☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes☐No☒

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Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒No☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).Yes☒No☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).YES☐NO☒

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, ~~did not have a public float~~based on the ~~last business day~~closing price of ~~its most recently completed second fiscal quarter because there~~the shares of common stock on the Nasdaq Global Select Market on June 30, 2022, was ~~no public market for the Registrant’s common equity as of such date.~~$22,580,118.

The number of shares of Registrant’s Common Stock outstanding as of March ~~8, 2021~~20, 2023 was ~~38,295,422.~~20,741,841.

This Annual Report on Form 10-K contains forward-looking statements about us and our industry that involve substantial risks, uncertainties and assumptions. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, 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,” “forecast,” “goal,” “guidance,” “intend,” “likely,” “may,” “objective,” “plan,” “ongoing,” “positioned,” “possible,” “potential,” “predict,” “project,” “seek,” “shall,” “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. These forward-looking statements include, but are not limited to, statements about:

We have based these forward-looking statements largely on our current expectations, estimates, forecasts and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. In light of the significant uncertainties in these forward-looking

statements, you should not rely upon forward-looking statements as predictions of future events. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Annual Report on Form 10-K, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur at all. You should refer to the section titled “Risk Factors” for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

~~We are~~Eargo, Inc. (“Eargo,” the “Company,” “we,” “us” or “our”) is 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~~products 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~~ever virtually invisible, rechargeable, ~~completely-in-canal,~~completely in-the-canal, FDA-regulated ~~exempt Class I and Class II~~ devices 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. Our differentiated, consumer-first approach empowers consumersindicated to take control of their hearing by improving accessibility, with personalized, high-quality telecare-based hearing support from licensed hearing professionals. We believe that our differentiated hearing aids, consumer-oriented approach and strong brand have fueled the rapid adoption of our products and high customer satisfaction, as evidenced by over 60 thousand Eargo hearing aid systems sold, net of returns, as of December 31, 2020. We believe this represents the beginning of our penetration into a large, growing and underserved market of people with hearing loss, which we estimate included approximately 43 million adults in the United States and more than 465 million adults globally in 2019.

Hearing loss is a natural consequence of aging and has a significant impact on quality of life. Globally, hearing loss is one of the most prevalent health conditions, and it is the third most common medical condition in the United States—more prevalent than both diabetes and cancer. As demographic trends shift and people continue to live longer, we expect that the proportion of the population with hearing loss will continue to rise, further expanding this already large market.

~~We estimate that in 2019, 37 million individuals over the age of 50 in the United States had~~compensate for mild to moderate hearing loss. Of these 37 million, our initial marketing efforts are focused on individuals with annual incomes above the median household national average. We estimate that this group consisted of approximately 14 million people and represented an initial target market of over $30 billion in 2019.

Age-related hearing loss in the United States is predominantly addressed by the use of FDA-regulated hearing aids. Despite the significant individual and societal impact of hearing loss, we estimate only approximately 27% of the estimated approximately 43 million adults with hearing loss in the United States in 2019 owned a hearing aid. We believe the low adoption and underserved nature of this market is a direct result of the limitations of and stigma associated with traditional hearing aids and the cumbersome manner in which they are sold.

Hearing aids are traditionally distributed through a business-to-business model in which hearing aid manufacturers rely on a fragmented network of independent hearing clinics to sell their devices to consumers. Purchasing a hearing aid through a clinic can be a lengthy, inconvenient and disempowering process that generally requires a series of in-clinic appointments with a licensed hearing professional for assessment, fitting, programming, ongoing adjustments and maintenance. We believe the separation of the manufacturer from the consumer is not necessary, adds an incremental layer of cost and has contributed to the historical lack of innovation in this market, resulting in products that fail to meet consumer needs.

Designing hearing aids that offer high quality audio performance in a virtually invisible and comfortable form factor that address the needs of consumers presents significant engineering challenges. These challenges have historically been difficult to reconcile in a single device, resulting in the traditional landscape of products that reflect trade-offs between functionality, comfort, visibility and ease of use. Behind-the-ear devices represented approximately 88% of hearing aids dispensed in the United States in 2019 but have a highly visible form factor that contributes to the stigma of hearing loss and limits their adoption. The remaining approximately 12% of hearing aids dispensed in 2019 were in-the-ear devices that are less visible but can occlude or obstruct the ear canal causing discomfort. Additionally, in-the-ear devices require customization and generally require batteries that need to be replaced, making them expensive and cumbersome to use.

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 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 ongoing impact of COVID-19 depends on the duration and severity of the pandemic, which is 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, and the ongoing impact of COVID-19 could be substantially different than what we have experienced to date.

We believe our hearing aids and consumer-centric approach, which we refer to collectively as our Eargo solution, address many of the drawbacks of the traditional hearing aid market. The primary benefits of our solution include the following:

We designed the Eargo solution to provide significant advantages relative to traditional solutions for hearing loss and believe that the high level of customer satisfaction that we have achieved demonstrates our strong value proposition.

We believe we are the first and only company to successfully address the technical challenges inherent in designing and commercializing a high quality, comfortable, rechargeable, in-the-canal hearing aid. We have established a highly capable research and development organization with what we believe is a rare combination of expertise in mechanical engineering, product design, audio processing, clinical and hearing science, consumer electronics and embedded software design. In addition, we have strategic intellectual property protection in certain key areas. Our technical capabilities and commitment to innovation have allowed us to deliver significant product enhancements on a rapid development timeline, which in turn drives our compelling new product roadmap.

We market and sell our hearing aids ~~directly to consumers~~primarily in a direct-to-consumer format, 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.~~team. Our commercial organization is focused on accelerating customer adoption, improving sales team productivity and increasing brand awareness. Going forward, we also plan to selectively pursue omni-channel opportunities and international expansion initiatives that are accretive to our customer acquisition strategy and that provide consumers additional means to access our solution.

~~We believe the following competitive strengths are essential to our mission of empowering~~differentiated, consumer-first approach empowers consumers to take control of their hearing ~~and will~~by improving accessibility, with personalized, high-quality remote customer support ~~our goal of penetrating the large population of individuals with untreated hearing loss:~~

~~Globally,~~people suffering from hearing loss, ~~impacted more than 465 million people in 2019. In the United States,~~which we estimate ~~there were~~included approximately 4345 million adults ~~with hearing loss~~(or approximately one in ~~2019, making it the third most common medical condition and more prevalent than both diabetes and cancer.~~

As demonstrated below, hearing loss increases with age and reflects the natural and gradual progression of hearing deterioration that occurs in most people as they age. In the United States, we estimate approximately 34% of people over the age of 50 and nearly two-thirds of people over the age of 70 experienced difficulty hearing in 2019. As demographic trends shift and people live longer, we expect that the proportion of the population with hearing loss will continue to rise.

Hearing loss may be characterized as mild, moderate, severe or profound, depending on how loud sounds need to be for an individual to hear. In the United States, approximately 6% of the hearing impaired population is characterized as having severe or profound hearing loss, while the moderate and mild segments represent approximately 28% and 66% of this population, respectively.

Hearing loss can significantly impact quality of life. Hearing loss can make it more difficult to work or interact with family and friends, leading to feelings of isolation, depression and increased stress. According to a study published in the Journal of the American Medical Association, hearing loss has been linked to accelerated cognitive decline. The World Health Organization estimates that unaddressed hearing loss poses an annual global cost of approximately $750 billion. As global populations become older, we believe the burden of hearing loss will continue to rise.

Hearing loss in the United States is typically addressed by the use of FDA-regulated hearing aids. To be functional for daily use, hearing aids must be engineered with a form factor that is portable, long-lasting, comfortable and discreet. These challenges have historically been difficult to reconcile in a single device, resulting in the traditional landscape of products that reflect trade-offs between functionality, comfort, visibility and ease of use. Behind-the-ear devices represent approximately 88% of hearing aids dispensedsix adults) in the United States in ~~2019 but have a highly visible form factor that contributes to the stigma~~2022, of hearing loss and limits their adoption. The remaining approximately 12% of hearing aids dispensed in 2019 are in-the-ear devices that are less visible but can occlude or obstruct the ear canal, causing discomfort. Generally, in-the-ear devices are also not rechargeable and require batteries that need to be replaced, making them cumbersome to use. Due in part to these limitations, hearing aids are significantly underutilized in the hearing-impaired population. In 2019, of the estimated approximately 43 million adults with hearing loss in the United States,whom only approximately ~~27%~~25% actually owned a hearing aid.

~~The table below illustrates the primary features of traditional hearing aids.~~

In addition to FDA-regulated hearing aids, consumers can purchase personal sound amplification products, or PSAPs. PSAPs are primarily sound amplification devices that lack the audio quality, noise reduction and feedback cancellation technology of FDA-regulated hearing aids. While PSAPs are broadly available in consumer electronics stores and online at relatively affordable price points, the FDA does not currently recognize them as a treatment for hearing loss, instead describing PSAPs as “devices that increase environmental sounds for non-hearing impaired consumers.” The FDA Reauthorization Act of 2017, or FDARA, created a new category of over-the-counter, or OTC, hearing aids that are intended to be available without the involvement of a licensed practitioner, and it is possible that some PSAPs could become OTC hearing aids under the new framework if they satisfy applicable requirements. Despite the deadline in FDARA for the FDA to issue proposed regulations to implement the OTC hearing aid pathway by August 18, 2020, the FDA has not yet issued a notice of proposed rulemaking or indicated how it will implement this pathway.

Hearing aids have traditionally been sold through a business-to-business model in which hearing aid manufacturers rely on a fragmented network of independent hearing clinics to sell their devices to consumers. Purchasing a hearing aid through a clinic generally requires a series of appointments with a licensed hearing professional for assessment, fitting, programming and ongoing adjustments. In 2018, there were approximately 18,800 licensed hearing professionals in the United States. We believe the separation of the manufacturer from the

~~consumer is not necessary, adds an incremental layer of cost and has contributed to the historical lack of innovation in this market, resulting in products that fail to meet consumer needs.~~

Market research indicates that approximately six to seven years pass between the time that the average hearing aid user in the United States first acknowledges their hearing loss and when they first purchase a hearing aid. Once consumers decide to seek help, they are often referred by an ear-nose-throat physician or general practitioner to a licensed hearing care professional. The licensed hearing care professional performs a hearing test, recommends a hearing device and then performs fitting procedures which often require multiple visits.

Hearing aids are typically sold as a part of a bundled package that includes the device itself, the audiology exam and related services. Further, there is limited transparency at the consumer level, and the end-user price generally includes the overhead cost and profit margin for the hearing clinic in addition to the cost of the device and audiology services.

Following purchase, traditional hearing aids typically require programming and adjustments by the licensed hearing care professional, resulting in additional in-person follow-up visits. Throughout this lengthy process, which can take weeks or even months, the consumer is reliant on the licensed hearing care professional for education and support. Despite the high touch nature of the selling process and extensive level of customization, hearing aids are often returned due to issues related to comfort, fit, functionality and aesthetics.

We believe the limitations of traditional hearing aids and the manner in which they are sold today are the primary reasons that approximately 73% of the estimated approximately 43 million adults in the United States in 2019 with hearing loss did not own a hearing aid. These limitations include the following:

We are passionate about helping people hear ~~better. We~~better and are on a mission to change the way the world thinks about hearing loss.

Since our inception, our founding principle has been to dramatically improve the consumer experience at every step of the hearing care journey. Our products, customer support and marketing messaging are a direct result of that passion. We believe our ~~model~~primarily direct-to-consumer and omni-channel models can shift the paradigm in the treatment of hearing loss for the ultimate benefit of consumers.

~~Our~~ Eargo hearing aids combine proprietary technology, engineering know-how and scientific and design expertise to offer high-quality performance in an in-the-canal form factor that makes them virtually invisible. We market a variety of models of hearing aids to provide customers with a range of cost and functionality options. Each generation of Eargo hearing aids has been improved with additional features, such as audio performance, enhanced physical fit and/or comfort and greater ease of use.

Our in-the-canal devices feature ~~high quality~~high-quality audio, are designed to provide up to 16 hours of battery life and ~~have~~feature Eargo’s proprietary ~~Flexi Fibers or Flexi Palms, which~~soft and flexible medical-grade silicon tips. These silicon tips are ~~designed~~removable, allowing for simple cleaning, and can be purchased separately in several sizes to ~~enable the unit to comfortably “float” in the~~accommodate individuals with different size ear ~~canal allowing air and sound to pass freely around them. Eargo~~canals. Eargo’s rechargeable hearing aids are designed for ease of use and maintenance ~~and to~~while providing a comfortable fit for a majority of our target market. Additionally, several of our model devices are self-fitting as defined by the ~~population,~~FDA. Eargo self-fitting hearing aids are adjusted by the user to meet the user’s hearing needs, without the need for pre-programming or a hearing test from a hearing care professional.

We expect to continue refining and ~~are rechargeable. In addition,~~improving Eargo hearing aids, and we have the intention of an approximate annual cadence of new product launches. To this end, we are ~~highly customizable, allowing our users to cycle through four different sound profiles, which include different features such~~working on the development of a cost-conscious offering as ~~amplification and noise levels while on-the-go to accommodate different ambient noise environments. We currently offer three versions of our~~well as the next Eargo hearing ~~aids, the Eargo Max, the Eargo Neo and the Eargo Neo HiFi, at three different price points to provide customers~~aid model with ~~choices on cost and~~improved functionality. ~~Our hearing aids also come with a portable charging case, and the Eargo Neo and Eargo Neo HiFi offer connectivity via a Bluetooth-enabled charging case and the Eargo mobile app.~~

We ~~employ a differentiated, consumer-first business model to empower the consumer and improve the accessibility and affordability of high-quality hearing aids. We currently market and~~ sell our hearing aids ~~directly to consumers with~~primarily on a ~~personalized approach that we believe helps motivate them to take action and then guides them along their hearing journey.~~

~~We engage~~direct-to-consumer basis, engaging consumers through a mix of digital and traditional marketing as well as select commercial partnership, omni-channel (including retail) and other opportunities that isare designed to appeal to prospective customers on a personal level and build our brand. Our data-driven approach to reaching consumers has allowed us to identify and target key demographics and purchasing behaviors of our most relevant audience, and we constantly refine our approach to most efficiently reach this audience. Our empowering messaging and sophisticated marketing strategy have helped contribute to over 60 thousand hearing aids sold, net of returns, as of December 31, 2020.

~~In addition to providing information about our products, we encourage prospective customers to learn about their hearing condition and provide~~Eargo provides free educational resources toas well as support from our team of sales consultants and hearing professionals, who help ~~them make informed decisions.~~ educate and guide prospective customers through addressing their hearing loss in a personalized and consultative experience.

While a hearing test is not necessary to purchase an Eargo hearing ~~aid,~~aids, we offer an online, do-it-yourself hearing ~~screen~~screening for prospective customers who are interested in ~~an assessment. We believe this~~learning more about their hearing. This screening is ~~an empowering experiential journey for the consumer as they are able~~not intended to ~~learn at their own pace and comfort.~~

~~Once a potential customer has expressed interest in our Eargo solution, by completing a form~~prevent, diagnose or otherwise contacting us, one of our sales consultants will contact them directly. Our sales consultants are highly trained inside salespeople who collaborate with the consumer on how best to address theirtreat hearing loss ~~challenges and determine~~or any other disease or condition, but can assist customers in evaluating whether ~~the~~ Eargo hearing ~~solution is appropriate~~aids may be right for them. Prospective customers can also utilize Eargo’s remote support system to receive guidance regarding matters such as use, charging and cleaning of Eargo hearing aids, and real-time audio setting modification for individualized hearing loss.

Customers are able to complete ~~their purchase~~purchases over the phone with ~~their~~an Eargo sales consultant or directly on our ~~website, without the need to navigate multiple visits to the hearing clinic for tests and fittings. Importantly, potential customers are not required to have a hearing test to order the~~website. The Eargo ~~hearing solution, which simplifies the~~ purchasing experience is designed to be simple and ~~improves~~to improve the accessibility of hearing ~~aids relative to the traditional hearing clinic channel.~~aids. In addition, ~~Eargo provides insurance claims processing for consumers, eliminating in most cases the need for consumers to interface with their insurance providers. Further,~~ we offer a general 45-day trial period.

Following the United States Food and Drug Administration (“FDA”) final rule regarding the creation of a new category of over-the-counter (“OTC”) hearing aids (the “OTC Final Rule”), we have focused efforts on transitioning to the new OTC framework and expanding our omni-channel approach, including exploring select additional commercial partnerships, retail, and other distribution opportunities. For example, we have a commercial arrangement with Victra, one of America’s largest wireless retailers, to facilitate access to our hearing screeners and demonstrate our devices at approximately 1,500 Victra store locations across the country; customers are also able to purchase or order Eargo hearing aids at such store locations. We believe that the OTC Final Rule may facilitate the opportunity to execute additional commercial partnerships, expanding our customers’ ability to learn about our hearing aids, obtain general information about their hearing through our current hearing screeners, and experience our devices in person prior to purchasing or ordering directly at retail locations.

Moreover, following the effective date of the OTC Final Rule, we have partnered with certain resellers and other distributors, including benefits managers, to offer ~~three~~Eargo hearing aids for sale through their online storefronts or portals. Under these partnerships, we sell Eargo hearing aids to resellers at wholesale prices, who in turn offer our products to end-customers through their respective online storefronts or portals. Generally, we fulfill and ship orders placed through these online storefronts or portals directly to end-customers, and we generally do not submit insurance claims on behalf of customers who purchase from one of these authorized resellers, including Victra. We believe these partnerships will help expand consumer access to our hearing aids and allow us to target high-intent customers more efficiently. We continue to look for additional partners to help expand our customer base.

Between December 8, 2021 and September 15, 2022, we did not accept insurance as a direct method of payment to the Company (referred to as “direct plan access” and discussed below under “—Insurance-Related Business—Insurance-Related Business following DOJ settlement”) and instead focused sales of our products to customers we refer to as “cash-pay” or “self-pay” customers, which includes upfront payment, credit card, and third-party financing, as well as third-party distributor, authorized reseller, or partner payments. We partner with third-party financing providers to make our products more accessible, and payment types may also be combined. When purchased directly through us, the Eargo Max, Eargo Neo and the Eargo Neo HiFi, which range in price from $1,850 to $2,950, and we provide consumers with the option to utilize insurance coverage, pay the full cost up-front or enroll in a convenient, third-party monthly financing program that makes our products even more accessible. The Eargo hearing ~~solution is then shipped and~~aid system typically arrives ~~in less than~~on average approximately three business days ~~on average.~~after shipping.

Once a customer ~~makes their purchase~~purchases Eargo hearing aids, whether directly through us or through one of our partners, distributors, or authorized resellers, they are assigned to one of our ~~licensed~~ hearing professionals, who provides complimentary, convenient ~~clinical~~ support by phone, chat or ~~email. All of our hearing professionals are licensed by recognized third parties.~~ e-mail.

Once a customer receives their Eargo hearing ~~solution,~~aids, their ~~licensed~~assigned hearing professional will schedule a welcome call to ~~ensure the~~assist with proper use, fit and setting modification of the Eargo ~~solution. In 2020, more than 80% of our customers completed a welcome call with one of our licensed hearing professionals.~~device. Our ~~licensed~~ hearing professionals and customer care team are also available to provide unlimited support for as long as the customer owns ~~the~~an Eargo device. ~~We also~~Additionally, we provide short, online training videos and ~~additional~~other resources that customers can access online. The combination of these services allows us to deliver ~~telecare-based clinical~~remote customer support in an efficient and streamlined ~~manner without the burden of in-clinic visits.~~

We believe ~~the Eargo hearing solution offers the following~~our business model and consumer-centric focus offer certain advantages relative to traditional sales channels (which are characterized by a business-to-business model in which hearing ~~aids:~~aid manufacturers rely on a fragmented network of independent audiology clinics to sell their devices to consumers), including in particular the convenience and accessibility of our remote customer

We believe we are transforming the hearing aid market and are working to establish the Eargo solution as the preferred approach to the treatment of hearing loss. We seek to achieve this goal by converting existing hearing aid users to the Eargo solution and attracting consumers who have historically chosen not to wear hearing aids. Our growth strategies include:

We designed a differentiated, consumer-first business model to empower the consumer and improve the accessibility and affordability of high-quality hearing aids. We currently market and sell our hearing aids directly to consumers with a personalized approach that we believe motivates them to take action and then guides them along their hearing journey.

Our consumer-first marketing efforts are focused on generating brand awareness and demand for the Eargo solution. We are working to further establish Eargo as a recognizable brand name in an industry traditionally characterized by large manufacturers generally lacking brand recognition. We believe we can achieve this by running empowering advertisements that are designed to appeal to prospective customers on a personal level. We seek to raise interest levels in potential customers who have not been motivated by the uninspiring messaging in the traditional channel and attract interested consumers who have not yet purchased a hearing aid due to the limitations of the traditional channel. We then nurture these potential customer relationships with educational marketing campaigns that are intended to develop comfort and familiarity with our brand.

We also acquire customers that are interested in hearing aids through marketing channels such as paid search, social media and native advertising and draw them to our website with landing pages where they can learn more about us, submit their contact information for phone-based follow-up or purchase immediately.

Our differentiated marketing and messaging is supported by a high touch, efficient team of professionals that guides the consumer through the journey of addressing their hearing loss with a personalized and consultative approach. We frequently review feedback and data our consumers provide to work to improve the customer experience.

We have an efficient, effective, centralized, sales force consisting of 55 sales consultants as of December 31, 2020. Our sales consultants act as advisors and work with the customer to understand their needs. We sell our hearing solution directly through our online store and through phone conversations with our sales consultants, which enables them to work with substantially more customers than traditional hearing care professionals in a clinic setting. In addition, from time to time and as requested by a prospective customer, we provide a pre-sales telecare visit with one of our licensed hearing professionals.

Once a customer makes their purchase, they are assigned to one of our licensed hearing professionals who provides convenient clinical support by phone, online chat or email for the life of the product. Our licensed hearing professionals include audiologists with degrees in audiology and speech-language science, professionals with board certifications in hearing aid science and other professionals licensed for the treatment of hearing loss. After a customer receives their Eargo hearing aids, one of our licensed hearing professionals will initiate a welcome call to help ensure the proper use of the Eargo hearing aids. Our licensed hearing professionals and customer care team are also available to provide unlimited support for as long as the customer owns the device. We also provide short, online training videos and additional online resources that customers can access.

We believe this consultative approach and ongoing support is key to developing strong customer relationships, increasing brand affinity and improving the lifetime value of customers. As of December 31, 2020, we employed 42 licensed hearing professionals.

In designing the Eargo hearing solution, we set out to offer a differentiated product with a compelling value proposition to the consumer centered on the ability to offer high quality audio performance in a virtually invisible and comfortable form factor, which poses significant engineering challenges.

To address these challenges, we have established proprietary capabilities in the critical aspects of hearing aid design. We believe our distinct combination of engineering and design know-how coupled with intellectual property protection in certain key areas, enables us to offer an attractive, virtually invisible hearing aid while maintaining high quality audio performance.

refurbishment capabilities. We believe that the ~~combination~~continued introduction of ~~technical capabilities and our innovative data driven approach~~new products is critical to ~~consumer-first marketing are a distinct competitive advantage for us in penetrating our target market.~~

We developed the Eargo solution to create a hearing aid that consumers actually want to use. We believe our hearing aids are the first and only rechargeable, completely-in-canal, FDA regulated, exempt Class I or Class II

~~devices for the treatment of hearing loss. We currently offer three versions~~maintaining existing customers, attracting new customers, achieving market acceptance of our ~~Eargo solution, the Eargo Max, the Eargo Neo~~products and ~~the Eargo Neo HiFi, at three different price points to provide customers with choices on cost and functionality.~~

~~Our Eargo products consist of the following: Eargo hearing aids,~~maintaining or increasing our ~~proprietary Flexi Fibers or Flexi Palms depending on the hearing aid, our portable charger case and, with the Eargo Neo and Eargo Neo HiFi, tech-enabled through the Eargo mobile app.~~

We are committed to ongoing research and development. As of December 31, 2020, our research and development organization included 67 individuals with expertise in mechanical engineering, product design, electrical engineering, systems engineering, audio processing, clinical and hearing science and embedded software design. Our technical capabilities and commitment to innovation have allowed us to deliver significant product enhancementsrely on a ~~rapid development timeline, which we believe has helped us to support a compelling new product roadmap.~~

~~Our current research and development efforts are focused on developing future generations~~limited number of manufacturers for our ~~Eargo solution with increased functionality and audio output, improved in-ear fit, reduced cost of goods, better connectivity and enhanced machine learning.~~

In October 2019, we conducted a series of comparative electroacoustic benchmarking tests, or the Bench Study, to compare our Eargo Neo hearing aid with hearing aids from three major manufacturers: the Starkey Livio AI 2400, the Phonak Audeo Marvel M90, and the Resound Linx Quattro 5, all behind-the-ear style hearing aids with receiver-in-the-canal.

The goal of the Bench Study was to conduct electroacoustic benchmarking tests to determine whether the hearing aids tested were able to amplify sounds appropriately to improve speech audibility while maintaining adequate sound quality.

Our results indicated that both our Eargo Neo hearing aid and the other hearing aids we tested met or exceeded the identified benchmarks for sound quality and amplification to improve speech audibility. We believe the results of the Bench Study are useful to investors because they provide information regarding the comparability of our Eargo Neo hearing aid to the other hearing aids tested with respect to the identified benchmarks.

We designed the Bench Study to use industry standard tests developed by the American National Standards Institute, or ANSI, the American organization that manages the voluntary standards system for electroacoustic tests.

~~In addition, we evaluated the ability of each hearing aid in the Bench Study to make speech more understandable using another industry standard test called the Speech Intelligibility Index, or SII.~~

The measurements were performed by two of our employees who are licensed audiologists using two different hearing aid test systems. One model of each device was utilized for testing. The results were then compared for discrepancies. If there were no major discrepancies, the better result of the two measures was used. If major discrepancies between the results existed, we performed both measures again. We defined a major discrepancy as the device meeting the identified standards in one test system but failing to meet the identified standards on the other system.

Coupling using a 2cc coupler and placement of devices was used in accordance with ANSI S3.22-2009 specifications. Measurements were then taken with devices at either full-on-gain (FOG) or reference-test-setting (RTS) in accordance with ANSI standards.

~~In order to determine what qualified as a good result, we reviewed recent research and used what we believe to be the most cited standards in the hearing aid industry as our benchmarks:~~

~~All devices tested met the acceptable frequency range, amplifying frequencies in a range of at least 250Hz to 6,000Hz as demonstrated in Graph 1 below.~~

All devices tested had an acceptable SII, as demonstrated in Graph 2 below. Each bar in the graph represents the SII score for each input level, and the horizontal lines represent the minimum scores required adequate speech intelligibility. All tested devices met or exceeded the minimum requirement.

~~All devices tested had a low level of total harmonic distortion, with each reporting less than 3% as demonstrated in Graph 3 below.~~

~~Equivalent input noise levels were good, with each device reporting less than 28 dB SPL, as demonstrated in Graph 4 below.~~

We are continuously innovating and have released four new generations of our Eargo solution since 2017. Our current iteration of the Eargo hearing solution, Neo HiFi, provides improved Flexi Palms and improved capabilities across audio fidelity and bandwidth. We launched Neo HiFi in January 2020 and anticipate launching our next generation hearing aid in the first half of 2021.

We anticipate that future generations of our solution will offer further improved fit and acoustic output with the capability for in-situ hearing assessment and adjustment through connected hearing aids. We expect that future generations of our solution will also include increased water resistance and have refurbishment capability. We believe this will advance the ability of our licensed hearing professionals to personalize our customers’ hearing

~~solutions. Our development priorities are also focused on adding a refurbishment capability, which would benefit our gross margin.~~

~~Our hearing aids are currently assembled by~~products: Hana Microelectronics Group (“Hana”), a contract manufacturer ~~which is~~ based in ~~Thailand. We have a manufacturing services agreement with Hana for the assembly and supply of~~Thailand, as well as our hearing aids, pursuant to which we make purchases on a purchase order basis. The manufacturing services agreement was effective beginning on May 5, 2017 with an initial term of 12 months that automatically renews for additional 12 month periods. The automatic renewals are subject to our right to terminate the agreement without cause by providing 120 days’ advance written notice, or Hana’s right to terminate the agreement without cause by providing at least 12 months’ advance written notice.

~~We have entered into a manufacturing services agreement with a second~~primary manufacturer, Pegatron Corporation ~~or Pegatron, which is based~~(“Pegatron”), headquartered in Taiwan ~~for~~and with manufacturing facilities throughout Asia. Pegatron manufactures the ~~manufacture of our next generation~~Eargo 5, Eargo 6, and Eargo 7 hearing aid ~~pursuant to which we make purchases on a purchase order basis. The manufacturing services agreement was effective beginning on August 21, 2018 with an initial term~~systems out of three years that automatically renews for additional one-year periods. The automatic renewals are subject to either party’s right to terminate the agreement without cause by providing 30 days’ advance written notice. Either party may terminate the agreement if the other party materially breaches the agreement and fails to cure the breach within 30 days after notice of such breach from the terminating party.

its facilities in Suzhou, China. We rely on several third-party suppliers for the components used in our hearing aids, including ~~the batteries,~~semiconductor components, such as integrated circuits, as well as batteries, microphones and receivers.

We believe that these third-party facilities and suppliers will be adequate to meet our current and anticipated manufacturing needs. We do not currently plan to manufacture our hearing aids or any related components ourselves.

Manufacturing facilities that produce medical devices and/or their component parts intended for distribution world-wide are subject to regulation and periodic unannounced inspection by the FDA and other domestic and international regulatory agencies. In the United States, any products we sell are required to be manufactured in compliance with the FDA’s Quality System Regulation, which covers the methods used in, and the facilities used

for, the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products.

The distribution of our hearing aids is handled directly through ~~DCL Logistics,~~ a third-party logistics provider. Our finished hearing aids are shipped from ~~Hana in Thailand~~our contract manufacturer to ~~DCL Logistics in Louisville, Kentucky~~the third-party logistics provider’s facility and are distributed from there to ~~customers.~~customers or retailers or other partners, as applicable.

~~Prior to the effects of COVID-19,~~While we have ~~experienced~~not been directly impacted by any major disruption to our supply chain or access to necessary raw materials and ~~expect~~component parts for the manufacture of our products to ~~continue~~date that have impacted our ability to ~~experience seasonality in our business, with higher sales volumes in quarters when~~service customers, disruptions have occurred across a number of industries and we ~~launch new products and in the fourth calendar quarter~~cannot provide any assurance that future disruptions will not emerge as a result of ~~holiday promotional activity.~~the ongoing supply chain issues, inflation, the COVID-19 pandemic or other external factors. To date, increases in our product component pricing have occurred but have not had a material impact on supply continuity or gross margin. We have taken steps to monitor our supply chain and actions to address limited supply and increasing lead times, including outreach to critical suppliers and spot market purchases. For more information, please see the risks described under the caption “We rely on the timely supply of high-quality components, parts and finished products, and our business could suffer if suppliers or manufacturers are unable to procure raw materials or other components of an acceptable quality (or at all) or otherwise fail to meet their delivery obligations, raise prices or cease to supply us with components, parts or products of acceptable quality” in the “Risk Factors” section of this Annual Report on 10-K.

We rely on a combination of patent, copyright, trademark and trade secret laws and confidentiality and invention assignment agreements to protect our intellectual property rights. As of December 31, 2022, we had 26 issued U.S. patents, 26 patents outside the United States, 9 pending U.S. patent applications and 12 pending foreign patent applications. Our patents include utility patents covering technology ranging from remote control of our hearing aids to design patents covering the housing and securing mechanisms for our hearing aids. We have foreign patents in the EU, Australia, Canada, China, Germany, France, the United Kingdom, Japan, Singapore and South Korea. We own all of our patents and do not rely on any licenses to utilize the technology covered by these patents. The earliest of our patents is expected to expire in 2025. An issued U.S. patent with claims generally directed to an open ear canal hearing aid comprised of certain electronics and securing portions and an issued U.S. patent with claims generally directed to an adjustable securing mechanism for a space access device are each expected to expire in 2030.

Our pending patent applications may not result in issued patents, and we cannot assure you that any current or subsequently issued patents will protect our intellectual property rights. Third parties may challenge certain patents issued to us as invalid, may independently develop similar or competing technologies or may design around any of our patents. We cannot be certain that any of the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights in these countries as fully as in the United States.

There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. Any litigation claims against us, independent of their validity, may result in substantial costs and the diversion of resources with no assurance of success. As of December 31, 2022, there is no active patent litigation involving us.

As of December 31, 2022, we had 35 trademark registrations and 6 pending trademark applications worldwide.

We compete in the hearing aid market against manufacturers, clinics and retailers of hearing aids, other direct-to-consumer providers of hearing aids and, to a lesser extent, providers of personal sound amplification products ~~(PSAPs)~~(“PSAPs”). We believe that the primary competitive factors in the market are:

After a period of industry consolidation, five manufacturers control a vast majority of the global hearing aid industry today. These manufacturers ~~include~~are GN Store Nord, Sonova, Starkey, William Demant and WS Audiology, all of which have established products and substantially greater financial, sales and marketing, manufacturing and development resources than we possess. In addition to these manufacturers, we also compete against hearing clinics and retailers, such as Costco. Costco sells behind-the-ear, in-the-ear and in-the-canal hearing aids from traditional manufacturers, as well as its Kirkland Signature label behind-the-ear hearing aids, ~~in store and also sells behind-the-ear, in-the-ear and in-the-canal hearing aids under the Philips, Phonak, ReSound and Rexton brands,~~ each at

various price points. We also compete against other direct-to-consumer hearing aid providers such as Audicus and Lively (which was acquired by GN Store Nord and rebranded as Jabra Enhance), which, similar to our business model, allow consumers to purchase hearing aids without visiting a clinic and provide remote support for their products.

Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer ~~requirements.~~ requirements, including with respect to changes to the industry landscape potentially arising as a result of the FDA’s adoption and implementation of the OTC Final Rule (see “Government Regulation—Regulation by the FDA” for more information).

Prior to the effective date of the OTC Final Rule, no OTC category of hearing aids existed. The creation of the new category of OTC hearing aids by the FDA could materially alter the competitive environment for hearing loss treatment. The FDA and the Biden administration have stated that the intention of the OTC Final Rule is to reduce barriers to access, foster innovation in hearing aid technology, and promote the wide availability of low-cost hearing aids. We expect the removal of regulatory barriers to entry will facilitate the introduction of new and varied product designs by incumbent and new competitors. For instance, a number of competitors have begun marketing OTC hearing aids since the adoption of the OTC Final Rule, including existing competitors in the hearing aid industry, such as WS Audiology (in partnership with Sony Electronics) and GN Store Nord (through its Jabra brand), as well as new entrants into the hearing aid industry such Nuheara (through a licensing partnership with HP, Inc.).

In connection with the OTC Final Rule, we have expended, and will continue to expend, significant time and resources evaluating the OTC Final Rule and ensuring that our devices and processes comply with the new requirements in order to market our products in line with our primary direct-to-consumer business and omni-channel models. It is possible that the OTC Final Rule may lead to additional commercial partnership, omni-channel, including retail, or other opportunities, although there are no assurances that it will do so.

Considering the resources and advantages that our competitors maintain, even if our technology and consumer-first business model and distribution strategy isare more effective than the technology and distribution strategy of our competitors, current or potential customers might accept competitor products in lieu of purchasing our products. We anticipate that we will face increased competition in the future, and may also experience intensifying pricing pressures, as existing companies and competitors develop new or improved products and distribution strategies and as new companies enter the market with new technologies and distribution ~~strategies.~~strategies (possibly with increased frequency due to the implementation of the OTC Final Rule, discussed above). We may not be able to compete effectively against these organizations. Our ability to compete successfully and to increase our market share is dependent upon our approach to addressing unmet needs in the hearing aid industry. Increased competition in the future could adversely affect our revenue, revenue growth rate, if any, margins and market share.

~~Our~~We operate in a complex regulatory environment with an extensive and evolving set of federal, state and local governmental laws, regulations, and other requirements. These laws, regulations and other requirements are promulgated and overseen by a number of different legislative, regulatory, administrative and quasi-regulatory bodies, each of which may have varying interpretations, judgments or related guidance. For example, our products and operations are subject to extensive and rigorous regulation by the ~~FDA~~U.S. Food and ~~other federal, state and local authorities, as well as foreign regulatory authorities. The FDA~~Drug Administration (the “FDA”), which regulates, among other things, the research, development, testing, design, manufacturing, approval, labeling, storage, recordkeeping, advertising, promotion, ~~and~~ marketing, distribution, ~~post approval~~post-approval monitoring and reporting, and import and export of medical devices in the United States to assure the safety and effectiveness of medical products for their intended use. The U.S. Federal Trade Commission (the “FTC”) also regulates the advertising of our products in the United States. Further, we are subject to laws directed at preventing fraud and abuse, which subject our sales and marketing, training, and other practices to government scrutiny.

As such, we utilize considerable resources on an ongoing basis to monitor, assess and respond to applicable legislative, regulatory, and administrative requirements, but there is no guarantee that we will be successful in our efforts to adhere to all of these requirements. Additional discussion on certain of these laws, regulations and other requirements is set forth below in this section.

If any of our personnel, representatives or operations are alleged to have violated these or other laws, regulations or requirements, we could suffer severe consequences, including material harm to our reputation, that could have a material adverse effect on our business, results of operations, financial condition and cash flows, among other things.

We expect that our industry will continue to be subject to extensive and complex regulation, the scope and effect of which are difficult to predict. For additional detail on risks related to each of the foregoing, see the Risk Factors titled, “Changes in the regulatory landscape for hearing aid devices could materially impact our direct-to-consumer and omni-channel business models and lead to increased regulatory requirements, and we may be required to seek additional clearance or approval for our products,” “Our hearing aids are subject to extensive government regulation at the federal and state level, and our failure to comply with applicable requirements could harm our business,” and “If we fail to comply with U.S. or foreign federal and state healthcare regulatory laws, we could be subject to penalties, including, but not limited to, administrative, civil and criminal penalties, damages, fines, disgorgement,

exclusion from participation in governmental healthcare programs and the curtailment of our operations, any of which could adversely impact our reputation and business operations.”

The FDA classifies hearing aids, including in-the-canal hearing aids such as our products, as medical devices. In the United States, the Federal Food, Drug, and Cosmetic Act ~~or the FDCA,~~(the “FDCA”), as well as FDA regulations and other federal and state statutes and regulations, govern, among other things, medical device design and development, preclinical and clinical testing, device safety, premarket clearance and approval, establishment registration and device listing, manufacturing, labeling, storage, record-keeping, advertising and promotion, sales and distribution, export and import, recalls and field safety corrective actions, and post-market surveillance, including complaint handling and medical device reporting of adverse events. Failure to comply with applicable requirements may subject a company to a variety of administrative or judicial sanctions, such as warning or untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties and criminal prosecution. The FDA can also refuse to approve or clear pending product applications.

The FDA classifies medical devices into three classes (Class I, II or III) based on the degree of risk associated with a device and the level of regulatory control deemed necessary to ensure its safety and effectiveness. Class I devices are those for which safety and effectiveness can be assured by adherence to the FDA’s general controls for medical devices, which include compliance with the FDA’s current good manufacturing practices (“cGMPs”) for devices, as reflected in the Quality System Regulation ~~or QSR,~~(“QSR”), establishment registration and device listing, reporting of adverse events, and truthful, non-misleading labeling, advertising and promotional materials. Some Class I devices also require premarket clearance by the FDA through the premarket notification process set forth in Section 510(k) of the FDCA. Class II devices are subject to the FDA’s general controls and any other special controls deemed necessary by the FDA to ensure the safety and effectiveness of the device, such as performance standards, product-specific guidance documents, special labeling requirements, patient registries and/or post-market surveillance. Most Class II devices must also comply with the FDA’s Section 510(k) premarket notification requirements. Class III devices are those that support or sustain human life, are of substantial importance in preventing impairment of human health, or which present a potential, unreasonable risk of illness or injury. Due to the level of risk associated with Class III devices, general and special controls alone are insufficient to assure their safety and effectiveness. Devices placed in Class III generally require the submission of a premarket approval ~~or PMA,~~(“PMA”) application demonstrating the safety and effectiveness of the device, which must be approved by the FDA prior to marketing, or the receipt of a ~~510(k)~~ de novo classification, which provides for the reclassification of the device into Class I or II. The PMA approval process is more stringent, time-consuming and expensive than the 510(k) clearance process; however, the 510(k) clearance process has also become increasingly stringent and expensive.

~~We currently market our products pursuant to~~On August 17, 2022, the FDA published a final rule to establish new regulatory ~~framework~~categories for ~~air-conduction~~OTC and prescription hearing aids ~~which are classified as Class I or Class II FDA Registered Exempt Medical Devices. While applicable FDA regulations establish certain “conditions for sale”~~(the “OTC Final Rule”). The OTC Final Rule implements relevant provisions of ~~all hearing aids, including that prospective hearing aid users must have a medical evaluation by a licensed physician within~~ the six months prior to the hearing aid dispensation, the FDA has stated that it does not intend to enforce these medical evaluation requirements prior to the dispensing of Class I air-conduction and Class II wireless air-conduction hearing aids to individuals 18 years of age and older. Accordingly, while we are required to comply with other FDA requirements, our products are currently not reviewed by the FDA.

~~The~~ FDA Reauthorization Act of 2017 ~~or FDARA, created~~(“FDARA”), which set forth requirements for the FDA to create a new category of ~~over-the-counter, or~~ OTC hearing aids that are intended to be available ~~through in-person transactions, by mail~~without supervision, prescription, or ~~online without the~~other order, involvement or intervention of a licensed practitioner. ~~Under~~Prior to the ~~statute,~~effective date of the OTC Final Rule, no OTC category of hearing aids existed. Following publication of a proposed rule in October 2021, the FDA ~~must issue regulations~~issued its OTC Final Rule with requirements for labelling, conditions of sale, performance standards, design requirements and other provisions under which manufacturers may elect to ~~implement the new~~

~~framework. As part of its rulemaking process, the FDA is required to evaluate whether OTC~~market hearing aids ~~should be subject to Section 510(k) premarket review and clearance, and it is unclear whether~~as either OTC or prescription devices, or both. In addition, under FDARA, the FDA will subject OTC hearing aids to this requirement or other more onerous requirements. Despite the deadline in FDARA for the FDA to issue proposed regulations by August 18, 2020, the FDA has not yet issued a notice of proposed rulemaking or indicated how it will implement the new OTC hearing aid ~~pathway. In addition,~~controls promulgated in ~~May 2018,~~ the ~~FDA granted a de novo classification request from Bose for a direct-to-consumer “self-fitting air-conduction~~OTC Final Rule preempt any state or local requirement specifically related to hearing ~~aid,” which is classified~~products that would restrict or interfere with commercial activity involving OTC hearing aids. The OTC Final Rule became effective on October 17, 2022, although certain previously marketed devices have until April 14, 2023 to come into compliance with the OTC Final Rule.

We have marketed in ~~Class II~~the past, and ~~subject~~continue to ~~510(k) premarket review.~~

We market, ~~the~~certain Eargo system devices as Class I air-conduction or Class II ~~exempt~~wireless air-conduction hearing aids under existing regulations at 21 CFR 874.330 and 874.3305, respectively, both of which are ~~not dependent on~~exempt from 510(k) premarket review. In June 2022, we submitted a 510(k) premarket notification seeking FDA clearance of expanded labelling for our Eargo 5 and Eargo 6 hearing aids under the ~~FDA’s issuance of~~“self-fitting” regulation at 21 CFR 874.3323. In December 2022, we received FDA 510(k) clearance for Eargo 5 and Eargo 6 as Class II self-fitting air-conduction hearing aids. Additionally, in January 2023, we launched the Eargo 7 as our third over-the-counter, 510(k) cleared self-fitting device. We plan to market our devices as OTC hearing ~~aid regulations~~aids and intend to comply with all applicable OTC regulatory requirements as of the compliance date for currently marketed devices on April 14, 2023, or sooner. We may also seek to market certain devices as prescription hearing aids, which would require compliance with separate physical and electronic labeling requirements under the ~~marketing of our products. We also do not consider~~OTC Final Rule.

In connection with the OTC Final Rule, we have expended, and will continue to expend, significant time and resources evaluating the OTC Final Rule and ensuring that our devices and processes are in compliance with the new requirements in order to ~~be “self-fitting” hearing aids similar to the newly cleared Bose device. Accordingly, while we expect~~market our products in line with our primary direct-to-consumer business and omni-channel models. It is possible that the OTC Final Rule may lead to ~~continue~~additional commercial partnership, omni-channel, including retail, or other opportunities, although there are no assurances that it will do so. The OTC Final Rule and the responses thereto by leading insurance providers could also materially impact our efforts to ~~be regulated as Class I~~resume submitting claims for customers with potential insurance benefits or ~~Class II exempt devices,~~have other unforeseen impacts on our ~~products could~~business and results of operations.

Please see the Risk Factor titled, “Changes in the ~~future be deemed to fall under the definition of a “self-fitting air-conduction hearing aid” or an OTC~~regulatory landscape for hearing aid ~~in which case~~devices could materially impact our direct-to-consumer business model and lead to increased regulatory requirements, and we ~~could~~may be required to seek ~~510(k)~~additional clearance or approval for our ~~products or otherwise comply with additional regulatory requirements associated with these new pathways.~~products” for more information.

If not exempted from the FDA’s 510(k) notification requirement, to obtain 510(k) clearance for a medical device, an applicant must submit a premarket notification to the FDA demonstrating that the device is “substantially equivalent” to a legally marketed device, commonly known as the “predicate device.” A legally marketed predicate device may include a device that was legally marketed in the United States prior to May 28, 1976 for which a PMA is not required (commonly known as a “pre-amendments device” based on the date the Medical Device Amendments of 1976 were enacted), a device which the FDA has reclassified from Class III to Class II or I, or a device which has been found substantially equivalent to such a device through the 510(k) process. A device is considered to be substantially equivalent if, with respect to the predicate device, it has the same intended use and has either (i) the same technological characteristics, or (ii) different technological characteristics, but the information provided in the 510(k) submission demonstrates that the device does not raise new questions of safety and effectiveness and is at least as safe and effective as the predicate device. A showing of substantial equivalence may sometimes, but not always, require clinical data. Before the FDA will accept a 510(k) submission for substantive review, the FDA will first assess whether the submission satisfies a minimum threshold of acceptability. If the FDA determines that the 510(k) submission is incomplete, the FDA will issue a “Refuse to Accept” letter which generally outlines the information the FDA believes is necessary to permit a substantive review and to reach a determination regarding substantial equivalence. An applicant must submit the requested information before the FDA will proceed with additional review of the submission. Once a 510(k) submission is accepted for review, the FDA has 90 days to review and issue a determination. As a practical matter, clearance often takes longer. The FDA may request additional information, including clinical data, to make a determination regarding substantial equivalence, which may significantly prolong the review process. The review period is suspended during the time the additional information request is pending. Unless a specific exemption applies, 510(k) premarket notification submissions are subject to user fees.

Medical devices can be marketed only for the indications for which they are cleared or approved. After a device has received 510(k) clearance for a specific intended use, any change or modification that significantly affects its safety or effectiveness, such as a significant change in the design, materials or method of manufacture, or that would constitute a new or major change in intended use, may require a new 510(k) clearance or PMA approval and payment of an additional FDA user fee. The determination as to whether or not a modification constitutes such a change is initially left to the manufacturer using available FDA guidance; however, the FDA may review this determination to evaluate the regulatory status of the modified product at any time and may require the manufacturer to cease marketing and recall the modified device until new 510(k) clearance or PMA approval is obtained. The manufacturer may also be subject to significant regulatory fines or penalties.

Clinical trials are sometimes required for 510(k) clearance. Such trials generally require submission of an investigational device exemption ~~or IDE,~~(“IDE”) application to the FDA for a specified number of patients and study sites, unless the product is deemed to be a non-significant risk device which may be subject to more abbreviated IDE

requirements. ~~If an IDE is required, the FDA and the~~The appropriate institutional review boards ~~or IRBs,~~(“IRBs”) at the clinical sites must also approve the study before clinical trials may begin. Clinical trials are subject to extensive monitoring, record keeping and reporting requirements. Clinical trials must be conducted under the oversight of IRBs for the relevant clinical trial sites and must comply with FDA regulations, including but not limited to those relating to good clinical practices ~~or GCPs,~~(“GCPs”), which include the requirement that all research subjects provide their informed consent for participation in each clinical study. The clinical trial sponsor, the FDA or the IRB could suspend or terminate a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable health risk. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and effectiveness of the device or may otherwise not be sufficient to obtain FDA clearance to market the product.

All hearing aids commercially distributed in the United States must comply with specific FDA labeling requirements. These requirements address the labeling of the device itself and any accompanying software, as well as the User Instructional Brochure that must be provided to all potential hearing aid recipients. ~~Hearing aids must be clearly and permanently marked with, among other things,~~

Prior to the name of the device manufacturer, the model name or number, and the year of manufacture. In addition, the User Instructional Brochure must contain, among other things, specific instructions for the use of, maintenance and care of, and replacement or recharging of the batteries of the hearing instrument, information regarding known side effects that may warrant a physician consultation, a warning statement specified inOTC Final Rule, FDA regulations ~~and technical data useful in selecting and fitting a hearing instrument and checking its performance.~~

~~In addition, FDA regulations require~~required that the marketing of hearing aids comply with certain “conditions for sale,” including, among other things, the requirement that prospective hearing aid users must undergo a medical evaluation (or provide a signed waiver) before a hearing aid may be dispensed, along with certain recordkeeping requirements. In 2016, the FDA issued a guidance document stating that it did not intend to enforce the medical evaluation, waiver, or recordkeeping requirements prior to the dispensing of Class I air-conduction and Class II wireless air-conduction hearing aids to individuals 18 years of age and older. ~~In addition, under FDARA,~~We previously marketed our devices pursuant to this exercise of enforcement discretion until the requirement was eliminated with the OTC Final Rule. Under the OTC Final Rule, we must comply with new requirements for labelling, conditions of sale, performance standards, design requirements and other provisions applicable to our hearing aids ~~that qualify for the future~~as either OTC ~~pathway must be exempt from certain labeling requirements and condition of sale requirements otherwise applicable to hearing aids.~~or prescription devices, or both.

The hearing aids that we commercially distribute in the United States are subject to pervasive and continuing regulation by the FDA and certain state agencies. This includes product listing and establishment registration requirements, which facilitate FDA inspections and other regulatory actions. We are required to adhere to applicable ~~current good manufacturing practice, or~~ cGMP requirements, as set forth in the QSR, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all phases of the design and manufacturing process. We are also required to verify that our suppliers maintain facilities, procedures and operations that comply with applicable quality and regulatory requirements. The FDA enforces the QSR through periodic announced or unannounced inspections of medical device manufacturing facilities, which may include the facilities of contractors. FDA regulations also require investigation and correction of any deviations from the QSR and impose reporting and documentation requirements upon us and our third-party manufacturers. Noncompliance with these regulations can result in, among other things, fines, injunctions, civil penalties, recalls or seizures of products, total or partial suspension of production, FDA refusal to grant 510(k) clearance or PMA approval to new devices, withdrawal of existing clearances or approvals, and criminal prosecution.

We must also comply with post-market surveillance regulations, including medical device reporting ~~or MDR,~~(“MDR”) requirements which require that we review and report to the FDA any incident in which our products may have caused or contributed to a death or serious injury, and any incident in which our product has malfunctioned if that malfunction would likely cause or contribute to a death or serious injury if it were to recur. We must also comply with medical device correction and removal reporting regulations, which require manufacturers to report to the FDA corrections and removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the

FDCA that may present a risk to health. Although we may undertake recall actions voluntarily, we must submit detailed information on any recall action to the FDA, and the FDA can order a medical device recall in certain circumstances.

In addition to post-market quality and safety actions, labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the ~~U.S. Federal Trade Commission, or~~ FTC. Medical devices approved or cleared by the FDA may not be promoted for unapproved or uncleared uses, otherwise known as “off-label” promotion. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability, including substantial monetary penalties and criminal prosecution.

Failure to comply with applicable regulatory requirements, including delays in or failures to report incidents to the FDA as required under the MDR regulations, can result in enforcement action by the FDA, which can include any of the following sanctions:

The healthcare industry is also subject to federal and state fraud and abuse laws, including anti-kickback, self-referral, false claims and physician payment transparency laws, as well as patient data privacy and security and consumer protection and unfair competition laws and regulations. Our operations are also subject to certain state and local hearing care laws, including those applicable to the licensure and registration of audiologists and other individuals that dispense hearing aids, sales and marketing practices, interactions with consumers, consumer incentive and other promotional programs, and state corporate practice and fee-splitting prohibitions.

In addition to the FDA, other broadly applicable federal and state healthcare laws and regulations ~~could restrict~~apply to our operations and business ~~practices~~practices. These laws may constrain the business or financial arrangements and relationships through which we conduct our operations, including our direct-to-consumer ~~activities. To the extent our products are or become covered by any federal or state government healthcare program, regulatory~~activities and ~~enforcement authorities may nonetheless interpret that~~sales and marketing practices as well as other business practices. Additionally, we are subject to numerous federal healthcare anti-fraud laws, ~~which include~~including the federal Anti-Kickback Statute, the Physician Self-Referral Law and the False Claims Act, that are intended to reduce fraud, waste ~~fraud~~ and abuse in the healthcare industry, and analogous state laws that may apply to healthcare items and services paid by all payors, including self-pay patients and private insurers. These laws are broad and subject to evolving interpretations. They prohibit many arrangements and practices that are lawful in industries other than healthcare, including pricing, sales and marketing activities, sales commissions, customer incentive and other promotional programs, and the provision of gifts and business courtesies. To the extent that any of our products are sold in a foreign country, we may be subject to similar foreign laws, which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws and implementation of corporate compliance programs and reporting of payments or transfers of value to healthcare professionals. We must operate our business within the requirements of these laws. Violations of any of these health regulatory laws may result in potentially significant penalties, including criminal and civil and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in government healthcare programs, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings, and the curtailment or restructuring of our operations.

In addition, the U.S. Physician Payments Sunshine Act (as amended by the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act) requires manufacturers to report to the Department of Health and Human Services ~~(HHS)~~(“HHS”) detailed information about financial arrangements with physicians ~~and teaching hospitals and, with reporting requirements going into effect in 2022 for payments made in 2021, financial arrangements with~~(as defined by statute), certain non-physician practitioners, including physician assistants and nurse practitioners, and ~~other mid-level practitioners.~~teaching hospitals. These reporting provisions preempt state laws that require reporting of the same information, but not those that require reports of different or additional information. ~~Although none of our products are currently covered by any government healthcare program, we may still be subject to certain state reporting requirements that apply regardless of payor.~~ Failure to comply subjects manufacturers to significant civil monetary penalties.

Regulation of the hearing aid industry exists in every state. These laws and regulations are primarily concerned with the licensure and registration of audiologists and other individuals and companies that dispense hearing aids, including procedures involving the fitting and dispensing of hearing aids. In addition, most states require warranty and return policies for consumers allowing for the return of product, and restrict hearing aid advertising and marketing practices. These state laws are subject to change, and states may impose more stringent requirements for dispensers of hearing aids. The FDCA preempts state laws relating to the safety and efficacy of medical devices and state laws that are different from or in addition to federal requirements. In Missouri Board of Examiners for Hearing Instrument Specialists v. Hearing Help Express, Inc. and METX, LLC v. Wal-Mart Stores Texas, LLC, the Eighth Circuit Court of Appeals and the U.S. District Court for the Eastern District of Texas, respectively, have held that certain state laws relating to the fitting and dispensing of hearing aids, are preempted because they relate to the safety and efficacy of medical devices. Although we have structured our operations to comply with our understanding of applicable state regulatory requirements, interpretative legal precedent and regulatory guidance varies by jurisdiction and is often sparse and not fully developed, including which laws and regulations are subject to the federal preemption relating to safety and efficacy of medical devices, complicating our compliance efforts. ~~Other courts could conclude~~In August 2022, the FDA adopted the OTC Final Rule, providing that, ~~similar~~among other things, any state or ~~identical state laws are not~~local requirement specifically related to hearing products that would restrict or interfere with commercial activity involving OTC hearing aids would be preempted. A determination that we are in violation of applicable laws and regulations in any jurisdiction in which we operate could have a material adverse effect on us, particularly if we are unable to restructure our operations and arrangements to comply with the requirements of that jurisdiction, if we are required to restructure our operations and arrangements at a significant cost, or if we are subject to penalties or other adverse action. Additionally, applicable federal laws and regulations continue to evolve.

~~We employ licensed~~Our arrangements with hearing professionals ~~to deliver services to our customers. These activities are subject to various~~may implicate certain state laws, ~~that prohibit~~commonly referred to as the corporate practice of ~~certain~~learned professions, including audiology, ~~by lay entities or persons~~ and fee-splitting laws, which are intended to prevent unlicensed persons from interfering with or influencing the audiologist’s or other hearing care specialist’s professional judgment. These laws vary from state to state, including those where we do business, and are subject to broad interpretation and enforcement by state regulators. In the event that regulatory authorities or other third parties were to challenge these arrangements, we could be subject to adverse judicial or administrative interpretations, to civil or criminal penalties, our contracts could be found legally invalid and unenforceable or we could be required to restructure our arrangements with our audiologists and other licensed professionals. ~~In addition, various state laws also generally prohibit the sharing or splitting professional fees with lay entities or persons.~~ Audiologists and certain other hearing care specialists are required to maintain valid state licenses to practice and must comply with numerous state and local licensing laws and regulations, and each state defines the scope of practice for audiologists and other hearing care specialists through legislation and their respective state regulatory agencies and boards. Activities that qualify as professional misconduct under state law may subject our personnel to sanctions or may even result in loss of their licensure and could, possibly, subject us to sanctions as well.

~~Our products are primarily purchased on a cash-pay basis~~Numerous state, federal and ~~are not generally covered by government healthcare programs~~foreign laws, regulations and standards govern the collection, use, access to, confidentiality and security of health-related and other ~~third-party payors. In addition, there have been,~~personal information and ~~we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system seeking, among other things, to reduce healthcare costs that~~ could ~~affect our results of operations. For example, the implementation of the Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act,~~apply now or the Affordable Care Act, has changed healthcare financing and delivery by both governmental and private insurers substantially and has affected medical device manufacturers significantly. In addition, the Affordable Care Act provided incentives to programs that increase the federal government’s comparative effectiveness research and implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other

providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models. Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, and we expect there will be additional challenges and amendments to the Affordable Care Act in the future. It is uncertain the extent to which any such changes or other healthcare reform measures by the current Presidential Administration may impact our business or financial condition. We expect additional state and federal healthcare reform measures to be adopted in the future ~~any~~to our operations or the operations of ~~which could result in reduced demand for~~ our ~~products or additional pricing pressure.~~partners. In the United States, numerous federal and state laws and regulations, including data breach notification laws, health

~~The Health Insurance Portability~~ laws and ~~Accountability Act~~consumer protection laws and regulations govern the collection, use, disclosure, and protection of ~~1996, or HIPAA, as amended by the Health Information Technology for Economic~~health-related and Clinical Health Act, or HITECH, and their implementing regulations, imposes privacy, security and breach reporting obligations with respect to individually identifiable health information upon “covered entities” (health care providers, health plans and health care clearinghouses), and their respective business associates, individuals or entities that create, received, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities and business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce HIPAA and seek attorney’s fees and costs associated with pursuing federal civil actions. Additionally, HITECH mandates the reporting of certain breaches of health information to the HHS, affected individuals and, if the breach is large enough, the media.

~~Even when HIPAA does not apply, according to the FTC, failing to take appropriate steps to keep consumers’~~other personal information secure constitutes unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act. The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities. Individually identifiable health information is considered sensitive data that merits stronger safeguards.

information. In addition, certain ~~state and non-U.S.~~foreign laws ~~such as the GDPR~~ govern the privacy and security of ~~health information in certain circumstances, some of which~~personal data, including health-related data. Privacy and security laws, regulations, and other obligations are ~~more stringent than HIPAA and many of which differ from~~constantly evolving, may conflict with each other ~~in significant ways~~to complicate compliance efforts, and ~~may not have the same effect, thus complicating compliance efforts. Failure to comply with these laws, where applicable,~~ can result in ~~the imposition of~~investigations, proceedings, or actions that lead to significant civil and/or criminal penalties and private litigation. For example, California recently enacted the California Consumer Privacy Act, or CCPA, which took effect on January 1, 2020. The CCPA, among other things, creates new data privacy obligations for covered companies and provides new privacy rights to California residents, including the right to opt out of certain disclosures of their information. The CCPA also creates a private right of action with statutory damages for certain data breaches, thereby potentially increasing risks associated with a data breach. Although the law includes limited exceptions, including for “protected health information” maintained by a covered entity or business associate, it may regulate or impact our processing of personal information depending on the context. Further, the California Privacy Rights Act (the “CPRA”) recently passed in California. The CPRA will impose additional data protection obligations on covered businesses, including additional consumer rights processes, limitationsrestrictions on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data. It will also create a new California data protection agency authorized to issue substantive regulations and could result in increased privacy and information security enforcement. The majority of the provisions will go into effect on January 1, 2023, and additional compliance investment and potential business process changes may be required. In Europe, the GDPR went into effect in May 2018 and imposes strict requirements for processing the personal data of individuals within the European Union (the “EU”) and the EEA. Companies that must comply with the GDPR face increased compliance obligations and risk, including more robust regulatory enforcement of data protection requirements and potential fines for noncompliance of up to €20 million or 4% of the annual global revenues of the noncompliant company, whichever is greater. Among other requirements, the GDPR regulates transfers of personal data subject to the GDPR to third countries that have not been found to provide adequate protection to such personal data, including the United States, and the efficacy and longevity of current transfer mechanisms between the EU and the United States remains uncertain. For example, in 2016, the EU and United States agreed to a transfer framework for data transferred from the EU to the United States, called the Privacy Shield, but the Privacy Shield was invalidated in July 2020 by the Court of Justice of the European Union. Further, from January 1, 2021, companies have to complyprocessing.

with the GDPR and also the United Kingdom GDPR (“UK GDPR”), which, together with the amended UK Data Protection Act 2018, retains the GDPR in UK national law. The UK GDPR mirrors the fines under the GDPR, ~~i.e.~~, fines up to the greater of €20 million (£17.5 million) or 4% of global turnover. The relationship between the United Kingdom and the EU in relation to certain aspects of data protection law remains unclear, and it is unclear how United Kingdom data protection laws and regulations will develop in the medium to longer term, and how data transfers to and from the United Kingdom will be regulated in the long term. Currently there is a four to six-month grace period agreed in the EU and United Kingdom Trade and Cooperation Agreement, ending June 30, 2021 at the latest, whilst the parties discuss an adequacy decision. However, it is not clear whether (and when) an adequacy decision may be granted by the European Commission enabling data transfers from EU member states to the United Kingdom long term without additional measures. These changes may lead to additional costs and increase our overall risk exposure.

The U.S. Foreign Corrupt Practices Act of 1977, as amended (the ~~FCPA)~~“FCPA”), prohibits U.S. businesses and their representatives from offering to pay, paying, promising to pay or authorizing the payment of money or anything of value to a foreign official in order to influence any act or decision of the foreign official in his or her official capacity or to secure any other improper advantage in order to obtain or retain business. The FCPA also obligates companies whose securities are listed in the United States, like us, to comply with accounting provisions ~~requiring~~that require us to maintain books and records ~~which~~that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the corporation, including international subsidiaries, if any, and to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements. The scope of the FCPA includes interactions with certain healthcare professionals in many countries.

Globally, other countries have enacted anti-bribery laws and/or regulations similar to the FCPA. Violations of any of these anti-bribery laws, or allegations of such violations, could have a negative impact on our business, results of operations and reputation.

~~There~~Additionally, as described above, there are also international privacy laws that impose restrictions on the access, use, and disclosure of health ~~information. All of these laws may impact our business. Our failure to comply with these privacy laws or significant changes in the laws restricting our ability to obtain required patient~~ information ~~could significantly impact our business~~ and, ~~our future business plans.~~

We rely on a combination of patent, copyright, trademark and trade secret laws and confidentiality and invention assignment agreements to protect our intellectual property rights. As of December 31, 2020, we had 22 issued U.S. patents, 16 patents outside the United States, 4 pending U.S. patent applications and 10 pending foreign patent applications. Our patents include utility patents covering technology ranging from remote control of our hearing aids to design patents covering the housing and securing mechanisms for our hearing aids. We have foreign patents in the EU, Australia, Canada, China, Germany, Japan, Singapore and South Korea. We own all of our patents and do not rely on any licenses to utilize the technology covered by these patents. The earliest of our patents is expected to expire in 2025. Our issued U.S. patent with claims generally directed to an open ear canal hearing aid comprised of certain electronics and securing portions and our issued U.S. patent with claims generally directed to an adjustable securing mechanism for a space access device are each expected to expire in 2030.

~~There is no active patent litigation involving us~~States, there are significant and ~~we have not received any notices of patent infringement involving any of our products. The validity, enforceability or scope, as the case may be, of one of our patents relating~~complex laws and regulations pertaining to our ~~Flexi Palm design is being challenged~~products and business model. To the extent we expand internationally, we will need to expend time and resources evaluating and complying with any such laws and regulations. For more information, see the Risk Factors titled, “Any future international expansion will subject us to additional costs and risks that may have a material adverse effect on our business, financial condition and results of operations” and “We operate in Europe. An oral hearing for this challenge is expected to be scheduled in 2021. The preliminary opinion from the European Patent Office’s Opposition Division considered the claims to be novel, inventivea regulated industry and sufficient of disclosure, while only making objections regarding added matter. Our response includes a main request to maintain the claims of the patent as-is and 11 auxiliary requests, each of which we believe will still provide coverage of the Flexi Palms. While any result that narrows or invalidates this patent could harm our ability to prevent third parties from producing competing products similar in design, we believe the result of these proceedings will not resultchanges in the ~~patent being invalidated~~regulations or the implementation of existing regulations could affect our operations and ~~that any result that relies upon one of the auxiliary requests would still provide us coverage regarding Flexi Palms in Europe.~~prospects for future growth.”

~~As of December 31, 2020, we had 35 trademark registrations and 8 pending trademark applications worldwide.~~

Our operations, properties and products are subject to a variety of U.S. and foreign environmental laws and regulations governing, among other things, air emissions, wastewater discharges, management and disposal of hazardous and non-hazardous materials and waste and remediation of releases of hazardous materials. We believe ~~based on current information~~ that we are in material compliance with environmental laws and regulations applicable to us. However, our failure to comply with present and future requirements under these laws and regulations, or environmental contamination or releases of hazardous materials on our leased premises, as well as through disposal of our products, could cause us to incur substantial costs, including clean-up costs, personal injury and property damage claims, fines and penalties, costs to redesign our products or upgrade our facilities and legal costs, or require us to curtail our operations, any of which could seriously harm our business.

As of December 31, ~~2020,~~2022, we had ~~238~~approximately 243 full-time ~~employees.~~employees worldwide, of which approximately 236 were employed in the United States. None of our employees is represented by a labor union or collective bargaining agreement, and we consider our employee relations to be good.

Our success depends in part on our continued ability to recruit, retain, develop and motivate a diverse population of talented employees at all levels of our organization. To succeed in a competitive industry, our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and additional employees. ~~The principal purposes~~

In addition to acquiring new talent, we focus on growing and developing our existing talent. We conduct regular individual performance reviews in which managers provide regular feedback and coaching to assist with employee development. We make investments to enhance employees’ skill levels and provide professional opportunities for career development and advancement. Our learning and development experiences focus on onboarding new hires as well as offering workshops focused on skills development, including leadership development programs and people manager coaching, and compliance training.

Our leadership team focuses on identifying the next generation of leaders to ensure that the organization is prepared to fill critical roles with employees who are prepared to support the strategy of the business and respond to the needs of key stakeholders. Furthermore, although we had reductions-in-force in the fourth quarter of 2021 and the second quarter of 2022, we offered affected employees severance packages.

We view diversity as integral to our future success. Diversity in our workforce fosters innovation, while inclusion helps ensure that we have the right culture, processes, policies, and practices to make employees feel valued and included. Developing teams where team members feel heard, respected, and included is one of our ~~equity~~core values. As of December 31, 2022, approximately 46% of our total US workforce was female and approximately 34% of our employees in domestic managerial roles were female. Minorities (non-White) constituted approximately 37% of our total US workforce and approximately 31% of our employees in domestic managerial roles were minorities as of the same date.

We focus on paying employees fairly and competitively. As a medical device company in the healthcare industry, we recognize the importance of compensation and benefits that are designed to support the financial, mental, and physical well-being of our team members and their families. Our compensation packages typically include incentive plans ~~are to attract, retain and motivate selected employees, consultants and directors through the granting~~comprised of discretionary stock-based compensation awards and cash-based performance bonus ~~awards.~~awards, health benefits, including options for medical plans, pharmacy, dental and vision coverage, a 401(k) plan, life and disability insurance, discretionary paid time off, family leave, a technology stipend for remote work, commuter benefit program, and a program for partial education reimbursement. Eligibility for, and the level of, benefits vary depending on team members’ full-time or part-time status, work location, compensation level, and tenure.

The physical health, financial wellbeing, life balance, and mental health of our employees are vital to our success. We remain focused on promoting the total wellness of our employees, including resources, programs and services to support their physical, mental and financial wellness. Throughout the COVID-19 pandemic, we have promoted the health, safety, and wellbeing of our employees and their families. We have established safety policies and protocols based on guidance from healthcare experts and public health leaders, and we regularly review and update them to reflect the best, most current information available.

Our Internet address is www.eargo.com. We routinely post important information for investors on our website in the “Investor Relations” section, which may be accessed from our homepage at www.eargo.com or directly at https://ir.eargo.com/. We use this website as a means of disclosing material, non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor the Investor Relations section of our website, in addition to following our press releases, SEC filings, public conference calls, presentations and webcasts. Our goal is to maintain the Investor Relations website as a portal through which investors can easily find or navigate to pertinent information about us, free of charge, including:

The content on our website is not incorporated by reference into, or a part of, this Annual Report on Form 10-K or any other report or document we file with or furnish to the SEC, and any references to our website are intended to be inactive textual references only.

Below is a summary of the principal factors that make an investment in our common stock speculative or risky. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below under the heading “Risk Factors” and should be carefully considered, together with other information in this Annual Report on Form 10-K and our other filings with the ~~Securities and Exchange Commission (the SEC),~~SEC, before making investment decisions regarding our common stock.

Our operating and financial results are subject to various risks and uncertainties. You should carefully consider the risks described below, as well as all of the other information contained in this Annual Report on Form 10-K, including our financial statements and related notes, before investing in our common stock. While we believe that the risks and uncertainties described below are the material risks currently facing us, additional risks that we do not yet know of or that we currently think are immaterial may also arise and materially affect our business.

We face considerable uncertainty in our business prospects, as a significant portion of our revenue has historically been dependent upon reimbursement from third-party payors participating in the FEHB program, but we have operated on a primarily “cash-pay” basis since December 8, 2021. We may be unsuccessful in validating and establishing processes to support the submission of claims for reimbursement from third-party payors, including those participating in the FEHB program. As a result, we have faced a significant reduction in revenue and any failure to establish additional processes to support reimbursement from third-party payors may significantly and adversely impact our business and growth prospects and our ability to sell our products. Additionally, potential opportunities for growth in our business outside of the FEHB program, such as the implementation of the FDA’s new OTC hearing aid regulatory framework and any potential insurance coverage for certain hearing aids, may not materialize and, as such, our business and growth prospects and our ability to sell our products may be materially and adversely impacted.

A significant portion of our revenue has historically been dependent on payments from third-party payors; for example, in the quarter ended September 30, 2021, 6,243 out of the 13,117 total gross systems shipped were for customers with potential insurance benefits. However, since December 8, 2021, we have operated on a primarily “cash-pay” basis.

Third-party payors periodically conduct pre- and post-payment reviews, including audits of previously submitted claims, and we are currently experiencing and may experience such reviews and audits of claims in the future. Historically, we submitted claims to a concentrated number of third-party payors under certain benefit plans, and substantially all such claims related to the FEHB program. We temporarily suspended all claims submission activities on September 22, 2021 when we learned of the investigation by the DOJ related to our role in customer reimbursement claim submissions to various federal employee health plans under the FEHB program.

On April 29, 2022, we entered into a civil settlement agreement with the U.S. government that resolved the DOJ investigation. Pursuant to the settlement agreement, we paid approximately $34.4 million to the U.S. government. We cooperated fully with the DOJ investigation. We deny the allegations in the settlement agreement, and the settlement is not an admission of liability by us. Additionally, following the settlement with the U.S. government, we remain subject to prepayment review of claims by the third-party payor with whom historically we had the largest volume. An additional payor audit related to claims submitted for customers with FEHB plans also remains in process. While we intend to continue to work with applicable third-party payors with the objective of validating and establishing additional processes to support any future claims that we may submit for reimbursement and, as of September 15, 2022, we have begun to accept insurance benefits as a method of direct payment again under certain limited circumstances, we may not be able to arrive at additional acceptable processes or submit future claims, including under the FEHB program, in sufficient volume to meaningfully restore or expand our insurance-based business. For example, we do not currently conduct in-person hearing tests, and it is possible that in-person testing would be required to support any claims submissions, representing a significant change from our past processes and direct-to-customer business model that may adversely impact the attractiveness of our offerings to customers.

Between December 8, 2021 and September 15, 2022, we did not accept insurance benefits as a direct method of payment to us, a practice we refer to as “direct plan access.” In “direct plan access,” we submit an insurance claim on behalf of an Eargo customer to their insurance plan, or support an Eargo customer in their own claim submission, and the customer’s insurance benefits are utilized for the

purchase, in whole or in part. Common forms of utilization can include, but are not limited to, co-pay, payment by a third-party payor to either Eargo or the customer, reimbursement by a third-party payor to the customer, or application toward a customer’s deductible.

Because we do not currently have contracts with any FEHB carriers or other third-party payors, our products are considered out-of-network for such payors. We do not believe that the reimbursement amounts, patient co-payment amounts, or the claims submission process, including medical necessity requirements and documentation requirements, depend on whether we are in-network or out-of-network for that FEHB carrier or other FEHB plans. To illustrate, the hearing aid benefit in this FEHB plan is a set amount that covers the hearing aid itself and related fees and supplies, regardless of the plan option and regardless of whether the hearing aid is provided by a preferred, participating, or non-participating provider (i.e., regardless of whether it is in-network or out-of-network), which is not always the case for other benefit categories. However, depending on the FEHB carrier or third-party payor, payment may be made directly to the patient rather than to us if Eargo is out-of-network.

Beginning on September 15, 2022, we resumed our direct plan access insurance-based business, accepting insurance benefits as a method of direct payment in certain limited circumstances, when the customer has undergone additional testing by an independent, licensed healthcare provider to establish medical necessity, with supporting clinical documentation. However, a majority of the claims we have submitted since instating this process are still pending adjudication by the payors, and although a portion of the claims we have submitted for reimbursement have been approved for payment and/or paid, others have been denied and are currently in the appeals process. We are evaluating additional alternatives for testing, including but not limited to contracting with third parties or existing networks and/or establishing a management services organization separate from our existing corporate structure that manages professional entities that employ licensed healthcare providers. These alternatives involve significant time and related activities, including, but not limited to, development of internal processes, training, and compliance and quality control programs, coordination with external healthcare providers and professional services organizations, and evaluation of and compliance with state-by-state regulatory requirements. We cannot provide any assurance as to the efficacy of the processes that we have recently established or the extent to which such processes will need to be changed, or additional processes established, or the associated timing or costs, whether we will be successful in implementing any of them, or the impact that such processes and changes may have on our business and operations. If we are unable to successfully implement at least one of these alternatives for testing, we expect that we will not be able to submit future claims in sufficient volume to meaningfully restore or expand the amount of our insurance-based business related to direct plan access going forward.

We intend to focus on both accessing third-party reimbursement and increasing coverage and reimbursement for our current products and any future products we may develop. However, we cannot provide any assurance as to the timing or costs associated with establishing processes to support the submission of claims, if we can do so at all, or the impact that such processes may have on our business and results of operations. Further, the OTC Final Rule may lead such payors to take additional actions further limiting our ability to access insurance coverage, or there may be a delay in accessing insurance coverage as payors seek to address the new OTC framework in their offered benefits, if at all, any of which may have a material adverse effect on our financial condition, results of operations or cash flows. Prior to the effective date of the OTC Final Rule, no OTC category of hearing aids existed, and certain carriers, including the third-party FEHB carrier with whom historically we had the largest volume, excluded from coverage so-called “over-the-counter” hearing aids and enhancement devices (such as personal sound amplification products, or “PSAPs”). Accordingly, the new regulatory category of OTC hearing aids created with the OTC Final Rule are not covered under certain plans as currently written, until such time as such carriers update their coverage policies to reflect the newly established OTC category under the OTC Final Rule, if ever. It is our understanding that the third-party FEHB carrier that administers approximately two-thirds of all FEHB benefits nationwide currently does not intend to update its coverage requirements for hearing aids following the recent OTC Final Rule. In addition, even if health plans update their coverage policies to include the new regulatory category of OTC hearing aids, they nonetheless may require a prescription, evaluation or diagnostic test conducted by a licensed healthcare professional to establish medical necessity and/or establish lower reimbursement rates for OTC hearing aids. Although we may seek to market certain of our devices as prescription hearing aids, payors, including the third-party FEHB carrier that administers approximately two-thirds of all FEHB benefits nationwide, may still not provide coverage for such devices because they are also offered OTC. We may need to work with individual carriers (including FEHB plans) to determine coverage for our hearing aids, including on a claim-by-claim basis with individual payors, which may be time-consuming and unpredictable. Coverage and payment levels are determined at each third-party payor’s discretion, and we have limited control over such third parties’ decision making with respect to coverage and payment levels or over their claims submissions processes and timelines. Coverage restrictions and reductions in reimbursement levels or payment methodologies may negatively impact our business and ability to sell products.

We are also seeking to establish further relationships with benefits managers or managed care providers. Employer self-funded plans or other health plans may at times offer supplemental benefits, which may include hearing aid benefits or general “over-the-counter” benefits; they may in those cases contract with benefits managers or managed care providers in the administration of such supplemental benefits. In this role, among other things, benefits managers are responsible for selecting benefits vendors or, in other words, vendors whose products or services are eligible to be covered by the supplemental benefit. The vendors themselves, or Eargo in this role, are not responsible for claims submissions but instead fulfill the product order from the customer through the benefits manager.

We cannot provide any assurances that we will be able to maintain or increase our participation in arrangements with third-party payors, insurance carriers, benefits managers, or managed care providers or that we will be adequately reimbursed or otherwise paid by such parties for the products we sell, which may have a material adverse effect on our financial condition, results of operations or cash flows.

As a result of the change to a primarily “cash-pay” business model, we have faced a significant reduction in revenue and reduced growth prospects. If we are unable to establish processes to support reimbursement from third-party payors, our business and growth prospects and our ability to sell our products may be significantly and adversely impacted. Our future growth prospects may also depend on insurance coverage, if any, for certain hearing aids (which may not include Eargo hearing aids). We may never achieve sufficient additional third-party reimbursement to meaningfully restore or expand our insurance-based business.

We cannot predict whether, under what circumstances, or at what payment levels third-party payors will cover and reimburse our products. If we fail to establish and maintain broad adoption of our products or fail to penetrate the insurance and managed care markets for our products, our ability to generate revenue could be harmed and our prospects and our business could suffer. To the extent we sell our products internationally, market acceptance may depend, in part, upon the availability of coverage and reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country and include both government-sponsored healthcare and private insurance. We may not obtain international coverage and reimbursement approvals in a timely manner, if at all. Our failure to receive such approvals would negatively impact market acceptance of our products in the international markets in which those approvals are sought. Please also see the Risk Factor titled, “Changes in the regulatory landscape for hearing aid devices could materially impact our direct-to-consumer business model and lead to increased regulatory requirements, and we may be required to seek additional clearance or approval for our products.”

Our negative cash flows and current lack of financial resources raise substantial doubt as to our ability to continue as a going concern. Our future capital requirements may be substantial, and if we are unable to raise additional funding to meet our operational needs, we will be forced to limit or cease our operations and/or liquidate our assets.

We believe that, without any future financing, our current resources are insufficient to satisfy our obligations as they become due within one year from the date of filing of this Annual Report on Form 10-K. Our negative cash flows and current lack of financial resources raise substantial doubt as to our ability to continue as a going concern. We anticipate our future capital requirements will be substantial and that we will need to raise significant additional capital to fund our operations through equity or debt financing, or some combination thereof; however, additional capital may not be available to us on acceptable terms on a timely basis, or at all. If we are unable to raise additional funding to meet our operational needs, we will be forced to limit or cease our operations and/or liquidate our assets, in which case it is likely that investors would lose part or all of their investment.

Our expected future capital requirements and ability to raise additional capital will depend on many factors, including but not limited to the following:

As a result of the Rights Offering and conversion of the Notes, our stockholders may have experienced substantial dilution of their holdings and the PSC Stockholder has obtained a controlling interest in us. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant further dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our common stock.

Debt financing, if available, is likely to involve restrictive covenants limiting our flexibility in conducting future business activities. Even if we are able to raise significant additional capital necessary to continue our operations, if we are unable to obtain additional adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to pursue our business objectives, develop our technology and products, and respond to business opportunities, challenges, unforeseen circumstances, or developments, including the implementation of the OTC Final Rule, could be significantly limited, and our business, financial condition and results of operations could be materially adversely affected.

Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties, could adversely affect our current and projected business operations and our financial condition and results of operations.

Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. For example, on March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (the “FDIC”) as receiver. On March 12, 2023, the Department of the Treasury, the Federal Reserve, and the FDIC jointly released a statement that depositors at SVB would have access to their funds, even those in excess of the standard FDIC insurance limits, under a systemic risk exception. As of March 10, 2023, we maintained cash in deposit accounts at SVB in excess of the standard FDIC insured amount and a substantial majority of our cash equivalents was invested, through a cash sweep arrangement with SVB, which are invested in a variety of short-term and high-credit bonds and other liquid investments. Although the FDIC ultimately announced that it would pay all deposits, including deposits that exceeded FDIC-insured amounts, we and other SVB customers initially were not able to access our accounts and faced significant uncertainty about whether and when we would be able to fully access amounts held through SVB, which would have had several follow-on consequences with respect to our ability to meet our near-term payment obligations. According to our cash sweep arrangements, we believe we should be recognized by the FDIC as the owner of such assets in the event of such financial institutions’ failure, such as the March 10, 2023 closure of SVB. While we have regained access to our funds at SVB, we have made and are making arrangements to open new and additional accounts with, and to transfer cash, cash equivalents and investments to such other financial institutions. We also continue to make arrangements to expand and evaluate our banking relationships in an effort to diversify as we believe necessary or appropriate. Additionally, we could experience disruption with customer receivables and vendor payments as we transition to new accounts.

Despite our proactive measures and the measures taken by the United States federal government, there is uncertainty in the markets regarding the stability of banks and the safety of deposits in excess of the insured deposit limits. The ultimate outcome of these events, and whether further regulatory actions will be taken, cannot be predicted. If any parties with whom we conduct business are impacted by the closure of SVB or any other financial institution, such parties’ ability to pay their obligations to us or to enter into new commercial arrangements requiring additional payments to us could be adversely affected. In this regard, counterparties to SVB credit agreements and arrangements, and third parties such as beneficiaries of letters of credit (among others), may experience direct impacts from the closure of SVB and uncertainty remains over liquidity concerns in the broader financial services industry.

In addition, if any of our partners, customers, suppliers or other parties with whom we conduct business are unable to access their own funds or access liquidity pursuant to credit agreements, letters or credit or other such lending arrangements or financial instruments as a result of financial institution volatility, such parties’ ability to pay their obligations to us or to enter into new commercial arrangements requiring additional payments to us could be adversely affected, which in turn, could have a material adverse effect on our business operations and financial condition and results or operations. Similar impacts have occurred in the past, such as during the 2008-2010 financial crisis.

Further, these events may make equity or debt financing more difficult to obtain, and additional equity or debt financing might not be available on reasonable terms, if at all; difficulties obtaining equity or debt financing could have a material adverse effect on our financial condition, as well as our ability to continue to grow our operations.

We are subject to risks from legal proceedings, investigations and inquiries, including a number of recent legal proceedings and investigations, which have had and could continue to have a material adverse effect on our reputation, business, financial condition, cash flows and results of operations, and could result in additional claims and material liabilities.

We are currently subject to a number of legal proceedings, investigations and inquiries, including: (i) purported securities class action litigation alleging that certain of our disclosures about our business, operations and prospects, including reimbursement from third-party payors, violated federal securities laws; and (ii) purported derivative action alleging the directors breached their fiduciary duties by allegedly failing to implement and maintain an effective system of internal controls related to the Company’s financial reporting, public disclosures, and compliance with laws, rules and regulations governing the business. On April 29, 2022, we entered into a civil settlement agreement with the U.S. government that resolved the DOJ investigation and pursuant to which we paid approximately $34.4 million. We remain subject to audit or prepayment review by various third-party payors. In addition, we could face additional legal proceedings, investigations, and inquiries relating to these or similar matters. For more information regarding legal proceedings, see “Item 3. Legal Proceedings.”

We are unable to predict how long such legal proceedings, investigations and inquiries will continue, but we have incurred and anticipate that we will continue to incur significant costs in connection with these matters and that these legal proceedings, investigations and inquiries have resulted and will continue to result in substantial distraction of management’s time, regardless of the outcome. These legal proceedings, investigations and inquiries may result in damages, fines, penalties, consent orders or other sanctions (including exclusion from government programs and/or a recoupment of previous claims paid) against us and/or certain of our officers or directors, or in changes to our business practices, including the potential long-term shift to a primarily “cash-pay” model, with minimal volume from our customers using insurance benefits as a direct method of payment to Eargo. Furthermore, publicity surrounding these legal proceedings, investigations and inquiries or any enforcement action as a result thereof, even if ultimately resolved favorably for us, coupled with the recent intensified public scrutiny of our Company, could result in additional legal proceedings, investigations and inquiries. As a result, these legal proceedings, investigations and inquiries have had and could continue to have a material adverse effect on our reputation, business, financial condition, cash flows and results of operations.

These legal proceedings, investigations and inquiries, and the uncertainty stemming from them, could also precipitate or heighten the other Risk Factors that we identify in this Item 1A, any of which could materially adversely impact our business. Further, these legal proceedings, investigations and inquiries may also affect our business and financial results in a manner that is not presently known to us or that we currently do not consider to present significant risks to our operations.

Additionally, we may become subject to other legal disputes and regulatory proceedings in connection with our business activities involving, among other things, product liability, product defects, intellectual property infringement and/or alleged violations of applicable laws in various jurisdictions. Although we maintain liability insurance in amounts we believe to be consistent with industry practice, we may not be fully insured against all potential damages that may arise out of any claims to which we may be party in the ordinary course of our business. A negative outcome of these proceedings may prevent us from pursuing certain activities and/or require us to incur additional costs in order to do so and pay damages.

The outcome of pending or potential future legal and arbitration proceedings is difficult to predict with certainty. In the event of a negative outcome of any material legal or arbitration proceeding, whether based on a judgment or a settlement agreement, we could be obligated to make substantial payments, which could have a material adverse effect on our business, financial condition and results of operations. In addition, the costs related to litigation and arbitration proceedings may be significant, and any legal or arbitration proceedings could have a material adverse effect on our business, financial condition and results of operations.

We have a limited operating history and have grown significantly in a short period of time. If we ~~fail~~are unable to manage our business and anticipated growth effectively, our business and growth prospects could be materially and adversely affected.

We were organized in 2010 and began selling hearing aids in 2015. ~~Accordingly,~~In that time, we have ~~a limited operating history, which makes an evaluation~~grown significantly, increasing the size of our ~~future prospects difficult. Our operating results~~organization and expanding our business. We have ~~fluctuated~~expanded, and any growth that we experience in the ~~past,~~future will require us to further expand, our sales, clinical, and research and development personnel (including those with software and hardware expertise), our manufacturing operations and our general and administrative infrastructure. As a public company, we ~~expect~~need to support increased managerial, operational, financial and other resources. Rapid expansion in personnel could mean that less experienced people develop, market and sell our ~~future quarterly~~products, which could result in inefficiencies and ~~annual operating results~~unanticipated costs, reduced quality and disruptions to ~~fluctuate as~~our operations. In addition, rapid and significant growth may strain our administrative and operational infrastructure.

The challenges we ~~focus on increasing~~face in managing our business, including our potential long-term shift to a primarily “cash-pay” business model, the ~~demand~~obstacles to our being able to obtain reimbursement for our ~~products. We may need to make business decisions that could adversely affect our operating results, such as modifications to our pricing strategy, business structure or operations.~~

~~In addition, we have experienced recent rapid growth~~products from third-party payors, and ~~anticipate further growth, although~~ the COVID-19 pandemic may substantially impact our future growth. For example, our revenue increased from $32.8 million for the year ended December 31, 2019 to $69.2 million for the year ended December 31, 2020.

~~This growth has placed~~changing regulatory landscape, place significant demands on our management, financial, operational, technological and other resources, and we expect that managing our ~~growth~~business will continue to place significant demands on our management and other resources and will require us to

continue developing and improving our operational, financial and other internal ~~controls.~~controls, reporting systems and procedures. In particular, ~~continued growth increases~~ the challenges ~~involved~~ in managing our business involve a number of areas, including recruiting and retaining sufficient skilled personnel, providing adequate training and supervision to maintain our high-quality product standards and regulatory compliance and preserving our culture and values. We may not be able to address these challenges in a cost-effective manner, or at all. In addition, we completed employee workforce reductions in the fourth quarter of 2021 and second quarter of 2022, which actions may continue to impact the attraction and retention of employees, as well as employee morale and productivity. We cannot assure you that any increases in scale, related improvements and quality or compliance assurance will be successfully implemented or that appropriate personnel will be available to facilitate the management and growth of our business. Failure to implement necessary procedures, transition to new processes or hire the necessary personnel could result in higher costs or an inability to meet demand. If we do not effectively manage our ~~growth,~~business through the various challenges we face, we may not be able to execute on our business plan, respond to competitive pressures, take advantage of market opportunities, satisfy customer requirements or maintain high-quality product offerings, which could have a material adverse effect on our business, financial condition and results of operations.

If we fail to attract and retain senior management and key technology personnel, our business may be materially and adversely affected.

Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, administrative and clinical and scientific personnel, including those with software and hardware expertise. We are highly dependent upon our senior management, particularly our President and Chief Executive Officer, as well as our senior technology personnel and other members of our senior management team. The unplanned loss of the services of any of our members of senior management could adversely affect our business until a suitable replacement can be found.

Competition for qualified personnel in the medical device field in general and the audiology field specifically is intense due to the limited number of individuals who possess the training, skills and experience required by our industry. In addition, our success also depends on our ability to attract, recruit, develop and retain skilled managerial, sales, administration, operating and technical personnel. We intend to continue to review and, where necessary, strengthen our senior management as the needs of the business develop, including through internal promotion and external hires. However, there may be a limited number of persons with the requisite competencies to serve in these positions and we cannot assure you that we would be able to locate or employ such qualified personnel on terms acceptable to us, or at all. Therefore, the unplanned loss of one or more of our key personnel, or our failure to attract and retain additional key personnel, could have a material adverse effect on our business, financial condition and results of operations. Our ability to attract and retain such qualified personnel has been and may continue to be negatively impacted by the DOJ investigation or shareholder litigation, our recent workforce reductions and suspension of certain of our equity compensation practices, and related negative publicity. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or that they have divulged proprietary or other confidential information, or that their former employers own their research output.

We may experience difficulties in managing our business, and a deterioration in our relationships with our employees could have an adverse impact on our business.

We expect to rely on our managerial, operational, finance and other resources in order to manage our operations and continue our research and development activities. We may expand our international operations, which would subject us to the legal, political, regulatory and social requirements and economic conditions of these jurisdictions, and create a variety of potential operational challenges due to a variety of international factors, including local labor laws and regulations and managing a geographically dispersed workforce. Our management and personnel, systems and facilities currently in place may not be adequate to support our business. Our need to effectively execute our strategy requires that we:

Maintaining good relationships with our employees is crucial to our operations. As a result, any deterioration of the relationships with our employees could have a material adverse effect on our business, financial condition and results of operations. Our ability to attract and retain qualified personnel, and foster positive employee morale, has been and may continue to be negatively impacted by the DOJ investigation and related negative publicity as well as the suspension of certain of our equity compensation practices. In addition, we completed employee workforce reductions in the fourth quarter of 2021 and second quarter of 2022, which actions may impact the attraction and retention of employees, as well as employee morale and productivity. Further, many of our key employees receive a total compensation package that includes equity awards. In addition to the aforementioned suspension of certain equity compensation

practices, volatility in the stock market, our share price and other factors could diminish the Company’s use or the value of the Company’s equity awards, putting the Company at a competitive disadvantage.

Additionally, material disruption to our business as a result of strikes, work stoppages or other labor disputes could disrupt our operations, result in a loss of reputation, increased wages and benefits or otherwise have a material adverse effect on our business, financial condition and results of operations.

We have a history of net losses, and we ~~may not achieve or maintain profitability~~expect to incur additional substantial losses in the foreseeable future.

We have incurred net losses since ~~inception.~~inception, and we expect to incur additional substantial losses in the foreseeable future. For the years ended December 31, ~~2020~~2022 and ~~2019,~~2021, we incurred net losses of ~~$39.9~~$157.5 million and ~~$44.5~~$157.8 million, respectively. As a result of our ongoing losses, as of December 31, ~~2020,~~2022, we had an accumulated deficit of ~~$199.1~~$514.3 million. Since inception, we have spent significant funds on organizational and start-up activities, to recruit key managers and employees, to develop our hearing aids, to develop our manufacturing know-how and customer support resources and for research and development.

The net losses we incur may fluctuate significantly from quarter to ~~quarter~~quarter. During the year ended December 31, 2022, net losses increased in part as a result of the costs involved in resolving the DOJ investigation, including the approximately $34.4 million we paid pursuant to the settlement agreement with the U.S. government, and other corrective actions and recoupment of previous claims paid, as well as other legal proceedings, and their duration and impact on our business generally. Net losses may also fluctuate and increase as a result of the ~~COVID-19 pandemic.~~implementation of the FDA’s new OTC hearing aid regulatory framework and any potential Medicare coverage for certain hearing aids, neither of which may ultimately be favorable to us.

Our long-term success is dependent upon our ability to successfully develop, commercialize and market our products, earn revenue, obtain additional capital when needed and, ultimately, to achieve profitable operations. The uncertainty regarding the extent to which we are able to validate and establish additional processes to support the submission of claims for reimbursement to health plans, including those under the FEHB program, the implementation of the FDA’s new OTC hearing aid regulatory framework (which may lead insurance providers to take actions limiting our ability to access insurance coverage) and potential insurance (including Medicare) coverage for certain hearing aids (which may not include Eargo hearing aids) will require that we evaluate and consider any changes to our business model as new information becomes available, including a potential long-term shift to a primarily “cash-pay” model, with minimal volume from our customers using insurance benefits as a direct method of payment to Eargo, which would likely result in a sustained increased cost of customer acquisition and a reduction in shipments, revenue, gross margin and higher operating expenses, which could have a material negative impact on our ability to achieve profitability and our growth prospects. We will need to generate significant additional revenue and raise significant additional capital to continue our operations and potentially achieve profitability. It is possible that even if we generate significant additional revenue and raise significant additional capital, we will not achieve profitability or that, even if we do achieve profitability, we may not maintain or increase profitability in the future. ~~Our failure~~Without the benefit of customers with insurance coverage and significant additional capital, the future prospects of the Company and our ability to achieve ~~or maintain~~ profitability ~~could negatively impact the value of our common stock.~~are uncertain.

We are deploying a new business model in an effort to disrupt a relatively mature industry. In order to successfully challenge incumbent business models and become profitable, we will need to continue to refine our product and strategy.

Our direct-to-consumer business model is new to the hearing aid industry. Our products are currently primarily available direct-to-consumer and are therefore generally not sold by channels which consumers would traditionally look to for the treatment of their hearing loss. Because audiologists and hearing clinics do not currently offer our products, they are unlikely to recommend our products as a solution to their patients. If we are unable to reach this population through our online or direct marketing, the estimated market size for our products may be lower than we anticipate.

Delivery of hearing aids via a direct-to-consumer model represents a change from the traditional channel, which requires in-person visits to one or more hearing care professionals, and consumers may be reluctant to accept this model or may not find it preferable to the traditional channel. In addition, consumers may not respond to our direct marketing campaigns, or we may be unsuccessful in reaching our target audience, particularly if we expand our sales efforts in foreign jurisdictions where our advertising and distribution model may be more heavily regulated. If consumers prove unwilling to adopt our model as rapidly or in the numbers that we anticipate, our business, financial condition and results of operations could be materially harmed.

~~We operate in a highly competitive industry, and competitive pressures could have a material adverse effect on our business.~~

faster in capturing available market opportunities, which in turn may negatively impact our market share. There are five major traditional manufacturer competitors in the industry—GN Store Nord, Sonova, Starkey, William Demant and WS Audiology—who together control a significant majority of the hearing aid market.

In addition to these manufacturer competitors, Costco sells multiple brands of hearing aids, including those of the traditional manufacturers and Costco’s own white-label Kirkland Signature brand of hearing aid, at prices ranging from approximately $1,499 to $2,899 per pair. We estimate that during 2019, Costco dispensed approximately 14% of the hearing aids distributed in the United States, which percentage is expected to increase going forward. The United States Department of Veterans Affairs, or the VA, is also a significant provider of hearing aids and provides hearing aids at no charge to its patients. We estimate that, in 2019, the VA dispensed approximately 19% of the hearing aids distributed in the United States. Our products are not distributed by Costco, or on contract or currently eligible to be distributed by the VA.

We also face competition from companies that introduce new technologies, including consumer electronics companies that sell direct to consumers. For example, in May 2018, the United States Food and Drug Administration, or FDA, granted marketing clearance to Bose Corporation for a “self-fitting air-conduction hearing aid.” The Bose self-fitting hearing aid was cleared under the FDA’s de novo premarket review pathway with the intended use to amplify sound for individuals 18 years of age or older with perceived mild to moderate hearing impairment, with no pre-programming or hearing test necessary. We view our consumer-first model as a competitive advantage, and competitors, including Bose or other consumer electronics companies, that sell hearing aids directly to consumers may erode that advantage. Please see the risk factor below titled, “ChangesChanges in the regulatory landscape for hearing aid devices could ~~render~~materially impact our direct-to-consumer and omni-channel business ~~model contrary~~models and lead to ~~applicable~~increased regulatory requirements, and we may be required to seek additional clearance or approval for our products.”

~~We also face competition from~~On August 17, 2022, the FDA published a final rule to establish new regulatory categories for OTC and prescription hearing aids (the “OTC Final Rule”). The OTC Final Rule implements relevant provisions of the FDA Reauthorization Act of 2017 (“FDARA”), which set forth requirements for the FDA to create a new category of OTC hearing aids that are intended to be available without supervision, prescription, or other ~~direct-to-consumer~~order, involvement or intervention of a licensed practitioner. Prior to the effective date of the OTC Final Rule, no OTC category of hearing aids existed. Following publication of a proposed rule in October 2021, the FDA issued its OTC Final Rule with requirements for labelling, conditions of sale, performance standards, design requirements and other provisions under which manufacturers may elect to market hearing aids as either OTC or prescription devices, or both. In addition, under FDARA, the OTC hearing aid ~~providers. Similar~~controls promulgated in the OTC Final Rule preempt any state or local requirement specifically related to hearing products that would restrict or interfere with commercial activity involving OTC hearing aids. The OTC Final Rule became effective on October 17, 2022, although certain previously marketed devices have until April 14, 2023 to come into compliance with the OTC Final Rule.

We have marketed in the past, and continue to market, certain Eargo system devices as Class I air-conduction or Class II wireless air-conduction hearing aids under existing regulations at 21 CFR 874.330 and 874.3305, respectively, both of which are exempt from 510(k) premarket review. In addition, in June 2022, we submitted a 510(k) premarket notification seeking FDA clearance of expanded labelling for our Eargo 5 and 6 hearing aids under the “self-fitting” regulation at 21 CFR 874.3325. We received FDA 510(k) clearance for Eargo 5 and 6 as Class II self-fitting air-conduction hearing aids in December 2022 and, in January 2023, we launched the Eargo 7 as our third over-the-counter, 510(k) cleared self-fitting device. We plan to market our devices as OTC hearing aids and intend to comply with all applicable OTC regulatory requirements by the compliance date for currently marketed devices on April 14, 2023, or sooner. In addition, we may seek to market certain devices as prescription hearing aids, which would require compliance with separate physical and electronic labeling requirements under the OTC Final Rule. If the FDA were to determine that our devices do

not satisfy the requirements of the OTC Final Rule, we could be forced to cease distribution of our products, and we could be subject to additional enforcement action by the FDA.

We have expended, and we will continue to expend, significant time and resources evaluating the OTC Final Rule and ensuring that our devices and processes comply with the new requirements in order to market our products in line with our primary direct-to-consumer and omni-channel business models. It is possible that the OTC Final Rule may lead to additional commercial partnership, omni-channel, including retail, or other opportunities, although there are no assurances that it will do so. The OTC Final Rule and the responses thereto by leading insurance providers could also materially impact our efforts to resume submitting claims for customers with potential insurance benefits or have other unforeseen impacts on our business ~~model, these~~and results of operations.

Finally, in October 2021, the Biden administration outlined its plan to expand government healthcare programs as part of its broader domestic spending bill, which includes, among other things, extending Medicare coverage to include hearing benefits. Congress has considered legislation that would provide for such coverage, for example, the Build Back Better Act (H.R. 5376), which was passed by the House on November 19, 2021. The bill, as passed by the House, would have provided Medicare coverage for certain hearing aids to individuals with specific types of hearing loss, furnished pursuant to a written order of a physician, qualified audiologist or other hearing aid ~~companies allow consumers~~professional, physician assistant, nurse practitioner or clinical nurse specialist. The Inflation Reduction Act, which was ultimately signed into law, however, did not include a hearing aid benefit. We cannot predict the likelihood, nature, or extent to ~~purchase~~which Medicare or other government healthcare programs will cover hearing aids, ~~remotely, with no need to visit a clinic and they provide remote clinical support. Given the similarities in~~if at all, or specifically our ~~business model to these providers, if potential consumers opt to buy their~~ hearing aids, ~~from these direct-to-consumer competitors, our business could be adversely affected.~~

~~We may be unable to compete with these~~which are intended for “mild” or ~~other competitors, and one~~“moderate” hearing loss, in the future, or ~~more~~the impact of any such competitors may render our technology obsolete or economically unattractive. To the extent we expand internationally, we will face additional competition in geographies outside the United States. If we are unable to compete effectively with existing products or respond effectively to any new products developed by competitors, our business could be materially harmed. Increased competition may result in price reductions, reduced gross margins and loss of market share. There can be no assurance that we will be able to compete successfully against our current or future competitors or that competitive pressures will not have a material adverse effectchanges on our business, financial condition ~~and~~or results of operations.

There are a variety of hearing aid products and technologies, and consumer confusion about product features and technology could lead consumers to purchase competitive products instead of our products, or to conflate any adverse events or safety issues associated with third-party hearing aid products with our products, which could adversely affect our business, financial condition and results of operations.

If we are unable to reduce our return rates or if our return rates increase, our net revenue may decrease or grow more slowly than we anticipate, and our business, financial condition and results of operations could be adversely affected.

Eargo’s customer return accrual rates were approximately 26% for the year ended December 31, 2020. 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. 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. Furthermore, if we are unable to reduce our return rates or if they increase, our net revenue may decrease or grow more slowly than we anticipate, and our business, financial condition and results of operations could be adversely affected.

We depend on sales of our hearing aids for our revenue. Demand for our hearing aids may not increase as rapidly as we anticipate due to a variety of factors, including a weakness in general economic conditions or competitive pressures.

We expect that revenue from sales of our hearing aids will continue to account for our revenue for the foreseeable future. Continued and widespread market acceptance of hearing aids by consumers is critical to our future success. Consumer spending habits are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wage rates, consumer confidence and consumer perception of economic conditions, which have been adversely affected by the COVID-19 pandemic and may continue to be materially adversely affected by the COVID-19 pandemic. Hearing aids are primarily paid for directly by the consumer and, as a result, demand can vary significantly depending on economic growth. A general slowdown in the U.S. economy and international economies into which we may expand or an uncertain economic outlook could adversely affect consumer spending habits, which may result in, among other things, a reduction in consumer spending on elective or higher value products, or a reduction in demand for hearing aids generally, each of which would have an adverse effect on our sales and operating results. Weakness in the global economy results in a challenging environment for selling hearing loss technologies. In such circumstances, consumers may opt to purchase less expensive hearing loss technologies. If there is a reduction in consumer demand for hearing aids generally, if consumers choose to use a competitive product rather than our hearing aids or if the average selling price of our hearing aids declines as a result of economic conditions, competitive pressures or any other reason, these factors could have a material adverse effect on our business, financial condition and results of operations. If we are not successful in adapting our production and cost structure to the market environment, we may experience further adverse effects that may be material to our business, financial condition and results of operations.

If we cannot innovate at the pace of our hearing aid manufacturing competitors, we may not be able to develop or exploit new technologies in time to remain competitive.

The hearing aid industry has in the past experienced rapid shifts to new key technologies, including for example the switch from analog to digital hearing aids in the 1990s, that disrupted existing market patterns and led to a large-scale market realignment among customers and hearing aid manufacturers. For us to remain competitive, it is essential to develop and bring to market new technologies or to find new applications for existing technologies at an increasing speed. If we are unable to meet customer demands for new technology, or if the technologies we introduce are viewed less favorably than our competitors’ products, our results of operations and future prospects may be negatively affected. To meet our customers’ needs in these areas, we must continuously design new products, update existing products and invest in and develop new technologies. We will also need to anticipate consumer demand with respect to these technologies and which technological advances are most desirable in the hearing aids we sell. This need will result in requiring our employees to continue learning and adapting to new technologies, and our competing for highly skilled talent in a competitive market. Our operating results depend to a significant extent on our ability to anticipate and adapt to technological changes in the hearing aid market, maintain innovation, maintain a strong product pipeline and reduce the costs of producing high-quality new and existing hearing aids. Any inability to do so could have a material adverse effect on our business, financial condition and results of operations.

34As we expand our product offerings to physical retail outlets and begin to rely on third parties outside of our control, any failure of such third parties to comply with applicable laws and regulations could negatively impact our brand image and business and lead to negative publicity and potential liability.

As we expand our product offerings to physical retail outlets, we must rely on third parties to comply with applicable regulatory requirements in the promotion and sale of our devices. These third-party retailers may have limited or no experience selling regulated products such as hearing aids. If our third-party retail partners fail to comply with applicable requirements, our operations could be disrupted and we may be required to contract with alternate retail partners, which could result in substantial delays and which could materially and adversely affect our business, financial conditions, results of operations and growth prospects. Any violation of applicable law by any retail partner could expose us to unforeseen potential liability or attract negative publicity for us and our brand, which could materially impact our business. In addition, our retail partners have limited experience marketing and selling hearing aids in retail settings. If they are unable to successfully market and sell our hearing aids, we or they may decide to terminate our partnerships, which could materially and adversely affect our business, financial conditions, results of operations and growth prospects.

Our primary direct-to-consumer and omni-channel business model is relatively new to the hearing aid industry. Our products are currently primarily available direct-to-consumer and are therefore generally not sold by channels which consumers would traditionally look to for the treatment of their hearing loss. Because audiologists and hearing clinics do not offer our products, they are unlikely to recommend our products to their patients. If we are unable to reach this population through our online or direct and channel marketing, the estimated market size for our products may be lower than we anticipate.

Additionally, following the effective date of the OTC Final Rule on October 17, 2022, customers can now purchase or order Eargo hearing aids in certain physical retail settings. We believe that the OTC Final Rule may facilitate the opportunity to execute additional

commercial partnerships and expand our potential customers’ opportunity to purchase our products at physical retail locations. Delivery of hearing aids via direct-to-consumer and retail models represents a change from the traditional channel, which requires in-person visits to one or more hearing care professionals, and consumers may be reluctant to accept these models or may not find it preferable to the traditional channel. In addition, consumers may not respond to our direct and channel marketing campaigns or efforts, or we may be unsuccessful in reaching our target audience, particularly if we expand our sales efforts in foreign jurisdictions where our advertising and distribution model may be more heavily regulated. If consumers prove unwilling to adopt our model as rapidly or in the numbers that we anticipate, our business, financial condition and results of operations could be materially harmed.

Historically, the majority of hearing aids sold to customers who used insurance benefits as a method of direct payment to Eargo corresponded to claims for reimbursement to third-party payors under the FEHB program. While we are continuing to work with applicable third-party payors with the objective of validating and establishing additional processes to support claims that we may submit for reimbursement, we may not be able to arrive at additional acceptable processes or submit future claims in sufficient volume to meaningfully restore or expand our insurance-based business. As such, our future growth prospects may be dependent upon other opportunities, such as the OTC Final Rule and any potential insurance coverage for certain hearing aids that we may be able to access.

We operate in a highly competitive industry, and competitive pressures could have a material adverse effect on our business.

The worldwide market for hearing aids is competitive in terms of pricing, product quality, product innovation and time-to-market. We face strong competitors, which have greater resources and stronger financial profiles that may enable them to better exploit changes in our industry on a cost-competitive basis and to be more effective and faster in capturing available market opportunities, which in turn may negatively impact our market share. There are five major traditional manufacturer competitors in the industry—GN Store Nord, Sonova, Starkey, William Demant and WS Audiology—who together control a significant majority of the hearing aid market.

In addition to these manufacturer competitors, Costco sells multiple brands of hearing aids, including those of the traditional manufacturers and Costco’s own white-label Kirkland Signature brand of hearing aid, at various price points. We estimate that during 2019, Costco dispensed approximately 14% of the hearing aids distributed in the United States, which percentage is expected to increase going forward. The United States Department of Veterans Affairs (the “VA”) is also a significant provider of hearing aids and provides hearing aids at no charge to its patients. We estimate that, in 2022, the VA dispensed approximately 20% of the hearing aids distributed in the United States. Our products are not distributed by Costco, or on contract or currently eligible to be distributed by the VA.

We also face competition from other direct-to-consumer hearing aid providers. Similar to our business model, these hearing aid companies allow consumers to purchase hearing aids remotely, with no need to visit a clinic, and they also provide remote support. Given the similarities in our direct-to-consumer business model to these providers, if potential consumers opt to buy their hearing aids from these direct-to-consumer competitors, our business could be adversely affected.

Finally, in particular following the effective date of the OTC Final Rule, we may also face increased competition from companies that introduce new technologies, including consumer electronics companies that sell direct to consumers or other hearing aid companies that partner with other retailers or consumer electronics companies. For example, in May 2018, the FDA granted marketing clearance to Bose Corporation for a “self-fitting air-conduction hearing aid,” and following the effective date of the OTC Final Rule, Nuheara will be selling its OTC self-fitting air-conduction hearing aids under branding by HP, Inc., while Sony Electronics has partnered with WS Audiology. The Bose self-fitting hearing aid was cleared under the FDA’s de novo premarket review pathway with the intended use to amplify sound for individuals 18 years of age or older with perceived mild to moderate hearing impairment, with no pre-programming or hearing test necessary. We view our consumer-first model as a competitive advantage, and competitors, including Bose or other consumer electronics companies, or any other companies following the effective date of the OTC Final Rule, that sell hearing aids directly to consumers or in partnership with other retailers may erode that advantage. Please see the Risk Factor titled, “Changes in the regulatory landscape for hearing aid devices could ~~render~~materially impact our direct-to-consumer business model ~~contrary~~and lead to ~~applicable~~increased regulatory requirements, and we may be required to seek additional clearance or approval for our products.”

~~Hearing aids are considered medical devices subject to regulation by the FDA.~~ We currently market our products pursuant to the FDA regulatory framework for air-conduction hearing aids, which are classified as Class I or Class II devices exempt from premarket review procedures. In addition, while applicable FDA regulations establish certain “conditions for sale” of all hearing aids, including that prospective hearing aid users must have a medical evaluation by a licensed physician within the six months prior to hearing aid dispensation, the FDA has stated that it does not intend to enforce these medical evaluation requirements prior to the dispensing of Class I air-conduction and Class II wireless air-conduction hearing aids to individuals 18 years of age and older. Accordingly, while we are required to comply with other FDA requirements, including specific hearing aid labeling requirements and provision of a User Instructional Brochure, our products have not been reviewed by the FDA and are not dispensed by licensed physicians. If the FDA were to determine that our products do not properly satisfy the conditions for marketing Class I or Class II air-conduction hearing aid devices, we could be forced to cease distribution of our products until we obtain regulatory clearance or approval, and we could be subject to additional enforcement action by the FDA. In addition, many states have laws regarding the provision of hearing aid devices, and if we are found to be in violation of the laws of any state in which our devices are sold, we could be subject to further sanctions at the state level.

The regulatory landscape for hearing aid devices has been subject to recent changes that may alter or increase our requirements for regulatory compliance. The FDA Reauthorization Act of 2017, or FDARA, created a new category of over-the-counter, or OTC, hearing aids that are intended to be available through in-person transactions, by mail or online without the involvement of a licensed practitioner. Under the statute, the FDA is required to issue regulations to implement the new framework. As part of its rulemaking process, the FDA is required to evaluate whether OTC hearing aids should be subject to premarket review and clearance under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or FDCA, and it is unclear whether the FDA will subject OTC hearing aids to this requirement or other more onerous requirements. The language in FDARA is not self-implementing, which means that the OTC hearing aid category does not exist until the effective date of a published final regulation. Despite the deadline in FDARA for the FDA to issue proposed regulations by August 18, 2020, the FDA has not yet issued a notice of proposed rulemaking or indicated how it will implement the new OTC hearing aid pathway. We market the Eargo system devices as Class I or Class II exempt air-conduction hearing aids under existing regulations and are not dependent on the FDA’s issuance of OTC hearing aid regulations for the marketing of our products. However, our devices may become subject to additional requirements in connection with such regulations in the future.

In addition, in May 2018, the FDA granted a de novo classification request from Bose for a direct-to-consumer “self-fitting air-conduction hearing aid,” which is classified as Class II and subject to 510(k) premarket review. We do not consider our devices to be “self-fitting” hearing aids similar to the recently cleared Bose device, but the FDA could disagree. While we expect our products to continue to be regulated as Class I or Class II exempt devices, our products could in the future be deemed to fall under the definition of a “self-fitting air-conduction hearing aid” or an OTC hearing aid, in which case we could be required to seek 510(k) clearance for our products or otherwise comply with additional regulatory requirements associated with these new pathways. In such case, the FDA may require us to remove our devices from the market while we seek FDA clearance. In addition, even if our current products remain Class I or Class II exempt devices, it is possible that any future products we may develop could fail to meet the requisite criteria for similar regulation and could be subject to more stringent requirements and premarket review, increasing our costs for regulatory compliance.

~~Our business, financial condition, results of operations and growth may be impacted by the effects of the COVID-19 pandemic.~~

We are subject to risks related to public health crises such as the global pandemic associated with COVID-19. The COVID-19 pandemic may negatively impact our operations and revenues and overall financial condition by harming the ability or willingness of customers to pay for our products due to macro -economic conditions resulting from the pandemic or the operations of manufacturers, suppliers and other third parties with which we do business. These challenges will likely continue for the duration of the pandemic, which is uncertain, and the macro-economic effects of the pandemic will likely continue far beyond the duration of the pandemic.

Numerous state and local jurisdictions have imposed or reimposed, and others in the future may impose, “shelter-in-place” orders, quarantines, orders requiring non-essential businesses to remain closed, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. The pandemic and such restrictions have resulted in a majority of our employees working remotely, work stoppages, slowdowns and delays, travel restrictions and cancellation of events, among other effects, thereby negatively impacting our operations. Other potential disruptions may include delays in processing registrations or approvals by applicable state or federal regulatory bodies; delays in product development efforts; and additional government requirements or other incremental mitigation efforts that may further impact our capacity to manufacture, sell and support the use of our Eargo systems. In addition, even after the “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19 are lifted, we may continue to experience disruptions to our business.

While the potential economic impact brought by and the duration of COVID-19 may be difficult to assess or predict, the widespread pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity, including our ability to repay our existing indebtedness. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock. The COVID-19 pandemic has also resulted in a significant increase in unemployment in the United States which may continue even after the pandemic subsides. The occurrence of any such events may lead to reduced disposable income and access to health insurance which could adversely affect the number of our products sold after the pandemic has subsided. Further, although we have experienced growth in our sales volume during the COVID-19 pandemic, this and any other favorable impacts we have experienced in connection with the pandemic may subside, and the ultimate effect of COVID-19 on our sales volume and other results of operations could differ substantially from our expectations and our experience to date.

~~We currently rely on a single manufacturer for the assembly of our hearing aids. If we encounter manufacturing problems or delays, we~~ may be unable to ~~promptly transition to an alternative manufacturer~~compete with these or other competitors, and one or more of such competitors may render our ~~ability to generate revenue will be limited.~~

~~We have no manufacturing capabilities~~technology obsolete or economically unattractive. Please see the Risk Factor titled, “If we cannot innovate at the pace of our ~~own. We currently rely on a single manufacturer located in Thailand, Hana Microelectronics, for the manufacture of all of our products currently available for sale. We have entered in a~~hearing aid manufacturing ~~services agreement with a second manufacturer located in Taiwan, Pegatron Corporation, for the manufacture of our next generation hearing aid. For us to be successful, our contract manufacturers must~~competitors, we may not be able to ~~provide us~~develop or exploit new technologies in time to remain competitive.” To the extent we expand internationally, we will face additional competition in geographies outside the United States. If we are unable to compete effectively with existing products ~~in substantial quantities, in compliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable costs and on a timely basis. While~~or respond effectively to any new products developed by competitors, our existing manufacturer has generally met our demand requirements on a timely basis in the past, its ability and willingness to continue to do so going forward, and the ability and willingness of our new manufacturer to meet our demand requirements, may be limited for several reasons, including our relative importance as a customer of the manufacturer or its ability to provide assembly services to manufacture our products, which may be affected by the COVID-19 pandemic. An interruption in our commercial operations could occur if we encounter delays or difficulties in securing these manufactured products if we cannot obtain an acceptable substitute.

~~Any transition to a new contract manufacturer, or any transition of products between existing manufacturers,~~business could be ~~time-consuming and expensive,~~materially harmed. Increased competition may result in ~~interruptions in our operations~~price reductions, reduced gross margins and ~~product delivery, could affect the performance specifications~~loss of ~~our products or could require that we modify the design of our products. If we are required to change either of our contract manufacturers, we will~~market share. There can be required to verify that the new manufacturer maintains facilities, procedures and operations that comply with our quality and applicable regulatory requirements, which could further impede our ability to manufacture our products in a timely manner. We cannot assure youno assurance that we will be able to ~~identify and engage alternative contract manufacturers on similar terms~~compete successfully against our current or without delay. Furthermore, our contract manufacturers could require us to move to a different production facility. The occurrence of any of these events could harm our ability to meet the demand for our products in a timely and cost-effective manner, which couldfuture competitors or that competitive pressures will not have a material adverse effect on our business, financial condition and results of operations.

commercial quantities in compliance with regulatory requirements and at an acceptable cost. Our hearing aids require significant expertise to manufacture, and our contract manufacturers may encounter difficulties in scaling up production of the hearing aids, including problems with quality control and assurance, component supply shortages, increased costs, shortages of qualified personnel, the long lead time required to develop additional facilities for purposes of testing our products and/or difficulties associated with compliance with local, state, federal and foreign regulatory requirements. There can be no assurance that manufacturing or quality control problems will not arise in connection with the scale-up of the manufacture of our products. If we are unable to obtain a sufficient supply of product, maintain control over product quality and cost or otherwise adapt to anticipated growth, or if we underestimate growth, we may not have the capability to satisfy market demand, and our business and reputation in the marketplace will suffer. Conversely, if demand for our products decreases, we may have excess inventory, which could result in inventory write-offs that would have a material adverse effect on our business, financial condition and results of operations. We may also encounter defects in materials and/or workmanship, which could lead to a failure to adhere to regulatory requirements. Any defects could delay operations at our contract manufacturers’ facilities, lead to regulatory fines or halt or discontinue manufacturing indefinitely. Any of these outcomes could have a material adverse effect on our business, financial condition and results of operations.

We rely on the timely supply of high-quality components, ~~and~~ parts and finished products, and our business could suffer if suppliers or manufacturers are unable to procure raw materials or other components of an acceptable quality (or at all) or otherwise fail to meet their delivery obligations, raise prices or cease to supply us with components, parts or ~~parts.~~products of acceptable quality.

We rely on ~~three~~a limited number of critical suppliers for many of the components that are used in the manufacture of our products, including for ~~batteries,~~semiconductor components, such as integrated circuits, as well as batteries, microphones and receivers. We are dependent on these third-party manufacturers and suppliers to identify and purchase quality raw materials, semi-finished goods and finished goods while seeking to preserve our quality standards. This reliance and dependence on third parties adds additional risks to the manufacturing process that are beyond our control. For example, the occurrence of epidemics or pandemics, such as the COVID-19 pandemic, may cause labor shortages and/or disrupt the supply of various raw materials and components, causing price spikes and/or shortages. As a result, one or more of our suppliers toor manufacturers may suspend, close or otherwise reduce the scope of their operations either temporarily or permanently. In addition, reductions in our supplier volume due to demand or product changes may lead and has led suppliers to raise volume requirements, increase their pricing, levy minimum purchase requirements, revise terms of payment, or otherwise reduce or cease the scope of their supplier relationship with us.

In addition, many of these suppliers also provide components and products to our competitors. The industry’s reliance on a limited number of key components and product suppliers subjects us to the risk that in the event of an increase in demand or shortage of key materials or components, our suppliers may fail to provide supplies to us in a timely manner while they continue to supply our competitors, many of which have greater purchasing power than us, or seek to supply components to us at a higher cost. Lead times for materials, components and products ordered by us or by our contract manufacturers can vary significantly and depend on factors such as contract terms, demand for a component, and supplier capacity. From time to time, we may experience and have experienced component shortages and extended lead times, as well as increased component costs and increased logistics costs, including on semiconductor components and batteries, and other components used in our products.

For example, we have at times experienced, and expect to continue to periodically experience, price increases in certain of our critical components due to commodity price inflation. Additionally, while we have taken certain steps to alleviate cost pressures on freight shipping of our components and products, logistics costs may continue to increase and there can be no assurance that our cost-saving measures will continue to offset such logistics price increases. While we continue to monitor our supply chain and have taken and are taking actions to address limited supply and increasing lead times, including outreach to critical suppliers and spot market purchases, future disruptions in our supply chain, including the sourcing of certain components and raw materials by us or our suppliers, such as semiconductor and memory chips, as well as increased logistics and inflationary costs, could impact our sales and gross margins as well as launch and shipment of our products. The failure of our suppliers or manufacturers to deliver components or products in a timely fashion could have disruptive effects on our ability to produce our products in a timely manner, or we may be required to find new suppliers or manufacturers at an increased ~~cost. Furthermore,~~cost, or we generally do not enter into long-term commitment contracts with our suppliers, but rather enter into framework agreements as a basis for individual orders. The terms of such framework agreements are typically up to two years and in most cases do not contain any firm purchase commitments. We can make no assurance that we willmay be ~~able to renew such supply agreements. If we are~~ unable to ~~renew~~find replacement suppliers or manufacturers at all. Shortages or interruptions in the supply ~~agreements,~~of components or subcontracted products, or our ~~access~~inability to ~~key~~procure these components or products from alternate sources at acceptable prices in a timely manner, could ~~be reduced,~~delay launch or shipment of our products or increase our production costs, which could ~~harm~~adversely affect our ~~business.~~business and operating results. The effects of climate change, including extreme weather events, long-term changes in temperature levels and water availability may exacerbate these risks. Such disruption has in the past impacted our costs and could in the future impact costs or interrupt our ability to source certain product components. A severe weather event in countries from which we source components and parts could cause disruptions in our supply chain which could, in turn, cause product shortages, delays in delivery and/or increases in our cost incurred to manufacture our products.

Any shortage, delay or interruption in the availability of our products, or key inputs used in their production, may negatively affect our ability to meet consumer demand. Additionally, our reputation and the quality of our products are in part dependent on the quality of the components that we source from third-party suppliers. If we are unable to control the quality of the components supplied to us or to address known quality problems in a timely manner, our reputation in the market may be damaged and sales of our products may suffer. As a result, we may experience a material adverse effect on our business, financial condition and results of operations.

Certain components needed to manufacture our hearing aids are only available from a limited number of suppliers.

Several of our suppliers provide products for our hearing aids and accessories for which they own the design and/or intellectual property rights. This includes semiconductor components, including integrated circuits, as well as transducers, batteries and various electrical ~~components.~~components, some of which are highly customized. Although there may be several potential suppliers for our components, as our components are highly customized, there is a risk that these components may not be readily substituted by similar products of other suppliers or that any substitution may take a lengthy period of time to implement. Even if we do identify new suppliers, we may experience increased costs and product shortages as we transition to alternative suppliers. If any of these limited suppliers cease to supply us with their products, significantly increase their costs, or any of the foregoing events occurs, we could experience a material adverse effect on our business, financial condition and results of operations.

37We rely on a limited number of manufacturers for the assembly of our hearing aids. If we encounter manufacturing problems or delays, we may be unable to promptly transition to alternative manufacturers and our ability to generate revenue will be limited.

We have no manufacturing capabilities of our own. We currently rely on a limited number of manufacturers: one located in Thailand, Hana Microelectronics, and our primary manufacturer, Pegatron Corporation, headquartered in Taiwan and with manufacturing facilities throughout Asia. Pegatron manufactures the Eargo 5, Eargo 6, and Eargo 7 hearing aid systems out of its facilities in Suzhou, China. For us to be successful, our contract manufacturers must be able to provide us with products in substantial quantities, in compliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable costs and on a timely basis. While our existing manufacturers have generally met our demand and cost requirements on a timely basis in the past, their ability and willingness to continue to do so going forward may be limited for several reasons, including the volume of our orders and our relative importance as a customer of the manufacturer or its ability to provide assembly services to manufacture our products, which may be affected by the COVID-19 pandemic and potential geopolitical events involving the countries in which our manufacturers are headquartered or operate. Please see the risk factor titled, “We are dependent on international manufacturers and suppliers, as well as certain international contractors we engage from time to time with respect to select research and development activities, which exposes us to foreign operational and political risks that may harm our business.” An interruption in our commercial operations could occur if we encounter delays or difficulties in securing these manufactured products if we cannot obtain an acceptable substitute.

Any transition to a new contract manufacturer, or any transition of products between existing manufacturers, could be time-consuming and expensive, may result in interruptions in our operations and product delivery, could affect the performance specifications of our products or could require that we modify the design of our products. We will be required to verify that any new manufacturer maintains facilities, procedures and operations that comply with our quality and applicable regulatory requirements, which could further impede our ability to manufacture our products in a timely manner. We cannot assure you that we will be able to identify and engage alternative or additional contract manufacturers on similar terms or without delay. Furthermore, our contract manufacturers could require us to move to a different production facility. The occurrence of any of these events could harm our ability to meet the demand for our products in a timely and cost-effective manner, which could have a material adverse effect on our business, financial condition and results of operations.

The manufacture of our products is complex and requires the integration of a number of components from several sources of supply. Our contract manufacturers must manufacture and assemble these complex products in commercial quantities in compliance with regulatory requirements and at an acceptable cost. Our hearing aids require significant expertise to manufacture, and our contract manufacturers may encounter difficulties in scaling up production of the hearing aids, including problems with quality control and assurance, component supply shortages, including any semiconductor components, increased costs, shortages of qualified personnel, the long lead time required to develop additional facilities for purposes of testing our products and/or difficulties associated with compliance with local, state, federal and foreign regulatory requirements. There can be no assurance that manufacturing or quality control problems will not arise in connection with the scale-up of the manufacture of our products. If we are unable to obtain a sufficient supply of product, maintain control over product quality and cost or otherwise adapt to challenges in managing our business, we may not have the capability to satisfy market demand, and our business and reputation in the marketplace will suffer. If demand for our products decreases, as it has in the past year as a result of the DOJ investigation and claims audits (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—DOJ investigation and settlement and claims audits”), we may have excess inventory, which could result in inventory write-offs that may adversely affect our business, financial condition and results of operations. In addition, reductions in our supplier volume due to demand or product changes may lead and has led suppliers to raise volume requirements, increase their pricing, levy minimum purchase requirements, revise terms of payment, or otherwise reduce or cease the scope of their supplier relationship with us. We may also encounter defects in materials and/or workmanship, which could lead to a failure to adhere to regulatory requirements. Any defects could delay operations at our contract manufacturers’ facilities, lead to regulatory fines or halt or discontinue manufacturing indefinitely. Any of these outcomes could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to successfully develop and effectively manage the introduction of new products, our business may be adversely affected.

We must successfully manage introductions of new or advanced hearing aid products. Introductions of new or advanced hearing aid products could also adversely impact the sales of our existing products to consumers. For instance, the introduction or announcement of new or advanced hearing aid products may shorten the life cycle of our existing devices or reduce demand, thereby reducing any benefits of successful hearing aid introductions and potentially lead to challenges in managing write-downs or write-offs of inventory of existing products. We may also not have success in transitioning customers from legacy hearing aids to new products. In addition, new hearing aid products may have higher manufacturing costs than legacy products, which could negatively impact our gross margins and operating results. As the technological complexity of our products increases, the infrastructure to support our products, such as our design and manufacturing processes and technical support for our products, may also become more complex. Accordingly, if we fail to effectively manage introductions of new or advanced products, our business may be adversely affected.

We experience challenges managing the inventory of existing hearing aids, which can lead to excess inventory and discounting of our existing devices. Inventory levels in excess of consumer demand may result in inventory write-downs or write-offs and the sale of inventory at discounted prices, which has affected our gross margin and could impair the strength of our brand. Reserves and write-downs for rebates, promotions and excess inventory are recorded based on our forecast of future demand. Actual future demand could

be less than our forecast, which may result in additional reserves and write-downs in the future, or actual demand could be stronger than our forecast, which may result in a reduction to previously recorded reserves and write-downs in the future and increase the volatility of our operating results.

If the quality of our hearing ~~solution~~aid products does not meet consumer expectations, or if our products wear out more quickly than expected, then our brand and reputation or our business could be adversely affected.

Our products may not perform as well in day-to-day use as we or our customers expect. Although we designed our Eargo hearing aids to provide high quality audio, we have collected limited data comparing our products to competitive devices. In ~~October 2019,~~September 2021, we conducted a series of comparative electroacoustic benchmarking tests ~~or the Bench Study,~~(the “Bench Study”) to compare our Eargo Neo HiFi and Eargo 5 hearing ~~aid~~aids with hearing aids from ~~three~~four major manufacturers. While each of the devices tested in the Bench Study, including our Eargo Neo HiFi and Eargo 5 hearing ~~aid,~~aids, met or exceeded the identified benchmarks for appropriate levels of sound quality and amplification to improve speech audibility, the design, methodology and results of the Bench Study have not been subject to external review and may not be reliable or replicable indicators of the general performance of our Eargo Neo HiFi and Eargo 5 hearing ~~aid~~aids or the other manufacturers’ hearing aids that were the subject of the Bench Study. Further, the benchmarks for appropriate levels of sound quality and amplification that we identified in the Bench Study may not be appropriate proxies for hearing aid performance or reflect the real-world performance of any tested device. Future studies, including our internal studies or those of our competitors or other third parties, may not yield the results that we expect to obtain and may not demonstrate that our products are superior to, or may demonstrate that our products are inferior to, existing or future products with regard to functional or economic measures. These study results may be published in medical journals or other publications, or by our competitors and result in adverse publicity for our products. The performance of our Eargo hearing aids may not live up to customer expectations, and our brand, reputation, customer satisfaction, return rates and sales may be adversely affected as a result.

Furthermore, because of our products’ limited time in the market, we cannot be certain about the usable life of our products. Due to the design constraints applicable to our rechargeable, in-the-canal ~~form factor,~~design, our hearing aids may offer a shorter usable life compared to our competitors’ hearing aids. Thus, even though our products may be more affordable than competitive devices, they may need to be replaced more often. Although we believe the advantages of our design justify this tradeoff, customers may expect a longer useful life, and failure to live up to this expectation could result in reduced sales, decreased customer loyalty, higher-than-expected warranty claims and adverse publicity.

Certain components of our hearing aids may also offer reduced performance or wear out over time. For example, the rechargeable technology used in our hearing aids and charging cases has a limited lifespan, and recharging performance will degrade over time. We designed our Eargo Neo ~~and Eargo Neo~~ HiFi hearing aids to provide up to 20 hours of continuous use between charges when new and up to 16 hours after 1,000 charging cycles, but charging capacity may decrease more quickly than expected. Moreover, certain components of our hearing aids ~~including Flexi Fibers and Flexi Palms~~ that can be purchased online, such as the hearing aid tips, will require more frequent replacement than the

device itself. If the quality, longevity and durability of our products does not meet the expectations of customers, then our brand and reputation and our business, financial condition and results of operations, could be adversely affected.

Customer or third-party complaints or negative reviews or publicity about our company or our hearing aids could harm our reputation and brand.

We are heavily dependent on customers who use our hearing aids to provide good reviews and word-of-mouth recommendations to contribute to our ~~growth.~~reputation and brand. Customers who are dissatisfied with their experiences with our products or services or their ability to receive reimbursement from their insurance companies may post negative reviews. We have been and may ~~also~~continue to be the subject of blog, forum or other media postings that include inaccurate statements and create negative publicity. In addition, traditional hearing aid supply chain participants may express and publish negative views regarding our direct-to-consumer ~~model~~and omni-channel models and products. Any negative reviews or negative publicity, ~~whether real or perceived, disseminated by word-of-mouth, by~~including in relation to the ~~general media, by electronic or social networking means or by~~DOJ investigation, the claims audits, and other ~~methods,~~legal proceedings have harmed and could continue to harm our reputation and brand and ~~could~~ severely diminish consumer confidence in our products.

~~Repair or replacement costs due~~ Please also see the Risk Factor titled, “We are subject to ~~guarantees we provide on our products~~risks from legal proceedings, investigations, and inquiries, including a number of recent legal proceedings and investigations, which have had and could continue to have a material adverse effect on our reputation, business, financial condition, cash flows and results of ~~operations.~~

~~We provide product guarantees to our customers, both as a result of contractual~~operations, and legal provisions and for marketing purposes. We allow for the return of products from direct customers within 45 days after the original sale and record estimated sales returns as a reduction of sales in the same period revenue is recognized. We also generally allow customers to return defective or damaged products for a replacement or refund. The term of the warranty provided is currently two years for Neo HiFi and one year for all other devices. Existing and future product guarantees place us at the risk of incurring future repair and/or replacement costs. As of December 31, 2020, we had provisions of $2.4 million relating to warranties. Substantial amounts of product guarantee claims could ~~have a material adverse effect on our business, financial condition and results of operations.~~

In addition, we reserve for the estimated cost of product warranties when revenue is recognized, and we evaluate our warranty reserves periodically by reviewing our warranty repair experience. While we engage in product quality programs and processes, including monitoring and evaluating the quality of our components sourced from our suppliers and instituting methods to remotely detect and correct defects, our warranty obligation is affected by actual product defect rates, parts and equipment costs and service labor costs incurred in correcting a product defect. Our warranty reserves may be inadequate due to undetected product defects, unanticipated component failures or changes in estimates for material, labor and other costs we may incur to replace projected product defects. As a result, if actual product defect rates, parts and equipment costs or service labor costs exceed our estimates, it could have a material adverse effect on our business, financial condition and results of operations.

~~Our failure to successfully anticipate product returns may have a material adverse effect on our business, financial condition and results of operations.~~

Our net losses are affected by changes in reserves to account for product returns and product credits. The reserve for product returns accounts for customer returns of our products after purchase. We record a reserve for product returns based on historical return trends together with current product sales performance in each reporting period. If actual returns are greater than those projected and reserved for by management, additional sales returns may be recorded in the future. We do not currently have the ability to resell products that are returned. To the extent we are unable to successfully refurbish devices in the future, we will not be able to resell such devices. Further, the introduction of new products, changes in product mix, changes in consumer confidence or other competitive and general economic conditions may cause actual returns to differ from product return reserves. Any significant increase in product returns that exceeds our reserves could have a material adverse effect on our business, financial condition and results of operations.

~~Accelerated consolidation and formation of purchasing groups increases the pricing pressure on hearing aids.~~

Many purchasing groups, such as hearing aid clinics, retailers and hospital systems, are consolidating to create new entities with greater market power. Such groups, such as Costco and the VA, have used and may continue to use their increased purchasing power to negotiate price reductions or other concessions across our industry. This pricing leverage has resulted, and will likely continue to result in downward pressure on the average selling prices of hearing aid products generally, including our own products. The forthcoming OTC regulations could further contribute to the pace of consolidation as well as the introduction of new entrants in the hearing aid market. Please see the risk factor titled, “Changes in the regulatory landscape for hearing aid devices could render our direct-to-consumer business model contrary to applicable regulatory requirements,additional claims and ~~we may be required to seek additional clearance or approval for our products.” These factors could have a~~ material ~~adverse effect on our business, financial condition and results of operations.~~liabilities.”

~~The size and expected growth of our addressable market has not been established with precision and may be smaller than we estimate.~~

Our estimates of the addressable market for our current products and future products are based on a number of internal and third-party estimates and assumptions, including the prevalence of hearing loss across income levels and demographic profiles. While we believe our assumptions and the data underlying our estimates are reasonable, these assumptions and estimates may not be correct. For example, although we expect that the prevalence of hearing loss will increase as the U.S. population ages, demographic trends could shift and the prevalence of hearing loss could decrease. Furthermore, even if the prevalence of hearing loss increases as we expect, technological or medical advances could provide alternatives to address hearing loss and reduce demand for hearing aids. As a result, our estimates of the size and expected growth of the addressable market for our current or future products may prove to be incorrect. If the actual number of consumers who would benefit from our products, the price at which we can sell future products or the addressable market for our products is smaller than we estimate, it could have a material adverse effect on our business, financial condition and results of operations.

~~Changes in third-party coverage and reimbursement may impact our ability to grow and sell our products.~~

Our products are primarily purchased on a cash-pay basis and currently only have limited coverage by third-party payors. Third-party coverage and reimbursement may increase for certain hearing aids but not our products, or could decrease for our products, which could reduce our market share. The process for determining whether a third-party payor will provide coverage for a product may be separate from the process for establishing the reimbursement rate that such a payor will pay for the product. A payor’s decision to provide coverage for a product does not imply that an adequate reimbursement rate will be approved. Further, one payor’s determination to provide coverage for a product does not assure that other payors will also provide such coverage. Third-party coverage and reimbursement may never become available to us at sufficient levels.

To the extent we sell our products internationally, market acceptance may depend, in part, upon the availability of coverage and reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country and include both government-sponsored healthcare and private insurance. We may not obtain international coverage and reimbursement approvals in a timely manner, if at all. Our failure to receive such approvals would negatively impact market acceptance of our products in the international markets in which those approvals are sought.

We spend significant amounts on advertising and other marketing campaigns to acquire new customers, which may not be successful or cost effective.

We market our hearing aids through a mix of digital and traditional marketing channels. These include paid search, digital display advertising, email marketing, affiliate and channel marketing, direct response television, national reach television, direct mail and select print and radio advertising. We also leverage our database of prospects and customers to further drive customer acquisition and referrals. We spend significant amounts on advertising and other marketing campaigns to acquire new customers, and we expect ~~our marketing expenses~~ to ~~increase in the future as we~~ continue to spend significant amounts to acquire new customers and increase awareness of our products. Beginning on December 8, 2021, we temporarily stopped accepting insurance benefits as a method of direct payment. As a result, we have reduced sales and

marketing resources that were previously focused on insurance customers to prioritize the conversion of cash-pay consumers into satisfied customers. The shift to a primarily “cash-pay” model has increased the cost to acquire new customers, based on the historically lower conversion rate for cash-pay customers as compared to customers with potential insurance benefits. This shift to a primarily “cash-pay” model may be reinforced by the new OTC regulatory framework if our products are marketed as OTC hearing aids, which may not be covered under certain plans even if medical necessity is otherwise established. While we seek to structure our marketing campaigns in the manner that we believe is most likely to encourage consumers to use our

products while lowering our acquisition costs, we may fail to identify marketing opportunities that satisfy our anticipated return on marketing spend as we scale our investments in marketing, accurately predict customer acquisition or fully understand or estimate the conditions and behaviors that drive consumer behavior. If any of our marketing campaigns prove less successful than anticipated in attracting new customers, we may not be able to recover our marketing spend, and our rate of customer acquisition may fail to meet market expectations, either of which could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that our marketing efforts will result in increased sales of our products.

In addition, we believe that building a strong brand and developing and achieving broad awareness of our brand is critical to achieving market success. Negative publicity, including in relation to the DOJ investigation, the claims audits, and other legal proceedings has harmed and could continue to harm our reputation and brand and severely diminish consumer confidence in our products. If any of our brand-building activities prove less successful than anticipated, or such activities are inhibited by negative publicity in ~~attracting~~relation to the DOJ investigation, the claims audits and other legal proceedings, it could materially adversely impact our ability to attract new ~~customers,~~customers. If this were to occur, we may not be able to recover our brand-building spend, and our rate of customer acquisition may fail to meet market expectations, either of which could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that our brand-building efforts will result in increased sales of our products.

See also the Risk Factors titled, “Customer or third-party complaints or negative reviews or publicity about our company or our hearing aids could harm our reputation and brand” and“We ~~experience seasonality in our business,~~are subject to risks from legal proceedings, investigations, and inquiries, including a number of recent legal proceedings and investigations, which ~~may cause fluctuations in our financial results.~~

~~Historically, we~~ have ~~experienced~~had and ~~expect to~~could continue to ~~experience seasonality~~have a material adverse effect on our reputation, business, financial condition, cash flows and results of operations, and could result in ~~our business, with higher sales volumes in quarters when we launch new products~~additional claims and ~~in the fourth calendar quarter as a result of holiday promotional activity.~~material liabilities.”

Because of these fluctuations, among other factors, it is possible that in future periods our operating results will fall below the expectations of securities analysts or investors, in which case the market price of our stock would likely decrease. These fluctuations, among other factors, also mean that our operating results in any particular period may not be relied upon as an indication of future performance.

Our products are complex to design and manufacture and could contain defects. The production and sale of defective products could adversely affect our business, financial condition and results of operations. If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our products.

We make hearing aids that include highly complex electronic components, which are sourced from external third parties, and there is an inherent risk that defects may occur in the production of any of our products. Although we rely on the ~~supplier’s~~suppliers’ internal procedures designed to minimize risks that may arise from quality issues, there can be no assurance that we or our suppliers will be able to eliminate or mitigate occurrences of these issues and associated liabilities. Under consumer product legislation in many jurisdictions, we may be forced to recall or repurchase defective products, and more restrictive laws and regulations relating to these matters may be adopted in the future. We also face exposure to product liability claims in the event that any of our devices are alleged to have resulted in personal injury or damage to property, or otherwise to have caused harm. For example, we may be sued if any of our hearing aids allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranty. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

Our inability to obtain and maintain sufficient product liability insurance at an acceptable cost and scope of coverage to protect against potential product liability claims could prevent or inhibit the sale of our current or any future products we develop. Although we currently carry product liability insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our

insurance policies also have various exclusions and deductibles, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient funds to pay such amounts. Moreover, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses.

In addition, any product defects, recalls or claims that result in significant adverse publicity could have a negative effect on our reputation, result in loss of market share or failure to achieve market acceptance. For example, our ~~first generation~~first-generation hearing aid, launched in 2015, had a high incidence of product returns and warranty claims. As a result, we voluntarily withdrew the product from the market. The production and sale of defective products in the future could have a material adverse effect on our business, financial condition and results of operations.

We are subject to consumer protection laws that regulate our marketing practices and prohibit unfair or deceptive acts or practices. Our actual or perceived failure to comply with such obligations could harm our business, and changes in such regulations or laws could require us to modify our products or marketing or advertising efforts.

In connection with the marketing orand advertisement of our products, we could be the target of claims relating to false, misleading, deceptive, unfair, or otherwise unsubstantiated or noncompliant advertising or marketing practices, including under the auspices of federal or state rules or regulations such as the Federal Trade Commission Act and state consumer protection statutes. If we rely on third parties, including customers, to provide any marketing ~~and~~or advertising of our products, including as we expand our product offerings in physical retail settings or through online channels, we could be liable for, or face reputational harm as a result of, their ~~marketing~~ practices if, for example, they or we fail to comply with applicable statutory and regulatory requirements.

If we are found or perceived to have breached any consumer protection, advertising, unfair competition or other laws or regulations, we may be ~~subject to enforcement actions that require us~~required to change our ~~marketing and~~ business model, products or practices in a manner ~~which~~that may negatively impact us. ~~This~~We could also ~~result in~~be subject to regulatory investigations, enforcement actions, litigation (including class actions), fines, penalties, increased compliance or remediation costs, and adverse publicity that could cause reputational harm and loss of customer trust, which could have a material adverse effect on our business, financial condition and results of operations.

There are a variety of hearing aid products and technologies, and consumer confusion about product features and technology could lead consumers to purchase competitive products instead of our products, or to conflate any adverse events or safety issues associated with third-party hearing aid products or other sound enhancement products with our products, which could adversely affect our business, financial condition and results of operations.

We believe that many individuals do not have full information regarding the types of hearing aids and hearing aid features and technologies available in the market, in part due to the lack of consumer education in the traditional hearing industry sales model. Consumers may not have sufficient information about hearing aids generally or how hearing aid products and technologies compare to each other. This confusion may result in consumers purchasing hearing aids from our competitors instead of our products, even if our hearing aids would provide them with their desired product features. Additionally, there may be confusion in the market following the publication of the OTC Final Rule and the implementation of the new OTC hearing aid regulatory framework, which does not include certain sound enhancement devices (such as personal sound amplification products, or “PSAPs”), because of the increased availability and access to hearing aid devices in similar locations and manners as sound enhancement devices. Our products and trademarks have also been and may continue to be subject to counterfeiting, infringement, or otherwise unauthorized resale. Such actions and other intellectual property infringement could result in consumer confusion, dilute our brand, and otherwise harm our reputation and business. Please see the risk factors titled, “Our success depends in part on our proprietary technology, and if we are unable to obtain, maintain or successfully enforce our intellectual property rights, the commercial value of our products and services will be adversely affected and our competitive position may be harmed” and “If our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our markets of interest and our competitive position may be harmed.” Any adverse events or safety issues relating to competitive hearing aid products or other non-hearing aid, sound enhancement, or counterfeit devices and related negative publicity, even if such events are not attributable to our products, could result in reduced purchases of hearing aids by consumers generally. Any of these occurrences could lead to reduced sales of our products and adversely affect our business, financial condition and results of operations.

Our business, financial condition and results of operations may be impacted by the effects of the COVID-19 pandemic.

We are subject to risks related to public health crises such as the global pandemic associated with COVID-19. The COVID-19 pandemic may negatively impact our operations and revenues and overall financial condition by harming the ability or willingness of customers to pay for our products due to macro-economic conditions resulting from the pandemic or the operations of manufacturers, suppliers and other third parties with which we do business. These challenges will likely continue for the duration of the pandemic, which is uncertain, and the macro-economic effects of the pandemic will likely continue far beyond the duration of the pandemic.

Since the start of the pandemic, numerous state and local jurisdictions have imposed, and others in the future may impose, “shelter-in-place” orders, quarantines, orders requiring non-essential businesses to remain closed, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. The pandemic and such restrictions have resulted in a majority of our employees working remotely, work stoppages, slowdowns and delays, travel restrictions and cancellation of events, among other effects, thereby negatively impacting our operations. Other potential disruptions may include delays in processing registrations or approvals by applicable state or federal regulatory bodies; delays in product development efforts; disruptions to our supply chain, including any impacts from global semiconductor shortages; and additional government requirements or other incremental mitigation efforts that may further impact our capacity to manufacture, sell and support the use of our Eargo systems.

Disruptions in supply chain have resulted in industry-wide component supply (such as semiconductors) shortages, and we may not be able to obtain adequate inventory on a timely basis or at all. To date, increases in component pricing have occurred but have not had a material impact on supply continuity or gross margin. We have taken steps to monitor our supply chain and actions to address limited supply and increasing lead times, including outreach to critical suppliers and spot market purchases. Future disruptions in our supply chain, including the sourcing of certain components and raw materials, such as semiconductor and memory chips, as well as increased logistics costs, could impact our sales and gross margins.

The ultimate impact of COVID-19 on our business, financial conditions and results of operations depends on many factors and future developments beyond our control, which are highly uncertain and difficult to predict, including: the duration of the pandemic, a potential resurgence, the impact of variants, new or renewed restrictions, the timing, availability, acceptance and effectiveness of vaccines and treatments against COVID-19 as well as vaccination rates among the population, the pace of recovery when the COVID-19 pandemic subsides, and the severity and duration of the global economic downturn that results from the ongoing pandemic.

While the potential economic impact brought by and the duration of COVID-19 may be difficult to assess or predict, the widespread pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 or other macro-economic factors could materially affect our business and the value of our common stock. The COVID-19 pandemic has also resulted in volatility in the unemployment rate in the United States, which may continue even after the pandemic subsides. The occurrence of any such events may lead to reduced disposable income and access to health insurance, which could adversely affect the number of our products sold after the pandemic has subsided. The ultimate effect of COVID-19 on our sales volume and other results of operations could differ substantially from our expectations and our experience to date.

Repair or replacement costs due to guarantees we provide on our products could have a material adverse effect on our business, financial condition and results of operations.

We provide product guarantees to our customers, both as a result of contractual and legal provisions and for marketing purposes.

We generally allow for the return of products from direct customers within 45 days after the original sale and record estimated sales returns as a reduction of sales in the same period revenue is recognized. We also generally allow customers to return defective or damaged products for a replacement or refund. The term of the warranty provided is typically two years for our latest device and one year for all other devices. Existing and future product guarantees place us at the risk of incurring future repair and/or replacement costs. As of December 31, 2022, we had provisions of approximately $3.8 million relating to warranties. Substantial amounts of product guarantee claims could have a material adverse effect on our business, financial condition and results of operations.

Our failure to successfully anticipate sales returns may have a material adverse effect on our business, financial condition and results of operations.

Our reported net revenue and net losses are affected by changes in reserves to account for sales returns and product credits. The reserve for sales returns accounts for customer returns of our products after purchase. We record a reserve for sales returns estimated based on historical return trends together with current product sales performance in each reporting period. If actual returns are greater than those projected and reserved for by management, additional sales returns reserve may be recorded in the future and reported net revenue may be reduced accordingly. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—DOJ investigation and settlement and claims audits” for more information.

We do not currently have the ability to resell all products that are returned. Our refurbishment capabilities are focused on components and allow us to reuse certain key components from our returned devices. To the extent we are unable to successfully refurbish devices in the future, we will not be able to resell such devices. Further, the introduction of new products, changes in product mix, changes in consumer confidence or other competitive and general economic conditions may cause actual returns to differ from product return reserves. Any significant increase in product returns that exceeds our reserves could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to reduce our return rates or if our return rates continue to increase, our net revenue may decrease, and our business, financial condition and results of operations could be adversely affected.

Our customer sales returns rate was approximately 34% for the year ended December 31, 2022. Our return policy generally 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. Additionally, following learning of the DOJ investigation and prior to shifting to our current practice of accepting insurance benefits as a method of direct payment in certain limited circumstances, we offered customers with potential insurance benefits the option to return their hearing aids or purchase their hearing aids without use of their insurance benefits if their claim is denied or ultimately not submitted by us to their insurance plan for payment (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—DOJ investigation and settlement and claims audits” for more information).

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. Our net revenue and profitability have been and will continue to be negatively impacted by the inability to recognize revenue related to shipments to customers with potential insurance benefits, which customers generally have had a significantly lower rate of return as compared to cash-pay customers. As we have shifted to selling on a primarily “cash-pay” basis, we have experienced a significantly higher sales return rate. If actual sales returns differ significantly from our estimates, an adjustment to revenue in the current or subsequent period is recorded. Furthermore, if we are unable to reduce our return rates or if they continue to increase, our net revenue may continue to decrease, and our business, financial condition and results of operations could be adversely affected. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors affecting our business—Sales returns rate.”

Accelerated consolidation and formation of purchasing groups increases the pricing pressure on hearing aids.

Many purchasing groups, such as hearing aid clinics, retailers and hospital systems, are consolidating to create new entities with greater market power. Such groups, such as Costco and the VA, have used and may continue to use their increased purchasing power to negotiate price reductions or other concessions across our industry. This pricing leverage has resulted, and will likely continue to result, in downward pressure on the average selling prices of hearing aid products generally, including our own products. The OTC Final Rule could further contribute to the pace of consolidation as well as the introduction of new entrants in the hearing aid market, which would further increase pricing pressure on hearing aid manufacturers. Please see the Risk Factors titled, “Changes in the regulatory landscape for hearing aid devices could materially impact our direct-to-consumer and omni-channel business models and lead to increased regulatory requirements, and we may be required to seek additional clearance or approval for our products,” and “As we expand our product offerings to physical retail outlets and begin to rely on third parties outside of our control, any failure of such third parties to use comply with applicable laws and regulations could negatively impact our brand image and business and lead to negative publicity and potential liability.” These factors could have a material adverse effect on our business, financial condition and results of operations.

Alternative technologies or therapies that improve or cure hearing loss could adversely affect our business, financial condition and results of operations.

If medical research were to lead to the discovery of alternative therapies or technologies that improve or cure the various forms of hearing loss as an alternative to the hearing aid, such as by surgical techniques, the use of pharmaceuticals or breakthrough bio-technological innovations or therapies, our profitability could suffer through a reduction in sales. The discovery of a cure for the various forms of hearing loss and the development of other alternatives to hearing aids could result in decreased demand for our products and, accordingly, could have a material adverse effect on our business, financial condition and results of operations.

Adapting our production capacities to evolving patterns of demand is expensive, time-consuming and subject to significant uncertainties. We may not be able to adequately predict consumer trends and may be unable to adjust our production in a timely manner. Additionally, as we expand our product offering to physical retail settings, we may not be able to accurately estimate the inventory needs of such physical retail settings.

We market our products directly to consumers in the United States, where we face the risk of significant changes in the demand for our products. If demand decreases, we will need to implement capacity and cost reduction measures involving restructuring costs. If demand increases, we will be required to make capital expenditures related to increased production and expenditures to hire and train production and sales and product support personnel. Adapting to changes in demand inherently lags behind the actual changes because it takes time to identify the change the market is undergoing and to implement any measures taken as a result. Finally, capacity

adjustments are inherently risky because there is imperfect information, and market trends may rapidly intensify, ebb or even reverse. We have in the past not always been, and may in the future not be, able to accurately or timely predict trends in demand and consumer behavior or to take appropriate measures to mitigate risks and exploit opportunities resulting from such trends. Any inability in the future to identify or to adequately and effectively react to changes in demand could have a material adverse effect on our business, financial condition and results of operations.

~~International trade disputes~~Additionally, following the effective date of the OTC Final Rule of October 17, 2022, customers can now purchase or order Eargo hearing aids in retail settings; we have also partnered with certain resellers or other distributors, including benefits managers, to offer Eargo hearing aids for sale through their online storefronts or portals. Our expansion into physical retail settings and other third-party partnerships represent new channels for the Company in which we currently have limited expertise. We may not be able to accurately estimate the return rate or inventory needs of such channels, which could result in ~~tariffs~~supply disruptions if growth in demand in such channels exceeds our ability to supply product. Currently, we have no or limited historical basis for us to make judgments on the inventory demand of any such retail partner or other third-party partner. If we underestimate such return rate or inventory requirements, our retail and other ~~protectionist measures that could~~third-party partners may have ~~a material adverse effect on our business, financial condition and results of operations.~~

~~Tariffs could increase~~inadequate inventory for sale to their customers. In addition, delays in the ~~cost~~delivery of our products to our retail and ~~the raw materials that go into making them. These increased costs~~other third-party partners or a failure to provide our product to our retail and other third-party partners in sufficient quantities in a timely manner could ~~adversely~~harm our relationships with such partners and impact ~~the gross margin that~~our business and operating results. Moreover, we ~~earn on our products. Tariffs could also make~~sell our products ~~more expensive for customers, which could make~~to our ~~products less competitive~~retail and ~~reduce consumer demand. Countries may also adopt~~ other ~~protectionist measures~~third-party partners at prices that ~~could limit~~are lower than what we would otherwise charge in our ~~ability to offer~~direct-to-consumer channel, reducing our ~~products. Political uncertainty surrounding international trade disputes~~associated revenues and ~~protectionist measures could also have a negative effect on consumer confidence and spending, which could have a material adverse effect on our business, financial condition and results of operations.~~gross margins.

We are dependent on international manufacturers and suppliers, as well as certain international contractors we engage from time to time with respect to select research and development activities, which exposes us to foreign operational and political risks that may harm our business.

We currently rely on a ~~single manufacturer~~limited number of manufacturers: one located in Thailand, Hana Microelectronics, ~~for the manufacture of all of~~and our ~~products currently available for sale and have entered into a manufacturing services agreement with a second~~primary manufacturer, ~~located~~Pegatron Corporation, headquartered in Taiwan and with manufacturing facilities throughout Asia. Pegatron ~~Corporation, for~~manufactures the ~~manufacture~~Eargo 5, Eargo 6, and Eargo 7 hearing aid systems out of ~~our next generation hearing aid.~~its facilities in Suzhou, China. In addition, we rely on some third-party suppliers in Europe, Southeast Asia, Japan, China and the United States, who supply, among other things, certain of the technology and raw materials used in the manufacturing of our products. We also engage certain international consultants, contractors and other specialists in connection with our research and development activities.

Our reliance on international operations exposes us to risks and uncertainties, including:

If any of these risks were to materialize, it could have a material adverse effect on our business, financial condition and results of operations.

~~If manufacturers and suppliers are unable to procure raw materials, semi-finished products and finished products on terms or within timeframes acceptable to us, our business may suffer.~~31

We are dependent on the availability of raw materials necessary to manufacture the products we sell. We rely on third-party manufacturers and suppliers to identify and purchase quality raw materials, semi-finished goods and finished goods while seeking to preserve our quality standards. If our suppliers or third-party manufacturers experience shortages, limited access or increased costs of certain raw materials and other semi-finished or finished goods, including as a result of the COVID-19 pandemic, it may result in production delays or delays in deliveries of our products to our customers. Production by one or more manufacturers or suppliers may be suspended or delayed, temporarily or permanently, due to economic or technical problems such as the insolvency of the manufacturer, the failure of the manufacturing facilities or disruption of the production process, all of which are beyond our control. Any shortage, delay or interruption in the availability of our products may negatively affect our ability to meet consumer demand. As a result, our business may be unable to offer a satisfactory experience to customers, which could have a material adverse effect on our business, financial condition and results of operations.

We or the third parties upon whom we depend may be adversely affected by disasters, and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster. Any interruption in the operations of our or our suppliers’ manufacturing or other facilities may have a material adverse effect on our business, financial condition and results of operations.

Our corporate headquarters are located in the San Francisco Bay Area, which has experienced ~~both~~ severe earthquakes and ~~wildfires.~~wildfires as well as flooding and power outages. We do not carry earthquake insurance. ~~The current sole manufacturer~~Our manufacturers and many of our ~~hearing aid finished products is~~suppliers are located in ~~Thailand,~~Asia, which ~~has~~regions have experienced natural disasters such as earthquakes, landslides, flooding, tropical storms and ~~tsunamis. We have entered into a manufacturing services agreement with a second manufacturer located in Taiwan, which has also experienced landslides, flooding, tropical storms~~tsunamis, and ~~tsunamis.~~tornadoes. Our customer support operations ~~are based in Nashville, Tennessee, and~~as well as our third-party provider’s distribution facilities are based in ~~Louisville, Kentucky, both~~regions of ~~which~~the Southern United States that have experienced flooding and tornadoes. Severe weather (including any potential effects of climate change), natural disasters and other calamities, such as pandemics (including COVID-19), earthquakes, tsunamis and hurricanes, fires and explosions, accidents, mechanical failures, unscheduled downtimes, civil unrest, strikes, transportation interruptions, unpermitted discharges or releases of toxic or hazardous substances, other environmental risks, sabotage, geopolitical unrest, political instability, terrorism or acts of war, could severely disrupt our operations, or our third-party manufacturers’ and suppliers’ operations, and have a material adverse effect on our business, financial condition and results of operations.

If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters or other facilities, or those of our third-party manufacturers or suppliers, that damaged critical infrastructure, such as our enterprise financial systems or manufacturing resource planning and enterprise quality systems, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period of time. A mechanical failure or disruption affecting any major operating line may result in a disruption to our ability to supply customers, and standby capacity may not be available. The disaster recovery and business continuity plans we have in place currently are limited and are unlikely to prove adequate in the event of a serious disaster or similar event. The potential impact of any disruption would depend on the nature and extent of the damage caused by a disaster. There can be no assurance that alternative production capacity will be available in the future in the event of a major disruption or, if it is available, that it could be obtained on favorable terms. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect on our business, financial condition and results of operations.

Furthermore, integral parties in our supply chain are similarly vulnerable to natural disasters or other sudden, unforeseen and severe adverse events. If such an event were to affect our supply chain, it could have a material adverse effect on our business, financial condition and results of operations.

44We depend on sales of our hearing aids for our revenue. Demand for our hearing aids may not increase due to a variety of factors.

We expect that revenue from sales of our hearing aids will continue to account for our revenue for the foreseeable future. Continued and widespread market acceptance of hearing aids by consumers is critical to our future success. Consumer spending habits are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wage rates, interest rates, inflation rates, consumer confidence and consumer perception of economic conditions, which have been adversely affected by the COVID-19 pandemic and may continue to be materially adversely affected by the COVID-19 pandemic. Hearing aids are often paid for directly by the consumer and, as a result, demand can vary significantly depending on economic conditions. The uncertainty regarding the extent to which we are able to validate and establish additional processes to support the submission of claims for reimbursement to health plans, including those under the FEHB program, the implementation of the new OTC hearing aid regulatory framework (which may lead insurance providers to take actions limiting our ability to access insurance coverage) and potential Medicare coverage for certain hearing aids (which may not include Eargo hearing aids) will require that we evaluate and consider any changes to our business model as new information becomes available, including a potential long-term shift to a primarily “cash-pay” model, with minimal volume from our customers using insurance benefits as a method of direct payment to Eargo, which would likely result in a sustained increased cost of customer acquisition and a reduction in shipments, revenue, gross margin, and higher operating expenses, which could have a material negative impact on our profitability and growth prospects. Without the benefit of customers with insurance coverage, the future growth prospects and profitability of the Company are uncertain, unless we can identify new sources of profitable growth.

Further, a general slowdown in the U.S. economy and international economies into which we may expand or an uncertain economic outlook could adversely affect consumer spending habits, which may result in, among other things, a reduction in consumer spending on elective or higher value products, a preference for lower cost products, or a reduction in demand for hearing aids generally, each of which would have an adverse effect on our sales and operating results. Ongoing challenges in global financial markets, as well as various social and political circumstances in the United States and around the world, have contributed and may continue to contribute to increased market volatility and economic uncertainties, including increased inflation pressures, supply chain challenges and international sanctions, some or all of which have resulted in an economic downturn and/or recession either globally or locally in the United States. These and other factors may continue to influence our customers’ behavior, disposable income, spending patterns and demand for our products. If there is a reduction in consumer demand for hearing aids generally, if consumers choose to use a competitive product rather than our hearing aids or if the average selling price of our hearing aids declines as a result of economic conditions, including employment levels and inflation, competitive pressures or any other reason, these factors could have a material

adverse effect on our business, financial condition and results of operations. If we are not successful in adapting our production and cost structure to the market environment, we may experience further adverse effects that may be material to our business, financial condition and results of operations. See also the Risk Factor titled, “We face considerable uncertainty in our business prospects, as a significant portion of our revenue has historically been dependent upon reimbursement from third-party payors participating in the FEHB program, but we have operated on a primarily “cash-pay” basis since December 8, 2021. We may be ~~deemed~~unsuccessful in validating and establishing processes to support the submission of claims for reimbursement from third-party payors participating in the FEHB program. As a result, we have faced a significant reduction in revenue and any failure to establish processes to support reimbursement from third-party payors in the future may significantly and adversely impact our business and growth prospects and our ability to sell our products.”

We are required to diligence the origin of minerals used in the manufacture ~~or contract to manufacture~~of our products ~~that contain “conflict minerals.”~~

While we do not believe we manufacture or contract to manufacture products that contain conflict minerals, we may be deemed to manufacture or contract to manufacture products that contain certain minerals that have been designated as “conflict minerals” under the Dodd-Frank Wall Street Reform and Consumer Protection ~~Act. As a result,~~Act and, beginning in ~~future periods, we may be required to diligence the origin of such minerals and~~May 2023, disclose and report whether or not such minerals originated in the Democratic Republic of the Congo or adjoining countries. ~~The implementation of these new~~These requirements could adversely affect the sourcing, availability and pricing of minerals used in the manufacture of our products. In addition, we ~~may~~will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of ~~any of~~ the relevant minerals and metals used in our products.

Any future international expansion will subject us to additional costs and risks that may have a material adverse effect on our business, financial condition and results of operations.

Historically, all of our sales have been to customers in the United States. To the extent we enter into international markets in the future, there are significant costs and risks inherent in conducting business in international markets. If we expand, or attempt to expand, into foreign markets, we will be subject to new business risks, in addition to regulatory risks. In addition, expansion into foreign markets imposes additional burdens on our executive and administrative personnel, finance and legal teams, research and marketing teams and general managerial resources.

We have limited experience with regulatory environments and market practices internationally, and we may not be able to penetrate or successfully operate in new markets. We may also encounter difficulty expanding into international markets because of limited brand recognition in certain parts of the world, leading to delayed acceptance of our products by consumers in these international markets. If we are unable to expand internationally and manage the complexity of international operations successfully, it could have a material adverse effect on our business, financial condition and results of operations. If our efforts to introduce our products into foreign markets are not successful, we may have expended significant resources without realizing the expected benefit. Ultimately, the investment required for expansion into foreign markets could exceed the results of operations generated from this expansion.

~~Our Loan Agreement contains restrictions that limit our flexibility in operating our business.~~

~~In June 2018, we entered into a loan and security agreement, as amended in January 2019, May 2020 and in September 2020, with Silicon Valley Bank (the 2018 Loan).~~ We borrowed $15.0 million upon the closing of the September 2020 amendment, a portion of which was used to repay in full the outstanding principal amount of the previously funded term loan. As of December 31, 2020, $15.0 million in aggregate principal amount was outstanding under the term loan facility. The 2018 Loan has a maturity date of September 1, 2024. The 2018 Loan contains various covenants that limit our ability to engage in specified types of transactions without Silicon Valley Bank’s prior consent. These covenants limit our ability to, among other things:

In addition, the 2018 Loan requires us to maintain a certain percentage of our total cash holdings in accounts with Silicon Valley Bank. The covenants in the 2018 Loan limit our ability to take certain actions and, in the event that we breach one or more covenants, Silicon Valley Bank may choose to declare an event of default and require that we immediately repay all amounts outstanding of the aggregate principal amount of term loans funded under the 2018 Loan, plus exit fees, prepayment premiums, penalties and interest, and foreclose on the collateral granted to it to secure such indebtedness. Such repayment could have a material adverse effect on our business, financial condition and results of operations.

~~We are subject to a number of risks related to the credit card and debit card payments we accept.~~

We accept payments through credit and debit card transactions. For credit and debit card payments, we pay interchange and other fees, which may increase over time. An increase in those fees may require us to increase the prices we charge and would increase our operating expenses, either of which could have a material adverse effect on our business, financial condition and results of operations.

If we or our processing vendors fail to maintain adequate systems for the authorization and processing of credit and debit card transactions, it could cause one or more of the major credit card companies to disallow our continued use of their payment products. In addition, if these systems fail to work properly and, as a result, we do not charge our customers’ credit or debit cards on a timely basis, or at all, it could have a material adverse effect on our business, financial condition and results of operations.

The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated in exploiting weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due to a breach, we may be liable for significant costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs. If we fail to adequately control fraudulent credit card transactions, we may face civil liability, diminished public perception of our security measures and significantly higher card-related costs, each of which could have a material adverse effect on our business, financial condition and results of operations.

We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it more difficult for us to comply. We are required to comply with payment card industry security standards. Failing to comply with those standards may violate payment card association operating rules, federal and state laws and regulations and the terms of our contracts with payment processors. Any failure to comply fully also may subject us to fines, penalties, damages and civil liability, and may result in the loss of our ability to accept credit and debit card payments. Further, there is no guarantee that such compliance will prevent illegal or improper use of our payment systems or the theft, loss or misuse of data pertaining to credit and debit cards, card holders and transactions.

If we are unable to maintain our chargeback rate or refund rates at acceptable levels, our processing vendor may increase our transaction fees or terminate its relationship with us. Any increases in our credit and debit card fees could harm our results of operations, particularly if we elect not to raise our rates for our products to offset the increase. The termination of our ability to process payments on any major credit or debit card would significantly impair our ability to operate our business.

~~If we fail to attract and retain senior management and key technology personnel, our business may be materially and adversely affected.~~

Our success depends in part on our continued ability to attract, retain and motivate highly qualified management and clinical and scientific personnel. We are highly dependent upon our senior management, particularly our President and Chief Executive Officer, as well as our senior technology personnel and other members of our senior management team. The unplanned loss of the services of any of our members of senior management could adversely affect our business until a suitable replacement can be found.

Competition for qualified personnel in the medical device field in general and the audiology field specifically is intense due to the limited number of individuals who possess the training, skills and experience required by our industry. In addition, our future growth and success also depend on our ability to attract, recruit, develop and retain skilled managerial, sales, administration, operating and technical personnel. We will continue to review, and where necessary, strengthen our senior management as the needs of the business develop, including through internal promotion and external hires. However, there may be a limited number of persons with the requisite competencies to serve in these positions and we cannot assure you that we would be able to locate or employ such qualified personnel on terms acceptable to us, or at all. Therefore, the unplanned loss of one or more of our key personnel, or our failure to attract and retain additional key personnel, could have a material adverse effect on our business, financial condition and results of operations. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or that they have divulged proprietary or other confidential information, or that their former employers own their research output.

Weprimarily rely on our own direct sales force, and if we are unable to maintain or expand our sales force, it could harm our business. Additionally, our reliance on our direct sales force may result in higher fixed costs than our competitors and may slow our ability to reduce costs in the face of a sudden decline in demand for our products.

We primarily rely on our own direct sales force to market and sell our products. We do not have any long-term employment contracts with the members of our direct sales force. Our operating results are directly dependent upon the sales and marketing efforts of our sales and customer support team. If our employees fail to adequately promote, market and sell our products, our sales could significantly decrease. As we launch new products, expand our product offerings and increase our marketing efforts with respect to existing products, we will need to expand the reach of our marketing and sales networks. Our future success will depend largely on our ability to continue to attract, hire, train, retain and motivate skilled employees with significant technical knowledge in various areas. New hires require training and take time to achieve full productivity.

Additionally, most of our competitors rely predominantly on third-party distributors. Although we are beginning to expand our product offerings to physical retail locations of third parties and as a result will begin to rely on such third parties’ sales forces, we anticipate that we will continue to rely predominantly on our own direct sales force for the foreseeable future. A direct sales force may subject us to higher fixed costs than those of competitors that market their products through independent third parties, due to the costs that we will bear associated with employee benefits, training and managing sales personnel. As a result, we could be at a competitive disadvantage. Additionally, these fixed costs may slow our ability to reduce costs in the face of a sudden decline in demand for our products, which could have a material adverse effect on our business, financial condition and results of operations.

In the future, we expect we will need to increase the size of our organization, and we may experience difficulties in managing growth. A deterioration in our relationships with our employees could have an adverse impact on our business.

In the future, we expect to expand our managerial, operational, finance and other resources in order to manage our operations and continue our research and development activities. Our management and personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively execute our growth strategy requires that we:

We rely on our relationship with a professional employer organization for our human relations function and as a co-employer of our personnel, and if that party failed to perform its responsibilities under that relationship, our relations with our employees could be damaged and we could incur liabilities that could have a material adverse effect on our business.

All of our U.S. personnel, including our executive officers, are co-employees of Eargo and a professional employer organization, Insperity. Under the terms of our arrangement, Insperity is the formal employer of all of our U.S. personnel and is responsible for

administering all payroll, including tax withholding, and providing health insurance and other benefits for these individuals, and our employees are governed by the work policies created by Insperity. We reimburse Insperity for these costs and pay Insperity an administrative fee for its services. If Insperity fails to comply with applicable laws or its obligations under this arrangement or creates work policies that are viewed unfavorably by employees, our relationship with our employees could be damaged. We could, under certain circumstances, be held liable for a failure by Insperity to appropriately pay, or withhold and remit required taxes from payments to, our employees. In such a case, our potential liability could be significant and could have a material adverse effect on our business.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

We do not expect to become profitable in the near future, may never achieve profitability, and have incurred substantial net operating losses ~~or NOLs,~~(“NOLs”) during our history. Unused NOLs will carry forward to offset a portion of future taxable income, if any, until such unused NOLs expire, if ever. Federal NOLs generated after December 31, 2017 are not subject to expiration, but the yearly utilization of such federal NOLs is limited to 80 percent of taxable income for taxable years beginning after December 31, 2020. In addition, in general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” (within the meaning of Section 382 of the Code) is subject to limitations on its ability to utilize its ~~prechange~~pre-change NOLs or tax credits to offset future taxable income or taxes. For these purposes, an ownership change generally occurs where the aggregate stock ownership of one or more stockholders or groups of stockholders who ~~owns~~own at least 5% of a corporation’s stock increases ~~its ownership~~ by more than 50 percentage points over ~~its~~the lowest ~~ownership~~ percentage of the corporation’s stock owned by such stockholders within a specified testing period. ~~If finalized, Treasury Regulations currently proposed under~~

We have experienced an ownership change within the meaning of Section 382 of the Code ~~may further limit our ability to utilize our pre-change NOLs or credits if we undergo a future ownership change. We believe we have experienced more than one ownership change~~ in the past, ~~and we~~for which an estimate has been accounted for in our deferred tax disclosure. We may experience additional ownership changes in the future as a result of shifts in our stock ownership (some of which shifts ~~are~~may be outside our control). ~~As a result, even if~~While we ~~attain profitability,~~do not expect any limitation would impact our ability to use our tax attributes before they expire, we may be unable to use a material portion of our NOLs and other tax ~~attributes.~~attributes even if we attain profitability.

If we fail to comply with U.S. or foreign federal and state healthcare regulatory laws, we could be subject to penalties, including, but not limited to, administrative, civil and criminal penalties, damages, fines, disgorgement, exclusion from participation in governmental healthcare programs and the curtailment of our operations, any of which could adversely impact our reputation and business operations.

We operate in a complex regulatory environment with an extensive and evolving set of federal, state and local governmental laws, regulations, and other requirements. These laws, regulations and other requirements are promulgated and overseen by a number of different legislative, regulatory, administrative and quasi-regulatory bodies, each of which may have varying interpretations, judgments or related guidance. For example, broadly applicable fraud and abuse and other healthcare laws and regulations apply to our operations and business practices. These laws may constrain the business or financial arrangements and relationships through which we conduct our operations, including our sales and marketing practices, consumer incentive and other promotional programs and other business practices.

Foreign laws and regulations in this regard may vary greatly from country to country. For example, the advertising and promotion of our products in the European Economic Area (the “EEA”) would be subject to EEA Directives concerning misleading and comparative advertising and unfair commercial practices, as well as other EEA Member State legislation governing the advertising and promotion of medical devices. These laws may limit or restrict the advertising and promotion of our products to the general public and may impose limitations on our promotional activities with healthcare professionals. We are also subject to healthcare fraud and abuse regulation and enforcement by the countries in which we conduct our business. These healthcare laws and regulations vary significantly from country to country.

Ensuring that our internal operations and future business arrangements with third parties comply with applicable healthcare laws and regulations will involve substantial costs. We utilize considerable resources on an ongoing basis to monitor, assess and respond to applicable legislative, regulatory, and administrative requirements, but there is no guarantee that we will be successful in our efforts to adhere to all of these requirements. It is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations, agency guidance or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of the laws described above or any other governmental laws and regulations that may apply to us, we may be subject to significant penalties, including civil, criminal and administrative penalties, damages, fines, exclusion from government-funded healthcare programs, such as state Medicaid programs, TRICARE or similar programs in other countries or jurisdictions, disgorgement, imprisonment, contractual damages, reputational harm, diminished profits and the curtailment or restructuring of our operations. Further, defending against any such actions can be costly and time-consuming and may require significant personnel resources. Even if we are successful in defending against any such actions that may be brought against us, our business may be impaired.

Our hearing aids are subject to extensive government regulation at the federal and state level, and our failure to comply with applicable requirements could harm our business.

Our hearing aids are medical devices that are subject to extensive regulation in the United States, including by the FDA and state agencies. The FDA regulates, among other things, the design, development, research, manufacture, testing, labelling, marketing, promotion, advertising, sale, import and export of hearing aid devices, such as those we market. Applicable medical device regulations are complex and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to carry out or expand our operations.

The FDA classifies medical devices into one of three classes (Class I, II, or III) based on the degree of risk associated with a device and the level of regulatory control deemed necessary to ensure its safety and effectiveness. Class I devices are those for which safety and effectiveness can be assured by adherence to the FDA’s general controls for medical devices, which include compliance with the FDA’s current good manufacturing practices (“cGMPs”) for devices, as reflected in the Quality System Regulation (“QSR”), establishment registration and device listing, reporting of adverse events, and truthful, non-misleading labelling, advertising, and promotional materials. Some Class I and Class II devices also require premarket clearance by the FDA through the premarket notification process set forth in Section 510(k) of the Federal Food, Drug and Cosmetic Act (“FDCA”).

We have marketed in the past, and continue to market, certain Eargo system devices as Class I air-conduction or Class II wireless air-conduction hearing aids under existing regulations at 21 CFR 874.330 and 874.3305, respectively, both of which are exempt from 510(k) premarket review. In addition, in connection with the effective date of the OTC Final Rule, we plan to market our devices as OTC hearing aids following the April 14, 2023 compliance date, or sooner. In addition, we may seek to market certain devices as prescription hearing aids, which would require compliance with separate physical and electronic labeling requirements under the OTC Final Rule. In June 2022, we submitted a 510(k) premarket notification seeking FDA clearance of expanded labelling for our Eargo 5 and 6 hearing aids as “self-fitting” devices. On December 22, 2022, we received FDA 510(k) clearance for Eargo 5 and 6 as Class II self-fitting air-conduction hearing aids. In January 2023, we launched the Eargo 7 as our third over-the-counter, 510(k) cleared self-fitting air-conduction hearing aid.

In the 510(k) clearance process, before a device may be marketed, the FDA must determine that the proposed device is “substantially equivalent” to a legally-marketed “predicate” device, which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (a “pre-amendments” device), a device that was originally on the U.S. market pursuant to an approved PMA application and later down-classified, or a legally marketed 510(k)-exempt device. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics that do not raise different questions of safety or effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence. In the PMA process, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labelling data. The PMA process is typically required for Class III devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices.

Modifications to products that are approved through a PMA application generally require FDA approval. Similarly, certain modifications made to products cleared through a 510(k) may require a new 510(k) clearance. Both the PMA approval and the 510(k) clearance process can be expensive, lengthy and uncertain. The FDA’s 510(k) clearance process usually takes from 3 to 12 months, but can last longer. The process of obtaining a PMA is much more costly and uncertain and generally takes from one to three years, or even longer, from the time the application is filed with the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Despite the time, effort and cost, we cannot assure you that any particular device will be approved or cleared by the FDA.

Any delay or failure to obtain necessary regulatory clearances or approvals if required in the future could harm our business.

The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:

In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions, which may prevent or delay our ability to introduce new products or modify our current products on a timely basis. For example, in November 2018, FDA officials announced forthcoming steps that the agency intends to take to modernize the 510(k) premarket notification pathway, and in September 2019, the FDA finalized guidance to describe an optional “safety and performance based” premarket review pathway for manufacturers of certain “well-understood device types,” which would allow manufacturers to demonstrate substantial equivalence by meeting objective safety and performance criteria established by the FDA, obviating the need

for manufacturers to compare the safety and performance of their medical devices to specific predicate devices in the clearance process. As another example, in the FDA’s OTC Final Rule, the FDA states that it is separately proposing to harmonize the QSR with an international consensus standard. If we are required to seek additional premarket review of our devices in the future or if the FDA proposes modifications to quality system requirements, these proposals and reforms could impose additional regulatory requirements on us and increase the costs of compliance.

We operate in a regulated industry and changes in the regulations or the implementation of existing regulations could affect our operations and prospects for future growth globally.

Our products and our business activities are subject to rigorous regulation in any jurisdiction in which we operate, now or in the future. In particular, these laws generally govern: (i) coverage and reimbursement by the national health services or by private health insurance services for the purchase of hearing aids; (ii) the supply of hearing aids to the public and, more specifically, the training and qualifications required to practice the profession of hearing aid fitting specialist; and (iii) the development, testing, manufacturing, labelling, premarket clearance or approval and marketing, advertising, promotion, export and import of our hearing aids. Accordingly, our business may be affected by changes in any such laws and regulations and, in particular, by changes to the conditions for coverage, the way in which reimbursement is calculated, the ability to obtain national health insurance coverage or the role of the ear, nose and throat specialists.

While the FDA is the primary regulatory body affecting our business, which is currently based in the United States, there are numerous other regulatory schemes at the international, national and sub-national levels to which we are subject and, to the extent we expand internationally, we could become subject to international agencies and regulatory bodies such as the various agencies that enforce the European Union (“EU”) Medical Device Directive, the Japanese Ministry of Health, Labor and Welfare, and sub-national regulatory schemes in such jurisdictions. These regulations can be burdensome and subject to change on short notice, exposing us to the risk of increased costs and business disruption, and regulatory premarket clearance or approval requirements may affect or delay our ability to market our new products. We cannot guarantee that we will be able to obtain marketing clearance or approval for our new products, or enhancements or modifications to existing products. If we do, such clearance or approval may take a significant amount of time and require the expenditure of substantial resources. Further, such clearance or approval may involve stringent testing procedures, modifications, repairs or replacements of our products and could result in limitations on the proposed uses of our products. Regulatory authorities and legislators have been recently increasing their scrutiny of the healthcare industry, and there are ongoing regulatory efforts to reduce healthcare costs that may intensify in the future. Our business is also sensitive to any changes in tort and product liability laws.

Regulations pertaining to our products have become increasingly stringent and more common, particularly in developing countries whose regulations approach standards previously attained only by some Organisation for Economic Co-operation and Development countries, and we may become subject to more rigorous regulation by governmental authorities in the future. Conversely, however, the regulation of hearing aids as medical devices provides a barrier to entry for new competitors. If the markets in which we operate become less regulated, those barriers to entry may be eliminated or reduced, which could have a material adverse effect on our business, financial condition and results of operations.

Both before and after a product is commercially released, we have ongoing responsibilities under various laws and regulations. If a regulatory authority were to conclude that we are not in compliance with applicable laws or regulations, or that any of our hearing aids are ineffective or pose an unreasonable risk for the end-user, the authority may ban such hearing aids, detain or seize adulterated or misbranded hearing aids, order a recall, repair, replacement or refund of such instruments, and require us to notify health professionals and others that the devices present unreasonable risks of substantial harm to the public health. A regulatory authority may also impose operating restrictions, enjoin and restrain certain violations of applicable law pertaining to medical devices, and assess civil or criminal penalties against our officers, employees or us. The regulatory authority may also recommend prosecution by law enforcement agencies. Any governmental law or regulation, existing or imposed in the future, or enforcement action taken may have a material adverse effect on our business, financial condition and results of operations. Please also see the Risk Factor titled, “Changes in the regulatory landscape for hearing aid devices could materially impact our direct-to-consumer business model and lead to increased regulatory requirements, and we may be required to seek additional clearance or approval for our products.”

Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire, retain or deploy key leadership and other personnel, or otherwise delay or prevent necessary regulatory clearances or approvals, which could negatively impact our business.

The ability of the FDA to review and clear or approve new products can be affected by a variety of factors, including government budget and funding levels, statutory, regulatory and policy changes, the FDA’s ability to hire and retain key personnel and accept the payment of user fees, and other events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable. Disruptions at the FDA and other agencies may also slow the time necessary for new medical devices or modifications to be cleared or approved by government agencies, which would adversely affect our business. For example, over the last several years, including for 35 days

beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities.

Separately, in response to the COVID-19 pandemic, the FDA postponed most inspections of domestic and foreign manufacturing facilities at various points. Even though the FDA has since resumed standard inspection operations of domestic facilities where feasible, the FDA has continued to monitor and implement changes to its inspectional activities to ensure the safety of its employees and those of the firms it regulates as it adapts to the evolving COVID-19 pandemic, and any resurgence of the virus or emergence of new variants may lead to further inspectional delays. Regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.

Legislative or regulatory healthcare reforms may make it more difficult and costly to produce, market and distribute our products or to do so profitably.

Recent political, economic and regulatory influences are subjecting the healthcare industry to fundamental changes. Both the federal and state governments in the United States and foreign governments continue to propose and pass new legislation and regulations designed to contain or reduce the cost of healthcare, improve quality of care and expand access to healthcare, among other purposes. For example, the implementation of the Affordable Care Act has changed healthcare financing and delivery by both governmental and private insurers substantially and has affected medical device manufacturers significantly. Other legislative changes have also been proposed and adopted since the Affordable Care Act was enacted, which included, among other things, reductions to Medicare payments to providers through the Budget Control Act of 2011 and the American Taxpayer Relief Act of 2012. In addition, the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”), enacted on April 16, 2015, repealed the formula by which Medicare made annual payment adjustments to physicians and replaced the former formula with fixed annual updates and a new system of incentive payments which began in 2019 that are based on various performance measures and physicians’ participation in alternative payment models such as accountable care organizations. Future legislation and regulatory changes, including, for example, the new OTC regulatory framework, may result in, directly or indirectly, decreased coverage and reimbursement for medical devices, which may further exacerbate industry-wide pressure to reduce the prices charged and impact market demand for medical devices. This could harm our ability to market and generate sales from our products.

Our hearing aids may cause or contribute to adverse medical events that we are required to report to the FDA, and if we fail to do so, we would be subject to sanctions that could harm our reputation, business, financial condition and results of operations. The discovery of serious safety issues with our products, or a recall of our products either voluntarily or at the direction of the FDA or another governmental authority, could have a negative impact on us.

We are subject to the FDA’s medical device reporting regulations and similar foreign regulations, which require us to report to the FDA when we receive or become aware of information that reasonably suggests that one or more of our hearing aids may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the initial use of the hearing aid device. If we fail to comply with our reporting obligations, the FDA could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, seizure of our products or, if premarket review is required in the future, delay in clearance of future products.

The FDA and foreign regulatory bodies have the authority to require the recall of commercialized medical device products in the event of material deficiencies or defects in design or manufacture of a product or in the event that a product poses an unacceptable risk to health. The FDA’s authority to require a recall must be based on a finding that there is reasonable probability that the device could cause serious injury or death. We may also choose to voluntarily recall a product if any material deficiency is found. A government-mandated or voluntary recall by us could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing defects, labelling or design deficiencies, packaging defects or other deficiencies or failures to comply with applicable regulations. We cannot assure you that product defects or other errors will not occur in the future. Recalls involving our hearing aids could have a material adverse effect on our business, financial condition and results of operations.

Medical device manufacturers are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA. We may initiate voluntary withdrawals or corrections for our hearing aid devices in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, it could require us to report those actions as recalls and we may be subject to enforcement action. A future recall announcement could harm our reputation with customers, potentially lead to product liability claims against us and negatively affect our sales.

We must manufacture our products in accordance with federal and state regulations, and we could be forced to recall our products or terminate production if we fail to comply with these regulations.

The methods used in, and the facilities used for, the manufacture of our hearing aid devices must comply with the FDA’s QSR, which is a complex regulatory scheme that covers the procedures and documentation of the design, testing, production, process controls, quality assurance, labelling, packaging, handling, storage, distribution, servicing and shipping of medical devices. Furthermore, we are required to verify that our suppliers maintain facilities, procedures and operations that comply with our quality and applicable regulatory requirements. The FDA enforces the QSR through periodic announced or unannounced inspections of medical device manufacturing facilities, which may include the facilities of subcontractors, and such inspections can result in warning letters, untitled letters and other regulatory communications and adverse publicity. Our hearing aid devices are also subject to similar state regulations and various laws and regulations of foreign countries governing manufacturing.

We cannot guarantee that we or any subcontractors will take the necessary steps to comply with applicable regulations, which could cause delays in the manufacture and delivery of our products. In addition, failure to comply with applicable FDA requirements or later discovery of previously unknown problems with our products or manufacturing processes could result in, among other things:

Any of these actions could significantly and negatively impact supply of our products. If any of these events occurs, our reputation could be harmed, we could be exposed to product liability claims and we could lose customers and suffer reduced revenue and increased costs.

We are subject to numerous state and local hearing aid and licensure laws and regulations as well as state laws regulating the corporate practice of audiology or fee splitting, and non-compliance with these laws and regulations may expose us to significant costs or liabilities and negatively impact our business, financial condition and ability to operate in those states.

The FDCA preempts state laws relating to the safety and efficacy of medical devices and state laws that are different from or in addition to federal requirements. In addition, under FDARA, the OTC Final Rule preempts any state or local requirement specifically related to hearing products that would restrict or interfere with commercial activity involving OTC hearing aids. However, the FDA made clear in its rulemaking that although a state or local government may not require the order, involvement, or intervention of a licensed person for consumers to access OTC hearing aids, any person representing as a defined professional or establishment remains subject to applicable state and local requirements, even if the person undertakes commercial or professional activities only in relation to OTC hearing aids. Our ability to operate profitably will depend, in part, on our ability to obtain and maintain any necessary licenses and other approvals and operate in compliance with applicable state laws and regulations. A determination that we are in violation of applicable laws and regulations in any jurisdiction in which we operate could have a material adverse effect on us, particularly if we are unable to restructure our operations and arrangements to comply with the requirements of that jurisdiction, if we are required to restructure our operations and arrangements, including those with our audiologists and other licensed professionals, at a significant cost, or if we are subject to penalties or other adverse action.

Applicable federal laws and regulations continue to evolve. In addition to the changes under the OTC Final Rule, the Biden Executive Order July 9, 2021 instructed the FTC to review overly restrictive occupational licensing requirements that may impede the ability for licensed individuals to move between states. We cannot predict the impact on our business of new or amended laws or regulations or any changes in the way existing and future laws and regulations are interpreted or enforced, nor can we ensure we will be able to

obtain or maintain any required licenses or permits. See the Risk Factor titled, “Changes in the regulatory landscape for hearing aid devices could materially impact our direct-to-consumer business model and lead to increased regulatory requirements, and we may be required to seek additional clearance or approval for our products.”

We may face risks related to any future international sales, including the need to obtain necessary foreign regulatory clearance or approvals.

Sales of our products outside the United States will subject us to foreign regulatory requirements that vary widely from country to country. The time required to obtain clearances or approvals required by other countries may be longer than that required for FDA clearance or approval, and requirements for such approvals may differ from FDA requirements. We may be unable to obtain regulatory approvals and may also incur significant costs in attempting to obtain foreign regulatory approvals. If we experience delays in receipt of approvals to market our products in new jurisdictions, or if we fail to receive these approvals, we may be unable to market our products in international markets in a timely manner, if at all, which could materially impact our international expansion and adversely affect our business as a whole. Some international regulations may also limit the availability of our hearing aids to customers in certain jurisdictions without our first obtaining a license or engaging a third party to provide such financing, or limit the financing options we can offer our customers. If any of these risks were to materialize, they could limit our expected international expansion opportunities, which could have a material adverse effect on our business, financial condition and results of operations.

Regulations in certain foreign countries may challenge our direct-to-consumer sales model.

Our business may also be affected by actions of domestic and foreign governments to restrict the activities of direct-to-consumer companies for various reasons, including a limitation on the ability of direct-to-consumer companies to operate without the involvement of a traditional retail channel. To the extent that we begin to offer our products in international markets, foreign governments may also introduce other forms of protectionist legislation, such as limitations or requirements on where the products can or must be produced or requirements that non-domestic companies doing or seeking to do business place a certain percentage of ownership of legal entities in the hands of local nationals to protect the commercial interests of its citizens. Customs laws, tariffs, import duties, export and import quotas and restrictions on repatriation of foreign earnings and/or other methods of accessing cash generated internationally, may negatively affect our local or corporate operations. Additionally, the U.S. government may impose restrictions on our ability to engage in business in other countries in connection with the foreign policy of the United States. Any such restrictions on our direct-to-consumer sales model in international jurisdictions could limit our ability to grow internationally, which could have a material adverse effect on our business, financial condition and results of operations.

Our success depends in part on our proprietary technology, and if we are unable to obtain, maintain or successfully enforce our intellectual property rights, the commercial value of our products and services will be adversely affected and our competitive position may be harmed.

Our success and ability to compete depend in part on our ability to maintain and enforce existing intellectual property and to obtain, maintain and enforce further intellectual property protection for our products and services, both in the United States and in other countries. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and third-party confidentiality and assignment agreements. Our inability to do so could harm our competitive position. As of December 31, ~~2020,~~2022, we had 2226 issued U.S. patents, 1626 patents outside the United States, 49 pending U.S. patent applications and 1012 pending foreign patent applications.

We rely on our portfolio of issued and pending patent applications in the United States and other countries to protect our intellectual property and our competitive position. However, the patent positions of medical device companies, including our patent position, may involve complex legal and factual questions, and, therefore, the scope, validity and enforceability of any patent claims that we may obtain cannot be predicted with certainty.

Accordingly, we cannot provide any assurances that any of our issued patents have, or that any of our currently pending or future patent applications that mature into issued patents will include, claims with a scope sufficient to protect our products and services. Our pending and future patent applications may not result in the issuance of patents or, if issued, may not issue in a form that will be advantageous to us. While we generally apply for patents in those countries where we intend to make, have made, use or sell patented products, we may not accurately predict all of the countries where patent protection will ultimately be desirable. If we fail to timely file for a patent, we may be precluded from doing so at a later date. Additionally, any patents issued to us may be challenged, narrowed, invalidated, held unenforceable or circumvented, or may not be sufficiently broad to prevent third parties from producing competing products similar in design to our products.

Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection, which in turn could diminish the commercial value of our products and services. In addition, any protection afforded by foreign patents may be more limited than that provided under U.S. patent and intellectual property laws. There can be no assurance that any of our patents, any patents licensed to us or any patents which we may be issued in the future will provide us with a competitive advantage or afford us protection against infringement by others, or that the patents will not be successfully challenged or circumvented by third parties, including our competitors. Further, there can be no assurance that we will have adequate resources to enforce our patents.

In addition, from time to time we engage international consultants, contractors and other specialists to assist in our research and development activities. Certain of these third parties may operate in jurisdictions where it is difficult or impossible for us to assert our intellectual property rights in case of infringement or theft, either as a statutory or practical matter. We have engaged in, and may in the future engage in, various contractual relationships with third parties outside the United States in connection with the development of our products, which may expose our technology and intellectual property to a heightened risk of unauthorized use or theft.

Any of the foregoing risks, individually or in the aggregate, could have a material adverse effect on our competitive position, business, financial condition, results of operations, and prospects.

If our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our markets of interest and our competitive position may be harmed.

We rely on our trademarks, trade names and brand names to distinguish our products from the products of our competitors, and have registered or applied to register many of these trademarks. There can be no assurance that our trademark applications will be approved. Third parties may also oppose our trademark applications or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote resources to advertising and marketing new brands. Further, there can be no assurance that competitors will not infringe our trademarks or that we will have adequate resources to enforce our trademarks. We also license third parties to use our trademarks. In an effort to preserve our trademark rights, we enter into license agreements with these third parties, which govern the use of our trademarks and require our licensees to abide by quality control standards with respect to the goods and services that they provide under our trademarks. Although we make efforts to monitor the use of our trademarks by our licensees, there can be no assurance that these efforts will be sufficient to ensure that our licensees abide by the terms of their licenses. In the event that our licensees fail to do so, our trademark rights could be diluted. Any of the foregoing could have a material adverse effect on our competitive position, business, financial condition, results of operations, and prospects.

We may become involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time-consuming and unsuccessful.

Third parties, including our competitors, could be infringing, misappropriating or otherwise violating our intellectual property rights. While we are not aware of any unauthorized use of our intellectual property, we do not regularly conduct monitoring for unauthorized use at this time. In the future, we may from time to time, seek to analyze our competitors’ products and services, or seek to enforce our rights against potential infringement, misappropriation or violation of our intellectual property. However, the steps we have taken to protect our proprietary rights may not be adequate to enforce our rights as against such infringement, misappropriation or violation of our intellectual property. We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Any inability to meaningfully enforce our intellectual property rights could harm our ability to compete and reduce demand for our products and services.

We may in the future become involved in lawsuits to protect or enforce our intellectual property rights. An adverse result in any litigation proceeding could harm our business. In any lawsuit we bring to enforce our intellectual property rights, a court may refuse to stop the other party from using the technology at issue on grounds that our intellectual property rights do not cover the technology in question. If we initiate legal proceedings against a third party to enforce a patent covering a product, the defendant could counterclaim that such patent is invalid or

unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the United States Patent and Trademark Office ~~or USPTO,~~(“USPTO”) or made a misleading statement, during prosecution. Mechanisms for such challenges include re-examination, post-grant review, inter partes review, interference proceedings, derivation proceedings, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings). Such proceedings could result in the revocation of, cancellation of, or amendment to our patents in such a way that they no longer cover our products, or any future products that we may develop.

The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our products. Such a loss of patent protection would have a material adverse impact on our business, financial condition, results of operations, and prospects.

Because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation. There could also be public announcements of the results of hearing, motions, or other interim developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of shares of our common stock. Even if we ultimately prevail, a court may decide not to grant an injunction against further infringing activity and instead award only monetary damages, which may not be an adequate remedy. Furthermore, the monetary cost of such litigation and the diversion of the attention of our management could outweigh any

benefit we receive as a result of the proceedings. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our business.

If we infringe, misappropriate or otherwise violate the intellectual property rights of third parties or are subject to an intellectual property infringement or misappropriation claim, our ability to grow our business may be severely limited and our business could be adversely affected.

We may in the future be the subject of patent or other litigation. Our products and services may infringe, or third parties may claim that they infringe, intellectual property rights covered by patents or patent applications under which we do not hold licenses or other rights. Third parties may own or control these patents and patent applications in the United States and abroad. These third parties could bring claims against us that would cause us to incur substantial expenses and, if successfully asserted against us, could cause us to pay substantial damages. Further, if a patent infringement or other intellectual property-related lawsuit were brought against us, we could be forced to stop or delay production or sales of the product that is the subject of the suit. From time to time, we have received and may in the future receive letters from third parties drawing our attention to their patent rights. While we take steps to ensure that we do not infringe upon, misappropriate or otherwise violate the rights of others, there may be other more pertinent rights of which we are presently unaware. The defense and prosecution of intellectual property lawsuits could result in substantial expense to us and significant diversion of effort by our technical and management personnel. An adverse determination of any litigation or interference proceeding to which we may become a party could subject us to significant liabilities. As a result of patent infringement claims, or in order to avoid potential claims, we may choose or be required to seek a license from the third party and be required to pay significant license fees, royalties or both. Licenses may not be available on commercially reasonable terms, or at all, in which event our business would be materially and adversely affected. Even if we were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, if we are unable to obtain such licenses, we could be forced to cease some aspect of our business operations, which could harm our business significantly.

~~Recent changes~~Changes in U.S. patent laws may limit our ability to obtain, defend and/or enforce our patents.

~~Recent~~Any patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. ~~The~~For example, the Leahy-Smith America Invents Act ~~or the Leahy-Smith Act, includes~~(the “Leahy-Smith Act”) included a number of significant changes to U.S. patent law. These include provisions that

~~affect~~ affected the way patent applications are prosecuted and also affect patent litigation. The USPTO ~~recently~~ developed ~~new~~ regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, which became effective on March 16, 2013. The first to file provisions limit the rights of an inventor to patent an invention if not the first to file an application for patenting that invention, even if such invention was the first invention. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business.

However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the enforcement and defense of our issued patents. For example, the Leahy-Smith Act provides that an administrative tribunal known as the Patent Trial and Appeals Board ~~or PTAB,~~(“PTAB”) provides a venue for challenging the validity of patents at a cost that is much lower than district court litigation and on timelines that are much faster. Although it is not clear what, if any, long-term impact the PTAB proceedings will have on the operation of our business, the initial results of patent challenge proceedings before the PTAB since its inception in 2013 have resulted in the invalidation of many U.S. patent claims. The availability of the PTAB as a lower-cost, faster and potentially more potent tribunal for challenging patents could increase the likelihood that our own patents will be challenged, thereby increasing the uncertainties and costs of maintaining and enforcing them.

We may be subject to claims that we or our employees have misappropriated the intellectual property of a third party, including trade secrets or know-how, or are in breach of non-competition or non-solicitation agreements with our competitors and third parties may claim an ownership interest in intellectual property we regard as our own.

Many of our employees and consultants were previously employed at or engaged by other medical device companies, including our competitors or potential competitors. Some of these employees, consultants and contractors may have executed proprietary rights, non-disclosure and non-competition agreements in connection with such previous employment. Although we try to ensure that our employees and consultants do not use the intellectual property, proprietary information, know-how or trade secrets of others in their work for us, we may be subject to claims that we or these individuals have, inadvertently or otherwise, misappropriated the intellectual property or disclosed the alleged trade secrets or other proprietary information, of these former employers, competitors or other third parties. Additionally, we may be subject to claims from third parties challenging our ownership interest in or inventorship of intellectual property we regard as our own, based on claims that our agreements with employees or consultants obligating them to assign intellectual property to us are ineffective or in conflict with prior or competing contractual obligations to assign inventions to another employer, to a former employer, or to another person or entity. Litigation may be necessary to defend against claims, and it may be necessary or we may desire to enter into a license to settle any such claim; however, there can be no assurance that we would be able to obtain a license on commercially reasonable terms, if at all. If our defense to those claims fails, in addition to paying monetary damages or a settlement payment, a court could prohibit us from using technologies, features or other intellectual property

that are essential to our products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. An inability to incorporate technologies, features or other intellectual property that are important or essential to our products could have a material adverse effect on our business and competitive position, and may prevent us from selling our products. In addition, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a distraction to management. Any litigation or the threat thereof may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our products, which could materially and adversely affect our business, financial condition, operating results, cash flows and prospects.

~~We operate in a regulated industry and changes in regulation or the implementation of existing regulation could affect our operations~~.

Our products and our business activities are subject to rigorous regulation in the jurisdictions in which we operate. In particular, these laws govern: (i) coverage and reimbursement by the national health services or by private health insurance services for the purchase of hearing aids; (ii) the supply of hearing aids to the public and, more specifically, the training and qualifications required to practice the profession of hearing aid fitting specialist; and (iii) the development, testing, manufacturing, labeling, premarket clearance or approval and marketing,

advertising, promotion, export and import of our hearing aids. Accordingly, our business may be affected by changes in any such laws and regulations and, in particular, by changes to the conditions for coverage, the way in which reimbursement is calculated, the ability to obtain national health insurance coverage or the role of the ear, nose and throat specialists.

While the various agencies that enforce the EU’s Medical Device Directive, the Japanese Ministry of Health, Labor and Welfare and the FDA are the regulatory bodies affecting us most prominently, there are numerous other regulatory schemes at the international, national and sub-national levels to which we are subject. These regulations can be burdensome and subject to change on short notice, exposing us to the risk of increased costs and business disruption, and regulatory premarket clearance or approval requirements may affect or delay our ability to market our new products. We cannot guarantee that we will be able to obtain marketing clearance or approval for our new products, or enhancements or modifications to existing products. If we do, such clearance or approval may take a significant amount of time and require the expenditure of substantial resources. Further, such clearance or approval may involve stringent testing procedures, modifications, repairs or replacements of our products and could result in limitations on the proposed uses of our products. Regulatory authorities and legislators have been recently increasing their scrutiny of the healthcare industry, and there are ongoing regulatory efforts to reduce healthcare costs that may intensify in the future. Our business is also sensitive to any changes in tort and product liability laws.

Regulations pertaining to our products have become increasingly stringent and more common, particularly in developing countries whose regulations approach standards previously attained only by some Organisation for Economic Co-operation and Development countries, and we may become subject to more rigorous regulation by governmental authorities in the future. Conversely, however, the regulation of hearing aids as medical devices provides a barrier to entry for new competitors. For example, if certain of our products were made subject to less stringent regulation by the FDA in the United States, then products similar to ours may be marketed and sold more freely, and our products may become commoditized. If the markets in which we operate become less regulated, those barriers to entry may be eliminated or reduced, which could have a material adverse effect on our business, financial condition and results of operations.

~~Our hearing aids are subject to extensive government regulation at the federal and state level, and our failure to comply with applicable requirements could harm our business.~~

Our hearing aids are medical devices that are subject to extensive regulation in the United States, including by the FDA and state agencies. The FDA regulates, among other things, the design, development, research, manufacture, testing, labeling, marketing, promotion, advertising, sale, import and export of hearing aid devices, such as those we market. Applicable medical device regulations are complex and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to carry out or expand our operations.

The FDA classifies medical devices into one of three classes (Class I, II, or III) based on the degree of risk associated with a device and the level of regulatory control deemed necessary to ensure its safety and effectiveness. Class I devices are those for which safety and effectiveness can be assured by adherence to the FDA’s general controls for medical devices, which include compliance with the FDA’s current good manufacturing practices for devices, as reflected in the Quality System Regulation, or QSR, establishment registration and device listing, reporting of adverse events, and truthful, non-misleading labeling, advertising, and promotional materials. Some

~~Class I devices also require premarket clearance by the FDA through the premarket notification process set forth in Section 510(k) of the FDCA.~~

The FDA has classified air-conduction hearing aids as Class I and Class II devices exempt from premarket review procedures, and although we comply with applicable Class I and Class II medical device requirements, none of our devices have been reviewed by the FDA. Moreover, because the FDA has stated that it does not intend to enforce the medical evaluation requirements for dispensation of Class I or Class II air-conduction hearing aids to individuals 18 years of age and older, our devices are available directly to consumers without the medical evaluation of a licensed practitioner. If our current or future products become subject to the pending OTC hearing aid pathway, are deemed to be Class II “self-fitting air-conduction hearing aids,” or are otherwise required to undergo premarket review, we may be required to first receive clearance under Section 510(k) of the FDCA or approval of a premarket approval, or PMA, application from the FDA. If this were to occur for our currently marketed devices, the FDA could require us to remove our products from the market until we receive applicable regulatory clearance or approval, which would significantly impact our business.

In the 510(k) clearance process, before a device may be marketed, the FDA must determine that the proposed device is “substantially equivalent” to a legally-marketed “predicate” device, which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (a pre-amendments device), a device that was originally on the U.S. market pursuant to an approved PMA application and later down-classified, or a 510(k)-exempt device. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence. In the PMA process, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices.

Modifications to products that are approved through a PMA application generally require FDA approval. Similarly, certain modifications made to products cleared through a 510(k) may require a new 510(k) clearance. Both the PMA approval and the 510(k) clearance process can be expensive, lengthy and uncertain. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can last longer. The process of obtaining a PMA is much more costly and uncertain and generally takes from one to three years, or even longer, from the time the application is filed with the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Despite the time, effort and cost, we cannot assure you that any particular device will be approved or cleared by the FDA.

~~Any delay or failure to obtain necessary regulatory clearances or approvals if required in the future could harm our business.~~

~~The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:~~

obviating the need for manufacturers to compare the safety and performance of their medical devices to specific predicate devices in the clearance process. If we are required to seek premarket review of our devices in the future, these proposals and reforms could impose additional regulatory requirements on us and increase the costs of compliance.

Separately, in response to the COVID-19 pandemic, on March 10, 2020, the FDA announced its intention to postpone most inspections of foreign manufacturing facilities, and on March 18, 2020, the FDA temporarily postponed routine surveillance inspections of domestic manufacturing facilities. Subsequently, on July 10, 2020, the FDA announced its intention to resume certain on-site inspections of domestic manufacturing facilities subject to a risk-based prioritization system. The FDA intends to use this risk-based assessment system to identify the categories of regulatory activity that can occur within a given geographic area, ranging from mission critical inspections to resumption of all regulatory activities. Regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.

~~Legislative or regulatory healthcare reforms may make it more difficult and costly to produce, market and distribute our products or to do so profitably.~~

Recent political, economic and regulatory influences are subjecting the healthcare industry to fundamental changes. Both the federal and state governments in the United States and foreign governments continue to propose and pass new legislation and regulations designed to contain or reduce the cost of healthcare, improve quality of care and expand access to healthcare, among other purposes. For example, the implementation of the Affordable Care Act has changed healthcare financing and delivery by both governmental and private insurers substantially and has affected medical device manufacturers significantly. Other legislative changes have also been proposed and adopted since the Affordable Care Act was enacted, which included, among other things, reductions to Medicare payments to providers of 2% per fiscal year. The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, which was signed into law on March 27, 2020, designed to provide financial support and resources to individuals and businesses affected by the COVID-19 pandemic, suspended these reductions from May 1, 2020 through March 31, 2021, and extended the sequester by one year, through 2030. In addition, on January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law which, among other things, further reduced Medicare payments to certain providers, including hospitals. The Medicare Access and CHIP Reauthorization Act of 2015, enacted on April 16, 2015, or MACRA, repealed the formula by which Medicare made annual payment adjustments to physicians and replaced the former formula with fixed annual updates and a new system of incentive payments which began in 2019 that are based on various performance measures and physicians’ participation in alternative payment models such as accountable care organizations. Future legislation and regulations may result in decreased coverage and reimbursement for medical devices, which may further exacerbate industry-wide pressure to reduce the prices charged and market demand for medical devices. This could harm our ability to market and generate sales from our products.

~~We may face risks related to any future international sales, including the need to obtain necessary foreign regulatory clearance or approvals.~~

Sales of our products outside the United States will subject us to foreign regulatory requirements that vary widely from country to country. The time required to obtain clearances or approvals required by other countries may be longer than that required for FDA clearance or approval, and requirements for such approvals may differ from FDA requirements. We may be unable to obtain regulatory approvals and may also incur significant costs in attempting to obtain foreign regulatory approvals. If we experience delays in receipt of approvals to market our products in new jurisdictions, or if we fail to receive these approvals, we may be unable to market our products in international markets in a timely manner, if at all, which could materially impact our international expansion and adversely affect our business as a whole. Some international regulations may also limit the availability of our hearing aids to customers in certain jurisdictions without our first obtaining a license or engaging a third party to provide such financing, or limit the financing options we can offer our customers. If any of these risks were to materialize, they could limit our expected international growth and profitability, which could have a material adverse effect on our business, financial condition and results of operations.

~~Regulations in certain foreign countries may challenge our direct-to-consumer sales model.~~

labeling or design deficiencies, packaging defects or other deficiencies or failures to comply with applicable regulations. We cannot assure you that product defects or other errors will not occur in the future. Recalls involving our hearing aids could have a material adverse effect on our business, financial condition and results of operations.

~~We must manufacture our products in accordance with federal and state regulations, and we could be forced to recall our products or terminate production if we fail to comply with these regulations.~~

The methods used in, and the facilities used for, the manufacture of our hearing aid devices must comply with the FDA’s Quality System Regulation, or QSR, which is a complex regulatory scheme that covers the procedures and documentation of the design, testing, production, process controls, quality assurance, labeling, packaging, handling, storage, distribution, servicing and shipping of medical devices. Furthermore, we are required to verify that our suppliers maintain facilities, procedures and operations that comply with our quality and applicable regulatory requirements. The FDA enforces the QSR through periodic announced or unannounced inspections of medical device manufacturing facilities, which may include the facilities of subcontractors, and such inspections can result in warning letters, untitled letters and other regulatory communications and adverse publicity. Our hearing aid devices are also subject to similar state regulations and various laws and regulations of foreign countries governing manufacturing.

To the extent our products are or become covered by any federal or state government healthcare program, our operations and business practices may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations. These laws may constrain the business or financial arrangements and relationships through which

~~we conduct our operations, including our sales and marketing practices, consumer incentive and other promotional programs and other business practices. Such laws include, without limitation:~~

Foreign laws and regulations in this regard may vary greatly from country to country. For example, the advertising and promotion of our products in the European Economic Area (the EEA) would be subject to EEA Directives concerning misleading and comparative advertising and unfair commercial practices, as well as other EEA Member State legislation governing the advertising and promotion of medical devices. These laws may limit or restrict the advertising and promotion of our products to the general public and may impose limitations on our promotional activities with healthcare professionals. We are also subject to healthcare fraud and abuse regulation and enforcement by the countries in which we conduct our business. These healthcare laws and regulations vary significantly from country to country.

Ensuring that our internal operations and future business arrangements with third parties comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations, agency guidance or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of the laws described above or any other governmental laws and regulations that may apply to us, we may be subject to significant penalties, including civil, criminal and administrative penalties, damages, fines, exclusion from government-funded healthcare programs, such as state Medicaid programs, TRICARE or similar programs in other countries or jurisdictions, disgorgement, imprisonment, contractual damages, reputational harm, diminished profits and the curtailment or restructuring of our operations. Further, defending against any such actions can be costly and time-consuming and may require significant personnel resources. Even if we are successful in defending against any such actions that may be brought against us, our business may be impaired.

~~We are subject to numerous state hearing aid and licensure laws and regulations, and non-compliance with these laws and regulations may expose us to significant costs or liabilities.~~

We are subject to numerous state and local hearing aid laws and regulations relating to, among other matters, licensure and registration of audiologists and other individuals we employ or contract with to provide services and dispense hearing aids. Some of these laws require us to maintain warranty and return policies for consumers allowing for the return of product and restrict advertising and marketing practices. These state and local laws and regulations are complex, change frequently and have tended to become more stringent over time. The FDCA preempts state laws relating to the safety and efficacy of medical devices and state laws that are different from or in addition to federal requirements. In ~~Missouri Board of Examiners for Hearing Instrument Specialists v. Hearing Help Express, Inc.~~ ~~and~~ ~~METX, LLC v. Wal-Mart Stores Texas, LLC~~, the Eighth Circuit Court of Appeals and the U.S. District Court for the Eastern District of Texas, respectively, have held that certain state laws relating to the fitting and dispensing of hearing aids are preempted because they relate to the safety and efficacy of medical devices. Although we have structured our operations to comply with our understanding of applicable state regulatory requirements, interpretative legal precedent and regulatory guidance varies by jurisdiction and is often sparse and not fully developed, including which laws and regulations are preempted because they relate to the safety and efficacy of medical devices, complicating our compliance efforts. Accordingly, we cannot be certain that our interpretation of laws and regulations applicable to our operations is correct, and we could be subject to adverse judicial or administrative interpretations. Our ability to operate profitably will depend, in part, on our ability to obtain and maintain any necessary licenses and other approvals and operate in compliance with applicable state laws and regulations. A determination that we are in violation of applicable laws and regulations in any jurisdiction in which we operate could have a material adverse effect on us, particularly if we are unable to restructure our operations and arrangements to comply with the requirements of that jurisdiction, if we are required to restructure our operations and arrangements at a significant cost, or if we are subject to penalties or other adverse action. We cannot predict the impact on our business of new or amended laws or regulations or any changes in the way existing and future laws and regulations are interpreted or enforced, nor can we ensure we will be able to obtain or maintain any required licenses or permits.

If our arrangements with audiologists and other hearing care specialists are found to violate state laws prohibiting the corporate practice of medicine or fee splitting, our business, financial condition and our ability to operate in those states could be adversely impacted.

Many states have laws that prohibit us from engaging in the practice of audiology, exercising control, interfering with or influencing an audiologist or other hearing care specialist’s professional judgment and entering into certain financial arrangements, such as splitting professional fees with audiologists. These laws and their interpretations vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion. Although we believe our arrangements comply with applicable state prohibitions on the corporate practice of medicine and fee splitting, regulatory authorities or other third parties may challenge our existing organization and contractual arrangements. If such a claim were successful, we could be subject to adverse judicial or administrative interpretations, to civil or criminal penalties, our contracts could be found legally invalid and unenforceable or we could be required to restructure our contractual arrangements with our audiologists and other licensed professionals. A determination that these arrangements violate state laws and regulations or our inability to successfully restructure our relationships and business operations to comply with these laws would have a material adverse effect on our business, financial condition and results of operations.

~~If we are unable to continue to drive consumers to our website, it could cause our revenue to decrease.~~

Many consumers find our website by searching for hearing aid information through internet search engines or from word-of-mouth and personal recommendations. A critical factor in attracting visitors to our website is how prominently we are displayed in response to search queries. Accordingly, we use search engine marketing as a means to provide a significant portion of our customer acquisition. Search engine marketing includes both paid website visitor acquisition on a cost-per-click basis and visitor acquisition on an unpaid basis, often referred to as organic or algorithmic search.

One method we employ to acquire visitors via organic search is commonly known as search engine optimization, or SEO. SEO involves developing our website in a way that enables the website to rank high for search queries for which our website’s content may be relevant. We also rely heavily on favorable recommendations from our existing customers to help drive traffic to our website. If our website is listed less prominently or fails to appear in search result listings for any reason, it is likely that we will attract fewer visitors to our website, which could adversely affect our revenue.

~~We are an “emerging growth company,” and the reduced public company reporting requirements applicable to emerging growth companies may make our common stock less attractive to investors.~~

We qualify as an “emerging growth company,” as defined in the JOBS Act. For so long as we remain an emerging growth company, we are permitted and plan to rely on exemptions from certain disclosure requirements that are applicable to public companies that are not emerging growth companies. These provisions include, but are not limited to: being permitted to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure; an exemption from compliance with the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act; not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board, or PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements; reduced disclosure obligations regarding executive compensation arrangements in our periodic reports, registration statements and proxy statements; and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, the JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We intend to take advantage of the exemptions discussed above. As a result, the information we provide will be different than the information that is available with respect to other public companies. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and the market price of our common stock may be more volatile.

We will remain an emerging growth company until the earliest of (i) the end of the fiscal year following the fifth anniversary of the completion of our initial public offering, (ii) the first fiscal year after our annual gross revenue exceed $1.07 billion, (iii) the date on which we have, during the immediately preceding three-year period, issued more than $1.00 billion in non-convertible debt securities, or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million as of the end of the second quarter of that fiscal year.

We incur significantly increased costs and are subject to additional regulations and requirements as a result of becoming a public company, which could lower our profits or make it more difficult to run our business.

As a public company, we incur significant legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will continue to incur costs associated with the Sarbanes-Oxley Act, and related rules implemented by the Securities and Exchange Commission, or SEC, and the exchange our securities are listed on. The expenses generally incurred by public companies for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions, other regulatory action and potentially civil litigation.

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may decline.

As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. In addition, beginning with our second annual report on Form 10-K, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act. The process of designing, implementing and testing the internal control over financial reporting required to comply with this obligation is time-consuming, costly and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to assert that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could decline, and we could also become subject to investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

We have identified a material weakness in our internal control over financial reporting. If our remediation of the material weakness is not effective, or if we experience additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock.

In connection with the preparation of our financial statements in connection with our IPO, we identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. The material weakness related to a lack of qualified supervisory accounting resources, including those necessary to account for and disclose certain complex transactions and for which we lacked the technical expertise to identify, analyze and appropriately record those transactions. We have implemented and are in the process of implementing additional measures designed to improve our internal control over financial reporting to remediate this material

~~weakness, including the hiring of qualified supervisory resources, the engagement of technical accounting consulting resources and plans to hire additional finance department employees.~~

We cannot assure you that the measures we have taken to date, and are continuing to implement, will be sufficient to remediate the material weakness we have identified or avoid potential future material weaknesses. If the steps we take do not correct the material weakness in a timely manner, we will be unable to conclude that we maintain effective internal control over financial reporting. Accordingly, there could continue to be a reasonable possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis.

If we fail to remediate our existing material weakness or identify new material weaknesses in our internal controls over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, if we are unable to conclude that our internal controls over financial reporting are effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting when we are no longer an emerging growth company, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected. As a result of such failures, we could also become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, and become subject to litigation from investors and stockholders, which could harm our reputation and financial condition or divert financial and management resources from our regular business activities.

We have no current plans to pay cash dividends on our common stock; as a result, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We have never declared or paid cash dividends on our capital stock, and we do not currently intend to pay any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and expansion of our business. Any future determination related to dividend policy will be made at the discretion of our board of directors, subject to applicable laws, and will depend upon, among other factors, our results of operations, financial condition, contractual restrictions and capital requirements. Also, unless waived, the terms of our 2018 Loan with Silicon Valley Bank generally prohibit us from declaring or paying any cash dividends and other distributions. Additionally, our ability to pay cash dividends on our capital stock may be limited by the terms of any future debt or preferred securities we issue or any future credit facilities we enter into. As a result, you may not receive any return on an investment in our common stock unless you sell your common stock for a price greater than that which you paid for it.

~~If our operating and financial performance in any given period does not meet any guidance that we provide to the public, the market price of our common stock may decline.~~

We may, but are not obligated to, provide public guidance on our expected operating and financial results for future periods. Any such guidance will be comprised of forward-looking statements subject to the risks and uncertainties described in this Annual Report on Form 10-K and in our other public filings and public statements. Our actual results may not always be in line with or exceed any guidance we have provided, especially in times of economic uncertainty. If, in the future, our operating or financial results for a particular period do not meet any guidance we provide or the expectations of investment analysts, or if we reduce our guidance for future periods, the market price of our common stock may decline. Even if we do issue public guidance, there can be no assurance that we will continue to do so in the future.

~~We may be unable to raise additional capital, which could harm our ability to compete.~~

As of December 31, 2020, we had cash and cash equivalents of $212.2 million. Our expected future capital requirements may depend on many factors including the expansion of our product portfolio and the timing and extent of spend on the development of our technology to increase our product offerings. As a result, we may need additional funding to fund our operations, but additional funds may not be available to us on acceptable terms on a timely basis, if at all. We may seek funds through borrowings or through additional rounds of financing, including private or public equity or debt offerings.

If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to pursue our business objectives and to respond to business opportunities, challenges, or unforeseen circumstances could be significantly limited, and our business, financial condition and results of operations could be materially adversely affected.

~~Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or products.~~

Since our inception, our operations have been financed primarily by net proceeds from the sale of our convertible preferred stock, indebtedness and, to a lesser extent, revenue from the sales of our products. We expect that we may be required to obtain additional funding in the future and may do so through partnerships, public or private equity offerings or debt financings, credit or loan facilities or a combination of one or more of these funding sources. Even if we are not required to obtain additional funding, we may do so due to favorable market conditions or to be able to pursue strategic or business expansion opportunities. If we raise additional funds by issuing equity securities, our stockholders may suffer dilution and the terms of any financing may adversely affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. Debt financing, if available, is likely to involve restrictive covenants limiting our flexibility in conducting future business activities, and, in the event of insolvency, debt holders would be repaid before holders of our equity securities receive any distribution of our corporate assets. We also could be required to seek funds through arrangements with partners or others that may require us to relinquish rights or jointly own some aspects of our technologies or products that we would otherwise pursue on our own.

~~Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.~~

As of December 31, 2020, our current executive officers, directors, holders of 5.0% or more of our capital stock and their respective affiliates held approximately 66% of our outstanding voting stock. Therefore, these stockholders will have the ability to influence us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

~~Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.~~

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline. We have a total of 38,246,601 shares of common stock outstanding as of December 31, 2020. Of these shares, approximately 9.0 million shares are freely tradable, without restriction, in the public market.

The lock-up agreements pertaining to our IPO will expire April 13, 2021. After the lock-up agreements expire, up to approximately 28.7 million additional shares of common stock will be eligible for sale in the public market, approximately 21.7 million of which shares are held by directors, executive officers and other affiliates and will be subject to Rule 144 under the Securities Act of 1933, as amended (the Securities Act). J.P. Morgan Securities LLC and BofA Securities, Inc. may, however, in their sole discretion, permit our officers, directors and other stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

In addition, based on shares outstanding as of the completion of our IPO, approximately 6.9 million shares of common stock that are either subject to outstanding options, reserved for future issuance under our existing equity incentive plan, or subject to outstanding warrants will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

The holders of approximately 28.2 million shares of our common stock, or approximately 74% of our total outstanding common stock as of December 31, 2020, are entitled to rights with respect to the registration of their shares under the Securities Act, subject to vesting schedules and to the lock-up agreements described above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

~~Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of management.~~

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent changes in control or changes in our management without the consent of our board of directors. These provisions include:

We are also subject to the anti-takeover provisions contained in Section 203 of the Delaware General Corporation Law. Under Section 203, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other exceptions, the board of directors has approved the transaction.

Claims for indemnification by our directors, officers and other employees or agents may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.

Our amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law.

In addition, as permitted by Section 145 of the Delaware General Corporation Law, our amended and restated bylaws and our indemnification agreements that we have entered into with our directors, officers and certain other employees provide that:

Our amended and restated certificate of incorporation and amended and restated bylaws provide that the Court of Chancery of the State of Delaware will be the exclusive forum for certain disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine; provided that, the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Securities Exchange Act of 1934, as amended (the Exchange Act), or any other claim for which the federal courts have exclusive jurisdiction; and provided further that, if and only if the Court of Chancery of the State of Delaware dismisses any such action for lack of subject matter jurisdiction, such action may be brought in another state or federal court sitting in the State of Delaware. Our amended and restated certificate of incorporation and amended and restated bylaws also provide that the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action against us or any of our directors, officers, employees or agents and arising under the Securities Act. Nothing in our amended and restated certificate of incorporation or amended and restated bylaws precludes stockholders that assert claims under the Exchange Act from bringing such claims in state or federal court, subject to applicable law.

We believe these provisions may benefit us by providing increased consistency in the application of Delaware law and federal securities laws by chancellors and judges, as applicable, particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. However, this choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims, although our stockholders will not be deemed to have waived our compliance with federal securities laws and the rules and regulations thereunder. Furthermore, the enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions, and there can be no assurance that such provisions will be enforced by a court in those other jurisdictions. If a court were to find the choice of forum provision that will be contained in our amended and restated certificate of incorporation and amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.

If we engage in future acquisitions or strategic partnerships, it may increase our capital requirements, dilute our stockholders, cause us to incur debt or assume contingent liabilities and subject us to other risks.

We may evaluate various acquisitions and strategic partnerships, including licensing or acquiring complementary products, intellectual property rights, technologies or businesses. Any potential acquisition or strategic partnership may entail numerous risks, including:

In addition, if we undertake acquisitions or strategic partnerships, we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses and acquire intangible assets that could result in significant future amortization expense. Moreover, we may not be able to locate suitable acquisition or partnership opportunities, and even if we do locate such opportunities we may not be able to successfully bid for or obtain them due to competitive factors or lack of sufficient resources. This inability could impair our ability to grow or obtain access to technology or products that may be important to the development of our business.

Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate. These factors include, but are not limited to, changes in tax laws both within and outside the United States, regulations and/or rates, structural changes in our business, new or changes to accounting pronouncements, non-deductible goodwill impairments, changing interpretations of existing tax laws or regulations, changes in the relative proportions of revenue and income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates, the future levels of tax benefits of equity-based compensation, changes in overall levels of pretax earnings or changes in the valuation of our deferred tax assets and liabilities. Additionally, we could be challenged by state and local tax authorities as to the propriety of our sales tax compliance, and our results could be materially impacted by these compliance determinations.

In addition, our effective tax rate may vary significantly depending on our stock price. The tax effects of the accounting for share-based compensation may significantly impact our effective tax rate from period to period. In periods in which our stock price is higher than the grant price of the share-based compensation vesting in that period, we will recognize excess tax benefits that will decrease our effective tax rate. In future periods in which our stock price is lower than the grant price of the share-based compensation vesting in that period, our effective tax rate may increase. The amount and value of share-based compensation issued relative to our earnings in a particular period will also affect the magnitude of the impact of share-based compensation on our effective tax rate. These tax effects are dependent on our stock price, which we do not control, and a decline in our stock price could significantly increase our effective tax rate and adversely affect our financial results.

If we fail to execute invention assignment agreements with our employees and contractors involved in the development of intellectual property or are unable to protect the confidentiality of our trade secrets, the value of our products and our business and competitive position could be harmed.

In addition to patent protection, we also rely on protection of copyright, trade secrets, know-how and confidential and proprietary information. We generally enter into confidentiality and invention assignment agreements with our employees, consultants and third parties upon their commencement of a relationship with us. However, we may not enter into such agreements with all employees, consultants and third parties who have been involved in the development of our intellectual property. In addition, these agreements may not provide meaningful protection against the unauthorized use or disclosure of our trade secrets or other confidential information, and adequate remedies may not exist if unauthorized use or disclosure were to occur. The exposure of our trade secrets and other proprietary information would impair our competitive advantages and could have a material adverse effect on our business, financial condition and results of operations. In particular, a failure to protect our proprietary rights may allow competitors to copy our technology, which could adversely affect our pricing and market share. Further, other parties may independently develop substantially equivalent know-how and technology.

In addition to contractual measures, we try to protect the confidential nature of our proprietary information using commonly accepted physical and technological security measures. Such measures may not, for example, in the case of misappropriation of a trade secret by an employee or third party with authorized access, provide adequate protection for our proprietary information. Our security measures may not prevent an employee or consultant from misappropriating our trade secrets and providing them to a competitor, and recourse we take against such misconduct may not provide an adequate remedy to protect our interests fully. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our products that we consider proprietary. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive and time-consuming, and the outcome is unpredictable. Even though we use commonly accepted security measures, trade secret violations are often a matter of state law, and the criteria for protection of trade secrets can vary among different jurisdictions. In addition, trade secrets may be independently developed by others in a manner that could prevent legal recourse by us. We also have agreements with our employees, consultants and third parties that obligate them to assign their inventions to ~~us,~~us; however, these agreements may not be self-executing, not all employees or consultants may enter into such agreements, or employees or consultants may breach or violate the terms of these agreements, and we may not have adequate remedies for any such breach or violation. If any of our intellectual property or confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such information was independently developed by a competitor, it could have a material adverse effect on our competitive position, business, financial condition, results of operations, and prospects.

We may be unable to enforce our intellectual property rights throughout the world.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. This could make it difficult for us to stop infringement of our foreign patents, if obtained, or the misappropriation of our other intellectual property rights. For example, some foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, some countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.

Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of our intellectual property.

We are subject to risks from legal and arbitration proceedings and that may prevent us from pursuing our business activities or require us to incur additional costs in defending against claims or paying damages.

We may become subject to legal disputes and regulatory proceedings in connection with our business activities involving, among other things, product liability, product defects, intellectual property infringement and/or alleged violations of applicable laws in various jurisdictions. Although we maintain liability insurance in amounts we believe to be consistent with industry practice, we may not be fully insured against all potential damages that may arise out of any claims to which we may be party in the ordinary course of our business. A negative outcome of these proceedings may prevent us from pursuing certain activities and/or require us to incur additional costs in order to do so and pay damages.

Actual or perceived failures to comply with applicable data privacy and security laws, regulations, policies, standards, contractual obligations and other requirements related to data privacy and security and changes to such laws, regulations, standards, policies and contractual obligations could adversely affect our business, financial condition and results of operations.

The global data protection landscape is rapidly evolving, and there has been an increasing focus on privacy and data protection issues with the potential to affect our business. We are or may become subject to numerous state, federal and foreign laws, requirements and regulations governing the collection, transmission, use, disclosure, storage, retention and security of personal and personally-identifying information, such as information that we may collect in connection with conducting our business in the United States and abroad. Implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future, and we cannot yet determine the impact future laws, regulations, standards or perception of their requirements may have on our business. This evolution may create uncertainty in our business, affect our ability to operate in certain jurisdictions or to collect, store, transfer use and share personal information, necessitate the acceptance of more onerous obligations in our contracts, result in liability or impose additional costs on us. The cost of compliance with these laws, regulations and standards is high and is likely to increase in the future. Any failure or perceived failure by us to comply with federal, state or foreign laws or regulation, our internal policies and procedures or our contracts governing our processing of personal information could result in negative publicity, government investigations and enforcement actions, fines, imprisonment of company officials and public censure, claims by third parties, damage to our reputation and loss of goodwill, any of which could have a material adverse effect on our business, financial condition and results of operations.

In the ordinary course of our business, we collect and store sensitive data, including protected health information ~~(PHI)~~(“PHI”), personally identifiable information ~~(PII)~~(“PII”), intellectual property and proprietary business information owned or controlled by ourselves or our customers, third-party payors and other parties. We also collect and store sensitive data of our employees and contractors. We manage and maintain our applications and data utilizing cloud-based data centers for PII. We utilize external security and infrastructure vendors to manage parts of our data centers.

As our operations and business grow, we are and may become subject to or affected by new or additional data protection laws and regulations and face increased scrutiny or attention from regulatory authorities. In the United States, HIPAA establishes, among other things, privacy and security standards that limit the use and disclosure of ~~individually identifiable health information, or protected health information,~~PHI, and imposes certain obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of ~~protected health information~~PHI by covered entities, such as health plans, healthcare clearinghouses and healthcare providers, as well as their business associates that perform certain services involving the use or disclosure of ~~protected health information.~~PHI, and their covered subcontractors. HIPAA requires covered entities and their business associates to develop and maintain certain policies and procedures with respect to ~~individually identifiable health information~~PHI that is used or disclosed. Further, in the event of a breach of unsecured protected health information, HIPAA requires covered entities to notify each individual whose ~~protected health information~~PHI is breached as well as federal regulators and, in some cases, the media. Certain states have also adopted comparable privacy and security laws and regulations, some of which may be more stringent than HIPAA. Such laws and regulations will be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us and our future customers and strategic partners. Determining whether protected health information has been handled in compliance with applicable privacy standards and our contractual obligations can be complex and may be subject to changing interpretation. If we are unable to properly protect the privacy and security of ~~protected health information,~~PHI, we could be found to have breached our contracts. Further, if we fail to comply with applicable privacy laws, including applicable privacy and security standards, we could face civil and criminal penalties. The ~~HHS~~U.S. Department of Health and Human Services (“HHS”), has the discretion to impose penalties without attempting to resolve violations through informal means. HHS enforcement activity can result in financial liability and reputational harm, and responses to such enforcement activity can consume significant internal resources, each of which could have a material adverse effect on our business financial condition, results of operations or prospects.

In addition, the ~~CCPA,~~California Consumer Privacy Act (“CCPA”), which took effect on January 1, 2020, creates individual privacy rights for California consumers and increases the privacy and security obligations of entities handling certain personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected

to increase data breach litigation. ~~The CCPA may increase our compliance costs and potential liability, and many similar laws have been proposed at the federal level and in other states.~~ Further, the ~~CPRA recently passed in~~ California Privacy Rights Act (the “CPRA”), which ~~will impose~~generally went into effect on January 1, 2023, imposes additional data protection obligations on covered businesses, including additional consumer rights processes, limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data. It ~~will~~ also ~~create~~created a new California data protection agency authorized to issue substantive regulations and could result in increased privacy and information security enforcement. The ~~majority of the provisions will go into effect on January 1, 2023,~~CCPA and ~~additional~~CPRA may increase our compliance ~~investment~~costs and potential ~~business process changes may be required.~~liability, and many similar laws have been proposed at the federal level and in other states. In the event that we are subject to or affected by HIPAA, the CCPA, the CPRA or other domestic privacy and data protection laws, any liability from failure to comply with the requirements of these laws could adversely affect our financial condition. Similar laws have passed in Virginia, Connecticut, Colorado and Utah, and have been proposed in other states and at the federal level, reflecting a trend toward more stringent privacy legislation in the United States. The enactment of such laws could have potentially conflicting requirements that would make compliance challenging. We may need to invest substantial resources in putting in place policies and procedures to comply with these evolving state laws.

In addition, state attorneys general are authorized to bring civil actions seeking either injunctions or damages in response to violations that threaten the privacy of state residents. We cannot be sure how these regulations will be interpreted, enforced or applied to our operations. In addition to the risks associated with enforcement activities and potential contractual liabilities, our ongoing efforts to comply with evolving laws and regulations at the federal and state level may be costly and require ongoing modifications to our policies, procedures and systems.

Data protection laws are evolving globally and may add additional compliance costs and legal risks to our operations. We ~~may in the future become~~are subject to the GDPR, which went into effect in May 2018 and which imposes obligations on companies that operate in our industry with respect to the processing of personal data and the cross-border transfer of such data. The GDPR imposes onerous accountability obligations requiring data controllers and processors to maintain a record of their data processing and policies. If our or our partners’ or service providers’ privacy or data security measures fail to comply with the GDPR requirements, we may be subject to litigation, regulatory investigations, enforcement notices requiring us to change the way we use personal data and/or fines of up to 20 million Euros or up to 4% of the total worldwide annual turnover of the preceding financial year, whichever is higher, as well as compensation claims by affected individuals, negative publicity, reputational harm and a potential loss of business and goodwill. Further, ~~from~~as of January 1, 2021, impacted companies have to comply with the GDPR and the UK GDPR, which, together with the amended UK Data Protection Act 2018, retains the GDPR in UK national law, the latter regime having the ability to separately fine up to the greater of £17.5 million or 4% of global turnover. While we continue to address the implications of the recent changes to European data privacy regulations, data privacy remains an evolving landscape at both the domestic and international level, with new regulations coming into effect and continued legal challenges, and our efforts to comply with the evolving data protection rules may be unsuccessful. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our practices. Accordingly, we must devote significant resources to understanding and complying with this changing landscape.

Although we work to comply with applicable laws, regulations and standards, our contractual obligations and other legal obligations, these requirements are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another or other legal obligations with which we must comply. Any failure or perceived failure by us or our employees, representatives, contractors, consultants or other third parties to comply with such requirements or adequately address privacy and security concerns, even if unfounded, could result in additional cost and liability to us, damage our reputation, negative publicity, loss of goodwill and materially adversely affect our business, financial condition and results of operations or prospects.

Failure to comply with the U.S. Foreign Corrupt Practices Act, economic and trade sanctions regulations and similar laws could subject us to penalties and other adverse consequences.

We are subject to the FCPA and similar regulations in other countries, as well as other laws in the United States and elsewhere that prohibit improper payments or offers of payments to foreign governments and their officials and political parties for the purpose of obtaining or retaining business. Certain suppliers of our product components are located in countries known to experience corruption. Business activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, contractors or agents that could be in violation of various laws, including the FCPA and anti-bribery laws in these countries, even though these parties are not always subject to our control. While we have implemented policies and procedures designed to discourage these practices by our employees, consultants and agents and to identify and address potentially impermissible transactions under such laws and

regulations, we cannot assure you that all of our employees, consultants and agents will not take actions in violation of our policies, for which we may be ultimately responsible.

We are also subject to certain economic and trade sanctions programs that are administered by the Department of Treasury’s Office of Foreign Assets Control which prohibit or restrict transactions to or from or dealings with specified countries, their governments and in certain circumstances, their nationals, and with individuals and entities that are specially designated nationals of those countries, narcotics traffickers and terrorists or terrorist organizations.

Failure to comply with any of these laws and regulations or changes in this regulatory environment, including changing interpretations and the implementation of new or varying regulatory requirements by the government, may result in significant financial penalties or reputational harm, which could adversely affect our business, financial condition and results of operations.

We have identified material weaknesses in our internal control over financial reporting and entity level controls. If our remediation of the material weaknesses is not effective, or if we experience additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock.

In connection with the preparation of our financial statements at the time of our IPO and through the financial reporting period ended December 31, 2022, we identified material weaknesses in our internal control over financial reporting and our entity level controls. A material weakness is a deficiency, or combination of deficiencies, in internal controls such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.

With respect to the material weakness related to internal control over financial reporting, we have implemented, and are in the process of reviewing corrective actions taken to improve our internal control over financial reporting to remediate this material weakness,

including (i) the hiring of additional qualified supervisory resources and finance department employees, and (ii) the engagement of additional technical accounting consulting resources.

With respect to the material weakness related to entity level controls related to a lack of sufficient qualified healthcare industry compliance and risk management resources, including those necessary to provide appropriate oversight, monitor compliance, and to identify and mitigate risks with respect to the financial reporting and disclosures of our operations, we have expended, and intend to continue to expend, considerable time and effort to enhance our compliance and risk management processes with respect to our operations in the healthcare industry to remediate this material weakness, including the hiring of additional qualified personnel, and the engagement of additional specialized consulting resources.

We cannot assure you that the measures we intend to take will be sufficient to remediate the material weaknesses we have identified or avoid potential future material weaknesses. While we believe that our efforts will enhance our internal control, remediation of the material weaknesses will require further validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles, and we cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses.

If we are unable to implement and maintain effective internal control over financial reporting in the future, we may not be able to accurately report our financial condition or results of operations which may adversely affect investor confidence in us and, as a result, the value of our common stock.

We are subject to Section 404 of the Sarbanes-Oxley Act, or Section 404, and the related rules of the SEC, which generally require our management to furnish a report on the effectiveness of our internal control over financial reporting. The process of designing, implementing and testing the internal control over financial reporting required to comply with this obligation is time-consuming, costly and complicated. If we fail to remediate identified material weaknesses or identify additional material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to assert that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could decline, and we could also become subject to investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities, which could require additional financial and management resources. Because we re-qualified as a smaller reporting company and we have less than $100 million in annual revenue, we are a non-accelerated filer and are no longer required to comply with the auditor attestation requirements regarding the effectiveness of our internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act until we become an accelerated filer or large accelerated filer. These exemptions and reduced disclosures in our SEC filings due to our status as a smaller reporting company may make it harder for investors to analyze our results of operations and financial prospects. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or products.

Since our inception, our operations have been financed primarily by net proceeds from the sale of our convertible preferred stock and common stock, indebtedness and revenue from the sales of our products. We anticipate our future capital requirements will be substantial and that we will need to raise significant additional capital to fund our operations through equity or debt financing, or some combination thereof.

If we are unable to raise additional funding to meet our operational needs, we will be forced to limit or cease our operations. We regularly consider fundraising opportunities and may decide, from time to time, to raise capital based on various factors, including market conditions and our plans of operation. We may seek funds through borrowings or through additional rounds of financing, including private or public equity or debt offerings. Additional capital may not be available to us on acceptable terms on a timely basis, or at all. If adequate funds are not available, or if the terms of potential funding sources are unfavorable, our business and our ability to develop our technology and our products would be harmed. If we raise additional funds by issuing equity securities, our stockholders may suffer dilution and the terms of any financing may adversely affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. Debt financing, if available, is likely to involve restrictive covenants limiting our flexibility in conducting future business activities, and, in the event of insolvency, debt holders would be repaid before holders of our equity securities receive any distribution of our corporate assets. We also could be required to seek funds through arrangements with partners or others that may require us to relinquish rights or jointly own some aspects of our technologies or products that we would otherwise pursue on our own.

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We also have incurred and will continue to incur costs associated with the Sarbanes-Oxley Act, and related rules implemented by the SEC and the exchange our securities are listed on. The expenses generally incurred by public companies for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions, other regulatory action and potentially civil litigation.

If our operating and financial performance in any given period does not meet any guidance that we provide to the public, the market price of our common stock may decline.

Any public guidance we provided regarding our expected operating and financial results for future periods is comprised of forward-looking statements subject to the risks and uncertainties described in this Annual Report on Form 10-K and in our other public filings and public statements. Our actual results may not always be in line with or exceed any guidance we provide, especially in times of economic uncertainty. If our operating or financial results for a particular period do not meet any guidance we provide or the expectations of investment analysts, or if we reduce our guidance for future periods, the market price of our common stock may decline. In September 2021, we withdrew our financial guidance for the fiscal year ended December 31, 2021 as a result of uncertainties arising with respect to the DOJ investigation and claims audits (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—DOJ investigation and settlement and claims audits” for more information). While we have since provided some limited financial guidance, we cannot be certain if or when we will resume providing more fulsome financial guidance.

Our principal stockholder, an entity affiliated with Patient Square, owns a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

As of December 31, 2022, our principal stockholder, an entity affiliated with Patient Square, held approximately 76.3% of our outstanding voting stock. As a result of this ownership position, Patient Square may be able to determine all matters requiring stockholder approval. For example, Patient Square may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

We have never declared or paid cash dividends on our common stock, and we do not currently intend to pay any cash dividends on our common stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and expansion of our business. Any future determination related to dividend policy will be made at the discretion of our board of directors, subject to applicable laws, and will depend upon, among other factors, our results of operations, financial condition, contractual restrictions and capital requirements. Additionally, our ability to pay cash dividends on our common stock may be limited by the terms of any future debt or preferred securities we issue or any future credit facilities we enter into. As a result, you may not receive any return on an investment in our common stock unless you sell your common stock for a price greater than that which you paid for it.

We are a “controlled company” within the meaning of the Nasdaq rules and, as a result, qualify for, and rely on, certain exemptions from certain corporate governance requirements.

Patient Square controls a majority of the voting power of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the Nasdaq corporate governance standards. A company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” within the meaning of the Nasdaq rules and may elect not to comply with certain corporate governance requirements of Nasdaq, including:

We intend to rely on some or all of the exemptions listed above for so long as we are eligible to do so. To the extent we utilize these exemptions, we will not have a majority of independent directors and our nominating and corporate governance and compensation committees will not consist entirely of independent directors. As a result, our board of directors and those committees may have more directors who do not meet Nasdaq’s independence standards than they would if those standards were to apply. The independence standards are intended to ensure that directors who meet those standards are free of any conflicting interest that could influence their actions as directors. Accordingly, our stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq.

Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline. On a post-reverse stock split basis, we had a total of 20,726,965 shares of common stock outstanding as of December 31, 2022.

Patient Square, which holds approximately 76.3% of our common stock, and maintains rights with respect to the registration of their shares under the Securities Act. On December 16, 2022, the Company filed a registration statement on Form S-1 (File No. 333-268859) to register for resale up to 15,821,299 shares held by Patient Square (as amended, the “PSC Resale Registration Statement”), representing the entirety of Patient Square’s holdings in the Company’s common stock as of December 31, 2022. The PSC Resale Registration Statement became effective on February 13, 2023. Registration of these shares under the Securities Act has resulted in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates. Any sales of these securities by Patient Square could have a material adverse effect on the trading price of our common stock.

Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of management.

Our amended and restated certificate of incorporation and amended and restated bylaws provide that the Court of Chancery of the State of Delaware (or, in the event that the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware or other state courts of the State of Delaware) is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim of breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine; provided that, the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act, or any other claim for which the federal courts have exclusive jurisdiction; and provided further that, if and only if the Court of Chancery of the State of Delaware dismisses any such action for lack of subject matter jurisdiction, such action may be brought in another state or federal court sitting in the State of Delaware. Our amended and restated certificate of incorporation and amended and restated bylaws also provide that the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action against us or any of our directors, officers, employees or agents and arising under the Securities Act. Nothing in our amended and restated certificate of incorporation or amended and restated bylaws precludes stockholders that assert claims under the Exchange Act from bringing such claims in state or federal court, subject to applicable law.

restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.

If securities analysts publish negative evaluations of our stock or stop publishing research or reports about our business, the price of our stock could decline.

The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. We currently have limited research coverage by financial analysts. Some of the analysts who previously covered the Company have discontinued coverage, and certain analysts have downgraded their evaluation of our stock. For example, certain of our analysts downgraded our common stock following our announcement of the DOJ investigation and claims audits (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations— DOJ investigation and settlement and claims audits”), which may have contributed to a significant decline in the price of our common stock. If any of the analysts who continue to cover or cover us in the future downgrade their evaluation of our common stock or publishes inaccurate or unfavorable research about our business, our common stock price may decline. If additional analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could cause our stock price to decline.

Engaging in acquisitions or strategic partnerships may increase our capital requirements, dilute our stockholders, cause us to incur debt or assume contingent liabilities and subject us to other risks.

As part of our business strategy, we may acquire companies or businesses, enter into strategic partnerships and joint ventures and make investments to further our business. Risks associated with these transactions include the following, any of which could adversely affect our revenue, gross margin, profitability, cash flows and financial condition:

In addition, in connection with these acquisitions or strategic partnerships, we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses and acquire intangible assets that could result in significant future amortization expense. Moreover, we may not be able to locate suitable acquisition or partnership opportunities, and even if we do locate such opportunities we may not be able to successfully bid for or obtain them due to competitive factors or lack of sufficient resources. This inability could impair our ability to grow or obtain access to technology or products that may be important to the development of our business.

We experience seasonality in our business, which may cause fluctuations in our financial results.

In the past we have experienced, and we may continue to experience, seasonality in our business, with higher sales volumes in quarters when we commercially launch new products and in the fourth calendar quarter as a result of holiday promotional activity. However, since our public disclosure of the DOJ investigation and our related decision to temporarily stop accepting insurance benefits as a method of direct payment between December 8, 2021 and September 15, 2022, we have experienced and may continue to experience a material decline in gross systems shipped. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—DOJ investigation and settlement and claims audits” for more information. As a result, seasonal factors did not have a material impact on our results of operations for the three months and year ended December 31, 2022. Negative publicity, including in relation to the DOJ investigation, the claims audits, and other legal proceedings has and could continue to harm our reputation and brand and diminish consumer confidence in our products, which may further impact any seasonal trends in our business.

among other factors, also mean that our operating results in any particular period may not be relied upon as an indication of future performance.

In addition, our effective tax rate may vary significantly depending on our stock price. The tax effects of the accounting for share-based compensation may significantly impact our effective tax rate from period to period. In periods in which our stock price is higher than the grant price of the share-based compensation vesting in that period, we will recognize excess tax benefits that will decrease our effective tax rate. In periods in which our stock price is lower than the grant price of the share-based compensation vesting in that period, our effective tax rate may increase. The amount and value of share-based compensation issued relative to our earnings in a particular period will also affect the magnitude of the impact of share-based compensation on our effective tax rate. These tax effects are dependent on our stock price, which we do not control, and a decline in our stock price could significantly increase our effective tax rate and adversely affect our financial results.

We are subject to a number of risks related to the credit card and debit card payments we accept.

We accept payments through credit and debit card transactions. For credit and debit card payments, we pay interchange and other fees, which may increase over time. An increase in those fees may require us to increase the prices we charge and would increase our operating expenses, either of which may adversely affect our business, financial condition and results of operations.

If we or our processing vendors fail to maintain adequate systems for the authorization and processing of credit and debit card transactions, it could cause one or more of the major credit card companies to disallow our continued use of their payment products. In addition, if these systems fail to work properly and, as a result, we do not charge our customers’ credit or debit cards on a timely basis, or at all, it could adversely affect our business, financial condition and results of operations.

Our information technology ~~systems, internal computer~~ systems or those used by our third-party service providers, vendors, strategic partners or other contractors or consultants, may fail or suffer security breaches and other disruptions, which could result in a material disruption of our products and services development programs, compromise sensitive information related to our business or prevent us from

accessing critical information, potentially exposing us to liability or otherwise adversely affecting our business, financial condition and results of operations.

We collect and maintain information in digital form that is necessary to conduct our business, and we are increasingly dependent on information technology systems and infrastructure to operate our business, including our cloud-based infrastructure, mobile and web-based applications, our e-commerce platform and our enterprise software. In the ordinary course of our business, we collect, store and transmit large amounts of confidential information, including intellectual property, proprietary business information and personal information of customers and our employees and contractors. It is critical that we do so in a secure manner to maintain the confidentiality and integrity of such confidential information. We have also outsourced elements of our information technology infrastructure, and as a result a number of third-party vendors may or could have access to our confidential information. We do not conduct audits or formal evaluations of our third-party vendors’ information technology systems and cannot be sure that our third-party vendors have sufficient measures in place to ensure the security and integrity of their information technology systems and our confidential and proprietary information. If our third-party vendors fail to protect their information technology systems and our confidential and proprietary information, we may be vulnerable to disruptions in service and unauthorized access to our confidential or proprietary information and we could incur liability and reputational damage.

Our ~~internal~~ information technology systems and those of our third-party service providers, vendors, strategic partners and other contractors or consultants are vulnerable to attack and damage or interruption from computer viruses and malware (e.g., ransomware), natural disasters, terrorism, war, telecommunication and electrical failures, hacking, cyberattacks, phishing attacks and other social engineering schemes, malicious code, employee theft or misuse, denial or degradation of service attacks, sophisticated nation-state and nation-state-supported actors or unauthorized access or use by persons inside our organization, or persons with access to systems inside our organization. The risk of a security breach or disruption, particularly through cyberattacks or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Russia’s invasion of Ukraine or another war of international dispute (such as, for example, any escalation in geopolitical turmoil between the People’s Republic of China and Taiwan) may cause a general increase in the number and severity of such malicious incidents. As a result of the COVID-19 pandemic, and continued hybrid working environment, we may also face increased cybersecurity risks due to our reliance on internet technology and the number of our employees who are working remotely, which may create additional opportunities for cybercriminals to exploit vulnerabilities. Furthermore, because the techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. We may also experience security breaches that may remain undetected for an extended period. Even if identified, we may be unable to adequately investigate or remediate incidents or breaches due to attackers increasingly using tools and techniques that are designed to circumvent controls, to avoid detection, and to remove or obfuscate forensic evidence.

The costs to us to investigate and mitigate network security problems, bugs, viruses, worms, malicious software programs, ransomware, and security vulnerabilities could be significant, and while we have implemented security measures to protect our data security and information technology systems from system failure, accident and security breach, our efforts to address these problems may not be successful, and these problems could result in unexpected interruptions, delays, disruption of our development programs and our business operations, cessation of service, negative publicity and other harm to our business and our competitive position, whether due to a loss of our trade secrets or other proprietary information or other disruptions. IfWe and certain of our vendors and service providers are from time to time subject to cyberattacks and security incidents. While we do not believe that we have experienced any significant system failure, accident or security breach to date, if we were to experience a significant ~~cybersecurity~~ breach of our information systems or data, the costs associated with the investigation, remediation and potential notification of the breach to ~~counter-parties~~counterparties and data subjects could be material. In addition, our remediation efforts may not be successful. If we do not allocate and effectively manage the resources necessary to build and sustain the proper technology and cybersecurity infrastructure, we could suffer significant business disruption, including transaction errors, supply chain or manufacturing interruptions, processing inefficiencies, data loss or the loss of or damage to intellectual property or other proprietary information. If such an event were to occur and cause interruptions in our operations, it could

result in a material disruption of our development programs and our business operations, whether due to a loss, corruption or unauthorized disclosure of our trade secrets, personal information or other proprietary or sensitive information or other similar disruptions.

If a security breach or other incident were to result in the unauthorized access to or unauthorized use, disclosure, release or other processing of personal information, it may be necessary to notify individuals, governmental authorities, supervisory bodies, the media and other parties pursuant to applicable privacy and security laws. For example, the Company retains data that is subject to HIPAA, which contain specific security and notification requirements to which we must adhere. Any security compromise affecting us, our service providers, vendors, strategic partners, other contractors, consultants, or our industry, whether real or perceived, could harm our reputation, erode confidence in the effectiveness of our security measures and lead to regulatory scrutiny. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or systems, or inappropriate disclosure of confidential or proprietary or personal information, we could incur liability, including litigation exposure, penalties and fines, we could become the subject of regulatory action or investigation, our competitive position could be harmed and the further development and commercialization of our products and services could be delayed. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our business. Furthermore, federal, state and international laws and regulations can expose us to enforcement actions and investigations by regulatory authorities, and potentially result in regulatory penalties, fines and significant legal liability, if our information technology security efforts fail. We would also be exposed to a risk of loss or

litigation and potential liability, which could materially and adversely affect our business, financial condition and results of operations or prospects. Further, any losses, costs or liabilities may not be covered by, or may exceed the coverage limits of, any applicable insurance policies.

International trade disputes could result in tariffs and other protectionist measures that could have a material adverse effect on our business, financial condition and results of operations.

Tariffs could increase the cost of our products and the raw materials that go into making them. These increased costs could adversely impact the gross margin that we earn on our products. Tariffs could also make our products more expensive for customers, which could make our products less competitive and reduce consumer demand. Countries may also adopt other protectionist measures that could limit our ability to offer our products. Political uncertainty surrounding international trade disputes and protectionist measures (including as a result of the conflict between Russia and Ukraine and the various sanctions and export controls being implemented by the international community against Russia, as well as any escalating geopolitical turmoil between the People’s Republic of China and Taiwan) could also have a negative effect on consumer confidence and spending, which could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to continue to drive consumers to our website, it could cause our revenue to decrease.

One method we employ to acquire visitors via organic search is commonly known as search engine optimization (“SEO”). SEO involves developing our website in a way that enables the website to rank high for search queries for which our website’s content may be relevant. We also rely heavily on favorable recommendations from our existing customers to help drive traffic to our website. If our website is listed less prominently or fails to appear in search result listings for any reason, it is likely that we will attract fewer visitors to our website, which could adversely affect our revenue.

Disruptions in internet access, or in cloud-based hosting services from certain third parties, could adversely affect our business, financial condition and results of operations.

As an online business, we are dependent on the internet and maintaining connectivity between ourselves and consumers and sources of internet traffic, such as Google. As consumers increasingly turn to mobile devices, we also become dependent on consumers’ access to the internet through mobile carriers and their systems. Disruptions in internet access, whether generally, in a specific market or otherwise, especially if widespread or prolonged, could adversely affect our business, financial condition and results of operations. For example, the “denial-of-service” attack against Dyn in October 2016 resulted in a service outage for several major internet companies. It is possible that we could experience an interruption in our business, and we do not carry business interruption insurance sufficient to compensate us for all losses that may occur.

Additionally, we rely on third-party service providers to host our data and to provide services to key aspects of our operations, including production, logistics, delivery and customer services and databases as well as employee and payroll services. We do not control the operations, physical security, or data security of any of these third parties. Despite our efforts to use commercially reasonable diligence in the selection and retention of such third-party providers, such efforts may be insufficient or inadequate to prevent or remediate such risks. Our third-party providers, including our cloud computing providers, may be subject to intrusions, computer viruses, denial-of-service attacks, sabotage, acts of vandalism, acts of terrorism, and other misconduct. They are vulnerable to damage or interruption from power loss, telecommunications failures, fires, floods, earthquakes, hurricanes, tornadoes, and similar events, and they may be subject to financial, legal, regulatory, and labor issues, each of which may impose additional costs or requirements on us or prevent these third parties from providing services to us or our customers on our behalf.

In addition, these third parties may breach their agreements with us, disagree with our interpretation of contract terms or applicable laws and regulations, refuse to continue or renew these agreements on commercially reasonable terms or at all, fail to or refuse to process transactions or provide other services adequately, take actions that degrade functionality, increase prices, impose additional costs or requirements on us or our customers, or give preferential treatment to our competitors. If we are unable to procure alternatives in a timely and efficient manner and on acceptable terms, or at all, we may be subject to business disruptions, losses, or costs to remediate any of these deficiencies. The occurrence of any of the above events could result in reputational damage, legal or regulatory proceedings, or other adverse consequences, which could materially adversely affect our business, financial condition and results of operations.

Laws, rules and regulations governing internet communications, advertising and e-commerce are dynamic, and the extent of future government regulation is uncertain. Federal and state regulations govern various aspects of our online business, including intellectual property ownership and infringement, trade secrets, the distribution of electronic communications, marketing and advertising, user privacy and data security, search engines and internet tracking technologies. Future taxation on the use of the internet or e-commerce transactions could also be imposed. Existing or future regulation or taxation could increase our operating expenses and expose us to significant liabilities. To the extent any such regulations require us to take actions that negatively impact us, they could have a material adverse effect on our business, financial condition and results of operations.

~~If securities analysts publish negative evaluations of our stock or stop publishing research or reports about our business, the price of our stock could decline.~~

The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We currently have research coverage by several financial analysts. If one or more of these analysts should drop research coverage of us or if one or more of the analysts covering our business downgrade their evaluations of our stock, the price of our stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could cause our stock price to decline.

Our corporate headquarters are located in San Jose, ~~California, where we lease~~California. We leased approximately ~~30,434~~30,000 square feet of office ~~research and development, engineering~~ and laboratory space pursuant to a lease agreement which was effective as of July 30, 2018 and ~~expires~~expired on February 28, 2022. We entered into a new lease agreement in September 2021 for approximately 30,000 square feet of office and laboratory space, which we began using as our headquarters starting in February 2022. This lease expires on June 30, 2029 and we may renew the lease term for two additional 60-month periods.

We also lease approximately ~~14,965~~9,327 square feet of office space, which is primarily used for our customer support operations, in Nashville, Tennessee, pursuant to a lease that ~~commenced on March 15, 2019 and~~ expires on ~~March 31, 2021. In February 2021, we entered into an amendment of our lease in Nashville, Tennessee, that reduced our office space to 9,327 square feet and extended the term to~~ March 31, 2023. We believe that our existing facilities are adequate to meet our business requirements for the near-term, and that additional space will be available on commercially reasonable terms, if required. We entered into a new lease agreement in January 2023 for approximately 17,572 square feet of office space at a new location in Nashville, Tennessee, for which the lease term will commence on the later of (i) April 1, 2023 or (ii) the date of substantial completion of certain tenant improvements in accordance with the terms of the lease (the “Commencement Date”). This lease will expire after a 76-month period following the Commencement Date.

~~We are not currently a party~~The information required to ~~any material legal proceedings. We may, however,~~be set forth under this Item 3 is incorporated by reference to Note 6 of the Notes to Consolidated Financial Statements included in ~~the ordinary course~~Part II of business face various claims brought by third parties, and we may, from time to time, make claims or take legal actions to assert our rights, including intellectual property rights as well as claims relating to employment matters and the safety or efficacy of our products. Any of these claims could subject us to costly litigation, and, while we generally believe that we have adequate insurance to cover many different types of liabilities, our insurance carriers may deny coverage, may be inadequately capitalized to paythis Annual Report on valid claims, or our policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on our business, financial condition and results of operations. Additionally, any such claims, whether or not successful, could damage our reputation and business.Form 10-K.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is traded on the Nasdaq Global Select Market under the symbol “EAR”. Public trading of our common stock began on October 16, 2020. Prior to that, there was no public market for our common stock.

As of March ~~8, 2021,~~20, 2023, there were ~~201~~67 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.

The graph below shows the cumulative total stockholder return assuming the investment of $100 and the reinvestment of any dividends in each of our common stock, the NASDAQ Composite Index, and the S&P Healthcare Equipment Index. The comparisons in the graph below are based on historical data and are not indicative of, or intended to forecast, future performance of our common stock.

We have never declared or paid, and do not anticipate declaring or paying in the foreseeable future, any cash dividends on our ~~capital~~common stock. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors, subject to applicable laws and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant.

~~See the section titled “Security Ownership~~The following table provides information on our equity compensation plans as of ~~Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding securities authorized for issuance.~~

~~From January 1, 2020 through~~ December 31, 2022. Information is included for equity compensation plans approved by our stockholders.

(3)

The ESPP contains an “evergreen” provision, pursuant to which the ~~3.0-for-1.0 reverse stock split~~maximum number of shares of our common stock ~~that occurred~~authorized for sale under the ESPP shall be increased on ~~October 8, 2020:~~

~~Between March 2020 and April 2020, we issued convertible promissory notes in the aggregate principal amount of $10.1 million to 21 accredited investors.~~

the first day of each year beginning in 2021 and ending in 2030, equal to the lesser of (A) one percent (1.0%) of the shares of common stock outstanding (on an as-converted basis) on the last day of the immediately preceding fiscal year and (B) such number of shares of common stock as determined by our Board; provided, however, no more than 272,539 shares of our common stock may be issued thereunder.

In July 2020, we issued an aggregate of 1,889,542 shares of our Series E convertible preferred stock upon redemption of convertible promissory notes issued by us, in exchange for approximately $10.3 million in cancellation of indebtedness.

(4)

Consists of 309,315 stock options and 176,063 RSUs. The weighted-average exercise price only applies to stock options.

Between July 2020 and August 2020, we issued and sold an aggregate of 10,513,924 shares of Series E convertible preferred stock to 24 accredited investors at $6.7836 per share for gross proceeds of $71.3 million.

(5)

Includes 66,378 shares available for future issuance under the ESPP.

~~In September 2020 we issued a warrant to purchase 53,487 shares of our Series E convertible preferred stock with an exercise price of $6.7836 per share to one accredited investor.~~

Prior to filing our registration statement on Form S-8 in October 2020, we granted stock options and stock awards to employees, directors and consultants under our 2010 Equity Incentive Plan, covering an aggregate of 3,885,943 shares of common stock, at a weighted-average exercise price of $3.02 per share. The weighted-average exercise price per share reflects the repricing of all options granted from January 1, 2020 to August 3, 2020 with an exercise price greater than $2.55 per share that were repriced to $2.55 per share on August 3, 2020.

Prior to filing our registration statement on Form S-8 in October 2020, we issued an aggregate of 555,654 shares of common stock at a weighted-average purchase price of $1.81 per share to employees, directors and consultants for aggregate proceeds to us of approximately $1.0 million upon the exercise of stock options.

Use of proceeds from public offering of common stock

On October 20, 2020, we completed our initial public offering ~~or IPO,~~(the “IPO”) and issued ~~9,029,629~~451,481 shares of our common stock, which includes an additional ~~1,177,777~~58,888 shares of common stock purchased by the underwriters pursuant to their option to purchase additional shares, in each case, on a post-reverse stock split basis, at an initial offering price of ~~$18.00~~$360.0 per share less underwriting discounts and commissions. We received net proceeds from the ~~initial public offering~~IPO of approximately $148.5 million, after deducting underwriting discounts and commissions of $11.4 million and offering costs of $2.6 million. None of the expenses associated with the ~~initial public offering~~IPO were paid to directors, officers, persons owning 10% or more of any class of equity securities, or to their associates. J.P. Morgan Securities LLC and BofA Securities, Inc. acted as book-running managers for the IPO.

Shares of our common stock began trading on the Nasdaq Global Select Market on October 16, 2020. The offer and sale of the shares were registered under the Securities Act on a registration statement on Form S-1 (Registration No. 333-249075), which was declared effective on October 15, 2020.

~~There has been no material change in~~All the ~~planned use of~~ proceeds from our ~~initial public offering as~~IPO have been applied in the manner described in the related prospectus filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act. ~~We invested the funds received in cash equivalents and other marketable~~

Sales of unregistered securities ~~in accordance with our investment policy.~~

74None.

Issuer p~~urchases~~purchases of equity securities

None.

Item 6. ~~Selected Financial Data.~~[Reserved].

The consolidated statements of operations data for the fiscal years ended December 31, 2020, 2019 and 2018, and the selected consolidated balance sheets data as of December 31, 2020 and 2019, are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

~~The selected consolidated balance sheet data as of December 31, 2018 is derived from our audited consolidated financial statements which are not included in this Annual Report on Form 10-K.~~

The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

Year ended December 31,

(in thousands, except share and per share amounts)

2020

2019

2018

Revenue, net

$
69,154

$
32,790

$
23,163

Cost of revenue

21,873

15,790

11,423

Gross profit

47,281

17,000

11,740

Operating expenses:

Research and development

12,045

12,841

9,520

Sales and marketing

49,525

35,725

25,540

General and administrative

20,582

12,470

8,251

Total operating expenses

82,152

61,036

43,311

Loss from operations

(34,871
)

(44,036
)

(31,571
)
Other income (expense), net:

Interest income

37

627

164

Interest expense

(1,920
)

(711
)

(424
)
Other income (expense), net

(1,474
)

(366
)

(1,403
)
Loss on extinguishment of debt

(1,627
)

—

(559
)
Total other income (expense), net

(4,984
)

(450
)

(2,222
)
Loss before income taxes

(39,855
)

(44,486
)

(33,793
)
Income tax provision

—

—

—

Net loss and comprehensive loss

$
(39,855
)

$
(44,486
)

$
(33,793
)
Net loss attributable to common stockholders, basic
   and diluted

$
(30,015
)

$
(44,486
)

$
(33,793
)
Net loss per share attributable to common
   stockholders, basic and diluted

$
(3.80
)

$
(173.47
)

$
(149.69
)
Weighted-average shares used in computing net loss per
   share attributable to common stockholders, basic and
   diluted

7,890,375

256,452

225,754

As of December 31,

(in thousands)

2020

2019

2018

Consolidated balance sheet data:

Cash and cash equivalents

$
212,185

$
13,384

$
51,051

Working capital(1)

198,739

(2,377
)

43,029

Total assets

232,632

27,305

59,042

Long-term debt, current and noncurrent

14,837

12,246

6,990

Convertible preferred stock warrant liability

—

396

81

Convertible preferred stock

—

152,880

152,015

Accumulated deficit

(199,058
)

(159,203
)

(114,717
)
Total stockholders’ equity (deficit)

193,911

(156,103
)

(112,999
)

~~(1)~~We define working capital as current assets less current liabilities. See our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K for further details regarding our current assets and current liabilities.

7656

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes included in Part II, Item 8 of this Annual Report on Form 10-K.

~~This~~The following discussion and analysis of our financial condition and results of operations contains forward-looking statements ~~based upon~~about us and our ~~current beliefs, estimates, plans and expectations~~industry that involve substantial risks, uncertainties and assumptions. ~~Our~~All statements other than statements of historical facts contained in this item, including statements regarding factors affecting our business, trends and uncertainties, are forward-looking statements. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Annual Report on Form 10-K, our actual results ~~may~~could differ materially from ~~those contained~~the results described in or implied by these forward-looking ~~statements as a result of various factors, including those set forth under~~statements. You should carefully read the “Risk Factors” ~~or in other parts~~to gain an understanding of ~~this Annual Report.~~the important factors that could cause actual results to differ materially from our forward-looking statements.

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~~products 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~~ever virtually invisible, rechargeable, ~~completely-in-canal, FDA regulated, exempt Class I or Class II~~completely in-the-canal, FDA-regulated devices indicated to compensate for ~~the treatment of~~mild to moderate 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~~primarily in a direct-to-consumer format 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.~~team.

We believe that our differentiated hearing aids and consumer-oriented approach ~~and strong brand~~ have fueled the rapid adoption of our hearing aids and high customer satisfaction, as evidenced by over ~~60 thousand~~109,000 Eargo hearing aid systems ~~sold,~~shipped, net of returns, as of December 31, ~~2020.~~

On October 20, 2020, we completed our initial public offering, or IPO, pursuant to which we sold an aggregate of 9,029,629 shares of our common stock at a price of $18.00 per share, resulting in net proceeds of $148.5 million after deducting underwriting discounts, commissions and offering expenses. Upon the closing of our IPO, all outstanding shares of our convertible preferred stock automatically converted into 28,196,388 shares of our common stock.

~~For the year ended December 31, 2020, we generated net revenue of $69.2 million, an increase of $36.4 million from the year ended December 31, 2019.~~2022. To date, all our revenue has been generated from customers in the United States.

For the year ended December 31, 2022, we generated net revenue of $37.2 million, an increase of $5.1 million from the year ended December 31, 2021. Our gross systems shipped during the year ended December 31, 2022 were 24,247, compared to 45,136 during 2021. The decrease in shipment volume was largely driven by our decision to temporarily stop accepting insurance benefits as a method of direct payment between December 8, 2021 and September 15, 2022. During the year ended December 31, 2021, we recorded adjustments that materially reduced net revenue as discussed in detail below under “—DOJ investigation and settlement and claims audits.”

Our net losses were ~~$39.9~~$157.5 million, ~~$44.5~~$157.8 million and ~~$33.8~~$39.9 million for the years ended December 31, ~~2020, 2019~~2022, 2021 and ~~2018,~~2020, respectively. As of December 31, ~~2020~~2022 and ~~2019,~~2021, we had an accumulated deficit of ~~$199.1~~$514.3 million and ~~$159.2~~$356.8 million, respectively. We expect to continue to incur losses for the foreseeable future. As of December 31, 2022, we had cash and cash equivalents of $101.2 million, which are available to fund operations. As of December 31, 2022, we had no debt outstanding.

DOJ investigation and settlement and claims audits

As previously disclosed, on September 21, 2021, we were informed that we were the target of a criminal investigation by the DOJ related to insurance claims we submitted for reimbursement on behalf of our customers covered by various federal employee health plans under the Federal Employee Health Benefits (“FEHB”) program, which is administered by the Office of Personnel Management (the “OPM”). The investigation also pertained to our role in claim submissions to federal employee health plans (collectively, the “DOJ investigation”). Total payments the Company received from the government in relation to claims submitted under the FEHB program, as subject to the DOJ investigation, net of any product returns and associated refunds, were approximately $44.0million. Also as previously disclosed, the third-party payor with whom historically we had the largest volume, which is one of the carriers contracted with the OPM under the FEHB program (“largest third-party payor”), conducted an audit of insurance claims for reimbursement (“claims”) submitted by us (the “Primary Audit”), which included a review of medical records. We were informed by the third-party payor conducting the Primary Audit that the DOJ was the principal contact related to the subject matter of the Primary Audit. In addition to the Primary Audit, we have been subject to a number of other claims audits by additional third-party payors (collectively with the Primary Audit, the “claims audits”). One of these claims audits did not relate to claims submitted under the FEHB program. On January 4, 2022, the DOJ confirmed to us that the investigation had been referred to the Civil Division of the DOJ and the U.S. Attorney’s Office for the Northern District of Texas and the criminal investigation was no longer active.

On April 29, 2022, we entered into a civil settlement agreement with the U.S. government that resolved the previously disclosed DOJ investigation related to our role in claim submissions to various federal employee health plans under the FEHB program. We cooperated fully with the DOJ investigation. We deny the allegations in the settlement agreement, and the settlement is not an

admission of liability by us. The allegations did not pertain to the quality or performance of our product. The settlement agreement provided for our payment of approximately $34.4 million to the U.S. government and resolved allegations that we submitted or caused the submission of claims for payment to the FEHB program using unsupported hearing loss-related diagnostic codes. As discussed further in Note 6 to the Consolidated Financial Statements included in this Annual Report on Form 10-K, based on the settlement agreement with the U.S. government, we recorded a settlement liability of $34.4 million in the consolidated balance sheets as of December 31, 2021. The settlement amount was recorded as a reduction of revenue in the third quarter of 2021. On May 2, 2022, we paid the settlement amount.

The settlement with the U.S. government may not resolve all of the claims audits initiated by various third-party payors, and additionally we remain subject to a prepayment review of claims by the payor who conducted the Primary Audit.

From the time we learned of the DOJ investigation and until December 8, 2021, we continued to process orders for customers with potential insurance benefits (including FEHB program members) but suspended all claims submission activities and offered affected customers (i.e., customers using insurance benefits as a method of direct payment for transactions prior to December 8, 2021) the option to return their hearing aids or purchase their hearing aids without the use of their insurance benefits in case their claim was denied or ultimately not submitted by us to their insurance plan for payment (the “extended right of return”).

From December 8, 2021 until September 15, 2022, we did not accept insurance benefits as a method of direct payment.

We determined that customer transactions using insurance benefits as a method of direct payment occurring between September 21, 2021 (when we learned of the DOJ investigation) and December 8, 2021 (when we temporarily stopped accepting insurance benefits as a method of direct payment) did not meet the criteria for revenue recognition and, as a result, we did not recognize revenue for shipments within that timeframe to customers with potential insurance benefits, substantially all of whom were covered under the FEHB program.

We previously estimated that a majority of customers with unsubmitted claims would choose to return the hearing aid system if their insurance provider denied their claim or the claim was ultimately not submitted by us for payment, resulting in an increase in expected product returns from sales transactions that occurred prior to September 21, 2021 and recorded during the year ended December 31, 2021. Returns associated with unsubmitted claims reduce the sales returns reserve, with a corresponding reduction in the related accounts receivable at the time the product is returned.

We also estimated that, in addition to the customers who chose to return their hearing aid systems, a significant number of customers whose claims were denied by payors or not submitted by us for payment would not pay for or return the hearing aid system, resulting in bad debt expense that was recorded during the year ended December 31, 2021.

During the year ended December 31, 2022, we made the determination not to seek payment for approximately $16.1 million from customers with unsubmitted and unpaid claims. We accounted for this decision as a pricing concession (the “Pricing Concession”) and, during the year ended December 31, 2022 recorded a $16.1 million reduction to our insurance-related accounts receivable balance along with related reduction to net revenue of $11.6 million and an allowance for credit losses balance of $4.5 million for such unsubmitted and unpaid claims. Further, we simultaneously recorded a decrease in our insurance-related sales return reserve of $11.3 million, with a corresponding increase of $11.3 million to net revenue for the year ended December 31, 2022 related to unsubmitted and unpaid claims. These changes resulted in a decrease in net revenue of $0.3 million for the year ended December 31, 2022.

On January 5, 2022, the U.S. District Court for the Northern District of California consolidated three purported securities class actions brought against the Company (as consolidated, the “Securities Class Action”). On May 20, 2022, the lead plaintiffs in the Securities Class Action filed a consolidated amended complaint, which generally alleges that certain of the Company’s disclosures about its business, operations and prospects, including reimbursement from third-party payors, violated federal securities laws. Defendants filed a motion to dismiss the consolidated amended complaint on July 29, 2022. The Court granted the defendants’ motion to dismiss on February 14, 2023, and the plaintiffs have until March 16, 2023, to file a second amended complaint.

On August 4, 2022, the U.S. District Court for the Northern District of California consolidated two verified shareholder derivative complaints brought against certain of our executive officers and current and former members of our board of directors (as consolidated, the “Derivative Action”). The court stayed the consolidated Derivative Action until the resolution of the motion to dismiss the Securities Class Action. See Note 6 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for more information.

As a result of the uncertainty created by the DOJ investigation and the claims audits, we took certain actions including, but not limited to:

•

We temporarily restricted our employees from selling Company common stock, ceased granting stock option awards and restricted stock unit (“RSUs”) that settle solely in Company common stock, suspended our 2020 Employee Stock Purchase Plan (“ESPP”) and temporarily paused the settlement of outstanding RSUs, in each case effective as of November 9, 2021 (collectively, the “employee equity actions”). RSUs that vested on November 15, 2021 were settled for $0.1 million in cash during the first quarter of 2022. All RSUs that vested during the year ended December 31, 2022 were settled in shares during the reporting period. All outstanding equity awards continued and continue to vest in accordance with their existing vesting schedules.

•

Our Board of Directors temporarily suspended the non-employee director compensation program with respect to the option awards that would otherwise have been awarded to non-employee directors automatically on the date of our annual meeting of stockholders held on November 9, 2021. In August 2022, our non-employee directors were granted options having an aggregate grant date fair value of $26.80 per share that vested in substantially equal monthly installments between November 9, 2021 and the date of the 2022 annual meeting of stockholders, and vested options remain outstanding and exercisable until the later of December 31, 2024 or 3 months following a termination of service.

•

On December 7, 2021, we announced a plan to reduce our employee workforce to streamline our organization in response to declines in customer orders since we announced the investigation of the Company by the DOJ. We substantially completed the employee workforce reduction during the fourth quarter of 2021, resulting in a reduction of approximately 27% of our employee workforce, or approximately 90 people.

•

On May 24, 2022, we announced a plan to reduce our employee workforce as part of our cost-cutting measures to reduce operating expenses and preserve capital. We substantially completed the employee workforce reduction during the second quarter of 2022, resulting in a reduction of approximately 17% of our employee workforce, or 44 people.

Patient Square Capital Investment

On June 24, 2022, after reviewing all available alternatives to secure the funding needed to support our ongoing operations and pursuit of our business strategies, and a potential sale of the Company, we entered into an agreement (the “Note Purchase Agreement”) with PSC Echo, LP (the “PSC Stockholder”), an affiliate of Patient Square Capital (“Patient Square”), and Drivetrain Agency Services, LLC, as administrative agent and collateral agent. Pursuant to the Note Purchase Agreement, we issued approximately $105.5 million in two tranches of senior secured convertible notes (the “Notes”) and agreed to conduct a rights offering for an aggregate of 18.75 million shares of common stock to stockholders as of a record date determined by our Board, at an offering price of $10.0 per share of common stock (the “Rights Offering”). Pursuant to the Rights Offering, which closed on November 23, 2022, we sold an aggregate of approximately 2.9 million shares to our existing stockholders, from which we received net proceeds of $27.6 million, and, in accordance with the terms of the Note Purchase Agreement, the Notes converted into 15,821,299 shares of our common stock (the “Conversion Shares”), in each case, on a post-reverse stock split basis, representing approximately 76.3% of our outstanding common stock as of the date of conversion.

In connection with the Note Purchase Agreement, we had also entered into an Investors’ Rights Agreement with the PSC Stockholder, pursuant to which, among other things, the PSC Stockholder has the right to nominate a number of directors to our Board that is proportionate to the PSC Stockholder’s ownership of the Company, rounded up to the nearest whole number (and which shall in no event be less than one). As a result, following the closing of the Rights Offering and the conversion of the Notes, the PSC Stockholder has the right to nominate six directors to our Board. The PSC Stockholder exercised its right to nominate three directors to the Board, Trit Garg, M.D., Karr Narula and Justin Sabet-Peyman, in December 2022.

As of March 20, 2023, the PSC Stockholder held 15,821,299 shares, representing approximately 76.3% of our outstanding common stock. As a result of Patient Square’s ownership position, we are considered a “controlled company” within the meaning of the marketplace rules (the “Listing Rules”) of the Nasdaq Stock Market (“Nasdaq”) and Patient Square may be able to determine all matters requiring stockholder approval.

Reverse Stock Split

On October 12, 2022, at our 2022 annual meeting of stockholders, our stockholders approved an amendment to our Amended and Restated Certificate of Incorporation to effect a reverse stock split of our common stock, at a ratio in the range of 1-for-5 to 1-for-50, with such ratio to be determined by the Board. On January 11, 2023, we announced that the Board had approved a 1-for-20 reverse stock split (the “Reverse Stock Split”), and on January 17, 2023, the Reverse Stock Split was effected. Our common stock began trading on a split-adjusted basis on January 18, 2023. All share and per share information presented in this Annual Report on Form 10-K has been retrospectively adjusted to reflect the Reverse Stock Split.

Factors affecting our business

Our business priorities include: (i) accessing insurance coverage for Eargo hearing aids, including potentially regaining insurance coverage of Eargo hearing aids for government employees under the FEHB program; (ii) refining and expanding our retail strategy; (iii) optimizing our cash-pay business; and (iv) continuing to invest in innovation. 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 Annual Report on Form 10-K.

Our direct-to-consumer and omni-channel business model

We sell our hearing aids primarily on a direct-to-consumer basis, engaging consumers through a mix of digital and traditional marketing as well as select commercial partnership, omni-channel (including retail) and other opportunities that are designed to appeal to prospective customers on a personal level and build our brand.

Via our direct-to-consumer model, customers are able to complete purchases over the phone with an Eargo sales consultant or directly on our website. The Eargo purchasing experience is designed to be simple and to improve the accessibility of hearing aids.

Following the United States Food and Drug Administration (“FDA”) final rule regarding the creation of a new category of over-the-counter (“OTC”) hearing aids (the “OTC Final Rule”), we have focused efforts on transitioning to the new OTC framework and exploring select additional commercial partnerships, omni-channel (including retail) and other opportunities. For example, we have a commercial arrangement with Victra, one of America’s largest wireless retailers, to facilitate access to our hearing screeners and demonstrate our devices at approximately 1,500 Victra store locations across the country; customers are also able to purchase or order Eargo hearing aids at such store locations. We believe that the OTC Final Rule may facilitate the opportunity to execute additional commercial partnerships, expanding our customers’ ability to learn about our hearing aids, obtain general information about their hearing through our current hearing screeners, and experience our devices in person prior to purchasing or ordering directly at retail locations.

Moreover, following the effective date of the OTC Final Rule, we have partnered with certain resellers and other distributors, including benefits managers, to offer Eargo hearing aids for sale through their online storefronts or portals. Under these partnerships, we sell Eargo hearing aids to resellers at wholesale prices, who in turn offer our products to end-customers through their respective online storefronts or portals. Generally, we fulfill and ship orders placed through these online storefronts or portals directly to end-customers, and we generally do not submit insurance claims on behalf of customers who purchase from one of these authorized resellers, including Victra. We believe these partnerships will help expand consumer access to our hearing aids and allow us to target high-intent customers more efficiently. We continue to look for additional partners to help expand our customer base.

Once a customer purchases Eargo hearing aids, whether directly through us or through one of our partners, distributors, or authorized resellers, they are assigned to one of our hearing professionals, who provides complimentary, convenient support by phone, chat or e-mail. Our hearing professionals and customer care team are also available to provide unlimited support for as long as the customer owns an Eargo device. Additionally, we provide short, online training videos and other resources that customers can access online. The combination of these services allows us to deliver remote customer support in an efficient and streamlined manner.

We believe our business model and consumer-centric focus offer certain advantages relative to traditional sales channels (which are characterized by a business-to-business model in which hearing aid manufacturers rely on a fragmented network of independent audiology clinics to sell their devices to consumers), including in particular the convenience and accessibility of our remote customer support as well as our consumer-centric focus. We offer free online education, convenient consultation and remote customer support, the ability to easily purchase the Eargo system, and fast delivery.

Changes to the regulatory landscape

Hearing aids are considered medical devices subject to regulation by the FDA. On August 17, 2022, the FDA published the OTC Final Rule, which established new regulatory categories for OTC and prescription hearing aids. The OTC Final Rule implements relevant provisions of the FDA Reauthorization Act of 2017 (“FDARA”), which set forth requirements for the FDA to create a new category of OTC hearing aids that are intended to be available without supervision, prescription, or other order, involvement or intervention of a licensed practitioner. Prior to the effective date of the OTC Final Rule, no OTC category of hearing aids existed. Following publication of a proposed rule in October 2021, the FDA issued its OTC Final Rule with requirements for labelling, conditions of sale, performance standards, design requirements and other provisions under which manufacturers may elect to market hearing aids as either OTC or prescription devices, or both. In addition, under FDARA, the OTC hearing aid controls promulgated in the OTC Final Rule preempt any state or local requirement specifically related to hearing products that would restrict or interfere with commercial activity involving OTC hearing aids. The OTC Final Rule became effective on October 17, 2022, although certain previously marketed devices have until April 14, 2023 to come into compliance with the OTC Final Rule.

for our Eargo 5 and Eargo 6 hearing aids under the “self-fitting” regulation at 21 CFR 874.3323. In December 2022, we received FDA 510(k) clearance for Eargo 5 and Eargo 6 as Class II self-fitting air-conduction hearing aids. Additionally, in January 2023, we launched the Eargo 7 as our third over-the-counter, 510(k) cleared self-fitting device. We plan to market our devices as OTC hearing aids and intend to comply with all applicable OTC regulatory requirements as of the compliance date for currently marketed devices on April 14, 2023, or sooner. We may also seek to market certain devices as prescription hearing aids, which would require compliance with separate physical and electronic labeling requirements under the OTC Final Rule.

Please see the Risk Factors titled, “Changes in the regulatory landscape for hearing aid devices could materially impact our direct-to-consumer business model and lead to increased regulatory requirements, and we may be required to seek additional clearance or approval for our products” and “Our hearing aids are subject to extensive government regulation at the federal and state level, and our failure to comply with applicable requirements could harm our business” for more information.

Insurance-related business

A significant portion of our revenue has historically been dependent on payments from third-party payors; for example, in the year ended December 31, 2021, 44% of total gross systems shipped were to customers with potential insurance coverage. Historically, we submitted claims on behalf of our customers to a concentrated number of third-party payors under certain benefit plans, and substantially all such claims related to the FEHB program. See “—DOJ investigation and settlement and claims audits” for a discussion of the DOJ investigation and settlement as well as claims audits prior to the resumption of our insurance claims submissions practices in September 2022.

Between December 8, 2021 and September 15, 2022, we did not accept insurance benefits as a direct method of payment to the Company, a practice we refer to as “direct plan access.” In “direct plan access,” we submit an insurance claim on behalf of an Eargo customer to their insurance plan, or support an Eargo customer in their own claim submission, and the customer’s insurance benefits are utilized for the purchase, in whole or in part. Common forms of utilization can include, but are not limited to, co-pay, payment by a third-party payor to either Eargo or the customer, reimbursement by a third-party payor to the customer, or application toward a customer’s deductible.

Because we do not currently have contracts with any FEHB carriers, third-party payors, or other insurance providers, our products are considered out-of-network with such payors and insurance providers. We do not believe that the reimbursement amounts, patient co-payment amounts, or the claims submission process, including medical necessity and other documentation requirements, depend on whether we are in-network or out-of-network with that FEHB carrier or other FEHB plans. To illustrate, the hearing aid benefit in an FEHB plan is a set amount that covers the hearing aid itself and related fees and supplies, regardless of the plan option and regardless of whether the hearing aid is provided by a preferred, participating, or non-participating provider (i.e., regardless of whether it is in-network or out-of-network), which is not always the case for other benefit categories. However, depending on the FEHB carrier or third-party payor, payment may be made directly to the patient rather than to us if Eargo is out-of-network.

Beginning on September 15, 2022, we resumed our direct plan access insurance-based business, accepting insurance benefits as a method of direct payment in certain limited circumstances, when the customer has undergone additional testing by an independent, licensed healthcare provider to establish medical necessity, with supporting clinical documentation. We are evaluating additional alternatives for testing or establishing medical necessity, including, but not limited to, contracting with third parties or existing networks of licensed healthcare providers, and/or establishing a management services organization, separate from our existing corporate structure, that manages professional entities that employ licensed healthcare providers. These alternatives involve significant time and related activities, including, but not limited to, development of additional internal processes, training, and compliance and quality control programs, coordination with external healthcare providers and professional services organizations, and evaluation of and compliance with state-by-state regulatory requirements. We cannot provide any assurance as to the efficacy of the processes that we have established or the extent to which such processes will need to be changed, or additional processes established, or the associated timing or costs, whether we will be successful in implementing any of them, or the impact that such processes and changes may have on our business and operations. If we are unable to successfully implement at least one of these alternatives for testing, or to otherwise establish additional acceptable processes to support claims that we may submit for reimbursement, we expect that we may not be able to submit future claims in sufficient volume to meaningfully restore or expand the amount of our insurance-based business related to direct plan access. In addition, it is possible that such testing would be required to be conducted in-person, representing a significant change from our past processes and customer experience that may adversely impact the attractiveness of our offerings to customers, and we may not be able to efficiently or effectively integrate such tests into our operating model. Further, the OTC Final

Rule may lead payors to take additional actions, such as excluding OTC hearing aids from coverage, further limiting our ability to access insurance coverage, or there may be a delay in accessing insurance coverage as payors seek to address the OTC Final Rule in their offered benefits, if at all, any of which may have a material adverse effect on our financial condition, results of operations or cash flows.

We are also seeking to establish relationships with benefits managers or managed care providers. Employer self-funded plans or other health plans may at times offer supplemental benefits, which may include hearing aid benefits or general “over-the-counter” benefits; they may in those cases contract with benefits managers or managed care providers in the administration of such supplemental benefits. In this role, among other things, benefits managers are responsible for selecting benefits vendors, i.e., vendors whose products or services are eligible to be covered by the supplemental benefit. The vendors themselves, or Eargo in this role, are not responsible for claims submissions but instead fulfill the product order from the customer through the benefits manager.

In light of the DOJ investigation, claims audits and the OTC Final Rule, we have made and may continue to need to make significant changes to our business and operating model, including a potential long-term shift to a model without a meaningful insurance-related business, which would likely result in a sustained increased cost of customer acquisition and require identification of commercial partnership, omni-channel, including retail, or other opportunities, to drive cost efficient acquisition of customers.

See “—DOJ investigation and settlement and claims audits” for more information. Please see the Risk Factors titled, “We are subject to risks from legal proceedings, investigations, and inquiries, including a number of recent legal proceedings and investigations, which have had and could continue to have a material adverse effect on our reputation, business, financial condition, cash flows and results of operations, and could result in additional claims and material liabilities,” and “We face considerable uncertainty in our business prospects, as a significant portion of our revenue has historically been dependent upon reimbursement from third-party payors participating in the FEHB program, but we have operated on a primarily “cash-pay” basis since December 8, 2021. We may be unsuccessful in validating and establishing processes to support the submission of claims for reimbursement from third-party payors participating in the FEHB program in the future. As a result, we have faced a significant reduction in revenue and any failure to establish processes to support reimbursement from third-party payors in the future may significantly and adversely impact our business and growth prospects and our ability to sell our products.”

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,~~system, acquire new customers and convert sales leads. WeSince our public disclosure of the DOJ investigation on September 22, 2021 and our related decision to temporarily stop accepting insurance benefits as a method of direct payment between December 8, 2021 and September 15, 2022, we have experienced and may continue to experience a material decline in sales and gross systems shipped.

From December 8, 2021 until September 15, 2022, as a result of the DOJ investigation and claims audits (as further described in “—DOJ investigation and settlement and claims audits”), we did not accept insurance as a direct method of payment to the Company (referred to as “direct plan access”). Instead, all sales within such timeframe were to customers we refer to as “cash-pay” or “self-pay” customers, which includes upfront payment, credit card, third-party financing, and third-party distributor, authorized reseller or partner payments. We have ~~also invested~~refocused our sales and ~~expect~~marketing efforts and related spend to ~~continue investing in growing our teams~~prioritize conversion of ~~sales consultants and licensed hearing professionals to keep pace with increased demand, converting~~cash-pay consumer leads into satisfied customers. While we intend to continue to work with third-party payors with the objective of validating and establishing additional processes to support any future claims that we may submit for reimbursement, we may not be able to arrive at additional acceptable processes or submit future claims in sufficient volume to meaningfully restore or expand our insurance-based business. The shift to a primarily “cash-pay” model, with minimal volume from our customers using insurance benefits as a direct method of payment to Eargo, will likely result in a sustained increased cost of customer acquisition and require significant sales and marketing investments, based on the historically lower conversion rate for cash-pay customers as compared to direct plan access insurance customers. We anticipate that our expansion into retail locations may allow for a more streamlined sales process; however, it may not ultimately reduce our cost of customer acquisition due to new sales and marketing initiatives related to such expansion. We are currently unable to predict whether our expansion into retail locations will affect the return rate for our cash-pay customers, and ~~potentially growing~~the impact any such change may have on our ~~revenue.~~cost of customer acquisition. Further, the low volume of direct plan access insurance customers using insurance as a direct payment method may also necessitate identifying commercial partnerships, omni-channel, including retail, or other opportunities, as well as the potential implementation of cost-savings measures, in order to drive cost-efficient cash-pay customer acquisition and offset the significantly higher return rates as well as the related negative impact on revenue and gross margin historically applicable to cash-pay customers.

Sales ~~return~~returns rate

Our return policy generally 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~~states, and can be extended under certain circumstances, including, for example, the previously extended right of return offered for shipments made prior to 2022 involving insurance payors. Historically, the most commonly cited reason for returning our hearing aids is unsatisfactory fit, which we believe is a ~~byproduct~~by-product 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 26% and 35% for the years ended December 31, 2020 and 2019, respectively. The decline in our sales return rate in 2020 and 2019 was a result of the growth in customers with health insurance coverage for hearing aids and repeat customers which have generally lower return rates than other customers, and our initiatives to improve customer service and enhance the quality of our pre-screening assessments.

We report revenue net of expected returns, which is an estimate informed in part by historical return rates. As such, our ~~return~~returns rate impacts our reported net revenue and ~~profitability. If actual sales~~gross profit or loss. Sales returns ~~differ significantly from our estimates, an adjustment to revenue in~~rates, as defined under “—Key business metrics,” were 34% and 32% for the ~~current or subsequent period is recorded.~~years ended December 31, 2022 and 2021, respectively.

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 full commercial launch of the Eargo ~~Neo HiFi~~7 in ~~January 2020,~~February 2023, we have now launched ~~four~~seven generations of our hearing aids since 2017, with each iteration having increased functionality and improved ~~audio performance,~~sound quality, amplification, noise reduction, physical fit, ~~and/or comfort.~~comfort, water resistance and ease-of-use, as well as reduced costs of goods and better connectivity. We are focused on continuing to launch new versions of the Eargo hearing ~~solution~~aid devices that further improve ~~audio quality, fit, comfort and/or ease-of-use.~~these attributes. We believe that the continued introduction of new products is critical to maintaining existing customers, ~~and increasing adoption~~attracting new customers, achieving market acceptance of our ~~solution,~~products and maintaining or increasing our competitive position in the market.

We expect to continue refining and improving Eargo hearing aids, and we have the intention of an approximate annual cadence of new product launches. To this end, we are working on the development of a cost-conscious offering as ~~such,~~well as the next Eargo hearing aid model with improved functionality. Accordingly, 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. Our development priorities are focused, in part, on ~~adding a~~expanding refurbishment capability for returned hearing ~~aids, which would~~aids. Our refurbishment capabilities are focused on components and allow us to ~~refurbish~~reuse certain key components from our returned devices.

Recruitment and ~~re-sell returned devices,~~retention of personnel

Our success depends in part upon our continued ability to recruit, retain and motivate high-quality employees, including management, administrative, our clinical and scientific personnel and our direct sales force (among others), and competition for qualified personnel can be intense due to the limited number of individuals possessing the requisite training, skill and experience we require. As a result of uncertainty created by the DOJ investigation and the claims audits, we temporarily suspended our practice of granting equity awards, suspended our employee stock purchase plan and deferred the settlement of outstanding restricted stock units, in each case effective as of November 9, 2021. We resumed granting RSUs on March 18, 2022 and resumed granting stock option awards on August 23, 2022. However, as of February 1, 2023, we have again suspended our practice of granting RSUs.

In addition, on December 7, 2021, we announced a plan to reduce our employee workforce to streamline our organization in response to declines in customer orders since we announced the DOJ investigation. We substantially completed the employee workforce reduction during the fourth quarter of 2021, resulting in a reduction of approximately 27% of our employee workforce, or approximately 90 people. On May 24, 2022, we announced a plan to further reduce our employee workforce as part of continued cost-cutting measures to reduce operating expenses and preserve capital. We substantially completed the employee workforce reduction during the second quarter of 2022, resulting in a reduction of approximately 17% of our employee workforce, or 44 people.

Future suspension of equity awards, including of our practice of granting RSUs, and reductions in workforce, in addition to any negative perceptions of employment with us as a result of the DOJ investigation, the settlement with the U.S. government, and the claims audits, could continue to adversely affect employee morale and have a material adverse impact on our ability to recruit, retain and motivate the high-quality employees critical to our operations, which ~~we anticipate would benefit~~in turn could have a material adverse effect on our ~~gross margin, although there is no guarantee that these efforts will succeed.~~business, results of operations and financial condition.

Macroeconomic environment

Our business, results of operation and financial condition are dependent on macroeconomic conditions. We face domestic as well as global macroeconomic challenges, particularly in light of the effects of the COVID-19 pandemic, inflationary trends, uncertainty or volatility in the market (including recent and potential disruption in the banking system and financial markets) and geopolitical events (such as the conflict in Ukraine and tensions across the Taiwan Strait).

We believe the COVID-19 pandemic ~~thus far has largely resulted in favorable trends for~~accelerated the pace of consumer awareness of our ~~business. We believe that shelter-in-place~~vertically integrated remote customer support model and facilitated customer adoption of the same. Shelter-in-place restrictions and increased reluctance of consumers to ~~be exposed to the virus,~~conduct

in-person activities, particularly among older ~~consumers~~individuals that comprise a majority of the population needing hearing aids, resulted in increased knowledge of our business and sales and a potential acceleration of consumer acceptance of our primarily direct-to-consumer business model. However, we cannot be sure whether this trend in consumer behavior will persist or if consumers will instead return to pre-pandemic patterns. In addition, the benefits of such trends in consumer behavior, to the extent they persist, may be outweighed by other macroeconomic factors, including, but not limited to, inflationary pressures, financial market volatility, and slower growth or recession, which can adversely impact consumer confidence and result in lower discretionary consumer spending. If these macroeconomic pressures continue or increase, we may experience an adverse impact on demand for our products. Additionally, our business is also subject to disruptions in the banking system and financial markets and other uncertainties or volatility in the markets. For example, on March 10, 2023, the Federal Deposit Insurance Corporation (the “FDIC”) took control and was appointed receiver of Silicon Valley Bank (“SVB”). Although the FDIC ultimately announced that it would pay all deposits, including deposits that exceeded FDIC-insured amounts, we and other SVB customers initially were not able to access our accounts and faced significant uncertainty about whether and when we would be able to fully access amounts held through SVB, which would have ~~increased customer interest~~had several follow-on consequences with respect to ~~consider~~ our ~~vertically integrated telecare model. We believe~~ability to meet our ~~sales model can help consumers decrease their risk of potential~~near-term payment obligations. If other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our existing cash, cash equivalents and investments may be threatened and could have a material adverse effect on our business and financial condition. In addition, even if we lack exposure to ~~COVID-19 by avoiding multiple trips~~the uncertainty or volatility of one or more financial institutions, the impact of financial institution volatility on our partners, customers or suppliers may also impact our business and financial condition.

We rely on a number of international suppliers and manufacturers, including our primary manufacturer, Pegatron Corporation, who is headquartered in Taiwan, which exposes us to ~~hearing aid clinics~~foreign operational and ~~close proximity to audiologists~~political risks such as changes in trade policies and export regulations between the United States and other ~~individuals at such clinics, which are part of the traditional hearing aid sales model.~~

~~Although~~countries or geopolitical conflict. Additionally, although we believe the COVID-19 pandemic has largely resulted in favorable consumer trends for our business, ~~we have experienced business disruptions, particularly at our California headquarters, where a majority of our employees have been working remotely. Moreover,~~ travel restrictions, factory closures and disruptions in ~~our~~global supply ~~chain could happen~~chains have resulted in industry-wide component supply shortages (such as in semiconductors), and we may not be able to obtain adequate inventory on a timely basis or at all. To date, increases in component pricing have occurred but have not had a material impact on supply continuity or gross margin. We have taken steps to ~~sell.~~

~~The ongoing impact of COVID-19 depends on the duration~~monitor our supply chain and ~~severity of the pandemic, which are difficult~~actions to ~~assess or predict.~~address limited supply and increasing lead times, including outreach to critical suppliers and spot market purchases. While we have not experienced ~~growth in~~any significant disruptions to our ~~sales volume during~~supply chain that have impacted our ability to service customers or our access to necessary raw materials and component parts for the manufacture of our products to date, disruptions have occurred across a number of industries and we cannot provide any assurance that future disruptions will not emerge as a result of the ongoing supply chain issues, inflation, the COVID-19 pandemic, ~~we cannot be~~geopolitical events or other extrinsic factors. Future disruptions in our supply chain, including the sourcing of certain ~~whether we will maintain~~components and raw materials, such as semiconductor and memory chips, as well as increased logistics costs, could impact our revenue and gross margins.

For a further discussion of trends, uncertainties and other factors that could impact our operating results, see 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~~in Item 1A of ~~the possible impact of the COVID-19 pandemic~~Part I in this Annual Report on ~~our business.~~Form 10-K.

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~~state of our business:

•

Gross systems ~~shipped.~~shipped. We define our gross systems shipped as the number of hearing aid systems shipped during the period. Since our public disclosure of the DOJ investigation on September 22, 2021 and our related decision to temporarily stop accepting insurance benefits as a method of direct payment between December 8, 2021 and September 15, 2022, we have experienced and may continue to experience a material decline in gross systems shipped. Beginning on September 15, 2022, we resumed accepting insurance benefits as a method of direct payment in certain limited circumstances and for which ~~we recognized~~ revenue ~~during~~is and has been recognized. Continued negative publicity, including in relation to the DOJ investigation and settlement, the claims audits, and other legal proceedings could further harm our reputation and lead to a ~~reporting period.~~

further decline in gross systems shipped. See “—DOJ investigation and settlement and claims audits” and “—Factors affecting our business.”

•

~~Return accrual rates.~~ ~~Return accrual~~Sales returns rates. Sales returns rates are determined by management at the end of each reporting period to estimate the percentage of ~~returns made~~products for which we have recorded revenue during ~~a period.~~that period that are expected to be returned. This determination is informed in part by ~~historic~~historical actual return rates. ~~Return accrual~~Sales returns 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~~sales returns rate ~~determination made~~determined at period end ~~we may adjust~~or new factors arise, indicating a rate of return that is different from the original estimated sales returns rate, revenue is adjusted in subsequent periods to reflect the actual returns made. Such an adjustment to revenue ~~will~~is not ~~result~~included in ~~an adjustment to~~ the ~~return accrual rate for~~sales returns rates disclosed in the ~~period.~~

table below.

The following table details the number of gross systems shipped and ~~return accrual~~sales returns rates for the periods presented below:

Three months ended

March 31,
2019

June 30,
2019

September 30,
2019

December 31,
2019

March 31,
2020

June 30,
2020

September 30,
2020

December 31,
2020

Gross
   systems
   shipped

5,363

4,955

5,257

7,212

7,030

9,040

10,077

12,096

Return
   accrual
   rate

36.7
%

34.4
%

35.3
%

34.0
%

28.2
%

27.1
%

25.2
%

24.3
%


	Three months ended
	Mar 31, 2021			Jun 30, 2021			Sep 30, 2021			Dec 31, 2021			Mar 31, 2022			Jun 30, 2022			Sep 30, 2022			Dec 31, 2022
Gross systems shipped		11,704			12,548			13,117			7,767			5,773			4,455			5,156			8,863
Sales returns rate		23.2	%		24.1	%		46.4	%		34.0	%		33.9	%		33.3	%		32.3	%		34.9	%

During the twelve months ended December 31, 2022 and 2021, Eargo shipped 24,247 and 45,136 gross hearing aid systems, respectively, of which less than 1% and 44%, respectively, were to customers with potential insurance coverage. We made the decision to temporarily stop accepting insurance benefits as a method of direct payment between December 8, 2021 and September 15, 2022. Beginning September 2022, we resumed accepting insurance benefits as a method of direct payment in certain limited circumstances and for which revenue is and has been recognized. Additionally, during the fourth quarter of 2022, we shipped Eargo hearing devices to Victra, our retail partner, for in-person customer sales at its approximately 1,500 store locations across the United States, for which we recognize revenue upon shipment to our retail partner.

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~~sales returns rates are an indicator of ~~potential~~expected reductions to revenue and an indicator of change in customer ~~mix.~~mix and factors affecting the returns rates by customer type. However, as discussed elsewhere in this report, our sales volume, sales returns rate and revenue during the current period were not consistent with the prior periods as a result of the DOJ investigation and settlement and claims audits. See “—DOJ investigation and settlement and claims audits.”

Due to the historically higher return rate for cash-pay customers as compared to insurance customers, we expect that revenue, gross profit and gross margin may remain depressed as compared to prior periods for so long as there is minimal volume from our customers using insurance benefits as a direct method of payment to Eargo; however, we are currently unable to predict whether the expansion of our omni-channel strategy (including retail and other partners) will affect our return rate for cash-pay customers, and the impact any such change may have on our revenue, gross profit and gross margin.

Components of our results of operations

See the discussion under “—DOJ investigation and settlement and claims audits,” which describes a variety of circumstances currently affecting our business and results of operations, and which require that we continually evaluate and adapt our business model and expenditures as new information becomes available.

Revenue, net

We generate revenue primarily 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~~market a variety of ~~our~~models of hearing ~~aid systems, the Eargo Max, the Eargo Neo and the Eargo Neo HiFi,~~aids, each at ~~three~~ different price points, and we periodically offer discounts and promotions, including holiday 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,~~

Since learning of the DOJ investigation, we ~~also offered extended product warranties to~~temporarily suspended all insurance claims submissions and, from December 8, 2021 until September 15, 2022, did not accept insurance as a direct method of payment. Instead, we focused our efforts on cash-pay customers, which ~~covered~~includes upfront payment, credit card payments, third-party financed payments and distributor payments. Historically, cash-pay customers have had significantly higher return rates than customers with potential insurance benefits, and therefore the ~~product for an additional year, commencing~~potential long-term shift to primarily cash-pay sales may adversely impact revenue, net. Beginning 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.~~September 15, 2022, we resumed accepting insurance benefits as a method of direct payment in certain limited circumstances.

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, channel mix, pricing strategies, ~~return accrual~~sales returns rates, costs of finished goods, product warranty claim rates and refurbishment ~~strategies.~~ strategies, and our ability to service insurance customers and any potential actions insurance providers may take following the implementation of the FDA’s new OTC hearing aid regulatory framework that may limit our ability to access insurance coverage.

We expect our gross margin ~~percentage~~ to ~~increase over the~~remain depressed for so long ~~term~~as there is minimal volume from our customers using insurance benefits as a direct method of payment to ~~the extent~~Eargo, unless we ~~are successful in decreasing our~~can successfully target and convert new customers with a similarly low 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.return.

Research and development expenses

Research and development or (“R~~&D,~~&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~~have generally been the largest component of our operating expenses and consist primarily of personnel-related costs, including salaries and stock-based compensation, direct and channel marketing, advertising and promotional expenses, consulting fees, public relations costs and allocated facility overhead costs. Sales and marketing personnel include our direct sales force consisting of inside sales consultants, ~~licensed~~ hearing professionals, marketing professionals and related support personnel. We expect our sales and marketing expenses to ~~increase in absolute dollars, but decrease~~fluctuate over time as a percentage of ~~revenue, as~~revenue. In response to the factors discussed in “—DOJ investigation and settlement and claims audits,” we ~~hire additional~~have reduced sales and marketing ~~personnel, expand our sales support infrastructure~~resources that were previously focused on insurance customers to prioritize the conversion of cash-pay consumers into satisfied customers, including the 2021 and ~~invest~~2022 reductions in ~~our brand and product awareness to further penetrate the U.S. market and potentially expand into international markets.~~force.

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, transaction fees, consulting fees, recruiting fees, information technology costs, corporate insurance, bad debt expense, general corporate expenses and allocated facility overhead costs.

WeExcluding the costs associated with the DOJ investigation, we expect ~~to continue to incur additional~~our general and administrative expenses will increase in absolute dollars in future periods 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~~services, as well as professional service and ~~administrative~~legal fees and expenses related to ~~increase~~shareholder litigation that has been filed and that may be filed in ~~absolute dollars in future periods.~~the future.

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~~obligations. In connection with the fair value ~~of embedded derivatives associated with certain redemption features of our convertible promissory notes and adjustments~~option, we elected to present interest expense related to the Notes in the changes in fair value.

Change in fair value of ~~our~~ convertible ~~preferred stock warrant liabilities.~~notes

We elected on issuance to account for the Notes at fair value until their settlement. The change in fair value of the convertible notes is recognized in the consolidated statements of operations, with the exception of changes in fair value due to instrument-specific credit risk, which are recorded as a component of other comprehensive income, if present.

Loss on extinguishment of debt

The loss on extinguishment of debt arose onfrom the ~~redemption~~early repayment of long-term debt under our ~~2020 Notes into shares of our Series E convertible preferred stock~~2018 Loan Agreement in ~~July 2020.~~June 2022.

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.

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 years ended December 31, ~~2020~~2022 and ~~2019~~2021

We made the decision to temporarily stop accepting insurance benefits as a method of direct payment between December 8, 2021 and September 15, 2022 as a result of the DOJ investigation and claims audits (as further described in “—DOJ investigation and settlement and claims audits”). Beginning in late 2021, as a result of the impact of the DOJ investigation on the Company's business and financial condition, we shifted our strategy to limit our costs, conducted a reduction in force and took other precautionary measures to preserve capital and liquidity. As a result, the following comparison of the 2022 and 2021 fiscal years reflect a trend of decreasing expenditures due to the implementation of capital and liquidity preservation measures.

Year ended December 31,

Change

(dollars in thousands)

2020

2019

Amount

%

Revenue, net

$
69,154

$
32,790

$
36,364

110.9
%
Cost of revenue

21,873

15,790

6,083

38.5

Gross profit

47,281

17,000

30,281

178.1

Operating expenses:

Research and development

12,045

12,841

(796
)

(6.2
)
Sales and marketing

49,525

35,725

13,800

38.6

General and administrative

20,582

12,470

8,112

65.1

Total operating expenses

82,152

61,036

21,116

34.6

Loss from operations

(34,871
)

(44,036
)

9,165

(20.8
)
Other income (expense), net:

Interest income

37

627

(590
)

(94.1
)
Interest expense

(1,920
)

(711
)

(1,209
)

170.0

Other income (expense), net

(1,474
)

(366
)

(1,108
)

302.7

Loss on extinguishment of debt

(1,627
)

—

(1,627
)

*

Total other income (expense), net

(4,984
)

(450
)

(4,534
)

1,008

Loss before income taxes

(39,855
)

(44,486
)

4,631

(10.4
)
Income tax provision

—

—

—

—

Net loss and comprehensive loss

$
(39,855
)

$
(44,486
)

$
4,631

(10.4
)%


	Year ended December 31,						Change
(dollars in thousands)	2022			2021			Amount			%
Revenue, net	$	37,248		$	32,122		$	5,126			16.0	%
Cost of revenue		22,988			27,956			(4,968	)		(17.8	)
Gross profit (loss)		14,260			4,166			10,094			242.3
Operating expenses:
Research and development		18,813			25,232			(6,419	)		(25.4	)
Sales and marketing		52,947			85,759			(32,812	)		(38.3	)
General and administrative		54,259			49,882			4,377			8.8
Total operating expenses		126,019			160,873			(34,854	)		(21.7	)
Loss from operations		(111,759	)		(156,707	)		44,948			(28.7	)
Other income (expense), net:
Interest income		1,196			21			1,175		*
Interest expense		(549	)		(1,068	)		519			(48.6	)
Change in fair value of convertible notes		(45,503	)		—			(45,503	)	*
Loss on extinguishment of debt		(772	)		—			(772	)	*
Total other income (expense), net		(45,628	)		(1,047	)		(44,581	)	*
Loss before income taxes		(157,387	)		(157,754	)		367			(0.2	)
Income tax provision		100			—			100		*
Net loss and comprehensive loss	$	(157,487	)	$	(157,754	)	$	267			(0.2	)%

* Not ~~meaningful~~Meaningful

Revenue, net


	Year ended December 31,				Change					Year ended December 31,				Change
(dollars in thousands)	2020		2019		Amount		%			2022		2021		Amount		%
Revenue, net	$	69,154	$	32,790	$	36,364		110.9	%	$	37,248	$	32,122	$	5,126		16.0	%

Gross systems shipped during 2022 were 24,247, compared to 45,136 in 2021, of which less than 1% and 44%, respectively, were to customers with potential insurance coverage. The decrease in shipment volume was largely driven by our decision to temporarily stop accepting insurance benefits as a method of direct payment in the fourth quarter of 2021. Beginning September 2022, we resumed accepting insurance benefits as a method of direct payment in certain limited circumstances and for which revenue is and has been recognized. Additionally, during the fourth quarter of 2022, we shipped Eargo hearing devices to Victra, our retail partner, for in-person customer sales at its approximately 1,500 store locations across the United States, for which we recognize revenue upon shipment to our retail partner.

Revenue, which is reported net of consideration payable to customers and expected returns, increased by ~~$36.4~~$5.1 million, or ~~110.9%~~16.0%, from ~~$32.8~~$32.1 million during the year ended December 31, 2021 to $37.2 million during the year ended December 31, 2022.

In September 2022, we made the determination not to seek payment for approximately $16.1 million from customers with unsubmitted and unpaid claims, or the Pricing Concession. This decision resulted in ~~2019~~a reduction in net revenue of $0.3 million for the year ended December 31, 2022 after the remeasurement of the corresponding sales return reserve and the utilization of the related allowance for expected credit losses.

During the year ended December 31, 2021, the $34.4 million settlement amount associated with the DOJ investigation was recorded as a reduction in revenue. Additionally, we previously estimated that a majority of customers with unsubmitted claims as of December 31, 2021 would choose to ~~$69.2~~return the hearing aid system if their insurance provider denied their claim or the claim was ultimately not submitted by us for payment, resulting in an increase in expected product returns from such transactions that occurred prior to September 21, 2021. As a result, we recorded $13.3 million of estimated sales returns as a reduction in ~~2020,~~revenue in the third quarter of 2021 related to shipments to customers with potential insurance benefits. Further, we did not recognize revenue and related sales

returns reserve on approximately 2,230 Eargo hearing aid systems shipped during the year ended December 31, 2021 and subsequent to learning of the DOJ investigation, as these transactions did not meet the criteria for revenue recognition.

Cost of revenue, gross profit, and gross margin


	Year ended December 31,						Change
(dollars in thousands)	2022			2021			Amount			%
Cost of revenue	$	22,988		$	27,956		$	(4,968	)		(17.8	)%
Gross profit		14,260			4,166			10,094			242.3	%
Gross margin		38.3	%		13.0	%

Cost of revenue decreased by $5.0 million, or 17.8%, from $28.0 million during 2021 to $23.0 million during 2022. The change was primarily due to the decrease in the volume of Eargo hearing aid systems shipped, partially offset by charges related to certain slow moving inventory items.

Gross margin increased to 38.3% during 2022, compared to 13.0% during 2021. The increase in gross margins is primarily due to revenue-related adjustments made in 2021, including the $34.4 million settlement amount associated with the DOJ investigation, the expected increase in product returns from customers with unsubmitted claims, as well as the approximately 2,230 Eargo hearing aid systems shipped during the year ended December 31, 2021, for which no revenue was recognized as the transactions did not meet criteria for revenue recognition.

Estimated sales returns are recorded as a reduction in revenue. The $18.2 million of estimated sales returns recorded during 2022 significantly decreased from the $37.7 million of estimated sales returns recorded during 2021. The reduction is attributable primarily to $13.3 million recorded during the year ended December 31, 2021 for estimated sales returns related to the expected increase in product returns from shipments to customers with potential insurance benefits and the reduction in the number of our gross systems shipped during the year ended December 31, 2022.

Research and development (R&D)


	Year ended December 31,				Change
(dollars in thousands)	2022		2021		Amount			%
Research and development	$	18,813	$	25,232	$	(6,419	)		(25.4	)%

R&D expenses decreased by $6.4 million, or 25.4%, from $25.2 million during 2021 to $18.8 million during 2022. The change was primarily due to the impact of decreased headcount, a net decrease of $5.5 million in personnel and personnel-related costs due in part to a decrease in stock-based compensation, primarily related to the suspension of our ESPP in November 2021 and a reduction in cumulative compensation costs of $1.8 million recognized during the year ended December 31, 2022 related to the non-achievement of certain performance targets for restricted stock units. Additionally, during the year ended December 31, 2022, there was a net decrease of $1.1 million in third-party costs subsequent to the commercial launches of Eargo 5 in July 2021 and Eargo 6 in January 2022.

Sales and marketing


	Year ended December 31,				Change
(dollars in thousands)	2022		2021		Amount			%
Sales and marketing	$	52,947	$	85,759	$	(32,812	)		(38.3	)%

Sales and marketing expenses decreased by $32.8 million, or 38.3%, from $85.8 million during 2021 to $52.9 million during 2022. The change was primarily due to decreases in direct marketing, advertising and promotional expenses of $19.5 million due to a reduction in media spend following our decision to temporarily stop accepting insurance benefits as a method of direct payment on December 8, 2021, and decreases in personnel and personnel-related costs of $13.3 million due to decreased headcount and suspension of our ESPP in November 2021.

General and administrative


	Year ended December 31,				Change
(dollars in thousands)	2022		2021		Amount		%
General and administrative	$	54,259	$	49,882	$	4,377		8.8	%

General and administrative expenses increased by $4.4 million, or 8.8%, from $49.9 million during 2021 to $54.3 million during 2022. This change was primarily due to an increase of $6.6 million in general corporate costs primarily related to legal, accounting, consulting and other professional fees driven by activities related to the DOJ investigation and compliance matters and increase in

insurance overhead costs as a result of operating as a public company, and $5.7 million in third-party costs related to the issuance of the Notes. The increase was partially offset by a net decrease in bad debt expense during the year ended December 31, 2022. During the year ended December 31, 2021 our bad debt expense was higher by $8.9 million, based on our estimate that a significant number of customers whose claims are denied by insurance providers or not submitted by us for payment may not pay for or return the hearing aid system.

Interest income


	Year ended December 31,				Change
(dollars in thousands)	2022		2021		Amount		%
Interest income	$	1,196	$	21	$	1,175	*

Interest income increased by $1.2 million, from $0.1 million during 2021 to $1.2 million during 2022. The increase in interest income was primarily attributable to the increased interest rates on cash balances during 2022.

Interest expense


	Year ended December 31,						Change
(dollars in thousands)	2022			2021			Amount		%
Interest expense	$	(549	)	$	(1,068	)	$	519		(48.6	)%

Interest expense decreased by $0.5 million, or 48.6%, from $1.1 million during 2021 to $0.6 million during 2022. The decrease in interest expense was primarily attributable to the repayment of long-term debt under our 2018 Loan Agreement in June 2022 and our accounting policy election to account for the Notes at fair value and include interest expense related to the Notes in the changes in fair value.

Change in fair value of convertible notes


	Year ended December 31,					Change
(dollars in thousands)	2022			2021		Amount			%
Change in fair value of convertible notes	$	(45,503	)	$	—	$	(45,503	)	*

The change in fair value of convertible notes payable of $45.5 million for the year ended December 31, 2022 represents the difference between the fair value of the Notes at issuance and the fair value of the Conversion Shares on the dates of settlement. Prior to the closing of the Rights Offering, the fair value of the Notes was estimated as a combination of our equity, an option on our equity valued using the Black-Scholes option pricing model, and a short position in a bond valued under the discounted cash flow model. The conversion date fair value of the Notes was estimated based on the closing price of the Company’s common stock adjusted for the impact of certain legal restrictions on the Conversion Shares.

Loss on extinguishment of debt


	Year ended December 31,					Change
(dollars in thousands)	2022			2021		Amount			%
Loss on extinguishment of debt	$	(772	)	$	—	$	(772	)	*

Loss on extinguishment of debt of $0.8 million for the year ended December 31, 2022 arose from the early repayment of long-term debt under our 2018 Loan Agreement in June 2022.

Comparison of the years ended December 31, 2021 and 2020


	Year ended December 31,						Change
(dollars in thousands)	2021			2020			Amount			%
Revenue, net	$	32,122		$	69,154		$	(37,032	)		(53.6	)%
Cost of revenue		27,956			21,873			6,083			27.8
Gross profit		4,166			47,281			(43,115	)		(91.2	)
Operating expenses:
Research and development		25,232			12,045			13,187			109.5
Sales and marketing		85,759			49,525			36,234			73.2
General and administrative		49,882			20,582			29,300			142.4
Total operating expenses		160,873			82,152			78,721			95.8
Loss from operations		(156,707	)		(34,871	)		(121,836	)		349.4
Other income (expense), net:
Interest income		21			37			(16	)		(43.2	)
Interest expense		(1,068	)		(1,920	)		852			(44.4	)
Other income (expense), net		—			(1,474	)		1,474		*
Loss on extinguishment of debt		—			(1,627	)		1,627		*
Total other income (expense), net		(1,047	)		(4,984	)		3,937			(79.0	)
Loss before income taxes		(157,754	)		(39,855	)		(117,899	)		295.8
Income tax provision		—			—			—			—
Net loss and comprehensive loss	$	(157,754	)	$	(39,855	)	$	(117,899	)		295.8	%

* Not Meaningful

Revenue, net


	Year ended December 31,				Change
(dollars in thousands)	2021		2020		Amount			%
Revenue, net	$	32,122	$	69,154	$	(37,032	)		(53.6	)%

Gross systems shipped during 2021 were 45,136, compared to 38,243 in 2020. The increase in shipment volume was largely driven by a continued expansion in national marketing efforts and customer adoption of our telecare model. However, revenue, which is reported net of consideration payable to customers and expected returns, decreased by $37.0 million, or 53.6%, from $69.2 million during the year ended December 31, 2020 to $32.1 million during the year ended December 31, 2021.

The $34.4 million settlement amount associated with the DOJ investigation was recorded as a reduction in revenue during the year ended December 31, 2021. Additionally, we estimated that a majority of customers with unsubmitted claims will choose to return the hearing aid system if their insurance provider denies their claim or the claim is ultimately not submitted by us for payment, resulting in an increase in expected product returns from such transactions that occurred prior to September 21, 2021. As a result, we recorded $13.3 million of estimated sales returns as a reduction in revenue in the third quarter of 2021 related to shipments to customers with potential insurance benefits.

Further, we did not recognize revenue and related sales returns reserve on approximately 2,230 Eargo hearing aid systems shipped during third and fourth quarters of 2021 subsequent to learning of the DOJ investigation, as these transactions did not meet the criteria for revenue recognition. We recognized revenue on approximately 42,910 Eargo hearing aid systems shipped to customers during 2021, a 12.2% increase compared to the 38,243 Eargo hearing aid systems for which revenue was recognized during 2020. The impact on revenue from an increase in the volume of shipments was offset by the $34.4 million settlement amount, the increase in expected returns from customers with potential insurance benefits and with unsubmitted claims as of December 31, 2021, and by the hearing aid systems shipped for which we did not recognize revenue.

Cost of revenue, gross profit, and gross margin


	Year ended December 31,						Change
(dollars in thousands)	2021			2020			Amount			%
Cost of revenue	$	27,956		$	21,873		$	6,083			27.8	%
Gross profit		4,166			47,281			(43,115	)		(91.2	)%
Gross margin		13.0	%		68.4	%

Cost of revenue increased by $6.1 million, or 27.8%, from $21.9 million during 2020 to $28.0 million during 2021. The change was primarily due to the increase in the volume of Eargo hearing aid systems shipped, ~~the majority of~~product mix shift towards Eargo 5 which ~~were Eargo Neo HiFi systems, which began shipping in January 2020. The increase in revenue was also attributable to~~has a higher average ~~selling price due~~product cost, and higher depreciation and software amortization related to ~~introduction of~~ the ~~Neo HiFi systems and a~~Eargo 5 commercial launch in July 2021.

Gross margin decreased to 13.0% during 2021, compared to 68.4% during 2020. The decrease in sales returns as a percentage of systems shipped, the latter of which was partially due to growth in sales to customers with health insurance coverage as such customers generally have lower return rates. Gross systems shipped during 2020 were 38,243, a 68% increase compared to the 22,787 gross systems shipped during 2019. The increase in volume was largely driven by expanded national marketing efforts in conjunction with the launch of Eargo Neo HiFi, growth in customers with health insurance coverage for hearing aids and increased customer adoption of our telecare modelmargins is primarily due to the ~~COVID-19 pandemic.~~

~~Cost of revenue, gross profit, and gross margin~~

Year ended December 31,

Change

(dollars in thousands)

2020

2019

Amount

%

Cost of revenue

$
21,873

$
15,790

$
6,083

38.5
%
Gross profit

47,281

17,000

30,281

178.1
%
Gross margin

68.4
%

51.8
%

~~Cost of revenue increased by $6.1~~$34.4 million ~~or 38.5%, from $15.8 million in 2019 to $21.9 million in 2020. The change was primarily due to an~~settlement amount associated with the DOJ investigation, the expected increase in product returns from customers with unsubmitted claims, the ~~volume of~~approximately 2,230 Eargo hearing aid systems shipped during the ~~period. In addition,~~third and fourth quarters of 2021 for which we did not recognize related revenue, and a product ~~warranty costs increased from $1.6 million in 2019 to $3.2 million in 2020~~mix shift towards Eargo 5, which has a higher cost of goods per product sold.

Estimated sales returns are recorded as a ~~result~~reduction in revenue. The $37.7 million of ~~increased~~estimated sales ~~volume and~~returns recorded during 2021 is an increase of $15.0 million from the ~~new two-year warranty coverage term associated with Neo HiFi, compared to one-year warranty coverage for prior generations~~$22.7 million of ~~Eargo hearing aid systems.~~

~~Gross margin increased to 68.4% in 2020, compared to 51.8% in 2019. The~~estimated sales returns recorded during 2020. This change ~~in gross margin percentage was~~is primarily due to an$13.3 million of estimated sales returns recorded during the third quarter of 2021 related to the expected increase in ~~the average selling price of systems shipped and a decrease in sales~~product returns ~~as a percentage of systems shipped.~~from shipments to customers with potential insurance benefits.

Research and development (R&D)


	Year ended December 31,				Change						Year ended December 31,				Change
(dollars in thousands)	2020		2019		Amount			%			2021		2020		Amount		%
Research and development	$	12,045	$	12,841	$	(796	)		(6.2	)%	$	25,232	$	12,045	$	13,187		109.5	%

R&D expenses ~~decreased~~increased by ~~$0.8~~$13.2 million, or ~~6.2%~~109.5%, from ~~$12.8 million in 2019 to~~ $12.0 million ~~in 2020.~~during 2020 to $25.2 million during 2021. The change was primarily due to a net ~~decrease~~increase of ~~$0.8~~$10.6 million in personnel and personnel-related costs, ~~resulting from~~which includes the impact of increased ~~capitalized costs associated with the development~~headcount and an increase in stock-based compensation of ~~internal use software~~$6.1 million, and a ~~decrease in travel costs due to the COVID-19 pandemic. We capitalized $2.1 million~~net increase of ~~personnel and personnel-related internal use software costs in 2020 compared to $1.1~~$1.8 million in ~~2019.~~third-party costs related to current and future product development initiatives.

Sales and marketing


	Year ended December 31,				Change					Year ended December 31,				Change
(dollars in thousands)	2020		2019		Amount		%			2021		2020		Amount		%
Sales and marketing	$	49,525	$	35,725	$	13,800		38.6	%	$	85,759	$	49,525	$	36,234		73.2	%

Sales and marketing expenses increased by ~~$13.8~~$36.2 million, or ~~38.6%~~73.2%, from ~~$35.7 million in 2019 to~~ $49.5 million ~~in 2020. The change was primarily due~~during 2020 to increases in personnel and personnel-related costs of $7.2 million and increases in direct marketing, advertising and promotional expenses of $6.6 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, including an increase of $1.4 million in stock-based compensation.

~~General and administrative~~

Year ended December 31,

Change

(dollars in thousands)

2020

2019

Amount

%

General and administrative

$
20,582

$
12,470

$
8,112

65.1
%

General and administrative expenses increased by $8.1 million, or 65.1%, from $12.5 million in 2019 to $20.6 million in 2020. This change was primarily due to an increase in general corporate, personnel and personnel-related costs of $5.0 million, an increase in bad debt expense of $2.0 million directly related to the growth in our insurance payment channel and terminated IPO costs of $1.6 million, which were partially offset by a decrease in non-capitalizable IPO readiness costs of $0.5 million. The change in personnel and personnel-related costs includes an increase of $1.7 million in stock-based compensation.

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 onset of the COVID-19 pandemic.

~~Interest income~~

Year ended December 31,

Change

(dollars in thousands)

2020

2019

Amount

%

Interest income

$
37

$
627

$
(590
)

(94.1
)%

Interest income decreased by $0.6 million, or 94.1%, from $0.6 million in 2019 to less than $0.1 million in 2020. The decrease in interest income was due to a lower average interest rate in 2020 compared to 2019.

~~Interest expense~~

Year ended December 31,

Change

(dollars in thousands)

2020

2019

Amount

%

Interest expense

$
(1,920
)

$
(711
)

$
(1,209
)

170.0
%

~~Interest expense increased by $1.2 million, or 170.0%, from $0.7~~$85.8 million during the year ended December 31, 2019 to $1.9 million during the year ended December 31, 2020. This increase was primarily attributable to interest expense on the 2020 Notes in 2020, for which there was no similar expense in 2019.

~~Other income (expense), net~~

Year ended December 31,

Change

(dollars in thousands)

2020

2019

Amount

%

Other income (expense), net

$
(1,474
)

$
(366
)

$
(1,108
)

302.7
%

~~Other expense increased by $1.1 million, or 302.7%, from $0.4 million during the year ended December 31, 2019 to $1.5 million during the year ended December 31, 2020.~~2021. The expense recorded in each period is primarily related to the change in fair value of our convertible preferred stock warrant liability, which is based in part on the fair value of our common stock. Upon the closing of our IPO in October 2020, the convertible preferred stock

~~warrants were converted into warrants to purchase common stock and the warrant liabilities were reclassified to additional paid in capital.~~

~~Loss on extinguishment of debt~~

Year ended December 31,

Change
(dollars in thousands)

2020

2019

Amount

%
Loss on extinguishment of debt

$
(1,627
)

$
—

$
(1,627
)

*

The loss on extinguishment of debt in 2020 was related to the redemption of our 2020 Notes in July 2020 in exchange for shares of Series E convertible preferred stock, which was accounted for as extinguishment of debt.

~~Comparison of the years ended December 31, 2019 and 2018~~

Year ended December 31,

Change

(dollars in thousands)

2019

2018

Amount

%

Revenue, net

$
32,790

$
23,163

$
9,627

41.6
%
Cost of revenue

15,790

11,423

4,367

38.2

Gross profit

17,000

11,740

5,260

44.8

Operating expenses:

Research and development

12,841

9,520

3,321

34.9

Sales and marketing

35,725

25,540

10,185

39.9

General and administrative

12,470

8,251

4,219

51.1

Total operating expenses

61,036

43,311

17,725

40.9

Loss from operations

(44,036
)

(31,571
)

(12,465
)

39.5

Other income (expense), net:

Interest income

627

164

463

282.3

Interest expense

(711
)

(424
)

(287
)

67.7

Other income (expense), net

(366
)

(1,403
)

1,037

(73.9
)
Loss on extinguishment of debt

—

(559
)

559

(100.0
)
Total other income (expense), net

(450
)

(2,222
)

1,772

(79.7
)
Loss before income taxes

(44,486
)

(33,793
)

(10,693
)

31.6

Income tax provision

—

—

—

—

Net loss and comprehensive loss

$
(44,486
)

$
(33,793
)

$
(10,693
)

31.6
%

~~Revenue, net~~

Year ended December 31,

Change

(dollars in thousands)

2019

2018

Amount

%

Revenue, net

$
32,790

$
23,163

$
9,627

41.6
%

Revenue increased by $9.6 million, or 41.6%, from $23.2 million in 2018 to $32.8 million in 2019. The increase was primarily due to an increase in the volume of sales as a result of our product offerings being able to meet the needs of more consumers following the introduction of Eargo Neo hearing aid system, which provides improved physical fit and audio performance. Gross systems shipped in 2019 were 22,787, a 17.6% increase compared to the 19,371 gross systems shipped in 2018. The Eargo Neo hearing aid system represented the majority of the gross systems shipped in 2019 and shipped at a higher average selling price compared to Eargo Max and Eargo Plus. The increase in revenue is also attributable to a decrease in sales returns as a percentage of systems shipped.

~~Cost of revenue, gross profit, and gross margin~~

Year ended December 31,

Change

(dollars in thousands)

2019

2018

Amount

%

Cost of revenue

$
15,790

$
11,423

$
4,367

38.2
%
Gross profit

17,000

11,740

5,260

44.8
%
Gross margin

51.8
%

50.7
%

Cost of revenue increased by $4.4 million, or 38.2%, from $11.4 million in 2018 to $15.8 million in 2019. The change was primarily due to an increase in the volume of Eargo hearing aid systems shipped. Gross margin increased to 51.8% in 2019, compared to 50.7% in 2018. 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, offset by increased warranty costs of $1.5 million and increased provisions for slow-moving, excess or obsolete inventory primarily due to the discontinuation of Eargo Plus. Product warranty costs in 2019 were $1.6 million compared to $0.1 million in 2018. There were 9,730 product warranty claims in 2019 compared to 5,700 claims in 2018. The majority of the increase in product warranty costs in 2019 is attributable to product warranty claims for Eargo Neo in the first three quarters of 2019 being fulfilled using new Eargo Neo hearing aid systems at a higher cost per claim compared to product warranty claims for Eargo Plus and Eargo Max in 2018 and 2019, the majority of which were fulfilled with refurbished hearing aid components. This was due to the Eargo Neo hearing aid refurbishment program not being established until the second half of 2019.

~~Research and development (R&D)~~

Year ended December 31,

Change

(dollars in thousands)

2019

2018

Amount

%

Research and development

$
12,841

$
9,520

$
3,321

34.9
%

R&D expenses increased by $3.3 million, or 34.9%, from $9.5 million in 2018 to $12.8 million in 2019. This change was primarily due to increases in personnel and related costs of $2.9 million due to increased headcount and increased investments in new product development of $0.3 million.

~~Sales and marketing~~

Year ended December 31,

Change

(dollars in thousands)

2019

2018

Amount

%

Sales and marketing

$
35,725

$
25,540

$
10,185

39.9
%

~~Sales and marketing expenses increased by $10.2 million, or 39.9%, from $25.5 million in 2018 to $ 35.7 million in 2019. This~~ change was primarily due to increases in direct marketing, advertising and promotional expenses of ~~$6.0~~$18.9 million, ~~as well as increases~~partially driven by increased rates due to decreased cable TV viewership in our core demographic, and an increase in personnel and personnel-related costs of ~~$3.7~~$17.3 million, ~~due~~which includes the impact of increased headcount (a trend that was reversed in the fourth quarter of 2021 as further described in the introductory paragraph to this “—Results of operations” and “—DOJ investigation and settlement and claims audits”), higher commissions from increased ~~headcount.~~sales and an increase in stock-based compensation of $9.6 million.

General and administrative


	Year ended December 31,				Change					Year ended December 31,				Change
(dollars in thousands)	2019		2018		Amount		%			2021		2020		Amount		%
General and administrative	$	12,470	$	8,251	$	4,219		51.1	%	$	49,882	$	20,582	$	29,300		142.4	%

General and administrative expenses increased by ~~$4.2~~$29.3 million, or ~~51.1%~~142.4%, from ~~$8.3~~$20.6 million ~~in 2018~~during 2020 to ~~$12.5~~$49.9 million ~~in 2019.~~during 2021. This change was primarily due to ~~increases~~an increase in general corporate costs of $14.3 million, an increase in personnel and personnel-related costs of ~~$2.0~~$9.7 million, ~~due to increased headcount~~ and ~~increases~~a net increase in bad debt expense of $7.3 million.

The change in general corporate costs ~~of $0.8 million. We also incurred non-capitalizable IPO readiness costs of $1.0~~includes $8.4 million in ~~2019,~~legal and other professional fees as a result of ~~which there were none~~the DOJ investigation as well as increased costs as a result of operating as a public company. The change in ~~2018.~~personnel and personnel-related costs includes compensation-related costs as a result of increased headcount as well as an increase in stock-based compensation of $6.3 million. The $7.3 million net increase in bad debt expense is primarily based on our estimate that, in addition to the customers who choose to return their hearing aid systems, a significant number of customers whose claims are denied by insurance providers or not submitted by us for payment may not pay for or return the hearing aid system.

85Interest expense


	Year ended December 31,						Change
(dollars in thousands)	2021			2020			Amount		%
Interest expense	$	(1,068	)	$	(1,920	)	$	852		(44.4	)%

Interest ~~income~~

Year ended December 31,

Change

(dollars in thousands)

2019

2018

Amount

%

Interest income

$
627

$
164

$
463

282.3
%

~~Interest income increased~~expense decreased by ~~$0.5~~$0.9 million, or ~~282.3%~~44.4%, from ~~$0.2~~$1.9 million ~~in 2018~~during 2020 to ~~$0.6~~$1.1 million ~~in 2019.~~during 2021. The increase in interest income was due to higher average cash and cash equivalents balances in 2019 resulting from the receipt of $52.0 million of net proceeds from our Series D convertible preferred stock issuances in December 2018 and February 2019.

~~Interest expense~~

Year ended December 31,

Change

(dollars in thousands)

2019

2018

Amount

%

Interest expense

$
(711
)

$
(424
)

$
(287
)

67.7
%

~~Interest expense increased by $0.3 million, or 67.7%, from $0.4 million in 2018 to $0.7 million in 2019. The increase~~decrease in interest expense was primarily attributable to ~~higher average term loan balances~~lower long-term debt balance outstanding ~~in 2019.~~and lower related interest rate during 2021 as compared 2020.

Other income (expense), net


	Year ended December 31,						Change					Year ended December 31,					Change
(dollars in thousands)	2019			2018			Amount		%			2021		2020			Amount		%
Other income (expense), net	$	(366	)	$	(1,403	)	$	1,037		(73.9	)%	$	—	$	(1,474	)	$	1,474	*

Other ~~expense decreased by $ 1.0 million, or 73.9%~~income (expense), ~~from $1.4 million in 2018~~net during 2020 consisted primarily of adjustments to ~~$0.4 million in 2019. The expense recorded in 2018 primarily related to the change in~~ the fair value of our convertible preferred stock ~~tranche liability, which was recognized until~~warrant liabilities prior to their reclassification to additional paid-in capital upon the closing of ~~the second tranche of the Series C convertible preferred stock financing~~our IPO in ~~March 2018, and an accrued amount for sales tax audit liability. The~~October 2020. There was no similar expense ~~recorded in 2019 primarily related to the change in fair value of our convertible preferred stock warrant liability.~~

~~Loss on extinguishment of debt~~

Year ended December 31,

Change

(dollars in thousands)

2019

2018

Amount

%

Loss on extinguishment of debt

$
—

$
(559
)

$
559

(100.0
)%

~~The loss on extinguishment of debt in 2018 related to an early repayment of an outstanding loan in June 2018.~~

~~Quarterly results of operations~~

The following table sets forth our selected unaudited quarterly consolidated statements of operations data for each of the quarters indicated. The information for each of these quarters has been prepared in accordance with GAAP, on the same basis as our audited consolidated financial statements and includes, in the ~~opinion~~comparable period of management, all adjustments, consisting of normal recurring adjustments, that are necessary for the fair presentation of the results of operations for these periods. These quarterly results of operations are not necessarily indicative of the results we may achieve in any future period. The following quarterly financial data should be read in conjunction with the consolidated financial statements and related notes included in Part II, Item 8 of this Annual Report on Form 10-K.2021.

Three months ended

(dollars in thousands)

March 31,
2019

June 30,
2019

September 30,
2019

December 31,
2019

March 31,
2020

June 30,
2020

September 30,
2020

December 31,
2020

Revenue, net

$
7,290

$
7,155

$
7,730

$
10,615

$
12,669

$
15,921

$
18,186

$
22,378

Cost of revenue

(3,823
)

(3,627
)

(3,583
)

(4,757
)

(4,656
)

(5,205
)

(5,434
)

(6,578
)
Gross profit

3,467

3,528

4,147

5,858

8,013

10,716

12,752

15,800

Operating expenses:

Research and
   development

2,669

2,893

3,219

4,060

2,809

2,208

2,871

4,157

Sales and
   marketing

7,663

7,745

9,290

11,027

10,859

10,828

12,354

15,484

General and
   administrative

2,421

2,677

3,683

3,689

6,078

3,257

5,163

6,084

Total operating
   expenses

12,753

13,315

16,192

18,776

19,746

16,293

20,388

25,725

Loss from operations

(9,286
)

(9,787
)

(12,045
)

(12,918
)

(11,733
)

(5,577
)

(7,636
)

(9,925
)
Other income
   (expense), net:

Interest income

232

187

136

72

21

2

3

11

Interest expense

(142
)

(132
)

(218
)

(219
)

(266
)

(877
)

(279
)

(498
)
Other income
   (expense), net

(27
)

(27
)

(30
)

(282
)

240

(140
)

(187
)

(1,387
)
Loss on
   extinguishment
   of debt

—

—

—

—

—

—

(1,627
)

—

Total other income
   (expense), net

63

28

(112
)

(429
)

(5
)

(1,015
)

(2,090
)

(1,874
)
Loss before income
   taxes

(9,223
)

(9,759
)

(12,157
)

(13,347
)

(11,738
)

(6,592
)

(9,726
)

(11,799
)
Income tax provision

—

—

—

—

—

—

—

—

Net loss and
   comprehensive
   loss

$
(9,223
)

$
(9,759
)

$
(12,157
)

$
(13,347
)

$
(11,738
)

$
(6,592
)

$
(9,726
)

$
(11,799
)
Other financial
   data

Gross margin

47.6
%

49.3
%

53.6
%

55.2
%

63.2
%

67.3
%

70.1
%

70.6
%

~~Quarterly revenue trends~~

The overall increase in quarterly revenue over the course of the periods presented was primarily due an increase in the volume of Eargo hearing aid systems shipped, an increase in the average selling price of systems shipped and a decrease in sales returns as a percentage of systems shipped. The increase in the volume of Eargo hearing aid systems shipped was generally driven by increased sales and marketing investments, growth in sales to customers with health insurance coverage and expanded product offerings with the introduction of the Eargo Neo hearing aids in January 2019 and Eargo Neo HiFi hearing aids in January 2020, as each introduction has allowed us to meet the needs of more consumers. We experience seasonality in our business, with revenue typically being higher in quarters when we launch new products and revenue in the fourth quarter typically being higher as a result of holiday promotional activity. Revenue increased in 2020 from continuing growth in customers with health

~~insurance coverage for hearing aids and repeat customers, and increased customer adoption of our telecare model amid the COVID-19 pandemic.~~

~~Quarterly cost of revenue and gross margins trends~~

The overall increase in the quarterly cost of revenue over the periods presented was primarily the result of the growth in Eargo hearing aid systems shipped. Our quarterly gross margins increased from 47.6% to 70.6% over the periods presented. Sales returns as a percentage of systems shipped generally improved over the periods presented, resulting in increases in gross margins. The increase in gross margins in the quarter ended December 31, 2019, as compared to the prior quarter, was partially offset by an increase in the provisions for slow-moving, excess or obsolete inventory primarily due to the discontinuation of Eargo Plus. The increase in gross margins throughout 2020 was primarily due to an increase in the average selling prices of systems shipped as a result of the launch of Neo HiFi in January 2020 and decreases in sales returns as a percentage of systems shipped.

~~Quarterly operating expenses trends~~

The overall increase in quarterly operating expenses over the course of the periods presented was primarily due to increased headcount in connection with the expansion of our business, increased investments in new product development and increased direct marketing, advertising and promotional expenses to promote our products and increase brand awareness. We have experienced seasonality in our business, with operating expenses in the fourth quarter typically being higher as a result of holiday promotional activity. Furthermore, operating expenses also increased in the quarter ended March 31, 2020, as compared to the prior quarter due to the recording of previously deferred costs associated with the termination of our IPO process. Operating expenses decreased in the quarter ended June 30, 2020, as compared to the prior quarter due to measures taken to reduce net costs including, but not limited to, professional and legal fees, IPO readiness costs and personnel-related costs in response to the COVID-19 pandemic. Operating expenses increased in subsequent quarters due to the factors noted above as well as increased bad debt expense directly related to the growth in our insurance payment channel and increased stock-based compensation as compared to prior quarters.

Liquidity and capital resources

Sources of liquidity and operating capital requirements

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 revenue from the sale of our products.

On ~~October 20, 2020,~~June 28, 2022 (the “First Tranche Closing”), we completed the initial issuance of $100.0 million aggregate principal amount of Notes (the “First Tranche Notes”). The Notes were secured by a first-priority lien on substantially all our ~~IPO, pursuant~~assets, including our intellectual property. We used approximately $16.2 million of the net proceeds from the First Tranche Notes issuance to ~~which we sold~~repay all existing third-party indebtedness and related pay-off expenses.

Pursuant to the Note Purchase Agreement, the PSC Stockholder agreed to purchase up to an additional $25.0 million of Notes if the Company completed the Rights Offering within 150 days after the First Tranche Closing and the existing stockholders of Eargo subscribed to purchase less than 3,750,000 shares of newly issued common stock in such Rights Offering.

The Rights Offering expired on November 17, 2022 and existing stockholders of Eargo subscribed for an aggregate of ~~9,029,629~~approximately 2.9 million shares of common stock. On November 23, 2022, the Rights Offering was consummated, and we received net proceeds of approximately $27.6 million from existing stockholders. In accordance with the terms of the Note Purchase Agreement, on November 25, 2022, the PSC Stockholder purchased an additional approximately $5.5 million of aggregate principal amount of Notes (the “Second Tranche Notes”).

On November 23, 2022, the First Tranche Notes converted into an aggregate of 15,000,000 shares of our common stock, ~~at a price~~and on November 25, 2022 the Second Tranche Notes converted into an aggregate of ~~$18.00 per share, resulting~~821,299 shares of our common stock, in ~~net proceeds~~each case pursuant to the Note Purchase Agreement. Following such conversion, the PSC Stockholder beneficially owned approximately 76.3% of ~~$148.5 million after deducting underwriting discounts, commissions and offering expenses.~~

~~Funding requirements~~

the outstanding common stock. As of December 31, ~~2020,~~2022, we had no debt outstanding.

As of December 31, 2022, we had cash and cash equivalents of ~~$212.2~~$101.2 million, which are available to fund ~~operations,~~our operations. Cash and cash equivalents include amounts deposited in financial institutions regulated by the FDIC. The FDIC insures cash deposits of up to $250,000. We regularly maintain cash balances in deposit accounts in excess of the FDIC insured limits. Additionally, our cash equivalents are held in accordance with cash sweep arrangements with financial institutions, which amounts are invested in money market accounts that are neither included on the balance sheets of such financial institutions nor insured by the FDIC. According to our cash sweep arrangements, we believe we should be recognized by the FDIC as the owner of such assets in the event of such financial institution’s failure, such as the March 10, 2023 closure of SVB. While we have regained access to our funds at SVB and are evaluating our banking relationships, future disruptions of financial institutions where we bank or disruptions of the financial services industry in general could adversely affect our ability to access our cash and cash equivalents. If we are unable to access our cash and cash equivalents as needed, our financial position and ability to operate our business could be adversely affected. In addition, even if we lack exposure to the uncertainty or volatility of one or more financial institutions, the impact of financial institution volatility on our partners, customers or suppliers may also impact our business and financial condition.

Our net losses were $157.5 million, $157.8 million and $39.9 million for the years ended December 31, 2022, 2021 and 2020, respectively. We had an accumulated deficit of $199.1 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.

~~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.

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. Our ability to borrow any additional principal pursuant to the 2018 Loan expired unused on December 31, 2020. As of December 31, 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 December 31, 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$514.3 million as of December 31, ~~2020,~~2022. We expect to incur additional substantial losses in the foreseeable future. We believe that without any future financing, our current resources are insufficient to satisfy our obligations as they become due ~~upon~~within one year after the ~~earliest~~date that the financial statements are issued. Our negative cash flows and current lack of ~~maturity, acceleration, prepayment~~financial resources raise substantial doubt as to our ability to continue as a going concern.

We anticipate our future operating requirements will be substantial and that we will need to raise significant additional resources to fund our operations through equity or ~~termination~~debt financing, or some combination thereof. We are currently exploring fundraising opportunities to meet these capital requirements. If we are unable to raise additional funding to meet our operational needs, we will be forced to limit or cease our operations.

In addition to our current capital needs, we regularly consider fundraising opportunities and may decide, from time to time, to raise capital based on various factors, including market conditions and our plans of operation. We may seek funds through borrowings or through additional rounds of financing, including private or public equity or debt offerings. Uncertainty in the ~~2018 Loan.~~

~~Under~~market generally due to increasing interest rates and inflation may make it challenging to raise additional capital, and such capital may not be available to us on acceptable terms on a timely basis, or at all. If adequate funds are not available, or if the terms of potential funding sources are unfavorable, our business and our ability to develop our technology and our products would be harmed. Furthermore, any new equity or convertible debt securities we issue may result in the ~~2018 Loan, we granted SVB first priority liens and security interests in substantially all~~dilution of our ~~assets~~stockholders, and any debt financing may include covenants that restrict our business.

Our expected future capital requirements and ability to raise additional capital will depend on many forward-looking factors, including but not limited to the following:

•

investor confidence in our ability to continue as ~~collateral, excluding~~a going concern;

•

the timing, receipt and amount of sales from our ~~intellectual property. The 2018 Loan also contains certain representations~~current and ~~warranties, indemnification provisions~~future products;

•

the costs involved in ~~favor~~resolving third-party claims audits, as well as other legal proceedings (including the shareholder class action and derivative actions discussed in Note 6 to the Consolidated Financial Statements included in this Annual Report on Form 10-K), and their duration and impact on our business generally;

•

the availability of ~~SVB, affirmative~~insurance coverage for our hearing aid devices, and ~~negative covenants (including, among~~any costs associated with reimbursement and compliance, including following the implementation of the OTC Final Rule (which may lead insurance providers to take actions limiting our ability to access insurance coverage), and any resulting changes to our business model, including a potential long-term shift to a model that generally excludes insurance benefits as a method of direct payment to Eargo, which would likely result in a sustained increased cost of customer acquisition;

•

the cost and timing of expanding our sales, marketing and distribution capabilities;

•

any expenses, as well as the impact to our business and operating model, as a result of changes in the regulatory landscape for hearing aid devices;

•

the cost of manufacturing, either ourselves or through third-party manufacturers, our products;

•

the terms, timing and success of any other ~~things, limitations on~~licensing, partnership, omni-channel, including retail, or other ~~indebtedness, liens, encumbrances on~~arrangements that we may establish;

•

any product liability or other lawsuits related to our current or future products;

•

the expenses needed to attract, hire and retain skilled personnel;

•

the extent of our spending to support research and development activities and the expansion of our product offerings;

•

the costs associated with being a public company;

•

the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing our intellectual property ~~acquisitions, investments~~portfolio; and ~~dividends and requirements relating~~

•

the extent 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 impairmentwhich we acquire or invest in businesses.

Our liquidity is subject to various risks, including the risks identified in the ~~perfection or priority~~section titled “Risk Factors” in Item 1A of Part I. While the extent to which we are able to validate and establish additional processes to support the submission of claims for reimbursement to health plans, including those under the FEHB program, and the future impacts of the ~~lender’s security interest~~implementation of the FDA’s new OTC hearing aid regulatory framework (which may lead insurance providers to take actions limiting our ability to access insurance coverage) are difficult to assess or predict at this time, since the announcement of the DOJ investigation and our related decision to temporarily stop accepting insurance benefits as a method of direct payment between December 8, 2021 and September 15, 2022, there has been and may continue to be a significant reduction in shipments, revenue and gross margin which could in the ~~collateral,~~future negatively impact our liquidity and ~~events relating~~working capital, including by impacting our ability to ~~bankruptcy or insolvency).~~access any additional capital.

~~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

8973

~~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.

Cash flows

The following table summarizes our cash flows for the periods indicated:


	Year ended December 31,									Twelve months ended December 31,
(in thousands)	2020			2019			2018			2022			2021
Net cash used in operating activities	$	(26,041	)	$	(39,108	)	$	(27,149	)	$	(117,304	)	$	(98,456	)
Net cash used in investing activities		(5,079	)		(3,859	)		(2,547	)		(3,087	)		(7,587	)
Net cash provided by financing activities		229,921			5,150			71,728			111,129			4,358
Net increase (decrease) in cash	$	198,801		$	(37,817	)	$	42,032
Net decrease in cash and cash equivalents										$	(9,262	)	$	(101,685	)

Operating activities

In ~~2020,~~2022, cash used in operating activities was ~~$26.0~~$117.3 million, attributable to a net loss of ~~$39.9~~$157.5 million, partially offset by non-cash charges of $69.4 million and a net change in our net operating assets and liabilities of ~~$1.9~~$29.2 million. Non-cash charges primarily consisted of $45.5 million related to the change in fair value of convertible notes, $10.0 million in stock-based compensation, $5.7 million in debt issuance costs from convertible notes, $5.5 million in depreciation and amortization expense, $1.1 million in non-cash operating lease expense, $0.8 million in loss on extinguishment of debt, and $0.7 million in bad debt expense. The change in our net operating assets and liabilities was primarily due to the payment of $34.4 million settlement liability associated with the DOJ investigation, a $9.9 million decrease in sales returns reserve and a $2.8 million decrease in accounts payable. These changes were partially offset by a $9.9 million decrease in accounts receivable, a $4.3 million decrease in prepaid expenses and other current and noncurrent assets, a $3.7 million increase in accrued expenses and a $0.7 million decrease in inventories.

In 2021, cash used in operating activities was $98.5 million, attributable to a net loss of $157.8 million, partially offset by non-cash charges of ~~$15.7~~$43.2 million and a net change in our net operating assets and liabilities of $16.1 million. Non-cash charges primarily consisted of ~~$5.1~~$27.7 million in stock-based compensation ~~$2.5~~that includes the amounts recorded upon the suspension of the ESPP in the fourth quarter of 2021, $9.6 million in bad debt expense, $4.2 million in depreciation and amortization ~~$2.4 million in bad debt~~ expense, related to our insurance payment channel, $1.6 million in loss on extinguishment of debt, $1.5 million in non-cash interest expense and amortization of debt discount, $1.5 million from the change in fair value of financial instruments primarily due to the change in fair value of our warrant liability and $1.1 million in non-cash operating lease expense. The change in our net operating assets and liabilities was primarily due to the $34.4 million settlement liability associated with the DOJ investigation, a ~~$4.1~~$9.5 million increase in sales returns reserve, and a $3.1 million increase in accounts payable. These changes were partially offset by a $18.4 million increase in accounts receivable, ~~related to an increase sales volume and growth in customers with health insurance coverage,~~ a ~~$2.1~~$7.4 million increase in prepaid expenses and other current and noncurrent assets ~~primarily related to an increase in prepaid insurance, a $1.2 million decrease in lease liabilities~~ and a ~~$0.4 million decrease in deferred revenue. These changes were partially offset by a $4.5~~$3.0 million increase in accrued expenses primarily related to an increase in accrued compensation, a $0.7 million increase in other current liabilities, a $0.5 million decrease in other assets and a $0.2 million increase in accounts payable.inventories.

In 2019, cash used in operating activities was $39.1 million, attributable to a net loss of $44.5 million, partially offset by non-cash charges of $3.5 million and by a net change in our net operating assets and liabilities of $1.9 million. Non-cash charges primarily consisted of $1.5 million in depreciation and amortization, $1.3 million in stock-based compensation, $0.3 million in non-cash interest expense and amortization of debt discount and $0.3 million from the change in fair value of financial instruments due to the change in fair value of our warrant liability. The change in our net operating assets and liabilities was primarily due to a $3.7 million increase in accrued expenses, a $0.5 million increase in deferred revenue balance and a $0.2 million increase in accounts payable; the increase in accrued expenses was primarily due to increases in accrued vendor costs, accrued compensation and accrued warranty reserves, which were partially offset by a decrease in the allowance for sales returns. These changes were partially offset by a $1.1 million increase in accounts receivable, $0.7 million increase in inventories to support the growth in sales, $0.4 million increase in other assets, and $0.2 million increase in prepaid expenses and other current assets.

In 2018, cash used in operating activities was $27.1 million, attributable to a net loss of $33.8 million, partially offset by a net change in our net operating assets and liabilities of $4.3 million, and by non-cash charges of $2.3 million. Non-cash charges primarily consisted of $0.7 million in depreciation and amortization, $0.6 million due to the loss on extinguishment of debt, $0.5 million from the change in fair value of financial instruments primarily due to the change in the fair value of our convertible preferred stock tranche liability, $0.4 million in stock-based compensation, and $0.1 million in non-cash interest expense and amortization of debt discount. The change in our net operating assets and liabilities was primarily due to a $2.8 million increase in accrued expense related to allowance for sales returns due to increased sales, accrued payroll and benefits as a result of increased headcount and amounts due to customers for returned products, $2.5 million increase in accounts payable due to timing of vendor payments, $1.5 million increase in other current liabilities, $0.2 million increase in other long-term liabilities and $0.2 million increase in deferred revenue balance. These changes were partially offset by a $1.8 million increase in inventories to support the growth in our business operations, $0.5 million increase in prepaid expenses and other current assets, $0.3 million increase in accounts receivable due to increased sales at year end and $0.3 million increase in other assets primarily related to security deposit for the new office in 2018.

Investing activities

In ~~2020,~~2022, cash used in investing activities was ~~$5.1~~$3.1 million, which consisted of ~~$3.5~~$2.8 million related to the purchase of property and equipment and $0.3 million in payments for costs related to the development of internal use software capitalized during 2021.

In 2021, cash used in investing activities was $7.6 million, which consisted of $3.8 million in capitalized costs related to the development of internal use software, $2.9 million in cash paid for acquisition of a business, and ~~$1.6~~$0.9 million related to the purchase of property and equipment.

In 2019, cash used in investing activities was $3.9 million, which consisted of $2.2 million related to the purchase of property and equipment and $1.7 million in capitalized costs related to the development of internal use software.

In 2018, cash used in investing activities was $2.5 million, which consisted of $1.7 million related to the purchase of property and equipment and $0.8 million in capitalized costs related to the development of internal use software.

Financing activities

In ~~2020,~~2022, cash provided by financing activities was ~~$229.9 million,~~$111.1 million. This was primarily attributable to ~~$148.5 million in net proceeds received in our IPO, $67.9~~$99.7 million in net proceeds from issuance of the Notes and $27.6 million in net proceeds from issuance of our ~~Series E convertible preferred~~common stock ~~$19.6~~upon the Rights Offering closing, offset by $16.2 million ~~in borrowings~~relating to the repayment of long-term debt under ~~our term loan~~the 2018 Loan Agreement.

In 2021, cash provided by financing activities was $4.4 million. This was primarily attributable to $2.7 million from employee stock purchase plan purchases and ~~PPP loan, $10.1 million in proceeds from the issuance of convertible notes, and $1.2~~$1.7 million from the exercise of stock ~~options, partially offset by $17.3 million in debt repayments, which includes repayment of our PPP loan.~~options.

In 2019, cash provided by financing activities was $5.2 million, attributable to gross proceeds of $5.0 million from borrowings on our 2018 Loan and net proceeds of $0.9 million from the issuance of our Series D convertible preferred stock, partially offset by $0.8 million in payments of deferred offering costs related to our planned IPO.

In 2018, cash provided by financing activities was $71.7 million. This was attributable to the net proceeds of $72.4 million from the issuance of our Series C and Series D convertible preferred stock and gross proceeds of $7.0

~~million from borrowings on our 2018 Loan, partially offset by $7.7 million in repayment of principal and related fees on a prior loan entered into in 2014.~~

~~Contractual obligations and commitments~~

~~The following table summarizes our contractual obligations and commitments as of December 31, 2020:~~

Payments due by period

(in thousands)

Total

Less than
1 year

1-3
years

3-5
years

More than
5 years

Operating lease obligations

$
1,241

$
1,074

$
167

$
—

$
—

Debt, principal and interest(1)

$
17,662

$
646

$
3,950

$
7,038

$
6,028

Total

$
18,903

$
1,720

$
4,117

$
7,038

$
6,028

¹⁾

We borrowed $15.0 million pursuant to a term loan under the 2018 Loan. Principal payments associated with the 2018 Loan are included in the above table. Interest expense is included in the above table based on obligations outstanding and rates effective as of December 31, 2020, including a final one-time payment of $0.9 million in September 2024.

~~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. Our significant accounting policies and methods used in the preparation of our consolidated financial statements are described in Note 2 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

The preparation of ~~these~~the 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. The estimates, assumptions and judgments described below involve a substantial level of estimation uncertainty and as a result have had or are reasonably likely to have a material impact on our consolidated financial statements, results of operations and financial condition. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.

While our significant accounting policies are more fully described in the Note 2 to our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following discussion addresses our most critical accounting policies,74

Revenue recognition—sales returns reserve

Revenue is recorded net of expected returns, which are ~~those that are most important to our financial condition and results of operations and require our most difficult, subjective and complex judgments.~~

~~Revenue recognition~~

We generate revenue from the sale of Eargo hearing aid systems, accessories and extended warranties directly to consumers. Our products are primarily sold through our website and sales representatives. For product sales, control is transferred upon shipment to the customer. The extended warranties sold to consumers covers 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 timeestimated based on ~~time elapsed throughout the extended warranty period.~~

~~Each product is sold with a 45-day right~~analysis of ~~return. We account for the estimated impact of any returns as a reduction of transaction price. To estimate product sales that will be returned (i.e., variable consideration), we analyze~~various factors including historical returns, current economic trends, and changes in customer demand. ~~Based~~

As of December 31, 2022 and 2021, we recorded a sales returns reserve of $3.9 million and $13.8 million, respectively, in the consolidated balance sheets. We recorded $18.2 million of estimated sales returns as a reduction in revenue during 2022 based on our estimated returns of products sold during the year, which includes $13.3 million recorded during the third quarter of 2021 primarily based on our estimate that a majority of customers with unsubmitted claims will choose to return the hearing aid system if their insurance provider denies their claim or the claim is ultimately not submitted by us for payment (as further described in “—DOJ investigation and settlement and claims audits”). See also the caption “Sales returns reserve” under Note 4 of the Notes to the Consolidated Financial Statements included in this ~~information,~~Annual Report on Form 10-K. The estimated sales returns recorded during the third quarter of 2021 included $5.1 million related to transactions that occurred during the first and second quarters of 2021. These estimates are inherently subject to estimation uncertainty because they assume the potential actions that a substantial number of our insurance pay customers may take as a result of the unavailability of insurance benefits as a direct payment method, which increases the probability of higher returns. If actual returns differ from our estimates or new factors arise indicating a rate of return that is different from our original estimate, an adjustment to revenue in a subsequent period will be recorded, which could have a material impact on our results of operations.

Accounts receivable—estimated credit losses

Accounts receivable is recorded net of an allowance for expected credit losses, which is based on our historical collection experience, current and future economic market conditions and a review of the current aging status and financial condition of our customers.

As of December 31, 2022 and 2021, we ~~reserve~~recorded an allowance for credit losses of $0.2 million and $4.8 million, respectively, in the consolidated balance sheets. We recorded $0.7 million and $9.6 million in bad debt expense during the years ended December 31, 2022 and 2021, respectively. Bad debt expense recorded in 2021 was primarily based on our estimate that, in addition to the customers who choose to return their hearing aid systems, a ~~percentage~~significant number of ~~each dollar of product sales that provide the customer~~customers with ~~the~~an extended right of ~~return. The transaction price includes an estimate~~return whose claims are denied by insurance providers or are not submitted by us for payment may not pay for or return the hearing aid system. Of the $9.6 million recorded to bad debt expense during the year ended December 31, 2021, $5.8 million relates to submitted claims that have been denied or have not been paid and were written off during 2021. During the year ended December 31, 2022, we released $4.5 million from the allowance for credit losses balance as part of ~~variable consideration up~~the Pricing Concession. See the captions “DOJ investigation and settlement and claims audits” and “Allowance for credit losses” in the Notes 1 and 4 to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

As similarly described in “Revenue recognition—sales returns reserve” above, estimates with respect to the ~~amount for which~~actions of our customers, in this case relating to non-payment, are subject to estimation uncertainty, particularly because any attempt to predict the behavior of individual customers can be affected by a variety of external factors. If actual credit losses differ from our estimates or new factors arise indicating credit losses that are different from our original estimate, it ~~is probable that~~could have a ~~significant reversal in the amount~~material impact on our future operating expenses and results of ~~cumulative revenue recorded will not occur once the uncertainties surrounding the variable consideration are resolved.~~operations.

~~Revenue is recognized when a customer obtains control~~Stock-based compensation—valuation of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.equity awards

~~Stock-based compensation~~

We recognize compensation costs related to stock-based awards granted, including stock options, purchase rights granted under the employee stock purchase plan and restricted stock units, based on the estimated fair value of the awards on the date of grant. ~~The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.~~The valuation model used for calculating the estimated fair value of stock options and purchase rights granted under the employee stock purchase plan is the Black-Scholes option-pricing model. The Black-Scholes model requires us to make assumptions and judgments about the variables used in the calculations, including the expected term (weighted-average period of time that the stock-based awards are expected to be outstanding), the expected volatility of our common stock, the related risk-free interest rate and the expected dividend. We have elected to recognize forfeitures of stock options as they occur.

For option awards issued to non-employees, we record expense related to stock options based on the fair value of the options calculated using the Black-Scholes option-pricing model over the service performance period.

The Black-Scholes option-pricing model requires the use of highly subjective assumptions which determine the fair value of stock-based awards. These assumptions include:

•

Fair value of common stock. For grants prior to our IPO in October 2020, the fair value of our common stock underlying share-based awards was estimated on each grant date by our board of directors. In order to determine the fair value of our common stock underlying option grants, our board of directors considered, among other things, valuations of our common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. For all grants subsequent to our IPO in October 2020, the fair value of common

stock was determined by using the closing price per share of common stock as reported on the Nasdaq Global Select Market.

•

Expected term. The expected term represents the period that share-based awards are expected to be outstanding. The expected term for option grants is determined using the simplified method. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the share-based awards.

•

Expected volatility. Since we had been privately held and did not have any trading history for our common stock and subsequent to our IPO have limited trading history for our common stock, the expected volatility was estimated based on the average volatility for comparable publicly traded companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, stage in the life cycle or area of specialty.

•

Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.

•

Expected dividend. We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero.

Recent accounting pronouncements

See Note 2 to our consolidated financial statements appearing under Part II, Item 8 for more information about recent accounting pronouncements, the timing of their adoption, and our assessment.

~~JOBSAct 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.

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 may not be comparable to companies that comply with new or revised accounting pronouncements

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Interest rate risk

Our cash and cash equivalents as of December 31, ~~2020~~2022 consists of ~~$212.2~~$101.2 million in bank deposits and money market funds. Such interest-earning instruments carry a degree of interest rate risk. The goals of our investment policy are liquidity and capital preservation; we do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate exposure. We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates due to the short-term nature of our cash and cash equivalents.

As of December 31, ~~2020~~2021, we had $15.0 million in variable rate debt outstanding. ~~The~~On June 28, 2022 in connection with the Note Transaction, we repaid all amounts outstanding and terminated the 2018 Loan matures in September 2024 and has interest-only payments until July 2022. The 2018 Loan accrues interest at a floating per annum rate equal to the Wall Street Journal prime rate plus 1.00% with a floor of 0.00% (4.25% asAgreement. As of December 31, ~~2020).~~2022, we had no debt outstanding. Refer to Note 8 to our Consolidated Financial Statements included in this Annual Report on Form 10-K for more information regarding the Note Purchase Agreement and related transactions.

Item 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34)	96
	78
Consolidated Balance Sheets	97
	80
Consolidated Statements of Operations and Comprehensive Loss	98
	81
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity ~~(Deficit)~~	99
	82
Consolidated Statements of Cash Flows	~~100~~
	84
Notes to Consolidated Financial Statements	~~101~~85

9577

~~Report of Independent Registered Public Accounting Firm~~

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of Eargo, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Eargo, Inc. and ~~its subsidiary~~subsidiaries (the "Company") as of December 31, ~~2020~~2022 and ~~2019,~~2021, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders' equity, ~~(deficit),~~ and cash flows for each of the three years in the period ended December 31, ~~2020,~~2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, ~~2020~~2022 and ~~2019,~~2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2020,~~2022, in conformity with accounting principles generally accepted in the United States of America.

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company's losses, negative cash flows and current lack of financial resources raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the ~~Public Company Accounting Oversight Board (United States) (PCAOB)~~PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Description of Business and other matters – Pricing Concession – Refer to Notes 1, 2, and 4 to the financial statements

Critical Audit Matter Description

As of December 31, 2021, the Company recorded a sales returns reserve as a result of an offer to customers with potential insurance coverage the option to return their hearing aids. The Company also recorded an allowance for credit losses related to all outstanding insurance claims receivable as of December 31, 2021.

In September 2022, the Company made the determination not to seek payment for approximately $16.1 million from customers with unsubmitted and unpaid insurance claims for customers with potential insurance coverage, which was accounted for as a pricing concession (the “Pricing Concession”).

We identified management’s accounting evaluation and conclusions around the Pricing Concession as a critical audit matter due to the significant judgments required by management to appropriately account for the Pricing Concession. This required a high degree of auditor judgment and an increased extent of effort, including the involvement of professionals in our firm having expertise in revenue recognition when performing audit procedures to evaluate the accounting conclusions and amounts recorded.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the accounting evaluation and conclusions around the Pricing Concession related to unsubmitted and unpaid insurance claims included the following, among others:

•

With the assistance of professionals in our firm having expertise in revenue recognition, we evaluated the Company’s accounting considerations and conclusions under accounting principles generally accepted in the United States of America (“GAAP”), regarding the accounting for the Pricing Concession.

•

We evaluated whether the assertions and assumptions made by management supporting their conclusions regarding the Price Concession were consistent with the evidence obtained in other areas of the audit.

Rights Offering and debt obligations – the Notes – Refer to Notes 1, 2, 3, and 8 to the financial statements

Critical Audit Matter Description

The Company entered into a note purchase agreement with Patient Square Capital (“PSC”) in June of 2022. This agreement contained the right for PSC to convert their debt into equity. The Company elected to use the fair value option to account for the notes that were issued in June 2022 and remeasured the underlying liability through the notes conversion on November 23 and 25, 2022.

We identified the accounting related to the issuance and reacquisition of the notes to be a critical audit matter due to the significant judgments required by management to appropriately account for the issuance and reacquisition of the notes. This required a high degree of auditor judgment and an increased extent of effort, including the involvement of professionals in our firm having expertise in debt and financial instruments when performing audit procedures to evaluate the accounting conclusions and amounts recorded.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the accounting evaluation related to the issuance and reacquisition of the notes included the following, among others:

•

With the assistance of professionals in our firm having expertise in debt and financial instruments, we evaluated the Company’s accounting considerations and conclusions under accounting principles generally accepted in the United States of America (“GAAP”), regarding the accounting for the issuance and reacquisition of the notes.

•

We evaluated whether the assertions and assumptions made by management supporting their conclusions regarding the issuance and reacquisition of the notes were consistent with the underlying note agreement and the evidence obtained in other areas of the audit.

/s/ ~~DELOITTE~~Deloitte & ~~TOUCHE~~Touche LLP

San Jose, California

March ~~16, 2021~~23, 2023

We have served as the ~~Company's~~Company’s auditor since 2018.

9679

Eargo, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

December 31,

December 31,

2020

2019

ASSETS

Current assets:

Cash and cash equivalents

$
212,185

$
13,384

Accounts receivable, net

3,793

2,051

Inventories

2,739

2,880

Prepaid expenses and other current assets

3,740

1,598

Total current assets

222,457

19,913

Operating lease right-of-use assets

1,079

—

Property and equipment, net

8,034

5,400

Other assets

1,062

1,992

Total assets

$
232,632

$
27,305

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND
   STOCKHOLDERS’ EQUITY (DEFICIT)

Current liabilities:

Accounts payable

$
6,020

$
5,428

Accrued expenses

13,909

9,939

Long-term debt, current portion

—

4,800

Other current liabilities

2,448

1,717

Deferred revenue, current portion

311

406

Lease liability, current portion

1,030

—

Total current liabilities

23,718

22,290

Lease liability, noncurrent portion

166

—

Deferred revenue, noncurrent portion

—

269

Long-term debt, noncurrent portion

14,837

7,446

Convertible preferred stock warrant liability

—

396

Other liabilities

—

127

Total liabilities

38,721

30,528

Commitments and contingencies (Note 5)

Convertible preferred stock, $0.0001 par value; zero and 36,269,166 shares
   authorized as of December 31, 2020 and 2019, respectively; zero
   and 11,825,812 shares issued and outstanding as of December 31, 2020
   and 2019, respectively

—

152,880

Stockholders’ equity (deficit):

Preferred stock, $0.0001 par value per share; 5,000,000 and zero shares
   authorized as of December 31, 2020 and 2019, respectively; zero shares
   issued and outstanding as of December 31, 2020 and 2019, respectively

—

—

Common stock; $0.0001 par value; 110,000,000 and 55,190,000 shares
   authorized as of December 31, 2020 and 2019, respectively; 38,246,601
   and 265,943 shares issued and outstanding as of December 31, 2020
   and 2019, respectively

4

—

Additional paid in capital

392,965

3,100

Accumulated deficit

(199,058
)

(159,203
)
Total stockholders’ equity (deficit)

193,911

(156,103
)
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

$
232,632

$
27,305


	December 31,			December 31,
	2022			2021
ASSETS
Current assets:
Cash and cash equivalents	$	101,238		$	110,500
Accounts receivable, net		1,910			12,547
Inventories		5,036			5,712
Prepaid expenses and other current assets		7,846			10,873
Total current assets		116,030			139,632
Operating lease right-of-use assets		5,765			7,165
Property and equipment, net		7,441			9,551
Intangible assets, net		1,063			1,681
Goodwill		873			873
Other assets		906			1,209
Total assets	$	132,078		$	160,111
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,504		$	9,053
Accrued expenses		12,715			9,235
Sales returns reserve		3,942			13,827
Settlement liability		—			34,372
Long-term debt, current portion		—			3,333
Other current liabilities		1,462			1,813
Lease liability, current portion		628			750
Total current liabilities		25,251			72,383
Lease liability, noncurrent portion		5,973			6,640
Long-term debt, noncurrent portion		—			11,924
Total liabilities		31,224			90,947
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.0001 par value per share; 5,000,000 shares authorized as of December 31, 2022 and December 31, 2021, respectively; zero shares issued and outstanding as of December 31, 2022 and December 31, 2021, respectively		—			—
Common stock; $0.0001 par value; 450,000,000 and 110,000,000 shares authorized as of December 31, 2022 and December 31, 2021, respectively; 20,726,965 and 1,965,347 shares issued and outstanding as of December 31, 2022 and December 31, 2021, respectively		2			—
Additional paid-in capital		615,151			425,976
Accumulated deficit		(514,299	)		(356,812	)
Total stockholders’ equity		100,854			69,164
Total liabilities and stockholders’ equity	$	132,078		$	160,111

The accompanying notes are an integral part of these consolidated financial statements.

9780

Eargo, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)


	Year ended December 31,									Year ended December 31,
	2020			2019			2018			2022			2021			2020
Revenue, net	$	69,154		$	32,790		$	23,163		$	37,248		$	32,122		$	69,154
Cost of revenue		21,873			15,790			11,423			22,988			27,956			21,873
Gross profit		47,281			17,000			11,740			14,260			4,166			47,281
Operating expenses:
Research and development		12,045			12,841			9,520			18,813			25,232			12,045
Sales and marketing		49,525			35,725			25,540			52,947			85,759			49,525
General and administrative		20,582			12,470			8,251			54,259			49,882			20,582
Total operating expenses		82,152			61,036			43,311			126,019			160,873			82,152
Loss from operations		(34,871	)		(44,036	)		(31,571	)		(111,759	)		(156,707	)		(34,871	)
Other income (expense), net:
Interest income		37			627			164			1,196			21			37
Interest expense		(1,920	)		(711	)		(424	)		(549	)		(1,068	)		(1,920	)
Other income (expense), net		(1,474	)		(366	)		(1,403	)		—			—			(1,474	)
Change in fair value of convertible notes											(45,503	)		—			—
Loss on extinguishment of debt		(1,627	)		—			(559	)		(772	)		—			(1,627	)
Total other income (expense), net		(4,984	)		(450	)		(2,222	)		(45,628	)		(1,047	)		(4,984	)
Loss before income taxes		(39,855	)		(44,486	)		(33,793	)		(157,387	)		(157,754	)		(39,855	)
Income tax provision		—			—			—			100			—			—
Net loss and comprehensive loss	$	(39,855	)	$	(44,486	)	$	(33,793	)	$	(157,487	)	$	(157,754	)	$	(39,855	)
Gain on extinguishment of Series C and Series C-1 convertible preferred stock											—			—			9,840
Net loss attributable to common stockholders, basic and diluted	$	(30,015	)	$	(44,486	)	$	(33,793	)	$	(157,487	)	$	(157,754	)	$	(30,015	)
Net loss per share attributable to common stockholders, basic and diluted	$	(3.80	)	$	(173.47	)	$	(149.69	)	$	(39.68	)	$	(81.11	)	$	(76.10	)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted		7,890,375			256,452			225,754			3,968,432			1,944,857			394,405

The accompanying notes are an integral part of these consolidated financial statements.

Eargo, Inc.

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity ~~(Deficit)~~

(In thousands, except share amounts)

Convertible preferred stock

Common stock

Additional
paid-in

Accumulated

Total
stockholders’

Shares

Amount

Shares

Amount

capital

deficit

equity (deficit)

Balance December 31, 2017

5,547,765

$
79,129

224,074

$
—

$
1,259

$
(80,924
)

$
(79,665
)
Issuance of Series C convertible preferred
   stock, net of issuance costs of $159

2,381,336

21,320

—

—

—

—

—

Settlement of Series C convertible
   preferred stock tranche liability on
   second tranche closing of Series C
   convertible preferred stock

—

479

—

—

—

—

—

Issuance of Series D convertible preferred
   stock, net of issuance costs of $163

3,832,058

51,087

—

—

—

—

—

Stock-based compensation

—

—

—

—

449

—

449

Exercise of stock options

—

—

7,757

—

10

—

10

Net loss and comprehensive loss

—

—

—

—

—

(33,793
)

(33,793
)
Balance December 31, 2018

11,761,159

152,015

231,831

-

1,718

(114,717
)

(112,999
)
Issuance of Series D convertible preferred
   stock, net of issuance costs of $0

64,653

865

—

—

—

—

—

Stock-based compensation

—

—

—

—

1,339

—

1,339

Exercise of stock options

—

—

34,112

—

43

—

43

Net loss and comprehensive loss

—

—

—

—

—

(44,486
)

(44,486
)
Balance December 31, 2019

11,825,812

152,880

265,943

-

3,100

(159,203
)

(156,103
)
Issuance of Series E convertible preferred
   stock, net of issuance costs of $4,056

10,513,921

67,267

—

—

—

—

—

Issuance of Series E convertible preferred
   stock, upon extinguishment of
   convertible notes

1,889,548

12,818

—

—

—

—

—

Gain on extinguishment of Series C and
   Series C-1 convertible preferred stock

—

(9,840
)

—

—

9,840

—

9,840

Conversion of convertible preferred stock to
   common stock upon initial public offering

(24,229,281
)

(223,125
)

28,196,388

3

223,122

—

223,125

Conversion of convertible preferred stock
   warrants to common stock warrants upon
   initial public offering

—

—

—

—

1,931

—

1,931

Issuance of common stock upon initial public
   offering, net of underwriting discounts and
   commissions and other offering costs
   of $14,031

—

—

9,029,629

1

148,501

—

148,502

Exercise of common stock warrants

—

—

107,790

—

—

—

—

Stock-based compensation

—

—

—

—

5,292

—

5,292

Exercise of stock options

—

—

646,851

—

1,179

—

1,179

Net loss and comprehensive loss

—

—

—

—

—

(39,855
)

(39,855
)
Balance December 31, 2020

—

$
—

38,246,601

$
4

$
392,965

$
(199,058
)

$
193,911


	Convertible preferred stock						Common stock				Additional paid-in			Accumulated			Total stockholders’
	Shares			Amount			Shares		Amount		capital			deficit			equity (deficit)
Balance December 31, 2019		591,290		$	152,880			13,297	$	—	$	3,100		$	(159,203	)	$	(156,103	)
Issuance of Series E convertible preferred stock, net of issuance costs of $4,056		525,696			67,267			—		—		—			—			—
Issuance of Series E convertible preferred stock upon extinguishment of convertible notes payable		94,477			12,818			—		—		—			—			—
Gain on extinguishment of Series C and Series C-1 convertible preferred stock		—			(9,840	)		—		—		9,840			—			9,840
Conversion of convertible preferred stock to common stock upon initial public offering		(1,211,463	)		(223,125	)		1,409,819		—		223,125			—			223,125
Conversion of convertible preferred stock warrants to common stock warrants upon initial public offering		—			—			—		—		1,931			—			1,931
Issuance of common stock upon initial public offering, net of underwriting discounts and commissions and other offering costs of $14,031		—			—			451,481		—		148,502			—			148,502
Exercise of common stock warrants		—			—			5,389		—		—			—			—
Stock-based compensation		—			—			—		—		5,292			—			5,292
Exercise of stock options		—			—			32,340		—		1,179			—			1,179
Net loss and comprehensive loss		—			—			—		—		—			(39,855	)		(39,855	)
Balance December 31, 2020		—			—			1,912,326		—		392,969			(199,058	)		193,911
Stock-based compensation		—			—			—		—		28,609			—			28,609
Exercise of stock options and release of restricted stock units		—			—			44,284		—		1,724			—			1,724
Issuance of common stock in connection with employee stock purchase plan		—			—			8,737		—		2,674			—			2,674
Net loss and comprehensive loss		—			—			—		—		—			(157,754	)		(157,754	)
Balance December 31, 2021		—			—			1,965,347		—		425,976			(356,812	)		69,164
Stock-based compensation		—			—			—		—		9,965			—			9,965
Exercise of stock options and release of restricted stock units		—			—			11,618		—		65			—			65
Tax withholdings on settlement of restricted stock units		—			—			—		—		(29	)		—			(29	)
Issuance costs		—			—			—		—		600			—			600
Conversion of convertible notes		—			—			15,821,299		2		150,976			—			150,978
Issuance of common stock upon rights offering, net of issuance costs of $1,689		—			—			2,928,701		—		27,598			—			27,598
Net loss and comprehensive loss		—			—			—		—		—			(157,487	)		(157,487	)
Balance December 31, 2022		—		$	—			20,726,965	$	2	$	615,151		$	(514,299	)	$	100,854

The accompanying notes are an integral part of these consolidated financial statements.

Eargo, Inc.

Consolidated Statements of Cash Flows

(In thousands)


	Year ended December 31,									Year ended December 31,
	2020			2019			2018			2022			2021			2020
Operating activities:
Net loss	$	(39,855	)	$	(44,486	)	$	(33,793	)	$	(157,487	)	$	(157,754	)	$	(39,855	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,525			1,528			695			5,458			4,202			2,525
Stock-based compensation		5,089			1,339			449			9,965			27,731			5,089
Loss on disposal of property and equipment		—			24			-
Non-cash interest expense and amortization of debt discount		1,513			297			129			209			420			1,513
Debt issuance costs from convertible notes											5,742			—			—
Change in fair value of convertible notes											45,503			—			1,471
Loss on extinguishment of debt											772			—			1,627
Non-cash operating lease expense		1,128			—			—			1,050			1,063			1,128
Bad debt expense		2,352			313			—			713			9,615			2,352
Loss on extinguishment of debt		1,627			—			559
Change in fair value of financial instruments		1,471			274			506
Loss on disposal of property and equipment											—			155			—
Changes in operating assets and liabilities:
Accounts receivable		(4,094	)		(1,399	)		(314	)		9,924			(18,369	)		(4,094	)
Inventories		141			(720	)		(1,750	)		676			(2,973	)		141
Prepaid expenses and other current assets		(2,142	)		(235	)		(512	)
Other assets		506			(406	)		(343	)
Prepaid expenses and other noncurrent and current assets											4,277			(7,383	)		(1,636	)
Accounts payable		187			163			2,540			(2,794	)		3,130			187
Accrued expenses		4,467			3,738			2,799			3,735			(368	)		3,900
Other current liabilities		731			27			1,520
Deferred revenue		(364	)		514			161
Sales returns reserve											(9,885	)		9,501			567
Settlement liability											(34,372	)		34,372			—
Other current and noncurrent liabilities											(351	)		(946	)		240
Operating lease liabilities		(1,196	)		—			—			(439	)		(852	)		(1,196	)
Other liabilities		(127	)		(79	)		205
Net cash used in operating activities		(26,041	)		(39,108	)		(27,149	)		(117,304	)		(98,456	)		(26,041	)
Investing activities:
Purchases of property and equipment		(1,624	)		(2,167	)		(1,718	)		(2,791	)		(882	)		(1,624	)
Capitalized software development costs		(3,455	)		(1,692	)		(829	)		(296	)		(3,842	)		(3,455	)
Cash paid for acquisition of business											—			(2,863	)		-
Net cash used in investing activities		(5,079	)		(3,859	)		(2,547	)		(3,087	)		(7,587	)		(5,079	)
Financing activities:
Proceeds from issuance of common stock upon initial public offering, net of underwriting discounts and commissions		151,156			—			—
Payments of other offering costs related to the initial public offering		(2,614	)		(758	)		—
Proceeds from issuance of convertible notes, net of issuance costs paid to lender											105,378			—			10,053
Payment of convertible notes issuance costs to third parties											(5,645	)		—			—
Proceeds from issuance of common stock upon rights offering, net of issuance costs											27,598			—			—
Proceeds from convertible preferred stock issuance, net of issuance costs		67,867			865			72,407			—			—			67,867
Proceeds from issuance of convertible notes, net of issuance costs		10,053			—			—
Proceeds from debt financing		15,000			5,000			7,000			—			—			15,000
Debt repayments		(12,720	)		—			(7,689	)		(16,238	)		—			(12,720	)
Proceeds from issuance of common stock upon initial public offering, net of underwriting discounts and commissions and other offering costs											—			(40	)		148,542
Proceeds from PPP loan		4,574			—			—			—			—			4,574
Repayment of PPP loan		(4,574	)		—			—			—			—			(4,574	)
Proceeds from stock options exercised		1,179			43			10			134			1,724			1,179
Proceeds from employee stock purchase plan purchases											—			2,674			—
Payment of taxes related to net share settlement of restricted stock units											(29	)		—			—
Restricted stock units settled in cash											(69	)		—			—
Net cash provided by financing activities		229,921			5,150			71,728			111,129			4,358			229,921
Net increase (decrease) in cash and cash equivalents and restricted cash		198,801			(37,817	)		42,032
Cash and cash equivalents and restricted cash at beginning of period		13,384			51,201			9,169
Cash and cash equivalents and restricted cash at end of period	$	212,185		$	13,384		$	51,201
Net decrease in cash and cash equivalents											(9,262	)		(101,685	)		198,801
Cash and cash equivalents at beginning of period											110,500			212,185			13,384
Cash and cash equivalents at end of period										$	101,238		$	110,500		$	212,185
Supplemental disclosure of cash flow information:
Cash paid for taxes	$	63		$	—		$	—		$	124		$	107		$	63
Cash paid for interest	$	398		$	395		$	563		$	396		$	646		$	398
Non-cash operating activities:
Lease liability obtained in exchange for right-of-use asset	$	2,392		$	—		$	—		$	—		$	7,046		$	2,392
Non-cash investing and financing activities:
Common stock issued on conversion of convertible preferred stock upon initial public offering	$	223,125		$	—		$	—
Conversion of convertible preferred stock warrants to common stock warrants and related reclassification of convertible preferred stock warrant liability to additional paid in capital	$	1,931		$	—		$	—
Property and equipment and capitalized software costs in accounts payable and accrued liabilities	$	393		$	515		$	371		$	—		$	357		$	393
Stock-based compensation included in capitalized software costs	$	203		$	—		$	—		$	—		$	878		$	203
Convertible preferred stock issuance costs included in accounts payable										$	—		$	600		$	600
Common stock issued on conversion of convertible preferred stock upon initial public offering										$	—		$	—		$	223,125
Common stock issued upon conversion of convertible notes										$	150,978		$	—		$	—
Conversion of convertible preferred stock warrants to common stock warrants and related reclassification of convertible preferred stock warrant liability to additional paid in capital										$	—		$	—		$	1,931
Offering costs in accounts payable and accrued liabilities	$	40		$	424		$	—		$	—		$	—		$	40
Convertible preferred stock issuance costs included in accounts payable	$	600		$	—		$	—
Issuance of Series E convertible preferred stock upon extinguishment of convertible notes	$	12,818		$	—		$	—		$	—		$	—		$	12,818
Settlement of Series C convertible preferred stock tranche liability on second tranche closing of Series C convertible preferred stock	$	—		$	—		$	479

The accompanying notes are an integral part of these consolidated financial statements.

Eargo, Inc.

Notes to Consolidated Financial Statements

Note 1. Description of business and other matters

Eargo, Inc. (the “Company”) is a medical device company dedicated to improving the quality of life of people with hearing loss. The ~~Eargo solution was developed to create a hearing aid that consumers actually want to use. The~~ Company’s innovative product and go-to-market approach address the major challenges of traditional hearing aid adoption, including social stigma, accessibility and cost.

~~Initial public offering~~Reverse stock split

~~On October 20, 2020,~~In January 2023, the Company closed its initial public offering (“IPO”) of its common stock in which the Company issued and sold 7,851,852 shares of its common stock, and concurrently sold an additional 1,177,777 shares upon the full exercise of the underwriters’ option to purchase additional shares. The Company sold these shares at $18.00 per share, raising approximately $148.5 million in proceeds, net of underwriting discounts and commissions of $11.4 million and offering costs of $2.6 million.

~~Immediately prior to the closing~~ of the IPO, all outstanding shares of convertible preferred stock were converted into 28,196,388 shares of common stock. Further, all outstanding convertible preferred stock warrants were converted into warrants to purchase 137,812 shares of common stock. Following the IPO, there were no shares of convertible preferred stock or preferred stock outstanding.

~~Reverse stock split~~

~~In October 2020, the Company’s board of directors approved an amended and restated certificate of incorporation to effect~~effected a reverse split of shares of the Company’s common stock ~~and convertible preferred stock~~ on a ~~3-for-1~~ 1-for-20 basis ~~(the~~(the “Reverse Stock Split”)~~, which was filed and effective~~. The Company’s common stock began trading on ~~October 8, 2020.~~a post-split basis on January 18, 2023. The number of authorized shares ~~and the par values~~ of the common stock ~~and convertible preferred stock were~~was not adjusted as a result of the Reverse Stock Split. All ~~references to common stock, options to purchase common stock, convertible preferred stock, warrants to purchase convertible preferred stock,~~ share ~~data,~~and per share data ~~and related information contained~~ in ~~the~~these consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented. The shares of common stock retain a par value of $0.0001 per share. Accordingly, an amount equal to the par value of the decreased shares resulting from the Reverse Stock Split was reclassified from common stock to additional paid-in capital.

~~Liquidity~~DOJ investigation and settlement and claims audits

On September 21, 2021, the Company was informed that it was the target of a criminal investigation by the U.S. Department of Justice (the “DOJ”) related to insurance claims for reimbursement the Company submitted on behalf of its customers covered by various federal employee health plans under the Federal Employee Health Benefits (“FEHB”) program, which is administered by the Office of Personnel Management (the “OPM”). The investigation also pertained to Eargo’s role in claim submissions to federal employee health plans (collectively, the “DOJ investigation”). Total payments the Company received from the government in relation to claims submitted under the FEHB program, as subject to the DOJ investigation, net of any product returns and associated refunds, were approximately $44.0 million. Additionally, the third-party payor with whom the Company historically had the largest volume, which is one of the carriers contracted with the OPM under the FEHB program (“largest third-party payor”), conducted an audit of insurance claims for reimbursement (“claims”) submitted by the Company (the “Primary Audit”), which included a review of medical records. The Company was informed by the third-party payor conducting the Primary Audit that the DOJ was the principal contact related to the subject matter of the Primary Audit. On January 4, 2022, the DOJ confirmed to the Company that the investigation had been referred to the Civil Division of the DOJ and the U.S. Attorney’s Office for the Northern District of Texas and the criminal investigation was no longer active.

On April 29, 2022, the Company entered into a civil settlement agreement with the U.S. government that resolved the DOJ investigation related to the Company’s role in claim submissions to various federal employee health plans under the FEHB program. The settlement agreement provided for the Company’s payment of approximately $34.4 million to the U.S. government and resolved allegations that the Company submitted or caused the submission of claims for payment to the FEHB program using unsupported hearing loss-related diagnostic codes. As discussed further in Note 6, based on the settlement agreement with the U.S. government, the Company recorded a settlement liability of $34.4 million as of December 31, 2021. The settlement amount was treated as consideration payable to a customer and was recorded as a reduction of revenue in the third quarter of 2021. On May 2, 2022, the Company paid the settlement amount.

From the time the Company learned of the DOJ investigation and until December 8, 2021, the Company continued to process orders for customers with potential insurance benefits (including FEHB program members) but suspended all claims submission activities and offered affected customers (i.e., customers using insurance benefits as a method of direct payment for transactions prior to December 8, 2021) the option to return their hearing aids or purchase their hearing aids without the use of their insurance benefits in case their claim was denied or ultimately not submitted by the Company to their insurance plan for payment (the “extended right of return”). From December 8, 2021 until September 15, 2022, the Company did not accept insurance benefits as a method of direct payment.

The Company determined that customer transactions using insurance benefits as a method of direct payment occurring between September 21, 2021 (when the Company learned of the DOJ investigation) and December 8, 2021 (when the Company temporarily stopped accepting insurance benefits as a method of direct payment) did not meet the criteria for revenue recognition and, as such, the Company did not recognize revenue for shipments within that timeframe to customers with potential insurance benefits, substantially all of whom were covered under the FEHB program.

The Company previously estimated that a majority of customers with unsubmitted claims would choose to return the hearing aid system if their insurance provider denied their claim or the claim was ultimately not submitted by the Company for payment, resulting in an increase in expected product returns from sales transactions that occurred prior to September 21, 2021 and recorded during the year ended December 31, 2021. Returns associated with unsubmitted claims reduce the sales returns reserve, with a corresponding reduction in the related accounts receivable at the time the product is returned.

Further, the Company also estimated that, in addition to the customers who chose to return their hearing aid systems, a significant number of customers whose claims were denied by payors or not submitted by the Company for payment would not pay for or return the hearing aid system, resulting in bad debt expense that was recorded during the year ended December 31, 2021.

In September 2022, the Company made the determination not to seek payment for approximately $16.1 million from customers with unsubmitted and unpaid claims which was accounted for as a pricing concession (the “Pricing Concession”). During the year ended December 31, 2022, the Company recorded a $16.1 million reduction to its insurance-related accounts receivable balance along with related reduction to net revenue of $11.6 million and an allowance for credit losses balance of $4.5 million for such unsubmitted and unpaid claims. Further, the Company simultaneously recorded a decrease in its insurance-related sales return reserve of $11.3 million along with a corresponding increase of $11.3 million to net revenue for the year ended December 31, 2022 related to unsubmitted and unpaid claims. These changes resulted in a decrease in net revenue of $0.3 million for the year ended December 31, 2022.

Liquidity and going concern

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business. The Company has incurred losses and negative cash flows from operations since its inception and management expects to incur additional substantial losses in the foreseeable future. As of December 31, ~~2020,~~2022, the Company had cash and cash equivalents of ~~$212.2~~$101.2 million and an accumulated deficit of ~~$199.1~~$514.3 million.

In June 2022, the Company entered into a note purchase agreement (“Note Purchase Agreement”) with an affiliate of Patient Square Capital (the “PSC Stockholder”) and Drivetrain Agency Services, LLC, as administrative agent and collateral agent. Pursuant to the Note Purchase Agreement, the Company agreed to issue and sell up to $125.0 million in senior secured convertible notes (the “Notes”) of the Company, convertible into shares of common stock (the “Note Transaction”), of which the Company issued $100.0 million in June 2022 and $5.5 million in November 2022. In November 2022, the Company completed a rights offering for up to 18,750,000 newly issued shares of common stock (“Rights Offering”), as required under the terms of the Note Transaction documents and raised $27.6 million in net proceeds from existing investors. Subsequent to the Rights Offering, the outstanding Notes converted into 15,821,299 shares of the Company’s common stock (the “Conversion Shares”). The Note Transaction and Rights Offering are discussed further in Note 8.

Since the announcement of the DOJ investigation, there has been and may continue to be a significant reduction in shipments, revenue and gross margin, which has and could continue to negatively impact the Company’s liquidity and working capital, including impacting its ability to access additional capital. It is difficult to assess or predict at this time the extent to which the Company is able to validate and establish additional processes to support the submission of claims for reimbursement to health plans, including those under the FEHB program, and the future impacts of the implementation of an over-the-counter (“OTC”) hearing aid regulatory framework (which may lead insurance providers to take actions limiting the Company’s ability to access insurance coverage).

The Company believes that without an alternative future financing, its ~~existing cash and cash equivalents~~current resources are insufficient to satisfy its obligations as ~~of December 31, 2020 will be sufficient for the Company to continue as a going concern for at least~~they become due within one year ~~from~~after the date that these consolidated financial statements are ~~filed with~~issued. The negative cash flows and current lack of financial resources of the ~~Securities~~Company raise substantial doubt as to the Company’s ability to continue as a going concern. If the Company is unable to raise additional funding to meet its operational needs, it will be forced to limit or cease its operations.

These consolidated financial statements do not include any adjustments relating to the recoverability and ~~Exchange Commission (“SEC”). The Company’s future capital requirements will depend on many factors, including its growth rate,~~classification of recorded asset amounts or the ~~timing~~amounts and ~~extent~~classification of ~~its spending to support research and development activities and~~liabilities that might result from the ~~timing and cost~~outcome of ~~establishing additional sales and marketing capabilities.~~the uncertainty.

Note 2. Summary of significant accounting policies

Basis of presentation and principles of consolidation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of Eargo, Inc. and its ~~wholly-owned subsidiary.~~wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

~~101~~

~~Eargo, Inc.~~

~~Notes to Consolidated Financial Statements~~

Use of estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made in the accompanying consolidated financial statements include, but are not limited to, ~~allowance for~~the sales returns reserve, the ~~fair~~present value of lease liabilities, the fair value of equity securities, the fair value of financial instruments, the allowance for ~~doubtful accounts,~~credit losses, the net realizable value of inventory, the fair value of assets acquired in a business combination, the useful lives of long-lived assets, accrued product warranty reserve, legal and other contingencies, certain other accruals and recoverability of the Company’s net deferred tax assets and the related valuation ~~allowance~~.allowance. Management periodically evaluates its estimates, which are

based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from those estimates.

Cash and cash equivalents

Cash and ~~restricted~~ cash

~~Cash~~ equivalents ~~consist of~~include amounts deposited in financial institutions regulated by the Federal Deposit Insurance Corporation (the “FDIC”) as well as short-term, highly liquid investments with original maturities of three months or less from the purchase ~~date. Cash~~date; cash equivalents consist primarily of amounts invested in money market accounts.

The FDIC insures cash deposits of up to $250,000. The Company regularly maintains cash balances in deposit accounts ~~and~~in excess of the FDIC insured limits. Additionally, the Company’s cash equivalents are ~~stated at fair value.~~

Asheld in accordance with cash sweep arrangements with financial institutions, which amounts are invested in money market accounts that are neither included on the balance sheets of ~~December 31, 2018,~~such financial institutions nor insured by the FDIC. According to such cash sweep arrangements, the Company ~~had $0.2 million in an outstanding letter~~believes it should be recognized by the FDIC as the owner of credit related to its operating lease. The letter of credit was collateralized by a restricted cash deposit account consisting of short-term money market funds. The Company does not have any amounts classified as restricted cash as of December 31, 2020 and 2019.

~~The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown~~assets in the ~~consolidated statements~~event of ~~cash flows:~~financial institution’s failure, such as the March 10, 2023 closure of Silicon Valley Bank.

Year Ended December 31,

2020

2019

2018

(in thousands)

Cash and cash equivalents
$
212,185

$
13,384

$
51,051

Restricted cash

—

—

150

Total cash, cash equivalents, and restricted cash
$
212,185

$
13,384

$
51,201

Concentration of credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of demand deposit accounts, money market accounts and accounts receivable, including credit card receivables. The Company maintains its cash and cash equivalents, which may, at times, exceed federally insured limits, with financial institutions of high credit standing. ~~As of~~Through December 31, ~~2020,~~2022, the Company has not experienced any losses on its deposit accounts and money market accounts. As of December 31, ~~2020,~~2022, the Company does not believe there is a significant financial risk from nonperformance by the issuers of the Company’s deposit accounts and money market accounts.

Approximately ~~45% and 39%~~93% of the Company’s gross accounts receivable ~~are related to reimbursement from an insurance company~~ as of December 31, ~~2020~~2021 were for customers with insurance benefits, substantially all of whom were covered under the FEHB program. Furthermore, approximately 90% of the Company’s gross accounts receivable as of December 31, 2021 were related to shipments of Eargo hearing aids to customers insured under a single insurance plan whose claims are processed through the Company’s largest third-party payor, which conducted the Primary Audit. The Company remains subject to a prepayment review of claims by the payor who conducted the Primary Audit. Please see caption “DOJ investigation and ~~2019, respectively.~~settlement and claims audits” in Note 1 for more information regarding the DOJ investigation and claims audits. As of December 31, 2022, subsequent to the Pricing Concession, there was no credit risk concentration in the Company’s accounts receivable.

Fair value measurement

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for that asset or liability in an orderly transaction between market participants on the measurement date.

~~102~~

~~Eargo, Inc.~~

~~Notes to Consolidated Financial Statements~~

The Company measures fair value based on a three-level hierarchy of inputs, of which the first two are considered observable and the last unobservable. Unobservable inputs reflect the Company’s own assumptions about current market conditions. The Company maximizes the use of observable inputs, where available, and minimizes the use of unobservable inputs when measuring fair value. The three-level hierarchy of inputs is as follows:

Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets thatare not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets orliabilities.

To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their short-term nature. The fair value of the Company’s outstanding term loan is estimated using the net present value of the payments, discounted at an interest rate that is consistent with a market interest rate, which is a Level 2 input. The fair value of the outstanding term loan approximates the carrying amount as the term loan bears a floating rate that approximates the market interest rate. Refer to Note 3 for discussion of certain other financial instruments.

Convertible notes - fair value option

The Company has elected the fair value option to account for the Notes that were issued in June 2022 and remeasured the underlying liability through the Notes conversion in November 2022, as further disclosed in Notes 3 and 8. At issuance, the Company recorded the Notes at fair value with changes in fair value recorded as a component of other income (expense), net in the consolidated statements of operations and comprehensive loss with the exception of changes in fair value due to instrument-specific credit risk, which are recorded as a component of other comprehensive income. Interest expense related to the Notes is included in the changes in fair value. As a result of applying the fair value option, direct costs and fees related to the Notes were not deferred and, therefore, expensed as incurred as a component of general and administrative expenses.

Accounts receivable, net

Accounts receivable represents amounts due from third-party institutions for credit card and debit card transactions and trade accounts receivable. Trade accounts receivable are primarily insurance claims receivable amounts due from customers, which includes third-party payors and end-users. Accounts receivable are recorded ~~at invoiced amounts,~~ net of ~~allowances for doubtful accounts. The~~an allowance for ~~doubtful accounts~~expected credit losses. The Company’s expected loss allowance for receivables is based on its historical collection experience, current and future economic market conditions and a review of the ~~Company’s~~current aging status and financial condition of its customers. Specific allowance amounts are established to record the appropriate allowance for customers that have an identified risk of default. General allowance amounts are established based upon an assessment of ~~the collectibility of accounts. Management regularly reviews the adequacy of the allowance~~expected credit losses for ~~doubtful accounts~~receivables by ~~considering the age of each outstanding invoice, each customer’s expected ability~~aging category. Accounts receivable balances are written off when they are determined to pay, and the collection history with each customer, when applicable, to determine whether a specific allowance is appropriate. The allowance for doubtful accounts charges are recorded as a component of general and administrative expenses in the consolidated statements of operations and comprehensive loss.be uncollectible.

Inventories

~~Inventories~~

Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) ~~and~~or net realizable value. Inventory consists of purchased components for producing hearing aid products and accessories and finished goods. Provisions for slow-moving, excess or obsolete inventories are recorded when required to reduce inventory values to their estimated net realizable values based on product life cycle, development plans or quality issues.

Property and equipment, net

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, generally three to five ~~years.~~years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the consolidated balance sheets and any resulting gain or loss is reflected in operations in the period realized. Repairs and maintenance are expensed as incurred.

~~103~~

~~Eargo, Inc.~~

~~Notes to Consolidated Financial Statements~~

Capitalized software development costs

The Company capitalizes software purchased for internal use and qualified costs incurred in connection with the development of internal use software. Purchased software consists of software products and licenses, which are amortized over the lesser of their estimated useful life or the contractual term. Internally developed software costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external direct costs of the development are capitalized until the software is substantially complete and ready for its intended use. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable that the expenditure will result in additional functionality. Internal use software is amortized on a straight-line basis over its estimated useful life, generally three ~~years.~~years. Post-implementation activities including training and maintenance are expensed as incurred. Capitalized costs less accumulated amortization are recorded as a component of property and equipment, net on the consolidated balance sheets.

Goodwill, finite-lived acquired intangible assets, and impairment

Goodwill represents the excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets acquired in business combinations. In November of each fiscal year, or more frequently if indicators of impairment exist, management performs a review to determine if the carrying value of goodwill is impaired. Impairment testing is performed at the reporting unit level. The Company’s intangible assets consist of ~~long-lived~~intangible assets acquired in a business combination. These assets are amortized using the straight-line method over their estimated useful lives ranging from one to four years reflecting the period in which the economic benefits of the assets are expected to be realized.

The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or group of assets may not be fully recoverable. Recoverability is measured by comparing the carrying amount to the future net undiscounted cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset. ~~The Company has not identified any such impairment losses to date.~~

Leases

~~Leases~~

The ~~Company adopted Accounting Standards Codification (“ASC”) Topic 842, “Leases” (“ASC 842”) on January 1, 2020, as discussed below in the section titled “Recently adopted accounting pronouncements”. Under ASC 842, the~~ Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use ~~(“ROU”)~~ assets and the current and noncurrent portions of the operating lease liability are included as operating lease liabilities in the Company’s consolidated balance sheets.

~~ROU~~Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ~~ROU~~right-of-use assets and liabilities are recognized based on the present value of lease payments over the lease term at the commencement date of the lease. ~~ROU~~Right-of-use assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less any lease incentive received.

As the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. ~~Lease~~Operating lease expense ~~for lease payments~~ is recognized on a straight-line basis over the lease term.

The Company elected to exclude from its consolidated balance sheet recognition of leases having a term of 12 months or less (short-term leases) and elected to not separate lease components and non-lease components for its real estate leases. The Company’s non-lease components are primarily related to property maintenance, which varies based on future outcomes, and is recognized in rent expense when incurred.

Product warranty

The Company provides a one-year or two-year limited warranty on its hearing aid products and accrues for the estimated future costs of repair or replacement upon shipment of the original ~~product. The warranty expense is accrued as a liability and recorded to cost of revenue and is~~product based upon current and historical information for the cost to repair or replace the product.

~~104~~

~~Eargo, Inc.~~

~~Notes to Consolidated Financial Statements~~

~~Convertible preferred stock warrant liability~~

~~The Company accounts for its convertible preferred stock warrants issued~~ Product warranty reserve is recorded as a component of accrued expenses in ~~connection with its various financing transactions based upon the characteristics and provisions of the instrument. Convertible preferred stock warrants classified as liabilities are recorded on~~ the consolidated balance sheets ~~at their fair value on~~and the ~~date~~related expense is recorded as a component of ~~issuance and remeasured to fair value at each reporting period, with the changes in fair value recognized as other income (expense), net~~cost of revenue in the consolidated statements of operations and comprehensive loss.The Company adjusted the liability for changes in the fair value of these warrants until the earlier of the exercise of the warrants, the expiration of the warrants, or until such time as the warrants were no longer considered liability instruments. Upon the closing of the IPO in October 2020, the convertible preferred stock warrants were converted into warrants to purchase common stock and the warrant liabilities were reclassified to additional paid in capital.

~~Derivative liability~~

The Company’s convertible notes issued in 2020 (the “2020 Notes”) contain certain features that meet the definition of embedded derivatives requiring bifurcation from the 2020 Notes as a separate compound financial instrument. The derivative liability is initially measured at fair value on issuance and is subject to remeasurement at each reporting period with changes in fair value recognized in other income (expense), net in the consolidated statements of operations and comprehensive loss. In July 2020, the derivative liability was settled upon the extinguishment of the 2020 Notes. Refer to Note 3 and Note 6 for further discussion.

Revenue recognition

The Company’s revenue is generated from the sale of products (hearing aid systems and related accessories) and services (extended warranties). ~~These products and services are primarily sold directly to customers through Eargo website and the Company sales representatives.~~

~~Under ASC 606, revenue~~Revenue is recognized when promised goods or services are transferred to end-use customers, distributors, or retail partners in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services by following a ~~five step~~five-step process: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

Identify the contract with a ~~customer.~~ customer. The Company generally considers completion of an Eargo sales order (which requires customer acceptance of the Company’s click-through terms and conditions for website sales and authorization of payment through credit card or another form of payment for sales made over the phone) as a customer contract provided that collection is considered probable. For payments that are not made upfront by credit card, the Company assesses insurance eligibility or customer creditworthiness based on credit checks, payment history, and/or other circumstances. For ~~payments~~orders involving insurance payors, the Company validates customer eligibility and potential reimbursement amounts prior to shipping the product. If the criteria to establish a contract with a customer is not met, revenue is not recognized.

Identify the performance obligations in the contract. Product performance obligations include hearing aid systems and related accessories and service performance obligations include extended warranty coverage. The Company also offers customers a one-time replacement of certain components of the hearing aid system for a fee ~~(i.e.~~(i.e., “loss and damage policy”), which represents an option with material right.

However, as the historical redemption rate under the policy has been low, the option is not accounted for as a separate performance obligation. The Company does not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.

The Company has elected to treat shipping and handling activities performed after a customer obtains control of products as a fulfillment activity.

Determine the transaction price and allocation to performance obligations. The transaction price in the Company’s customer contracts consists of both fixed and variable consideration. Fixed consideration includes

~~105~~

~~Eargo, Inc.~~

~~Notes to Consolidated Financial Statements~~

amounts to be contractually billed to the customer while variable consideration ~~includes~~may include concessions, product returns, discounts, incentives, or other similar items. Variable consideration is estimated based on contractual terms and historical analysis using specific data for the type of consideration being assessed.

•

Product Returns: The Company’s customer contracts include the general 45-day right of return that applies to all ~~products.~~products and the extended right of return offered for certain shipments to direct plan access customers involving certain insurance payors. To estimate product returns, the Company analyzes various factors, including historical return levels, current economic trends, and ~~changes in customer demand.~~insurance coverage. Based on this information, the Company reserves a percentage of product sale revenue and accounts for the estimated impact as a reduction in the transaction price. Consideration paid or payable to a

customer that is not for a distinct good or service is accounted for as a reduction of the transaction price and recorded as a reduction in revenue in the period it becomes payable.

•

Concessions: Concessions are generally viewed as any post-execution change to the original agreement between the Company and customer that increase the customer’s rights or the Company’s obligations without a commensurate increase to the consideration due the Company. Concessions may take many forms and include, but are not limited to, (i) accepting returns that are not required under the terms of the original arrangement, (ii) reducing the arrangement fee, and (iii) extending the terms of payment. While the Company granted a price concession to its customers with unsubmitted and unpaid claims during the year ended December 31, 2022 (please see caption “DOJ investigation and settlement and claims audits” in Note 1), the Company does not have an established history of providing concessions to its customers and has determined that no adjustments should made to the transaction price in the Company’s ongoing customer arrangements. However, for each reporting period, the Company will re-evaluate the occurrence and level of materiality of concessions and will assess any potential impact on the transaction price accordingly.

Allocate the transaction price to the performance obligations in the ~~contract~~.contract. For contracts that contain multiple performance obligations, the Company allocates the transaction price to the performance obligations on a relative standalone selling price basis. Standalone selling prices are based on multiple factors including, but not limited to, historical discounting trends for products and services, gross margin objectives, internal costs, competitor pricing strategies, and industry technology lifecycles.

Recognize revenue when or as the Company satisfies a performance obligation. Revenue for products (hearing aid systems and related accessories) is recognized at a point in time, which is generally upon ~~shipment.~~shipment, provided all other revenue recognition criteria have been met. Revenue for services (extended warranty) is recognized over time on a ratable basis over the warranty period. The Company does not have material contract liabilities related to unsatisfied performance obligations as of December 31, 2022 and 2021.

Contract costs

The Company applies the practical expedient to recognize the incremental costs of obtaining a contract as expense when incurred if the amortization period would be one year or less. These incremental costs include processing fees paid to third-party financing vendors, who provide the Company’s customers with the option to finance their ~~purchase.~~purchases. If a customer elects to utilize this service, the Company receives a non-recourse upfront payment for the product sold, less processing fee withheld by the financing vendor. These processing fees are recognized in cost of revenue in the consolidated statements of operations and comprehensive loss as incurred.

Cost of revenue

Cost of revenue consists of expenses relating to the cost of finished goods, freight, personnel costs, consumables, product warranty costs, transaction fees ~~including~~(including processing fees paid to third-party financing ~~vendors, allocated facility overhead costs,~~vendors), reserves for excess and obsolete inventory, depreciation and ~~amortization.~~amortization, and related overhead.

Research and development

Research and development expenses consist of personnel costs, travel expenses, tools, prototype materials and product certification and are charged to expense as incurred.

Sales and marketing

Sales and marketing expenses consist of personnel costs, travel expenses, consulting fees, public relations costs, direct marketing, advertising and promotional expenses and allocated facility overhead costs. The Company recorded advertising costs, which are expensed as incurred, of ~~$23.6~~$19.3 million, ~~$18.6~~$41.9 million and ~~$12.3~~$23.6 million for the years ended December 31, 2022, 2021 and 2020, ~~2019 and 2018,~~ respectively.

Stock-based compensation

The Company accounts for stock-based ~~payment~~ awards at fair value. The fair value of restricted stock units (“RSUs”) is equal to the closing price of the Company’s common stock on the grant date. The fair value of stock options and purchase rights ~~granted~~ under ~~the~~an employee stock purchase plan are ~~measured~~estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of the underlying common stock is the closing price of the Company’s common stock for grants awarded subsequent to the Company’s IPO. The expected volatility is derived from the historical stock volatilities of comparable peer public companies within the Company’s industry that are considered to be comparable to the Company’s business over a period equivalent to the expected term of the awards due to limited trading history of the Company’s common stock. The expected term for employee option grants is determined using the simplified method due to a lack of sufficient data points. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The

expected dividend yield is zero as the Company has not paid nor does it anticipate paying any dividends on its common stock in the foreseeable future.

For stock-based awards that vest subject to the satisfaction of a service requirement, the fair value measurement date is the date of grant and the expense is recognized on a straight-line basis over the requisite service period. For stock-based awards with performance-based vesting conditions, the expense is recognized over the vesting period using the accelerated attribution method. The Company accounts for forfeitures as they occur.

Prior to the Company’s IPO in October 2020, the Company had not recognized any stock-based compensation associated with grants that vest upon satisfaction of both a service condition and a performance condition that is satisfied upon the closing of the IPO as the performance condition was not considered probable. Upon the closing of the IPO, the Company recorded stock-based compensation using the accelerated attribution method for the service period rendered from the date of grant through the closing of the IPO as the performance condition was achieved.

~~106~~

~~Eargo, Inc.~~

~~Notes to Consolidated Financial Statements~~

Income taxes

The Company uses the asset and liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on the 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. Financial statement effects of uncertain tax positions are recognized when it is more-likely-than-not that the position will be sustained upon examination. Interest and penalties related to unrecognized tax benefits are included within the provision for income tax.

Segments

~~Segments~~

Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s CODM is its Chief Executive Officer. To date, the Company has viewed its operations and manages its business as one operating and reportable segment, with all operations in the United States.

Employee benefit plan

The Company sponsors a qualified 401(k) defined contribution plan covering eligible employees. Participants may contribute a portion of their annual compensation limited to a maximum annual amount set by the Internal Revenue Service. There have been no employer contributions under this plan to date.

Net loss per share attributable to common stockholders

The Company follows the two-class method when computing net loss per share ~~as the Company has issued~~in periods in which shares that meet the definition of participating ~~securities.~~securities are outstanding. The two-class method determines net loss per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.

Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period, without consideration for potential dilutive securities. Diluted net loss attributable to common stockholders is computed by adjusting net loss attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares and common share equivalents of potentially dilutive securities outstanding for the period. ~~For purposes of the diluted net loss per share calculation, convertible preferred stock, convertible notes, convertible preferred stock warrants and common stock options~~Potentially dilutive securities are ~~considered~~not assumed to ~~be potentially dilutive securities.~~

~~Emerging growth company status~~

~~The Company~~have been issued if their effect is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (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. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.anti-dilutive.

~~107~~

~~Eargo, Inc.~~

~~Notes to Consolidated Financial Statements~~

Recently adopted accounting pronouncements

In ~~February 2016,~~December 2019, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~2016-02,~~ ~~Leases (Topic 842)~~, which amended existing guidance to require substantially all leases to be recognized by lessees on their balance sheet as a right-of-use (“ROU”) asset and corresponding lease liability, including leases previously accounted for as operating leases. The Company early adopted this standard in the fiscal year beginning January 1, 2020. Upon adoption of Topic 842, on January 1, 2020, the Company recorded operating ROU assets of $2.2 million, operating lease liabilities of $2.4 million and derecognized the deferred rent liability of $0.2 million. Results for the year ended December 31, 2020 are presented under Topic 842. Prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historical accounting under previous lease guidance, ASC 840: ~~Leases (Topic 840)~~. The Company elected the practical expedients to not reassess whether any expired or existing contracts are or contain leases, carry forward its historical lease classification and determination of whether initial direct costs qualify for capitalization.

~~In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement~~, which amends the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. The Company adopted this standard in the fiscal year beginning January 1, 2020. The adoption of this standard did not materially impact the Company’s consolidated financial statements and related disclosures.

~~Recent accounting pronouncements not yet adopted~~

~~In June 2016, the FASB issued ASU 2016-13,~~ ~~Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. This new standard is effective for the Company in the fiscal year beginning January 1, 2023 and must be adopted using a modified retrospective approach, with certain exceptions. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

~~In December 2019, the FASB issued ASU No.~~ 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify the accounting for income taxes. This standard removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing standards to improve consistent application. ~~This new standard is effective for the Company in the fiscal year beginning January 1, 2022. An entity that elects early~~The adoption ~~must adopt all the amendments in the same period. The Company is currently evaluating the impact~~ of this standard did not have a material impact on ~~its~~the Company’s consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”), which is intended to simplify the accounting for convertible debt instruments and convertible preferred stock. This standard removes the existing guidance in Subtopic 470-20 that requires companies to account for cash conversion features and beneficial conversion features in equity, separately from the host convertible debt or preferred stock. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. ASU 2022-03 clarifies that contractual sales restrictions are not considered in measuring an

equity security at fair value and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Recent accounting pronouncements not yet adopted

The Company does not believe that any recently issued accounting pronouncements and other authoritative guidance with the effective dates in the future will have material impact to its financial position or results of operations when implemented.

Note 3. Fair value measurements

~~The following table summarizes the Company’s financial assets and liabilities that were measured at fair value on a recurring basis by level within the fair value hierarchy:~~

December 31, 2019

Level 1

Level 2

Level 3

Total

(in thousands)

Liabilities:

Convertible preferred stock warrant liability

$
—

$
—

$
396

$
396

There were no financial assets and liabilities outstanding that were remeasured at fair value on a recurring basis as of December 31, ~~2020.~~2022 and 2021. The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their short-term nature.

~~Convertible preferred stock warrant liability~~

The ~~Company estimates~~fair value of the Notes was determined based on significant inputs not observable in the market, which represents a level 3 measurement within the fair value ~~of its convertible preferred stock warrant liability using~~hierarchy. Prior to the ~~Black-Scholes option-pricing model, assumptions that are based on the individual characteristics~~closing of the ~~warrants on the valuation date, and assumptions related to~~Rights Offering, the fair value of the ~~underlying stock, expected volatility, expected life,~~

~~108~~

~~Eargo, Inc.~~

Notes ~~to Consolidated Financial Statements~~

~~dividends,~~was estimated as a combination of the Company’s equity, an option on the Company’s equity valued using the Black-Scholes option pricing model, and ~~risk-free interest rate. Due to~~a short position in a bond valued under the ~~nature~~discounted cash flow model. The conversion date fair value of ~~these inputs,~~ the ~~warrants are considered a Level 3 liability.~~

~~Upon~~Notes was estimated based on the closing price of the ~~IPO in October 2020, the convertible preferred stock warrants were converted into warrants to purchase~~Company's common stock ~~and~~adjusted for the ~~warrant liabilities were reclassified to additional paid in capital.~~impact of certain legal restrictions on the Conversion Shares (see Note 8).

The following table provides a summary of the ~~change~~changes in the estimated fair value of the ~~Company’s convertible preferred stock warrant liability:~~Notes:

Total

(in thousands)

Balance — December 31, 2018

$
81

Fair value of convertible preferred stock warrants
   issued in connection with debt financing

41

Change in fair value of warrant liability

274

Balance — December 31, 2019

396

Fair value of convertible preferred stock warrants
   issued in connection with debt financing

270

Change in fair value of warrant liability

1,265

Conversion of preferred stock warrants to common
   stock warrants upon the closing of the IPO

(1,931
)
Balance — December 31, 2020

$
—

~~The fair value of the convertible preferred stock warrants, which were converted to common stock warrants upon the closing of the IPO in October 2020, was determined using the following assumptions:~~

December 31,
Valuation assumptions:

2020

2019
Expected volatility

67%—71%

43%—67%
Expected term

2.17—9.9 years

1.0—8.6 years
Risk-free interest rate

0.15%—0.75%

1.59%—1.88%
Dividend yield

—

—

~~Derivative liability~~

The 2020 Notes contain embedded derivatives requiring bifurcation as a single compound derivative instrument. The Company estimated the fair value of the derivative liability on issuance using a “with-and-without” method. The “with-and-without” methodology involves valuing the whole instrument on an as-is basis and then valuing the instrument without the individual embedded derivative. The difference between the entire instrument with the embedded derivative compared to the instrument without the embedded derivative was the fair value of the derivative liability on issuance. The estimated probability and timing of underlying events triggering the redemption features, conversion feature or put option contained within the 2020 Notes are inputs used to determine the estimated fair value of the entire instrument with the embedded derivative.

~~The following table provides a summary of the change in the estimated fair value of the Company’s derivative liability:~~


	~~Total~~Amount
	(in thousands)
Balance — December 31, ~~2019~~2021	$	—
~~Initial fair~~Fair value of ~~derivative liability~~convertible notes upon issuance		~~2,879~~105,475
Change in fair value of ~~derivative liability~~convertible notes		~~206~~45,503
~~Extinguishment~~Conversion of ~~derivative liability~~convertible notes		(~~3,085~~150,978	)
Balance — December 31, ~~2020~~2022	$	—

~~109~~

~~Eargo, Inc.~~

~~Notes to Consolidated Financial Statements~~

~~In July 2020, the embedded derivative liability was settled upon the extinguishment of the 2020 Notes. Refer to Note 6 for further discussion.~~

Note 4. Balance sheet components

Inventories

Inventories consist primarily of raw materials related to component parts and finished goods. The following is a summary of the Company’s inventories by category:


	December 31,
	2022		2021
	(in thousands)
Raw materials	$	410	$	1,905
Finished goods		4,626		3,807
Total inventories	$	5,036	$	5,712

Prepaid expenses and other current assets

December 31,

2020

2019

(in thousands)

Raw materials

$
853

$
1,115

Finished goods

1,886

1,765

Total inventories

$
2,739

$
2,880

Prepaid expenses and other current assets consist of the following:


	December 31,
	2022		2021
	(in thousands)
Advances to suppliers	$	2,000	$	95
Marketing costs		1,709		1,948
Payroll advances		1,686		3,889
Software subscriptions		1,553		1,468
Product launch fee		252		—
Insurance costs		78		2,945
Other		568		528
Total prepaid expenses and other current assets	$	7,846	$	10,873

Property and equipment, net

Property and equipment, net, consists of the following:

	December 31,
	2020			2019			December 31,
	(in thousands)						2022			2021
							(in thousands)
Capitalized software							$	11,579		$	11,569
Tools and lab equipment	$	4,426		$	2,885			5,087			4,712
Capitalized software		6,744			3,148
Furniture and fixtures		906			906			2,440			906
Leasehold improvements		757			757			993			861
Computer and equipment		288			423			482			401
		13,121			8,119			20,581			18,449
Less accumulated depreciation and amortization		(5,087	)		(2,719	)		(13,140	)		(8,898	)
Total property and equipment, net	$	8,034		$	5,400		$	7,441		$	9,551

Depreciation and amortization expense for the years ended December 31, 2022, 2021 and 2020 ~~and 2019 amounted to $2.5~~is $4.8 million, $4.2 million and ~~$1.5~~$2.5 million, respectively, which includes amortization of capitalized software costs of ~~$0.8~~$3.5 million, $2.1 million and ~~$0.3~~$0.8 million, respectively.

Accrued expenses

Accrued expenses consist of the following:


	December 31,
	2022		2021
	(in thousands)
Accrued compensation	$	8,070	$	4,845
Accrued warranty reserve		3,765		4,014
Refunds due to customers		580		376
Other accrued expenses		300		—
Total accrued expenses	$	12,715	$	9,235

Sales returns reserve

December 31,

2020

2019

(in thousands)

Allowance for sales returns

$
4,326

$
3,759

Accrued compensation

5,861

2,739

Accrued vendor costs

751

2,776

Refunds due to customers

581

215

Accrued warranty reserve

2,390

450

Total accrued expenses

$
13,909

$
9,939

~~110~~

~~Eargo, Inc.~~

~~Notes to Consolidated Financial Statements~~

~~Allowance for doubtful accounts~~

The ~~allowance for doubtful accounts~~sales returns reserve consists of the following activity:

Year ended December 31,

2020

2019

2018

(in thousands)

Allowance for doubtful accounts, beginning balance

$
225

$
—

$
—

Charged to expense

2,352

225

—

Accounts written off, net of recoveries

(709
)

—

—

Allowance for doubtful accounts, ending balance

$
1,868

$
225

$
—


	Year ended December 31,
	2022			2021			2020
	(in thousands)
Sales returns reserve, beginning balance	$	13,827		$	4,326		$	3,759
Reduction of revenue		18,240			37,674			22,676
Decrease related to Pricing Concession		(11,263	)		—			—
Utilization of sales returns reserve		(16,862	)		(28,173	)		(22,109	)
Sales returns reserve, ending balance	$	3,942		$	13,827		$	4,326

During the year ended December 31, 2022, as part of the Pricing Concession, the Company recorded a decrease in its insurance-related sales return reserve liability of $11.3 million related to unsubmitted and unpaid claims, which was recorded against revenue in the consolidated statement of operations. Please see caption “DOJ investigation and settlement and claims audits” in Note 1.

Allowance for ~~sales returns~~credit losses

The allowance for ~~sales returns~~credit losses consists of the following activity:

Year ended December 31,

2020

2019

2018

(in thousands)

Allowance for sales returns, beginning balance

$
3,759

$
2,713

$
1,198

Charged to revenue

22,676

17,739

17,848

Utilization of allowance for sales returns

(22,109
)

(16,693
)

(16,333
)
Allowance for sales returns, ending balance

$
4,326

$
3,759

$
2,713


	Year ended December 31,
	2022			2021			2020
	(in thousands)
Allowance for credit losses, beginning balance	$	4,838		$	1,868		$	225
Charged to expense		713			9,615			2,352
Accounts written off, net of recoveries		(5,393	)		(6,645	)		(709	)
Allowance for credit losses, ending balance	$	158		$	4,838		$	1,868

Accrued warranty reserve

The accrued warranty reserve consists of the following activity:


	Year ended December 31,
	2022			2021			2020
	(in thousands)
Accrued warranty reserve, beginning balance	$	4,014		$	2,390		$	450
Charged to cost of revenue		2,607			3,229			3,178
Utilization of accrued warranty reserve		(2,856	)		(1,605	)		(1,238	)
Accrued warranty reserve, ending balance	$	3,765		$	4,014		$	2,390

Year ended December 31,

2020

2019

2018

(in thousands)

Accrued warranty reserve, beginning balance

$
450

$
53

$
39

Charged to cost of revenue

3,178

1,589

57

Utilization of accrued warranty reserve

(1,238
)

(1,192
)

(43
)
Accrued warranty reserve, ending balance

$
2,390

$
450

$
53

Note 5. Acquisitions

In June 2021, the Company completed the purchase of certain web-based hearing screening technology assets (“Clementine”) for $2.9 million in cash, all of which has been paid as of December 31, 2021. This purchase was accounted for as a business combination. Clementine offers remote audiology solutions and self-administered hearing screen technology to consumers across digital and in-person settings with an online tool. The Company believes that integrating this technology with the Company’s telecare infrastructure has the potential to further advance its core mission of making it easier for consumers to assess their hearing, consult with hearing professionals, and purchase Eargo hearing devices more conveniently.

The table below presents the purchase price allocation:


	Amount
	(in thousands)
Goodwill	$	873
Intangible assets		1,990
Total fair value of consideration	$	2,863

The intangible assets acquired in the Clementine acquisition are comprised primarily of developed technologies and have a weighted-average amortization period of 3.6 years as of the date of the acquisition.

Note 5.6. Commitments and contingencies

Operating leases

The Company has entered into non-cancelable operating leases for its offices. These leases generally contain scheduled rent increases and renewal options, which are not included in the determination of lease term unless the Company is reasonably certain that the renewal option would be exercised.

San Jose lease

In September 2021, the Company entered into a lease agreement, as amended, for approximately 30,000 square feet of office and laboratory space located in San Jose, California, which the Company has used as its headquarters since early 2022. The lease commenced in September 2021 and has a 93-month term with two60-month renewal options, which are not reasonably certain of being exercised. The Company recorded a right-of-use asset of $6.9 million and lease liability of $6.8 million as of commencement of the lease.

Nashville lease

In February 2021, the Company amended the operating lease for its Nashville, Tennessee office to extend the term of the initial lease through March 2023 and reduce the size of office space leased. This extension was accounted for as a lease modification and the Company recorded an increase to the right-of-use asset and lease liability of $0.4 million at the time of the amendment.

Operating lease summary

As of December 31, ~~2020,~~2022, the Company recorded an aggregate ~~ROU~~right-of-use asset of ~~$1.1~~$5.8 million and an aggregate lease liability of ~~$1.2~~$6.6 million in the accompanying consolidated balance sheet. ~~The ROU asset and corresponding lease liability~~These balances were initially estimated using a weighted-average incremental borrowing rate of ~~7.1 %.~~7.7%. The weighted-average remaining lease term is ~~1.1 years.~~6.4 years as of December 31, 2022.

~~For~~During the ~~year~~years ended December 31, 2022, 2021 and 2020, the Company incurred ~~$1.3~~$1.6 million, of$1.5 million and $1.3 million, respectively, in operating lease costs. Variable lease payments for operating expenses and costs related to short-term leases were immaterial for the ~~year~~years ended December 31, 2021 and 2020. For the years ended December 31, 2022, 2021 and 2020, net cash paid for amounts included in the measurement of operating lease liabilities was $1.1 million, $1.4 million and $1.2 million, respectively.

~~111~~

~~Eargo, Inc.~~

~~Notes to Consolidated Financial Statements~~

As of December 31, ~~2020,~~2022, undiscounted future minimum lease payments due under the non-cancelable operating leases are as follows:

Operating
leases

(in thousands)

2021

$
1,074

2022

167

Total minimum future lease payments

1,241

Present value adjustment for minimum lease
commitments

(45
)
Total lease liability

$
1,196


	Amount
	(in thousands)
2023	$	1,114
2024		1,081
2025		1,331
2026		1,372
2027		1,413
Thereafter		2,193
Total minimum future lease payments		8,504
Present value adjustment for minimum lease commitments		(1,903	)
Total lease liability	$	6,601

Legal and other contingencies

~~Litigation~~

The Company ~~may become~~is involved in legal proceedings in the ordinary course of its ~~business. The~~business and may become involved in additional legal proceedings. Other than those listed below, the Company does not believe that any lawsuits or claims currently pending against it, individually or in the aggregate, are material or will have a material adverse effect on its financial condition, results of operations or cash flows. The Company may enter into settlement discussions, and may enter into settlement agreements, if it believes settlement is in the best interest of the Company and its shareholders. Unless stated otherwise, the matters discussed below, if decided adversely or settled by the Company, individually or in the aggregate, may result in a liability material to the Company’s financial condition, results of operations or cash flows.

The Company is also subject to review from federal and state taxing authorities in order to validate the amounts of income, sales and/or use taxes which have been claimed and remitted. The Company has estimated exposure and established reserves for its estimated sales tax audit liability.

In the normal course of business, the Company may agree to indemnify third parties with whom it enters into contractual relationships, including customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations or covenants, other third-party claims that the Company’s products, when used for their intended purposes, infringe the intellectual property rights of such other third parties, or other claims made against certain parties. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the Company’s limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in ~~each~~any particular claim.

DOJ Investigation and Settlement

On September 21, 2021, the Company was informed that it was the target of a criminal investigation by the DOJ related to insurance claims for reimbursement the Company submitted on behalf of its customers covered by various federal employee health plans under the FEHB program. The investigation also pertained to the Company’s role in claim submissions to federal employee health plans. Additionally, the Company was the subject of an ongoing claims audit by an insurance company that was historically the Company’s largest third-party payor and was informed by such insurance company that the DOJ was the principal contact related to the subject matter of the audit. In addition to such audit, the Company has been subject to a number of other audits of claims submitted to additional third-party payors. One of these claims audits did not relate to claims submitted under the FEHB program. On January 4, 2022, the DOJ confirmed to the Company that the investigation had been referred to the Civil Division of the DOJ and the U.S. Attorney’s Office for the Northern District of Texas and the criminal investigation was no longer active.

On April 29, 2022, the Company entered into a civil settlement agreement with the U.S. government that resolved the DOJ investigation, including allegations that the Company violated the False Claims Act by knowingly submitting or causing the submission of false claims for payment under the FEHB program during the period from February 1, 2021 through September 22, 2021. The settlement agreement provided for the payment by the Company of approximately $34.4 million to the U.S. government and resolved allegations that the Company submitted or caused the submission of claims for payment to the FEHB program using unsupported hearing loss-related diagnostic codes. As of December 31, 2021, the Company recorded a $34.4 million settlement liability in the consolidated balance sheets in connection with the settlement. The settlement amount was treated as consideration payable to a customer and was recorded as a reduction in revenue in the third quarter of 2021. On May 2, 2022, the Company paid the settlement amount.

The settlement of the investigation may not resolve all of the claims audits initiated by various third-party payors, and additionally the Company remains subject to a prepayment review of claims by the payor who conducted the Primary Audit. The Company intends to continue to work with applicable third-party payors to establish processes to support any claims that it may submit for reimbursement, and there are no guarantees that the Company will be able to arrive at such acceptable processes or submit future claims in sufficient volume to meaningfully restore or expanded its insurance-based business.

Securities Class Action

On October 6, 2021, putative shareholder Joseph Fazio filed a purported securities class action against the Company and certain of its officers, captioned Fazio v. Eargo, Inc., et al., No. 21-cv-07848 (N.D. Cal. Oct. 6, 2021) (the “Fazio Action”). Plaintiff Fazio alleges that certain of the Company’s disclosures about its business, operations, and prospects, including reimbursement from third-party payors, violated federal securities laws. Fazio voluntarily dismissed his complaint on December 6, 2021. On November 4, 2021, putative shareholder Alden Chung filed a purported class action lawsuit substantially similar to the Fazio Action, captioned Chung v. Eargo, Inc., et al., No. 21-cv-08597 (N.D. Cal. Nov. 4, 2021) (the “Chung Action”). On November 10, 2021, putative shareholder IBEW Local 353 Pension Plan filed a purported class action substantially similar to the Fazio and Chung Actions and also asserting claims under the federal securities laws against current and former members of the Company’s Board of Directors (the “Board of Directors”) and the underwriters of the Company’s October 15, 2020 initial public offering of common stock, captioned IBEW Local 353 Pension Plan v. Eargo, Inc., et al., No. 21-cv-08747 (N.D. Cal. Nov. 10, 2021) (the “IBEW Action”). These class actions, which seek damages and other relief, were filed in the United States District Court for the Northern District of California. The Fazio and Chung Actions were brought purportedly on behalf of a class of investors who purchased or otherwise acquired Eargo securities between February 25, 2021 and September 22, 2021. The IBEW Local 353 Action was brought purportedly on behalf of a class of investors who purchased or otherwise acquired: (i) Eargo shares in or traceable to the Company’s October 15, 2020 initial public offering of common stock; and/or (ii) shares of Eargo common stock between October 15, 2020 and September 22, 2021. On January 5, 2022, the court consolidated the foregoing class actions (as consolidated, the “Securities Class Action”) under the caption In re Eargo, Inc. Securities Litigation, No. 21-cv-08597-CRB, and appointed IBEW Local 353 Pension Plan and Xiaobin Cai as Lead Plaintiffs and Bernstein Litowitz Berger & Grossmann LLP and Block & Leviton LLP as Lead Counsel. On May 20, 2022, Lead Plaintiffs filed a consolidated amended complaint, which purported to extend the class period through March 2, 2022. Defendants filed a motion to dismiss on July 29, 2022. The Court granted the defendants’ motion to dismiss on February 14, 2023. Plaintiffs filed a second amended complaint on March 16, 2023. Defendants plan to file a second motion to dismiss.

The Company intends to vigorously defend the Securities Class Action and cannot reasonably estimate any loss or range of loss that may arise from the litigation. Accordingly, the Company can provide no assurance as to the scope and outcome of this matter and no assurance as to whether its business, financial position, results of operations, or cash flows will not be materially adversely affected.

Derivative Action

On December 3, 2021, putative shareholder Barbara Wolfson filed a derivative complaint purportedly on the Company’s behalf against members of the Board of Directors and the Company as nominal defendant, captioned Wolfson v. Gormsen, et. al., No. 21-cv-09342 (N.D. Cal. Dec. 3, 2021) (the “Wolfson Action”). Plaintiff asserts, among other things, that the defendants breached their fiduciary duties by allegedly failing to implement and maintain an effective system of internal controls related to the Company’s financial reporting, public disclosures and compliance with laws, rules and regulations governing the business. Plaintiff purports to assert derivative claims on the Company’s behalf for alleged violations of Section 14(a) of the Securities Exchange Act of 1934, as amended, breach of fiduciary duty, waste of corporate assets, and aiding and abetting. On March 1, 2022, the court entered the parties’ stipulation staying the Wolfson Actionuntil the resolution of the motion to dismiss in the Securities Class Action. On June 9, 2022, putative shareholder Brodie Woodward filed a derivative complaint purportedly on Eargo’s behalf against the same defendants as in the Wolfson Action, as well as Juliet Tammenoms Bakker, Adam Laponis, and Geoff Pardo, captioned Woodward v. Gormsen, et al., No. 22-cv-03419 (N.D. Cal. June 9, 2022) (together with the Wolfson Action, the “Derivative Action”). Plaintiff Woodward asserts substantively similar allegations and causes of action as those asserted in the Wolfson Action. On August 4, 2022, the court granted the parties’ stipulation to consolidate the Derivative Action and to stay the consolidated action until the resolution of the motion to dismiss in the Securities Class Action.

The defendants intend to vigorously defend the Derivative Action and cannot reasonably estimate any loss or range of loss that may arise from the litigations. Accordingly, the Company can provide no assurance as to the scope and outcome of these matters and no assurance as to whether its business, financial position, results of operations, or cash flows will not be materially adversely affected.

Proxy Statement Class Action

On September 14, 2022, putative shareholder Adam C. Wolfe filed a purposed securities class action against members of the Board of Directors and the Company as nominal defendant, captioned Wolfe v. Gormsen, et al., No. 2022-0812-MTZ (Del. Ch. Sept. 14, 2022) (the “Wolfe Action”). Plaintiff Wolfe asserted, among other things, breaches of fiduciary duty by the Board of Directors in connection with the Note ~~6. Debt~~issuance, as well as that the Company’s proxy statement omitted material information concerning the Note issuance. Plaintiff Wolfe sought injunctive relief and attorneys’ fees and costs, among other remedies. Although the Company believes no supplemental disclosures were required under applicable law, to alleviate the costs, risks and uncertainties inherent in litigation, avoid any potential delay in the Company’s annual meeting of stockholders or the Rights Offering and provide additional information to its stockholders, on October 3, 2022, the Company filed a Current Report on Form 8-K to voluntarily supplement its proxy statement disclosures. On October 17, 2022, Plaintiff Wolfe filed a notice of dismissal with the court, which the court granted on October 24, 2022. On March 15, 2023, the parties agreed that the Company would pay $249,500 to Plaintiff Wolfe’s counsel in full satisfaction of Plaintiff Wolfe’s claim for attorneys’ fees and expenses in the Wolfe Action. The court was not asked to review, and did not pass judgment on, the payment of the attorneys’ fees and expenses or their reasonableness. As of December 31, 2022, the Company recorded a settlement liability in such amount in the consolidated balance sheets.

Note 7. Goodwill and intangible assets

Goodwill

The Company recorded goodwill of $0.9 million during the year ended December 31, 2021 related to the Clementine acquisition (Note 5). There was no impairment of goodwill during the years ended December 31, 2022 and 2021.

Intangible assets, net

Intangible assets, net consist of the following:


	December 31, 2022
	Gross carrying value		Accumulated amortization		Net carrying value
	(in thousands)
Developed technologies	$	1,700	$	637	$	1,063
Other		290		290		—
Total intangible assets, net	$	1,990	$	927	$	1,063

Amortization expense was $0.6 million and $0.3 million for the years ended December 31, 2022 and 2021. There was no impairment of intangible assets during the years ended December 31, 2022 and 2021. The following table summarizes the estimated future amortization expense of intangible assets, net as of December 31, 2022:


	Amount
	(in thousands)
2023	$	425
2024		425
2025		213
Total	$	1,063

Note 8. Rights Offering and debt obligations

Note Purchase Agreement and Rights Offering

First Tranche Closing

On June 24, 2022, the Company entered into the Note Purchase Agreement with the PSC Stockholder and Drivetrain Agency Services, LLC, as administrative agent and collateral agent. Pursuant to the Note Purchase Agreement, the Company agreed to issue and sell up to $125.0 million of Notes. On June 28, 2022 (the “First Tranche Closing”), the Company closed the initial issuance of $100.0 million of Notes (the “First Tranche Notes”). As a result of applying the fair value option, direct costs and fees related to the Notes of $5.7 million were expensed as incurred to general and administrative expenses. The maturity date of the Notes was expected

on the one-year anniversary of the First Tranche Closing, subject to earlier conversion, redemption or repurchase as provided by their terms.

Rights Offering

In October 2022, the Company’s stockholders approved the Rights Offering for an aggregate of 18,750,000 shares of common stock to the Company’s stockholders at a fixed offering price of $10.00 per share of common stock. On November 23, 2022, the Company completed the Rights Offering and existing shareholders subscribed to purchase 2,928,701 shares of the Company’s common stock resulting in net proceeds of $27.6 million to the Company.

Second Tranche Closing

Pursuant to the Note Purchase Agreement, the noteholders agreed to purchase up to an additional $25.0 million of Notes if the Company completed the Rights Offering within 150 days from the First Tranche Closing and the Company’s existing stockholders subscribed to purchase less than 3,750,000 shares. On November 23, 2022, following the completion the Rights Offering, the Company issued an additional $5.5 million of the aggregate principal amount of the Notes (the “Second Tranche Notes”).

Issuance of Conversion Shares

On November 23, 2022, the First Tranche Notes converted into 15,000,000 shares of the Company’s common stock. On November 25, 2022, the Second Tranche Notes converted into 821,299 shares of the Company’s common stock. Following the conversion, the PSC Stockholder beneficially owned the Conversion Shares representing approximately 76.3% of the Company’s common stock (“Change in Control”). The estimated fair value of the Conversion Shares of $151.0 million was based on the closing prices of the Company’s common stock on the conversion dates adjusted for the impact of certain legal restrictions on the Conversion Shares.

2018 Loan Agreement

In June 2018, the Company entered into a Loan and Security Agreement (the “2018 Loan Agreement”) with Silicon Valley Bank. Under the terms of the 2018 Loan Agreement, Silicon Valley Bank made available to the Company term loans in an aggregate principal amount of ~~$12.5~~$12.5 million and the Company borrowed ~~$5.0~~$7.0 million in ~~October 2018, $1.0 million in November 2018 and $1.0 million in December~~ 2018. The ~~term loans~~Company’s existing subsidiaries were, and any additional future domestic subsidiaries of the Company were required to be co-borrowers jointly and severally liable under the 2018 Loan Agreement mature in June 2022, with interest-only monthly payments for a specified period of time. Interest on the term loans accrued at a per annum rate equal to the Wall Street Journal prime rate minus 1.0% with a floor of 0.0%.Agreement.

In connection with the execution of the 2018 Loan Agreement, the Company issued warrants to purchase 30,173 shares of Series C convertible preferred stock. The estimated fair value of the warrants at issuance was recorded as a discount on the loan and is amortized to interest expense over the term of the agreement using the effective interest method.

~~Amendments to the 2018 Loan Agreement~~

In January 2019, the Company executed the First Amendment to the Loan and Security Agreement, which extended the interest-only period for all borrowings under the agreement until January 2020. ~~No other terms were amended.~~ In June 2019, the Company borrowed an additional ~~$5.0~~$5.0 million to increase the total principal balance to ~~$12.0~~$12.0 million. In connection with the June 2019 borrowing, the Company issued Silicon Valley Bank warrants to purchase 14,999 shares of Series C convertible preferred stock.

~~112~~

~~Eargo, Inc.~~

~~Notes to Consolidated Financial Statements~~

In May 2020, the Company executed the Second Amendment to its Loan and Security Agreement, which deferred the principal payments due between May 2020 and July 2020 such that the deferred amounts will be repaid in equal monthly payments that started in August 2020 through the scheduled maturity of the loan in June 2022. The amendment was accounted for as a modification.

In September 2020, the Company executed the Third Amendment to the Loan and Security Agreement (the “Third Amendment”), under which Silicon Valley Bank made available to the Company additional term loans in an aggregate principal amount of ~~$20.0~~$20.0 million through December 31, 2020. The Company borrowed ~~$15.0~~$15.0 million in September 2020 and used ~~$10.2~~$10.2 million of the proceeds to repay the outstanding balance of ~~$9.5~~$9.5 million and final payment fee of ~~$0.7~~$0.7 million, or ~~6.0%~~6.0% of the original aggregate principal amount, on the existing term loan. The Company’s ability to borrow any additional principal under the Third Amendment expired unused on December 31, 2020.

~~The term loan under~~Subsequent to the Third Amendment, ~~matures~~the term loan had a maturity date in September 2024 with interest-only monthly payments until January 2022, which was extended to July 2022 upon the completion of the Company’s IPO in October 2020. The term loan ~~accrues~~included an interest at a per annum rate equal to the Wall Street Journal prime rate plus ~~1.0% (4.25% as of December 31, 2020)~~1.0% and ~~includes~~ a final payment fee equal to ~~6.25%~~6.25% of the original aggregate principal amount. In connection with the execution of the Third Amendment, the Company issued Silicon Valley Bank a warrant to purchase 53,487 shares of Series E convertible preferred stock. The amendment was accounted for as a modification.

~~Borrowings under~~In June 2022, in connection with the ~~Third Amendment are collateralized by substantially all~~Note Transaction, the ~~assets~~Company repaid the outstanding balance of $15.0 million, as well as a prepayment fee of $0.3 million and a final payment fee of $0.9 million, and terminated the 2018 Loan Agreement. In connection with the repayment of the 2018 Loan Agreement, the Company excluding intellectual property (but including rights to payment and proceeds thereof). The Third Amendment contains customary affirmative and restrictive covenants, including with respect to the Company’s ability to enter into fundamental transactions, incur additional indebtedness, grant liens, pay any dividend or make any distributions to its holders, make investments, merge or consolidate with any other person or engage in transactions with the Company’s affiliates, but do not include any financial covenants. recognized a loss on extinguishment of $0.8 million.

The Company ~~was in compliance with all of the covenants~~had no outstanding debt as of December 31, ~~2020.~~2022. The balance of the term loans as of December 31, 2021 is as follows:


	December 31,
	2021
	(in thousands)
Principal value of long-term debt	$	15,000
Net of debt discount and accretion of final payment		257
Long-term debt, current and noncurrent		15,257
Less: Long-term debt, current portion		(3,333	)
Long-term debt, noncurrent portion	$	11,924

During the years ended December 31, 2022, 2021 and 2020, ~~2019 and~~for the 2018 Loan Agreement, the Company recognized interest expense ~~related to the term loans~~ of ~~$1.0~~$0.5 million, ~~$0.7~~$1.1 million, and ~~$0.1 million, respectively, which is inclusive of amortization of debt discount. The effective interest rate was 7.12% as of December 31, 2020.~~

~~The balance of the term loans is as follows:~~

December 31,

2020

2019

(in thousands)

Principal value of long-term debt

$
15,000

$
12,000

Net of debt discount and accretion of final payment

(163
)

246

Long-term debt, current and noncurrent

14,837

12,246

Less: Long-term debt, current portion

—

(4,800
)
Long-term debt, noncurrent portion

$
14,837

$
7,446

~~113~~

~~Eargo, Inc.~~

~~Notes to Consolidated Financial Statements~~

~~Future minimum payments of principal and estimated payments of interest on the Company’s outstanding variable rate borrowings as of December 31, 2020 are as follows:~~

Total

(in thousands)

2021

$
646

2022

3,950

2023

7,038

2024

6,028

Total future payments

17,662

Less amounts representing interest

(1,724
)
Less final payment

(938
)
Total principal amount of term loan payments

$
15,000

~~Paycheck Protection Program loan~~

On May 3, 2020, the Company executed a promissory note with MidFirst Bank, which provided for an unsecured loan in an aggregate principal amount of $4.6 million (the “PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act signed into law on March 27, 2020.

The PPP Loan provided 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 were deferred for a six-month period beginning from the date of disbursement of the PPP Loan. The PPP Loan allowed for prepayment by the Company at any time prior to maturity with no prepayment penalty. The Note contained customary event of default provisions.

In August 2020, the Company repaid the PPP Loan in full in the amount of $4.6 million and terminated the related promissory note. During the year ended December 31, 2020, the Company recognized interest expense related to the PPP Loan of less than $0.1 million.

~~2020 Convertible Promissory Notes~~

The Company issued an aggregate of $8.9 million in convertible promissory notes in March 2020 (the “2020 Notes”) 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 and mature in March 2021. Upon maturity, the majority note holders have the option of having outstanding principal and unpaid accrued interest paid in cash or converted into Series D convertible preferred stock.

In the event of a qualified sale of preferred stock or other equity securities resulting in aggregate gross proceeds to the Company of at least $15.0 million, all principal and accrued and unpaid interest under the 2020 Notes would automatically convert into the preferred stock issued in such a financing at a price per share equal to 80% of the lowest price per share of the preferred stock sold in the financing (redemption feature). In the event of an IPO, all principal and accrued and unpaid interest under the 2020 Notes would automatically convert into common stock at a price per share equal to 90% of the public offering price (redemption feature).

The 2020 Notes also contained an option whereby in the event of a change of control event, at the option of the holders holding a majority in outstanding principal amount of the 2020 Notes, all principal and accrued and unpaid interest under the 2020 Notes would be convertible into the Company’s Series D convertible preferred stock at its original issue price (conversion feature) or, alternatively, such holders may elect to require the Company to pay to all 2020 Note holders an amount equal to the principal amount then outstanding and any accrued but unpaid interest plus an amount equal to 100% of the outstanding principal and accrued and unpaid interest (put option).

The above mentioned redemption features, conversion feature and the put option contained in the 2020 Notes were determined to be embedded derivatives requiring bifurcation and separately accounted for as a single compound derivative instrument.

~~114~~

~~Eargo, Inc.~~

~~Notes to Consolidated Financial Statements~~

Upon the issuances of the 2020 Notes, the Company 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 was being amortized to interest expense using the effective interest method over the term of the 2020 Notes. During the year ended December 31, 2020, the Company recognized interest expense related to the 2020 Notes of $0.9$1.0 million which is inclusive of amortization of debt discount.

In July 2020, the 2020 Notes were redeemed whereby the outstanding principal balance of $10.1 million and accrued interest of $0.2 million was converted into 1,889,548 shares of 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 preferred stock financing. The redemption of the 2020 Notes was accounted for as a debt extinguishment, which resulted in a loss of $1.6 million that was recognized in other income (expense) in the consolidated statement of operations and comprehensive loss. The loss on extinguishment was calculated as the difference between (i) the fair value of the shares of Series E convertible preferred stock issued to settle the 2020 Notes and (ii) the carrying value of the 2020 Notes, net of the unamortized debt discount, plus the fair value of the derivative liability associated with the 2020 Notes at the time of extinguishment.

~~Note 7. Convertible preferred stock and stockholders’ equity (deficit)~~

~~In connection with the IPO, the Company filed an amended and restated certificate of incorporation effective~~ ~~immediately~~ prior to the closing of the IPO that authorized the issuance of up to 300,000,000 shares of common stock, par value $0.0001 per share, and 5,000,000 shares of undesignated preferred stock, par value $0.0001 per share.

~~Convertible preferred stock~~

~~Convertible preferred stock as of December 31, 2019 consisted of the following:~~

December 31, 2019

Shares
authorized

Shares
issued and
outstanding

Net
carrying
value

Aggregate
liquidation
preference

(in thousands, except share amounts)

Series A convertible preferred stock

1,283,000

423,713

$
16,130

$
16,271

Series B convertible preferred stock

83,000

27,652

2,229

2,473

Series B-1 convertible preferred stock

2,540,000

838,892

22,871

23,003

Series C convertible preferred stock

11,284,680

3,725,354

33,418

33,603

Series C-1 convertible preferred stock

8,740,486

2,913,490

26,280

21,024

Series D convertible preferred stock

12,338,000

3,896,711

51,952

52,115

Total convertible preferred stock

36,269,166

11,825,812

$
152,880

$
148,489

In July and August 2020, the Company issued an aggregate of 10,513,921 shares of Series E convertible preferred stock at a purchase price of $6.7836 per share in exchange for net proceeds of approximately $67.3 million.

Contemporaneous with the initial closing of the Series E convertible preferred stock financing, the 2020 Notes (see Note 6) were redeemed whereby all of the outstanding principal and accrued interest amounting to $10.3 million was converted into 1,889,548 shares of Series E convertible preferred stock.

In connection with the Series E convertible preferred stock financing, the Company amended and restated its certificate of incorporation to effect anti-dilution adjustments to prior series of convertible preferred stock that were issued, which changed the conversion prices for each share of convertible preferred stock from $27.87, $60.60, $9.0201, $9.0201, $7.2162 and $13.374 for the Series A convertible preferred stock, Series B convertible preferred stock, Series B-1 convertible preferred stock, Series C convertible preferred stock, Series C-1 convertible preferred stock and Series D convertible preferred stock, respectively, to $19.599, $39.6303, $8.0625, $8.0625, $6.9585, $10.7271, respectively.

~~115~~

~~Eargo, Inc.~~

~~Notes to Consolidated Financial Statements~~

The amended and restated certificate of incorporation filed in connection with the Series E convertible preferred stock financing also amended the liquidation right held by holders of Series C and Series C-1 convertible preferred stock under which such holders were entitled to an aggregate liquidation amount per share from up to two times the original issue price to one times the original issuance price for the related series upon the event of a liquidation, dissolution, or winding up of the Company. This amendment of the liquidation right was determined to be significant using the qualitative approach. As such, the Company accounted for the amendment as an extinguishment of the outstanding Series C and Series C-1 convertible preferred stock and recorded a gain on extinguishment of $9.8 million on the date of the filing of the charter. The gain on the extinguishment of Series C and Series C-1 convertible preferred stock was calculated by taking the difference between the net carrying value of $59.7 million of Series C and Series C-1 convertible preferred stock immediately prior to the amendment of the liquidation right and the fair value of $49.9 million of the new of Series C and Series C-1 convertible preferred stock that for accounting purposes was deemed to be issued in connection with the amended and restated certificate of incorporation filed in connection with the Series E convertible preferred stock financing. The gain on extinguishment was recorded as a deemed contribution in equity and was recorded as a decrease to the net loss attributable to common stockholders for the year ended December 31, 2020 and as an increase to additional paid in capital.

~~In October 2020,~~ immediately prior to the completion of the IPO (see Note 1), all of the then-outstanding shares of convertible preferred stock automatically converted into 28,196,388 shares of common stock at the applicable conversion ratio then in effect.

~~Preferred stock warrants~~

Immediately prior to the closing of the IPO, all of the then-outstanding convertible preferred stock warrants were converted into warrants to purchase 137,812 shares of common stock and the convertible preferred stock warrant liability was reclassified to additional paid in capital. Subsequent to the IPO, all of these common stock warrants were net exercised into 107,790 shares of common stock. There are no convertible preferred stock warrants or common stock warrants outstanding as of December 31, 2020.

Note 8.9. Stock-based compensation

Total stock-based compensation is as follows:


	Year Ended December 31,						Year ended December 31,
	2020		2019		2018		2022		2021		2020
	(in thousands)						(in thousands)
Cost of revenue	$	60	$	16	$	2	$	126	$	738	$	60
Research and development		822		232		29		1,039		6,939		822
Sales and marketing		1,629		188		25		2,720		11,213		1,629
General and administrative		2,578		903		393		6,080		8,841		2,578
Total stock-based compensation	$	5,089	$	1,339	$	449	$	9,965	$	27,731	$	5,089

Stock-based compensation costs capitalized as part of capitalized software costs was ~~$0.2~~$0.9 million and $0.2 million during the years ended December 31, 2021 and 2020. No stock-based compensation costs were capitalized during the year ended December 31, ~~2020. No such costs were capitalized during the years ended December 31, 2019 and 2018.~~2022.

Stock-based compensation includes the impact of the Company repricing its stock options in August 2020 by canceling 1,574,243 option grants with a per share exercise price higher than $2.55 in exchange for 1,574,243 new option grants at an exercise price of $2.55 per share. Except for the change in exercise price, the new options had the same terms and conditions as the original options, including the contractual term, vesting schedule and the vesting start date. The total amount of stock-based compensation associated with the repricing is $1.2 million. During the year ended December 31, 2020, the Company recognized $0.5 million of stock-based compensation associated with the repricing, of which $0.3 million relates to options that were already vested on the date of modification. As of December 31, 2020, the Company has unrecognized stock-based compensation related to the repricing of $0.7 million to be expensed over the remaining vesting term of the new options.

~~116~~

~~Eargo, Inc.~~

~~Notes to Consolidated Financial Statements~~

~~Determination of fair value~~

~~The estimated grant-date fair value of the Company’s stock-based awards was calculated using the Black-Scholes option pricing model, based on the following assumptions:~~

Year ended December 31,
Valuation assumptions:

2020
��
2019

2018
Expected volatility

60%-71%

58%-60%

23%-27%
Expected term

5.1-7.0 years

5.0-10.0 years

5.5-10.0 years
Risk-free interest rate

0.23%-1.20%

1.46%-2.51%

2.46%-3.19%
Dividend yield

—

—

—

The fair value of each stock option grant was determined by the Company using the methods and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment and estimation by management.

~~Expected term~~—The expected term represents the period that stock-based awards are expected to be outstanding. The Company’s historical share option exercise information is limited due to a lack of sufficient data points and does not provide a reasonable basis upon which to estimate an expected term for employee options. The expected term for employee option grants is therefore determined using the simplified method, which is the midpoint between the vesting period and the contractual life. The expected term for nonemployee options is the contractual term.

~~Expected volatility~~—The expected volatility was derived from the historical stock volatilities of comparable peer public companies within the Company’s industry that are considered to be comparable to the Company’s business over a period equivalent to the expected term of the stock-based awards as there has been no trading history of the Company’s common stock prior to its IPO and limited trading history subsequent to its IPO.

~~Risk-free interest rate~~—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the stock-based awards’ expected term.

~~Expected dividend yield—The expected dividend yield is zero as the Company has not paid nor does it anticipate paying any dividends on its common stock in the foreseeable future.~~

~~Fair value of common stock~~— For grants prior to the Company’s IPO in October 2020, the fair value of common stock underlying share-based awards was estimated on each grant date by the Company’s board of directors. In order to determine the fair value of the Company’s common stock underlying option grants, the board of directors considered, among other things, valuations of common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. For all grants subsequent to the IPO in October 2020, the fair value of common stock was determined by using the closing price per share of common stock as reported on the Nasdaq Global Select Market.

Equity incentive plans

In November 2010, the Company adopted the 2010 Equity Incentive Plan (the “2010 Plan”) under which the Board had the authority to issue stock options to employees, directors and consultants.

In October 2020, the Company’s board of directors and stockholders adopted and approved the 2020 ~~Equity~~ Incentive Award Plan, (the “2020 Plan”) and 2020 Employee Stock Purchase Plan (the “ESPP”). The Company’s 2010 ~~Stock~~ Plan was terminated in connection with the IPO and no further grants will be made under the 2010 Plan from the date that the 2020 Plan became effective.

~~A total~~As of ~~4,687,685~~December 31, 2022, 231,437 shares of common stock ~~were initially~~are issuable upon the exercise of outstanding awards under the 2010 Plan. As of December 31, 2022, the Company had reserved471,015 shares of common stock for issuance under the 2020 Plan, of which ~~includes 9,940~~205,926 shares ~~that remained~~were available for issuance ~~under~~in connection with grants of future awards.

As a result of the ~~2010 Plan. There are 4,593,583~~uncertainty created by the DOJ investigation and the claims audits, on November 9, 2021, the Company temporarily restricted its employees from selling Company common stock, ceased granting stock option awards and restricted stock units (“RSUs”) that settle solely in Company common stock, suspended its ESPP and paused the settlement of outstanding RSUs, each effective as of November 9, 2021. The Company resumed granting RSUs on March 18, 2022. RSUs that vested on November 15, 2021 were settled in cash during the first quarter of 2022. All RSUs that vested during the year ended December 31, 2022 were settled in shares ~~available for issuance under~~during the ~~2020 Plan as~~reporting period. The Company resumed granting stock option awards on August 23, 2022. As of December 31, ~~2020.~~2022, all outstanding equity awards continue to vest in accordance with their existing vesting schedules.

~~117~~The Board of Directors also determined to suspend the non-employee director compensation program with respect to the option awards that would otherwise have been awarded to non-employee directors automatically on the date of the Company’s annual meeting of stockholders held on November 9, 2021. All equity awards that are currently outstanding continue to vest in accordance with their existing vesting schedules. During the third quarter of 2022 the Board of Directors resumed the practice of granting equity awards to non-employee directors. In November 2022, subsequent to the Change in Control, the Company recorded $0.3 million in stock-based compensation related to the accelerated vesting of the outstanding common stock options held by certain members of the Board of Directors pursuant to their original terms.

~~Eargo, Inc.~~

~~Notes to Consolidated Financial Statements~~Stock options

~~Activity under~~Stock option activity for the ~~2010 Plan and 2020 Plan~~year ended December 31, 2022 is set forth below:

Number of
shares

Weighted
average
exercise
price

Weighted
average
remaining
contractual
term

Aggregate
intrinsic value

(in years)

(in thousands)

Balance December 31, 2019

3,474,052

$
2.93

8.55

$
16,440

Grants

3,972,421

3.81

Exercises

(646,851
)

1.82

Cancelled/forfeited

(330,778
)

3.71

Balance December 31, 2020

6,468,844

$
2.78

8.77

$
271,944

Vested and exercisable at December 31, 2020

1,609,444

$
1.88

7.50

$
75,312


	Number of shares			Weighted average exercise price		Weighted average remaining contractual term		Aggregate intrinsic value
						(in years)		(in thousands)
Balance December 31, 2021		270,195		$	97.36		7.88	$	12,860
Grants		64,391			26.62
Exercises		(3,026	)		44.42
Cancelled or forfeited		(22,245	)		112.23
Balance December 31, 2022		309,315		$	82.08		5.60	$	—
Vested and exercisable as of December 31, 2022		213,131		$	70.51		5.33	$	—

The weighted-average grant-date fair value of options granted during the years ended December 31, 2022, 2021 and 2020 ~~2019~~were $14.65, $494.40 and ~~2018 were $3.22, $2.85 and $0.39~~$64.40 per share, respectively.

The aggregate intrinsic values of options outstanding and vested and exercisable were calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock. The intrinsic value of options exercised during the ~~year ended December 31, 2020 was $5.0 million, and was immaterial during the~~ years ended December 31, ~~2019~~2022, 2021 and ~~2018.~~2020 was $0.1 million, $32.4 million and $5.0 million, respectively.

As of December 31, ~~2020,~~2022, total unrecognized stock-based compensation related to outstanding unvested stock options was ~~$15.1~~$6.2 million, which the Company expects to recognize over a remaining weighted-average period of ~~2.9~~1.9 years.

~~Performance awards~~

~~In August 2020, the Company granted 1,129,270 stock options with both service-based vesting conditions and performance-based vesting conditions based on operating results.~~ The performance-based conditions terminated upon the closing of the IPO in October 2020 per the original terms of the awards, with the service-based vesting conditions remaining in effect. The Company recorded $1.1 million in stock-based compensation during the year ended December 31, 2020 related to these awards.

~~In September 2020, the Company granted 212,489 stock options with both service-based and performance-based vesting conditions. The grant date~~estimated grant-date fair value of the ~~awards~~Company’s stock options was ~~$0.7 million. In October 2020,~~calculated using the ~~performance-based vesting condition was satisfied upon~~Black-Scholes option pricing model, based on the completion of the IPO. The Company recorded $0.2 million in related stock-based compensation during the year ended December 31, 2020, which includes $0.1 million of stock-based compensation upon the IPO for the service period rendered from the date of grant through the completion of the IPO.following assumptions:


	Year ended December 31,
Valuation assumptions:	2022	2021	2020
Expected volatility	59% - 60%	53%-57%	60%-71%
Expected term	5.2 - 5.8 years	5.8-6.7 years	5.1-7.0 years
Risk-free interest rate	3.18% - 4.01%	0.62%-1.11%	0.23%-1.20%
Dividend yield	—	—	—

Restricted stock units

Restricted stock units (“RSUs”) granted under the 2020 Plan are share awards that generally entitle the holder to receive freely tradable shares of the Company’s common stock upon vesting. The RSUs cannot be transferred and the awards are subject to forfeiture if the holder’s service to the Company terminates prior to the release of the vesting restrictions. ~~The fair value of the RSUs is equal to the closing price of the Company’s common stock on the grant date.~~

~~In December 2020, the Company granted 8,270 RSUs at a grant-date fair value of $50.70 per share. There were no RSUs granted prior to December 2020. During~~RSU activity for the year ended December 31, ~~2020, the Company recorded stock-based compensation of less than $0.1 million related to the RSUs.~~ 2022 is set forth below:


	Number of shares			Weighted average grant date fair value per share

Balance December 31, 2021		17,458		$	866.76
RSUs granted		181,995			59.59
RSUs vested		(9,992	)		495.48
RSUs forfeited		(13,398	)		232.09
Balance December 31, 2022		176,063		$	101.76

As of December 31, ~~2020,~~2022, there was ~~$0.4~~$16.0 million of total unrecognized compensation cost related to the RSUs that is expected to be recognized over a weighted-average period of ~~3.87~~3.4 years.

~~118~~Performance-based restricted stock units

In June 2021, the Company granted 4,000 RSUs with performance-based vesting conditions that primarily related to the achievement of certain minimum sales of Eargo ~~Inc.~~

~~Notes~~hearing aid systems and that were required to ~~Consolidated Financial Statements~~

~~Employee Stock Purchase Plan (ESPP)~~

~~In October 2020,~~be met on or before December 31, 2022 for the ~~Board~~awards to vest. The grant date fair value of ~~Directors and stockholders adopted and approved~~ the ~~2020 Employee Stock Purchase Plan (the “ESPP”).~~awards was $3.0 million. The Company previously estimated that all vesting conditions were probable of being satisfied as of March 31, 2022. Subsequently, the performance-based vesting conditions became improbable of being satisfied, and the Company recorded a reduction in cumulative compensation cost of $1.8 million during the year ended December 31, 2022. These awards remained unvested and were forfeited as of December 31, 2022.

100

Employee stock purchase plan

As of December 31, 2022, the Company reserved ~~726,773~~75,115 shares of common stock for ~~future~~ issuance under the ~~ESPP.~~ ESPP, of which 66,378 shares were available for future issuance. The ESPP was suspended on November 9, 2021, and there were no offering periods in effect through December 31, 2022.

The ESPP provides for consecutive, overlapping 24-month offering periods, which are generally divided into four purchase periods of approximately six months. The offering periods are scheduled to start on the first trading day on or after May 16 and November 16 of each year, with exception of the first offering period which commenced on October 16, 2020, the first trading day after the effective date of the Company’s registration ~~statement, and will end on November 15, 2022.~~statement. Contributions under the ESPP are generally limited to a maximum of ~~15%~~15% of an employee’s eligible compensation.

Each offering period consists of four six-month purchase periods. On each purchase date, which falls on the last date of each purchase period, ESPP participants will purchase shares of common stock at a price per share equal to ~~85%~~85% of the lesser of (1) the fair market value per share of the common stock at the start of the offering period or (2) the fair market value of the common stock on the purchase date.

~~The Company recorded $0.8 million of stock-based compensation related to the ESPP for the year ended December 31, 2020.~~ The fair value of the ESPP shares is estimated using the Black-Scholes option pricing model, based on the following ~~assumptions:~~assumptions for the offering period that started in May 2021:


		Year ended December 31,
Valuation assumptions:		~~2020~~2021
Expected volatility		~~48%-62%~~44%-57%
Expected term		~~0.4-1.9~~0.5-2.0 years
Risk-free interest rate		~~0.09%-0.14%~~0.04%-0.16%
Dividend yield		—

Subsequent to the suspension of the ESPP on November 9, 2021, all outstanding participant contribution amounts of $2.2 million were refunded to participants during the fourth quarter of 2021 and all future purchases under the current offering periods were cancelled. The Company accounted for the suspension of the ESPP as a cancellation of the ESPP and recognized $9.0 million of stock-based compensation in the fourth quarter of 2021 primarily as a result of the suspension. The Company recorded an aggregate of $17.4 million of stock-based compensation related to the ESPP for the year ended December 31, 2021, which includes the amounts recorded upon the suspension of the ESPP.

Note 9.10. Income taxes

For the year ended December 31, 2022, the Company recorded an income tax expense of $0.1 million. The Company ~~has not recorded~~did not record an income tax provision for the years ended December 31, ~~2020, 2019~~2021 and ~~2018~~2020 due to its history of operating losses. All loss before income taxes was generated in the United States for the years ended December 31, ~~2020, 2019~~2022, 2021 and ~~2018.~~2020.

Reconciliation of the statutory federal income tax to the Company’s effective tax is as follows:


	December 31,									December 31,
	2020			2019			2018			2022			2021			2020
	(in thousands)									(in thousands)
Income tax provision at statutory rate	$	(8,370	)	$	(9,342	)	$	(7,096	)	$	(33,011	)	$	(33,128	)	$	(8,370	)
State income taxes, net of federal benefit		(826	)		(2,350	)		(2,546	)		(3,280	)		(3,104	)		(826	)
Change in valuation allowance		8,720			3,064			9,789			22,731			37,792			8,720
Stock-based compensation		(621	)		190			128			101			(716	)		(621	)
Section 382 limitation on net operating loss and credit carryforwards		—			9,956			—
Convertible debt											9,556			—			—
Research and development tax credits		(1,442	)		(1,306	)		(714	)		2,439			(1,210	)		(1,442	)
Change in fair value of warrants		326			79			178			10			21			326
Derivative liability and extinguishment of debt		545			—			—			—			—			545
Return-to-provision adjustments		1,261			(413	)		(1	)		318			308			1,261
Other		407			122			262			1,236			37			407
Total current income tax provision	$	—		$	—		$	—		$	100		$	—		$	—

~~119~~101

~~Eargo, Inc.~~

~~Notes to Consolidated Financial Statements~~

The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets are as follows:


	December 31,									December 31,
	2020			2019			2018			2022			2021			2020
	(in thousands)									(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	35,943		$	29,684		$	28,044		$	91,036		$	62,322		$	35,943
Depreciation and amortization		-			—			131
Research and development credits		3,910			2,468			1,345			3,077			5,120			3,910
Accruals and reserves		2,986			1,667			927			3,067			13,597			2,986
Lease liability											1,574			1,690			—
Stock-based compensation		589			345			203			2,559			565			589
Interest expense carryforward											60			—			—
Research and development capitalization											3,695			—			—
Total deferred tax assets		43,428			34,164			30,650			105,068			83,294			43,428
Valuation allowance		(42,435	)		(33,714	)		(30,650	)		(102,957	)		(80,226	)		(42,435	)
Deferred tax assets after valuation allowance		993			450			—			2,111			3,068			993
Deferred tax liabilities		(993	)		(450	)		—
Deferred tax liabilities:
Depreciation and amortization											(736	)		(1,429	)		(993	)
Right-of-use asset											(1,375	)		(1,639	)		—
Total deferred tax liabilities											(2,111	)		(3,068	)		(993	)
Net deferred tax assets	$	—		$	—		$	—		$	—		$	—		$	—

Due to the uncertainties surrounding the realization of deferred assets through future income, the Company has established a full valuation allowance against its deferred tax assets and, therefore, no benefit has been recognized for the net operating loss and other deferred tax assets. The valuation allowance increased by ~~$8.7~~$22.7 million, ~~$3.1~~$37.8 million, and ~~$9.8~~$8.7 million during the years ending December 31, ~~2020, 2019~~2022, 2021, and ~~2018.~~2020.

Under the Tax Cuts and Jobs Act of 2017, research and development costs are no longer fully deductible and are required to be capitalized and amortized for U.S. tax purposes, effective January 1, 2022. The mandatory capitalization requirement increases the Company’s deferred tax assets offset by a full valuation allowance.

As of December 31, ~~2020,~~ 2022, the Company had federal net operating loss carryforwards of approximately ~~$137.1~~ $374.7 million, of which $~~32.6~~ 26.7million begin to expire in the year 2030 and $~~104.5~~348.0 million will carry over indefinitely. The Company also has state net operating loss carryovers of approximately ~~$83.3~~ $156.1 million available to reduce future taxable income, if any. The state carryforwards begin to expire beginning in the year ~~2030.~~2030.

As of December 31, ~~2020,~~2022, the Company had research and development credits carryovers for federal income tax purposes of approximately ~~$2.6~~$0.1 million which expire beginning in the year ~~2031.~~2031. The Company also has state research and development credit carryforwards of approximately ~~$3.0~~$4.3 million as of December 31, ~~2020,~~2022, which do not expire.

Utilization of the net operating loss and credit carryforwards will be subject to an annual limitation due to the ownership percentage change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of the net operating loss carryforwards before utilization. In the event the Company has had a change of ownership, utilization of the carryforwards could be restricted. The Company’s net operating loss deferred tax asset was reduced from the prior year as a result of limitation on the utilization of net operating loss carryforwards subject to the Internal Revenue Code Section 382.

Uncertain tax positions

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:


	December 31,						December 31,
	2020		2019		2018		2022			2021		2020
	(in thousands)						(in thousands)
Beginning balance	$	1,058	$	576	$	286	$	2,194		$	1,676	$	1,058
Increases related to current year tax positions		618		482		290
Increases (decreases) related to current year tax positions								(875	)		518		618
Ending balance	$	1,676	$	1,058	$	576	$	1,319		$	2,194	$	1,676

If recognized, gross unrecognized tax benefits would not have an impact on the Company’s effective tax rate due to the Company’s full valuation allowance position. While it is often difficult to predict the final outcome of any particular uncertain tax position, the Company does not believe that the amount of gross unrecognized tax benefits will change significantly in the next twelve months.

~~120~~

~~Eargo, Inc.~~

~~Notes to Consolidated Financial Statements~~

The Company’s income tax returns for all tax years remain open to examination by federal and state taxing authorities due to the taxing authorities’ ability to adjust operating loss carryforwards.

102

The Company has elected to recognize interest and penalties related to uncertain tax positions as a component of the income tax provision. No such expenses were incurred in the years ended December 31, ~~2020, 2019~~2022, 2021 and ~~2018.~~2020. The Company has ~~not~~not made any accruals for payment of interest related to unrecognized tax benefits.

Note ~~10.~~11. Net loss per share attributable to common stockholders

The following outstanding potentially dilutive common stock equivalents have been excluded from the computation of diluted net loss per share for the periods presented due to their anti-dilutive effect:


	Year ended December 31,
	2022		2021		2020
Common stock options issued and outstanding		309,315		270,195		323,442
Restricted stock units		176,063		21,458		413
Shares issuable pursuant to ESPP		—		—		893
Total		485,378		291,653		324,748

Year ended December 31,

2020

2019

2018

Convertible preferred stock

—

13,710,242

13,645,589

Common stock options issued and
outstanding

6,468,844

3,474,052

2,181,122

Restricted stock units

8,270

—

—

Shares issuable pursuant to ESPP

17,865

—

—

Convertible preferred stock warrants

—

73,913

58,913

Total

6,494,979

17,258,207

15,885,624

The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders:


	Year ended December 31,
	2022			2021			2020
	(in thousands, except share and per share amounts)
Numerator:
Net loss	$	(157,487	)	$	(157,754	)	$	(39,855	)
Gain on extinguishment of Series C and Series C-1 convertible preferred stock		—			—			9,840
Net loss attributable to common stockholders, basic and diluted	$	(157,487	)	$	(157,754	)	$	(30,015	)
Denominator:
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted		3,968,432			1,944,857			394,405
Net loss per share attributable to common stockholders, basic and diluted	$	(39.68	)	$	(81.11	)	$	(76.10	)

Year ended December 31,

2020

2019

2018

(in thousands, except share and per share amounts)

Numerator:

Net loss

$
(39,855
)

$
(44,486
)

$
(33,793
)
Gain on extinguishment of Series C and Series
   C-1 convertible preferred stock

9,840

—

—

Net loss attributable to common stockholders,
   basic and diluted

$
(30,015
)

$
(44,486
)

$
(33,793
)
Denominator:

Weighted-average shares used in computing net
   loss per share attributable to common
   stockholders, basic and diluted

7,890,375

256,452

225,754

Net income loss per share attributable to common
   stockholders, basic and diluted

$
(3.80
)

$
(173.47
)

$
(149.69
)

Note 12. Subsequent events

~~Note 11. Subsequent Events~~Reverse stock split

On January 11, 2023, the Company announced that the Board had approved the Reverse Stock Split, and on January 17, 2023, the Reverse Stock Split was effected. The Company’s common stock began trading on a split-adjusted basis on January 18, 2023. The number of authorized shares and par values of the common stock were not adjusted as a result of this amendment.

Nashville office space lease

In January ~~and February 2021,~~2023, the Company ~~granted options~~entered into a lease agreement for approximately 17,572 square feet of office space located in Nashville, Tennessee. The initial term of the lease is 76 months commencing on the later of April 1, 2023 or the date of substantial completion of certain tenant improvements. The Company will have the right to ~~purchase 119,100 shares~~extend the lease term once for additional 5 years. Total noncancelable lease payments are $3.1 million under the lease. The Company has an option to apply the tenant improvement allowance of ~~its common stock at a weighted-average exercise price of $57.03 per share and 119,100 RSUs at a weighted-average grant-date fair value of $57.03 per share.~~$0.9 million against the lease payments.

103

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of disclosure controls and procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file under the Exchange Act of 1934, as amended, with the U.S. Securities and Exchange Commission (“SEC”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer, principal financial officer and principal accounting officer, as appropriate, to allow timely decisions regarding required disclosure.

As of December 31, ~~2020,~~2022, our management, with the participation and supervision of our principal executive officer, ~~and~~ our principal financial officer, and our principal accounting officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive, principal financial, and principal ~~financial~~accounting officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures.

Based on this evaluation, our principal executive officer, our principal financial officer and our principal ~~financial~~accounting officer concluded that solely as a result of the material weaknesses in our internal control over financial reporting and entity level controls described below, our disclosure controls and procedures were not effective as of December 31, ~~2020~~2022 to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer, our principal financial officer and our principal ~~financial~~accounting officer, as appropriate, to allow timely decisions regarding required disclosure.

Remediation efforts on previously reported material weaknesses

In connection with the preparation of our financial statements in connection with our IPO and through the current reporting period, we identified a material ~~weakness~~weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. The material weakness identified related to a lack of qualified supervisory accounting resources, including those necessary to account for and disclose certain complex transactions and for which we lacked the technical expertise to identify, analyze and appropriately record those transactions.

We have implemented, and are in the process of reviewing, corrective actions taken to improve our internal control over financial reporting to remediate this material weakness, including (i) the hiring of additional qualified supervisory resources and finance department employees and (ii) the engagement of additional technical accounting consulting resources.

In addition, in connection with the preparation of our financial statements for the financial reporting periods ended September 30, 2021 and December 31, 2021, we identified a material weakness related to a lack of sufficient qualified healthcare industry compliance and risk management resources, including those necessary to provide appropriate oversight, monitor compliance, and to identify and mitigate risks with respect to the financial reporting and disclosures of our operations. We have implemented and are in the process of implementing additional measures designed to ~~improve~~enhance our ~~internal control over financial reporting~~compliance and risk management processes with respect to our operations in the healthcare industry to remediate this material weakness, including the hiring of additional qualified ~~supervisory resources,~~personnel, and the engagement of ~~technical accounting~~additional specialized consulting ~~resources and plans to hire additional finance department employees.~~resources.

We cannot assure you that the measures we have taken to date, and are continuing to implement, will be sufficient to remediate the material ~~weakness~~weaknesses we have identified or avoid potential future material weaknesses. While we believe that our efforts have improved our internal control over financial reporting, remediation of the material weaknesses will require further validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles, and we cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses.

104

Changes in internal control over financial reporting

Other than the changes intended to remediate the previously reported material ~~weaknesses~~weakness noted above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)

during the period covered by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s report on internal control over financial reporting

~~This Annual Report on Form 10-K does not include a report of management’s assessment regarding~~Our management is responsible for establishing and maintaining adequate internal control over financial reporting, ~~or an attestation report~~as defined in Exchange Act Rules 13a-15(f). Our internal control over financial reporting is a process designed under the supervision of our ~~independent registered public~~Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with U.S. generally accepted accounting ~~firm~~principles.

As of December 31, 2022, we assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting under the 2013 “Internal Control—Integrated Framework,” issued by the Committee of Sponsoring Organizations, or COSO, of the Treadway Commission, under the supervision of, and with the participation of our management, including our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer. We identified the following material weaknesses related to 1) a lack of qualified supervisory accounting resources, including those necessary to account for and disclose certain complex transactions and for which we lacked the technical expertise to identify, analyze and appropriately record those transactions, and 2) a lack of sufficient qualified healthcare industry compliance and risk management resources, including those necessary to provide appropriate oversight, monitor compliance, and to identify and mitigate risks with respect to the financial reporting and disclosures of our operations. Based on that assessment, our management concluded that our internal control over financial reporting as of December 31, 2022 were ineffective due to ~~a transition period established by~~ the ~~rules~~existence of ~~the SEC for newly public companies.~~material weaknesses.

Item 9B. Other Information.

Eargo will host its 2023 Annual Meeting of Stockholders (the “Annual Meeting”) on June 7, 2023 at 11 A.M. Pacific Time. The Annual Meeting will be held entirely online. Information regarding how stockholders may attend, submit questions and vote online during the Annual Meeting will be set forth in the Company’s definitive proxy statement for the Annual Meeting. In order for a stockholder proposal under Rule 14a-8 or director nomination to be included in the proxy statement related to the Annual Meeting or otherwise to be properly brought before the Annual Meeting, stockholders must submit any such proposals or director nomination in writing by no later than April 3, 2023 to the Secretary of the Company at 2665 North First Street, Suite 300, San Jose, California 95134. Stockholders are advised to review our Amended and Restated Bylaws, which contain additional requirements for advance notice of stockholder proposals and director nominations.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

None.

105

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The ~~following table sets forth the name, age, and position of each of our executive officers and directors. There are no family relationships among any of our directors or executive officers.~~

~~Name~~	~~Age~~	~~Position(s)~~

~~Executive Officers~~

~~Christian Gormsen~~	44	~~President, Chief Executive Officer and Director~~

~~William Brownie~~	54	~~Chief Operating Officer~~

~~Adam Laponis~~	44	~~Chief Financial Officer~~

~~Non-Employee Directors~~

~~Josh Makower, M.D.~~⁽²⁾⁽³⁾	57	~~Chairman and Director~~

~~Peter Tuxen Bisgaard~~⁽²⁾⁽³⁾	47	~~Director~~

~~Doug Hughes~~⁽¹⁾	59	~~Director~~

~~Geoff Pardo~~⁽¹⁾⁽³⁾	49	~~Director~~

~~Nina Richardson~~⁽²⁾	62	~~Director~~

~~A. Brooke Seawell~~⁽¹⁾	73	~~Director~~

~~Juliet Tammenoms Bakker(2)(3)~~	59	~~Director~~

~~David Wu~~	52	~~Director~~

~~(1)~~

~~Member of our audit committee.~~

~~(2)~~

~~Member of our compensation committee.~~

~~(3)~~

~~Member of our nominating and corporate governance committee.~~

~~Executive officers~~

~~Christian Gormsen~~ has served as a member of our board of directors since November 2014 and as our President and Chief Executive Officer since June 2016. From June 2014 to June 2016, Mr. Gormsen served as Commercial Director, EMEA, of ISS A/S, a global facility services company. Prior to that, he spent a decade at GN Group, a global leader in intelligent audio solutions including hearing aids, in roles of increasing responsibility until he became the Senior Vice President of Operations, Europe and Strategic Accounts. Mr. Gormsen started his career in investment banking before transitioning to McKinsey & Company, a management consulting firm. Mr. Gormsen received a B.S. in economics and his M.S. in economics and business administration from the Copenhagen Business School.

We believe that Mr. Gormsen is qualified to serve on our board of directors due to the valuable expertise and perspective he brings in his capacity as our President and Chief Executive Officer and because of his extensive experience and knowledge of our industry.

~~William Brownie~~ has served as our Chief Operating Officer since April 2019. From August 2016 through March 2019, Mr. Brownie served as our Chief Customer Operations Officer. In addition, from January 2017 to June 2019 he served as our Chief Financial Officer. From June 2015 to August 2016, Mr. Brownie served as an independent consultant to various companies. From January 2012 to June 2015, Mr. Brownie served as the Managing Director at Sonova e-Hearing Care a group company of Sonova AG. Prior to that, from August 2001 to December 2011, Mr. Brownie served as Chief Financial Officer and then President and Chief Executive Officer of

~~HearingPlanet Inc., which was purchased by Sonova AG. Mr. Brownie received a B.S. in business administration from San Diego State University-California State University.~~

~~Adam Laponis~~ has served as our Chief Financial Officer since June 2019. From November 2018 to March 2019, Mr. Laponis served as Vice President of Financial Planning and Analysis for Tesla, an automotive and energy company, where he previously served as Senior Director of Finance from April 2017 to November 2018. Prior to that, he served as the Vice President and Chief Financial Officer of Cardiovascular Care of Cardinal Health, a healthcare services and products company, from October 2015 to April 2017. Prior to that, he served in various financial roles at Johnson & Johnson, a healthcare company, from August 2004 to October 2015. Mr. Laponis received a B.S. in chemical engineering from the University of California, Berkeley and his M.B.A. from the University of Southern California.

~~Non-employee directors~~

~~Josh Makower, M.D.~~ has served as the non-executive Chairman of our board of directors since December 2018 and as a member of our board of directors since November 2015. Since May 2015, Dr. Makower has been a General Partner at New Enterprise Associates, a venture capital firm. In addition to his role at New Enterprise Associates, Dr. Makower serves as an Adjunct Professor of Medicine at Stanford University Medical School and is Co-Founder of Stanford University’s Biodesign Innovation Program. Dr. Makower is also the Founder and Executive Chairman of ExploraMed, a medical device incubator. He received a B.S. in mechanical engineering from Massachusetts Institute of Technology, his M.D. from New York University School of Medicine and his M.B.A. from Columbia University.

We believe that Dr. Makower is qualified to serve on our board of directors due to the valuable expertise and perspective he brings with his medical and financial backgrounds and his extensive investment experience in the technology and healthcare industries.

~~Peter Tuxen Bisgaard~~ has served as a member of our board of directors since October 2017. Since September 2017, Mr. Bisgaard has been Managing Director of Nan Fung Life Sciences, a global life sciences investment platform and a Managing Partner at Pivotal Bioventure Partners LLC, a healthcare venture capital fund. Prior to this, he was a Senior Partner at Novo Ventures, a healthcare focused venture investment firm, from 2009 to September 2017. Prior to Novo Ventures he was with McKinsey and Co. He has previously served on the board of directors of the following publicly held companies: Ra Pharmaceuticals, Inc., a clinical stage biopharmaceutical company; Nevro Corp, a commercial stage medical device company; HTG Molecular Diagnostics, Inc., a commercial stage RNA-platform based life sciences tools company; Otonomy, Inc., a biopharmaceutical company developing therapeutics for treating hearing disorders; and Alder Biopharmaceuticals, Inc., a late stage drug development company focusing on migraine therapeutics. In addition, Mr. Bisgaard is serving, and has served, on numerous boards of privately held biotechnology and medical technology companies. Mr. Bisgaard received an M.Sc. in engineering from Technical University of Denmark and a post graduate degree in mathematical modeling in economics by the European Consortium for Mathematics in the Industry.

~~We believe that Mr. Bisgaard is qualified to serve on our board of directors due to the valuable expertise and perspective he brings with his investment experience.~~

~~Doug Hughes~~ has served as a member of our board of directors since September 2020. Since October 2019, Mr. Hughes has served as Chief Financial Officer of Calyxo, Inc., a urology medical device company. From 2011 until April 2018, Mr. Hughes was Chief Financial Officer of NeoTract, Inc., a urology company. He served as Chief Financial Officer and Chief Operating Officer for Nellix, Inc., an endovascular graft company from 2010 until 2011. Before joining Nellix, Inc., Mr. Hughes served as Chief Financial Officer for Evalve Inc., a cardiovascular company, from 2009 until 2010. Prior to 2009, Mr. Hughes held a variety of senior finance management positions at Boston Scientific, Guidant Corporation and The Clorox Company. Mr. Hughes is currently a member of the board of directors of Immunovant, Inc., a publicly held biopharmaceutical company. Mr. Hughes received a B.S. in finance from San Francisco State University and his M.B.A. from University of Chicago.

~~We believe that Mr. Hughes is qualified to serve on our board of directors due to his experience in successfully leading high-growth companies.~~

~~Geoff Pardo~~ has served as a member of our board of directors since July 2020. Mr. Pardo has served as a partner at Gilde Healthcare since 2011. Previously, he was a partner at Spray Venture Partners from 2004 to 2011. He also served as President and Chief Executive Officer of Facet Solutions, a spinal implant company focused on treating lumbar spinal stenosis, from 2007 until the company was sold to Globus Medical in 2011. He currently serves on the board of directors of the following publicly held companies: Inari Medical, Inc., where he serves on the audit committee, and Vapotherm, Inc., where he serves on the audit and finance committees. He has previously served on the board of directors of Axonics Modulation Technologies, Inc, a publicly held company. Mr. Pardo received a B.A. from Brown University and his M.B.A. from The Wharton School of Business.

~~We believe Mr. Pardo is qualified to serve on our board of directors due to his experience leading and managing a medical technology company, as well as his investing in healthcare companies.~~

~~Nina Richardson~~ has served as a member of our board of directors since September 2020. Ms. Richardson is currently a Managing Director of Three Rivers Energy, an energy services company she co-founded in 2004. From May 2016 to April 2017, she served as a consultant to the Company. From February 2013 through February 2015, Ms. Richardson served as the Chief Operating Officer at GoPro, a publicly held technology company. Previously, Ms. Richardson was an operations and management consultant for companies including Tesla, Solaria and TouchTunes Interactive Networks. Ms. Richardson also held executive positions at Flextronics, including Vice President and General Manager. Ms. Richardson’s early career included positions at Hughes Aircraft Ground Systems Group and Metcal. Ms. Richardson serves on the board of directors of the following publicly held companies: Resideo Technologies, Inc., a global provider of comfort and security solutions, Silicon Laboratories Inc., a global technology company, and Cohu, Inc., a back-end semiconductor equipment and services company. She previously served as a director to the following publicly held companies: Silicon Graphics International Corp., a computer systems company, Callidus Software, Inc., an enterprise software company, and Zayo Group Holdings, Inc, which became a private company in March 2020. Ms. Richardson received a B.S. in Industrial engineering from Purdue University and her Executive M.B.A. from Pepperdine University.

~~We believe that Ms. Richardson is qualified to serve on our board of directors due to her experience as an executive and member of the board of directors of companies that span multiple industries.~~

~~A. Brooke Seawell~~ has served as a member of our board of directors since September 2020. Since 2005, Mr. Seawell has been a Venture Partner at New Enterprise Associates. He was a Partner from 2000 to 2005 at Technology Crossover Ventures, a venture capital firm. From 1997 to 1998, he was Executive Vice President at NetDynamics, Inc., an application server software company, which was acquired by Sun Microsystems, Inc. From 1991 to 1997, he was Senior Vice President and Chief Financial Officer of Synopsys, Inc., an electronic design automation software company. Mr. Seawell serves on the boards of the following publicly held companies: NVIDIA Corporation, a visual computing company, where he serves on the audit committee, and Tenable Holdings, Inc., a cyber-security solutions company, where he serves on the audit committee. Mr. Seawell previously served on the board of directors of the following publicly held companies: Tableau Software, Inc., a business intelligence software company; Informatica Corp., a data integration software company; and Glu Mobile, Inc., a publisher of mobile games. Mr. Seawell previously served on the Stanford University Athletic Board and the Management Board of the Stanford Graduate School of Business. Mr. Seawell received a B.A. degree in economics and his M.B.A. in Finance from Stanford University.

~~We believe that Mr. Seawell is qualified to serve on our board of directors due to his investment experience and executive leadership and board roles.~~

~~Juliet Tammenoms Bakker~~ has served as a member of our board of directors since July 2020. Ms. Tammenoms Bakker founded Longitude Capital Management Co., LLC in January 2007, a healthcare venture capital firm, and has served as its Managing Director since its inception. Prior to Longitude Capital, Ms. Tammenoms Bakker was a Managing Director of Pequot Ventures, where she founded the life sciences investment practice. Prior to Pequot, she was Director, Strategic Planning and Director of Operations of Waste Management International. Previously, she was a sell-side equity analyst with Banque Paribas. Ms. Tammenoms Bakker began

her career as an investment banker in the corporate finance department at PaineWebber. Ms. Tammenoms Bakker currently serves on the board of directors of DyaMX, Nalu and RxSight. She has previously served on the boards of Ablation Frontiers (acquired by Medtronic), AqueSys (acquired by Allergan), Axonics Modulation Technologies (Nasdaq: AXNX), CryoVascular Systems (acquired by Boston Scientific), Embolic Protection (acquired by Boston Scientific), Enteric Medical (acquired by Boston Scientific), eyeonics (acquired by Bausch+Lomb), Genyx Medical (acquired by C.R. Bard), Insulet, Precision Dermatology (acquired by Valeant Pharmaceuticals), Sadra Medical (acquired by Boston Scientific) and Venus Concept. Ms. Tammenoms Bakker received an M.P.A. from the Harvard Kennedy School and a B.Sc. from the College of Agriculture and Life Sciences at Cornell University (“CALS”), where she is a member of the CALS Advisory Council. Ms. Tammenoms Bakker is also a board member of the Boys and Girls Club of Greenwich.

~~We believe that Ms. Tammenoms Bakker is qualified to serve on our board of directors due to her experience investing in healthcare companies.~~

~~David Wu~~ has served as a member of our board of directors since July 2014. Since 2012, Mr. Wu has been a Partner at Maveron LLC, a venture capital firm, where his primary focus is emerging consumer Internet companies. Mr. Wu led Maveron’s investments in Illumix, inkbox, Booster, Wave and Eargo, and serves on each company’s board of directors. Mr. Wu received a B.S. electrical engineering and a B.A. in quantitative economics from Stanford University.

~~We believe that Mr. Wu is qualified to serve on our board of directors due to the valuable expertise and perspective he brings with his experience investing in consumer-facing companies.~~

~~Board composition~~

~~Classified board of directors~~

In accordance with our amended and restated certificate of incorporation, our board of directors is divided into three classes with staggered three-year terms, with the classes to be as nearly equal in number as possible. As a result, approximately one-third of the board of directors will be elected each year at the annual general meeting of stockholders, with the successors to directors whose terms then expire elected to serve from the time of election and qualification until the third annual meeting following election. Our directors are divided among the three classes as follows:

•~~The Class I directors~~ ~~are Christian Gormsen, Doug Hughes and David Wu, and their terms will expire at the annual meeting of stockholders to be held in 2021;~~

•~~The Class II directors~~ ~~are Geoff Pardo, Nina Richardson and Brooke Seawell, and their terms will expire at the annual meeting of stockholders to be held in 2022; and~~

•~~The Class III directors~~ ~~are Peter Tuxen Bisgaard, Josh Makower and Juliet Tammenoms Bakker, and their terms will expire at the annual meeting of stockholders to be held in 2023.~~

~~The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change in control.~~

~~Leadership structure of the board~~

Our amended and restated bylaws and corporate governance guidelines provide our board of directors with flexibility to combine or separate the positions of Chairman of the board of directors and Chief Executive Officer and to implement a lead director in accordance with its determination regarding which structure would be in the best interests of our company.

Our board of directors has concluded that our current leadership structure is appropriate at this time. However, our board of directors will continue to periodically review our leadership structure and may make such changes in the future as it deems appropriate.

~~Role of board in risk oversight process~~

Risk assessment and oversight are an integral part of our governance and management processes. Our board of directors encourages management to promote a culture that incorporates risk management into our corporate strategy and day-to-day business operations. Management discusses strategic and operational risks at regular management meetings and conducts specific strategic planning and review sessions during the year that include a focused discussion and analysis of the risks facing us. Throughout the year, senior management reviews these risks with the board of directors at regular board meetings as part of management presentations that focus on particular business functions, operations or strategies, and presents the steps taken by management to mitigate or eliminate such risks.

Our board of directors does not have a standing risk management committee, but rather administers this oversight function directly through our board of directors as a whole, as well as through various standing committees of our board of directors that address risks inherent in their respective areas of oversight. While our board of directors is responsible for monitoring and assessing strategic risk exposure, our audit committee is responsible for overseeing our major financial risk exposures and the steps our management has taken to monitor and control these exposures. The audit committee also approves or disapproves any related person transactions. Our nominating and corporate governance committee monitors the effectiveness of our corporate governance guidelines. Our compensation committee assesses and monitors whether any of our compensation policies and programs has the potential to encourage excessive risk-taking.

~~Board committees~~

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. Our board of directors may establish other committees to facilitate the management of our business. The composition and functions of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our board of directors. Each of these committees operates under a written charter that satisfies the applicable rules and regulations of the SEC and Listing Rules, and that has been approved by our board of directors.

~~Audit committee~~

~~Our audit committee oversees our corporate accounting and financial reporting process. Among other matters, the audit committee:~~

~~appoints our independent registered public accounting firm;~~

~~evaluates the independent registered public accounting firm’s qualifications, independence and performance;~~

~~determines the engagement of the independent registered public accounting firm;~~

~~reviews and approves the scope of the annual audit and pre-approves the audit and non-audit fees and services;~~

~~reviews and approves all related party transactions on an ongoing basis;~~

~~establishes procedures for the receipt, retention and treatment of any complaints received by the Company regarding accounting, internal accounting controls or auditing matters;~~

~~discusses with management and the independent registered public accounting firm the results of the annual audit and the review of our quarterly financial statements;~~

~~approves the retention of the independent registered public accounting firm to perform any proposed permissible non-audit services;~~

~~discusses on a periodic basis, or as appropriate, with management the Company’s policies and procedures with respect to risk assessment and risk management;~~

~~is responsible for reviewing our financial statements and our management’s discussion and analysis of financial condition and results of operations~~information required to be included by Item 10 of Form 10-K will be included in the definitive proxy statement (the “Proxy Statement”) for our ~~annual~~2023 Annual Meeting of Stockholders and ~~quarterly reports to~~such information is incorporated by reference herein. The Proxy Statement will be filed electronically with the ~~SEC;~~

~~investigates any reports received through~~SEC within 120 days after the ~~ethics helpline and reports~~end of the fiscal year covered by this Form 10-K pursuant to ~~the Board periodically with respect to any information received through the ethics helpline and any related investigations; and~~

~~reviews the audit committee charter and the audit committee’s performance on an annual basis.~~

~~Our audit committee consists of Doug Hughes, Geoff Pardo and Brooke Seawell. Our board of directors has determined that all members are independent under the Listing Rules and Rule 10A-3(b)(1)~~Regulation 14A of the Exchange Act. The chair of our audit committee is Brooke Seawell. Our board of directors has determined that each of Mr. Hughes and Mr. Seawell is an “audit committee financial expert” as such term is currently defined in Item 407(d)(5) of Regulation S-K. Our board of directors has also determined that each member of our audit committee can read and understand fundamental consolidated financial statements, in accordance with applicable requirements.

~~Compensation committee~~

Our compensation committee oversees policies relating to compensation and benefits of our officers and employees. The compensation committee reviews and approves or recommends corporate goals and objectives relevant to compensation of our executive officers (other than our Chief Executive Officer), evaluates the performance of these officers in light of those goals and objectives, and approves the compensation of these officers based on such evaluations. The compensation committee also reviews and approves or makes recommendations to our board of directors regarding the issuance of stock options and other awards under our stock plans to our executive officers (other than our Chief Executive Officer). The compensation committee reviews the performance of our Chief Executive Officer and makes recommendations to our board of directors with respect to his compensation, and our board of directors retains the authority to make compensation decisions relative to our Chief Executive Officer. The compensation committee reviews and evaluates, on an annual basis, the compensation committee charter and the compensation committee’s performance. Our compensation committee consists of Peter Tuxen Bisgaard, Josh Makower, Nina Richardson and Juliet Tammenoms Bakker. Our board of directors has determined that all members are independent under the Listing Rules. The chair of our compensation committee is Josh Makower.

~~Nominating and corporate governance committee~~

The nominating and corporate governance committee is responsible for making recommendations to our board of directors regarding candidates for directorships and the size and composition of our board of directors. In addition, the nominating and corporate governance committee is responsible for overseeing our corporate governance policies and making recommendations to our board of directors concerning governance matters. Our nominating and corporate governance committee consists of Peter Tuxen Bisgaard, Josh Makower, Geoff Pardo and Juliet Tammenoms Bakker. Our board of directors has determined that all members are independent under the Listing Rules. The chair of our nominating and corporate governance committee is Juliet Tammenoms Bakker.

~~Code of business conduct and ethics~~

Our board of directors has adopted a written code of business conduct and ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer or controller, or persons performing similar functions, and agents and representatives. The statement contains general guidelines for conducting our business consistent with the highest standards of business ethics. The full text of our code of business conduct and ethics is available on our website at ~~www.eargo.com~~. The nominating and corporate governance committee of our board of directors is responsible for overseeing our code of business conduct and ethics and any waivers applicable to any director, executive officer or employee. We intend to disclose any future amendments to certain provisions of our code of business conduct and ethics, or waivers of such provisions applicable to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, and agents and representatives, on our website identified above or in public filings.

~~Procedures for stockholder nominations to the board of directors~~

For the year ended December 31, 2020, there have been no material changes to the procedures for nominating directors by our stockholders other than the adoption of our amended and restated bylaws in connection with our IPO dated October 15, 2020.

Item 11. Executive Compensation.

~~Our named executive officers for the year ended December 31, 2020, which consist of our principal executive officer and our two most highly compensated executive officers, are:~~

•~~Christian~~ ~~Gormsen, our President and Chief Executive Officer;~~

•~~William Brownie, our Chief Operating Officer; and~~

•~~Adam Laponis, our Chief Financial Officer.~~

~~Summary compensation table~~

The ~~following table provides~~ information ~~regarding the compensation earned~~required to be included by ~~our named executive officers for services rendered in all capacities during the years ended December 31, 2020 and December 31, 2019.~~

Name and principal position

Year

Salary
($)⁽¹⁾

Bonus
($)⁽²⁾

Option
awards
($)⁽³⁾

Non-equity
incentive plan
compensation
($)⁽⁴⁾

All other
compensation
($)

Total
($)

Christian Gormsen

2020

$
452,279

$
61,982

$
3,149,564

$
147,911

$
—

$
3,811,736

President and Chief
Executive Officer

2019

502,170

—

1,022,911

—

—

1,525,081

William Brownie

2020

257,500

52,800

891,393

88,200

—

1,289,893

Chief Operating Officer

2019

300,000

—

230,826

—

—

530,826

Adam Laponis

2020

257,500

52,800

998,198

88,200

—

1,396,698

Chief Financial Officer

2019

161,539

—

490,510

—

—

652,049

~~(1)~~

~~The amounts reported for Mr. Gormsen include a housing allowance of $150,000 that does not require substantiation and is indistinguishable from base salary.~~

~~(2)~~

~~The amounts reported for 2020~~ represent the amounts earned by our named executive officers under a one-time company-wide cash bonus program approved by the board of directors in April 2020. Please see the description of the one-time cash bonus program under “Bonuses and non-equity incentive plan compensation” below.

~~(3)~~

In accordance with SEC rules, this column reflects the aggregate grant date fair value of the option awards granted during fiscal years 2019 and 2020 and the incremental fair value of the option awards modified during fiscal years 2019 and 2020, in each case, computed in accordance with ASC 718 for stock-based compensation transactions, adjusted to reflect the probable outcome of performance conditions. Messrs. Gormsen and Brownie were granted options on November 3, 2018 that were subject to performance conditions that were determined not toItem 11 will be probable. In April 2019, prior to the expiration of such options, the November 3, 2018 options were amended such that the November 3, 2018 options would not terminate on May 31, 2019 as a result of the failure to achieve the performance conditions and the options would instead vest in equal monthly installments over a 48-month period from April 24, 2019, subject to continued employment. Additionally, the amounts reported for 2020 include the effect of a repricing in August 2020 of stock options held by current employees, including each of our named executed officers, whereby the exercise price per share of each stock option was lowered to $2.55 (our fair market value per share on the date of the repricing). Please see the description of such repricing under “Equity—based incentive awards” below. The incremental grant date fair value of such repricing was $182,709, $142,968, and $451,414 for Messrs. Gormsen, Brownie and Laponis, respectively. See Note 8 to our audited consolidated financial statements included ~~in this Annual Report on Form 10-K for a discussion of the assumptions used in the calculation of these amounts.~~

~~(4)~~

~~The amounts for 2020 reported~~ represent the amounts earned by our named executive officers upon the achievement of certain company performance objectives approved by our board of directors for fiscal year 2020. These amounts were paid to the named executive officers during February 2021. Please see the description of the annual bonus program under “Bonuses and non-~~equity incentive plan compensation” below.~~

~~Narrative to the summary compensation table~~

Prior to the completion of our IPO, our board of directors reviewed compensation annually for all employees, including our named executive officers. In setting executive base salaries and bonuses and granting equity incentive awards, our board of directors considered compensation for comparable positions in the market, the historical compensation levels of our executives, individual performance as compared to our expectations and objectives, our desire to motivate our employees to achieve short- and long-term results in the best interests of our stockholders and long-term commitment to our company.

~~Our board of directors has historically determined our executive officers’ compensation and has typically reviewed and discussed~~ ~~management’s~~ proposed compensation with our chief executive officer for all executives other than our chief executive officer. Based on those discussions and its discretion, our board of directors then determined the compensation of each executive officer.

Following our IPO, generally the compensation committee of our board of directors, rather than our board of directors, approves the compensation of each executive officer (other than our Chief Executive Officer) and follow the process outlined above. The compensation committee reviews the performance of our Chief Executive Officer and make recommendations to our board of directors with respect to his compensation, and our board of directors will retain the authority to make compensation decisions relative to our Chief Executive Officer.

~~Annual base salary~~

~~Base salaries~~Proxy Statement for our ~~executive officers are initially established through arm’s-length negotiations at the time~~2023 Annual Meeting of ~~the executive officer’s hiring, taking into account~~Stockholders and such ~~executive officer’s qualifications, experience, the scope of his or her responsibilities and competitive market compensation paid~~information is incorporated by other companies for similar positions within the industry and geography. Base salaries are reviewed periodically, typically in connection with our annual performance review process, and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance and experience. In making decisions regarding salary increases, we may also draw upon the experience of members of our board of directors with executives at other companies. The 2020 base salaries for our named executive officers were as follows: (a) $502,170 for Mr. Gormsen, inclusive of a monthly housing allowance, (b) $300,000 for Mr. Brownie, and (c) $300,000 for Mr. Laponis.reference herein.

In April 2020, as part of company-wide salary reductions, the base salaries for each of Mr. Gormsen, Mr. Brownie and Mr. Laponis were reduced by 20%, effective through December 31, 2020. The salary reductions were reversed effective January 1, 2021.

In January 2021 and February 2021, the compensation committee and the board of directors approved 2021 base salaries for our named executive officers as follows: (1) $550,000 for Mr. Gormsen, (b) $390,000 for Mr. Brownie, and $390,000 for Mr. Laponis.

~~Bonuses and non-equity incentive plan compensation~~

Our named executive officers are each eligible to receive a discretionary annual bonus based on individual and company performance. However, no cash bonuses were awarded based on services provided during 2019.

In connection with the salary reductions implemented in April 2020, our board of directors approved a cash bonus plan, payable in the discretion of the board based on company performance during 2020, of cash bonuses up to 50% of the reduced salary level for Mr. Gormsen and up to 35% of the respective reduced salary levels for Mr. Brownie and Mr. Laponis.

In April 2020 our board of directors approved a one-time special cash bonus opportunity for each of our employees, including Mr. Gormsen, Mr. Brownie and Mr. Laponis, by increasing each employee’s target bonus by the percentage of his or her respective salary reductions, which was 20% for each of Mr. Gormsen, Mr. Brownie and Mr. Laponis, payable in the discretion of the board based on company performance during 2020.

Additionally, in January 2021 and February 2021, the compensation committee and the board of directors approved target bonus amounts for Mr. Gormsen, Mr. Brownie and Mr. Laponis of 80%, 60% and 50%, respectively, of their respective salary levels.

~~Equity-based incentive awards~~

~~Our equity-based incentive awards are designed to align our interests and those of our stockholders with those of our employees and consultants, including our named executive officers.~~

We have historically used stock options as the principal equity incentive award for long-term compensation to our named executive officers because the return on the options is tied to an increase in our stock price. We may grant equity awards at such times as our board of directors or compensation committee determines appropriate. Additional grants may occur periodically in order to specifically incentivize executives with respect to achieving certain corporate goals or to reward executives for exceptional performance.

~~Prior to our IPO, all of the equity incentive awards we granted were made pursuant to our 2010 Plan. Following the IPO, the company grants equity incentive awards under the terms of our 2020 Plan.~~ ~~See note 8 to our audited consolidated financial statements included in this Annual Report on Form 10-K for a discussion of our 2010 Plan and our 2020 Plan.~~

All options are granted with an exercise price per share that is no less than the fair market value of our common stock on the date of grant of such award. In August 2020, in order to retain and properly incentivize our employees to continue our growth, we approved a repricing of stock options, with no other change to the terms of the awards, held by current employees, including each of our named executive officers, whereby the exercise price per share of each stock option was lowered to $2.55 (our fair market value per share on the date of the repricing). Our stock option grants generally vest over a four-year period and may be subject to acceleration of vesting and exercisability under certain termination and change in control events.

~~In August 2020, we granted options to Mr. Gormsen, Mr. Brownie and Mr. Laponis to purchase an aggregate of 947,865, 293,503 and 214,427 shares of our common stock, respectively.~~

In January 2021 and February 2021, we granted options to Mr. Gormsen, Mr. Brownie and Mr. Laponis to purchase an aggregate of 50,800, 16,500 and 16,500 shares of common stock, respectively. We simultaneously granted, pursuant to the 2020 Plan, Mr. Gormsen, Mr. Brownie and Mr. Laponis 50,800, 16,500 and 16,500 RSUs, respectively.

~~Outstanding equity awards at fiscal year-end~~

~~The following table provides information regarding the outstanding equity awards held by our named executive officers as of December 31, 2020.~~

Name and principal position

Grant date⁽¹⁾

Vesting
commencement
date

Number of
securities
underlying
unexercised
options (#)
(exercisable)

Number of
securities
underlying
unexercised
options (#)
(unexercisable)

Option
exercise
price
($)

Option
expiration
date
Christian Gormsen

4/22/2014

1,100

—

$
1.29

4/22/2024
President and Chief Executive

11/20/2014

11,000

—

1.29

11/20/2024
Officer

9/1/2016

37,148

—

1.29

9/1/2026

10/11/2016

37,148

—

1.29

10/11/2026

7/12/2017

7/12/2017
⁽⁴⁾

18,574

—

1.29

7/12/2027

11/29/2017

11/29/2017
⁽²⁾

437,907

—

1.29

11/29/2027

11/3/2018

4/24/2019
⁽⁵⁾

43,333

—

1.41

11/3/2028

4/24/2019

4/24/2019
⁽⁴⁾

229,737

—

2.55

⁽⁷⁾

4/24/2029

4/24/2019

2/26/2020
⁽⁶⁾

59,167

—

2.55

⁽⁷⁾

4/24/2029

8/3/2020

8/3/2020
⁽⁸⁾

36,886

405,752

2.55

8/2/2030

8/20/2020

8/20/2020
⁽⁹⁾

42,102

463,123

2.55

8/19/2030
William Brownie

9/1/2016

387

—

1.29

9/1/2026
Chief Operating Officer

2/14/2017

2/14/2017
⁽²⁾

290

—

1.29

2/14/2027

7/12/2017

145

—

1.29

7/12/2027

7/12/2017

7/12/2017
⁽⁴⁾

9,287

—

1.29

7/12/2027

11/29/2017

11/29/2017
⁽⁴⁾

59,522

—

1.29

11/29/2027

11/3/2018

4/24/2019
⁽⁵⁾

18,333

—

1.41

11/3/2028

4/24/2019

4/24/2019
⁽⁴⁾

45,666

—

2.55

⁽⁷⁾

4/24/2029

4/24/2019

2/26/2020
⁽⁶⁾

10,400

—

2.55

⁽⁷⁾

4/24/2029

8/3/2020

8/3/2020
⁽⁸⁾

11,363

124,992

2.55

8/2/2030

8/20/2020

8/20/2020
⁽⁹⁾

13,095

144,050

2.55

8/19/2030
Adam Laponis

6/19/2019

7/3/2019
⁽³⁾

33,051

110,641

2.55

⁽⁷⁾

6/19/2029
Chief Financial Officer

8/3/2020

8/3/2020
⁽⁸⁾

6,936

76,266

2.55

8/2/2030

8/20/2020

8/20/2020
⁽⁹⁾

10,935

120,288

2.55

8/19/2030

~~(1)~~

~~The exercise price of each option granted prior to November 29, 2017 was repriced to $1.29 per share on November 29, 2017.~~

~~(2)~~

This option is exercisable in full as of the date of grant, with any unvested shares underlying the option subject to repurchase by us at the original exercise price in the event of a termination of service. The option vests as to 25% of the total number of shares subject to the option on the first anniversary of the vesting commencement date and as to 1/48th of the total number of shares subject to the option on each monthly anniversary thereafter, in each case, subject to continued service. Vesting accelerates in full in the event the holder is terminated by us without cause or the holder resigns for good reason, in each case, within the 12-month period commencing on a change in control.

~~(3)~~

This option vests and becomes exercisable as to 25% of the total number of shares subject to the option on the first anniversary of the vesting commencement date and as to 1/48th of the total number of shares subject to the option on each monthly anniversary thereafter, in each case, subject to continued service. Vesting accelerates in full in the event the holder is terminated by us without cause or the holder resigns for good reason, in each case, within the 12-month period commencing on a change in control.

~~(4)~~

This option is exercisable in full as of the date of grant, with any unvested shares underlying the option subject to repurchase by us at the original exercise price in the event of a termination of service. The option vests as to 1/48th of the total number of shares subject to the option on each monthly anniversary of the vesting commencement date, subject to continued service. Vesting accelerates in full in the event the holder is terminated by us without cause or the holder resigns for good reason, in each case, within the 12-month period commencing on a change in control.

~~(5)~~

This option was set to vest and become exercisable based on the achievement of certain performance goals, subject to continued service through the date of achievement. On April 24, 2019, our board of directors approved the amendment of this option such that the option would not terminate as a result of the failure to achieve the performance conditions and was converted to a time-based vesting option that vests as to 1/48th of the total number of shares subject to the option on each monthly anniversary of the vesting commencement date, subject to continued service. Vesting accelerates in full in the event the holder is terminated by us without cause or the holder resigns for good reason, in each case, within the 12-month period commencing on a change in control.

~~(6)~~

This option vests and becomes exercisable following the determination of the achievement of certain performance goals, subject to continued service through the date of achievement and subsequent vesting. On February 26, 2020, the number of options was reduced, pursuant to its terms, based on the achievement of such goals, and the option vests as to 1/48th of the number of shares subject to the option on each monthly anniversary of this date. Vesting accelerates in full in the event the holder is terminated by us without cause or the holder resigns for good reason, in each case, within the 12-month period commencing on a change in control.

~~(7)~~

The exercise price of each option with an exercise price greater than $2.55 per share was repriced to $2.55 per share on August 3, 2020. Prior to the repricing, the exercise price per share of these options was $4.728.

~~(8)~~

~~(9)~~

This option vests and becomes exercisable as to 1/48th of the total number of shares subject to the option on the one-month anniversary of the vesting commencement date and as to 1/48th of the total number of shares subject to the option on each monthly anniversary thereafter, in each case, subject to continued service. Vesting accelerates in full in the event the holder is terminated by us without cause or the holder resigns for good reason, in each case, within the 12-month period immediately following a change in control that occurs following the closing of an initial public offering. The vesting conditions of these options were based on the achievement of certain performance goals, with such performance goals terminating upon the closing of the IPO pursuant to the original terms of the options.

~~Employment arrangements~~

~~Offer Letters~~

We previously entered into offer letter agreements with each of our named executive officers in connection with their employment with the Company. These agreements set forth the terms and conditions of employment of each named executive officer, including initial base salary, housing allowance (for each of Messrs. Gormsen and Brownie), equity grants and employee benefits eligibility.

~~New Employment Agreements~~

~~In connection with our IPO, we entered into new employment agreements with our named executive officers, which supersede in their entirety their original offer letters.~~

Pursuant to the terms of the new employment agreements, in the event the named executive officer is terminated without Cause or resigns for Good Reason (each, as defined in the employment agreements), in each case, other than during the period that is on or 12 months following a change in control, the named executive officer will be eligible to receive: (i) a lump sum cash payment equal to 1x, in the case of our Chief Executive Officer, or 0.75x, in the case of our other named executive officers, the sum of the executive’s annual base salary and target annual bonus; and (ii) payment or reimbursement of COBRA premiums for 12 months, in the case of our Chief Executive Officer, or nine months, in the case of our other named executive officers.

In addition, in the event the named executive officer is terminated without Cause or resigns for Good Reason, in each case, during the period that is on or 12 months following a change in control, the named executive officer will be eligible to receive: (i) a lump sum cash payment equal to 2x, in the case of our Chief Executive Officer, or 1x, in the case of our other named executive officers, the sum of the executive’s annual base salary and target annual bonus; (ii) payment or reimbursement of COBRA premiums for up to 24 months, in the case of our Chief Executive Officer, or up to 12 months, in the case of our other named executive officers; and (iii) full accelerated vesting of all equity awards.

~~All severance payments and benefits under the employment agreements are subject to the executive’s execution of a release of claims against us.~~

~~Health and welfare and retirement benefits; perquisites~~

Messrs. Gormsen, Brownie and Laponis are eligible to participate in the benefit plans made generally available to our employees on the same terms and conditions as our employees, including comprehensive medical, dental and vision insurance, life and disability insurance, commuter benefit program and 401(k) plan. We have not made any matching contributions under our 401(k) plan. Other than eligibility for the commuter benefit program, the temporary housing allowance provided to Mr. Brownie in connection with his commencement of employment with us and the continuing housing allowance provided to Mr. Gormsen, which forms a part of his base salary, Messrs. Gormsen, Brownie and Laponis are not provided any perquisites.

~~Director compensation~~

~~We did not compensate any members of our board of directors during 2019.~~

~~Director Compensation Program~~

Pursuant to the compensation policy for our non-employee directors (the “Director Compensation Program”), which became effective in October 2020 in connection with our IPO, our non-employee directors will receive cash compensation as follows:

•~~Each non-employee director receives an annual cash retainer in the amount of $40,000 per year.~~

•~~The~~ ~~non-executive Chairperson receives an additional annual cash retainer in the amount of $35,000 per year.~~

•~~The chairperson of the audit committee receive~~s additional annual cash compensation in the amount of $20,000 per year for such chairperson’s service on the audit committee. Each non-chairperson member of the audit committee receives additional annual cash compensation in the amount of $10,000 per year for such member’s service on the audit committee.

•~~The chairperson of the compensation committee receive~~s additional annual cash compensation in the amount of $15,000 per year for such chairperson’s service on the compensation committee. Each non-chairperson member of the compensation committee receives additional annual cash compensation in the amount of $7,500 per year for such member’s service on the compensation committee.

•~~The chairperson of the nominating and corporate governance committee receive~~s additional annual cash compensation in the amount of $10,000 per year for such chairperson’s service on the nominating and corporate governance committee. Each non-chairperson member of the nominating and corporate governance committee receives additional annual cash compensation in the amount of $5,000 per year for such member’s service on the nominating and corporate governance committee.

Under the Director Compensation Program, each non-employee director automatically is granted (i) an option to purchase that number of shares of our common stock calculated by dividing (a) $200,000 by (b) the per share grant date fair value of the option, calculated based on the 30 trading day average closing price of our common stock as of the date of grant (or if the date of grant is not a trading day, the immediately preceding trading day) and using assumptions published in our most recent periodic report as of the date of grant, rounded down to the nearest whole share, upon the director’s initial appointment or election to our board of directors, referred to as the Initial Grant, and (ii) for each non-employee director who has served for at least 6 months as of the date of each annual stockholder’s meeting, an option to purchase that number of shares of our common stock calculated by dividing (a) $120,000 by (b) the per share grant date fair value of the option, calculated based on the 30 trading day average closing price of our common stock as of the trading day immediately preceding the date of grant and using assumptions published in our most recent periodic report as of the date of grant, rounded down to the nearest whole share, automatically on the date of each annual stockholder’s meeting thereafter, referred to as the Annual Grant. The Initial Grants vest and become exercisable as to 1/36th of the underlying shares on a monthly basis over three years, subject to continued service through each applicable vesting date. The Annual Grants vest and become exercisable as to 1/12th of the underlying shares on each monthly anniversary of the applicable date of grant, provided, that if our annual stockholder’s meeting immediately following the date of grant takes place prior to the first anniversary of the date of grant, the Annual Grants vest and become exercisable immediately prior to our annual stockholder’s meeting following the date of grant, subject to continued service through each applicable vesting date.

In the event of a change in control (as defined under the Director Compensation Program), each Initial Grant and Annual Grant, along with any other stock options or equity-based awards held by any non-employee director, will vest and become exercisable immediately prior to such change in control.

~~2020 director compensation table~~

The following table sets forth information regarding the compensation earned for service on our board of directors during the year ended December 31, 2020. The compensation for Mr. Gormsen, as a named executive officer, is set forth above under “—Summary Compensation Table.”

Name⁽¹⁾

Fees earned
or paid
in cash
($)⁽²⁾

Option
awards
($)⁽³⁾

All other
compensation
($)

Total
($)

Josh Makower, M.D.

$
23,750

$
119,988

$
—

$
143,738

Peter Tuxen Bisgaard

13,125

119,988

—

133,113

Tak Cheung, M.D.

—

—

—

—

Doug Hughes

12,500

169,035

—

181,535

Raphael Michel

—

—

—

—

Geoff Pardo

13,750

119,988

—

133,738

Nina Richardson

11,875

169,035

—

180,910

A. Brooke Seawell

15,000

169,035

—

184,035

Juliet Tammenoms Bakker

14,375

119,988

—

134,363

David Wu

10,000

119,988

—

129,988

~~(1)~~

Geoff Pardo and Juliet Tammenoms Bakker joined our board of directors in July 2020, and Doug Hughes, Nina Richardson and Brooke Seawell joined our board of directors in September 2020. Raphael Michel resigned from our board of directors in August 2020, and Dr. Tak Cheung resigned from our board of directors in September 2020.

~~(2)~~

These amounts were earned in 2020 and paid in 2021 in accordance with our Director Compensation Program, described above, on a pro-rated basis following our IPO. Amounts earned by Messrs. Bisgaard, Hughes, and Seawell and Ms. Richardson were paid to them directly. Amounts earned by Ms. Tammenoms Bakker were paid to Longitude Capital Management Co., LLC; amounts earned by Mr. Makower were paid to NEA Management Company LLC; amounts earned by Mr. Pardo were paid to Gilde (as defined below); and amounts earned by Mr. Wu were paid to Maveron LLC.

~~(3)~~

Amounts reported represent the aggregate grant date fair value of stock options granted to our non-employee directors during 2020 under our 2020 Plan, computed in accordance with ASC Topic 718. Assumptions used in the calculation of these amounts are included in note 8 to our audited consolidated financial statements included in this Annual Report on Form 10-K. ~~As of December 31, 2020, our non-employee directors held the following outstanding options and stock awards:~~

~~Name~~	~~Shares subject to outstanding options~~ ~~(#)~~		~~Unvested restricted shares outstanding~~ ~~(#)~~
~~Josh Makower, M.D.~~		~~6,666~~		—
~~Peter Tuxen Bisgaard~~		~~6,666~~		—
~~Tak Cheung, M.D.~~		—		—
~~Doug Hughes~~		~~29,500~~		—
~~Raphael Michel~~		~~149,166~~		—
~~Geoff Pardo~~^(a)		~~6,666~~		—
~~Nina Richardson~~		~~56,832~~		—
~~A. Brooke Seawell~~		~~29,500~~		—
~~Juliet Tammenoms Bakker~~		~~6,666~~		—
~~David Wu~~		~~6,666~~		—

~~(a)~~

~~The shares underlying options granted to Mr. Pardo are beneficially owned by Gilde or one of its affiliates.~~

~~Compensation committee interlocks and insider participation~~

None of the members of our compensation committee is currently, or has been at any time, one of our executive officers or employees. None of our executive officers currently serves, or has served during the last year, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or on our compensation committee.

Item 12. ~~Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.~~

~~Equity Compensation Plan Information~~

~~The~~ ~~following~~ ~~table provides information on our equity compensation plans as of December 31, 2020. Information is included for equity compensation plans approved by our stockholders.~~

Name

Number of securities to be issued upon exercise of outstanding options, warrants and rights

Weighted-average exercise price of outstanding options, warrants and rights

Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders^(1)(2)(3)

6,477,114

$
2.78

⁽⁴⁾

5,320,356

⁽⁵⁾

~~(1)~~

~~Consists of options outstanding and available for issuance under our 2010 Plan, 2020 Plan and the Employee Stock Purchase Plan (ESPP).~~

~~(2)~~

The 2020 Plan contains an “evergreen” provision, pursuant to which the number of shares of common stock reserved for issuance or transfer pursuant to awards under the 2020 Plan shall be increased on the first day of each year beginning in 2021 and ending in 2030 equal to the lesser of (A) five percent (5.0%) of the shares of common stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (B) such smaller number of shares of stock as determined by our Board; provided, however, that no more than 28,344,144 shares of stock may be issued upon the exercise of incentive stock options.

~~(3)~~

The ESPP contains an “evergreen” provision, pursuant to which the maximum number of shares of our common stock authorized for sale under the ESPP shall be increased on the first day of each year beginning in 2021 and ending in 2030, equal to the lesser of (A) one percent (1.0%) of the shares of common stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (B) such number of shares of common stock as determined by our Board; provided, however, no more than 5,450,797 shares of our common stock may be issued thereunder.

~~(4)~~

~~Excludes restricted stock units, which have no exercise price.~~

~~(5)~~

Includes 726,773 shares available for future issuance under the ESPP (of which up to 17,865 shares are issuable with respect to the purchase period in effect as of December 31, 2020, which purchase period ends on May 15, 2021).

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The ~~following~~ ~~table~~ ~~sets forth, as of December 31, 2020,~~ information ~~regarding beneficial ownership of our capital stock by:~~

•~~each person, or group of affiliated persons, known~~required to be included by ~~us to beneficially own more than 5% of our common stock;~~

•~~each of our named executive officers;~~

•~~each of our directors; and~~

•~~all of our executive officers and directors as a group.~~

The percentage of ownership is based on 38,246,601 shares of common stock outstanding as of December 31, 2020. Beneficial ownership is determined according to the rules of the SEC and generally means that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power of that security. In addition, shares of common stock issuable upon the exercise of stock options or warrants that are currently exercisable or exercisable within 60 days of December 31, 2020 areItem 12 will be included in the ~~following table. These shares are deemed to be outstanding~~Proxy Statement for our 2023 Annual Meeting of Stockholders and ~~beneficially owned~~such information is incorporated by the person holding those options or warrants for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. The information contained in the following table does not necessarily indicate beneficial ownership for any other purpose. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.reference herein.

~~Unless otherwise noted below, the address for each beneficial owner listed in the table below is c/o Eargo, Inc., 1600 Technology Drive, 6~~^th ~~Floor, San Jose, California 95110.~~

Name of beneficial owner

Number of
outstanding
shares
beneficially
owned

Number of
shares
exercisable
within 60
days

Number of
shares
beneficially
owned

Percentage of
beneficial
ownership

5% and greater stockholders:

Entities affiliated with New
   Enterprise Associates⁽¹⁾

6,520,944

—

6,520,944

17.05
%
Cooperatieve Gilde Healthcare V U.A.⁽²⁾

3,918,691

—

3,918,691

10.25
%
Longitude Venture Partners IV, L.P.⁽³⁾

3,918,691

—

3,918,691

10.25
%
Future Fund Investment Company
   No.4 Pty Ltd⁽⁴⁾

3,690,481

—

3,690,481

9.65
%
Entities affiliated with Pivotal Alpha
   Limited⁽⁵⁾

2,886,724

—

2,886,724

7.55
%
The Charles and Helen Schwab
   Living Trust U/A DTD 11/22/1985

2,537,684

—

2,537,684

6.64
%
Named executive officers and directors:

Christian Gormsen⁽⁶⁾

81,548

993,596

1,075,144

2.74
%
William Brownie⁽⁷⁾

152,283

180,716

332,999

*

Adam Laponis⁽⁸⁾

44,430

67,231

111,661

*

Josh Makower, M.D.⁽⁹⁾

6,520,017

2,222

6,522,239

17.05
%
Peter Tuxen Bisgaard⁽¹⁰⁾

2,928,694

2,222

2,930,916

7.66
%
Doug Hughes⁽¹¹⁾

37,209

4,099

41,308

*

Geoff Pardo⁽¹²⁾

3,918,691

2,222

3,920,913

10.25
%
Nina Richardson⁽¹³⁾

14,386

31,431

45,817

*

A. Brooke Seawell⁽¹⁴⁾

—

4,099

4,099

*

Juliet Tammenoms Bakker⁽¹⁵⁾

3,918,691

2,222

3,920,913

10.25
%
David Wu⁽¹⁶⁾

1,552,369

2,222

1,554,591

4.06
%
All current directors and executive
   officers as a group (11 persons)

19,168,318

1,292,282

20,460,600

51.75
%

*	~~Indicates beneficial ownership of less than 1% of the total outstanding common stock.~~

~~(1)~~

Consists of (a) 6,520,017 shares held by New Enterprise Associates 15, L.P. (“NEA 15”) and (b) 927 shares held by NEA Ventures 2015, L.P. (“Ven 2015”). The shares held directly by NEA 15 are indirectly held by NEA Partners 15, L.P. (“NEA Partners 15”), which is the sole general partner of NEA 15, NEA 15 GP, LLC (“NEA 15 LLC”), which is the sole general partner of NEA Partners 15, and the individual managers of NEA 15 LLC (the “NEA Managers”). The NEA Managers are Forest Baskett, Anthony A. Florence, Jr., Mohamad H. Makhzoumi, Joshua Makower (a member of our board of directors), Scott D. Sandell and Peter W. Sonsini. The NEA Managers share voting and dispositive power with regard to the shares held by NEA 15. The shares directly held by Ven 2015 are indirectly held by Karen P. Welsh, the general partner of Ven 2015. Karen P. Welsh shares voting and dispositive power with regard to the shares held by Ven 2015. All indirect owners of the above-referenced shares disclaim beneficial ownership of all applicable shares except to the extent of their actual pecuniary interest in such shares. The principal address for NEA 15 is c/o New Enterprise Associates, Inc., 1954 Greenspring Drive, Suite 600, Timonium, Maryland 21093.

~~(2)~~

~~Based on the most recently available Schedule 13D filed jointly with the SEC on October 30, 2020 by Co~~öperatieve Gilde Healthcare V U.A. (“Gilde”), Gilde Healthcare V Management B.V. (“Gilde B.V.”), Gilde Healthcare Holding B.V., Marc Olivier Perret, Edwin de Graaf, Martemanshurk BV, which is owned 100% by Pieter van der Meer, and Geoff Pardo. According to the Schedule 13D filed, this amount consists of 3,918,691 shares of our common stock held by Gilde. Gilde B.V. is the manager of Gilde and may be deemed to have voting, investment and dispositive power with respect to shares held by Gilde. Gilde B.V. is managed by Gilde Healthcare Holding B.V. The managing partners of Gilde Healthcare Holding B.V. are Marc Olivier Perret, Edwin de Graaf and Pieter van der Meer. Mr. Pardo is a member of our board of directors and is a partner of Gilde and may be deemed to share voting and dispositive power over the shares held by Gilde. Each of these individuals disclaim beneficial ownership of all applicable shares except to the extent of their actual pecuniary interest in such shares. The mailing address of Gilde is 222 Third Street, Suite 1321, Cambridge, Massachusetts 02142, c/o Gilde Healthcare Partners.

~~(3)~~

Based on the most recently available Schedule 13D filed jointly with the SEC on October 30, 2020 by Longitude Capital Partners IV, LLC (“LCP4”), Longitude Venture Partners IV, L.P. (“LVP4”), Patrick G. Enright, and Juliet Tammenoms Bakker. According to the Schedule 13D filed, this amount consists of 3,918,691 shares of our common stock held by LVP4. LCP4 is the general partner of LVP4 and may be deemed to have sole voting, investment and dispositive power over the shares held by LVP4. Patrick G. Enright and Ms. Tammenoms

Bakker, a member of our board of directors, are managing members of LCP4 and in their capacity as such, may be deemed to exercise shared voting and investment power over the shares held by LCP4 and LVP4. Each of these individuals disclaim beneficial ownership of all applicable shares except to the extent of his or her actual pecuniary interest in such shares. The mailing address of LVP4 is 2740 Sand Hill Road, 2nd Floor, Menlo Park, California 94025.

~~(4)~~

Based on the most recently available Schedule 13G filed jointly with the SEC on February 11, 2021 by Future Fund Board of Guardians and Future Fund Investment Company. According to the Schedule 13G filed, this amount consists of 3,690,481 shares of common stock held of record by The Northern Trust Company in its capacity as custodian for Future Fund Investment Company No. 4 Pty Ltd (ACN 134 338 908), or the Future Fund, a wholly owned subsidiary of the Future Fund Board of Guardians. Investment and voting decisions by the Future Fund are made jointly by three or more individuals that serve on the non-executive board of the Future Fund Board of Guardians, and therefore no individual is the beneficial owner of the shares held by Future Fund. According to the Schedule 13G filed, the Future Fund reported having sole voting power over no shares, shared voting power over 3,690,481 shares, sole dispositive power over no shares, and shared dispositive power over 3,690,481 shares. The principal business address of the Future Fund is Level 42, 120 Collins Street, Melbourne VIC 3000.

~~(5)~~

Based on the most recently available Schedule 13D filed jointly with the SEC on October 29, 2020 by Nan Fung Group Holdings Limited (“NFGHL”), NF Investment Holdings Limited (“NFIHL”), Permwell Management Limited (“Permwell”), Grand Epoch Holdings Limited (“Grand Epoch”), Eternal Sky Holdings Limited (“Eternal Sky”), and Pivotal Alpha Limited (“Pivotal Alpha”). According to the Schedule 13D filed, this amount consists of 2,664,502 shares of our common stock held directly by Pivotal Alpha and 222,222 shares of our common stock held by Permwell. Pivotal Alpha is wholly owned by Eternal Sky, which is wholly owned by Grand Epoch. Grand Epoch and Permwell are both wholly owned by NFIHL, which is wholly owned by NFGHL. The members of the Executive Committee of NFGHL make investment decisions with respect to shares of our common stock held by Pivotal Alpha and Permwell. Mr. Kam Chung Leung, Mr. Frank Kai Shui Seto, Mr. Vincent Sai Sing Cheung, Mr. Pui Kuen Cheung, Mr. Kin Ho Kwok, Ms. Vanessa Tih Lin Cheung, Mr. Meng Gao and Mr. Chun Wai Nelson Tang are the members of the Executive Committee of NFGHL. Pivotal Alpha, Eternal Sky and Grand Epoch each disclaims beneficial ownership of all applicable shares beneficially owned by Permwell and Permwell disclaims beneficial ownership of all applicable shares beneficially owned by Pivotal Alpha, Eternal Sky and Grand Epoch.

~~(6)~~

~~Consists of (a) 81,548 shares of common stock held directly and (b) 993,596 shares of common stock that may be acquired pursuant to the exercise of stock options within 60 days of December 31, 2020.~~

~~(7)~~

~~Consists of (a) 152,283 shares of common stock held directly and (b) 180,716 shares of common stock that may be acquired pursuant to the exercise of stock options within 60 days of December 31, 2020.~~

~~(8)~~

~~Consists of (a) 44,430 shares of common stock held directly and (b) 67,231 shares of common stock that may be acquired pursuant to the exercise of stock options within 60 days of December 31, 2020.~~

~~(9)~~

Consists of (a) 6,520,017 shares of common stock beneficially owned by NEA 15 and NEA Ventures and (b) 2,222 shares of common stock that may be acquired pursuant to the exercise of stock options held by Dr. Makower within 60 days of December 31, 2020. The shares directly held by NEA 15 are indirectly held by NEA Partners 15, the sole general partner of NEA 15, NEA 15 LLC, the sole general partner of NEA Partners 15 and each of the individual managers of NEA 15 LLC. Dr. Makower is a General Partner of New Enterprise Associates, which is affiliated with NEA 15, NEA Ventures and NEA 15 GP and disclaims beneficial ownership of all applicable shares except to the extent of his actual pecuniary interest in such shares.

~~(10)~~

Consists of (a) 2,886,724 shares of common stock beneficially owned by Pivotal Alpha, (b) 41,790 shares of common stock held directly and (c) 2,222 shares of common stock that may be acquired pursuant to the exercise of stock options held by Mr. Bisgaard within 60 days of December 31, 2020. Investment and voting decisions by Pivotal Alpha are made jointly by three or more individuals and therefore no individual is the beneficial owner of the shares held by Pivotal Alpha. Mr. Bisgaard is a Managing Partner of Pivotal Bioventure Partners LLC, which is affiliated with Pivotal Alpha and disclaims beneficial ownership of all applicable shares except to the extent of his actual pecuniary interest in such shares.

~~(11)~~

~~Consists of (a) 37,209 shares of common stock held directly and (b) 4,099 shares of common stock that may be acquired pursuant to the exercise of stock options within 60 days of December 31, 2020.~~

~~(12)~~

Consists of (a) 3,918,691 shares of common stock beneficially owned by Gilde and (b) 2,222 shares of common stock that may be acquired pursuant to the exercise of stock options held by Mr. Pardo within 60 days of December 31, 2020 (while such options were granted to Mr. Pardo, the shares underlying the options, when exercised, will be held by Gilde or one of its affiliates). Gilde is managed by Gilde B.V. Gilde B.V. is managed by Marc Perret, Edwin de Graaf and Pieter van der Meer, who each disclaim beneficial ownership of all applicable shares except to the extent of their actual pecuniary interest in such shares.

~~(13)~~

~~Consists of (a) 14,386 shares of common stock held directly and (b) 31,431 shares of common stock that may be acquired pursuant to the exercise of stock options within 60 days of December 31, 2020.~~

~~(14)~~

~~Consists of 4,099 shares of common stock that may be acquired pursuant to the exercise of stock options within 60 days of December 31, 2020.~~

~~(15)~~

Consists of (a) 3,918,691 shares of common stock beneficially owned by LVP4 and (b) 2,222 shares of common stock that may be acquired pursuant to the exercise of stock options held by Ms. Tammenoms Bakker within 60 days of December 31, 2020. LCP4 is the general partner of LVP4 and may be deemed to have sole voting, investment and dispositive power over the shares held by LVP4. Patrick G. Enright and Ms. Tammenoms Bakker are managing members of LCP4 and, in their capacity as such, may be deemed to exercise shared voting and investment power over the shares held by LCP4 and LVP4. Each of these individuals disclaims beneficial ownership of all applicable shares except to the extent of his or her actual pecuniary interest in such shares.

~~(16)~~

Consists of (a) 1,552,369 shares of common stock beneficially owned by Maveron Equity Partners IV, L.P., Maveron Equity Partners V, L.P., Maveron IV Entrepreneurs Fund L.P., Maveron V Entrepreneurs Fund L.P., MEP Associates IV, L.P., and MEP Associates V, L.P., and (b) 2,222 shares of common stock that may be acquired pursuant to the exercise of stock options within 60 days of December 31, 2020. The stock options are held in Mr. Wu’s name but are contractually assigned to Maveron LLC. Mr. Wu is a Partner at Maveron LLC, which is affiliated with Maveron Equity Partners IV, L.P., Maveron Equity Partners V, L.P., Maveron IV Entrepreneurs Fund L.P., Maveron V

Entrepreneurs Fund L.P., MEP Associates IV, L.P., and MEP Associates V, L.P. and disclaims beneficial ownership of all applicable shares except to the extent of his actual pecuniary interest in such shares.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Other than compensation arrangements, including employment arrangements, with our directors and executive officers, including those discussed in “Item 11. Executive Compensation” of this Annual Report on Form 10-K, the following is a description of each transaction since January 1, 2020 in which:

•

~~we were a party or will be a party;~~

~~the amounts involved exceeded or~~The information required to be included by Item 13 will ~~exceed $120,000; and~~

~~any of our directors, executive officers or holders of more than 5% of our capital stock, or an affiliate or immediate family member thereof, had or will have a direct or indirect material interest.~~

~~Convertible promissory note financing (2020)~~

In March 2020, we entered into a convertible note purchase agreement pursuant to which we issued $10.1 million in aggregate principal amount of convertible promissory notes between March 2020 and April 2020, which we refer to as the 2020 Notes. The 2020 Notes accrued interest at a rate of 6% per year. The 2020 Notes were redeemed and the aggregate principal ~~amount~~ and accrued interest on the 2020 Notes automatically converted into shares of our Series E convertible preferred stock at a conversion price of $5.427 per share upon the initial closing of our Series E convertible preferred stock financing in July 2020, a price equal to 80% of the $6.7836 per share paid by the investorsbe included in the ~~Series E convertible preferred stock financing.~~

~~The following table summarizes the 2020 Notes purchased~~Proxy Statement for our 2023 Annual Meeting of Stockholders and such information is incorporated by ~~our executive officers, directors and holders of more than 5% of our capital stock and their affiliated entities or immediate family members, and the shares of Series E convertible~~ ~~preferred~~ ~~stock issued upon the conversion of the 2020 Notes.~~reference herein.

Name

Series E
convertible
promissory
note principal
and interest ($)

Shares of
Series E
convertible
preferred
stock (#)

Entities affiliated with New Enterprise Associates⁽¹⁾

$
3,779,299

696,388

Entities affiliated with Maveron Equity Partners V, L.P.⁽²⁾

22,608

4,164

The Charles and Helen Schwab Living Trust

2,047,184

377,221

Future Fund Investment Company No. 4 Pty Ltd

2,321,220

427,717

Pivotal Alpha Limited⁽³⁾

1,412,114

260,201

Peter Tuxen Bisgaard

15,170

2,795

Adam Laponis

20,227

3,727

~~(1)~~

Consists of $3,713,974 in principal plus accrued interest held by NEA 15. Dr. Cheung and Dr. Makower were designated to serve as members of our board of directors by New Enterprise Associates, Inc., or NEA, which is affiliated with NEA 15. Dr. Cheung is a principal at NEA, and Dr. Makower is a general partner at NEA. In September 2020, Dr. Cheung resigned from our board of directors, and NEA designated Mr. Hughes to serve in his place. In addition, in September 2020, Mr. Seawell, a venture partner at NEA, joined our board of directors.

~~(2)~~

~~Entities affiliated with Maveron Equity Partners V, L.P. held more than 5% of our capital stock as of the date of the 2020 Notes financing.~~

~~(3)~~

Consists of $1,387,706.00 in principal plus accrued interest held by Pivotal Alpha. Mr. Bisgaard was designated to serve as a member of our board of directors by Pivotal Alpha. Mr. Bisgaard is a managing director of Pivotal Alpha.

~~Series E convertible preferred stock financing~~

In July 2020, we entered into a Series E convertible preferred stock purchase agreement with various investors, pursuant to which we issued in July 2020 and August 2020 an aggregate of 10,513,921 shares of Series E convertible preferred stock at $6.7836 per share for gross proceeds of $71.3 million.

~~The table below sets forth the number of shares of our Series E convertible preferred stock purchased by our executive officers,~~ ~~directors, holders of more than 5% of our capital stock and their affiliated entities or immediate~~

~~family members. Each share of Series E convertible preferred stock in the table below converted into one share of our common stock in connection with our IPO.~~

Name

Series E
convertible
preferred
stock (#)

Aggregate cash
purchase
price ($)

Entities affiliated with New Enterprise Associates⁽¹⁾

737,071

$
4,999,999

The Charles and Helen Schwab Living Trust

227,640

1,544,221

Pivotal Alpha Limited⁽²⁾

589,657

3,999,999

Coöperatieve Gilde Healthcare V U.A.⁽³⁾

3,685,358

24,999,999

Longitude Venture Partners IV, L.P.⁽⁴⁾

3,685,358

24,999,999

Peter Tuxen Bisgaard

22,112

149,999

Adam Laponis

7,370

50,000

Nina Richardson

5,856

39,727

~~(1)~~

Consists of 737,071 shares of our Series E convertible preferred stock held by NEA 15. Dr. Cheung and Dr. Makower were designated to serve as members of our board of directors by NEA, which is affiliated with NEA 15. Dr. Cheung is a principal at NEA, and Dr. Makower is a general partner at NEA. In September 2020, Dr. Cheung resigned from our board of directors, and NEA designated Mr. Hughes to serve in his place.

~~(2)~~

~~Mr. Bisgaard was designated to serve as a member of our board of directors by Pivotal Alpha. Mr. Bisgaard is a managing director of Pivotal Alpha.~~

~~(3)~~

~~Mr. Pardo was designated to serve as a member of our board of directors by Gilde. Mr. Pardo is a partner of Gilde.~~

~~(4)~~

~~Ms. Tammenoms Bakker was designated to serve as a member of our board of directors by LVP4. Ms. Tammenoms Bakker is a managing director of LVP4.~~

~~Investors’ Rights Agreement~~

We entered into an amended and restated investors’ rights agreement with the purchasers of our convertible preferred stock, which was subsequently converted into common stock in connection with the IPO, and certain of our other stockholders, including certain of our directors and executive officers, holders of more than 5% of our capital stock and entities with which certain of our directors are affiliated. As of December 31, 2020, the holders of approximately 28.2 million shares of our common stock are entitled to rights with respect to the registration of their shares under the Securities Act.

~~Indemnification agreements~~

We have entered into indemnification agreements with certain of our current directors, executive officers and certain other employees. Our amended and restated certificate of incorporation and our amended and restated bylaws will provide that we will indemnify our directors and officers to the fullest extent permitted by applicable law.

~~Policies and procedures for related-party transactions~~

Our board of directors has adopted a written related-person transaction policy, setting forth the policies and procedures for the review and approval or ratification of related-person transactions. This policy covers, with certain exceptions set forth in Item 404 of Regulation S-K under the Securities Act, any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships in which we were or are to be a participant, where the amount involved exceeds $120,000 and a related person had or will have a direct or indirect material interest, including, without limitation, purchases of goods or services by or from the related person or entities in which the related person has a material interest, indebtedness, guarantees of indebtedness and employment by us of a related person. In reviewing and approving any such transactions, our audit committee is tasked to consider all relevant facts and circumstances, including, but not limited to, whether the transaction is on terms comparable to those that could be obtained in an arm’s length transaction with an unrelated third party and the extent of the related person’s interest in the transaction. All of the transactions described in this section occurred prior to the adoption of this policy.

~~Director independence~~

Our board of directors currently consists of nine members. Our board of directors has determined that all of our directors, other than Mr. Gormsen, qualify as “independent” directors in accordance with the marketplace rules of the Nasdaq Stock Market, or the Listing Rules. Mr. Gormsen is not considered independent by virtue of his position as our President and Chief Executive Officer. Under the Listing Rules, the definition of independence includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director nor any of his or her family members has engaged in various types of business dealings with us. In addition, as required by the Listing Rules, our board of directors has made a subjective determination as to each independent director that no relationship exists that, in the opinion of our board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In making these determinations, our board of directors reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and relationships as they may relate to us and our management.

Item 14.Principal ~~Accounting~~Accountant Fees and Services.

~~Aggregate fees~~The information required to be included by Item 14 will be included in the Proxy Statement for ~~professional services rendered for us~~our 2023 Annual Meeting of Stockholders and such information is incorporated by ~~Deloitte & Touche LLP for the years ended December 31, 2020 and 2019, were as follows, all of which were approved by the audit committee:~~reference herein.

2020

2019

(in thousands)

Audit fees⁽¹⁾

$
1,625

$
470

Audit-related fees⁽²⁾

—

—

Tax fees⁽³⁾

37

68

All other fees⁽⁴⁾

—

—

Total

$
1,662

$
538

106

~~(1)~~

Represents the aggregate fees billed for the audit of the Company’s consolidated financial statements, review of the condensed consolidated financial statements included in the Company’s quarterly reports and services in connection with the statutory and regulatory filings or engagements for those years. Fees for our fiscal year ended December 31, 2020 and 2019 also consisted of professional services rendered in connection with our Registration Statement on Form S-1 related to the initial public offering of our common stock completed in October 2020.

~~(2)~~

Represents the aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported under “audit fees.”

~~(3)~~

~~Represents the aggregate fees billed for tax compliance, advice and planning.~~

~~(4)~~

~~Represents the aggregate fees billed for all products and services that are not included under “audit fees,” “audit-related fees” or “tax fees.”~~

PART IV

Item 15. Exhibits, Financial Statement Schedules.

We have filed the following documents as part of this Annual Report on Form 10-K:

~~Financial Statements: The financial statements included in “Index to Consolidated Financial Statements” in Part II, Item 8 are filed as part of this Annual Report on Form 10-K~~

Financial Statements: The financial statements included in “Index to Consolidated Financial Statements” in Part II, Item 8 are filed as part of this Annual Report on Form 10-K

Exhibits: The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K.

Item 16. Form 10-K Summary

None.

~~Exhibit~~ ~~Index~~

Incorporated by reference
Exhibit
Number

Description
Form
Dated
Number
3.1

Amended and Restated Certificate of Incorporation
8-K
10/20/2020
3.1
3.2

Amended and Restated Bylaw
8-K
10/20/2020
3.2
4.1

Reference is made to Exhibits 3.1 through 3.2

4.2

Form of Common Stock Certificate.
S-1
9/25/2020
4.2
4.3

Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.†

10.1

Amended and Restated Investors’ Rights Agreement, dated July 13, 2020, by and among Eargo, Inc. and the investors listed therein.
S-1
9/25/2020
10.1
10.2(a)

2010 Equity Incentive Plan, as amended.#
S-1/A
10/01/2020
10.2(a)
10.2(b)

Form Agreements under 2010 Equity Incentive Plan, as amended.#
S-1
9/25/2020
10.2(b)
10.3(a)

2020 Incentive Award Plan.#
S-8
10/19/2020
99.2(a)
10.3(b)

Form Agreements under the 2020 Incentive Award Plan.#
S-1
9/25/2020
10.3(b)
10.4

2020 Employee Stock Purchase Plan.#
S-8
10/19/2020
99.3
10.5

Employment Agreement, by and between Eargo, Inc. and Christian Gormsen.#
S-1
9/25/2020
10.5
10.6

Employment Agreement, by and between Eargo, Inc. and William Brownie.#
S-1
9/25/2020
10.6
10.7

Employment Agreement, by and between Eargo, Inc. and Adam Laponis.#
S-1
9/25/2020
10.7
10.8

Non-Employee Director Compensation Program.#
S-1
9/25/2020
10.8
10.9

Form of Indemnification Agreement for directors, officers and certain other employees.
S-1
9/25/2020
10.9
10.10

Manufacturing Services Agreement, dated May 5, 2017, by and between Eargo, Inc. and Hana Microelectronics Co., Ltd.*
S-1
9/25/2020
10.10
10.11

Sublease Agreement, dated July 30, 2018, by and between Eargo, Inc. and Microchip Technology Incorporated.
S-1
9/25/2020
10.11
10.12

Office & Parking Lease, dated September 11, 2018, by and between Eargo, Inc. and SEV 8th and Division, LLC.
S-1
9/25/2020
10.12
10.13

Standard Office Building Lease, dated April 27, 2018, by and between Eargo, Inc. and LAGOS PROPERTIES, LLC.
S-1
9/25/2020
10.13
10.14

Loan and Security Agreement, dated June 6, 2018, by and among Eargo, Inc., Eargo Hearing, Inc. and Silicon Valley Bank, as amended by the First Amendment, dated January 31, 2019, as further amended by the Second Amendment, dated May 1, 2020, as further amended by the Third Amendment, dated September 9, 2020.
S-1
9/25/2020
10.14
10.15

Manufacturing Agreement, dated August 21, 2018, by and between Eargo, Inc. and Pegatron Corporation.*
S-1
9/25/2020
10.15
21.1

List of subsidiaries.
S-1
9/25/2020
21.1

107

Exhibit Index


		Incorporated by reference
Exhibit Number	Description	Form	Dated	Number

3.1	Amended and Restated Certificate of Incorporation.	8-K	10/20/2020	3.1

3.2	First Certificate of Amendment to Amended and Restated Certificate of Incorporation.	8-K	10/13/2022	3.1

3.3	Second Certificate of Amendment to Amended and Restated Certificate of Incorporation.	8-K	1/17/2023	3.1

3.4	Amended and Restated Bylaws.	8-K	10/20/2020	3.2

4.1	Reference is made to Exhibits 3.1 through 3.4 .

4.2	Form of Common Stock Certificate.	S-1	9/25/2020	4.2

4.3	Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.†

10.1	Amended and Restated Investors’ Rights Agreement, dated July 13, 2020, by and among Eargo, Inc. and the investors listed therein.	S-1	9/25/2020	10.1

10.2(a)	2010 Equity Incentive Plan, as amended.#	10-K	3/16/2021	10.2(a)

10.2(b)	Form Agreements under 2010 Equity Incentive Plan, as amended.#	S-1	9/25/2020	10.2(b)

10.3(a)	2020 Incentive Award Plan, as amended through February 1, 2023.#†

10.3(b)	Form Agreements under the 2020 Incentive Award Plan.#	S-1	9/25/2020	10.3 (b)

10.3(c)	Form of Restricted Stock Unit Award Agreement under the 2020 Incentive Award Plan (Cash Settled Awards).#	10-K	5/13/2022	10.3(c)

10.4	2020 Employee Stock Purchase Plan.#†

10.5	Employment Agreement, by and between Eargo, Inc. and Christian Gormsen.#	S-1	9/25/2020	10.5

10.6	Employment Agreement, by and between Eargo, Inc. and William Brownie.#	S-1	9/25/2020	10.6

10.7	Employment Agreement, by and between Eargo, Inc. and Adam Laponis.#	S-1	9/25/2020	10.7

10.8	Promotion Letter by and between Eargo, Inc. and Mark Thorpe.#	8-K	1/18/2022	10.1

10.9	Employment Agreement by and between Eargo, Inc. and Mark Thorpe.#†

10.10	Non-Employee Director Compensation Program.#	S-1	9/25/2020	10.8

10.11	Form of Indemnification Agreement for directors, officers and certain other employees.	S-1	9/25/2020	10.9

10.12	Manufacturing Services Agreement, dated May 5, 2017, by and between Eargo, Inc. and Hana Microelectronics Co., Ltd.*	S-1	9/25/2020	10.10

10.13	Sublease Agreement, dated July 30, 2018, by and between Eargo, Inc. and Microchip Technology Incorporated.	S-1	9/25/2020	10.11

10.14	Office & Parking Lease, dated September 11, 2018, by and between Eargo, Inc. and SEV 8th and Division, LLC.	S-1	9/25/2020	10.12

10.15	Office Lease, dated January 11, 2023, by and between Eargo, Inc. and Nashland TT, LP.	8-K	1/13/2023	10.1

10.16	Loan and Security Agreement, dated June 6, 2018, by and among Eargo, Inc., Eargo Hearing, Inc. and Silicon Valley Bank, as amended by the First Amendment, dated January 31, 2019, as further amended by the Second Amendment, dated May 1, 2020, as further amended by the Third Amendment, dated September 9, 2020.	S-1	9/25/2020	10.14

108


		Incorporated by reference
Exhibit Number	Description	Form	Dated	Number
10.17	Manufacturing Agreement, dated August 21, 2018, by and between Eargo, Inc. and Pegatron Corporation.*	S-1	9/25/2020	10.15

10.18	First Amendment to Lease, dated February 19. 2021, by and between Eargo, Inc. and SEV 8th and Division, LLC.	10-Q	5/12/2021	10.1

10.19	Standard Form Office Lease, executed September 3, 2021, by and between Eargo, Inc. and GZI First North 1, LLC.	10-Q	5/13/2022	10.1

10.20	First Amendment to Lease, dated January 26, 2022, by and between Eargo, Inc. and GZI First North 1, LLC.	10-Q	5/13/2022	10.2

10.21	Settlement Agreement	8-K	5/02/2022	10.1

10.22	Note Purchase Agreement, dated June 24, 2022, by and among Eargo, Inc., Eargo Hearing, Inc., Eargo Screening, LLC, noteholders affiliated with Patient Square Capital and Drivetrain Agency Services, LLC, as administrative agent and collateral agent. +*	8-K	6/27/2022	10.1

10.23	Form of Indemnification Agreement entered into with Investor Directors. *	8-K	6/27/2022	10.2

10.24	Board Observer Agreement, dated June 24, 2022, by and between Eargo, Inc. and PSC Echo LP.*	8-K	6/27/2022	10.3

10.25	Investors’ Rights Agreement, dated June 24, 2022, by and between Eargo, Inc. and those certain investors set forth therein. +*	8-K	6/27/2022	10.4

10.26	Registration Rights Agreement, dated June 24, 2022, by and between Eargo, Inc. and those certain investors set forth therein.*	8-K	6/27/2022	10.5

21.1	List of subsidiaries.†

23.1	Consent of Deloitte & Touche LLP, independent registered public accounting firm.†

24.1	Power of Attorney (included in the signature page hereto).†

31.1	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.†

31.2	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.†

32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.‡

32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.‡

101.INS	Inline XBRL Instance Document†

101.SCH	Inline XBRL Taxonomy Extension Schema Document†

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document†

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document†

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document†

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document†

109


~~23.1~~		~~Consent of Deloitte & Touche LLP, independent registered public accounting firm.†~~Incorporated by reference
~~24.1~~Exhibit Number	Description	~~Power of Attorney (included in the signature page hereto).†~~Form	Dated	Number
~~31.1~~		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.†
~~31.2~~104	Cover Page Interactive Data File (embedded within the Inline XBRL document)†	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.†
~~32.1~~		~~Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.†~~
~~32.2~~		~~Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.†~~
~~101.INS~~		~~XBRL Instance Document†~~
~~101.SCH~~		~~XBRL Taxonomy Extension Schema Document†~~
~~101.CAL~~		~~XBRL Taxonomy Extension Calculation Linkbase Document†~~
~~101.DEF~~		~~XBRL Taxonomy Extension Definition Linkbase Document†~~
~~101.LAB~~		~~XBRL Taxonomy Extension Label Linkbase Document†~~
~~101.PRE~~		~~XBRL Taxonomy Extension Presentation Linkbase Document†~~

#	~~Indicates management contract or compensatory plan~~

*	Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Registration S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the SEC upon request.

†	~~Filed herewith.~~

‡	~~Furnished herewith.~~

~~SIGNATURES~~# Indicates management contract or compensatory plan.

+ Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Registration S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the SEC upon request.

* Certain confidential information contained in this document, marked by [***], has been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K because it is both (i) not material and (ii) the type of information that the registrant treats as private or confidential.

† Filed herewith.

‡ Furnished herewith.

110

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Eargo, Inc.

Date: March ~~16, 2021~~23, 2023	By:	/s/ Christian Gormsen
		Christian Gormsen
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Christian Gormsen, Adam Laponis and Christy La Pierre, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.


Name	Title	~~Title~~Date	~~Date~~

/s/ Christian Gormsen Christian Gormsen		President, Chief Executive Officer and Director (Principal Executive Officer)	March ~~16, 2021~~23, 2023
~~Christian Gormsen~~
/s/ Adam Laponis Adam Laponis	Chief Financial Officer (Principal Financial Officer)		March 23, 2023
~~/s/ Adam Laponis~~		~~Chief Financial Officer~~ ~~(Principal Financial and Accounting Officer)~~	~~March 16, 2021~~
~~Adam Laponis~~/s/ Mark Thorpe Mark Thorpe	Chief Accounting Officer (Principal Accounting Officer)		March 23, 2023

/s/ ~~Josh Makower, M.D.~~Donald Spence Donald Spence		~~Chairman~~Chair of the Board of Directors	March ~~16, 2021~~23, 2023
~~Josh Makower, M.D.~~
/s/ Katie J. Bayne Katie J. Bayne	Director		March 23, 2023
~~/s/ Peter Tuxen Bisgaard~~		~~Director~~	~~March 16, 2021~~
~~Peter Tuxen Bisgaard~~/s/ Trit Garg, M.D. Trit Garg, M.D.	Director		March 23, 2023

/s/ ~~Doug Hughes~~Karr Narula Karr Narula	Director	~~Director~~	March ~~16, 2021~~23, 2023
~~Doug Hughes~~
/s/ Justin Sabet-Peyman Justin Sabet-Peyman	Director		March 23, 2023
~~/s/ Geoff Pardo~~		~~Director~~	~~March 16, 2021~~
~~Geoff Pardo~~

~~/s/ Nina Richardson~~		~~Director~~	~~March 16, 2021~~
~~Nina Richardson~~

~~/s/ A. Brooke Seawell~~		~~Director~~	~~March 16, 2021~~
~~A. Brooke Seawell~~

~~/s/ Juliet Tammenoms Bakker~~		~~Director~~	~~March 16, 2021~~
~~Juliet Tammenoms Bakker~~

/s/ David Wu David Wu	Director	~~Director~~	March ~~16, 2021~~
~~David Wu~~			23, 2023

~~145~~111


Delaware	~~27-3879805~~27-3879804
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
~~1600 Technology Drive, 6th Floor~~ ~~San Jose, California 95110~~	~~95110~~
2665 North First Street, Suite 300 San Jose, California	95134
(Address of principal executive offices)	(Zip Code)


Large accelerated filer	☐	☐Accelerated filer	~~Accelerated filer~~	☐

Non-accelerated filer	☒	☒	Smaller reporting company	☐☒

		Emerging growth company	☒		☐


		Page
PART I
Item 1.	Business	41
Item 1A.	Risk Factors	3014
Item 1B.	Unresolved Staff Comments	7154
Item 2.	Properties	7254
Item 3.	Legal Proceedings	7254
Item 4.	Mine Safety Disclosures	7254

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	7355
Item 6.	~~Selected Financial Data~~[Reserved]	7556
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7757
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	9476
Item 8.	Financial Statements and Supplementary Data	9577
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	~~122~~104
Item 9A.	Controls and Procedures	~~122~~104
Item 9B.	Other Information	~~123~~105
Item 9C.	Disclosure Regarding Foreign Jurisdictions that Prevent Inspections	105
~~PART III~~
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	~~124~~106
Item 11.	Executive Compensation	~~130~~106
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~137~~106
Item 13.	Certain Relationships and Related Transactions, and Director Independence	~~140~~106
Item 14.	Principal ~~Accounting~~Accountant Fees and Services	~~142~~106

PART IV
Item 15.	Exhibits, Financial Statement Schedules	~~143~~107
Item 1616.	Form 10-K Summary	~~143~~107

~~Hearing Loss Prevalence by Severity~~	~~Hearing Loss Prevalence by Severity and Age~~


~~Sources:~~ ~~Lin, F. R., Niparko, J. K., & Ferrucci, L. (2011). Hearing Loss Prevalence in the United States. Archives of Internal Medicine, 171(20), 1851– 1852.~~ ~~Prevalence of Hearing Loss by Severity in the United States, Adele M. Goman, PhD, and Frank R. Lin, MD, PhD, 2016~~ ~~U.S. Census International Database https://www.census.gov/data-tools/demo/idb/region.php?T=13&RT=0&A=both&Y=2020&C=US&R=~~


Name	Number of securities to be issued upon exercise of outstanding options, warrants and rights			Weighted-average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders(1)(2)(3)		485,378	(4)	$	82.08	(4)		272,776	(5)
Equity compensation plans not approved by security holders		—			—			—
Total		485,378		$	82.08			272,776

	As of December 31,
(in thousands)	2020			2019			2018
Consolidated balance sheet data:
Cash and cash equivalents	$	212,185		$	13,384		$	51,051
Working capital(1)		198,739			(2,377	)		43,029
Total assets		232,632			27,305			59,042
Long-term debt, current and noncurrent		14,837			12,246			6,990
Convertible preferred stock warrant liability		—			396			81
Convertible preferred stock		—			152,880			152,015
Accumulated deficit		(199,058	)		(159,203	)		(114,717	)
Total stockholders’ equity (deficit)		193,911			(156,103	)		(112,999	)

	Three months ended
	March 31, 2019			June 30, 2019			September 30, 2019			December 31, 2019			March 31, 2020			June 30, 2020			September 30, 2020			December 31, 2020
Gross systems shipped		5,363			4,955			5,257			7,212			7,030			9,040			10,077			12,096
Return accrual rate		36.7	%		34.4	%		35.3	%		34.0	%		28.2	%		27.1	%		25.2	%		24.3	%

	Payments due by period
(in thousands)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating lease obligations	$	1,241	$	1,074	$	167	$	—	$	—
Debt, principal and interest(1)	$	17,662	$	646	$	3,950	$	7,038	$	6,028
Total	$	18,903	$	1,720	$	4,117	$	7,038	$	6,028

	December 31, 2019
	Level 1		Level 2		Level 3		Total
	(in thousands)
Liabilities:
Convertible preferred stock warrant liability	$	—	$	—	$	396	$	396

	Total
	(in thousands)
Balance — December 31, 2018	$	81
Fair value of convertible preferred stock warrants issued in connection with debt financing		41
Change in fair value of warrant liability		274
Balance — December 31, 2019		396
Fair value of convertible preferred stock warrants issued in connection with debt financing		270
Change in fair value of warrant liability		1,265
Conversion of preferred stock warrants to common stock warrants upon the closing of the IPO		(1,931	)
Balance — December 31, 2020	$	—

	Operating leases
	(in thousands)
2021	$	1,074
2022		167
Total minimum future lease payments		1,241
Present value adjustment for minimum lease commitments		(45	)
Total lease liability	$	1,196

	December 31, 2019
	Shares authorized		Shares issued and outstanding		Net carrying value		Aggregate liquidation preference
	(in thousands, except share amounts)
Series A convertible preferred stock		1,283,000		423,713	$	16,130	$	16,271
Series B convertible preferred stock		83,000		27,652		2,229		2,473
Series B-1 convertible preferred stock		2,540,000		838,892		22,871		23,003
Series C convertible preferred stock		11,284,680		3,725,354		33,418		33,603
Series C-1 convertible preferred stock		8,740,486		2,913,490		26,280		21,024
Series D convertible preferred stock		12,338,000		3,896,711		51,952		52,115
Total convertible preferred stock		36,269,166		11,825,812	$	152,880	$	148,489

Name and principal position	Year	Salary ($)⁽¹⁾		Bonus ($)⁽²⁾		Option awards ($)⁽³⁾		Non-equity incentive plan compensation ($)⁽⁴⁾		All other compensation ($)		Total ($)
Christian Gormsen	2020	$	452,279	$	61,982	$	3,149,564	$	147,911	$	—	$	3,811,736
President and Chief Executive Officer	2019		502,170	—			1,022,911	—			—		1,525,081
William Brownie	2020		257,500		52,800		891,393		88,200		—		1,289,893
Chief Operating Officer	2019		300,000	—			230,826	—			—		530,826
Adam Laponis	2020		257,500		52,800		998,198		88,200		—		1,396,698
Chief Financial Officer	2019		161,539	—			490,510	—			—		652,049

Name and principal position	Grant date⁽¹⁾	Vesting commencement date		Number of securities underlying unexercised options (#) (exercisable)		Number of securities underlying unexercised options (#) (unexercisable)		Option exercise price ($)			Option expiration date
Christian Gormsen	4/22/2014				1,100		—	$	1.29		4/22/2024
President and Chief Executive	11/20/2014				11,000		—		1.29		11/20/2024
Officer	9/1/2016				37,148		—		1.29		9/1/2026
	10/11/2016				37,148		—		1.29		10/11/2026
	7/12/2017	7/12/2017	⁽⁴⁾		18,574		—		1.29		7/12/2027
	11/29/2017	11/29/2017	⁽²⁾		437,907		—		1.29		11/29/2027
	11/3/2018	4/24/2019	⁽⁵⁾		43,333		—		1.41		11/3/2028
	4/24/2019	4/24/2019	⁽⁴⁾		229,737		—		2.55	⁽⁷⁾	4/24/2029
	4/24/2019	2/26/2020	⁽⁶⁾		59,167		—		2.55	⁽⁷⁾	4/24/2029
	8/3/2020	8/3/2020	⁽⁸⁾		36,886		405,752		2.55		8/2/2030
	8/20/2020	8/20/2020	⁽⁹⁾		42,102		463,123		2.55		8/19/2030
William Brownie	9/1/2016				387		—		1.29		9/1/2026
Chief Operating Officer	2/14/2017	2/14/2017	⁽²⁾		290		—		1.29		2/14/2027
	7/12/2017				145		—		1.29		7/12/2027
	7/12/2017	7/12/2017	⁽⁴⁾		9,287		—		1.29		7/12/2027
	11/29/2017	11/29/2017	⁽⁴⁾		59,522		—		1.29		11/29/2027
	11/3/2018	4/24/2019	⁽⁵⁾		18,333		—		1.41		11/3/2028
	4/24/2019	4/24/2019	⁽⁴⁾		45,666		—		2.55	⁽⁷⁾	4/24/2029
	4/24/2019	2/26/2020	⁽⁶⁾		10,400		—		2.55	⁽⁷⁾	4/24/2029
	8/3/2020	8/3/2020	⁽⁸⁾		11,363		124,992		2.55		8/2/2030
	8/20/2020	8/20/2020	⁽⁹⁾		13,095		144,050		2.55		8/19/2030
Adam Laponis	6/19/2019	7/3/2019	⁽³⁾		33,051		110,641		2.55	⁽⁷⁾	6/19/2029
Chief Financial Officer	8/3/2020	8/3/2020	⁽⁸⁾		6,936		76,266		2.55		8/2/2030
	8/20/2020	8/20/2020	⁽⁹⁾		10,935		120,288		2.55		8/19/2030

Name⁽¹⁾	Fees earned or paid in cash ($)⁽²⁾		Option awards ($)⁽³⁾		All other compensation ($)		Total ($)
Josh Makower, M.D.	$	23,750	$	119,988	$	—	$	143,738
Peter Tuxen Bisgaard		13,125		119,988		—		133,113
Tak Cheung, M.D.	—		—			—		—
Doug Hughes		12,500		169,035		—		181,535
Raphael Michel	—		—			—		—
Geoff Pardo		13,750		119,988		—		133,738
Nina Richardson		11,875		169,035		—		180,910
A. Brooke Seawell		15,000		169,035		—		184,035
Juliet Tammenoms Bakker		14,375		119,988		—		134,363
David Wu		10,000		119,988		—		129,988

Name of beneficial owner	Number of outstanding shares beneficially owned		Number of shares exercisable within 60 days		Number of shares beneficially owned		Percentage of beneficial ownership
5% and greater stockholders:
Entities affiliated with New Enterprise Associates⁽¹⁾		6,520,944		—		6,520,944		17.05	%
Cooperatieve Gilde Healthcare V U.A.⁽²⁾		3,918,691		—		3,918,691		10.25	%
Longitude Venture Partners IV, L.P.⁽³⁾		3,918,691		—		3,918,691		10.25	%
Future Fund Investment Company No.4 Pty Ltd⁽⁴⁾		3,690,481		—		3,690,481		9.65	%
Entities affiliated with Pivotal Alpha Limited⁽⁵⁾		2,886,724		—		2,886,724		7.55	%
The Charles and Helen Schwab Living Trust U/A DTD 11/22/1985		2,537,684		—		2,537,684		6.64	%
Named executive officers and directors:
Christian Gormsen⁽⁶⁾		81,548		993,596		1,075,144		2.74	%
William Brownie⁽⁷⁾		152,283		180,716		332,999	*
Adam Laponis⁽⁸⁾		44,430		67,231		111,661	*
Josh Makower, M.D.⁽⁹⁾		6,520,017		2,222		6,522,239		17.05	%
Peter Tuxen Bisgaard⁽¹⁰⁾		2,928,694		2,222		2,930,916		7.66	%
Doug Hughes⁽¹¹⁾		37,209		4,099		41,308	*
Geoff Pardo⁽¹²⁾		3,918,691		2,222		3,920,913		10.25	%
Nina Richardson⁽¹³⁾		14,386		31,431		45,817	*
A. Brooke Seawell⁽¹⁴⁾		—		4,099		4,099	*
Juliet Tammenoms Bakker⁽¹⁵⁾		3,918,691		2,222		3,920,913		10.25	%
David Wu⁽¹⁶⁾		1,552,369		2,222		1,554,591		4.06	%
All current directors and executive officers as a group (11 persons)		19,168,318		1,292,282		20,460,600		51.75	%

Name	Series E convertible promissory note principal and interest ($)		Shares of Series E convertible preferred stock (#)
Entities affiliated with New Enterprise Associates⁽¹⁾	$	3,779,299		696,388
Entities affiliated with Maveron Equity Partners V, L.P.⁽²⁾		22,608		4,164
The Charles and Helen Schwab Living Trust		2,047,184		377,221
Future Fund Investment Company No. 4 Pty Ltd		2,321,220		427,717
Pivotal Alpha Limited⁽³⁾		1,412,114		260,201
Peter Tuxen Bisgaard		15,170		2,795
Adam Laponis		20,227		3,727

Name	Series E convertible preferred stock (#)		Aggregate cash purchase price ($)
Entities affiliated with New Enterprise Associates⁽¹⁾		737,071	$	4,999,999
The Charles and Helen Schwab Living Trust		227,640		1,544,221
Pivotal Alpha Limited⁽²⁾		589,657		3,999,999
Coöperatieve Gilde Healthcare V U.A.⁽³⁾		3,685,358		24,999,999
Longitude Venture Partners IV, L.P.⁽⁴⁾		3,685,358		24,999,999
Peter Tuxen Bisgaard		22,112		149,999
Adam Laponis		7,370		50,000
Nina Richardson		5,856		39,727