ReShape Lifesciences (RSLS) - 2019 Q4 - Annual Report

PART I Item 1. Business Obalon Therapeutics, a medical device company, outlines its FDA-approved Obalon Balloon System, market, and operations, having shifted to a retail treatment center commercial strategy in 2019 OVERVIEW - Obalon Therapeutics is a vertically integrated medical device company focused on developing and commercializing innovative medical devices for obesity treatment[19] - The core product, Obalon Balloon System, is the first and only FDA-approved swallowable, inflatable intragastric balloon in the U.S., designed for gradual and sustained weight loss in obese patients with a BMI between 30 and 40[19][20] - In 2019, the company shifted its commercialization strategy from a direct sales team to establishing company-owned or managed Obalon-branded retail treatment centers, opening the first in San Diego in September 2019 and a second in Orange County in February 2020[27][28] Obalon Balloon System Clinical and Commercial Weight Loss Results | Metric | SMART Trial (Average) | Commercial Registry (Average) | | :------------------- | :------------------ | :------------------- | | Weight Loss | 15.1 pounds | 21.7 pounds | | Total Body Weight Loss Percentage | 6.9% | 10.2% | | BMI Reduction | 2.4 points | 3.5 points | | Weight Maintenance After 6 Months | 89.5% | Not Applicable | THE OBESITY EPIDEMIC - Obesity is recognized as an epidemic by the U.S. Surgeon General, posing a significant threat to American quality of life, with half of the U.S. population projected to be obese by 2030[29] - In 2016, over 650 million adults globally were obese and over 1.9 billion were overweight, with the number of obese adults nearly quadrupling worldwide since 1975[29] - National medical costs for obesity-related diseases (e.g., cardiovascular disease, diabetes, cancer) were estimated at $210 billion in 2008, with a global economic impact estimated at $2 trillion in 2014[31] CURRENT TREATMENTS AND LIMITATIONS - Lifestyle interventions (diet, exercise) are often difficult to sustain, leading to weight regain[34] - Pharmacological treatments may have limited efficacy due to poor patient adherence, safety risks, and side effects (e.g., gastrointestinal, cardiovascular, central nervous system issues)[35] - Bariatric surgeries (e.g., gastric bypass, sleeve gastrectomy), while effective, are invasive, expensive, irreversible, and associated with high reoperation rates and severe side effects like nausea, vomiting, and dumping syndrome[36] - Traditional liquid-filled intragastric balloons (e.g., ORBERA®) have limitations including a high incidence of serious adverse events, poor comfort and tolerability, insufficient progressive weight loss, and inconvenient placement procedures[38] OUR SOLUTION - The Obalon Balloon System demonstrates a favorable safety profile, with a serious adverse event (SADE) rate of 0.3% in the SMART trial and 0.14% in commercial use[39] - Patient tolerability and comfort are enhanced through the inflatable, lightweight balloons and the staged placement of three balloons[39] - Both clinical study and commercial registry data show progressive and sustained weight loss, with an average of 15.1 pounds lost in the SMART trial and 21.7 pounds in commercial registry[39] - The placement procedure is simple and convenient, requiring no anesthesia or endoscopy (mild sedation needed for removal), typically completed within 15 minutes, allowing patients to quickly resume daily activities[39] OUR STRATEGY - Expand the company-owned or managed Obalon-branded retail treatment center commercialization model to standardize care quality and patient pricing, enhancing operational and financial control[41] - Continuously increase patient awareness and interest through digital, offline, and social marketing, along with the Obalon Ambassador Center (call center), converting patient interest into appointments[41] - Optimize manufacturing for increased operating leverage by establishing a high-leverage manufacturing facility at the Carlsbad headquarters, aiming for faster innovation, greater cost-effectiveness, and higher quality products[41] - Protect and expand a robust intellectual property portfolio, including granted patents and pending applications, and safeguard key proprietary technology as trade secrets[41] OUR PRODUCTS AND TECHNOLOGY - The Obalon Balloon System consists of a swallowable capsule, inflatable balloon, microcatheter, Obalon Navigation System console (for tracking balloon position), Obalon Touch Inflation Dispenser (for inflation), and proprietary gas tank[40][21] - Balloon placement is typically completed within 15 minutes without sedation or endoscopy; patients swallow the capsule, and its position is confirmed and inflated via the Obalon Navigation System. Patients receive a total of three balloons in three separate placements over 8-12 weeks, with all balloons endoscopically removed within six months of the first placement[49][50] - The company is developing a balloon with a potential treatment duration of up to one year, having completed initial engineering and animal testing[52] Research and Development Expenses | Year | R&D Expenses (Millions of USD) | | :--- | :------------------- | | 2019 | 6.9 | | 2018 | 10.7 | CLINICAL TRIALS AND DATA - The SMART trial, a pivotal study for FDA approval of the Obalon Balloon System, showed an average weight loss of 15.1 pounds (6.9% total body weight loss), with 89.5% of weight loss maintained six months post-balloon removal[54][57][64] - SMART trial safety data indicated only 1 serious adverse event (SADE) (0.3%) among 336 patients, with the most common other adverse events being mild to moderate abdominal pain, nausea, and vomiting[66][67] - Commercial registry data from 1,411 patients showed an average weight loss of 21.7 pounds and 10.2% total body weight loss for patients receiving three balloons and treated for at least 20 weeks[24][73] - The FDA requires post-market studies for the Obalon Balloon System (200 patients) and Obalon Navigation System (1,000 commercial patients, 4,000 balloon administrations) to continuously assess safety and efficacy[76][78] SALES AND MARKETING - In April 2019, the company eliminated its direct sales force, transitioning to a centralized customer support model and focusing on establishing company-owned or managed Obalon-branded treatment centers[79] - The Obalon Ambassador Center (call center) launched in Q4 2018, aiming to convert patient interest generated by marketing activities into treatment appointments[80] Digital Marketing Activity Comparison (2019 vs. 2018) | Metric | 2019 | 2018 | | :------------------- | :----------- | :----------- | | Digital Ad Views | >10.5 million | 49 million | | Digital Video Views | >3.5 million | >6 million | | Website Visits | >300 thousand | ~1.7 million | | Doctor Searches | >43 thousand | 580 thousand | | Patient Leads | >20 thousand | 71 thousand | COMPETITION - The medical device industry and weight loss market are highly competitive, facing competition from pharmaceuticals (e.g., Vivus, Eisai), surgical procedures (e.g., Ethicon, Medtronic), and devices (e.g., ORBERA Balloon, Allurion Technologies, Spatz Medical, Aspire Bariatrics, Gelesis Plenity, BAROnova)[84][212] - Many competitors possess significant financial and resource advantages, including established reputations, customer bases, products supported by long-term data, longer operating histories, and broader product lines[87][214] - The company plans to compete effectively by developing new products, enhancing existing systems, competitive pricing, and maintaining adequate R&D and sales and marketing resources[88] INTELLECTUAL PROPERTY - As of December 31, 2019, the company held 24 granted U.S. patents and 19 pending U.S. patent applications, along with 32 granted international patents and 54 pending international patent applications[91] - Granted patents, expiring between 2023 and 2038, cover technical features of the Obalon Balloon System, including balloon attachment mechanisms, balloon wall structure and composition, and initial fill gas composition[91] - The company also owns 2 registered U.S. trademarks and 41 registered international trademarks, along with 5 pending U.S. trademark applications[93] MANUFACTURING - All products, except the Obalon Navigation System console, are manufactured or assembled at a single facility in Carlsbad, but rely on single suppliers for critical components such as extruded film, swallowable capsules, molded silicone valves, and catheter hydrophilic coating[94] - The company is registered with the FDA as a medical device manufacturer and holds a manufacturing license from the California Department of Health Care Services, with all product manufacturing complying with FDA Quality System Regulations (QSR)[95] - Reliance on single suppliers and long lead times for components could lead to supply shortages, production interruptions, and commercialization delays[94][96] GEOGRAPHIC REGIONS - In 2019 and 2018, the vast majority of the company's assets, revenues, and expenses were derived from operations within the United States[99] International Revenue as Percentage of Total Revenue | Year | International Revenue Percentage | | :--- | :----------- | | 2019 | 27.1% | | 2018 | 48.4% | - The agreement with Middle East distributor Bader terminated in December 2019, but a new distribution agreement was signed with Al Danah Medical Company in Qatar[99] SEASONALITY - Due to limited experience selling products in the U.S. and significant quarterly revenue fluctuations, the company cannot currently identify seasonal variations in product demand[100] GOVERNMENT REGULATION - The Obalon Balloon System is classified by the FDA as a Class III medical device, requiring a rigorous Pre-Market Approval (PMA) process, which is more expensive, time-consuming, and uncertain than 510(k) clearance[106][117][288] - Post-market, the company remains subject to extensive FDA regulatory requirements, including Quality System Regulations (QSR), Medical Device Reporting (MDR) for adverse events, post-market studies, and advertising and promotion regulations[118][119][117] - The FDA has issued three warning letters regarding serious adverse events (including deaths) with liquid-filled intragastric balloons, which could negatively impact the entire intragastric balloon category and potentially lead to additional warnings or approval withdrawal for Obalon products[119][272] - The company is also subject to U.S. federal and state, as well as foreign, healthcare laws and regulations such as health information privacy (e.g., HIPAA, GDPR, CCPA), anti-kickback laws, false claims laws, and transparency laws, with non-compliance potentially resulting in significant fines and penalties[133][136][137][140][142][145][146][147][148] EMPLOYEES - As of December 31, 2019, the company had 34 full-time employees across manufacturing operations, sales and marketing, R&D, clinical affairs, regulatory affairs and quality assurance, and finance and administration departments[155] - None of the company's employees are unionized or covered by collective bargaining agreements, and the company considers its employee relations to be good[155] FINANCIAL INFORMATION - The company manages its operations and resource allocation as a single reporting segment[156] - Financial information regarding the company's operations, assets, and liabilities, including net losses for 2019 and 2018 and total assets as of December 31, 2019 and 2018, is included in Item 8, Consolidated Financial Statements, of this annual report[156] CORPORATE INFORMATION - The company was incorporated in Delaware on January 2, 2008, with its principal executive offices located in Carlsbad, California[157] AVAILABLE INFORMATION - The company files annual reports (Form 10-K), quarterly reports (Form 10-Q), current reports (Form 8-K), and other information with the U.S. Securities and Exchange Commission (SEC)[158] - These filings are available free of charge on the SEC's website (www.sec.gov) and in the "Investor Information" section of the company's website[159] Item 1A. Risk Factors Investing in Obalon common stock carries high risks, including going concern doubts, new strategy execution failures, financing needs, single product reliance, regulatory compliance, intellectual property challenges, and stock ownership risks RISKS RELATED TO OUR BUSINESS - Substantial doubt exists about the company's ability to continue as a going concern, with the audit report including an explanatory paragraph highlighting recurring losses and liquidity issues[162] - The new commercial strategy of establishing company-owned or managed retail treatment centers may be unsuccessful, introducing new risks such as recruiting medical personnel, building brand awareness, identifying suitable properties, timely obtaining licenses, and achieving site profitability[164][165] - The company anticipates needing additional financing to support its operating plans, and failure to obtain funds on acceptable terms in a timely manner could force delays in product development and commercialization activities[168][171] - As a single-product company, any negative impact on the Obalon Balloon System would severely affect the business, financial condition, and operating results[179] - Patient acceptance of intragastric balloons may be slow, and adverse events with other companies' intragastric balloons or obesity treatments could further hinder acceptance; the FDA has issued warnings regarding serious adverse events with liquid-filled intragastric balloons[184][185] - Products could cause serious patient harm due to misuse, malfunction, or design defects, leading to costly litigation, diverting management attention, and damaging the company's reputation and business[191][193] - The company does not expect patients to receive third-party reimbursement, so success depends on patients' ability and willingness to pay for treatment out-of-pocket[196] - The company relies on third-party suppliers, including single-source suppliers, for manufacturing certain components and subassemblies, which could lead to supply shortages, production interruptions, and price fluctuations[206] RISKS RELATED TO REGULATORY MATTERS - Despite FDA approval for the Obalon Balloon System, the company remains subject to extensive FDA regulation, including Medical Device Reporting (MDR), post-market studies, and advertising and promotion regulations[267][269] - FDA warnings regarding liquid-filled intragastric balloons could negatively impact the entire intragastric balloon category, potentially leading to additional warnings or approval withdrawal for Obalon products[272] - Failure to comply with FDA and international quality system requirements could result in manufacturing operational delays or shutdowns, impacting Obalon Balloon System sales[280][281] - Uncertainty exists regarding FDA or other regulatory approvals for the company's future products and product improvements, and failure to obtain timely approvals will harm financial performance[285][286] - The company is subject to healthcare regulations and anti-fraud and abuse laws, with non-compliance potentially leading to substantial fines and penalties, adversely affecting business operations[296][297] - The company's retail arrangements may violate state laws prohibiting the corporate practice of medicine or fee-splitting, adversely impacting its business, financial condition, and ability to operate in those states[306] - The company is subject to data privacy and security laws and regulations, and failure to fully comply could result in penalties and restricted business operations[309][311][312] RISKS RELATED TO OUR INTELLECTUAL PROPERTY - If the company cannot adequately protect its proprietary technology or maintain sufficient granted patents, competitors may compete more directly, significantly harming the business[318] - The company may infringe or be accused of infringing others' intellectual property, potentially leading to costly and time-consuming litigation, delaying product development, or preventing commercialization of the Obalon Balloon System[325][327] - Granted patents covering the company's products may be found invalid or unenforceable if challenged in court or administrative proceedings[335] - The company does not seek intellectual property protection in all global jurisdictions, and even where sought, it may not be able to adequately enforce its intellectual property[337][338] RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK - The sale or issuance of common stock to Lincoln Park may result in dilution, and Lincoln Park's sale of acquired shares or market anticipation of such sales could cause the company's common stock price to decline[341][342][343] - The company's stock price may fluctuate due to various factors, including medical device industry slowdowns, commercial strategy execution, clinical trial results, safety concerns, regulatory decisions, competition, and changes in key personnel[344] - Failure to meet all applicable Nasdaq Global Market requirements could lead to Nasdaq delisting the company's common stock, adversely affecting its market liquidity and price[347] - Future sales and issuances of common stock or other securities may result in significant dilution and could cause the common stock price to decline[350] - The company's management has broad discretion over the use of net proceeds from common stock sales to Lincoln Park, and investors may disagree with its use, with proceeds potentially not being successfully invested[354] - As an emerging growth company, utilizing reduced disclosure requirements may make common stock less attractive to investors[355][356] - The company faces securities class action lawsuits, which could result in substantial costs, divert management's attention, and harm its business, operating results, financial condition, reputation, and cash flows[364][367] - Provisions in the company's charter documents and Delaware law may make it more difficult to acquire the company and could deter attempts by shareholders to replace or remove the current board or management[368][369] - The company does not intend to pay cash dividends on common stock in the foreseeable future, so capital appreciation, if any, will be the sole source of return[372] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments as of the filing date of this annual report - No unresolved staff comments[373] Item 2. Properties Obalon's principal executive offices are located in a 20,200 square foot leased facility in Carlsbad, California, with additional leased retail treatment centers across the state - The principal executive offices are located in Carlsbad, California, occupying 20,200 square feet with a lease term until March 2022[374] - As of February 27, 2020, the company leased 3 Obalon-branded retail treatment centers in California, totaling approximately 6,725 square feet, with lease terms ranging from 2021 to 2025[375] Item 3. Legal Proceedings Obalon is involved in a consolidated securities class action lawsuit alleging violations of securities laws, which the company intends to vigorously defend despite partial dismissals - The company is involved in a consolidated securities class action lawsuit filed in February 2018, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act and Section 11 of the Securities Act[378] - On September 25, 2019, the court partially granted and partially denied the defendants' motion to dismiss, dismissing all Section 11 claims and some Section 10 claims[378] - The company believes the remaining claims lack merit and intends to vigorously defend them[378] - On December 12, 2019, the company received a shareholder demand letter asserting alleged wrongdoing similar to that in the securities class action lawsuit[366] Item 4. Mine Safety Disclosures The company reports no mine safety disclosure matters - No mine safety disclosure matters[379] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Obalon's common stock trades on Nasdaq, with approximately 38 record holders, no dividends paid, and IPO proceeds primarily used for commercialization and R&D, with no equity repurchases during the period Market Information - The company's common stock has traded on the Nasdaq Global Market under the symbol "OBLN" since October 6, 2016[382] Holders of Record - As of February 18, 2020, the company had approximately 38 record holders of common stock[383] Dividend Policy - The company has never declared or paid any cash dividends on its common stock and currently does not intend to pay any cash dividends in the foreseeable future[384] - The company plans to retain all available funds and future earnings for the development and expansion of its business[384] Securities Authorized for Issuance under Equity Compensation Plans - The information required by this item is incorporated by reference into the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders[385] Recent Sales of Unregistered Securities - No recent sales of unregistered securities[385] Use of Proceeds - On October 5, 2016, the company sold 5,000,000 shares of common stock at $15.00 per share through an initial public offering (IPO), generating net proceeds of approximately $67.2 million after deducting underwriting discounts, commissions, and offering expenses[386] - As of December 31, 2019, all net proceeds have been primarily used for the commercialization of the Obalon Balloon System, ongoing R&D efforts, working capital, and other general corporate purposes[387] Purchases of Equity Securities by the Issuer and Affiliated Purchasers - No purchases of equity securities by the issuer and affiliated purchasers[388] Item 6. Selected Consolidated Financial Data Obalon's selected consolidated financial data from 2016 to 2019 shows continuous losses, increasing accumulated deficit, and declining cash and total assets, reflecting ongoing going concern challenges and liquidity pressures Selected Consolidated Financial Data (2016-2019, in thousands of USD) | Metric | 2019 | 2018 | 2017 | 2016 | | :--------------------------------- | :----- | :----- | :----- | :----- | | Revenue | 3,281 | 9,101 | 9,914 | 3,393 | | Cost of sales | 2,950 | 5,423 | 4,829 | 2,809 | | Gross profit | 331 | 3,678 | 5,085 | 584 | | Research and development expenses | 6,893 | 10,697 | 10,647 | 9,872 | | Selling, general and administrative expenses | 16,668 | 29,946 | 28,829 | 10,217 | | Loss from operations | (23,230) | (36,965) | (34,391) | (19,505) | | Net loss | (23,676) | (37,380) | (34,765) | (20,467) | | Net loss per share (basic and diluted) | (5.03) | (19.64) | (20.80) | (48.47) | | Cash and cash equivalents and short-term investments | 14,055 | 23,735 | 44,400 | 75,475 | | Working capital | 14,258 | 11,416 | 41,744 | 73,469 | | Total assets | 20,393 | 30,386 | 53,101 | 78,778 | | Accumulated deficit | (172,430) | (148,754) | (111,374) | (76,609) | | Total stockholders' equity | 15,849 | 13,107 | 35,113 | 64,305 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses Obalon's financial condition and operating results, highlighting the 2019 commercial strategy shift, resulting in revenue decline but narrowed net loss, ongoing going concern doubts, and key accounting policies OVERVIEW - Obalon Therapeutics is a medical device company focused on developing and commercializing the Obalon Balloon System for obesity treatment, an FDA-approved swallowable, inflatable intragastric balloon[393][394] - In 2019, the company shifted its commercialization strategy from direct sales to physicians to establishing company-owned or managed Obalon-branded retail treatment centers, opening its first center in San Diego in September 2019[399][400][401] Financial Performance Overview (2019 vs. 2018, in thousands of USD) | Metric | 2019 | 2018 | | :----- | :----- | :----- | | Total Revenue | 3,281 | 9,101 | | Net Loss | (23,676) | (37,380) | | Accumulated Deficit (as of December 31) | (172,430) | (148,754) | | Cash and Cash Equivalents (as of December 31) | 14,055 | 21,187 | - The company has incurred losses since inception, with an accumulated deficit of $172.4 million as of December 31, 2019, and cash levels raising substantial doubt about its ability to continue as a going concern[403][406] - In August 2019, the company raised approximately $14.7 million in net proceeds through a public offering of stock and warrants, and repaid $20 million in term loans during the second and third quarters of 2019[404] - In April 2019, the company underwent an internal reorganization, reducing its workforce by approximately 50% (49 employees), to address liquidity issues and streamline operations[405] COMPONENTS OF OUR RESULTS OF OPERATIONS Revenue, Cost, and Gross Profit (2019 vs. 2018, in thousands of USD) | Metric | 2019 | 2018 | Change | Change % | | :----- | :----- | :----- | :----- | :----- | | Revenue | 3,281 | 9,101 | (5,820) | -64% | | Cost of sales | 2,950 | 5,423 | (2,473) | -46% | | Gross profit | 331 | 3,678 | (3,347) | -91% | | Gross margin | 10.1% | 40.4% | -30.3% | -75% | - The decline in revenue was primarily due to the shift in commercialization strategy (reduced sales to physicians and institutions) and a $3.5 million decrease in sales to a Middle East distributor[428] - The decrease in cost of sales was primarily due to lower product sales volume, a $1.1 million reduction in scrap and obsolescence inventory reserves, and a $1.4 million decrease in personnel costs due to workforce reductions, partially offset by a $2.2 million increase in absorbed inventory[429] Operating Expenses (2019 vs. 2018, in thousands of USD) | Metric | 2019 | 2018 | Change | Change % | | :------------------- | :----- | :----- | :----- | :----- | | Research and development expenses | 6,893 | 10,697 | (3,804) | -36% | | Selling, general and administrative expenses | 16,668 | 29,946 | (13,278) | -44% | | Total operating expenses | 23,561 | 40,643 | (17,082) | -42% | - The decrease in R&D expenses was primarily due to a $2.1 million reduction in compensation-related expenses from workforce reductions, a $0.4 million decrease in stock-based compensation, a $0.6 million reduction in Obalon Navigation System development costs, and a $0.5 million decrease in clinical trial expenses[430] - The decrease in selling, general and administrative expenses was primarily due to a $5.7 million reduction in marketing and advertising expenses, a $5.5 million decrease in compensation-related expenses, a $1.1 million decrease in stock-based compensation, and a $1.1 million decrease in variable compensation, all related to the April 2019 internal reorganization[431] CRITICAL ACCOUNTING POLICIES AND ESTIMATES - The company recognizes revenue under ASC 606 when control of products transfers to customers, estimating variable consideration for customer incentives and returns[417][422] - The company offers a swallow guarantee program, deferring revenue for replacement balloons based on the expected swallow failure rate[409][421] - Effective January 1, 2019, the company adopted ASC 842 (Leases), recognizing right-of-use assets and corresponding liabilities for operating leases with terms exceeding 12 months[424] - The company consolidates variable interest entities (VIEs) for which it is the primary beneficiary, such as its company-managed Obalon-branded retail treatment centers[426] RESULTS OF OPERATIONS Operating Results Comparison (2019 vs. 2018, in thousands of USD) | Metric | 2019 | 2018 | | :------------------- | :----- | :----- | | Revenue | 3,281 | 9,101 | | Cost of sales | 2,950 | 5,423 | | Gross profit | 331 | 3,678 | | Research and development expenses | 6,893 | 10,697 | | Selling, general and administrative expenses | 16,668 | 29,946 | | Loss from operations | (23,230) | (36,965) | | Net loss | (23,676) | (37,380) | - Revenue decreased by $5.8 million to $3.3 million in 2019, primarily due to the commercialization strategy shift and reduced sales to a Middle East distributor[428] - Gross profit decreased by $3.4 million to $0.3 million in 2019, with gross margin falling from 40.4% in 2018 to 10.1%[429] - R&D expenses decreased by $3.8 million to $6.9 million in 2019, primarily due to reductions in compensation-related expenses, stock-based compensation, Obalon Navigation System development costs, and clinical trial expenses[430] - Selling, general and administrative expenses decreased by $13.2 million to $16.7 million in 2019, primarily due to reductions in marketing and advertising expenses, compensation-related expenses, stock-based compensation, and variable compensation[431] LIQUIDITY AND CAPITAL RESOURCES - As of December 31, 2019, the company had $14.1 million in cash and cash equivalents and an accumulated deficit of $172.4 million, raising substantial doubt about its ability to continue as a going concern[434][435] - In August 2019, the company raised approximately $14.7 million in net proceeds through a public offering of stock and warrants[436] - In the second and third quarters of 2019, the company fully repaid its $20 million term loan with Pacific Western Bank, releasing associated risks and restrictions[434][444][445] - On December 27, 2019, the company entered into an equity distribution agreement with Canaccord to sell up to $10 million of common stock, having sold 377,615 shares for $2.8 million in gross proceeds as of December 31, 2019[438][440] - In February 2020, the company terminated its old purchase agreement with Lincoln Park and entered into a new one, committing to purchase up to $15 million of common stock over 36 months[442][622][623] CASH FLOWS Cash Flow Overview (2019 vs. 2018, in thousands of USD) | Activity | 2019 | 2018 | | :----------------------- | :----- | :----- | | Net cash used in operating activities | (22,866) | (29,432) | | Net cash provided by investing activities | 2,356 | 19,517 | | Net cash provided by financing activities | 13,378 | 9,994 | | Net (decrease) increase in cash and cash equivalents | (7,132) | 79 | - Net cash used in operating activities was $22.9 million in 2019, primarily comprising a net loss of $23.7 million and a $3.3 million increase in net operating assets, partially offset by $4.1 million in non-cash expenses[451] - Net cash provided by investing activities was $2.4 million in 2019, primarily from short-term investment maturities, partially offset by capital expenditures[453] - Net cash provided by financing activities was $13.4 million in 2019, primarily from $17 million in proceeds from common stock and warrant issuances, $6.4 million from prepaid warrant exercises, and $10 million from long-term loan proceeds, offset by $20 million in long-term loan repayments[454] OFF-BALANCE SHEET ARRANGEMENTS - The company currently has no off-balance sheet arrangements, such as structured finance, special purpose entities, or variable interest entities[456] EFFECTS OF INFLATION - The company believes inflation and price changes did not have a significant impact on operating results for the periods presented[457] RECENT ACCOUNTING PRONOUNCEMENTS - Refer to Note 2, "Recent Accounting Pronouncements," in the annual financial statements for detailed information[458] JOBS ACT ACCOUNTING ELECTION - As an emerging growth company, the company has irrevocably elected not to use the extended transition period for complying with new or revised accounting standards, thus adopting these standards concurrently with other public companies[459] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable - Not applicable[460] Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data required by this item are included in Item 15(a)(1) of Part IV of this annual report - The financial statements and supplementary data required by this item are included in Item 15(a)(1) of Part IV of this annual report[461] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure[462] Item 9A. Controls and Procedures Obalon management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with no material changes during the quarter Evaluation of Disclosure Controls and Procedures - As of December 31, 2019, the company's management assessed and concluded that its disclosure controls and procedures were effective at a reasonable assurance level[463] Management's Report on Internal Control over Financial Reporting - Management is responsible for establishing and maintaining adequate internal control over financial reporting and assessed its effectiveness based on the COSO (2013) framework[465][467] - Management's assessment concluded that the company's internal control over financial reporting was effective as of December 31, 2019[468] - As an emerging growth company, this annual report does not include an attestation report from the company's registered public accounting firm regarding internal control over financial reporting[468] Changes in Internal Control over Financial Reporting - No material changes occurred in internal control over financial reporting during the quarter ended December 31, 2019[469] Item 9B. Other Information The company reports no other information requiring disclosure - No other information disclosure[470] PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this item is incorporated by reference into the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders - The information required by this item is incorporated by reference into the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders[473] Item 11. Executive Compensation The information required by this item is incorporated by reference into the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders - The information required by this item is incorporated by reference into the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders[474] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is incorporated by reference into the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders - The information required by this item is incorporated by reference into the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders[475] Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item is incorporated by reference into the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders - The information required by this item is incorporated by reference into the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders[476] Item 14. Principal Accountant Fees and Services The information required by this item is incorporated by reference into the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders - The information required by this item is incorporated by reference into the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders[477] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements and schedules included in Obalon's annual report, along with a detailed exhibit index covering various agreements and certifications Financial Statements and Financial Statement Schedules - This annual report includes the following financial statements and financial statement schedules: Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Loss, Consolidated Statements of Stockholders' Equity, Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements[480] Exhibits - The Exhibit Index lists various documents filed as part of or incorporated by reference into this annual report, including equity distribution agreements, articles of incorporation, warrants, securities purchase agreements, registration rights agreements, employment agreements, lease agreements, and various certification documents[481][635][636][639] Report of Independent Registered Public Accounting Firm - KPMG LLP has served as the company's auditor since 2015, issuing an unqualified opinion on the consolidated financial statements as of December 31, 2019 and 2018[489][484] - The report includes an explanatory paragraph highlighting substantial doubt about the company's ability to continue as a going concern due to recurring losses and net capital deficiency[485] - The report also notes the company's change in lease accounting method effective January 1, 2019, adopting Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842)[486] Consolidated Balance Sheets Consolidated Balance Sheets (as of December 31, in thousands of USD) | Metric | 2019 | 2018 | | :--------------------------- | :----- | :----- | | Cash and cash equivalents | 14,055 | 21,187 | | Short-term investments | — | 2,548 | | Accounts receivable, net | 285 | 870 | | Inventory | 1,936 | 1,580 | | Other current assets | 1,959 | 2,462 | | Total current assets | 18,235 | 28,647 | | Right-of-use assets (leases) | 1,077 | — | | Property and equipment, net | 1,081 | 1,739 | | Total assets | 20,393 | 30,386 | | Accounts payable | 648 | 1,159 | | Accrued compensation | 820 | 3,805 | | Deferred revenue | 424 | 352 | | Other current liabilities | 1,524 | 1,985 | | Lease liabilities (current portion) | 561 | — | | Long-term loan (current portion) | — | 9,930 | | Total current liabilities | 3,977 | 17,231 | | Lease liabilities (long-term) | 567 | — | | Total liabilities | 4,544 | 17,279 | | Common stock | 8 | 2 | | Additional paid-in capital | 188,271 | 161,859 | | Accumulated deficit | (172,430) | (148,754) | | Total stockholders' equity | 15,849 | 13,107 | | Total liabilities and stockholders' equity | 20,393 | 30,386 | Consolidated Statements of Operations and Comprehensive Loss Consolidated Statements of Operations and Comprehensive Loss (for the years ended December 31, in thousands of USD) | Metric | 2019 | 2018 | | :--------------------------- | :----- | :----- | | Revenue | 3,281 | 9,101 | | Cost of sales | 2,950 | 5,423 | | Gross profit | 331 | 3,678 | | Research and development expenses | 6,893 | 10,697 | | Selling, general and administrative expenses | 16,668 | 29,946 | | Loss from operations | (23,230) | (36,965) | | Interest expense, net | (385) | (226) | | Other expense, net | (61) | (189) | | Net loss | (23,676) | (37,380) | | Other comprehensive income (loss) | — | 5 | | Net loss and comprehensive loss | (23,676) | (37,375) | | Net loss per share (basic and diluted) | (5.03) | (19.64) | | Weighted-average common shares outstanding (basic and diluted) | 4,706,775 | 1,903,734 | Consolidated Statements of Stockholders' Equity Consolidated Statements of Stockholders' Equity (December 31, 2018 to December 31, 2019, in thousands of USD) | Change Item | Common Stock (Shares) | Common Stock (Amount) | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | | :--------------------------------- | :----------- | :----------- | :----------- | :----------- | :----------- | | Balance at December 31, 2018 | 2,351,333 | 2 | 161,859 | (148,754) | 13,107 | | Stock-based compensation expense | — | — | 2,983 | — | 2,983 | | Issuance of common stock upon stock option exercise | 119 | — | — | — | — | | Vesting of early exercised stock options | — | — | 58 | — | 58 | | Issuance of common stock and warrants, net of issuance costs | 3,661,238 | 4 | 23,362 | — | 23,366 | | Exercise of warrants to purchase common stock | 1,735,000 | 2 | — | — | 2 | | Cancellation of restricted stock awards | (26,910) | — | — | — | — | | Issuance of common stock for reverse stock split rounding | 3,320 | — | 9 | — | 9 | | Net loss | — | — | — | (23,676) | (23,676) | | Balance at December 31, 2019 | 7,724,100 | 8 | 188,271 | (172,430) | 15,849 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (for the years ended December 31, in thousands of USD) | Activity | 2019 | 2018 | | :--------------------------- | :----- | :----- | | Net cash used in operating activities | (22,866) | (29,432) | | Net cash provided by investing activities | 2,356 | 19,517 | | Net cash provided by financing activities | 13,378 | 9,994 | | Net (decrease) increase in cash and cash equivalents | (7,132) | 79 | | Cash and cash equivalents at beginning of period | 21,187 | 21,108 | | Cash and cash equivalents at end of period | 14,055 | 21,187 | - Net cash used in operating activities was $22.9 million in 2019, primarily comprising a net loss of $23.7 million and a $3.3 million increase in net operating assets, partially offset by $4.1 million in non-cash expenses[451] - Net cash provided by investing activities was $2.4 million in 2019, primarily from $2.55 million in short-term investment maturities, partially offset by $0.194 million in property and equipment purchases[453] - Net cash provided by financing activities was $13.4 million in 2019, primarily from $23.38 million in net proceeds from common stock and warrant issuances and $10 million in long-term loan proceeds, offset by $20 million in long-term loan repayments[454] Notes to Consolidated Financial Statements - The company has incurred continuous operating losses since inception, with an accumulated deficit of $172.4 million as of December 31, 2019, and cash levels raising substantial doubt about its ability to continue as a going concern[507] - On July 24, 2019, the company effected a one-for-ten reverse stock split[505] - In April 2019, the company underwent an internal reorganization, reducing its workforce by approximately 50%, and shifted its commercialization focus to company-owned or managed Obalon-branded retail treatment centers[510] - In August 2019, the company raised approximately $14.7 million in net proceeds through a public offering of stock and warrants, and repaid $20 million in term loans during the second and third quarters of 2019[509] - As of December 31, 2019, the company had federal net operating loss carryforwards of approximately $147.9 million and state net operating loss carryforwards of approximately $114.6 million, along with federal and California R&D tax credit carryforwards totaling $3.4 million and $2.7 million, respectively[596] - The company has established a $45.6 million valuation allowance against deferred tax assets due to uncertainty regarding their realization[595] - In January 2020, the company approved the grant of 816,081 restricted stock units to executives; in February 2020, the company opened its second Obalon-branded treatment center in Orange County and entered into a lease agreement for a third center near Sacramento[619][620][621] - On February 5, 2020, the company terminated its old purchase agreement with Lincoln Park and entered into a new one, committing to sell up to $15 million of common stock to Lincoln Park over 36 months[622][623] Item 16. Form 10-K Summary This annual report does not contain a Form 10-K summary - No Form 10-K summary[624] SIGNATURES This annual report was formally signed on February 27, 2020, by Obalon Therapeutics, Inc.'s President and CEO, CFO, and Board members - This annual report was signed on February 27, 2020[629][631][633] - Signatories include William Plovanic, President and Chief Executive Officer, Nooshin Hussainy, Chief Financial Officer, and members of the Board of Directors[629][631][633]