Good day, ladies and gentlemen, and welcome to the EnteroMedics Second Quarter 2013 Financial Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Greg Lea, Senior Vice President and Chief Financial Officer and Chief Operating Officer. Please go ahead, sir.

Thank you for joining us this morning to discuss our financial results for the second quarter of 2013. As a reminder, this conference call, as well as EnteroMedics' SEC filings and website at enteromedics.com, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results could differ materially from those discussed due to known and unknown risks, uncertainties and other factors. These risks and uncertainties are described more fully in the company's filings with the Securities and Exchange Commission, particularly those factors identified as risk factors in the company's 10-K filed March 7, 2013. With me on the call from EnteroMedics is Dr. Mark Knudson. We will begin with prepared remarks. When these are concluded, we'll open the call for questions. I will now turn the call over to Mark.

Thank you, Greg. Since the beginning of the second quarter, we have made significant progress in our U.S. regulatory strategy for VBLOC, vagal blocking therapy, delivered via the Maestro System. This culminated in the submission of our premarket approval application with the FDA at the end of the quarter. And as we announced last week, the FDA's acceptance for filing of that application. We are pleased by the continued progress of our PMA application through the FDA approval process. The focal point of the PMA application is our randomized pivotal ReCharge trial of VBLOC Therapy for the treatment of obesity. As announced at the beginning of the year, this study yielded a statistically significant and clinically meaningful excess weight loss outcome, along with an excellent safety profile, although it did not meet its predefined efficacy endpoints. Included in the results is an average excess weight loss of over 25% for VBLOC Therapy-treated patients, with almost 60% of patients achieving at least a 20% EWL in the per protocol population, that is patients who completed the 12-month visit, a group comprising almost 90% of subjects. The safety profile was exemplary and exceeded the standard set for that predefined endpoint. These results demonstrated both an excellent benefit-to-risk equation for our patient population and a significant clinical effect over the control group. These key criteria, we believe, support the potential for the Maestro System and VBLOC Therapy to serve as an important new tool in the fight against obesity, one which may feel a significant gap in the current treatment spectrum. In light of the obesity epidemic, it is important to remember that the FDA has indicated a current receptiveness to treatments demonstrating a positive benefit-risk profile. Based on the FDA's evolving view, as well as the weight loss advantages and benefit-to-risk profile…

Thank you, Mark. For the 3 months ended June 30, 2013, the company reported a net loss of $6.3 million, or a negative $0.11 per share, including research and development expenses of $2.7 million, and general and administrative expense of $3.4 million. For the 6 months ended June 30, 2013, the company reported a net loss of $12.9 million, or a negative $0.25 per share. Our cash burn from operations for the 6 months ended June 30, 2013, was $10.2 million as we anticipated. Operating expenses are primarily associated with the support of our ongoing -- multiple ongoing clinical trials, including the ReCharge study, international commercialization efforts and the company's premarket approval application and the continuing development of the Maestro System. On June 30, 2013, the company's cash, cash equivalents, restricted cash and short-term investments totaled $23.3 million. In addition to cash and equivalents on hand, we announced today that we have entered into an "at-the-market" equity distribution agreement with Canaccord Genuity. These widely used facilities provide a flexible mechanism, which should allow us to strategically add capital. Under the terms of this agreement, we may, from time to time, sell shares of common stock with an aggregate offering value of up to $20 million. The timing and number of shares sold under this ATM agreement is entirely at our discretion, and as our intention to use this judiciously, balancing potential dilution with our capital requirements going forward. This facility replaces the company's $45 million equity financing facility with Terrapin Opportunity, which now has been discontinued. Our current cash and equivalents, along with our ability to potentially sell shares under this new facility, give us the necessary resources to continue executing on our pivotal regulatory strategy and commercialization activities into 2014. I will now turn the call back to Dr. Knudson. Mark?

Thank you, Greg. In summary, we remain confident in our belief that VBLOC Therapy can become an important and potentially revolutionary new treatment option for obesity and its co-morbidities of diabetes and hypertension. We will continue to execute on our milestones with the goal of commercializing the Maestro System around the world and delivering a new treatment option to the millions of people looking for solutions to the lifelong challenges of obesity. We look forward to updating you on our progress as the year unfolds. With that, I will open the line for questions. Operator?

[Operator Instructions] And our first question comes from Bill Plovanic from Canaccord.

This is actually Kyle on for Bill. Can you hear me all right?

Good.

So I just wondered if you could just remind us what the reimbursement process looks like in Australia? And where you are in that process in the time line to get to year end?

Yes. This is Mark, good talking with you. Yes, we are working through that process. We have moved through the first part of it. And in which, we've made an application to MSAC, which is the Medical Services Advisory Committee. And they then go to their Physician Advisory Committee, have them prepare a report. That report is in process. We prepare a response to that report and file at their 2 filing times per year. And we expect to be able to file our response toward the end of -- which will be at the end of -- toward the end of this year as the next filing period. And that will move it into the process with the idea that we will get -- we will then get a decision within 6 months after that filing. And that is for the first half of the process, which is for the item number. The item number will cover the hospital and surgeon's fees for performing VBLOC procedure. In parallel, we are working to develop a reimbursement for the device itself, and that's called the listing on the Prostheses List, and that will extend through 2014, as we work on that side of the equation. So that's the process in Australia, in general. It's not precise, but it's the general overview.

Great. And then, just one last question. As we -- as you move forward to the reimbursement process in Australia, and also in Europe, can we expect any increased spending or any increased activity exiting the year?

I'll let Greg answer that in regard to our resources, but as we said, our resources right now are clearly focused on getting ready for Advisory Committee meeting, the panel meeting. And right now, we're shepherding our cash toward that. So that decision will be made later in the year. And Greg, you might want to comment on how we're managing cash?

Yes. Obviously, cash is a very important focus for us. As Mark mentioned, we are deploying all of our -- the majority of our resource to that U.S. regulatory path and preparing for panel. We would anticipate, while we don't give guidance, we would anticipate that we'll control our expenditures and cash roughly the way we've seen it in the first half. However, there could be some upward pressure to that, depending on 2 things: the amount of effort we have to put in to getting ready for that Adcom panel meeting; and second, continuing to support our ongoing clinical trials. If you would recall, we do have patients in both the EMPOWER trial and ReCharge trial that could require some kind of conversion, especially the ReCharge trial where they have the -- the sham arm is entitled to, after 12 months, conversion to an active device. So we're working through that and managing that. And those would be the 2 reasons that we would see any pressure at all on our cash. Otherwise, we'll contain it at where we're at.

And our next question comes from Chris Lewis from Roth Capital Partners.

First off, I was hoping you could just provide some more color on the conversations you're having with the FDA? Obviously, the PMA was accepted and filed for review last week. So can you just provide some more insight into the types of discussion and the nature of those discussions you're currently having with the agency?

Sure. At this point, I would say that, that it's as we have said in our press release about our pre-PMA meeting, that our conversations continue to be very open and productive. And we expect that, that will continue. We do have -- at this point, I'm very comfortable with the way that FDA is dealing with our application and moving it through the process.

Okay. And assuming FDA approval, can you kind of walk us through your initial plans in terms of a U.S. commercial launch? How big do you expect your sales force to be? And how quickly will you begin to build that team as we progress in -- down the FDA pathway here?

Greg, do you want to take that?

Sure. We've talked very open about how we would commercialize in the U.S. If we were, our plan is to launch that on our own. We would expand out from the centers that we already have actively involved in our technology. You recall that we have 13 centers in our EMPOWER trial and 10 centers in our ReCharge trial, of which, 8 -- 13 centers in the U.S. and 8 centers in our ReCharge trial in the U.S., for both trial, EMPOWER and ReCharge. So we will expand off of those. We'd launch in those first, use them as training centers and launch out from there. And gradually, train in other medical organizations and surgeons that would be interested. We don't think that's a monumental task. We'd go slow and we'd go consistent with the training plants we have. But even back when we IPO'd in 2007, we said that we didn't believe, even at peak, probably out sometime in year 2, we'd have more than 100 sales force, and that would be a makeup of roughly 50% field clinical engineers and 50% sales reps.

Okay, that's helpful. And then, for the ATM that you announced today, can you walk us through kind of your approach you're taking regarding when and how often you plan to use that facility?

Well, what we're seeing with this ATM, first of all, there's probably 3 reasons we implemented this ATM. The first one was that it replaces an existing equity facility, which we did not utilize at all. And this facility tends to be a much more reasonably priced, reasonable approach to bringing small amounts of equity into the company. We just want that out there for -- to leave our options open, as we moved through the year, as we see the progress with the FDA. We'll consider our options here and see how things are performing. You remember I mentioned that as we went through the call, that we would use this very judiciously, if we choose to use it. And we believe this gives us another alternative that's just out there, that presents itself well when we're in discussion with strategics that we have options available to us, if we enter into strategic partnerships. So that's our plan. We don't have any fixed plan of gradual implementation. And we're just going to keep this as an option in front of us.

Okay. And if I could sneak one more in. With AMA's recent decision to classify obesity as a disease, I was hoping you could just touch on that and provide kind of your thoughts around that? And the impact you expect that could have on the Maestro System, both in terms of commercial opportunities, as well as potential reimbursement implications, as we move forward?

I think it again shows the continued evolution of the medical community's thinking with regard to this -- really, what we all have to think of is the major public health problem facing, not just in the United States, but the world, and that is metabolic syndrome, this problem of obesity, diabetes, hypertension and blood lipid profile. And I think that it's another step in that evolution. And I think that over time, as more and more of these kinds of decisions are made, it will continue to support our efforts and all efforts to get reimbursement in place for helping people to move through the system, and to treat this disease. We think that, obviously, we are positioned, which is right in the gap between diet, exercise and drugs, and the much more dramatic surgeries, especially with the decline in the use of the adjustable gastric band. We think we offer, really, the safer and more patient-friendly alternative for people who really want to deal with this problem and this disease, in a way that gives them a better chance to succeed and to be able to live the kind of life that they'd like to live going forward.

[Operator Instructions] Our next question comes from Matt Hewitt from Craig-Hallum Capital.

This is Matt Bunker [ph] in for Matt Hewitt. Can you hear me okay?

Yes.

Yes, we can, Matt.

Congratulations on the Journal on Obesity there with -- well, you said the DM-2 trial, is that correct?

Yes. Our outside the U.S. trial in diabetics with obesity.

Okay. Is there some other incremental data that you could use as -- to kind of bolster your case with the FDA since the PMA submission?

Yes. We will file updates with FDA as we move forward on the clinical information. So when we do go to panel, we will be submitting probably 15- and 18-month data.

Okay. And then, as far as notifying investors, do you have any -- just the press release on when the 100-day meeting happens here coming up? And when maybe the FDA panel will be scheduled and all that? Is that how it's going to be?

Absolutely.

Okay. And any updates on Middle East, as far as the development there?

I think it goes back to the comment that Greg made. We've made the choice to focus all of our resources on making sure that we get the right focus, the right people, the right amount of effort on getting through the U.S. regulatory process, and getting approved here in the United States. Then we're working on getting the additional indications in Europe and getting reimbursement in Australia. And really, with that, what we're really doing in the Middle East is we continue to work with our distributor there to follow the patients that have been implanted, but we are not opening up any of the other countries in that territory this year in all likelihood.

Okay. And then, lastly, would you consider any strategic partners for alternative financing options?

Absolutely.

[Operator Instructions] And I'm not showing -- okay, one moment please. We do have a question from Suraj Kalia from Northland Securities.

Sorry about that. Can you guys hear me all right?

Sure can, Suraj.

Mark and Greg, forgive me, I just jumped in a little late to the call. So obviously, we have the timing -- or at least, the visibility of a panel sometime later this year or early next year. As you very well know, CMS are now talking -- at least there's a proposal to get on board earlier in the process for IDE-based trials, specifically for superiority and determining reimbursement. Obviously, this is a proposal right now, but let's say, by October or so, if it becomes finalized, do you all get the sense and the feel that your trial could also be reviewed by CMS? Can you comment if the FDA is looking at it?

We think that would be unlikely because that review process will generally happen at the IDE stage when the trial is being designed. So we think that, that's not how this is going to work. And the reason we think that is, that as some of our conversations with FDA, we've talked about the fact that guidance documents have come out, including that paper, after our IDE was approved and we started the trial. And they made it very clear that once an IDE is underway, just say they don't want you going back and changing it, they don't feel that the government should go back and change it either. So I think that's probably unlikely that, that would occur, but that's 2 speculations on our part and I have no idea. But I do think that it's probably a reasonable strategy in the long run, but it will take a while for that to get implemented, I'm quite sure.

Fair enough. And Mark, maybe it was being mentioned earlier, forgive me if I ask this question again. So let's say, from a timing of a panel and approval, how long since you -- from that point you'll envision a reimbursement in the U.S., assuming that it's a final PMA approval?

Well, then it really depends on -- we were starting, right now, discussions with private payers. We've got a strategy in place and as we move into the fall and have the process moving through with the FDA, we will already begin the conversations with private payers so that once we get approval, that can move relatively quickly, and we'll do those one at a time, probably be starting mostly with the multi-specialty, large, clinical-oriented type of payers. As far as CMS goes, as we mentioned, we have this peer-reviewed paper. We only need a couple of more, and then we have what we need to get through or to go to the CPT panel and get our codes converted. Once they're converted, then we can start the process with CMS to get our reimbursement and payment assigned. And that process is probably a 1- or 2-year process. But the majority of our patients are not Medicare patients in any event.

And that is all the time we have today for questions. I would now like to turn the call back to Dr. Knudson.

Well, thank you very much, everyone for joining us on our call today. We look forward to updating you as we move through the U.S. approval process and receive further input from the FDA, and setting of our anticipated panel date. Thank you for your support. And with that, I will end the call. Thank you very much. Bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.