Jeremy Feffer - IR, LifeSci Advisors, LLC Philippe Chauveau - Chairman Marc Oczachowski - CEO François Dietsch - CFO

Swayampakula Ramakanth - H.C. Wainwright Paul Nouri - Noble Equity Fund Jeffrey Cohen - Ladenburg Thalmann Stanley Mason - Private Investor John Lin - HIFU Prostate Services Mike Donovan - Private Investor

Please standby. Good day and welcome to the EDAP TMS Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jeremy Feffer. Please go ahead.

Thank you, Lauren. Good morning and thank you for joining us for the EDAP TMS third quarter 2018 earnings conference call. On today's call we will hear from Philippe Chauveau, Chairman of the Board; Marc Oczachowski, Chief Executive Officer; and François 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, Philippe Chauveau. Please go ahead.

Thank you and thank you all for joining us today. During the third quarter, we maintained and built upon the commercial momentum that we experienced during the first half of the year and our discussions with leading institutions in the U.S. are progressing and several have entered into an advanced stage. We remain excited about the potential of Focal One to disrupt the current prostate cancer treatment paradigm and believe we are well-positioned to deliver long-term value to our shareholders while offering superior outcomes to prostate cancer patients. With that, I would like to turn over the call to EDAP's CEO, Marc Oczachowski. Marc?

Thank you, Philippe. Good morning everyone and thank you for joining us for our third quarter 2018 conference call. François will detail our financial results a bit later on, but as short comment, we finished the first nine months of 2018 with a revenue of €25.9 million, a 3% increase with €25.1 million for the comparable year in 2017. And while it is of course important that we are a commercial stage company generating revenue, today's update is more about the future potential of the company given our accelerating sales momentum rather than revenue generated in the past. During the third quarter, we continued to execute on our primary growth strategy which is to expand our commercial footprint for Focal One our next-generation HIFU device for the treatment of prostate cancer. In our view, Focal One represents a paradigm shift in the treatment of prostate cancer. It is currently the only device cleared by FDA that can perform high targeted prostate tissue ablation while stirring healthy surrounding tissue and avoiding many of the line altering side effects of traditional treatment such as surgery including impotent and incontinence. Now hitting some of the highlights from the quarter, we announced the installation of our third Focal One device sold in Brazil, one of the largest addressable market in Latin America, with an estimated 70,000 mutations of prostate cancer every year. Also in South Korea, we announced our first installation at one of the company's most renowned Centers of Excellence through National University Bundang Hospital. Going forward, this will be an important wisdom site in South Korea, which is among the most important medical device market in all of Asia, and one, that we expect will drive future sales growth not only in South Korea but in the region more broadly. In the U.S. following AB approval that we announced last quarter, our commercial team continues to engage in advanced nutrition with leading hospitals and health centers that we hope will result in simplifying contract and subsequent installation in the near-term. These will be a significant inflection point for our company as a U.S. government installation would represent our formal entry into the largest medical device markets in the world. And given the caliber of institutions that we are searching too, we will have an important reference type that we think will be key to driving future growth across the U.S. This remains a top priority for our team and we will approach this U.S. as soon as [indiscernible]. As with any piece of capital equipment, Focal One represents a significant investment for hospitals and as you can imagine the sales cycle is lengthy. The largest and patients life are in need of a better treatment options that allows for a more targeted treatment that can ablate even more caution of the prostate while minimizing damage to healthy tissue. As a result, the hospital that offers treatment with Focal One can differentiate itself from surrounding hospitals in the area, this attracting more patients. So while Focal One offers clinical advantages to the largest number of patients in parallel it can also offer tangible financial advantages to hospitals. Finally on the corporate front, we announced last month that warrants were approximately 3.3 million ordinary shares in the form of American Depository Shares ADS expired on October 14, 2018. This situation can be simplified tactical structure and leaves us with one tranche of 1.5 million warrants remaining that expires throughout the end of the month on November the 29. The ongoing simplification of our capital structure should help attract more fundamental long-term investors, who can appreciate our strengthening fundamentals without the distraction that the warrant is presented. In summary, we believe Focal One represents a significant advancement of our earlier HIFU device in terms of accuracy and precision of prostate tissue ablation that can consistently deliver improved patient outcome. And now, our CFO, François Dietsch will provide a review of our financial results. Francois? François Dietsch: Thanks you, Marc, 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 1.1641 for the third quarter and 1.1923 for the first nine months of 2018. Total revenue for the third quarter was €8.1 million, an increase of 14.2% versus Q3 2017 and a recovery there for the third quarter. On the HIFU side, we generated sales of €1.9 million representing an increase of 6% versus Q3 2017. The increase was driven by the sale of one Ablatherm device in U.S. in 2018 that is none in the year-ago period. On the UDS business side, Q3 revenue of €6.2 million was up 17% versus the third quarter of 2017. We sold four lithotripsy devices in the quarter versus six in the same period last year. The increase was driven by 61% growth in our sales of Distribution product. Gross margin for the quarter was 41.5% an increase of 210 basis points year-over-year reflecting mainly the higher level of activities. Operating loss for the third quarter was €0.7 million as affecting 14 in our lithotripsy business was offset by an operating loss in HIFU. This compares to an operating loss of €1 million in the third quarter of 2017. Net loss for the quarter was €0.7 million or €0.02 per diluted share versus a net loss of €0.5 million or €0.03 per diluted share in Q3, 2017. The third quarter net loss included a non-cash interest income of €0.3 million to adjust the accounting fair value of our outstanding warrants. Turning to the first nine months of 2018, total revenue was €25.9 million as compared to €25.1 million for the comparable period in 2017, increasing a 6.3% increase in the UDS division sales and a 5.1% decrease in the HIFU sales -- from R&D in the U.S. For the nine months of 2018, gross margin was 32.3% an increase of 90 basis points year-over-year mainly driven by the higher level of activities. Operating expenses for the first nine months of 2018 were €13.5 million, an increase of €0.9 million compared to the comparable period in 2017, reflects the increased investment in sales and marketing and development program. Net loss for the first nine months of 2018 was €1.4 million and including non-cash interest income of €0.3 million to adjust the accounting fair values of the outstanding warrants. Lastly, we exited the third quarter with a strong cash balance of €15.9 million. The cash position at the end of September reflect the high level of working capital as we prepare the last quarter of the year. I will now turn the call back to Marc.

Thank you, Francois. As I said, we are very excited to have Focal One cleared for sale in the U.S. and we continue to make progress in our discussions with potential customers. With that, we would now like to open up the call to your questions. Operator?

Thank you. [Operator Instructions]. We will take our first question from Swayampakula Ramakanth with H.C. Wainwright.

Good morning, Marc.

Thank you.

Couple of quick questions. So when between Ablatherm commercialization and Focal One coming on board in the sense and getting approved, you had few potential customers waiting on the sidelines trying to figure out the approval of Focal One? So how many of those potentially leads at that time are either converting or getting ready to convert into customers of Focal One?

So for obvious competition reason, I won't give you too much details but we have and as I said right before the question, we had a number of very well done projects and discussions and we also have an increasing type of leading prospects. So we can really see the momentum since we got Focal One cleared by the FDA. But again I won't disclose names or numbers as obviously we're on the public call and competition heating as well.

I certainly understand that. Is that -- is there a way you could help us understand the selling cycle if you may for these devices because you got approval in June and people knew this was coming, what sort of -- what sort of paperwork or conversations you need to have for the hospitals to decide -- to order emission, order a Focal One and get the sales done. So in general how long of a cycle is it and since you've been in the U.S. market for a while now, is there any learnings from the previous times that's making you lower the amount of time for a sales cycle?

That's a good question. And I think it's important for everyone to understand the way it works in the sales cycle. It's not only a decision cycle; it's of course budgeting cycle. And usually in an hospital for this type of investments, about a million of dollars, usually you have to do a budget request during a year so that you can get it approved for the year -- for the following year. So for example, if you want to have -- you want to buy something in 2019, you have to make sure your request has been given to purchasing to the management of the hospital has been taken into account and approved so that you can get the phones of the level for the next year to get it built. So depending on hospitals, depending on institutions, the budget meetings and decision sometimes will pattern around half of the year let's say in summer is a good decision for budget discussion in hospitals for them to clarify and approve what will be invested and what will be spend for next year. So as you know, we got Ablatherm in June and as we said and of course we brought the case, a lot of our prostates, a lot of our Ablatherm users or the HIFU users in the U.S. were aware that we were in the process of FDA clearance though nobody can know the exact timing of when would it be approved or cleared or it will be given up. So it's very difficult if device is not cleared or available for sale it is treated as a budget request in hospitals so that we can get it validated for the next year. So to make a long short again, I mean you had to fix at least and you have to make the request for budget a year before and then you decide the year after will fix through the cycle is let's say between 12 to 18 months from the time you get the budget approved and till the purchase is done. So what we're working on is that there are a number of hospitals, number of urologists that are so interested in getting the new technology that they would try to manage that as special project which they could use a 2018 budget even though it was not allocated for the prostate budget [ph]. So that could be anything that could be sold this year would be special project, regular and standout project or investment in hospital usually happens a year after. In fact is that answering your question?

Perfect, thank you and now that's quite helpful. So having said that, so obviously what is -- I know you did make some commentary about your confidence for the upcoming year, but for us to get to that confidence level, so are there any way or is there any other way that we could get a feel for what the excitement is in the sense once this sale happens the next stage would be the reimbursement. So where are you on that front? And whatever you have had progress you have made so far can that apply to Focal One or does that cycle start all over again for Focal One?

So the reimbursement is not based on cost of a treatment is now based on duplication to get -- what we call additional CPT code. So that's a long process we will get to time and that requires not only several installation of equipment but treatment and duplication locally, that's something we work on.

We will take our next question from Paul Nouri with Noble Equity Fund.

Starting with the UDS business had a good performance this quarter and I think in the press release you mentioned that part of it was from distributor stocking, so should we expect kind of a snapback next quarter or now?

Sorry, I didn't get your question there.

I'm just asking if sales in the UDS division will fall off at all in the fourth quarter because it looks like there is distributor stocking in the third quarter?

Well, there is no relation between the one point and the other because we do -- UDS is a mix of all, lithotripsy revenue and distribution revenue and both are recovering fast in their revenues. So we don't expect that. And also the other thing is that as we explain a few times Q4 in our cycle equipment business is usually pretty strong as people usually try to spend their budget for -- revenue budget for year. So I would say probably not.

Okay, great. And then within that division, do you think there is any room to improve margins?

Well certainly there is always room to improve margins, so I would say, yes.

Okay. And you sold one HIFU device this quarter?

Yes.

So does that mean that the majority of the HIFU revenue now is recurring?

Well that's where I think between comfortable maintenance and efficiency.

Okay great. And any R&D updates in terms of next uses for the HIFU technology?

No real update will be given. It's at the time that we are continuing our different clinical and R&D programs for HIFU for the applications. So we’re on track in that, there is no -- not any update to be given so far.

Okay. And the cost structure for the HIFU division, do you think that you’re going to need to add more sales people in 2019 or any more infrastructure; do you think that this is kind of a good run rate to think about going into next year?

Well certainly, we will increase our footprint and our sales and marketing initiatives, as we are continuing our strategy of expansion both in new countries and markets. So we certainly will continue investing in sales and marketing into this HIFU.

Our next question comes from Jeffrey Cohen with Ladenburg Thalmann.

Hi Marc and François. Can you hear me, okay?

Yes. How are you?

Good morning. Doing fine. François, could you share anything specific to your warrants I believe so from April 2016 I believe it is €2.283 million exactly $4.50 expiring two years after that, can you refresh our memory what the numbers that you put out? François Dietsch: So you’re speaking about the warrants that already expired, right?

Yes, speaking about two tranches specifically, give me that please? François Dietsch: Yes, so the first tranche expired on October 14th and that's the one I think you were mentioning which was about 3.3 million warrants. And we had another tranche that will expire at the end of November on -- on the day of November the 29th, so 1.5 million, so after that we will have no warrants.

And you had 1.5 million in December, which current [ph] price you're doing?

4.25.

4.25, okay, perfect. And then secondly could you talk a little or so in the U.S. currently, number Focal One's are how many?

As I said, we just got it cleared in June and we are in discussions to close the first deal, so we don't have yet any Focal One in the U.S.

Okay. Some initial occasions at UM?

Sorry.

You had some initial occasions in University of Miami? Correct.

No, that was with the Ablatherm. As I said we don’t have any Focal One installed yet.

Okay. And what's the size of your commercial force in the U.S. currently in totality?

We've -- again moving forward obviously reason on the call we can have a slight discussion if you want, but nothing other than that. On the call, I won't disclose the [indiscernible] addition of that for competitive reasons but we have a pretty well coverage of the company.

Well actually my question was the size of your commercial sales force?

Yes, speaking as to coverage only.

Okay. And can you walk us through some of the data that you may expect in the short-term or medium-term being coming out related to Focal One and some of the conferences that you may be at as well?

I didn't really get the point can you ask again? Do you want to know which conference we are attending or what's your question?

Some of the scientific conferences as well as any data that's currently in the pipeline as far as being produced that will be presented at the conferences upcoming.

I don't really get it. We have -- like I said we have a number of advanced discussions with very well known physicians that I would not name. And we are as usual participating in most of the international or conferences or regional in the U.S.

Okay. One more if I may, since the approval in the summer, can you give us a sense of institutions, numbers of institutions that the company has been in communication with, is it five, is it 10, it is 50, and I guess where I'm trying to get at is get a better understanding of the pipeline but also to ask are those institutions -- is a large portion of those institutions having a capital cycle and are those capital cycles based on the calendar year and if so, do you feel like with some of these opportunities that you made into the 2018 capital budget, I guess is their way to ask the same question RK was asking previously but just trying to get a sense for commercialization and the potential ramp for the balance of this year and into 2019?

[Indiscernible] so we cannot get to RK, because that's how it worked. And usually most of hospitals or capital expenditure will have the best in process that I described earlier. And again I won’t disclose names or numbers of institutions we have a good number of them. And as I said we are in very well advanced discussions with some of them that are in some cases able to work on special projects that are not in the budget allocation, so that have to be fixed into their budget. And again we keep you posted as soon as we have announcements for [indiscernible].

We will take our next question from stockholder Jacqueline Day [ph]. Ms. Day, your line is open. We are unable to hear you, please check your mute function?

All right. Can you hear me now?

Yes, good morning.

Okay, thank you. Yes, good morning. I have been a long served investor with the good position in EDAP, I'm excited about the future of HIFU, I did listen to the fourth broadcast with Dr. Mio, and was very informative, wondering how you can expand on -- he did mention that the Medicare coverage we could be seeing that in about six months and looking for some expansion on that and whether or not EDAP is working in tandem with SonaCare to secure the Medicare payments. And if so how you're doing that?

Yes, the Medicare payment is already up in -- via C-code and the right code, I think we explained that a few times. The next step in the reimbursement process is to get a CPT code which is a different code for reimbursing the HIFU possibly for -- for the tissue ablation. And yes, as we said we're working jointly with SonaCare as the reimbursement is not device dependent but it’s based on the technology. So we can joint force, it's a very difficult, complex and lengthy process to get a CPT code and it proves to be joining for that.

We will take our next question from Private Investor, Stanley Mason.

Good morning, Marc.

Good morning, Stanley.

Good morning, Marc. Can you hear me?

Yes.

Okay, I'm wondering getting back to reimbursement Canada has four centers I think with our equipment and France has 67 centers with our equipment. I believe France has approved reimbursement for HIFU for prostate cancer; I'm not sure what the Canadian government has done but are they online with approval of insurance payments for HIFU?

Right. All those systems that you mentioned are very different in their working. To get back on France we have today like you said 67 centers almost 70 now using the technology with prostate cancer growth we have been granted with a -- like we explain as well few years ago with temporary reimbursement which we [indiscernible] what we get in the U.S. on the C-Code even though bit different, it could be -- we call it a SEDAR and that's a temporary reimbursement on the limited number of sites that are about 40 sites in France that can access reimbursement. So that means the others are treating without reimbursement. And that process will last for a few years until we get some clinical data out of the treatment from new sites that will be given to mutual sales and then we will decide to give to a definitive reimbursement with no mutation in number of sites. In other countries work differently where product and price systems are different so each market is a bit different. But what is true and what is similar in all of the market is that building a reimbursement process is a long and complex process and some -- most of the time very different from one place to the other.

We'll take our next question from John Lin with HIFU Prostate Services.

Hey Marc good morning. How are you?

Hey John I’m good and you?

Good, good. Being in the hyper business that we're in here in the United States we’ve been told that Medicare is going to be flashing the reimbursement in the hospital and the surgery centers starting January 1st you have any insight on that and has anything been done to help reverse that.

We've heard that as well. And as I said I mean we’re working on that top take of reinvestment with SonaCare and we are -- I mean we are jointly working on that as anything will stay and remain [indiscernible] till the end of the year anyways and we’re working with our consultants and SonaCare in what’s going to be on for next year, so it’s too early to say.

We'll take our next question from Private Investor Mike Donovan. Mr. Donovan, we're unable to hear you. Please check your mute function.

My question is what they are doing to getting involved as far as getting insurance reimbursement in the United States which would help stimulate sales significantly increase in insurance company reimbursement.

All right I think we definitely answer the question and again we’re working on that the complex and long process and we’re running of course with competition to welcome that to make sure the technology and reimbursement is recognized and we also taking some sales and marketing initiatives.

Thank you. And we have no further phone questions at this time. I would like to turn the conference back to Mr. Marc Oczachowski for any additional or closing remarks.

Again thank you very much for joining us in today's conference call and we look forward to keeping you posted on EDAP developments in the U.S. and worldwide. Thank you. Have a good day.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.