1—SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES

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 devices for treating stones of the urinary tract and localized prostate cancer. 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.

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 and price of maintenance contract used to determine the amount of revenue to be differed. 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

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.

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.

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.

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.

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.

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.

Inventories

Inventories are valued at the lower of manufacturing cost, which is principally comprised of components and labor costs, or market. 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 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		10 years or lease term if shorter
Equipment		3 - 10 years
Furniture, fixtures, fittings and other		2 - 10 years

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.

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

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			5 years
Licenses			5 years
Trade name and trademark			7 years

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.

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

€319

thousand,

€354

thousand and

€429

thousand for the years ended

December

31,

2016,

2015

and

2014,

respectively.

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

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.

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

€511

thousand,

€448

thousand and

€518

thousand for the years ended

December

2016,

2015

and

2014,

respectively.

Advertising costs

Advertising costs are recorded as an expense in the period in which they are incurred. Advertising costs amounted to

€744

thousand,

€461

thousand and

€413

thousand for the years ended

December

31,

2016,

2015

and

2014,

respectively.

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.

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.

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.

Employee stock option plans

December

31,

2016,

the Company had

four

stock-based employee compensation plans. The Company adopted ASC

718,

“Share-Based Payment”, effective

January

2006.

ASC

718

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

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

October

29,

2007,

the Board of Directors granted

504,088

options to subscribe to new Shares to certain employees of EDAP TMS. The exercise price was fixed at

€3.99

per share. Options were to begin vesting

one

year after the date of grant and all options were fully vested as of

October

29,

2011

(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

October

29,

2017

(i.e.,

ten

years after the date of grant) or when employment with the Company ceases, whichever occurs earlier. At

December

31,

2007

the total fair value of the options granted under this plan was

€1,731

thousand. This non-cash financial charge has been recognized in the Company’s operating expenses over a period of

months, between

October

2007

and

October

2011.

There was

impact on

2014,

2015

and

2016

operating income. Under this plan,

327,838

options are still in force on

December

31,

2016.

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

months. The impact on operating income, in accordance with ASC

718,

was

€8

thousand on

2014

and there was

impact on

2015

and

2016

operating income. Under this plan,

50,000

options are still in force on

December

31,

2016.

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

months. The impact on operating income, in accordance with ASC

718,

was

€4

thousand on

2014

and there was

impact on

2015

and

2016

operating income. Under this plan,

127,100

options are still in force on

December

31,

2016.

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

months. The impact on operating income, in accordance with ASC

718,

was

€128

thousand,

€66

thousand and

€29

thousand in

2014,

2015

and

2016,

respectively. Under this plan,

362,500

options are still in force on

December

31,

2016.

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

€331

thousand. This non-cash financial charge has been recognized in the Company’s operating expenses over a period of

months. The impact on operating income, in accordance with ASC

718,

was

€331

thousand on

2016.

Under this plan,

560,000

options are still in force on

December

31,

2016.

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,
	2016			2015 (1)		2014 (1)
Weighted-average expected life (years)		6.25			—		—
Expected volatility rates (2)		60,60	%		—		—
Expected dividend yield		0	%		—		—
Risk-free interest rate		0,01	%		—		—
Weighted-average exercise price (€)		3.22			—		—
Weighted-average fair value of options granted during the year (€)		1.67			—		—

(1)

The Company did

not

make any grants during the years ended

December

31,

2015

and

2014.

(2)

Historical volatility calculated over

years.

Warrants

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.

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.

April

14,

2016,

pursuant to a securities purchase agreement dated

April

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.

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.

New accounting pronouncements

July

2015,

the FASB issued ASU

2015

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),

one

year. ASU

2014

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

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

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 does not expect a significant impact from implementation. The company anticipates selecting the full retrospective method.

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

–

is effective for the Company in its

first

quarter of fiscal

2017,

with early application permitted and, upon adoption,

may

be applied either prospectively or retrospectively. The Company will adopt the ASU

2015

for the year ended

December

31,

2017.

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

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.

August

2014,

the FASB issued ASC Update No.

2014

15,

Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic

205

40).

Update

2014

requires management to assess an entity’s ability to continue as a going concern every reporting period, and provide certain disclosures if management has substantial doubt about the entities ability to operate as a going concern, or an express statement if not, by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Update

2014

is effective for the annual period ending after

December

15,

2016,

and for annual periods and interim periods thereafter. The Company implemented ASU

2014

as of

January

2016.