Obalon: Whistleblower’s allegations ‘without merit’

Obalon Therapeutics (NSDQ:OBLN) said today that a probe by its audit committee found that the whistleblower allegations that last month sundered a $35 million offering are “without merit.”

In January the San Diego-based company terminated the offering after the whistleblower told its independent auditors, KPMG, of the allegations of improper revenue recognition during the fourth quarter. Obalon was looking to offer 5.5 million shares at $5.50 per share, for roughly $30.3 million plus an over-allotment worth another $4.5 million.

Obalon said at the time that the allegations made it “infeasible for the company to complete an investigation of the allegations prior to the intended closing of the public offering.”

Today the company said that it’s board’s four-member audit committee, led by law firm Latham & Watkins and with forensic accounting assistance from Ankura Consulting Group, found no evidence of wrongdoing.

“We took the whistleblower complaint very seriously and conducted a thorough investigation. The investigators found no merit to any of the whistleblower allegations, determined that preliminary revenues were not misrepresented and that management did nothing to mislead investors,” audit committee chairman Les Howe said in prepared remarks.

“Prior to our U.S. launch in January 2017, we worked closely with our audit committee to develop a robust procedure for appropriately recognizing revenue. We hired a dedicated revenue recognition specialist who carefully analyzes our programs, develops a formal position on revenue recognition and presents that analysis to the company’s auditors prior to implementing any accounting treatments,” added CFO Bill Plovanic. “We have run marketing promotions in every quarter since launch in January 2017. We have followed our revenue recognition process every quarter, including the fourth quarter of 2017. We look forward to continuing our intense focus on building a sustainable franchise that addresses a very significant and important need for weight loss.”

Obalon also said that its normal audit of its 2017 results, although still under way, could change from the preliminary results it put out in early January. Fourth-quarter sales could change 5% to 7% from the roughly  $3.9 million preliminary number; full-year sales could change 2% to 3% from the $ 10.1 million prelim, the company said.

Obalon’s device is an ingestible, gas-filled balloon designed for weight loss that won FDA premarket approval in September 2016. It’s indicated for weight loss in adults 30 to 100 pounds overweight, with a body mass index of 30 to 40, who have failed to lose weight through diet and exercise. The device is swallowed as a capsule which inflates with gas as it reaches the stomach, partially filling the stomach to help patients feel full and eat less.

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