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


                                       20
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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.

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 do not expect
to continue manufacturing past June 30, 2020. Additionally, we expect that,
after a transition at the end of July 2020, only two full-time employees will
remain: 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


                                       21

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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.
We generated total revenue of $0.7 million and $0.4 million for the three months
ended June 30, 2020 and 2019, respectively, and $1.5 million and $2.2 million
for the six months ended June 30, 2020 and 2019, respectively. We have incurred
significant losses in each period since our inception in 2008, with net losses
of $4.2 million and $6.8 million during the three months ended June 30, 2020 and
2019, respectively, and $9.4 million and $15.1 million during the six months
ended June 30, 2020 and 2019, respectively. We have not been profitable since
inception, and as of June 30, 2020, our accumulated deficit was $181.9 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 six months
ended June 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.


COMPONENTS OF OUR RESULTS OF OPERATIONS
Revenue
For the three and six months ended June 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 six months
ended June 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 com


                                       22

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modèle économique et programmes d'incitation à la clientèle que nous avons décidé d'offrir et
canaux par lesquels les revenus sont tirés.
Coût des revenus et marge brute


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 June 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:
•     employee-related expenses, including salaries, benefits, travel expense and
      stock-based compensation expense;


•     cost of outside consultants who...
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