ear-10q_20220630.htm
false Q2 0001719395 --12-31 true true true true 2023-06-30 P7Y10M17D P7Y21D P6Y7M24D 0001719395 2022-01-01 2022-06-30 xbrli:shares 0001719395 2022-08-03 iso4217:USD 0001719395 2022-06-30 0001719395 2021-12-31 iso4217:USD xbrli:shares 0001719395 2022-04-01 2022-06-30 0001719395 2021-04-01 2021-06-30 0001719395 2021-01-01 2021-06-30 0001719395 us-gaap:CommonStockMember 2021-12-31 0001719395 us-gaap:AdditionalPaidInCapitalMember 2021-12-31 0001719395 us-gaap:RetainedEarningsMember 2021-12-31 0001719395 us-gaap:AdditionalPaidInCapitalMember 2022-01-01 2022-03-31 0001719395 2022-01-01 2022-03-31 0001719395 us-gaap:CommonStockMember 2022-01-01 2022-03-31 0001719395 us-gaap:RetainedEarningsMember 2022-01-01 2022-03-31 0001719395 us-gaap:CommonStockMember 2022-03-31 0001719395 us-gaap:AdditionalPaidInCapitalMember 2022-03-31 0001719395 us-gaap:RetainedEarningsMember 2022-03-31 0001719395 2022-03-31 0001719395 us-gaap:AdditionalPaidInCapitalMember 2022-04-01 2022-06-30 0001719395 us-gaap:CommonStockMember 2022-04-01 2022-06-30 0001719395 us-gaap:RetainedEarningsMember 2022-04-01 2022-06-30 0001719395 us-gaap:CommonStockMember 2022-06-30 0001719395 us-gaap:AdditionalPaidInCapitalMember 2022-06-30 0001719395 us-gaap:RetainedEarningsMember 2022-06-30 0001719395 us-gaap:CommonStockMember 2020-12-31 0001719395 us-gaap:AdditionalPaidInCapitalMember 2020-12-31 0001719395 us-gaap:RetainedEarningsMember 2020-12-31 0001719395 2020-12-31 0001719395 us-gaap:AdditionalPaidInCapitalMember 2021-01-01 2021-03-31 0001719395 2021-01-01 2021-03-31 0001719395 us-gaap:CommonStockMember 2021-01-01 2021-03-31 0001719395 us-gaap:RetainedEarningsMember 2021-01-01 2021-03-31 0001719395 us-gaap:CommonStockMember 2021-03-31 0001719395 us-gaap:AdditionalPaidInCapitalMember 2021-03-31 0001719395 us-gaap:RetainedEarningsMember 2021-03-31 0001719395 2021-03-31 0001719395 us-gaap:AdditionalPaidInCapitalMember 2021-04-01 2021-06-30 0001719395 us-gaap:CommonStockMember 2021-04-01 2021-06-30 0001719395 us-gaap:RetainedEarningsMember 2021-04-01 2021-06-30 0001719395 us-gaap:CommonStockMember 2021-06-30 0001719395 us-gaap:AdditionalPaidInCapitalMember 2021-06-30 0001719395 us-gaap:RetainedEarningsMember 2021-06-30 0001719395 2021-06-30 0001719395 ear:TwoThousandAndTwentyTwoConvertibleNotesMember 2022-01-01 2022-06-30 0001719395 2022-03-30 2022-04-29 0001719395 ear:NotePurchaseAgreementMember ear:TwoThousandAndTwentyTwoConvertibleNotesMember 2022-06-30 0001719395 ear:NotePurchaseAgreementMember ear:TwoThousandAndTwentyTwoConvertibleNotesMember 2022-01-01 2022-06-30 xbrli:pure 0001719395 us-gaap:AccountsReceivableMember us-gaap:CreditConcentrationRiskMember ear:EargoHearingAidsMember 2022-01-01 2022-06-30 0001719395 us-gaap:AccountsReceivableMember us-gaap:CreditConcentrationRiskMember ear:EargoHearingAidsMember 2021-01-01 2021-12-31 0001719395 us-gaap:AccountsReceivableMember us-gaap:CreditConcentrationRiskMember ear:FederalEmployeeHealthBenefitsProgramMember 2022-01-01 2022-06-30 0001719395 us-gaap:AccountsReceivableMember us-gaap:CreditConcentrationRiskMember ear:FederalEmployeeHealthBenefitsProgramMember 2021-01-01 2021-12-31 0001719395 us-gaap:AccountingStandardsUpdate201912Member 2022-06-30 0001719395 us-gaap:AccountingStandardsUpdate202006Member 2022-06-30 0001719395 us-gaap:FairValueMeasurementsRecurringMember ear:ConvertibleNotesMember us-gaap:FairValueInputsLevel3Member 2022-06-30 0001719395 us-gaap:FairValueMeasurementsRecurringMember ear:ConvertibleNotesMember 2022-06-30 0001719395 us-gaap:SoftwareAndSoftwareDevelopmentCostsMember 2022-06-30 0001719395 us-gaap:SoftwareAndSoftwareDevelopmentCostsMember 2021-12-31 0001719395 ear:ToolsAndLabEquipmentMember 2022-06-30 0001719395 ear:ToolsAndLabEquipmentMember 2021-12-31 0001719395 us-gaap:FurnitureAndFixturesMember 2022-06-30 0001719395 us-gaap:FurnitureAndFixturesMember 2021-12-31 0001719395 us-gaap:LeaseholdImprovementsMember 2022-06-30 0001719395 us-gaap:LeaseholdImprovementsMember 2021-12-31 0001719395 ear:ComputerAndComputerEquipmentMember 2022-06-30 0001719395 ear:ComputerAndComputerEquipmentMember 2021-12-31 0001719395 us-gaap:DevelopedTechnologyRightsMember 2022-06-30 0001719395 us-gaap:OtherIntangibleAssetsMember 2022-06-30 0001719395 us-gaap:DevelopedTechnologyRightsMember 2021-12-31 0001719395 us-gaap:OtherIntangibleAssetsMember 2021-12-31 0001719395 2021-09-30 ear:Option 0001719395 2021-09-01 2021-09-30 0001719395 ear:CivilSettlementAgreementMember us-gaap:GovernmentMember 2022-04-29 0001719395 ear:CivilSettlementAgreementMember 2021-12-31 0001719395 ear:AmendedTwoThousandAndEighteenLoanAgreementMember 2022-06-27 2022-06-28 0001719395 ear:AmendedTwoThousandAndEighteenLoanAgreementMember 2022-06-28 0001719395 ear:AmendedTwoThousandAndEighteenLoanAgreementMember 2022-01-01 2022-06-30 0001719395 ear:AmendedTwoThousandAndEighteenLoanAgreementMember 2021-01-01 2021-06-30 0001719395 ear:TwoThousandAndTwentyTwoConvertibleNotesMember 2022-06-24 0001719395 ear:TwoThousandAndTwentyTwoConvertibleNotesMember ear:FirstTrancheMember 2022-06-28 0001719395 ear:TwoThousandAndTwentyTwoConvertibleNotesMember us-gaap:GeneralAndAdministrativeExpenseMember 2022-01-01 2022-06-30 0001719395 ear:TwoThousandAndTwentyTwoConvertibleNotesMember 2022-06-23 2022-06-24 0001719395 ear:TwoThousandAndTwentyTwoConvertibleNotesMember srt:MinimumMember 2022-06-24 0001719395 ear:TwoThousandAndTwentyTwoConvertibleNotesMember srt:MaximumMember 2022-06-23 2022-06-24 0001719395 ear:TwoThousandAndTwentyTwoConvertibleNotesMember us-gaap:RightsMember 2022-01-01 2022-06-30 0001719395 ear:TwoThousandAndTwentyTwoConvertibleNotesMember us-gaap:RightsMember 2022-06-30 0001719395 ear:TwoThousandAndTwentyTwoConvertibleNotesMember us-gaap:RightsMember ear:FirstTrancheMember 2022-01-01 2022-06-30 0001719395 ear:TwoThousandAndTwentyTwoConvertibleNotesMember us-gaap:RightsMember srt:MinimumMember 2022-01-01 2022-06-30 0001719395 ear:TwoThousandAndTwentyTwoConvertibleNotesMember us-gaap:RightsMember ear:FirstTrancheMember 2022-06-30 0001719395 ear:TwoThousandAndTwentyTwoConvertibleNotesMember us-gaap:RightsMember ear:SecondTrancheMember srt:MaximumMember 2022-01-01 2022-06-30 0001719395 ear:TwoThousandAndTwentyTwoConvertibleNotesMember 2022-06-30 0001719395 us-gaap:CostOfSalesMember 2022-04-01 2022-06-30 0001719395 us-gaap:CostOfSalesMember 2021-04-01 2021-06-30 0001719395 us-gaap:CostOfSalesMember 2022-01-01 2022-06-30 0001719395 us-gaap:CostOfSalesMember 2021-01-01 2021-06-30 0001719395 us-gaap:ResearchAndDevelopmentExpenseMember 2022-04-01 2022-06-30 0001719395 us-gaap:ResearchAndDevelopmentExpenseMember 2021-04-01 2021-06-30 0001719395 us-gaap:ResearchAndDevelopmentExpenseMember 2022-01-01 2022-06-30 0001719395 us-gaap:ResearchAndDevelopmentExpenseMember 2021-01-01 2021-06-30 0001719395 us-gaap:SellingAndMarketingExpenseMember 2022-04-01 2022-06-30 0001719395 us-gaap:SellingAndMarketingExpenseMember 2021-04-01 2021-06-30 0001719395 us-gaap:SellingAndMarketingExpenseMember 2022-01-01 2022-06-30 0001719395 us-gaap:SellingAndMarketingExpenseMember 2021-01-01 2021-06-30 0001719395 us-gaap:GeneralAndAdministrativeExpenseMember 2022-04-01 2022-06-30 0001719395 us-gaap:GeneralAndAdministrativeExpenseMember 2021-04-01 2021-06-30 0001719395 us-gaap:GeneralAndAdministrativeExpenseMember 2022-01-01 2022-06-30 0001719395 us-gaap:GeneralAndAdministrativeExpenseMember 2021-01-01 2021-06-30 0001719395 ear:TwoThousandTenEquityIncentivePlansMember 2022-06-30 0001719395 ear:TwoThousandTwentyEquityIncentivePlanMember 2022-06-30 0001719395 2021-01-01 2021-12-31 0001719395 us-gaap:RestrictedStockUnitsRSUMember 2021-12-31 0001719395 us-gaap:RestrictedStockUnitsRSUMember 2022-01-01 2022-06-30 0001719395 us-gaap:RestrictedStockUnitsRSUMember 2022-06-30 0001719395 ear:PerformanceBasedRestrictedStockUnitsMember 2021-06-01 2021-06-30 0001719395 ear:PerformanceBasedRestrictedStockUnitsMember 2022-01-01 2022-06-30 0001719395 ear:PerformanceBasedRestrictedStockUnitsMember 2022-04-01 2022-06-30 0001719395 ear:EmployeeStockPurchasePlanMember 2022-06-30 0001719395 ear:EmployeeStockPurchasePlanMember 2022-01-01 2022-06-30 0001719395 ear:EmployeeStockPurchasePlanMember 2020-10-01 2020-10-31 0001719395 us-gaap:EmployeeStockOptionMember 2022-04-01 2022-06-30 0001719395 us-gaap:EmployeeStockOptionMember 2021-04-01 2021-06-30 0001719395 us-gaap:EmployeeStockOptionMember 2022-01-01 2022-06-30 0001719395 us-gaap:EmployeeStockOptionMember 2021-01-01 2021-06-30 0001719395 us-gaap:RestrictedStockUnitsRSUMember 2022-04-01 2022-06-30 0001719395 us-gaap:RestrictedStockUnitsRSUMember 2021-04-01 2021-06-30 0001719395 us-gaap:RestrictedStockUnitsRSUMember 2022-01-01 2022-06-30 0001719395 us-gaap:RestrictedStockUnitsRSUMember 2021-01-01 2021-06-30 0001719395 us-gaap:ConvertibleNotesPayableMember 2022-04-01 2022-06-30 0001719395 us-gaap:ConvertibleNotesPayableMember 2022-01-01 2022-06-30 0001719395 ear:SharesIssuablePursuantToEmployeeStockPurchasePlanMember 2021-04-01 2021-06-30 0001719395 ear:SharesIssuablePursuantToEmployeeStockPurchasePlanMember 2021-01-01 2021-06-30

 

 

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, 2022

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.)

2665 North First Street, Suite 300

San Jose, California

95134

(Address of principal executive offices)

(Zip Code)

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

 

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

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 3, 2022, the registrant had 39,385,438 shares of common stock, par value $0.0001 outstanding.

 

 

 


 

 

Table of Contents

 

 

 

 

Page

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

1

PART I.

FINANCIAL INFORMATION

 

3

Item 1.

Financial Statements

 

3

 

Condensed Consolidated Balance Sheets (Unaudited)

 

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

 

4

 

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

 

5

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

Item 2.

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

 

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

38

Item 4.

Controls and Procedures

 

38

PART II.

OTHER INFORMATION

 

40

Item 1.

Legal Proceedings

 

40

Item 1A.

Risk Factors

 

40

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

82

Item 3.

Defaults Upon Senior Securities

 

82

Item 4.

Mine Safety Disclosures

 

82

Item 5.

Other Information

 

82

Item 6.

Exhibits

 

83

 

SIGNATURES

 

85

 

 

 

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,” “forecast,” “goal,” “guidance,” “intend,” “likely,” “may,” “objective,” “plan,” “ongoing,” “positioned,” “possible,” “potential,” “predict,” “project,” “seek,” “shall,” “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:

 

the impact on our business of the civil settlement agreement with the U.S. government that resolved the investigation by the U.S. Department of Justice (the “DOJ”) related to insurance reimbursement claims submitted to various federal employee health plans under the Federal Employee Health Benefits (“FEHB”) program, and the extent to which we may be able to validate and establish processes to support the submission of claims for reimbursement to health plans under the FEHB program in the future, if at all, and our ability to obtain, maintain or increase insurance coverage for our hearing aids in the future;

 

the timing or results of claims audits and medical records reviews by third-party payors;

 

the expense, timing and outcome of the purported securities class action litigation alleging that certain of our disclosures about our business, operations and prospects, including reimbursements from third-party payors, violated the federal securities laws and the purported derivative action alleging that our directors breached their fiduciary duties by failing to implement and maintain an effective system of internal controls;

 

our ability to continue to maintain the listing of our securities on The Nasdaq Stock Market LLC (“Nasdaq”);

 

estimates of our future revenue and expenses, including the extent of any losses we incur from hearing aids delivered to customers where we have not submitted an insurance claim and may not receive payment;

 

estimates of our future capital needs and our ability to raise capital on favorable terms, if at all, including the timing of future capital requirements and the terms or timing of any future financings;

 

our expectations with regard to changes in the regulatory landscape for hearing aid devices, including the anticipated implementation of a pending over-the-counter (“OTC”) hearing aid regulatory framework and potential Medicare coverage for certain hearing aids, as well as any potential actions insurance providers may take following any regulatory changes;

 

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 obtain, maintain or increase insurance coverage of and reimbursement of insurance claims for Eargo hearing aids, which is substantially dependent on, among other things, the outcomes of our efforts to validate and establish processes to support the submission of claims for reimbursement from various federal health plans, any third-party payor audits and pending regulations;

 

our ability to release new hearing aids and the anticipated features of any such hearing aids and our ability to transition our existing customers to new hearing aids, including when older models are discontinued;

 

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 availability, supply, cost and inflationary pressures related to the component parts 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 commercialization and marketing capabilities and expectations;

 

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

1


 

 

 

the implementation of our business model and strategic plans for our business, 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 business in light of the civil settlement agreement with the U.S. government, third-party payor claims audits and medical records reviews, purported securities class action and derivative litigations, and pending regulations;

 

our ability to retain existing talent and attract new, highly skilled talent;

 

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

2


 

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,

 

 

 

2022

 

 

2021

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

106,630

 

 

$

110,500

 

Accounts receivable, net

 

 

12,235

 

 

 

12,547

 

Inventories

 

 

6,822

 

 

 

5,712

 

Prepaid expenses and other current assets

 

 

7,106

 

 

 

10,873

 

Total current assets

 

 

132,793

 

 

 

139,632

 

Operating lease right-of-use assets

 

 

6,568

 

 

 

7,165

 

Property and equipment, net

 

 

8,202

 

 

 

9,551

 

Intangible assets, net

 

 

1,372

 

 

 

1,681

 

Goodwill

 

 

873

 

 

 

873

 

Other assets

 

 

210

 

 

 

1,209

 

Total assets

 

$

150,018

 

 

$

160,111

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

8,371

 

 

$

9,053

 

Accrued expenses

 

 

8,767

 

 

 

9,235

 

Sales returns reserve

 

 

12,746

 

 

 

13,827

 

Settlement liability

 

 

 

 

 

34,372

 

Convertible notes

 

 

100,000

 

 

 

 

Long-term debt, current portion

 

 

 

 

 

3,333

 

Other current liabilities

 

 

1,815

 

 

 

1,813

 

Lease liability, current portion

 

 

702

 

 

 

750

 

Total current liabilities

 

 

132,401

 

 

 

72,383

 

Lease liability, noncurrent portion

 

 

6,373

 

 

 

6,640

 

Long-term debt, noncurrent portion

 

 

 

 

 

11,924

 

Total liabilities

 

 

138,774

 

 

 

90,947

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   as of June 30, 2022 and December 31, 2021, respectively; zero shares

   issued and outstanding as of June 30, 2022 and December 31, 2021,

   respectively

 

 

 

 

 

 

Common stock; $0.0001 par value; 300,000,000 shares authorized as of

   June 30, 2022 and 110,000,000 shares authorized as of December 31,

   2021, respectively; 39,385,438 and 39,307,093 shares issued and

   outstanding as of June 30, 2022 and December 31, 2021, respectively

 

 

4

 

 

 

4

 

Additional paid-in capital

 

 

431,141

 

 

 

425,972

 

Accumulated deficit

 

 

(419,901

)

 

 

(356,812

)

Total stockholders’ equity

 

 

11,244

 

 

 

69,164

 

Total liabilities and stockholders’ equity

 

$

150,018

 

 

$

160,111

 

 

 

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

3


 

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,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Revenue, net

 

$

7,247

 

 

$

22,883

 

 

$

16,423

 

 

$

44,931

 

Cost of revenue

 

 

4,733

 

 

 

6,462

 

 

 

10,224

 

 

 

12,759

 

Gross profit

 

 

2,514

 

 

 

16,421

 

 

 

6,199

 

 

 

32,172

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

3,879

 

 

 

5,148

 

 

 

9,726

 

 

 

9,926

 

Sales and marketing

 

 

12,734

 

 

 

21,903

 

 

 

26,024

 

 

 

38,758

 

General and administrative

 

 

17,344

 

 

 

8,432

 

 

 

32,278

 

 

 

15,919

 

Total operating expenses

 

 

33,957

 

 

 

35,483

 

 

 

68,028

 

 

 

64,603

 

Loss from operations

 

 

(31,443

)

 

 

(19,062

)

 

 

(61,829

)

 

 

(32,431

)

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

56

 

 

 

6

 

 

 

61

 

 

 

17

 

Interest expense

 

 

(285

)

 

 

(266

)

 

 

(549

)

 

 

(529

)

Loss on extinguishment of debt

 

 

(772

)

 

 

 

 

 

(772

)

 

 

 

Total other income (expense), net

 

 

(1,001

)

 

 

(260

)

 

 

(1,260

)

 

 

(512

)

Loss before income taxes

 

 

(32,444

)

 

 

(19,322

)

 

 

(63,089

)

 

 

(32,943

)

Income tax provision

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and comprehensive loss

 

$

(32,444

)

 

$

(19,322

)

 

$

(63,089

)

 

$

(32,943

)

Net loss attributable to common stockholders, basic and

   diluted

 

$

(32,444

)

 

$

(19,322

)

 

$

(63,089

)

 

$

(32,943

)

Net loss per share attributable to common stockholders,

   basic and diluted

 

$

(0.82

)

 

$

(0.50

)

 

 

(1.60

)

 

$

(0.85

)

Weighted-average shares used in computing net loss per share

   attributable to common stockholders, basic and diluted

 

 

39,364,299

 

 

 

38,806,861

 

 

 

39,343,955

 

 

 

38,546,557

 

 

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

4


 

Eargo, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except share amounts)

 

 

 

Common stock

 

 

Additional

paid-in

 

 

Accumulated

 

 

Total

stockholders’

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

deficit

 

 

equity

 

Balance December 31, 2021

 

 

39,307,093

 

 

$

4

 

 

$

425,972

 

 

$

(356,812

)

 

$

69,164

 

Stock-based compensation

 

 

 

 

 

 

 

 

3,024

 

 

 

 

 

 

3,024

 

Exercise of stock options

 

 

37,425

 

 

 

 

 

 

92

 

 

 

 

 

 

92

 

Restricted stock units cash settlement

 

 

 

 

 

 

 

 

(69

)

 

 

 

 

 

(69

)

Net loss and comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(30,645

)

 

 

(30,645

)

Balance March 31, 2022

 

 

39,344,518

 

 

 

4

 

 

 

429,019

 

 

 

(387,457

)

 

 

41,566

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,511

 

 

 

 

 

 

1,511

 

Exercise of stock options and release of

   restricted stock units

 

 

40,920

 

 

 

 

 

 

33

 

 

 

 

 

 

33

 

Tax withholdings on settlement of

   restricted stock units

 

 

 

 

 

 

 

 

(22

)

 

 

 

 

 

(22

)

Issuance costs

 

 

 

 

 

 

 

 

600

 

 

 

 

 

 

600

 

Net loss and comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(32,444

)

 

 

(32,444

)

Balance June 30, 2022

 

 

39,385,438

 

 

$

4

 

 

$

431,141

 

 

$

(419,901

)

 

$

11,244

 

 

 

 

 

Common stock

 

 

Additional

paid-in

 

 

Accumulated

 

 

Total

stockholders’

 

 

 

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

 

 

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

 

 

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

5


 

Eargo, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Six months ended June 30,

 

 

 

2022

 

 

2021

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(63,089

)

 

$

(32,943

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,713

 

 

 

1,424

 

Stock-based compensation

 

 

4,535

 

 

 

10,372

 

Non-cash interest expense and amortization of debt discount

 

 

209

 

 

 

208

 

Debt issuance costs from convertible notes

 

 

5,662

 

 

 

 

Loss on extinguishment of debt

 

 

772

 

 

 

 

Non-cash operating lease expense

 

 

597

 

 

 

554

 

Bad debt expense

 

 

429

 

 

 

594

 

Loss on disposal of property and equipment

 

 

28

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(117

)

 

 

(12,162

)

Inventories

 

 

(1,110

)

 

 

(463

)

Prepaid expenses and other current assets

 

 

4,763

 

 

 

834

 

Other assets

 

 

999

 

 

 

(24

)

Accounts payable

 

 

(3,294

)

 

 

942

 

Accrued expenses

 

 

(213

)

 

 

738

 

Sales returns reserve

 

 

(1,081

)

 

 

(479

)

Settlement liability

 

 

(34,372

)

 

 

 

Other current and noncurrent liabilities

 

 

2

 

 

 

(404

)

Operating lease liabilities

 

 

(315

)

 

 

(597

)

Net cash used in operating activities

 

 

(82,882

)

 

 

(31,406

)

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,056

)

 

 

(546

)

Capitalized software development costs

 

 

(296

)

 

 

(2,418

)

Cash paid for acquisition of business

 

 

 

 

 

(2,434

)

Net cash used in investing activities

 

 

(2,352

)

 

 

(5,398

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from stock options exercised

 

 

125

 

 

 

1,299

 

Debt repayments

 

 

(16,238

)

 

 

 

Proceeds from employee stock purchase plan purchases

 

 

 

 

 

2,674

 

Proceeds from issuance of convertible notes, net of issuance costs paid to lender

 

 

99,903

 

 

 

 

Payment of convertible notes issuance costs to third parties

 

 

(2,335

)

 

 

 

Payment of taxes related to net share settlement of restricted stock units

 

 

(22

)

 

 

 

Restricted stock units settled in cash

 

 

(69

)

 

 

 

Net cash provided by financing activities

 

 

81,364

 

 

 

3,973

 

Net decrease in cash and cash equivalents

 

 

(3,870

)

 

 

(32,831

)

Cash and cash equivalents at beginning of period

 

 

110,500

 

 

 

212,185

 

Cash and cash equivalents at end of period

 

$

106,630

 

 

$

179,354

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment and capitalized software costs in accounts payable and accrued liabilities

 

$

84

 

 

$

26

 

Stock-based compensation included in capitalized software costs

 

$

 

 

$

596

 

Convertible preferred stock issuance costs included in accounts payable

 

$

 

 

$

600

 

Acquisition liability in accrued liabilities

 

$

 

 

$

429

 

 

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

 

6


 

Eargo, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

1. Description of business and other matters

Eargo, Inc. (the “Company”) is a medical device company dedicated to improving the quality of life of people with hearing loss. 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.

DOJ investigation and settlement and claims audits

On September 21, 2021, the Company was informed that it was the target of a criminal investigation by the U.S. Department of Justice (the “DOJ”) related to insurance reimbursement claims the Company submitted on behalf of its customers covered by various federal employee health plans under the Federal Employee Health Benefits (“FEHB”) program, which is administered by the Office of Personnel Management (the “OPM”). The investigation also pertained to Eargo’s role in customer reimbursement claim submissions to federal employee health plans (collectively, the “DOJ investigation”). Additionally, the third-party payor with whom the Company historically had the largest volume, which is one of the carriers contracted with the OPM under the FEHB program (“largest third-party payor”), conducted an audit of insurance reimbursement claims (“claims”) submitted by the Company (the “Primary Audit”), which included a review of medical records. The Company was informed by the third-party payor conducting the Primary Audit that the DOJ was the principal contact related to the subject matter of the Primary Audit. On January 4, 2022, the DOJ confirmed to the Company that the investigation had been referred to the Civil Division of the DOJ and the U.S. Attorney’s Office for the Northern District of Texas and the criminal investigation was no longer active.

On April 29, 2022, the Company entered into a civil settlement agreement with the U.S. government that resolved the DOJ investigation related to the Company’s role in customer reimbursement claim submissions to various federal employee health plans under the FEHB program. The settlement agreement provided for the Company’s payment of approximately $34.4 million to the U.S. government and resolved allegations that the Company submitted or caused the submission of claims for payment to the FEHB program using unsupported hearing loss-related diagnostic codes.

From the time the Company learned of the DOJ investigation and until December 8, 2021, the Company continued to process orders for customers with potential insurance benefits (including FEHB program members) but suspended all claims submission activities and has offered affected customers (i.e., customers using insurance benefits as a method of direct payment for transactions prior to December 8, 2021) the option to return their hearing aids or purchase their hearing aids without the use of their insurance benefits in case their claim is denied or ultimately not submitted by the Company to their insurance plan for payment (the “extended right of return”).

Beginning on December 8, 2021, the Company made the decision to stop accepting insurance benefits as a method of direct payment and it is uncertain when, if ever, the Company will resume accepting insurance benefits as a method of direct payment. While the Company intends to work with the government and third-party payors with the objective of validating and establishing processes to support any future claims that it may submit for reimbursement, the Company may not be able to arrive at acceptable processes or submit any future claims.

Total life-to-date payments the Company has received through June 30, 2022 from the government in relation to claims submitted under the FEHB program, net of any product returns and associated refunds, were approximately $44 million, which is unchanged from December 31, 2021. As discussed further in Note 5, based on the settlement agreement with the U.S. government, the Company has recorded a settlement liability of $34.4 million as of December 31, 2021. The settlement amount was treated as consideration payable to a customer and was recorded as a reduction of revenue in the third quarter of 2021. On May 2, 2022, the Company paid the settlement amount.

The Company determined that customer transactions using insurance benefits as a method of direct payment occurring subsequent to learning of the DOJ investigation on September 21, 2021 did not meet the criteria for revenue recognition under Accounting Standards Codification (“ASC”) 606. As such, the Company did not recognize revenue for shipments to customers with potential insurance benefits, substantially all of whom were covered under the FEHB program, subsequent to that date.

The Company estimated that a majority of customers with unsubmitted claims will choose to return the hearing aid system if their insurance provider denies their claim or the claim is ultimately not submitted by the Company for payment, resulting in an increase in expected product returns from such transactions that occurred prior to September 21, 2021 that was recorded during the year ended December 31, 2021. Of the $12.7 million sales returns reserve recorded as of June 30, 2022, $11.3 million relates to unsubmitted claims that are included in accounts receivable, net. Returns associated with unsubmitted claims will reduce the sales returns reserve, with a corresponding reduction in the related accounts receivable at the time the product is returned.

Further, the Company also estimated that, in addition to the customers who choose to return their hearing aid systems, a significant number of customers whose claims are denied by insurance providers or not submitted by the Company for payment may not pay for or return the hearing aid system, resulting in bad debt expense that was recorded during the year ended December 31, 2021.

7


 

Notwithstanding the settlement, the Company remains subject to prepayment review of claims by its largest third-party payor before any insurance payments are made. The Company does not intend to submit claims through the FEHB program until it is able to establish processes with applicable third-party payors to support the submission of these claims, and the Company may be unable to do so.

Liquidity and going concern

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business. 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, 2022, the Company had cash and cash equivalents of $106.6 million and an accumulated deficit of $419.9 million.

In June 2022, the Company entered into a note purchase agreement (“Note Purchase Agreement”) pursuant to which it agreed to issue and sell up to $125.0 million in senior secured convertible notes (the “Notes”) of the Company (the “Note Transaction”), of which $100.0 million were issued as of June 30, 2022 and will mature in June 2023. Further, the Company’s future operating requirements will be substantial and it will need to raise significant additional resources to fund its operations through equity or debt financing, or some variation thereof. The Company is currently exploring fundraising opportunities to meet these capital requirements, including conducting a rights offering (“Rights Offering”) under the terms of the Note Transaction documents. If the Company is unable to raise additional funding to meet its operational needs, it will be forced to limit or cease its operations. The Note Transaction and Rights Offering are discussed further in Note 6.

The Company believes that, without the completion of the Rights Offering or an alternative future financing, its current resources are insufficient to satisfy its obligations as they become due within one year after the date that the financial statements are issued. The negative cash flows and current lack of financial resources of the Company raise substantial doubt as to the Company’s ability to continue as a going concern. Additionally, if the Company is unable to complete the Rights Offering and all of the Notes remain outstanding, it will have insufficient funds to repay the Notes at their maturity without additional capital.

The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainty.

While the extent to which the Company is able to validate and establish processes to support the submission of claims for reimbursement to health plans, including those under the FEHB program, if at all, in the future, and the future impacts of the anticipated implementation of a pending over-the-counter (“OTC”) hearing aid regulatory framework (which may lead insurance providers to take actions limiting the Company’s ability to access insurance coverage and may also generally result in additional compliance or other regulatory requirements for the Company) is difficult to assess or predict at this time, since the announcement of the DOJ investigation, there has been and may continue to be a significant reduction in shipments, revenue and gross margin, which could negatively impact the Company’s liquidity and working capital, including by impacting its ability to access additional capital.

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 GAAP and applicable rules and regulations of the Securities and Exchange Commission (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, include all adjustments of a normal recurring nature necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows. 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, 2021, filed with the SEC on May 13, 2022.

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, the sales returns reserve, the present value of lease liabilities, the fair value of equity securities, the fair value of financial instruments, the allowance for credit losses, 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, legal and other

8


 

contingencies, 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, 2022, 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 for the policy titled “Convertible notes - fair value option” below.

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, 2022, the Company has not experienced any losses on its deposit accounts and money market accounts. As of June 30, 2022, 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 95% and 93% of the Company’s gross accounts receivable as of June 30, 2022 and December 31, 2021, respectively, were for customers with insurance benefits, substantially all of whom were covered under the FEHB program. Furthermore, approximately 92% and 90% of the Company’s gross accounts receivable as of June 30, 2022 and December 31, 2021, respectively, were related to shipments of Eargo hearing aids to customers insured under a single insurance plan whose claims are processed through the Company’s largest third-party payor, which conducted the Primary Audit. During the Primary Audit, certain claims with a service date after March 1, 2021 were not submitted for reimbursement and, as of June 30, 2022, have not yet and may never be submitted for reimbursement. The gross accounts receivable balance as of June 30, 2022 is primarily attributable to such claims. We remain subject to a prepayment review of claims by the payor who conducted the Primary Audit.

Please see caption “DOJ investigation and settlement and claims audits” in Note 1 for more information regarding the DOJ investigation and claims audits.

Convertible notes - fair value option

As permitted under ASC 825, the Company has elected the fair value option to account for the Notes that were issued in June 2022, discussed further at Note 6. In accordance with ASC 825, the Company recorded the Notes at fair value with changes in fair value recorded as a component of other income (expense), net in the condensed consolidated statements of operations and comprehensive loss with the exception of changes in fair value due to instrument-specific credit risk, which are recorded as a component of other comprehensive income in the condensed consolidated statements of operations and comprehensive loss. Interest expense related to the Notes is included in the changes in fair value. As a result of applying the fair value option, direct costs and fees related to the Notes were expensed as incurred as a component of general and administrative expenses and were not deferred.

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’s 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 orders involving insurance payors, the Company validates customer eligibility and potential reimbursement amounts prior to shipping the product. If the criteria to establish a contract with a customer is not met, revenue is not recognized in accordance with ASC 606.

9


 

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 and the extended right of return offered for certain shipments involving insurance payors prior to December 8, 2021 (at which time the Company ceased accepting insurance benefits as a method of direct payment). Please see caption “DOJ investigation and settlement and claims audits” in Note 1 for more information regarding the extended right of return. To estimate product returns, the Company analyzes various factors, including historical return levels, current economic trends, and insurance coverage. 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. Consideration paid or payable to a customer that is not for a distinct good or service is accounted for as a reduction of the transaction price and recorded as a reduction in revenue in the period it becomes payable.

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 provided all other revenue recognition criteria have been met.

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.

Recently adopted accounting pronouncements

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. The Company adopted this standard in the fiscal year beginning January 1, 2022. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), which is intended to simplify the accounting for convertible debt instruments and convertible preferred stock. This standard removes the existing guidance in ASC 470-20 that requires companies to account for cash conversion features and beneficial conversion features in equity separately from the host convertible debt or preferred stock. The Company adopted this standard in the fiscal year beginning January 1, 2022. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

10


 

3. Fair value measurements

The following table summarizes the Company’s financial assets and liabilities that were measured at fair value on a recurring basis by level within the fair value hierarchy:

 

 

June 30, 2022

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible notes

 

$

 

 

$

 

 

$

100,000

 

 

$

100,000

 

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

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 Company elected the fair value option to account for the Notes (see Note 6). The fair value of the Notes was determined based on significant inputs not observable in the market, which represents a level 3 measurement within the fair value hierarchy.

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,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Raw materials

 

$

865

 

 

$

1,905

 

Finished goods

 

 

5,957

 

 

 

3,807

 

Total inventories

 

$

6,822

 

 

$

5,712

 

Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

 

 

June 30,

 

 

December 31,

 

 

 

2022