Good day, ladies and gentlemen. And welcome to the EnteroMedics Second Quarter 2017 Earnings 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 conference call may be recorded. I would now like to introduce your host for today's conference, Scott Youngstrom, Chief Financial Officer. You may begin.

Good morning. And thank you for joining us on today's call. I am joined by Dan Gladney, our President, CEO and Chairman of the Board, who will provide an overview of the company's recent commercialization success and business highlights. I will then review our financial results for the second quarter. Dan will then provide you with additional business highlights. Following our remarks, we will be available for questions during the Q&A session. 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 the known and unknown risks, uncertainties and other factors. These and additional risks and uncertainties are described the more fully in the company's filings with the Securities Exchange Commission, including those factors identified as Risk Factors of our current report on Form 8-K filed on July 26, 2017. I will now turn the call over to Dan Gladney.

Thanks, Scott. Good morning, everybody, and thank you for joining us today. I'd like to share the significant achievements our team has realized since our last earnings call, as we work hard to deliver our strategic, operational and commercial imperatives. In recent months, we have had several important accomplishments: first, we announced the acquisition of BarioSurg and its minimally invasive Gastric Vest System, which supports our long-term goal of serving the obesity continuum of care; second, we initiated our previously announced study with Kaiser using vBloc with type 2 diabetic patients; three, we inked a collaboration deal with Galvani Bioelectronics Limited; and, four, we made good progress on our partnership with the VA; and lastly, we launched our VA Now program, the goal of which is to accelerate our rate of commercial implants and associated clinical data in order to support and expedite private payer reimbursement. First, in May, we expanded our pipeline by announcing the acquisition of the Gastric Vest System through our purchase of BarioSurg, Inc. The Gastric Vest represents a building block in our strategic goal of filling the gap in the obesity continuum of care. While our vBloc is effective for healthier patients, who are looking to lose weight and improve comorbidities over time, the Gastric Vest is designed to treat very ill, morbidly obese individuals with a BMI of at least 35, whose excess weight is life threatening, and who therefore need to achieve significant weight loss in a very short period of time. The Vest is minimally invasive and requires no cutting, no stapling, no removal of anatomy or restriction on patient diet choices. In a small pilot study done in Mexico on 16 patients over a period of one year, the average weight loss with the Vest was 85% of excess body weight,…

Thanks, Dan. As we have stated, our highest priority right now is to gain insurance coverage for our products. We know the demand is there. We just need to help patients access our technology in an affordable way. The vBloc Now program that Dan spoke about through its EnteroMedics is essentially subsidizing the cost of vBloc surgeries for a limited time in order to collect patient data to support reimbursement represents our direct response to the situation. We are supporting this program by significantly reducing our advertising and marketing dollars over the last half of this year. This reduction represents approximately $1.9 million. In the vBloc Now program, the patient is responsible for a co-pay amount, and then EnteroMedics pays the facility charge, the surgeon fees and provides the vBloc implant. We estimate that each patient will cost approximately $11,000. So doing the math, multiplying $11,000 times 125 to 150 patients shows this program will cost us around $1.4 million to $1.6 million, slightly below our advertising costs. With the vBloc Now program in place, our focus as a company has shifted to units placed and away from top line revenue, which we knew would decrease as a result of the lower ASPs with the vBloc Now program. Ultimately, it is the unit placements and associated commercial experience and data that will be the gateway to our success. As Dan stated, our team placed 42 units in the second quarter of 2017, representing an increase of 83% compared to 23 units in the second quarter of 2016, bringing our six month total to 50 as compared to 63 for the entire 2016 year. For the three months ended June 30, 2017, we reported sales of $93,000, with gross profit totaling $39,000. This compares to revenues of $276,000 and gross profit of $121,000 for the three months ended June 30, 2016. Selling, general and administrative expenses for the quarter were $5.6 million, as compared to the same amount $5.6 million for the second quarter of 2016. Payroll-related expenses, advertising and consulting expenses decreased from 2016, however, these were offset by vBloc Now and acquisition-related professional fees. Research and development expenses were $1.4 million for the three months ended June 30, 2017, as compared to $1.2 million for the same quarter in 2016 due to a slight increase in professional fees. As of June 30,2017, the company's cash, cash equivalents and short-term investments totaled $11.2 million and the company does not have any debt on its balance sheet. I'll now turn the call back over to Dan.

Thank you, Scott. We have made solid progress over last several months. The acquisition of the Gastric Vest was a great step for us, as we seek to fill the gaps in the obesity continuum of care. We're pleased to recently have been granted approval to participate in a clinical trial for the Gastric Vest System in Spain. We expect a full safety and performance CE Mark study for the Gastric Vest to include a total of between 50 and 100 patients at up to four sites within the European Union. This approval by the Ministry of Health, Social Services and Equality in Spain represents a first country approval for the Gastric Vest, CE Mark trial. We anticipate enrollment in the CE Mark trial to commence in the first quarter of 2018. While our discussions with the FDA regarding the U.S. clinical trial study requirements for Gastric Vest are ongoing, we anticipate that U.S. enrollments will commence in the first half of 2018. We are expanding our business and growth opportunities through our agreement with Galvani, especially on the heels of the recent acquisition of BarioSurg. We believe our work with Galvani will also help to advance our underlying proprietary technology platform, while simultaneously allowing us to continue to recognize our valuable IP portfolio, which in turn will ultimately enhance our future innovation capabilities, benefiting patients and our shareholders. With our estimated well over 1 million obese veterans, we are honored to be able to help veterans live a healthier life with vBloc, either through the vBloc hospitals or through our Choice Program institutions. We are very confident in this program and the success it will bring to all involved. Our vBloc commercialization strategy is heavily focused on obtaining coverage by insurers. And the vBloc Now program has taken off…

Thank you. [Operator Instructions] Our first question comes from the line of Suraj Kalia from Northland Securities. Your line is now open.

Good morning, gentlemen. Thank you for taking my questions. So, Dan, specifically on this vBloc Now you provided a number of stats and additional information in terms of how this program would work. Even if I use a round number of 150 patients, could you all give us an idea when these would be finished, when you all would finish enrolling them? I thought I heard you say, comorbidity data for vBloc Now would be sometime in first half 2018. And I guess, the second part to my question is, once you finish enrollment what is the follow-up needed? And would this follow-up be sufficient to notice whatever delta you all have hypothesized in your study?

Yes, first of all the enrollment isn't going to be - isn't going to take us long at all. I mean, as we comment, we test marketed the program in just two hospitals of our 12 vBloc institutes out there. And in those 12 hospitals, we got 34 implants in the first month we tried it. So this isn't going to be any kind of a time lag at all in enrollment. Now, with these patients, they're not even viewed - it's not being viewed by the patient or the doctor that this is a study. I mean, they're offering the vBloc Now as a way to get their patients implanted at a cost to the patient that is the same that they would have I think by paying their co-pay, right, for a gastric bypass or gastric sleeve. So it's very much kind of a commercial program. So we don't see that as being a lag at all. As far as the insurance coverage, the insurance companies are looking for data, thoroughly one month, three months, six months, nine months and twelve months, okay. So we think we can get the 125 to 150 patients implanted, if not by the end of the year, very, very early next year, I mean, by January/February. So we would hope to have them implanted by pretty much the end of the year. So that at some point in the first-half we'll be at a level of being able to walk into insurance providers and talk about this - the requirements - the results. And we would expect to see coverage. Our goal is to get coverage for at least one of these payers in the first half of 2018.

So, Dan, forgive me for belaboring this point. Specifically for these, let's say, 150 patients, I presume these are all comers and there aren't any rigorous inclusion criteria, specifically related to A1C or baseline systolic, diastolic. I guess, where I'm headed is, let's say, hypothetically December 31, you'll finish enrollment, let's say, it's a six month follow-up. And baseline A1C was, I don't know, pick a number, 8.5% or systolic, diastolic or something. The question is in six months post this, are you going to get the delta needed to essentially convince a private payer, that yes we need to start having favorable policies. That's what I was getting at.

Yeah, the private payers have made it very clear to us that they want to see how this works in the real world with commercial patients. And as you know, as long as those commercial patients fall within our BMI limit of 35 to 45, that doctor can choose to take that patient. There are no requirements to say that this commercial data has to be X amount of HbA1c patients, type 2 diabetic patients or pre-diabetic patients or anything like that. This is what the insurance providers are asking for. They want solid, just real life commercial data. And we know that that commercial data is going to - there will be type 2 diabetic patients or pre-diabetic patients, because obesity is one of the leading causes of that disease. So we recognize we're going to have some of those patients. But there aren't any requirements in this grouping of patients that we're looking for. We're asking the doctors to give us real world data. And that's exactly what the payers have been asking for. What we've been told by the payers is that 125 to 150 will give us enough; that will give us what we need to get coverage. At least that's what we're hearing from, I would state, from the first - what I would call, the three payers that we are working with right now that we're much farther along with.

Fair enough. Dan, there are number of endeavors you all are undertaking, right? One is the different trials, the Kaiser T2 trial, there is the Spanish trial, U.S. ID, there's the Galani relationship, and obviously, getting commercial adoption of vBloc Now. Can you keep us some color on resource allocation? How many people do you all have? What is the gating factor? How do you pick and choose basically to get the best ROI in all of these endeavors? Are you all adequately staffed right now, I guess, it's where I'm headed?

Yeah, I believe we got 40 employees. As you know, we have a small direct sales-force. But, first of all, the Kaiser study is that's being managed by Kaiser. We got one individual from here that's working with Kaiser, but that's very much being driven by Kaiser that type 2 diabetic study that they're doing. And that kicked off here in July, and right now, out they're out there. They've got obviously a huge audience of patients. So they're going after the patients that they think would best fit into that study. As far as the Spanish trial goes, that's really just supplementing what we're doing in setting up the CE trial over in Europe. So we are going to be hiring an outside source to help us with that trial over in Spain. We're not selling anything right now in Europe, obviously, because with that particular product, because we don't have approval. So we'll use an outside firm that will help us do that, and that's being managed inside hereby Pete DeLange, who heads up our Clinical Programs Department. So Pete can handle that. As far as Galvani, Galvani at this point is a pure engineering deal. And if you look at our engineering team, we've always been highly rated for our engineering here. And our engineering team today is working primarily on our second generation vBloc. And the second generation vBloc, the plan is to have, at least, the product itself completed by year-end, and then testing would begin on that in the beginning of the next year. So testing is going to take in the neighborhood of six months to get that done. So really that's the only thing that we're working on right now. So to be - to work with the existing product we have…

And final question, Dan, I'll let others jump in the queue. My math indicates that over the past 18 months, roughly, cash burn has been give or take around $30 million. Can you quantify for us how much of this was directly on the DTC campaign? Any color there would be great. Gentlemen, thank you for taking my questions.

Yes, the direct-to-consumer campaign was - I would say, we were about $4 million - $5 million is where - I just looked over at my CFO and he put up his five fingers, so it's $5 million is what we spent on…

It's pretty scientific.

…it's pretty scientific - is what we spent on the direct-to-consumer campaign that's lead us down to now the vBloc Now program. And that was pretty important, because the payers last year that did see us, Suraj, said they wanted to hear a lot more from doctors. They wanted to hear a lot more from patients, and they wanted commercial wanted commercial data. That was about all we got from them. So it was really last year's effort of the direct-to-patient consumer campaign that drove patients to the insurance companies. We had over 400 patients that contacted their insurance companies last year that wrote letters, and some of which actually went through the appeals process with the insurance providers, and we had over 30 surgeons that also reached out for their patients, either on conference calls or physically met with the payer or had other types of meetings with the payer. So it was that, that led into now payers meeting us - with us this year and giving us more specific criteria and what they needed to get insurance. So I think that was much - it was very beneficial to us.

Got it. Thank you.

Thank you.

Thank you. [Operator Instructions] And at this time, I am not showing any further questions on the phone lines.

Okay. Well, thank you, everyone, for joining us today. Have a great day. Thank you very much.