Dan W. Gladney – President, Chief Executive Officer, Director and Chairman of the Board Scott Youngstrom – Chief Financial Officer and Chief Operating Officer.

Jeffrey Cohen – Ladenburg Thalmann.

Good day, ladies and gentlemen. And welcome to the EnteroMedics Fourth Quarter 2016 Earnings and Corporate 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 conference call is being recorded. I would now like to turn the conference over to Mr. Scott Youngstrom, Chief Financial Officer. Sir, you may begin..

Good morning and thank you all for joining us on today's call. I am pleased to be joined by Dan Gladney, our President, CEO and Chairman of the Board, who will provide an update on the Company's recent commercialization and corporate achievements. I will then review our financial results for the fourth quarter and 2016 full year.

Following our prepared 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 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 the known and unknown risk, 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.

I will now turn the call over to Dan..

Thank you, Scott. And thank you all for joining us this morning. 2016 was a transformational year for EnteroMedics. We've made significant progress in achieving our commercial and corporate goals and expect continue this momentum through 2017.

Our goal remains to bring vBloc Therapy to as many appropriate patients as possible who are living with obesity and to obtain broad reimbursement coverage for this groundbreaking therapy. In 2016, EnteroMedics put commercialization at the forefront of a strategy, taking on new leadership with proven track records of business development.

The new appointments included; Scott Youngstrom as Chief Financial Officer, Paul Hickey as Senior Vice President of Marketing and Reimbursement, Nick Ansari as Senior Vice President of Sales and Surgeon Training, and Pete Delange as Senior Vice President of Operations and Business Development.

Last September, I was also named Chairman of the Board of Directors. With this change in management, we have realized achievements and accessibility, demand and reimbursement for vBloc Therapy.

First and foremost, we announced a five-year sole source agreement with the Department of Veterans Affairs or the VA, secured through a partnership with Academy Medical. Thanks to this agreement. Any surgeon associated with the VA facility in United States can have access to the vBloc System for their patients through Academy Medical.

As a result, vBloc is now available at little or no cost to veterans in accordance with their veterans' benefits. These men and women who have directed their lives to service now have an option to receive vBloc Therapy. Accessibility to vBloc, at this point has never been higher.

As we continue to work toward expanding coverage with integrated delivery networks or IDN and payers, our efforts have been supported by an increasing number of facilities where the device is available now to be implanted.

vBloc is available nationally and there are physicians trained in implantation at hospital and surgical centers across the country. This past year, we had great success in expanding the number of our vBloc Institutes. With the addition of MedStar Health, headquartered in Maryland and Roper St.

Francis in South Carolina, there are now 13 established vBloc Institute offering vBloc Therapy and our vBloc Achieve program at their facilities with plans underway to expand in two additional locations. We can report that in 2016, a total of 62 vBloc devices were sold, generating $786,600 in revenue.

That number includes three patients who underwent adjunctive rescue treatment for vBloc Therapy after failing to achieve sufficient weight loss and diabetes control with their previous gastric sleeve surgeries. Each were offered the option to proceed to duodenal switch, gastric bypass, or vBloc and all three opted for vBloc.

One of the three, rescue surgeries was broadcast live to hundreds of attendees at the ObesityWeek 2016 conference, demonstrating how easy and minimally invasive it is to have the device implanted. The success of this live surgery opens a new avenue through which patients can gain awareness of vBloc benefits.

We hope to build out on this added exposure to increase both access to and the use of vBloc Therapy. In addition to these specific examples of our commercial efforts, the Company has also continued to aggressively pursue positive payer coverage decisions. And as previously mentioned, increase the number of vBloc Institutes.

Often times, these two efforts work in tandem. For example, in February of 2016, one vBloc Institute Winthrop University Hospital became the first employer in the United States to cover vBloc Therapy, making the treatment available to nearly 8,000 of their employees and families.

As we continue to expand vBloc's reach, we are also working closely with our current patients to help ensure that they continue to achieve their health goals with vBloc Therapy.

These efforts not only include patient assistance and support programs, such as the vBloc Achieve program, our comprehensive personalized weight loss support program involving dietitian counseling and other support tools, but also the technical support for the actual vBloc device and the personalized therapy that it delivers.

EnteroMedics continues to pursue its major marketing campaign designed to build awareness of vBloc Therapy. With a focus on potential patients, currently meet the indicated use including both veterans and private payers. Supporting our commercial expansion is a growing body of clinical evidence.

In 2016, two articles supporting the clinical benefit of vBloc Therapy over time were published in the Journal of Obesity Surgery, and a third was published most recently in January of 2017 in the Journal of Diabetes and Obesity.

This past April, obesity surgery published results from our ReCharge study, measuring the effects of vBloc in patients with moderate obesity and its comorbidities. Among these patients, 74% saw a greater weight loss, resulting in an average loss of 33% of excess body weight at 12 months.

In August, Obesity Surgery published two-year outcomes from the ReCharge study. At 24 months, 76% of patients on vBloc remaining in the trial displayed a mean excess weight loss or EWL of 21% compared to an EWL of only 4% in the Sham control patients.

Finally, this past January, the Journal of Diabetes and Obesity published a three-year outcomes study from our DM2 study of obese patients with Type 2 diabetes.

Results show that after three years, average EWL was 21%, also 39% of the participants reduced or stopped their diabetes medication as a result of a reduction the hemoglobin A1c, averaging 0.6% in the patient population, in other words very competitive with drugs.

These publications show the depth of support within the medical community for vBloc Therapy. Additionally in 2016, the American Society of Metabolic and Bariatric Surgery or ASMBS published a physician statement on the safety and efficacy of vagal blocking therapy in the Journal Surgery for Obesity Related Diseases.

We endeavor to continue building our portfolio of clinical data and showcase results through possible scientific publications in 2017.

These commercial and clinical milestones provide validation, but our strategy to position vBloc as a minimally invasive alternative to traditional bariatric surgery, built on our ability to show the efficacy and safety of vBloc's Therapy through positive clinical data, as well as support of key opinion leaders in disseminating patients' success stories really works.

We've already begun to see public recognition of our efforts to position vBloc as a life-changing minimally invasive alternative to traditional bariatric surgery and recently received two prestigious awards. Most notably, EnteroMedics has been named a finalist in the 2017 Edison Award in the category of health and wellness patient care.

This award judged by a panel of over 3,000 industry professionals and experts, puts us in a well-respected class of innovators. We've also continue to receive recognition and exposure in the media with mentions in outlet as geographically diverse and wide reaching as the Wall Street Journal, Fox News, The Daily Mail, and the Minneapolis StarTribune.

As far as our outlook in 2017, we are committed to building on successes we've seen over the past year. Through and targeted direct to veterans marketing campaign, we hope to expand our presence in VA facilities across the country. In order to ensure that veterans seeking obesity treatment are aware of vBloc technology as a covered benefit.

Through our marketing efforts, we will target the over 1 million obese veterans to ensure they are informed of their vBloc treatment options and directed to the appropriate treatment facility.

We plan to expand the number of active vBloc institutes across the United States to increase our number of surgeon advocates, our number of cash pay patients and ultimately drive covered lives with IDNs such as Winthrop Hospital in New York and with private payers.

We hope to publish commercial clinical data to further support the safety, efficacy and cost effectiveness of vBloc therapy to treat obesity and related comorbidities, specifically diabetes.

We are also looking to expand our sales internationally, by entering the Canadian market, and the already mature cash pay market that exist for gastric band, balloon, sleeves. Our earliest access to this market maybe now as soon as the second quarter of 2017, through Health Canada's Special Access Programme or FAP.

The FAP allows doctors to gain access to medical devices that have not yet been approved for sale in Canada. Lastly and most importantly, we anticipate all of our efforts will build upon our current payer covered strategy and support favorable coverage decisions in 2017 from a private payer and/or Medicare administrative contractors.

We are very excited about the momentum that's built in each of our strategies and look forward to providing you with updates as these efforts progress. With that, I will now ask Scott Youngstrom to make a few comments about our current financial position and other company developments..

Thank you, Dan. In the fourth quarter, we made it a priority to take charge of the Company's financial situation, right-to-ship and chart a path forward. We decreased operating expenses to a bare bones level of $4.2 million, a reduction of 45.2% over the prior year period and 17.4% year-over-year.

All non-field sales employees took a 20% pay reduction in November and December and no bonuses were awarded for the calendar year 2016. Further, our Board of Directors waived fees for the second half of 2016. As a result, we ended the calendar year with cash, cash equivalents and short-term investments that totaled $3.3 million.

Our fourth quarter expense reductions indirect to consumer advertising resulted in a reduction in the sales funnel that will impact our revenues for Q1 2017.

That said, since re-initiating our advertising programs a month ago, we have been very pleased with the results, which over time, we hope to see translate into patients moving through our sales process.

All these actions enabled us to secure a $19 million public offering this January and allowed EnteroMedics to continue its work in the fight against obesity. Together, with careful expense management and the execution of our commercial strategy, we believe EnteroMedics is well-positioned for value creation in the future. Onto the income statement.

For the three-months ended December 31, 2016 the Company report sales of $141,900 with gross profits totaling $52,500. The Company reported a net loss of $4.4 million or $2.65 per share, including selling, general and administrative expenses of $2.9 million and research and development expenses of $1.3 million.

Sales were $787,000 for the year-ended December 31, 2016 compared with $292,000 for the year ended December 31, 2015. The increase of $495,000 is a result of continued controlled commercial launch of our vBloc Rechargeable System at select surgical centers in the U.S.

As also for the full year, the Company reported a net loss of $23.4 million or $37.53 per share. One of the persistent challenges to our financial growth in 2016 was uncertainty over our continued listing on the NASDAQ Capital Market.

Last month we were pleased to report that NASDAQ issued a determination letter that the Company has evidenced compliance with all requirements for continued listing on the NASDAQ Capital Market and accordingly the listing qualifications matter was closed.

Key to our success in the coming year will be maintaining the strong financial position we've worked so hard to establish and we believe that we're well-positioned for a strong 2017. With that, I'd like to open up the call to questions..

[Operator Instructions]. Our first question comes from the line of Jeffrey Cohen from Ladenburg Thalmann. Sir, your line is now open..

Alright Scott and Dan, thanks for taking the questions.

Could you talk a little bit about the current 13 established institutes and the current number of trained physicians out there in the marketplace and the percent of those institutes that are VA facilities and how training is going for the physicians and how many physicians we could expect to be trained during 2017 and how many you've finished in 2016?.

Sure. Well, what I can tell you is that, first of all, in terms of trained physicians in the marketplace is about 80 of them. But realistically, we do not focus on all 80 physicians, because it requires fair amount of money to have to advertise in their markets to generate interest for cash pay patients.

So, what we did is, we chose to focus 13 different locations in the United States with leading bariatric surgeons in each of those areas. So, you will find that there is a minimum of one, a maximum of two, maybe there in each of these hospitals that will be doing the surgery. So, MedStar is our newest one in Maryland, Virginia and Roper St.

Francis in South Carolina, Sky Ridge Medical Center in Denver, it's just one surgeon there, but he is a very busy surgeon and he's actually our number one institute for implantation. Winthrop University Hospital is an IDN in New York City.

We have a leading surgeon in that arena both putting in covered – what we would call covered lives implants for employees as well as accepting cash pay patients. Beltline Surgery Center is outside of Atlanta, Georgia. More of a surgery center environment.

There, they are getting the patients in very cost-effectively, getting home most of the time the same day. Christiana Institute of Advanced Surgery or they call CHRIAS is in Pennsylvania. They were trained about mid-year last year. Smart DIMENSIONS Weight Loss center in Southern California is on board – came on board in the second half of last year.

UTMB, the University of Texas Medical Branch was trained early last year. South Florida Surgery and Bariatric Institute of Florida, Hackensack University Medical Center in New Jersey, Hartford Hospital in Connecticut, Nix Medical in Texas and Tufts Medical Center in Massachusetts are the 13 what we would call our leading centers out there.

We've also most recently have sort of trained and certified a total of five VAs, the Dallas VA which was onboard with us last year, the Boston VA came on board I think in January, the Richmond VA came on board in the last 30 days, the Charleston VA which is also, what's called the Choice Program, they also came on board in the last 30 days and the West Virginia VA is on board as well..

Okay.

And as far as VAs on board, at least one physician, if so these have been trained?.

Correct..

And implants have begun?.

Actually the implants have begun at Dallas VA and we're just now working to schedule patients with the other VAs. These are brand new. They've just come out in the last 30 days and we didn't start our advertising campaign until the very end of January.

So, we're just now getting patients calling in and getting them through the system?.

Okay.

And could you talk a little bit about Type 2 diabetics as far as recent implants? Could you give us an idea, what percent of recent implants are Type 2s or have elevated HbA1cs or are taking drugs for Type 2?.

Yeah. Well, that one is going to be a little tougher to answer in the commercial environment, because typically surgeons – the surgeons give us the information and reference too, what the patient weighs, what the patient age is, what the sex of patient is and how much weight they lose over time. They do not traditionally track HbA1c levels.

So, that's interesting that a lot of them don't do that. So, what we're doing is continuing to focus on what we would call very directive clinical – clinical results in a clinical study environment where they're required to take blood and track that for us.

So, the most recent release was on our DM2 study and that clearly show that even after three years we are for Type 2 diabetics that we are highly competitive with drugs. And I think you'll see more announced this year which sites we're working on a clinical study environment concerning diabetes..

Okay, great.

And finally for me, could you talk about scientific publications and or podium that you anticipate to occur during 2017?.

Well, certainly as we did last year, we would expect that we'll be very involved in giving scientific updates and study updates at the ObesityWeek, which is the largest conference in United States for this area, versus bariatric community, number one.

Two is, we expect that sometime here in the first half we will be submitting our commercial data for publication. We don't know how long it will take for the – the publication actually get it out, but we plan to submit it here in just the next couple of months.

Thirdly is, we are continuing to track both our DM2 and our ReCharge study patients and we'll give us annual update on them as well at some point during 2017..

Okay, perfect. That does it for me, Dan. Thanks very much..

Okay. Thank you..

I am showing no further questions. I will now like to turn the call back to Mr. Dan Gladney for any further remarks..

Thank you everybody for joining us on our call and please feel free to reach out to us today or in the future with any additional questions. Thanks again..

Ladies and gentlemen, thank you for participation in today's conference. This concludes today's program and you may all disconnect. Everyone have a great day..