Eargo Reports Third Quarter 2020 Financial Results

Third Quarter and Recent Highlights:

  • Net revenues of $18.2 million, up 135.3% year-over-year
  • Gross systems shipped of 10,077, up 91.7% year-over-year
  • Return accrual rate of 25.2%, a 10.1 percentage point improvement year-over-year
  • Gross margin of 70.1%, up 16.5 percentage points year-over-year
  • Sales and marketing expense as a percent of net revenues of 67.9%, a 52.3 percentage point improvement year-over-year
  • Loss from operations of ($7.6) million, compared to ($12.0) million in the third quarter of 2019
  • Completed initial public offering of 9,029,629 shares of common stock on October 20, 2020, raising approximately $148 million in net proceeds

SAN JOSE, Calif., Nov. 19, 2020 (GLOBE NEWSWIRE) -- Eargo, Inc. (Nasdaq: EAR), a medical device company on a mission to improve the quality of life of people with hearing loss, today reported its financial results for the third quarter ended September 30, 2020.

Christian Gormsen, President and CEO, said, “By all financial and operational measures, our performance in the third quarter of 2020 was very strong. Most importantly, we are helping more people hear better by offering both a revolutionary product and customer experience. Consumers continued to rapidly adopt our virtually invisible, rechargeable, completely-in-canal solution for hearing loss and our differentiated telecare model, which provides education, purchase and clinical support from the comfort and safety of home.”

“During the third quarter, we executed our strategy of efficient revenue growth through multi-channel marketing targeted at a diverse mix of consumers across cash pay, insurance and repeat customers. We expanded our national TV advertising, which built increased consumer awareness of Eargo while complementing our digital marketing to drive 91.7% year over year growth in gross systems shipped while leveraging sales and marketing spend. In addition, we delivered an improved customer return accrual rate and gross margin of 70.1%, all of which contributed to the continued scalability of our business.”

“We were also pleased to see hearing aid volumes sold through traditional brick and mortar clinics return to year-over-year growth in the third quarter, but even more pleased to see continued acceleration in our year-over-year gross systems shipped growth even as the clinics’ operations began to recover. We expect strong demand for Eargo as we head into the fourth quarter and holiday buying season, driving our expectation of approximately 97% full year 2020 net revenue growth. With approximately 43 million adults in the U.S. with hearing loss but only approximately 27% owning hearing aids, we believe we have barely scratched the surface of this large and underpenetrated market,” concluded Mr. Gormsen.

According to data collected by the Hearing Industries Association (HIA), private/commercial sector hearing aid unit sales in the third quarter of 2020 increased by 0.5% year-over-year, following 58.6% year-over-year decline in the second quarter of 2020. Despite the improvement in traditional clinic-based distribution, Eargo saw expanded awareness and continued consumer adoption of its telecare model, which eliminates the need for cumbersome visits to the clinic by offering an easy-to-use purchasing interface and convenient access to a highly trained clinical support team consisting of licensed hearing professionals.

Third Quarter 2020 Financial Results
Net revenue was $18.2 million for the third quarter of 2020, compared to $7.7 million in the third quarter of 2019. The increase was driven by an increase in consumer adoption of the Eargo hearing aid system and a decrease in sales return accrual rate.

Gross profit for the third quarter of 2020 was $12.8 million compared to $4.2 million for the third quarter of 2019. Gross margin increased to 70.1% for the third quarter of 2020, compared with 53.6% for the third quarter of 2019. The increase was primarily due to higher average selling prices, driven by the shift in mix to our latest product innovation, Neo HiFi, and a decrease in sales returns as a percentage of gross systems shipped.

Total operating expenses were $20.4 million or 112.1% of net revenues, for the third quarter of 2020, compared with $16.2 million or 209.5% of net revenues, for the third quarter of 2019. The increase was primarily due to higher sales and marketing investments, personnel investments to scale the organization for continued growth, and expenses related to being a public company.

Sales and marketing expenses were $12.4 million or 67.9% of net revenues, for the third quarter of 2020, compared with $9.3 million or 120.2% of net revenues, for the third quarter of 2019.

Research and development expenses were $2.9 million or 15.8% of net revenues, for the third quarter of 2020, compared with $3.2 million or 41.6% of net revenues, for the third quarter of 2019.

General and administrative expenses were $5.2 million or 28.4% of net revenues for the third quarter of 2020, compared with $3.7 million or 47.6% of net revenues, for the third quarter of 2019.

Total stock-based compensation expenses were $1.4 million for the third quarter of 2020, compared with $0.5 million for the third quarter of 2019.

Loss from operations was ($7.6) million for the third quarter of 2020 compared with ($12.0) million for the third quarter of 2019.

Cash and cash equivalents were $70.2 million as of September 30, 2020, compared to $25.3 million as of September 30, 2019.

Initial Public Offering
Eargo closed its initial public offering of 9,029,629 shares of its common stock at a public offering price of $18.00 per share, which included 1,177,777 shares of common stock issued upon the exercise in full by the underwriters of their option to purchase additional shares, for total net proceeds from the offering of approximately $148 million. All of the shares of common stock were offered by Eargo. Eargo’s common stock began trading on The Nasdaq Global Select Market on October 16, 2020, under the ticker symbol “EAR.”

Full Year 2020 Financial Guidance
Eargo expects revenue for the full year 2020 of approximately $64.5 million, which represents approximately 97% growth over the company’s prior year revenue.

Conference Call and Web Cast Information
Eargo will host a conference call to discuss the third quarter financial results after market close on Thursday, November 19, 2020 at 1:30 p.m. Pacific Time / 4:30 p.m. Eastern Time. The conference call can be accessed live over the phone (833) 649-1234 for U.S. callers or (914) 987-7293 for international callers, using conference ID: 2826509. The live webinar can be accessed at ir.eargo.com.

About Eargo
Eargo is a medical device company dedicated to improving the quality of life of people with hearing loss. Our innovative product and go-to-market approach address the major challenges of traditional hearing aid adoption, including social stigma, accessibility and cost. We believe our Eargo hearing aids are the first and only virtually invisible, rechargeable, completely-in-canal, FDA regulated, exempt Class I device for the treatment of hearing loss. Our differentiated, consumer-first solution empowers consumers to take control of their hearing. Consumers can purchase online or over the phone and get personalized and convenient consultation and support from licensed hearing professionals via phone, text, email or video chat. The Eargo solution is offered to consumers at approximately half the cost of competing hearing aids purchased through traditional channels in the United States.

The company’s 4th generation product, the Eargo Neo HiFi, was launched in January and features improved capabilities across audio fidelity and bandwidth. The Eargo Neo HiFi is available for purchase here.

Related Links

Forward Looking Statements
This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “positioned,” “potential,” “predict,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. All statements other than statements of historical fact contained in this press release are forward-looking statements. These forward-looking statements include, but are not limited to, statements about: our 2020 revenue guidance; consumer adoption of our hearing loss solution and telecare model; the continued scalability of our business; expectations regarding strong demand for Eargo during the fourth quarter and holiday buying season; and the size of the hearing loss market and our ability to penetrate the market. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results and events to differ materially from those anticipated, including, but not limited to, risks and uncertainties related to: our expectations concerning additional orders by existing customers; our expectations regarding the potential market size and size of the potential consumer populations for our products and any future products, including our ability to increase insurance coverage of Eargo hearing aids; our ability to release new hearing aids and the anticipated features of any such hearing aids; developments and projections relating to our competitors and our industry, including competing products; our ability to maintain our competitive technological advantages against new entrants in our industry; the pricing of our hearing aids; our expectations regarding the ability to make certain claims related to the performance of our hearing aids relative to competitive products; our expectations with regard to changes in the regulatory landscape for hearing aid devices, including the implementation of the pending over-the-counter hearing aid pathway regulatory framework; and our estimates regarding the COVID-19 pandemic, including but not limited to, its duration and its impact on our business and results of operations. These and other risks are described in greater detail under the section titled “Risk Factors” contained in Eargo’s prospectus filed with the Securities and Exchange Commission (SEC) on October 19, 2020 pursuant to Rule 424(b) under the Securities Act and the company’s other filings with the SEC. Any forward-looking statements in this press release are made pursuant to the Private Securities Litigation Reform Act of 1995, as amended, and speak only as of the date of this press release. Except as required by law, the company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Investor Contact
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Vice President of Investor Relations

Media Contact
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Eargo, Inc. 
Condensed Consolidated Statements of Operations and Comprehensive Loss 
(In thousands, except share and per share amounts) 
  Three months ended September 30, Nine months ended September 30, 
   2020   2019   2020   2019  
Revenue, net $18,186  $7,730  $46,776  $22,175  
Cost of revenue  5,434   3,583   15,295   11,033  
Gross profit  12,752   4,147   31,481   11,142  
Operating expenses:         
Research and development  2,871   3,219   7,888   8,781  
Sales and marketing  12,354   9,290   34,041   24,698  
General and administrative  5,163   3,683   14,498   8,781  
Total operating expenses  20,388   16,192   56,427   42,260  
Loss from operations  (7,636)  (12,045)  (24,946)  (31,118) 
Other income (expense), net:         
Interest income  3   136   26   555  
Interest expense  (279)  (218)  (1,422)  (492) 
Other income (expense), net  (187)  (30)  (87)  (84) 
Loss on extinguishment of debt  (1,627)     (1,627)    
Total other income (expense), net  (2,090)  (112)  (3,110)  (21) 
Loss before income taxes  (9,726)  (12,157)  (28,056)  (31,139) 
Income tax provision             
Net loss and comprehensive loss $(9,726) $(12,157) $(28,056) $(31,139) 
Net income (loss) attributable to common stockholders, basic and diluted $  $(12,157) $(18,216) $(31,139) 
Net income (loss) per share attributable to common stockholders, basic and diluted $  $(46.26) $(57.73) $(122.74) 
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders, basic and diluted  398,895   262,785   315,546   253,701  

Eargo, Inc. 
Condensed Consolidated Balance Sheets 
(In thousands, except share and per share amounts) 
  September 30, December 31, 
   2020   2019  
Current assets:     
Cash and cash equivalents  70,224   13,384  
Accounts receivable, net  2,576   2,051  
Inventories  3,289   2,880  
Prepaid expenses and other current assets  1,379   1,598  
Total current assets  77,468   19,913  
Operating lease right-of-use assets  1,369     
Property and equipment, net  6,946   5,400  
Other assets  2,304   1,992  
Total assets $88,087  $27,305  
Current liabilities:     
Accounts payable $6,658  $5,428  
Accrued expenses  10,809   9,939  
Long-term debt, current portion     4,800  
Other current liabilities  2,079   1,717  
Deferred revenue, current  441   406  
Lease liability, current portion  1,097     
Total current liabilities  21,084   22,290  
Lease liability, noncurrent portion  412     
Deferred revenue, noncurrent portion  17   269  
Long-term debt, noncurrent portion  14,502   7,446  
Convertible preferred stock warrant liability  544   396  
Other liabilities     127  
Total liabilities  36,559   30,528  
Commitments and contingencies (Note 5)     
Convertible preferred stock, $0.0001 par value; 73,108,323 and 36,269,166 shares authorized as of September 30, 2020 and December 31, 2019, respectively; 24,229,281 and 11,825,812 issued and outstanding as of September 30, 2020 and December 31, 2019, respectively  223,125   152,880  
Stockholders’ deficit:     
Common stock; $0.0001 par value; 110,000,000 and 55,190,000 shares authorized as of September 30, 2020 and December 31, 2019, respectively; 534,599 and 265,943 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively       
Additional paid in capital  15,662   3,100  
Accumulated deficit  (187,259)  (159,203) 
Total stockholders’ deficit  (171,597)  (156,103) 
Total liabilities, convertible preferred stock and stockholders’ deficit $88,087  $27,305  

Eargo, Inc.   
Condensed Consolidated Statements of Cash Flows   
(In thousands)   
  Nine months ended September 30,    
   2020   2019    
Operating activities:      
Net loss $(28,056) $(31,139)   
Adjustments to reconcile net loss to net cash used in operating activities:     
Depreciation and amortization  1,805   1,011    
Stock-based compensation  2,363   997    
Non-cash interest expense and amortization of debt discount  1,178   200    
Non-cash operating lease expense  838       
Bad debt expense  2,135   44    
Loss on extinguishment of debt  1,627       
Change in fair value of warrant liability  (122)  84    
Change in fair value of derivative liability  206       
Changes in operating assets and liabilities:       
Accounts receivable  (2,660)  (113)   
Inventories  (409)  (1,110)   
Prepaid expenses and other current assets  219   (199)   
Other assets  963   (311)   
Accounts payable  579   (585)   
Accrued expenses  147   1,750    
Other current liabilities  362   (172)   
Deferred revenue  (217)  409    
Operating lease liabilities  (883)      
Other liabilities  (127)  (59)   
Net cash used in operating activities  (20,052)  (29,193)   
Investing activities:       
Purchases of property and equipment  (844)  (1,616)   
Capitalized software development costs  (2,601)  (1,017)   
Net cash used in investing activities  (3,445)  (2,633)   
Financing activities:       
Proceeds from stock options exercised  359   40    
Proceeds from debt financing  15,000   5,000    
Proceeds from convertible preferred stock issuance, net of issuance costs  67,867   865    
Proceeds from issuance of convertible notes, net of issuance costs  10,053       
Proceeds from PPP loan  4,574       
Repayment of PPP loan  (4,574)      
Debt repayments  (12,720)      
Payments of deferred offering costs  (222)      
Net cash provided by financing activities  80,337   5,905    
Net increase (decrease) in cash and cash equivalents and restricted cash 56,840   (25,921)   
Cash and cash equivalents and restricted cash at beginning of period  13,384   51,201    
Cash and cash equivalents and restricted cash at end of period $70,224  $25,280    
Supplemental disclosure of cash flow information:       
Cash paid for interest $253  $275    
Non-cash operating activities:       
Lease liability obtained in exchange for right-of-use asset $2,392  $    
Non-cash investing and financing activities:       
Property and equipment and capitalized software costs in accounts payable and accrued liabilities $421  $307    
Deferred offering costs in accounts payable and accrued liabilities $1,053  $    
Convertible preferred stock issuance costs included in accounts payable $600  $    
Derivative liability in connection with issuance of convertible promissory notes on issuance $2,879  $    
Issuance of Series E convertible preferred stock upon extinguishment of convertible notes $12,818  $    
Settlement of derivative liability in connection with extinguishment of convertible notes $3,085  $    
Issuance of convertible preferred stock warrants in connection with debt financing $270  $41