Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2018

Nature of Operations [Policy Text Block]

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.

Basis of Accounting, Policy [Policy Text Block]

Basis of preparation

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP).

With the exception of the change in the Company’s Revenue Recognition Policy as a result of the adoption of ASC

606,

there have been

changes to the accounting policies for the fiscal year ended

December

31,

2018,

that are of significance, or potential significance, to the Company.

Use of Estimates, Policy [Policy Text Block]

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.

Consolidation, Policy [Policy Text Block]

Consolidation

The accompanying consolidated financial statements include the accounts of EDAP TMS S.A. and all its domestic and foreign owned subsidiaries.

Revenue Recognition, Policy [Policy Text Block]

Revenue recognition

The Company adopted ASC Topic

606,

Revenue from Contracts with Customers

, on

January 1, 2018.

The Company’s revenue consists of:

- Sales of goods (devices and consumables), where invoicing takes place upon delivery.

- Revenue-per-Procedures (“RPP”) and leases: they comprise (i) revenues on a per treatment basis which are invoiced after each treatment, or in advance, or on a periodic basis, (ii) leases of devices, which are generally invoiced on a monthly or quarterly basis, and (iii) lease components arising from multiple-element arrangements, where specific sales terms are negotiated in accordance with each customer’s individual requirements and which are generally invoiced based on contract terms,

- Sales of spare parts and services (maintenance, upgrades, mobility and others). Spare parts are invoiced when delivered. Regarding services, invoicing is performed either on a subscription basis (in advance or at the end of the period) or when performed.

The Company invoices its customers based on the billing schedules in its sales arrangements. Payments are generally due between

one

three

months from date of invoice.

The Company accounts for a contract with a customer when there is a legally enforceable contract between the Company and its customer, the rights of the goods or services and their payment terms can be identified, the contract has commercial substance, collectability of the contract consideration is probable, it is approved and the parties are committed to their obligations.

Our sale arrangements

may

contain multiple elements, including device(s), consumables and services. For these multiple-element arrangements, the Company accounts for individual goods and services as separate performance obligations: (i) if they are a distinct good or service that is separately identifiable from other items in the multiple-element arrangement; and (ii) if a customer can benefit from the good or service on its own or with other resources that are readily available to the customer. The Company’s sale arrangements

may

include a combination of the following performance obligations: device(s), consumables, leases and services (such as, but

not

limited to, warranty extension).

For multiple-element arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which the Company separately sells the goods or services. If a standalone selling price is

not

directly observable, then the Company estimates the standalone selling price considering market conditions and entity-specific factors including, but

not

limited to, features and functionality of the goods and services, geographies, and type of customer. The Company regularly reviews standalone selling prices and updates these estimates as necessary.

The Company recognizes revenue when the performance obligations are satisfied by transferring control over the good or service to a customer.

The Company’s revenue consists of the following:

Sales of goods:

Sales of goods are and have historically been comprised of net sales of medical devices (ESWL lithotripters and HIFU devices) and net sales of disposables (mostly Ablapaks and Focalpaks in the HIFU division and electrodes in the UDS division). Sales of goods also includes products such as urology laser and urodynamics devices distributed through our agents and

third

-party distributors.

For devices and disposables, revenue is recognized when the Company transfers control to the customer (i.e. when the customer has the ability to direct the use of, and obtain substantially all of the remaining benefit from, the device or disposables), which is generally at the point of delivery or installation, depending on the terms of the arrangement (i.e. when the customer can use the good to provide services or sell or exchange the good), and based on contractual incoterms.

The Company’s sales arrangements do

not

provide a right of return. The goods are generally covered by a period of

one

two

years standard warranty upon installation. The Company also provides training associated with the sales of goods; such training-related costs are immaterial in the context of the contract with the customer and do

not

constitute a distinct performance obligation.

Sales of RPPs and leases:

Sales of RPP and leases include the revenues from the sale of treatment procedures and from the leasing of machines. We provide machines to clinics and hospitals for free for a limited period, rather than selling the devices. These hospitals and clinics perform treatments using the devices and usually pay us based on the number of individual treatments provided.

Revenues related to the sale of treatments invoiced on a ‘‘Revenue-Per-Procedure’’ (‘‘RPP’’) basis are recognized when the treatment procedure has been completed. Revenues from devices leased to customers under operating leases are recognized on a straight-line basis.

Regarding multiple-element arrangements with a lease component, a portion of the contract is allocated to the lease component on the basis of observable market prices applied by the Company for similar devices under operating leases. The lease component is recognized on a straight line basis over the contractual period. Other components under the contract are recognized in accordance with their nature.

Sales of spare parts and services:

Revenues related to spare parts are recognized when spare parts are delivered to distributors who perform their own maintenance services. Spare parts used in the performance of EDAP’s own maintenance and repair services are generally

not

recognized separately, unless specified in the contract.

Revenues related to Services mainly consist of maintenance contracts which rarely exceed

one

year and are recognized on a straight line basis over the term of the service period as the customer benefits from the service throughout the service contract period. For services rendered when

maintenance contract is in place or for services

not

included in the scope of a maintenance contract, revenues are recorded when services are performed.

The Company recognizes revenue for extended warranties included in the multiple-element arrangements as a separate performance obligation in Sales of services on a straight-line basis over the extended warranty period. In the majority of countries in which the Company operates, the statutory warranty period is

one

two

years and the extended warranty covers periods beyond this statutory period. Standard warranties do

not

constitute a separate performance obligation. The Company accrues for the warranty costs at the time of sale of the device through the multiple-element arrangement.

Agents and distributors:

As part of its sale process in countries other than continental France, when the Company does

not

have a local subsidiary, sales of goods to end-customers are performed through agent and distributors. Such agent and distributors are primarily responsible for the sales’ process, bear the inventory risk, and are free to determine the sale prices. Sales of goods to agents and distributors are recognized at the time of the sale to the related agent or distributor, based on contractual incoterms.

Deferred revenue:

Deferred revenue for the periods presented primarily relates to service contracts where the service fees are billed up-front, generally quarterly or annually, prior to those services having been performed, and consists primarily of billing or cash receipts in advance of services due under maintenance contracts or extended warranty contracts. The associated deferred revenue is generally recognized ratably over the service period.

Disaggregation of revenue:

Disaggregation by primary geographical market, and timing of revenue recognition is reported in Note

17.

Contract Balances:

Details on contract liabilities are reported on Note

10.

The Company applies the practical expedient in paragraph

606

and does

not

disclose information about remaining performance obligations that have original expected durations of

one

year or less. This relates mainly to maintenance services.

Cost of Sales, Policy [Policy Text Block]

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.

Revenue from Contract with Customer, Shipping and Handling Costs, Policy [Policy Text Block]

Shipping and handling costs

Shipping and handling costs are

not

considered as performance obligations. Shipping and handling costs are recorded as a component of cost of sales.

Cash and Cash Equivalents, Policy [Policy Text Block]

Cash equivalents and short term investments

Cash equivalents are cash investments which are highly liquid and have initial maturities of

days or less.

Cash investments with a maturity higher than

days are considered as short-term investments.

Receivables, Policy [Policy Text Block]

Accounts Receivables

Accounts receivables are stated at cost net of allowances for doubtful accounts. The Company makes judgments as to its ability to collect outstanding receivables and provides allowances for the portion of receivables when collection becomes doubtful. Provision is made based upon a specific review of all significant outstanding invoices. These estimates are based on our bad debt write-off experience, analysis of credit information, specific identification of probable bad debt based on our collection efforts, aging of accounts receivables and other known factors. Accounts receivable also include factored receivables for which the Company is bearing the collection risk.

Inventory, Policy [Policy Text Block]

Inventories

Inventories are valued at the lower of cost and net realizable value. Cost is either the manufacturing cost, which is principally comprised of components and labor costs for our own manufactured products, or purchase price for urology products we distribute. Cost is determined on a

first

-in,

first

-out basis for components and spare parts and by specific identification for finished goods (medical devices). The Company establishes reserves for inventory estimated to be obsolete, unmarketable or slow moving,

first

based on a detailed comparison between quantity in inventory and historical consumption and then based on case-by-case analysis of the difference between the cost of inventory and the related estimated market value.

Property, Plant and Equipment, Policy [Policy Text Block]

Property and equipment

Property and equipment is stated at historical cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful life of the related assets, as follows:

Leasehold improvements (in years)		10 or lease term if shorter
Equipment (in years)	3	-	10
Furniture, fixtures, fittings and other (in years)	2	-	10

Equipment includes industrial equipment and research equipment that has alternative future uses. Equipment also includes devices that are manufactured by the Company and leased to customers through operating leases related to Revenue-Per-Procedure transactions and devices subject to sale and leaseback transactions. This equipment is depreciated over a period of

seven

years.

Impairment or Disposal of Long-Lived Assets, Policy [Policy Text Block]

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.

Goodwill and Intangible Assets, Policy [Policy Text Block]

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

Stockholders' Equity, Policy [Policy Text Block]

Treasury Stocks

Treasury stock purchases are accounted for at cost. The sale of treasury stocks is accounted for using the

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.

Standard Product Warranty, Policy [Policy Text Block]

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

year to

years depending on the market. Actual warranty costs incurred are charged against the accrual when paid and are classified in cost of sales in the statement of income. Warranty expense amounted to

€433

thousand,

€316

thousand and

€319

thousand for the years ended

December 31, 2018,

2017

and

2016,

respectively.

Income Tax, Policy [Policy Text Block]

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,

provision has been made for income or withholding taxes on undistributed earnings of foreign subsidiaries, such undistributed earnings being permanently reinvested.

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.

Research, Development, and Computer Software, Policy [Policy Text Block]

Research and development costs

Research and development costs are recorded as an expense in the period in which they are incurred.

The French government provides tax credits to companies for innovative research and development. This tax credit is calculated based on a percentage of eligible research and development costs and it can be refundable in cash and is

not

contingent on future taxable income. As such, the Company considers the research tax credits as a grant, offsetting research and development expenses.

Advertising Costs, Policy [Policy Text Block]

Advertising costs

Advertising costs are recorded as an expense in the period in which they are incurred and are included in selling and administrative expenses in the accompanying consolidated statements of income (loss). Advertising costs amounted to

€719

thousand,

€672

thousand and

€744

thousand for the years ended

December 31, 2018,

2017

and

2016,

respectively.

Foreign Currency Transactions and Translations Policy [Policy Text Block]

Foreign currency translation and transactions

Translation of the financial statements of consolidated companies

The reporting currency of EDAP TMS S.A. for all years presented is the euro (€). The functional currency of each subsidiary is its local currency. In accordance with ASC

830,

all accounts in the financial statements are translated into euro from the functional currency at the following exchange rates:

assets and liabilities are translated at year-end exchange rates;

shareholders’ equity is translated at historical exchange rates (as of the date of contribution);

statement of income items are translated at average exchange rates for the year; and

translation gains and losses are recorded in a separate component of shareholders’ equity.

Foreign currencies transactions

Transactions involving foreign currencies are translated into the functional currency using the exchange rate prevailing at the time of the transactions. Receivables and payables denominated in foreign currencies are translated at year-end exchange rates. The resulting unrealized exchange gains and losses are carried to the statement of income.

Presentation in the Statement of Income

Aggregate foreign currency transactions gains and losses are disclosed in a single caption in the Statement of Income under section “Foreign currency exchange gain (loss), net”.

Earnings Per Share, Policy [Policy Text Block]

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.

Derivatives, Policy [Policy Text Block]

Derivative instruments

ASC

815

requires the Company to recognize all of its derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, the Company must classify the hedging instrument, based upon the exposure being hedged, as fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.

Gains and losses from derivative instruments are recorded in the Statement of Income.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Employee stock option plans

December 31, 2018,

the Company had

four

stock-based employee compensation plans. ASC

718

requires the recognition of fair value of stock compensation as an expense in the calculation of net income (loss).

Debt, Policy [Policy Text Block]

Warrants

The Company recorded outstanding warrants issued in

March 2012,

May 2013

and

April 2016

as a liability. Pursuant to guidance of ASC

815

(i), the Company determined that the said warrants could

not

be considered as being indexed to the Company’s own stock, on the basis that the exercise price of the warrants was determined in U.S. dollars while the functional currency of the Company is the Euro. As of

December 31, 2018,

there were

more warrants outstanding.

Lessee, Leases [Policy Text Block]

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;

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.

New Accounting Pronouncements, Policy [Policy Text Block]

Recent accounting pronouncements

Recently Adopted Accounting Pronouncements

July 2015,

the FASB issued ASU

2015

Revenue from Contracts with Customers: Deferral of the Effective Date (ASU

2015

) which deferred the effective date for ASU

No.

2014

09,

Revenue from Contracts with Customers

(Topic

606

), by

one

year. Topic

606supersedes

the revenue recognition requirements in Revenue Recognition (Topic

605

) and requires entities to recognize revenue in a way that depicts the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The Company adopted Topic

606

Revenue from Contracts with Customers

with a date of initial application as of

January 1, 2018.

As a result, the Company has changed its accounting policy for revenue recognition as detailed below.

The Company applied Topic

606

using the cumulative effect method i.e. by recognizing the cumulative effect of initially applying Topic

606

as an adjustment to the opening balance of equity at

January 1, 2018.

Therefore, the comparative information has

not

been adjusted and continues to be reported under Topic

605.

The details of the significant changes and quantitative impact of the changes are disclosed below.

In implementing Topic

606,

the Company considered in particular that separate performance obligations and contract liabilities were already identified as such and dates of transfer of controls were similar under the previous accounting standards. Contract assets are non-material as of

December 31, 2018

and

2017.

The Company performed an analysis of its relationships with agents and distributors within the framework of topic

606,

which did

not

result in a change of its conclusions that they are acting as principal.

The impact to the Company of adopting the new revenue standard primarily relates to additional and expanded disclosures, and in particular contract liabilities and disaggregated revenues. There is

impact on the opening balance of equity and on the

2018

revenue.

November 2015,

the FASB issued ASU

No.

2015

17,

Balance Sheet Classification of Deferred Taxes

(ASU

2015

), which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU

2015

is effective for the Company in its

first

quarter of fiscal

2017.

The Company adopted the ASU

2015

retrospectively as of

December 31, 2017.

March 2016,

the FASB issued ASU

2016

09,

Improvements to Employee Share-Based Payment Accounting. ASU

2016

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

are effective for annual periods beginning after

December 2016,

and interim periods within those annual periods.

impact has been identified on Financial Statements upon adoption of ASU

2016

09.

Recent Accounting Pronouncements

Not

Yet Adopted

February 2016,

the FASB issued ASU

No.

2016

02,

Leases (ASU

2016

), 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

months. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after

December 15, 2018

and interim periods within those fiscal years, with earlier application permitted. This update will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company will adopt the new standard as of

January 1, 2019.

The Company performed an analysis of all contracts to identify lease components or rights of use. The Company determined that the new standard mostly applies to leases for facilities situated in France, Japan and in the U.S., for Company vehicles and printers. The last category has been determined as being below the threshold and

not

material. As of

January 1, 2019,

the estimated opening balance sheet impact is expected to amount to Euros

2.9

million on financial debt.

January 2017,

the FASB issued ASU

2017

04,

“Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment.” This update eliminates step

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.