ETRM Enteromedics

Item 1.01.    Entry into a Material Definitive Agreement.

Merger Agreement

        On May 22, 2017, EnteroMedics Inc., a Delaware corporation (the "Company"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), with BarioSurg, Inc., a Delaware corporation ("BarioSurg"), Acorn Subsidiary Inc., a Delaware corporation and wholly owned subsidiary of the Company ("Merger Sub"), Acorn Subsidiary Holdings LLC, a Delaware limited liability company and wholly owned subsidiary of the Company ("Sub LLC"), and Dr. Raj Nihalani, solely in his capacity as representative of BarioSurg's stockholders, pursuant to which, among other things, Merger Sub merged with and into BarioSurg, with BarioSurg surviving as a wholly owned subsidiary of the Company (the "Merger"). BarioSurg was subsequently merged with and into Sub LLC, with Sub LLC as the surviving company. The Merger has been approved by the boards of directors of the Company, Merger Sub and BarioSurg, by the sole member of Sub LLC, and by the stockholders of BarioSurg.

        The aggregate merger consideration to be paid by the Company for all of the outstanding shares of capital stock and outstanding options of BarioSurg is: (i) 1.38 million shares of common stock, par value $0.01 per share, of the Company ("Company Common Stock"), (ii) 1.0 million shares of newly created conditional convertible preferred stock, par value $0.01 per share, of the Company ("Company Preferred Stock"), which shares will convert into 5.0 million shares of Company Common Stock subject to and contingent upon the post-closing approval of the Company's stockholders in accordance with the NASDAQ Stock Market Rules, and (iii) $2 million in cash, less the amount of third party expenses paid by the Company on behalf of BarioSurg, as set forth in the Merger Agreement. At the closing of the Merger, 100,018 shares of Company Preferred Stock will be deposited with an escrow agent to fund-post closing indemnification obligations of BarioSurg's former stockholders.

        The shares of Company Common Stock issued at the closing of the Merger represent approximately 10.4% of the total outstanding shares of Company Common Stock immediately following the Merger. Subject to receipt of the required approval of the Company's stockholders, the number of shares of Company Common Stock to be issued upon conversion of the shares of Company Preferred Stock represents approximately 37.6% of the total outstanding shares of Company Common Stock immediately following the Merger, on an as-converted basis. Collectively, the shares of Company Common Stock and Company Preferred Stock (assuming conversion of the Company Preferred Stock into Company Common Stock) to be issued in connection with the Merger will represent approximately 48.0% of the issued and outstanding capital stock of the Company following the Merger, on an as-converted basis. Shares of Company Preferred Stock will be non-voting until the receipt of the required Company stockholder approval.

        Approval by the Company's stockholders was not required in connection with the closing of the Merger and the issuance of shares of Company Common Stock in connection with the Merger. Under the terms of the Merger Agreement, the Company has agreed to use commercially reasonable efforts to call and hold a meeting of the Company's stockholders to obtain the requisite approval for the conversion of the Company Preferred Stock into shares of Company Common Stock, for purposes of the NASDAQ Stock Market Rules, within 120 days after the date of the Merger Agreement and, if such approval is not obtained at that meeting, to obtain such approval at an annual or special stockholders meeting to be held at least every six months thereafter.

        The foregoing description of the Merger Agreement does not purport to be complete and is subject to, qualified in its entirety by reference to, the full text of the Merger Agreement, which is filed as Exhibit 2.1 to this report and is incorporated herein by reference. The Merger Agreement and related description are intended to provide you with information regarding the terms of the Merger Agreement and are not intended to modify or supplement any factual disclosures about the Company in its reports filed with the Securities and Exchange Commission (the "SEC"). In particular, the Merger Agreement and related description are not intended to be, and should not be relied upon as,

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disclosures regarding any facts and circumstances relating to the Company. The assertions embodied in the representations and warranties made by BarioSurg in the Merger Agreement are qualified in information contained in disclosure schedules that BarioSurg has delivered to the Company in connection with the signing of the Merger Agreement made for purposes of allocating contractual risk between the parties to the Merger Agreement instead of establishing these matters as facts. The representations and warranties also may be subject to a contractual standard of materiality different from those generally applicable under the securities laws. Stockholders of the Company are not third-party beneficiaries under the Merger Agreement and should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of the Company, BarioSurg or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Merger Agreement.

Voting Agreement and Irrevocable Proxy; Employment Agreement; Non-Competition Agreement

        On May 22, 2017, in connection with and as a condition to the execution of the Merger Agreement, the Company and Dr. Raj Nihalani, the founder and Chief Executive Officer of BarioSurg, entered into a voting agreement and irrevocable proxy (the "Voting Agreement") pursuant to which Dr. Nihalani agreed to vote all shares of Company Common Stock he owns after the Merger, including shares of Company Common Stock issued upon conversion of Company Preferred Stock, in accordance with the recommendation of the Board of Directors of the Company. Dr. Nihalani holds approximately 34% of the Company Common Stock immediately after the Merger (assuming conversion of the Company Preferred Stock into Company Common Stock).

        Dr. Nihalani also entered into an employment agreement (the "Employment Agreement") with the Company pursuant to which he will serve as the Company's Chief Technology Officer. The employment agreement provides for an annual base salary of $300,000 and a potential cash incentive payment of up to 32% of annual base salary. Dr. Nihalani also entered into an indemnification agreement with the Company (the "Indemnification Agreement") in substantially the same form as the Company's other executive officers. In connection with the Merger Agreement, the Company and Dr. Nihalani entered into a non-competition agreement pursuant to which Dr. Nihalani agreed, among other things, not to engage in any business activities that are directly related to bariatric surgery medical devices for a period of three-years after the Merger.

        The foregoing description of the Voting Agreement, Employment Agreement, Indemnification Agreement and Non-Competition Agreement does not purport to be complete and is subject to, qualified in its entirety by reference to, the full text of the Voting Agreement, Employment Agreement, Indemnification Agreement and Non-Competition Agreement, which are filed as Exhibits 10.1, 10.2, 10.3 and 10.4, respectively, to this report and are incorporated herein by reference.