10-Q
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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 September 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

27-3879804

(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.

 

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 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

 

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 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;

1


 

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.

2


 

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.

3


 

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.

4


 

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.

5


 

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

 

 

(