EDAP TMS S.A. (NASDAQ:EDAP) Q1 2019 Results Earnings Conference Call May 16, 2019 8:30 AM ET Company Participants Jeremy Feffer - IR, LifeSci Advisors Philippe Chauveau - Chairman Marc Oczachowski - Chief Executive Officer François Dietsch - Chief Financial Officer Conference Call Participants Walter Ramsley - R-Squared Brooks O'Neil - Lake Street Capital Markets Matthew Pilkington - Strategic Credit Concepts Operator Greetings and welcome to the EDAP TMS First Quarter 2019 Earnings Conference Call. At this ...

[PART I](index=6&type=section&id=PART%20I) [Key Information](index=6&type=section&id=Item%203.%20Key%20Information) This section presents EDAP's five-year financial summary, highlighting revenue growth, recent losses, and critical risks including HIFU reliance, regulatory hurdles, and internal control weaknesses Selected Consolidated Financial Data (in thousands of euros) | Indicator | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | **Income Statement Data** | | | | | Total revenues | 39,183 | 35,746 | 35,611 | | Gross profit | 16,917 | 14,808 | 16,411 | | Income (loss) from operations | (1,315) | (2,027) | 392 | | Net income (loss) | (338) | (681) | 3,842 | | **Balance Sheet Data (End of Period)** | | | | | Total assets | 48,740 | 46,897 | 46,591 | | Total shareholders' equity | 24,964 | 25,158 | 24,451 | - The company has a history of operating losses, achieving profitability only in **2015 and 2016**, with losses returning in **2017 and 2018**; future profitability is uncertain as expenses are expected to increase with HIFU commercialization[22](index=22&type=chunk)[23](index=23&type=chunk) - Future growth is highly dependent on the success of **HIFU technology** (Ablatherm, Focal One), as the traditional ESWL market is mature with declining prices[24](index=24&type=chunk) - Significant risks exist related to obtaining and maintaining regulatory approvals (e.g., from **FDA**, and under the new **EU MDR**) and securing reimbursement for procedures from payers like **CMS** and national health authorities[27](index=27&type=chunk)[30](index=30&type=chunk)[38](index=38&type=chunk) - A material weakness in internal control over financial reporting was identified as of **December 31, 2018**, related to a new SAP system implementation, though a previous material weakness from **2017** was remediated[84](index=84&type=chunk)[85](index=85&type=chunk)[90](index=90&type=chunk) - The company faces intense competition from manufacturers with greater resources and from alternative therapies, including **Wolf, Storz, Dornier** in ESWL and **SonaCare Medical, Profound Medical, Insightec** in HIFU[45](index=45&type=chunk)[46](index=46&type=chunk) [Information on the Company](index=21&type=section&id=Item%204.%20Information%20on%20the%20Company) EDAP TMS is a medical technology company specializing in minimally invasive urology devices, operating through its HIFU division for prostate cancer treatment and UDS division for ESWL and third-party product distribution - The company operates through two divisions: **HIFU** (High-Intensity Focused Ultrasound) and **UDS** (Urology Devices and Services, including lithotripsy)[117](index=117&type=chunk) Divisional Net Sales (in millions of euros) | Division | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | HIFU | €11.0 | €9.5 | €13.8 | | UDS | €28.1 | €26.2 | €21.8 | - Key recent milestones include **FDA 510(k) clearance** for Ablatherm Fusion in **October 2017** and Focal One in **June 2018**, both for prostate tissue ablation[114](index=114&type=chunk)[115](index=115&type=chunk) - The company's manufacturing operations are consolidated at a single, **FDA-approved and ISO 13485 certified facility** in Vaulx-en-Velin, France[195](index=195&type=chunk)[201](index=201&type=chunk) [HIFU Division](index=22&type=section&id=HIFU%20Division) The HIFU division develops robotic devices for minimally invasive prostate cancer treatment, with key products like Focal One, aiming to establish HIFU as a standard of care and expand applications to other tumors - Core products include **Ablatherm, Ablatherm Fusion, and Focal One**, all robotic HIFU devices for treating localized prostate cancer[121](index=121&type=chunk)[130](index=130&type=chunk) - The business model includes direct equipment sales and a **Revenue-Per-Procedure (RPP) model**, where hospitals use devices and pay per treatment[122](index=122&type=chunk) - Obtained **CE Marking** for Focal One in Europe (**June 2013**) and **FDA 510(k) clearance** in the U.S. (**June 2018**)[138](index=138&type=chunk)[142](index=142&type=chunk) - Expanding HIFU applications beyond prostate cancer, with the **HECAM project** focused on developing a treatment for liver cancer, supported by a **€2.4 million grant** from Bpifrance[125](index=125&type=chunk)[159](index=159&type=chunk) [UDS Division](index=30&type=section&id=UDS%20Division) The UDS division focuses on the mature ESWL market for urinary stones, leveraging its installed base for recurring revenue and its distribution network to market complementary third-party urology products - Primary business is manufacturing and marketing lithotripters (**Sonolith i-move, Sonolith i-sys**) for ESWL treatment of urinary stones[173](index=173&type=chunk) - The ESWL market is mature, with revenue growth driven by a large installed base (**725 units serviced**) generating sales of disposables and maintenance, and by the replacement market[173](index=173&type=chunk)[188](index=188&type=chunk) - A key strategy is capitalizing on its established distribution network to sell third-party products, including urology lasers from **Lumenis and Quanta System**, and urodynamics products from **Laborie**[176](index=176&type=chunk)[194](index=194&type=chunk) [Operating and Financial Review and Prospects](index=34&type=section&id=Item%205.%20Operating%20and%20Financial%20Review%20and%20Prospects) In fiscal year 2018, total revenues grew to **€39.2 million**, gross margin improved, and net loss decreased, while cash declined; the company adopted ASC 606 and faces significant currency fluctuation risks Financial Performance: 2018 vs. 2017 (in millions of euros) | Metric | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | 39.2 | 35.7 | +9.6% | | Gross Profit | 16.9 | 14.8 | +14.2% | | Gross Margin | 43.2% | 41.5% | +170 bps | | Operating Loss | (1.3) | (2.0) | Improved | | Net Loss | (0.3) | (0.7) | Improved | Financial Performance: 2017 vs. 2016 (in millions of euros) | Metric | 2017 | 2016 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | 35.7 | 35.6 | +0.3% | | Gross Profit | 14.8 | 16.4 | -9.8% | | Gross Margin | 41.5% | 46.1% | -460 bps | | Operating Income/(Loss) | (2.0) | 0.4 | Declined | | Net Income/(Loss) | (0.7) | 3.8 | Declined | - Cash and cash equivalents decreased from **€20.0 million** at year-end **2017** to **€19.5 million** at year-end **2018**, with net cash from operating activities turning positive at **€0.2 million** in **2018** from a **€3.1 million** use in **2017**[294](index=294&type=chunk)[297](index=297&type=chunk) - The company is exposed to foreign currency risk, with approximately **74% of costs in euros** and **41% of sales in other currencies**, primarily USD and JPY, in **2018**[250](index=250&type=chunk) [Directors, Senior Management and Employees](index=47&type=section&id=Item%206.%20Directors,%20Senior%20Management%20and%20Employees) This section details the company's leadership, board composition, executive compensation, employee headcount, and stock option plans, noting senior management's minimal share ownership - The senior executive team consists of **Marc Oczachowski** (Chief Executive Officer) and **François Dietsch** (Chief Financial Officer)[317](index=317&type=chunk) Employee Headcount by Year | Year-End | Total Employees | | :--- | :--- | | 2018 | 215 | | 2017 | 200 | | 2016 | 197 | - Aggregate compensation for Senior Executive Officers and the Board of Directors was approximately **€514,000** for fiscal year **2018**[325](index=325&type=chunk) Stock Option Activity | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Outstanding Options (Year-End) | 1,347,600 | 1,207,600 | | Weighted Average Exercise Price (€) | 2.61 | 2.61 | | Exercisable Options (Year-End) | 772,600 | 598,850 | [Major Shareholders and Related Party Transactions](index=52&type=section&id=Item%207.%20Major%20Shareholders%20and%20Related%20Party%20Transactions) As of December 31, 2018, no shareholder beneficially owned more than 5% of shares, and related party transactions with Dae You ceased in 2017, with 2018 involving subsidiary loan guarantees - To the company's knowledge, there are no beneficial owners of more than **5%** of its shares as of **December 31, 2018**[344](index=344&type=chunk) - As of **April 12, 2019**, there were **28,997,866** outstanding shares[335](index=335&type=chunk)[347](index=347&type=chunk) - Related party transactions with Korean company **Dae You** ceased in **October 2017**; in **2018**, the company provided personal loan guarantees for its Japanese and Malaysian subsidiary heads, a standard practice[348](index=348&type=chunk)[350](index=350&type=chunk)[351](index=351&type=chunk) [Financial Information](index=53&type=section&id=Item%208.%20Financial%20Information) This section confirms financial statements are in Item 18, highlights **70%** export sales in **2018**, notes ordinary course legal proceedings, and states the company's policy of no future dividends - Export sales (outside of mainland France) represented **70%** of total net sales in **2018**, amounting to **€27.6 million**[353](index=353&type=chunk) - The company has never paid dividends and does not anticipate paying any in the foreseeable future, with any future earnings intended for reinvestment[100](index=100&type=chunk)[358](index=358&type=chunk) - The company is not currently involved in any material legal proceedings outside the ordinary course of business[355](index=355&type=chunk) [Additional Information](index=54&type=section&id=Item%2010.%20Additional%20Information) This section details the company's corporate governance under French law, including board structure and shareholder rights, and outlines French and U.S. tax implications for security holders, including PFIC status - The company's corporate affairs are governed by its by-laws (statuts) and French law, with a **five-member Board** and distinct roles for the Chairman and CEO[362](index=362&type=chunk)[365](index=365&type=chunk)[379](index=379&type=chunk) - For U.S. holders, dividends are generally subject to a **30% French withholding tax**, reducible to **15%** (or **5%** for certain corporate holders) under the U.S.-France tax treaty by following specific procedures[426](index=426&type=chunk)[447](index=447&type=chunk) - U.S. holders are generally not subject to French tax on capital gains from the sale of securities, unless the gain is connected with a permanent establishment in France[454](index=454&type=chunk) - The company believes it was not a **Passive Foreign Investment Company (PFIC)** for U.S. tax purposes in **2017 and 2018**, though prior years may have adverse tax consequences for certain long-term U.S. holders[464](index=464&type=chunk)[465](index=465&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=59&type=section&id=Item%2011.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company's primary market risk is foreign currency exchange rate fluctuations, with **74% of costs in euros** and **41% of sales in other currencies** in **2018**, and equity price risk from warrants eliminated by year-end **2018** - The company is significantly exposed to exchange rate risk; in **2018**, **74% of costs were in EUR**, while a large portion of revenue was in USD and JPY[477](index=477&type=chunk) - A uniform **10% strengthening of the euro** against USD and JPY would have increased income before taxes, while a **10% weakening** would have decreased it, highlighting profit sensitivity to currency movements[478](index=478&type=chunk) - Equity price risk related to outstanding warrants was eliminated as all warrants expired by the end of **2018**[483](index=483&type=chunk) [PART II](index=72&type=section&id=PART%20II) [Controls and Procedures](index=72&type=section&id=Item%2015.%20Controls%20and%20Procedures) Management and KPMG concluded internal controls were ineffective as of **December 31, 2018**, due to a material weakness from a new SAP system implementation, though a **2017** weakness was remediated - Management and the independent auditor (**KPMG**) concluded that internal control over financial reporting was not effective as of **December 31, 2018**[493](index=493&type=chunk)[500](index=500&type=chunk)[506](index=506&type=chunk) - A material weakness was identified related to the implementation of a new **SAP S/4HANA system**, citing deficiencies in program change authorization, data migration testing, and segregation of duties[501](index=501&type=chunk) - The company has begun remediation efforts to address the **2018** material weakness[502](index=502&type=chunk) - A material weakness from **2017**, related to insufficient segregation of duties in the consolidation process, was successfully remediated as of **December 31, 2018**[504](index=504&type=chunk) [Corporate Governance and Other Matters](index=73&type=section&id=Item%2016.%20Corporate%20Governance%20and%20Other%20Matters) This section covers corporate governance, including the audit committee financial expert, code of ethics, the change of auditor to **KPMG S.A.** in **June 2018**, and the company's adherence to French governance practices as a foreign private issuer - The Board of Directors has determined that **Mr. Pierre Beysson** qualifies as an audit committee financial expert[509](index=509&type=chunk) - The company changed its certifying accountant in **June 2018**, dismissing **PricewaterhouseCoopers Audit** and appointing **KPMG S.A.**[519](index=519&type=chunk)[522](index=522&type=chunk) Principal Accountant Fees (in euros) | Nature of the Fees | Fees for 2018 (KPMG) | Fees for 2017 (PwC) | | :--- | :--- | :--- | | Audit fees | 398,177 | 329,000 | | Audit-related fees | 19,700 | - | | **Total** | **417,877** | **329,000** | - As a foreign private issuer, the company is exempt from and follows French law instead of certain NASDAQ corporate governance rules, such as shareholder quorum requirements[524](index=524&type=chunk)[525](index=525&type=chunk) [PART III](index=76&type=section&id=PART%20III) [Financial Statements](index=79&type=section&id=Item%2018.%20Financial%20Statements) The consolidated financial statements, prepared under U.S. GAAP and audited by KPMG, show **€48.7 million** in total assets and a **€0.3 million** net loss in **2018**, with cash from operations turning positive and ASC 606 adopted Consolidated Balance Sheet Highlights (in thousands of euros) | Account | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Cash and cash equivalents | 19,464 | 20,004 | | Total current assets | 40,376 | 39,574 | | Total assets | 48,740 | 46,897 | | Total current liabilities | 16,812 | 16,134 | | Total liabilities | 23,776 | 21,739 | | Total shareholders' equity | 24,964 | 25,158 | Consolidated Statement of Income (Loss) Highlights (in thousands of euros) | Account | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total revenues | 39,183 | 35,746 | 35,611 | | Gross profit | 16,917 | 14,808 | 16,411 | | Income (loss) from operations | (1,315) | (2,027) | 392 | | Net income (loss) | (338) | (681) | 3,842 | | Diluted EPS (€) | (0.01) | (0.02) | 0.13 | Consolidated Statement of Cash Flows Highlights (in thousands of euros) | Account | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 175 | (3,059) | 1,209 | | Net cash used in investing activities | (1,569) | (2,032) | (384) | | Net cash from financing activities | 1,178 | 2,871 | 7,604 | | Net (decrease) increase in cash | (539) | (1,985) | 8,410 | - The company adopted **ASC Topic 606** (Revenue from Contracts with Customers) on **January 1, 2018**, using the cumulative effect method, with no material impact on opening equity or **2018** revenue[656](index=656&type=chunk)[657](index=657&type=chunk)[659](index=659&type=chunk)

EDAP TMS S.A. (NASDAQ:EDAP) Q4 2018 Earnings Conference Call April 2, 2019 8:30 AM ET Company Participants Jeremy Feffer - IR, LifeSci Advisors Philippe Chauveau - Chairman Marc Oczachowski - Chief Executive Officer François Dietsch - Chief Financial Officer Conference Call Participants Swayampakula Ramakanth - H.C. Wainwright Stefan Schwab - Linoa Holding Operator Greetings and welcome to the EDAP TMS Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. At this time, all participants are in a list ...