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ETRM > SEC Filings for ETRM > Form 10-Q on 12-Aug-2016All Recent SEC Filings

Show all filings for ENTEROMEDICS INC

Form 10-Q for ENTEROMEDICS INC


12-Aug-2016

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

Except for the historical information contained herein, the matters discussed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements that involve risks and uncertainties. In some cases, these statements may be identified by terminology such as "may," "will," "should," "expects," "could," "intends," "might," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue," or the negative of such terms and other comparable terminology. These statements involve known and unknown risks and uncertainties that may cause our results, level of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to such differences include, among others, those discussed in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2015. Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after the date of this report.

Overview

We are a medical device company with approvals to commercially launch our product, the Maestro Rechargeable System, in the United States, Australia, the European Economic Area and other countries that recognize the European CE Mark. We are focused on the design and development of devices that use neuroblocking technology to treat obesity, metabolic diseases and other gastrointestinal disorders. Our proprietary neuroblocking technology, which we refer to as vBloc Therapy, is designed to intermittently block the vagus nerve using high frequency, low energy, electrical impulses. We have a limited operating history and only recently received U.S. Food and Drug Administration (FDA) approval to sell our product in the United States. In addition, we have regulatory approval to sell our product in Australia, the European Economic Area and other countries that recognize the European CE Mark and do not have any other source of revenue. We were incorporated in Minnesota on December 19, 2002 and later reincorporated in Delaware on July 22, 2004. We have devoted substantially all of our resources to the development and commercialization of the Maestro Rechargeable System.

The Maestro Rechargeable System, our initial product, uses vBloc Therapy to limit the expansion of the stomach, help control hunger sensations between meals, reduce the frequency and intensity of stomach contractions and produce a feeling of early and prolonged fullness. We believe the Maestro Rechargeable System offers obese patients a minimally-invasive treatment that can result in significant, durable and sustained weight loss. We believe that our Maestro Rechargeable System allows bariatric surgeons to offer a new option to obese patients who are concerned about the risks and complications associated with currently available anatomy-altering, restrictive or malabsorptive surgical procedures.

We received FDA approval on January 14, 2015 for vBloc Therapy, delivered via the Maestro Rechargeable System, for the treatment of adult patients with obesity who have a Body Mass Index (BMI) of at least 40 to 45 kg/m2, or a BMI of at least 35 to 39.9 kg/m2 with a related health condition such as high blood pressure or high cholesterol levels, and who have tried to lose weight in a supervised weight management program and failed within the past five years. We have begun a controlled commercial launch at select centers in the United States and had our first commercial sales in 2015. During 2015, we began a controlled expansion of our commercial operations and started the process of building a sales force. In January 2016, we hired three new executives to oversee this expansion. The direct sales force is supported by field technical managers who provide training, technical and other support services to our customers. Throughout 2015, our sales force called directly on key opinion leaders and bariatric surgeons at commercially-driven centers that met our certification criteria, which led to the training and certification of over 50 centers and 75 surgeons in implanting and administering vBloc Therapy. We have continued these efforts in the first six months of 2016 and plan to build on these efforts during the remainder of 2016 through geography and self-pay patient focused direct-to-patient marketing, key opinion leader and center specific partnering, and a multi-faceted reimbursement strategy. To date, we have relied on, and anticipate that we will continue to rely on, third-party manufacturers and suppliers for the production of the Maestro Rechargeable System.

Data from our ReCharge trial was used to support the premarket approval (PMA) application for the Maestro Rechargeable System, submitted to the FDA in June 2013. The ReCharge trial is a randomized, double-blind, sham-controlled, multicenter pivotal clinical trial testing the effectiveness and safety of vBloc Therapy utilizing our Maestro Rechargeable System. All patients in the trial received an implanted device and were randomized in a 2:1 allocation to treatment or sham control groups. The sham control group received a non-functional device during the trial period. All patients were expected to participate in a standard weight management counseling program. The primary endpoints of efficacy and safety were evaluated at 12 months. As announced, the ReCharge trial met its primary safety endpoint with a 3.7% serious adverse event rate. The safety profile at 12 months was further supported by positive cardiovascular signals including a 5.5 mmHg drop in systolic blood pressure, a 2.8 mmHg drop in diastolic blood pressure and a 3.6 bpm drop in average heart rate.


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Although the trial did not meet its predefined co-primary efficacy endpoints, it did demonstrate in the intent to treat (ITT) population (n=239) a clinically meaningful and statistically significant excess weight loss (EWL) of 24.4% (approximately 10% total body weight loss (TBL)) for vBloc Therapy-treated patients, with 52.5% of patients achieving at least 20% EWL. In the per protocol population, the trial demonstrated an EWL of 26.3% for vBloc Therapy-treated patients, with 56.8% of patients achieving at least 20% EWL.

In the ReCharge trial, two-thirds of vBloc Therapy-treated patients achieved at least 5% TBL at 12 months. According to the Centers for Disease Control and Prevention (CDC), 5% TBL can have significant health benefits on obesity related risk factors, or comorbidities, including reduction in blood pressure, improvements in Type 2 diabetes and reductions in triglycerides and cholesterol. Further analysis of our data at 12 months showed a meaningful impact on these comorbidities as noted in the below table showing the improvements seen at 10% TBL, the average weight loss in vBloc Therapy-treated patients.

                     Risk Factor                     10% TBL
                     Systolic BP (mmHg)                    -9
                     Diastolic BP (mmHg)                   -6
                     Heart Rate (bpm)                      -6
                     Total Cholesterol (mg/dL)            -15
                     LDL (mg/dL)                           -9
                     Triglycerides (mg/dL)                -41
                     HDL (mg/dL)                            3
                     Waist Circumference (inches)          -7
                     HbA1c (%)                           -0.5

We subsequently announced that vBloc Therapy-treated patients were maintaining their weight loss at 18 months and 24 months with an EWL of 23.5% and 21.1%, respectively. The trial's positive safety profile also continued throughout this reported time period.

We obtained European CE Mark approval for our Maestro Rechargeable System in 2011 for the treatment of obesity. The CE Mark approval for our Maestro Rechargeable System was expanded in 2014 to also include use for the management of Type 2 diabetes in obese patients. In January 2012, the final Maestro Rechargeable System components were listed on the Australian Register of Therapeutic Goods (ARTG) by the Therapeutic Goods Administration (TGA). The costs and resources required to successfully commercialize the Maestro Rechargeable System internationally are currently beyond our capability. Accordingly, we intend to devote our near-term efforts toward mounting a successful system launch in the United States. We intend to explore select international markets to commercialize the Maestro Rechargeable System as our resources permit, using direct, dealer and distributor sales models as the targeted market best dictates.

To date, we have not observed any mortality related to our device or any unanticipated adverse device effects in our human clinical trials. We have also not observed any long-term problematic clinical side effects in any patients. In addition, data from our VBLOC-DM2 ENABLE trial outside the United States demonstrate that vBloc Therapy may hold promise in improving obesity-related comorbidities such as diabetes and hypertension. We are conducting, or plan to conduct, further studies in each of these comorbidities to assess vBloc Therapy's potential in addressing multiple indications.

We recently commenced commercial operations in the United States, deriving revenues from our primary business activity in 2015. We expect to incur significant sales and marketing expenses prior to recording sufficient revenue to offset these expenses. We expect our selling, general and administrative expenses to increase as we continue to add the infrastructure necessary to support our initial commercial sales, operate as a public company and develop our intellectual property portfolio. For these reasons, we expect to continue to incur operating losses for the next several years. We have financed our operations to date principally through the sale of equity securities, debt financing and interest earned on investments.

Our board of directors and stockholders approved a 1-for-15 reverse split of the Company's outstanding common stock that became effective after trading on January 6, 2016 (the Reverse Stock Split). The Reverse Stock Split did not change the par value of our stock or the number of preferred shares authorized by our Fifth Amended and Restated Certificate of Incorporation. An amendment to the Certificate of Incorporation was also approved in connection with the Reverse Stock Split to increase the number of shares of our common stock authorized for issuance to 150 million shares, effective immediately after the Reverse Stock Split on January 6, 2016. All share and per share amounts have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented.


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Financial Overview

Revenue

We received FDA approval on January 14, 2015 for vBloc Therapy, delivered via the Maestro Rechargeable System, and have begun a controlled commercial launch at select centers in the United States. In 2015 we trained and certified over 50 centers and 75 surgeons in implanting and administering vBloc Therapy. We had our first commercial sales within the United States in 2015 and for the year ended December 31, 2015 we recognized $292,000 in revenue. We have not generated revenue from commercial sales outside of the United States since 2012.

Any revenue from initial sales of a new product in the United States or internationally is difficult to predict and in any event will only modestly reduce our continued losses resulting from our research and development and other activities.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist primarily of compensation for executive, finance, market development and administrative personnel, including stock-based compensation. Other significant expenses include professional services and consulting fees, costs associated with attending medical conferences, other professional fees for legal services, including legal services associated with our efforts to obtain and maintain broad protection for the intellectual property related to our products, and accounting services, cash management fees and travel expenses.

Research and Development Expenses

Our research and development expenses primarily consist of engineering, product development, quality assurance and clinical and regulatory expenses, incurred in the development of our Maestro Rechargeable System. Research and development expenses also include employee compensation, including stock-based compensation, consulting services, outside services, materials, clinical trial expenses, including supplies, devices, explants and revisions, depreciation and travel. We expense research and development costs as they are incurred.

Results of Operations

Comparison of the Three Months Ended June 30, 2016 and 2015

Sales. Sales were $276,000 for the three months ended June 30, 2016, compared to $79,000 sales for the three months ended June 30, 2015. The increase of $197,000 is the result of receiving FDA approval on January 14, 2015 and commencing a controlled commercial launch of the Maestro Rechargeable System at select centers in the United States which resulted in sales of 23 units during the second quarter of 2016 versus six units during the second quarter of 2015.

Cost of Goods Sold. Cost of goods sold were $155,000 for the three months ended June 30, 2016, compared to $31,000 cost of goods sold for the three months ended June 30, 2015. The expense increase was driven primarily by the 283% increase in unit sales over the prior year period. The Company's gross margin percentage declined to 43.8% for the three months ended June 30, 2016 from 61.1% due primarily to a reduction in average sales price and, to a lesser degree, by an increase in overhead costs applied to inventory.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $5.6 million for the three months ended June 30, 2016, compared to $4.9 million for the three months ended June 30, 2015. The increase of $0.7 million, or 13.2%, was primarily due to increases of $830,000 in professional services partially offset by declines in payroll-related expenses of $272,000. The increase in professional services expenses are the result of increasing commercialization efforts after receiving FDA approval on January 14, 2015 and beginning a controlled commercial launch at select centers in the United States.

Research and Development Expenses. Research and development expenses declined to $1.2 million for the three months ended June 30, 2016 from $2.5 million for the three months ended June 30, 2015. The decrease of $1.3 million, or 51.3%, was primarily due to decreases of $272,000, $228,000, and $362,000 in payroll-related expenses, professional services expenses and supplies expenses, respectively. The decreases are the result of a shift away from a research and development focus towards commercialization following FDA approval on January 14, 2015.

Interest Expense. Interest expense was $853,000 for the three months ended June 30, 2016, compared to $60,000 for the three months ended June 30, 2015. The increase of $793,000 was driven by interest costs from the three closings of the senior amortizing convertible notes (the Notes), that occurred on November 9, 2015, January 11, 2016 and May 2, 2016, as well as approximately $277,000 in debt issuance costs expensed as interest during the second quarter of 2016.


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Change in Value of Convertible Notes Payable. The value of the Notes payable declined $1.2 million during the three months ended June 30, 2016. There were no Notes outstanding for the three months ended June 30 2016 as the notes were issued November 9, 2015, January 11, 2016 and May 2, 2016. The Notes contain a conversion feature and the decline in the Company's common stock price from $0.97 to $0.20 on June 30, 2016 was the primary driver of the reduction in the fair value of the Notes. The fair market value was calculated using a Binomial Lattice model.

Change in Value of Warrant Liability. The value of the common stock warrant liability decreased $1.3 million for the three months ended June 30, 2016. There were no warrants outstanding that were required to be measured at fair value for the six months ended June 30, 2015. Common stock warrant liabilities were recorded on July 8, 2015, November 9, 2015, January 11, 2016 and May 2, 2016, as the common stock warrants issued with the July 8, 2015 public offering and with the Notes provide for certain anti-dilution protections in the event shares of common stock or securities convertible into shares of common stock are issued below the then-existing exercise price. The fair market value was calculated using the Black-Scholes valuation model, which resulted in $846,000, $60,000, $285,000 and $117,000 decreases for the three months ended June 30, 2016 for the common stock warrants issued with the July 8, 2015 public offering, November 9, 2015 Notes, the January 11, 2016 Notes and the May 2, 2016 Notes, respectively, as our stock price decreased from $0.97 on March 31, 2016 and $0.75 on May 2, 2016 to $0.20 on June 30, 2016.

Comparison of the Six Months Ended June 30, 2016 and 2015

Sales. Sales were $348,000 for the six months ended June 30, 2016, compared to $79,000 sales for the six months ended June 30, 2015. The increase of $269,000 is the result of receiving FDA approval on January 14, 2015 and commencing a controlled commercial launch of the Maestro Rechargeable System at select centers in the United States which resulted in sales of 29 units during the six months ended June 30, 2016 versus six units during the comparable period from 2015.

Cost of Goods Sold. Cost of goods sold were $195,000 for the six months ended June 30, 2016, compared to $31,000 for the six months ended June 30, 2015. The expense increase was driven primarily by the 480% increase in unit sales over the prior year period. The Company's gross margin percentage declined to 43.8% for the six months ended June 30, 2016 from 61.1% due primarily to a reduction in average sales price and, to a lesser degree, by an increase in overhead costs applied to inventory.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $11.7 million for the six months ended June 30, 2016, compared to $9.7 million for the six months ended June 30, 2015. The increase of $2.1 million, or 21.3%, was primarily due to a $2.0 million increase in professional services expenses The increase in professional services are the result of increasing commercialization efforts after receiving FDA approval on January 14, 2015 and beginning a controlled commercial launch at select centers in the United States.

Research and Development Expenses. Research and development expenses were $2.6 million for the six months ended June 30, 2016, compared to $4.7 million for the six months ended June 30, 2015. The decrease of $2.1 million or 44.0%, was primarily due to decreases of $947,000. $502,000 and $426,000 in payroll-related expenses, professional services expenses and supply expenses, respectively. The decreases are the result of a shift away from a research and development focus towards commercialization following FDA approval on January 14, 2015.

Interest Expense. Interest expense was $2.0 million for the six months ended June 30, 2016, compared to $275,000 for the six months ended June 30, 2015. The increase of $1.7 million is primarily due to the interest expense recognized during the period for the three closings of the Notes that occurred on November 9, 2015, January 11, 2016 and May 2, 2016. Additionally, approximately $960,000 of debt issuance costs were recognized in the first two quarters of 2016 as interest expense as we elected the fair value alternative for the Notes. Interest expense recognized for the six months ended June 30, 2015 included a $187,000 success fee paid to Silicon Valley Bank required by the Loan and Security Agreement as a result of achieving FDA approval on January 14, 2015.

Change in Value of Convertible Notes Payable. The value of the Notes payable declined $709,000 million during the six months ended June 30, 2016. There were no Notes outstanding for the six months ended June 30, 2016 as the Notes were issued November 9, 2015, January 11, 2016 and May 2, 2016. The Notes contain a conversion feature and the decline in the Company's common stock price from $1.95 at December 31, 2015, $1.33 on January 11, 2016 and $0.75 at May 20, 2016 to $0.20 on June 30, 2016 was the primary driver of the reduction in the fair value of the Notes. The fair market value was calculated using a Binomial Lattice model.

Change in Value of Warrant Liability. The value of the common stock warrant liability decreased $3.1 million for the six months ended June 30, 2016, primarily due to the decrease in the market value of the Company's common stock compared with the exercise price of warrants. There were no warrants outstanding that were required to be measured at fair value for the six months ended June 30, 2015. Common stock warrant liabilities were recorded on July 8, 2015, November 9, 2015 and January 11, 2016 as the common stock warrants issued with the July 8, 2015 public offering and with the Notes provide for certain anti-dilution protections in the event shares of common stock or securities convertible into shares of common stock are issued below the then-existing exercise price. The fair market value was calculated using the Black-Scholes valuation model, which resulted in $2.4 million, $103,000,


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$461,000 and $117,000 decreases for the six months ended June 30, 2016 for the common stock warrants issued with the July 8, 2015 public offering, November 9, 2015 Notes, the January 11, 2016 Notes and the May 2, 2016 Notes, respectively, as our stock price decreased from $1.95 on December 31, 2015 and $1.33 on January 11, 2016 and $0.75 on May 2, 2016 to $0.20 on June 30, 2016.

Liquidity and Capital Resources

As of June 30, 2016, we had $11.5 million in cash and cash equivalents. Of this amount $2.8 million was invested in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Company or other government agency. These money market funds seek to preserve the value of the investment at $1.00 per share; however, it is possible to lose money investing in these funds. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. At times, such deposits may be in excess of insured limits. We have not experienced any losses on our deposits of cash and cash equivalents.

We have financed our operations to date principally through the sale of equity securities, debt financing and interest earned on investments. As of June 30, 2016, we had $11.5 million of cash and cash equivalents to fund our anticipated operations through 2016. On November 4, 2015, we entered into a securities purchase agreement (the Purchase Agreement) with institutional investors to issue $25.0 million of Notes along with the accompanying warrants. $1.5 million of the Notes was funded at the initial closing on November 9, 2015 (the First Closing). An additional $11.0 million of the Notes were funded at the second closing on January 11, 2016 (the Second Closing). Pursuant to an amendment to the Purchase Agreement (the First Amendment) entered into on May 2, 2016, the remaining $12.5 million would be funded at two separate closings, with $6.25 million of the Notes funded on May 2, 2016 and the remaining amount, up to $6.25 million, scheduled to be funded no later than December 1, 2016. Additionally, we have agreed that we will not, for a period of one year after the First Closing, issue any further securities, other than certain excluded securities. Our anticipated operations include plans that consider the controlled commercial launch of vBloc Therapy, delivered via the Maestro Rechargeable System, which was approved by the FDA on January 14, 2015. We believe that we have the flexibility to manage the growth of our expenditures and operations. In order to accelerate the execution of our business plans we may need to raise additional funds.

Nasdaq Listing Notices

In May 2016, the Company received written notices from the Nasdaq Stock Market Nasdaq stating that the Company was not in compliance with the following two Nasdaq listing requirements: (i) the requirement that the Company have a minimum of $2.5 million stockholders' equity (the Stockholders' Equity Requirement) and
(ii) the $1.00 minimum bid price stock price requirement (the Minimum Bid Requirement).

On July 19, 2016, the Company received a letter from Nasdaq granting the Company an extension until November 14, 2016 to regain compliance with the Stockholders' Equity Requirement. The extension was granted based on the plan the Company submitted to Nasdaq to regain compliance with the Stockholders' Equity Requirement through a combination of note conversions and accelerated principal amortizations and infusions of equity capital prior to the deadline.

The Company has 180 calendar days from the May 9, 2016 notice date to regain compliance with the Minimum Bid Requirement. In the event the Company does not regain compliance with this requirement, Nasdaq will provide the Company with written notification that its securities are subject to delisting. At that time, the Company may appeal the delisting determination to a Hearings Panel.

Alternatively, if the Company fails to regain compliance with the Minimum Bid Requirement prior to the expiration of the 180 calendar day period, the Company may be granted an additional 180 calendar days to regain compliance with the Minimum Bid Requirement if it (i) meets the continued listing requirement for market value of publicly held shares and all of the other applicable requirements for initial listing on Nasdaq other than the minimum bid price, and
(ii) provides written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary.

The Company intends to actively monitor its performance with respect to the Stockholders' Equity Requirement and the Minimum Bid Requirement and will consider all available options to resolve each deficiency and regain compliance with the Nasdaq listing requirements

Sales Agreement-June 2014

On June 13, 2014, we entered into a sales agreement with Cowen and Company, LLC
(Cowen) to sell shares of our common stock having aggregate gross sales proceeds of up to $25.0 million, from time to time, through an "at-the-market" equity offering program under which Cowen will act as our sales agent (the Cowen ATM). We will determine, at our sole discretion, the timing and


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number of shares to be sold under the Cowen ATM. We will pay Cowen a commission for its services in acting as agent in the sale of common stock equal to 3.0% of the gross sales price per share of all shares sold through it as agent under the sales agreement. As of June 30, 2016, we have sold 367,903 shares under the Cowen ATM at a weighted-average selling price of $20.60 per share for gross proceeds of $7.6 million before deducting offering expenses. There have been no . . .

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