CARLSBAD Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Obalon Therapeutics Inc earnings conference call or presentation Friday, November 8, 2019 at 2:00:00pm GMT
Obalon Therapeutics, Inc. - CFO
Obalon Therapeutics, Inc. - Chief Retail Officer
Obalon Therapeutics, Inc. - President, CEO, Secretary & Director
Good day, ladies and gentlemen, and welcome to the Obalon Therapeutics Third Quarter 2019 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.
I would now like to turn the conference over to Bill Plovanic, Chief Executive Officer for Obalon. Mr. Plovanic, you may begin.
William John Plovanic, Obalon Therapeutics, Inc. - President, CEO, Secretary & Director [2]
Thank you, operator. Good morning, and welcome to Obalon Therapeutics Third Quarter Financial Results Conference Call. With me on today's call are Bob Macdonald, Chief Retail Officer; and Nooshin Hussainy, Chief Financial Officer. This morning, the company issued a press release detailing our financial results for the 3 months ended September 30, 2019. This release can be accessed through the Investor Relations section of the Obalon website at obalon.com. You can also access the webcast of this call from there.
Before we get started, I'd like to remind everyone that any statements made on today's conference call that express a belief, expectation, projection, forecast, anticipation or intent regarding future events and the company's future performance may be considered forward-looking statements as defined by the Private Securities Litigation Reform Act.
Forward-looking statements in this release include Obalon's expectations regarding the near and the long-term growth potential of its business, including the company-owned retail treatment centers. These forward-looking statements are based on information available to Obalon management as of today and involve risks and uncertainties, which include, but are not limited to, the risk factors disclosed in the periodic and current reports filed by the company filed with the SEC from time to time, including the Form 10-Q for the quarter, September 30, 2019.
Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those projected in the forward-looking statements. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Obalon specifically disclaims any intent or obligation to update these forward-looking statements, except as required by law.
The archived webcast will be available for 1 year on the company's website, obalon.com. For the benefit of those who may be listening to the archived webcast, this call was held and recorded on November 8, 2019. Since then, Obalon may have made announcements related to the topics discussed, so please reference the company's most recent press releases and SEC filings.
And with that, I'll now provide an update on our business and review highlights from the recently reported quarter. The third quarter of 2019 was a transitional quarter for the company. We successfully financed the company, paid off our debt, which provides a runway to begin executing on the revised commercial strategy. We further streamlined operations and have significantly reduced our quarterly operating expenses, especially as compared to the first quarter of 2019.
Our new commercial model allows us to eliminate the expensive direct field force and the costs associated with supporting them. We still maintain all of our other capabilities, such as manufacturing, marketing, research and development, clinical, regulatory and quality assurance. Although our primary commercial focus is on establishing the Obalon Center for Weight Loss retail treatment center strategy, we have continued to provide product to key high-volume private practices. We have done so with the centralized support model, no field sales personnel. We believe this keeps the door open to expand back into that channel in the future if we believe it to be complementary to our Obalon-branded store strategy. Importantly, we opened the first Obalon Center for Weight Loss in San Diego, California and successfully treated the first patients. We have also laid the groundwork to allow us to rapidly open additional Obalon Centers for Weight Loss once we believe we have a repeatable store model.
At this time, I'd like to describe in more detail the Obalon Center for Weight Loss. The Obalon Center for Weight Loss is the first Obalon-branded center where a patient is able to receive a comprehensive weight loss treatment experience, including 6 months of the Obalon Balloon System and 12 months nutritional counseling in a high-end medical spa-like setting. The first center is located in the relatively affluent San Diego suburb with easy access to and from major roads and thoroughfares. The center itself is in a high-end medical building with other practices such as plastic surgery, cosmetic dentistry and orthodontics. It looks more like a high-end medical spa than a bariatric surgery office.
The first Obalon Center for Weight Loss, or OCWL, is staffed to provide everything required for a patient's weight loss journey. This includes a physician who's experienced in weight loss, supported by a medical assistant to manage the medical aspects of treating a patient with the Obalon Balloon System, a professional experienced salesperson with an aesthetic medical background that handles initial patient interest and financially qualifies the patient and a registered dietitian to provide nutritional counseling to drive the lifestyle changes that can help create and sustain meaningful weight loss for patients.
We are leveraging our prior experience with a centralized interest creation and conversion model to drive the patient funnel more efficiently. We believe this model can be expanded to support future Obalon centers. The model includes: one, a tactical marketing team to drive patient interest in the form of leads to our in-house call center. This is primarily accomplished through digital and social media and may also include radio and print, which capitalizes on our prior experience of creating strong top line patient interest. And two, a central call center, which had previously been utilized to support a private practice physicians. The goal of the call center is to properly respond to patient interest or leads and convert that interest in a consultation with our sales professional at the center.
As a reminder, there are approximately 69 million adults in the U.S. that are in our FDA-approved indication, which has a body mass index range of 30 to 40, are those people that need to lose between 30 to 100 pounds. We believe that Obalon-owned treatment center model will make the Obalon Balloon System more accessible to many individuals with obesity.
I'd now like to turn the call over to Bob Macdonald, our Chief Retail Officer, who is responsible for driving the Obalon Center for Weight Loss strategy. As a reminder, Bob previously functioned in a similar role with Sono Bello, the largest aesthetic surgery chain in the United States and was instrumental in expanding Sono Bello's footprint from 16 sites to over 40 sites in a little over 2 years.
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Robert Macdonald, Obalon Therapeutics, Inc. - Chief Retail Officer [3]
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Thank you, Bill. Overall, I am pleased with our initial results in the few weeks that our first center has been open. I'm very impressed with how quickly the team was able to open the first Obalon Center for Weight Loss. And I believe that we have established an initial model that can allow us to expand to other markets quickly. Currently, we're focused on making the first center successful and maximizing our operational efficiency with the goal to create a portable and replicable store model.
We've analyzed and identified our next potential markets for expansion and believe that we're positioned to move quickly once we're confident that we've established the correct Obalon Center model. We've also established a set of strict metrics to measure our performance, and we review these on a daily basis, especially those metrics related to the efficiency and effectiveness of the patient funnel, from creating initial patient interest, converting that interest to a consultation and ultimately, a patient receiving treatment.
We're encouraged by the initial results and the current trends. However, because we've only been operational a few weeks, we're not sharing those key metrics at this time, but expect to provide them in the future.
But with that, I'll turn the call back to Bill.
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William John Plovanic, Obalon Therapeutics, Inc. - President, CEO, Secretary & Director [4]
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Thanks, Bob. I'd now like to have Nooshin Hussainy, our Chief Financial Officer, provide a brief financial recap for the quarter.
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Nooshin Hussainy, Obalon Therapeutics, Inc. - CFO [5]
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Thanks, Bill. Today, I'll share details on our financial results for the third quarter ended September 30, 2019. I will compare third quarter 2019 to second quarter 2019 as I believe sequential growth is what a majority of investors are most interested, given the recent pivot in our business model.
This quarter revenue was reported at $0.3 million compared with $0.4 million in the second quarter of 2019. Revenues in the third quarter of 2019 included a mix of both navigation consoles and balloon reorder kits as compared to only balloon reorder kits in the second quarter of 2019. In the third quarter of 2019, we shipped 6 navigation consoles to current physicians -- physician customers who wanted to offer the most current generation of the Obalon Balloon System to their patients. We did not recognize any revenue from the Obalon Center for Weight Loss in the third quarter as the site became operational at the very end of the quarter.
Cost of revenue was $0.4 million in the third quarter as compared to $0.7 million in the second quarter of 2019. Gross deficit for the third quarter of 2019 was $0.1 million, which was an improvement from a gross deficit of $0.3 million in the second quarter of 2019. Onetime charges associated with the changes in the business in the second quarter of 2019 contributed to the sequential improvement.
R&D expenses for the third quarter of 2019 totaled $1.2 million compared to $1.8 million in the second quarter of 2019. We have continued to make investments to support improvements of our recently approved Obalon Navigation System and Obalon Touch Dispenser, as well as continued development of our new product pipeline. Sales, marketing and G&A expenses for the third quarter totaled $2.5 million, down from $4.3 million in the second quarter of 2019.
As a reminder, the beginning of the second quarter of 2019, we changed our commercial strategy, which include an elimination of our field sales force and a significant deduction in overall corporate headcount. In the third quarter, we continued to streamline operations and expenses to support the new company-owned retail treatment center strategy.
The operating loss for the third quarter was $3.7 million, which is down significantly from an operating loss of $6.4 million in the second quarter of 2019. We believe operating expenses of $3.7 million in the third quarter of 2019 is representative of a baseline level upon which we will grow as the business expands. Net loss for the third quarter of 2019 was $3.7 million or $0.61 per share based on 6.1 million weighted diluted average common shares outstanding as compared to a net loss of $6.8 million or $2.52 per share based on 2.7 million weighted diluted average common shares outstanding in the second quarter of 2019.
We ended September 30, 2019, with $19.4 million in cash, cash equivalent and short-term investments and no debt. As of October 31, 2019, we had 7.7 million total shares of common stock outstanding.
We will not be providing guidance at this time, given that the first Obalon Center for Weight Loss has been operational for only a few weeks. We would expect to provide more detail regarding our expectations, including performance metrics, in the future.
And with that, I will turn the call back over to Bill for final comments.
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William John Plovanic, Obalon Therapeutics, Inc. - President, CEO, Secretary & Director [6]
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The third quarter of 2019 was a transitional quarter for Obalon. We began to lay the foundation for our new commercial strategy of developing company-owned retail treatment centers. In a very short time, we created the required corporate structure, engaged a professional medical corporation to oversee medical care, hired the necessary staff to run day-to-day operations and entered into a lease and built out the physical space, all of which culminated in the opening of the first Obalon-owned retail treatment center and initial patient treatments. We believe this groundwork will allow us to rapidly open additional Obalon Centers for Weight Loss at the appropriate time.
As a reminder, we will be participating in 2 upcoming conferences: the Stifel 2019 Healthcare Conference in New York City on Wednesday, November 20; and the Canaccord Genuity, MedTech and Diagnostics Forum in New York City on Thursday, November 21. With that, our prepared comments are complete. Operator, will you please now open the line for questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Your first question comes from the line of Ben Haynor with Alliance Global.
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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [2]
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First off for me, congrats on opening the first center and I know there are some things that you have to do prior to opening the first center, writing out procedures, doing things of that nature. But can you talk about what the opening expenses look like, and whether there's kind of good metric that we can think about in terms of build-out costs? Is it $1,000 a square foot? What's a good way for us to think about that?
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Robert Macdonald, Obalon Therapeutics, Inc. - Chief Retail Officer [3]
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Yes. Ben, thanks for the question. So we obviously modeled this out going in. And based on my prior experience in a similar type business, we were able to, I think, have a pretty good handle on what the expectations were. And proportionately, in terms of the square footage, these are a little smaller facilities than what I had done before. But proportionally, the expenses came in line. And as we continue to refine it and look at future stores, we think we'll get some more efficiencies there. But we're quite pleased with where we are at today.
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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [4]
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Okay, great. And then just thinking about the training that goes into the personnel that you hire? I mean is that something that you can do over the course of a handful of days? Or is it weeks? Or does it depend on when they come on and giving them all the work together? Or any thoughts there that you can share?
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Robert Macdonald, Obalon Therapeutics, Inc. - Chief Retail Officer [5]
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Yes. I mean we kind of designed the operating model before we opened and established what those procedures are. There's obviously some learnings as you get into it. And as patient flow increases, you get better at it, and we've kind of continually refined and updated some of those protocols and procedures over the first few weeks. But we expect that, that will settle in and we'll capture those learnings and then replicate those.
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William John Plovanic, Obalon Therapeutics, Inc. - President, CEO, Secretary & Director [6]
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Yes, Ben, and this is Bill Plovanic. Just remember, from a physician and a medical training standpoint, we've been working with the physician customers for almost 3 years now. So in terms of the policies and procedures for training the medical staff on the administration of balloons and -- that's well scripted, and we've been doing it for a long time, 3 years, as I said. So that was in place prior to even opening the center.
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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [7]
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Okay. That's definitely helpful. And then you mentioned that you continue to streamline some of the operating expenses in Q3. And I know you said you're not providing guidance. I don't know if whether to take that as revenue guidance or guidance period, but I thought I'd ask on the operating expense line items. What should we kind of expect through the end of the year? I mean, should it -- we look at it as similar to Q3 with some of the expenses with the center being live? Or is there anything that you can share that might be helpful for us.
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William John Plovanic, Obalon Therapeutics, Inc. - President, CEO, Secretary & Director [8]
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Yes. I think if you look at the financial results for the third quarter, Ben, operating expenses were approximately $3.7 million for the third quarter of 2019. And we think that's representative of a baseline level as we springboard off of as we start expanding and building the company.
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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [9]
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Okay. That helps. And then lastly, from -- sorry, go ahead.
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William John Plovanic, Obalon Therapeutics, Inc. - President, CEO, Secretary & Director [10]
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Obviously, Ben, as we -- as we add additional sites, each additional site would be incremental with the objective, obviously, of driving those to profitability, those individual sites to profitability. But -- so you have your baseline in terms of the operating expenses today, and then you'd have whatever you add incrementally with each additional treatment center.
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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [11]
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Okay. That makes sense. And then, I guess, one last one for me, probably directed at Bob here. I know it's early days, but looking at the funnel conversion rate that you've seen with the Obalon Centers, can you maybe compare and contrast or maybe tell us if that conversion rate is relatively similar to what you saw at your prior firm?
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Robert Macdonald, Obalon Therapeutics, Inc. - Chief Retail Officer [12]
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Well, the businesses are a little bit different, and the marketing strategies are different with respect to some things. But our marketing focus right now is largely driven by digital and social media. So we have the ability to measure conversion at each step of that funnel on a fairly granular basis. And we are looking at that every day. And we're testing. We're doing some AB tests and otherwise optimizing it. But again, keeping a sharp eye on that on a daily basis.
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William John Plovanic, Obalon Therapeutics, Inc. - President, CEO, Secretary & Director [13]
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