Good day, ladies and gentlemen. And welcome to the EnteroMedics' Second Quarter 2015 Financial Results and Update Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this call maybe recorded. I would now like to introduce your host for today’s conference, Mr. Greg Lea, Chief Financial Officer and Chief Operating Officer. Please go ahead, sir.

Thank you for joining us this morning to discuss our second quarter 2015 financial results and business update. As a reminder, this conference call, as well as EnteroMedics' SEC filings and website at enteromedics.com contains 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 13, 2015. With me on the call from EnteroMedics is, Dr. Mark Knudson, our President and Chief Executive Officer; and Brad Hancock, our Chief Commercial Officer. We will begin with prepared remarks and when these are concluded, we will open the call for questions. I will now turn the call over to Mark. Mark?

Thank you, Greg. In the first half of 2015, EnteroMedics has met a number of transformational milestones, beginning with the approval of vBloc neurometabolic therapy on January 14th, an accomplishment that could not have been achieved without the hard work of our dedicated and talented employees and the support from you our shareholders. Of course on the heels of this milestone, we announced the certification of a number of centers and surgeons that far exceeded our expectation for all of 2015, and that number continues to grow. This center enthusiasm is a direct reflection of the fact that physicians and patients need more tools in their fight against this disease. And of course, we reached that very important milestone. Just one quarter after FDA approval of this new class of device, our first U.S. commercial implant, evidencing that our initial commercial strategies are gaining solid traction already. Earlier in July, we also strengthened our balance sheet and although, was not as much as we expected with careful resource management and our sharp focus on U.S. sales, marketing and reimbursement, it will allow us to continue the success we have already experienced with our early commercial activities. vBloc Therapy is in a class all its own within the obesity treatment spectrum. Until recently, patients had no other real option between a pill and restrictive or anatomy altering surgery that can lead to serious side effects. Also overlooked are the drastic lifestyle changes required patients who undergo these traditional bariatric surgeries, including draconian dietary restrictions and the potential for nutrient malabsorption. These issues are compounded by the social anxiety brought on by frequent vomiting and obvious signs of undesirable intestinal side effects. vBloc Therapy on the other hand, was designed with the patient experience in mind. Through neuromodulation, we offer the safest long-term device option for people with obesity looking for meaningful sustained weight loss and control of their obesity related diseases for instance, type II diabetes. vBloc Therapy does not alter or restrict the anatomy but rather reduces consumption by controlling fullness in hunger using smart sophisticated technology. The Maestro system itself is implanted in a same-day procedure, allowing for a quick recovery. In total, vBloc offers patients a path to living life fully. I will now turn the call over to our Chief Commercial Officer, Brad Hancock, to provide an update on how our commercial strategy is unfolding. Brad?

Thank you, Mark, and good morning. Our commercial strategy which continues to gain traction is centered on three critical areas. First, trained surgeons and certified centers to leverage the strong physician enthusiasm we are seeing for vBloc Therapy; second, accelerate the growth of our patient base; third, help patients gain access to vBloc Therapy through a number of programs such as financing and reimbursement support. We have 51 centers certified and 77 surgeons trained to implant our vBloc Therapy, which has surpassed our initial objective of 20 to 25 centers for the year. This increase in the number of surgeons trained is due to the positive response we have seen from physicians who believe vBloc Therapy is an important weight loss options for their practice. Immediately after approval we began the process of identifying and certifying centers of excellence and training surgeons and their support staff on vBloc. Next, we introduce the technology to these centers and to the Value Analysis Committee or VAC at each center. This is an administrative process that includes an evaluation of the technology by a team of internal experts, contract negotiations and accounting procedures. In most cases the VAC process takes a minimum of two to three months per center. To-date nearly half of our certified centers have completed this internal approval process. Following these approvals, the center and EnteroMedics can start to collaborate on activity to recruit patients, schedule them for a surgeon consultation, and finally, moved to the implant procedure. This is a lengthy required process with the new technology and we are pleased with our progress to-date, including the first U.S. commercial implant in May at Tufts Medical Center. This very positive initial experience gives us confidence that more centers and physicians will be coming online and that this adoption will…

Thank you, Brad. Our emphasis over the next few quarters will be on managing our current resources to keep us on our critical path with respect to sales, marketing and reimbursement. To do this, we are reducing our activities outside the United States, as well as postponing any low priority projects related to research and development. Over the next couple quarters, these actions should help us reduce our burn rate by approximately 25% to 30%, from a cash burn in the current quarter. This resource management will allow us to achieve our critical commercial milestones and generate value, therefore, positioning us to evaluate our additional resource requirements and needs in 2016. On the product side, we have worked to ensure adequate supply to the Maestro system devices. We have lined up our suppliers. Again, building additional inventory on demand as product sales begin to ramp and we believe we have the capability to meet the requirement of this first phase of commercial activity. Moving to financials. The company's pleased to report its first U.S. commercial sales of $79,000, which occurred in the second quarter. The sales result in gross profits of $40,000 for the quarter. For the three months ended June 30, 2015, the company reported a net loss of $7.4 million, or a negative $0.10 per share. Research and development expenses were $2.5 million and selling, general and administrative expenses were $4.9 million. For the six months ended June 30, 2015, the company reported a net loss of $14.6 million or a negative $0.20 per share. Operating expenses were primarily associated with the cost of supporting multiple ongoing clinical trials, commercialization of vBloc neuromodulation therapy, including regulatory and reimbursement activities and the continued development of vBloc Therapy delivered through the companies Maestro rechargeable system. On June 30, 2015, the company's cash, cash equivalents and short-term investments totaled $4.8 million, which does not include the additional $14.7 million netted in the financing completed in early July. We will continue to explore all of the options for capitalizing the company. We believe that our current resources will allow us to continue to execute our commercial strategy discussed today well into 2016 without hindrance, while we build value through the execution of milestones for the vBloc Therapy. With that, I open the call up for questions. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of Matt Hewitt of Craig-Hallum Capital. Your line is open.

Good morning. And thank you for taking our questions and congratulations on the progress here in the second quarter. Can you hear me, okay? Yeah. All right. Couple of questions for me. First, are you going to provide an update on the number of procedures that you've done either during the quarter or year-to-date as we go forward?

Matt, we are not going to focus on particularly the procedures. What we will focus on is revenue going forward and that's why we've talked revenue on this call.

Okay. But given that I would imagine, with these certifications and the training and whatnot that's being done that we are not getting a true reflection on the revenues being provided by those procedures. Is that accurate? Are these are being done at a discount or some lower cost and will ultimately see down the road? So how should we give a sense for the number of patients that have been implanted to date?

We are not sure. We are not seeing a significant discount in our pricing. What I can tell you is that the pricing we’ve seen in the second quarter here and we would anticipate it continuing to a great extent at that same level is in that $15,000 to $17,000 range, which is very, very close to what we were anticipating or exceeding going forward.

Okay. Well, that’s great news. I guess, looking at -- so you had your first commercial implant here in the first quarter. Have you had any centers or surgeons that have gone beyond the training and actually started to implant through normal practice?

Matt, this is Brad. Yes. And obviously with the revenue of $79,000, what we would say is that did not all come from one particular center. So, we do have centers that have started to implant vBloc. We have centers as well in the third quarter that have indicated they have patients, new centers that have patients. And so we expect to continue to open up new centers on a quarterly basis.

Okay. That’s great news. And then, I guess one last one for me. Obviously, a recent development -- I don’t know -- it's appropriate to say you have opened the floodgates but reshape just got there, balloon therapy approved. It might be helpful for investors and us to understand the difference, not only in the device, obviously a big difference there but in the target market. I mean, as I look at it, it looks to be a very different type solution, very short-term in nature but maybe if you could walk through your thoughts between the two?

Sure. Just the one thing that we have to remember is that today, we are only serving about 1% of the potential patient population. We really believe that vBloc is in a class of its own. The patients that we're in planning are looking for a few things. They're looking for meaningful weight loss but they are looking for long-term durability. And they are looking for a therapy that doesn't restrict their lifestyle and so that’s the positive feedback that we are getting from our therapy thus far.

Okay. Great. Thank you.

Thank you. Our next question comes from the line of William Plovanic of Cannacord Genuity. Your line is open.

Great. Thanks. Good morning. Can you hear me okay?

Yeah, Bill, we can.

Great. So you talked about, I think a number of centers that are certified and the number of surgeons trained, yes definitely well ahead of expectations. Where should we be thinking that will end up at the end of this year and the end of 2016?

Bill, this is Brad. I think it’s safe to say that we expect to continue to add new centers as I indicated in the call. We’re very pleased by the positive response from physicians across the country. So we will add new centers in 2015 and certainly continue to add as we move into 2016 but beyond that we’re not really providing any specific guidance on the actual number of new centers.

I would assume though that you kind of big bolus upfront, kind of lot of demand and then yeah, the numbers, the absolute numbers kind of slowdown?

I think that’s a fair statement.

And then one of the things we've seen in obesity devices at least in the clinical trial is when advertising is put out there for them, the significant demand and I think these are some of the fastest ongoing trials we see in medical devices. And I’m just curious, we’ve talked about the pipeline, the kind of barriers or the hurdles you have to get through, you get a center up, you got to get through the back and then they start enrolling. It seems like there should be a big bolus of patients. I was just wondering one, how long is it before, do you think on average it will be from a center to go from on board, you're saying you have 65 to actually implanting patients and then as we think of the patient population. I think the second biggest barriers reimbursement or who is going to pay for it. So the question is if there were x amount of patients, given that its cash pay to start with. Should we be thinking about 5% of maybe the population to start with -- could truly -- would truly get this or should we think larger, smaller, how should we think about this in terms of -- so we can try to gauge how this will -- commercialization will move forward?

So let me answer your first question about the timing. And obviously, as you can imagine it varies for every center. But you are right, it is a process and it takes a few months to get the surgeons trained. It can take anywhere between two and four months after that surgeon is trained for that hospital to grant approval to that surgeon to actually do the implant. At that point, we start our recruiting efforts and bringing patients in for consultation. And what we see now is that most of the patients that the surgeons are talking to, one access to our vBloc access program, just see if they can get the procedure covered. That can take anywhere for another months to as long as three months. And so it is as we described on the call somewhat of a lengthy process. But we do feel that we are executing on each one of those stages. As far as the percentage of patients that will ultimately get approval going to the prior authorization process, if I understand your question, you were so new in this right now. We just announced our relationship with vBloc access last week. What gives us confidence is that these experts that we’re working with have been doing this for a long time. And they believe that we will have patience that will move to the prior authorization and will ultimately get a positive coverage decision to have vBloc implanted.

Okay. That’s helpful. So it sounds like as we think about this, if now you're at 65 centers. You’re half of -- let's say you’re half through the VAC. We’re probably still another -- it's not until Q4, you’ll start kind of seeing the ramp. If you see it, you will see it in Q4. And then like the centers that are just get through the VAC now would be like first half of next year. I'm just trying to kind of gauge how this is -- we should think about this ramp. Is that fair?

I think you're spot on, yeah, with the timing.

And then of the ones going through, from a coverage standpoint, I mean just -- and I know it's early, should we think about, maybe 10% will get covered or if you can even gauge like how many of the patients that go through this process can get covered for a lap end. We’re getting covered from a lap end just to give us a historical perspective. And that’s all I have. Thanks.

Sure. I don’t have data on the lap band prior authorization success. Again what I would say is that the firm that we’re working with has been doing this for a long time. And when they look at the clinical data, the economic data associated with vBloc, they have a pretty high confidence that our patients, some of our patients will get covered going through the prior authorization process. As I mentioned, we just started the process of having physician sign up in contract with vBloc access. Last week, we started getting our first patients enrolled through the prior authorization process. So while it’s new and we just have few patients coming in right now, we have a lot of confidence in the group that we’re working with. They have a lot of experience doing this.

Thank you.

Our next question comes from the line of Suraj Kalia of Northland Securities. Your line is open.

Good morning everyone. So let me start out with Mark or Brad. So Brad, you gave a lot of metrics and the numbers that I got was 77 surgeons trained and 56 sites or 65, one of the two, my apologies there. Let me just piggyback on Bill’s question. All of us are trying to get a handle on the commercialization efforts. You’ve obviously done a great job in terms of getting the surgeons on board. Can you give us a perspective of how much these surgeons right now are trained -- are doing any sort of interventional procedures for obesity in their respective centers? Any aggregate metrics on the annualized basis to give us a ballpark where in terms of shares that you guys could gain so on and so forth?

Absolutely. One of the criteria that we have for selecting a center on the first place is that they have to meet certain requirements established by ASMBS. They have to be identified as a center of excellence. Most of the surgeons that we are training and working with will do a minimum of 100 bariatric procedures a year. Obviously, there are some that will do a significantly higher volume in that but that is the criteria that we used in terms of going out and identifying those centers that we want to have an affiliation within thermatics.

And Suraj, this is Mark. The numbers that Brad gave you were 51 centers and 77 surgeons.

Fair enough. And I guess for Greg or Mark or Brad. You’ll have a certain amount of resources. You are allocating appropriately so to focus in the U.S. and somewhat scaling back at least on the o-US side. Does it make sense at this stage of the game, let say, for the next 12-18 months to go deep within these centers, the 51 or does it make sense to go abroad? I guess just trying to get a sense of what’s the best bang for the buck over the next 12 to 18 months based on your internal commercialization strategy?

Yeah. Absolutely. I think we agree with. That assessment 100%. It takes a lot of resources together center trained to start the collaborative marketing, initiatives with the center, pulling these patients through, putting them in the funnel and so based on our current resources, we have to be very careful. What gives me confidence though is the fact that we have 51 centers now that have been trained that are very passionate about promoting our therapy. We think that they’re going to be tremendous partners for us. And so we will to the point made earlier slowdown the rate of training new centers because we are very confident with the centers that we have trained, that we have terrific partners in helping us go out and continue to grow the adoption of vBloc.

Okay. And finally Mark, let me just pose you a question. My apologies of the sounds unfair at this stage of the game. Mark, as far as I know, vBloc is the only one that has shown durable results for up to three years, the 25% EWL. It's a remarkably consistent and almost all your studies and the adverse events are really low. Mark, now that you’ll are commercializing the product and I understand its early, do you think it make sense to develop some sort of registry for vBloc. Just given everyone has tried some sort of therapy in obesity with the drugs or devices, somewhere down the commercialization path, things go awry and nobody is able to figure out. Given you guys as clinical performance with the vBloc, do you think it makes sense at a certain point to develop some sort of registry and it gives a very good perspective for short-term and long-term adoption? Thank you for taking my questions.

Yes. Suraj, in fact we are doing that. We are starting let’s call the ENGAGE Registry and ENGAGE is a registry of commercial patients that we are going to follow over the course of the next couple of years, because we believe that in the hands of these centers of excellence, as Brad described, that we will see outstanding performance by this system, both in terms of efficacy, we know what works and in terms of safety. We just -- we know that we just don't have that really bad patient, who has a bad complication. And so we are starting that trial and it is going to be called ENGAGE. There are a number of centers that we are currently talking to and that protocol is in front of their institution or review board, because obviously, it has to go to an institutional review board if we expect to collect data and publish those data. So I think that's exactly what we plan to do.

Fair enough. Thank you for taking my questions.

Our next question comes from the line of Chris Lewis with Roth Capital Partners. Your line is open.

Hey, guys. Thanks for taking the question. Wanted to start on just kind of the nature of utilization per center, I guess, once the center performs an implant, how do you expect that center to monitor the patient after that and the associated results with the procedure? And then how long would you expect it to take for center to get comfortable with that first procedure results before it starts ramping up utilization and additional procedures?

So we believe that it’s probably going to take somewhere between eight and 10 procedures before that surgeon is completely comfortable with the procedure. And in hopefully most cases, we’ll go smoothly, but every once in a while, surgeons going to run into a case, it’s a little bit more challenging. And so we've been using the metric between eight and 10 procedures before surgeon is really proficient. In addition to that to answer the other part of your question, patients will come back into the centers to have the devices monitored and to see what kind of weight loss they’re getting. We do have the ability to change some of the parameters of vBloc, based on the weight loss of that patient is achieving and their ability to move to a different parameter.

I guess, asking in a different way, I guess, do you expect to see gap between potentially the first and second implant at given center as that center monitors the first patient results?

No. We really haven't seen that yet. The few centers that are started to implant, they seem to have a fairly steady stream of patients that are coming into the pipeline. I think where we may start to see a little bit of a gap, as I alluded too early, is that patients will now go to the vBloc Access resource and see if they can get coverage for the procedure. So other surgeons and the centers are anxious to continue to implant the vBloc. We may see a little bit of a lag while these patients are waiting for their coverage decisions and in some cases moving to the appeal process.

Great. And just on …..

It’s obviously…

Yeah.

… our desire that as many of them as possible go through the prior authorization is that the foundation of our reimbursement strategy, because each prior authorization that is successful is a coverage decision and that’s what builds up to local regional and ultimately, national coverage decisions.

Great. Can you just elaborate on how long that prior authorizations, kind of period takes from start to finish and what’s been the initial response from this payers during that process and your initial discussions with them?

So, if you are talking about the time that the prior authorization is actually submitted, it’s quite a range. In some cases, the consultants that we are working with indicate that it can be as quick as two to three weeks if you get an initial approval. When you have a denial and we start to through the appeal process, that is a process that could go on a little bit longer, that could take anywhere from somewhere between one month and three months.

Understood. And then just one more for me. Can you guys elaborate on what R&D programs are considered low priority for you? How do you go about evaluating which programs are low priorities? And then, I think I missed what the expectation for our cash burn going forward? Thank you.

Okay. Talk about -- I will talk about it, Chris in reverse. What are the priority projects related to the development? And what we are really focused on is that next generation of the product to continue our commercial success. So, our priority right now is focusing on those long lead time development projects related to developing that next generation device, which I think we’ve talked about in the past is smaller, easier to manufacture less costly. So, we will continue to do those with our limited resources as much as we possible can. Research around other indications, and/or different therapy levels will probably take a backseat through this process because we are satisfied with our therapy levels today and we will explore those with more capitalization or with a partner.

Okay. And cash burn going forward?

Cash burn, we announced that we expect -- once we have all this plans in place that from what you saw in the second quarter, we’d expect to see a 25% or 30% reduction from what we burnt in the second quarter. And most likely that will be -- we will realized the majority of that by the fourth quarter.

Okay. Thank you.

[Operator Instructions] Our next question comes from the line of Bruce Jackson with Lake Street Capital Markets. Your line is open.

Okay. So, with the expected burn rate, your net loss has been about $7 million per quarter's, so that would be going down into the range of about $5 million a quarter, is that -- I’m I doing the math correct?

Well. Bruce, our net losses include non-cash charges. So, if you take a look at our net losses and reduce the current quarter non-cash charges, we’re more in the neighborhood of $5 million related to the cash burn 5.5 and that’s where we would come off, that 25% to 30%.

Okay. And then as you scale up the sites, are you adequately staffed in terms of support people and sales people?

Yes. Yes. We’ve got a good team of engineers and sales representatives that can fully support the initial implants at all of our new centers.

Bruce, I think as we mentioned in the call, we’re not constraining with the current resource. We feel we can reach our commercial milestones to not constrain our commercial activities at all.

Okay. And then you mentioned that you've taken your Category 3 code and cross-walked it to some existing reimbursement codes. What's the total amount that you're asking for procedure?

So the list price for the vBloc Therapy when we are submitting the prior authorizations is $19,000 and we will be in the other range, as Greg indicated earlier, probably somewhere between the $16,000 and $19,000.

Okay. Last question. Did you have any accounts receivable in the quarter? And then how do you feel your working capital is set up going forward?

The answer is, yes. We did have accounts receivable in the quarter. And we're very comfortable with our current resources so we can manage working capital requirements both for inventory and receivables as we move into the commercial environment.

One of our long-term strategies over time once you gain enough receivables and inventories that we would move to have that funded through working capital kind of lending vehicles and we’ll certainly take a look at that.

Okay. Last question. You had an aftermarket agreement at one point, is that still available to you and how much is left?

The aftermarket agreement is currently not available to us because we’re restricted under the last offering. It will eventually become available again, and there is about $17 million left under that aftermarket vehicle.

Okay. Thank you.

Ladies and gentlemen, that concludes our Q&A. I would now like to pass the call over to Mark Knudson, President and CEO for any further remarks.

Thank you all for joining our call today. It has been a tremendous journey getting from our earliest discovery efforts with vBloc Therapy to where we are today with our initial commercialization in the United States. We believe as to many who treat obesity that solution will come in many forms. At the root of this effort is the patient. EnteroMedics is proud to offer this only and first of its kind weight loss option one that considers first and foremost the patient, his or her experience and the restoration of his or her health. We look forward to the quarters ahead and to reporting on our progress with this exciting new technology. In the mean time, please feel free to reach out to us today or in the future with any additional questions. Good 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.