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10-Q 1 obln-93020x10q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-37897
OBALON THERAPEUTICS, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
26-1828101
(State of Incorporation)
(I.R.S. Employer
Identification No.)
5421 Avenida Encinas, Suite F
Carlsbad, California
92008
(Address of Principal Executive Offices)
(Zip Code)
(844) 362-2566
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.001 per share
OBLN
The NASDAQ Stock Market LLC
(NASDAQ Global Market)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
x
Smaller reporting company
x
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financing accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Total shares of common stock outstanding as of the close of business on November 2, 2020 was 7,770,698.



TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



1



PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements


OBALON THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and par value data)
September 30, 2020
December 31, 2019
Assets
(Unaudited)
Current assets:


Cash and cash equivalents
$
5,514

$
14,055

Accounts receivable, net
—

285

Inventory
—

1,936

Other current assets
3,517

1,959

Total current assets
9,031

18,235

Property and equipment, net
982

1,081

Lease right-of-use assets
646

1,077

Other long-term assets
1,303

—

Total assets
$
11,962

$
20,393

Liabilities and Stockholders’ Equity


Current liabilities:


Accounts payable
$
656

$
648

Accrued compensation
116

820

Deferred revenue
61

424

Other current liabilities
3,634

1,524

Current portion of lease liabilities
583

561

Total current liabilities
5,050

3,977

Lease liabilities, long-term
553

567

Long-term debt
430

—

Other long-term liabilities
7

—

Total long-term liabilities
990


567

Total liabilities
6,040

4,544

Commitments and contingencies (See Note 10)




Stockholders’ equity:


Common stock, $0.001 par value; 100,000,000 shares authorized as of September 30, 2020 and December 31, 2019; 7,770,698 and 7,724,100 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively
8

8

Additional paid-in capital
189,353

188,271

Accumulated deficit
(183,439
)
(172,430
)
Total stockholders’ equity
5,922

15,849

Total liabilities and stockholders’ equity
$
11,962

$
20,393


See accompanying notes to unaudited interim condensed consolidated financial statements.


2




OBALON THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
(in thousands, except shares and per share data)
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
2020

2019
Revenue
$
44

$
333

$
1,527

$
2,494

Cost of revenue
41

412

1,005

2,323

Gross profit (deficit)
3

(79
)
522

171

Operating expenses:




Research and development
271

1,174

2,293

5,401

Selling, general and administrative
1,291

2,489

7,546

13,025

Asset impairment and other charges
—

—

1,310

—

Total operating expenses
1,562

3,663

11,149

18,426

Loss from operations
(1,559
)
(3,742
)
(10,627
)
(18,255
)
Interest (expense) income, net
(1
)
37

29

(448
)
Other expense, net
—

(1
)
(411
)
(60
)
Net loss and comprehensive loss
$
(1,560
)
$
(3,706
)
$
(11,009
)
$
(18,763
)
Net loss per share, basic and diluted
$
(0.20
)
$
(0.61
)
$
(1.42
)
$
(5.07
)
Weighted-average common shares outstanding, basic and diluted
7,728,639

6,061,248

7,727,494

3,700,538

See accompanying notes to unaudited interim condensed consolidated financial statements.


3



OBALON THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
(in thousands, except shares and per share data)

Common stock
Additional
paid-in
capital
Accumulated
deficit
Total
stockholders’
equity
Shares
Amount
Balance at December 31, 2019
7,724,100

$
8

$
188,271

$
(172,430
)
$
15,849

Stock-based compensation
—

—

470

—

470

Vesting of stock awards, net of cancellations
7,533

—

—

—

—

Vesting of early exercised stock options
—

—

14

—

14

Net loss
—

—

—

(5,261
)
(5,261
)
Balance at March 31, 2020
7,731,633

8

188,755

(177,691
)
11,072

Stock-based compensation
—

—

292

—

292

Vesting of early exercised stock options
—

—

2

—

2

Net loss
—

—

—

(4,188
)
(4,188
)
Balance at June 30, 2020
7,731,633

8

189,049

(181,879
)
7,178

Stock-based compensation
—

—

259

—

259

Issuance of warrants for the purchase of common stock
—

—

45

—

45

Vesting of restricted stock, net of cancellations
39,065

—

—

—

—

Net loss
—

—

—

(1,560
)
(1,560
)
Balance at September 30, 2020
7,770,698

$
8

$
189,353

$
(183,439
)
$
5,922



See accompanying notes to unaudited interim condensed consolidated financial statements.



4



OBALON THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
(in thousands, except shares and per share data)
Common stock
Additional
paid-in
capital
Accumulated
deficit
Total
stockholders’
equity
Shares
Amount
Balance at December 31, 2018
2,351,333

$
2

$
161,859

$
(148,754
)
$
13,107

Stock-based compensation
—

—

1,105

—

1,105

Issuance of common stock for cash upon exercise of stock options
119

—

1

—

1

Vesting of early exercised stock options
—

—

14

—

14

Issuance of common stock, net of issuance costs
75,551

1

580

—

581

Cancellation of restricted stock awards
(2,051
)
—

—

—

—

Net loss
—

—

—

(8,290
)
(8,290
)
Balance at March 31, 2019
2,424,952

3

163,559

(157,044
)
6,518

Stock-based compensation
—

—

536

—

536

Issuance of common stock for cash upon exercise of stock options
—

—

—

—

—

Vesting of early exercised stock options
—

—

15

—

15

Issuance of common stock, net of issuance costs
1,158,187

1

8,073

—

8,074

Cancellation of restricted stock awards
(24,859
)
—

—

—

—

Net loss
—

—

—

(6,767
)
(6,767
)
Balance at June 30, 2019
3,558,280

$
4

$
172,183

$
(163,811
)
$
8,376

Stock-based compensation
—

$
659

$
—

$
659

Costs associated with issuance of common stock
—

$
(7
)
$
—

$
(7
)
Vesting of early exercised stock options
—

$
14

$
—

$
14

Issuance of common stock and warrants, net of issuance costs
2,427,500

$
2

$
14,716

$
—

$
14,718

Exercise of warrants for the purchase of common stock
1,735,000

$
2

$
—

$
2

Issuance of round up common stock for reverse stock split
3,320

$
9

$
—

$
9

Net loss
—

$
(3,706
)
$
(3,706
)
Balance at September 30, 2019
7,724,100

$
8

$
187,574

$
(167,517
)
$
20,065

See accompanying notes to unaudited interim condensed consolidated financial statements.


5



OBALON THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended September 30,
2020
2019
Operating activities:


Net loss
$
(11,009
)
$
(18,763
)
Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation
260

361

Stock-based compensation
1,021

2,300

Fair value of cash-settled options
7

—

Issuance of warrants for the purchase of common stock
45

—

Loss on disposal of fixed assets
—

128

Amortization of right-of-use assets
378

301

Accretion of investment discount, net
—

(2
)
Amortization of debt discount
—

70

Impairment of long-lived assets and other charges
1,257

—

Impairment of inventory
53

—

Change in operating assets and liabilities:

Accounts receivable, net
285

632

Inventory
(524
)
(117
)
Other current assets
(1,389
)
1,604

Other long-term assets
(9
)
—

Accounts payable
8

(724
)
Accrued compensation
(688
)
(3,097
)
Deferred revenue
(363
)
(69
)
Lease liabilities, net
(293
)
(248
)
Other current and long-term liabilities
2,107

(363
)
Net cash used in operating activities
(8,854
)
(17,987
)
Investing activities:


Maturities of short-term investments
—

2,550

Purchases of property and equipment
(117
)
(44
)
Net cash (used in) provided by investing activities
(117
)
2,506

Financing activities:


Proceeds from long-term loan
430

10,000

Payment on long-term loan
—

(20,000
)
Proceeds from issuance of common stock, net of issuance costs
—

8,659

Proceeds from issuance of common and warrants, net of paid issuance costs
—

15,014

Proceeds from sale of common stock upon exercise of stock options
—

1

Net cash provided by financing activities
430

13,674

Net decrease in cash and cash equivalents
(8,541
)
(1,807
)
Cash and cash equivalents at beginning of period
14,055

21,187

Cash and cash equivalents at end of period
$
5,514

$
19,380

Supplemental cash flow information:


Interest paid
$
—

$
700

Unpaid issuance costs
$
—

$
295



6



See accompanying notes to unaudited interim condensed consolidated financial statements.


7



OBALON THERAPEUTICS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Basis of Presentation
Obalon Therapeutics, Inc., or the Company, was incorporated in the state of Delaware on January 2, 2008. The Company is a vertically-integrated medical device company focused on developing and commercializing innovative medical devices to treat obesity. Using its patented technology, the Company has developed the Obalon® balloon system, the first and only U.S. Food and Drug Administration, or FDA, approved swallowable, gas-filled intragastric balloon designed to provide progressive and sustained weight loss in obese patients.
The unaudited interim condensed consolidated financial statements include the accounts of Obalon Therapeutics, Inc., and its wholly owned subsidiary, Obalon Center for Weight Loss, Inc.
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, and include the Company's accounts and accounts of its wholly-owned subsidiary. The Company also consolidates variable interest entities or VIE for which it is the primary beneficiary. The primary beneficiary has both (a) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and (b) either the obligation to absorb losses or the right to receive benefits. Refer to Note 11, “Variable Interest Entity” for further details. All intercompany transactions and balances have been eliminated in consolidation.
The Company’s principal operations are located in Carlsbad, California, and it operates in one business segment.

Reverse Stock Split

On July 24, 2019, the Company filed a certificate of amendment to its certificate of incorporation with the Secretary of State of the State of Delaware to effect a one-for-ten reverse split of its issued and outstanding common stock. The accompanying consolidated financial statements and notes thereto give retrospective effect to the reverse stock split for all periods presented. All issued and outstanding common stock, options exercisable for common stock, restricted stock units, performance restricted stock units, and per share amounts contained in the consolidated financial statements have been retrospectively adjusted to reflect this reverse stock split for all periods presented. The number of authorized shares of common stock was not changed by virtue of the reverse stock split and remained at 100.0 million shares.
Liquidity
As of September 30, 2020 , the Company has devoted a substantial portion of its efforts to product development, raising capital, and building infrastructure, and, since January 2017, U.S. commercialization. The Company has incurred operating losses and has experienced negative cash flows from operations since its inception. In July 2012, the Company realized initial revenue from its planned principal operations. The Company recognized total revenue of $44,000 and $0.3 million for the three months ended September 30, 2020 and 2019 , respectively, and $1.5 million and $2.5 million for the nine months ended September 30, 2020 and 2019 , respectively. The Company's revenue since April 2020 is primarily due to reversing various reserves related to revenue from customer incentive programs, swallow guarantee, and returns reserves as a result of stopping all commercial operations and underlying programs. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and has funded its activities to date almost exclusively from debt and equity financings.
As reflected in the accompanying condensed consolidated financial statements, the Company has a limited operating history and the sales and income potential of the Company’s business are unproven. The Company has not been profitable since inception, and as of September 30, 2020 , its accumulated deficit was $183.4 million . Since inception, the Company has financed its operations primarily through private placements of its preferred stock, the sale of common stock in its IPO and in subsequent public offerings and private placements, and, to a lesser extent, debt financing arrangements. As of September 30, 2020 , the Company had cash and cash equivalents of $5.5 million . The Company expects to continue to incur net losses for the foreseeable future.

The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. In late 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread globally. To date, COVID-19 has had, and will continue to have, an adverse impact on the Company’s operations and expenses as a result of the preventive and precautionary measures that the Company, its customers, other businesses, and governments are taking, including the deferral of elective medical procedures and diversion of capital and other resources. In March 2020, the Company suspended all new patient treatments at its Obalon-branded retail centers due to the ongoing COVID-19 pandemic. The Company has taken further steps to significantly reduce expenses in an effort to extend its cash runway while it evaluates potential business options, strategic alternatives and the potential for third-party payor reimbursement that may be available


8



when and if the current COVID-19 crisis stabilizes and the economy rebounds. The Company has significantly reduced the organization to essential personnel only and, since August 2020, has only had two full-time employees. All Obalon-branded retail centers have been shutdown with no intention to reopen, and the Company has halted plans for future retail center expansion. The Company does not expect to restart shipments to U.S. customers and has terminated the agreement with its international distributor, Al Danah Medical Company W.L.L. The decision to shift the Company's strategy to focus on pursuing reimbursement, while also evaluating other strategic options, occurred after the end of the first quarter of 2020. If the Company is unsuccessful in those two endeavors over the next several months, it may be forced to liquidate the business or pursue bankruptcy protection. As a result of the above factors, there is substantial doubt about the Company's ability to continue as a going concern for the twelve months following the issuance date of the unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2020.


2. Summary of Significant Accounting Policies

There were no significant changes to the accounting policies during the nine months ended September 30, 2020 , from the significant accounting policies described in Note 2 of the “Notes to Consolidated Financial Statements” in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, filed on February 27, 2020.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.
Reported amounts and note disclosures reflect the overall economic conditions that are most likely to occur and anticipated measures management intends to take. Actual results could differ materially from those estimates. All revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Unaudited Interim Condensed Consolidated Financial Statements
The interim condensed consolidated financial statements as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and reflect, in the opinion of management, all adjustments of a normal and recurring nature that are necessary for the fair presentation of the Company’s condensed consolidated financial position as of September 30, 2020 and its condensed consolidated results of operations for the three and nine months ended September 30, 2020 and 2019 , statements of stockholders' equity for the three and nine months ended September 30, 2020 and 2019 , and cash flows for the nine months ended September 30, 2020 and 2019 . The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any other future annual or interim period. The balance sheet as of December 31, 2019 included herein was derived from the audited financial statements as of that date. These financial statements should be read in conjunction with the Company’s audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 , filed on February 27, 2020.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents include cash in readily available checking and money market accounts.

Comprehensive Loss

Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company’s comprehensive loss was the same as its reported net loss for all periods presented.
Fair Value Measurements
The carrying values of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their fair values due to the short maturity of these instruments. The carrying value of the loan approximates its fair value as the interest rate and other terms are that which are currently available to the Company.


9



The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels in accordance with authoritative accounting guidance:
▪
Level 1 inputs: Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
▪
Level 2 inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
▪
Level 3 inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
Inventory
Inventory is stated at the lower of cost (which approximates actual cost on a first-in, first-out basis) or net realizable value, computed on a standard cost basis. Inventory that is obsolete or is in excess of forecasted usage is written down to its estimated net realizable value based on assumptions about future demand. Inventory write-downs are charged to cost of revenue and establish a new cost basis for the inventory.

The Company evaluated whether the shift in business strategy to pursue a reimbursement model was indicative of inventory impairment. The Company performed an impairment assessment on its inventory stock and recognized $0.1 million in impairment charges for the nine months ended September 30, 2020 related to excess inventory not expected to be used in clinical trials to pursue reimbursement. The Company determined that the remaining inventory balance has an alternative future use in clinical trials and reclassified it to other current assets and other long-term assets. As a result, the Company does not have any inventory as of September 30, 2020.
Impairment of Long-Lived Assets
The Company evaluates property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount of the assets to the future undiscounted net cash flows, which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the difference between the carrying amount and the fair value of the impaired asset.

In light of the Company's shift in business strategy from the Obalon-branded retail treatment center model to a reimbursement model, the Company performed an impairment analysis on its long-lived assets and recognized $1.2 million in impairment charges for the nine months ended September 30, 2020 relating to the assets as the Company's previous retail treatment centers.
Net Loss per Share
Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period without consideration for common stock equivalents. Diluted net loss per share is the same as basic net loss per common share, since the effects of potentially dilutive securities are anti-dilutive due to the net loss position of all periods presented.
Potentially dilutive common stock equivalents are comprised of warrants, if material, unvested restricted stock awards (RSAs), and unexercised stock options outstanding under the Company’s equity plan.


10



Recently Issued and Adopted Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820); Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This guidance removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. Certain disclosures required by this guidance must be applied on a retrospective basis and others on a prospective basis. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The adoption of the new standard did not have a material impact on the Company's interim condensed consolidated financial statements.
Recently Issued Accounting Pronouncements not yet adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses, which changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. In February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) , which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it does not anticipate a material impact on results of operations. The Company is in the process of determining the effects the adoption will have on its consolidated financial statements.

In December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes: ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. This guidance is effective for annual periods after December 15, 2020, including interim periods within those annual periods. The Company is currently evaluating the potential impact of this guidance on its consolidated financial statements.



3. Fair Value Measurements
Instruments Recorded at Fair Value on a Recurring Basis
The Company has segregated all financial assets and liabilities that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below.
Assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 are as follows (in thousands):
Fair value measurements at reporting date using
Balance as of September 30, 2020
Quoted prices
in active
markets for
identical assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Assets:




Cash
$
433

$
433

Cash equivalents:




Money market funds
5,081

5,081

$
—

$
—

Total assets
$
5,514

$
5,514

$
—

$
—

Liabilities:
Cash settled equity awards
7

—

7

Total liabilities
$
7

$
—

$
—

$
7

Fair value measurements at reporting date using
Balance as of December 31, 2019
Quoted prices
in active
markets for
identical assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Assets:



Cash
$
1,012

$
1,012

Cash equivalents:
Money market funds
13,043

13,043

Total assets
$
14,055

$
14,055

$
—

$
—

The Company’s investments in Level 1 assets are valued based on publicly available quoted market prices for identical securities as of September 30, 2020 and December 31, 2019 .

The liabilities are recorded at fair value using the Black-Scholes option pricing model based on the following assumptions as of September 30, 2020 :


11




September 30, 2020
Assumed risk-free interest rate
0.38% - 0.44%
Assumed volatility
69.86% - 70.84%
Expected life
6.10 years
Expected dividend yield
—%

The assumptions were determined as follows:

Assumed risk-free interest rate — Based on the average yield of U.S. Treasury bills as of the valuation date for the expected term of the awards.

Assumed volatility — Based on the historical volatility of a number of publicly traded companies comparable in size, business model, industry and business description.

Expected life — Based on the remaining contractual term of warrant or the equity award as of the valuation date.

Expected dividend yield — Based upon the Company’s historic dividends and dividend expectations for the foreseeable future.

As of September 30, 2020 , reasonable changes in the unobservable inputs would not be expected to have a significant impact on the consolidated financial statements. The Company’s policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no significant transfers into or out of Level 1, 2, or 3 for the three months ended September 30, 2020 .

The following table provides reconciliation for all liabilities measured at fair value using significant unobservable inputs (Level 3) for the nine months ended September 30, 2020 (in thousands):
Fair value measurements at reporting date using significant unobservable inputs (Level 3)
Balance as of December 31, 2019
$
—

Issuance of cash settled equity awards
5

Change in fair value of warrant and cash settled award liabilities
2

Balance as of September 30, 2020
$
7


Instruments Not Recorded at Fair Value on a Recurring Basis
The estimated fair value of the Company's long-term loan is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues. The recorded value of the Company's long-term loan approximates the current fair value as the interest rate and other terms are more favorable than that which are currently available to the Company.

4. Net Loss per Share
The following table sets forth the computation of basic and diluted net loss per share of common stock (in thousands, except shares and per share data):
Three Months Ended September 30,
Nine Months Ended September 30,
2020

2019
2020
2019
Net loss
$
(1,560
)
$
(3,706
)
$
(11,009
)
$
(18,763
)
Weighted-average common shares outstanding, basic and
diluted
7,728,639

6,061,248

7,727,494

3,700,538

Net loss per share, basic and diluted
$
(0.20
)
$
(0.61
)
$
(1.42
)
$
(5.07
)

The following table sets forth the outstanding potentially dilutive securities determined using the treasury stock method that have been excluded in the calculation of diluted net loss per share because to do so would be anti-dilutive (in common stock equivalent shares):
Three Months Ended September 30,
Nine Months Ended September 30,
2020

2019
2020
2019
Stock options to purchase common stock
—

8

—

5,328

Total
—

8

—

5,328

5. Balance Sheet Details

Inventory consist of the following (in thousands):
September 30, 2020
December 31, 2019
Raw materials
$
—

$
1,835

Work in process
—

12

Finished goods
—

89

Total
$
—

$
1,936


As noted in Note 2, the current economic environment along with the shift in business resulted in the Company reclassifying inventory to other current and long term assets as the Company has no intention to sell these assets but instead plans to use them for clinical trials. Additionally, the Company recorded an impairment charge of $0.1 million for the nine months ended September 30, 2020 related to certain excess inventory.

Other current assets consist of the following (in thousands):
September 30, 2020
December 31, 2019
Prepaid expenses
$
186

$
1,890

Insurance receivable
3,150

—

Manufacturing use assets
166

—

Other assets
15

69

Total
$
3,517

$
1,959


Property and equipment, net consist of the following (in thousands):


12



September 30, 2020
December 31, 2019
Computer hardware
$
259

$
263

Computer software
274

291

Leasehold improvements
427

497

Furniture and fixtures
179

247

Scientific equipment
1,968

1,999

Construction in progress, or CIP
406

110

3,513

3,407

Less: accumulated depreciation
(2,531
)
(2,326
)
Total
$
982

$
1,081

Depreciation expense was $0.1 million for both the three months ended September 30, 2020 and 2019 and $0.3 million and $0.4 million for the nine months ended September 30, 2020 and 2019, respectively. As noted in Note 2, the current economic environment along with the shift in business focus is an impairment triggering event for the other long-lived assets. This resulted in impairment and other charges of $1.3 million for the nine months ended September 30, 2020. Based upon the Company's analysis, no other asset impairment charge was recorded.

Other long-term assets consist entirely of manufacturing use assets as of September 30, 2020.
Other current liabilities consist of the following (in thousands):
September 30, 2020
December 31, 2019
Accrued legal and professional fees
$
111

$
412

Accrued customer incentives
—

198

Accrued clinical trial expenses
64

—

Accrued sales and other taxes
103

107

Returns reserve liability
—

315

Settlement accrual
3,150

—

Other accrued expenses
206

492

Total
$
3,634

$
1,524


Insurance Refund

During the three months ended September 30, 2020, the Company received a refund pertaining to its Directors and Officer's Insurance for reimbursement of approximately $0.6 million . The refund related to excess charges regarding past insurance premiums. The full amount of the refund of $0.6 million was received during the three months ended September 30, 2020 and was recorded as an offset to the Company's insurance expenses within selling, general and administrative expenses on the Company's consolidated condensed statement of operations.

6. Loan

Payroll Protection Program Loan

On April 22, 2020, the Company executed a promissory note (the “Note”) with Silicon Valley Bank (the “Lender”) evidencing an unsecured loan in the aggregate principal amount of $0.4 million (the “PPP Loan”), which was made pursuant to the Paycheck Protection Program (the “PPP”). The PPP was established under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020, and is administered by the U.S. Small Business Administration (“SBA”). All the funds under the PPP Loan were disbursed to the Company on April 23, 2020.

The Note provides for a fixed interest rate of one percent per year with a maturity date of April 22, 2022 (the “Maturity Date”). Loan payments may be deferred until August 2021, which date is 10 months after the end of the Company’s 24-week covered period for the PPP Loan. If the Company applies for loan forgiveness, loan payments may be deferred until the SBA remits the Company’s loan forgiveness amount to the lender. As of September 30, 2020, the Company had not applied for loan forgiveness. The PPP Loan may be prepaid by the Company at any time prior to the Maturity Date with no prepayment penalties or premiums. The Note contains customary event of default provisions.

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loans granted under the PPP. Such forgiveness will be subject to approval by the SBA and the Lender and determined, subject to limitations, based on factors set forth in the CARES Act, including verification of the use of loan proceeds for payment of payroll costs and payments of mortgage interest, rent and utilities. In the event the PPP Loan, or any portion thereof, is forgiven, the amount forgiven is applied to outstanding principal. The terms of any forgiveness may also be subject to further regulations and guidelines that the SBA may adopt. The Company will carefully monitor all qualifying expenses and other requirements necessary to attain loan forgiveness; however, no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part.

As of September 30, 2020, the Company has used all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments.


13



7. Stock-Based Compensation

Equity Incentive Plan
As of September 30, 2020 , 163,512 stock options and awards remained available for future grant under the 2016 Equity Incentive Plan. No other plans had options or awards available for grant.
The Company recorded total non-cash compensation, including non-cash compensation to employees and nonemployees in the consolidated statements of operations and comprehensive loss as follows (in thousands):

Three Months Ended September 30,
Nine Months Ended
September 30,
2020
2019
2020
2019
Cost of revenue
$
—

$
5

$
1

$
(21
)
Research and development
73

158

230

568

Selling, general and administrative
186

496

790

1,753

Total
$
259

$
659

$
1,021

$
2,300

Unrecognized stock-based compensation expense at September 30, 2020 for all stock-based compensation pertaining to options was approximately $0.8 million , which is expected to be recognized over a weighted-average term of 2.5 years .
Incentive Stock Options
The following table summarizes stock option transactions for the 2016 Equity Incentive Plan for the nine months ended September 30, 2020 (in thousands, except shares and per share data):
Number of
shares
Weighted-
average
exercise
price per share
Weighted-
average
remaining
contractual
life (in
years)
Aggregate
intrinsic
value (in
thousands)
Outstanding at December 31, 2019
504,968

$
39.42


Options granted
790,000

0.79


Options exercised
—

—


Options canceled
(194,831
)
37.74


Outstanding at September 30, 2020
1,100,137

$
11.97

8.95
$
125

Vested and expected to vest at September 30, 2020
1,100,137

$
11.97

8.95
$
125

Vested and exercisable at September 30, 2020
279,229

$
41.48

6.72
$
7

The weighted-average fair value of options granted during the nine months ended September 30, 2020 was $0.49 .

Restricted Stock Awards
The following table summarizes restricted stock award transactions for the 2016 Equity Incentive Plan for the nine months ended September 30, 2020:


14



Number of
awards
Weighted-
average
grant date fair value
Outstanding at December 31, 2019
29,524

$
39.64

Awards granted
—

—

Awards released
(26,524
)
36.03

Awards canceled
—

—

Outstanding at September 30, 2020
3,000

$
71.50

The Company's current restricted stock awards vest 100% at various terms from the grant date, subject to continued employment. The fair-value of each restricted stock award is determined on the grant date using the closing price of the Company's common stock on the grant date.

Restricted Stock Units
The following table summarizes restricted stock unit transactions for the 2016 Equity Incentive Plan for the nine months ended September 30, 2020:
Number of
shares
Weighted-average grant date fair value
Aggregate
intrinsic
value (in
thousands)
Outstanding at December 31, 2019
55,574

$
11.70


Awards granted
816,081

1.88


Awards released
(47,761
)
12.04


Awards canceled
(823,894
)
1.95


Outstanding at September 30, 2020
—

$
—

$
—

Vested and expected to vest at September 30, 2020
—

$
—

$
—

The Company's current restricted stock units vest 100% at various terms from the grant date, subject to continued service. The fair-value of each restricted stock unit is determined on the grant date using the closing price of the Company's common stock on the grant date.


8. Stockholders' Equity

Blue Ox

On August 11, 2020, the Company entered into a consulting agreement (the “Consulting Agreement”) with Blue Ox Healthcare Partners, LLC (“Blue Ox”) and its assigned entities. Pursuant to the Consulting Agreement, Blue Ox will work to (i) secure an agreement between the Company and a major health plan to conduct an outcomes study that will expand the current clinical evidence base to include health economic analysis on the cost of care reductions from use of the Obalon Balloon System, (ii) advise the Company’s management regarding the development of a coverage and reimbursement-based market strategy, and (iii) secure agreements with health plans and other entities that result in reimbursement for and/or utilization of the Obalon Balloon System, among other services. Pursuant to, and in accordance with, the terms and conditions of the Consulting Agreement, the Company issued to Blue Ox a warrant (the “Warrant’) to purchase up to 100,000 shares of the Company’s common stock, par value $0.001 per share, at an exercise price of $0.8285 , subject to adjustment pursuant to the terms of the
Warrant. The Warrant is exercisable immediately and will expire on August 10, 2025. The exercise price represents a 15% premium to the average closing price of the Company’s common stock for the 10 days preceding the effective date of the Consulting Agreement. The Warrant may be exercised, in whole or in part, through a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of common stock determined according to the formula set forth in the Warrant. If the Consulting Agreement is terminated within six months of the effective date of the Consulting Agreement, then the number of shares of common stock that may be purchased by Blue Ox under the Warrant shall be reduced on a pro rata basis. The Warrant was deemed to qualify for equity treatment under authoritative accounting guidance and an immaterial amount was recorded within equity on the Company's condensed consolidated statement of stockholders' equity for the three months ended September 30, 2020.

The Warrant provides for certain piggy back registration rights if, during the period beginning six (6) months after the date of the Consulting Agreement and ending six (6) months after the expiration date of the Warrant, the Company proposes to file a registration statement under the Securities Act of 1933, as amended, with respect an offering by the Company of its common stock (other than certain registration statements as set forth in the Warrant). The Company also agreed to grant Blue Ox certain additional warrants upon the completion of certain milestones. Any such warrants would have generally the same terms and conditions and exercise price as the Warrant. Pursuant to the Consulting Agreement, Blue Ox also has the right to participate in the first securities offering of the Company, if any, following the effective date of the Consulting Agreement, subject to certain limitations.

Public Offering and related warrants

On August 1, 2019, the Company entered into an underwriting agreement with A.G.P./Alliance Global Partners, as underwriter, in connection with a public offering of the Company's securities, pursuant to which the Company issued and sold (i) 2,427,500 shares of common stock (including 412,500 shares of common stock pursuant to the partial exercise of the underwriters’ over-allotment option to purchase 562,500 additional shares), (ii) pre-funded warrants to purchase up to 1,735,000 shares of common stock (“Pre-funded Warrants”), (iii) accompanying warrants to purchase up to 3,234,375 shares of common stock (including the exercise in full of the underwriters’ over-allotment option to purchase additional warrants to purchase 421,875 shares of common stock) (“Purchase Warrants”) and (iv) an additional warrant to the underwriters for the purchase 37,500 shares of common stock (“Representative Warrant”). The offering was made pursuant to a registration statement on Form S-1. The offering closed on August 6, 2019 resulting in gross proceeds of approximately $15.4 million . The Company incurred $0.7 million of legal, accounting, and other fees related to the offering. The shares of common stock and accompanying Purchase Warrants were sold at a public offering price of $4.00 per share, the Pre-funded Warrants and accompanying Purchase Warrants were sold at a public offering of $3.999 . The Purchase Warrants were immediately exercisable upon issuance, will expire on August 6, 2024 and have an exercise price of $4.40 and the Representative Warrant has an exercise price of $5.00 , in each case subject to adjustment in the event of stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events.

The Representative Warrant became exercisable in February 2020 and expires on August 6, 2024. All of the Pre-funded warrants were exercised during the third quarter of 2019. None of the Purchase or Representative Warrants have been exercised as of September 30, 2020. All of the warrants are recorded within equity in accordance with authoritative accounting guidance.

Lincoln Park Purchase Agreement
On February 5, 2020, the Company entered into a new purchase agreement (the “Purchase Agreement”) and registration rights agreement (the “Registration Rights Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park has committed to purchase up to $15.0 million of the Company’s common stock, $0.001 par value per share (the “Common Stock”). The new Purchase Agreement replaces an existing purchase agreement, dated December 27, 2018, by and between the Company and Lincoln Park, pursuant to which Lincoln Park committed to purchase up to $20.0 million of the Company’s Common Stock. In connection with entering into the new Purchase Agreement, the Company and Lincoln Park terminated the prior purchase agreement, effective February 5, 2020.

Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $15.0 million of the Company’s Common Stock. Such sales of common stock by the Company, if any, will be subject to certain limitations, and may occur from time to time, at the Company’s sole discretion, over the 36 -month period commencing on February 28, 2020 date that a registration statement covering the resale of shares of Common Stock that have been and may be issued under the Purchase Agreement, which the Company agreed to file with the Securities and Exchange Commission (the “SEC”) pursuant to the Registration Rights Agreement, was declared effective by the SEC and a final prospectus in connection therewith was filed and the other conditions


15



set forth in the purchase agreement were satisfied (such date on which all of such conditions are satisfied, the “Commencement Date”).

The Company incurred approximately $0.3 million of legal, accounting, and other fees related to the offering. As of September 30, 2020 the Company has not sold any shares under the Purchase Agreement to Lincoln Park. The Company determined that there is a low probability that the equity line will be utilized for the remainder of 2020 due to adverse market circumstances. As a result, the Company fully expensed the $0.3 million of fees in March 2020.


Common Stock Reserved for Future Issuance
Common stock reserved for future issuance consists of the following as of September 30, 2020 :
Stock options issued and outstanding
1,100,137

Warrants issued and outstanding
3,371,875

Authorized for future option and ongoing vesting of award grants
163,512

Authorized for future issuance under ESPP
190,222

Total
4,825,746


9. Income Taxes
For the three and nine months September 30, 2020 and 2019 , the Company did not record an income tax provision. The U.S. federal and California deferred tax assets generated from the Company’s net operating losses have been fully reserved, as the Company believes it is more likely than not the benefit will not be realized.

10. Commitments and Contingencies
Operating Lease
The Company leases its facilities and retail treatment center under noncancelable operating leases which expire on various dates between 2022 and 2025. In July 2019, the Company entered into an office lease agreement to launch an Obalon-branded retail treatment center in San Diego, California, which expires on August 5, 2021. In January 2020, the Company entered into lease agreements for two additional Obalon-branded retail treatment centers in Orange County, California and Sacramento, California, respectively. Under the terms of the facilities and retail center leases, the Company is required to pay its proportionate share of property taxes, insurance and normal maintenance costs. The treatment center leases in Sacramento and San Diego were terminated on April 29, 2020 and May 27, 2020, respectively as a result in the Company's shift in strategy away from the retail treatment center model in the second quarter of 2020. The Company has not paid rent under the Orange County lease or its lease for its headquarters in Carlsbad, since April 2020. The full amounts of the unpaid rent have been accrued on the Company's balance sheet as of September 30, 2020. The Company’s landlord in Carlsbad, Gildred Development Company (“Gildred”), has since sent a demand letter for rent. On October 13, 2020, Gildred served the Company with an unlawful detainer action in the Superior Court of California, County of San Diego ( Gildred Development Company v. Obalon Therapeutics, Inc. , Case No. 37-2020-00035927-CU-UD-CTL). Gildred alleges that the Company owes more than $113,000 of unpaid rent and fees to Gildred and seeks damages for unpaid rent and continued occupancy of the premises. The Company believes Gildred’s claims are without merit and will defend vigorously against them.
During the nine months ended September 30, 2020, the Company recorded a $0.4 million charge to fully write off the Orange County right-of-use asset as the center will not be functioning.

Upon the Company’s adoption of ASC 842 as of January 1, 2019, the Company recognized a ROU asset and lease liability for its building lease, assuming a 7.0% discount rate. Any short-term leases defined as 12 months or less or month-to-month leases were excluded and continue to be expensed each month. Total costs associated with short-term leases for the three months ended September 30, 2020 were immaterial.

The Company determines if an arrangement is a lease at inception. The exercise of lease renewal options is at the Company’s sole discretion and were not included in the calculation of the Company’s lease liability as the Company is not able to determine without uncertainty if the renewal option will be exercised. The depreciable life of assets and leasehold improvements are limited to the expected term, unless there is a transfer of title or purchase option reasonably certain of


16



exercise. The Company’s lease agreements do not contain any variable lease payments, residual value guarantees or any restrictive covenants.

The Company’s ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date of the lease or the ASC 842 adoption date, whichever is later, based on the present value of lease payments over the lease term. When readily determinable, the Company uses the implicit rate in determining the present value of lease payments, or 7.0% , as of the adoption date. When leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date or adoption date, including the lease term. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company recorded an immaterial amount of lease liabilities, ROU assets, and interest expense associated with finance leases as of and for the three months ended September 30, 2020. The current and long-term portions of operating and finance lease liabilities are presented within the current portion of lease liabilities and lease liabilities long-term line items on the consolidated balance sheet, respectively. Operating and finance lease ROU assets are presented within the lease right-of-use assets line item on the consolidated balance sheet.
Future minimum annual lease payments under such leases were as follows as of September 30, 2020 (in thousands):

Operating leases:
Remainder of 2020
$
351

2021
564

2022
219

2023
105

2024
108

2025
37

Total undiscounted lease payments - operating leases
1,384

Finance leases:
Remainder of 2020
6

2021
24

Total undiscounted lease payments - finance leases
30

Total undiscounted lease payments
1,414

Less: imputed interest
(278
)
Lease liability
1,136

Less: current portion of lease liability
(583
)
Lease liability, less current portion
$
553



As of September 30, 2020, the Company’s remaining lease term ranges from 1.4 to 4.5 years . Rent expense totaled $0.3 million for both the three months ended September 30, 2020 and 2019 and $0.6 million and $0.4 million for the nine months ended September 30, 2020 and 2019, respectively. The Company paid $0.2 million of cash payments related to its operating lease agreements for the nine months ended September 30, 2020, respectively. The Company's weighted average discount rate for leases as of September 30, 2020 was 6.0% .

Supplier Contracts
The Company enters into contracts in the normal course of business with clinical trial sites and clinical supply manufacturing organizations and with vendors for preclinical studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination after a notice period, and, therefore, are cancelable contracts.

Shareholder Lawsuit
On February 14 and 22, 2018, plaintiff stockholders filed class action lawsuits against us and certain of our executive officers in the United States District Court for the Southern District of California ( Hustig v. Obalon Therapeutics, Inc., et al. , Case No.


17



3:18-cv-00352-AJB-WVG, and Cook v. Obalon Therapeutics, Inc. et al. , Case No. 3:18-cv-00407-CAB-RBB). On July 24, 2018, the court consolidated the lawsuits and appointed Inter-Local Pension Fund GCC/IBT as lead plaintiff. On October 5, 2018, plaintiffs filed an amended complaint. The amended complaint alleges that we and certain of our executive officers made false and misleading statements and failed to disclose material adverse facts about our business, operations, and prospects in violation of Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of the Exchange Act. The amended complaint also alleges violations of Section 11 of the Exchange Act arising out of the Company’s initial public offering. The plaintiffs seek damages, interest, costs, attorneys' fees, and other unspecified equitable relief. The underwriters from our initial public offering have also been named as defendants in this case and we have certain obligations under the underwriting agreement to indemnify them for their costs and expenses incurred in connection with this litigation. On September 25, 2019, the court granted in part and denied in part the defendants’ motion to dismiss. The court dismissed the Section 11 claims entirely, without leave to amend, and accordingly dismissed the underwriters and certain directors from the case. The Court also dismissed certain statements from the Section 10 claims. On June 16, 2020, the parties reached a settlement of the securities class action, and they intend to submit a final settlement agreement for court approval. The settlement provides for a payment of $3.15 million to the plaintiffs, and provides that the defendants continue to deny the allegations and claims asserted by the plaintiffs, and are entering into the settlement solely to eliminate the burden and expense of further litigation. The Company expects that any amounts due as part of the settlement will be covered by the Company’s insurance policies.

As of September 30, 2020, the Company recorded a settlement accrual and corresponding insurance receivable for $3.15 million on the other current liabilities and other current assets lines on the condensed consolidated balance sheets, respectively.

11. Variable Interest Entity

In conjunction with the Company’s strategic focus to open weight loss treatment centers to provide medical services to patients who wish to lose weight through the Obalon balloon system, the Company entered into a consulting agreement with a lead doctor to open the first treatment center and oversee the treatment center’s activities. The treatment center was opened in September 2019 as a professional corporation (“PC”) in the State of California and, as a result of state regulatory requirements, may not be owned by a corporation. The Company fully funds all the activities of the treatment center and no financial contributions are made by the lead doctor. In addition, the Company is authorized and expected to provide daily oversight of the activities of the center, with the exception of directly providing medical services.

As the PC’s equity investment at risk is not sufficient to permit the entity to finance its activities without subordinated financial support, the PC is considered a variable interest entity. Although the Company does not own any equity interest in the PC, the Company holds the controlling financial interest as the sole funding source for the entity and through the ability to provide daily oversight. Therefore, the Company was determined to be the primary beneficiary of the PC and consolidated the PC’s balances and activity within its condensed consolidated financial statements.

For the nine months ended September 30, 2020, the PC recognized $0.3 million of deferred revenue associated with prepaid services at the treatment center, which is fully presented in the condensed consolidated balance sheet of the Company at September 30, 2020.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical fact are “forward-looking statements” for purposes of this Quarterly Report on Form 10-Q. These forward-looking statements may include, but are not limited to, statements regarding our future results of operations and financial position, business strategy, market size, potential growth opportunities, timing and results of preclinical and clinical development activities, selection of specific financial and strategic alternatives, and potential regulatory approval and commercialization of products and product candidates. In some cases, forward looking-statements may be identified by terminology such as “believe,” “may,” “will,” “should,” “predict,” “goal,” “strategy,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect,” “seek” and similar expressions and variations thereof. These words are intended to identify forward-looking statements.
We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, research and development, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law.
As used in this Quarterly Report on Form 10-Q, the terms “Obalon,” “the Company,” “we,” “us,” and “our” refer to Obalon Therapeutics, Inc. and, where appropriate, its consolidated subsidiary, unless the context indicates otherwise.
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes thereto for the year ended December 31, 2019, included in our Annual Report on Form 10-K for the year ended December 31, 2019, filed on February 27, 2020.
OVERVIEW
We are a vertically integrated medical device company focused on developing and commercializing innovative medical devices to treat people with obesity. Our current product offering is the Obalon Balloon System, the first and only U.S. Food and Drug Administration, or FDA, approved swallowable, gas-filled intragastric balloon designed to provide progressive and sustained weight loss in patients with obesity. We believe the Obalon Balloon System offers patients and physicians benefits over prior weight loss devices including, but not limited to, clinically meaningful weight loss, a favorable safety profile, improved patient tolerability and comfort, progressive weight loss with durable results, simple and convenient placement, and potentially attractive economics.

The Obalon Balloon System is FDA approved for temporary use to facilitate weight loss in adults with obesity having a body mass index, or BMI, of 30 to 40, or approximately 30 to 100 pounds overweight, who have failed to lose weight through diet and exercise. The system is intended to be used as an adjunct to a moderate intensity diet and behavior modification program. All balloons must be removed six months after the first balloon is placed. We believe the Obalon Balloon System provides a cost-effective, non-surgical and reversible weight loss solution in an outpatient setting.

The Obalon Balloon System consists of a swallowable capsule that contains an inflatable balloon attached to a microcatheter; the Obalon Navigation System console, which is a combination of hardware and software used to track and display the location of the balloon during placement without x-ray; the Obalon Touch Inflation Dispenser, which is a semi-automated, hand-held inflation device used to inflate the balloon once it is placed; and a disposable canister filled with our proprietary mixture of gas. Placement of a balloon typically occurs in less than 15 minutes and can be accomplished in an outpatient setting without the need for anesthesia or sedation. Patients receive a total of three balloons over the course of eight to 12 weeks and all balloons are removed six months after the first balloon is placed.

In clinical studies, the Obalon Balloon System has demonstrated clinically meaningful weight loss with durable results. In addition, data published and presented from our commercial registry demonstrates greater weight loss in the commercial setting as compared to our pivotal clinical study used to support FDA approval. In our published pivotal SMART trial, patients in the Obalon treatment group lost, on average, approximately twice as much body weight as patients in the sham-control group, with an average of 15.1 pounds of weight loss, resulting in an average 6.9% reduction in total body weight and an average 2.4 point decrease in BMI. 66.7% of patients lost at least 5% of their total body weight (%TBWL) and the study showed statistically significant improvements in cardiometabolic risk factors, including fasting glucose, systolic blood pressure, cholesterol and triglycerides. Patients in the treatment group were followed for 48 weeks and showed, on average, 89.5% of the weight loss achieved during the initial 24-week balloon treatment period was maintained at 48 weeks, or 24 weeks after the balloons were removed.

In December 2018, data from our commercial registry was analyzed, and later published and presented, on more than 1,300 patients at 108 treatment sites. For those patients who received three balloons and at least 20 weeks of therapy, the average weight loss was 21.7 pounds, resulting in 9.9% reduction in total body weight and a 3.5 point decrease in BMI compared to baseline values. Of note, the top quartile of those patients lost an average of 39 pounds, resulting in an average of 16.8% reduction in total body weight and an average of a 6.2 point decrease in BMI compared to baseline values. Furthermore, in May 2019, analysis of data from our commercial registry was updated to include 1,411 total patients from 143 treatment sites in the United States. In this larger data set, for those patients receiving three balloons and at least 20 weeks of therapy, the average weight loss was 21.7 pounds, resulting in a 10.2% reduction in total body weight. Of note, 50.7% of patients lost 10% or more total body weight and 77.9% lost 5% or more total body weight.



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We commenced U.S. commercialization of our prior generation Obalon balloon system in January 2017. In February 2019, we commercialized our current generation Obalon Balloon System with the Obalon Touch Inflation Dispenser and our Obalon Navigation System, which together are designed to make balloon placements more reliable, safer, easier and less expensive. The Obalon Navigation System is designed to eliminate the need to use x-ray technology when placing the Obalon balloon.

When we commenced our U.S. commercial launch in 2017, we relied on a small direct sales force to sell our products directly to physicians, who would then sell weight loss treatment packages to their patients that included our balloon therapy, dietary counseling and balloon removal on a non-reimbursed, self-pay basis for patients. In 2019, we began implementing a fundamental change to our commercialization efforts, pursuant to which we eliminated our direct sales force and began establishing Company-owned or managed Obalon-branded retail treatments centers. We also transitioned to a centralized customer support model through which we sold to existing physician customers or new physicians that contacted us directly to acquire the Obalon Balloon System and provided centralized marketing and clinical support to those physicians.

In March 2020, we announced that the overall uncertainty, the restriction on elective procedures and the specific directives issued by the Governor of California as a result of COVID-19 had a significant impact on our business. As a result, we halted sales to new patients in our company-branded retail treatment centers, terminated expansion plans for additional retail centers and subsequently closed the two retail treatment centers we had opened. We have also halted manufacturing operations and have not filled orders to U.S. customers or our former international distributor since that time. Additionally, we terminated our contract with Al Danah, our only international distributor. In June 2020, we temporarily restarted manufacturing on a limited basis to convert our work in progress inventory to finished goods in order to have units available for clinical trials and unexpected physician sales but did not continue manufacturing past July 30, 2020. Additionally, since August 2020, we have only had two full-time employees: Andy Rasdal, our President and Chief Executive Officer, and Nooshin Hussainy, our Chief Financial Officer.

Given those impacts and the significant concern about an economic recovery that would allow consumers to feel confident enough to spend on a cash-pay procedure like the Obalon Balloon System, we do not currently plan to re-open our retail treatment centers, re-initiate our retail treatment center expansion plans, or plan to ship orders to U.S. customers or our former international distributor. As a result, we would not expect to report any meaningful revenue for the foreseeable future.

We continue to believe the Obalon Balloon System can provide significant benefits to patients and value to the healthcare system. However, treatment with the Obalon Balloon System is not currently covered by any kind of private or public health insurance. We believe this has contributed to slow commercial adoption of the product and the procedure, as physicians are not reimbursed for treating patients with the Obalon therapy and patients must pay solely out of pocket for the Obalon Balloon System and the placement procedure. With that in mind, we are initiating efforts to explore obtaining third-party payor reimbursement and coverage for the Obalon Balloon System. We believe that reimbursement and coverage for the Obalon Balloon System could significantly expand our market opportunity. There are more than 70 million adults in the United States who are obese and over 11 million adults in the United States who have Type 2 diabetes and are obese. Moreover, the COVID-19 pandemic has further highlighted the personal health and economics costs of the obesity epidemic in the United States. Recently published data suggest that next to age, the underlying health conditions of obesity and obesity-related health conditions (hypertension and diabetes) are the greatest predictors of COVID-19 hospitalizations and death. We believe the Obalon Balloon System could help reduce third-party payors’ costs and improve patient care, and we intend to explore how additional data may be collected to demonstrate the economic and clinical evidence necessary to secure reimbursement. However, obtaining reimbursement is never certain and can take many years to achieve, and if achieved, may not be determinative of our success. If our initial efforts with payors begin to bear success, we would expect to need to raise additional capital to support those efforts.

To enable us to pursue this reimbursement strategy, we are taking further steps to significantly reduce expenses in an effort to extend our cash runway. We have significantly reduced the organization to only essential personnel. During this time we also plan to continue to explore other potential business options and strategic alternatives. In September 2020, we re-engaged Canaccord Genuity to serve as our financial advisor related to strategic alternatives. Although we have scaled back operations, we continue our operations and strive to execute on our corporate and strategic objectives. For example, we continue to pursue third-party reimbursement of the Obalon Balloon System, explore strategic alternatives, tend to our obligations to care for patients treated at the Obalon Centers for Weight Loss, follow-up on and support product-related issues involving customers that have used Obalon products, review and comply with our regulatory obligations, including FDA and SEC requirements.
We generated total revenue of $ 44,000 and $ 0.3 million for the three months ended September 30, 2020 and 2019 , respectively, and $1.5 million and $2.5 million for the nine months ended September 30, 2020 and 2019, respectively. We have incurred significant losses in each period since our inception in 2008, with net losses of $1.6 million and $3.7 million during the three months ended September 30, 2020 and 2019, respectively, and $11.0 million and $18.8 million during the nine months ended


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September 30, 2020 and 2019, respectively. We have not been profitable since inception, and as of September 30, 2020 , our accumulated deficit was $ 183.4 million . On April 22, 2020, we executed a promissory note in favor of Silicon Valley Bank evidencing an unsecured loan in the aggregate principal amount of $0.4 million, which was made pursuant to the Paycheck Protection Program and which we refer to as the PPP Loan. The Paycheck Protection Program was established under the Coronavirus Aid, Relief and Economic Security Act, which was enacted on March 27, 2020 and is administered by the U.S. Small Business Administration. All the funds under the PPP Loan were disbursed to us on April 23, 2020.

Our consolidated financial statements as of and for the three and nine months ended September 30, 2020 have been prepared on the basis that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Based on our cash balances and recurring losses since inception, there is substantial doubt about our ability to continue as a going concern Our ability to continue as a going concern, and correspondingly to execute on our business plan and strategy, is dependent upon our ability to accomplish one or more of the following: raise additional capital in the very near term to fund our ongoing operations or engage in a strategic alternative. If we are not able to accomplish one or more of these goals in the near term, there is a high likelihood we may need to sell all or portions of our business, liquidate all or some of our assets or seek bankruptcy protection, which could result in significant decrease in value for all stakeholders.

Nasdaq Delisting Notices

On August 6, 2020, the Company received two written notifications from the Nasdaq Listing Qualifications Staff of the Nasdaq Stock Market LLC (“Nasdaq”). The first written notification (the “First Notice”) notified the Company that it is not in compliance with Nasdaq Listing Rule 5450(b)(1)(A) based on the Company’s Quarterly Report on Form 10‑Q for the quarter ended June 30, 2020, which reported the Company’s stockholders’ equity as $7.2 million, which is below the minimum of $10.0 million in stockholders’ equity required for continued listing.

In accordance with such notice, on September 18, 2020, the Company submitted a plan to Nasdaq to regain compliance with all Nasdaq Global Market listing requirements. Since submitting the plan, the Company responded on October 2, 2020 and November 1, 2020 to requests from Nasdaq for additional information. If the plan is accepted, Nasdaq may grant an extension of up to 180 calendar days from the date of the First Notice for the Company to regain compliance. If Nasdaq determines that such plan is not sufficient, the Company will have an opportunity to appeal the decision to a hearings panel. There can be no assurance that, if the Company does appeal Nasdaq’s determination to the hearing panel, that such appeal would be successful. If unsuccessful, the Company’s shares will be delisted. Alternatively, the Company may apply to transfer from the Nasdaq Global Market to the Nasdaq Capital Market if it satisfies all of the Nasdaq Capital Market’s listing requirements.

The second written notification (the “Second Notice”) notified the Company that the closing bid price for its common stock had been below $1.00 for the last 30 consecutive business days and that the Company therefore is not in compliance with the minimum bid price requirement for continued inclusion on the Nasdaq Global Market under Nasdaq Listing Rule 5450(a)(1). The notification has no immediate effect on the listing of the Company’s common stock on Nasdaq.

Under the Nasdaq Listing Rules, the Company has a period of 180 calendar days from the date of the Second Notice to regain compliance with the minimum bid requirement. To regain compliance, the closing bid price of the Company’s common stock must be at least $1.00 for a minimum of ten consecutive business days. Since the COVID-19 pandemic began, the closing bid for the Company’s common stock has consistently been below $1.00. The Company’s common stock has closed below $1.00 every day since June 19, 2020. If the Company does not regain compliance before February 2, 2021, the Company may be eligible for a second 180 calendar day period, provided that the Company meets the continued listing requirement for market value of publicly held shares and all other initial listing standards for Nasdaq, except the bid price requirement, and the Company provides written notice to Nasdaq of its intention to cure the deficiency during the second compliance period. If the Company is not eligible for the second compliance period or Nasdaq staff concludes that the Company will not be able to cure the deficiency during the second compliance period, Nasdaq will provide written notice to the Company that the Company’s common stock will be subject to delisting. In the event of such notification, the Company may appeal Nasdaq’s determination to delist its securities, but there can be no assurance that Nasdaq would grant the Company's request for continued listing.

The Company intends to take all reasonable measures available to regain compliance under the Nasdaq Listing Rules and remain listed on the Nasdaq. There can be no assurance that the Company will be able to regain compliance with the minimum stockholders’ equity or bid price requirements, or will otherwise be in compliance with other Nasdaq Listing Rules.

Landlord Dispute

On October 13, 2020, Gildred served the Company with an unlawful detainer action in the Superior Court of California, County of San Diego (Gildred Development Company v. Obalon Therapeutics, Inc., Case No. 37-2020-00035927-CU-UD-


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CTL). Gildred alleges that the Company owes more than $113,000 of unpaid rent and fees to Gildred and seeks damages for unpaid rent and continued occupancy of the premises. The Company believes Gildred’s claims are without merit and will defend vigorously against them.

COMPONENTS OF OUR RESULTS OF OPERATIONS
Revenue
For the three and nine months ended September 30, 2020 and 2019 , revenue reflects sales of our Obalon Balloon System directly to physicians and institutions in the United States, sales of our Obalon Balloon System to our Middle East distributors, and sales from patients treated at our Company-managed Obalon-branded retail center. We also generated revenue during the nine months ended September 30, 2020 from reversing various reserves related to revenue from customer incentive programs, swallow guarantee, and returns reserves as a result of terminating all commercial operations and underlying programs.

We do not currently plan to re-open our retail treatment centers, re-initiate our retail treatment center expansion plans, restart manufacturing operations, or plan to ship orders to U.S. customers or our former international distributor. As a result, we would not expect to report any meaningful revenue for the foreseeable future.

To date we have experienced limited penetration of the U.S. market, and there are many factors that may impact our future results of operations, including: our ability to establish coverage and reimbursement for the Obalon Balloon System, our ability to successfully develop the intragastric balloon market (which is currently small and immature) and gain acceptance of our current Obalon Balloon System and its future iterations by doctors and patients, our ability to scale production in a cost effective manner or if at all should we restart manufacturing operations, the emergence of competing products, actions by regulatory bodies, and general economic trends. The amount of revenue and timing of revenue recognition may also be impacted by any future commercial model and customer incentive programs we decide to offer and the channels through which the revenue is derived.
Cost of revenue and gross margin

Cost of revenue consists primarily of costs related to the direct materials and direct labor that are used to manufacture our products and the overhead costs that directly support manufacturing. Currently, a significant portion of our cost of revenue consists of manufacturing overhead, which is mostly fixed in nature. These overhead costs include the costs of compensation for operations management, engineering support, material procurement and inventory control personnel, outside consultants, production related supplies, allocated quality assurance and facilities costs, and depreciation on production equipment. In the foreseeable future, we expect cost of revenue to be higher than revenue as we focus on reimbursement activities rather than commercial sales.

We calculate gross margin as gross profit divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, primarily production volumes, geographic mix, product mix, manufacturing costs, product yields, headcount and cost-reduction strategies. We expect gross margin to fluctuate from quarter to quarter due to variability of our recognized revenue, our adoption of new manufacturing processes and technologies, changes in our manufacturing capacity, and discontinuation of obsolete products. We have experienced challenges in our ability to produce finished goods, which may impact our ability to meet the demands for future commercial and clinical trials.

In March 2020, we suspended manufacturing of the Obalon Balloon System due to the ongoing COVID-19 pandemic. We restarted manufacturing on a limited basis in June 2020 to convert a small amount of work-in-progress inventory to finished goods, in order to have units available for clinical trials and unexpected physician sales. As of September 30, 2020 our manufacturing operations have been suspended with no future plans for restarting.
Research and development expenses
Research and development, or R&D, expenses consist of the cost of engineering, clinical affairs, regulatory affairs and quality assurance associated with developing our Obalon Balloon System. R&D expenses consist primarily of:
•
cost of outside consultants who assist with technology development, regulatory affairs, clinical affairs and quality assurance;
•
cost of clinical trial activities performed by third-party medical partners;
•
cost of facilities, depreciation on R&D equipment and supplies used for internal research and development and clinical activities; and
•
prior to April 2020, employee-related expenses, including salaries, benefits, travel expense and stock-based compensation expense.
We expense R&D costs as incurred. We expect R&D expenses for the fourth quarter of 2020 to be lower than historical averages due to the suspension of business operations. Going forward, we expect to incur R&D expenses associated with ongoing post-approval studies and with developing the clinical data needed to support reimbursement.
Selling, general and administrative expenses


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Selling, general and administrative, or SG&A, expenses consist of employee-related expenses, including salaries, commissions, benefits, travel expense and stock-based compensation expense. Other SG&A expenses include promotional and advertising activities, marketing, conferences and trade shows, professional services fees, including legal fees, accounting fees, insurance costs, general corporate expenses, and allocated facilities-related expenses. SG&A expenses decreased significantly starting in the second quarter of 2020 due to suspension of business operations and the reduction of employee personnel to only certain key employees. SG&A expenses are expected to remain significantly lower than historical averages until such time when business operations may resume.

Impairment Expense
In light of recent events associated with the global spread of COVID-19 and other factors, impairment expense was recognized for impairment of inventory and long-lived assets pertaining our retail operations during the second quarter of 2020.

RESULTS OF OPERATIONS
Three Months Ended
September 30,
Nine Months Ended September 30,
2020
2019
2020
2019
(in thousands)
Condensed consolidated statements of operations data:


Revenue
$
44

$
333

$
1,527

$
2,494

Cost of revenue
41

412

1,005

2,323

Gross profit (deficit)
3

(79
)
522

171

Operating expenses:





Research and development
271

1,174

2,293

5,401

Selling, general and administrative
1,291

2,489

7,546

13,025

Asset impairment and other charges
—

—

1,310

—

Total operating expenses
1,562

3,663

11,149

18,426

Loss from operations
(1,559
)
(3,742
)
(10,627
)
(18,255
)
Interest (expense) income, net
(1
)
37

29

(448
)
Other expense, net
—

(1
)
(411
)
(60
)
Net loss
$
(1,560
)
$
(3,706
)
$
(11,009
)
$
(18,763
)
Comparison of three months ended September 30, 2020 and 2019
Revenue. Revenue decreased $0.3 million to $44,000 during the three months ended September 30, 2020 , compared to $0.3 million during the three months ended September 30, 2019 . In the third quarter of 2020, we generated revenue from ongoing treatments that were already in process prior to suspending commercial operations during the second quarter of 2020. The revenue decrease was primarily due to the suspension of operations and abandonment of the retail treatment model in the second quarter of 2020.
Cost of revenue and gross profit (deficit). Cost of revenue decreased $0.4 million to $0.0 million during the three months ended September 30, 2020 , compared to $0.4 million during the three months ended September 30, 2019 . The decrease in cost of revenue was primarily attributable to the decrease in operations compared to the prior year as a result of suspending all commercial operations during the second quarter of 2020.
Research and development expenses. R&D expenses decreased $0.9 million to $0.3 million during the three months ended September 30, 2020 , compared to $1.2 million during the three months ended September 30, 2019 . This decrease was primarily driven by the significant reduction in operations and personnel related to the COVID-19 pandemic. The reduction in operations and personnel resulted in decreases in payroll related expenses of $0.5 million, clinical trial expenses of $0.1 million, stock-based compensation expense of $0.1 million, and facility related allocation expenses of $0.2 million.
Selling, general and administrative expenses. SG&A expenses decreased $1.2 million to $1.3 million during the three months ended September 30, 2020 , compared to $2.5 million during the three months ended September 30, 2019 . The decrease


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from the prior period was primarily driven by the significant reduction in operations and personnel related to the COVID-19 pandemic. The reduction in operations and personnel resulted in decreases in payroll related expenses of $0.7 million, facility related allocation expenses of $0.2 million, and legal expenses of $0.1 million. Additionally, $0.6 million in insurance expenses reimbursement contributed to a $0.4 decrease in insurance expenses. These decreases were offset by an increase in consulting and accounting fees of $0.2 million.
Asset impairment expenses and other charges. In the second quarter of 2020, we recognized impairment charges related to our inventory and long-lived assets as a result of our shift in business strategy away from the Obalon-branded retail center model to a reimbursement model strategy. There were no further impairment charges during the three months ended September 30, 2020.
Interest (expense) income, net. Interest expense, net decreased an immaterial amount during the three months ended September 30, 2020 , compared to the three months ended September 30, 2019 . This decrease was attributable to the paying off all the outstanding debt on the Term Loan in the third quarter of 2019.
Comparison of nine months ended September 30, 2020 and 2019
Revenue. Revenue decreased $1.0 million to $1.5 million during the nine months ended September 30, 2020 , compared to $2.5 million during the nine months ended September 30, 2019 . The revenue decrease was primarily due to the suspension of operations and abandonment of the retail treatment model in the second quarter of 2020.
Cost of revenue and gross profit. Cost of revenue decreased $1.3 million to $1.0 million during the nine months ended September 30, 2020 , compared to $2.3 million during the nine months ended September 30, 2019 . The decrease was primarily attributable to a decrease in production of products as we suspended operations and abandoned the retail treatment model in the second quarter of 2020. Gross profit increased $0.3 million to $0.5 million during the nine months ended September 30, 2020 , compared to $0.2 million during the nine months ended September 30, 2019 . The increase was primarily attributable to the reversal of revenue reserves during the third quarter of 2020, as a result of suspension of business operations.
Research and development expenses. R&D expenses decreased $3.1 million to $2.3 million during the nine months ended September 30, 2020 , compared to $5.4 million during the nine months ended September 30, 2019 . This decrease was due primarily driven by the significant reduction in operations and personnel related to the COVID-19 pandemic. This resulted to decreases in payroll related expenses of $1.7 million, supplies expense of $0.5 million, clinical trial expense of $0.1 million, facility allocation of $0.3 million, outside consulting of $0.1 million, and stock-based compensation expense of $0.4 million. R&D expenses for the three months ended September 30, 2019 included a restructuring charge of approximately $0.4 million.
Selling, general and administrative expenses. SG&A expenses decreased $5.5 million to $7.5 million during the nine months ended September 30, 2020 , compared to $13.0 million during the nine months ended September 30, 2019 . The decrease from the prior period was primarily driven by the significant reduction in operations and personnel related to the COVID-19 pandemic. The reduction in operations and personnel resulted in decreases of $2.3 million in payroll related expenses, $1.0 million in stock-based compensation due to a reduction in headcount, $0.6 million in accounting and legal fees, $0.7 million in spending on marketing and advertising programs, and $0.3 million in travel expenses. SG&A expenses for the three months ended September 30, 2019 included a restructuring charge of approximately $0.7 million.
Asset impairment expenses and other charges. Asset impairment expenses and other charges increased $1.3 million during the nine months ended September 30, 2020, compared to zero during the nine months ended September 30, 2019. The increase is due to the inventory and long-lived asset impairment charges recognized during the second quarter of 2020 as a result of our shift in business strategy away from the Obalon-branded retail center model to a reimbursement model strategy.
Interest (expense) income, net. Interest (expense) income, net decreased $0.5 million to an immaterial amount of interest income during the nine months ended September 30, 2020 , compared to $0.4 million of interest expense during the nine months ended September 30, 2019 . This decrease was attributable to paying off the Term Loan during the third quarter of 2019.
Other expense, net. Other expense, net increased $0.3 million to $0.4 million during the nine months ended September 30, 2020, compared to $0.1 million for the prior period. This increase was attributable to increased equity issuance costs during the first nine months of 2020 compared to the prior period.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2020 , we had cash and cash equivalents of $5.5 million and an accumulated deficit of $183.4 million . Our primary sources of capital have been private placements of our preferred securities, the sale of common stock in our initial


23



public offering, or IPO, in October 2016, a subsequent private placement in August 2018, and various equity financings in 2019 including a follow-on offering in August 2019, and, to a lesser extent, debt financing arrangements. We are continuing to significantly reduce expenditures to extend our cash runway during the suspension of our business operations. We believe our current cash and cash equivalents as of September 30, 2020 are sufficient to fund our operations through the end of 2020.

In late 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread globally. To date, COVID-19 has had, and will continue to have, an adverse impact on our operations and expenses as a result of the preventive and precautionary measures that we, our customers, other businesses, and governments are taking, including the deferral of elective medical procedures and diversion of capital and other resources. In March 2020, we suspended all new patient treatments at our Obalon-branded retail centers due to the ongoing COVID-19 pandemic. We have taken further steps to significantly reduce expenses in an effort to extend our cash runway while we evaluate potential business options, strategic alternatives and the potential for third-party payer reimbursement that may be available when and if the current COVID-19 crisis stabilizes and the economy rebounds. We have significantly reduced the organization to only essential personnel and since August 2020, only two full-time employees remain. All Obalon-branded retail centers have been shut down with no intention to reopen, and we have halted plans for future retail center expansion. We do not expect to restart shipments to U.S. customers and we have terminated the agreement with our international distributor, Al Danah Medical Company W.L.L. The decision to shift our strategy to focus on pursuing reimbursement, while also evaluating other strategic options, occurred after the end of the first quarter of 2020. As we reduce our personnel to two full time employees, we plan to continue to seek strategic alternatives that may be in the best interest of our stockholders, while we pursue third-party payor reimbursement and coverage for the Obalon Balloon System. If we are unsuccessful in those two endeavors over the next several months, there is a high likelihood we may need to liquidate all or some of our assets or seek bankruptcy protection which could result in significant decrease in value for all stakeholders.

Although we have scaled back operations, we continue our operations and strive to execute on our corporate and strategic objectives. For example, we continue to pursue third-party reimbursement of the Obalon Balloon System, explore strategic alternatives, tend to our obligations to care for patients treated at the Obalon Centers for Weight Loss, follow-up on and support product-related issues involving customers that have used Obalon products, review and comply with our regulatory obligations, including FDA and SEC requirements.

As a result of the above factors, there is substantial doubt about our ability to continue as a going concern for the twelve months following the issuance date of the unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2020. The accompanying condensed consolidated financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to our ability to continue as a going concern.

On April 22, 2020, we executed a promissory note in favor of Silicon Valley Bank evidencing an unsecured loan in the aggregate principal amount of $0.4 million, which was made pursuant to the Paycheck Protection Program and which we refer to as the PPP Loan. The Paycheck Protection Program was established under the Coronavirus Aid, Relief and Economic Security Act, which was enacted on March 27, 2020, and is administered by the U.S. Small Business Administration. All the funds under the PPP Loan were disbursed to us on April 23, 2020. The Note provides for a fixed interest rate of one percent per year with a maturity date of April 22, 2022 (the “Maturity Date”). Loan payments may be deferred until August 2021, which date is 10 months after the end of our 24-week covered period for the PPP Loan. If we apply for loan forgiveness, loan payments may be deferred until the SBA remits our loan forgiveness amount to the lender. As of September 30, 2020, we have not applied for loan forgiveness. The PPP Loan may be prepaid at any time prior to the Maturity Date with no prepayment penalties or premiums. The Note contains customary event of default provisions.

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loans granted under the PPP. Such forgiveness will be subject to approval by the SBA and the Lender and determined, subject to limitations, based on factors set forth in the CARES Act, including verification of the use of loan proceeds for payment of payroll costs and payments of mortgage interest, rent and utilities. In the event the PPP Loan, or any portion thereof, is forgiven, the amount forgiven is applied to outstanding principal. The terms of any forgiveness may also be subject to further regulations and guidelines that the SBA may adopt. We will carefully monitor all qualifying expenses and other requirements necessary to attain loan forgiveness; however, no assurance is provided that we will obtain forgiveness of the PPP Loan in whole or in part. We have used all proceeds to date from the PPP Loan to retain employees, maintain payroll and make lease and utility payments.
Public Offering


24



On August 1, 2019, we entered into an underwriting agreement with A.G.P./Alliance Global Partners, as underwriter, in connection with a public offering of our securities, pursuant to which we issued and sold (i) 2,427,500 shares of our common stock (including 412,500 shares of common stock pursuant to the partial exercise of the underwriters’ over-allotment option to purchase 562,500 additional shares), (ii) pre-funded warrants to purchase up to 1,735,000 shares of our common stock , (iii) accompanying warrants to purchase up to 3,234,375 shares of our common stock (including the exercise in full of the underwriters’ over-allotment option to purchase additional warrants to purchase 421,875 shares of common stock) and (iv) an additional warrant to the underwriters for the purchase of 37,500 shares of our common stock resulting in net proceeds from the offering of approximately $14.7 million after deducting underwriting discounts and commissions and offering expenses payable by us. Each share of common stock and each prefunded warrant was sold together with a purchase warrant entitling the holder to purchase 0.75 of a share of common stock. The common stock and accompanying purchase warrants were sold together at a public offering price of $4.00, and the pre-funded warrant and accompanying purchase warrants were sold at a public offering price of $3.999. The purchase warrants were immediately exercisable upon issuance, will expire on August 6, 2024 and have an exercise price of $4.40 and the underwriter warrant has an exercise price of $5.00 per share, in each case subject to adjustment in the event of stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events. The underwriter warrant became exercisable in February 2020 and expires on August 6, 2024. All of the pre-funded warrants were exercised during the third quarter of 2019. None of the purchase or underwriter warrants have been exercised as of September 30, 2020.

Lincoln Park Purchase Agreement
On February 5, 2020, we entered into a new purchase agreement (the “Purchase Agreement”) and registration rights agreement (the “Registration Rights Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park has committed to purchase up to $15.0 million of our common stock, $0.001 par value per share (the “Common Stock”). The new Purchase Agreement replaces an existing purchase agreement, dated December 27, 2018, by and between us and Lincoln Park, pursuant to which Lincoln Park committed to purchase up to $20.0 million of our Common Stock. In connection with entering into the new Purchase Agreement, we terminated the prior purchase agreement with Lincoln Park, effective February 5, 2020.

Under the terms and subject to the conditions of the Purchase Agreement, we have the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $15.0 million of our Common Stock. Such sales of common stock by us, if any, will be subject to certain limitations, and may occur from time to time, at our sole discretion, over the 36-month period commencing on February 28, 2020 date that a registration statement covering the resale of shares of Common Stock that have been and may be issued under the Purchase Agreement, which we agreed to file with the Securities and Exchange Commission (the “SEC”) pursuant to the Registration Rights Agreement, was declared effective by the SEC and a final prospectus in connection therewith was filed and the other conditions set forth in the purchase agreement were satisfied (such date on which all of such conditions are satisfied, the “Commencement Date”).

We incurred approximately $0.3 million of legal, accounting, and other fees related to the offering. As of September 30, 2020 we have not sold any shares under the Purchase Agreement to Lincoln Park. We determined that there is a low probability that the equity line will be utilized for the remainder of 2020 due to adverse market circumstances. As a result, we fully expensed the $0.3 million of fees in March 2020.

CASH FLOWS
The following table provides a summary of the net cash flow activity for each of the periods set forth below (in thousands):
Nine Months Ended
September 30,
2020
2019
Net cash (used in) provided by:


Operating activities
$
(8,854
)
$
(17,987
)
Investing activities
(117
)
2,506

Financing activities
430

13,674

Net decrease in cash and cash equivalents
$
(8,541
)
$
(1,807
)
Net cash used in operating activities
During the nine months ended September 30, 2020 , net cash used in operating activities was $8.9 million , consisting primarily of a net loss of $11.0 million , and an increase in net operating assets of $0.9 million . These items were partially offset by non-cash charges of $3.0 million , consisting primarily of stock-based compensation expense and impairment of inventory and long-lived assets.
During the nine months ended September 30, 2019 , net cash used in operating activities was $18.0 million , consisting primarily of a net loss of $18.8 million , an increase in net operating assets of $2.4 million primarily related to a decrease in accrued compensation, partially offset by a decrease in other current assets. These items were partially offset by non-cash charges of $3.2 million, consisting primarily of stock-based compensation expense and depreciation expense.
Net cash (used in) provided by investing activities
During the nine months ended September 30, 2020 , net cash used by investing activities was $0.1 million , consisting primarily of capital expenditures.
During the nine months ended September 30, 2019 , net cash provided by investing activities was $2.5 million , consisting primarily of maturities of short-term investments.
Net cash provided by financing activities
During the nine months ended September 30, 2020 , net cash provided by financing activities was $0.4 million , consisting of proceeds from the Payroll Protection Program loan.
During the nine months ended September 30, 2019 , net cash provided by financing activities was $13.7 million , consisting primarily of $23.7 million in proceeds from issuance of equity securities, net of issuance costs, the draw down on the second tranche under our loan and security agreement with Pacific Western Bank of $10.0 million, partially offset by the subsequent pay down on the loan with Pacific Western Bank of $20.0 million.

OFF-BALANCE SHEET ARRANGEMENTS
We currently have no off-balance sheet arrangements, such as structured finance, special purpose entities or variable interest entities.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies related to revenue recognition, accrued research and development costs, stock-based compensation expense


25



and income taxes are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
There have been no significant changes in our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Operations included in the Annual Report on Form 10-K for the year ended December 31, 2019, filed on February 27, 2020.
RECENT ACCOUNTING PRONOUNCEMENTS
Except as described in Note 2 to our Unaudited Interim Condensed Consolidated Financial Statements under the heading “Recently Issued and Adopted Accounting Pronouncements”, there have been no new accounting pronouncements or changes to accounting pronouncements during the nine months ended September 30, 2020, as compared to the recent accounting pronouncements described in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, filed on February 27, 2020.

JOBS ACT ACCOUNTING ELECTION
In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.


ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act). Based on that evaluation, our principal executive officer and principal financial officer have concluded that as of September 30, 2020 , our disclosure controls and procedures were effective at the reasonable assurance level. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


26




PART II-OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in legal proceedings in the ordinary course of business.

On February 14 and 22, 2018, plaintiff stockholders filed class action lawsuits against us and certain of our executive officers in the United States District Court for the Southern District of California (Hustig v. Obalon Therapeutics, Inc., et al., Case No. 3:18-cv-00352-AJB-WVG, and Cook v. Obalon Therapeutics, Inc. et al., Case No. 3:18-cv-00407-CAB-RBB). On July 24, 2018, the court consolidated the lawsuits and appointed Inter-Local Pension Fund GCC/IBT as lead plaintiff. On October 5, 2018, plaintiffs filed an amended complaint. The amended complaint alleges that we and certain of our executive officers made false and misleading statements and failed to disclose material adverse facts about our business, operations, and prospects in violation of Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of the Exchange Act. The amended complaint also alleges violations of Section 11 of the Exchange Act arising out of the Company’s initial public offering. The plaintiffs seek damages, interest, costs, attorneys' fees, and other unspecified equitable relief. The underwriters from our initial public offering have also been named as defendants in this case and we have certain obligations under the underwriting agreement to indemnify them for their costs and expenses incurred in connection with this litigation. On September 25, 2019, the court granted in part and denied in part the defendants’ motion to dismiss. The court dismissed the Section 11 claims entirely, without leave to amend, and accordingly dismissed the underwriters and certain directors from the case. The Court also dismissed certain statements from the Section 10 claims. On June 16, 2020, the parties reached a settlement of the securities class action, and they intend to submit a final settlement agreement for court approval. The settlement provides for a payment of $3.15 million to the plaintiffs, and provides that the defendants continue to deny the allegations and claims asserted by the plaintiffs, and are entering into the settlement solely to eliminate the burden and expense of further litigation. The Company expects that any amounts due as part of the settlement will be covered by the Company’s insurance policies.


ITEM 1A. Risk Factors

Under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on February 27, 2020 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, which was filed with SEC on July 30, 2020, we identified important factors that could affect our financial performance and could cause our actual results for future periods to differ materially from our anticipated results or other expectations, including those expressed in any forward-looking statements made in this Quarterly Report on Form 10-Q. There has been no material change in our risk factors subsequent to the filing of our Annual Report and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, except for the factors described below. However, the risks described in our Annual Report, Quarterly Report for the quarter ended June 30, 2020, and below are not the only risks we face. Additional risks and uncertainties that we currently deem to be immaterial or not currently known to us, as well as other risks reported from time to time in our reports to the SEC, also could cause our actual results to differ materially from our anticipated results or other expectations.

We have ongoing lease obligations under two non-cancelable long-term leases and we may not be able to meet our obligations under these agreements.

We have long-term lease obligations related to our headquarters and manufacturing space in Carlsbad and for one Obalon-branded retail treatment center in Orange County, California. We have not paid rent for our Carlsbad facility or Orange County retail treatment center since April 2020 and have notified both owners that we are taking advantage of the protections we believe are afforded by the relevant mandates related to the COVID-19 crisis. We have received a demand letter for payment of rent by the owner of our Carlsbad facility. With rent payments being delayed, our landlords may at their option (a) terminate our headquarters and manufacturing leases or could take other actions that restrict our ability to operate the business, including requesting damages for the Carlsbad lease, or (b) keep the lease in place and continue to have the right to collect rent as and when it becomes due for the remainder of the term of such lease. On October 13, 2020, Gildred Development Company (“Gildred”), our landlord in Carlsbad, served us with an unlawful detainer action in the Superior Court of California, County of San Diego ( Gildred Development Company v. Obalon Therapeutics, Inc ., Case No. 37-2020-00035927-CU-UD-CTL). Gildred alleges that we owe more than $113,000 of unpaid rent and fees to Gildred and seeks damages for unpaid rent and continued occupancy of the premises. We believe Gildred’s claims are without merit and will defend vigorously against them.



27



If we fail to meet all applicable Nasdaq Global Market requirements, Nasdaq could delist our common stock, which could adversely affect the market liquidity of our common stock and the market price of our common stock could decrease.
Nasdaq monitors our ongoing compliance with its minimum listing requirements and if we fail to meet those requirements and cannot cure such failure in the prescribed period of time, our common stock could be subject to delisting from the Nasdaq market. On August 6, 2020, we received two written notifications from the Nasdaq Listing Qualifications Staff of the Nasdaq. The first written notification (the “First Notice”) notified the Company that it is not in compliance with Nasdaq Listing Rule 5450(b)(1)(A) based on the Company’s Quarterly Report on Form 10‑Q for the quarter ended June 30, 2020, which reported the Company’s stockholders’ equity as $7,178,000, which is below the minimum of $10,000,000 in stockholders’ equity required for continued listing. In accordance with the First Notice, on September 18, 2020, we submitted a plan to Nasdaq to regain compliance with all Nasdaq Global Market listing requirements. Since submitting the plan, we have responded on October 2, 2020 and November 1, 2020 to requests from Nasdaq for additional information. At this time, Nasdaq has not granted us the requested 180 day extension to regain compliance.

The second written notification (the “Second Notice”) notified us that the closing bid price for our common stock had been below $1.00 for the last 30 consecutive business days and that we are not in compliance with the minimum bid price requirement for continued inclusion on the Nasdaq Global Market under Nasdaq Listing Rule 5450(a)(1). The notification has no immediate effect on the listing of our common stock on Nasdaq. Under the Nasdaq Listing Rules, we have a period of 180 calendar days from the date of the Second Notice to regain compliance with the minimum bid requirement. To regain compliance, the closing bid price of our common stock must be at least $1.00 for a minimum of ten consecutive business days.

Since the COVID-19 pandemic began, the closing bid for our common stock has consistently been below $1.00. Our common stock has closed below $1.00 every day since June 19, 2020. We cannot assure you that the closing price of our common stock will be at or above $1.00 per share for a sufficient period to enable us to avoid notification of non-compliance with this listing requirement.

In the event that our common stock is delisted from the Nasdaq Global Market and is not eligible for quotation or listing on another market or exchange, trading of our common stock could be conducted only in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in our coverage by securities analysts and the news media, which could cause the price of our common stock to decline further. Also, it may be difficult for us to raise additional capital if we are not listed on a major exchange.
We are subject to securities class action litigation.

On February 14 and 22, 2018, plaintiff stockholders filed class action lawsuits against us and certain of our executive officers in the United States District Court for the Southern District of California (Hustig v. Obalon Therapeutics, Inc., et al., Case No. 3:18-cv-00352-AJB-WVG, and Cook v. Obalon Therapeutics, Inc. et al., Case No. 3:18-cv-00407-CAB-RBB). On July 24, 2018, the court consolidated the lawsuits and appointed Inter-Local Pension Fund GCC/IBT as lead plaintiff. On October 5, 2018, plaintiffs filed an amended complaint. The amended complaint alleges that we and certain of our executive officers made false and misleading statements and failed to disclose material adverse facts about our business, operations, and prospects in violation of Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The amended complaint also alleges violations of Section 11 of the Exchange Act arising out of the Company’s initial public offering. The plaintiffs seek damages, interest, costs, attorneys' fees, and other unspecified equitable relief. The underwriters from our initial public offering have also been named as defendants in this case and we have certain obligations under the underwriting agreement to indemnify them for their costs and expenses incurred in connection with this litigation.
On September 25, 2019, the court granted in part and denied in part the defendants’ motion to dismiss. The court dismissed the Section 11 claims entirely, without leave to amend, and accordingly dismissed the underwriters and certain directors from the case. The Court also dismissed certain statements from the Section 10 claims.

On June 16, 2020, the parties reached a settlement of the securities class action, and they intend to submit a final settlement agreement for court approval. The settlement provides for a payment of $3.15 million to the plaintiffs, and provides that the defendants continue to deny the allegations and claims asserted by the plaintiffs, and are entering into the settlement solely to eliminate the burden and expense of further litigation. The Company expects that any amounts due as part of the settlement will be covered by the Company’s insurance policies.


28




On December 12, 2019, a purported stockholder submitted a formal demand letter to the board of directors asserting similar alleged wrongdoing as alleged in the securities class action and demanding that the board of directors investigate the alleged wrongdoing and take action to remedy the alleged injury to the Company.  The board of directors reviewed the demand and, without admitting any liability or wrongdoing, voluntarily implemented certain corporate governance updates in order to avoid the risk of litigation.

Such litigation could subject us to substantial costs, divert resources and the attention of management from our business and harm our business, results of operations, financial condition, reputation and cash flows. These factors may materially and adversely affect the market price of our common stock.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
None.

Use of Proceeds
None.

ITEM 3. Defaults Upon Senior Securities
Not applicable.

ITEM 4. Mine Safety Disclosures
Not applicable.

ITEM 5. Other Information
None.



29




ITEM 6. Exhibits
Exhibit Number
Description of Document
Filed/Furnished Herewith
3.1

3.2

3.3


3.4
4.1
10.1‡
X
10.2‡




31.1


X
31.2

X
32.1†

X
101.INS
XBRL Instance Document.
X
101.SCH
XBRL Taxonomy Extension Schema Document.
X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
X
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
X
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document.
X
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
X


30



†
This certification is deemed not filed for purpose of section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.
‡
Management contract or compensatory plan or arrangement.



31






SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
OBALON THERAPEUTICS, INC.
Date: November 6, 2020
by:
/s/ Andrew Rasdal
Andrew Rasdal
President & Chief Executive Officer



32

TABLE OF CONTENTS
Part I. Financial InformationItem 1. Condensed Consolidated Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart Ii-other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits

Exhibits

3.1 Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to the Companys Registration Statement on Form S-1/A filed on September 26, 2016). 3.2 Certificate of Amendment to the Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed on June 14, 2018). 3.3 Certificate of Second Amendment to the Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed on July 24, 2019). 3.4 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4 to the Companys Registration Statement on Form S-1/A filed on September 26, 2016). 4.1 Form of Warrant (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed on August 14, 2020). 10.1 Amended and Restated 2016 Equity Incentive Plan and form award agreements thereunder. 10.2 Consulting Agreement, dated August 11, 2020, between the Company and Blue Ox Healthcare Partners, LLC (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on August 14, 2020). 31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section302 of the Sarbanes-Oxley Act of 2002. 32.1 Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002.