adverse effect
on our business, financial condition and results of operations.
HIFU technology may not be adopted by the medical community
and may never become a standard of care.
Our HIFU devices represent new therapies for
the conditions that they are designed to treat. Notwithstanding any positive clinical results that our HIFU devices may have achieved
or may achieve in the future in terms of safety and efficacy and any marketing approvals that we have obtained or may obtain in
the future, there can be no assurance that such products will gain adoption by the medical community. Physician adoption depends,
among other things, on evidence of the cost effectiveness of a therapy as compared to existing therapies and on adequate reimbursement
from healthcare payers. Furthermore, acceptance by patients depends in part on physician recommendations, as well as other factors,
including the degree of invasiveness, the rate and severity of complications and other side effects associated with the therapy
as compared to other therapies.
If our HIFU devices do not achieve an adequate
level of acceptance by physicians, patients, health care payers and the medical community and never become a standard of care,
we may not generate or maintain positive cash flows and we may not become profitable or be able to sustain profitability. If we
do achieve market acceptance of our products, we may not be able to sustain it or otherwise achieve it to a degree, which would
support the ongoing viability of our operations.
Our cash flow is highly dependent on demand
for our products.
Our cash flow has historically been subject
to significant fluctuations over the course of any given financial year due to cyclical demand for medical devices, and the resulting
annual and quarterly fluctuations in trade and other receivables and inventories. This has in the past resulted in significant
variations in working capital requirements and operating cash flows. Although in 2015 and 2016, our operating cash flow was positive,
in 2018 our operating cash flow was negative due to the operating loss and working capital cash requirements, to expand our worldwide
activities. Since we anticipate relying on cash flow from operating activities to meet our liquidity requirements, a decrease in
the demand for our products, or the inability of our customers to meet their financial obligations to us, would reduce the funds
available to us. In the future, our liquidity may be constrained and our cash flows may be uncertain, negative or significantly
different from period to period. Our future cash flow will be affected by increased expenses in clinical trials, sales efforts
as well as marketing campaigns and promotional tools, particularly to implement our expanded U.S. and global strategy following
the FDA clearance of Ablatherm, and Focal One, while there is no assurance that this will result in the increase in the demand
for our products and services.
Competition in the markets in which we operate is intense
and is expected to increase in the future.
Competition in the markets in which we operate
is intense and is expected to increase in the future. In each of our main businesses, we face competition both directly from other
manufacturers of medical devices that apply the same technologies that we use, as well as indirectly from existing or emerging
therapies for the treatment of urological disorders.
We believe that because ESWL has long been the
standard treatment for urinary tract calculus disease, competition in that market comes principally from current manufacturers
of lithotripters, including Wolf, Storz and Dornier. In the markets that we target for our HIFU products, competition comes from
new market entrants and alternative therapies, as well as from current manufacturers of medical devices. In the HIFU market, our
devices, in particular the Ablatherm and the Focal One, compete with all current treatments for localized tumors, including surgery,
external beam radiotherapy, brachytherapy and cryotherapy. Other energies addressing prostate cancer ablation are also currently
being developed such as electroporation and microwave. Other companies working with HIFU technology for the minimally invasive
treatment of tumors include SonaCare Medical, a U.S. company that markets a device called the Sonablate for the ablation of prostatic
tissue. Sonablate was approved by the FDA for commercialization in the U.S. in October 2015. Profound Medical, a Canadian company,
is developing transurethral ultrasound therapy for prostate cancer. Profound Medical acquired Philips Healthcare’s HIFU activity,
integrating the development of HIFU devices addressing uterine fibroids, breast tumors and drug delivery activated by HIFU. Insightec,
an Israeli company owned mainly by General Electric and Elbit Medical Imaging, has developed a device using HIFU technology to
treat uterine fibroids, painful bone tumors and brain disorders. Theraclion, a French company licensed by EDAP to use of some of
our HIFU patents, is currently marketing the Echopulse HIFU device to treat thyroid tumors and benign breast tumors. Haifu, a Chinese
company, is developing HIFU products addressing various types of cancers. See Item 4, ‘‘Information on the Company—HIFU
Division— HIFU Competition’’ and Item 4, ‘‘Information on the Company—UDS Division.’’
Many of our competitors have significantly
greater financial, technical, research, marketing, sales, distribution and other resources than we have and may have more experience
in developing, manufacturing, marketing and supporting new medical devices. In addition, our future success will depend in large
part on our ability to maintain a leading position in technological innovation, and we cannot assure investors that we will be
able to develop new products or enhance our current ones to compete successfully with new or existing technologies. Rapid technological
development by competitors may result in our products becoming obsolete before we recover a significant portion of the research,
development and commercialization expenses incurred with respect to those products.
We also face competition for our maintenance
and service contracts. Larger hospitals often utilize their in-house maintenance departments instead of contracting with equipment
manufacturers like us to maintain and repair their medical equipment. In addition, third-party medical equipment maintenance companies
increasingly compete with equipment manufacturers by offering broad repair and maintenance service contracts to hospitals and clinics.
This increased competition for medical devices and maintenance and service contracts could have a material adverse effect on our
business, financial condition and results of operations.
Our manufacturing operations are highly regulated and failure
to comply with those regulations would harm our business.
Our manufacturing operations must comply with
regulations established by regulatory agencies in the United States, the European Union and other countries, and in particular
with the Current Good Manufacturing Practices (‘‘CGMP’’) mandated by the FDA and European Union standards
for quality assurance and manufacturing process control. Since such standards may change, we
may
not, at all times, comply with all applicable standards and, as a result would be unable to manufacture our products for commercial
sale. Our manufacturing facilities are subject to inspection by regulatory authorities at any time. If any inspection by the regulatory
authorities reveals deficiencies in manufacturing, we could be required to take immediate remedial actions, suspend production
or close the current and future production facilities, which would disrupt our manufacturing processes. Accordingly, failure to
comply with these regulations could have a material adverse effect on our business, financial condition and results of operations.
We depend on a single site to manufacture our products, and
any interruption of operations could have a material adverse effect on our business.
Most of our manufacturing currently takes
place in a single facility located in Vaulx-en-Velin, on the outskirts of Lyon, France. In the event of a significant interruption
in the operations of our sole facility for any reason, such as fire, flood or other natural disaster or a failure to obtain or
maintain required regulatory approvals, we would have no other means of manufacturing our products until we were able to restore
the manufacturing capabilities at our facility or develop alternative facilities, which could take considerable time and resources
and have a material adverse effect on our business, financial condition and results of operations. If we are unable to manufacture
a sufficient or consistent supply of our products or products we are developing, or if we cannot do so efficiently, our revenue,
business and financial prospects would be adversely affected.
For certain components or services, we depend on a single
supplier who, due to events beyond our control may fail to deliver sufficient supplies to us or increase the cost of items supplied,
which would interrupt our production processes or negatively impact our results of operations.
We purchase the majority of the components
used in our products from a number of suppliers, but rely on a single supplier for some key components. In addition, we rely on
single suppliers for certain services. If the supply of these components or services were interrupted for any reason, our manufacturing
and marketing of the affected products would be delayed. These delays could be extensive, especially in situations where a component
substitution would require regulatory approval. In addition, such suppliers could decide unilaterally to increase the price of
supplied items and therefore cause additional charges for the Company. We expect to continue to depend upon our suppliers for the
foreseeable future. Failure to obtain adequate supplies of components or services in a timely manner and at the agreed price could
have a material adverse effect on our business, financial condition and results of operations.
Intellectual property rights are essential to protect our
medical devices, and any dispute with respect to these rights could be costly and have an uncertain outcome.
Our success depends in large part on our ability
to develop proprietary products and technologies and to establish and protect the related intellectual property rights, without
infringing the intellectual property rights of third parties. The validity and scope of claims covered in medical technology patents
involve complex legal and factual questions and, therefore, the outcome of such claims may be highly uncertain. The medical device
industry has been characterized by extensive patents and other intellectual property rights litigation. From time to time we may
receive letters from third parties drawing our attention to their patent rights. Our products, including our HIFU devices, may
be subject to litigation involving claims of patent infringement or violation of other intellectual property rights of third parties.
The defense and prosecution of intellectual property suits, patent opposition proceedings and related legal and administrative
proceedings are both costly and time consuming and may result in a significant diversion of effort and resources by our technical
and management personnel. An adverse determination in any such litigation or proceeding to which we become a party could subject
us to significant liability to third parties, require us to seek licenses from third parties and pay ongoing royalties, require
us to redesign certain products or subject us to injunctions preventing the manufacture, use or sale of the affected products.
In addition to being costly, drawn-out litigation to defend or prosecute intellectual property rights could cause our customers
or potential customers to defer or limit their purchase or use of our products until the litigation is resolved. See Item 4, ‘‘Information
on the Company—HIFU Division—HIFU Division Patents and Intellectual Property’’ and Item 4, ‘‘Information
on the Company—UDS Division—UDS Division Patents and Intellectual Property.’’
We own patents covering several of our technologies
and have additional patent applications pending in the United States, the European Union, Japan and elsewhere. The process of seeking
patent protection can be long and expensive and there can be no assurance that our patent applications will result in the issuance
of patents. We also cannot assure investors that our current or future patents are or will be sufficient to provide meaningful
protection or commercial advantage to us. Our patents or patent applications could be challenged, invalidated or circumvented in
the future. Failure to maintain or obtain necessary patents, licenses or other intellectual property rights from third parties
on acceptable terms or the invalidation or cancellation of material patents could have a material adverse effect on our business,
financial condition or results of operations. Litigation may be necessary to enforce patents issued to us or to determine the enforceability,
scope and validity of the proprietary rights of others. Our competitors, many of which have substantial resources and have made
substantial investments in competing technologies, may apply for and obtain patents that will interfere with our ability to make,
use or sell certain products, including our HIFU devices, either in the United States or in foreign markets.
We also rely on trade secrets and proprietary
know-how, which we seek to protect through non-disclosure agreements with employees, consultants and other parties. It is possible,
however, that those non-disclosure agreements will be breached, that we will not have adequate remedies for any such breach, or
that our trade secrets will become known to, or independently developed by, competitors. Litigation may be necessary to protect
trade secrets or know-how owned by us. In addition, effective copyright and trade secret protection may be unavailable or limited
in certain countries.
The occurrence of any of the foregoing could
have a material adverse effect on our business, financial condition and result of operations.
We face a significant risk of exposure to product liability
claims in the event that the use of our products results in personal injury or death.
Our products are designed to be used in the
treatment of severe affections and conditions. Despite the use of our products, patients may suffer personal injury or death, and
we may, as a result, face significant product liability claims. We maintain separate product liability insurance policies for the
United States and Canada and for the other markets in which we sell our products. Product liability insurance is expensive and
there can be no assurance that it will continue to be available on commercially reasonable terms or at all. In addition, our insurance
may not cover certain product liability claims or our liability for any claims may exceed our coverage limits. A product liability
claim or series of claims brought against us with respect to uninsured liabilities or in excess of our insurance coverage, or any
claim or product recall that results in significant cost to or adverse publicity against us could have a material adverse effect
on our business, financial condition and results of operations. Also, if any of our products prove to be defective, we may be required
to recall or redesign the product which could result in costly corrective actions and harm to our business reputation, which could
materially affect our business, financial condition and results of operations.
We are exposed to risks related to cybersecurity threats and incidents.
In the conduct of our business, we collect,
use, transmit and store data on information technology systems. This data includes confidential information belonging to us, our
customers and other business partners, as well as personally identifiable information of individuals. We also store data related
to our clinical trials on our information technology systems. We also rely in part on the reliability of certain tested third parties'
cybersecurity measures, including firewalls, virus solutions and backup solutions. Cybersecurity incidents, such as breaches of
data security, disruptions of information technology systems and cyber threats, may result in business disruption, the misappropriation,
corruption or loss of confidential information and critical data (ours or that of third parties), reputational damage, litigation
with third parties, diminution in the value of our investment in research and development, data privacy issues and increased cybersecurity
protection and remediation costs. Like many companies, we may experience certain of these incidents given that the external cyber-attack
threat continues to grow. Moreover, we devote significant resources to network security, data encryption and other measures to
protect our systems and data from unauthorized access or misuse, including meeting certain information security standards that
may be required by our customers, all of which increases cybersecurity protection costs. We have not experienced any significant
or material cybersecurity threats or incidents through the date of this annual report. As these threats, and government and regulatory
oversight of associated risks, continue to grow, we may be required to expend additional resources to enhance or expand upon the
security measures we currently maintain.
There can be no assurance that our efforts or
those of our third-party service providers to implement adequate security and control measures would be sufficient to protect against
breakdowns, service disruption, data deterioration or loss in the event of a system malfunction, or prevent data from being stolen
or corrupted in the event of a cyber-attack, security breach, industrial espionage attacks or insider threat attacks which could
result in financial, legal, business or reputational harm. Future cybersecurity breaches or incidents or further increases in cybersecurity
protection costs may have a material adverse effect on our business, financial condition or results of operations.
The expansion of social media platforms
and new technologies present risks and challenges for our business and reputation.
We increasingly rely
on social media and new technologies to communicate about our products and technologies. The use of these media requires specific
attention. Unauthorized communications, such as press releases or posts on social media, purported to be issued by the Company,
may contain information that is false or otherwise damaging and could have an adverse impact on our stock price. Negative or inaccurate
posts or comments about the Company, our business, directors or officers on any social networking website could seriously damage
our reputation. In addition, our employees and partners may use social media and mobile technologies inappropriately, which may
give rise to liability for the Company, or which could lead to breaches of data security, loss of trade secrets or other intellectual
property or public disclosure of sensitive information, including information about our employees, clinical trials or customers.
Such uses of social media, mobile technologies, or information technology more generally could have a material adverse effect on
our reputation, business, financial condition and results of operations.
Our French and international operations expose us to additional
costs and legal and regulatory risks, which could have a material adverse effect on our business, results of operations and financial
condition.
We have significant French and international
operations. We have direct distribution channels in over fifty countries outside of France, our country of incorporation, and through
our foreign subsidiaries. Compliance with complex foreign and French laws and regulations that apply to our international operations
increases our cost of doing business. These regulations include, among others, U.S. laws such as the U.S. Foreign Corrupt Practices
Act (FCPA) and other U.S. federal laws and regulations established by the Office of Foreign Asset Control, laws such as the UK
Bribery Act 2010 or other local laws, which prohibit corrupt payments to governmental officials or certain payments or remunerations
to customers. We have adopted a Code of Ethics that requires employees to comply with applicable laws and regulations and particularly
with Article 8 of law n°2016-1691 (known as Sapin II law). In accordance with Sapin II law, we have implemented a whistle-blowing
policy. These numerous and sometimes conflicting laws and regulations include, among others, data privacy requirements (particularly
with respect to the recent invalidation of the U.S.-European Union safe harbor by the European Court of Justice), labor relations
laws, tax laws, anti-competition regulations, “Know Your Customer” requirements, import and trade restrictions, export
requirements.
Given the high level of complexity of these
laws, there is a risk that we may inadvertently breach some provisions, for example, through fraudulent or negligent behavior of
individual employees, our failure to comply with certain formal documentation requirements, or otherwise. Our success depends,
in part, on our ability to anticipate these risks and manage these challenges. We have a dispersed international sales organization,
and this structure makes it more difficult for us to ensure that our international selling operations comply with our global policies
and procedures.
Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, requirements
to obtain export licenses, cessation of business activities in sanctioned countries and prohibitions on the conduct of our business.
Violations of laws and regulations also could result in prohibitions on our ability to offer our products in one or more countries
and could materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees,
or our business, results of operations and financial condition.
In May 2018, the new EU data protection framework,
the General Data Protection Regulation (“GDPR”) took effect. The GDPR significantly increases the level of data protection
and imposes a greater compliance burden on companies. In particular, it now treats also clinical data as personal data, requiring
us to implement more extensive procedures in the collection and processing of clinical trial data. Furthermore, the GDPR significantly
increases the level of sanctions for non-compliance. The European Union data protection authorities have the power to impose administrative
fines of up to a maximum of €20 million or 4% of the Company’s consolidated revenues for the preceding financial year,
whichever is higher. We believe that the regulation should not have a material impact on our business or the way our technologies
operate. However, due to the small size of the Company, we may not be able to adequately document all data collection, to obtain
related consents in due time, to adequately protect private collected data or nor to react in due time to address an individual
request linked to GDPR application.
We sell our products in many parts of the world and, as a
result, our business is affected by fluctuations in currency exchange rates.
We are exposed to foreign currency exchange
rate risk because the mix of currencies in which our costs are denominated is different from the mix of currencies in which we
earn our revenue. In 2018, approximately 74% of our total costs of sales and operating expenses were denominated in euro, while
approximately 41% of our sales were denominated in currencies other than euro (primarily the U.S. dollar and the Japanese yen).
Our operating profitability could be materially adversely affected by large fluctuations in the rate of exchange between the euro
and other currencies. For instance, a decrease in the value of the U.S. dollar or the Japanese yen against the euro would have
a negative effect on our revenues, which may not be offset by an equal reduction in operating expenses and would therefore negatively
impact operating profitability. From time to time we enter into foreign exchange forward sale contracts to hedge against fluctuations
in the exchange rates of the principal foreign currencies in which our receivables are denominated (in particular, the U.S. dollar
and the Japanese yen), but there can be no assurance that such hedging activities will limit the effect of movements in exchange
rates on our results of operations. As of December 31, 2018, we had no outstanding hedging instruments. In addition, since any
dividends that we may declare will be denominated in euro, exchange rate fluctuations will affect the U.S. dollar equivalent of
any dividends received by holders of ADSs. For more information concerning our exchange rate exposure, see Item 11. “Quantitative
and Qualitative Disclosures about Market Risk.”
Our results of operations have fluctuated significantly from
quarter to quarter in the past and may continue to do so in the future, as we experience long and variable product sales cycles
which are long and seasonal
Our results of operations have fluctuated in
the past and are expected to continue to fluctuate significantly from quarter to quarter depending upon numerous factors, including,
but not limited to, the timing and results of clinical trials, changes in healthcare reimbursement policies, cyclicality of demand
for our products, changes in pricing policies by us or our competitors, new product announcements by us or our competitors, customer
order deferrals in anticipation of new or enhanced products offered by us or our competitors, product quality problems and exchange
rate fluctuations. Furthermore, because our main products have relatively high unit prices, the amount and timing of individual
orders can have a substantial effect on our results of operations in any given quarter.
The sales cycle of our products is lengthy
as our products are high value capital items for our customers which purchase generally requires the approval of management or
Boards of hospitals, purchasing groups and government authorities if applicable. In addition, some sales are subject to public
tender offer processes and approvals which could happen to be lengthy and as a result, hospitals may delay their purchase orders
according to their timelines and budget allocation. It is difficult to predict the exact timing for closing product sales directly
linked to the length of capital expenditure cycles. Historically, our sales of products have tended to be stronger during the fourth
quarter of each fiscal year.
Our results of operations and financial condition could be
adversely affected by the adverse economic, geo-political and financial developments.
The current geo-political, economic and financial
environment has affected the level of public and private spending in the
healthcare
sector
generally. A cautious or negative outlook may cause our customers to further delay or cancel investment in medical equipment, which
would adversely affect our revenues.
In addition, we rely on the credit market to
secure dedicated lease financings to fund the development of our Revenue-Per-Procedure (“RPP”)
business
model
related to the sale of treatments’ procedures.
Due to the limited availability
of lending, we may be unable to
access
sufficient
lease financing. Without lease
financing, we may be unable to continue the development of our RPP model or we may need to fund such activity out of
our
existing working capital. Similarly, some of our clients rely on lease financing to finance their purchases of equipment.
Limited
availability of
lease financing facilities may
also
affect their purchasing decisions
and may adversely impact our equipment sales.
The United
Kingdom (the “UK”) held a referendum in 2016 in which voters approved an exit from the European Union (the “EU”),
commonly referred to as “Brexit.” On March 29, 2017, the UK formally notified the EU of its intention to withdraw pursuant
to Article 50 of the Lisbon Treaty. The EU and UK have negotiated a draft withdrawal agreement, which however has not yet been
ratified by the UK. If the agreement is ratified by the UK, there will be a transition period with negotiations between UK and
EU to determine future relationship between the UK and EU countries. If the agreement is not ratified, there will be no transition
period. In either case, it is possible that there will be greater restrictions on imports and exports between the UK and EU countries,
increased regulatory complexities, and economic and political uncertainty in the region. However, on March 15, 2019, the British
Parliament voted for an extension of Article 50 process. A further vote will be needed to decide of the conditions and timing of
an effective withdrawal. We sell devices and spare parts in the UK and need to regularly maintain and service our installed base
of equipment. Such restrictions on imports and exports may have a significant impact on our business in the UK.
New device developments and introductions may adversely impact
our financial results.
From time to time, we develop and introduce
new devices with enhanced features and extended capabilities, targeting new clinical applications or improving existing approaches.
The success of new device introductions depends on a number of factors including, but not limited to, timely and successful research
and development, regulatory clearances or approvals, pricing, competition, market and consumer acceptance, the manufacturing and
supply costs, and the risk that new devices may have quality or other defects in the early stages of introduction.
We invest in various research and development
projects to expand our product offerings. Our research and development efforts are critical to our success, and our research and
development projects may not be successful. We may be unable to develop and market new products successfully, and the products
we invest in and develop may not be well-received by customers or meet our expectations. Our research and development investments
may not generate significant operating income or contribute to our future operating results for several years, and such contributions
may not meet our expectations or even cover the costs of such investments.
If we fail to effectively develop new products,
obtain regulatory clearances or approval and manage new product introductions in the future, our business, financial condition,
results of operations, or cash flows could be materially adversely impacted.
We have been and we may in the future be the target of securities
class action or other litigation, which could be costly and time consuming to defend.
In the past, securities class action litigation
has often been brought against companies following a decline in the market price of its securities. This risk is especially relevant
for us because innovative life sciences and medical device companies have experienced significant stock price volatility in recent
years.
Any litigation, if instituted, could cause us
to incur substantial costs and our management resources may be diverted to defending such litigation, which could adversely affect
our financial condition or results of operations.
We have identified a material weakness in our internal controls
over financial reporting and, if we fail to remediate adequately this material weakness and achieve an effective system of internal
controls, we may not be able to report our financial results accurately. In addition, the trading price of our securities may be
adversely affected by a related negative market reaction.
As a publicly traded company, we are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley
Act of 2002. We have incurred, and expect to continue to incur, significant continuing costs, including accounting fees and staffing
costs, to maintain compliance with the internal control requirements of the Sarbanes-Oxley Act of 2002. As described in Item 15,
we have identified a material weakness in our internal control over financial reporting with respect to the implementation of a
new integrated information management system (SAP version 4HANA) which we launched in production on July 1, 2018, and that includes
our accounting, as well as our production and inventory processes. This material weakness results from several significant deficiencies
in the development and change program which, considered in aggregation, gave rise to a material weakness and to the conclusion
that our internal control over financial reporting was not effective as of December 31, 2018. We also in the past identified a
material weakness in our internal control over financial reporting with respect to the insufficient segregation of duties within
the consolidation process directly linked to the limited size of our finance team. Our management concluded that, as a result,
our internal control over financial reporting was not effective as of December 31, 2017. This material weakness was remediated
as of December 31, 2018. Nevertheless,
we concluded that
neither material weakness resulted in a material misstatement of the consolidated financial statements for the year ended December
31, 2018 or restatement of any prior period previously reported by the Company.
Although we initiated remediation actions to
address these material weaknesses, we may not be able to produce adequate additional documentation or correct settings to address
deficiencies linked to implementation of above SAP system and, as a small company, we may have insufficient personnel to allow
us to segregate duties, and consistently execute the Company’s internal controls.
Furthermore, the ongoing requirements of the
Sarbanes-Oxley Act may place a strain on our systems and resources. Our management is required to evaluate the effectiveness of
our internal control over financial reporting as of each year-end, and we are required to disclose management’s assessment
of the effectiveness of our internal control over financial reporting, including any material weakness in our internal control
over financial reporting.
Our internal control over financial reporting
has been designed to provide our management and Board of Directors with reasonable assurance regarding the preparation and fair
presentation of our consolidated financial statements. On an on-going basis, we are reviewing, documenting and testing our internal
control procedures. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control
over financial reporting, and as our business develops, additional resources and management oversight may be required.
In an effort to remediate the identified material weaknesses and to enhance our overall control environment,
we already have produced additional documentation, reviewed segregation of duty around access to production and changed certain
configuration settings. As of the date of this filing, two of these significant deficiencies were already remediated and remediation
for the remainder is underway. Additional controls were performed to demonstrate no inappropriate use of our IT system between
July 1, 2018 and December 31, 2018. In view of addressing the 2017 material weakness linked to the insufficient segregation of
duties, we also hired a person responsible for the consolidation process, so that our Chief Financial Officer can be the primary
person responsible for performing the review control.
Any failure to complete our assessment
of our internal control over financial reporting, to remediate any material weaknesses that we have identified or may identify
in the future, any failure to implement new or improved controls, or difficulties encountered in their implementation, could harm
our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial
statements. Any failure to maintain adequate internal controls over financial reporting and provide accurate financial statements
may subject us to litigation, render future financings more difficult or expensive, and could cause the trading price of our common
stock to decrease substantially. Inferior controls and procedures could cause investors to lose confidence in our reported financial
information, which may give rise to a class action and have a negative effect on the trading price of our common stock. Any such
failure could also adversely affect the results of the periodic management evaluations of our internal controls and, in the case
of a failure to remediate any material weaknesses that we have identified or may identify in the future, would adversely affect
the annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that are required
under Section 404 of the Sarbanes-Oxley Act.
Risks Relating to Ownership of Securities
Our securities may be affected by volume fluctuations, and may fluctuate significantly
in price, causing you to lose some or all of your investment.
Our ADSs
are currently traded on the NASDAQ Global Market. The average daily trading volume of our ADSs in 2018 was 204,760, the high and
low bid price of our ADSs for the last two financial years ended on December 31, 2018 and December 31, 2017, was $4.25 and $1.35,
and $3.85 and $2.25, respectively. Our ADSs have experienced, and are likely to experience in the future, significant price and
volume fluctuations, which could adversely affect the market price of our ADSs without regard to our operating performance. For
example, average daily trading volume of our ADSs in December 2017 was 61,031 as opposed to 204,760 for the same period of 2018.
The price of our securities and our ADSs in particular, may fluctuate as a result of a variety of factors, including changes in
our business, operations and prospects, and factors beyond our control, including regulatory considerations, results of clinical
trials of our products or those of our competitors, developments in patents and other proprietary rights, and general market and
economic conditions.
Any downward pressure on the price of ADSs caused by the sale of ADS could also encourage short sales
by third parties. In a short sale, a prospective seller borrows shares from a shareholder or broker and sells the borrowed shares.
The prospective seller hopes that the share price will decline, at which time the seller can purchase shares at a lower price for
delivery back to the lender. The seller profits when the share price declines because it is purchasing shares at a price lower
than the sale price of the borrowed shares. Such sales could place downward pressure on the price of our ADSs by increasing the
number of ADSs being sold, which could further contribute to any decline in the market price of our ADSs.
These broad market and industry factors may
adversely affect the market price of our ADSs, regardless of our operating performance. If you invest in our ADSs, you could lose
some or all of your investment.
In addition, following periods of volatility
in the market price of a company's securities, securities class action litigation has often been instituted. Any additional litigation,
if instituted, causes and could cause us to incur substantial costs and our management resources are and could be diverted to defending
such litigation, which could adversely affect our financial condition or results of operations.
We may issue additional securities that may be dilutive to our existing shareholders.
On February 18, 2016, our shareholders adopted
a resolution allowing the Board of Directors to issue 1 million new shares under the form of subscription options to motivate and
reward teams dedicated to successfully implement our U.S. and worldwide expansion plans. As of December 31, 2018, all options authorized
under this Plan have been allocated.
The issuance
of additional ordinary shares, including any additional ordinary shares issuable pursuant to the exercise of preferential subscription
rights that may not be available to all of our shareholders, would reduce the proportionate ownership and voting power of the then-existing
shareholders.
We are subject to different corporate disclosure standards
that may limit the information available to holders of our ADSs.
As a foreign
private issuer, we are not required to comply with the notice and disclosure requirements under the Exchange Act relating to the
solicitation of proxies for shareholder meetings. Although we are subject to the periodic reporting requirements of the Exchange
Act, the periodic disclosure required of foreign private issuers under the Exchange Act is more limited than the periodic disclosure
required of U.S. issuers. Therefore, there may be less publicly available information about us than is regularly published by or
about other public companies in the United States.
We currently do not intend to pay dividends, and cannot assure shareholders that
we will make dividend payments in the future.
We have
never paid any dividend on our shares and do not anticipate paying any dividends for the foreseeable future. Thereafter, declaration
of dividends on our shares will depend upon, among other things, future earnings, if any, the operating and financial condition
of our business, our capital requirements, general business conditions and such other factors as our Board of Directors deems relevant.
See Item 8, “Financial Information—Dividends and Dividend Policy.”
Judgments of U.S. courts, including those predicated on the
civil liability provisions of the federal securities laws of the United States, may not be enforceable in French courts.
An investor in the United States
may find it difficult to:
|
•
|
effect service of process upon or obtain jurisdiction over us or our non-U.S. resident directors and officers in the United States;
|
|
•
|
enforce U.S. court judgments based upon the civil liability provisions of the U.S. federal securities laws against us and our non-U.S. resident directors and officers in France
;
or the United States; or
|
|
•
|
bring an original
action in a French court to enforce liabilities based upon the U.S. federal securities laws against us and our non-U.S. resident
directors and officers.
|
Holders of ADSs have fewer rights than shareholders and must act through the Depositary
to exercise those rights.
Holders of
ADSs do not have the same rights as shareholders and accordingly, cannot exercise rights of shareholders against us. The Bank of
New York Mellon, as Depositary (the “Depositary”), is the registered shareholder of the deposited shares underlying
the ADSs, and therefore holders of ADSs will generally have to exercise the rights attached to those shares through the Depositary.
We have used and will continue to use reasonable efforts to request that the Depositary notify the holders of ADSs of upcoming
votes and ask for voting instructions from them. If a holder fails to return a voting instruction card to the Depositary by the
date established by it for receipt of such voting instructions, or if the Depositary receives an improperly completed or blank
voting instruction card, or if the voting instructions included in the voting instruction card are illegible or unclear, then such
holder will be deemed to have instructed the Depositary to vote its shares and the Depositary shall vote such shares in favor of
any resolution proposed or approved by our Board of Directors and against any resolution not so proposed or approved.
Preferential subscription rights may not be available for
U.S. persons.
Under French
law, shareholders have preferential rights to subscribe for cash issuances of new shares or other securities giving rights to acquire
additional shares on a
pro rata
basis. U.S. holders of our securities may not be able to exercise preferential subscription
rights for their shares unless a registration statement under the Securities Act is effective with respect to such rights or an
exemption from the registration requirements imposed by the Securities Act is available. We may, from time to time, issue new shares
or other securities giving rights to acquire additional shares (such as warrants) at a time when no registration statement is in
effect and no Securities Act exemption is available. If so, U.S. holders of our securities will be unable to exercise their preferential
rights and their interests will be diluted. We are under no obligation to file any registration statement in connection with any
issuance of new shares or other securities.
For holders
of ADSs, the Depositary may make these rights or other distributions available to holders after we instruct it to do so and provide
it with evidence that it is legal to do so. If we fail to do this and the Depositary determines that it is impractical to sell
the rights, it may allow these rights to lapse. In that case, the holders of ADSs will receive no value for them.
Holders of our ADSs may be exposed to increased transaction
costs as a result of proposed European financial transaction taxes.
On February 14, 2013, the EU Commission
adopted a proposal for a Council Directive (the "Draft Directive") on a common financial transaction tax (the "FTT").
According to the Draft Directive, the FTT should have been implemented and should have entered into effect in 10 EU Member States
(Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Spain, Slovakia, and Slovenia, each a “Participating
Member State”). In March of 2016, Estonia indicated its withdrawal from enhanced cooperation.
Pursuant to the Draft Directive, the FTT was
to be payable on financial transactions provided at least one party to the financial transaction was established or deemed established
in a Participating Member State and there was a financial institution established or deemed established in a Participating Member
State which was a party to the financial transaction, or was acting in the name of a party to the transaction.
Under
the Draft Directive, the FTT should not have applied, however, to (inter alia) primary market transactions referred to in Article
5(c) of Regulation (EC) No 1287/2006, including the activity of underwriting and subsequent allocation of financial instruments
in the framework of their issue.
The rates of the FTT were to be fixed by each Participating Member State but for transactions
involving financial instruments other than derivatives would have amounted to at least 0.1 per cent of the taxable amount. The
taxable amount for such transactions would have been generally determined by reference to the consideration paid or owed in return
for the transfer.
The FTT would have been payable by each financial institution established or
deemed established in a Participating Member State which was either a party to the financial transaction, or acting in the name
of a party to the transaction or where the transaction had been carried out on its account. Where the FTT due had not been paid
within the applicable time limits, each party to a financial transaction, including persons other than financial institutions,
would have become jointly and severally liable for the payment of the FTT due.
The Draft
Directive has not been adopted.
The FTT proposal is still subject to negotiation between the Participating Member States
and therefore may be changed at any time. Moreover, once a final agreement on such FTT proposal will be reached (the "FTT
Directive"), it will need to be implemented into the respective domestic laws of the Participating Member States and the domestic
provisions implementing the FTT Directive might deviate from the FTT Directive itself. See Item 10, "Certain Income Tax Considerations."
Prospective holders should therefore note,
in particular, that any sale, purchase, or exchange of the Shares or ADSs could become subject to the FTT at a minimum rate of
0.1 per cent. The holder may be liable to itself pay this charge or reimburse a financial institution for the charge, and / or
may affect the value of the Shares or ADSs.
In any case,
prospective holders should consult their own advisers in relation to the consequences of the FTT associated with subscribing for,
purchasing, holding and disposing of ADSs.
Item 4. Information on the Company
We develop and market robotic HIFU devices,
advanced choices for the treatment of localized prostate cancer. HIFU treatment is shown to be a minimally invasive and effective
treatment option for localized prostate cancer (T1-T2) with a low occurrence of side effects. Our HIFU devices are also used for
patients who failed a radiotherapy treatment. In addition, we are developing a HIFU platform for the treatment of various types
of tumors including rectal endometriosis, liver and pancreatic cancer, but also breast and gynecological tumors. We also produce
and commercialize medical equipment for the treatment of urinary tract stones using ESWL and distribute other types of urology
devices in certain countries.
History and Development of the Company
Our legal name is EDAP TMS S.A. and our commercial
name is EDAP TMS. EDAP TMS S.A. was incorporated on December 3, 1979 as a
société anonyme
organized under
the laws of the Republic of France for a duration of 60 years from the date of incorporation. Our principal executive offices are
located at Parc d’Activités la Poudrette- Lamartine, 4/6, rue du Dauphiné, 69120 Vaulx-en-Velin, France and
our telephone number is +33 (0) 4 72 15 31 50. Corporation Service Company, 251 Little Falls Drive, Wilmington, DE19808-1674, United
States, is our agent for service of process in the United States. The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding the Company’s electronic filings with the SEC. Such electronics
filings can be found by visiting the SEC web site at http://www.sec.gov or the Company’s web site at http://www.edap-tms.com.
On April 14, 2016, we issued 3,283,284 ordinary
shares in the form of ADSs to certain institutional investors in a registered direct placement (the “April 2016 Placement”),
at a price of $3.50 per share, raising $11,491,494 mainly in view of acceleration of HIFU marketing expansion in the US following
FDA clearance of our Ablatherm device.
On September 11, 2017, we submitted a (510K)
application for our Focal One HIFU device in accordance with FDA guidance.
On October 4, 2017, we obtained FDA clearance
for our Ablatherm Fusion device which incorporates our proprietary fusion software and merges MRI and ultrasound images, providing
increased accuracy during planning and prostate treatment for physicians.
On June 7, 2018, we obtained FDA clearance
for our Focal One device dedicated to the focal ablation of prostate cancer. It incorporates our proprietary fusion software, which
merges MRI and ultrasound images, providing increased accuracy during planning and prostate treatment for physicians. Focal approach
in the treatment of localized prostate cancer reduces side effects and improves patients’ quality of life.
Business Overview & Strategy
EDAP TMS S.A. is a holding company and is responsible
for providing common services to its subsidiaries, including preparation and consolidation of the financial statements for the
group, complying with the requirements of various regulatory agencies and maintaining the listing of its publicly held securities
and, in conjunction with its Board of Directors, directing the overall strategy of our group.
Our activity is organized in two divisions:
HIFU and UDS (including lithotripsy activities). Through these two divisions, we develop, produce and market minimally invasive
medical devices, mainly for urological diseases. We believe that the creation of these two divisions has allowed us to expand our
market share by optimizing worldwide distribution capabilities, all of which is coordinated through our subsidiaries.
Our HIFU and UDS divisions operate in Europe,
the Americas, Asia and the rest of the world. Total net sales for the HIFU division (in net contributions to total consolidated
sales) were €11.0 million, €9.5 million and €13.8 million for 2018, 2017 and 2016, respectively. Those sales are
generated in Europe, the United States and the rest of the world, excluding certain countries in Asia (including Japan) where our
HIFU devices are not approved yet. Total net sales for the UDS division were €28.1 million (including €13.9 million in
Asia and €14.2 million in Europe and the rest of the world), €26.2 million (including €13.4 million in Asia and
€12.8 million in Europe and the rest of the world), and €21.8 million (including €10.3 million in Asia and €11.5
million in Europe and the rest of the world), each for 2018, 2017 and 2016, respectively.
See Note 28 to our consolidated financial statements
for a breakdown of total sales and revenue during the past three fiscal years by operating division and Item 5, “Operating
and Financial Review and Prospects.”
HIFU Division
The HIFU division is engaged in the development,
manufacturing and marketing of medical devices based on HIFU technology for the minimally invasive treatment of urological and
other clinical indications. Our HIFU business is cyclical and generally linked to lengthy hospital decision and investment processes.
Hence, our quarterly revenues are often impacted and fluctuate according to these parameters, generally resulting in a higher purchasing
activity in the last quarter of the year. The HIFU division
contributed €11.0 million
to our consolidated net sales during the fiscal year ended December 31, 2018.
HIFU Division Business Overview
The HIFU division currently develops, manufactures
and markets devices for the minimally invasive ablation of certain types of localized tumors using HIFU technology. HIFU technology
uses a high-intensity convergent ultrasound beam generated by high power transducers to produce heat. HIFU technology is intended
to allow the surgeon to destroy a well-defined area of diseased tissue without damaging surrounding tissue and organs, thereby
eliminating the need for incisions, transfusions and general anesthesia and associated complications. The HIFU division markets
three HIFU devices: the Ablatherm, the Ablatherm Fusion and the Focal One. The Ablatherm and Ablatherm Fusion are dedicated to
the treatment of organ-confined prostate cancer, referred to as T1-T2 stage. The Focal One high-end device is a HIFU fully robotic
device dedicated to the focal therapy of localized prostate cancer of T1-T2 stage, thereby destroying targeted cancer cells only.
The robotic features of our HIFU devices make the treatment procedure much safer for the patient and less operator dependent. All
three devices can be used for patients who are not candidates for surgery or who have failed a radiotherapy treatment.
In addition to selling HIFU devices, the HIFU
division also records revenues driven from HIFU treatments performance (“HIFU Treatment Driven Revenues”) which include
net sales of (i) disposables, (ii) leases (iii) revenue-per-procedure (“RPP”) and (iv) treatment related services.
The HIFU mobile treatment option provides access to our HIFU devices without requiring hospitals and clinics to make an up-front
investment in the equipment. Instead, hospitals and clinics perform treatments using these devices and remunerate us on a RPP basis
(i.e., on the basis of the number of individual treatments provided). With this model, once the treatment is established in the
medical community, a permanent installation may become more attractive, leading to the sale of the device in some of the larger
locations.
In addition, the HIFU division also generates
revenues from net sales of maintenance services associated to our HIFU devices installed base. As of December 31, 2018, the HIFU
division had an installed base of 109 Ablatherm machines, 33 Focal One machines and 519 certified trained clinical sites
worldwide had access to this technology.
HIFU Division Business Strategy
The HIFU division’s business strategy
is to capitalize on its expertise in HIFU and its position in urology to achieve long-term growth as a leader in the development,
manufacturing, marketing and distribution of minimally invasive medical devices for urological and other indications, using HIFU
technology, while preserving patient quality of life. The HIFU division believes that minimally invasive treatments using HIFU
could provide an alternative to current invasive therapies on the basis of reduced cost and reduced morbidity for a number of different
indications. The key elements of the HIFU division’s strategy to achieve that objective are:
|
·
|
Provide Minimally Invasive Solutions to Treat Localized Prostate Cancer using HIFU
. Building
upon our established position in the ESWL market, our HIFU division is striving to become the leading provider of our minimally
invasive HIFU treatment option for prostate cancer. We believe that there is a large market opportunity with an increase in incidence
linked to the aging male population, an increase in screening and recent campaigns to increase awareness. We also believe that
HIFU could represent a credible alternative to surgery, external beam radiotherapy, brachytherapy and cryotherapy for the treatment
of organ-confined prostate cancer without the cost, in-patient hospitalization and adverse side effects associated with those therapies.
With the growing demand for more focused treatments destroying the tumor only (focal therapy) while continuously controlling the
disease, HIFU and its focused approach, is well positioned to address this new clinical approach. The HIFU division intends to
achieve this through a direct sales network in key European countries and the United States and through selected distributors in
other European countries and in Asia. The HIFU division has built a strong clinical credibility based on clinical articles published
in peer-reviewed journals. We ensure effective patient and physician education through a focused communication program.
|
|
·
|
Achieve Long-Term Growth by Expanding HIFU Applications Beyond Prostate Cancer
. The HIFU
division’s long-term growth strategy is to apply our HIFU technology toward the treatment of
other
medical conditions
beyond prostate cancer. We believe that HIFU could represent an alternative to surgery and radiotherapy
for the treatment of many tumors without the cost, in-patient hospitalization and adverse side effects associated with those therapies.
The HIFU division is working on various other applications such as rectal endometriosis, liver, pancreatic cancers, breast and
gynecological tumors where HIFU could provide an alternative to current therapies. In 2018, the HIFU division maintained expenses
at
levels similar to 2017 on research and development (“R&D”) projects
to develop HIFU applications beyond prostate cancer. The division is considering increasing levels of R&D spending in 2019
and future years to strengthen its technological leadership in HIFU and expand its application beyond urology.
|
HIFU Products
Currently, we commercialize three products utilizing
the HIFU technology. Cell destruction by HIFU is accomplished by a combination of thermal and cavitation effects caused by focused
application of piezoelectric-generated high-intensity ultrasound; HIFU procedures are performed under general or spinal anesthesia.
|
•
|
The
Ablatherm is an ultrasound guided robotic HIFU device for the treatment of organ-confined prostate cancer. It consists of a treatment
module, including a HIFU endorectal probe, a control table with a computer and a computer screen, and a diagnostic ultrasound
device connected to the treatment module. After insertion of an endorectal probe, the physician visualizes the prostate using
ultrasound imaging and defines the area to be treated. The computer automatically calculates the optimum treatment distribution
of lesions. During the treatment, the probe automatically moves and fires HIFU beams at each predefined lesion until the entire
targeted area has been treated. At the same time, the physician is able to control and visualize the treatment in real time due
to the integrated imaging system.
|
|
•
|
Ablatherm
Fusion is an evolution of Ablatherm, and incorporates the Company’s proprietary fusion software which merges MRI and ultrasound
images providing physicians with increased accuracy during planning and treatment.
|
|
•
|
The Focal One is a HIFU fully robotic device dedicated to the focal therapy of prostate cancer.
Focal One combines the three essential components to efficiently perform a focal treatment of localized prostate cancer: (i) high-quality
imaging to localize tumors with the use of magnetic resonance imaging (MRI) combined with real-time ultrasound, (ii) high precision
of HIFU treatment focused on identified targeted cancer areas and (iii) immediate feedback on treatment efficacy utilizing Contrast-Enhanced
Ultrasound Imaging. Focal One provides an effective and accurate ablative treatment of localized tumors with the capacities of
being flexible and repeatable, while preserving patient quality of life.
|
HIFU Division Patents and
Intellectual Property
As of December 31, 2018, the HIFU division’s
patent portfolio contained 37 patents consisting of 10 granted patents in the United States, 20 patents in the European Union and
Japan and six patents in both Israel and the rest of the world. They belong to 17 groups of patents covering key technologies related
to therapeutic ultrasound principles, systems and associated software.
During 2018, one patent, covering our dynamic
focusing technology embedded in the Focal One device, has been delivered in the United States, in Europe, in Japan and in China.
One patent related to liver treatment was granted in China and Japan. Two European patents, not exploited, expired in 2018.
Five additional patents covering certain other
aspects of our HIFU technology in the European Union and Japan (three), the United States (one), and the rest of the world (one)
are currently under review. Our ongoing research and development objectives are to maintain our leadership position in the treatment
of prostate cancer and to extend the HIFU technology to new applications and minimally invasive systems. These research projects
are conducted in cooperation with the French National Institute for Health and Medical Research (“INSERM”) which give
rise in some cases to the filing of patents, followed by the grant of co-owned patents. We have entered into various license agreements
with INSERM whereby we commit to pay a fixed amount of royalties to INSERM based on the net revenues generated from the sales of
HIFU devices using co-owned patents. Under these agreements, which last for the life of each co-owned patent, we have the exclusive
right to the commercial use of the co-owned patents, including the right to out-license such commercial rights.
In August 2004, we licensed our HIFU technology
for the specific treatment of the ‘‘cervicofacial’’ lesions, including the thyroid, to Theraclion, a French
company created by our former director of research and development. On January 11, 2011, we extended the above license by granting
Theraclion exclusivity for the treatment of benign breast tumors and by granting a non-exclusive license for the treatment of malignant
breast tumors. This license agreement provides for the payment of certain royalties calculated on the basis of Theraclion’s
sales of devices. We determined that we could not invest in these specific applications at that time and this license agreement
therefore allows Theraclion to pursue the development of HIFU for these applications. We own no interest in Theraclion..
Although we believe that our HIFU patents are
valid and should be enforceable against third parties and that our patent applications should, if successfully pursued, result
in the issuance of additional enforceable patents, there can be no assurance that any or all of these patents or patent applications
will provide effective protection for the HIFU division’s proprietary rights in such technology. HIFU devices, as they are
currently or may in the future be designed, may also be subject to claims of infringement of patents owned by third parties, which
could result in an adverse effect on our ability to market HIFU systems. See Item 3, “Risk Factors – Risks relating
to Intellectual Property Rights.”
HIFU Division Clinical and Regulatory
Status
Clinical and Regulatory Status in Europe
Based on clinical results obtained from an extensive
European Multicentric study which assessed safety and effectiveness of our Ablatherm system, we obtained a CE Marking in May 1999
allowing us to market the Ablatherm for prostate primary care in the European Union and in other territories in the world where
CE Marking is required. CE Marking was further extended to address radiation failures. As of today, Ablatherm CE Marked devices
previously placed on the market are maintained for use according to applicable regulation and any new placement of HIFU devices,
in Europe or in territory covered by CE Marking, is being addressed with a Focal One new generation device.
In June 2011, a new clinical trial was initiated
to evaluate the new technical improvements in HIFU technology: the Dynamic Focusing technology. This technology gives the ability
to target a more precise area within the prostate making the dynamic focusing technology the perfect tool for focal therapy. It
also allows for the treatment of bigger prostates and for a more precise contouring of the gland providing a better control over
sensitive areas responsible for continence and sexual functions. As a result, the Dynamic Focusing technology has been incorporated
into the new Focal One HIFU device. Based on the above study clinical results, we obtained a CE Marking in June 2013 that allowed
us to market the Focal One in the European Union and in worldwide territories where CE Marking is required.
Clinical and Regulatory Status in the United
States
In 2005, EDAP started an Investigational Device
Exemption (“IDE”) study (G050103) to assess the safety and effectiveness of Ablatherm HIFU in the U.S. for the treatment
of low risk, localized prostate cancer. This study was designed as a pivotal study to support PMA approval. This study was planned
as a multicentric, prospective, non-randomized, concurrently controlled clinical trial comparing Ablatherm HIFU to cryotherapy
in patients with low risk, localized prostate cancer. Due to accrual difficulties, particularly in the cryosurgery arm, this planned
study was not completed. Of the planned 205 patients per arm, 136 and five patients were recruited to the Ablatherm HIFU and cryosurgery
arms, respectively. We completed the treatment of 134 patients in June 2010, the required two years’ follow-up phase was
completed in June 2012. Clinical outcomes from these patients combined with our strong European long-term database formed the foundation
of our PMA submission to the FDA on January 31, 2013.
On March 9, 2015, we announced that based on
our collaborative discussions with the FDA, we planned to seek clearance of Ablatherm HIFU by way of a direct de novo 510(k) application
as opposed to the PMA application amendment we had been considering. The FDA indicated that while PMA approval would be required
for specific claims regarding treatment of prostate cancer, a prostate tissue ablation claim could be cleared via a direct de novo
510(k) application.
In November 2015, we received 510(k) clearance
from the FDA to market Ablatherm
®
Integrated Imaging HIFU in the U.S. for the ablation of prostate tissue and in
October 2017, we were granted a 510(k) clearance for our Ablatherm Fusion device in 2017.
On June 7, 2018, we obtained FDA 510(k) clearance
for our Focal One device.
Clinical and Regulatory Status in Japan
We have initiated discussions with the Japanese
authorities (“PMDA”) on the best process to apply to obtain Japanese approval for our Focal One device and we are currently
reviewing all options to obtain PMDA clearance. We might need to conduct a clinical trial in Japan to obtain clearance for our
HIFU Focal One device. The process of requesting approval to market the Focal One in Japan may be long and may never result in
the approval to market the Focal One in Japan. See Item 3, ‘‘Key Information—Risk Factors—Our future revenue
growth and income depend, among other things, on the success of our HIFU technology.’’
Clinical and Regulatory Status in China
We entered into an exclusive distribution agreement
with Shaw Han Biomedical Co. Ltd in 2010 to distribute Ablatherm throughout China, once approved by Chinese authorities. We did
not obtained marketing clearance of our Ablatherm by Chinese authorities due to lengthy and complex processes. We are currently
reviewing our strategy with a new partner to go through the approval process of our Focal One in China.
Clinical and Regulatory Status in the rest
of the world
The Ablatherm is cleared for distribution
in Canada, Costa Rica, Peru, Russia and Taiwan.
The Focal One device is cleared for distribution
in Saudi Arabia, Argentina, Brazil, Canada, South Korea, Costa Rica, United Arab Emirates, Malaysia, Mexico, Peru, Russia, Serbia,
and Venezuela.
See Item 3, “Risk Factors” –
“We operate in a highly regulated industry and our future success depends on government regulatory approval of our products,
which we may not receive or which may be delayed for a significant period of time.”
HIFU Clinical Data
To date, clinical results related to our HIFU
devices have been published in more than 85 renowned peer-reviewed journals. In 2010, the results of a major multicentric study
on 803 patients were published showing a local control of the disease in 77.9% of the patients. In 2013, three long-term studies
presenting results obtained over a period of more than 14 years on 538 patients, 704 patients and 1,002 patients were published,
showing excellent cancer-specific and metastasis-free survival in primary patients (Ganzer et al. BJU 2013, Thuroff et al. Journal
of Urology 2013 and Crouzet et al. European Urology 2013).
In 2014, the first clinical results of focal
treatments with Ablatherm were published by Baco et al. in the British Journal of Urology International (“BJUInt”)
and Van Velthoven et al. in
Prostate Cancer
magazine. Baco et al. published promising results of hemi-salvage HIFU (treatment
of one lobe of the prostate) after External Beam Radiation Therapy (“EBRT”) and brachytherapy recurrences. In this
fragile population of patients, the treatment of the infected lobe isreported to provide better functional outcomes and preserves
quality of life. A similar approach of HIFU prostate Hemi-ablation was presented by Van Velthoven et al. for primary care patients.
With a maximum follow-up of 61 months the study showed a rate of 100% full continence and 75% erectile function preservation combined
with only 11% of salvage treatment (re-HIFU in the contralateral lobe). Authors concluded primary zonal HIFU is a valid focal therapy
strategy, which is safe and feasible in a day-to-day practice showing good promising results. This study was updated and published
in 2016 in
Prostate Cancer and Prostatic Diseases
journal with 50 patients treated with Hemi-HIFU strategy and provided
100% five-year cancer specific survival rate. The functional results included 94% pad free patients and 80% erectile function preservation
at the end of follow-ups.
We
have
set up
an extensive
worldwide
patient database called "@-registry." This on-line database wasdesigned to
compile
treatment
information
and
follow-up data for patients who have undergone HIFU for prostate cancer. The goal of the @-registry was to further demonstrate
the safety, effectiveness and durability of Ablatherm.
Information
from
the registry are submitted to medical conferences for presentation and to peer-reviewed medical journals for publication. Based
on more than 10,000 patients included into our @-registry database, we presented at the European Association of Urology (EAU) held
in Paris in February 2012, an abstract presentation covering 5,662 primary patients, and an abstract covering 929 patients treated
with Ablatherm after radio-recurrence with seven years follow-up
.
Thüroff et al presented
a poster at the American Urology Association (AUA) 2014 on the long term HIFU retreatment rate, evaluating 2,632 patients. Thüroff
et al concluded that technical development and adjuvant transurethral radical prostatectomy (“TURP”) before HIFU resulted
in higher local efficacy and lower HIFU retreatment rates.
In October 2016, clinical results were published
in the
European Urology
journal (Rischmann et al.). They were relating to the validation of a new strategy of minimally
invasive HIFU treatment of prostate cancer localized in a single lobe of the prostate. The goal of Hemi-ablation is to reduce the
complications associated with standard treatments, notably the risks of incontinence and impotence. At 1-year follow-up, HIFU-Hemi-ablation
was efficient with 95% absence of clinically significant cancer associated with low morbidity and preservation of quality of life
(urinary continence was preserved in 97% of patients and sexual function was preserved in 78%). Radical treatment-free survival
rate was 89% at 2 years.
In January 2014, a new clinical trial on multifocal
HIFU treatments with the Focal One device began in France in six investigational centers. The aim of this study is to evaluate
the efficacy and safety results of different focal HIFU treatment strategies. Thanks to Focal One technical capacities (Dynamic
Focusing technology, elastic fusion of MRI and ultrasound images and Contrast Enhanced Ultrasound treatment validation) various
HIFU focal treatments approaches are now possible allowing for treatment that is individually tailored to the patient’s disease.
In January 2015, the last patient was included in the above study, clinical results analysis is currently ongoing and may be published
in the coming months.
In February 2015, the reimbursement evaluation
study of HIFU was initiated under the “Forfait Innovation”. This process, piloted by French Association of Urology
(AFU), compares primary whole-gland or sub-total HIFU and salvage whole-gland and focal HIFU results with those of radical prostatectomy
in 42 French urological centers. The primary outcome is the salvage treatment free rate at two years. In October 2018, 1,375 patients
have been treated in primary setting and 431 patients for the salvage indication. Inclusion period will be terminated in October
2019.
In December 2016, Professor Roland van Velthoven
from Institut Bordet Oncology Center, Brussels, Belgium published a matched pair analysis of HIFU Hemi-ablation vs robotic assisted
laparoscopic prostatectomy. In this study, 55 patients with unilateral localized prostate cancer were treated using Ablatherm-HIFU
and their outcomes were compared 1:1 with patients having similar clinical criteria but underwent robotic assisted laparoscopic
prostatectomy. The matched pair analysis concluded that HIFU was comparable to robotic-assisted radical prostatectomy in the management
of prostate cancer and showed HIFU to have significantly better functional outcomes.
In 2017, Crouzet et al. reported the oncological
outcome of salvage high-intensity focused ultrasound (S-HIFU) for locally recurrent prostate cancer after external beam radiotherapy
(EBRT) from the @-registry multicenter database in
British Journal of Urology
(BJU) International journal. This retrospective
study comprises patients from nine centers with local recurrent disease after EBRT treated with S-HIFU from 1995 to 2009. The publication
is the largest series of salvage treatment, confirming very positive oncological outcomes for this population (7 years metastasis
free rate of 81%). It also insists on the importance of treating recurrence of prostate cancer early after failure, as it largely
improves outcomes.
More recently, Ganzer & al., EDAP’s
users in Germany, evaluated focal HIFU Hemi-ablation in a prospective trial. Their data were published in
Journal of Urology
in April 2018. In their conclusion, they reported that Focal therapy Hemi-ablation is safe with little alteration of functional
outcome and concluded that the oncologic outcome was acceptable on short-term follow-up.
In early 2018, a new database, called the Focal
Robotic Ultrasound Ablation Registry (“FoR-UsA”), has been established to collect high quality clinical data of U.S.
patients treated with Ablatherm Robotic HIFU. The FoR-UsA Registry is the first in the U.S. that specifically collects data on
patients who have had HIFU focal therapy for prostate tissue ablation, giving urologists around the U.S. greater access to short
and long term HIFU outcomes. The registry also holds the potential for the FDA, which cleared HIFU for prostate tissue ablation
in 2015, to re-evaluate the technology in the future for a prostate cancer indication. Likewise, health insurance reimbursements
on a wider scale are also possible with a registry documenting HIFU data from patients in the U.S.
HIFU Division Market Potential
Prostate cancer is currently the first or
second most common form of cancer among men in many populations. In the United States, the American Cancer Society estimates the
number of new prostate cancers diagnosed every year to be approximately 174,650, of which approximately 70% are diagnosed with
localized stage prostate cancer. Additionally, the HIFU division believes, based on figures provided by the World Health Organization
that the worldwide incidence of localized prostate cancer is approximately twice this U.S. figure. A more effective diagnostic
method for prostate cancer, the PSA test, has increased public awareness of the disease in developed countries since its introduction.
PSA levels jump sharply when cancer is present. Prostate cancer is an age-related disease, and its incidence in developed countries
is expected to increase as the population ages.
The HIFU division believes that HIFU therapy
could be expanded to other
medical conditions
, such as certain localized thyroid, breast,
gynecological, bladder, kidney, liver, brain, pancreatic and retroperitoneal tumors. We decided to focus on developing HIFU for
certain types of pathologies. For example, in late 2016, we initiated a clinical Phase I study to address certain types of deep
endometriosis situated in the low rectum, using Focal One HIFU. Nineteen patients have been treated successfully. A multi-centric
study is to be initiated in 2019. As per the European Society of Human Reproduction and Embryology, endometriosis is estimated
to affect approximately one in 10 women of reproductive age. In June 2015, we entered into a multi-partner liver cancer development
project organized by the HECAM (“HEpatocellular CArcinoma Multi-technological”) consortium. This project aims at developing
innovative diagnostic, imaging and therapeutic technologies to address liver cancer. EDAP’s focus within the HECAM consortium
is on developing a novel HIFU treatment for liver cancer in cooperation with its long-term academic partner INSERM and leading
cancer centers. To fund this development program, EDAP will receive a maximum of €2.4 million in non-dilutive financing from
Bpifrance over the five-year project period of which we received the first instalment of €0.7 million in June 2015 and a second
installment of €0.8 million in June 2017 (i.e. a total of €1.5 million including €1.0 million as a conditional subsidy
and €0.5 million as a grant). The HECAM project is ongoing and a multicentric study will be initiated mid-2019 based on a
first mono-centric study implemented with Lyon’s Centre Leon Bérard cancer center. We also anticipate to develop HIFU
technology to address pancreatic, breast and gynecological tumors. However, the expansion of the use of HIFU to other areas of
treatment will require a significant investment in research and development, an investment we will undertake gradually while focusing
on the acceptance of HIFU as a treatment for localized prostate cancer.
HIFU Competition
The principal current therapies for prostate
cancer carry side effects that can seriously affect a patient’s quality of life. One of the current therapies is radical
prostatectomy (surgery), which involves the ablation of the entire prostate gland. Radical prostatectomy requires several days
of hospital stay and several weeks of recovery, usually with catheterization, and may result in partial and/or total urinary incontinence.
In addition, it almost invariably renders patients impotent. A new surgical technique, nerve-sparing prostatectomy, has been developed
to address that problem. However, the procedure can only be applied when the tumor is not located close to the surface of the prostate
and requires a very skilled surgeon. Other therapies for localized prostate cancer include brachytherapy, a therapy that involves
the implantation of radioisotopes into the prostate gland, EBRT and cryotherapy.
Our HIFU devices compete with all current treatments
for localized tumors, which include surgery, brachytherapy, radiotherapy, cryotherapy and electroporation. We believe that HIFU
competes against those treatments on the basis of efficacy, limited side effects and cost-effectiveness.
We also believe that Focal One will be well
positioned to address the growing demand for a “focal” approach of localized prostate cancer which cannot be answered
by surgery or radiation therapy. “Focal” treatment (also known as “partial” or “zonal” treatment,
as opposed to “radical” treatment) provides an effective and accurate ablative treatment of localized tumors with the
capacities of being flexible and repeatable, while preserving patient quality of life.
Other companies are working with HIFU for the
minimally invasive treatment of tumors. See Item 3, “Risk Factors – Risks Relating to Competition.”
Certain existing and potential competitors of
our HIFU division may have substantially greater financial, research and development, sales and marketing and personnel resources
than us and may have more experience in developing, manufacturing, marketing and supporting new products. We believe that an important
factor in the potential future market for HIFU treatments will be the ability to make the substantial investments in research and
development required to advance the technology beyond the treatment of prostate cancer. These future investments are wholly dependent
on the successful acceptance of the device for the treatment of prostate cancer.
HIFU Division Sales and Distribution of Products
The HIFU division markets and sells its products
through our own direct marketing and sales organization as well as through selected third-party distributors and agents in several
countries. Using our direct subsidiaries or representative offices network, the HIFU division maintains direct marketing and sales
forces in France, United States, Germany, Russia and Italy, which currently represent its largest HIFU markets. Additionally, the
HIFU division markets and sells its products through our distribution platform in the Middle East, South Korea and South East Asia.
The HIFU division’s customers are located
worldwide and have historically been principally public and private hospitals and urology clinics. The HIFU division believes that
as it increases its customer base it will gain further access to the medical community, which will enable it to monitor the urological
market as well as other new targeted markets, introduce new products and conduct trials addressing new pathologies under satisfactory
conditions. No single customer of the HIFU division represents a significant portion of the division’s installed base.
The HIFU division’s marketing efforts
currently include the organization of information and training programs for urologists, mainly in key European countries and in
the United States where HIFU awareness is growing, comprehensive media and web programs to educate patients on the availability
of HIFU technology to treat localized prostate cancer and strong participation in focused dedicated urological events. Our dedicated
web site www.hifu-prostate.com for patients and physicians is visited regularly. The information contained on that website is not
incorporated by reference herein.
The HIFU division is also committed to exclusively
distribute HIFU products on behalf of Theraclion, in France, including the Echopulse device dedicated to the treatment of benign
breast tumors and thyroid tumors.
UDS Division
The UDS division is engaged in the development,
marketing, manufacturing and servicing of medical devices for the minimally invasive diagnosis or treatment of urological disorders,
mainly urinary stones, and other clinical indications. The UDS division
contributed €28.1
million
to our consolidated net sales during the fiscal year ended December 31, 2018.
Our UDS business is quite cyclical and generally
linked to lengthy hospital decision and investment processes and their activities. Hence our quarterly revenues are often impacted
and fluctuate according to these parameters, generally resulting in a higher selling activity in the last quarter of the year.
UDS Division Business Overview
The UDS division’s primary business
is producing and marketing devices, known as lithotripters, for the treatment of urinary tract stones by means of ESWL technology.
ESWL uses extracorporeal shockwaves, which can be focused at urinary stones within the human body to fragment the stones, thereby
permitting their natural elimination and preventing the need for incisions, transfusions, general anesthesia, and the resulting
complications. The UDS division currently manufactures two models of lithotripters: the Sonolith i-move and the Sonolith i-sys.
As of December 31, 2018, the UDS division has sold 933 ESWL lithotripters worldwide
to this
date and
actively
maintained or otherwise
serviced 725 installed
lithotripters
.
In addition to its manufacturing and selling
of lithotripters, the UDS division also generates revenues from the leasing of lithotripters, as well as from the sale of disposables,
spare parts and maintenance services. It also derives revenues from the distribution of urodynamics products and urology lasers.
UDS Division Business Strategy
The business strategy for the UDS division
is to capitalize on its expertise in ESWL and its position in urology to achieve long-term growth as a leader in the development,
production, marketing and distribution of minimally invasive medical devices for urological and other clinical indications. The
UDS division manufactures its own products as part of EDAP TMS France SAS (“EDAP TMS France”), our wholly owned subsidiary.
The key elements of the UDS division’s strategy are:
|
·
|
Capitalize on the Current ESWL Installed Base
. The UDS division’s long-term growth
strategy relies on its ability to capitalize on its extensive installed base of ESWL lithotripters to recognize ongoing revenue
from sales of disposables, accessories, services and replacement machines. We believe that offering highly innovative units that
are easily adaptable to various treatment environments, as well as a commitment to quality and service will allow the UDS division
to achieve this goal. See ‘‘Information on the Company—UDS Division Products’’.
|
|
·
|
Capitalize on an Established Distribution Platform in Urology by Expanding Distribution Possibilities
.
We believe that we can achieve additional long-term growth by offering our established distribution platform in urology to other
developers of medical technologies and acting as a distributor for their devices. Our distribution platform in urology consists
of a series of well-established subsidiaries in Europe, United States, Middle East and Asia as well as a network of third-party
distributors worldwide.
|
|
·
|
Provide Manufacturing Solutions to Other Developers of Medical Technologies
. Building upon
its established position in the high-tech medical devices market, we believe that the UDS division can become a provider of manufacturing
alternatives to other developers of medical technologies that do not have or do not wish to invest in their own manufacturing facilities.
We believe that our FDA-inspected and ISO 13485: 2016 certified facilities allow us to offer manufacturing services to a wide range
of potential medical equipment developers.
|
UDS Division Products
The UDS division offers the Sonolith i-move
to small and mid-size hospitals, while the Sonolith i-sys is offered to large hospitals that can afford a fully dedicated and integrated
lithotripter. The UDS division also sells disposable parts for lithotripters, including the piezoelectric elements of the LT02,
(a machine we discontinued manufacturing in 2002) and the electrodes of the Sonolith line, which need to be replaced approximately
every ten treatments. These parts incorporate key proprietary technologies, and the UDS division has retained sole marketing rights
for these parts.
The Sonolith i-move and the Sonolith i-sys rely
on the electroconductive technology for shockwave generation. The electroconductive technology, which is derived from the electrohydraulic
technology on which the first ESWL lithotripters were based, permits improved focusing of the shockwave, reduces the variability
in the shockwave pressure and allows a better transfer of energy to the calculus. These features result in a faster, more effective
treatment as compared to electrohydraulic lithotripters.
The UDS division’s ESWL customers are
located worldwide and have historically been principally large hospitals, urology clinics and research institutions. To increase
its penetration of the market segment of smaller hospitals and outpatient clinics, the UDS division developed the Sonolith i-move,
an electroconductive lithotripter designed for smaller clinics. It is more compact than the Sonolith i-sys, which is more fully
integrated and dedicated to larger hospitals and can be used as a urological workstation to perform endourological procedures.
The Sonolith i-move, launched in 2010, brings a novel approach to the market by offering a wide range of configurations to suit
various budgets and various local market needs. The Sonolith range has also been very successful thanks to its innovative
Visio-Track
ultrasound stone localization: a unique three-dimensional virtual system that uses infrared stereovision proprietary technology
to guide the treatment robotically.
UDS Division Patents and Intellectual
Property
As of December 31, 2018, the UDS division’s
patent portfolio contained 11 granted patents consisting of one patent in the United States, eight patents in the European Union
and Japan and two patents in both Israel and the rest of the world. They belong to five groups of patents covering key technologies
relating to ESWL systems and associated software capabilities. The UDS division’s patents cover both piezoelectric and electroconductive
technologies associated to ESWL generator, localization systems and device design. The UDS division’s ongoing R&D objectives
in ESWL are to further increase the clinical efficacy, the cost-effectiveness and the ease of use of its products to make them
accessible to wider patient and user populations.
As with the development of our HIFU technology,
we cooperate with INSERM to develop our ESWL technology. This cooperation gave rise to co-owned patents in some cases. We have
entered in the past into various license agreements with INSERM whereby we committed to pay a fixed amount of royalties to INSERM
based on the net revenues generated from the sales of ESWL devices using co-owned patents. Under these agreements, we had the exclusive
right to the commercial use of the co-owned patents, including the right to out-license such commercial rights. These license agreements
expired in 2016, allowing EDAP to freely use the related patents.
UDS Division Regulatory Status
The Sonolith i-move is available for commercial
distribution in the European Union, South Korea, Malaysia, Thailand, Taiwan, Singapore, Russia, Serbia, Peru, Colombia, Costa Rica,
Argentina, Japan, United States, Saudi Arabia, Argentina, Mexico and Brazil.
The Sonolith i-sys is available in the European
Union, South Korea, Canada, United States, Peru, Colombia, Mexico, Costa Rica, Chile, Russia, Serbia, Japan, Australia, Malaysia,
Singapore, Vietnam, Saudi Arabia, China and Taiwan.
The UDS division continues to provide disposables,
replacement parts and services for the current installed base of Sonolith Praktis, even though we discontinued the manufacture
of these machines.
UDS Division Market Potential
We estimate that roughly 5% of the world population
suffers from kidney or ureteric stones during their lifetime and that urinary calculi are responsible for 10% of urological hospital
admissions worldwide. Although urinary calculi may be eliminated naturally by the body, natural elimination is frequently accompanied
by considerable pain and very often by serious complications, such as obstruction and infection of the urinary tract.
Since its introduction in clinical practice
more than 35 years ago, ESWL has become the standard treatment for urinary calculi. ESWL consists of fragmenting calculi within
the body using extracorporeal shockwaves without any surgery. We believe that the market for lithotripters includes both buyers
looking for a sophisticated, higher-priced machine (generally hospitals and larger urology clinics) but also buyers looking for
simpler and less expensive machines (typically smaller clinics). We also believe that after a period of fast growth in the mid-1980s
and early 1990s, the market for lithotripters is now mature and has become primarily a replacement and service and maintenance
market in most of the world. Several geographical opportunities remain in under-equipped countries or in some countries where the
national health system strategy is being reviewed for hospitals and clinics equipment. ESWL is today in competition with less costly
stone laser devices. Consequently, in order to remain competitive, EDAP integrated stone laser products into its ESWL product range.
We believe that companies with a large installed
base of ESWL lithotripters will be most successful in the replacement market. Consequently, we intend to capitalize on our share
of the installed base of ESWL lithotripters to gain a significant position in the replacement market for those machines. We expect
the ESWL business to continue to contribute, at historically consistent levels, to the UDS division’s financial results despite
the mature nature of the market, due to revenues from maintenance contracts and demand for replacement machines. See Item 5, ‘‘Operating
and Financial Review and Prospects’’.
UDS Division Competition
The ESWL market is characterized by severe
price competition among manufacturers, with the result that, in recent years, the average unit price of ESWL lithotripters has
declined. The UDS division expects this trend to continue. See Item 5, ‘‘Operating and Financial Review and Prospects.’’
The UDS division’s major competitors in developed countries are Wolf, Storz Medical and Dornier Medtech.
UDS Division Sales and Distribution of
Products
The UDS division markets, sells and services
its products through our direct sales and service platform in France, Italy, Germany, United States, Japan, South Korea, Malaysia
and, most recently, in the United Arab Emirates through our representative office in Dubai. The UDS division also markets its products
through agents and third-party distributors in several other countries.
The UDS division’s customers are located
worldwide and have historically been mainly public and private hospitals and urology clinics. We believe that the division’s
customer base provides it with excellent access to the urological community and enables it to introduce new products and conduct
trials under satisfactory conditions.
No single customer of the UDS division represents
a significant portion of the division’s installed base. The UDS division’s marketing efforts include the organization
of training programs for urologists worldwide.
The UDS division is also pursuing various distribution
options that use its strong network of worldwide subsidiaries and agents. In Japan, the UDS division distributes urodynamics products
on behalf of Laborie Company, including MMS (Medical Measurement Systems) products, and Andromeda Company, and also distributes
x-ray imaging systems for the diagnosis and treatment of diseases on behalf of French company EOS Imaging. In France, the UDS division
distributes laser urology solutions from Lumenis and from Quanta System in Asia and the Middle East. We believe that the laser
use in endo-urology will increase in the coming years, for both the treatment of urinary stones and for other urological procedures
such as HoLEP (Holmium Laser Enucleation of Prostate). We believe that the UDS division can successfully market its worldwide distribution
platform to a wide range of medical equipment development companies, thus allowing for quick, easy and economically sound entry
for these companies into markets covering most of the world.
Manufacturing
Our current manufacturing operations consist
of manufacturing medical products in our facility, which is FDA-approved and certified under international ISO 13485: 2016 standards.
We believe that this facility could possibly extend its outsourced services to provide device and disposable development and manufacturing
services to a range of medical equipment development companies. Each division manufactures its own products through EDAP TMS France.
We manufacture the critical components for
our devices and accessories, unless a subcontractor can manufacture the component more cost-effectively, we also perform final
assembly and quality control processes and maintain our own set of production standards. We purchase the majority of the raw materials
used in our products from a number of suppliers, but for several components of our products, rely on a single source. Furthermore,
we conduct regular quality audits of suppliers’ manufacturing facilities. Our principal suppliers are located in France,
Germany, Denmark, South Korea and the United States. Management believes that the relationships with our suppliers are good.
Quality and Design Control
The manufacturing operations of EDAP TMS France
must comply with all regulations of countries where we market our products, including the GMP regulations enacted by the FDA, which
establish requirements for assuring quality by controlling components, processes and document traceability and retention, among
other things. EDAP TMS France’s facilities are also subject to inspections performed by the FDA. EDAP TMS France is ISO 13485:
2016 certified which indicate compliance by EDAP TMS France’s manufacturing facilities with international standards for quality
assurance, design and manufacturing process control. EDAP TMS France also complies with the applicable requirements that will allow
it to affix the CE Marking to certain of its products. Our manufacturing site also complies with Taiwanese, Japanese and Canadian
regulations, as well as with the U.S. Quality System Regulation. See ‘‘Information on the Company—Government
Regulation—Healthcare Regulation in the United States’’ and ‘‘—Government Regulation—Healthcare
Regulation in the European Union.’’
Organizational Structure
The following table sets forth the fully consolidated
subsidiaries of the Company as of the date of this annual report:
Name of the Company
|
Jurisdiction of Establishment
|
Percentage Owned
(1)
|
|
|
|
EDAP TMS France SAS
|
France
|
100%
|
EDAP Technomed Inc.
|
United States
|
100%
|
EDAP Technomed Co. Ltd
|
Japan
|
100%
|
EDAP Technomed Sdn Bhd
|
Malaysia
|
100%
|
EDAP Technomed Srl
|
Italy
|
100%
|
EDAP TMS GmbH
|
Germany
|
100%
|
(1)
|
|
Percentage of equity capital owned by EDAP TMS S.A. directly or indirectly through
subsidiaries (percentage of capital owned and voting rights are the same).
|
Property and Equipment
We have one principal facility, which is located
in Vaulx-en-Velin, on the outskirts of Lyon, France. The premises comprise 4,150 square meters and are leased to us under a renewable
ten-year commercial lease agreement signed on July 1, 2015. We use this facility to manufacture our device portofolio. We believe
the terms of the lease reflect commercial practice and market rates.. We are not aware of any environmental issues that could affect
utilization of the facility.
In addition, we lease office and/or warehouse
facilities in Kuala Lumpur (Malaysia), Rome (Italy), Flensburg (Germany), Austin (U.S.), Moscow (Russia), Seoul (South Korea),
Fukuoka, Osaka, Sapporo and Tokyo (Japan), Dubai (United Arab Emirates).
Government Regulation
Government regulation in our major markets,
in particular the United States, the European Union and Japan, is a significant factor in the development and marketing of our
products and in our ongoing research and development activities. See Item 3, “Risk Factors –Risks Related to Government
Regulations.”
Regulation in the United States
We and our products are regulated in the United
States by the FDA under a number of statutes including the Federal Food, Drug and Cosmetic Act (‘‘FDC Act’’).
Pursuant to the FDC Act, the FDA regulates the preclinical and clinical testing, manufacturing, labeling, distribution, sale, marketing,
advertising and promotion of medical devices in the United States. Medical devices are classified in the United States into one
of three classes - Class I, II or III - on the basis of the controls reasonably necessary to ensure their safety and effectiveness.
Class I devices are those whose safety and effectiveness can be ensured through general controls, such as establishment and registration,
medical device listing, FDA-mandated CGMP, labeling. Most Class I devices are exempt from premarket notification (510(k)). Class
II devices are those whose safety and effectiveness can reasonably be ensured through the use of general controls and ‘‘special
controls,’’ such as special labeling requirements, mandatory performance standards, and post-market surveillance. Class
II medical devices require 510(k) submission and clearance. The FDA may also require the submission of clinical data as part of
the 510(k) for Class II devices. The FDA introduced the de novo 510(k) process for novel devices that present low to moderate risk
where there is no suitable predicate device to support a standard 510(k) submission. Class III devices are those that require submission
of a PMA by the FDA to ensure their safety and effectiveness. The PMA process is expensive and often lengthy, typically requiring
several years, and may not necessarily result in approval. The manufacturer or the distributor of the device must obtain an IDE
approval from the FDA before commencing human clinical trials in the United States in support of the PMA. Some newer PMA devices
must also go before a clinical review panel before FDA approval. Our lithotripsy range of products are now classified by the FDA
as Class II devices. As far as our Ablatherm
or Focal One HIFU
devices are concerned,
they also have been classified as Class II. Advertising and promotional activities in the United States are subject to regulation
by the FDA and, in certain instances, by the U.S. Federal Trade Commission. The FDC Act also regulates quality and manufacturing
procedures by requiring us to demonstrate and maintain compliance with current Quality System Regulations (QSR). Our manufacturing
facilities are in compliance with the requirements of the QSR.
Regulation in the European Union
In the European Union, we annually perform ISO
13485: 2016 certification audits, showing that we comply with standards for quality assurance, manufacturing and design control.
In the European Union, our products are still subject to legislation implementing the European Union Council Directive 93/42/EEC
concerning medical devices (the ‘‘Medical Device Directive’’). The Medical Device Directive provides that
medical devices that meet certain safety standards must bear a certification of conformity, the European Community approval ‘‘CE
Marking.’’ Except in limited circumstances,
member states of the European Union
may not prohibit or restrict the sale, free movement or use for its intended purpose of a medical device bearing the CE Marking.
Medical devices marketed throughout the European Union must comply with the requirement of the Medical Device Directive to bear
a CE Marking (subject to certain exceptions).
Pursuant to the Medical Device Directive, medical
devices are classified into four classes, Class I, Class IIa, Class IIb and Class III, on the basis of their invasiveness and the
duration of their use. The classification serves as a basis for determining the conformity assessment procedures that apply to
medical devices to be eligible to receive a CE Marking. The conformity assessment procedures for Class I devices can be carried
out, as a general rule, under the sole responsibility of the manufacturer, while for devices of other classes, the involvement
of an authorized supervisory body is required. The extent of the involvement of such body in the development and manufacturing
of a device varies according to the class under which it falls, with Class III devices being subject to the greatest degree of
supervision. All of the devices currently marketed by us are Class IIb devices.
On May 25, 2017, Europe’s new Medical
Device Regulation (“MDR”) was enacted and came into force. Manufacturers with currently approved medical devices in
their portfolio will have a transition time of three years, i.e. until May 26, 2020 to meet new MDR requirements. MDR addresses
substantial changes to the way medical device manufacturers bring their devices to the European market and how they maintain compliance
throughout the product's life cycle. MDR will replace the EU’s current Medical Device Directive (93/42/EEC). We are updating
our organization and quality system to be able to handle the transition within the expected timelines for our existing devices
ranges and the devices under development. During the transition period, regulatory actions are being implemented to ensure our
devices continue to be marketed on European and international market after May 2020.
Regulation in Japan
The import and sales of medical devices in
Japan is regulated by the Japanese Ministry of Health, Labor and Welfare (‘the “MHLW’’) under the license
“Marketing Authorization Holder” Our Japanese subsidiary has obtained a general license as well as specific approvals
to import our products that have been approved in Japan. Our Japanese subsidiary is also operating under the statute of Designated
Marketing Authorization Holder (“DMAH”) on behalf of some companies to act as their representative on the Japanese
Territory, before Japanese regulatory authorities. The MHLW also administers various national health insurance programs to which
each Japanese citizen is required to subscribe. These programs cover, among other things, the cost of medical devices used in operations.
The MHLW establishes a price list of reimbursable prices applicable to certain medical devices under the national health insurance
programs and until a new device is included in this list its costs are not covered by the programs. The LT02, the Sonolith Praktis,
the Sonolith Vision, the Sonolith i-sys and the Sonolith i-move are all included on the MHLW’s list for reimbursement.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
The following discussion of our results of
operations and liquidity and capital resources for the fiscal years ended December 31, 2018, 2017 and 2016 is based on, and should
be read in conjunction with, our consolidated financial statements and the notes thereto included in Item 18 of this annual report.
The consolidated financial statements have been prepared in accordance with U.S. GAAP and refer to the new topic-based FASB Accounting
Standards Codification.
The following discussion contains certain forward-looking
statements that involve risks and uncertainties. Actual results may differ materially from those contained in such forward-looking
statements. See ‘‘Cautionary Statement on Forward-Looking Information’’ at the beginning of this annual
report.
Critical Accounting Policies
The discussion and analysis of our financial
condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition,
accounts receivable, bad debts, inventories, warranty obligations, employee stock-option plans, goodwill impairment, provisions
for retirement indemnities, litigation and deferred tax assets. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. These estimates and assumptions form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
We believe our more significant judgments and
estimates used in the preparation of our consolidated financial statements are made in connection with the following critical accounting
policies.
Revenue Recognition
The Company adopted
ASC Topic 606,
Revenue from Contracts with Customers
, on January 1, 2018.
The Company’s
revenue consists of:
- Sales of goods (devices
and consumables), where invoicing takes place upon delivery.
- Revenue-per-Procedures
(“RPP”) and leases: they comprise (i) revenues on a per treatment basis which are invoiced after each treatment, or
in advance, or on a periodic basis, (ii) leases of devices, which are generally invoiced on a monthly or quarterly basis, and (iii)
lease components arising from multiple-element arrangements, where specific sales terms are negotiated in accordance with each
customer’s individual requirements and which are generally invoiced based on contract terms,
- Sales of spare parts
and services (maintenance, upgrades, mobility and others). Spare parts are invoiced when delivered. Regarding services, invoicing
is performed either on a subscription basis (in advance or at the end of the period) or when performed.
The Company invoices its customers based
on the billing schedules in its sales arrangements. Payments are generally due between one to three months from date of invoice.
The Company accounts
for a contract with a customer when there is a legally enforceable contract between the Company and its customer, the rights of
the goods or services and their payment terms can be identified, the contract has commercial substance, collectability of the
contract consideration is probable, it is approved and the parties are committed to their obligations.
Our sale arrangements
may contain multiple elements, including device(s), consumables and services. For these multiple-element arrangements, the Company
accounts for individual goods and services as separate performance obligations: (i) if they are a distinct good or service that
is separately identifiable from other items in the multiple-element arrangement; and (ii) if a customer can benefit from the good
or service on its own or with other resources that are readily available to the customer. The Company’s sale arrangements
may include a combination of the following performance obligations: device(s), consumables, leases and services (such as, but not
limited to, warranty extension).
For multiple-element
arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling
prices are based on observable prices at which the Company separately sells the goods or services. If a standalone selling price
is not directly observable, then the Company estimates the standalone selling price considering market conditions and entity-specific
factors including, but not limited to, features and functionality of the goods and services, geographies, and type of customer.
The Company regularly reviews standalone selling prices and updates these estimates as necessary.
The Company recognizes
revenue when the performance obligations are satisfied by transferring control over the good or service to a customer.
The Company’s
revenue consists of the following:
Sales of goods:
Sales of goods are
and have historically been comprised of net sales of medical devices (ESWL lithotripters and HIFU devices) and net sales of disposables
(mostly Ablapaks and Focalpaks in the HIFU division and electrodes in the UDS division). Sales of goods also includes products
such as urology laser and urodynamics devices distributed through our agents and third-party distributors.
For devices and disposables,
revenue is recognized when the Company transfers control to the customer (i.e. when the customer has the ability to direct the
use of, and obtain substantially all of the remaining benefit from, the device or disposables), which is generally at the point
of delivery or installation, depending on the terms of the arrangement (i.e. when the customer can use the good to provide services
or sell or exchange the good), and based on contractual incoterms.
The Company’s
sales arrangements do not provide a right of return. The goods are generally covered by a period of one to two years standard warranty
upon installation. The Company also provides training associated with the sales of goods; such training-related costs are immaterial
in the context of the contract with the customer and do not constitute a distinct performance obligation.
Sales of RPPs
and leases:
Sales of RPP and leases
include the revenues from the sale of treatment procedures and from the leasing of machines. We provide machines to clinics and
hospitals for free for a limited period, rather than selling the devices. These hospitals and clinics perform treatments using
the devices and usually pay us based on the number of individual treatments provided.
Revenues related to
the sale of treatments invoiced on a ‘‘Revenue-Per-Procedure’’ (‘‘RPP’’) basis
are recognized when the treatment procedure has been completed. Revenues from devices leased to customers under operating leases
are recognized on a straight-line basis.
Regarding multiple-element
arrangements with a lease component, a portion of the contract is allocated to the lease component on the basis of observable market
prices applied by the Company for similar devices under operating leases. The lease component is recognized on a straight line
basis over the contractual period. Other components under the contract are recognized in accordance with their nature.
Sales of spare parts
and services:
Revenues related to
spare parts are recognized when spare parts are delivered to distributors who perform their own maintenance services. Spare parts
used in the performance of EDAP’s own maintenance and repair services are generally not recognized separately, unless specified
in the contract.
Revenues related to
Services mainly consist of maintenance contracts which rarely exceed one year and are recognized on a straight line basis over
the term of the service period as the customer benefits from the service throughout the service contract period. For services rendered
when no maintenance contract is in place or for services not included in the scope of a maintenance contract, revenues are recorded
when services are performed.
The Company recognizes
revenue for extended warranties included in the multiple-element arrangements as a separate performance obligation in Sales of
services on a straight-line basis over the extended warranty period. In the majority of countries in which the Company operates,
the statutory warranty period is one to two years and the extended warranty covers periods beyond this statutory period. Standard
warranties do not constitute a separate performance obligation. The Company accrues for the warranty costs at the time of sale
of the device through the multiple-element arrangement.
Agents and distributors:
As part of its sale
process in countries other than continental France, when the Company does not have a local subsidiary, sales of goods to end-customers
are performed through agent and distributors. Such agent and distributors are primarily responsible for the sales’ process,
bear the inventory risk, and are free to determine the sale prices. Sales of goods to agents and distributors are recognized at
the time of the sale to the related agent or distributor, based on contractual incoterms.
Deferred revenue:
Deferred revenue
for the periods presented primarily relates to service contracts where the service fees are billed up-front, generally quarterly
or annually, prior to those services having been performed, and consists primarily of billing or cash receipts in advance of services
due under maintenance contracts or extended warranty contracts. The associated deferred revenue is generally recognized ratably
over the service period.
Disaggregation of revenue:
Disaggregation by
primary geographical market, and timing of revenue recognition is reported in Note 17.
Contract Balances:
Details on contract liabilities
are reported on Note 10.
The Company applies
the practical expedient in paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that
have original expected durations of one year or less. This relates mainly to maintenance services.
Warrants
On May 28, 2013,
pursuant to a securities purchase agreement dated May 20, 2013, as amended, the Company issued new ordinary shares in the form
of ADSs to selected institutional investors in a registered direct placement (the “May 2013 Placement”) with warrants
attached (the “May 2013 Investor Warrants”). The Company also issued warrants to the placement agent, H.C. Wainwright
& Co., LLC (the “May 2013 Placement Agent Warrants” and together with the May 2013 Investor Warrants, the “May
2013 Warrants”). As the May 2013 Warrants included an exercise price determined in U.S. dollars while the functional currency
of the Company is the euro, the Company determined that the May 2013 Warrants should be accounted for as a liability.
The Company used
the Black-Scholes pricing model to value the May 2013 Warrants at inception, with changes in fair value recorded as a financial
expense or income.
On April 14, 2016,
pursuant to a securities purchase agreement dated April 7, 2016, the Company issued new ordinary shares in the form of ADSs to
selected institutional investors in a registered direct placement (the “April 2016 Placement”) with warrants attached
(the “April 2016 Investor Warrants”). As the April 2016 Warrants comprised the same structure and provisions than the
May 2013 Warrants, including an exercise price determined in U.S. dollars while the functional currency of the Company is the Euro,
the Company determined that the April 2016 Warrants should be accounted for as a liability.
The Company used
the Black-Scholes pricing model to value the April 2016 Warrants at inception, with changes in fair value recorded as a financial
expense or income.
As of December 31,
2018, all warrants had expired.
Allowance for
Doubtful Accounts
We evaluate the collectability
of our accounts receivable based on the individual circumstances of each customer on a quarterly basis. In circumstances where
we are aware of a specific customer’s inability to meet its financial obligations to us (e.g., bankrupcy filings, substantial
downgrading of credit scores), we record a specific reserve for bad debts against amounts due to reduce the net recognized receivable
to the amount we reasonably believe we will collect. If circumstances change (i.e. higher than expected defaults or an unexpected
material adverse change in a major customer’s ability to meet its financial obligations to us), our estimates of the recoverability
of amounts due to us could be reduced by a material amount.
Operating Results
Overview
Total revenues include
sales of our medical devices and sales of disposables (“sales of goods”), sales of RPPs and leases, and sales of spare
parts and services, all net of commissions, as well as other revenues.
Sales of goods have
historically been comprised of net sales of medical devices (ESWL lithotripters and HIFU devices) and net sales of disposables
(mostly Ablapaks and Focalpaks in the HIFU division and electrodes in the UDS division). Sales of goods also included products
such as urology laser and urodynamics devices distributed through our agents and third-party distributors. The sale price of our
medical devices is subject to variation based on a number of factors, including market competition, warranties and payment terms.
Consequently, a particular sale of a medical device may, depending on its terms, result in significant fluctuations in the average
unit sale price of the product for a given period, which may not be indicative of a market trend.
Sales of RPP and leases
include the revenues from the sale of Ablatherm and Focal One treatment procedures and from the leasing of Ablatherm and Focal
One devices. We provide Ablatherm and Focal One devices to clinics and hospitals for free for a limited period, rather than selling
the devices. These hospitals and clinics perform treatments using the devices and usually pay us based on the number of individual
treatments provided. With this business model, the hospital or clinic does not make an initial investment until the increase in
patient demand justifies the purchase of a HIFU device. Consequently, we are able to make Ablatherm or Focal One treatments available
to a larger number of hospitals and clinics, which we believe should serve to create more long-term interest in the product. Compared
to the sale of devices, this business model initially generates a smaller, although more predictable stream of revenue and, if
successful, should lead to more purchases of Ablatherm and Focal One devices by hospitals and clinics in the long term.
In 2018, 2017 and 2016
,
our UDS sales activity benefited from the success of our Sonolith i-sys device and our Sonolith i-move device, together with
a
sustained commercial effort in distributing additional urology devices which allowed us to capture market share worldwide.
We believe that the market for ESWL lithotripters is now mature and has become primarily a replacement and maintenance market,
with intense competition. As a result, we expect total market volumes for our UDS Division to remain stable in the foreseeable
future.
Sales of spare parts
and services include revenues arising from maintenance services furnished by us for the installed base of ESWL lithotripters and
HIFU devices.
We derive a significant
portion of both net sales of medical devices and disposables and net sales of spare parts and services from our operations in Asia,
through our wholly
-
owned subsidiaries or representative offices
in Japan (Edap Technomed Co. Ltd), Malaysia (Edap Technomed Sdh Bhd) and South Korea (Edap Technomed Korea). Net sales derived
from our operations in Asia represented approximately 36% of our total consolidated net sales in 2018. Net sales of goods in Asia
represented approximately_42% of such sales in 2018 and consisted mainly of sales of urology devices and disposables. Net sales
of spare parts, supplies and services in Asia represented approximately 38% of such sales in 2018 and related primarily to ESWL
lithotripters, reflecting the fact that approximately 45% of the installed base of our ESWL lithotripters
that
we actively maintain or otherwise serve
is located in Asia. See Note 28 of our consolidated financial statements. We sell
our products in many parts of the world and, as a result, our business is affected by fluctuations in currency exchange rates.
We are exposed to foreign currency exchange rate risk because the mix of currencies in which our costs are denominated is different
from the mix of currencies in which we earn revenues. In 2018, approximately 74% of our costs of sales and research and development,
selling, marketing and general and administrative expenses were denominated in euro, while approximately 41% of our sales were
denominated in currencies other than euro (primarily the U.S. Dollar and Japanese yen). Our operating profitability could be materially
affected by large fluctuations in the rate of exchange between the euro and such other currencies. To minimize our exposure to
exchange rate risks, we sometimes use certain financial instruments for hedging purposes. See Item 3, ‘‘Key Information—Risk
Factors—We sell our products in many parts of the world and, as a result, our business is affected by fluctuations in currency
exchange rates’’ and Item 11, ‘‘Quantitative and Qualitative Disclosures About Market Risk’’
for a description of the impact of foreign currency fluctuations on our business and results of operations.
Reserves for slow-moving and obsolete inventory
are determined based upon quarterly reviews of all inventory items. Items which are not expected to be sold or used in production,
based on management’s analysis, are written down to their net realizable value, which is their fair market value or zero
in the case of spare parts or disposable parts for devices that are no longer in commercial production.
Consolidated research and development expenses
include all costs related to the development of new technologies and products and the enhancement of existing products, including
the costs of organizing clinical trials and of obtaining patents and regulatory approvals. We do not capitalize any of our research
and development expenses, except for the expenses relating to the production of machines to be used in clinical trials and that
have alternative future uses as equipment or components for future research projects.
Consolidated research and development expenses,
as described above, amounted to €4.1 million, €3.9 million, and €3.9 million in 2018, 2017 and 2016, respectively,
representing approximately 10.4%, 10.9%, and 10.9% of total revenues in 2018, 2017 and 2016, respectively. Research and development
government grants and tax credits are deducted from our consolidated research and development expenses for amounts of €0.8
million, €0.7 million and €0.7 million in 2018, 2017 and 2016, respectively. Beginning in 2019, management expects the
budget for research and development expenses in Europe to increase at approximately 10.7% of total revenues, which we expect will
allow us to maintain our strategy to launch new clinical studies (thus strengthening our clinical credibility), to continue to
focus our efforts on obtaining regulatory approvals in Japan in particular, and reimbursement in key countries, to continue to
develop our HIFU and ESWL product range and to fund projects to expand the use of HIFU beyond the treatment of prostate cancer.
Consolidated selling and marketing expenses
amounted to €10.6 million in 2018, €9.5 million in 2017 and €8.9 million in 2016. Selling and marketing expenses
included net impact of allowances for doubtful accounts of €0.4 million in 2018, €0.1 million in 2017 and €(0.02)
million in 2016. The €1.0 million or 10.8% increase in selling and marketing expenses from 2017 to 2018 was primarily a result
of the increase in global sales and marketing activity. Management expects marketing and sales efforts to stay at significant levels
in the future to consolidate the Ablatherm and Focal One HIFU technology’s status as a standard of care for prostate pathologies,
and to sustain the Company’s worldwide market position in urology. Beginning in 2019, management expects selling and marketing
expenses to continue to increase in view of the Company’s expansion.
We believe that our results of operations in
the near future will be affected by our ability to grow our sales volumes both in the prostate cancer and the lithotripsy markets,
along with our ability to control expenses in connection with the development, marketing and commercial expansion of HIFU for prostate
cancer and other applications worldwide, . See ‘‘—Liquidity and Capital Resources.’’
Fiscal Year Ended December 31, 2018 Compared to
Fiscal Year Ended December 31, 2017
We report our segment information on a “net
contribution” basis, so that each segment’s results comprise the elimination of our intra-group revenues and expenses
and thus reflect the true contribution to consolidated results of the segment. See Note 28 to our consolidated financial statements.
(in millions of euros)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
39.2
|
|
|
|
35.7
|
|
Total net sales
|
|
|
39.2
|
|
|
|
35.7
|
|
Of which HIFU
|
|
|
11.0
|
|
|
|
9.5
|
|
Of which UDS
|
|
|
28.1
|
|
|
|
26.2
|
|
Total cost of sales
|
|
|
(22.3
|
)
|
|
|
(20.9
|
)
|
Gross profit
|
|
|
16.9
|
|
|
|
14.8
|
|
Gross profit as a percentage of total net sales
|
|
|
43.2
|
%
|
|
|
41.5
|
%
|
Total operating expenses
|
|
|
(18.2
|
)
|
|
|
(16.8
|
)
|
Income (loss) from operations
|
|
|
(1.3
|
)
|
|
|
(2.0
|
)
|
Net income (loss)
|
|
|
(0.3
|
)
|
|
|
(0.7
|
)
|
Total revenues
Our total revenues increased 9.6% from €35.6
million in 2017 to €39.2 million in 2018.
HIFU division
. The HIFU division’s
total revenues
increased by 16.1% from €9.5 million in 2017 to €11.0 million.
The HIFU division’s net sales of medical
devices increased 58.0% to €3.6 million in 2018, with one Ablatherm unit and six Focal One units sold
,
as
compared to
€2.3 million, with two Ablatherm and three Focal One units sold in
2017.
Treatment-driven revenue, which includes net
sales of RPP & leases, net sales of disposables and treatments related services, slightly decreased by 1% to €6.1 million
in 2018.
Net sales of HIFU maintenance services increased
from €1.1 million in 2017 to €1.3 million in 2018, reflecting the development of the installed base.
Other HIFU-related revenues decreased to €19
thousand in 2018 from €36 thousand in 2017 and were comprised of license-based revenues from Theraclion.
UDS division
. The UDS division’s
total revenues increased 7.3 % from €26.2 million in 2017 to €28.1 million in 2018, mostly due to the increase in consumables
and maintenance revenues.
The UDS division’s net sales of medical
devices increased 1.6% from €15.1 million in 2017 to €15.3 million in 2018 with 33 ESWL devices sold in 2018 compared
to 40 ESWL units sold in 2017. The increase was driven by a 33% growth in the sales of distribution machines.
Net sales of UDS-related consumables, spare
parts, supplies, RPP, leasing and services increased 15.2% from €11.1 million in 2017 to €12.8 million in 2018, as a
result of the larger installed base of UDS machines and the development of the distribution products revenues.
Cost of sales
.
Cost of sales increased 6.3% from €20.9
million in 2017 to €22.3 million in 2018, and represented 56.9% as a percentage of net sales in 2018, down from 58.7% as a
percentage of net sales in 2017, due primarily to the effect of the increase of net sales on the fixed costs.
Operating expenses
.
Operating expenses increased 8.3%, or €1.4
million, from €16.8 million in 2017 to €18.2 million in 2018.
Marketing and sales expenses increased €1.0
million, or 10.8% at €10.6 million, reflecting the sales and marketing efforts on expanding the business.
Research and development expenses increased 5.3% at €4.1 million in 2018 from €3.9 million in 2017, mainly
driven by development projects and strengthening of regulatory requirements and are net of R&D grants and tax credits of €0.8
million in 2018 and €0.7 million 2017.
General and administrative expenses increased
4.8% to €3.6 million in 2018, mainly due to the higher level of activity, the implementation of SAP program and the impact
of the remediation plan following the 2017 identified material weakness.
Operating profit (loss)
.
As a result of the factors discussed above,
we recorded a consolidated operating loss of €1.3 million in
2018,
as compared to
a consolidated operating loss of €2.0 million in 2017.
We realized an operating loss in the HIFU division
of €2.3 million in 2018, as compared with an operating loss of €2.7 million in 2017, and an operating profit in the UDS
division of €2.3 million in 2018, as compared to an operating profit of €2.1 million in 2017.
Financial (expense) income, net
.
Net financial income was €0.8 million in
2018, including a €0.9 million income for fair value adjustments on the outstanding warrants, compared with a
net
financial income
of €2.6 million in 2017, including a €2.7 million income due to fair value adjustments.
In 2018, we recorded a net foreign currency
exchange income of €0.5 million, mainly due to the variation of the Euro against the U.S. Dollar and the Japanese Yen, compared
to a loss of €0.9 million in 2017.
Income taxes
.
Income tax was an expense of €0.4 million
in 2018 and 2017.
Net
income
/ (
loss)
As a result of the above, we realized a consolidated
net loss of €0.3 million in 2018 compared with a consolidated net loss of €0.7 million in 2017.
Fiscal Year Ended December 31, 2017 Compared to
Fiscal Year Ended December 31, 2016
We report our segment information on a “net
contribution” basis, so that each segment’s results comprise the elimination of our intra-group revenues and expenses
and thus reflect the true contribution to consolidated results of the segment. See Note 28 to our consolidated financial statements.
(in millions of euros)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
35.7
|
|
|
|
35.6
|
|
Total net sales
|
|
|
35.7
|
|
|
|
35.6
|
|
Of which HIFU
|
|
|
9.5
|
|
|
|
13.8
|
|
Of which UDS
|
|
|
26.2
|
|
|
|
21.8
|
|
Total cost of sales
|
|
|
(20.9
|
)
|
|
|
(19.2
|
)
|
Gross profit
|
|
|
14.8
|
|
|
|
16.4
|
|
Gross profit as a percentage of total net sales
|
|
|
41.5
|
%
|
|
|
46.1
|
%
|
Total operating expenses
|
|
|
(16.8
|
)
|
|
|
(16.0
|
)
|
Income (loss) from operations
|
|
|
(2.0
|
)
|
|
|
0.4
|
|
Net income (loss)
|
|
|
(0.7
|
)
|
|
|
3.8
|
|
Total revenues
Our total revenues increased 0.3% from €35.6 million in 2016 to €35.7 million in 2017.
HIFU division
. The HIFU division’s
total revenues
decreased by 31.2% to €9.5 million in 2017 as compared to €13.8 million
in 2016.
The HIFU division’s net sales of medical
devices decreased 70.7% to €2.3 million in 2017, with two Ablatherm units and three Focal One units sold
,
as
compared to
€7.8 million, with six Ablatherm and eight Focal One units sold in
2016.
Treatment-driven revenue, which includes net
sales of RPP & leases, net sales of disposables and treatments related services, increased 12.9% to €6.1 million in 2017.
Net sales of HIFU maintenance services increased
from €0.6 million in 2016 to €1.1 million in 2017.
Other HIFU-related revenues increased to €36
thousand in 2017 from €28 thousand in 2016 and were comprised of license-based revenues from Theraclion.
UDS division
. The UDS division’s
total revenues increased 20.4 % from €21.8 million in 2016 to €26.2 million in 2017, mostly due to the increase in machine
sales and maintenance revenues.
The UDS division’s net sales of medical
devices increased 23.6% from €12.2 million in 2016 to €15.1 million in 2017 with 40 ESWL devices sold in 2017 compared
to 36 ESWL units sold in 2016.
Net sales of UDS-related spare parts, supplies,
RPP, leasing and services increased 16.1% from €9.6 million in 2016 to €11.1 million in 2017, as a result of the larger
installed base of UDS machines and the development of the distribution products revenues.
Cost of sales
.
Cost of sales increased 9.1% from €19.2
million in 2016 to €20.9 million in 2017, and represented 58.7% as a percentage of net sales in 2017, up from 54.0% as a percentage
of net sales in 2016, due primarily to the decrease in HIFU revenues and the adverse mix between HIFU and UDS division, as HIFU
margins are higher than UDS margins.
Operating expenses
.
Operating expenses increased 5.1%, or €0.8
million, from €16.0 million in 2016 to €16.8 million in 2017.
Marketing and sales expenses increased €0.7
million, or 7.6% at €9.5 million, reflecting the sales and marketing efforts on expanding the business.
Research and development expenses increased
0.4% at €3.9 million in 2017 from €3.9 million in 2016, mainly driven by HIFU development projects and comprised R&D
grants and tax credits of €0.7 million in 2017 and 2016.
General and administrative expenses increased
4.0% to €3.4 million in 2017, mainly due to implementation of SAP program.
Operating profit (loss)
.
As a result of the factors discussed above,
we recorded a consolidated operating loss of €2.0 million in
2017,
as compared to
a consolidated operating profit of €0.4 million in 2016.
We realized an operating loss in the HIFU division
of €2.7 million in 2017, as compared with an operating profit of €1.0 million in 2016, and an operating profit in the
UDS division of €2.1 million in 2017, as compared to an operating profit of €0.7 million in 2016.
Financial (expense) income, net
.
Net financial income was €2.6 million in
2017, including a €2.7 million income for fair value adjustments on the outstanding warrants, compared with a
net
financial income
of €3.9 million in 2016, including a €3.8 million income due to fair value adjustments.
In 2017, we recorded a net foreign currency
exchange loss of €0.9 million, mainly due to the variation of the Euro against the U.S. Dollar and the Japanese Yen, compared
to an income of €0.1 million in 2016.
Income taxes
.
Income tax was an expense of €0.4 million
in 2017 and €0.6 million in 2016.
Net
income
/ (
loss)
As a result of the above, we realized a consolidated
net loss of €0.7 million in 2017 compared with a consolidated net income of €3.8 million in 2016.
Effect of Inflation
Management believes that the impact of inflation
was not material to our net sales or loss from operations in the three years ended December 31, 2018.
Liquidity and Capital Resources
Our cash flow has historically been subject
to significant fluctuations over the course of any given financial year due to cyclical demand for medical devices. Cyclical demand
has historically resulted in significant annual and quarterly fluctuations in trade and other receivables and inventories, and
therefore led to significant variations in working capital requirements and operating cash flows that were not necessarily indicative
of changes in our business. We believe our working capital is sufficient for our present working capital requirements although
we have in the past experienced negative cash flows and associated risks to liquidity, and may in the future experience the same.
Our cash flow situation
is
described in more detail below.
We anticipate that cash flow in future periods
will be derived mainly from ongoing operations. As of the date of this annual report we do not employ any off-balance sheet financing.
Because we anticipate relying principally on cash and cash equivalent balances to meet our liquidity requirements, a decrease in
the demand for our products, or the inability of our customers to meet their financial obligations to us due to operating difficulties
or adverse market conditions, would reduce the availability of funds to us.
(in thousands of euros)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Net cash generated by/(used in) in operating activities
|
|
|
175
|
|
|
|
(3,059
|
)
|
|
|
1,209
|
|
Net cash generated by/(used in) in investing activities
|
|
|
(1,569
|
)
|
|
|
(2,032
|
)
|
|
|
(384
|
)
|
Net cash generated by/(used in) in financing activities
|
|
|
1,178
|
|
|
|
2,871
|
|
|
|
7,604
|
|
Net effect of exchange rate changes
|
|
|
(323
|
)
|
|
|
235
|
|
|
|
(19
|
)
|
Net increase/(decrease) in cash and cash equivalents
|
|
|
(539
|
)
|
|
|
(1,985
|
)
|
|
|
8,410
|
|
Cash and cash equivalents at the beginning of the year
|
|
|
20,004
|
|
|
|
21,989
|
|
|
|
13,578
|
|
Cash and cash equivalents at the end of the year
|
|
|
19,465
|
|
|
|
20,004
|
|
|
|
21,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our cash position as of December 31, 2018, 2017
and 2016, was €19.5 million (with no short-term treasury investments), €20.0 million (with no short-term treasury investments)
and €22.0 million (with no short-term treasury investments), respectively. We experienced negative cash flows of €0.5
million in 2018, negative cash flows of €2.0 million in 2017 and positive cash flows of €8.4 million in 2016.
In 2018, our negative net cash flow was primarily due to the high level of cash used in investing activities
partly
offset by net cash generated by financing activities which included the new Long Term debt (€1.0 million) granted during the
year. In 2017, our negative net cash flow was primarily due to the negative cash flow from operations and the high level of cash
used in investing activities. In 2016, our positive net cash flow was due to the April 2016 Placement and our positive cash flow
from operations.
In 2018, net cash generated by operating activities
was €0.2 million compared with net cash used in operating activities of €3.1 million in 2017 and compared with net cash
generated by operating activities of €1.2 million in 2016.
In 2018, net cash generated by operating activities
reflected principally
|
-
|
a net loss of €0.3million;
|
|
-
|
elimination of €1.8 million of net loss without effects on cash, including a gain of €0.9
million due to fair value variations of financial instruments, €1.6 million of depreciation and amortization, and €0.3
million of non-cash compensation linked to stock-options plans.
|
|
-
|
an increase in working capital of €1.3 million reflecting the higher level of activity and the high level of net sales
recorded in December 2018 which will be collected in 2019.
|
In 2017, net cash used in operating activities
reflected principally:
|
-
|
a net loss of €0.7 million;
|
|
-
|
elimination of €0.7 million of net gain without effects on cash, including a gain of €2.7
million due to fair value variations of financial instruments, €1.6 million of depreciation and amortization, and €0.4
million of non-cash compensation linked to stock-options plans.
|
|
-
|
an increase in trade accounts and other receivables of €1.7 million;
|
|
-
|
a decrease in inventories of €0.7 million;
|
|
-
|
an increase in payables of €0.4 million;
|
|
-
|
a decrease in accrued expenses and other current liabilities of €1.0 million.
|
In 2016, net cash generated in operating activities
reflected principally:
|
-
|
a net income of €3.8 million;
|
|
-
|
elimination of €2.4 million of net gain without effects on cash, including a gain of €4.0
million due to fair value variations of financial instruments, €1.0 million of depreciation and amortization, and €0.4
million of non-cash compensation linked to stock-options plans.
|
|
-
|
a decrease in trade accounts and other receivables of €1.8 million;
|
|
-
|
an increase in inventories of €2.0 million;
|
|
-
|
a decrease in payables of €0.2 million;
|
|
-
|
a increase in accrued expenses and other current liabilities of €0.1 million.
|
In 2018, net cash used in investing activities
was €1.6 million compared with net cash used in investing activities of €2.0 million in 2017 and compared with net
cash used of €0.4 million in investing activities in 2016.
Net cash used in investing activities of €1.6
million in 2018 reflected investments of €0.8 million in capitalized assets produced by the Company (devices), mostly for
RPP activity (€0.3 million) and R&D program (€0.5 million) and investment of €1.1 million in property, equipment
(including €0.3 million of equipment for mobile activity) and software (including new Enterprise Resource Planning “ERP”
implementation for €0.4 million), and net proceeds from sales of leased-back assets of €0.4 million.
Net cash used in investing activities of €2.0
million in 2017 reflected investments of €1.0 million in capitalized assets produced by the Company (devices), mostly for
RPP activity (€0.5 million) and R&D program (€0.3 million) and investment of €1.0 million in property, equipment
and software (including new Enterprise Resource Planning “ERP” implementation for €0.5 million), and net proceeds
from sales of leased-back assets of €0.1 million.
Net cash used in investing activities of €0.4
million in 2016 reflected investments of €0.9 million in capitalized assets produced by the Company, mostly for commercial
demonstrations, training and RPP activity and investment of €0.5 million in property, equipment and software, and net proceeds
from sales of short term investments of €1,0 million.
In 2018, net cash generated in financing activities
was €1.1 million compared with a net cash generated in financing activities of €2.9 million in 2017 and net cash generated
in financing activities of €7.6 million in 2016.
Net cash generated in financing activities of
€1.1 million in 2018 reflected principally the new long term borrowings of €1.0 million in Germany and Japan, repayment
of long-term borrowings and lease financing for €0.8 million and an increase of short-term borrowings of €0.9 million.
Net cash generated in financing activities of
€2.9 million in 2017 reflected principally the net proceeds of €0.7 million from the exercise of stock options and warrants,
but also new long term borrowings of €0.8 million related to new investments financing, €0.8 million of conditional advances
to finance research HECAM project, repayment of long-term borrowings and lease financing for €0.5 million and an increase
of short-term borrowings of €1.1 million.
Net cash generated in financing activities of
€7.6 million in 2016 reflected principally the €9.2 million net proceeds from the April 2016 Placement and the net proceeds
of €0.1 million from the exercise of warrants, repayment of short-term and long-term borrowings and lease financing for €1.8
million.
Our policy is that our treasury department should
maintain liquidity with the use of short-term borrowings and the minimal use of long-term borrowings. The treasury department currently
adheres to this objective by using fixed-rate debt, which normally consists of long-term borrowing and with certain long-term borrowings
consisting of sale and leaseback equipment financing. Currently the short-term debt consists of account receivables factored and
for which the Company is supporting the collection risk. We maintain bank accounts for each of our subsidiaries in the local currencies
of each subsidiary. The primary currencies in which we maintain balances are the euro, the U.S. dollar and the Japanese yen. To
minimize our exposure to exchange rate risks, we may use certain financial instruments for hedging purposes from time to time.
As of December 31, 2018, there were no outstanding hedging instruments. See Notes 13 and 14 to the consolidated financial statements
for further information on our borrowings.
Contractual Obligations and Commercial Commitments as of December 31, 2018 (in thousands
of euro)
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
More than 5 years
|
|
Short-Term Debt
|
|
|
3,683
|
|
|
|
3,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
|
|
|
1,830
|
|
|
|
491
|
|
|
|
841
|
|
|
|
324
|
|
|
|
174
|
|
Capital Lease Obligations
|
|
|
1,235
|
|
|
|
383
|
|
|
|
596
|
|
|
|
246
|
|
|
|
10
|
|
Operating Leases
|
|
|
2,933
|
|
|
|
638
|
|
|
|
1,080
|
|
|
|
722
|
|
|
|
493
|
|
Interest
|
|
|
96
|
|
|
|
31
|
|
|
|
45
|
|
|
|
15
|
|
|
|
4
|
|
Recent Accounting Pronouncements
See “NOTE 1—SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES --
1.25 New Accounting Pronouncements
” of the Notes to Consolidated Financial Statements for a
description of recent accounting pronouncements including the respective expected dates of adoption and estimated effects,
if any, on our Consolidated Financial Statements.
Research and Development, Patents and Licenses
See
“—
Operating
Results
—
Overview” and Item 4, ‘‘Information on the Company—HIFU
Division—HIFU Division Patents and Intellectual Property’’ and ‘‘Information on the Company—UDS
Division—UDS Division Patents and Intellectual Property.’’
The French government provides tax credits to
companies for innovative research and development. This tax credit is calculated based on a percentage of eligible research and
development costs and it can be refundable in cash.
Off-Balance Sheet Arrangements
At December 31, 2018, we had no off-balance sheet arrangements other than those specified in Note 14-1 of
our consolidated financial statements.
Item 6. Directors, Senior Management and Employees
Senior Executive Officers
The following table sets forth the name, age
and position of each of our Senior Executive Officers as of April 12, 2019. The Chief Executive Officer and the Chief Financial
Officer listed below have entered into employment contracts with us or our subsidiaries (which permit the employee to resign subject
to varying notice periods). In addition, in case of a change of control of the Company, or of a termination of their employment
contract by the Company without cause, the Senior Executive Officers are entitled to receive severance packages totaling approximately
€0.6 million.
Marc Oczachowski
|
|
Chief Executive Officer of EDAP TMS S.A. and Member of the Board of Directors
|
Age: 49
|
|
President of EDAP TMS France SAS and EDAP Technomed, Inc.
|
Marc Oczachowski joined the Company
in May 1997 as Area Sales Manager, based in Lyon, France. From March 2001 to January 2004, he held management positions as General
Manager of EDAP Technomed Malaysia. He was appointed Chief Operating Officer of EDAP TMS in November 2004 and became Chief Executive
Officer of the Company on March 31, 2007. From July 2012 to July 2017, he relocated to Austin, Texas to manage EDAP’s U.S.
operations. Previously he worked for Sodem Systems, which manufactures orthopedic power tools, as Area Sales Manager. He is a
graduate of Institut Commercial de Lyon, France.
François Dietsch
|
|
Chief Financial Officer of EDAP TMS S.A.
|
Age: 43
|
|
François Dietsch joined EDAP in 2005 as Internal Audit and Consolidation Manager, leading the implementation of internal controls for Sarbanes-Oxley
Compliance, consolidation of financial statements from the Company's subsidiaries and preparation of financial statements in accordance
with U.S. GAAP, including EDAP's annual report on Form 20-F. In 2012, he was promoted to Group Financial Control Manager and Finance
Manager of EDAP's French subsidiary where, in addition to his previous responsibilities, he managed accounting firm relationships
at the subsidiary level and was the primary liaison between the Company and its external auditors. He also managed the Finance
department at EDAP France. He was appointed Chief Financial Officer of the Company on July 14, 2015. Prior to joining EDAP he held
finance positions at Valeo, a leading global supplier of components and systems to the automotive industry. He holds Master's Degrees
in Management and Corporate Finance from University of Paris Dauphine.
|
Board of Directors
The following table sets forth the names and
backgrounds of the members of the Board of Directors. None of the directors has service contracts with the Company or any of its
subsidiaries providing for benefits upon termination of employment. All of the Board members are independent within the meaning
of NASDAQ Marketplace Rule 5605(2). Four Board of Directors mandates terminate in June 2020 at the General Meeting of Shareholders
approving the 2019 accounts.
Philippe Chauveau
Age: 83
Mandate: 6 years
Appointment: April. 8, 1997
(renewed in 2014)
Expiration: 2019
|
Philippe Chauveau was named chairman of EDAP TMS S.A.'s
Supervisory Board in 1997. In 2002, the Company’s two-tiered board structure was replaced by a single Board of Directors
with Philippe Chauveau serving as Chairman and CEO until 2004 when he was succeeded as CEO. From 2000 to 2007, Philippe Chauveau
served as founding Chairman of the Board of Scynexis Inc., funded by private equity, which is an innovative drug discovery company
based in the United States. He was Vice-President of research and development at AT&T Bell Labs and has also served as Chairman
of Apple Computer Europe, preceded by increasing marketing roles in ITT and in Procter & Gamble. He has an Honours Degree
from Trinity College Dublin with a B.A. and a Bsc.
|
Pierre Beysson
Age: 77
Mandate: 6 years
Appointment:
September 27, 2002
(renewed in 2014)
Expiration: 2019
|
Pierre Beysson was appointed as a member of the Board of
Directors in September 2002. Pierre Beysson was then the Chief Financial Officer of Compagnie des Wagons-Lits ("CWL"),
the on-board train service division of Accor, a French multinational Hotel and Business Services Group. In this capacity, he sat
on a number of boards of companies related to the Accor Group. Before his assignment at CWL, Pierre Beysson held a number of senior
financial positions with Nixdorf Computers, Trane (Air Conditioning), AM International (Office Equipment) and FMC (Petroleum Equipment).
Pierre Beysson was trained as a CPA, has auditing experience and holds an MBA from Harvard Business School.
|
Argil Wheelock
Age: 71
Mandate: 6 years
Appointment: June 25, 2009
(renewed in 2014)
Expiration: 2019
|
Dr. Argil Wheelock was elected as a member of the Company's
Board of Directors in June 2009. Dr. Wheelock, a U.S. board certified urologist, is currently Senior Physician at the University
of Tennessee Department of Urology at Erlanger Medical Center, a tertiary care and teaching hospital in Chattanooga, Tennessee.
He is Chief Medical Advisor to HealthTronics Inc., a privately held company. HealthTronics is a leading U.S. provider of urological
services and products. From 1996 to 2005, Dr. Wheelock served as Chairman and CEO of HealthTronics, a publicly traded NASDAQ company
where he was a founder. He has built a successful track record introducing new medical devices to the U.S. and navigating the
FDA approval process. He is widely known among the U.S. urological community for bringing clinical benefits to patients and economic
value to urology practices. Dr. Wheelock graduated from the University of Tennessee College of Medicine and completed urological
training at Mount Sinai Hospital in New York City.
|
Rob Michiels
Age: 69
Mandate: 6 years
Appointment: July 16, 2009
(renewed in 2014)
Expiration: 2019
|
Rob Michiels was elected as a member of the Company's Board
of Directors in July 2009. He is a 30-year U.S. veteran of the medical device industry. He most recently serves as Chief Executive
Officer (CEO) of CardiAQ Valve Technologies, a venture funded start-up developing Transcatheter Mitral Valve Implantation which
was acquired by Edwards Lifesciences during the second half of 2015. He previously served as Chief Operating Officer (COO)
of CoreValve (acquired by Medtronic); and as President and COO of InterVentional Technologies (acquired by Boston Scientific).
He helped drive both companies from cardiovascular start-ups to established market leaders, using new and innovative technologies
which have strong synergies to the HIFU story. Rob Michiels is a director of Aegis Surgical Ltd, Atrius Ltd, and FEops NV, all
privately held companies developing cutting edge cardio-vascular less-invasive Technologies. Rob Michiels is a founding partner
of CONSILIUM, a medical device market research company active in identifying, funding and greenhousing start-up technologies.
Fluent in English, French and Dutch languages, he holds a bachelor's degree in economics from Antwerp University in Belgium and
a Master’s in business administration (MBA) from Indiana University.
|
Marc Oczachowski
Age: 49
Mandate: 6 years
Appointment: July 1, 2017
Expiration: 2022
|
See Marc Oczachowski’s background above (Senior Executive
Officers).
|
Compensation
Aggregate compensation paid or accrued for
services in all capacities by the Company and its subsidiaries to Senior Executive Officers and to the Board of Directors as a
group for the fiscal year 2018 was approximately €514 thousand including performance bonuses of €81 thousand and benefits
in kind of €9 thousand (benefits in kind comprise car allowances for senior management). No amount was set aside or accrued
by us to provide pension, retirement or similar benefits for Senior Executive Officers and to the Board of Directors as a group
in respect of the year 2018. For information regarding compensation paid in the form of stock options, see “Directors, Senior
Management and Employees-Share Ownership” and “Directors, Senior Management and Employees-Options to
Purchase or Subscribe for Securities.”
Compensation Committee
The Compensation Committee is comprised of
the following independent members: Mr. Philippe Chauveau, Mr. Pierre Beysson, Dr. Argil Wheelock and Mr. Rob Michiels. The Committee
gathers once a year to review the compensation of our Chief Executive Officer, as per the approved charter of the Compensation
Committee, and to propose to the Board of Directors any changes to the Chief Executive Officer’s compensation. The Chief
Executive Officer is not present when the Compensation Committee reviews his compensation. In August 2014, the Compensation Committee
updated its charter which was subsequently approved by the Board of Directors.
Audit Committee
The Board of Directors’ Audit Committee
comprises four independent members of the Board: Mr. Pierre Beysson, acting as Head of the Audit Committee and financial expert,
Mr. Philippe Chauveau, Dr. Argil Wheelock and Mr. Rob Michiels. The purpose of the Audit Committee, in accordance with its annually
approved charter, is as stated below, but not limited to:
|
-
|
Provide assistance to the Board of Directors in fulfilling their oversight responsibility to the
shareholders, potential shareholders, the investment community and others relating to: the integrity of our financial statements,
our compliance with legal and regulatory requirements, our accounting practices and financial reporting processes, the effectiveness
of our disclosure controls and procedures and internal control over financial reporting,
|
|
-
|
Review the independent auditor’s qualifications, compensation and independence, and the performance
of our internal audit function and independent auditors,
|
|
-
|
Recommend the appointment of the independent auditors for consideration and approval by the Company’s
shareholders in accordance with French law.
|
|
-
|
Review and discuss annual financial statements with Management and independent auditors
and prepare the Audit Committee report, prior to SEC filings, as well as review related press releases.
|
|
-
|
Request any officer or employee of the Company or our outside counsel or independent auditor to
attend a meeting of the Audit Committee or to meet with any members of, or consultants to, the Audit Committee.
|
For more information on the missions of our
Audit Committee, please refer to our web site www.edap-tms.com, under Investor Relations Section, where our Audit Committee Charter
is available.
Nomination Committee
The Company’s Board of Directors recommends
for the Board’s selection director nominees to submit to the vote of the Company’s shareholders. In addition, under
specified circumstances and in accordance with French law, shareholders may also submit resolutions to the general meeting to appoint
directors.
The Company’s nominations practice is
formalized in a Board resolution and at its Board meeting in February 2015, the Board resolved that in the event that one or more
directors is or are no longer independent, the Board will create a Nominations Committee (composed exclusively of independent Directors).
A Nominations Committee Charter was approved accordingly, the terms of which apply to the Board of Directors when considering director
nominees. As per this Charter, upon the appointment of Mr. Marc Oczachowski to the Board as a non-independent Director, on June
30, 2017, the Board of Directors, was convened on July 10, 2017, and decided to create a Nominations Committee composed exclusively
of independent Directors.
Employees
As of December 31, 2018, we employed 215 individuals
on a full-time basis, as follows:
|
|
Sales & Marketing
|
|
|
Manufac-
turing
|
|
|
Service
|
|
|
Research & Dvpt
|
|
|
Regula-
tory
|
|
|
Clinical Affairs
|
|
|
Adminis-
trative
|
|
|
Total
|
|
France
|
|
|
25
|
|
|
|
32
|
|
|
|
20
|
|
|
|
18
|
|
|
|
6
|
|
|
|
9
|
|
|
|
16
|
|
|
|
126
|
|
Italy
|
|
|
3
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
5
|
|
Germany
|
|
|
4
|
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
9
|
|
Japan
|
|
|
21
|
|
|
|
0
|
|
|
|
16
|
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
|
|
6
|
|
|
|
46
|
|
Malaysia
|
|
|
2
|
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
7
|
|
South Korea
|
|
|
2
|
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
6
|
|
USA
|
|
|
7
|
|
|
|
0
|
|
|
|
2
|
|
|
|
0
|
|
|
|
1
|
|
|
|
2
|
|
|
|
4
|
|
|
|
16
|
|
Total
|
|
|
64
|
|
|
|
32
|
|
|
|
47
|
|
|
|
18
|
|
|
|
10
|
|
|
|
11
|
|
|
|
33
|
|
|
|
215
|
|
As of December 31, 2017, we employed 200 individuals
on a full-time basis, as follows:
|
|
Sales & Marketing
|
|
|
Manufac-
turing
|
|
|
Service
|
|
|
Research & Dvpt
|
|
|
Regula-
tory
|
|
|
Clinical Affairs
|
|
|
Adminis-
trative
|
|
|
Total
|
|
France
|
|
|
21
|
|
|
|
32
|
|
|
|
21
|
|
|
|
17
|
|
|
|
4
|
|
|
|
9
|
|
|
|
14
|
|
|
|
118
|
|
Italy
|
|
|
4
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
6
|
|
Germany
|
|
|
4
|
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
9
|
|
Japan
|
|
|
18
|
|
|
|
0
|
|
|
|
15
|
|
|
|
0
|
|
|
|
2
|
|
|
|
0
|
|
|
|
4
|
|
|
|
39
|
|
Malaysia
|
|
|
2
|
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
7
|
|
South Korea
|
|
|
2
|
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
6
|
|
USA
|
|
|
7
|
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
4
|
|
|
|
15
|
|
Total
|
|
|
58
|
|
|
|
32
|
|
|
|
48
|
|
|
|
17
|
|
|
|
6
|
|
|
|
10
|
|
|
|
29
|
|
|
|
200
|
|
As of December 31, 2016, we employed 197 individuals
on a full-time basis, as follows:
|
|
Sales & Marketing
|
|
|
Manufac-
turing
|
|
|
Service
|
|
|
Research & Dvpt
|
|
|
Regula-
tory
|
|
|
Clinical Affairs
|
|
|
Adminis-
trative
|
|
|
Total
|
|
France
|
|
|
23
|
|
|
|
34
|
|
|
|
23
|
|
|
|
18
|
|
|
|
2
|
|
|
|
8
|
|
|
|
13
|
|
|
|
121
|
|
Italy
|
|
|
4
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
6
|
|
Germany
|
|
|
4
|
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
9
|
|
Japan
|
|
|
17
|
|
|
|
0
|
|
|
|
14
|
|
|
|
0
|
|
|
|
2
|
|
|
|
0
|
|
|
|
4
|
|
|
|
37
|
|
Malaysia
|
|
|
2
|
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
7
|
|
South Korea
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
2
|
|
USA
|
|
|
7
|
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
4
|
|
|
|
15
|
|
Total
|
|
|
58
|
|
|
|
34
|
|
|
|
46
|
|
|
|
18
|
|
|
|
4
|
|
|
|
9
|
|
|
|
28
|
|
|
|
197
|
|
Management considers labor relations to be good.
Employee benefits are in line with those specified by applicable government regulations.
Share Ownership
As of April 12, 2019, the total number of shares
issued was 29,368,394 with 370,528 shares held as treasury shares, thus bringing the total number of shares outstanding to 28,997,866.
As of April 12, 2019, the Board of Directors
and the Senior Executive Officers of the Company held a total of 68,923 Shares
.
The Board of Directors and Senior Executive
Officers beneficially own, in the aggregate less than 1% of the Company's shares.
As of April 12, 2019, Senior Executive Officers held a total of 20,001 Shares and an aggregate of 570,000
options to purchase or to subscribe a total of 570,000 ordinary shares, with a weighted average exercise price of €2.73 per
share. Of these options, 30,000 expire on June 25, 2020, 200,000 expire on January 18, 2023, 220,000 expire on April 26, 2026,
55,000 expire on April 25, 2027, 25,000 expire on August 29, 2028 and 40,000 expire on April 4, 2029.
Options to Purchase or Subscribe for Securities
On May 22, 2007, the shareholders authorized
the Board of Directors to grant up to 600,000 options to subscribe to 600,000 new shares at a fixed price to be set by the Board
of Directors.
On June 24, 2010, the shareholders authorized
the Board of Directors to grant up to 229,100 options to purchase pre-existing shares at a fixed price to be set by the Board of
Directors. All of the shares that may be purchased through the exercise of stock options are currently held as treasury stock.
On December 19, 2012, the shareholders authorized
the Board of Directors to grant up to 500,000 options to subscribe to 500,000 new shares at a fixed price to be set by the Board
of Directors.
On February 18, 2016, the shareholders authorized
the Board of Directors to grant up to 1,000,000 options to subscribe to 1,000,000 new shares at a fixed price to be set by the
Board of Directors.
As of April 12 2019, we had sponsored four
stock purchase and subscription option plans open to employees of EDAP TMS group.
On December 31, 2018, the expiration of our
stock option contracts was as follows:
Date of expiration
|
|
Number of Options
|
|
|
|
|
|
June 25, 2020
|
|
|
170,100
|
|
January 18, 2023
|
|
|
297,500
|
|
April 26, 2026
|
|
|
505,000
|
|
April 25, 2027
|
|
|
210,000
|
|
August 25, 2028
|
|
|
165,000
|
|
As of December 31, 2018, a summary of stock
option activity to purchase or to subscribe to shares under these plans is as follows:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
Options
|
|
|
Weighted average exercise price
(€)
|
|
|
Options
|
|
|
Weighted average exercise price
(€)
|
|
|
Options
|
|
|
Weighted average exercise price
(€)
|
|
Outstanding on January 1,
|
|
|
1,207,600
|
|
|
|
2.61
|
|
|
|
1,427,438
|
|
|
|
2.94
|
|
|
|
917,188
|
|
|
|
2.79
|
|
Granted
|
|
|
165,000
|
|
|
|
2.65
|
|
|
|
260,000
|
|
|
|
2.39
|
|
|
|
575,000
|
|
|
|
3.22
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(60,000
|
)
|
|
|
1.91
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(25,000
|
)
|
|
|
3.05
|
|
|
|
(134,750
|
)
|
|
|
3.09
|
|
|
|
(64,750
|
)
|
|
|
3.30
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
(285,088
|
)
|
|
|
3.99
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding on December 31,
|
|
|
1,347,600
|
|
|
|
2.61
|
|
|
|
1,207,600
|
|
|
|
2.61
|
|
|
|
1,427,438
|
|
|
|
2.94
|
|
Exercisable on December 31,
|
|
|
772,600
|
|
|
|
2.44
|
|
|
|
598,850
|
|
|
|
2.29
|
|
|
|
774,938
|
|
|
|
2.87
|
|
Share purchase options available for grant on December 31
|
|
|
250,428
|
|
|
|
|
|
|
|
250,428
|
|
|
|
|
|
|
|
243,428
|
|
|
|
|
|
The following table summarizes information
about options to purchase existing shares held by the Company, or to subscribe to new Shares, at December 31, 2018:
|
|
Outstanding options
|
|
|
|
|
|
Fully vested options
(1)
|
|
|
|
|
Exercise price (€)
|
|
Options
|
|
|
Weighted average remaining contractual life
|
|
|
Weighted average exercise price
(€)
|
|
|
Aggregate
Intrinsic
Value
(2)
|
|
|
Options
|
|
|
Weighted average exercise price
(€)
|
|
|
Aggregate
Intrinsic
Value
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.22
|
|
|
505,000
|
|
|
|
7.3
|
|
|
|
3.22
|
|
|
|
-
|
|
|
|
252,500
|
|
|
|
3.22
|
|
|
|
-
|
|
2.65
|
|
|
165,000
|
|
|
|
9.7
|
|
|
|
2.65
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
2.39
|
|
|
210,000
|
|
|
|
8.3
|
|
|
|
2.39
|
|
|
|
-
|
|
|
|
52,500
|
|
|
|
2.39
|
|
|
|
-
|
|
2.38
|
|
|
120,100
|
|
|
|
1.5
|
|
|
|
2.38
|
|
|
|
-
|
|
|
|
120,100
|
|
|
|
2.38
|
|
|
|
-
|
|
1.91
|
|
|
297,500
|
|
|
|
4.0
|
|
|
|
1.91
|
|
|
|
-
|
|
|
|
297,500
|
|
|
|
1.91
|
|
|
|
-
|
|
1.88
|
|
|
50,000
|
|
|
|
1.5
|
|
|
|
1.88
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
1.88
|
|
|
|
-
|
|
1.88 to 3.22
|
|
|
1,347,600
|
|
|
|
5.4
|
|
|
|
2.61
|
|
|
|
-
|
|
|
|
772,600
|
|
|
|
2.44
|
|
|
|
-
|
|
|
(1)
|
Fully vested options are all exercisable options
|
|
(2)
|
The aggregate intrinsic value represents the total pre-tax intrinsic value, based on the Company’s
closing stock price of $1.85 at December 31, 2018, which would have been received by the option holders had all in-the-money option
holders exercised their options as of that date.
|
Item 7. Major Shareholders and Related Party Transactions
Major Shareholders
To our knowledge, we are not directly or indirectly
owned or controlled by another corporation, by any foreign government, or by any other natural or legal person or persons acting
severally or jointly.
To the best of our knowledge and on the basis
of the notifications received or filed with the SEC, there are no shareholders who are beneficial owners of more than 5% of our
shares as of December 31, 2018.
There are no arrangements known to us, the
operation of which may at a later date result in a change of control of the Company. All shares issued by the Company have the
same voting rights, except the treasury shares held by the Company, which have no voting rights.
As of April
12, 2019, 29,368,394 shares were issued, including 28,997,866 outstanding and 370,528 treasury shares. At March 15, 2019, there
were 29,342,294 ADSs, each representing one Share, all of which were held of record by 16 registered holders in the United States
(including The Depository Trust Company).
Related Party Transactions
The General Manager of the Company's Korean
branch "EDAP-TMS Korea", who resigned from his position with EDAP on October 11, 2017, was also the Chairman of a Korean
company named Dae You. A new independent General Manager was immediately appointed as Head of EDAP-TMS Korea with no relation with
the company Dae You, therefore, since that date, transactions with this company are no longer considered related party transactions.
EDAP-TMS Korea subcontracted until October 11, 2017, the service contract maintenance of our medical devices installed in Korea
to Dae You. The amounts invoiced by Dae You under this contract were €41 thousand and €62 thousand, for 2017 and 2016
respectively. As of December 31, 2018 and 2017, the Company recorded no payables to Dae You.
Dae You has purchased medical devices from
us, which it operates in partnership with hospitals or clinics. These purchases (‘Sales of goods’) amounted to €161
thousand and €483 thousand, in 2017 and 2016, respectively. As of December 31, 2018 and 2017, the Company recorded no receivables.
In 2018, EDAP Technomed Co. Ltd. (Japan) contracted
a loan amounting 80,000,000 JPY. As a current practice in Japan, this loan required a personal warranty from the representative
director, president and CEO of the subsidiary Mr. Jean-François Bachelard. EDAP TMS S.A., as the mother company, counter-warranted
this personal loan and agreed to indemnify Mr. Bachelard, in an indemnification letter dated November 27, 2018.
In 2018, EDAP Technomed Sdn Bdh (Malaysia)
contracted a loan amounting 90,000 MYR. As a current practice in Malaysia, this loan required a personal warranty from the representative
director, president and CEO of the subsidiary Mr. Hervé de Soultrait. EDAP TMS S.A., as the mother company, counter-warranted
this personal loan and agreed to indemnify Mr. de Soultrait, in an indemnification letter dated January 29, 2019.
Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
Consolidated Financial Statements
See Item 18, ‘‘Financial Statements.’’
Export Sales
As of December 31, 2018, total consolidated
export net sales, which we define as sales made outside of mainland France, were €27.6 million, which represented 70% of total
net sales.
As part of our business, we are engaged in sales and marketing activities with hospitals, clinics, distributors
or agents in countries on a worldwide basis where we can provide our minimally invasive therapeutic solutions to patients with
prostate cancer or urinary stones. The following information complies with the sub-section “Disclosure of Certain Activities
Relating to Iran” of the Section 13 of the U.S. Securities Exchange Act of 1934 as amended: in 2015 we honored warranty contracts
on previous sales of lithotripsy devices to three Iranian public hospitals in order to provide the hospitals with the necessary
disposables and services to treat patients with kidney stones using our devices. As part of these warranty commitments, in 2016,
2017 and 2018 we did not invoice any medical equipment to the hospitals.
Legal Proceedings
From time to time, we may become involved
in legal proceedings or be subject to claims arising in the ordinary course of our business. Regardless of the outcome, litigation
can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Dividends and Dividend Policy
The payment and amount of dividends depend on
our earnings and financial condition and such other factors that our Board of Directors deems relevant. Dividends are subject to
recommendation by the Board of Directors and a vote by the shareholders at the shareholders’ ordinary general meeting. Dividends,
if any, would be paid in euro and, with respect to ADSs, would be converted at the then-prevailing exchange rate into U.S. dollars.
Holders of ADSs will be entitled to receive payments in respect of dividends on the underlying shares in accordance with the Deposit
Agreement.
No dividends were paid with respect to fiscal
years 2014 through 2017, and we do not anticipate paying any dividends for the foreseeable future. Thereafter, any declaration
of dividends on our shares as well as the amount and payment will be determined by majority vote of the holders of our shares at
an ordinary general meeting, following the recommendation of our Board of Directors. Such declaration will depend upon, among other
things, future earnings, if any, the operating and financial condition of our business, our capital requirements, general business
conditions and such other factors as our Board of Directors deems relevant in its recommendation to shareholders.
Significant Changes as of April 12, 2019
None.
Item 9. The Offer and Listing
Description of Securities
The shares are traded solely in the form of
ADSs, each ADS representing one ordinary share. Each ADS may be evidenced by an American Depositary Receipt issued by The Bank
of New York, our Depositary. The principal United States trading market for the ADSs, which is also the principal trading market
for the ADSs overall, is the NASDAQ Global Market of the NASDAQ Stock Market, Inc. (‘‘NASDAQ”), on which the
ADSs are quoted under the symbol ‘‘EDAP.’’
Item 10. Additional Information
Memorandum and Articles of Association
Set forth below is a brief summary of significant
provisions of our by-laws (or
statuts
) and applicable French laws. This is not a complete description and is qualified in
its entirety by reference to our by-laws, a translation of which is provided in Exhibit 1.1 to this annual report. Each time they
are modified, which can only occur with the approval of a two third majority of the shareholders present or represented at a shareholders’
meeting, we file copies of our
statuts
with, and such by-laws are publicly available from, the Registry of Commerce and
Companies in Lyon, France, under number 316 488 204.
Our corporate affairs are governed by our by-laws
and by Book II of the French Commercial Code, as amended.
Our by-laws were last updated in January 2018
to reflect the latest increases in share capital related to the issuance of additional shares following the exercise of warrants
and options. No shares were issued in the course of 2018.
Corporate Purposes
Pursuant to Article 2 of the by-laws, the
corporate purpose of the Company is:
|
-
|
the taking of financial interests, under whatever form, in all French or foreign groups, companies
or businesses which currently exist or which may be created in the future, mainly through contribution, subscription or purchasing
of stocks or shares, obligations or other securities, mergers, holding companies, groups, alliances or partnerships;
|
|
-
|
the management of such financial investments;
|
|
-
|
the direction, management, control and coordination of its subsidiaries and interests;
|
|
-
|
the provision of all administrative, financial, technical or other services; and
|
|
-
|
generally, all transactions of whatever nature, whether financial, commercial, industrial, civil,
relating to property and/or real estate, which may be connected directly or indirectly, in whole or in part, to the Company’s
purposes or to any similar or related purposes which may favor the extension or development of such purpose.
|
Board of Directors
The Board of Directors is currently composed
of five members, four of which were appointed by the shareholders for a period of six years expiring on the date of the annual
general shareholders’ meeting approving the accounts for fiscal year 2019. Mr. Marc Oczachowski, Chief Executive Officer,
was appointed director of the Company by the shareholders on June 30, 2017, effective July 1, 2017, for a period of six years expiring
on the date of the annual general shareholders’ meeting approving the accounts for the fiscal year 2022. See Item 6, ‘‘Directors,
Senior Management and Employees.’’ A director’s term ends at the end of the ordinary general shareholders”
meeting convened to vote on the accounts of the then-preceding fiscal year and held in the year during which the term of such director
comes to an end. Directors may be re-elected; a director may also be dismissed at any time at the shareholders’ meeting.
Each director must own at least one share during
his/her term of office. If, at the time of his/her appointment, a director does not own the required number of shares or if during
his/her term, he/she no longer owns the required number of shares, he/she will be considered to have automatically resigned if
he/she fails to comply with the shareholding requirement within three months.
An individual person may not be a member of
more than five Boards of Directors or Supervisory Boards in corporations (
société anonyme
) registered in France;
directorships held in controlled companies (as defined by Section L.233-16 of the French Commercial Code) by the Company are not
taken into account.
In the event of the death or resignation of
one or more directors, the Board of Directors may make provisional appointments to fill vacancies before the next general shareholders’
meetings. These provisional appointments must be ratified by the next ordinary shareholders meeting. Even if a provisional appointment
is not ratified, resolutions and acts previously approved by the Board of Directors nonetheless remain valid.
If the number of Directors falls below the compulsory
legal minimum, the remaining directors must immediately convene an ordinary general shareholders’ meeting to reach a full
Board of Directors.
Any director appointed in replacement of another
director whose term has not expired remains in office only for the remaining duration of the term of his predecessor.
One of our employees may be appointed to serve
as a director. His/her employment contract must include actual work obligations. In this case, he/she does not lose the benefit
of his/her employment contract.
The number of directors that have employment
contracts with the Company may not exceed one third of the directors then in office and in any case, a maximum of five members.
Pursuant to our by-laws, a director may not
be over eighty-five years old. If a director reaches this age limit during his/her term, such director is automatically considered
to have resigned at the next general shareholders meeting.
A director cannot borrow money from the Company.
The Board of Directors determines the direction
of our business and supervises its implementation. Within the limits set out by the corporate purposes and the powers expressly
granted by law to the general shareholders’ meeting, the Board of Directors may deliberate upon our operations and make any
decisions in accordance with our business. A director must abstain from voting on matters in which the director has an interest.
The resolutions passed in a meeting of the Board of Directors are valid only if a quorum of half of the Directors is reached.
French law provides that the functions of Chairman
of the Board and Chief Executive Officer in a French
société anonyme
may be distinct and held by two separate
individuals.
The Chairman of the Board
The Board of Directors must elect one of its
members as Chairman of the Board of Directors, who must be an individual. The Board of Directors determines the duration of the
term of the Chairman, which cannot exceed that of his/her tenure as a director. The Board of Directors may revoke the Chairman
at any time. The Chairman’s compensation is determined by the Board of Directors, upon recommendation of the Compensation
Committee.
The Chairman represents the Board of Directors
and organizes its work. The Chairman reports on the Board’s behalf to the general shareholders’ meeting. The Chairman
is responsible for ensuring the proper functioning of our governing bodies and that the Board members have the means to perform
their duties.
Pursuant to Section 706-43 of the French Criminal
Proceedings Code, the Chairman may validly delegate to any person he/she chooses the power to represent us in any criminal proceedings
that we may face.
As with any other director, the Chairman may
not be over eighty-five years old. In case the Chairman reaches this age limit during his/her tenure, he/she will automatically
be considered to have resigned. However, his/her tenure is extended until the next Board of Directors meeting, during which his/her
successor will be appointed. Subject to the age limit provision, the Chairman of the Board may also be re-elected.
The Chief Executive Officer
We are managed by the Chairman of the Board
of Directors or by an individual elected by the Board of Directors bearing the title of Chief Executive Officer. The choice between
these two methods of management belongs to the Board of Directors and must be made pursuant to our by-laws. On March 31, 2007,
the Board of Directors appointed Mr. Marc Oczachowski as Chief Executive Officer.
The Chief Executive Officer is vested with the
powers to act under all circumstances on behalf of the Company, within the limits set out by the Company’s corporate purposes,
and subject to the powers expressly granted by law to the Board of Directors and the general shareholders’ meeting.
The Chief Executive Officer represents the Company
with respect to third parties. The Company is bound by any acts of the Chief Executive Officer even if they are contrary to corporate
purposes, unless it is proven that the third party knew such act exceeded the Company’s corporate purposes or could not ignore
it in light of the circumstances. Publication of the by-laws alone is not sufficient evidence of such knowledge.
The Chief Executive Officer’s compensation
is set by the Board of Directors, upon recommendation of the Compensation Committee. The Chief Executive Officer can be revoked
at any time by the Board of Directors. If such termination is found to be unjustified, damages may be allocated to the Chief Executive
Officer, except when the Chief Executive Officer is also the Chairman of the Board.
The Chief Executive Officer may not hold another
position as Chief Executive Officer or member of a Supervisory Board in a corporation (
société anonyme
) registered
in France except when (a) such company is controlled (as referred to in Section L.233-16 of the French Commercial Code) by the
Company and (b) when this controlled company’s shares are not traded on a regulated market.
Pursuant to our by-laws, the Chief Executive
Officer may not be over seventy years old. In case the Chief Executive Officer reaches this age limit during his/her office, he/she
is automatically considered to have resigned. However, his/her tenure is extended until the next Board of Directors meeting, during
which his/her successor must be appointed.
Dividend and Liquidation Rights (French
Law)
Net income in each fiscal year, increased
or reduced, as the case may be, by any profit or loss of the Company carried forward from prior years, less any contributions to
legal reserves, is available for distribution to our shareholders as dividends, subject to the requirements of French law and our
by-laws.
Under French law, we are required to allocate
at least 5% of our unconsolidated net profits in each fiscal year to a legal reserve fund before dividends may be paid with respect
to that year. Such allocation is compulsory until the amount in such reserve fund is equal to 10% of the nominal amount of the
registered capital. The legal reserve is distributable only upon the liquidation of the Company.
Our shareholders may, upon recommendation of
the Board of Directors, decide to allocate all or a part of distributable profits, if any, among special or general reserves, to
carry them forward to the next fiscal year as retained earnings, or to allocate them to the shareholders as dividends.
Our by-laws provide that, if so agreed by the
shareholders, reserves that are available for distribution under French law and our by-laws may be distributed as dividends, subject
to certain limitations.
If we have made distributable profits since
the end of the preceding fiscal year (as shown on an interim income statement certified by our statutory auditors), the Board of
Directors has the authority under French law, without the approval of shareholders, to distribute interim dividends to the extent
of such distributable profits. We have never paid interim dividends.
Under French law, dividends are distributed
to shareholders pro rata according to their respective shareholdings. Dividends are payable to holders of shares outstanding on
the date of the annual shareholders' meeting deciding the distribution of dividends, or in the case of interim dividends, on the
date of the Board of Directors meeting approving the distribution of interim dividends. However, holders of newly issued shares
may have their rights to dividends limited with respect to certain fiscal years. The actual dividend payment date is decided by
the shareholders in an ordinary general meeting or by the Board of Directors in the absence of such a decision by the shareholders.
The payment of the dividends must occur within nine months from the end of our fiscal year. Under French law, dividends not claimed
within five years of the date of payment revert to the French State.
If the Company is liquidated, our assets remaining
after payment of our debts, liquidation expenses and all of our remaining obligations will be distributed first to repay in full
the nominal value of the shares, then the surplus, if any, will be distributed pro rata among the shareholders based on the nominal
value of their shareholdings and subject to any special rights granted to holders of priority shares, if any. Shareholders are
liable for corporate liabilities only up to the par value of the shares they hold and are not liable to further capital calls of
the Company.
Changes in Share Capital (French Law)
Our share capital may be increased only with
the approval of two thirds of the shareholders voting or represented at an extraordinary general meeting, following a recommendation
of the Board of Directors. Increases in the share capital may be effected either by the issuance of additional shares (including
the creation of a new class of shares) or by an increase in the nominal value of existing shares or by the exercise of rights attached
to securities giving access to the share capital. Additional Shares may be issued for cash or for assets contributed in kind, upon
the conversion of debt securities previously issued by the Company, by capitalization of reserves, or, subject to certain conditions,
by way of offset against indebtedness incurred by the Company. Dividends paid in the form of shares may be distributed in lieu
of payment of cash dividends, as described above under ‘‘—Dividend and Liquidation Rights (French law).’’
French law permits different classes of shares to have liquidation, voting and dividend rights different from those of the outstanding
ordinary shares, although we only have one class of shares.
Our share capital may be decreased only with
the approval of two thirds of the shareholders voting or represented at an extraordinary general meeting. The share capital may
be reduced either by decreasing the nominal value of the shares or by reducing the number of outstanding shares. The conditions
under which the registered capital may be reduced will vary depending upon whether or not the reduction is attributable to losses
incurred by the Company. The number of outstanding shares may be reduced either by an exchange of shares or by the repurchase and
cancellation by the Company of its shares. Under French law, all the shareholders in each class of shares must be treated equally
unless the inequality in treatment is accepted by the affected shareholder. If the reduction is not attributable to losses incurred
by us, each shareholder will be offered an opportunity to participate in such capital reduction and may decide whether or not to
participate therein.
Repurchase of Shares (French Law)
Pursuant to French law, the Company may not
acquire its own shares except (a) to reduce its share capital under certain circumstances with the approval of the shareholders
at an extraordinary general meeting or (b) to provide shares for distribution to employees under a profit sharing or a stock option
plan. However, the Company may not hold more than 10% of its shares then-issued. A subsidiary of the Company is prohibited by French
law from holding shares of the Company and, in the event it becomes a shareholder of the Company, such shareholder must transfer
all the shares of the Company that it holds.
Attendance and Voting at Shareholders’
Meetings (French Law)
In accordance with French law, there are two
types of general shareholders’ meetings, ordinary and extraordinary. Ordinary general meetings are required for matters such
as the election of directors, the appointment of statutory auditors, the approval of the report prepared by the Board of Directors
and the annual accounts and the declaration of dividends.
Extraordinary general meetings are required
for approval of matters such as amendments to the Company’s by-laws, modification of shareholders’ rights, approval
of mergers, increases or decreases in share capital (including a waiver of preferential subscription rights), the creation of a
new class of shares, the authorization of the issuance of investment certificates or securities convertible or exchangeable into
shares and for the sale or transfer of substantially all of the Company’s assets.
The Board of Directors is required to convene
an annual ordinary general shareholders’ meeting, which must be held within six months of the end of our fiscal year, for
approval of the annual accounts. Other ordinary or extraordinary meetings may be convened at any time during the year. Shareholders’
meetings may be convened by the Board of Directors or, if the Board of Directors fails to call such a meeting, by our statutory
auditors or by a court-appointed agent. The court may be requested to appoint an agent either by one or more shareholders holding
at least 5% of the our registered capital or by an interested party under certain circumstances, or, in case of an urgent matter,
by the Work Council (
Comité d’entreprise
) representing the employees. The notice calling a meeting must state
the agenda for such meeting.
French law provides that, at least 15 days before
the date set for any general meeting on first notice, and at least ten days before the date set for any general meeting on second
notice, notice of the meeting (
avis de convocation
) must be sent by mail to all holders of properly registered shares who
have held such shares for more than one month before the date of the notice. A preliminary written notice (
avis de réunion
)
must be sent to each shareholder who has requested to be notified in writing. Under French law, one or several shareholders together
holding a specified percentage of shares may propose resolutions to be submitted for approval by the shareholders at the meeting.
Upon our request, The Bank of New York Mellon will send to holders of ADSs notices of shareholders’ meetings and other reports
and communications that are made generally available to shareholders. The Work Council may also require the registration of resolution
proposals on the agenda.
Attendance and exercise of voting rights at
ordinary and extraordinary general shareholders’ meetings are subject to certain conditions. Shareholders deciding to exercise
their voting rights must have their shares registered in their names in the shareholder registry maintained by or on behalf of
the Company before the meeting. An ADS holder must timely and properly return its voting instruction card to the Depositary to
exercise the voting rights relating to the shares represented by its ADSs. The Depositary will use its reasonable efforts to vote
the underlying shares in the manner indicated by the ADS holder. In addition, if an ADS holder does not timely return a voting
instruction card or the voting instruction card received is improperly completed or blank, that holder will be deemed to have given
the Depositary a proxy to vote, and the Depositary will vote in favor of all proposals recommended by the Board of Directors and
against all proposals that are not recommended by the Board of Directors.
All shareholders who have properly registered
their shares have the right to participate in general shareholders’ meetings, either in person, by proxy, or by mail, and
to vote according to the number of shares they hold. Each share confers on the shareholder the right to one vote. Under French
law, an entity we control directly or indirectly is prohibited from holding shares in the Company and, in the event it becomes
a shareholder, shares held by such entity would be deprived of voting rights. A proxy may be granted by a shareholder whose name
is registered on our share registry to his or her spouse, to another shareholder or to a legal representative, in the case of a
legal entity, or by sending a proxy in blank to the Company without nominating any representatives. In the latter case, the Chairman
of the shareholders’ meeting will vote such blank proxy in favor of all resolutions proposed by the Board of Directors and
against all others.
The presence in person or by proxy of shareholders
having not less than 20% (in the case of an ordinary general meeting or an extraordinary general meeting deciding upon any capital
increase by capitalization of reserves) or 25% (in the case of any other extraordinary general meeting) of the shares entitled
to vote is necessary to reach a quorum. If a quorum is not reached at any meeting, the meeting is adjourned. Upon reconvening of
an adjourned meeting, there is no quorum requirement in the case of an ordinary general meeting or an extraordinary general meeting
deciding upon any capital increase by capitalization of reserves. The presence in person or by proxy of shareholders having not
less than 20% of the Shares is necessary to reach a quorum in the case of any other type of extraordinary general meeting.
At an ordinary general meeting or an extraordinary
general meeting deciding upon any capital increase by capitalization of reserves, a simple majority of the votes of the shareholders
present or represented by proxy is required to approve a resolution. At any other extraordinary general meeting, two-thirds of
the votes cast is required. However, a unanimous vote is required to increase liabilities of shareholders. Abstention from voting
by those present or represented by proxy is viewed as a vote against the resolution submitted to a vote.
In addition to his/her rights to certain information
regarding the Company, any shareholder may, during the two-week period preceding a shareholders’ meeting, submit to the Board
of Directors written questions relating to the agenda for the meeting. The Board of Directors must respond to such questions during
the meeting.
Under French law, shareholders can nominate
individuals for election to the Board of Directors at a shareholders’ meeting. When the nomination is part of the agenda
of the shareholders’ meeting, the nomination must contain the name, age, professional references and professional activity
of the nominee for the past five years, as well as the number of shares owned by such candidate, if any. In addition, if the agenda
for the shareholders’ meeting includes the election of members of the Board of Directors, any shareholder may require, during
the meeting, the nomination of a candidate for election at the Board of Directors at the shareholders’ meeting, even if such
shareholder has not followed the nomination procedures. Under French law, shareholders cannot elect a new member of the Board of
Directors at a general shareholders meeting if the agenda for the meeting does not include the election of a member of the Board
of Directors, unless such nomination is necessary to fill a vacancy due to the previous resignation of a member.
As set forth in our by-laws, shareholders’
meetings are held at the registered office of the Company or at any other locations specified in the written notice. We do not
have staggered or cumulative voting arrangements for the election of Directors.
Preferential Subscription Rights (French
Law)
Shareholders have preferential rights to subscribe
for additional shares issued by the Company for cash on a pro rata basis (or any equity securities of the Company or other securities
giving a right, directly or indirectly, to equity securities issued by the Company). Shareholders may waive their preferential
rights, either individually or at an extraordinary general meeting under certain circumstances. Preferential subscription rights,
if not previously waived, are transferable during the subscription period relating to a particular offering of shares. U.S. holders
of ADSs may not be able to exercise preferential rights for Shares underlying their ADSs unless a registration statement under
the Securities Act is effective with respect to such rights or an exemption from the registration requirement thereunder is available.
Form and Holding of Shares (French Law)
Form of Shares
Our by-laws provide that shares can only be held in registered
form.
Holding of Shares
The shares are registered in the name of the
respective owners thereof in the registry maintained by or on behalf of the Company.
Stock certificates evidencing shares, in a manner
comparable to that in the United States, are not issued by French companies, but we may issue or cause to be issued confirmations
of shareholdings registered in such registry to the persons in whose names the shares are registered. Pursuant to French law, such
confirmations do not constitute documents of title and are not negotiable instruments.
Ownership of ADSs or Shares by Non-French
Residents (French Law)
Under current French law, there is no limitation
on the right of non-French residents or non-French security holders to own, or where applicable, vote securities of a French company.
A non-resident of France must file a
déclaration administrative
, or administrative notice, with French authorities
in connection with the acquisition of a controlling interest in any French company. Under existing administrative rulings, ownership,
by a non-resident of France or a French corporation which is itself controlled by a foreign national, of 33.33% or more of a company’s
share capital or voting rights is regarded as a controlling interest, but a lower percentage may be held to be a controlling interest
in certain circumstances (depending upon such factors as the acquiring party’s intentions, its ability to elect directors
or financial reliance by the French company on the acquiring party).
Also, certain foreign investments in companies
incorporated under French laws are subject to the prior authorization from the French Minister of the Economy, where all or part
of the target’s business and activity relate to a strategic sector, such as energy, transportation, public health, telecommunications,
etc.
Certain Exemptions (French Law)
Under the U.S. securities laws, as a foreign
private issuer, we are exempt from certain rules that apply to domestic U.S. issuers with equity securities registered under the
U.S. Securities Exchange Act of 1934, including the proxy solicitation rules and the rules requiring disclosure of share ownership
by directors, officers and certain shareholders. We are also exempt from certain of the current NASDAQ corporate governance requirements.
For more information on these exemptions, see Item 16 G, ‘‘Corporate Governance —Exemptions from Certain NASDAQ
Corporate Governance Rules.’’
Enforceability of Civil Liabilities (French
Law)
We are a
société anonyme
,
or limited liability corporation, organized under the laws of the Republic of France. The majority of our directors and executive
officers reside in the Republic of France. All or a substantial portion of our assets and the assets of such persons are located
outside the United States. As a result, it may not be possible for investors to effect service of process within the United States
upon such persons or to enforce, either inside or outside the United States, judgments against such persons obtained in U.S. courts
or to enforce in U.S. court judgments obtained against such persons in courts in jurisdictions outside the United States, in each
case, in any action predicated upon the civil liability provisions of the federal securities laws of the United States. In an original
action brought in France predicated solely upon the U.S. federal securities laws, French courts may not have the requisite jurisdiction
to grant the remedies sought, and actions for enforcement in France of judgments of U.S. courts rendered against French persons
referred to in the second sentence of this paragraph would require such French persons to waive their right under Article 15 of
the French Civil Code to be sued in France only. We believe that no such French persons have waived such right with respect to
actions predicated solely upon U.S. federal securities laws. In addition, actions in the United States under the U.S. federal securities
laws could be affected under certain circumstances by the French law of July 16, 1980, which may preclude or restrict obtaining
evidence in France or from French persons in connection with such actions.
Material Contracts
None.
Exchange Controls
Under current French foreign exchange control
regulations, there are no limitations on the amount of cash payments that we may remit to residents of foreign countries. Laws
and regulations concerning foreign exchange controls do require, however, that all payments or transfers of funds made by a French
resident to a non-resident be handled by an accredited intermediary.
Certain Income Tax Considerations
The following generally summarizes the material
French and U.S. tax consequences of purchasing, owning and disposing of shares or ADS (the “Securities”). The statements
set forth below are based on the applicable laws, treaties and administrative interpretations of France and the United States as
of the date hereof, all of which are subject to change.
This discussion is intended only as a descriptive
summary and does not purport to be a complete analysis or listing of all potential tax effects of the purchase, ownership or disposition
of Securities. It does not constitute legal or tax advice.
Investors should consult their own tax advisors
regarding the tax consequences of the purchase, ownership and disposition of Securities in light of their particular circumstances,
including especially the laws of all jurisdictions in which they are resident for tax purposes.
French Taxation
The following summary of the French tax consequences
of purchasing and disposing of Securities does not address the treatment of Securities that are held by a resident of France (except
for purposes of describing related tax consequences for other holders) or in connection with a permanent establishment or fixed
base through which a holder carries on business or performs personal services in France, or by a person that owns, directly or
indirectly, 5% or more of the stock of the Company. Moreover, the following discussion of the tax treatment of dividends only deals
with distributions made on or after January 1, 2019.
There are currently no procedures available
for holders that are not U.S. residents to claim tax treaty benefits in respect of dividends received on Securities registered
in the name of a nominee. Such holders should consult their own tax advisors about the consequences of owning and disposing of
Securities.
French law provides for specific rules relating
to trusts, in particular specific tax and filing requirements as well as modifications to wealth, estate and gift taxes as they
apply to trusts. Given the complex nature of these rules and the fact that their application varies depending on the status of
the trust, the grantor, the beneficiary and the assets held in the trust, the following summary does not address the tax treatment
of Securities held in a trust.
If Securities are held in trust, the grantor, trustee and beneficiary are urged to consult their
own tax adviser regarding the specific tax consequences of acquiring, owning and disposing of Securities.
Taxation of Dividends on Securities - Withholding
Tax
Dividends paid by a French corporation, such
as EDAP, to non-residents normally are subject to a 30% French withholding tax (reduced to 12.8% when non-residents are individuals
and 15% for distributions made to not-for-profit organizations with a head office in a Member State of the European Economic Area
which would be subject to the tax regime set forth under article 206-5 of the French Tax Code, or FTC, if their head office was
located in France and which meet the criteria set forth in the administrative guidelines BOI-RPPM-RCM-30-30-10-70-20171004, n°130).
Dividends paid by a French corporation transferred
to non-cooperative States or territories (
Etat ou territoire non coopératif
), within the meaning of Article 238-0
A of the FTC (a “Non-Cooperative State”), will be subject to French withholding tax at a rate of 75% irrespective of
the tax residence of the beneficiary of the dividends, if the dividends are received in such States or territories (subject to
certain exceptions and the more favorable provisions of an applicable double tax treaty, provided that the double tax treaty is
found to apply and the relevant conditions are fulfilled). The list of Non-Cooperative States is published by ministerial executive
order, which is updated from time to time. However, non-resident holders that are entitled to and comply with the procedures for
claiming benefits under an applicable tax treaty may be subject to a reduced rate (generally 15%) of French withholding tax. If
a non-resident holder establishes its entitlement to treaty benefits prior to the payment of a dividend, then French tax generally
will be withheld at the reduced rate provided under the treaty.
Taxation on Sale or Disposition of Securities
Generally, holders who are not residents of
France for tax purposes, will not be subject to any French income tax or capital gains tax upon the sale or the disposal of Securities
provided such holders have not held more than 25% of EDAP dividend rights, known as (“
droits aux bénéfices
sociaux
”), at any time during the preceding five years, either directly or indirectly, and, as relates to individuals,
alone or with relatives (as an exception holders who are established or incorporated in a Non-Cooperative State are subject to
a 75% withholding tax in France on any such capital gain, regardless of the fraction of the dividend rights they hold).
If the holders are resident in a State with
which France has signed a double tax treaty that contains more favorable provisions, the holders may be exempt from any French
income or capital gains tax when they sell or dispose of any Securities even if one of the above statements applies to them.
Pursuant to Article 235 ter ZD of the FTC, purchases
of certain securities issued by a French company, including ordinary shares and ADSs, which are listed on a regulated market of
the EU or an exchange market formally acknowledged by the AMF (in each case within the meaning of the French Monetary and Financial
Code, or the FMFC) are subject in France to a 0.3% tax on financial transactions, or the TFT, provided
inter alia
that the
issuer’s market capitalization exceeds €1.0 billion as of December 1 of the year preceding the taxation year.
A list of companies whose market capitalization
exceeds €1.0 billion as of December 1 of the year preceding the taxation year within the meaning of Article 235 ter ZD of
the FTC has been published by the French tax authorities in its official guidelines on December 17, 2018 (BOI-ANNX-000467-20181217).
EDAP was not included in such list as its market capitalization did not exceed €1.0 billion as at December 1, 2018. Please
note that such list may be updated from time to time, or may not be published anymore in the future. Furthermore, NASDAQ is not
currently acknowledged by the French AMF, but this may change in the future. Therefore, purchases of the Securities are not subject
to the TFT.
In the case where the TFT is not applicable,
transfers of shares issued by a French company which are not listed on a regulated or organized market within the meaning of the
FMFC are subject to uncapped registration duties at the rate of 0.1% notwithstanding the existence of a written statement (
acte
).
Although the official guidelines published by the French tax authorities are silent on this point, ADSs should remain outside of
the scope of the aforementioned 0.1% registration duties.
Estate and Gift Tax
France imposes estate and gift tax on Securities
of a French company that are acquired by inheritance or gift. The tax applies without regard to the tax residence of the transferor.
However, France has entered into estate and gift tax treaties with a number of countries pursuant to which, assuming certain conditions
are met, residents of the treaty country may be exempted from such tax or obtain a tax credit.
Wealth Tax
The French Wealth tax (“
impôt
de solidarité sur la fortune
”) has been replaced with a French real estate wealth tax (“
impôt sur
la fortune immobilière
”) with effect from January 1, 2018. Individuals who are not residents of France for purposes
of French taxation are not subject to a real estate wealth tax in France as a result of owning an interest in the share capital
of a French corporation, provided that such individuals do not own directly or indirectly a shareholding exceeding 10% of the financial
rights and voting rights of the corporation. Double taxation treaties may provide for a more favorable tax treatment.
Taxation of U.S. Holders
Shares
The following is a summary of the material French
and U.S. federal income tax consequences of the purchase, ownership and disposition of Securities by a U.S. holder (as defined
above). It deals principally with U.S. holders that are residents of the United States for purposes of the Convention between the
Government of the United States of America and the Government of the French Republic for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital of August 31, 1994, (the “Treaty”), which
entered into force on December 30, 1995 (as amended by the protocol described below and any subsequent protocols), and the tax
regulations issued by the French tax authorities, and are fully eligible for benefits under the Treaty.
This summary does not deal with Securities that
are not held as capital assets, and does not address the tax treatment of holders of ADSs that acquire them in “pre-release”
transactions or holders that are subject to special rules, such as banks, insurance companies, dealers in securities or currencies,
regulated investment companies, persons that elect mark-to-market treatment, persons holding Securities as a position in a synthetic
security, straddle or conversion transaction, persons that own, directly or indirectly, 5% or more of our voting stock or 5% or
more of our outstanding capital and persons whose functional currency is not the U.S. dollar.
This summary does not discuss the treatment
of Securities that are held in connection with a permanent establishment or fixed base through which a holder carries on business
or performs personal services in France. The summary is based on laws, treaties, regulatory interpretations and judicial decisions
in effect on the date hereof, all of which are subject to change. Such changes could apply retroactively and could affect the consequences
described below.
In particular, the United States and France
signed a protocol on January 13, 2009, that entered into force on December 23, 2009 and make several significant changes to the
Treaty, including changes to the “Limitation of Benefits” provision. U.S. holders are advised to consult their own
tax advisors regarding the effect the protocol may have on their eligibility for Treaty benefits in light of their own particular
circumstances.
A “U.S. holder” includes (1) a citizen
or individual resident of the United States; (2) a corporation or other entity taxable as a corporation created or organized in
the United States or under the laws of the United States, any state thereof or the District of Columbia; (3) an estate whose income
is subject to U.S. federal income tax regardless of its source; and (4) a trust (i) whose administration is subject to the primary
supervision of a U.S. court and which has one or more “U.S. persons” who have the authority to control all substantial
decisions of the trust or (ii) which has made an election under applicable Treasury regulations to be treated as a U.S. person.
A U.S. holder generally will be entitled to
Treaty benefits in respect of Securities if he is concurrently: (1) the beneficial owner of Securities (and the dividends paid
with respect thereto); (2) an individual resident of the United States, a U.S. corporation, or a partnership, estate or trust to
the extent its income is subject to taxation in the United States in its hands or in the hands of its partners or beneficiaries;
(3) not also a resident of France for French tax purposes; and (4) not subject to an anti-treaty shopping article that applies
in limited circumstances.
Special rules apply to pension funds and certain
other tax-exempt investors.
If a partnership holds Securities, the tax treatment
of a partner generally will depend on the status of the partner and the activities of the partnership. If a U.S. holder is a partner
in a partnership that holds Securities, the holder is urged to consult its own tax advisor regarding the specific tax consequences
of owning and disposing of its Securities.
For U.S. federal income tax purposes, a U.S.
holder’s ownership of our ADSs will be treated as ownership of our underlying ordinary shares.
Holders should consult their own tax advisors
regarding the U.S. tax consequences of the purchase, ownership and disposition of Securities in the light of their particular circumstances,
including the effect of any state or local laws.
Dividends and Paying Agents
Generally, dividend distributions to non-residents
of France are subject to French withholding tax at a 30% rate (reduced to 12.8% when non-residents are individuals or to 75% if
paid in a Non-Cooperative State, irrespective of the tax residence of the beneficiary of the dividends if the dividends are received
in such Non-Cooperative State). Eligible U.S. holders providing evidence of the entitlement to Treaty benefits with respect to
the dividend (article 30) under the ‘‘Limitation on Benefits’’ provision contained in the Treaty who are
U.S. residents, as defined pursuant to the provisions of the Treaty, will not be subject to this 30% or 75% withholding tax rate,
but may be subject to the withholding tax at a reduced rate (as described below).
Under the Treaty, the rate of French withholding
tax on dividends paid to an eligible U.S. holder as defined pursuant to the provisions of the Treaty and whose ownership of Securities
is not effectively connected with a permanent establishment or fixed base that such U.S. holder has in France is reduced to 15%,
or to 5% if such U.S. holder is a corporation and owns directly or indirectly at least 10% of the share capital of the issuing
company; such U.S. holder may claim a refund from the French tax authorities of the amount withheld in excess of the Treaty rates
of 15% or 5%, if any. For U.S. holders that are not individuals, the requirements for eligibility for Treaty benefits, including
the reduced 5% or 15% withholding tax rate, contained in the “Limitation on Benefits” provision of the Treaty are complicated,
and certain technical changes were made to these requirements the protocol of January 13, 2009. U.S. holders are advised to consult
their own tax advisers regarding their eligibility for Treaty benefits in light of their own particular circumstances.
French withholding tax will be withheld at the
domestic rates mentioned above or the 5% or 15% Treaty rate if a U.S. holder has established before the date of payment that the
holder is a resident of the United States under the Treaty by following the simplified procedure described below.
The gross amount of dividends that a U.S. holder
receives (before the deduction of French withholding tax) generally will be subject to U.S. federal income taxation as ordinary
dividend income to the extent paid or deemed paid out of the current or accumulated earnings and profits of the Company (as determined
under U.S. federal income tax principles). Such dividends will not be eligible for the dividends received deduction generally allowed
to U.S. corporations. To the extent that an amount received by a U.S. holder exceeds the allocable share of current and accumulated
earnings and profits of the Company, such excess will be applied first to reduce such U.S. holder’s tax basis in its Securities
and then, to the extent it exceeds the U.S. holder’s tax basis, it will constitute capital gain from a deemed sale or exchange
of such Securities. As the Company does not maintain “earnings and profits” computations, holders should assume that
all distributions constitute dividends.
Subject to certain exceptions for short-term
and hedged positions, the U.S. dollar amount of dividends received by an individual with respect to the Securities is currently
subject to taxation at a maximum rate of 20% if the dividends are “qualified dividends.” Dividends paid on the Securities
will be treated as qualified dividends if (i) the issuer is eligible for the benefits of a comprehensive income tax treaty with
the United States that the IRS has approved for the purposes of the qualified dividend rules and (ii) the Company was not, in the
year prior to the year in which the dividend was paid, and is not, in the year in which the dividend is paid, a passive foreign
investment company, or PFIC. The Treaty has been approved for the purposes of the qualified dividend rules. Based on our audited
financial statements and relevant market and shareholder data, we do not believe we were a PFIC for U.S. federal income tax purposes
with respect to our 2017 taxable year. In addition, we do not anticipate it becoming a PFIC for the 2018 taxable year (as described
under “—Passive Foreign Investment Company Rules” below). Accordingly, dividends, if any, paid by us in 2017
to a U.S. holder would constitute “qualified dividends.”
Holders of Securities should consult their own
tax advisers regarding the availability of the reduced dividend tax rate in light of their own particular circumstances.
Dividends distributed with respect to the Securities
generally will be treated as dividend income from sources outside of the United States, and generally will be treated as “passive
category” (or, in the case of certain U.S. holders, “general category”) income for U.S. foreign tax credit purposes.
Subject to certain limitations, French income tax withheld in connection with any distribution with respect to the Securities may
be claimed as a credit against the U.S. federal income tax liability of a U.S. holder if such U.S. holder elects for that year
to credit all foreign income taxes. Alternatively, such French withholding tax may be taken as a deduction against taxable income.
Foreign tax credits will not be allowed for withholding taxes imposed in respect of certain short-term or hedged positions in securities
and may not be allowed in respect of certain arrangements in which a U.S. holder’s expected economic profit is insubstantial.
U.S. holders should consult their own tax advisors concerning the implications of these rules in light of their particular circumstances.
Dividends paid in euro will be included in the
income of a U.S. holder in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of receipt by
the holder (or, in the case of the ADSs, by the Depositary), regardless of whether the payment is in fact converted into U.S. dollars.
If such a dividend is converted into U.S. dollars on the date of receipt, a U.S. holder generally should not be required to recognize
foreign currency gain or loss in respect of the dividend income.
Capital Gains
Under the Treaty, a U.S. holder will not be
subject to French tax on any gain derived from the sale or exchange of Securities, unless the gain is effectively connected with
a permanent establishment or fixed base maintained by the holder in France.
For U.S. federal income tax purposes, gain or
loss realized by a U.S. holder on the sale or other disposition of Securities will be capital gain or loss, and will be long-term
capital gain or loss if the Securities were held for more than one year. The net amount of long-term capital gain recognized by
an individual U.S. holder generally is currently subject to taxation at a maximum rate of 20%. U.S. holders’ ability to offset
capital losses against ordinary income is limited.
Additional Issues For U.S. Holders
Procedures for Claiming Treaty Benefits
Pursuant to the official guidelines published
by the French tax authorities (BOI-INT-DG-20-20-20-20-20120912), U.S. holders can either claim Treaty benefits under a simplified
procedure or under the normal procedure. The procedure to be followed depends on whether the application for Treaty benefits is
filed before or after the dividend payment.
Under the simplified procedure, in order to
benefit from the lower rate of withholding tax applicable under the Treaty before the payment of the dividend, a U.S. holder must
complete and deliver to the paying agent (through its account holder) a treaty form (Form 5000), to certify in particular that:
|
-
|
the U.S. holder is beneficially entitled to the dividend;
|
|
-
|
the U.S. holder is a U.S. resident within the meaning of the Treaty;
|
|
-
|
the dividend is not derived from a permanent establishment or a fixed base that the U.S. holder
has in France; and
|
|
-
|
the dividend received is or will be reported to the tax authorities in the United States.
|
For partnerships or trusts, claims for Treaty
benefits and related attestations are made by the partners, beneficiaries or grantors who also have to supply certain additional
documentation.
In order to be eligible for Treaty benefits,
pension funds and certain other tax-exempt U.S. holders must comply with the simplified procedure described above, though they
may be required to supply additional documentation evidencing their entitlement to those benefits.
If Form 5000 is not filed prior to the dividend
payment, a withholding tax will be levied at the 30% rate, and a holder would have to claim a refund for the excess under the normal
procedure by filing both Form 5000 and Form 5001 no later than December 31 of the second calendar year following the year in which
the dividend is paid.
Pension funds and certain other tax-exempt entities
are subject to the same general filing requirements as other U.S. holders except that they may have to supply additional documentation
evidencing their entitlement to these benefits.
Copies of Form 5000 and Form 5001 may be downloaded
from the French tax authorities’ website (www.impots.gouv.fr) and are also available from the U.S. Internal Revenue Service
and from the
Centre des Impôts des Non-Résidents
in France (10 rue du Centre 93160, Noisy-le-Grand).
Medicare Tax
Certain U.S. holders that are individuals, estates
or trusts are required to pay an additional 3.8% tax on, among other things, dividends on and capital gains from the sale or other
disposition of stock. U.S. holders that are individuals, estates or trusts should consult their tax advisors regarding the effect
of this legislation on their ownership and disposition of the Securities.
Passive Foreign Investment Company Rules
Unfavorable U.S. tax rules such as the PFIC
rules, apply to companies that are considered PFICs. The Company will be classified as a PFIC in a particular taxable year if either
(a) 75% or more of its gross income is treated as passive income for purposes of the PFIC rules; or (b) the average percentage
of the value of its assets that produce or are held for the production of passive income is at least 50%.
As explained above, the Company believes that
it was not a PFIC for U.S. tax purposes with respect to the year 2017, and also does not anticipate becoming a PFIC with respect
to the year 2018. However, as discussed in Form 20-Fs filed by the Company with respect to certain prior years the Company believes
that it was a PFIC in the past. Moreover, because the PFIC determination is made annually and is dependent upon a number of factors,
some of which are beyond the Company's control (including whether the Company continues to earn substantial amounts of operating
income as well as the market composition and value of the Company's assets), there can be no assurance that the Company will not
become a PFIC in future years.
U.S. holders that held Securities at any time
during the years when the Company was a PFIC and did not make certain U.S. tax elections (a "mark-to-market election"
or a "QEF election") will be subject to adverse tax treatment. For instance, such holders will be subject to a special
tax at ordinary income tax rates on certain dividends that the Company pays and on gains realized on the sale of Securities (“excess
distributions”) in all subsequent years, even though the Company ceased to qualify as a PFIC. The amount of this tax will
be increased by an interest charge to compensate for tax deferral, calculated as if the excess distributions had been earned ratably
over the period the U.S. holder held its Securities. It may be possible, in certain circumstances, for a holder to avoid the application
of the PFIC rules by making a "deemed sale" election for its taxable year that includes the last day of the Company’s
last taxable year during which it qualified as a PFIC. The PFIC rules are extremely complex, and holders should consult their own
tax advisers regarding the possible application of the PFIC rules to their Securities and the desirability and availability of
the above elections.
French Estate and Gift Tax
Under the estate and gift tax convention between
the United States and France dated November 24, 1978 (as amended by the protocol signed on December 8, 2004), a transfer of Securities
by gift or by reason of the death of a U.S. holder entitled to benefits under that convention generally will not be subject to
French gift or inheritance tax, so long as the donor or transferor was not domiciled in France at the time of the transfer, and
Securities were not used or held for use in the conduct of a business or profession through a permanent establishment or fixed
base in France.
French Real Estate Wealth Tax
The French real estate wealth tax (“
impôt
sur la fortune immobilière
”), which replaced the French wealth tax (“
impôt de solidarité
sur la fortune
”) with effect from January 1, 2018, does not generally apply to Securities of a U.S. holder if the holder
is a resident of the United States for purposes of the Treaty and does not own directly or indirectly a shareholding exceeding
10% of the financial rights and voting rights of EDAP.
U.S. Information Reporting and Backup Withholding Rules
Payments of dividends and sales proceeds that
are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting
and may be subject to backup withholding unless the holder (i) is a corporation or other exempt recipient or (ii) provides a taxpayer
identification number and certifies that no loss of exemption from backup withholding has occurred. Holders that are not U.S. persons
generally are not subject to information reporting or backup withholding. However, such a holder may be required to provide a certification
of its non-U.S. status in connection with payments received within the United States or through a U.S.-related financial intermediary.
Information with Respect to Foreign Financial
Assets
In addition, U.S. holders that are individuals
(and, to the extent provided in future regulations, entities) are subject to reporting obligations with respect to the shares,
securities, debt instruments and other obligations of a French corporation if the aggregate value of such assets and certain other
“specified foreign financial assets” exceeds $50,000. Significant penalties can apply if a U.S. holder fails to disclose
its specified foreign financial assets.
U.S. holders should also consider their possible
obligation to file online a FinCEN Form 114 Foreign Bank and Financial Accounts Report as a result of holding the Securities. U.S.
holders are urged to consult their tax advisors regarding these and any other reporting requirements that may apply with respect
to their Securities.
The discussion above is a general summary.
It does not cover all tax matters that may be important to you. You should consult your tax advisors regarding the application
of the U.S. federal tax rules to your particular circumstances, as well as the state, local, non-U.S. and other tax consequences
to you of the purchase, ownership and disposition of the Securities.
Statement by Experts
Not applicable.
Documents on Display
We file annual, periodic, and other reports
and information with the SEC. These materials, including this annual report and the exhibits hereto, may be inspected and copied
at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the
operation of the SEC’s Public Reference Room by calling the SEC in the United States at +1 800 SEC 0330. Certain of our public
filings are also available on the SEC’s website at http://www.sec.gov (such documents are not incorporated by reference in
this annual report).
Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures about Market
Risk
We are exposed to market risk from changes
in both foreign currency exchange rates and interest rates. We do not hold or issue derivative or other financial instruments.
During 2018 and as of December 31, 2018, we had no outstanding foreign exchange sale or purchase contracts.
Exchange Rate Risk
Revenues and Expenses in Foreign Currencies
We are exposed to foreign currency exchange
rate risk because a significant portion of our costs are denominated in currencies other than those in which we earn revenues.
In 2018, approximately 74% of our total costs of sales and operating expenses were denominated in euro. During the same period,
approximately 59% of our sales were denominated in euro, the rest being denominated primarily in U.S. dollars and Japanese yen.
A uniform 10% strengthening in the value of the euro as of December 31, 2018 relative to the U.S. dollar
and the Japanese yen would have resulted in an increase in income before taxes of approximately € for the year ended December
31, 2018, compared to a decrease of approximately €93,000 for the year ended December 31, 2017. A uniform 10% decrease in
the value of the euro as of December 31, 2018 relative to the U.S. dollar and the Japanese yen would have resulted in a decrease
in income before taxes of approximately €66,511 for the year ended December 31, 2018 as compared to an increase of approximately
€66,465 for the year ended December 31, 2017. This calculation assumes that the U.S. dollar and Japanese yen exchange rates
would have changed in the same direction relative to the euro. In addition to the direct effect of changes in exchange rates quantified
above, changes in exchange rates also affect the volume of sales.
We regularly assess the exposure of our receivables
to fluctuations in the exchange rates of the principal foreign currencies in which our sales are denominated (in particular, the
U.S. dollar and the Japanese yen) and, from time to time, hedge such exposure by entering into forward sale contracts for the amounts
denominated in such currencies that we expect to receive from our local subsidiaries. As of December 31, 2018, we had no outstanding
hedging instruments.
Financial Instruments and Indebtedness
Over the past three years, we also had exchange rate exposures with respect to indebtedness and assets denominated
in Japanese yen and U.S. dollars. Approximately €0.6 million, €40 thousand and €0.1 million of our outstanding indebtedness
at December 31, 2018, 2017 and 2016, respectively, were denominated in Japanese yen. Approximately €0 million, €0.8 million
and €3.9 million of our outstanding indebtedness at December 31, 2017 and 2016, respectively, were denominated in U.S. dollars.
In addition, we had approximately €1.3 million, €2.1 million and €2.8 million of cash denominated in U.S. dollars
at December 31, 2018, 2017 and 2016, respectively, and €3.7 million, €3.9 million and €1.5 million of cash denominated
in Japanese yen at December 31, 2018, 2017 and 2016, respectively.
Equity Price Risk
In connection with the funds we raised in 2013 and 2016, we issued a certain number of Investor and Placement
Agent Warrants (see Item 5. “
Operating and Financial
Review and Prospects—Warrants”). These Warrants have all expired, the last series in October and November 2018. We
recorded such Warrants as a liability at fair value and we adjusted the carrying value of the Warrants to their estimated fair
value at each reporting date. The fair value increases (decreases) were recorded as a financial income (loss) in our consolidated
Statement of Income. We used a Black-Scholes option pricing model to adjust the fair value of the Warrants. See Note 25 of our
consolidated financial statements.
Item 12. Description of Securities Other than Equity Securities
American Depositary Shares
Fees Payable to ADS Holders
The Bank of New York Mellon, as the Company’s
Depositary, currently collects its fees for the delivery and surrender of ADSs directly from investors depositing shares or surrendering
ADSs for the purpose of withdrawal or from intermediaries acting for them.
The Depositary may collect fees for making distributions
to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the
fees. The Depositary may collect its annual fee for Depositary services by deductions from cash distributions or by directly billing
investors or by charging the book-entry system accounts of participants acting for them. The Depositary may generally refuse to
provide fee-attracting services until the fees for those services are paid.
Fees:
|
For:
|
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
|
- Issuance of ADSs, including
issuances resulting from a distribution of shares or rights or other property,
- Cancellation of ADSs for the purpose
of withdrawal, including if the deposit agreement terminates.
|
$0.2 (or less) per ADS
|
- Any cash distribution
to ADS registered holders.
|
A fee equivalent to the fee that would be payable if securities distributed to you had
been shares and the shares had been deposited to issuance of ADSs
|
- Distribution
of securities distributed to holders of deposited securities which are distributed by the Depositary to ADS registered
holders.
|
Registration or transfer fees
|
- Transfer and registration
of shares on our share register to or from the name of the Depositary or its agent when you deposit or withdraw shares
|
Expenses of the Depositary
|
- Cable, telex and facsimile
transmissions (when expressly provided in the deposit agreement)
- Converting foreign
currency to U.S. dollars
|
Taxes and other governmental charges the Depositary or the custodian have to
pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes
|
- As necessary
|
Any charges incurred by the Depositary or its agents for servicing the deposited
securities
|
- As necessary
|
Fees Payable to the Company by the Depositary
From January 1, 2018 to March 18, 2019, the
following amounts were paid by the Depositary to the Company: $92,011.43 and $10,460.79 respectively for the administration of
the ADR program and for expenses linked to the assistance in identifying shareholders of the Company.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an
integral part of the consolidated financial statements.
1—SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
1-1 Nature of
operations
EDAP TMS S.A. and its
subsidiaries (‘‘the Company’’) are engaged in the development, production, marketing, distribution and
maintenance of a portfolio of minimally-invasive medical devices for the treatment of urological diseases. The Company currently
produces innovative robotic devices for treating stones of the urinary tract and localized prostate cancer. We also derive revenues
from the distribution of urodynamics products and urology lasers. Net sales consist primarily of direct sales to hospitals and
clinics in France and Europe, export sales to third-party distributors and agents, and export sales through subsidiaries based
in Germany, Italy, the United States and Asia.
Moreover, the Company
develops a novel HIFU treatment for liver cancer in cooperation with its long-term academic partner INSERM and leading cancer centers
(the “HECAM” project).
The Company purchases
the majority of the components used in its products from a number of suppliers but for some components, relies on a single source.
Delay would be caused if the supply of these components or other components was interrupted and these delays could be extended
in certain situations where a component substitution may require regulatory approval. Failure to obtain adequate supplies of these
components in a timely manner could have a material adverse effect on the Company’s business, financial position and results
of operation.
1-2 Basis of
preparation
These consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S.
GAAP).
With the exception
of the change in the Company’s Revenue Recognition Policy as a result of the adoption of ASC 606, there have been no changes
to the accounting policies for the fiscal year ended December 31, 2018, that are of significance, or potential significance,
to the Company.
1-3 Management
estimates
The preparation of
financial statements in conformity with U.S. generally accepted accounting principles (‘‘U.S. GAAP’’) requires
management to make estimates and assumptions, such as business plans, stock price volatility, duration of standard warranty per
market, price of maintenance contract used to determine the amount of revenue to be deferred and life duration of our range of
products. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
1-4 Consolidation
The accompanying consolidated
financial statements include the accounts of EDAP TMS S.A. and all its domestic and foreign owned subsidiaries.
1-5 Revenue recognition
The Company adopted
ASC Topic 606,
Revenue from Contracts with Customers
, on January 1, 2018.
The Company’s
revenue consists of:
- Sales of goods (devices
and consumables), where invoicing takes place upon delivery.
- Revenue-per-Procedures
(“RPP”) and leases: they comprise (i) revenues on a per treatment basis which are invoiced after each treatment, or
in advance, or on a periodic basis, (ii) leases of devices, which are generally invoiced on a monthly or quarterly basis, and (iii)
lease components arising from multiple-element arrangements, where specific sales terms are negotiated in accordance with each
customer’s individual requirements and which are generally invoiced based on contract terms,
EDAP TMS S.A. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(in thousands of euros unless otherwise noted, except per share data)
|
- Sales of spare parts
and services (maintenance, upgrades, mobility and others). Spare parts are invoiced when delivered. Regarding services, invoicing
is performed either on a subscription basis (in advance or at the end of the period) or when performed.
The Company invoices its customers based
on the billing schedules in its sales arrangements. Payments are generally due between one to three months from date of invoice.
The Company accounts
for a contract with a customer when there is a legally enforceable contract between the Company and its customer, the rights of
the goods or services and their payment terms can be identified, the contract has commercial substance, collectability of the contract
consideration is probable, it is approved and the parties are committed to their obligations.
Our sale arrangements
may contain multiple elements, including device(s), consumables and services. For these multiple-element arrangements, the Company
accounts for individual goods and services as separate performance obligations: (i) if they are a distinct good or service that
is separately identifiable from other items in the multiple-element arrangement; and (ii) if a customer can benefit from the good
or service on its own or with other resources that are readily available to the customer. The Company’s sale arrangements
may include a combination of the following performance obligations: device(s), consumables, leases and services (such as, but not
limited to, warranty extension).
For multiple-element
arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling
prices are based on observable prices at which the Company separately sells the goods or services. If a standalone selling price
is not directly observable, then the Company estimates the standalone selling price considering market conditions and entity-specific
factors including, but not limited to, features and functionality of the goods and services, geographies, and type of customer.
The Company regularly reviews standalone selling prices and updates these estimates as necessary.
The Company recognizes
revenue when the performance obligations are satisfied by transferring control over the good or service to a customer.
The Company’s
revenue consists of the following:
Sales of goods:
Sales of goods are
and have historically been comprised of net sales of medical devices (ESWL lithotripters and HIFU devices) and net sales of disposables
(mostly Ablapaks and Focalpaks in the HIFU division and electrodes in the UDS division). Sales of goods also includes products
such as urology laser and urodynamics devices distributed through our agents and third-party distributors.
For devices and disposables,
revenue is recognized when the Company transfers control to the customer (i.e. when the customer has the ability to direct the
use of, and obtain substantially all of the remaining benefit from, the device or disposables), which is generally at the point
of delivery or installation, depending on the terms of the arrangement (i.e. when the customer can use the good to provide services
or sell or exchange the good), and based on contractual incoterms.
The Company’s
sales arrangements do not provide a right of return. The goods are generally covered by a period of one to two years standard warranty
upon installation. The Company also provides training associated with the sales of goods; such training-related costs are immaterial
in the context of the contract with the customer and do not constitute a distinct performance obligation.
Sales of RPPs
and leases:
Sales of RPP and leases
include the revenues from the sale of treatment procedures and from the leasing of machines. We provide machines to clinics and
hospitals for free for a limited period, rather than selling the devices. These hospitals and clinics perform treatments using
the devices and usually pay us based on the number of individual treatments provided.
EDAP TMS S.A. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(in thousands of euros unless otherwise noted, except per share data)
|
Revenues related to
the sale of treatments invoiced on a ‘‘Revenue-Per-Procedure’’ (‘‘RPP’’) basis
are recognized when the treatment procedure has been completed. Revenues from devices leased to customers under operating leases
are recognized on a straight-line basis.
Regarding multiple-element
arrangements with a lease component, a portion of the contract is allocated to the lease component on the basis of observable market
prices applied by the Company for similar devices under operating leases. The lease component is recognized on a straight line
basis over the contractual period. Other components under the contract are recognized in accordance with their nature.
Sales of spare parts
and services:
Revenues related to
spare parts are recognized when spare parts are delivered to distributors who perform their own maintenance services. Spare parts
used in the performance of EDAP’s own maintenance and repair services are generally not recognized separately, unless specified
in the contract.
Revenues related to
Services mainly consist of maintenance contracts which rarely exceed one year and are recognized on a straight line basis over
the term of the service period as the customer benefits from the service throughout the service contract period. For services rendered
when no maintenance contract is in place or for services not included in the scope of a maintenance contract, revenues are recorded
when services are performed.
The Company recognizes
revenue for extended warranties included in the multiple-element arrangements as a separate performance obligation in Sales of
services on a straight-line basis over the extended warranty period. In the majority of countries in which the Company operates,
the statutory warranty period is one to two years and the extended warranty covers periods beyond this statutory period. Standard
warranties do not constitute a separate performance obligation. The Company accrues for the warranty costs at the time of sale
of the device through the multiple-element arrangement.
Agents and distributors:
As part of its sale
process in countries other than continental France, when the Company does not have a local subsidiary, sales of goods to end-customers
are performed through agent and distributors. Such agent and distributors are primarily responsible for the sales’ process,
bear the inventory risk, and are free to determine the sale prices. Sales of goods to agents and distributors are recognized at
the time of the sale to the related agent or distributor, based on contractual incoterms.
Deferred revenue:
Deferred revenue
for the periods presented primarily relates to service contracts where the service fees are billed up-front, generally quarterly
or annually, prior to those services having been performed, and consists primarily of billing or cash receipts in advance of services
due under maintenance contracts or extended warranty contracts. The associated deferred revenue is generally recognized ratably
over the service period.
Disaggregation of revenue:
Disaggregation by
primary geographical market, and timing of revenue recognition is reported in Note 17.
Contract Balances:
Details
on contract liabilities are reported on Note 10.
The Company applies
the practical expedient in paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that
have original expected durations of one year or less. This relates mainly to maintenance services.
EDAP TMS S.A. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(in thousands of euros unless otherwise noted, except per share data)
|
1-6 Costs of
sales
Costs of sales include
all direct product costs, costs related to shipping, handling, duties and importation fees, as well as certain indirect costs such
as service and supply chain departments expenses. Indirect costs are allocated by type of sales (goods, RPP and leases, spare parts
and services) using an allocation method determined by management by type of costs and segment activities and reviewed on an annual
basis.
1-7 Shipping
and handling costs
Shipping and handling
costs are not considered as performance obligations. Shipping and handling costs are recorded as a component of cost of sales.
1-8 Cash equivalents
and short term investments
Cash equivalents are
cash investments which are highly liquid and have initial maturities of 90 days or less.
Cash investments with
a maturity higher than 90 days are considered as short-term investments.
1-9 Accounts
Receivables
Accounts receivables
are stated at cost net of allowances for doubtful accounts. The Company makes judgments as to its ability to collect outstanding
receivables and provides allowances for the portion of receivables when collection becomes doubtful. Provision is made based upon
a specific review of all significant outstanding invoices. These estimates are based on our bad debt write-off experience, analysis
of credit information, specific identification of probable bad debt based on our collection efforts, aging of accounts receivables
and other known factors. Accounts receivable also include factored receivables for which the Company is bearing the collection
risk.
1-10 Inventories
Inventories are valued
at the lower of cost and net realizable value. Cost is either the manufacturing cost, which is principally comprised of components
and labor costs for our own manufactured products, or purchase price for urology products we distribute. Cost is determined on
a first-in, first-out basis for components and spare parts and by specific identification for finished goods (medical devices).
The Company establishes reserves for inventory estimated to be obsolete, unmarketable or slow moving, first based on a detailed
comparison between quantity in inventory and historical consumption and then based on case-by-case analysis of the difference between
the cost of inventory and the related estimated market value.
1-11 Property
and equipment
Property and equipment
is stated at historical cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated
useful life of the related assets, as follows:
Leasehold improvements (in years)
|
|
|
10 or lease term if shorter
|
|
Equipment (in years)
|
|
3
|
-
|
10
|
Furniture, fixtures, fittings and other (in years)
|
|
2
|
-
|
10
|
Equipment includes industrial equipment
and research equipment that has alternative future uses. Equipment also includes devices that are manufactured by the Company and
leased to customers through operating leases related to Revenue-Per-Procedure transactions and devices subject to sale and leaseback
transactions. This equipment is depreciated over a period of seven years.
1-12 Long-lived
assets
The Company reviews
the carrying value of its long-lived assets, including fixed assets and intangible assets, for impairment whenever events or changes
in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Recoverability of long-lived assets
is assessed by a comparison of the carrying amount of the assets (or the Group of assets, including the asset in question, that
represents the lowest level of separately-identifiable cash flows) to the total estimated undiscounted cash flows expected to be
generated by the asset or group of assets. If the future net undiscounted cash flows is less than the carrying amount of the asset
or group of assets, the asset or group of assets is considered impaired and an expense is recognized equal to the amount required
to reduce the carrying amount of the asset or group of assets to its then fair value. Fair value is determined by discounting the
cash flows expected to be generated by the assets, when the quoted market prices are not available for the long-lived assets. Estimated
future cash flows are based on assumptions and are subject to risk and uncertainty.
EDAP TMS S.A. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(in thousands of euros unless otherwise noted, except per share data)
|
1-13 Goodwill
and intangible assets
Goodwill represents
the excess of purchase price over the fair value of identifiable net assets of businesses acquired. Goodwill is not amortized but
instead tested annually for impairment or more frequently when events or change in circumstances indicate that the assets might
be impaired by comparing the carrying value to the fair value of the reporting units to which it is assigned. Under ASC 350, “Goodwill
and other intangible assets”, the impairment test is performed in two steps. The first step compares the fair value of the
reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less than its carrying
amount, a second step is performed to measure the amount of impairment loss. The second step allocates the fair value of the reporting
unit to the Company’s tangible and intangible assets and liabilities. This derives an implied fair value for the reporting
unit’s goodwill. If the carrying amount of the reporting units’ goodwill exceeds the implied fair value of that goodwill,
an impairment loss is recognized equal to that excess. For the purpose of any impairment test, the Company relies upon projections
of future undiscounted cash flows and takes into account assumptions regarding the evolution of the market and its ability to successfully
develop and commercialize its products.
Changes in market conditions
could have a major impact on the valuation of these assets and could result in additional impairment losses.
Intangible assets consist
primarily of purchased patents relating to lithotripters, purchased licenses, a purchased trade name and a purchased trademark.
The basis for valuation of these assets is their historical acquisition cost. Amortization of intangible assets is calculated by
the straight-line method over the shorter of the contractual or estimated useful life of the assets, as follows:
Patents (in years)
|
|
|
5
|
|
SAP Licenses (in years)
|
|
|
10
|
|
Other licenses (in years)
|
|
|
5
|
|
Trade name and trademark (in years)
|
|
|
7
|
|
1-14 Treasury Stocks
Treasury stock purchases
are accounted for at cost. The sale of treasury stocks is accounted for using the first in first out method. Gains on the sale
or retirement of treasury stocks are accounted for as additional paid-in capital whereas losses on the sale or retirement of treasury
stock are recorded as additional paid-in capital to the extent that previous net gains from sale or retirement of treasury stocks
are included therein; otherwise the losses shall be recorded to accumulated benefit (deficit) account. Gains or losses from the
sale or retirement of treasury stock do not affect reported results of operations. Treasury stocks held by a Company cannot exceed
10% of the total number of shares issued.
1-15 Warranty expenses
The Company provides
customers with a warranty for each product sold and accrues warranty expense at time of sale based upon historical claims experience.
Standard warranty period may vary from 1 year to 2 years depending on the market. Actual warranty costs incurred are charged against
the accrual when paid and are classified in cost of sales in the statement of income. Warranty expense amounted to €433 thousand,
€316 thousand and €319 thousand for the years ended December 31, 2018, 2017 and 2016, respectively.
1-16 Income taxes
The Company accounts
for income taxes in accordance with ASC 740, ‘‘Accounting for Income Taxes’’ Under ASC 740, deferred tax
assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities
and are measured by applying enacted tax rates and laws to taxable years in which such differences are expected to reverse. A valuation
allowance is established if, based on the weight of available evidence, it is more likely than not that some portion, or all of
the deferred tax assets, will not be realized. In accordance with ASC740, no provision has been made for income or withholding
taxes on undistributed earnings of foreign subsidiaries, such undistributed earnings being permanently reinvested.
EDAP TMS S.A. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(in thousands of euros unless otherwise noted, except per share data)
|
Under ASC740, the measurement
of a tax position that meets the more-likely-that-not recognition threshold must take into consideration the amounts and probabilities
of the outcomes that could be realized upon ultimate settlement using the facts, circumstances and information available at the
reporting date.
1-17 Research
and development costs
Research and development costs are recorded
as an expense in the period in which they are incurred.
The French government
provides tax credits to companies for innovative research and development. This tax credit is calculated based on a percentage
of eligible research and development costs and it can be refundable in cash and is not contingent on future taxable income. As
such, the Company considers the research tax credits as a grant, offsetting research and development expenses.
1-18 Advertising
costs
Advertising costs are
recorded as an expense in the period in which they are incurred and are included in selling and administrative expenses in the
accompanying consolidated statements of income (loss). Advertising costs amounted to €719 thousand, €672 thousand and
€744 thousand for the years ended December 31, 2018, 2017 and 2016, respectively.
1-19 Foreign
currency translation and transactions
Translation of the
financial statements of consolidated companies
The reporting currency
of EDAP TMS S.A. for all years presented is the euro (€). The functional currency of each subsidiary is its local currency.
In accordance with ASC 830, all accounts in the financial statements are translated into euro from the functional currency at the
following exchange rates:
·
assets and liabilities are translated at year-end exchange rates;
·
shareholders’ equity is translated at historical exchange rates (as of the date of contribution);
·
statement of income items are translated at average exchange rates for the year; and
·
translation gains and losses are recorded in a separate component of shareholders’ equity.
Foreign currencies
transactions
Transactions involving
foreign currencies are translated into the functional currency using the exchange rate prevailing at the time of the transactions.
Receivables and payables denominated in foreign currencies are translated at year-end exchange rates. The resulting unrealized
exchange gains and losses are carried to the statement of income.
Presentation in
the Statement of Income
Aggregate foreign currency
transactions gains and losses are disclosed in a single caption in the Statement of Income under section “Foreign currency
exchange gain (loss), net”.
1-20 Earnings
per share
Basic earnings per
share is computed by dividing income available to common shareholders by the weighted average number of shares of common stock
outstanding for the period. Diluted earnings per share reflects potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company. The dilutive effects of the Company’s common stock options and warrants is determined using
the treasury stock method to measure the number of shares that are assumed to have been repurchased using the average market price
during the period, which is converted from U.S. dollars at the average exchange rate for the period.
EDAP TMS S.A. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(in thousands of euros unless otherwise noted, except per share data)
|
1-21 Derivative
instruments
ASC 815 requires the
Company to recognize all of its derivative instruments as either assets or liabilities in the statement of financial position at
fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether
it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those
derivative instruments that are designated and qualify as hedging instruments, the Company must classify the hedging instrument,
based upon the exposure being hedged, as fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.
Gains and losses from
derivative instruments are recorded in the Statement of Income.
1-22 Employee
stock option plans
At December 31, 2018,
the Company had four stock-based employee compensation plans. ASC 718 requires the recognition of fair value of stock compensation
as an expense in the calculation of net income (loss).
1-23 Warrants
The Company recorded
outstanding warrants issued in March 2012, May 2013 and April 2016 as a liability. Pursuant to guidance of ASC 815-40-15-7(i),
the Company determined that the said warrants could not be considered as being indexed to the Company’s own stock, on the
basis that the exercise price of the warrants was determined in U.S. dollars while the functional currency of the Company is the
Euro. As of December 31, 2018, there were no more warrants outstanding.
1-24 Leases and
Sales and leaseback transactions
In accordance with
ASC 840, Accounting for Leases, the Company classifies all leases at the inception date as either a capital lease or an operating
lease. A lease is a capital lease if it meets any one of the following criteria; otherwise, it is an operating lease:
|
-
|
Ownership is transferred to the lessee by the end of the lease term;
|
|
-
|
The lease contains a bargain purchase option;
|
|
-
|
The lease term is at least 75% of the property’s estimated remaining economic life;
|
|
-
|
The present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the
leased property to the lessor at the inception date.
|
For sales type leases, the following two additional
criteria are applied:
|
-
|
Collectability of the minimum lease payment is reasonably predictable;
|
|
-
|
No important uncertainties surround the amount of un-reimbursable costs yet to be incurred by the lessor under the lease.
|
The Company enters
into sale and leaseback transactions from time to time. In accordance with ASC 840, any profit or loss on the sale is deferred
and amortized prospectively over the term of the lease, in proportion to the leased asset if a capital lease, or in proportion
to the related gross rental charged to expense over the lease term, if an operating lease.
1-25 Recent accounting
pronouncements
Recently Adopted Accounting Pronouncements
In July 2015, the FASB
issued ASU 2015-14 Revenue from Contracts with Customers: Deferral of the Effective Date (ASU 2015-14) which deferred the effective
date for ASU No. 2014-09,
Revenue from Contracts with Customers
(Topic 606), by one year. Topic 606supersedes the revenue
recognition requirements in Revenue Recognition (Topic 605) and requires entities to recognize revenue in a way that depicts the
transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services.
EDAP TMS S.A. AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(in thousands of euros unless otherwise noted, except per share data)
|
The Company adopted
Topic 606
Revenue from Contracts with Customers
with a date of initial application as of January 1, 2018. As a result, the
Company has changed its accounting policy for revenue recognition as detailed below.
The Company applied Topic 606
using
the cumulative effect method i.e. by recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the
opening balance of equity at January 1, 2018. Therefore, the comparative information has not been adjusted and continues to be
reported under Topic 605. The details of the significant changes and quantitative impact of the changes are disclosed below.
In implementing Topic
606, the Company considered in particular that separate performance obligations and contract liabilities were already identified
as such and dates of transfer of controls were similar under the previous accounting standards. Contract assets are non-material
as of December 31, 2018 and 2017. The Company performed an analysis of its relationships with agents and distributors within the
framework of topic 606, which did not result in a change of its conclusions that they are acting as principal.
The impact to the
Company of adopting the new revenue standard primarily relates to additional and expanded disclosures, and in particular
contract liabilities and disaggregated revenues. There is no impact on the opening balance of equity and on the 2018
revenue.
In November 2015,
the FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes
(ASU 2015-17), which requires that deferred
tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective
for the Company in its first quarter of fiscal 2017. The Company adopted the ASU 2015-17 retrospectively as of December 31, 2017.
In March 2016, the
FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the
accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity
or liabilities and classification on the statement of cash flows. For public business entities, the amendments in ASU 2016-09 are
effective for annual periods beginning after 15 December 2016, and interim periods within those annual periods. No impact has been
identified on Financial Statements upon adoption of ASU 2016-09.
Recent Accounting Pronouncements Not
Yet Adopted
In February 2016, the
FASB issued ASU No. 2016-02, Leases (ASU 2016-02), which supersedes ASC 840 “Leases” and creates a new topic, ASC 842
"Leases." This update requires lessees to recognize on their balance sheet a lease liability and a lease asset for all
leases, including operating leases, with a term greater than 12 months. The update also expands the required quantitative and qualitative
disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods
within those fiscal years, with earlier application permitted. This update will be applied using a modified retrospective transition
approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial
statements. The Company will adopt the new standard as of January 1, 2019. The Company performed an analysis of all contracts to
identify lease components or rights of use. The Company determined that the new standard mostly applies to leases for facilities
situated in France, Japan and in the U.S., for Company vehicles and printers. The last category has been determined as being below
the threshold and not material. As of January 1, 2019, the estimated opening balance sheet impact is expected to amount to Euros
2.9 million on financial debt.
In January 2017, the
FASB issued ASU 2017-04, “Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment.” This update
eliminates step 2 from the goodwill impairment test, and requires the goodwill impairment test to be performed by comparing the
fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the
carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount
of goodwill allocated to that reporting unit. This guidance is effective for the Company in the first quarter of 2020. Early adoption
is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company will
assess the timing of adoption and impact of this guidance to future impairment considerations.