EDAP TMS S.A.

Greetings. Welcome to EDAP TMS fourth quarter and full year 2021 earnings conference 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. Please note this conference is being recorded. I would now like to turn the conference over to John Francis, Investor Relations. Thank you. You may begin.

Thank you. Good morning and thank you for joining us for the EDAP TMS's fourth quarter 2021 financial and operating results conference call. On today's call, we will hear from Mark Oksakowski, Chief Executive Officer and Chairman of the Board, Ryan Rhodes, Chief Executive Officer of EDAP U.S., and Francois Adiche, Chief Financial Officer. Before we begin, I would like to remind everyone that management's remarks today may contain forward-looking statements. which includes 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, Mark Arkzakowski. Mark?

Thank you, John, and good morning, everyone. I will start by providing a brief operational update before turning the call over to Ryan Rose, our EDAP U.S. Chief Executive Officer, for a review of the U.S. business and strategy, and then François Ditch, our CFO, will present our financial performance. I will start by recapping a few of the highlights. Full year 2021 revenue was 44.1 million euros, or $51.9 million as compared to full-year revenue of 41.7 million euros or $47.8 million for the full year 2020, an increase of 5.8%. While Ryan will cover developments in the U.S. business, it is worth noting that we exhibited 2021 with significant momentum. We placed Focal One machines with several new and highly regarded healthcare institutions that we believe serve as validation for the need of focal one as part of a comprehensive prostate oncology program. For the fourth quarter, total revenue was 14 million euros or $15.9 million, representing a decrease of 9.1% as compared to the fourth quarter of 2020. The fourth quarter did offer 48% growth in sequential revenue from Q3 2021, though we do tend to see the fourth quarter as a more favorable time for closing capital purchases. As I mentioned a moment ago, we are very pleased with the momentum with which we exceeded the fourth quarter and entered 2022. Focal 1 is gaining acceptance as the most advanced non-invasive treatment for prostate ablation controlled by the urologist. Our focused investment in the U.S. market is delivering results, and our distribution business is growing globally, especially in regards to the ExactView micro-ultrasound platform. At this point, I would like to provide an update on our expansion activities where we believe HIFU can have clinical utility and indications outside of prostate cancer. We are currently running a Phase II study evaluating HIFU using the FocalOne platform for the treatment of deep infiltrating endometriosis. We are very happy to announce today that we completed enrollment and treatment of 60 patients. The last treatment was done just two days ago. These 60 patients were treated across four major hospitals in France and will be assessed over a six-month follow-up period, likely concluding at the end of September of this year. Investigators are evaluating the safety and efficacy of HIFU for this pathology. We believe the treatment of endometriosis may be greatly improved and the use of HIFU technology could offer an important minimally invasive treatment option for these patients. The alternative for these patients is often an extensive surgical removal of the bowel. We look forward to results from this important study as HIFU could really add significant value in the management of complex endometriosis, for which there are no currently effective minimally invasive options, and it is becoming a major issue in women's health worldwide. We also announced in January the publication of positive preclinical results using intraoperative HIFU ablation of the pancreas in the journal Cancers. The study was designed to assess the feasibility of using HIFU under Doppler guidance to treat the pancreatic parenchyma and tissues surrounding the superior mesenteric vessels in vivo in an animal model. Pancreatic adenocarcinoma is among the most aggressive of all cancers. Regardless of treatment, the overall five-year survival rate for patients with locally advanced pancreatic adenocarcinoma is less than 5%. The HIFU approach could help in the treatment of such pathology that is inaccessible by other known therapeutic methods. The paper's authors conclude that the possibility of treating the pancreas using HIFU holds great promise for the treatment of locally advanced pragmatic cancer. We are very excited to further explore the possible utility of HIFU in these very difficult to treat cancer and build upon these findings. Finally, and as a quick note, we successfully treated the first two patients yesterday at Lyon-Édouard-Aieu University Hospital in a clinical trial to evaluate feasibility and safety in using our FOCAL-1 robotic HIFU device for the treatment of benign prostatic hyperplasia, or BPH. We will keep you posted as we move forward with this new clinical study. With $53.4 million of cash, we are well-financed to continue to execute our U.S. growth and expansion plans while in parallel exploring these and other clinical expansion opportunities. At this point, I would like to turn the call over to Ryan Rhodes, our CEO of EDAP-US, whom I would like to congratulate for a strong finish to 2021 and a promising start to 2022. With a full pipeline of projects well supported by a newly hired team of talented sales experts, Ryan will give us an update of our U.S.

operations. Ryan? Thank you, Mark.

As Mark alluded to earlier, in the fourth quarter, we placed several new Focal One systems in notable hospital institutions. These included both a mix of leading academic hospitals as well as prominent community hospitals. Early in Q4, we installed a Focal One device to the University of California at San Diego. This sale was particularly meaningful as it was our third sale to the highly regarded UC healthcare system, following earlier sales to both University of California San Francisco and University of California, Irvine. More recently, we announced Focal One installations at Brigham and Women's Hospital in Boston, Cedars-Sinai Medical Center in Los Angeles, Henry Ford Health System in Detroit, Duke University in North Carolina, and Prisma Health in South Carolina. We believe these placements together with those announced earlier in the year, such as University of Washington, are a reflection of our growing pipeline, which is now the largest it has ever been since gaining approval of focal one in the United States. We believe this further validates that focal therapy is a needed option to each and every comprehensive prostate cancer program, and that focal one is uniquely suited as the most advanced HIFU technology, utilizing robotics, MRI fusion, and improved ultrasound energy delivered while all controlled by the urologist. It's also worth noting that these new centers represent both a mix of academic and community hospitals. Prisma Health, for example, is South Carolina's largest nonprofit healthcare system. And the Henry Ford Healthcare System is a large integrated delivery network made up of 40 facilities in Detroit and the surrounding areas of Michigan. Selling to a mix of leading academic and community healthcare providers is an important validation that focal therapy with focal one is growing as a valued option for all types of busy prostate centers. Another important highlight continues to be the growth in U.S. prostate treatment volumes at existing installations. For the full year 2021, U.S. HIFU treatment volumes increased 66% over full year 2020. As we have said in the past, we believe robust year-over-year procedural growth is one of the most important leading indicators as it directly reflects the increased adoption and utilization of FOCAL-1 by urologists. even as the pandemic continued to weigh in on hospital capital spending and activity for much of the year. In terms of our U.S. team, we continue to add world-class sales talent with deep industry experience. In December, we hired a new vice president of sales, Scott Finger, with more than 18 years of experience leading large sales organizations and selling disruptive capital equipment, including those of medical robotics. At the close of 2021, we have now grown our capital sales team strategically so they may cover multiple geographies. This gives us the ability to actively engage the many leading institutions in 22 out of the 25 largest metropolitan statistical areas in the United States. The profile of our capital team is made up of sales professionals with a proven track record in selling disruptive medical capital equipment. I'm very pleased at the quality of this team and look forward to them ramping up to have a significant positive impact on our business. And on the clinical sales side, we have also added several new clinical sales managers who have separate dedicated responsibility for driving utilization within the existing customer accounts. Before turning the call over to Francois to review the financials, I want to highlight a recent peer reviewed consensus paper that was published during the fourth quarter in the journal Urologic Oncology. This paper is noteworthy in part because it was authored by numerous notable academic institutions and leaders in focal therapy, some who use our technology and some who use other focal technologies. Out of this paper, there were 56 respondents across multiple disciplines including physicians representing urology, radiology, and radiation oncology. The key takeaway is that there are significant benefits of focal therapy, including an important role for HIFU for these patients with localized prostate cancer who progress beyond active surveillance. In addition, as noted and presented, focal therapy has distinct advantages and benefits over more aggressive treatments, such as surgery and radiation. 91% of respondents indicated that focal therapy has a greater likelihood of preserving both erectile function and urinary continence, two significant and life-altering side effects of more invasive radical therapy. We view this publication as yet another very strong validation of the clinical role of our technology. This sentiment was also shared at the 22nd meeting of the Society of Urologic Oncology held in Orlando in early December. Our team actively participated in this meeting, and we brought systems for focal therapy and micro-ultrasound to perform simulated treatments. The SUAO is made up of notable academic thought leaders who have a defined focus in advancing the treatment of cancers within the field of urologic oncology. During that meeting, there was a very high level of interest expressed in acquiring Focal-1 HIFU technology to support the growing delivery of focal therapy. Momentum for HIFU is clearly accelerating. We believe we have the most advanced platform in delivering HIFU on the market today. In summary, I'm very pleased with the trajectory that our U.S. business is on. And while we will not be discussing Q1 results today, we did enter the new year with good sales and utilization momentum, and I look forward to providing our first quarter update in May. And now our CFO, Francois Deutsch, will provide some details of our financial results. Francois?

Thank you, Ryan, and good morning, everyone. Please note that all figures except for percentages are in euros. For conversion purposes, our average euro-dollar exchange rate was 1.1386 for the fourth quarter of 2021 and 1.1787 for the full year 2021. Beginning with the fourth quarter, total revenue for the fourth quarter of 2021 was 14 million euro roughly in line with the suite expectation as compared to total revenue of 15.4 million euro for the same period in 2020. Looking at revenue by division, total revenue in the IFU business for the fourth quarter of 2021 was 4.2 million euro as compared to 4.4 million euro for the fourth quarter of 2020. We sold five 4K1 units in the first quarter of 2021 versus six in the first quarter of 2020. Total revenue in the Lito business for the first quarter of 2021 was 3.3 million euros as compared to 4.6 million euros for Q4 2020. We sold nine LitoTripC devices during the first quarter of 2021 versus 16 in the year-ago period. Total revenue in the distribution business for the first quarter of 2021 was 6.4 million euros as compared to 6.4 million euros for the first quarter of 2020. Worth profit for the first quarter of 2021 was 6.2 million euros compared to 7 million euros for the year-ago period. Worth profit margin and net sales were 44.5% in the first quarter of 2021. compared to 45.8% in the year-ago period. The decrease in gross profit year-ago year was primarily due to the lower sales effect and fixed costs. Operating expenses were 5.8 million euros for the first quarter of 2021, compared to 5.3 million euros for the same period in 2020. The decrease was primarily linked which was primarily driven by the ongoing build-out of our U.S. team and commercial infrastructure. Furthermore, we recorded in Q4 2021 a grant of €0.4 million as a final settlement of our R&D ACAM program. Operating profit for the first quarter of 2021 was €0.5 million, compared to an operating profit of 1.7 million euros in the first quarter of 2020. Out of the non-cash share-based compensation program impact, operating profit for Q4 2021 would have been 1.2 million euros compared to an operating profit of 1.7 million euros in Q4 2020. Net income for the fourth quarter of 2021 was 1.4 million euros, or 4 cents of 2 euros per deleted share, as compared to 0.8 million euros of net income, or 3 cents of 2 euros per deleted share in the year-ago period. Now turning to the full year, total revenue for the full year 2021 was 44.1 million euros, also was roughly in line with the strict expectation, an increase of 5.8% from total revenue of €41.7 million for the full year 2020. Total revenue in the IFU business for the full year 2021 was €9.9 million as compared to €11.4 million for the full year 2020. We sold 7 focal-1 units for the full year 2021 versus 10 for the full year 2020. Total revenue in the litho business for the full year 2020 was 11 million euros as compared to 12.9 million euros for the full year 2020. We sold 21 lithotripsy devices for the full year 2021 versus 33 for the full year 2020. Total revenue in the distribution business for the food year 2021 was 23.1 million euros as compared to 17.3 million euros for the food year 2020. The 33% increase was driven in part to growth in exact managing revenue. Both profit for the food year 2021 was 18.4 million euros compared to 18.4 million euros for the full year 2020. Gross profit margin and net sales was 41.3% for the full year 2021, compared to 44.1% for the comparable period in 2020. The decline in gross profit margin and net sales was primarily due to the adverse mixed effects generated by the increase in percentage of distribution revenue to overall revenue. Operating expenses were €20 million for the full year 2021 as compared to €18.1 million for the full year 2020. 2021 operating expenses included the non-cash impact of share-based compensation programs initiated in 2021 for €1.8 million. Operating loss for the full year 2021 was 1.6 million euros compared to an operating profit of 0.3 million euros for the full year 2020. Net income for the full year 2021 was 0.7 million euros or 2 cents of euros per deleted share as compared to a net loss of 1.7 million euros or 6 cents of euros per deleted share for the full year 2020. As of December 31st, 2021, the company had cash and cash equivalents of 47.2 million euros or 53.4 million US dollars. The number of outstanding shares was approximately 33.5 million at the end of the year 2021. And I will now turn the call back to Mark.

Thank you, Francois. In summary, we are very pleased with our performance against what continues to be a challenging operating environment in many parts of the world. Our U.S. significant growth in treatment volumes and the many notable focal on placements that we announced in Q4 give us tremendous optimism for this year and beyond. We look forward to providing our next regularly scheduled quarterly update in May. We will now open the call to your questions. Operator.

Thank you. If you would 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 would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question is from Frank Tacketon with Lake Street Capital Markets. Please proceed.

Hey, Mark, Ryan, Francois, congrats on all the progress. Thanks for taking my question. Wanted to start with the expectations of capital equipment sales versus placements. Just curious if there were any sole placements with disposables contract in the fourth quarter, and then how should we be thinking about this model as you go throughout 2022 to accelerate some of the placement volume you may see in the year?

Ryan, can you present that for us?

Yes, I'll answer that. Frank, yes, we have a few of the accounts where we place systems under what we would call an operational lease or a bridge to buy. That model is not a leading model we use, but we reserve the opportunity to visit that model if accounts may have some challenges in getting funding for capital equipment in the near term. So I think what we see commonly out there is that most centers we sell to buy the technology outright. Either they finance it themselves or they pay cash. In some instances, we will find accounts that are very eager to acquire focal one technology and we may help them in an operational lease scenario. And so we still lead, obviously, with sales, direct sales, and that is our go-forward strategy. But we reserve the opportunity to have other flexible models and visit those models periodically throughout the sales cycle.

Got it. That's great. Then next, moving on to one of the comments made in the press release and on the call, pipeline at best point in company history. Can you extend that thought process at all? It would be great to get a little feel into how many of high potential prospects are in the funnel right now and how we should expect those to convert throughout 2022.

Yeah, so since joining the company last year in June, I can clearly say we've been ramping our pipeline. Part of it is just organic growth and interest. as we've gotten out there and been interacting with notable new institutions. The other is we have added salespeople to our team in the U.S., and, of course, they're cultivating new interest. As mentioned on the call, we attended the SUO meeting in December in Florida. We'll attend other notable urology meetings throughout the year. So I can really assure, looking at where we were when I joined in June, that our pipeline has increased dramatically. I can't give you hard numbers, but rest assured that it's never been healthier as it is now. And I think we know through history, certainly me, I've had 18 years in urology, kind of where the key institutions are to focus our time and attention. I'm eagerly excited with our new sales team, this new team we brought on, some fantastic individuals to make a big contribution in this area.

Okay, that's helpful. And then last one for me. It feels like we're getting to a point you have a little bit more predictable market. Some investments have been made in the selling organization, obviously, but how should we be thinking about additional investments and the impacts on operating expenses? You get to a little bit cleaner environment and you can more predictably pursue growth.

Well, on the areas that I'm most focused on, obviously commercial excellence is top of the list. So, you know, we have a great product. And I'd say, you know, we will add headcount where needed. You can imagine in the commercial domain, sales and the sales side, and reminding you, we have a bifurcated sales force. So we have a capital side of selling. We also have the clinical side. And so we'll make notable investments there. We make We'll make other investments probably in the marketing organization and or in other domains to include training, market development, et cetera. I think this year is going to be a transitional year for the company, meaning that we know what we need to go do. We've got a very good team in place. We'll take the opportunity to add individuals as needed, and we'll build out the structure accordingly. It's hard to forecast what does that all look like three or four quarters from now. Rest assured, our focus is on top-line growth, and we're making notable investments to support that.

Perfect. I'll stop there. Congrats on all the progress. Thanks, Mike. Thank you.

Our next question is from Jason Bednar with Paper Sandler. Please proceed.

Oh, hey, thanks. Good morning, everyone. Good afternoon over there in Europe, and congrats on the progress as well. I wanted to ask some questions, you know, topical to the current environment here in MedTech. You know, first, many companies are seeing some supply chain challenges in terms of accessing necessary product, needing to seek alternate suppliers in many cases, and then challenges in getting product where it needs to be. I just want to ask a question to check. I mean, is there anything that you're seeing within your business in terms of inability to get products on your side and then inability to get it in the hands of customers at all?

Well, we didn't get to a point that where we had to stop or to slow down anything. We feel like everyone that the time and the environment is getting more challenging. So we're trying to anticipate and we work with our supply chain team here to really make sure that we anticipate with enough time so that we don't have any slowdown or any issue. But it's true that the environment is getting more and more challenging in that aspect.

Okay.

All right. Very helpful. I guess with Omicron out there influencing patient visits and cancer diagnoses, I'm just curious maybe if you can talk about the trajectory of high-through-procedure demand if we compare the exit velocity of where we were here at the end of March or where we sit here today versus where we might have been at the beginning of the year. I mean, it seems intuitive or logical that things would have gotten better.

Is that what you saw in your business? Ryan? Yeah, can you repeat that question? I'm sorry.

Yeah, I guess the gist of the question really was just with Omicron raging out there in the early part of the quarter, just curious on the exit velocity that you saw in procedure demand, procedures getting done. here as we exited the quarter versus what we might have seen early in the quarter?

Yeah, I mean, there's some seasonality in any quarter, depending on how patients are being in the queue in terms of those who are under the care of physicians who may progress from active surveillance or other types of treatments or newly diagnosed. There's nothing I can see or put my pulse or hand on that would show that we've had any challenges in the U.S. as of this stage. Nothing notable that affects our business. I think most physicians I speak with feel that things are loosening up and that's been a state of progression happening over the last several months, but I'm only speaking on behalf of the U.S. Again, I think we have good momentum We have new systems to ramp and install and build utilization and, of course, take care of our legacy accounts. So I don't see any big headwinds in that area, and I think we will continue to drive utilization from our side. I think there's also a higher interest and higher awareness as more and more patients seek out options that are less radical, pointing back to surgery and radiation. We have a very good story for a large subset of patients diagnosed with prostate cancer.

All right. Very helpful. Thanks, Ryan. And maybe to come back as a clarifying point on Frank's question just there previously, just on the commercial team, I think the reference in the press release was the commercial team's right size at this point, but it sounds like they're still, you know, maybe opportunistic ads that could be made, whether it's on the capital side or the clinical side in terms of, you know, bringing in new headcount. So I guess, am I hearing you right there? And then just, is there anything you'd be willing to speak to as far as the pace of ads that you might be thinking about for this year as we move throughout 2022? Thank you.

Yeah, so I'd say we feel that we have the right team in place now to execute for the year on the capital side. Clinical side, we may add some additional headcount as we place more systems. And so the cadence in terms of placing clinical headcount really is dictated upon where we place the systems, how many, et cetera. So, um, I, I leave the door open, you know, we have a plan, uh, that we execute on. But we reserve the right and opportunity to make additional investments where needed throughout the year. Um, and I think, as I mentioned before, it's a transitional year. So we'll up those, we'll up those investments if needed. Uh, you know, if we see an opportunity to grow faster. Uh, and so, um, again, I, I'm, I'm very pleased with the people we've hired. We put a good team in place. They've been through training. And now we, you know, we may add a few others in a few other areas throughout the year.

All right. Very helpful. Thanks so much. Congrats again. Thanks, Susan. Thank you.

As a reminder, it's star one on your telephone keypad if you would like to ask a question. Our next question is from Arthur He with HC Wainwright. Please proceed.

Hi, everyone. This is Asif in for RK. Thanks for taking my question. So my first question regarding the CMS reimbursement, what can we expect from the CMS side of this year regarding the upgrade, the APC reimburse level?

Yeah, so we had a meeting with CMS back in February on the 17th. I think it was a very productive meeting. We've made our case in, you know, looking at kind of average charges and things that they look at. These are the data points that CMS bases the reimbursement on at the facility side. And all indicators point that the average charges throughout people or throughout the billing cycle across HIFU are increasing. And so if they use the data, which in their analysis this year will be the proposed rule coming out in July, the final rule coming out in the fall, leading up to the proposed rule, we're optimistic that they'll be looking at data from this past year. So it'll be data based on 2021 charges. We've looked at that data for the first half of the year. We're now crunching the numbers as they come in. So these are numbers that we can look at through third quarter of last year, excuse me, through the end of September. And again, as mentioned, the charges and volumes of treatments have both gone up. So I'd say we're guarded optimistic. I mean, this is the government. And if you remember last year, We had the HOPS panel, which is an independent advisory panel, vote unanimously to increase reimbursement, yet the final rule came out and there was no change to reimbursement. So anything can happen, obviously, but I think if you looked at purely the numbers and the analytics around those numbers, it would point to an increase. But again, I'm very guarded of saying that we'll get an increase. It's in the hands of CMS. And I'd say we've done everything on our side to be well prepared to have interactions and present discussion points that would support that.

That sounds great. Thanks, Rai. And also congrats on the complete enrollment for the endometrial study. Could you guys give us more color on your plan for a pivotal study to get these, again, HIFU into these patient populations?

So as I said, I mean, we completed the enrollment of our phase two study. So we'll work on the follow-up, which should lead us at the end of September, and then get some computation done by the end of the year. And then the next step will probably be to go into a phase three study with a randomized clinical study compared with sham.

So that's the next step. And that should be by the end of the year. That's great. Thanks, Marc. And thanks for taking my question. Thank you very much.

This concludes our question and answer session. I would like to turn it back over to Mark for closing comments.

Well, thank you again for your interest in that. We wish you a good day, and we look forward to updating news in May after the Q1 results. Thank you very much.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.