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 3, ‘‘Key Information—Exchange Rates’’
for information regarding certain currency exchange rates and 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
®
,
Technomed
®
, 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, 2017 and 2016 and the selected income statement data for the years ended December 31, 2017, 2016 and 2015 set forth
below have been derived from our consolidated financial statements included in this annual report. These financial statements,
together with 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
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
INCOME STATEMENT DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
35,746
|
|
|
|
35,611
|
|
|
|
32,253
|
|
|
|
26,785
|
|
|
|
24,080
|
|
Total sales
|
|
|
35,686
|
|
|
|
35,579
|
|
|
|
32,218
|
|
|
|
26,252
|
|
|
|
24,065
|
|
Gross profit
|
|
|
14,808
|
|
|
|
16,411
|
|
|
|
13,785
|
|
|
|
11,201
|
|
|
|
9,319
|
|
Operating expenses
|
|
|
(16,835
|
)
|
|
|
(16,019
|
)
|
|
|
(13,298
|
)
|
|
|
(12,937
|
)
|
|
|
(12,074
|
)
|
Income (loss) from operations
|
|
|
(2,027
|
)
|
|
|
392
|
|
|
|
488
|
|
|
|
(1,736
|
)
|
|
|
(2,755
|
)
|
Basic Income (loss) from operations per common share
|
|
|
(0.07
|
)
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
(0.07
|
)
|
|
|
(0.13
|
)
|
Diluted Income (loss) from operations per common share
|
|
|
(0.07
|
)
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
(0.07
|
)
|
|
|
(0.13
|
)
|
Income (loss) before income taxes
|
|
|
(294
|
)
|
|
|
4,444
|
|
|
|
(907
|
)
|
|
|
(396
|
)
|
|
|
(4,886
|
)
|
Income tax (expense) benefit
|
|
|
(388
|
)
|
|
|
(602
|
)
|
|
|
(759
|
)
|
|
|
(116
|
)
|
|
|
(135
|
)
|
Net income (loss)
|
|
|
(681
|
)
|
|
|
3,842
|
|
|
|
(1,667
|
)
|
|
|
(512
|
)
|
|
|
(5,021
|
)
|
Basic earnings (loss) per share
|
|
|
(0.02
|
)
|
|
|
0.14
|
|
|
|
(0.07
|
)
|
|
|
(0.02
|
)
|
|
|
(0.24
|
)
|
Diluted earnings (loss) per share
|
|
|
(0.02
|
)
|
|
|
0.13
|
|
|
|
(0.07
|
)
|
|
|
(0.02
|
)
|
|
|
(0.24
|
)
|
Dividends per share
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Basic weighted average shares outstanding
|
|
|
28,961,928
|
|
|
|
27,823,313
|
|
|
|
25,021,966
|
|
|
|
23,601,428
|
|
|
|
20,593,720
|
|
Diluted weighted average shares outstanding
|
|
|
28,961,928
|
|
|
|
29,365,583
|
|
|
|
25,021,966
|
|
|
|
23,601,428
|
|
|
|
20,593,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
(2)
|
|
|
39,574
|
|
|
|
40,502
|
|
|
|
32,992
|
|
|
|
26,575
|
|
|
|
22,103
|
|
Property and equipment, net
|
|
|
3,682
|
|
|
|
2,770
|
|
|
|
2,123
|
|
|
|
2,122
|
|
|
|
1,655
|
|
Total current liabilities
|
|
|
16,134
|
|
|
|
15,010
|
|
|
|
16,271
|
|
|
|
12,158
|
|
|
|
11,589
|
|
Total assets
|
|
|
46,897
|
|
|
|
46,591
|
|
|
|
38,581
|
|
|
|
32,154
|
|
|
|
26,874
|
|
Capital lease obligations, less current portion
|
|
|
528
|
|
|
|
313
|
|
|
|
294
|
|
|
|
355
|
|
|
|
378
|
|
Long-term debt, less current portion
|
|
|
834
|
|
|
|
3,665
|
|
|
|
4,798
|
|
|
|
2,434
|
|
|
|
3,678
|
|
Total shareholders’ equity
|
|
|
25,158
|
|
|
|
24,451
|
|
|
|
14,430
|
|
|
|
15,141
|
|
|
|
9,284
|
|
|
(1)
|
No
dividends were paid with respect to fiscal years 2013 through 2016 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 2017. See Item 8, ‘‘Financial
Information — Dividends and Dividend Policy.’’
|
|
(2)
|
Years
2016 to 2013 were amended to reflect deferred tax assets reclassification due to the
adoption of ASU 2015-17.
|
EXCHANGE RATES
Fluctuations in
the exchange rate between the euro and the dollar will affect the dollar amounts received by owners of American Depositary Shares
(‘‘ADSs’’) representing ordinary shares of the Company (‘‘Shares’’) on conversion
by the Depositary of dividends, if any, paid on the Shares in the form of ADSs. Moreover, such fluctuations may affect the dollar
price of our ADSs on
NASDAQ
.
The following table
sets forth, for each of the years indicated, the high, low, average and year-end Noon Buying Rates expressed in euro per $1.00.
The rate is derived from the noon buying rate in The City of New York for cable transfers in euro as certified for customs purposes
by the Federal Reserve Bank of New York (the ‘‘Noon Buying Rate’’).
Year ended December 31,
|
|
High
|
|
Low
|
|
Average
(1)
|
|
End of Year
|
|
|
€
|
|
€
|
|
€
|
|
€
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
0.78
|
|
|
|
0.72
|
|
|
|
0.75
|
|
|
|
0.73
|
|
2014
|
|
|
0.83
|
|
|
|
0.72
|
|
|
|
0.75
|
|
|
|
0.83
|
|
2015
|
|
|
0.95
|
|
|
|
0.83
|
|
|
|
0.90
|
|
|
|
0.92
|
|
2016
|
|
|
0.96
|
|
|
|
0.87
|
|
|
|
0.90
|
|
|
|
0.95
|
|
2017
|
|
|
0.96
|
|
|
|
0.83
|
|
|
|
0.89
|
|
|
|
0.83
|
|
|
(1)
|
The average of the
Noon Buying Rates on the last business day of each month during the year indicated. See
‘‘Presentation of Financial and Other Information’’ elsewhere
in this annual report.
|
The following table
sets forth, for each of the previous six months, the high and low Noon Buying Rates expressed in euro per $1.00.
|
|
High
|
|
Low
|
|
Average
(1)
|
|
End of Month
|
|
|
€
|
|
€
|
|
€
|
|
€
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
|
|
|
0.85
|
|
|
|
0.83
|
|
|
|
0.84
|
|
|
|
0.85
|
|
October
|
|
|
0.86
|
|
|
|
0.84
|
|
|
|
0.85
|
|
|
|
0.86
|
|
November
|
|
|
0.86
|
|
|
|
0.84
|
|
|
|
0.85
|
|
|
|
0.84
|
|
December
|
|
|
0.85
|
|
|
|
0.83
|
|
|
|
0.84
|
|
|
|
0.83
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
0.84
|
|
|
|
0.80
|
|
|
|
0.82
|
|
|
|
0.80
|
|
February
|
|
|
0.82
|
|
|
|
0.80
|
|
|
|
0.81
|
|
|
|
0.82
|
|
March
|
|
|
0.82
|
|
|
|
0.80
|
|
|
|
0.81
|
|
|
|
0.81
|
|
(1)
|
|
The
average of the Noon Buying Rate on each business day of the month.
|
On March 30, 2018, the Noon Buying Rate
was U.S.$1.00 = €0.81
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 maintain profitability.
Although we achieved
operational profitability in 2015 and 2016, we have incurred operating losses in 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 High Intensity Focused Ultrasound (“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 remain
profitable 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. The Ablatherm and the Focal One are commercialized in the European Union, Canada,
United States (except for the Focal One which is still under FDA review) and other countries.
Further, even if we
do receive the required approvals, we may not receive them on a timely basis and we may not be able to satisfy the conditions
of such approval, if any. The failure to receive product approval by the FDA for our Focal One device, or any significant delay
in receipt thereof, will have a material adverse effect on our business, financial condition or results of operations. See “—Our
clinical trials for products using HIFU technology may not be successful” and Item 4, “Information on the Company—HIFU
Division—HIFU Division Clinical and Regulatory Status.” 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 urology 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 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.”
Our clinical trials for 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. 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; 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.
|
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. 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. Discussions with regulatory authorities to improve our
clinical protocols may prove difficult and lengthy. 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.
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.
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.
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. The process of applying for regulatory
approval is unpredictable, 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.”
Furthermore,
w
e 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.
Furthermore, 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.
HIFU technology may not be accepted
and adopted by the medical community.
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 acceptance in the medical
community. Physician acceptance 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, 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 2017 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 when or if approved, 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 recently 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.
The success of our products depends
on whether procedures performed by those products are eligible for reimbursement which depends on the decisions of 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 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 an innovative process 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 innovative 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 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 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.
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 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. The 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 have experienced no significant nor material
cybersecurity threats and incidents. We also rely in part on the reliability of certain tested third parties' cybersecurity measures,
including firewalls, virus solutions and backup solutions. Cybersecurity incidents 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. 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. As these threats, and government and
regulatory oversight of associated risks, continue to evolve, we may be required to expend additional resources to enhance or
expand upon the security measures we currently maintain.
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 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
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 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, import and trade restrictions,
export requirements, U.S. laws such as the 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. On November 8, 2016, the French Parliament passed a law targeting transparency,
anti-corruption and the modernization of the economy, known as the Sapin II Law. The provisions related to the implementation
of the Sapin II Law, effective mid-2017, are applicable to any company (i) having at least 500 employees, or belonging to any
group whose parent company's headquarters is located in France and which has at least 500 employees, and (ii) whose annual turnover
is more than €100 million. Presidents and directors of such companies may be held liable for failure to implement compliance
programs. We are not subject to provisions of Sapin II Law.
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.
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.
On August 4, 2014,
a purported class action lawsuit was filed in the United States District Court for the Southern District of New York asserting
that the Company, Marc Oczachowski, and Eric Soyer (our former Chief Financial Officer) violated federal securities laws by issuing
materially false and misleading statements that caused the price of our ADSs to be artificially inflated. An amended complaint
alleges that the Company and Mr. Oczachowski breached their obligations under the Exchange Act in various ways, including by misrepresenting
and failing to disclose allegedly material information about the safety and efficacy of treatment with Ablatherm-HIFU, and the
Company’s interactions with the FDA. The complaint sought unspecified damages, interest, costs, and fees, including attorneys’
and experts’ fees. In February 2015, the defendants, including the Company, filed a motion to dismiss and on November 11,
2015, we announced the dismissal of the class action lawsuit and that no notice of appeal was subsequently filed by the plaintiffs.
Any additional 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 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 2017, approximately 77% of our total costs of sales and operating expenses were
denominated in euro, while approximately 45% 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, 2017, 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.
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.
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 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
issuance of ADSs upon exercise of outstanding warrants will cause immediate and substantial dilution to our existing shareholders.
The
issuance of ADSs upon exercise of the warrants issued in May 2013 (the “May 2013 Warrants”) and in April 2016 (the
“April 2016 Warrants”) will result in dilution of other shareholders since the selling shareholders may ultimately
sell the full amount of ADSs issuable on exercise. Based on the total number of outstanding warrants as of April 2, 2018, and
on the total number outstanding options to subscribe to new shares, up to 5,870,784 ADSs are issuable upon exercise, representing
approximately 20.3% of our issued and outstanding share capital. Although no single warrant holder may exercise its Warrants if
such exercise would cause it to own more than 9.99% of our outstanding ordinary shares, this restriction does not prevent each
holder from exercising a portion of its holdings and selling those securities. In this way, each holder could sell more than this
limit while never holding more than such limit.
On
April 22, 2014, we filed a Form F-3 registration statement with the SEC to register ordinary shares and warrants for a maximum
amount of $50 million, hence providing for registration of any future new ordinary shares issued for the purpose of raising capital.
This registration statement was declared effective by the SEC on May 5, 2014. We issued and registered shares under this registration
statement on June 2, 2014 and on April 14, 2016, although we did not offer the maximum amount registered under this registration
statement.
The sale of ADSs issued upon exercise
of outstanding warrants could encourage short sales by third parties which could further depress the price of our ADSs.
Any downward pressure
on the price of ADSs caused by the sale of ADS issued upon the exercise of the outstanding warrants could 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.
We have identified
a material weakness in our internal controls over financial reporting, and if we fail to remediate 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 insufficient segregation of duties within the consolidation
process directly linked to the limited size of our finance team. Our management has concluded that, as a result, our internal
control over financial reporting was not effective as of December 31, 2017. Nevertheless, we have concluded that this material
weakness did not result in a material misstatement of the consolidated financial statements for the year ended December 31, 2017
or restatement of any prior period previously reported by the Company
Although we plan
to initiate remediation actions to address this material weakness, 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 develop, additional resources and management oversight
may be required.
In an effort to remediate
the identified material weakness and to enhance our overall control environment, we plan to initiate, the following actions: hiring
of a person who will be responsible for the consolidation process, so that our Chief Financial Officer can be the preliminary
person responsible for performing the review control. As a small business, we may not be in a position to have that person to
be hired and operational before the 2018-year end and may decide to engage a third party financial firm in the interim period
to enhance segregation of duties and to help assemble robust documentation.
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 2017 was 63,553, the high
and low bid price of our ADSs for the last two financial years ended on December 31, 2017 and December 31, 2016, was $3.85 and
$2.25, and $4.80 and $2.43, 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 2016 was 40,560 as opposed to 61,031 for the same period of
2017. 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.
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.
We are currently the subject of such litigation, and such litigation, regardless of its outcome, and 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 April 2,
2018, the maximum number of shares available to be issued was 165,000.
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:
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effect
service of process upon or obtain jurisdiction over us or our non-U.S. resident directors and officers in the United States;
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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
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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.
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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. Following Estonia's withdrawal, a proposal combining a broader scope and lower rates, as
well as several specific rules, is currently being discussed between the ten other Participating Member States.
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.
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."
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
the Ablatherm and Focal One devices, advanced choices for HIFU treatment of localized prostate cancer. HIFU treatment is shown
to be a minimally invasive and effective treatment option for localized prostate cancer with a low occurrence of side effects.
Ablatherm is generally recommended for patients with localized prostate cancer (stages T1-T2) who are not candidates for surgery
or who prefer an alternative option. Focal One is a robot assisted HIFU device dedicated to the focal treatment of prostate cancer.
Both 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 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, 1090 Vermont Avenue,
Suite 430, Washington, D.C. 20005, United States, is our agent for service of process in the United States.
Founded in 1979,
we originally specialized in the manufacturing and distribution of lithotripters (devices which use shockwaves to disintegrate
urinary calculi) and produced the first piezoelectric lithotripter (using electric shocks produced by a piezo-component) in 1985.
In 1994, we acquired most of the assets of Technomed International S.A. (‘‘Technomed’’) out of liquidation,
including the ownership of, and full distribution rights to, the Prostatron, the Sonolith series of lithotripters (Sonolith Praktis,
Sonolith Vision) and the Ablatherm device.
On January 31, 2013,
we submitted our PMA application to the FDA for our Ablatherm HIFU device for treatment of low risk, localized prostate cancer.
Our submission included data from the ENLIGHT U.S. Phase II/III clinical trial, as well as data from our extensive worldwide database
of treatment information and follow-up data from patients who have undergone HIFU therapy for prostate cancer. On June 3, 2013
we held our 100-day meeting with the FDA to discuss our PMA file and address questions and requests from the FDA reviewing team.
On May 28, 2013,
we issued 3,000,000 ordinary shares in the form of ADSs to certain institutional investors in a registered direct placement (the
“May 2013 Placement”), at a price of $4.00 per share, with warrants attached that allow investors to purchase up to
1,500,000 shares in the form of ADSs, at an exercise price of $4.25 per share. We also issued warrants to purchase up to 180,000
shares to the placement agent, HC Wainwright and Co. LLC, at an exercise price of $5.00 per share. Following our May 2013 Placement,
on June 14, 2013, we fully redeemed our $8.0 million outstanding long-term debt by using a portion of the net proceeds from the
$12.0 million May 2013 Placement.
On June 2, 2014,
we issued 3,000,000 ordinary shares in the form of ADSs to certain institutional investors in a registered direct placement (the
“June 2014 Placement”), at a price of $3.11 per share.
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.
On October 15, 2015,
we announced the withdrawal of our de novo application and the submission of a 510(k) notice, in accordance with the FDA guidelines,
following the FDA clearance of the Sonablate 450 for prostatic tissue ablation using HIFU.
On November 9, 2015,
we announced the receipt of 510(k) clearance from the FDA to market Ablatherm Integrated Imaging HIFU in the U.S. for the ablation
of prostate tissue.
On April 6, 2016,
we submitted a 510(k) application for FDA clearance of our Focal One HIFU device.
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, with warrants attached that allow investors to purchase up
to 3,283,284 shares in the form of ADSs, at an exercise price of $4.50 per share.
On July 17, 2017,
we had to withdraw the 510(k) application for our Focal One HIFU device in order to submit a new file including new clinical data
to support our file, which we did on September 11, 2017, in accordance with FDA guidance. Our new 510(k) file is still under FDA
review.
On October 4, 2017,
we obtained FDA clearance for our Ablatherm Fusion device which incorporates our proprietary fusion software which merges MRI
and ultrasound images, providing increased accuracy during planning and prostate treatment for physicians.
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 €9.5 million, €13.8 million and €8.4 million for 2017, 2016 and 2015, 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 €26.2 million (including €13.4
million in Asia and €12.8 million in Europe and the rest of the world), €21.8 million (including €10.3 million
in Asia and €11.5 million in Europe and the rest of the world), and €23.8 million (including €10.7 million in Asia
and €13.0 million in Europe and the rest of the world), each for 2017, 2016 and 2015, respectively.
See Note 27 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 quite 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
€9.5 million
to our consolidated net sales during the fiscal year ended December 31, 2017.
HIFU Division Business Overview
The HIFU division
currently develops, manufactures and markets devices for the minimally invasive destruction 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 robotic device fully dedicated to the focal therapy of localized prostate cancer, thereby destroying
targeted cancer cells only. 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) consumables, (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, 2017, the HIFU division had an installed base of 108 Ablatherm machines, 25 Focal One machines and 476 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:
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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 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.
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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 2017, the HIFU division maintained expenses
at
levels similar to 2016 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 2018 and future years to strengthen its technological leadership
in HIFU and expand its application beyond urology.
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HIFU Products
Currently, we commercialize
two products utilizing the HIFU technology. For both HIFU products, 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.
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The
Ablatherm is an ultrasound guided 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. The Ablatherm
is cleared for distribution in the European Union, the United States, South Korea, Canada,
South Africa, New Zealand, the Philippines, Mexico, Argentina, Brazil, Russia, Peru,
Costa Rica and Ecuador.
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Ablatherm Fusion is an evolution of Ablatherm, and incorporates
the Company’s proprietary fusion software which merges MRI and ultrasound images providing increased accuracy during planning
and treatment for physicians. Ablatherm Fusion is cleared by the FDA for distribution in the U.S.
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The
Focal One is a HIFU robotic device fully 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. The Focal
One device received CE Marking for European market clearance in June 2013 and is also
cleared for distribution in Canada, Russia, Saudi Arabia, South Korea, Malaysia, Brazil,
Peru and Chile. We are also working to obtain clearance in other parts of the world.
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HIFU Division Patents and Intellectual Property
As of December 31,
2017, the HIFU division’s patent portfolio contained 34 patents consisting of 9 patents in the United States, 20 patents
in the European Union and Japan and four 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 2017, three
U.S. patents have expired. They covered old endorectal probe design and treatment sequences that were no longer used. Two new
patents have been delivered in the US. Both concern specific ultrasound transducer design. The first one allows the formation
of large and deep lesions within biological tissue resulting from a toroidal transducer shape and crossing ultrasound beams. The
second one covers a transducer consisting of different individual elements with different emitting surfaces in order to compensate
acoustical tissue absorption. The latter patent has been also delivered in Japan.
Nine additional patents
covering certain other aspects of our HIFU technology in the European Union and Japan (five), the United States (two), and the
rest of the world (two) are currently under review. One new patent covering specific transducer cooling was filed in 2017. 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. In December 2012, Theraclion obtained CE Marking for their HIFU device dedicated to the treatment
of benign breast tumors.
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
The HIFU division
has conducted an extensive clinical trial for the Ablatherm in the European Union. This trial, the European Multicentric Study,
involved a total of 652 patients diagnosed with localized prostate cancer and included six sites in France, Germany and The Netherlands.
The primary goals of the trial were to assess the safety and effectiveness of the Ablatherm. An interim analysis performed on
the first 559 patients included 402 patients treated with the Ablatherm device as a first-line therapy. Of these patients, 81.4%
had a normal PSA and 87.2% had negative biopsies at the last follow-up and were considered cancer free. The trials also included
157 patients who underwent an Ablatherm treatment as a salvage therapy after a previous failed therapy (hormone therapy, radiation
or prostatectomy). Of these patients, 80.7% and 67.9% had negative biopsies and normal PSA after treatment, respectively.
Based on these results,
in May 1999
,
we obtained a CE Marking that allows us to market the Ablatherm
in the European Union.
Clinical and
Regulatory Status in France
In 2001, the French
Urology Association (‘‘AFU’’) conducted an independent clinical trial to confirm the efficacy and safety
results observed in the European Multicentric Study, and to evaluate the therapy-related costs. Patient recruitment was successfully
performed at eight investigational sites. Patient enrollment was completed in an 11-month period with 117 patients included. Follow-up
with these patients will continue to evaluate the long-term efficacy of the treatment.
In March 2004, we
obtained CE Marking, which currently allows us to market Ablatherm for primary care patients and the treatment of patients who
failed radiotherapy.
In 2005, a clinical
trial was started in France to validate the efficacy and safety of Ablatherm as salvage treatment for patients who did not respond
to brachytherapy. This clinical study was successfully completed in 2011 with satisfactory safety and efficacy results. Following
the study, in January 2012, we submitted to the European certification body an application for an extension of Ablatherm CE marking
addressing brachytherapy failures. Extension was granted in February 2012.
In 2007, a new clinical
trial using Ablatherm and dedicated to the treatment of patients with high risk disease who are not candidates for radical surgery
because of their age and/or co-morbidities was started in France. This clinical trial was terminated in March 2012 due to low
patient enrollment.
Also in 2007, a clinical
trial to evaluate the utility of Contrast-Enhanced UltraSound (“CEUS”) for the early diagnosis of local cancer recurrence
after HIFU treatment was started in France. The preliminary results assessed that contrast-enhanced ultrasound is efficient in
distinguishing residual viable prostate tissue from ablated tissue after HIFU prostate ablation. This study provides evidence
that contrast ultrasound can diagnose early cancer recurrences. In May 2011, preliminary results related to good detection potential
of CEUS after HIFU treatment were published by Edouard Herriot Hospital, Lyon, France, in the journal
Radiology
. Patient
follow-up was completed in February 2012. CEUS technology was adopted for use in the new Focal One HIFU device.
In 2009, a new clinical
trial was started in France to validate a new strategy of minimally invasive treatment of prostatic adenocarcinomas localized
in a single lobe with HIFU. This concept of partial treatment is proposed as an intermediate option between active surveillance
and whole prostate treatment. Partial treatment for this trial is hemiablation of the prostate in which a single prostatic lobe
(or hemisphere) is ablated using HIFU in patients with prostate cancer that has a low risk of recurrence and for which the imaging
and biopsy assessments show a unilateral cancer. The goal of hemiablation is to reduce the complications associated with standard
treatments, notably the risks of incontinence and impotence. Final results were published in 2017 in the European Urology journal
(Rischmann et al.
'Focal High Intensity Focused Ultrasound of Unilateral Localized Prostate Cancer: A Prospective Multicentric
Hemiablation Study of 111 Patients
', Eur Urol, 71: 267-73). At 1 year follow-up, HIFU-hemiablation 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 September 2010,
a new clinical trial commenced in France and Norway to validate the new strategy of hemi-ablation treatment in radio-recurrent
prostate cancer localized in a single lobe. This objective of focal treatment in patients with prostate cancer recurrence after
radiotherapy is to reduce the risks of side effects in a very fragile population of patients. This clinical trial had been expanded
to include a cohort of 100 patients and to confirm the published preliminary outcomes. Preliminary results from this study were
published in the British Journal of Urology International in 2014. A total of 48 patients were enrolled. The study publication
concluded that hemispherical salvage HIFU is a feasible therapeutic option in patients with unilateral radio-recurrent prostate
cancer, which offers limited urinary and rectal morbidity, and preserves health-related quality of life. The patient recruitment
and evaluation of this hemi-ablation treatment in radio-recurrent prostate cancer localized in a single lobe is still ongoing.
This study will allow to gather data from a larger population of patients with a good hindsight.
In June 2011, a new
clinical trial began in France and then extended to Belgium in 2012 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 clinical data
obtained with the first 83 treatments as a primary indication and the 14 treatments as a salvage indication, we obtained a CE
Mark in June 2013 that allows us to market the Focal One in the European Union. This clinical trial will be completed in late
2019.
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) many focal treatments approaches are 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 will 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 December 2017, 1,033 patients have been treated in primary setting and 303 patients as salvage indication.
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.
On October 15, 2015,
we announced the withdrawal of our de novo application and the submission of a 510(k) notice, in accordance with the FDA guidelines,
following the FDA clearance of the Sonablate 450 for prostatic tissue ablation using HIFU.
On November 9, 2015,
we announced the receipt of 510(k) clearance from the FDA to market Ablatherm
®
Integrated Imaging HIFU in the U.S.
for the ablation of prostate tissue.
In April 2016 EDAP
submitted to FDA a 510k application for the clearance of the Focal One HIFU Device.
On July 17, 2017,
we had to withdraw the 510(k) application for our Focal One device in order to submit a new file including new clinical data to
support our file, which we did on September 11, 2017, in accordance with FDA guidance. Our new 510(k) file is still under FDA
review.
On July 31, 2017,
the Company submitted a 510(k) application to the FDA for its Ablatherm Fusion device, which incorporates our proprietary fusion
software which merges MRI and ultrasound images, providing increased accuracy during planning and prostate treatment for physicians.
On October 4, 2017, we obtained FDA clearance for our Ablatherm Fusion device.
Clinical and
Regulatory Status in Japan
In June 2000, the
HIFU division applied for approval by the Japanese Ministry of Health for the Ablatherm to be marketed in Japan. We retrieved
the application in 2005 to update it and review the process. In December 2016, based on FDA clearance of our Ablatherm HIFU system,
we initiated discussions with the Japanese authorities (“PMDA”) on the best process to apply for obtain Japanese approval
for our 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
On August 2, 2010,
we entered into an exclusive distribution agreement with Shaw Han Biomedical Co. Ltd to distribute Ablatherm throughout China,
once approved by Chinese authorities. This agreement involves a two-stage process: Shaw Han will first be responsible for processing
the marketing clearance application with China’s Food and Drug Administration for Ablatherm, then they will lead the marketing
and distribution of the device in China for four years post approval. As of the date of this annual report on Form 20-F, the marketing
clearance application is still ongoing with the Chinese authorities.
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, our clinical
Ablatherm results 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 is reported 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 in 2015 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 was designed 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 radiorecurrence with seven years follow-up that was elected "best poster" by the scientific committee
.
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 January 2016, Professor
Ronald van Velthoven, Head of Urology Department at Institut Bordet Oncology Center, Brussels, Belgium published outcomes of hemiablation
HIFU in the journal Prostate Cancer and Prostatic Diseases. With the initial patient treated in early 2007 it is the first prospective
study of focal HIFU to enroll patients and had a follow-up of extending to 8 years. The publication reports a 100% cancer specific
survival at 5 years, a 97% rate of continence preservation and 80% rate of potency preservation.
The results of the
French hemiablation study were electronically published in the peer-reviewed journal European Urology in October 2016. The study
included a total of 110 patients at 10 centers whose prostates were treated with Ablatherm HIFU in which half the prostate was
ablated. The follow-up of the study was 2 years at which time all patients were required to undergo follow-up biopsy. In the treated
side, 5% of subjects had residual or recurrent clinically significant cancer. The survival rate without additional definitive
treatment at 24 months was 89%. Urinary continence was preserved in 97% of patients and erectile function was preserved in 78%.
In December 2016,
Professor Roland van Velthoven from Institut Bordet Oncology Center, Brussels, Belgium published a matched pair analysis of HIFU
hemiablation 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 year 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.
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 165,000, 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. Nine patients have
been treated successfully. A multi-centric study is to take place 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-2018 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. For example,
our licensee, Theraclion, obtained CE Marking for their HIFU device dedicated to the treatment of benign breast tumors and thyroid
tumors. See Item 4, “Information on the Company—HIFU Division Patents and Intellectual Property.”
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
€26.2 million
to our consolidated net sales during the fiscal year ended December 31, 2017.
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, 2017, the UDS division
has
sold
904 ESWL lithotripters worldwide
to this date
and
actively
maintained or otherwise serviced 701 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 (V:2003) 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 technology
to guide the treatment robotically.
UDS Division
Patents and Intellectual Property
As of December 31,
2017, the UDS division’s patent portfolio contained 11 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 patent covering the ultrasound localization
system is also in the examination process in the United States.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, 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, Russia, Serbia, Japan,
Australia, Malaysia, Singapore, Saudi Arabia 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 and Dornier.
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.
UDS Division
Services and Distribution
The UDS division is
also pursuing various distribution options that use its strong network of worldwide subsidiaries and agents. The UDS division
distributes urodynamics products on behalf of Laborie Company, including MMS (Medical Measurement Systems) products, and Andromeda
in Japan. The UDS division also distributes laser urology solutions from Lumenis in France and from Quanta System in Asia. 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 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. The U.S. FDA conducted
a routine inspection of our manufacturing site in March 2018 which resulted in the issuance of a Form 483. There was only one
observation which was for Management Review procedure(s) but it was deemed by FDA that no further action was indicated at this
time. The issue is currently being addressed through our CAPA system. EDAP TMS France has obtained ISO 13485 (V:2003) certifications,
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.’’
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. The manufacturing facility,
and principal offices, which we utilize to manufacture and/or assemble all of our products, have ISO 13485 certifications. 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).
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).
|
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. Ablatherm was cleared by FDA in November
2015, via a 510(k) application, with a prostate tissue ablation claim, following the approval of another HIFU device via the de
novo 510(k) process. In April 2016, we submitted a 510(k) application for our Focal One device. After discussion with the FDA,
it was decided to withdraw our 510(k) application and submit a new premarket notification with new clinical data. This second
510(k) for the Focal One was submitted in September 2017 and is currently under FDA review. Our 510(k) application for the Ablatherm
Fusion was cleared by FDA in October 2017. 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. This was last verified in March 2018 when the FDA conducted a routine
inspection of our facility and quality processes. There was only one observation recorded on Form 483 which was for Management
Review procedure(s) but it was deemed by FDA that no further action was indicated at this time. The issue is currently being addressed
through our CAPA system.
Regulation in
the European Union
In the European
Union, we annually perform ISO 13485 (V:2003) certification audits, showing that we comply with standards for quality assurance,
manufacturing and design control. In the European Union, our products are also 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). All of our products bear the CE Marking,
except for Ablatherm Fusion.
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 April 27, 2016,
the European Union adopted the General Data Protection Regulation (“GDPR”) (Regulation (EU) 2016/679) which
intends to strengthen and unify data protection for all individuals within the European Union. It also addresses
the export of personal data outside the EU. The GDPR aims primarily to give control back to citizens and residents over their
personal data and to simplify the regulatory environment for international business by unifying the regulation within
the EU. When the GDPR takes effect, it will replace the data protection directive of 1995 (Directive 95/46/EC). The
GDPR becomes enforceable from May 25, 2018 after a two-year transition period and, unlike a directive, it does not require
national governments to pass any enabling legislation, and is thus directly binding and applicable.
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).
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, 2017, 2016 and 2015 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 (‘ASC’).
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, 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
Sales of goods:
For medical device
sales with no significant remaining vendor obligation, payments contingent upon customer financing or acceptance criteria that
can be subjectively interpreted by the customer or tied to the use of the device, revenue is recognized when evidence of an arrangement
exists, title to the device passes (depending on terms, either upon shipment or delivery), and the customer has the intent and
ability to pay in accordance with contract payment terms that are fixed or determinable. For sales in which payment is contingent
upon customer financing, acceptance criteria that can be subjectively interpreted by the customer, or payment depends on use of
the device, revenue is recognized when the contingency is resolved. We provide training and a minimum of one-year warranty upon
installation with a maximum of two-year warranty. We accrue the estimated warranty costs at the time of sale. Revenues related
to disposables are recognized when goods are delivered.
Sales of RPP treatments
and leases:
Revenues related to
the sale of HIFU treatments invoiced on a 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.
Sales of spare parts
and services:
Revenues related to
spare parts are recognized when goods are delivered. Maintenance contracts rarely exceed one year and are recognized on a straight-line
basis. Billings or cash receipts in advance of services due under maintenance contracts are recorded as deferred revenue.
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.
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 machines. We provide Ablatherm and Focal One 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. 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 machine. 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 machines by hospitals and clinics
in the long term.
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 consumables 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 38% of our total consolidated net sales in 2017. Net sales of goods in Asia
represented approximately 46% of such sales in 2017 and consisted mainly of sales of urology devices and consumables. Net sales
of spare parts, supplies and services in Asia represented approximately 39% of such sales in 2017 and related primarily to ESWL
lithotripters, reflecting the fact that approximately 43% of the installed base of our ESWL lithotripters
that
we actively maintain or otherwise serve
is located in Asia. See Note 27 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 2017, approximately 77% of our costs of sales and research and development,
selling, marketing and general and administrative expenses were denominated in euro, while approximately 45% 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 €3.9 million, €3.9 million and €2.7 million in 2017,
2016 and 2015, respectively, representing approximately 10.9%, 10.9% and 8.4% of total revenues in 2017, 2016 and 2015, respectively.
Consolidated research and development expenses included research and development government grants and tax credits of €0.7
million, €0.7 million and €0.6 million in 2017, 2016 and 2015, respectively. Beginning in 2018, management expects the
budget for research and development expenses in Europe to increase at approximately 13% 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 the U.S. and 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 €9.5 million in 2017, €8.9 million in 2016 and €7.4 million in 2015. Selling
and marketing expenses included net impact of allowances for doubtful accounts of €0.1 million in 2017, €(0.02) million
in 2016 and €0.02 million in 2015. The €0.7 million or 7.6% increase in selling and marketing expenses from 2016 to
2017 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 in Europe, and to sustain the Company’s worldwide market position in urology. Beginning
in 2018, management expects selling and marketing expenses to continue to increase in view of the Company’s expansion.
In 2017, 2016 and
2015
,
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.
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, 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 26 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 0.4% from €35.7 million in 2016 to €35.6 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 consumables 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
.
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.
Foreign currency
exchange gains (loss), net
. 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 €0.6 million in 2017 compared with a consolidated net income of €3.8 million
in 2016.
Fiscal Year Ended December 31, 2016
Compared to Fiscal Year Ended December 31, 2015
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 27 to our consolidated
financial statements.
(in millions of euros)
|
|
2016
|
|
2015
|
|
|
|
|
|
Total revenues
|
|
|
35.6
|
|
|
|
32.3
|
|
Total net sales
|
|
|
35.6
|
|
|
|
32.2
|
|
Of which HIFU
|
|
|
13.8
|
|
|
|
8.5
|
|
Of which UDS
|
|
|
21.8
|
|
|
|
23.8
|
|
Total cost of sales
|
|
|
(19.2
|
)
|
|
|
(18.5
|
)
|
Gross profit
|
|
|
16.4
|
|
|
|
13.8
|
|
Gross profit as a percentage of total net sales
|
|
|
46.1
|
%
|
|
|
42.8
|
%
|
Total operating expenses
|
|
|
(16.0
|
)
|
|
|
(13.3
|
)
|
Income (loss) from operations
|
|
|
0.4
|
|
|
|
0.5
|
|
Net income (loss)
|
|
|
3.8
|
|
|
|
(1.7
|
)
|
Total revenues
Our total revenues
increased 10.4% from €32.3 million in 2015 to €35.6 million in 2016, principally due to the increase in HIFU machine
sales.
HIFU division
.
The HIFU division’s total revenues
increased 63.0% to €13.8
million in 2016 as compared to €8.5 million in 2015.
The HIFU division’s
net sales of medical devices increased 110.9% to €7.8 million in 2016, with six Ablatherm units and eight Focal One units
sold
, as
compared to
€3.7
million, with two Ablatherm and five Focal One units sold in 2015.
Treatment-driven revenue,
which includes net sales of RPP & leases and net sales of consumables, increased 25.8% to €5.2 million in 2016.
Net sales of HIFU-related
spare parts, and services increased from €0.7 million in 2015 to €0.9 million in 2016.
Other HIFU-related
revenues were €28 thousand from €32 thousand in 2015 and were comprised of license-based revenues from Theraclion.
UDS division
.
The UDS division’s total revenues decreased 8.3 % from €23.8 million in 2015 to €21.8 million in 2016, mostly
due to the decrease in machine sales.
The UDS division’s
net sales of medical devices decreased 15.5% from €14.5 million in 2015 to €12.2 million in 2016 with 36 devices sold
in 2016 compared to 52 units sold in 2015.
Net sales of UDS-related
spare parts, supplies, RPP, leasing and services increased 2.8% from €9.3million in 2015 to €9.6 million in 2016, as
a result of the larger installed base of UDS machines and despite the Japanese authorities’ decision to stop reimbursing
lithotripters’ disposables.
Cost of sales
.
Cost of sales increased
4.0% from €18.5 million in 2015 to €19.2 million in 2016, and represented 54.0% as a percentage of net sales in 2016,
down from 57.3% as a percentage of net sales in 2015, thanks primarily to the strong growth in HIFU sales.
Operating expenses
.
Operating expenses
increased 20.5%, or €2.7 million, from €13.3 million in 2015 to €16.0 million in 2016. This increase in operating
expenses included an adverse exchange rate impact of €0.3 million.
Marketing and sales
expenses increased €1.5 million, or 19.6%, reflecting the sales and marketing efforts on expanding the HIFU business.
Research and development
expenses increased 43.8% at €3.9 million in 2016 from €2.7 million in 2015, mainly driven by HIFU development projects
and comprised R&D grants and tax credits of €0.7 million and €0.6 million in 2016 and 2015, respectively, including
costs of the FDA approval of €0.3 million in 2015. Following the Ablatherm FDA clearance received on November 9, 2015, there
is no more cost recorded on this segment activity in 2016 compared to €0.3 million recorded in 2015.
General and administrative
expenses increased 2.9% to €3.3 million in 2016.
Operating profit
.
As a result of the
factors discussed above, we recorded a consolidated operating profit of €0.4 million in
2016,
as compared to a consolidated operating profit of €0.5 million in 2015.
We realized an operating
profit in the HIFU division of €1.0 million in 2016, as compared with an operating profit of €0.5 million in 2015, and
an operating profit in the UDS division of €0.7 million in 2016, as compared to an operating profit of €1.6 million
in 2015.
Financial (expense)
income, net
. Net financial income was €3.9 million in 2016, including a €3.8 million income for fair value adjustments
on the outstanding warrants, compared with a
net financial expense
of €2.1 million in 2015, including a €2.4 million expense due to fair value adjustments.
Foreign currency
exchange gains (loss), net
. In 2016, we recorded a net foreign currency exchange income of €0.1 million, mainly due to
the variation of the Euro against the U.S. Dollar and the Japanese Yen, compared to an income of €0.7 million in 2015.
Income taxes
.
Income tax was an expense of €0.6 million in 2016 and €0.8 million in 2015.
Net
income
/ (
loss)
As a result of the
above, we realized a consolidated net income of €3.8 million in 2016 compared with a consolidated net loss of €1.7 million
in 2015.
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, 2017.
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)
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Net cash generated/(used) in operating activities
|
|
|
(3,058
|
)
|
|
|
1,209
|
|
|
|
1,213
|
|
Net cash generated/(used) in investing activities
|
|
|
(2,033
|
)
|
|
|
(384
|
)
|
|
|
(541
|
)
|
Net cash generated/(used) in financing activities
|
|
|
2,871
|
|
|
|
7,604
|
|
|
|
2,112
|
|
Net effect of exchange rate changes
|
|
|
235
|
|
|
|
(19
|
)
|
|
|
(347
|
)
|
Net increase/(decrease) in cash and cash equivalents
|
|
|
(1,985
|
)
|
|
|
8,410
|
|
|
|
2,436
|
|
Cash and cash equivalents at the beginning of the year
|
|
|
21,989
|
|
|
|
13,578
|
|
|
|
11,142
|
|
Cash and cash equivalents at the end of the year
|
|
|
20,004
|
|
|
|
21,989
|
|
|
|
13,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents, and short-term investments at the end of the year
|
|
|
20,004
|
|
|
|
21,989
|
|
|
|
14,578
|
|
Our cash position
as of December 31, 2017, 2016 and 2015, was €20.0 million (with no short-term treasury investments), €22.0 million (with
no short-term treasury investments) and €14.6 million (including €1.0 million of short-term treasury investments), respectively.
We experienced negative cash flows of €2.0 million in 2017 and positive cash flows of €8.4 million in 2016 and €2.4
million in 2015.
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 2015, our
positive net cash flow was due to a positive cash flow from operations and to warrant exercises for €1.1 million.
In 2017, net cash
used in operating activities was €3.1 million compared with net cash generated by operating activities of€1.2 million
in 2016 and compared with net cash generation by operating activities of €1.2 million in 2015.
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 2015, net cash
generated in operating activities reflected principally:
|
-
|
a net loss of €1.7 million;
|
|
-
|
elimination of €3.1 million of
net loss without effects on cash, including €1.0 million of depreciation and amortization
and a loss of €2.0 million due to fair value variations of financial instruments;
|
|
-
|
a increase in trade accounts receivables of €1.8 million;
|
|
-
|
a decrease in other receivables of €0.2 million;
|
|
-
|
an increase in inventories of €0.4 million;
|
|
-
|
an increase in payables of €0.5 million;
|
|
-
|
an increase in prepaid expenses of €0.1 million; and
|
|
-
|
an increase in accrued expenses and
other current liabilities of €1.3 million.
|
In 2017, net cash
used in investing activities was €2.0 million compared with net cash used of €0.4 million in investing activities in
2016 and net cash used of €0.5 thousand in 2015.
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,
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.
Net cash used in investing
activities of €0.5 million in 2015 reflected investments of €0.5 million in capitalized assets produced by the Company,
mostly for commercial demonstrations, training and RPP activity and investment of €0.2 million in property, equipment and
software, net proceeds from sales of leased-back assets of €0.1 million and net proceeds from sales of assets of €26
thousand.
In 2017, net cash
generated in financing activities was €2.9 million compared with net cash generated in financing activities of €7.6
million in 2016 and net cash generated in financing activities of €2.1 million in 2015.
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.
Net cash generated
in financing activities of €2.1 million in 2015 reflected principally the net proceeds of €1.2 million from the exercise
of stock options and warrants, but also new long-term borrowings of €0.5 million, €0.2 million of conditional advances
to finance research HECAM project, repayment of short-term and long-term borrowings and lease financing for €0.5 million
and an increase of short-term borrowings of €0.7 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, 2017, 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, 2017 (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
|
|
|
2,718
|
|
|
|
2,718
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Long-Term Debt
|
|
|
2,057
|
|
|
|
1,223
|
|
|
|
806
|
|
|
|
29
|
|
|
|
-
|
|
Capital Lease Obligations
|
|
|
783
|
|
|
|
269
|
|
|
|
497
|
|
|
|
42
|
|
|
|
5
|
|
Operating Leases
|
|
|
2,581
|
|
|
|
401
|
|
|
|
1,065
|
|
|
|
642
|
|
|
|
473
|
|
Interest
|
|
|
33
|
|
|
|
19
|
|
|
|
14
|
|
|
|
1
|
|
|
|
-
|
|
New Accounting Pronouncements
New Accounting Pronouncements Recently
Adopted
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.
Deferred tax assets have been reclassified from current assets to non-current assets for the period ended as of December 31, 2016.
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.
New Accounting Pronouncements Not Yet
Adopted
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 (ASU 2014-09), by one year. ASU 2014-09 will supersede
the revenue recognition requirements in Revenue Recognition (Topic 605) and requires entities to recognize revenue in a way that
depicts the transfer 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. ASU 2014-09 is now effective for annual reporting periods beginning
after December 15, 2017, including interim periods within that reporting period, which for the Company is January 1, 2018. Early
adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within
that reporting period. The new standard can be applied retrospectively to each prior reporting period presented or retrospectively
with the cumulative effect of the change recognized at the date of the initial application in retained earnings. The Company reviewed
the accounting pronouncement with respect to its current accounting principles and did not identify any impact from implementation.
. The impact to the Company of adopting the new revenue standard primarily relates to additional and expanded disclosures.
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 is expecting that the impact of this update on its consolidated statements will mainly
consist of leases for facilities situated in France, Japan and in the U.S. as described in Note 12.2. The Company will adopt the
new standard in fiscal 2019. The Company is currently evaluating the effect of this standard on its consolidated financial statements
and related disclosures.
In March 2017, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2017-07, “Improving
the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs”. The standard requires the
service component of pension and other postretirement benefit expense to be presented in the same statement of income lines as
other employee compensation costs, however, the other components will be presented outside of operating income. In addition, only
the service cost component will be eligible for capitalization in assets. The standard is effective starting in 2018, with early
adoption permitted. Retrospective application is required for the guidance on the statement of income presentation. Prospective
application is required for the guidance on the cost capitalization in assets. The Company does not believe this standard will
materially impact our consolidated financial statements.
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.
In August 2016, the
FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
”
ASU 2016-15 identifies how certain cash receipts and cash payments are presented and classified in the Statement of Cash Flows
under Topic 230. ASU 2016-15 is effective for the Company for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. ASU 2016-15 should be applied retrospectively and early adoption is permitted, including adoption in
an interim period. The Company does not believe this standard will materially impact 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
.
In
2009, the Company reviewed the presentation of its research tax credit
and elected to change for the preferred classification
as permitted under ASC 250-10.
The research tax credit
amounted to €504 thousand in 2017, €511 thousand in 2016 and
€448 thousand in 2015 and was classified as a reduction of research and development expenses.
Off-Balance Sheet Arrangements
At December 31,
2017, we had no off-balance sheet arrangements other than those specified in Notes 2 and 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 3, 2018. 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.
Name
|
|
Position
|
|
|
|
Marc Oczachowski
|
|
Chief Executive Officer of EDAP TMS S.A. and Member of the Board of Directors
|
Age: 48
|
|
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. In 2012, 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: 42
|
|
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: 82
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: 76
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: 70
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: 68
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, FEops NV and Embolization Prevention Technologies, 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: 48
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 2017 was approximately €590 thousand including performance bonuses of €57
thousand and benefits in kind of €54 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 2017. 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 quarterly and 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,
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
|
As of December 31,
2015, we employed 165 individuals on a full-time basis, as follows:
|
Sales &
Marketing
|
Manufac-
turing
|
Service
|
Research
& Dvpt
|
Regula-
tory
|
Clinical
Affairs
|
Adminis-
trative
|
Total
|
France
|
19
|
28
|
22
|
14
|
3
|
6
|
11
|
103
|
Italy
|
3
|
0
|
0
|
0
|
0
|
0
|
2
|
5
|
Germany
|
4
|
0
|
2
|
0
|
0
|
0
|
2
|
8
|
Japan
|
18
|
0
|
11
|
0
|
1
|
0
|
3
|
33
|
Malaysia
|
2
|
0
|
2
|
0
|
0
|
0
|
2
|
6
|
South Korea
|
1
|
0
|
0
|
0
|
0
|
0
|
1
|
2
|
USA
|
3
|
0
|
1
|
0
|
0
|
1
|
3
|
8
|
Total
|
50
|
28
|
38
|
14
|
4
|
7
|
24
|
165
|
Management considers
labor relations to be good. Employee benefits are in line with those specified by applicable government regulations.
Share Ownership
As of April 2, 2018,
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 2, 2018,
the Board of Directors and the Senior Executive Officers of the Company held a total of 60,623 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 2, 2018,
Senior Executive Officers held a total of 20,001 Shares and an aggregate of 505,000 options to purchase or to subscribe a total
of 505,000 ordinary shares, with a weighted average exercise price of €2.64 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 and 55,000 expire on April 25, 2027.
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 3, 2018,
we had sponsored four stock purchase and subscription option plans open to employees of EDAP TMS group.
On December 31, 2017,
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
|
|
|
525,000
|
|
April 25, 2027
|
|
|
215,000
|
|
As of December 31,
2017, a summary of stock option activity to purchase or to subscribe to shares under these plans is as follows:
|
|
2017
|
|
2016
|
|
2015
|
|
|
Options
|
|
Weighted
average
exercise
price
(€)
|
|
Options
|
|
Weighted
average
exercise
price
(€)
|
|
Options
|
|
Weighted
average
exercise
price
(€)
|
Outstanding on January 1,
|
|
|
1,427,438
|
|
|
|
2.94
|
|
|
|
917,188
|
|
|
|
2.79
|
|
|
|
1,095,850
|
|
|
|
2.76
|
|
Granted
|
|
|
260,000
|
|
|
|
2.39
|
|
|
|
575,000
|
|
|
|
3.22
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(60,000
|
)
|
|
|
1.91
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(72,412
|
)
|
|
|
2.13
|
|
Forfeited
|
|
|
(134,750
|
)
|
|
|
3.11
|
|
|
|
(64,750
|
)
|
|
|
3.30
|
|
|
|
(106,250
|
)
|
|
|
2.88
|
|
Expired
|
|
|
(285,088
|
)
|
|
|
3.99
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding on December 31,
|
|
|
1,207,600
|
|
|
|
2.61
|
|
|
|
1,427,438
|
|
|
|
2.94
|
|
|
|
917,188
|
|
|
|
2.79
|
|
Exercisable on December 31,
|
|
|
598,850
|
|
|
|
2.29
|
|
|
|
774,938
|
|
|
|
2.87
|
|
|
|
724,688
|
|
|
|
3.03
|
|
Share purchase options available for grant on December 31
|
|
|
250,428
|
|
|
|
|
|
|
|
243,428
|
|
|
|
|
|
|
|
232,428
|
|
|
|
|
|
The following table
summarizes information about options to purchase existing shares held by the Company, or to subscribe to new Shares, at December
31, 2017:
|
|
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
|
|
|
525,000
|
|
|
|
8.3
|
|
|
|
3.22
|
|
|
|
-
|
|
|
|
131,250
|
|
|
|
3,22
|
|
|
|
-
|
|
2.39
|
|
|
215,000
|
|
|
|
9.3
|
|
|
|
2.39
|
|
|
|
646
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
2.38
|
|
|
120,100
|
|
|
|
2.5
|
|
|
|
2.38
|
|
|
|
1,562
|
|
|
|
120,100
|
|
|
|
2.38
|
|
|
|
1,562
|
|
1.91
|
|
|
297,500
|
|
|
|
5.0
|
|
|
|
1.91
|
|
|
|
143,694
|
|
|
|
297,5000
|
|
|
|
1.91
|
|
|
|
143,694
|
|
1.88
|
|
|
50,000
|
|
|
|
2.5
|
|
|
|
1.88
|
|
|
|
25,650
|
|
|
|
50,000
|
|
|
|
1.88
|
|
|
|
25,650
|
|
1.88 to 3.22
|
|
|
1,207,600
|
|
|
|
7.2
|
|
|
|
2.61
|
|
|
|
171,553
|
|
|
|
598,850
|
|
|
|
2.29
|
|
|
|
170,907
|
|
|
(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 $ at December 31, 2017, 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, 2017.
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 2, 2018, 29,368,394 shares were issued, including 28,997,866 outstanding and 370,528 treasury shares. At March 30, 2018,
there were 29,342,294 ADSs, each representing one Share, all of which were held of record by 18 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, in the future, transactions with this company will no longer be 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, €62 thousand
and €78 thousand, for 2017, 2016 and 2015 respectively. As of December 31, 2017, the Company recorded no payables to Dae
You. As of December 31, 2016, payables to Dae You amounted to €9 thousand.
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, €483 thousand and €408 thousand, in 2017, 2016 and 2015, respectively. As of December
31, 2017, the Company recorded no receivables (‘Net trade accounts and notes receivable’). As of December 31, 2016,
receivables (‘Net trade accounts and notes receivable’) amounted to €325 thousand.
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,
2017, total consolidated export net sales, which we define as sales made outside of mainland France, were €25.1 million,
which represented 70.4% 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 and 2017 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.
On August 4, 2014,
Mark Eaton filed a purported class action lawsuit in the United States District Court for the Southern District of New York, asserting
that the Company, Marc Oczachowski, and Eric Soyer (our former Chief Financial Officer) violated federal securities laws Section
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by issuing materially false and misleading
statements about the Company’s business operations and prospects particularly concerning the Company’s Ablatherm-HIFU
PMA file under review by the FDA that caused the price of the Company’s American Depository Receipts to be artificially
inflated during the period from February 1, 2013 to July 30, 2014. On August 6, 2014, Ronnie Haddad filed a second purported class
action lawsuit, also in the United States District Court for the Southern District of New York, asserting similar claims.
On October 24, 2014,
the related cases were consolidated by the United States District Court for the Southern District of New York and a lead plaintiff
and lead counsel were appointed.
On December 22,
2014, the lead plaintiff filed an amended complaint that no longer included Mr. Soyer. The amended complaint alleges that the
Company and Mr. Oczachowski breached their obligations under the Exchange Act in various ways, including by misrepresenting and
failing to disclose allegedly material information about the safety and efficacy of treatment with Ablatherm-HIFU, and the Company’s
interactions with the FDA. The complaint seeks unspecified damages, interest, costs, and fees, including attorneys’ and
experts’ fees.
On December 31,
2014, we accrued €206 thousand as legal costs to be incurred by the Company in relation to this litigation.
On February 20,
2015, the defendants, including the Company, filed a motion to dismiss the action.
On September 14,
2015, we received a confirmation of the dismissal of our class action. On November 11, 2015, we announced the appeals period had
concluded with no notice of appeal had been filed by the plaintiffs. The remaining accrued amount was reversed as of December
31, 2015.
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 2013 through 2016, 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 23,
2018
N/A
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.’’
Trading Market
The following tables
set forth, for the years 2013 through 2017, the reported high and low sales prices of the ADSs on NASDAQ.
|
|
NASDAQ
|
|
|
High
|
|
Low
|
|
|
$
|
2017
|
|
|
3.85
|
|
|
|
2.25
|
|
2016
|
|
|
4.80
|
|
|
|
2.43
|
|
2015
|
|
|
6.57
|
|
|
|
2.26
|
|
2014
|
|
|
6.05
|
|
|
|
1.15
|
|
2013
|
|
|
4.94
|
|
|
|
1.98
|
|
|
|
|
|
|
|
|
|
|
The following tables
set forth, for the years 2016 and 2017, and through March 30, 2018, the reported high and low sales prices of the ADSs on NASDAQ
for each full financial quarter:
|
|
NASDAQ
|
|
|
High
|
|
Low
|
|
|
$
|
2018:
|
|
|
|
|
|
|
|
|
Through March 30, 2018
|
|
|
2.86
|
|
|
|
2.07
|
|
2017:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
3.62
|
|
|
|
2.25
|
|
Second Quarter
|
|
|
3.85
|
|
|
|
2.35
|
|
Third Quarter
|
|
|
3.49
|
|
|
|
2.51
|
|
Fourth Quarter
|
|
|
3.50
|
|
|
|
2.60
|
|
2016:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
4.74
|
|
|
|
2.89
|
|
Second Quarter
|
|
|
4.80
|
|
|
|
3.00
|
|
Third Quarter
|
|
|
3.42
|
|
|
|
2.43
|
|
Fourth Quarter
|
|
|
3.60
|
|
|
|
2.59
|
|
The following table
sets forth, for the most recent six months (from September 2017 through March 30, 2018), the reported high and low sale prices
of the ADSs on NASDAQ for each month:
|
|
NASDAQ
|
|
|
High
|
|
Low
|
2018:
|
|
$
|
|
|
|
|
|
January
|
|
|
2.88
|
|
|
|
2.55
|
|
February
|
|
|
2.86
|
|
|
|
2.55
|
|
March (through March 30, 2018)
|
|
|
2.47
|
|
|
|
2.07
|
|
|
|
|
|
|
|
|
|
|
2017:
|
|
|
|
|
|
|
|
|
September
|
|
|
3.25
|
|
|
|
2.86
|
|
October
|
|
|
3.50
|
|
|
|
2.73
|
|
November
|
|
|
3.18
|
|
|
|
2.90
|
|
December
|
|
|
3.14
|
|
|
|
2.60
|
|
|
|
|
|
|
|
|
|
|
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 increases in share capital related to the issuance of additional shares following the exercise
of warrants and options in the course of 2017
.
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
On April 14, 2016,
pursuant to a securities purchase agreement dated April 7, 2016, we issued Investor Warrants which will expire on October 14,
2018 (the “April 2016 Warrants”). The April 2016 Warrants are exercisable, from October 14, 2016, at the option of
the holder, upon the surrender of the Investor Warrants to us and the payment in cash of the exercise price of $4.50 per ordinary
share in the form of ADSs. With respect to the April 2016 Warrants, the exercise price is subject to appropriate adjustment in
the event of stock dividends, stock splits, reorganizations or similar events affecting our ordinary shares. The holders of the
April 2016 Warrants are entitled to 20 days’ notice before the record date for certain distributions to holders of our ordinary
shares. If certain “fundamental transactions” occur, such as a merger, consolidation, sale of substantially all of
our assets, tender offer or exchange offer with respect to our ordinary shares or reclassification of our ordinary shares, the
holders of the April 2016 Warrants will be entitled to receive thereafter in lieu of our ordinary shares, the consideration (if
different from ordinary shares) that the holders of the April 2016 Warrants would have been entitled to receive upon the occurrence
of the fundamental transaction as if the April 2016 Warrants had been exercised immediately before the fundamental transaction.
If any holder of ordinary shares is given a choice of consideration to be received in the fundamental transaction, then the holders
of the April 2016 Warrants shall be given the same choice upon the exercise of the April 2016 Warrants following the fundamental
transaction. A copy of the form of Investor Warrant was furnished to the SEC on our report on Form 6-K dated April 14, 2016. The
foregoing description is qualified in its entirety by reference to the full text of the Form 6-K.
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, 2018.
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 new 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 General Tax
Code 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 French General Tax Code (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 unless:
-
the holders have 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;
or
-
the holders are established or domiciled in a Non-Cooperative State, in which case they will be subject to a 75% tax on
your capital gain.
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.
Transfers of Securities
issued by a listed French company such as EDAP will not be subject to French registration or stamp duty if such transfers are
not evidenced by a written agreement (acte). However, if the transfer is evidenced by a written agreement executed either in France
or outside France, the transfer of Securities will be subject to a registration duty of 0.1% assessed on the sale price.
Pursuant to Article
235 ter ZD of the French General Tax Code, purchases of shares or ADS are subject to a 0.3% French tax on financial transactions
provided that the market capitalization of the issuer exceeds €1.0 billion as of December 1 of the year preceding the taxation
year. The list of issuers whose securities are subject to the tax as at January 1, 2018, has been published in the official guidelines
of the French tax authorities on December 21, 2017 (BOI-ANNX-000467-20171221). EDAP was not included in such list as its market
capitalization did not exceed €1.0 billion as at December 1, 2017. Therefore, purchases of EDAP’s securities are not
subject to the French tax on financial transactions.
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 non-cooperative States or territories, as defined in Article 238-0 A of the French General
Tax Code, irrespective of the tax residence of the beneficiary of the dividends if the dividends are received in such States or
territories. Eligible U.S. holders providing evidence of the entitlement to Treaty benefits with respect to the dividend (art.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 and who receive dividends in non-cooperative States or territories, should not be subject
to this 75% withholding tax rate.
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 French
official administrative guidelines (BOFIP 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:
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the
U.S. holder is beneficially entitled to the dividend;
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the U.S. holder is a U.S. resident
within the meaning of the Treaty;
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the dividend is not derived from
a permanent establishment or a fixed base that the U.S. holder has in France; and
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the dividend received is or will
be reported to the tax authorities in the United States.
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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. As of December 31, 2017, 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 2017, approximately 77% of our total costs of sales and operating expenses were denominated in euro.
During the same period, approximately 55% 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, 2017 relative to the U.S. dollar and the Japanese yen would have resulted in an increase
in income before taxes and minority interests of approximately €93,000 for the year ended December 31, 2017, compared to
a decrease of approximately €9,000 for the year ended December 31, 2016. A uniform 10% decrease in the value of the euro
as of December 31, 2017 relative to the U.S. dollar and the Japanese yen would have resulted in a decrease in income before taxes
and minority interests of approximately €102,000 for the year ended December 31, 2017 as compared to an increase of approximately
€10,000 for the year ended December 31, 2016. 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, 2017 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 €40 thousand, €0.1 million and €0.2 million of our outstanding indebtedness at December 31, 2017,
2016 and 2015, respectively, were denominated in Japanese yen. Approximately €0.8 million, €3.9 million and €4.4
million2017 of our outstanding indebtedness at December 31, 2017, 2016 and 2015, respectively, were denominated in U.S. dollars.
In addition, we had approximately €2.1 million, €2.8 million and €2.1 million of cash denominated in U.S. dollars
at December 31, 2017, 2016 and 2015, respectively, and €3.9 million, €1.5million and €0.9 million of cash denominated
in Japanese yen at December 31, 2017, 2016 and 2015, respectively.
Equity Price Risk
In
connection with the funds we raised in 2013 and 2016, we have issued a certain number of Investor and Placement Agent Warrants
(see Item 5. “
Operating and Financial Review and Prospects—Warrants”)
.
We recorded such Warrants as a liability at fair value and we adjust the carrying value of the Warrants to their estimated fair
value at each reporting date. The fair value increases (decreases) are recorded as a financial income (loss) in our consolidated
Statement of Income. We use a Black-Scholes option pricing model to adjust the fair value of the Warrants. A 10% increase in our
stock price from its December 31, 2017 closing price of $2.87 per ADR would result in an increase of €0.4 million in the
fair value of the Warrants with a corresponding financial loss in our Statement of Income. See Note 24 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. With respect to the
outstanding 2013 and 2016 warrants, fees for delivery of ADSs directly linked to a warrant exercise or the payment of quarterly
interest shares are supported by the Company.
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:
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For:
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$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
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- Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property,
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- Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates.
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$0.2 (or less) per ADS
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- Any cash distribution to ADS registered holders.
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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
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- Distribution of securities distributed to holders of deposited securities which are distributed by the Depositary to
ADS registered holders.
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Registration or transfer fees
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- 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
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Expenses of the Depositary
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- Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)
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- Converting foreign currency to U.S. dollars
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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
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- As necessary
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Any charges incurred by the Depositary or its agents for servicing the deposited securities
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- As necessary
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Fees Payable
to the Company by the Depositary
From January 1,
2017 to March 16, 2018, the following amounts were paid by the Depositary to the Company: $90,000.00 and $9,927.13 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).
Certain
prior year comparative information in the financial statements has been revised to conform to the current year presentation. The
revision relates to the reclassification of conditional advance cash flows from operating activities (“net increase (decrease)
in operating assets and liabilities”) to financing activities (“proceeds from long term borrowings, net of financing
cost” and “repayment of long-term borrowings”). This revision results in (1) an increase in net cash generated
by operating activities and a decrease in net cash generated by financing activities of € 90k in 2016 and (2) a decrease
in net cash generated by operating activities and an increase in net cash generated by financing activities of € 125k in
2015. The Company has determined that this revision, is immaterial to the previously reported financial statements and does not
impact any of the key financial indicators.
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, which include
EDAP TMS France SAS, EDAP Technomed Inc., Edap Technomed Sdn Bhd, Edap Technomed Italia S.R.L, EDAP Technomed Co. Ltd. and EDAP
TMS Gmbh. Edap Technomed Sdn Bhd was incorporated in early 1997. Edap Technomed Co. Ltd. was created in late 1996. EDAP TMS Gmbh
was created in July 2006. EDAP SA, a subsidiary incorporating HIFU activities merged all of its activity into EDAP TMS France
SAS in 2008. All intercompany transactions and balances are eliminated in consolidation.
1-5 Revenue
recognition
Sales of goods:
For medical device
sales with no significant remaining vendor obligation, payments contingent upon customer financing, acceptance criteria that can
be subjectively interpreted by the customer, or tied to the use of the device, revenue is recognized when evidence of an arrangement
exists, title to the device passes (depending on terms, either upon shipment or delivery), and the customer has the intent and
ability to pay in accordance with contract payment terms that are fixed or determinable. For sales in which payment is contingent
upon customer financing, acceptance criteria can be subjectively interpreted by the customer, or payment depends on use of the
device, revenue is recognized when the contingency is resolved. The Company provides training and provides a minimum of one-year
warranty upon installation. The Company accrues for the warranty costs at the time of sale. Revenues related to disposables are
recognized when goods are delivered.
Our device sale arrangements
may contain multiple elements, including device(s), consumables and service. We generally deliver all the devices within days
of entering into the system sale arrangement, and consumables and service over the period agreed in the arrangement. Each of these
elements is a separate unit of accounting. Devices, consumables and service are also sold on a stand-alone basis.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
For multiple-element
arrangements, revenue is allocated to each unit of accounting based on their relative selling prices. Relative selling prices
are based first on vendor specific objective evidence of fair value (“VSOE”), then on third-party evidence of selling
price (“TPE”) when VSOE does not exist, and then on management's best estimate of the selling price (“ESP”)
when VSOE and TPE do not exist.
Consumables revenues
are deferred until delivery and services revenues are deferred until execution.
Sales of RPPs and
leases:
Revenues related to
the sale of HIFU 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.
Sales of spare parts
and services:
Revenues related to
spare parts are recognized when goods are delivered. Maintenance contracts rarely exceed one year and are recognized on a straight
line basis. Billings or cash receipts in advance of services due under maintenance contracts are recorded as deferred revenue.
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
The Company recognizes
revenue from the shipping and handling of its products as a component of revenue. 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 receivables also include receivables factored for which the Company is supporting the collection
risk.
1-10 Inventories
Inventories are valued
at the lower of cost (manufacturing cost, which is principally comprised of components and labor costs for our own manufactured
products, or purchase price for urology products we distribute), or on net realizable value. 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.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
1-11 Property
and equipment
Property and equipment
is stated at historical cost. Depreciation and amortization of property and equipment are calculated using the straight-line method
over the estimated useful life of the related assets, as follows:
Leasehold improvements (in years or lease term if
shorter)
|
|
|
10
|
|
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.
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
|
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
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 €316
thousand, €319 thousand and €354 thousand for the years ended December 31, 2017, 2016 and 2015, 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.
As of January 1, 2007,
the Company adopted FIN48 (now ASC 740) “Accounting for uncertainty in income tax”. 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 operating
expenses
.
The research tax credit
amounted to €504 thousand, €511 thousand and
€448
thousand for the years ended December 31 2017, 2016 and 2015, respectively.
1-18 Advertising
costs
Advertising costs
are recorded as an expense in the period in which they are incurred. Advertising costs amounted to €672 thousand, €744
thousand and €461 thousand for the years ended December 31, 2017, 2016 and 2015, respectively.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
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
exchange rate as follows:
|
•
|
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 Income Statement
Aggregate foreign
currency transactions gains and losses are disclosed in a single caption in the income statement 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.
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 income statement.
1-22 Employee
stock option plans
At December 31, 2017,
the Company had four stock-based employee compensation plans. The Company adopted ASC 718, “Share-Based Payment”,
effective January 1, 2006. ASC 718 requires the recognition of fair value of stock compensation as an expense in the calculation
of net income (loss).
On May 22, 2007, the
shareholders of EDAP TMS S.A. 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.
Conforming to this
stock option plan, on June 25, 2010, the Board of Directors granted the remaining 95,912 options to subscribe to new Shares to
certain employees of EDAP TMS. The exercise price was fixed at €1.88 per share. Options were to begin vesting one year after
the date of grant and will be fully vested as of June 25, 2014 (i.e., four years after the date of grant). Shares acquired pursuant
to the options cannot be sold prior to four years from the date of grant. The options expire on June 25, 2020 (i.e., ten years
after the date of grant) or when employment with the Company ceases, whichever occurs earlier. At June 25, 2010 the total fair
value of the options granted under this plan was €143 thousand. This non-cash financial charge will be recognized in the
Company’s operating expenses over a period of 48 months (using the graded vesting method). There was no impact on 2015,
2016 and 2017 operating expenses, in accordance with ASC 718. . Under this plan, 50,000 options are still in force on December
31, 2017.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
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. Conforming to this stock option plan, on June 25, 2010, the Board of Directors granted 229,100 options
to purchase existing Shares to certain employees of EDAP TMS. The exercise price was fixed at €2.38 per share. Options were
to begin vesting one year after the date of grant and will be fully vested as of June 25, 2014 (i.e., four years after the date
of grant). Shares acquired pursuant to the options cannot be sold prior to four years from the date of grant. The options expire
on June 25, 2020 (i.e., ten years after the date of grant) or when employment with the Company ceases, whichever occurs earlier.
At June 24, 2010 the total fair value of the options granted under this plan was €328 thousand. This non-cash financial
charge will be recognized in the Company’s operating expenses over a period of 48 months (using the graded vesting method).
There was no impact on 2015, 2016 and 2017 operating expenses, in accordance with ASC 718. Under this plan, 120,100 options are
still in force on December 31, 2017.
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. Conforming to this stock option plan, the Board of Directors granted 500,000 options
to subscribe Shares to certain employees of EDAP TMS on January 18, 2013. The exercise price was fixed at €1.91 per share.
Options were to begin vesting one year after the date of grant and all options will be fully vested as of January 18, 2017 (i.e.,
four years after the date of grant). Shares acquired pursuant to the options cannot be sold prior to four years from the date
of grant. The options expire on January 18, 2023 (i.e., ten years after the date of grant) or when employment with the Company
ceases, whichever occurs earlier. At December 31, 2013 the total fair value of the options granted under this plan was €660
thousand. This non-cash financial charge has been recognized in the Company’s operating expenses over a period of 48 months
(using the graded vesting method). The impact on operating income, in accordance with ASC 718, was €66 thousand, €29
thousand and €2 thousand, in 2015, 2016 and 2017, respectively. Under this plan, 297,500 options are still in force on December
31, 2017.
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. Conforming to this stock option plan, the Board of Directors granted 575,000
options to subscribe Shares to certain employees of EDAP TMS on April 26, 2016. The exercise price was fixed at €3.22 per
share. Options were to begin vesting one year after the date of grant and all options will be fully vested as of April 26, 2020
(i.e., four years after the date of grant). Shares acquired pursuant to the options cannot be sold prior to four years from the
date of grant. The options expire on April 26, 2026 (i.e., ten years after the date of grant) or when employment with the Company
ceases, whichever occurs earlier.
At December 31, 2016
the total fair value of the options granted under this plan was €960 thousand. This non-cash financial charge has been recognized
in the Company’s operating expenses over a period of 48 months (using the graded vesting method). Conforming to this February
18, 2016 stock option plan, the Board of Directors granted 260,000 options to subscribe Shares to certain employees of EDAP TMS
on April 25, 2017. The exercise price was fixed at €2.39 per share. Options were to begin vesting one year after the date
of grant and all options will be fully vested as of April 25, 2021 (i.e., four years after the date of grant). Shares acquired
pursuant to the options cannot be sold prior to four years from the date of grant. The options expire on April 25, 2027 (i.e.,
ten years after the date of grant) or when employment with the Company ceases, whichever occurs earlier.
At December 31, 2017,
the total fair value of the options granted on April 25, 2017 under this plan was €335 thousand. This non-cash financial
charge has been recognized in the Company’s operating expenses over a period of 48 months (using the graded vesting method).
The impact on operating
income, in accordance with ASC 718, was €331 thousand and €282 thousand, in 2016 and 2017 respectively. Under this
plan, 740,000 options are still in force on December 31, 2017.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
The fair value of
each stock option granted during the year is estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions:
|
|
Year Ended December
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
(1)
|
|
Weighted-average expected life (years)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
—
|
|
Expected volatility rates
(2)
|
|
|
57.4
|
%
|
|
|
60.60
|
%
|
|
|
—
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
—
|
|
Risk-free interest rate
|
|
|
0.02
|
%
|
|
|
0.01
|
%
|
|
|
—
|
|
Weighted-average exercise price (€)
|
|
|
2.39
|
|
|
|
3.22
|
|
|
|
—
|
|
Weighted-average fair value of options granted during the year (€)
|
|
|
1.29
|
|
|
|
1.67
|
|
|
|
—
|
|
(1)
The Company did not make any grants during the year ended December 31, 2015.
(2)
Historical volatility calculated over 10 years.
1-23 Warrants
On March 28, 2012,
pursuant to a securities purchase agreement dated March 22, 2012, as amended, the Company issued new ordinary shares in the form
of ADSs to selected institutional investors in a registered direct placement (the “March 2012 Placement”) with warrants
attached (the “March 2012 Investor Warrants”). The Company also issued warrants to the placement agent, Rodman &
Renshaw LLC (the “March 2012 Placement Agent Warrants” and together with the March 2012 Investor Warrants, the “March
2012 Warrants”). The Company has accounted for the March 2012 Warrants as a liability and reflected this analysis in the
Company’s financial statements filed for the year 2012.
The Company used the
Black-Scholes pricing model to value the March 2012 Warrants at inception, with subsequent changes in fair value recorded as a
financial expense or income.
On May 28, 2013, pursuant
to a securities purchase agreement dated May 20, 2013, as amended, the Company issued 3,000,000 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 comprised the same structure and provisions than the March 2012 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 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 subsequent 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, as amended, 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 March 2012 and 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 subsequent changes in fair value recorded as a
financial expense or income.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
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 New accounting
pronouncements
New Accounting Pronouncements Recently
Adopted
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.
Deferred tax assets have been reclassified from current assets to non-current assets for the period ended as of December 31, 2016.
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.
New Accounting Pronouncements Not Yet
Adopted
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 (ASU 2014-09),
by one year. ASU 2014-09 will supersede the revenue recognition requirements in Revenue Recognition (Topic 605) and requires entities
to recognize revenue in a way that depicts the transfer 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. ASU 2014-09 is now effective
for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which for
the Company is January 1, 2018. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016,
including interim periods within that reporting period. The new standard can be applied retrospectively to each prior reporting
period presented or retrospectively with the cumulative effect of the change recognized at the date of the initial application
in retained earnings. The Company reviewed the accounting pronouncement with respect to its current accounting principles and did
not identify any impact from implementation. The impact to the Company of adopting the new revenue standard primarily relates to
additional and expanded disclosures.
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 is expecting that the impact of this update on its consolidated statements will mainly
consist of leases for facilities situated in France, Japan and in the U.S. as described in Note 12.2. The Company will adopt the
new standard in fiscal 2019. The Company is currently evaluating the effect of this standard on its consolidated financial statements
and related disclosures.
EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”)
No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit
Costs”. The standard requires the service component of pension and other postretirement benefit expense to be presented
in the same statement of income lines as other employee compensation costs, however, the other components will be presented outside
of operating income. In addition, only the service cost component will be eligible for capitalization in assets. The standard
is effective starting in 2018, with early adoption permitted. Retrospective application is required for the guidance on the statement
of income presentation. Prospective application is required for the guidance on the cost capitalization in assets. The Company
does not believe this standard will materially impact our consolidated financial statements.
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.