Q2 2022 Eargo Inc Earnings Call
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Good afternoon and welcome to the Eargo second quarter 2022 earnings conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions.
To ask a question, you may press star then one on your telephone keypad. To enjoy your question, please press star then two.
Please note this event is being recorded. I would now like to turn the conference over to Nick Lideco, Senior Vice President, Strategy and Investor Relations. Please go ahead. Thank you
Good afternoon everyone and welcome to the Eardro Second Quarter 2022 earnings conference call. As a reminder, this call is being broadcast live and the digital replay will be available on our Eardro website.
Joining me on today's call are Christian Gordonson, President and Chief Executive Officer, and Adam Aponis, Chief Financial Officer.
Before we begin, I'd like to remind you that some of the managed discussed in this conference call will contain forward-looking statements regarding future events as outlined in our press release today. We wish to caution you that such statements are based on management's current expectations and beliefs, are forward-looking in nature, are subject to risks and uncertainties, and actual events or results may differ internally.
The factors that could cause actual results are events to different include but not limited to. factors referenced in our press release today as well as our filings with the SEC.
Before turning the call over to Christian, I want to make note that we have posted a historical gap to non-gap reconciliation table on our website in the events and presentation.
But that said, I will turn the call over to Christian.
Thanks, Inex. And thank you everyone for joining us today. And thank you everyone for joining us today.
The second quarter for year-go can be characterized as transitionary.
At approximately seven months, as the we learned of the investigation by the DOJ, we reached a civil settlement agreement with the US government to resolve the DOJ investigation with no admission of liability.
We have since cured our SEC filing delinquency, retaining the listing of Eargo stock on NASDAQ, and secured capital to fund our activities and pursue our omnichannel growth strategy.
We also took several efforts to reduce our cash burn.
including significant reduction in monthly media spend and an additional 17% reduction in our workforce, following the previous 27% reduction at the end of 2021. 1.
Clearly, our second quarter financial results and year-over-year comparisons reflect our decisions to stop accepting insurance as a form of fabric payment on December 8, 2021, as well as the cash burn reduction initiatives I just mentioned.
The volumes sequentially down as expected, we took the time to continue resigning the efficiency of our cash pay business, reducing media spend to 4.1 million dollars in the quarter, down 500,000 sequentially, but improving conversion rate to nearly 16%. But improving conversion rate to nearly 16%.
Since our last call, we have made progress in enhancing our internal compliance and risk management processes, as well as building our infrastructure across revenue life cycle management and claims processing to support any future reentry into the insurance market.
We also continue to improve the customer experience both online and a little bit of fun. And we're going to focus online and a little bit of fun. We're going to focus online and a little bit of fun.
From a financing perspective, we achieve a significant milestone in that we secured a strategic commitment of up to $125 million from patients where a capital closing the first-range investment of $100 million in senior secured convertible notes on June 28th. How does GMC Inter Idea
We are now focused on completing a rights offering of 375 million common shares to existing stockholders by November 25, 2022 or within 150 days of the closing of the first large investment.
Adam will discuss a more detailed timeline in a few moments.
As part of our financing process and in light of the events of the last 10 months, as well as the macro environment management and the board.
Took the time to evaluate our short and long-term business strategy.
While we made several changes to improve focus and efficiency, we reconfirmed that our omni-channel strategy should continue to be the primary approach to returning EAGO towards a growth quality.
The capital from Patient Square allows us to begin executing on that strategy, and we're excited to enter the second half of the year with a clear focus on our business priorities.
Number one.
potentially regain insurance coverage of Eargo for government employees under the FEHB program.
We need to work with individual FEHB carriers to align on go-forward processes and required documentation to support insurance coverage.
Although we are working to establish dialogues with third-party payers, we expect any negotiations with payers to last an extended period of time, and we do not plan to provide an update until if and when we have reached an understanding with payers.
Number two refine and expand our physical retail strategy
We continue to conduct retail pilots to better understand the optimal consumer journey in a physical retail environment and interact with our retail partners to refine our strategy for an expanded retail presence.
Number three, optimize our cash paid business.
Most recently, we improved conversion to nearly 16% in the second quarter on significantly reduced media spend.
4. Continue to invest in innovation to maintain an annual product launch cadence which has historically driven new consumer demand and increased repeat customer business.
Before turning it over to Adam, we also announced today that Peter Biskar has stepped down from the company's board of directors effective August 3rd, 2022. With an expanding role at Pivotal and Manfroam Life Sciences Fund, Peter has decided to dedicate more time to these increasing responsibilities.
We're grateful for the insight and expertise Peter has brought to the board over the years and wish him well in his expanded role.
Let me now turn it over to Adam for a more detailed summary of the next steps in our financing process and our second quarter financial results.
Thanks, Christian.
Let me start with an update on the timing of the rights offering.
one of our major company initiatives for the second half of 2022.
In the second quarter, we achieved a significant milestone in that we secured a strategic commitment of up to $125 million from patient square capital.
This significant capital raise will enable us to pursue our omnichannel growth strategy.
On June 28th, we closed the first tranche investment of $100 million in senior secured convertible nuts.
A short-term debt is a bridge to such time as we can issue equity to shareholders in our right software.
Pursuant to the terms of the transaction agreement, we are focused on completing a rights offering of 375 million common shares to existing stockholders.
which we intend to complete by November 25, 2022, or within 150 days, the closing of the first Tranche investment.
and in any event, by December 24, 2022.
Prior to commencing the rights offering, we intend to seek stockholder approval to increase the number of authorized shares and issue the full potential amount of conversion shares at our annual meeting of stockholders to be held on October 12, 2022.
We do not intend for the record date for the Rights Offering to precede the date of the annual meeting.
Now, moving to the summary of second quarter 2022 financial results.
Our second quarter results and year-over-year comparisons reflect our decision to stop accepting insurance as a form of direct payment on December 8, 2021, as well as the company's efforts to reduce cash burn.
Second quarter 2022 net revenue is $7.2 million, down 68% year-over-year.
The decrease was driven by a decrease in gross systems shipped as the company no longer accepted insurance as a method of direct payment as of December 8, 2021.
decreased average selling price, and an increase in sales return rates as the company operated on a cash pay basis only during the three-month end of June 30, 2022.
Second quarter 2022 gross shipment system shipped worth $4,455, down 65% year over year. The year over year change was driven by the company's decision to no longer accept insurance as a method of direct payment as of December 8, 2021.
Second quarter 2022 return accrual rate was 33.3%.
up 9.2 percentage points year over year driven by primarily the shift to cash bail in the business in the second quarter.
Our cash paid business has traditionally carried a higher return rate than our insurance business.
Moving on to non-GAAP gross margin and non-GAAP operating expenses.
Our discussion of financial metrics at the gross margin line and below will be on a non-GAAP series.
which excludes stock-based compensation expenses.
Please refer to our gap to non-gap reconciliation included in today's earnings report.
Second quarter non-gap gross margin was 35.2%.
compared to 72.3% in the second quarter of 2021.
The year-over-year gross margin decline is primarily due to an increase in sales return rates, lower shipment volume, causing fixed costs to be spread over smaller number of goods, and increasing cost of goods with products sold due to a change in product mix.
and an increase in amortization of capitalized software costs related to the commercial launch at yearbook 5 and yearbook 6.
Second quarter non-GAAP sales and marketing expenses were $12 million, or 166% of net revenues, compared to $20 million, or 87.4% of net revenues in the second quarter of 2021.
The decrease in expense was driven by decreases in direct marketing, advertising, and promotional expenses. Following our decision to stop accepting insurance benefits is a method of direct payment on December 8, 2021.
and decreases in personnel and personnel-related costs.
The increase in sales and marketing as a percentage of revenues was due to a reduction in revenue.
non-GAAP research and development expenses were $4.5 million, or 61.6% in net revenues, compared to $4.09, or 17.7% in net revenues in the second quarter of 2021.
non-GAAP general and administrative expenses were 16.0 million, or 220.5% of net revenues, compared to 6.3 million, or 27.5% of net revenues, in the second quarter of 2021.
The increase is primarily due to $5.7 million in transactional costs related to the note purchase agreement.
and a net increase in general corporate costs of $3.8 million, primarily related to legal and other professional fees driven by activities related to the DOJ investigation.
Non-gap net operating losses for the second quarter of 2022 was negative 29.9 million compared to a non-gap net loss of negative 13.8 million in the second quarter of 2021.
Moving to the balance sheet.
We had cash and cash equivalents of $106.6 million on June 30, 2022, which includes proceeds from the first tranche closing of the senior convertible nuts transaction on June 28, and using approximately $16.2 million to pay off our previous SBB debt obligation as well as the closing costs.
This compares to $110.5 million as of December 31, 2021.
Moving to cash burn guidance.
We continue to expect a quarterly cash burn between $20 million and $25 million in the near term, with slight variability from quarter to quarter.
I'll now turn it back to Christian for closing commentary.
Thanks, Adam.
We're glad to have the second quarter behind us and to have begun executing on the initiatives that we believe have the potential to return Eargo to a growth mode.
Despite what we've been through, the organization is motivated, incentivized and energized to achieve our objective.
If there's one characteristic of the people at Jogo, it is that we don't give up.
Clearly, a lot of hard work is ahead of us, but there remains a very large, under-penetrated market opportunity we believe we are well positioned to capitalize on. While others are always for the sake of this project, we have everything they need to actually
established remote support structure, pending changes to the commercial regulations, and the recent capital raise, we feel good about the future of Eargo.
I will now turn the call over to the operator for Q&A. Thank you.
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.
To withdraw your questions, please press star then 2.
The first question comes from Robbie Marcus of JP Morgan. Please go ahead.
Hi, this is actually Lillian for Robbie. Thanks so much for taking the question. First, just to start out, how have your conversations with the OPM regarding reentering the insurance market been progressing? And is there any sort of timeframe we should be keeping in mind for some sort of decision here?
Thank you for the question. As we spoke about in our prior update, we have had good discussions with OPM. The clear next step is the discussions that are ongoing with FEHB carriers. And as we also stated in the script and the announcement, we will update when we have any material updates to that.
Got it, okay. And then maybe just a follow-up, can you dig a little bit deeper into how you have been able to drive increased conversion rates, and how you are approaching marketing and advertising differently? And how do you see yourself being able to support this higher level of conversion and drive growth on lower media spend? Thanks so much.
No, this has been an...
In the middle of everything that the company has been through, we kept the sales and marketing team very focused on how do we take this time and really make sure that we are well set up for the future. And driving up conversion rate was the number one metric that we achieved, or that we were aiming for. We did this while at the same time reducing media spend, and actually also making productions on the people side.
So not an easy task, but I think it has really been based on what we've learned over the years of selling direct to consumers within the hearing health category. How do we apply that in a focused way and a lot of compliments to both our marketing and our sales team for really working on driving up that level of efficiency? And to your question, I think we believe that as a business, we are not going to be able
As we can open additional channels and also start expanding our media presence again, we believe that we can do this in a more efficient manner that's what we've done historically on a channel level.
Thanks so much.
The next question comes from Margaret Caxor of William Blair, who's go ahead.
Hey guys, this is Maggie from Margaret today. Thanks for taking the questions. I first wanted to ask during the second quarter, just the split of your business between your cash pay and your receipt customers and how you see that trending going forward this year based on the marketing initiatives you're putting in place. Thanks so much. You've beenk around the world 30 times. Grab your feet. You're in.laugh before you go moon.
Hi, Maggie. It's Adam. I can take that one. In both Q1 and Q2, the mix of repeat business was about 20% of total volume. From an absolute numbers perspective, I'd expect the number to be relatively stable in the back half.
Great. Thank you. The next webinar I wanted to ask...
How are close rates on your job? Just trying to understand if you're within that $25 million cash-form guidance you provided, how much of that is in the ETC and how much of that can be converted into the program?
Sorry, my line was a little tough. Okay, we had the same issue. Can you repeat the question?
Yes's soum.
So just trying to understand, you know, you're burning the $25 per quarter. How much of that's been within D to C, and then how much of that can be converted into sales?
Adam are you following this? I apologize. I'll repeat that.
It was a question of the 20 to 25 million ask how much of And that just about three to or into the Insurance side of things and I think what we've said is we don't have any updates in terms of you know when we'll be returning on or scaling either retail or insurance and the quarterly cash burn that we're forecasting
doesn't account for any positive movement that either one of those two could create on the business.
I'm not sure if I answered your question. I did catch every other word, but please let me know if that covered it.
That's great.
As a reminder, if you have a question, please press star 1. The next question comes from Larry Diggleson from Wells Fargo. Please go ahead.
Hi, this is Charles on for Larry. I wanted to dig a bit more into the cash pay business. Could you say, was Q2 at a point where you say you feel like you optimized that and just you got the spend at kind of a stable rate if you're maybe hoping for a stable cash burn there? What I'm trying to get there is, it seems like obviously the year over year decline, losing the insurance business, but it seems like cash pay still declined as well.
that business is.
near a low point or where it might start to turn around? I think given the distractions of management and all the activity that was going on outside of the commercial side of the business with settling with the DOJ as well as fundraising and associate activities, I think we have found a stability point in the cash pay business from which we can kind of hit the reset. I think Q2 was a transitional period now. I think with the new funding.
It's like how do we sort of establish that? Where do we find the right balance of efficiency versus spend and positioning us to really move forward? I think we clearly learned a lot through Q2.
Perfect. Good to hear. Thanks, guys.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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