SEC Filing | Eargo, Inc.

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10-Q

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 September 30, 2022


☐	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	27-3879804
(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.

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 November 2, 2022, the registrant had 39,411,069 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 (Deficit) (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	40
Item 4.	Controls and Procedures	40
PART II.	OTHER INFORMATION	42
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	88
Item 3.	Defaults Upon Senior Securities	89
Item 4.	Mine Safety Disclosures	89
Item 5.	Other Information	89
Item 6.	Exhibits	90
	SIGNATURES	91

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 additional processes to support the submission of claims for reimbursement to health plans under the FEHB program, 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 and level of participation in our rights offering and the related conversion and repayment of our convertible notes, 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 implementation of the United States Food and Drug Administration’s new over-the-counter (“OTC”) hearing aid regulatory framework and any potential Medicare coverage for certain hearing aids, as well as any potential actions insurance providers may take following such 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 additional 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;

•

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.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Eargo, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)


	September 30,			December 31,
	2022			2021
ASSETS
Current assets:
Cash and cash equivalents	$	88,075		$	110,500
Accounts receivable, net		1,156			12,547
Inventories		4,953			5,712
Prepaid expenses and other current assets		5,058			10,873
Total current assets		99,242			139,632
Operating lease right-of-use assets		6,337			7,165
Property and equipment, net		8,691			9,551
Intangible assets, net		1,217			1,681
Goodwill		873			873
Other assets		210			1,209
Total assets	$	116,570		$	160,111
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	6,396		$	9,053
Accrued expenses		10,966			9,235
Sales returns reserve		1,790			13,827
Settlement liability		—			34,372
Convertible notes		125,000			—
Long-term debt, current portion		—			3,333
Other current liabilities		1,902			1,813
Lease liability, current portion		665			750
Total current liabilities		146,719			72,383
Lease liability, noncurrent portion		6,175			6,640
Long-term debt, noncurrent portion		—			11,924
Total liabilities		152,894			90,947
Commitments and contingencies (Note 5)
Stockholders’ equity (deficit):
Preferred stock, $0.0001 par value per share; 5,000,000 shares authorized as of September 30, 2022 and December 31, 2021, respectively; zero shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively		—			—
Common stock; $0.0001 par value; 300,000,000 and 110,000,000 shares authorized as of September 30, 2022 and December 31, 2021, respectively; 39,411,069 and 39,307,093 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively		4			4
Additional paid-in capital		434,200			425,972
Accumulated deficit		(470,528	)		(356,812	)
Total stockholders’ equity (deficit)		(36,324	)		69,164
Total liabilities and stockholders’ equity (deficit)	$	116,570		$	160,111

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

Eargo, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except share and per share amounts)


	Three months ended September 30,						Nine months ended September 30,
	2022			2021			2022			2021
Revenue, net	$	7,908		$	(22,869	)	$	24,331		$	22,062
Cost of revenue		6,007			7,552			16,231			20,311
Gross profit (loss)		1,901			(30,421	)		8,100			1,751
Operating expenses:
Research and development		4,963			7,296			14,689			17,222
Sales and marketing		11,282			24,444			37,306			63,202
General and administrative		11,702			16,887			43,980			32,806
Total operating expenses		27,947			48,627			95,975			113,230
Loss from operations		(26,046	)		(79,048	)		(87,875	)		(111,479	)
Other income (expense), net:
Interest income		419			2			480			19
Interest expense		—			(269	)		(549	)		(798	)
Change in fair value of convertible notes		(25,000	)		—			(25,000	)		—
Loss on extinguishment of debt		—			—			(772	)		—
Total other income (expense), net		(24,581	)		(267	)		(25,841	)		(779	)
Loss before income taxes		(50,627	)		(79,315	)		(113,716	)		(112,258	)
Income tax provision		—			—			—			—
Net loss and comprehensive loss	$	(50,627	)	$	(79,315	)	$	(113,716	)	$	(112,258	)
Net loss attributable to common stockholders, basic and diluted	$	(50,627	)	$	(79,315	)	$	(113,716	)	$	(112,258	)
Net loss per share attributable to common stockholders, basic and diluted	$	(1.29	)	$	(2.02	)	$	(2.89	)	$	(2.90	)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted		39,397,347			39,195,211			39,361,948			38,765,151

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

Eargo, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)

(In thousands, except share amounts)


	Common stock				Additional paid-in			Accumulated			Total stockholders’
	Shares		Amount		capital			deficit			equity (deficit)
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
Stock-based compensation		—		—		3,057			—			3,057
Exercise of stock options and release of restricted stock units		25,631		—		9			—			9
Tax withholdings on settlement of restricted stock units		—		—		(7	)		—			(7	)
Net loss and comprehensive loss		—		—		—			(50,627	)		(50,627	)
Balance September 30, 2022		39,411,069	$	4	$	434,200		$	(470,528	)	$	(36,324	)


	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
Stock-based compensation		—		—		5,630		—			5,630
Exercise of stock options and release of restricted stock units		128,877		—		353		—			353
Net loss and comprehensive loss		—		—		—		(79,315	)		(79,315	)
Balance September 30, 2021		39,270,448	$	4	$	413,889	$	(311,316	)	$	102,577

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

Eargo, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


	Nine months ended September 30,
	2022			2021
Operating activities:
Net loss	$	(113,716	)	$	(112,258	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		4,023			2,780
Stock-based compensation		7,592			15,850
Non-cash interest expense and amortization of debt discount		209			314
Debt issuance costs from convertible notes		5,662			—
Change in fair value of convertible notes		25,000			—
Loss on extinguishment of debt		772			—
Non-cash operating lease expense		828			621
Bad debt expense		524			9,331
Loss on disposal of property and equipment		—			155
Changes in operating assets and liabilities:
Accounts receivable		10,867			(20,498	)
Inventories		759			(3,535	)
Prepaid expenses and other current assets		6,869			1,745
Other assets		999			(148	)
Accounts payable		(2,366	)		5,175
Accrued expenses