EDAP TMS S.A.

Greetings and welcome to the E-DAP TMS third quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jeremy Pfeffer, Managing Director of LifeSci Advisors. Thank you. You may begin.

Thank you, and good morning, and thank you for joining us for the EDEP TMS Third Quarter 2020 Financial and Operating Results Conference Call. On today's call, we will hear from Mark Ochetowski, Chief Executive Officer and Chairman of the Board, and Francois Dietsch, Chief Financial Officer. Before we begin, I would like to remind everyone that management's remarks today may contain forward-looking statements, which include statements regarding the company's growth and expansion plans. Such statements are based on management's current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those described in the company's filings with the Securities and Exchange Commission. I would now like to turn the call over to EDAP's Chairman and Chief Executive Officer, Marc Wojciechowski. Marc?

Thank you, Jeremy, and good morning, everyone. I will start with a brief operational update and then turn the call over to Francois Vitch to review our financial performance. We are pleased with our third quarter results. While the calendar's third quarter is seasonally our softest quarter of the year in terms of business volumes, this year it was the strongest quarter so far. So while restrictions in Europe and elsewhere began to lift, we did see a gradual shift back to a normal. Obviously, these trusted procedures cannot be delayed indefinitely. Total revenue in the quarter was €9.4 million, or $11.2 million, as compared to €9.3 million, or $10.3 million, in the second quarter of 2020. Another interesting sign was the fact that despite an 8% decrease in overall revenues in the third quarter this year compared to Q3 of last year, we generated a slightly higher amount of recurring treatment-driven revenues in our high-frequency emissions. and we sold the same number of focal one units. So following a difficult first half of the year, we are pleased with our third quarter performance. We announced just a few days ago that we entered into an agreement with EbiMedica, a leading distributor of medical technology in Italy. EbiMedica already distributes ExactView, so they are already familiar with our product line. Italy is the fourth largest medical technology market in Europe, and we are pleased to be able to partner with a recognized leader and significantly expand access to our portfolio in this important European market. COVID infection rates are again climbing in many parts of the world, including most of the US, and we are carefully monitoring our key markets. We are again seeing a modest impact on procedure volumes as hospitals continue to focus on the pandemic. However, halfway through the fourth quarter, I can say that, against this very challenging business environment, we continue to build our pipeline of FOCAL-1 and exact-due-cells prospects, while at the same time advancing our development programs into new soft-tissue indications that can potentially benefit from high-intensity focused ultrasound, or HIFU. As we recently announced, the clinical value of FOCAL-1 was further validated by the number of successful cells in the third quarter, despite the pandemic. This is a testament to the entire EDAT team that we were able to maintain our focus during these challenging times. During the third quarter, we announced 241 cells, and one of which also included the XactView high-resolution micro-ultrasound solution that we are now marketing as a result of our partnership with XactImaging. Recall that this micro-ultrasound resolution is comparable or better than MRI, and represents a 300% improvement over conventional ultrasound. Similar to MRI, it allows urologists to visualize and look at suspicious regions within the process and target biopsies in real time. Using this technology, urologists can see details that evade other imaging modalities. They can use the executive system to perform targeting biopsy, whether transrectal or transperineal, to confirm with a high success rate the suspicious reasons seen on the image. During the third quarter, we closed eight ExactView deals in different configurations, whether via bundled deals such as the Focal1-ExactView combo we sold to Mount Sinai Health System in New York, or as a standalone solution to existing HIFI users or to new accounts and prospects. Prostate cancer diagnosis and treatment can not only be delayed so long, but infinitely more direct. Therefore, we remain optimistic that the short-term impact of COVID will not affect the long-term momentum of market adoption of HIFU and its numerous benefits for patients, most notably quality of life preservation. We continue to host virtual education sessions with virologists and researchers, and in September, we hosted a key opinion leader call on focal one and exactly, featuring Dr. Brian Miles from Houston Metabase and Dr. Lawrence Cox from Sunnybrook Health Sciences Center. They spoke of the significant opportunity that exists between the current two extremes of prostate cancer treatment, radical prostatectomy on one side and active surveillance on the other side. With HIFU, suspect prostate tissue can be ablated while leaving the gland intact. These virtual outreach efforts have allowed us to stay in front of our case stakeholders. As noted, COVID infection rates are increasing, and we are tracking changes in other restrictions. To this point, we have stayed true to our long-term mission, which is to make these technologies available to the broadest possible patient population. We continue to build inventory so that we are in position to ship systems as soon as we are able to . Regarding reimbursements, as indicated last quarter, we expect CMS to publish the final rule for 2021 by the end of this year. We continue to prepare for a Category 1 CPP code effective January 1st, and we'll provide an additional update once the final rule is available. Turning to our endometriosis program, in August, we were granted full approval by French health authorities to initiate a Phase II clinical trial of HIFU for the treatment of deep invasive endometriosis. And we quickly completed the first patient treatment just a few weeks later. A total of 38 women will be enrolled in the study and treated at five major hospitals across France and assessed over a six-month follow-up period. During this study, investigators will evaluate the safety and efficacy of HIFU for this pathology. We have enrolled six patients and enrollment is continuing as we have scheduled an additional three patient treatments so far in December. And of course, should the results of this phase two study be positive, we will work to efficiently initiate a phase three program. The advancement of our endometriosis program is consistent with a strategic shift away from legacy lithotripsy business and toward high school. Endometriosis is just one example of the condition that we believe can benefit from this non-invasive technology. So we see significant opportunity to extend our HICU pipeline into very large global market opportunities. We look forward to keeping you apprised of our R&D efforts exploring HICU in other indications. Duplications of clinical data are key to our ongoing sales efforts. During the third quarter, we published two papers in the prestigious and peer-reviewed Journal of Urology. These studies represent the first U.S. publication detailing successful partial gland ablation using HIFU to treat prostate cancer patients since FDA cleared the technology in 2015. The studies conducted at USC and the University of Miami report on outcomes and follow-up of up to two years on the combined 162 patients. Importantly, radical surgery was avoided in the vast majority of study patients, participants, and incontinence and impotence were avoided or quickly returned to baseline levels. These results mirror what we have observed in prior European studies that involve larger patient cohorts and longer follow-up studies. Seeing some of our prominent reference center already publishing data demonstrating that our high-speed technology provides unmatched potency and accuracy marks another important milestone in our U.S. market penetration strategy. And now, our CFO, François Ditch, will provide some details of our financial results. François?

Thank you, Marc, and good morning, everyone. Please note that observers, except for percentages, are in euros. For conversion properties, our average euro-dollar exchange rate was 1.1832 for the third quarter of 2020 and 1.1319 for the first nine months of 2020. The total revenue for the third quarter of 2020 was 9.4 million euros, a decrease of 8.5% compared to total revenue of 10.3 million euros for the same period in 2019. So quarter of 2020 revenue reflects the impact of the ongoing COVID-19 pandemic and equipment sales. Total revenue in the IFU business for the first quarter of 2020 was 2.6 million euros, a 7.9% decrease compared to 2.8 million euros for the third quarter of 2019. During the quarter, we sold two focal ones versus two last year. Total revenue in the lead-to business for the third quarter of 2020 was €2.4 million, a 27.6% decrease compared to €3.3 million for the third quarter of 2019. Total revenue in the distribution business Q3 2020 was 4.4 million euros, a 6.4% increase compared to 4.2 million euros for the third quarter of 2019, thanks to the exact imagined sales development. Gross profit for the third quarter of 2020 was 4 million euros compared to 4.7 million euros for the year of the period. Gross profit margin and net sales was 42% in the third quarter of 2020, compared to 45.3% in the year-ago period. The decline in gross profit year-over-year was mainly due to the lower sales level as compared to the year-ago period, given primarily by COVID-19. Operating loss for the third quarter of 2020 was 0.3 million euro, compared to an operating profit of €0.3 million in the third quarter of 2019. Net loss for the third quarter of 2020 was €1 million, or €0.03 per deleted share, as compared to a net income of €0.8 million, or €0.03 per deleted share in the earlier period. Coming to the nine months of 2020, total revenue for the first nine months of 2020 was €26.3 million, a decrease of 20.1% compared to total revenue of €32.9 million for the same period in 2019. As mentioned, the first nine months of 2020 revenue reflects the impact of the ongoing COVID-19 pandemic and the company's activities. Gross profit for the first nine months of 2020 was 11.4 million euros compared to 15.9 million euros for the year-over-year period. Gross profit margin and net sales was 43.2% for the first nine months of 2020 compared to 48.2% in the year-over-year period. The decline in gross profit year-over-year was mainly due to the lower sales in the IFU business driven by COVID-19. Operating loss for the first nine months of 2020 was 1.5 million euros compared to an operating profit of 2.1 million euros for the same period of 2019. Net loss for the first nine months of 2020 was 2.5 million euros or 9 cents of euros per dividend share as compared to a net income of 2.5 million euros or 8 cents of euro per unit itself in the year-ago period. Finally, we finish this quarter with a very strong cash balance. Cash and cash equivalents, including short-term treasury investments, were 19.9 million euros at the end of September 2020, or 23.4 million US dollars, using a euro-dollar conversion rate of 1.1723. As announced earlier, we received during the first quarter two COVID-related loans granted by the French government, totaling 4 million euros. These loans carry very favorable terms, interest rates at 0.25% for the first year. With a repayment term of one year, it can be extended to five years. This French loan added to other COVID-related assistance already received during the second quarter. We received 0.2 million euros from the US Paycheck Protection Program that, as you probably know, is forgivable if certain conditions are met. And we received another loan of 0.4 million euros from a Japanese COVID-related assistance program which carries an interest rate of 1.8% and is repayable beginning in two years. And we now turn the call back to Marc.

Thank you, Francois. In closing, the third quarter was the strongest of the year thus far, despite the challenges caused by the ongoing COVID-19 pandemic. We believe that our strong gas position and efforts to grow our cell pipeline globally has positioned us well to finish 2020. We will now open the call to your questions. Operator?

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Brooks O'Neill with Lake Street Capital Markets. Please proceed with your question.

Good morning, guys. I hope things are not too difficult in Lyon for you during the COVID crisis.

Morning, Brooks. Well, it's not the easiest, but we're managing and navigating through it. Thanks for asking.

Yep, good for you guys. Obviously, it's a challenging environment to sell systems, but I'm curious if you're able to find ways to continue generating physician interest in HIFU for prostate and if you have any comments on how that's going.

Yeah, actually, it's true that it's difficult to generate equipment revenue or even activity in the hospital as everything is... pretty much focused on the COVID-19 management. But as we explained, we continue to do a lot of educational sessions using webinar and also taking the opportunity of more time available from the urologist. So we continue to do a lot of marketing and a lot of communication towards our users, our prospects, leads, and also by our distributors. So that's one of the positive part of that is that, again, most of those doctors not really involved directly in the management of COVID have more time for discussion or for training or for education also on new technologies. So as a result of that, we've seen a continued increase in our pipeline of projects and leads, which is good. Now the question is, will we be able to access management, purchasing department, legal in the hospital so that we can bring those new prospects to deals?

Right. That's the $800 question for everybody. It sounds like the partnership with ExactView is going well. Are you pleased with that? Is it more or less on schedule or would you say it's even going better than you had hoped?

Well, we're very pleased with it. I mean, again, everything that we had anticipated in terms of synergies between the product is really here. It's really helping as well to drive the pipeline of projects and to get the attention from urologists and from the hospitals. It has also allowed us to kind of, you know, build some very aggressive offering of like bundle deals or these kind of things. And, no, we're very happy and, you know, like we said, we sold three machines during the second quarter as we got started in June. and another eight during the second quarter, which is good, and it's probably over our expectations.

That's great. So you mentioned, Mark, the expectation for the Category 1 CPT code. My feeling is that's going to be a big deal for you guys. Is there anything specific that you've heard from FDA or the reimbursement folks in terms of that code or is it just sort of the expected timeframe of a dollar figure sometime here in December probably and then going live in January?

That's following the normal process. Again, usually the final rule is released by CMS somewhere around Thanksgiving. We expect some delay this year. as it was for the proposed rules. So probably somewhere in December, we might have all the final numbers for next year. Great.

And again, we will keep you guys updated once we have some news. Yeah, that'll be a big deal for you guys, I think. So can you just, you talked about the endometriosis trial, but sort of when are you thinking you get through all of that, maybe be able to have an indication for endometriosis? And I think you alluded to HIFU for other indications even beyond endometriosis. And I'm curious if you could even, I mean, I don't need the specifics, but I'm curious if you can give an example of one or two additional areas where you think HIFU might have applicability.

Sure.

Now, we're also working on earlier stage HIFU,

research and development programs for other indication, and that includes pancreas, pancreatic cancer, or liver metastasis. But these are earlier stage developments, and we are not yet in terms of patient treatments.

Sure. And what's the timing on endometriosis? Sorry, can you say that again? What's the timing for the phase two, and then how long would a phase three trial for endometriosis be?

The phase two, as I said, we have 38 patients to treat in five institutions in France. We got started in September, and we've already enrolled and treated six patients, and we have another three that are planned to be treated in December, so we'll probably around 10 patients by the end of the year, then the uncertainty on conducting clinical studies in the environment makes it difficult to really anticipate the exact time of completing the enrollment. But the good news as well on the protocol that was approved by the French health authorities is that the follow-up period is only six months. So overall, it should be a pretty short study from enrollment and follow-up. And then again, based on what we achieve on the phase two, we'll certainly conduct a phase three.

Sure. Thank you very much. Congratulations. I know it's a difficult environment, but it sounds like you're making tremendous progress. Thank you, Brooks.

Thank you. Our next question comes from the line of Andrew De Silva with B Reilly Securities. Please proceed with your questions.

Hi, yes, good morning. Thanks very much for taking my questions and congrats on the progress. Good morning. Thank you very much. So just to start, and I very much appreciate the additional financial information you provided this quarter, could you just let us know, if possible, what stock-based comp was during the quarter? And then I was also curious if you could let me know what ESWL and HIFU systems placements were during the quarter, if possible. Can you repeat the beginning of the question, Andy? Sorry, I didn't hear you well. No worries. The stock-based compensation, if you have that figure for the quarter, I'm just curious what it was. And then if you could just also let me know what ESWL and HIFU system placements were during the quarter.

So, François will answer you on the stock-based compensation. As far as the unit placement, as we said earlier in the call, we sold two 4.1 units during the quarter, similar number as last year. And in little TRIPSY, we sold, I think... In little TRIPSY, we sold four devices this quarter versus seven last year.

Okay.

And... The ablatherm, there were no ablatherm systems placed?

No.

Okay. Okay. Perfect. And are you able to find the stock-based comp, or do you need a little bit more time?

You're on it. Maybe if you have another question, meanwhile, you can follow up.

Oh, yes, yes. I'm also curious just what engagement's been like with potential customers since the proposed reimbursement came out? And have there been any discussions with private payers since the proposed reimbursement came out? And maybe give a little sense of what it's historically been like from previous experiences. Did it typically start to mature or evolve with customers and private payers while the proposed reimbursement's out there, or do you have to actually wait and see what the finalized reimbursement is to get that kind of traction?

No, usually the process is that we get the code in force and in use and then that will be in January when the final rule will be released and then the CPT will be in force next year. And then when you start using it, you start getting the coverage and getting the claims submitted to the different MACs of CMS around the country. And that's when you get to the point that you can start lobbying and discussing with the commercial and payers and private insurances. So it was still too early, but we, I mean, soon, I mean, in six weeks from now, we'll be able to get started on all those kinds of actions.

Okay. Very useful. And my last question is just related to the cadence in the fourth quarter. Can you maybe give a little bit of color around that? Are you seeing any change in traction from equipment sales quarter over quarter? Or is the fourth quarter a situation where you expect much of the heavy lifting as it relates to revenue recognition to take place in the last couple of weeks? I know that's the trend typically, but with the holidays in the fourth quarter, I wasn't sure if... if placements come in earlier than typically seen in the quarter?

Well, I mean, again, the fourth quarter is usually the strongest. It's very critical in terms of the yearly results. We see, I mean, of course, there is a lot of excitement. Of course, there is a lot of pressure as well to get deals done by the end of the year. And everything will, I mean, again, the most important month of the quarter is December. So everything will be, I mean, a lot of things will be done during the month of December and it will go until the end of the month like usual. So there is, I mean, there is less or more traction. There is a lot of excitement. We've also been, you know, working on making very aggressive offers as well to help in terms of not only in terms of conditions, but also in terms of financing and working with partners to offer our customers, you know, very interesting conditions in the context so that they can make decision and close deals before the end of the year. So we're, I mean, everybody's on the field trying to close deals. And again, we'll see the results of that in the next few weeks.

But just anecdotally, as it looks with the pipeline and engagement with customers, would you believe that that same quarterly trend seasonality will continue this year as far as the fourth quarter trend most likely being the strongest quarter of the year, or anecdotally speaking, do you feel like that is the case?

Anecdotally speaking, it's a fourth quarter of a COVID-19 year, which makes it completely different or unpredictable. And to answer your question, I mean, there are two things. One is that our pipeline of projects and leads has never been that big. So we have plenty of projects to work on. Now, the uncertainty is the ability to close deal and the ability for the hospital or for the healthcare system to navigate normal business activity within the current environment. So as I said, I mean, we're trying to be creative and have a lot of initiatives to kind of help those hospitals and healthcare systems to make the right decision and get the approaches done despite the environment. So that's That will be the real challenge, and that's the unpredictable and unknown situation that we're facing within the context of COVID-19. But again, we are doing our best effort to try to up the pollution.

Great follow-up. Thank you very much. If you don't have a stock-based copy, I can just take it offline. We do. François is ready to answer that.

Yes, the impact on the quarter is 30,000 euros.

Could you repeat that one more time?

And the quarter is 30,000 euros.

Okay. Thank you very, very much. Best of luck this year. Congrats on the progress during the third quarter. Thanks, Andy.

Thank you. Our next question comes from the line of Swayam Pakula Ramakant with HC Wainwright. Please proceed with your question.

Thank you. This is RK from HC Wainwright. Hello, RK. Hi, good afternoon, Mark and Francois. So a couple of questions. On the, you know, within the HIFO sales, you know, we see the sales from leases and RPPs either being stable or actually growing. So, and as you were talking about trying to become creative in terms of how to generate revenues, Do you think with all the budgetary constraints due to COVID and also from trying to be careful how much money these different organizations are able to outlay, do you think it's much easier to go the leasing route rather than an outright sale? especially for a device like HIFU. What's the appetite for that and also how are you able to navigate those uncomfortable conversations with the organizations out there?

Actually, this is part of the options that we're offering and we also have been able to design with a number of leading companies with whom we partner for long-term leads or even short-term leads, capital or operation leads. So we have all the options, and this is really depending from one hospital to the other, from one project to the other. But again, the idea for us is really to have the broadest potential offering in terms of financing so that we can answer most of the needs. Perfect.

Talking about distribution, congratulations on the Italian distribution collaboration that you just announced recently. Also looking into the distribution part of the revenue line, it certainly has been growing and I would think ExactView is adding to it. So when you look at your leads out there for not only fourth quarter but also for later, How much of that synergies is really working to your benefit? And also, do you see that part of the revenue line becoming more of an important growth item within your revenues, not only for 21, but also beyond?

Yeah, I think the... Again, what works very well is the synergy between the product we have in distribution and the product we are manufacturing ourselves. That's really the idea, to grow both types of equipment and business sales. It's working pretty well. You took the example of ExactView, and again, ExactView really works well with focal one First of all, because it's a good complement, but also because it really gives us a unique offering on the management of prostate cancer using focal approach, which is, again, the big growing strategy of treating prostate cancer, and that's making a lot of sense. So I think, you know, the two types of businesses, distribution and manufacturing products, are really working in the same direction, and the way we choose And the way we decide also to implement new distribution products is really to help, first of all, growing our global business, but also to help as well growing our homegrown technology like HIFU and focal one.

Great. And then the last question from me is on endometriosis. You stated that you have six women in the trial at this point. Do you Do you plan to wait for all the 38 women to go through the six-month follow-up before you announce the data from the study, or would we be able to see some data in the interim without waiting for the complete study to come to completion?

We'll see, and it will really depend on the pace of recruitment and enrollment that we have. if we're able to continue on that pace, which again, it's really depending on the context. As you know, most of the clinical studies are on hold now, and we've been very lucky to be able to do that and to continue to treat. Actually, we are very happy to have the confirmation of the slots for the treatment of the three other patients in December. So if we're able to recruit quickly, we might not need to go on interim results. Then if we have some, if it takes us some time to recruit the entire uh 38 women for the trial then we may we may want to give interim results so it will depend on the speed of of enrollment and treatment and again we we're making our best effort to do that as quick as possible and again because the follow-up is six months only so it's a very short period of time so we might not need to get some entering results of publication thank you congratulations on this on on what you have achieved so far especially with the with the

the difficult COVID situation going on and good luck for the fourth quarter and beyond. Thanks. Thank you, Ake.

Thank you. Ladies and gentlemen, if you'd like to join the question queue, please press star one. We'll pause a moment to allow for more questions. Thank you, ladies and gentlemen. That concludes our question and answer session. I'll turn the floor back to Mr. Ochikoski for any final comments.

Thank you, operator. And again, thank you, everyone, for joining us today. Again, stay safe, and we are looking forward to updating you very soon as we're making some progress. You all have a nice day, and stay safe. Bye-bye.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.