Greetings, and welcome to the EDAP TMS First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Fraunces, Managing Director of Life Advisors. Thank you. Please go ahead.

Good morning. Thank you for joining us for the EDAP TMS first quarter 2023 financial and operating results conference call. On today's call, we'll hear from Ryan Rhodes, Chief Executive Officer; and Francois Dietsch, 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 first 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. After reporting a record fourth quarter, I'm pleased to note that our strong business execution has continued into 2023, reporting our strongest ever first quarter revenue performance. In Q1 2023, we recorded revenue of €14.8 million, or $15.9 million, which is a year-over-year increase of 13.8% over the first quarter of 2022. Focal One Robotic HIFU sales continue to drive our strong top line performance. During this last quarter, we were successful in placing seven Focal One units, including six equipment sales and one operating lease. One of the noted placements included UCLA Medical Center located in Los Angeles, California. With the addition of UCLA, we have now placed Focal One Robotic HIFU systems at each and every university of California academic teaching hospital. In addition, last quarter, we placed our first Focal One systems in the states of Minnesota and Tennessee, reflecting our expanding and growing geographical presence across the U.S. Lastly, we placed a Focal One system at Santa Barbara Cottage Hospital and we also placed our first Focal One system at Kaiser Permanente Hospital. As market demand for Focal One HIFU technology continues to grow, we are pleased to note that more community hospitals are adopting our technology. Not surprisingly, the leading academic urology-focused hospitals were amongst the first adopters of Focal One Robotic HIFU. We now see a growing interest in Focal One technology in large community urology practices, indicating market demand is likely to increase as we further penetrate this key target market segment. An account like Kaiser, which is a leader…

Thank you, Ryan, and good morning, everyone. I would like to start by thanking our global cross functional teams who executed with dedication to deliver a solid first quarter of 2023. Please note that all figures, except for percentages, are in euros. For conversion purposes, our average euro-dollar exchange rate was 1.0777 for the first quarter of 2023. Total revenue for the first quarter was €14.8 million, an increase of 13.8% as compared to €13 million for the same period in 2022, and a record level for a first quarter. Looking at revenue by division, total revenue in the HIFU business for the first quarter was €5.3 million as compared to €3.8 million for Q1 2022. The 37.5% increase was driven primarily by six Focal One units sold in the first quarter versus four units sold in the first quarter of 2022. Total revenue in the LITHO business for the first quarter was €2.8 million as compared to €2.2 million for the first quarter of 2022. The improvement was driven by four lithotripsy units sold in the first quarter as compared to one unit sold in the first quarter of 2022. Total revenue in the distribution business for the first quarter was €6.8 million as compared to €7 million for the first quarter of 2022. The slight decrease was driven primarily by eight ExactVu units sold during the first quarter as compared to nine units sold during the first quarter of 2022. Gross profit for the first quarter was €6 million as compared to €5.8 million for the year ago period. Gross profit margin on net sales was 40.8% in the first quarter compared to 44.3% in the year ago period. The decrease in gross margin year-over-year was primarily due to investments in our service and clinical application support organizations…

Thank you, Ken. In summary, our strong first quarter results demonstrate that our efforts and strategies are proving effective. The improved reimbursement landscape is having an impact, and we believe Focal One HIFU is fast becoming a necessity to offer prostate cancer patients in the management of their disease. Based upon the results today and the positive feedback from urologists, particularly at this year's recent AUA meeting, we have every reason to anticipate continued strength throughout 2023. We want to again recognize and thank the entire EDAP team and the pioneering clinicians and their patients who seek the benefits and value in embracing Focal One HIFU as an appropriate treatment choice. I will now turn it back over to the operator for questions. Operator?

Thank you. The floor is now open for questions. [Operator Instructions]. The first question today is coming from Joseph Downing of Piper Sandler. Please go ahead.

Hi, guys. Good morning. Joe here for Jason Bednar today. How is the Focal One utilization been trending in 1Q following the reimbursement up coding? And what's the right way for investors to be thinking about utilization levels over the balance of the year, particularly as procedure volumes recover across the healthcare landscape?

Yes. So we've stated before, on a trend basis, Q1 is certainly favorable. We continue to see double digit growth, but we don't share our exact numbers. So directionally, we're seeing the benefits of the reimbursement change that went into effect January. We're again monitoring this very closely. And remember also, we also added last year our regional clinical manager team and applications team, so they're part of the process of driving hospital-based utilization. So again, we're trending favorably, and we are excited about the momentum in the market. And we continue to monitor it on a daily, weekly, monthly and quarterly basis.

Great. Thanks, Ryan. And then I think you mentioned on the previous call that there wasn't much in the way of a broad hesitation to purchase capital equipment. Just wondering if there's any update on how the capital equipment environment is shaping up amongst your hospital customers? And is there any distinction being made between buying patterns than some of the larger versus some of the smaller hospital customers you serve?

Yes, I think from my vantage point and how we look at it, it seems to be pretty consistent. Depending on markets, there are some pressures, I think, in some institutions, but I think we have been effective is obviously we've talked about reimbursement and that change. But adding Focal therapy to your prostate cancer treatment options for an institution is really strategic in nature. It's not an operational investment. So centers that understand that, this is anchored in cancer, it's anchored in the number one cancer diagnosed in men, it's also tied to men's health initiatives typically found in hospital institutions. So we continue to work through the processes, as noted. We do see more interest coming from community hospitals. We work both academic centers and community hospitals in tandem. And I think some of the benefits of reimbursement have played into making the decision to invest in acquiring Focal One Robotic HIFU technology. So we're excited to see the engagement. And as mentioned, we've hired more sales people. So I think we're getting more touches out in the market.

Perfect. Thanks, Ryan. And one more, I appreciate the updates on Phase 3. It seems like no change there for rectal endometriosis. I'm wondering if you could update us on where some of the clinical work sits and some of the other indications you're pursuing, particularly for BPH. What are some reasonable timelines or milestones you're extracting there? And are there any other indication expansion we should have on our radar?

Yes, so we've socialized the activity on BPH really being more focused on feasibility study work we're doing in Europe. We're going to broaden that in some regards. We have a plan to do that. But a lot of that work is being done currently in Europe. And we'll look for a strategy more specific to the U.S. over time. Again, we have a lot of strong users in Europe, as you can imagine, and many are participating in some of the early feasibility work that we're doing. And as we move forward, we'll look to expand that at some point with U.S. sites. But again, we're still early in our feasibility work and we're continuing to make progress as planned. Nothing else that I can speak to about other indications other than what's been already mentioned with endometriosis.

Great. Really appreciate the updates.

Thank you, Joe.

Thank you. The next question is coming from Mike Sarcone of Jefferies. Please go ahead.

Hi, thanks. And thanks for taking my questions. So just to start, can you elaborate a little bit more, Ryan, on the sales funnel and maybe just give us an update on how conversations went at AUA and maybe the new leads that you generated post that conference?

Yes, Michael, we had a real strong showing, as mentioned at AUA stronger showing ever. We were large, we were prominent. And we even added some presentations in our booth throughout the meeting. So we brought our whole capital team there. So we had everybody on board. The engagement, I would say, was very high. For some customers, they were already in our pipeline and we're moving them through that sales pipeline. But we also had notable new touches from new hospitals. And so I think as we've continued to make progress in growing our install base, there's -- realize that Focal therapy is a necessity and hospitals need to answer to that. And when they answer to that, the question is what technology do they answer with? And that's where I think we've been strong in our showing and being able to there at that meeting actually give hands-on procedural simulations of a Focal One treatment. We did that throughout the meeting. We also used and showed our 29 megahertz micro-ultrasound product, ExactVu. So we had more than one product to talk about. But I would say, overall, the engagement was very high. There were some notable presentations given. And, again, as we've added recent headcount to our sales team, we had everybody there who was available to really take advantage of AUA and our strong showing. So I think our pipeline continues to build. It's the strongest it's ever been. And we continue to add new accounts into that active pipeline.

Okay, thanks. That's really helpful. And I would love to also hear just what kind of turnout you got for the live procedure in April, and maybe the conversations and then the level of awareness you're seeing post that live procedure?

Yes. So we had a couple 100 folks logged on for the live event. And, again, we still see people going back to watch the replay. So I think it exceeded our expectations. We also had representatives from all over the world. So it wasn't just from the U.S. So we had promoted that on a global basis and saw many physicians from the extended OUS markets also watching the live broadcast. And again, it was very well received. I think people really had a better understanding of how our technology works, how it's very efficient, they got to see all the benefits that we typically describe the robotic positioning system, the contouring capability in Focal One, the speed of treatment which is notably something that we discuss with many of our customers because we have a very efficient way to ablate prostate tissue. So again, it was a very good showing for us, and we still see customers continue to log on to watch it for educational purposes, or just to better understand the technology.

Okay, great. And then just one more for me, maybe for Ken. How should we think about OpEx spend through the rest of the year?

Yes. So for OpEx this year, we continue to see it grow a little bit quarter-over-quarter as we continue to invest in both the commercial infrastructure to help build out the business here in the United States.

Okay. Thanks a lot.

Thanks, Michael.

Thank you. The next question is coming from Sean Lee of H.C. Wainwright. Please go ahead.

Good morning, Ryan and Ken. Thanks for taking my questions. My first one is on the upcoming Phase 3 study. Could you provide a bit more color on the design of the study? And also, whether there are any changes in terms of patient selection and treatment compared to the previous Phase 1, 2?

Yes, so you're referring to the endometriosis study. Is that correct?

That's correct. Yes.

Yes. So the Phase 3 study, as mentioned, it will be 60 patients. This is a blinded study, so half of those patients will be subject to an ablation of their endometrial implants and the other half will be part of a SHAM non-treatment arm. So again, I think this being a more stricter study in terms of protocol and design will really allow us to show with increasing evidence the value of being able to ablate endometrial implants of the rectum for women suffering from deep rectal endometriosis. So again, we're working closely with the center and enrolling patients as we're speaking now, because we're in Q2. And again, we're excited about the momentum I think and the interest. And we'll continue to work closely with our lead site as we enroll more patients and treat more patients.

Great. Just a quick follow up. Considering that the planned sites are all in France, do you believe that the results of this study could be used to support approval in this indication to U.S. as well?

Yes, Sean, that's a great question. Yes, we would want to use that data. One of our goals we've socialized is getting in front of the FDA this year for a pre-submission and really get a further understanding of what the acceptable data that we'll be looking for. But I think that data would be very useful from all the studies we've done, certainly the more recent one we're working on, but also the Phase 2 study that we had already completed. So we'll have to see what the FDA's response will be. But our goal, yes, would be to use that data where needed to make a case for a new indication in the U.S.

Great. Thanks for that. That's all I have.

Thank you, Sean.

Thank you. The next question is coming from Frank Takkinen of Lake Street Capital Markets. Please go ahead.

Hi. Thanks for taking the questions. I was hoping we could revisit placement expectations for the year, clearly a strong start with seven this year. Looking back at last year, it's obviously a much more volatile macro environment, so a little bit hard to take away any meaningful insight from the placement sequential cadence from last year. But maybe could you just speak to generally speaking, if we should be getting back to a more normalized seasonal pattern as Q1 is normally the lightest and Q2 and Q3 a little bit better? Maybe some lightness in Q3 due to OUS seasonality and then Q4 being strongest, but we're just hoping you can kind of put some guideposts around placement expectations for 2023?

Yes. So, Frank, I would look at it as kind of similar to what you had referenced. Certainly, coming off of Q1, we're continuing to see some momentum in the market. But again, hospitals buy on their own timelines. So it's sometimes hard to predict, again, if a deal gets done in a particular quarter or moves out a quarter. I would say on a directional basis, I think we would expect to see anticipated growth similar to what you referenced, Q2 being a quarter that would be certainly positive over prior year. I can't give you exact numbers. But also as mentioned, as we walk into Q3 and you see sometimes a slow down, especially in OUS markets and even sometimes in the U.S., and then you come out of it in Q4, which is typically seasonally our strongest quarter or strongest quarter for capital purchases. So I think we would follow along those lines in terms of how we would predict capital sales for the remainder of the year. As mentioned too and just answering a question we get asked, we've added some new capital sales executives. And our total sales team today is at about 19, both capital and clinical. We expect that number to jump by in a year to 38 to 40. So with that said, as we onboard more of those folks and have more touches and engagement, we would anticipate continuing to build a strong pipeline of potential accounts.

Okay, that's helpful. And then my second question was actually going to be directly on the sales organization. So thanks for that color. Maybe if you could provide a little more color of expected hiring cadence throughout the year to get to 38 to 43, should we think of that as a linear progression throughout the year? And maybe just talk about the quality of sales reps you're attracting to the organization now?

Yes, Frank, so I'd say the quality -- we're tapping into a higher quality segment of potential sales executives. And I think a lot of it is relevant to this story and we'll call it wins that we've had in the market already. I think people understand what we're doing; right product, right time, right market. So I think quality, obviously, is always important. But I'm impressed with the recent hires we've made on the capital side and clinical side. But speaking to the cadence, the capital team will typically ramp faster, because we're out selling capital. The clinical team will be hired as a result of those capital placements. So depending on the market, we would hire additional clinical folks. We would hire them as to where we place those systems. So they typically trail the system placements on some level, obviously, a coverage model, your largest MSAs, or metropolitan statistical areas. We focus on those and/or large metropolitan markets where there's a higher concentration of patients and hospitals. So I would just say, we continue to interview and hire routinely. And we'll do that in quarter two, the quarter we're in now, three and four and hit our year end goal of having a fully staffed team. But again, I think the capital folks will be hired before the clinical folks typically and we'll make the necessary adjustments on an as needed basis. So we're excited to make those investments and we're on our roadmap. Currently, we're on plan and we'll continue to make those additional hires throughout the rest of the year.

Got it. That's helpful. Maybe the last one for Ken as it relates to the gross margin. How should we be thinking about HIFU continuing to become a larger portion of sales that should naturally bring up that margin profile over time, but maybe just if you could throw some goalposts around gross margins expectations for the year, that'd be helpful as well?

Yes, so on the HIFU business, we should definitely -- as we sell more HIFU during the year, that will definitely be accretive to gross margin. So we will definitely see margin tick up there. In our other businesses, particular distribution, we need to trend the mix, right, of products. We did see distribution margin ticked down a little bit just due to mix of product, especially in Japan. And then I think also on the U.S. front, as procedure volumes grow, okay, that will continue to also help aid to accretive gross margins in the Focal One space in the U.S.

Okay, that's helpful. Thanks for taking the questions and congrats on all the progress.

Thank you, Frank.

Thank you. At this time, I would like to turn the floor back over to Mr. Rhodes for closing comments.

In closing, I want to thank all who participated in today's call. We look forward to speaking with you in August on results from our 2023 second quarter earnings release. Thank you, again.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your line or log off the webcast at this time, and enjoy the rest of your day.