EDAP TMS(EDAP) - 2020 Q4 - Annual Report

PART I Key Information This section presents selected financial data for the past three fiscal years, highlighting a revenue decrease and a shift from net income to net loss, alongside significant business risks Selected Financial Data Total revenues decreased from €44.9 million in 2019 to €41.7 million in 2020, resulting in a €1.7 million net loss Selected Consolidated Financial Data (in thousands of euro, except per share data) | | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | INCOME STATEMENT DATA | | | | | Total revenues | 41,662 | 44,912 | 39,183 | | Gross profit | 18,379 | 21,002 | 16,917 | | Income (loss) from operations | 269 | 2,201 | (1,315) | | Net income (loss) | (1,704) | 1,512 | (338) | | Basic earnings (loss) per share | (0.06) | 0.05 | (0.01) | | BALANCE SHEET DATA | | | | | Total assets | 55,193 | 53,068 | 48,740 | | Total current liabilities | 21,504 | 17,493 | 16,812 | | Total shareholders' equity | 26,248 | 27,359 | 24,964 | - The company has not paid dividends for fiscal years 2016 through 2019 and does not anticipate paying any for fiscal year 2020[14] Risk Factors The company faces significant risks including pandemic disruptions, operating losses, HIFU technology dependence, regulatory hurdles, intense competition, and currency fluctuations - The COVID-19 pandemic has caused postponement and cancellation of device sales and treatments, with uncertain long-term financial impact[14][15] - The company has a history of operating losses, incurring one in 2020 despite 2019 profitability, with future profitability not guaranteed due to expected expense increases[16] - Future growth is highly dependent on HIFU technology success and securing reimbursement, such as the new Category 1 CPT code for HIFU in the U.S., effective January 2021[17][24] - The company operates in a highly regulated industry (FDA, EU MDR) and faces intense competition from better-resourced companies and alternative therapies[23][29] - Operations are vulnerable due to reliance on a single manufacturing facility in France and single suppliers for some key components[32] - The company is exposed to foreign currency risk, with 74% of 2020 costs in euros and 51% of sales in other currencies, primarily USD and JPY[43] Information on the Company EDAP TMS S.A., a French medical technology company, restructured into HIFU, ESWL, and Distribution divisions in 2020, focusing on minimally invasive urology devices and leveraging the new U.S. HIFU reimbursement code History and Development of the Company Incorporated in 1979, EDAP TMS S.A. achieved key milestones including 2018 FDA clearance for Focal One, 2020 business realignment, and a pivotal January 2021 U.S. CPT Category 1 reimbursement code for HIFU - Obtained FDA clearance for the Focal One device for focal ablation of prostate tissue in June 2018[61] - In May 2020, the company realigned into HIFU, ESWL, and Distribution segments, signing an exclusive worldwide distribution agreement with Exact Imaging for micro-ultrasound technologies[61] - A U.S. CPT Code Category 1 for HIFU became effective in January 2021, establishing physician reimbursement[62] Business Overview & Strategy The company operates through HIFU, ESWL, and Distribution divisions, developing and marketing minimally invasive medical devices, aiming to expand HIFU while maintaining other revenue streams Net Sales by Division (in millions of euros) | Division | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | HIFU | 11.4 | 14.1 | 11.0 | | ESWL | 12.9 | 14.1 | 14.5 | | Distribution | 17.3 | 16.6 | 13.7 | HIFU Division The HIFU division, with €11.4 million in 2020 sales, develops robotic devices for prostate cancer, aiming to establish HIFU as standard of care and expand applications, supported by U.S. reimbursement and global regulatory efforts - The HIFU division develops robotic devices (Ablatherm, Focal One) for minimally invasive tumor ablation, primarily for prostate cancer, generating €11.4 million in net sales in 2020[66] - The business strategy focuses on leveraging HIFU expertise to lead minimally invasive treatments, expand applications beyond prostate cancer, and accelerate U.S. adoption post-CPT code[69] - The division holds regulatory clearance in Europe (CE Marking) and the U.S. (FDA 510(k) for Ablatherm and Focal One), while pursuing approval in Japan[74][75][77] - A new U.S. Category 1 CPT code for HIFU, effective January 1, 2021, established reimbursement rates for hospitals (approx. $4,400 national average) and physicians (approx. $997)[88][89] ESWL Division The ESWL division, with €12.9 million in 2020 net sales, manufactures and services lithotripters for urinary stones, maintaining this mature market as a cash-generating activity by servicing its 731-unit installed base amidst intense price competition - The ESWL division manufactures and markets lithotripters for urinary tract stones, contributing €12.9 million to 2020 net sales[94] - The strategy is to maintain this division as a cash-generating activity by servicing the installed base of 731 lithotripters, with R&D investments in lithotripsy discontinued[95][96] - The lithotripter market is mature, primarily a replacement and service market, characterized by severe price competition[101][103] Distribution Division The Distribution division, with €17.3 million in 2020 net sales, markets complementary third-party medical products, leveraging an exclusive worldwide distribution agreement with Exact Imaging for its ExactVu micro-ultrasound system to offer a comprehensive prostate cancer solution - The Distribution division markets and services complementary third-party products, generating €17.3 million in net sales in 2020[105] - A key strategic element is the exclusive worldwide distribution agreement with Exact Imaging to market its ExactVu micro-ultrasound device alongside EDAP's Focal One, offering a complete solution for focal prostate cancer management[105] - Products distributed include Holmium lasers from Lumenis and Quanta System, the ExactVu micro-ultrasound system, and urodynamics equipment from Laborie in Japan[106][108][109] Operating and Financial Review and Prospects In 2020, total revenues fell 7.2% to €41.7 million due to COVID-19, resulting in a €1.7 million net loss, despite maintaining a €24.7 million cash position bolstered by government loans, with expected increases in R&D and sales expenses Operating Results Operating results declined significantly in 2020, with revenues falling 7.2% and a €1.7 million net loss, primarily due to the pandemic's impact on HIFU and ESWL, contrasting with 2019's 14.6% revenue growth and profitability Financial Performance Comparison (in millions of euros) | Metric | 2020 | 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | | Total Revenues | 41.7 | 44.9 | -7.2% | | Gross Profit | 18.4 | 21.0 | -12.4% | | Gross Profit Margin | 44.1% | 46.8% | -2.7 p.p. | | Income from Operations | 0.3 | 2.2 | -86.4% | | Net Income (Loss) | (1.7) | 1.5 | N/A | - 2020 vs. 2019: Revenue decreased due to 19.1% and 9.2% drops in HIFU and ESWL divisions respectively, both impacted by COVID-19, while Distribution grew 4.6%, and gross margin declined due to lower high-margin HIFU sales[138][140] - 2019 vs. 2018: Revenue grew 14.6%, driven by a 28.1% increase in the HIFU division, particularly in the U.S. market, leading to significant profitability improvement with operating income reaching €2.2 million[145][146][148] Liquidity and Capital Resources Cash and cash equivalents increased from €20.9 million in 2019 to €24.7 million in 2020, primarily driven by €3.2 million in net cash from financing activities, including €4.6 million in COVID-19 government loans, despite a decrease in operating cash flow Cash Flow Summary (in thousands of euros) | Cash Flow Activity | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 1,977 | 3,800 | 175 | | Net cash from investing activities | (2,011) | (1,532) | (1,569) | | Net cash from financing activities | 3,201 | (664) | 1,178 | | Cash and cash equivalents at end of year | 24,696 | 20,886 | 19,464 | - The positive net cash flow in 2020 was mainly due to financing activities, including €4.6 million in COVID-related assistance loans from French, Japanese, and U.S. authorities[150][152] - Net cash used in investing activities was €2.0 million in 2020, primarily for €1.3 million in capitalized assets for RPP activity and HIFU probes[152] Directors, Senior Management and Employees The company is led by CEO Marc Oczachowski and CFO François Dietsch, with a five-member board, and employed 223 people in 2020, maintaining stock option plans with 1,186,900 options outstanding - The senior executive team consists of Marc Oczachowski (CEO and Chairman) and François Dietsch (CFO)[158][159] - The Board of Directors has five members, four of whom are independent, with the roles of Chairman and CEO combined under Marc Oczachowski in March 2020[159] - Total employees increased to 223 in 2020 from 216 in 2019, with the largest number (133) based in France[176][178] Stock Option Activity Summary (as of Dec 31, 2020) | | Number of Options | Weighted Avg. Exercise Price (€) | | :--- | :--- | :--- | | Outstanding on Jan 1, 2020 | 1,273,900 | 2.78 | | Exercised | (23,750) | 2.54 | | Forfeited / Expired | (63,250) | ~2.49 | | Outstanding on Dec 31, 2020 | 1,186,900 | 2.81 | | Exercisable on Dec 31, 2020 | 970,650 | 2.73 | Major Shareholders and Related Party Transactions The company reports no beneficial owners of more than 5% of its shares as of early 2021, with all shares carrying equal voting rights, and limited related party transactions primarily involving executive guarantees for subsidiary loans and a consulting agreement - To the company's knowledge, no shareholders beneficially own more than 5% of its shares as of April 2021, and all shares have equal voting rights[184] - Related party transactions include executive personal guarantees for subsidiary loans and leases in Japan, Malaysia, and the USA, and a consulting agreement with former Chairman Mr. Philippe Chauveau, who was paid €6,000 in 2020[185] Financial Information This section confirms detailed financial statements in Item 18, notes potential legal proceedings, and states the company has not paid dividends from 2015 through 2019 and does not anticipate future payments, prioritizing reinvestment - The company has not paid dividends for fiscal years 2015 through 2019 and does not anticipate paying any for the foreseeable future[189] - The company may become involved in legal proceedings or be subject to claims arising in the ordinary course of its business[188] Additional Information This section details the company's French corporate governance, including Board roles, shareholder rights, and capital changes, and summarizes French and U.S. tax consequences for U.S. holders, noting the company's belief it was not a PFIC in 2020 - The company's corporate affairs are governed by its by-laws and French law, with the Board of Directors determining business direction, and the roles of Chairman and CEO currently combined[191][198][200] - Under French law, shareholders have preferential rights to subscribe for new shares issued for cash, which U.S. holders may not exercise without an effective registration statement[209] - For U.S. holders, dividends are generally subject to a French withholding tax, reducible from 26.5% to 15% under the U.S.-France tax treaty[232] - The company believes it was not a Passive Foreign Investment Company (PFIC) for its 2020 taxable year, though it may have been in the past, with PFIC status carrying adverse U.S. tax consequences[235][238] Quantitative and Qualitative Disclosures about Market Risk The company is primarily exposed to foreign currency exchange rate risk, with 74% of 2020 costs in euros and 51% of sales in non-euro currencies, where a 10% euro strengthening would increase income before taxes by €65,000, and no hedging instruments were outstanding - The company is exposed to foreign currency exchange rate risk due to a majority of costs in euros and significant revenue in other currencies like USD and JPY[243] - In 2020, 74% of total costs were in euros, while 51% of net sales were in non-euro currencies[243] - A uniform 10% strengthening of the euro against the USD and JPY would have increased income before taxes by approximately €65,000 for the year ended December 31, 2020[243] - As of December 31, 2020, the company had no outstanding hedging instruments[242][243] PART II Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2020, having fully remediated a 2018 material weakness related to SAP implementation through a 'Ticketing tool' and IT team strengthening - Management concluded that disclosure controls and procedures were effective as of December 31, 2020[253][254] - Management concluded that internal control over financial reporting was effective as of December 31, 2020[255] - A material weakness related to the 2018 SAP system implementation, present at 2019 year-end, was fully remediated as of December 31, 2020[254][256][258] - Remediation activities in 2020 included implementing a formal 'Ticketing tool' to strengthen IT change management and enhancing the IT team for better segregation of duties[254][258] Principal Accountant Fees and Services For fiscal year 2020, the company incurred €383,829 in fees from KPMG S.A. and €37,000 from joint-auditor Agili(3F) due to French law, with all services pre-approved by the Audit Committee Auditor Fees (in €) | Auditor | Fees for 2020 | Fees for 2019 | | :--- | :--- | :--- | | KPMG S.A. | 383,829 | 363,902 | | Agili(3F) (Joint-auditor) | 37,000 | N/A | - The appointment of a joint-auditor, Agili(3F), for fiscal year 2020 was required under French law as the company exceeded certain revenue and balance sheet thresholds[260] Corporate Governance As a NASDAQ-listed foreign private issuer, EDAP follows French corporate governance, differing from NASDAQ rules in lower shareholder meeting quorum requirements and the advisory-only role of board committees, with ultimate decision-making resting with the Board or shareholders - As a foreign private issuer, the company follows French corporate governance practices in lieu of certain NASDAQ rules[261] - The quorum requirement for shareholder meetings is 20% or 25% of shares entitled to vote, an exemption from NASDAQ's majority requirement[261] - Under French law, board committees (Audit, Compensation, Nomination) have an advisory role, with final decision-making power residing with the full Board of Directors or shareholders[262] PART III Financial Statements This section presents the company's audited consolidated financial statements for the three-year period ended December 31, 2020, prepared under U.S. GAAP, including KPMG S.A.'s unqualified opinion on both financial statements and internal controls, highlighting revenue recognition as a critical audit matter Report of Independent Registered Public Accounting Firm KPMG S.A. issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2020, identifying the evaluation of distinct performance obligations in multi-element revenue arrangements as a critical audit matter - The auditor, KPMG S.A., issued an unqualified opinion on the consolidated financial statements for the three-year period ended December 31, 2020[275] - KPMG also issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2020[276][283] - A Critical Audit Matter was identified concerning revenue recognition, specifically the identification of distinct performance obligations in complex, multi-element sales contracts for medical devices, requiring challenging and subjective judgment[278][280] Consolidated Financial Statements The consolidated financial statements show total assets of €55.2 million and total liabilities of €28.9 million as of December 31, 2020, with a €1.7 million net loss on €41.7 million revenues for 2020, and a year-end cash balance of €24.7 million Consolidated Balance Sheet Highlights (in thousands of euros) | | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | 24,696 | 20,886 | | Total current assets | 45,393 | 42,097 | | Total assets | 55,193 | 53,068 | | Total current liabilities | 21,504 | 17,493 | | Total liabilities | 28,945 | 25,710 | | Total shareholders' equity | 26,248 | 27,359 | Consolidated Statement of Income (Loss) Highlights (in thousands of euros) | | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total revenues | 41,662 | 44,912 | 39,183 | | Gross profit | 18,379 | 21,002 | 16,917 | | Income (loss) from operations | 269 | 2,201 | (1,315) | | Net income (loss) | (1,704) | 1,512 | (338) | - Segment reporting for 2020 shows an operating loss of €0.4 million for the HIFU division and operating profits of €1.1 million for both the ESWL and Distribution divisions, before unallocated corporate expenses[434]