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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-39616

 

 

Eargo, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

27-3879805

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

1600 Technology Drive, 6th Floor

San Jose, California 95110

95110

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (650) 351-7700

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

 

EAR

 

The Nasdaq Stock Market LLC

 

 

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  

As of August 6, 2021, the registrant had 39,160,387 shares of common stock, par value $0.0001 outstanding.

 

 

 

 


 

 

Table of Contents

 

 

 

 

Page

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

1

PART I.

FINANCIAL INFORMATION

 

2

Item 1.

Financial Statements

 

2

 

Condensed Consolidated Balance Sheets (Unaudited)

 

2

 

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

 

3

 

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit (Unaudited)

 

4

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

25

Item 4.

Controls and Procedures

 

25

PART II.

OTHER INFORMATION

 

27

Item 1.

Legal Proceedings

 

27

Item 1A.

Risk Factors

 

27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

60

Item 3.

Defaults Upon Senior Securities

 

60

Item 4.

Mine Safety Disclosures

 

60

Item 5.

Other Information

 

60

Item 6.

Exhibits

 

61

 

 

 

i


 

 

Special note regarding forward-looking statements

This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks, uncertainties and assumptions. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future financial condition, future operations, projected costs, prospects, plans, objectives of management and expected market growth, are forward-looking statements. 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. These forward-looking statements include, but are not limited to, statements about:

 

our ability to attract and retain customers;

 

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 maintain or increase insurance coverage of Eargo hearing aids as well as the outcomes of third-party payor audits;

 

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;

 

our commercialization and marketing capabilities and expectations;

 

our relationships with, and the capabilities of, our component manufacturers, suppliers and freight carriers;

 

the implementation of our business model and strategic plans for our business and products and technology;

 

the scope of protection we are able to establish and maintain for intellectual property rights covering our products, including the projected terms of patent protection;

 

our ability to effectively manage our growth;

 

our expectations regarding the time during which we will be an emerging growth company under the JOBS Act;

 

our estimates regarding the COVID-19 pandemic, including but not limited to, its duration and its impact on our business and results of operations;

 

estimates of our expenses, future revenue, capital requirements, our needs for additional financing and our ability to obtain additional capital; and

 

our future financial performance.

We have based these forward-looking statements largely on our current expectations, estimates, forecasts and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. In light of the significant uncertainties in these forward-looking statements, you should not rely upon forward-looking statements as predictions of future events. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q, 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 at all. You should refer to the section titled “Risk Factors” for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

1


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Eargo, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

June 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

179,354

 

 

$

212,185

 

Accounts receivable, net

 

 

15,361

 

 

 

3,793

 

Inventories

 

 

3,202

 

 

 

2,739

 

Prepaid expenses and other current assets

 

 

2,906

 

 

 

3,740

 

Total current assets

 

 

200,823

 

 

 

222,457

 

Operating lease right-of-use assets

 

 

959

 

 

 

1,079

 

Property and equipment, net

 

 

9,804

 

 

 

8,034

 

Intangible assets, net

 

 

1,990

 

 

 

 

Goodwill

 

 

873

 

 

 

 

Other assets

 

 

1,086

 

 

 

1,062

 

Total assets

 

$

215,535

 

 

$

232,632

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,764

 

 

$

6,020

 

Accrued expenses

 

 

14,429

 

 

 

13,909

 

Other current liabilities

 

 

2,286

 

 

 

2,448

 

Deferred revenue, current portion

 

 

69

 

 

 

311

 

Lease liability, current portion

 

 

824

 

 

 

1,030

 

Total current liabilities

 

 

24,372

 

 

 

23,718

 

Lease liability, noncurrent portion

 

 

209

 

 

 

166

 

Long-term debt, noncurrent portion

 

 

15,045

 

 

 

14,837

 

Total liabilities

 

 

39,626

 

 

 

38,721

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value per share; 5,000,000 shares authorized

   as of June 30, 2021 and December 31, 2020, respectively; zero shares

   issued and outstanding as of June 30, 2021 and December 31, 2020,

   respectively

 

 

 

 

 

 

Common stock; $0.0001 par value; 110,000,000 shares authorized

   as of June 30, 2021 and December 31, 2020, respectively; 39,141,571

   and 38,246,601 shares issued and outstanding as of June 30, 2021

   and December 31, 2020, respectively

 

 

4

 

 

 

4

 

Additional paid-in capital

 

 

407,906

 

 

 

392,965

 

Accumulated deficit

 

 

(232,001

)

 

 

(199,058

)

Total stockholders’ equity

 

 

175,909

 

 

 

193,911

 

Total liabilities and stockholders’ equity

 

$

215,535

 

 

$

232,632

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2


 

Eargo, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

Three months ended

June 30,

 

 

Six months ended

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Revenue, net

 

$

22,883

 

 

$

15,921

 

 

$

44,931

 

 

$

28,590

 

Cost of revenue

 

 

6,462

 

 

 

5,205

 

 

 

12,759

 

 

 

9,861

 

Gross profit

 

 

16,421

 

 

 

10,716

 

 

 

32,172

 

 

 

18,729

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

5,148

 

 

 

2,208

 

 

 

9,926

 

 

 

5,017

 

Sales and marketing

 

 

21,903

 

 

 

10,828

 

 

 

38,758

 

 

 

21,687

 

General and administrative

 

 

8,432

 

 

 

3,257

 

 

 

15,919

 

 

 

9,335

 

Total operating expenses

 

 

35,483

 

 

 

16,293

 

 

 

64,603

 

 

 

36,039

 

Loss from operations

 

 

(19,062

)

 

 

(5,577

)

 

 

(32,431

)

 

 

(17,310

)

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

6

 

 

 

2

 

 

 

17

 

 

 

23

 

Interest expense

 

 

(266

)

 

 

(877

)

 

 

(529

)

 

 

(1,143

)

Other income (expense), net

 

 

 

 

 

(140

)

 

 

 

 

 

100

 

Total other income (expense), net

 

 

(260

)

 

 

(1,015

)

 

 

(512

)

 

 

(1,020

)

Loss before income taxes

 

 

(19,322

)

 

 

(6,592

)

 

 

(32,943

)

 

 

(18,330

)

Income tax provision

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and comprehensive loss

 

$

(19,322

)

 

$

(6,592

)

 

$

(32,943

)

 

$

(18,330

)

Net loss attributable to common stockholders, basic and

   diluted

 

$

(19,322

)

 

$

(6,592

)

 

$

(32,943

)

 

$

(18,330

)

Net loss per share attributable to common stockholders,

   basic and diluted

 

$

(0.50

)

 

$

(23.66

)

 

$

(0.85

)

 

$

(67.04

)

Weighted-average shares used in computing net loss per share

   attributable to common stockholders, basic and diluted

 

 

38,806,861

 

 

 

278,614

 

 

 

38,546,557

 

 

 

273,414

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


 

Eargo, Inc.

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(Unaudited)

(In thousands, except share amounts)

 

 

 

Convertible preferred stock

 

 

 

Common stock

 

 

Additional

paid-in

 

 

Accumulated

 

 

Total

stockholders’

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

deficit

 

 

equity

 

Balance December 31, 2020

 

 

 

 

$

 

 

 

 

38,246,601

 

 

$

4

 

 

$

392,965

 

 

$

(199,058

)

 

$

193,911

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,449

 

 

 

 

 

 

5,449

 

Exercise of stock options

 

 

 

 

 

 

 

 

 

51,467

 

 

 

 

 

 

118

 

 

 

 

 

 

118

 

Net loss and comprehensive

   loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,621

)

 

 

(13,621

)

Balance March 31, 2021

 

 

 

 

 

 

 

 

 

38,298,068

 

 

 

4

 

 

 

398,532

 

 

 

(212,679

)

 

 

185,857

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,519

 

 

 

 

 

 

5,519

 

Exercise of stock options and

   release of restricted stock

   units

 

 

 

 

 

 

 

 

 

668,760

 

 

 

 

 

 

1,181

 

 

 

 

 

 

1,181

 

Issuance of common stock in

   connection with employee

   stock purchase plan

 

 

 

 

 

 

 

 

 

174,743

 

 

 

 

 

 

2,674

 

 

 

 

 

 

2,674

 

Net loss and comprehensive

   loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(19,322

)

 

 

(19,322

)

Balance June 30, 2021

 

 

 

 

$

 

 

 

 

39,141,571

 

 

$

4

 

 

$

407,906

 

 

$

(232,001

)

 

$

175,909

 

 

 

 

 

 

 

 

Convertible preferred stock

 

 

 

Common stock

 

 

Additional

paid-in

 

 

Accumulated

 

 

Total

stockholders’

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

deficit

 

 

deficit

 

Balance December 31, 2019

 

 

11,825,812

 

 

$

152,880

 

 

 

 

265,943

 

 

$

 

 

$

3,100

 

 

$

(159,203

)

 

$

(156,103

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

525

 

 

 

 

 

 

525

 

Exercise of stock options

 

 

 

 

 

 

 

 

 

4,188

 

 

 

 

 

 

8

 

 

 

 

 

 

8

 

Net loss and comprehensive

   loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,738

)

 

 

(11,738

)

Balance March 31, 2020

 

 

11,825,812

 

 

 

152,880

 

 

 

 

270,131

 

 

 

 

 

 

3,633

 

 

 

(170,941

)

 

 

(167,308

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

471

 

 

 

 

 

 

471

 

Exercise of stock options

 

 

 

 

 

 

 

 

 

10,335

 

 

 

 

 

 

17

 

 

 

 

 

 

17

 

Net loss and comprehensive

   loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,592

)

 

 

(6,592

)

Balance June 30, 2020

 

 

11,825,812

 

 

$

152,880

 

 

 

 

280,466

 

 

$

 

 

$

4,121

 

 

$

(177,533

)

 

$

(173,412

)

 

4


 

 

Eargo, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Six months ended June 30,

 

 

 

2021

 

 

2020

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(32,943

)

 

$

(18,330

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,424

 

 

 

1,145

 

Stock-based compensation

 

 

10,372

 

 

 

996

 

Non-cash interest expense and amortization of debt discount

 

 

208

 

 

 

969

 

Non-cash operating lease expense

 

 

554

 

 

 

553

 

Bad debt expense

 

 

594

 

 

 

 

Change in fair value of financial instruments

 

 

 

 

 

(102

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(12,162

)

 

 

(911

)

Inventories

 

 

(463

)

 

 

(159

)

Prepaid expenses and other current assets

 

 

834

 

 

 

(71

)

Other assets

 

 

(24

)

 

 

1,007

 

Accounts payable

 

 

942

 

 

 

(1

)

Accrued expenses

 

 

259

 

 

 

(583

)

Other current liabilities

 

 

(162

)

 

 

254

 

Deferred revenue

 

 

(242

)

 

 

(43

)

Operating lease liabilities

 

 

(597

)

 

 

(581

)

Other liabilities

 

 

 

 

 

(127

)

Net cash used in operating activities

 

 

(31,406

)

 

 

(15,984

)

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(546

)

 

 

(307

)

Capitalized software development costs

 

 

(2,418

)

 

 

(1,868

)

Cash paid for acquisition of business

 

 

(2,434

)

 

 

 

Net cash used in investing activities

 

 

(5,398

)

 

 

(2,175

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from stock options exercised

 

 

1,299

 

 

 

26

 

Proceeds from employee stock purchase plan purchases

 

 

2,674

 

 

 

 

Proceeds from issuance of convertible notes, net of issuance costs

 

 

 

 

 

10,053

 

Proceeds from PPP loan

 

 

 

 

 

4,574

 

Debt repayments

 

 

 

 

 

(1,600

)

Net cash provided by financing activities

 

 

3,973

 

 

 

13,053

 

Net decrease in cash and cash equivalents and restricted cash

 

 

(32,831

)

 

 

(5,106

)

Cash and cash equivalents and restricted cash at beginning of period

 

 

212,185

 

 

 

13,384

 

Cash and cash equivalents and restricted cash at end of period

 

$

179,354

 

 

$

8,278

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for taxes

 

$

322

 

 

$

 

Cash paid for interest

 

$

340

 

 

$

174

 

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

 

$

26

 

 

$

247

 

Stock-based compensation included in capitalized software costs

 

$

596

 

 

$

 

Convertible preferred stock issuance costs included in accounts payable

 

$

600

 

 

$

97

 

Acquisition liability in accrued liabilities

 

$

429

 

 

$

 

Derivative liability in connection with issuance of convertible promissory notes on issuance

 

$

 

 

$

2,879

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5


 

 

Eargo, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Description of business

Eargo, Inc. (the “Company”) is a medical device company dedicated to improving the quality of life of people with hearing loss. The Eargo solution was developed to create a hearing aid that consumers actually want to use. The Company’s innovative product and go-to-market approach address the major challenges of traditional hearing aid adoption, including social stigma, accessibility and cost.

Liquidity

The Company has incurred losses and negative cash flows from operations since its inception and management expects to incur additional substantial losses in the foreseeable future. As of June 30, 2021, the Company had cash and cash equivalents of $179.4 million and an accumulated deficit of $232.0 million.

The Company believes that its existing cash and cash equivalents as of June 30, 2021 will be sufficient for the Company to continue as a going concern for at least one year from the date these unaudited condensed consolidated financial statements are filed with the Securities and Exchange Commission (“SEC”). The Company’s future capital requirements will depend on many factors, including its growth rate, the timing and extent of its spending to support research and development activities and the timing and cost of establishing additional sales and marketing capabilities.

2. Summary of significant accounting policies

Basis of presentation and principles of consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting of Eargo, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

These unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows. The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021 or for any other future annual or interim period. The condensed consolidated balance sheet as of December 31, 2020 included herein was derived from the audited consolidated financial statements as of that date. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 16, 2021.

Use of estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made in the accompanying unaudited condensed consolidated financial statements include, but are not limited to, allowance for sales returns, the fair value of lease liabilities, the fair value of equity securities, the fair value of financial instruments, the allowance for doubtful accounts, the net realizable value of inventory, the fair value of assets acquired in a business combination, the useful lives of long-lived assets, accrued product warranty reserve, certain other accruals and recoverability of the Company’s net deferred tax assets and the related valuation allowance. Management periodically evaluates its estimates, which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from those estimates.

Significant accounting policies

There have been no significant changes to the accounting policies during the six months ended June 30, 2021, as compared to the significant accounting policies described in Note 2 of the “Notes to Consolidated Financial Statements” in the Company’s audited consolidated financial statements included in the Annual Report on Form 10-K, except as discussed below.

6


 

Concentration of credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of demand deposit accounts, money market accounts and accounts receivable, including credit card receivables. The Company maintains its cash and cash equivalents, which may, at times, exceed federally insured limits, with financial institutions of high credit standing. As of June 30, 2021, the Company has not experienced any losses on its deposit accounts and money market accounts. As of June 30, 2021, the Company does not believe there is significant financial risk from nonperformance by the issuers of the Company’s deposit accounts and money market accounts.

Approximately 80% and 45% of the Company’s gross accounts receivable as of June 30, 2021 and December 31, 2020, respectively, were related to reimbursement claims submitted to an insurance company that is the Company’s largest third-party payor. The increase in gross accounts receivable as of June 30, 2021 was primarily due to a claims audit currently in process by such third-party payor, during which claims submitted since March 1, 2021 have not been paid.

Accounts receivable, net

Accounts receivable represents amounts due from third-party institutions for credit card and debit card transactions and trade accounts receivable. Accounts receivable are recorded at invoiced amounts, net of allowances for doubtful accounts. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of accounts. Management regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice, each customer’s expected ability to pay, and the collection history with each customer, when applicable, to determine whether a specific allowance is appropriate. As of June 30, 2021 and December 31, 2020, the Company recorded an allowance for doubtful accounts of $1.9 million and $1.9 million, respectively. The allowance for doubtful accounts charges are recorded as a component of general and administrative expenses in the condensed consolidated statements of operations and comprehensive loss.

Goodwill, Finite-Lived Acquired Intangible Assets, and Impairment

Goodwill represents the excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets acquired in business combinations. At least annually, in the fourth quarter of each Fiscal Year, or more frequently if indicators of impairment exist, management performs a review to determine if the carrying value of goodwill is impaired. Impairment testing is performed at the reporting unit level.  

The Company’s intangible assets consist of intangible assets acquired in a business combination. These assets are amortized using the straight-line method over their estimated useful lives ranging from one to four years reflecting the period in which the economic benefits of the assets are expected to be realized.

The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or group of assets may not be fully recoverable. Recoverability is measured by comparing the carrying amount to the future net undiscounted cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset. The Company has not identified any such impairment losses to date.

Revenue recognition

The Company’s revenue is generated from the sale of products (hearing aid systems and related accessories) and services (extended warranties). These products and services are primarily sold directly to customers through the Eargo website and the Company sales representatives.

Under ASC 606, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services by following a five step process: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

Identify the contract with a customer. The Company generally considers completion of an Eargo sales order (which requires customer acceptance of the Company’s click-through terms and conditions for website sales and authorization of payment through credit card or another form of payment for sales made over the phone) as a customer contract provided that collection is considered probable. For payments that are not made upfront by credit card, the Company assesses insurance eligibility or customer creditworthiness based on credit checks, payment history, and/or other circumstances. For payments involving insurance payors, the Company validates customer eligibility and reimbursement amounts prior to shipping the product.

7


 

Identify the performance obligations in the contract. Product performance obligations include hearing aid systems and related accessories and service performance obligations include extended warranty coverage. The Company also offers customers a one-time replacement of certain components of the hearing aid system for a fee (i.e., “loss and damage policy”), which represents an option with material right. However, as the historical redemption rate under the policy has been low, the option is not accounted for as a separate performance obligation. The Company does not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.

The Company has elected to treat shipping and handling activities performed after a customer obtains control of products as a fulfillment activity.

Determine the transaction price and allocation to performance obligations. The transaction price in the Company’s customer contracts consists of both fixed and variable consideration. Fixed consideration includes amounts to be contractually billed to the customer while variable consideration includes the 45-day right of return that applies to all products. To estimate product returns, the Company analyzes historical return levels, current economic trends, and changes in customer demand. Based on this information, the Company reserves a percentage of product sale revenue and accounts for the estimated impact as a reduction in the transaction price.

Allocate the transaction price to the performance obligations in the contract. For contracts that contain multiple performance obligations, the Company allocates the transaction price to the performance obligations on a relative standalone selling price basis. Standalone selling prices are based on multiple factors including, but not limited to, historical discounting trends for products and services, gross margin objectives, internal costs, competitor pricing strategies, and industry technology lifecycles.

Recognize revenue when or as the Company satisfies a performance obligation. Revenue for products (hearing aid systems and related accessories) is recognized at a point in time, which is generally upon shipment. Revenue for services (extended warranty) is recognized over time on a ratable basis over the warranty period. The Company does not have material contract liabilities as of June 30, 2021 and December 31, 2020.

Contract costs

The Company applies the practical expedient to recognize the incremental costs of obtaining a contract as expense when incurred if the amortization period would be one year or less. These incremental costs include processing fees paid to third-party financing vendors, who provide the Company’s customers with the option to finance their purchases. If a customer elects to utilize this service, the Company receives a non-recourse upfront payment for the product sold, less processing fee withheld by the financing vendor. These processing fees are recognized in cost of revenue in the condensed consolidated statements of operations and comprehensive loss as incurred.

Net loss per share attributable to common stockholders

The Company follows the two-class method when computing net loss per share in periods in which shares that meet the definition of participating securities are outstanding. The two-class method determines net loss per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.

Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period, without consideration for potential dilutive securities. Diluted net income loss attributable to common stockholders is computed by adjusting net loss attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares and common share equivalents of potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, convertible preferred stock, convertible notes, convertible preferred stock warrants and common stock options are considered to be potentially dilutive securities.

Recent accounting pronouncements not yet adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The Company will no longer qualify as an emerging growth company as of December 31, 2021, and will first present the application of this standard in its annual financial statements for the year ended December 31, 2021. This new standard must be adopted using a modified retrospective approach, with certain exceptions. While the Company has not yet quantified the impact to its condensed consolidated financial statements, the adoption of this standard is expected to change accounts receivable, net relative to such amounts reported prior to adoption.

8


 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify the accounting for income taxes. This standard removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing standards to improve consistent application. This new standard is effective for the Company in the fiscal year beginning January 1, 2022. An entity that elects early adoption must adopt all the amendments in the same period. The Company is currently evaluating the impact of this standard on its condensed consolidated financial statements.

3. Fair value measurements

There were no financial assets and liabilities outstanding that were remeasured at fair value on a recurring basis as of June 30, 2021 or December 31, 2020.

The carrying amounts reflected in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their short-term nature. The fair value of the Company’s outstanding term loan is estimated using the net present value of the payments, discounted at an interest rate that is consistent with a market interest rate. The fair value of the outstanding term loan approximates the carrying amount as the term loan bears a floating rate that approximates the market interest rate.

4. Balance sheet components

Inventories

Inventories consist primarily of raw materials related to component parts and finished goods. The following is a summary of the Company’s inventories by category:

 

 

 

June 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Raw materials

 

$

1,574

 

 

$

853

 

Finished goods

 

 

1,628

 

 

 

1,886

 

Total inventories

 

$

3,202

 

 

$

2,739

 

Property and equipment, net

Property and equipment, net, consists of the following:

 

 

 

June 30,

 

 

 

 

 

December 31,

 

 

 

2021

 

 

 

 

 

2020

 

 

 

(in thousands)

 

Capitalized software

 

$

9,574

 

 

 

 

 

$

6,744

 

Tools and lab equipment

 

 

4,790

 

 

 

 

 

 

4,426

 

Furniture and fixtures

 

 

906

 

 

 

 

 

 

906

 

Leasehold improvements

 

 

757

 

 

 

 

 

 

757

 

Computer and equipment