Q3 2022 Eargo Inc Earnings Call
Please standby.
Good day and welcome to the Yoga third quarter 2022 earnings conference call.
Today's conference is being recorded at this time I would like.
I turn the conference over to Nick <unk> Senior Vice President corporate strategy and Investor Relations. Please go ahead Sir.
Good afternoon, everyone and welcome to the year ago third quarter of 2022 conference call. As a reminder, this call is being broadcast live and a digital replay will be available on our IR website.
Joining me on today's call are Christian Garcia, President and Chief Executive Officer, and Adam Wood Products', Chief Financial Officer.
Before we begin I'd like to remind you that some of the matters discussed in the 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 materially.
The factors that could cause actual results or events to differ include but are not limited to factors referenced in our press release today as well as our filings with the SEC.
Before turning the call over to Kristian I want to make note that we have posted historical GAAP to non-GAAP reconciliation table.
Our website in the events and presentations section.
That said I will now turn the call over to Christian.
Thank you Nick and thank you everyone for joining us today, when we spoke to you on our second quarter call. We reported on a trend petitionary quarter. We have recently settled the Doj investigation should our SEC filings delinquency significantly reduced our cash burn and re.
Physical retail strategy.
<unk> insurance coverage for Yoko hearing AIDS, including potentially regaining insurance coverage of ego hearing aid devices for government employees under the F E H B program.
Optimizing our cash paid business and continuing to invest in innovation.
I will elaborate on each of these priorities separately, but before I do let me first comment briefly on our active rights offering a 375 million shares of common stock.
This offering through which we intend to raise up to an additional $37.5 million in proceeds before expenses.
To represent a major step forward for the company.
During our annual meeting of stockholders on October 12th we received the stockholder approval necessary on all proposals to conduct the brakes offering.
Been launched a rights offering on October 31st and are currently accepting subscriptions from shareholders of record as of October 24th.
Adam will provide more details on this shortly but we urge all shareholders interested in participating in the rights offering.
There are indications property if you hold your shares of common stock in Street name.
A broker dealer Oba nominee than your broker dealer often nominee if the record holder of the shares your own and you should promptly contact them should you wish to participate the last date for non U S holders to subscribe there's November 10th and the last day for U S holders to subscribe.
It is November 17th.
Before you invest you should read the final prospectus dated October 27th 2022 relating to the offering filed with the Securities and Exchange Commission.
Now.
Turning to our operational updates beginning with our retail strategy.
As many of you are aware the final SDA rule, establishing a new regulatory category for OTC hearing AIDS became effective October 17th 2022, allowing certain hearing AIDS to be sold in person without the supervision prescription of a order involvement or.
Intervention of a license hearing practitioner.
In preparation for this regulatory change ego conducted pilots to better understand how to build the optimal consumer experience for purchasing a hearing aid in a retail environment offering doing a fruit retail outside of the typical clinics has never been done before so.
So this bill James what's critical from our perspective, and all of you when shopping for adhering solution consumers to serve a world class in person experience that includes for call elements.
Number one education and proper merchandising.
<unk> self administered hearing screening.
<unk> expert sales consultation.
For outstanding post purchase support following the testing and refining of this experience and the pilot Big trouble one of America's largest wireless retailers, we agreed to expand the partnership making yoga available for purchase Goodbye approximately 1500 stores <unk>.
Nationwide.
Let me briefly outline how the consumer and picture stores meets before call elements I just mentioned.
Finally, your vacation and merchandising perspective.
Soon every big Thrift store will include an interactive displays that generates awareness and a clean and inviting way. The display contains educational content about you'll go devices in general hearing health that consumers can also request b E mailed to them directly.
The interactive display also includes egos self administer adhering screen and Barak demo devices for customers to handle it.
Store guests can engage with big truck sales consultants to learn more about yoga experience goes with virtually invisible devices up close and see how easy it is to use a portable charger in mobile app.
<unk> sales consultants are trained on ego features and benefits. So they can guide big truck guests through the hearing journey consumers can then purchase in store or take a follow up call within a year ago expert.
Following purchase customers received the same outstanding post purchase support from our client care team for as long as they own the product.
<unk> to be able to expand consumer access to yoga through this partnership with Victor a leader in connecting technology to life in a trustworthy way while the partnership is.
Infancy, and it is too early to comment on expected performance. We believe together we can help more people here better. We also come in the F D. A for reducing the final OTC rule, which.
Which we believe will help improve hearing health for the over 45 million adults in the U S with hearing loss.
As part of <unk> commitment to innovation in connection with the O. T. C. Ruling. We also submitted at five 10-K pre market notification seeking FDA clearance up expanded labeling for yoga five and six hearing AIDS S self fitting before the final OTC rule was announced.
If cleared this would allow you to go to expand to marketing claims of vehicles five and six to include a self fitting designation <unk>.
Lastly, we're currently in the process of updating our labeling an ego devices to meet the new O T C requirements and expect to be able to comply with all applicable OTC regulatory requirements, including labeling in advance of the April 14th 2023 deadline.
For currently marketed devices.
Turning to an update on accessing insurance coverage up you'll go hearing AIDS, including potential insurance coverage of ego for government employees under the FASB program.
Since for solving the Doj investigation last quarter, our focus has been on establishing dialogue with a third party payers and individual feh be carriers with the <unk> of the lining on and establishing go forward processes and required documentation to support their assumptions.
Of insurance coverage for ego devices.
Internally, our focus has been on enhancing our compliance and risk management processes and building our infrastructure across of revenue lifecycle management and claims processing to support re entry into the insurance market.
Getting in September we've assumed accepting both feh b and none <unk> insurance as a method of direct payment and certain limited circumstances.
Specifically in situations when the customer has undergone additional testing time independent licensed health care provider, which supported supporting documentation.
As part of this update of process all customers seeking to use insurance as a payment method are required to receive in person hearing evaluations before we can accept an order of submit an insurance claim for reimbursement.
We also began submitting claims on these insurance orders for reimbursement during the quarter. The volume of the submission is currently small and we are very early in our process. A majority of the claims we have submitted since instituting. This process are still pending responses from the payers.
And a portion of the claims we have submitted for reimbursement had been denied and are currently in the appeals process.
In addition, it is important to note that the new regulatory category of OTC hearing AIDS is not covered under certain insurance plans currently risks.
<unk> carriers with needs to update their coverage policies to reflect the newly established Odyssey category before we could access insurance coverage for OTC hearing AIDS and it is our understanding that the third party feh be carrier that administers approximately two thirds of all <unk> Bennett.
If it's nationwide currently does not intend to cover OTC devices.
Following the reason OTC final rule I want to emphasize that it is early in the process and this process and we do not expect to see any significant volume for insurance orders until we have better clarity on individual insurance plan requirements for coverage and reimbursement post Ot.
C final rule.
We're also.
We also continued focusing on optimizing our cash pay business in the third quarter. We're pleased with our sequential net revenue growth of approximately nine 1% and the stability of our cash pay business is further evidenced by an approximately 16.2% sequential growth and cross.
Cash pay shipment shipped most recently, we improve conversion too over 23.0% in the first quarter of over three percentage points sequentially, reflecting a more efficient media spend.
All our progress into third quarter reflects our commitment to our strategic initiatives. We are pleased with our incremental traction against these objectives and look forward to providing a further update on our next call.
Let me now turn it over to Adam for a more detailed summary of the next steps in our financing process.
In our first quarter financial results [noise].
Thanks Christian.
I'll start first with an update on the status and timing of the rights offerings, one of our major company initiatives the remainder of 2022.
Falling or significant milestones securing a commitment of up to $125 million from patients or capital in the second quarter. We.
We entered Q3 with a focus on obtaining stockholder approval to conduct a rights offering 375 million shares of common stock to existing stockholders pursuant to the terms of the transaction agreement with patient square.
At our annual meeting of stockholders held in October 12th 2022.
We received the required stockholder approval to enable the rights offering and we intend to complete the offerings by November 25th 2022, or within 150 days of closing the first function investment.
And in any event by December 24th 2022.
We recently announced electric dates for the rights offering as October 24th 2022.
Before you invest you should read the final perspective relating to be offering filed with the Securities and Exchange Commission on October 28th 2022.
Now moving to a summary of the third quarter of 2022 financial results.
I will provide all financial comparisons in a sequential basis, given the difficulty year over year comp as a result of the impacts the Doj investigation had in the third quarter of 2021 financial results.
Is Christine mentioned, we began re accepting insurance as a method of direct payments and unlimited capacity, but do not expect a significant volume of insurance orders at this time.
We're also seeking clarity unplanned requirements post.
He will.
Third quarter of 2022, net revenue with seven $9 million.
Approximately nine 1% sequentially <unk>.
The increase was primarily driven by an increase in growth systems shift.
Third quarter of 2022 growth system shift where 5156.
15, 70% sequentially.
The increase was driven by an increase conversion rate and more targeted immediate spent.
Third quarter of 2022 return accrual rate was 32.3%.
One percentage points sequentially.
Moving to non-GAAP gross margin and non-GAAP operating expenses.
Our discussion of financial metrics, the gross margin line and below will be under non-GAAP basis, which excluding stock based compensation expenses. Please.
Please refer to our gap to non-GAAP reconciliation included in today's earnings release, and the historical gap non-GAAP reconciliation table on our website and the events and presentations.
Third quarter non-GAAP gross margin was 24.5%.
<unk>, 35.2% in the second quarter of 2022.
Sequential gross margin decline was primarily due to an increase in cost of goods sold the product.
Due to a change in product mix and an increase in inventory reserves related to certain slow moving inventory items.
Third quarter, non-GAAP sales and marketing expenses were 10 $6 million or 134.5% of net revenues <unk>.
Compared to $12.1 million or $166, 2% of net revenues in the second quarter of 2022.
The decrease in sales and marketing as a percentage of net revenues was due to a continued reduction advertising marketing spend as well as a higher lead conversion rate.
non-GAAP research and development expenses were $4.3 million with 53.8% of net revenues compared to $4.5 million with 61.6% of net revenues in the second quarter of 2022.
non-GAAP general and administrative expenses were $10.1 million or $126, 8% of net revenues.
Paired to $16.1 million or 225% of net revenues in the second quarter of 2022.
The the decrease was primarily due to financing costs incurred in the second quarter of 2022 related to the convertible that transaction on patient square, Pat capital and a net decrease in accrued professional fees.
non-GAAP net operating loss the third quarter of 2022 $23 million compared to non-GAAP net loss of $29 $90 million for the second quarter of 2022.
Moving to the balance sheet.
We had cash and cash equivalents of $88 $1 million in September 30th $2000 to.
This compares to 10, five $110 $5 million as of December 31, 2021.
Our cash burning the third quarter approximately $19 million.
Rather than a previously disclosed quarterly cash for an expectation.
As reduced third party payments will partially offset by payments associated with the patient squared capital transaction of approximately $4 million.
Moving to cash burn guidance, we continue to expect the fourth quarter to cash burn to be between 20 and $25 million with the potential to achieve cash burn in the lower half of that range.
I will now turn it back to Christian for closing commentary.
Thanks.
The third quarter of us pivotal and continuing to lay the groundwork for future year ago success, including the stability of our cash paid business and developing an early re entry point into insurance market.
In addition over.
The last few weeks, we have established that significant physical retail presence through our partnership with veteran.
With our innovative product <unk>.
Isn't business progress.
Capital race, we believe we have the potential to return a year ago to a growth mode and continued to feel positive about the future of a year ago.
I will now turn the call over to the operator for Q&A.
Thank you.
Thank you could you would like to ask a question. Please take note bypassing star one on your telephone keypad.
If you're using a speaker phone. Please make sure you need some change is turned off time I was taking them to reach our equipment.
Thai style wine ask a question.
And we will take our question from Margaret.
William.
Hi, guys. This is actually my garden for Margaret today, Thanks for taking my questions can.
Can you guys just talk about the dynamics of repeat customers and a quarter and 4% of gross shipments that they make and then maybe what is your outlook for this channel, particularly given the potential increase in compensation with the recent.
Oh T C Act.
Yeah.
It's Adam Thanks for the question and I'm happy to talk about what we continue to see repeat the <unk>.
Strong performance in Q3, and then actually was part of the ASB headwinds that we saw because of that.
But it was just above 20.
5% to 25, 30% I think at that 0.7, 28% in the quarter up from the previous quarter by a couple of points.
But we don't expect the OTC Gabbing David impact on at this time and we haven't seen that number format success.
Got it. Thank you and then maybe just one.
I can appreciate that cause it's difficult to provide guidance, but.
Given the the noise in the background environment can you can you talk about expectations for the business in 2023, maybe just qualitatively.
What would make you comfortable providing guidance in the future.
I don't know I think I'll start this off Ryan.
Our focus has been bringing stability to a year ago, and making sure that we positioned the company.
Where we see the future growth levers, while maintaining the cash a business I think we have as we talked about done really well on that.
We are.
Ready to start working on more of the retail side with the picture partnership it's too early given where we are right now on that front and I think we will learn a lot over the following quarters to see how that whole business model actually behaves and at what point, we can actually provide.
A reliable guidance to the street on the impact on our business. So again early on that one I think the other piece.
As as I also mentioned on the insurance side.
We have a strong belief that both insurance and retail a long term growth drivers of the industry and we're seeing nothing into current market that that points to anything else and I'll focus is more on getting in and building that but given the new regulations, I think especially on the insurance side.
It will take longer to figure out how exactly insurance is going to be working in the new structure of the market, Hence why we're not providing guidance.
In the macro environment before all.
Hand, it over to Adam.
For more specific comments into macro environment.
We have not seen any meaningful slowdown we're continuing to monitor it tastes the same kind of traffic interests and behaviors. So we're definitely optimistic.
About the future growth potential of the industry and we believe that yoga is well positioned to address this sort of omnichannel strategy that we have laid out.
I don't know if there's any further guidance to when we can give guidance I think it's just premature at this point.
He said it workers.
Clearly the designer to get back into the normal course of business.
Which we could guy so the two areas I'm looking for.
Building out that track record of understanding once it comes out of the insurance as.
As well as it comes out the retail partnerships.
Learn more about those cute, Eric et cetera that would be the trigger for me to be able to re issue guidance.
Got it thank God.
Thank you.
Thank you and that will conclude today's question and answer session and will also conclude today's teleconference.
Your participation.
Everyone may now disconnect.
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