EDAP TMS(EDAP) - 2018 Q4 - Annual Report

PART I Key Information This section presents EDAP's five-year financial summary, highlighting revenue growth, recent losses, and critical risks including HIFU reliance, regulatory hurdles, and internal control weaknesses Selected Consolidated Financial Data (in thousands of euros) | Indicator | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Income Statement Data | | | | | Total revenues | 39,183 | 35,746 | 35,611 | | Gross profit | 16,917 | 14,808 | 16,411 | | Income (loss) from operations | (1,315) | (2,027) | 392 | | Net income (loss) | (338) | (681) | 3,842 | | Balance Sheet Data (End of Period) | | | | | Total assets | 48,740 | 46,897 | 46,591 | | Total shareholders' equity | 24,964 | 25,158 | 24,451 | - The company has a history of operating losses, achieving profitability only in 2015 and 2016, with losses returning in 2017 and 2018; future profitability is uncertain as expenses are expected to increase with HIFU commercialization[22][23] - Future growth is highly dependent on the success of HIFU technology (Ablatherm, Focal One), as the traditional ESWL market is mature with declining prices[24] - Significant risks exist related to obtaining and maintaining regulatory approvals (e.g., from FDA, and under the new EU MDR) and securing reimbursement for procedures from payers like CMS and national health authorities[27][30][38] - A material weakness in internal control over financial reporting was identified as of December 31, 2018, related to a new SAP system implementation, though a previous material weakness from 2017 was remediated[84][85][90] - The company faces intense competition from manufacturers with greater resources and from alternative therapies, including Wolf, Storz, Dornier in ESWL and SonaCare Medical, Profound Medical, Insightec in HIFU[45][46] Information on the Company EDAP TMS is a medical technology company specializing in minimally invasive urology devices, operating through its HIFU division for prostate cancer treatment and UDS division for ESWL and third-party product distribution - The company operates through two divisions: HIFU (High-Intensity Focused Ultrasound) and UDS (Urology Devices and Services, including lithotripsy)[117] Divisional Net Sales (in millions of euros) | Division | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | HIFU | €11.0 | €9.5 | €13.8 | | UDS | €28.1 | €26.2 | €21.8 | - Key recent milestones include FDA 510(k) clearance for Ablatherm Fusion in October 2017 and Focal One in June 2018, both for prostate tissue ablation[114][115] - The company's manufacturing operations are consolidated at a single, FDA-approved and ISO 13485 certified facility in Vaulx-en-Velin, France[195][201] HIFU Division The HIFU division develops robotic devices for minimally invasive prostate cancer treatment, with key products like Focal One, aiming to establish HIFU as a standard of care and expand applications to other tumors - Core products include Ablatherm, Ablatherm Fusion, and Focal One, all robotic HIFU devices for treating localized prostate cancer[121][130] - The business model includes direct equipment sales and a Revenue-Per-Procedure (RPP) model, where hospitals use devices and pay per treatment[122] - Obtained CE Marking for Focal One in Europe (June 2013) and FDA 510(k) clearance in the U.S. (June 2018)[138][142] - Expanding HIFU applications beyond prostate cancer, with the HECAM project focused on developing a treatment for liver cancer, supported by a €2.4 million grant from Bpifrance[125][159] UDS Division The UDS division focuses on the mature ESWL market for urinary stones, leveraging its installed base for recurring revenue and its distribution network to market complementary third-party urology products - Primary business is manufacturing and marketing lithotripters (Sonolith i-move, Sonolith i-sys) for ESWL treatment of urinary stones[173] - The ESWL market is mature, with revenue growth driven by a large installed base (725 units serviced) generating sales of disposables and maintenance, and by the replacement market[173][188] - A key strategy is capitalizing on its established distribution network to sell third-party products, including urology lasers from Lumenis and Quanta System, and urodynamics products from Laborie[176][194] Operating and Financial Review and Prospects In fiscal year 2018, total revenues grew to €39.2 million, gross margin improved, and net loss decreased, while cash declined; the company adopted ASC 606 and faces significant currency fluctuation risks Financial Performance: 2018 vs. 2017 (in millions of euros) | Metric | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | 39.2 | 35.7 | +9.6% | | Gross Profit | 16.9 | 14.8 | +14.2% | | Gross Margin | 43.2% | 41.5% | +170 bps | | Operating Loss | (1.3) | (2.0) | Improved | | Net Loss | (0.3) | (0.7) | Improved | Financial Performance: 2017 vs. 2016 (in millions of euros) | Metric | 2017 | 2016 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | 35.7 | 35.6 | +0.3% | | Gross Profit | 14.8 | 16.4 | -9.8% | | Gross Margin | 41.5% | 46.1% | -460 bps | | Operating Income/(Loss) | (2.0) | 0.4 | Declined | | Net Income/(Loss) | (0.7) | 3.8 | Declined | - Cash and cash equivalents decreased from €20.0 million at year-end 2017 to €19.5 million at year-end 2018, with net cash from operating activities turning positive at €0.2 million in 2018 from a €3.1 million use in 2017[294][297] - The company is exposed to foreign currency risk, with approximately 74% of costs in euros and 41% of sales in other currencies, primarily USD and JPY, in 2018[250] Directors, Senior Management and Employees This section details the company's leadership, board composition, executive compensation, employee headcount, and stock option plans, noting senior management's minimal share ownership - The senior executive team consists of Marc Oczachowski (Chief Executive Officer) and François Dietsch (Chief Financial Officer)[317] Employee Headcount by Year | Year-End | Total Employees | | :--- | :--- | | 2018 | 215 | | 2017 | 200 | | 2016 | 197 | - Aggregate compensation for Senior Executive Officers and the Board of Directors was approximately €514,000 for fiscal year 2018[325] Stock Option Activity | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Outstanding Options (Year-End) | 1,347,600 | 1,207,600 | | Weighted Average Exercise Price (€) | 2.61 | 2.61 | | Exercisable Options (Year-End) | 772,600 | 598,850 | Major Shareholders and Related Party Transactions As of December 31, 2018, no shareholder beneficially owned more than 5% of shares, and related party transactions with Dae You ceased in 2017, with 2018 involving subsidiary loan guarantees - To the company's knowledge, there are no beneficial owners of more than 5% of its shares as of December 31, 2018[344] - As of April 12, 2019, there were 28,997,866 outstanding shares[335][347] - Related party transactions with Korean company Dae You ceased in October 2017; in 2018, the company provided personal loan guarantees for its Japanese and Malaysian subsidiary heads, a standard practice[348][350][351] Financial Information This section confirms financial statements are in Item 18, highlights 70% export sales in 2018, notes ordinary course legal proceedings, and states the company's policy of no future dividends - Export sales (outside of mainland France) represented 70% of total net sales in 2018, amounting to €27.6 million[353] - The company has never paid dividends and does not anticipate paying any in the foreseeable future, with any future earnings intended for reinvestment[100][358] - The company is not currently involved in any material legal proceedings outside the ordinary course of business[355] Additional Information This section details the company's corporate governance under French law, including board structure and shareholder rights, and outlines French and U.S. tax implications for security holders, including PFIC status - The company's corporate affairs are governed by its by-laws (statuts) and French law, with a five-member Board and distinct roles for the Chairman and CEO[362][365][379] - For U.S. holders, dividends are generally subject to a 30% French withholding tax, reducible to 15% (or 5% for certain corporate holders) under the U.S.-France tax treaty by following specific procedures[426][447] - U.S. holders are generally not subject to French tax on capital gains from the sale of securities, unless the gain is connected with a permanent establishment in France[454] - The company believes it was not a Passive Foreign Investment Company (PFIC) for U.S. tax purposes in 2017 and 2018, though prior years may have adverse tax consequences for certain long-term U.S. holders[464][465] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is foreign currency exchange rate fluctuations, with 74% of costs in euros and 41% of sales in other currencies in 2018, and equity price risk from warrants eliminated by year-end 2018 - The company is significantly exposed to exchange rate risk; in 2018, 74% of costs were in EUR, while a large portion of revenue was in USD and JPY[477] - A uniform 10% strengthening of the euro against USD and JPY would have increased income before taxes, while a 10% weakening would have decreased it, highlighting profit sensitivity to currency movements[478] - Equity price risk related to outstanding warrants was eliminated as all warrants expired by the end of 2018[483] PART II Controls and Procedures Management and KPMG concluded internal controls were ineffective as of December 31, 2018, due to a material weakness from a new SAP system implementation, though a 2017 weakness was remediated - Management and the independent auditor (KPMG) concluded that internal control over financial reporting was not effective as of December 31, 2018[493][500][506] - A material weakness was identified related to the implementation of a new SAP S/4HANA system, citing deficiencies in program change authorization, data migration testing, and segregation of duties[501] - The company has begun remediation efforts to address the 2018 material weakness[502] - A material weakness from 2017, related to insufficient segregation of duties in the consolidation process, was successfully remediated as of December 31, 2018[504] Corporate Governance and Other Matters This section covers corporate governance, including the audit committee financial expert, code of ethics, the change of auditor to KPMG S.A. in June 2018, and the company's adherence to French governance practices as a foreign private issuer - The Board of Directors has determined that Mr. Pierre Beysson qualifies as an audit committee financial expert[509] - The company changed its certifying accountant in June 2018, dismissing PricewaterhouseCoopers Audit and appointing KPMG S.A.[519][522] Principal Accountant Fees (in euros) | Nature of the Fees | Fees for 2018 (KPMG) | Fees for 2017 (PwC) | | :--- | :--- | :--- | | Audit fees | 398,177 | 329,000 | | Audit-related fees | 19,700 | - | | Total | 417,877 | 329,000 | - As a foreign private issuer, the company is exempt from and follows French law instead of certain NASDAQ corporate governance rules, such as shareholder quorum requirements[524][525] PART III Financial Statements The consolidated financial statements, prepared under U.S. GAAP and audited by KPMG, show €48.7 million in total assets and a €0.3 million net loss in 2018, with cash from operations turning positive and ASC 606 adopted Consolidated Balance Sheet Highlights (in thousands of euros) | Account | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Cash and cash equivalents | 19,464 | 20,004 | | Total current assets | 40,376 | 39,574 | | Total assets | 48,740 | 46,897 | | Total current liabilities | 16,812 | 16,134 | | Total liabilities | 23,776 | 21,739 | | Total shareholders' equity | 24,964 | 25,158 | Consolidated Statement of Income (Loss) Highlights (in thousands of euros) | Account | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total revenues | 39,183 | 35,746 | 35,611 | | Gross profit | 16,917 | 14,808 | 16,411 | | Income (loss) from operations | (1,315) | (2,027) | 392 | | Net income (loss) | (338) | (681) | 3,842 | | Diluted EPS (€) | (0.01) | (0.02) | 0.13 | Consolidated Statement of Cash Flows Highlights (in thousands of euros) | Account | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 175 | (3,059) | 1,209 | | Net cash used in investing activities | (1,569) | (2,032) | (384) | | Net cash from financing activities | 1,178 | 2,871 | 7,604 | | Net (decrease) increase in cash | (539) | (1,985) | 8,410 | - The company adopted ASC Topic 606 (Revenue from Contracts with Customers) on January 1, 2018, using the cumulative effect method, with no material impact on opening equity or 2018 revenue[656][657][659]