Q4 2022 Eargo Inc Earnings Call
Speaker 1: The.
Speaker 1: I.
Speaker 2: Ladies and gentlemen, thank you for standing by and welcome to the Eargo Inc. 4th Quarter 2022 Earnings Conference Call. I would now like to turn the call over to Nick Ladiko, Chief Retail Officer. Please go ahead.
Speaker 3: Good afternoon everyone and welcome to the Eargo fourth quarter 2022 earnings conference call. As a reminder this call is being broadcast live and the digital replay will be available on our IR website.
Speaker 3: Joining me on today's call are Christian Gormson, President and Chief Executive Officer, and Adam Lapones, Chief Financial Officer.
Speaker 3: 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 uncertainty, and
Speaker 3: 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.
Speaker 3: 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 IRR website in the events and presentations section.
Speaker 3: With that said, I will now turn the call over to Christian.
Speaker 4: Thank you, Nick, and thank you everyone for joining us today.
Speaker 4: The fourth quarter marks the culmination of a pivotal year for Eargo.
Speaker 4: In 2022, we settled our DOJ investigation and cleared our SEC filing delinquency, recapitalized the business through a major financing, added patient square capital as our major shareholder,
Speaker 4: and made meaningful progress against our most important business priorities.
Speaker 4: Perhaps most impactful to the future of Eargo was the progress we made on our strategic evolution into a true omnichannel business.
Speaker 4: While we continue to see stable trends in sales to direct-to-consumer cash paid customers, retail has begun to diversify our cross-shipment and leverage our existing media spend. And while still early stage, insurance remains a future opportunity.
Speaker 4: Lastly, we have retained top talent across the organization despite the challenges our organization has faced. Given the circumstances, we think it's fair to say that EAGLE has made incredible progress in 2022 and we're excited about the continued evolution of our business in 2023.
Speaker 4: Turning to operational results.
Speaker 4: The business momentum we reported in the third quarter carried into the fourth quarter. We established a nationwide physical retail presence through our partnership with Victual, in connection with the OTC final rule being published in October .
Speaker 4: announced a strategic partnership with Nations Benefits, and in early 2023, commercially launched Eargo 7, our most innovative product yet.
Speaker 4: 4th quarter 2022 net revenue was $12.9 million, up approximately 28% year-over-year and over 63% sequentially.
Speaker 4: I'll now provide a brief update on our strategic initiatives and the path ahead through 2023, beginning with an update on our retail strategy, which is the top organizational priority in 2023. According tomn Agg specific resources available, the next task will be to
Speaker 4: In order to provide some context, let me first briefly recap our three primary objectives in acknowledging this retail channel.
Speaker 4: First, leverage existing retail foot traffic and sales presence at a national scale to add awareness and education a year ago.
Speaker 5: Second.
Speaker 4: better target and qualify consumers through in-person conversation and availability of an in-store hearing screen.
Speaker 4: Third, accelerate revenue growth while better defining our past profitability.
Speaker 4: Moving to our partnership with Victor, one of America's largest wireless retailers.
Speaker 4: Early in the fourth quarter, we announced our expanded partnership.
Speaker 4: placing Eargo inventory in approximately 1,500 stores nationwide.
Speaker 4: As a reminder, this partnership enabled us to meet the four core elements of a world-class experience that we believe consumers desire when shopping in person for hearing aids.
Speaker 4: 1. Education and proper merchandising 2. Self-administered hearing screening 3. Expert sales consultation 4. Outstanding post-purchase support
Speaker 4: The partnership remains in the early stages of scaling up and we are not prepared to make comments on expected performance. However, we have been encouraged by what we have seen in the five months that EAGLE has been available for purchase in Victor retail locations. We continue to support our partner by training and educating their sales...
Speaker 4: One, our partnership remains at their very early stages. We believe premium partnership opportunities like this one are important to the sustainability of the agost business, and I'll have to both accelerate the revenues and clear a line of that Looks
Speaker 4: We thank our partners at Victra and look forward to providing you with further performance updates over time.
Speaker 4: Turning now to insurance and benefits access. In mid-December, we announced a strategic partnership with Nations Benefits.
Speaker 4: Nations is a leading provider of supplemental benefits like FART and member engagement solutions for health plans, and this opportunity will allow health plan members certify nations to use their plan benefits towards purchasing ERGO-OTC hearing aids. I do so with the lead.
Speaker 4: This will create a pathway for individuals with hearing loss, lower barriers to care and offer oversight to ensure people have access to the right products for their individual needs, ultimately allowing more people to hear better.
Speaker 4: While the original timing of the nation launch was expected to be January 2023, nations has been laid large of its OTC hearing aid offering generally, and we do not know when ultimately nations will launch its offering. Nevertheless, we are excited to partner with an organization.
Speaker 4: It shares our values of customer satisfaction and using technology to enhance the customer experience. In terms of broader insurance access, we're currently accepting both FEHD and non-FEHD insurance as a method of direct payment in certain limited circumstances.
Speaker 4: In particular, when this customer has undergone additional testing by an independent licensed healthcare provider to establish medical necessity with supporting clinical documentation, for example, when customers receive an in-person hearing evaluation.
Speaker 4: It remains early in this new process and we do not expect to see any significant volume for insurance orders in 2023. Additionally, we have generally focused on enhancing our compliance and risk management operations, including to support insurance claims property.
Speaker 4: and we intend to continue to do so. Turning now to Ego South.
Speaker 4: We were thrilled to announce the launch of Eargo 7, our seventh generation device at CES in early January . With the commercial launch in mid-February, Eargo 7 is now available for purchase online as well as in picture locations across the country.
Speaker 4: Yergo 7 is the most revolutionary device we have developed to date.
Speaker 4: uniquely designed to offer an even better experience hearing speech in noisy environments, widely perceived to be the most challenging situation for people with hearing loss.
Speaker 4: This is achieved through Sound Adjust Plus with Clarity Mode.
Speaker 4: This feature provides more sophisticated sound processing in loud environments by analyzing the soundscape as it changes and then automatically choosing whether to emphasize speech or reduce noise. No need to open the app or manually adjust anything.
Speaker 4: We're incredibly proud of this feature and believe it will have particular appeal in the new OTC landscape offering advanced technology and high touch post purchase support at an affordable price without ever compromising quality or user experience.
Speaker 4: Importantly, following the receipt of 510K clearance from the FDA, year goes 5, 6 and 7 can each be marketed as self-fitting hearing aids with the use of SoundMatch via our mobile app and each will be marketed as self-fitting hearing aids.
Speaker 4: OTC, Persion to the FDA's new OTC regulatory requirements. Meaningful innovation is a priority, you know, and this latest generation device reaffirms this commitment with new features that continue to put the customer at the heart of the hearing experience. Let me now send it over to Adam for more details summary of all.
Speaker 6: on our 2021 financial results.
Speaker 6: As Christian mentioned, we began re-accepting insurance as a method of direct payment in a limited capacity.
Speaker 6: but we do not expect a significant volume of insurance orders at this time. We are also seeking clarity on a plan requirement post the OTC rule.
Speaker 6: Fourth quarter 2022 net revenue was $12.9 million, up approximately 63.3% sequentially.
Speaker 6: The increase is primarily driven by an increase in growth system shift.
Speaker 6: Fourth quarter 2022 growth system shift for 8,863.
Speaker 6: up 71.9% sequentially. The increase is driven by a wholesale inventory purchase by Victor to have eargoes available for purchase in their approximately 1500 locations nationwide and sequential growth and system ship toward traditional cash pay direct to consumer customers. The fourth quarter 2022.
Speaker 6: return accrual rate was 34.9 percent.
Speaker 6: 2.6 percentage point sequentially.
Speaker 6: Moving to non-GAAP gross margin and non-GAAP operating expenses.
Speaker 6: Our discussion of FIMantial Metrics in the gross margin line and below will be on a non-GAAP basis, which excludes stock-based compensation expenses.
Speaker 6: Please refer to our gap to non-gap reconciliation included in today's earnings release and the historical gap to non-gap reconciliation table on our IR website in the events and presentation section
Speaker 6: Fourth quarter, non-gap gross margin, was 47.9%.
Speaker 6: compared to 24.5% in the third quarter of 2022.
Speaker 6: The sequential gross margin increase was primarily due to higher gross shipment volume on a similar fixed cost base.
Speaker 6: Fourth quarter non-GAAP sales and marketing expenses were $14.9 million or 115.3% of net revenues.
Speaker 6: compared to 10.6 million or 134.5% of net revenues in the third quarter of 2022.
Speaker 6: The decrease in sales and marketing as a percentage in that revenue was due to the higher net revenues.
Speaker 6: non-GAAP research and development expenses were $4.2 million, or 32.7 percent of net revenues.
compared to $4.3 million or 53.8% of net revenues in the third quarter of 2022.
non-GAAP general and administrative expenses were $8.6 million or 66.4% of net revenues.
Compared to 10.0 million
or 126.8% in that revenue in the third quarter of 2022.
The decrease was primarily due to a net reduction in professional fees.
Non-GAP Net Offerting Loss from the 4th quarter of 2022 was 21.5 million. Comparison non-GAP Net Offerting Loss was 23.0 million for the 3rd quarter of 2022. And compare the 33.3 million in the 4th quarter of 2021.
Moving to the balance sheet. In late November , we closed our previously announced rights offering of up to 18.75 million shares of comments in March 2020 renewed activities. We will visit so
representing a major step forward for the company.
Through the offering, we raised gross proceeds from subscriptions of approximately 29.3 million. In addition to these gross proceeds from subscriptions, we also received an additional investment of approximately 5.5 million from patient square.
After deducting related costs and expenses, we are pleased to have raised a total net proceeds of approximately $32.9 million between the two transactions.
which we plan to use to further fund our omnichannel growth strategy.
We thank patient square for their support and commitment to our long-term success and look forward to their continued partnership.
Following the rights offering, and to end the year, we had cash and cash of co-op of 101.2 million and December 31, 2022.
with no debt on the balance sheet. This compares to $110.5 million of cash and cash equivalents and $15.3 million of term debt as of December 31, 2021.
Our previous guidance to the fourth quarter of 2022 was a quarterly cash burn of approximately $20 million to $25 million. Our operating cash burn was $20.4 million in the fourth quarter of 2022.
And her overall cash balance increased by $13.2 million in the fourth quarter of 2022.
Primarily driven by the right offering in patient square investments.
I will now turn it back to Christian for closing commentary. Thanks Adam. We're pleased to conclude 2022 and are proud of what the organization has achieved during a challenging year.
We now look forward to 2023 and the opportunity to transform our business through executing our omnichannel strategy.
We believe our progress in 2022 puts us at a sound operational platform for this execution.
We continue to focus on our four most important business priorities this year.
One, refining and expanding our retail strategy. Two, accessing insurance coverage for EAGLE hearing aids, including continuing dialogue with individual and DHC carriers and other third-party payers regarding insurance coverage of vehicle hearing aids.
three, optimizing our cash pay business, and four, continuing to invest in innovation. So see what I have. All right.
Of course, all of this is supported by our culture of compliance and accountability as we continue to refine our program and maintain the utmost compliance across the business.
Before closing, I would like to thank our team at Virgo for their unwavering dedication to improving hearing.
This organization remains motivated, incentivized, and energized to achieve our objectives, and without them, none of this progress would be possible.
We have a lot of work ahead of us, but this market remains large and under penetrated. And we believe our recent business progress and product innovation puts Ego in a position to capitalize on this opportunity.
I will now turn the call over to the operator for Q&A.
The floor is now open for your questions. To ask a question at this time, please press star 1 on your telephone keypad. If at any point you'd like to withdraw from the queue, please press star 1 again.
You'll be provided the opportunity to ask one question and one further follow-up question. We will now take a moment to render our roster.
We do have a question from the line of Margaret Caxor from William Blair. Please proceed.
Hey, good afternoon guys. Thanks for taking the question. I wanted to start, I guess, to follow up on the Victor sales. Obviously, it's great to see their commitment to try to take this as a wholesale purchase. But can you give us a sense, I guess, around repeat purchases by Victor, either in Q4.
in terms of detail and getting the commitment on their end to be present in all 1,500 locations has been significant. We're not giving specific guidance. Adam, I don't know if we can provide more nuance here, specifically to how we're looking at it. At Mobile, we're pretty excited about this.
partnership and the collaboration that we're seeing from Big Tru.
And the Margaret, this is Adam. Thank you for the question. We aren't giving specific guidance or a breakdown of the elements of the, as Krishnam mentioned, we did provide initial stocking or the covered unit needs the 1500 locations. And we did start to see self-druing Q4, but it was very early days in that partnership as it was.
you know, that can sub-bullet, you know, how, as you think about this whole telltale, were you able to recognize cash from it? And then the real kind of follow up, I guess, would be, as we think about the core DTC underlying franchise, how is demand there?
especially with your go seven and then kind of maybe offset if it is at all by recent inflation growth. Thank you, guys. Yeah. No, thank you. There was an elegant way of asking one question, Margaret. No surprise. And then it become of a first part and then I'm off to that when it comes to the gas.
You know how we're thinking and I think how we describe the Victor partnership.
is the best. OTC is very new for the whole industry and it's like how much support, what kind of experience are you building? Our view on the VICTRA partnership and the reason why we emphasize it so much.
You know, OTC is very new for the whole industry. And you know, it's like how much support, what kind of experience are you building? Our view on the VICTRA partnership and the reason why we emphasize it so much in, you know.
in this call is Reasonly that this is you know creating the close to optimal user experience So we're very thrilled with the level of commitment We're seeing and also the level of experience that we can built in store in terms of actually
actively talking about hearing loss and supporting prospective customers and experiencing either hearing, screaming, simulation, and having that kind of experience which...
to our understanding if not what you see in a lot of other over-the-counter experiences. So what we are clearly focused on here is continue to work with VICTRA to build out this as a case of how over-the-counter can be done. We are in discussions with other retailers.
Because clearly this is something that is getting a lot of interest but ideally, you know, we're at the point where we can use Victoria as a case example of how to really bring Customers into the category in a way where we're meeting the customer where they already are which is the whole point So so I guess your assumption is pretty correct on that one
partnership with VICRA and we'll continue to provide updates as things progress here in Q1 and beyond. And then finally on the core D2C, as we also mentioned, we had a Thomas Q4 also versus Q2 and Q3.
Which frankly, we've also historically been seeing good momentum in Q4, especially for the DTC business and the holiday season. And that's part of delivering the numbers that we did, that we had a strong Q4.
Again, we're not really commenting on the new year, but I think it's fair to say that we have not really seen any strong indicators that the economy as such and all the worries about inflation, interest, cash, you name it, has impacted our business.
Thank you, guys. Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect. All right and thank you for being here. Goodbye.