EDAP TMS S.A.

Greetings and welcome to the EDAP TMS second quarter 2023 earnings conference call. At this time, all participants are on a listen-only mode. A brief 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 John Francis, Managing Director of Lifestyle Advisors. Thank you. Please go ahead.

Good morning. Thank you for joining us for the EDAP TMS Second Quarter 2023 Financial and Operating Results Conference Call. Joining me on today's call are Ryan Rhodes, Chief Executive Officer, Francois Adige, Chief Financial Officer, and Ken Mobeck, Chief Financial Officer of the U.S. Subsidiary. 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 Chief Executive Officer, Ryan Rhodes. Ryan?

Thank you, John, and good morning, everyone. I will start today's call by providing highlights from the second quarter of 2023 and then turn the call over to Ken Mobeck, our U.S. CFO, who will then present the corresponding details of financial performance. I'm pleased to report that we achieved record second quarter and first half revenues, reflecting strong underlying demand for Focal One HIFU technology. Second quarter revenue of 14.3 million euros was predominantly driven by new U.S. capital placements at leading academic and community hospitals, as well as from increased procedure volumes leading to higher disposable sales. We are very encouraged by the higher utilization trends of Focal One HIFU amongst our existing customers, which helped EDAP generate strong year-over-year HIFU revenue growth of 63.6% for the quarter. There are several factors contributing to increased adoption. As a reminder, FOCAL-1 robotic HIFU is a non-invasive outpatient procedure that demonstrates excellent oncologic control with minimal patient downtime and does not require use of surgery or radiation. FOCAL-1 continues to demonstrate strong clinical outcomes and favorable economics that are driving both growth and adoption. In fact, Focal-1 is now a leading and prominent focal therapy in six out of the ten best hospitals for urology, according to a recent U.S. News and World Report. Focal-1 HIFU is also becoming one of the fastest-growing treatments within the category of prostate cancer management. Strong Focal-1 robotic HIFU capital sales continue to lead our top-line performance with sales of four Focal-1 units in the US, including the first system placements in the states of both Kansas and West Virginia. While we continue to see adoption at leading academic and regional cancer centers, we are also proud to announce the recent sale of Focal-1 to Memorial Sloan Kettering Cancer Center, which is a top-ranked, world-renowned urology institution. While prominent academic urology focused hospitals continue to be strong proponents of focal one HIFU therapy, community hospitals and large urology practices are increasingly adopting focal one HIFU as a necessary treatment option for their prostate cancer patients. Procedure growth is also an important metric that we follow closely. As noted, FOCA 1 HIFU procedure volumes in the U.S. experienced robust 85% year-over-year growth in the second quarter. Sequentially, procedure volumes grew 29% in the second quarter of 2023 as compared to the first quarter, representing our third consecutive quarter of double-digit percentage growth. We attribute this acceleration in procedure growth to our strategic investments to grow the focal one clinical sales team combined with improved reimbursement rates. While we continue to see favorable impact on demand for higher reimbursement in the US, in July we were also pleased to announce reimbursement approval in Switzerland for the use of high intensity focused ultrasound in the treatment of prostate cancer having taken effect on July 1, 2023. Switzerland is a member of the DOC region, including Germany, Austria, and Switzerland, with over 100 million combined total inhabitants. Switzerland has many hospitals ranked amongst the best 250 in the world, according to Newsweek's The World's Best Hospitals 2023. Included in this list is the University of Zurich, an active prominent Focal One site, and the leading innovation center for HIFU in the country, and a member of the League of European Research Universities, placing it among Europe's most prestigious research institutions. We have also made commensurate investments in ongoing educational activities, including the live broadcasted Focal One procedure performed by Dr. Andrea Brew and Dr. Amir Labachi, assistant professors of clinical urology at the Keck School of Medicine at the University of Southern California, the first institution to acquire and adopt EDAP HIFU technology. In April, we broadcasted this live event worldwide and discussed its success on our last earnings call. A replay of that procedure is still available to view at our website, focal1.com. In April, we had our largest presence ever at the American Urological Association meeting with many productive engagements amongst prominent clinicians, hospital executives, and other stakeholders who validated our leading position in the category of focal therapy. As a reminder, there were multiple focal one scientific abstracts presented by several prestigious institutions, including the Martini Clinic in Hamburg, Germany. The Martini Clinic has the largest prostate cancer treatment program in the world. The AUA abstract presented by the Martini Clinic highlighted seven years experience using focal one, high intensity focus ultrasound in 164 patients with prostate cancer. All treatments were established as primary therapy and monitoring definitions followed a very strict protocol. The oncologic outcome showed excellent cancer control with only 7% significant infield recurrence and 91.5% radical treatment-free survival at seven years. On the functional side, very few complications were reported with 91.5% patients maintaining their baseline urinary continence and 85% maintaining their baseline erectile function. These results were impressive as we continue to further educate clinicians, patients, and providers on the benefits of FOCAL-1 robotic HIFU. Additionally, throughout the AUAA meeting, EDAP was very busy giving numerous customers the hands-on ability to use FOCAL-1 in a simulated prostate ablation procedure. They were able to see in action the robotic positioning system, advanced imaging, and fusion capabilities while setting up a prescribed ablation treatment plan. More recently, FOCAL1 was the only focal therapy invited to present and participate in a plenary panel on innovative robotic systems at the preeminent annual meeting of the Society of Robotic Surgery held in Melbourne, Australia. I'd now like to provide a brief update on our distribution business. As previously announced during the first quarter, EDAP received approval from Japan's Pharmaceutical and Medical Devices Agency for commercialization of ExactView micro ultrasound, enabling EDAP to emerge as a major player in the prostate cancer market in Japan. Japan remains the second largest market for advanced medical device technology, with prostate cancer being the most commonly diagnosed cancer in Japanese men, with over 100,000 new prostate cancer diagnoses made annually. Following this approval, EDAP had a strong presence at the 110th annual meeting of the Japanese Urology Association, which showcased and officially launched ExactView Micro-Ultrasound in Japan, During the quarter, we sold nine ExactView units. We continue to see ongoing demand for this differentiated advanced imaging technology that is becoming routinely used in performing targeted biopsies for prostate cancer. In parallel, our FOCAL-1 HIFU clinical development programs are progressing well. Last quarter, we reported positive results from the EndoHIFU R1 Phase II study in deep infiltrating rectal endometriosis, where patients treated with FOCAL1 HIFU experienced measurable improvement across a broad range of debilitating symptoms. Following these positive results, we are pleased to report that more than 50% of the patients have now been enrolled across six centers in France for our confirmatory phase three comparative double-blind randomized control trial. As noted, the primary efficacy endpoint for this 60-patient study is a level of acute pelvic pain as assessed at three months post-procedure. If results from the phase three trial mirror those from the phase two trial, we would possess strong clinical evidence to support FOCA1 HIFU as a new, effective, less invasive, first-line treatment for deep infiltrating rectal endometriosis. Given how few treatment options are available, FOCAL-1 HIFU could become an important new treatment option enabling patients to avoid the known morbidity and complications often associated with surgical resection of the bowel or rectum. Looking ahead, we expect both growing demand for new FOCAL-1 HIFU systems as well as increased utilization amongst our existing customers. With 51.3 million euros or 56 million U.S. dollars in cash and short-term investments and de minimis debt, we remain well-positioned to invest in our sales, marketing, education, and clinical development activities to support the continued expansion of Focal One Haifu. The strategic and ongoing investments made in the first half of 2023 will support the increased demand in the US marketplace for our technology. With our growing active pipeline for new business, we anticipate continued strong adoption of focal one technology platform with respect to new system placements and increasing utilization. With that, I will now pass the call over to Ken. to review the second quarter financial performance. Ken? 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 1.0871 for the second quarter of 2023. Total revenue for the second quarter of 2023 was 14.3 million euros, an increase of almost 1% as compared to total revenue of 14.2 million euros for the same period in 2022, and a record level for a second quarter. Looking at revenue by division, total revenue in the high food business for the second quarter was 4.9 million euros as compared to 3 million euros for the second quarter of 2022, a 63.6% increase year over year. As referenced, the increase was driven by selling four focal one units in the second quarter of 2023 versus one unit sold in the second quarter of 2022. Total revenue in the litho business for the second quarter was 2.2 million euros as compared to 3.6 million euros for the second quarter of 2022. The year-over-year decline in litho revenue was mainly attributed to six less units sold year-over-year as well as supply chain constraints with a few key suppliers during the quarter. Total revenue in the distribution business for the second quarter was €7.2 million as compared to €7.6 million for the second quarter of 2022. The decline in distribution revenue was primarily driven by nine exact view units sold during the second quarter of 2023 as compared to 15 units sold during the second quarter of 2022. Gross profit for the second quarter was 5.7 million euros compared to 6.2 million euros for the year-ago period. Gross profit margin on net sales was 39.6% in the second quarter compared to 43.8% in the year-ago period. The decrease in gross profit margin year-over-year was primarily due to distribution product mix, global inflationary price pressure on components with increased manufacturing costs, and continued investments in our U.S. service and clinical application organizations to support HIFU and long-term revenue growth. Operating expenses were 9.9 million euros for the second quarter, compared to 6.6 million euros for the same period of 2022. The increase in operating expenses was primarily due to the strategic and planned build-out of the US team and commercial infrastructure, variable compensation, and increased marketing activities. Operating loss for the second quarter was 4.2 million euros, compared to an operating loss of 0.4 million euros in the second quarter of 2022. Excluding the impact of non-cash share-based compensation, operating loss for the second quarter would have been 3.1 million euros compared to an operating loss of 0.1 million euros in Q2 2022. Net loss for the second quarter was 4.7 million euros or 0.13 euros per diluted share as compared to net income of 1.8 million euros or 0.05 euros per diluted share in the year-ago period. Total cash and cash equivalents at the end of Q2 was 51.3 million euros or 56 million in U.S. dollars as compared to 58.3 million euros or 63.4 million in U.S. dollars at the end of Q1 2023. We continue to monitor cash flow closely as we invest for long-term business growth, while also remaining cognizant of short-term financial performance. Through our strategic investments, we are confident in realizing the extraordinary opportunity with Focal One Haifu to fundamentally change the emerging treatment paradigm for the management of prostate cancer. Those are our key financial highlights for the second quarter of 2023, and with that, I'd like to turn the call back to Ryan. Ryan? Thank you, Ken. In summary, our second quarter results continue to reinforce our confidence in the growing demand for Focal 1, as well as validating our strategy and execution to drive education and adoption. Sales and unit placements of Focal-1 are growing along with increased Focal-1 HIFU procedures. In closing, we remain optimistic about the remainder of 2023. I would like to thank the entire EDAP team for their dedication and hard work that is driving increased awareness amongst clinicians and patients of Focal-1 HIFU as an important and growing treatment option for prostate cancer management. We look forward to sharing our progress with you again in the fall. And I will now turn it back over to the operator for questions. Operator?