You should read the following discussion and analysis of our financial condition
and results of operations together with our unaudited consolidated financial
statements and the related notes thereto included in Part I, Item 1 of this
Quarterly Report on Form 10-Q. As a result of many factors, including those
factors set forth in the "Risk factors" section of this Quarterly Report on Form
10-Q, our actual results could differ materially from the results described in
or implied by these forward-looking statements. You should carefully read the
"Risk factors" to gain an understanding of the important factors that could
cause actual results to differ materially from our forward-looking statements.
Forward-looking statements
This Quarterly Report contains forward-looking statements about us and our
industry that involve substantial risks and uncertainties. All statements other
than statements of historical facts contained in this Quarterly Report,
including statements regarding our strategy, future financial condition, future
operations, projected costs, prospects, plans, objectives of management and
expected market growth, are forward-looking statements. In some cases, you can
identify forward-looking statements by terminology such as "aim," "anticipate,"
"assume," "believe," "contemplate," "continue," "could," "design," "due,"
"estimate," "expect," "goal," "intend," "may," "objective," "plan,"
"positioned," "potential," "predict," "seek," "should," "target," "will,"
"would" and other similar expressions that are predictions of or indicate future
events and future trends, or the negative of these terms or other comparable
terminology.
Overview
We are a medical device company dedicated to improving the quality of life of
people with hearing loss. We developed the Eargo solution to create a hearing
aid that consumers actually want to use. Our innovative product and go-to-market
approach address the major challenges of traditional hearing aid adoption,
including social stigma, accessibility and cost.
We believe our Eargo hearing aids are the first and only virtually invisible,
rechargeable, completely-in-canal, FDA regulated, exempt Class I device for the
treatment of hearing loss. Our rapid pace of innovation is enabled by our deep
industry and technical expertise across mechanical engineering, product design,
audio processing, clinical and hearing science, consumer electronics and
embedded software design, and is supported by our strategic intellectual
property portfolio.
We market and sell our hearing aids direct to consumers with a personalized,
consumer-centric approach. Our commercial organization consists of a talented
marketing team with deep experience in consumer-focused brand and performance
marketing, a team of inside sales consultants, and a dedicated customer support
team of licensed hearing professionals. We generate revenue from orders
processed primarily through our website and over the phone by our sales
consultants.
We believe that our differentiated hearing aids, consumer-oriented approach and
strong brand have fueled the rapid adoption of our hearing aids and high
customer satisfaction, as evidenced by over 49,000 Eargo hearing aid systems
sold, net of returns, as of September 30, 2020.
For the three months ended September 30, 2020, we generated revenue, net of
$18.2 million, an increase of $10.5 million from the three months ended
September 30, 2019, respectively. For the nine months ended September 30, 2020,
we generated revenue, net of $46.8 million, an increase of $24.6 million from
the nine months ended September 30, 2019, respectively. During the above
periods, all our revenue was generated from customers in the United States.
Our net losses were $9.7 million and $28.1 million for the nine months ended
September 30, 2020 and 2019, respectively. As of September 30, 2020 and December
31, 2019, we had an accumulated deficit of $187.3 million and $159.2 million,
respectively. We expect to continue to incur losses for the foreseeable future.
As of September 30, 2020 and December 31, 2019, we had cash and cash equivalents
of $70.2 million and $13.4 million, respectively. Our primary sources of capital
to date have been from private placements of our convertible preferred
securities, the incurrence of indebtedness and, to a lesser extent, revenue from
the sale of our products.
Recent developments
On October 15, 2020, our Registration Statements on Form S-1 (File No.
333-24907) relating to our IPO, were declared effective by the Securities
Exchange Commission, or SEC. Pursuant to the Registration Statements, we issued
and sold aggregate of 9,029,629 shares of common stock (inclusive of 1,177,777
shares pursuant to the underwriters' option to purchase additional shares) at a
price of $18.00 per share for aggregate cash proceeds of approximately $148.1
million, net of underwriting discounts and commissions and offering costs.
Immediately prior to the completion of the IPO, all outstanding shares of
convertible preferred stock automatically converted into 28,196,388 shares of
our common stock. Subsequent to the closing of the IPO, no shares of preferred
stock were outstanding.
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Factors affecting our business
We believe that our future performance will depend on many factors, including
those described below and in the section titled "Risk factors" included
elsewhere in this Quarterly Report on Form 10-Q.
Efficient acquisition of new customers
We have spent and expect to continue to spend significant amounts on sales and
marketing designed to build a strong brand, achieve broad awareness of our Eargo
solution, acquire new customers and convert sales leads. We have also invested
and expect to continue investing in growing our teams of sales consultants and
licensed hearing professionals to keep pace with increased demand, converting
leads into satisfied customers and potentially growing our revenue.
Sales return rate
Our return policy allows our customers to return hearing aids for any reason
within the first 45 days of delivery for a full refund, subject to a handling
fee in certain states. The most commonly cited reason for returning our hearing
aids is unsatisfactory fit, which we believe is a byproduct of our
direct-to-consumer model and online distribution that results in nearly all of
our customers ordering our product without trying it first. In addition to
unsatisfactory fit, the next most cited reason for returns is that our hearing
aids do not provide sufficient audio amplification. Customer return accrual
rates were approximately 35% and 27% for the year ended December 31, 2019 and
for the nine months ended September 30, 2020, respectively. The decline in our
rate of return in 2019 and in the nine months ended September 30, 2020 was a
result of our initiatives to improve customer service and enhance the quality of
our pre-screening assessments and the growth in customers with health insurance
coverage for hearing aids and repeat customers, which have generally lower
return rates than other customers. We report revenue net of expected returns,
which is an estimate informed in part by historical return rates. As such, our
return rate impacts our reported net revenue and profitability. If actual sales
returns differ significantly from our estimates, an adjustment to revenue in the
current or subsequent period is recorded. Our development priorities are
focused, in part, on adding a refurbishment capability for returned hearing
aids, which would allow us to refurbish and re-sell returned devices, which we
anticipate would benefit our gross margin, although there is no guarantee that
these efforts will succeed.
New product introductions
Our technical capabilities and commitment to innovation have allowed us to
deliver product enhancements on a rapid development timeline and support a
compelling new product roadmap that we believe will continue to differentiate
our competitive position over the next several years. With the launch of the
Eargo Neo HiFi in January 2020, we have launched four generations of our hearing
aids since 2017, with each iteration having improved audio performance, physical
fit and/or comfort. We are focused on continuing to launch new versions of the
Eargo hearing solution that further improve audio quality, fit, comfort and/or
ease-of-use. We believe that the continued introduction of new products is
critical to maintaining existing customers and increasing adoption of our
solution, and as such, we expect to continue to invest in research and
development to support new product introductions. In connection with our product
innovation and iteration, we also need to successfully manage our product
transitions to avoid delays in customer purchases, excess or obsolete inventory
and increased returns as customers wait for our new products to become
available.
Seasonality
Prior to the effects of COVID-19, we have experienced and expect to continue to
experience seasonality in our business, with higher sales volumes in quarters
when we launch new products and in the fourth calendar quarter as a result of
holiday promotional activity.
COVID-19 pandemic
We believe the COVID-19 pandemic thus far has largely resulted in favorable
trends for our business. We believe that shelter-in-place restrictions and
increased reluctance of consumers to be exposed to the virus, particularly among
older individuals that comprise a majority of the population needing hearing
aids, have increased the attractiveness to consumers of our hearing solution and
our vertically integrated telecare model. We believe our sales model can help
consumers decrease their risk of potential exposure to COVID-19 by avoiding
multiple trips to hearing aid clinics and close proximity to audiologists and
other individuals at such clinics, which are part of the traditional hearing aid
sales model. The traditional hearing aid sales channel experienced
year-over-year volume declines in the second quarter of 2020, returning to
year-over-year volume growth in the third quarter of 2020. Despite this return
to growth in the traditional channel, our 2020 third quarter gross systems
shipped increased 92% year-over-year.
Although we believe the COVID-19 pandemic has largely resulted in favorable
trends for our business, we have experienced business disruptions, particularly
at our California headquarters that was subject to a shelter-in-place order.
Moreover, travel restrictions, factory closures and disruptions in our supply
chain could happen and we may not be able to obtain adequate inventory to sell.
In addition, the global pandemic has resulted in, and may continue to result in,
significant disruption of global financial markets, which could limit our
ability to access additional capital on favorable terms or at all. If we are
unable to access capital on favorable terms or at all, it could negatively
affect our liquidity, including our ability to repay our debt obligations.
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The ongoing impact of COVID-19 depends on the duration and severity of the
pandemic, which are difficult to assess or predict. While we have experienced
growth in our sales volume during the COVID-19 pandemic, we cannot be certain
whether we will maintain the current level of demand for our hearing aids. As a
result, the impact of these or any future factors could be substantially
different than what we have experienced to date. Please see the section titled
"Risk factors" for further discussion of the possible impact of the COVID-19
pandemic on our business.
Key business metrics
To analyze our business performance, determine financial forecasts and help
develop long-term strategic plans, we review the following key business metrics,
each of which is an important measure that represents the growth of our
business:
• Gross systems shipped. We define our gross systems shipped as the number of
hearing aid systems shipped for which we recognized revenue during a period.
• Return accrual rates. Return accrual rates are determined by management at
the end of each period to estimate the percentage of returns made during a
period. This determination is informed in part by historic actual return
rates. Return accrual rates do not represent actual returns during a period
as customers may return the product for a period of time that can extend
beyond the period end, which can result in a hearing aid being returned
after the period in which the revenue from its sale was recognized. If
actual returns differ significantly from the return accrual rate
determination made at period end, we may adjust revenue in subsequent
periods to reflect the actual returns made. Such an adjustment to revenue
will not result in an adjustment to the return accrual rate for the period.
The following table details the number of gross systems shipped and return
accrual rates for the periods presented below:
Three months ended
March 31, June 30, September 30,
December 31, March 31, June 30, September 30,
2019 2019 2019 2019 2020 2020 2020
Gross systems shipped 5,363 4,955 5,257 7,212 7,030 9,040 10,077
Return accrual rate 37 % 34 % 35 % 34 % 28 % 27 % 25 %
We believe these key business metrics provide useful information to help
investors understand and evaluate our business performance. Gross systems
shipped is a key measure of sales volume, which drives potential revenue, while
return accrual rates are an indicator of potential reductions to revenue and an
indicator of change to customer mix.
Components of our results of operations
Revenue, net
We generate revenue from the sale of Eargo hearing aid systems, accessories and
extended warranties, with the majority of our revenue coming from sales of our
Eargo hearing aid systems. We currently offer three versions of our hearing aid
systems, the Eargo Max, the Eargo Neo and the Eargo Neo HiFi, at three different
price points, and we periodically offer discounts and promotions. For product
sales, control is transferred upon shipment to the customer. We report revenue
net of expected returns, which is an estimate informed in part by historical
return rates. Prior to January 2020, we also offered extended product warranties
to our customers which covered the product for an additional year, commencing on
the day after the initial one-year warranty expires. For extended warranty
sales, control is transferred over time based on time elapsed throughout the
extended warranty period.
Cost of revenue and gross margin
Cost of revenue consists of expenses associated with the cost of finished goods,
freight, personnel costs, consumables, product warranty costs, transaction fees,
reserves for excess and obsolete inventory, depreciation and amortization, and
related overhead. We expect cost of revenue to increase in absolute terms as our
revenue grows.
Our gross margin has been and will continue to be affected by a variety of
factors, including sales volumes, product mix, pricing strategies, costs of
finished goods, product warranty claim rates and refurbishment strategies. We
expect our gross margin percentage to increase over the long term to the extent
we are successful in decreasing our rate of returns and implementing
refurbishment programs after new product launches. Any increase in gross margin
will likely fluctuate from quarter to quarter as we continue to introduce new
products and adopt new technologies.
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Research and development expenses
Research and development, or R&D, expenses, consist primarily of engineering and
product development costs to develop and support our products, regulatory
expenses, non-recurring engineering and other costs associated with products and
technologies that are in development, as well as related overhead costs. These
expenses include personnel-related costs including salaries and stock-based
compensation, supplies, consulting fees, prototyping, testing, materials, travel
expenses, depreciation and allocated facility overhead costs. Additionally, R&D
expenses include internal and external costs associated with our regulatory
compliance and quality assurance functions, and related overhead costs. We
expect R&D expenses, net of capitalized internal use software development costs,
to increase in absolute dollars as we continue to develop new products and
enhance existing products and technologies.
Sales and marketing expenses
Our sales and marketing expenses are the largest component of our operating
expenses and consist primarily of personnel-related costs including salaries and
stock-based compensation, direct marketing, advertising and promotional
expenses, consulting fees, public relations costs and allocated facility
overhead costs. Sales and marketing personnel include our inside sales
consultants, licensed hearing professionals, marketing professionals and related
support personnel. We expect our sales and marketing expenses to increase in
absolute dollars as we hire additional sales and marketing personnel, expand our
sales support infrastructure and invest in our brand and product awareness to
further penetrate the U.S. market and potentially expand into international
markets.
General and administrative expenses
Our general and administrative expenses consist primarily of compensation for
executive, finance, legal, information technology and administrative personnel,
including stock-based compensation. Other significant expenses include
professional fees for legal and accounting services, consulting fees, recruiting
fees, information technology costs, insurance, general corporate expenses and
allocated facility overhead costs.
We expect to incur additional general and administrative expenses as a result of
operating as a public company, including expenses related to compliance with the
rules and regulations of the SEC, and those of the Nasdaq Stock Market,
additional insurance costs, investor relations activities and other
administrative and professional services. As a result, we expect general and
administrative expenses to increase in absolute dollars in future periods.
Interest income
Interest income consists of interest earned on cash and cash equivalents.
Interest expense
Interest expense consists of interest related to borrowings under our debt
obligations and convertible promissory notes.
Other income (expense), net
Other income (expense), net consists primarily of adjustments to the fair value
of embedded derivatives associated with certain redemption features of our
convertible promissory notes and adjustments to the fair value of our
convertible preferred stock warrant liabilities.
Loss on extinguishment of debt
The loss on extinguishment of debt arose on the redemption of our 2020 Notes
into shares of our Series E convertible preferred stock in July 2020.
Income tax provision
We use the asset and liability method to account for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial statement carrying amounts of existing assets and
liabilities and their tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates applied to taxable income in the years in which
those temporary differences are expected to be recovered or settled. A valuation
allowance is established when necessary to reduce deferred tax assets to the
amount expected to be realized. Due to our historical operating performance and
our recorded cumulative net losses in prior fiscal periods, our net deferred tax
assets have been fully offset by a valuation allowance.
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Financial statement effects of uncertain tax positions are recognized when it is
more-likely-than-not, based on the technical merits of the position, that it
will be sustained upon examination. Interest and penalties related to
unrecognized tax benefits are included within the provision for income tax.
Results of operations
Comparison of the three months ended September 30, 2020 and 2019
Three months ended
September 30, Change
(dollars in thousands) 2020 2019 Amount %
Revenue, net $ 18,186$ 7,730$ 10,456 135.3 %
Cost of revenue 5,434 3,583 1,851 51.7
Gross profit 12,752 4,147 8,605 207.5
Operating expenses:
Research and development 2,871 3,219 (348 ) (10.8 )
Sales and marketing 12,354 9,290 3,064 33.0
General and administrative 5,163 3,683 1,480 40.2
Total operating expenses 20,388 16,192 4,196 25.9
Loss from operations (7,636 ) (12,045 ) 4,409 (36.6 )
Other income (expense), net:
Interest income 3 136
(133 ) (97.8 )
Interest expense (279 ) (218 )
(61 ) 28.0
Other income (expense), net (187 ) (30 )
(157 ) 523.3
Loss on extinguishment of debt (1,627 ) -
(1,627 ) *
Total other income (expense), net (2,090 ) (112 ) (1,978 ) 1,766
Loss before income taxes (9,726 ) (12,157 ) 2,431 (20.0 )
Income tax provision - - - -
Net loss and comprehensive loss $ (9,726 )$ (12,157 )$ 2,431 (20.0 )%
Revenue, net
Three months ended
September 30, Change
(dollars in thousands) 2020 2019 Amount %
Revenue, net $ 18,186$ 7,730$ 10,456 135.3 %
Revenue increased by $10.5 million, or 135.3%, from $7.7 million during the
three months ended September 30, 2019 to $18.2 million during the three months
ended September 30, 2020, primarily due to an increase in the volume of Eargo
hearing aid systems shipped, the majority of which were Eargo Neo HiFi systems,
which began shipping in January 2020. The increase in revenue was also
attributable to a higher average selling price due to introduction of the Neo
HiFi systems and a decrease in sales returns as a percentage of systems shipped,
which was due to growth in sales to customers with health insurance coverage as
such customers generally have lower return rates. Gross systems shipped during
the three months ended September 30, 2020 were 10,077, a 91.7% increase compared
to the 5,257 gross systems shipped during the comparable period ended September
30, 2019. The increase in volume was driven by expanded national marketing
efforts, growth in customers with health insurance coverage for hearing aids and
increased customer adoption of our telecare model due to the COVID-19 pandemic.
Cost of revenue, gross profit, and gross margin
Three months ended
September 30, Change
(dollars in thousands) 2020 2019 Amount %
Cost of revenue $ 5,434$ 3,583$ 1,851 51.7 %
Gross profit 12,752 4,147 8,605 207.5 %
Gross margin 70.1 % 53.6 %
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Cost of revenue increased by $1.8 million, or 51.7%, from $3.6 million during
the three months ended September 30, 2019 to $5.4 million during the three
months ended September 30, 2020. The change was primarily due to the increase in
the volume of Eargo hearing aid systems shipped during the period. In addition,
product warranty costs increased from $0.4 million during the three months ended
September 30, 2019 to $0.7 million during the three months ended September 30,
2020.
Gross margin increased to 70.1% during the three months ended September 30,
2020, compared to 53.6% for the comparable period in 2019. The change in gross
margin percentage was primarily due to an increase in the average selling price
of systems shipped and a decrease in sales returns as a percentage of systems
shipped.
Research and development (R&D)
Three months ended
September 30, Change
(dollars in thousands) 2020 2019 Amount %
Research and development $ 2,871$ 3,219$ (348 ) (10.8 )%
R&D expenses decreased by $0.3 million, or 10.8%, from $3.2 million during the
three months ended September 30, 2019 to $2.9 million during the three months
ended September 30, 2020. The change was primarily due to a net decrease of $0.6
million in personnel and personnel-related costs resulting from increased
capitalized costs associated with the development of internal use software and a
decrease in travel costs.
Sales and marketing
Three months ended
September 30, Change
(dollars in thousands) 2020 2019 Amount %
Sales and marketing $ 12,354$ 9,290$ 3,064 33.0 %
Sales and marketing expenses increased by $3.1 million, or 33.0%, from $9.3
million during the three months ended September 30, 2019 to $12.4 million during
the three months ended September 30, 2020. The change was primarily due to
increases in personnel and personnel-related costs of $1.6 million and increases
in direct marketing, advertising and promotional expenses of $1.5 million. The
change in personnel and personnel-related costs was primarily due to increased
commissions from increased sales and a net increase in salary-related costs.
General and administrative
Three months ended
September 30, Change
(dollars in thousands) 2020 2019 Amount %
General and administrative $ 5,163$ 3,683$ 1,480 40.2 %
General and administrative expenses increased by $1.5 million, or 40.2%, from
$3.7 million during the three months ended September 30, 2019 to $5.2 million
during the three months ended September 30, 2020. This change was primarily due
to an increase in bad debt expense of $1.4 million directly related to the
growth in our insurance payment channel, and an increase in general corporate,
personnel and personnel-related costs of $0.6 million, which were partially
offset by a decrease in non-capitalizable IPO readiness costs of $0.6 million.
Interest income
Three months ended
September 30, Change
(dollars in thousands) 2020 2019 Amount %
Interest income $ 3$ 136$ (133 )
(97.8 )%
Interest income decreased by $0.1 million, or 97.8%, from $0.1 million during
the three months ended September 30, 2019 to less than $0.1 million during the
three months ended September 30, 2020. The decrease in interest income was due
to lower average cash balance and lower average interest rate during the three
months ended September 30, 2020 compared to the same period in 2019.
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Interest expense
Three months ended
September 30, Change
(dollars in thousands) 2020 2019 Amount %
Interest expense $ (279 )$ (218 )$ (61 ) 28.0 %
Interest expense increased by $0.1 million, or 28.0%, from $0.2 million during
the three months ended September 30, 2019 to $0.3 million during the three
months ended September 30, 2020. This increase was attributable to interest
expense on the 2020 Notes during the three months ended September 30, 2020, for
which there was no similar expense in the comparable period in 2019.
Comparison of the nine months ended September 30, 2020 and 2019
Nine months ended
September 30, Change
(dollars in thousands) 2020 2019 Amount %
Revenue, net $ 46,776$ 22,175$ 24,601 110.9 %
Cost of revenue 15,295 11,033 4,262 38.6
Gross profit 31,481 11,142 20,339 182.5
Operating expenses:
Research and development 7,888 8,781
(893 ) (10.2 )
Sales and marketing 34,041 24,698
9,343 37.8
General and administrative 14,498 8,781 5,717 65.1
Total operating expenses 56,427 42,260 14,167 33.5
Loss from operations (24,946 ) (31,118 ) 6,172 (19.8 )
Other income (expense), net:
Interest income 26 555
(529 ) (95.3 )
Interest expense (1,422 ) (492 )
(930 ) 189.0
Other income (expense), net (87 ) (84 )
(3 ) 3.6
Loss on extinguishment of debt (1,627 ) -
(1,627 ) *
Total other income (expense), net (3,110 ) (21 ) (3,089 ) 14,710
Loss before income taxes (28,056 ) (31,139 ) 3,083 (9.9 )
Income tax provision - - - -
Net loss and comprehensive loss $ (28,056 )$ (31,139 )$ 3,083 (9.9 )%
Revenue, net
Nine months ended
September 30, Change
(dollars in thousands) 2020 2019 Amount %
Revenue, net $ 46,776$ 22,175$ 24,601 110.9 %
Revenue increased by $24.6 million, or 110.9%, from $22.2 million during the
nine months ended September 30, 2019 to $46.8 million during the nine months
ended September 30, 2020, primarily due to an increase in the volume of Eargo
hearing aid systems shipped, the majority of which were Eargo Neo HiFi systems,
which began shipping in January 2020. The increase in revenue was also
attributable to a higher average selling price of Neo HiFi systems and a
decrease in sales returns as a percentage of systems shipped, which was due to
growth in sales to customers with health insurance coverage and repeat customers
as such customers, generally have lower return rates. Gross systems shipped
during the nine months ended September 30, 2020 were 26,147, a 67.9% increase
compared to the 15,575 gross systems shipped during the comparable period ended
September 30, 2019. The increase in volume was driven by expanded national
marketing efforts, growth in customers with health insurance coverage for
hearing aids and repeat customers, and increased customer adoption of our
telecare model due to the COVID-19 pandemic.
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Cost of revenue, gross profit, and gross margin
Nine months ended
September 30, Change
(dollars in thousands) 2020 2019 Amount %
Cost of revenue $ 15,295$ 11,033$ 4,262 38.6 %
Gross profit 31,481 11,142 20,339 182.5 %
Gross margin 67.3 % 50.2 %
Cost of revenue increased by $4.3 million, or 38.6%, from $11.0 million during
the nine months ended September 30, 2019 to $15.3 million during the nine months
ended September 30, 2020. The change was primarily due to the increase in the
volume of Eargo hearing aid systems shipped. Product warranty costs increased
from $1.1 million during the nine months ended September 30, 2019 to $2.3
million ended September 30, 2020 due to increased volume of hearing aid units
shipped.
Gross margin increased to 67.3% during the nine months ended September 30, 2020,
compared to 50.2% for the comparable period in 2019. The change in gross margin
percentage was primarily due to an increase in the average selling price of
systems shipped and a decrease in sales returns as a percentage of systems
shipped.
Research and development (R&D)
Nine months ended
September 30, Change
(dollars in thousands) 2020 2019 Amount %
Research and development $ 7,888$ 8,781$ (893 ) (10.2 )%
R&D expenses decreased by $0.9 million, or 10.2%, from $8.8 million during the
nine months ended September 30, 2019 to $7.9 million during the nine months
ended September 30, 2020. The change was primarily due to a net decrease of $1.2
million in personnel and personnel-related costs resulting from increased
capitalized costs associated with the development of internal use software and a
decrease in travel costs.
Sales and marketing
Nine months ended
September 30, Change
(dollars in thousands) 2020 2019 Amount %
Sales and marketing $ 34,041$ 24,698$ 9,343 37.8 %
Sales and marketing expenses increased by $9.3 million, or 37.8%, from $24.7
million during the nine months ended September 30, 2019 to $34.0 million during
the nine months ended September 30, 2020. The change was primarily due to
increases in direct marketing, advertising and promotional expenses of $4.7
million and increases in personnel and personnel-related costs of $4.5 million.
The change in personnel and personnel-related costs was primarily due to
increased commissions from increased sales and a net increase in salary-related
costs.
General and administrative
Nine months ended
September 30, Change
(dollars in thousands) 2020 2019 Amount %
General and administrative $ 14,498$ 8,781$ 5,717 65.1 %
General and administrative expenses increased by $5.7 million, or 65.1%, from
$8.8 million during the nine months ended September 30, 2019 to $14.5 million
during the nine months ended September 30, 2020. This change was primarily due
to an increase in bad debt expense of $2.1 million directly related to the
growth in our insurance payment channel, terminated IPO costs of $1.6 million,
an increase in general corporate costs of $1.5 million due to our preparations
to become a public company, and a net increase in personnel and
personnel-related costs of $0.6 million.
Terminated IPO costs consist of deferred offering costs expensed upon
termination of our previously planned IPO in March 2020. The offering was
terminated primarily because of the uncertainty in the public markets during the
initial onset of the COVID-19 pandemic. The increase in general corporate costs
includes non-capitalizable IPO readiness costs incurred prior to the termination
of our previously planned IPO.
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Interest income
Nine months ended
September 30, Change
(dollars in thousands) 2020 2019 Amount %
Interest income $ 26$ 555$ (529 )
(95.3 )%
Interest income decreased by $0.5 million, or 95.3%, from $0.6 million during
the nine months ended September 30, 2019 to less than $0.1 million during the
nine months ended September 30, 2020. The decrease in interest income was due to
lower average interest rate and lower average cash balance during the nine
months ended September 30, 2020 compared to the same period in 2019.
Interest expense
Nine months ended
September 30, Change
(dollars in thousands) 2020 2019 Amount %
Interest expense $ (1,422 )$ (492 )$ (930 ) 189.0 %
Interest expense increased by $0.9 million, or 189.0%, from $0.5 million during
the nine months ended September 30, 2019 to $1.4 million during the nine months
ended September 30, 2020. The increase in interest expense was primarily
attributable to $0.9 million in interest expense and amortization of debt
discount related to the 2020 Notes during the nine months ended September 30,
2020, for which there was no comparable expense during the same period ended
September 30, 2019.
Liquidity and capital resources
Sources of liquidity
Since our inception, we have incurred net losses and negative cash flows from
operations. We have funded our operations primarily from the net proceeds
received from the sale of our equity securities, indebtedness and to a lesser
extent revenue from the sale of our products.
On October 20, 2020, we closed the IPO of our common stock in which we issued
and sold 7,851,852 shares of our common stock and concurrently sold an
additional 1,177,777 shares upon the full exercise of the underwriters' option
to purchase additional shares. In connection with the IPO, including the
underwriters' option to purchase additional shares, we issued and sold an
aggregate of 9,029,629 shares of common stock at $18.00 per share, raising
approximately $148.1 million in proceeds, net of underwriting discounts and
commissions of $11.4 million and estimated offering costs of $3.1 million.
Debt obligations
2018 Loan
In June 2018, we entered into the 2018 Loan with SVB. Under the 2018 Loan, SVB
agreed to provide us access to term loans in an aggregate principal amount of up
to $12.5 million. In connection with the 2018 Loan, we issued SVB a warrant to
purchase 30,173 shares of Series C convertible preferred stock at an exercise
price of $9.0201 per share, with a term of ten years, and authorized the
issuance of an additional warrant to purchase 6,022 shares of Series C
convertible preferred stock upon the funding of a term loan under the second
tranche, or Tranche B. Term loans of $7.0 million were funded in October 2018
through December 2018 under the first tranche.
In January 2019, we amended the 2018 Loan and in connection with this amendment,
we authorized the issuance of a warrant to purchase 8,977 shares of our Series C
convertible preferred stock upon the funding of a term loan under Tranche B. In
June 2019, we borrowed an additional $5.0 million under Tranche B to increase
the total outstanding principal balance to $12.0 million. In connection with
this borrowing, we issued SVB a warrant to purchase 14,999 shares of our Series
C convertible preferred stock at an exercise price of $9.0201 per share, with a
term of ten years.
Pursuant to the terms of the 2018 Loan, we made interest-only monthly payments
on the term loans through December 31, 2019 and began making monthly payments of
interest and amortized principal in January 2020.
In May 2020, we executed an amendment to the 2018 Loan to defer the principal
payments due in May 2020 through July 2020 such that the deferred amounts would
be repaid in equal monthly payments starting in August 2020 through the maturity
of the loan in June 2022.
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In September 2020, we executed an amendment to the 2018 Loan to (i) extend the
interest-only period for all borrowings until December 31, 2021, which was
extended to June 30, 2022 upon the closing of the IPO, (ii) extend the maturity
date of the 2018 Loan to September 1, 2024 and (iii) increase the maximum
aggregate principal amount of the term loans to $20.0 million, of which we
borrowed $15.0 million in September 2020, a portion of which was used to repay
all the previously outstanding indebtedness under the 2018 Loan. In connection
with this borrowing, we issued SVB a warrant to purchase 53,487 shares of our
Series E convertible preferred stock at an exercise price of $6.7836 per share,
with a term of ten years. The number of shares of Series E convertible preferred
stock issuable pursuant to this warrant will increase by an additional 17,829
shares if we borrow additional amounts under our term loan facility. As of
September 30, 2020, we had $15.0 million in principal outstanding under the 2018
Loan.
Interest on the 2018 Loan accrues at a per annum rate equal to the Wall Street
Journal prime rate plus 1.0%, or 4.25% as of September 30, 2020. We are
permitted to prepay the outstanding principal balance advanced under the 2018
Loan in whole but not in part, subject to a prepayment fee of 3.0%, which
reduces to 2.0% in September 2021 and to 1.0% in September 2022. We are also
required to pay a final payment fee equal to 6.25% of the total term loans
advanced, which was $0.9 million as of September 30, 2020, due upon the earliest
of maturity, acceleration, prepayment or termination of the 2018 Loan.
Under the terms of the 2018 Loan, we granted SVB first priority liens and
security interests in substantially all of our assets as collateral, excluding
our intellectual property. The 2018 Loan also contains certain representations
and warranties, indemnification provisions in favor of SVB, affirmative and
negative covenants (including, among other things, limitations on other
indebtedness, liens, encumbrances on our intellectual property, acquisitions,
investments and dividends and requirements relating to financial reporting,
inventory management, returns, insurance and protection of our intellectual
property rights) and events of default (including payment defaults, breaches of
covenants following any applicable cure period, investor abandonment, a material
impairment in the perfection or priority of the lender's security interest or in
the collateral, and events relating to bankruptcy or insolvency).
Paycheck Protection Program loan
On May 3, 2020, we executed a promissory note with MidFirst Bank, which provided
for an unsecured loan in an aggregate principal amount of $4.6 million, or the
PPP Loan, pursuant to the Paycheck Protection Program, or PPP, under the
Coronavirus Aid, Relief and Economic Security Act, or the CARES Act, that was
signed into law on March 27, 2020.
The PPP Loan provides for a fixed interest rate of 1.0% per year with a maturity
date of May 3, 2022. Monthly principal and interest payments due on the PPP Loan
are deferred for a six-month period beginning from the date of disbursement of
the PPP Loan. The PPP Loan may be prepaid by us at any time prior to the
maturity with no prepayment penalty. The PPP Loan contains customary event of
default provisions.
In August 2020, we repaid the PPP Loan in full in the amount of $4.6 million and
terminated the related promissory note.
2020 Notes
We issued an aggregate of $8.9 million in convertible promissory notes in March
2020 and an additional aggregate of $1.2 million in April 2020 in a subsequent
closing. The 2020 Notes accrued interest at a rate of 6.0% per annum with a
maturity date in March 2021.
The 2020 Notes contained redemption features, a conversion feature and a put
option that were determined to be embedded derivatives requiring bifurcation as
a single compound financial instrument. Upon the issuance of the 2020 Notes, we
recorded the fair value of the derivative liability of $2.9 million as a debt
discount on the 2020 Notes and as a single compound derivative instrument. The
debt discount is being amortized to interest expense using the effective
interest method over the term of the 2020 Notes.
Pursuant to their terms, the 2020 Notes were redeemed in July 2020 in
conjunction with our Series E convertible preferred stock financing, and the
outstanding principal and accrued interest of $10.3 million were converted to
1,889,548 shares of our Series E convertible preferred stock at a conversion
price of $5.427 per share, a price equal to 80% of the $6.7836 per share paid by
the investors in the Series E convertible preferred stock financing.
Funding requirements
As of September 30, 2020, we had cash and cash equivalents of $70.2 million,
which are available to fund operations, and an accumulated deficit of $187.3
million. In connection with our IPO, we received net proceeds of approximately
$148.1 million.
We expect to continue to incur significant expenses for the foreseeable future
and to incur operating losses in the near term while we make investments to
support our anticipated growth. We may raise additional capital through the
issuance of additional equity financing, debt financings or other sources. If
this financing is not available to us at adequate levels, we may need to
reevaluate our operating plans. If we do raise additional capital through public
or private equity offerings, the ownership interest of our existing stockholders
will be diluted, and the terms of these securities may include liquidation or
other preferences that adversely affect our existing stockholders' rights. If we
raise additional capital through debt financing, we may be subject to covenants
limiting or restricting our ability to take specific actions, such as incurring
additional debt, making capital expenditures or declaring dividends. We believe
that our existing cash, cash equivalents and short-term investments, and cash
generated from sales of our products, will be sufficient to meet our anticipated
needs for at least the next 12 months from the date of this filing.
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Cash flows
The following table summarizes our cash flows for the periods indicated:
Nine months ended
September 30,
(in thousands) 2020 2019
Net cash used in operating activities $ (20,052 )$ (29,193 )
Net cash used in investing activities (3,445 ) (2,633 )
Net cash provided by financing activities 80,337 5,905
Net increase (decrease) in cash $ 56,840$ (25,921 )
Operating activities
During the nine months ended September 30, 2020, cash used in operating
activities was $20.1 million, attributable to a net loss of $28.1 million and a
net change in our net operating assets and liabilities of $2.0 million,
partially offset by non-cash charges of $10.0 million. Non-cash charges
primarily consisted of $2.4 million in stock-based compensation, $2.1 million in
bad debt expense, $1.6 million in loss on extinguishment of debt, $1.8 million
in depreciation and amortization, $1.2 million in non-cash interest expense and
amortization of debt discount and $0.8 million in non-cash operating lease
expense. The change in our net operating assets and liabilities was primarily
due to a $2.7 million increase in accounts receivable, a $0.9 million decrease
in lease liabilities, a $0.4 million increase in inventories to support the
growth in sales, a $0.2 million decrease in deferred revenue and a $0.1 million
decrease in other liabilities. These changes were partially offset by a $1.0
million decrease in other assets, a $0.6 million increase in accounts payable, a
$0.4 million increase in other current liabilities, a $0.1 million increase in
accrued expenses, and a $0.2 million decrease in prepaid expenses and other
current assets.
During the nine months ended September 30, 2019, cash used in operating
activities was $29.2 million, attributable to a net loss of $31.1 million and a
net change in our net operating assets and liabilities of $0.4 million,
partially offset by non-cash charges of $2.3 million. Non-cash charges primarily
consisted of $1.0 million in depreciation and amortization, $1.0 million in
stock-based compensation, $0.2 million in non-cash interest expense and
amortization of debt discount and $0.1 million from the change in fair value of
warrant liability. The change in our net operating assets and liabilities was
primarily due to a $1.1 million increase in inventories to support the growth in
sales, $0.6 million decrease in accounts payable, $0.3 million increase in other
assets, $0.2 million increase in prepaid expenses and other current assets, $0.2
million decrease in other current liabilities and $0.1 million increase in
accounts receivable. These changes were partially offset by a $1.8 million
increase in accrued expenses, and $0.4 million increase in deferred revenue.
Investing activities
During the nine months ended September 30, 2020, cash used in investing
activities was $3.4 million, which consisted of $2.6 million in capitalized
costs related to the development of internal use software and $0.8 million
related to the purchase of property and equipment.
During the nine months ended September 30, 2019, cash used in investing
activities was $2.6 million, which consisted of $1.6 million related to the
purchase of property and equipment and $1.0 million in capitalized costs related
to the development of internal use software.
Financing activities
During the nine months ended September 30, 2020, cash provided by financing
activities was $80.3 million, attributable to $67.9 million in net proceeds from
the issuance of our Series E convertible preferred stock, $19.6 million in
borrowings under our term loan and PPP loan, $10.1 million in proceeds from the
issuance of convertible notes, and $0.4 million from the exercise of stock
options, partially offset by $17.3 million in debt repayments, which includes
repayment of our PPP loan.
During the nine months ended September 30, 2019, cash provided by financing
activities was $5.9 million. This was attributable to the net proceeds of $5.0
million from borrowings under our term loan and $0.9 million from the issuance
of our Series D convertible preferred stock.
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Contractual obligations and commitments
The following table summarizes our contractual obligations and commitments as of
December 31, 2019:
Payments due by period
Less than 1-3 3-5 More than
(in thousands) Total 1 year years years 5 years
Operating lease obligations $ 2,608$ 1,349$ 1,259 $ - $ -
Debt, principal and interest(1) $ 13,306$ 5,171$ 8,135 $ - $ -
Total $ 15,914$ 6,520$ 9,394 $ - $ -
(1) We borrowed an aggregate of $12.0 million pursuant to a term loan under the
2018 Loan. Principal and interest payments associated with the 2018 Loan,
including a final one-time payment of $0.7 million, are included in the above
table. On May 2020, we amended the 2018 Loan to defer the principal payments
due in May through July 2020 such that the deferred amounts would be repaid
in equal monthly payments starting in August 2020 through the maturity of the
loan in June 2022.
In September 2020, we amended the 2018 Loan to (i) increase the final fee to
6.25% of the loans funded thereunder, (ii) extend the interest-only period for
all borrowings under the 2018 Loan until December 31, 2021 or, if we achieve
certain milestones, June 30, 2022, (iii) remove the 0.0% interest rate floor,
(iv) increase the maximum aggregate principal amount of the term loans to $20.0
million and (v) extend the maturity date of the 2018 Loan to September 1, 2024.
We also borrowed $15.0 million in connection with the amendment, a portion of
which was used to repay all the previously outstanding indebtedness under the
2018 Loan.
In March 2020, we issued an aggregate of $10.1 million in 2020 Notes, which
accrue interest at 6.0% per annum and mature in 2021. The 2020 Notes were
redeemed into shares of Series E convertible preferred stock in July 2020 in
conjunction with our Series E convertible preferred stock financing.
In May 2020, we borrowed an aggregate of $4.6 million under our PPP Loan. We
repaid the PPP loan in full in August 2020 in the amount of $4.6 million.
In addition, pursuant to a supply agreement with one of our suppliers, we have
agreed to a minimum purchase commitment through June 2020 for the purchase of
amplifier assemblies. As of December 31, 2019, we had a remaining purchase
commitment of $0.3 million. These payments are not included in this table of
contractual obligations.
Off-balance sheet arrangements
During the period presented, we did not have any off-balance sheet arrangements
as defined in the rules and regulations of the SEC.
Critical accounting policies and estimates
Management's discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these consolidated financial statements requires us to make
estimates and assumptions regarding the reported amounts of assets, liabilities,
revenue, expenses and related disclosures. Our estimates are based on our
historical experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions and any such differences may
be material.
There have been no significant changes in our critical accounting policies and
estimates as compared to the critical accounting policies and estimates
disclosed in the section titled "Management's Discussion and Analysis of
Financial Condition and Operations" included in the Prospectus dated October 15,
2020, except for the determination of the fair value of our common stock, which
is used in estimating the fair value of stock-based awards at grant date. Prior
to the IPO, our common stock was not publicly traded, therefore we estimated the
fair value of our common stock as discussed in our Prospectus. Following our
IPO, the closing sale price per share of our common stock as reported on the
Nasdaq Global Select Market on the date of grant will be used to determine the
exercise price per share of our share-based awards to purchase common stock.
Recent accounting pronouncements
See Note 2 to our consolidated financial statements for more information about
recent accounting pronouncements, the timing of their adoption, and our
assessment.
JOBS Act Accounting Election
We are an "emerging growth company," as defined in the JOBS Act. Under the
JOBS Act, emerging growth companies can delay adopting new or
revised accounting standards issued subsequent to the enactment of the JOBS Act
until such time as those standards apply to private companies.
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We have elected to use this extended transition period to enable us to
comply with new or revised accounting standards that have
different effective dates for public and private companies until the earlier of
the date we (i) are no longer an emerging growth company or
(ii) affirmatively and irrevocably opt out of the
extended transition period provided in the JOBS Act. As a result, our
consolidated financial statements and our interim condensed
consolidated financial statements may not be comparable to
companies that comply with new or revised accounting pronouncements.
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