QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
(Address of principal executive offices) |
(Zip Code) |
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer |
☒ | Smaller reporting company | ||||
Emerging growth company |
Page |
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1 |
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2 |
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PART I. |
4 |
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Item 1. |
4 |
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4 |
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5 |
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6 |
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8 |
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9 |
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Item 2. |
25 |
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Item 3. |
42 |
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Item 4. |
43 |
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PART II. |
45 |
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Item 1. |
45 |
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Item 1A. |
45 |
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Item 2. |
81 |
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Item 3. |
82 |
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Item 4. |
82 |
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Item 5. |
82 |
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Item 6. |
83 |
• | 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”), including our ability to execute a plan to regain compliance with the Nasdaq requirements regarding the timely filing of periodic financial reports with the Securities and Exchange Commission (the “SEC”); |
• | 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 |
• | 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; |
• | 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. |
September 30, |
December 31, |
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2021 |
2020 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ | $ | ||||||
Accounts receivable, net |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Operating lease right-of-use |
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Property and equipment, net |
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Intangible assets, net |
— | |||||||
Goodwill |
— | |||||||
Other assets |
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Total assets |
$ | $ | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
$ | $ | ||||||
Accrued expenses |
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Sales returns reserve |
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Settlement liability |
— | |||||||
Long-term debt, current portion |
— | |||||||
Other current liabilities |
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Deferred revenue, current portion |
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Lease liability, current portion |
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Total current liabilities |
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Lease liability, noncurrent portion |
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Long-term debt, noncurrent portion |
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Total liabilities |
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Commitments and contingencies (Note 6) |
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Stockholders’ equity: |
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Preferred stock, $ |
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Common stock; $ |
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Additional paid-in capital |
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Accumulated deficit |
( |
) | ( |
) | ||||
Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
$ | $ | ||||||
Three months ended September 30, |
Nine months ended September 30, |
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2021 |
2020 |
2021 |
2020 |
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Revenue, net |
$ | ( |
) | $ | $ | $ | ||||||||||
Cost of revenue |
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Gross profit (loss) |
( |
) | ||||||||||||||
Operating expenses: |
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Research and development |
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Sales and marketing |
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General and administrative |
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Total operating expenses |
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Loss from operations |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Other income (expense), net: |
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Interest income |
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Interest expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Other income (expense), net |
— | ( |
) | — | ( |
) | ||||||||||
Loss on extinguishment of debt |
— | ( |
) | — | ( |
) | ||||||||||
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Total other income (expense), net |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
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Loss before income taxes |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Income tax provision |
— | — | — | — | ||||||||||||
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Net loss and comprehensive loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
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Net income (loss) attributable to common stockholders, basic and diluted |
$ | ( |
) | $ | — | $ | ( |
) | $ | ( |
) | |||||
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Net income (loss) per share attributable to common stockholders, basic and diluted |
$ | ( |
) | $ | — | $ | ( |
) | $ | ( |
) | |||||
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Weighted-average shares used in computing net income (loss) per share attributable to common stockholders, basic and diluted |
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Convertible preferred stock |
Common stock |
Additional paid-in |
Accumulated |
Total stockholders’ |
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Shares |
Amount |
Shares |
Amount |
capital |
deficit |
equity |
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Balance December 31, 2020 |
— | $ | — | $ | $ | $ | ( |
) | $ | |||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
Exercise of stock options |
— | — | — | — | ||||||||||||||||||||||||
Net loss and comprehensive loss |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
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Balance March 31, 2021 |
— | — | ( |
) | ||||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
Exercise of stock options and release of restricted stock units |
— | — | — | — | ||||||||||||||||||||||||
Issuance of common stock in connection with employee stock purchase plan |
— | — | — | — | ||||||||||||||||||||||||
Net loss and comprehensive loss |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
|
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Balance June 30, 2021 |
— | — | ( |
) | ||||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
Exercise of stock options and release of restricted stock units |
— | — | — | — | ||||||||||||||||||||||||
Net loss and comprehensive loss |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
|
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Balance September 30, 2021 |
— | $ | — | $ | $ | $ | ( |
) | $ | |||||||||||||||||||
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Convertible preferred stock |
Common stock |
Additional paid-in |
Accumulated |
Total stockholders’ |
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Shares |
Amount |
Shares |
Amount |
capital |
deficit |
deficit |
||||||||||||||||||||||
Balance December 31, 2019 |
$ | $ | — | $ | $ | ( |
) | $ | ( |
) | ||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
Exercise of stock options |
— | — | — | — | ||||||||||||||||||||||||
Net loss and comprehensive loss |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
Balance March 31, 2020 |
— | ( |
) | ( |
) | |||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
Exercise of stock options |
— | — | — | — | ||||||||||||||||||||||||
Net loss and comprehensive loss |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
Balance June 30, 2020 |
— | ( |
) | ( |
) | |||||||||||||||||||||||
Issuance of Series E convertible preferred stock, net of issuance costs of $ |
— | — | — | — | — | |||||||||||||||||||||||
Issuance of Series E convertible preferred stock, upon extinguishment of convertible notes (Note 7) |
— | — | — | — | — | |||||||||||||||||||||||
Gain on extinguishment of Series C and Series C-1 convertible preferred stock |
— | ( |
) | — | — | — | ||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
Exercise of stock options |
— | — | — | — | ||||||||||||||||||||||||
Net loss and comprehensive loss |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
Balance September 30, 2020 |
$ | $ | — | $ | $ | ( |
) | $ | ( |
) | ||||||||||||||||||
Nine months ended September 30, |
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2021 |
2020 |
|||||||
Operating activities: |
||||||||
Net loss |
$ | ( |
) | $ | ( |
) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
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Stock-based compensation |
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Non-cash interest expense and amortization of debt discount |
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Non-cash operating lease expense |
||||||||
Bad debt expense |
||||||||
Loss on disposal of property and equipment |
— | |||||||
Loss on extinguishment of debt |
— | |||||||
Change in fair value of financial instruments |
— | |||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
( |
) | ( |
) | ||||
Inventories |
( |
) | ( |
) | ||||
Prepaid expenses and other current assets |
||||||||
Other assets |
( |
) | ||||||
Accounts payable |
||||||||
Accrued expenses |
||||||||
Sales returns reserve |
|
|
|
|
|
|
( |
) |
Settlement liability |
— | |||||||
Other current liabilities |
||||||||
Deferred revenue |
( |
) | ( |
) | ||||
Operating lease liabilities |
( |
) | ( |
) | ||||
Other liabilities |
— | ( |
) | |||||
|
|
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|
|||||
Net cash used in operating activities |
( |
) | ( |
) | ||||
|
|
|
|
|||||
Investing activities: |
||||||||
Purchases of property and equipment |
( |
) | ( |
) | ||||
Capitalized software development costs |
( |
) | ( |
) | ||||
Cash paid for acquisition of business |
( |
) | — | |||||
|
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|||||
Net cash used in investing activities |
( |
) | ( |
) | ||||
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|
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Financing activities: |
||||||||
Proceeds from stock options exercised |
||||||||
Proceeds from employee stock purchase plan purchases |
— | |||||||
Proceeds from debt financing |
— | |||||||
Proceeds from convertible preferred stock issuance, net of issuance costs |
— | |||||||
Proceeds from issuance of convertible notes, net of issuance costs |
— | |||||||
Proceeds from PPP loan |
— | |||||||
Repayment of PPP loan |
— | ( |
) | |||||
Debt repayments |
— | ( |
) | |||||
Payments of deferred offering costs |
— | ( |
) | |||||
|
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Net cash provided by financing activities |
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|||||
Net increase (decrease) in cash and cash equivalents |
( |
) | ||||||
Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
$ | $ | ||||||
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Supplemental disclosure of cash flow information: |
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Cash paid for taxes |
$ | $ | — | |||||
|
|
|
|
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Cash paid for interest |
$ | $ | ||||||
|
|
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|
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Non-cash operating activities: |
||||||||
Lease liability obtained in exchange for right-of-use |
$ | $ | ||||||
|
|
|
|
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Non-cash investing and financing activities: |
||||||||
Property and equipment and capitalized software costs in accounts payable and accrued liabilities |
$ | $ | ||||||
|
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|
|
|||||
Stock-based compensation included in capitalized software costs |
$ | $ | — | |||||
|
|
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|
|||||
Convertible preferred stock issuance costs included in accounts payable |
$ | $ | ||||||
|
|
|
|
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Acquisition liability in accrued liabilities |
$ | $ | — | |||||
|
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|
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Deferred offering costs in accounts payable and accrued liabilities |
$ | — | $ | |||||
|
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Derivative liability in connection with issuance of convertible promissory notes on issuance |
$ | — | $ | |||||
|
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|||||
Issuance of Series E convertible preferred stock upon extinguishment of convertible notes |
$ | — | $ | |||||
|
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|
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Settlement of derivative liability in connection with extinguishment of convertible notes |
$ | — | $ | |||||
|
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Issuance of convertible preferred stock warrants in connection with debt financing |
$ | — | $ | |||||
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Total |
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(in thousands) |
||||
Balance December 31, 2020 |
$ | — | ||
Addition due to business acquisition |
||||
Balance September 30, 2021 |
$ | |||
September 30, |
December 31, |
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2021 |
2020 |
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(in thousands) |
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Raw materials |
$ | $ | ||||||
Finished goods |
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Total inventories |
$ | $ | ||||||
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|
September 30, |
December 31, |
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2021 |
2020 |
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(in thousands) |
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Capitalized software |
$ | $ | ||||||
Tools and lab equipment |
||||||||
Furniture and fixtures |
||||||||
Leasehold improvements |
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Computer and equipment |
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|
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Less accumulated depreciation and amortization |
( |
) | ( |
) | ||||
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|
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Total property and equipment, net |
$ | $ | ||||||
|
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|
Gross carrying value |
Accumulated amortization |
Net carrying value |
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(in thousands) |
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Developed technologies |
$ | $ | $ | |||||||||
Other |
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Total intangible assets, net |
$ | $ | $ | |||||||||
Amount |
||||
(in thousands) |
||||
Remainder of 2021 |
$ | |||
2022 |
||||
2023 |
||||
2024 |
||||
2025 |
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Total |
$ | |||
September 30, |
December 31, |
|||||||
2021 |
2020 |
|||||||
(in thousands) |
||||||||
Accrued compensation |
$ |
$ |
||||||
Accrued warranty reserve |
||||||||
Refunds due to customers |
||||||||
Accrued vendor costs |
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Other accruals |
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Total accrued expenses |
$ | $ | ||||||
Nine months ended September 30, |
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2021 |
2020 |
|||||||
(in thousands) |
||||||||
Sales returns reserve, beginning balance |
$ | $ | ||||||
Reduction of revenue |
||||||||
Utilization of sales returns reserve |
( |
) | ( |
) | ||||
Sales returns reserve, ending balance |
$ | $ | ||||||
Nine months ended September 30, |
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2021 |
2020 |
|||||||
(in thousands) |
||||||||
Allowance for doubtful accounts, beginning balance |
$ | $ | ||||||
Charged to expense |
||||||||
Accounts written off, net of recoveries |
( |
) | ( |
) | ||||
Allowance for doubtful accounts, ending balance |
$ | $ | ||||||
Nine months ended September 30, |
||||||||
2021 |
2020 |
|||||||
(in thousands) |
||||||||
Accrued warranty reserve, beginning balance |
$ | $ | ||||||
Charged to cost of revenue |
||||||||
Utilization of accrued warranty reserve |
( |
) | ( |
) | ||||
Accrued warranty reserve, ending balance |
$ | $ | ||||||
(in thousands) |
||||
Goodwill |
$ | |||
Intangible assets |
||||
Total fair value of consideration |
$ | |||
Operating leases |
||||
(in thousands) |
||||
Remainder of 2021 |
$ | |||
2022 |
||||
2023 |
||||
2024 |
||||
2025 |
||||
Thereafter |
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|
|
|||
Total minimum future lease payments |
||||
Present value adjustment for minimum lease commitments |
( |
) | ||
|
|
|||
Total lease liability |
$ | |||
|
|
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
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(in thousands) |
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Cost of revenue |
$ | $ | $ | $ | ||||||||||||
Research and development |
||||||||||||||||
Sales and marketing |
||||||||||||||||
General and administrative |
||||||||||||||||
Total stock-based compensation |
$ | $ | $ | $ | ||||||||||||
Number of shares |
Weighted average exercise price |
Weighted average remaining contractual term |
Aggregate intrinsic value |
|||||||||||||
(in years) |
(in thousands) |
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Balance December 31, 2020 |
$ | $ | ||||||||||||||
Grants |
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Exercises |
( |
) | ||||||||||||||
Cancelled/forfeited |
( |
) | ||||||||||||||
Balance September 30, 2021 |
$ | $ | ||||||||||||||
Vested and exercisable at September 30, 2021 |
$ | $ | ||||||||||||||
Nine months ended September 30, | ||||
Valuation assumptions: |
2021 |
2020 | ||
Expected volatility |
||||
Expected term |
- years | |||
Risk-free interest rate |
||||
Dividend yield |
— | — |
Number of shares |
Weighted average grant date fair value per share |
|||||||
Balance December 31, 2020 |
$ | |||||||
RSUs granted |
||||||||
RSUs vested |
( |
) | ||||||
RSUs forfeited |
( |
) | ||||||
Balance September 30, 2021 |
$ | |||||||
Nine months ended | ||
Valuation assumptions: |
September 30, 2021 | |
Expected volatility |
||
Expected term |
||
Risk-free interest rate |
||
Dividend yield |
— |
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
Convertible preferred stock |
— | — | ||||||||||||||
Common stock options issued and outstanding |
||||||||||||||||
Restricted stock units |
— | — | ||||||||||||||
Shares issuable pursuant to ESPP |
— | — | ||||||||||||||
Convertible preferred stock warrants |
— | — | ||||||||||||||
|
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|
|
|
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|
|
|||||||||
Total |
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Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
(in thousands, except share and per share amounts) |
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Numerator: |
||||||||||||||||
Net loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Gain on extinguishment of Series C and Series C-1 convertible preferred stock |
— | — | ||||||||||||||
Undistributed earnings allocated to participating securities |
— | ( |
) | — | — | |||||||||||
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Net income (loss) attributable to common stockholders, basic and diluted |
$ | ( |
) | $ | — | $ | ( |
) | $ | ( |
) | |||||
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Denominator: |
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Weighted-average shares used in computing net income (loss) per share attributable to common stockholders, basic and diluted |
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Net income (loss) per share attributable to common stockholders, basic and diluted |
$ | ( |
) | $ | — | $ | ( |
) | $ | ( |
) | |||||
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• | We suspended our practice of granting equity awards, except for new restricted stock unit grants that we have the option to settle in cash at the time of vesting, suspended our 2020 Employee Stock Purchase Plan (“ESPP”) and deferred the settlement of outstanding restricted stock units (“RSUs”), in each case effective as of November 9, 2021 (collectively, the “employee equity actions”). |
• | Our Board of Directors suspended the non-employee director compensation program with respect to the option awards that would otherwise have been awarded to non-employee directors automatically on the date of our annual meeting of stockholders held on November 9, 2021. |
• | On December 7, 2021, we announced a plan to reduce our employee workforce to streamline our organization in response to declines in customer orders since we announced the investigation of the Company by the DOJ. We substantially completed the employee workforce reduction during the fourth quarter of 2021, resulting in a reduction of approximately 27% of our employee workforce, or approximately 90 people. |
• | Gross systems shipped. |
• | Sales returns rates. |
Three months ended |
||||||||||||||||||||||||||||
|
March 31, 2020 |
June 30, 2020 |
September 30, 2020 |
December 31, 2020 |
March 31, 2021 |
June 30, 2021 |
September 30, 2021 |
|||||||||||||||||||||
Gross systems shipped |
7,030 | 9,040 | 10,077 | 12,096 | 11,704 | 12,548 | 13,117 | |||||||||||||||||||||
Sales returns rate |
28.2 | % | 27.1 | % | 25.2 | % | 24.3 | % | 23.2 | % | 24.1 | % | 46.4 | % |
Three months ended September 30, |
Change |
|||||||||||||||
(dollars in thousands) |
2021 |
2020 |
Amount |
% |
||||||||||||
Revenue, net |
$ | (22,869 | ) | $ | 18,186 | $ | (41,055 | ) | (225.8 | )% | ||||||
Cost of revenue |
7,552 | 5,434 | 2,118 | 39.0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit (loss) |
(30,421 | ) | 12,752 | (43,173 | ) | (338.6 | ) | |||||||||
Operating expenses: |
||||||||||||||||
Research and development |
7,296 | 2,871 | 4,425 | 154.1 | ||||||||||||
Sales and marketing |
24,444 | 12,354 | 12,090 | 97.9 | ||||||||||||
General and administrative |
16,887 | 5,163 | 11,724 | 227.1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
48,627 | 20,388 | 28,239 | 138.5 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss from operations |
(79,048 | ) | (7,636 | ) | (71,412 | ) | 935.2 | |||||||||
Other income (expense), net: |
||||||||||||||||
Interest income |
2 | 3 | (1 | ) | (33.3 | ) | ||||||||||
Interest expense |
(269 | ) | (279 | ) | 10 | (3.6 | ) | |||||||||
Other income (expense), net |
— | (187 | ) | 187 | (100.0 | ) | ||||||||||
Loss on extinguishment of debt |
— | (1,627 | ) | 1,627 | (100.0 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other income (expense), net |
(267 | ) | (2,090 | ) | 1,823 | (87.2 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss before income taxes |
(79,315 | ) | (9,726 | ) | (69,589 | ) | 715.5 | |||||||||
Income tax provision |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss and comprehensive loss |
$ | (79,315 | ) | $ | (9,726 | ) | $ | (69,589 | ) | 715.5 | % | |||||
|
|
|
|
|
|
|
|
Three months ended September 30, |
Change |
|||||||||||||||
(dollars in thousands) |
2021 |
2020 |
Amount |
% |
||||||||||||
Revenue, net |
$ | (22,869 | ) | $ | 18,186 | $ | (41,055 | ) | (225.8 | )% | ||||||
|
|
|
|
|
|
|
|
Three months ended September 30, |
Change |
|||||||||||||||
(dollars in thousands) |
2021 |
2020 |
Amount |
% |
||||||||||||
Cost of revenue |
$ | 7,552 | $ | 5,434 | $ | 2,118 | 39.0 | % | ||||||||
Gross profit (loss) |
(30,421 | ) | 12,752 | (43,173 | ) | (338.6 | )% | |||||||||
Gross margin |
* | 70.1 | % |
* | Not meaningful |
Three months ended September 30, |
Change |
|||||||||||||||
(dollars in thousands) |
2021 |
2020 |
Amount |
% |
||||||||||||
Research and development |
$ | 7,296 | $ | 2,871 | $ | 4,425 | 154.1 | % | ||||||||
|
|
|
|
|
|
|
|
Three months ended September 30, |
Change |
|||||||||||||||
(dollars in thousands) |
2021 |
2020 |
Amount |
% |
||||||||||||
Sales and marketing |
$ | 24,444 | $ | 12,354 | $ | 12,090 | 97.9 | % | ||||||||
|
|
|
|
|
|
|
|
Three months ended September 30, |
Change |
|||||||||||||||
(dollars in thousands) |
2021 |
2020 |
Amount |
% |
||||||||||||
General and administrative |
$ | 16,887 | $ | 5,163 | $ | 11,724 | 227.1 | % | ||||||||
|
|
|
|
|
|
|
|
Nine months ended September 30, |
Change |
|||||||||||||||
(dollars in thousands) |
2021 |
2020 |
Amount |
% |
||||||||||||
Revenue, net |
$ | 22,062 | $ | 46,776 | $ | (24,714 | ) | (52.8 | )% | |||||||
Cost of revenue |
20,311 | 15,295 | 5,016 | 32.8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
1,751 | 31,481 | (29,730 | ) | (94.4 | ) | ||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
17,222 | 7,888 | 9,334 | 118.3 | ||||||||||||
Sales and marketing |
63,202 | 34,041 | 29,161 | 85.7 | ||||||||||||
General and administrative |
32,806 | 14,498 | 18,308 | 126.3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
113,230 | 56,427 | 56,803 | 100.7 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss from operations |
(111,479 | ) | (24,946 | ) | (86,533 | ) | 346.9 | |||||||||
Other income (expense), net: |
||||||||||||||||
Interest income |
19 | 26 | (7 | ) | (26.9 | ) | ||||||||||
Interest expense |
(798 | ) | (1,422 | ) | 624 | (43.9 | ) | |||||||||
Other income (expense), net |
— | (87 | ) | 87 | (100.0 | ) | ||||||||||
Loss on extinguishment of debt |
— | (1,627 | ) | 1,627 | (100.0 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other income (expense), net |
(779 | ) | (3,110 | ) | 2,331 | (75.0 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss before income taxes |
(112,258 | ) | (28,056 | ) | (84,202 | ) | 300.1 | |||||||||
Income tax provision |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss and comprehensive loss |
$ | (112,258 | ) | $ | (28,056 | ) | $ | (84,202 | ) | 300.1 | % | |||||
|
|
|
|
|
|
|
|
Nine months ended September 30, |
Change |
|||||||||||||||
(dollars in thousands) |
2021 |
2020 |
Amount |
% |
||||||||||||
Revenue, net |
$ | 22,062 | $ | 46,776 | $ | (24,714 | ) | (52.8 | )% | |||||||
|
|
|
|
|
|
|
|
Nine months ended September 30, |
Change |
|||||||||||||||
(dollars in thousands) |
2021 |
2020 |
Amount |
% |
||||||||||||
Cost of revenue |
$ | 20,311 | $ | 15,295 | $ | 5,016 | 32.8 | % | ||||||||
Gross profit |
1,751 | 31,481 | (29,730 | ) | (94.4 | )% | ||||||||||
Gross margin |
7.9 | % | 67.3 | % |
Nine months ended September 30, |
Change |
|||||||||||||||
(dollars in thousands) |
2021 |
2020 |
Amount |
% |
||||||||||||
Research and development |
$ | 17,222 | $ | 7,888 | $ | 9,334 | 118.3 | % | ||||||||
|
|
|
|
|
|
|
|
Nine months ended September 30, |
Change |
|||||||||||||||
(dollars in thousands) |
2021 |
2020 |
Amount |
% |
||||||||||||
Sales and marketing |
$ | 63,202 | $ | 34,041 | $ | 29,161 | 85.7 | % | ||||||||
|
|
|
|
|
|
|
|
Nine months ended September 30, |
Change |
|||||||||||||||
(dollars in thousands) |
2021 |
2020 |
Amount |
% |
||||||||||||
General and administrative |
$ | 32,806 | $ | 14,498 | $ | 18,308 | 126.3 | % | ||||||||
|
|
|
|
|
|
|
|
Nine months ended September 30, |
Change |
|||||||||||||||
(dollars in thousands) |
2021 |
2020 |
Amount |
% |
||||||||||||
Interest expense |
$ | (798 | ) | $ | (1,422 | ) | $ | 624 | (43.9 | )% | ||||||
|
|
|
|
|
|
|
|
• | investor confidence in our ability to continue as a going concern; |
• | the timing, receipt and amount of sales from our current and future products; |
• | the costs involved in resolving the third-party claims audits and potential recoupment of previous claims paid, as well as other legal proceedings (including the shareholder class action and derivative suits discussed in Note 6 to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q), and their duration and impact on our business generally (particularly with respect to our ability in future periods to accept insurance as a direct method of payment); |
• | the availability of insurance coverage for our hearing aid devices, and any costs associated with reimbursement and compliance, including the anticipated implementation of a pending OTC regulatory framework (which may lead insurance providers to take actions limiting our ability to access insurance coverage and may also generally result in additional compliance or other regulatory requirements for us), and any resulting changes to our business model, including a potential long-term shift to a model that excludes insurance benefits as a method of direct payment to Eargo, which would likely result in a sustained increased cost of customer acquisition; |
• | the cost and timing of expanding our sales, marketing and distribution capabilities and our continued success in reducing our customer acquisition costs; |
• | any expenses, as well as the impact to our business and operating model, as a result of changes in the regulatory landscape for hearing aid devices; |
• | the cost of manufacturing, either ourselves or through third-party manufacturers, our products; |
• | the terms, timing and success of any other licensing, partnership, omni-channel, including retail, or other arrangements that we may establish; |
• | any product liability or other lawsuits related to our current or future products; |
• | the expenses needed to attract, hire and retain skilled personnel; |
• | the extent of our spending to support research and development activities; and the expansion of our product offerings; |
• | the costs associated with being a public company; |
• | the duration and severity of the COVID-19 pandemic and its impact on our business and financial markets generally; |
• | the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing our intellectual property portfolio; and |
• | the extent to which we acquire or invest in businesses. |
Nine months ended September 30, |
||||||||
(in thousands) |
2021 |
2020 |
||||||
Net cash used in operating activities |
$ | (53,499 | ) | $ | (20,052 | ) | ||
Net cash used in investing activities |
(6,570 | ) | (3,445 | ) | ||||
Net cash provided by financing activities |
4,326 | 80,337 | ||||||
|
|
|
|
|||||
Net increase (decrease) in cash |
$ | (55,743 | ) | $ | 56,840 | |||
|
|
|
|
• | We entered into a new lease agreement in September 2021 for approximately 30,000 square feet of office and laboratory space in San Jose, California. The initial 93-month term of this lease commenced in September 2021 and the contractual obligations during the initial term are approximately $9.4 million in aggregate. We have the option to extend this lease for two additional 60-month periods after the initial term. |
• | We entered into an amendment in February 2021 related to our operating lease in Nashville, Tennessee, that reduced our office space to 9,327 square feet and extended the term to March 31, 2023. Payments associated with this operating lease amendment will result in additional operating lease obligations of $0.5 million plus operating expenses. |
• | We face considerable uncertainty in our business prospects, as a significant portion of our revenue has historically been dependent upon reimbursement from third-party payors participating in the FEHB program but we have operated on a “cash pay” only basis since December 8, 2021. Following the civil settlement with the U.S. government on April 29, 2022, we may be unsuccessful in validating and establishing processes to support the submission of claims for reimbursement from third-party payors participating in the FEHB program in the future. As a result, we have faced a significant reduction in revenue and any failure to establish processes to support reimbursement from third-party payors in the future may significantly and adversely impact our business and growth prospects and our ability to sell our products. |
• | Our negative cash flows and current lack of financial resources raise substantial doubt as to our ability to continue as a going concern. If we are unable to raise additional funding to meet our operational needs, we will be forced to limit or cease our operations and/or liquidate our assets. |
• | Potential opportunities for growth in our business outside of the FEHB program, such as the anticipated implementation of the pending OTC hearing aid regulatory framework and any potential Medicare, or other insurance, coverage for certain hearing aids, may not materialize and, as such, our business and growth prospects and our ability to sell our products may be materially and adversely impacted. |
• | We are subject to risks from legal proceedings, investigations and inquiries, including a number of recent legal proceedings and investigations, which have had and could continue to have a material adverse effect on our reputation, business, financial condition, cash flows and results of operations, and could result in additional claims and material liabilities. |
• | We have a limited operating history and have grown significantly in a short period of time. If we are unable to manage our business and anticipated growth effectively, our business and growth prospects could be materially and adversely affected. |
• | If we fail to attract and retain senior management and key technology personnel, our business may be materially and adversely affected. |
• | We have a history of net losses, and expect to incur additional substantial losses in the foreseeable future. |
• | Changes in the regulatory landscape for hearing aid devices could render our direct-to-consumer |
• | If we cannot innovate at the pace of our hearing aid manufacturing competitors, we may not be able to develop or exploit new technologies in time to remain competitive. |
• | We are deploying a new business model in an effort to disrupt a relatively mature industry. In order to successfully challenge incumbent business models and become profitable, we will need to continue to refine our product and strategy. |
• | We operate in a highly competitive industry, and competitive pressures could have a material adverse effect on our business. |
• | If we are unable to reduce our return rates or if our return rates continue to increase, our net revenue may continue to decrease, and our business, financial condition and results of operations could be adversely affected. |
• | We rely on a limited number of manufacturers for the assembly of our hearing aids. If we encounter manufacturing problems or delays, we may be unable to promptly transition to alternative manufacturers and our ability to generate revenue will be limited. |
• | We rely on the timely supply of high-quality components, parts and finished products, and our business could suffer if suppliers or manufacturers are unable to procure raw materials or other components of an acceptable quality (or at all) or otherwise fail to meet their delivery obligations, raise prices or cease to supply us with components, parts or products or acceptable quality. |
• | If the quality of our hearing aid products does not meet consumer expectations, or if our products wear out more quickly than expected, then our brand and reputation or our business could be adversely affected. |
• | There are a variety of hearing aid products and technologies, and consumer confusion about product features and technology could lead consumers to purchase competitive products instead of our products, or to conflate any adverse events or safety issues associated with third-party hearing aid products with our products, which could adversely affect our business, financial condition and results of operations. |
• | Our success depends in part on our proprietary technology, and if we are unable to obtain, maintain or successfully enforce our intellectual property rights, the commercial value of our products and services will be adversely affected and our competitive position may be harmed. |
• | investor confidence in our ability to continue as a going concern; |
• | the timing, receipt and amount of sales from our current and future products; |
• | the costs involved in resolving third-party claims audits and recoupment of previous claims paid, as well as other legal proceedings (including the shareholder class action and derivative suits discussed in Note 6 to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q), and their duration and impact on our business generally (particularly with respect to our ability in future periods to accept insurance as a direct method of payment); |
• | the availability of insurance coverage for our hearing aid devices, and any costs associated with reimbursement and compliance, including anticipated implementation of a pending OTC regulatory framework (which may lead insurance providers to take actions limiting our ability to access insurance coverage and may also generally result in additional compliance or other regulatory requirements for us), and any resulting changes to our business model, including a potential long-term shift to a model that excludes insurance benefits as a method of direct payment to Eargo, which would likely result in a sustained increased cost of customer acquisition; |
• | the cost and timing of expanding our sales, marketing and distribution capabilities; |
• | any expenses, as well as the impact to our business and operating model, as a result of changes in the regulatory landscape for hearing aid devices; |
• | the cost of manufacturing, either ourselves or through third-party manufacturers, our products; |
• | the terms, timing and success of any other licensing, partnership, omni-channel, including retail, or other arrangements that we may establish; |
• | any product liability or other lawsuits related to our current or future products; |
• | the expenses needed to attract, hire and retain skilled personnel; |
• | the extent of our spending to support research and development activities and the expansion of our product offerings; |
• | the costs associated with being a public company; |
• | the duration and severity of the COVID-19 pandemic and its impact on our business and financial markets generally; |
• | the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing our intellectual property portfolio; and |
• | the extent to which we acquire or invest in businesses. |
• | manage our commercial operations effectively; |
• | identify, recruit, retain, incentivize and integrate additional employees; |
• | manage our internal development and operational efforts effectively while carrying out our contractual obligations to third parties; and |
• | continue to improve our operational, financial and management controls, reports systems and procedures. |
• | decreased demand for our current or future products; |
• | injury to our reputation; |
• | costs to defend the related litigation; |
• | a diversion of management’s time and our resources; |
• | substantial monetary awards to customers; |
• | regulatory investigations, product recalls, withdrawals or labeling, marketing or promotional restrictions; |
• | loss of revenue; and |
• | the inability to sell our current or any future products. |
• | controlling quality of supplies and finished product; |
• | trade protection measures, tariffs and other duties, especially in light of trade disputes between the United States and several foreign countries, including China and countries in Europe; |
• | political, social and economic instability (for example, Russia’s invasion of Ukraine in February 2022 and the resultant sanctions and export controls introduced against Russia have created such instability and have and may continue to disrupt business activity both in the immediately affected region and around the world, the full effects of which remain unknown); |
• | the outbreak of contagious diseases, such as COVID-19; |
• | laws and business practices that favor local companies; |
• | interruptions and limitations in telecommunication services; |
• | product or material delays or disruption, including logistics challenges such as delays or disruptions in shipping; |
• | import and export license requirements and restrictions; |
• | difficulties in the protection of intellectual property; |
• | inflation and/or deflation; |
• | the threat of nationalization and expropriation; |
• | exchange controls, currency restrictions and fluctuations in currency values; and |
• | potential adverse tax consequences. |
• | encumber or license our intellectual property subject to certain exceptions; |
• | sell, transfer, lease or dispose of our assets subject to certain exclusions; |
• | create, incur or assume additional indebtedness; |
• | encumber or permit liens on any of our assets other than certain permitted liens; |
• | make restricted payments, including paying dividends on, repurchasing or making distributions with respect to any of our capital stock; |
• | make specified investments (including loans and advances); |
• | consolidate, merge with, or acquire any other entity, or sell or otherwise dispose of all or substantially all of our assets; and |
• | enter into certain transactions with our affiliates. |
• | the U.S. federal civil and criminal Anti-Kickback Statute, which prohibits, among other things, persons or entities from knowingly and willfully soliciting, offering, receiving or providing any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service, for which payment may be made, in whole or in part, under U.S. federal and state healthcare programs such as Medicare, state Medicaid programs and TRICARE. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation; |
• | the U.S. federal false claims laws, including the False Claims Act, which can be enforced through whistleblower actions, and civil monetary penalties laws, which, among other things, impose criminal and civil penalties against individuals or entities for knowingly presenting, or causing to be presented, to the U.S. federal government, claims for payment or approval that are false or fraudulent, knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim, or from knowingly making a false statement to avoid, decrease or conceal an obligation to pay money to the U.S. federal government. In addition, the government may assert that a claim including items and services resulting from a violation of the U.S. federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act; |
• | Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement, in connection with the delivery of, or payment for, healthcare benefits, items or services. Similar to the U.S. federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation; |
• | state law equivalents of each of the above federal laws, including state anti-kickback, self-referral and false claims laws that apply more broadly to healthcare items or services paid by all payors, including self-pay patients and private insurers, that govern our interactions with consumers or restrict payments that may be made to healthcare providers and other potential referral sources; |
• | the Federal Trade Commission Act and federal and state consumer protection, advertisement and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers; |
• | the U.S. Physician Payments Sunshine Act and its implementing regulations, which require certain manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid or the Children’s Health Insurance Program to report annually to the government information related to certain payments and other transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain other healthcare providers (physician assistants, nurse practitioners, clinical nurse specialists, anesthesiologist assistants, certified registered nurse anesthetists and certified nurse midwives) and teaching hospitals, as well as ownership and investment interests held by the physicians described above and their immediate family members; |
• | the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), and similar regulations in other countries, which prohibit, among other things, companies and their employees and agents from authorizing, promising, offering or providing, directly or indirectly, corrupt or improper payments or anything else of value to foreign government officials, employees of public international organizations and foreign government owned or affiliated entities, candidates for foreign political office and foreign political parties or officials thereof and require companies to keep books and records that accurately and fairly reflect the transactions of the company and to maintain an adequate system of internal accounting controls; |
• | foreign or U.S. analogous state laws and regulations, which may apply to our business practices, including but not limited to, state laws that require manufacturers to comply with the voluntary compliance guidelines and the relevant compliance guidance promulgated by the U.S. federal government; state laws and regulations that require manufacturers to file reports relating to pricing and marketing information or that require tracking gifts and other remuneration and items of value provided to healthcare professionals and entities; and |
• | similar healthcare laws and regulations in the EU and other jurisdictions in which we may conduct activities in the future, including reporting requirements detailing interactions with and payments to healthcare providers. |
• | inability to demonstrate to the FDA’s satisfaction that the product or modification is substantially equivalent to the proposed predicate device or safe and effective for its intended use, as applicable; |
• | the data from pre-clinical studies and clinical trials may be insufficient to support clearance or approval, where required; and |
• | the manufacturing process or facilities do not meet applicable requirements. |
• | fines, injunctions or civil penalties; |
• | suspension or withdrawal of future clearances or approvals; |
• | refusal to clear or approve pending applications; |
• | seizures or recalls of our products; |
• | total or partial suspension of production or distribution; |
• | administrative or judicially imposed sanctions; |
• | refusal to permit the import or export of our products; and |
• | criminal prosecution. |
• | the liquidity of our common stock; |
• | the market price of our common stock; |
• | our ability to raise additional capital; |
• | the number of institutional and general investors that will consider investing in our common stock; |
• | the number of market makers in our common stock; |
• | the availability of information concerning the trading prices and volume of our common stock; and |
• | the number of broker-dealers willing to execute trades in shares of our common stock. |
• | a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors; |
• | no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; |
• | the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors; |
• | the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror; |
• | the ability of our board of directors to alter our amended and restated bylaws without obtaining stockholder approval; |
• | the required approval of at least 66 2/3% of the shares entitled to vote at an election of directors to adopt, amend or repeal our amended and restated bylaws or to repeal certain provisions of our amended and restated certificate of incorporation; |
• | a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; |
• | the requirement that a special meeting of stockholders may be called only by our board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and |
• | advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us. |
• | We will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful. |
• | We may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law. |
• | We are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification. |
• | We will not be obligated pursuant to our amended and restated bylaws to indemnify a person with respect to proceedings initiated by that person against us or our other indemnitees, except with respect to proceedings authorized by our board of directors or brought to enforce a right to indemnification. |
• | The rights conferred in our amended and restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons. |
• | We may not retroactively amend our amended and restated bylaw provisions to reduce our indemnification obligations to directors, officers, employees and agents. |
• | increased operating expenses and cash requirements; |
• | the assumption of additional indebtedness or contingent liabilities; |
• | assimilation of operations, intellectual property and products of an acquired company, including difficulties associated with integrating new personnel; |
• | the diversion of our management’s attention from our existing product programs and initiatives in pursuing such a strategic merger or acquisition; |
• | loss of key personnel, and uncertainties in our ability to maintain key business relationships; |
• | uncertainties associated with the other party to such a transaction, including the prospects of that party and their existing products or product candidates and regulatory approvals; |
• | our inability to generate revenue from acquired technology and/or products sufficient to meet our objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs; and |
• | causing us to become subject to additional laws and regulations. |
† | Filed herewith. |
‡ | Furnished herewith. |
# | Indicates management contract or compensatory plan. |
* | Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Registration S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the SEC upon request. |
Eargo, Inc. | ||||||
Date: May 13, 2022 | By: | /s/ Christian Gormsen | ||||
Christian Gormsen | ||||||
President, Chief Executive Officer and Director | ||||||
(Principal Executive Officer) | ||||||
Date: May 13, 2022 | By: | /s/ Adam Laponis | ||||
Adam Laponis | ||||||
Chief Financial Officer | ||||||
(Principal Financial Officer) |