10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2023

OR

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

For the transition period from to

Commission File Number: 001-39616

Eargo, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	27-3879804
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2665 North First Street, Suite 300 San Jose, California	95134
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (650) 351-7700

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	EAR	The Nasdaq Stock Market LLC

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.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 30, 2023, the registrant had 20,762,389 shares of common stock, par value $0.0001 outstanding.

Table of Contents

		Page
	SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS	1
PART I.	FINANCIAL INFORMATION	3
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets (Unaudited)	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)	4
	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)	5
	Condensed Consolidated Statements of Cash Flows (Unaudited)	6
	Notes to Unaudited Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	34
PART II.	OTHER INFORMATION	35
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	77
Item 3.	Defaults Upon Senior Securities	77
Item 4.	Mine Safety Disclosures	77
Item 5.	Other Information	77
Item 6.	Exhibits	78
	SIGNATURES	79

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Special note regarding forward-looking statements

This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, 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,” “can,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “forecast,” “future,” “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. The forward-looking statements in this report, other than statements regarding the proposed Merger (as defined herein), do not assume the consummation of the Merger unless specifically stated otherwise. These forward-looking statements include, but are not limited to, statements about:

•our expectations regarding the structure, timing and completion of the proposed Merger; our ability to obtain any required regulatory approvals in connection with the proposed Merger; expenses related to the proposed Merger and any potential future costs; our ability to satisfy the conditions to closing or otherwise complete the Merger; the occurrence of any event, change, or other circumstances that could delay or prevent completion of the proposed Merger or give rise to the termination of the Merger Agreement (as defined herein); the impact the pending Merger may have on our current plans and operations, including potentially diverting management’s attention from our business; the effects of the Merger on our future business and financial and operating results; and our ability to retain key personnel and maintain relationships with customers, suppliers and others with whom we do business;

•the impact on our business of the civil settlement agreement with the U.S. government that resolved the investigation by the U.S. Department of Justice (the “DOJ”) related to insurance claims for reimbursement submitted to various federal employee health plans under the Federal Employee Health Benefits (“FEHB”) program, the extent to which we may be able to validate and establish additional processes to support the submission of claims for reimbursement to health plans under the FEHB program, and our ability to obtain, maintain or increase insurance coverage for our hearing aids in the future;

•our expectations with regard to changes in the regulatory landscape for hearing aid devices and related opportunities, including the implementation of the United States Food and Drug Administration’s new over-the-counter (“OTC”) hearing aid regulatory framework and any potential Medicare coverage for certain hearing aids, as well as any potential actions insurance providers may take following such regulatory changes;

•the expense, timing and outcome of the purported securities class action litigation alleging that certain of our disclosures about our business, operations and prospects, including reimbursement from third-party payors, violated the federal securities laws and the purported derivative action alleging that our directors breached their fiduciary duties by failing to implement and maintain an effective system of internal controls;

•estimates of our future revenue and expenses;

•estimates of our future capital needs and our ability to raise capital on favorable terms, if at all, including the timing of future capital requirements and the terms or timing of any future financings;

•our ability to continue as a going concern;

•our strategy and expectations regarding our omni-channel business, including commercial partnerships with retailers, resellers and other distributors, and our ability to execute additional commercial partnerships and expand our customers’ experience of and access to our devices through such commercial partnerships;

•our ability to attract and retain customers and to optimize our customer acquisition process;

•our expectations concerning additional orders by existing customers;

•our expectations regarding the potential market size and size of the potential consumer populations for our products and any future products, including our ability to obtain, maintain or increase insurance coverage of, and reimbursement of insurance claims for, Eargo hearing aids, which is substantially dependent on, among other things, the outcomes of our efforts to validate and establish additional processes to support the submission of claims for reimbursement from various federal health plans, any third-party payor audits and pending regulations;

•our ability to manage costs and the timing, scope and impact of our current and any future cost reduction plans, including any adverse impact on our business;

•our ability to release new hearing aids and the anticipated features of any such hearing aids and our ability to transition our existing customers to new hearing aids, including when older models are discontinued;

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•developments and projections relating to our competitors and our industry, including competing products;

•our ability to maintain our competitive technological advantages against new entrants in our industry;

•the pricing of our hearing aids;

•our expectations regarding the availability, supply, cost and inflationary pressures related to the component parts of our hearing aids;

•our expectations regarding the ability to make certain claims related to the performance of our hearing aids relative to competitive products;

•our commercialization and marketing capabilities and expectations;

•our relationships with, and the capabilities of, our component manufacturers, suppliers and freight carriers;

•the implementation of our business model and strategic plans for our business, products and technology;

•the scope of protection we are able to establish and maintain for intellectual property rights covering our products, including the projected terms of patent protection;

•our ability to effectively manage our business in light of the civil settlement agreement with the U.S. government, any third-party payor claims audits and medical records reviews, purported securities class action and derivative litigations, and pending regulations;

•our ability to retain existing talent and attract new, highly skilled talent;

•our expectations regarding macroeconomic conditions, including but not limited to, the impact of COVID-19, 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 the Middle East and tensions across the Taiwan Strait) on our business and results of operations; and

•our future financial performance.

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 Quarterly Report on Form 10-Q, 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.

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PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited).

Eargo, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)

	September 30,			December 31,
	2023			2022
ASSETS
Current assets:
Cash and cash equivalents	$	46,023		$	101,238
Accounts receivable, net		1,012			1,910
Inventories		4,386			5,036
Prepaid expenses and other current assets		5,271			7,846
Total current assets		56,692			116,030
Operating lease right-of-use assets		7,327			5,765
Property and equipment, net		4,384			7,441
Intangible assets, net		744			1,063
Goodwill		—			873
Other assets		606			906
Total assets	$	69,753		$	132,078
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,047		$	6,504
Accrued expenses		6,818			12,715
Sales returns reserve		3,767			3,942
Other current liabilities		1,338			1,462
Lease liability, current portion		624			628
Total current liabilities		17,594			25,251
Lease liability, noncurrent portion		7,030			5,973
Total liabilities		24,624			31,224
Commitments and contingencies (Note 5)
Stockholders’ equity:
Preferred stock, $0.0001 par value per share; 5,000,000 shares authorized    as of September 30, 2023 and December 31, 2022, respectively; zero shares    issued and outstanding as of September 30, 2023 and December 31, 2022,    respectively		—			—
Common stock; $0.0001 par value; 450,000,000 shares authorized    as of September 30, 2023 and December 31, 2022, respectively;    20,762,389 and 20,726,965 shares issued and outstanding as of September 30, 2023    and December 31, 2022, respectively		2			2
Additional paid-in capital		623,828			615,151
Accumulated deficit		(578,701	)		(514,299	)
Total stockholders’ equity		45,129			100,854
Total liabilities and stockholders’ equity	$	69,753		$	132,078

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Eargo, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except share and per share amounts)

	Three months ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Revenue, net	$	8,270		$	7,908		$	28,191		$	24,331
Cost of revenue		3,937			6,007			17,105			16,231
Gross profit		4,333			1,901			11,086			8,100
Operating expenses:
Research and development		4,742			4,963			14,711			14,689
Sales and marketing		9,281			11,282			35,309			37,306
General and administrative		7,385			11,702			26,739			43,980
Impairment charge		873			—			873			—
Total operating expenses		22,281			27,947			77,632			95,975
Loss from operations		(17,948	)		(26,046	)		(66,546	)		(87,875	)
Other income (expense), net:
Interest income		620			419			2,144			480
Interest expense		—			—			—			(549	)
Change in fair value of convertible notes		—			(25,000	)		—			(25,000	)
Loss on extinguishment of debt		—			—			—			(772	)
Total other income (expense), net		620			(24,581	)		2,144			(25,841	)
Loss before income taxes		(17,328	)		(50,627	)		(64,402	)		(113,716	)
Income tax provision		—			—			—			—
Net loss and comprehensive loss	$	(17,328	)	$	(50,627	)	$	(64,402	)	$	(113,716	)
Net loss attributable to common stockholders, basic and diluted	$	(17,328	)	$	(50,627	)	$	(64,402	)	$	(113,716	)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.83	)	$	(25.70	)	$	(3.10	)	$	(57.78	)
Weighted-average shares used in computing net loss per share    attributable to common stockholders, basic and diluted		20,756,123			1,969,856			20,745,534			1,968,074

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Eargo, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except share amounts)

	Common stock				Additional paid-in		Accumulated			Total stockholders’
	Shares		Amount		capital		deficit			equity
Balance December 31, 2022		20,726,965	$	2	$	615,151	$	(514,299	)	$	100,854
Stock-based compensation		—		—		3,408		—			3,408
Release of restricted stock units		14,876		—		—		—			—
Net loss and comprehensive loss		—		—		—		(21,922	)		(21,922	)
Balance March 31, 2023		20,741,841	$	2	$	618,559	$	(536,221	)	$	82,340
Stock-based compensation		—		—		2,629		—			2,629
Release of restricted stock units		7,738		—		—		—			—
Net loss and comprehensive loss		—		—		—		(25,152	)		(25,152	)
Balance June 30, 2023		20,749,579	$	2	$	621,188	$	(561,373	)	$	59,817
Stock-based compensation		—		—		2,640		—			2,640
Release of restricted stock units		12,810		—		—		—			—
Net loss and comprehensive loss		—		—		—		(17,328	)		(17,328	)
Balance September 30, 2023		20,762,389	$	2	$	623,828	$	(578,701	)	$	45,129

	Common stock				Additional paid-in			Accumulated			Total stockholders’
	Shares		Amount		capital			deficit			equity
Balance December 31, 2021		1,965,347	$	—	$	425,976		$	(356,812	)	$	69,164
Stock-based compensation		—		—		3,024			—			3,024
Exercise of stock options		1,871		—		92			—			92
Restricted stock units cash settlement		—		—		(69	)		—			(69	)
Net loss and comprehensive loss		—		—		—			(30,645	)		(30,645	)
Balance March 31, 2022		1,967,218	$	—	$	429,023		$	(387,457	)	$	41,566
Stock-based compensation		—		—		1,511			—			1,511
Exercise of stock options and release of     restricted stock units		2,045		—		33			—			33
Tax withholdings on settlement of     restricted stock units		—		—		(22	)		—			(22	)
Issuance costs		—		—		600			—			600
Net loss and comprehensive loss		—		—		—			(32,444	)		(32,444	)
Balance June 30, 2022		1,969,263	$	—	$	431,145		$	(419,901	)	$	11,244
Stock-based compensation		—		—		3,057			—			3,057
Exercise of stock options and release of     restricted stock units		1,281		—		9			—			9
Tax withholdings on settlement of     restricted stock units		—		—		(7	)		—			(7	)
Net loss and comprehensive loss		—		—		—			(50,627	)		(50,627	)
Balance September 30, 2022		1,970,544	$	—	$	434,204		$	(470,528	)	$	(36,324	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Eargo, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Nine months ended September 30,
	2023			2022
Operating activities:
Net loss	$	(64,402	)	$	(113,716	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		3,477			4,023
Stock-based compensation		8,677			7,592
Non-cash interest expense and amortization of debt discount		—			209
Debt issuance costs from convertible notes		—			5,662
Change in fair value of convertible notes		—			25,000
Loss on extinguishment of debt		—			772
Non-cash operating lease expense		734			828
Bad debt expense		409			524
Impairment charges		1,702			—
Changes in operating assets and liabilities:
Accounts receivable		489			10,867
Inventories		650			759
Prepaid expenses and other current assets		2,323			6,869
Other assets		(1,292	)		999
Accounts payable		(1,152	)		(2,366	)
Accrued expenses		(5,897	)		1,986
Sales returns reserve		(175	)		(12,037	)
Settlement liability		—			(34,372	)
Other current and noncurrent liabilities		(124	)		89
Operating lease liabilities		(346	)		(550	)
Net cash used in operating activities		(54,927	)		(96,862	)
Investing activities:
Purchases of property and equipment		(217	)		(2,531	)
Capitalized software development costs		(71	)		(296	)
Net cash used in investing activities		(288	)		(2,827	)
Financing activities:
Proceeds from stock options exercised		—			134
Debt repayments		—			(16,238	)
Proceeds from issuance of convertible notes, net of issuance costs paid to lender		—			99,903
Payment of convertible notes issuance costs to third parties		—			(5,565	)
Payment of deferred transaction costs		—			(872	)
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		—			77,264
Net decrease in cash and cash equivalents		(55,215	)		(22,425	)
Cash and cash equivalents at beginning of period		101,238			110,500
Cash and cash equivalents at end of period	$	46,023		$	88,075
Non-cash operating activities:
Lease liability obtained in exchange for right-of-use asset	$	1,399		$	—
Non-cash investing and financing activities:
Property and equipment and capitalized software costs in accounts payable and accrued liabilities	$	642		$	229
Deferred transaction costs included in accounts payable	$	—		$	182

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Eargo, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 Company’s innovative product and go-to-market approach address the major challenges of traditional hearing aid adoption, including social stigma, accessibility and cost.

Reverse stock split

In January 2023, the Company effected a reverse split of shares of the Company’s common stock on a 1-for-20 basis (the “Reverse Stock Split”). The Company’s common stock began trading on a post-split basis on January 18, 2023. The number of authorized shares of the common stock was not adjusted as a result of the Reverse Stock Split. All share and per share data in these unaudited condensed 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.

DOJ investigation and settlement

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, conducted an audit of insurance claims for reimbursement (“claims”) submitted by the Company, which included a review of medical records. 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 5, 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.

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 unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 September 30, 2023, the Company had cash and cash equivalents of $46.0 million and an accumulated deficit of $578.7 million.

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 by 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 or long-term impacts of the implementation of an over-the-counter (“OTC”) hearing aid

7

regulatory framework (which may, for example, lead insurance providers to take actions limiting the Company’s ability to access insurance coverage or have other long-term impacts on the Company’s omni-channel business that are not yet known).

The Company believes that, without an alternative future financing, its current resources are insufficient to satisfy its obligations as they become due within one year after the date that these unaudited condensed consolidated financial statements are issued. The negative cash flows and current lack of financial resources of the 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 unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainty.

2. Summary of significant accounting policies

Basis of presentation and principles of consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting of Eargo, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

These unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, include all adjustments of a normal recurring nature necessary to present fairly, in all material respects, the Company’s consolidated financial position, results of operations and cash flows. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 23, 2023.

Use of estimates

The preparation of condensed 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 unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made in the accompanying unaudited condensed consolidated financial statements include, but are not limited to, the sales returns reserve, the present value of lease liabilities, the fair value of equity securities, the fair value of financial instruments, the allowance for 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, impairment 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. 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.

Significant accounting policies

There have been no significant changes to the accounting policies during the nine months ended September 30, 2023, as compared to the significant accounting policies described in Note 2 of the Notes to Consolidated Financial Statements in the Company’s audited consolidated financial statements included in the Annual Report on Form 10-K.

Revenue recognition

The Company’s revenue is generated from the sale of products, including hearing aid systems and related accessories. 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 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. 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 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.

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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., “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 amounts to be contractually billed to the customer while variable consideration 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 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 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” 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. 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, provided all other revenue recognition criteria have been met. The Company does not have material contract liabilities related to unsatisfied performance obligations as of September 30, 2023.

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 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.

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 September 30, 2023, the Company has not experienced any losses on its deposit accounts and money market accounts. As of September 30, 2023, the Company does not believe there is significant financial risk from nonperformance by the issuers of the Company’s deposit accounts and money market accounts.

Approximately 36% of the Company's gross accounts receivable as of September 30, 2023 was from one of the Company's retail partners. There was no credit risk concentration in the Company's accounts receivable as of December 31, 2022. There was no concentration of net revenue during the three months ended September 30, 2023. During the nine months ended September 30, 2023,

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the Company derived approximately 11% of net revenue from sales to its retail partners. There was no concentration of revenue during the three and nine months ended September 30, 2022.

3. Fair value measurements

There were no financial assets and liabilities outstanding that were remeasured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022. The carrying amounts reflected in the condensed 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.

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:

	September 30,		December 31,
	2023		2022
	(in thousands)
Raw materials	$	209	$	410
Finished goods		4,177		4,626
Total inventories	$	4,386	$	5,036

Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

	September 30,		December 31,
	2023		2022
	(in thousands)
Insurance costs	$	774	$	78
Advances to suppliers		1,183		2,000
Software subscriptions		1,086		1,553
Marketing costs		906		1,709
Product launch fee		582		252
Other		740		568
Advanced payroll deposits		—		1,686
Total prepaid expenses and other current assets	$	5,271	$	7,846

Property and equipment, net

Property and equipment, net, consists of the following:

	September 30,			December 31,
	2023			2022
	(in thousands)
Capitalized software	$	10,821		$	11,579
Tools and lab equipment		5,775			5,087
Furniture and fixtures		2,437			2,440
Leasehold improvements		903			993
Computer and equipment		527			482
		20,463			20,581
Less accumulated depreciation and amortization		(16,079	)		(13,140	)
Total property and equipment, net	$	4,384		$	7,441

Depreciation and amortization expense for the three months ended September 30, 2023 and 2022 amounted to $0.9 million and $1.2 million, respectively, which includes amortization of capitalized software costs of $0.5 million and $0.9 million, respectively.

Depreciation and amortization expense for the nine months ended September 30, 2023 and 2022 amounted to $3.2 million and $3.6 million, respectively, which includes amortization of capitalized software costs of $2.1 million and $2.7 million, respectively.

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. Factors the Company considers important that could trigger an impairment review include underperformance relative to historical or projected future operating results, a significant change in the

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manner of the use of the asset, or macroeconomic factors. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method. Certain factors, such as estimated revenues and expenses, used for this nonrecurring fair value measurement are considered Level 3 inputs. As a result of the impairment assessment during the three months ended June 30, 2023, the Company recognized an impairment charge of $0.8 million related to its internally developed software, which was included in cost of revenue in the condensed consolidated statements of operations and comprehensive loss. There were no impairment charges during the three and nine months ended September 30, 2022.

Goodwill

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 concluded that a triggering event occurred as of September 30, 2023, and as a result of the goodwill impairment assessment during the three months ended September 30, 2023, the Company recognized an impairment charge of $0.9 million for the entire carrying value of goodwill, which is included in total operating expenses in the condensed consolidated statements of operations and comprehensive loss for the three months and nine months ended September 30, 2023. There were no impairment charges related to goodwill during the three and nine months ended September 30, 2022.

Intangible assets, net

Intangible assets, net consist of the following:

	September 30, 2023
	Gross carrying value		Accumulated amortization		Net carrying value
	(in thousands)
Developed technologies	$	1,700	$	956	$	744
Other		290		290		—
Total intangible assets, net	$	1,990	$	1,246	$	744

	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 $0.1 million and $0.3 million for the three and nine months ended September 30, 2023, respectively. Amortization expense was $0.2 million and $0.5 million for the three and nine months ended September 30, 2022, respectively.

The following table summarizes the estimated future amortization expense of finite-lived intangible assets, net as of September 30, 2023:

	Amount
	(in thousands)
Remainder of 2023	$	106
2024		425
2025		213
Total	$	744

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Accrued expenses

Accrued expenses consist of the following:

	September 30,		December 31,
	2023		2022
	(in thousands)
Accrued compensation	$	3,024	$	7,892
Accrued warranty reserve		3,390		3,765
Accrued severance		115		178
Refunds due to customers		239		580
Other accrued expenses		50		300
Total accrued expenses	$	6,818	$	12,715

Sales returns reserve

The sales returns reserve consists of the following activity:

	Nine months ended September 30,
	2023			2022
	(in thousands)
Sales returns reserve, beginning balance	$	3,942		$	13,827
Reduction of revenue		14,160			11,637
Decrease related to Pricing Concession		—			(11,263	)
Utilization of sales returns reserve		(14,335	)		(12,411	)
Sales returns reserve, ending balance	$	3,767		$	1,790

In September 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” in Note 1.

Allowance for credit losses

The allowance for credit losses consists of the following activity:

	Nine months ended September 30,
	2023			2022
	(in thousands)
Allowance for credit losses, beginning balance	$	158		$	4,838
Charged to expense		409			524
Accounts written off, net of recoveries		(429	)		(5,267	)
Allowance for credit losses, ending balance	$	138		$	95

Accrued warranty reserve

The accrued warranty reserve consists of the following activity:

	Nine months ended September 30,
	2023			2022
	(in thousands)
Accrued warranty reserve, beginning balance	$	3,765		$	4,014
Charged to cost of revenue		1,769			1,632
Utilization of accrued warranty reserve		(2,144	)		(2,130	)
Accrued warranty reserve, ending balance	$	3,390		$	3,516

5. Commitments and contingencies

Operating leases

Nashville office space lease

In January 2023, the Company entered into a lease agreement for approximately 17,572 sq. ft. of office space in Nashville, Tennessee. The tenant improvements of $0.9 million were funded by the Company and considered to be lessor-owned for accounting purposes. As such, the tenant improvement funding was recorded as part of the right-of-use asset. The Company recorded a right-of-use asset of $2.3 million and the corresponding lease liability of $1.4 million as of the commencement date in March 2023.

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The initial term of the lease is 76 months with the option to extend the lease term once for additional 5 years. The Company has elected to apply the tenant improvement allowance of $0.9 million against the lease payments, and this amount was excluded from the operating lease liability. The right-of-use asset and corresponding lease liability for the Nashville lease were estimated using an incremental borrowing rate of 11.2%.

Operating lease costs and minimum lease payments

For the three and nine months ended September 30, 2023, the Company incurred $0.4 million and $1.2 million of operating lease costs, respectively. Variable lease payments for operating expenses and costs related to short-term leases were immaterial for the three and nine months ended September 30, 2023.

As of September 30, 2023, undiscounted future minimum lease payments due under the non-cancelable operating leases are as follows:

	Amount
	(in thousands)
Remainder of 2023	$	318
2024		1,081
2025		1,635
2026		1,886
2027		1,945
Thereafter		3,066
Total minimum future lease payments		9,931
Present value adjustment for minimum lease commitments		(2,277	)
Total lease liability	$	7,654

Legal and other contingencies

The Company is involved in legal proceedings in the ordinary course of its 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 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 any particular claim.

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 Action was brought purportedly on behalf of a class of investors who purchased or otherwise acquired:

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(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 and defendants filed a second motion to dismiss on April 21, 2023. On May 26, 2023, plaintiffs filed an opposition to defendants’ motion, and on June 23, 2023, defendants filed their reply brief in support of their motion to dismiss. The Court granted the defendants’ motion to dismiss on August 31, 2023 and entered its final judgment on October 12, 2023. Plaintiffs have until November 13, 2023 to file a notice of appeal.

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 Action until 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.

6. Stock-based compensation

Total stock-based compensation is as follows:

	Three months ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)				(in thousands)
Cost of revenue	$	49	$	35	$	139	$	94
Research and development		708		707		2,075		1,142
Sales and marketing		587		642		2,552		1,975
General and administrative		1,296		1,673		3,911		4,381
Total stock-based compensation	$	2,640	$	3,057	$	8,677	$	7,592

Equity incentive plans

As of September 30, 2023, 195,424 shares of common stock were issuable upon the exercise of outstanding awards under the 2010 Equity Incentive Plan. As of September 30, 2023, the Company had reserved 3,953,431 shares of common stock for issuance under the 2020 Equity Incentive Plan (the “2020 Plan”), of which 1,371,079 were available for issuance in connection with grants of future awards.

2023 stock option modification

On August 15, 2023, the Board of Directors approved the repricing and, as applicable vesting modification (“modification” or “repricing”) related to 1,465,922 outstanding stock option awards issued under the 2020 Plan. This resulted in the modification of

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743,675 service-based option awards and 722,247 market-based option awards. The new exercise price of 3.305 for the repriced equity awards is equal to the Company’s share price at the close of market on August 15, 2023.

The vesting schedules for the majority of the repriced service-based stock options were modified to vest under a new requisite period of two years, with vesting occurring quarterly beginning on November 15, 2023. The market-based option awards continue to maintain their original market requirements but were modified to include an additional service-based vesting alternative.

The incremental stock-based compensation associated with the repricing is $1.6 million. During the three and nine months ended September 30, 2023, the Company recognized $0.3 million of incremental stock-based compensation associated with the repricing.

Service-based stock options

Service-based stock option activity for the nine months ended September 30, 2023 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, 2022		309,315		$	82.08		5.60	$	—
Grants		2,166,755			7.99
Cancelled or forfeited		(548,991	)		25.79
Balance September 30, 2023		1,927,079		$	10.41		8.83	$	—
Vested and exercisable at September 30, 2023		231,612		$	57.02		3.71	$	—

The weighted-average grant-date fair value of service-based stock options granted during the nine months ended September 30, 2023 was $5.55 per share. As of September 30, 2023, the unrecognized stock-based compensation related to outstanding unvested service-based stock options was $9.4 million, which the Company expects to recognize over a remaining weighted-average period of approximately 1.8 years.

The following assumptions were used to estimate the grant date fair value of the service-based options, including the repriced service based option awards, granted during the nine months ended September 30, 2023:

Black-Scholes model assumptions:
Expected volatility	72.8% - 77.0%
Expected term, years	5.6 - 6.5
Risk-free interest rate	3.39% - 4.35%
Dividend yield	—

Market-based stock options

During the nine months ended September 30, 2023, the Company granted options to purchase an aggregate of 1,224,370 shares of common stock that include a market condition (the “market-based option awards”). As of August 15, 2023 the modified market-based option awards include (i) the addition of a new two year service-based vesting period requirement with the first quarterly vesting period occurring on November 15, 2023, or (ii) vesting acceleration upon the achievement of the original market requirements established in February 2023, whichever vesting date is earlier. The market-based option awards vesting is subject to continued service through the applicable vesting date. During the nine months ended September 30, 2023, 502,123 shares were forfeited due to the termination of the grantees' service.

The following assumptions were used to estimate the grant date fair value of the market-based option awards, including the repriced market-based option awards, granted during the nine months ended September 30, 2023.

Market-based awards assumptions:
Expected volatility	75.5% - 77.0%
Cost of equity	25.0%
Risk-free interest rate	3.39% - 4.31%
Dividend yield	—
Expected term, years	5.30 - 5.35

The weighted-average grant-date fair value of the market-based option awards granted during the nine months ended September 30, 2023 was $6.36 per share. As of September 30, 2023, the unrecognized stock-based compensation related to market-based options was $3.6 million, which the Company expects to recognize over a remaining weighted-average period of approximately 1.9 years.

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Restricted stock units

Restricted stock units ("RSUs") granted under the 2020 Plan represent share-based 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 satisfaction of the vesting restrictions.

RSU activity for the nine months ended September 30, 2023 is set forth below:

	Number of shares			Weighted average grant date fair value per share
Balance December 31, 2022		176,063		$	101.76
RSUs vested		(35,424	)		137.95
RSUs forfeited		(58,755	)		82.42
Balance September 30, 2023		81,884		$	99.96

As of September 30, 2023, total unrecognized stock-based compensation related to unvested RSUs was $7.6 million, which the Company expects to recognize over a remaining weighted-average period of approximately 2.7 years.

Employee stock purchase plan

As of September 30, 2023, the Company reserved 282,384 shares of common stock for issuance under the 2020 Employee Stock Purchase Plan (the “ESPP”), of which 273,738 were available for future issuance. The ESPP was suspended on November 9, 2021, and there were no offering periods in effect through September 30, 2023.

7. 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:

	Three months ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Service-based options issued and outstanding		1,927,079		273,256		1,927,079		273,256
Market-based options issued and outstanding		722,247	—			722,247	—
Restricted stock units		81,884		167,936		81,884		167,936
Convertible notes	—			18,750,000	—			18,750,000
Total		2,731,210		19,191,192		2,731,210		19,191,192

8. Cost reduction activities

On June 23, 2023, the Company’s Board of Directors approved a cost reduction plan intended to optimize the Company's cost structure and operating model (the “2023 plan”), which the Company currently expects will be substantially implemented through the end of fiscal 2023. The 2023 plan is expected to impact approximately 90 to 120 employees, or approximately 32% to 42% of the Company's workforce. The Company currently estimates that it will incur one-time charges of approximately $3.5 million to $5.0 million in connection with the 2023 plan, primarily expected to consist of employee severance costs and related benefits. The Company may ultimately incur charges that are higher or lower than this range as it finalizes and implements the 2023 plan and the related accounting treatment.

During the three and nine months ended September 30, 2023, the Company recorded workforce reduction costs in relation to the 2023 plan of approximately $1.0 million and $2.6 million, respectively, for severance costs and related benefits, which are included in the condensed consolidated statements of operations and comprehensive loss in general and administrative expenses. Approximately $2.5 million of the severance payments in connection with the 2023 plan were made as of September 30, 2023.

9. Subsequent events

Merger

On October 29, 2023, the Company, PSC Echo Parent LLC (“Parent”) and PSC Echo Merger Sub Inc. (“Merger Sub”), a subsidiary of Parent, entered into a merger agreement (the “Merger Agreement”), pursuant to which Merger Sub will merge with and into the Company, with the Company as the surviving corporation (the “Merger”). Parent and Merger Sub are affiliates of PSC Echo, LP, an affiliate of Patient Square Capital, LP and the holder of a majority of the outstanding capital stock of the Company.

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Under the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of the Company’s common stock issued and outstanding immediately prior to the Effective Time, other than certain excluded shares pursuant to the terms of the Merger Agreement, shall be cancelled and extinguished and automatically converted into and shall thereafter represent the right to receive an amount in cash equal to $2.55 per share of common stock, payable to the holder thereof, without interest and subject to any applicable tax withholding. After the Merger, the Company’s common stock will no longer be traded on the Nasdaq.

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Item 2. 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 unaudited condensed consolidated financial statements and the related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and for a full understanding of Eargo’s results of operations and financial condition, in conjunction with the consolidated financial statements and notes for the fiscal year ended December 31, 2022 contained in the Company’s Annual Report on Form 10-K filed on March 23, 2023. The following discussion and analysis of our financial condition and results of operations 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 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 Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in or implied by these forward-looking statements. You should carefully read the “Risk Factors” to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.

Merger Agreement with Patient Square

On October 29, 2023, Eargo, PSC Echo Parent LLC (“Parent”) and PSC Echo Merger Sub Inc. (“Merger Sub”), a subsidiary of Parent, entered into a merger agreement (the “Merger Agreement”), pursuant to which Merger Sub will merge with and into Eargo, with Eargo as the surviving corporation (the “Merger”). Parent and Merger Sub are affiliates of PSC Echo, LP, an affiliate of Patient Square Capital, LP (“Patient Square”) and the holder of a majority of our outstanding capital stock (the “PSC Stockholder”).

Under the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of our common stock issued and outstanding immediately prior to the Effective Time, other than certain excluded shares pursuant to the terms of the Merger Agreement, will be cancelled and extinguished and automatically converted into and will thereafter represent the right to receive an amount in cash equal to $2.55 per share of common stock (the “Merger Consideration”), payable to the holder thereof, without interest and subject to any applicable tax withholding. After the Effective Time, our common stock will no longer trade on the Nasdaq Stock Market (“Nasdaq”) and will be deregistered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a result, we will become a privately held company. The transaction is expected to close in the first quarter of 2024.

The obligation of the parties to consummate the Merger is subject to various conditions, including: (i) the adoption of the Merger Agreement by a majority of the voting power of the outstanding shares of our common stock; (ii) the absence of any law, order, judgment, decree, injunction or ruling prohibiting the consummation of the Merger; (iii) the accuracy of the representations and warranties of the parties (subject to customary materiality qualifiers) and (iv) each party’s performance in all material respects of its covenants and obligations contained in the Merger Agreement. The Merger Agreement does not contain a financing condition. Because the PSC Stockholder holds approximately 76.2% of the outstanding shares of our common stock, the PSC Stockholder has the ability to provide the required stockholder approval for the Merger.

There is no guarantee that the Merger will be consummated in the timing that we currently anticipate or at all. We cannot predict with certainty whether or when any of the required closing conditions will be satisfied or whether another uncertainty may arise. We are subject to customary restrictions on our ability to solicit alternative acquisition proposals from third parties and to provide non-public information to, and participate in discussions and engage in negotiations with, third parties regarding alternative acquisition proposals, with customary exceptions for superior proposals. The Merger Agreement contains certain termination rights for Eargo and Parent, including the right of either party to terminate the Merger Agreement if the Merger is not consummated on or before April 29, 2024. If Eargo terminates the Merger Agreement, Eargo may be required to pay Parent a termination fee of $1.1 million under certain specified circumstances.

The foregoing description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement, a copy of which is incorporated by reference as Exhibit 2.1 to this Quarterly Report on Form 10-Q.

Overview

We are a medical device company dedicated to improving the quality of life of people with hearing loss. Our innovative 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 ever virtually invisible, rechargeable, completely in-the-canal, FDA-regulated devices indicated to compensate for 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.

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We market and sell our hearing aids primarily in a direct-to-consumer format with a personalized, consumer-centric approach. Our commercial organization primarily consists of a marketing team with deep experience in consumer-focused brand and performance marketing, a team of inside sales consultants, and a dedicated customer support team.

We believe that our differentiated hearing aids and consumer-oriented approach have fueled the rapid adoption of our hearing aids and high customer satisfaction, as evidenced by over 121,000 Eargo hearing aid systems shipped, net of returns, as of September 30, 2023. To date, all our revenue has been generated from customers in the United States.

For the nine months ended September 30, 2023, we generated net revenue of $28.2 million, an increase of $3.9 million from the nine months ended September 30, 2022. Our gross systems shipped during the nine months ended September 30, 2023 were 18,613, compared to 15,384 during the comparable period in 2022. The increase in shipment volume was largely driven by our commercial arrangement with Victra, which was launched in the fourth quarter of 2022.

Our net losses were $64.4 million and $113.7 million for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, we had an accumulated deficit of $578.7 million. We expect to continue to incur losses for the foreseeable future. As of September 30, 2023, we had cash and cash equivalents of $46.0 million, which are available to fund operations. As of September 30, 2023, we had no debt outstanding.

DOJ investigation and settlement

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 $44.0 million. 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, conducted an audit of insurance claims for reimbursement (“claims”) submitted by us, which included a review of medical records. 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 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. 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; however, as of April 13, 2023, we are no longer subject to prepayment review of claims by the third-party payor with whom historically we had the largest volume.

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 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.

Factors affecting our business

Our business priorities include: (i) accessing insurance coverage for Eargo hearing aids, (ii) refining and expanding our omni-channel 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 Quarterly Report on Form 10-Q.

Changes to the regulatory landscape

Hearing aids are considered medical devices subject to regulation by the United States Food and Drug Administration (“FDA”). On August 17, 2022, the FDA published the “OTC Final Rule”, which established new regulatory categories for over-the-counter (“OTC”)

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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 had until April 14, 2023 to come into compliance with the OTC Final Rule.

We have in the past marketed 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 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 “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. As of April 14, 2023, the compliance date for previously marketed devices, we market our devices as OTC hearing aids. 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. 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.

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 publication of the OTC Final Rule, we have focused efforts on transitioning our business to operate within the new OTC framework by expanding our omni-channel approach through select commercial partnerships, retail, and other distribution opportunities, including authorized resellers and benefits managers. Through these partnerships, we sell Eargo hearing aids- at wholesale prices to resellers, who in turn offer our products to end-customers through their respective physical or online storefronts or portals.

Generally, these opportunities take two forms. In certain cases, our partner may choose to purchase stock inventory from time to time; for example, our commercial arrangement with Victra, one of America’s largest wireless retailers, facilitates access to our hearing screeners and enables demonstration of our devices at approximately 1,500 Victra store locations across the country, where customers may purchase or order Eargo hearing aids. In other cases, we fulfill and ship orders placed through the online storefronts or portals of authorized resellers directly to end-customers. We generally do not submit insurance claims on behalf of customers who purchase from any of our authorized resellers, including our retail partners. We believe these partnerships will help expand consumer access to our hearing aids and allow us to target high-intent customers more efficiently.

We believe that the OTC Final Rule will continue to facilitate opportunities to execute commercial partnerships and thereby continue 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 or online through third-party partners. However, we may not ultimately identify such opportunities or have the financial or other resources necessary to capitalize on such opportunities if or as they arise, and any such opportunities may not generate sufficiently meaningful sales volumes of Eargo hearing aid devices profitably.

Once a customer purchases Eargo hearing aids, whether directly through us or through one of our partners, distributors, or authorized resellers, they can be connected to one of our hearing professionals, who provide complimentary and convenient support by phone, chat, or e-mail. Our hearing professionals and customer care team remain 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.

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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” for a discussion of the DOJ investigation and settlement.

We accept insurance benefits as a direct method of payment in certain circumstances, 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 application of an insurance benefit 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.

Our direct plan access insurance-based business accepts insurance benefits as a method of direct payment when the customer has undergone testing by a licensed healthcare provider to establish medical necessity, with supporting clinical documentation. We are evaluating additional alternatives for testing or establishing medical necessity, including 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 resources, including development of additional internal processes, training, 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 are also seeking to establish further relationships with health plans, benefits managers and managed care providers. Employer self-funded plans or other health plans may at times contract with benefits managers or managed care providers for the administration of supplemental benefits, including hearing aid benefits or general “over-the-counter” benefits. Benefits managers, who are prevalent in Medicare Advantage, are responsible for selecting vendors or suppliers whose products or services are eligible to be covered by the supplemental benefits. 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.

See “—DOJ investigation and settlement” for more information as well as the Risk Factors titled, “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, or in otherwise establishing relationships with health plans, benefits managers, or managed care providers” and “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.”

Competition

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”). Prior to the effective date of the OTC Final Rule, no OTC category of hearing aids existed. The long-term effects of the OTC Final Rule to the competitive landscape of the hearing aid industry are not yet known. 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 has facilitated and will continue to facilitate the introduction of new and varied product designs by incumbent and new competitors. For example, a number of new and existing competitors have begun marketing OTC hearing aids since the effective date of the OTC Final Rule.

While our devices have historically been price competitive with devices sold through traditional hearing aid channels, we may not be able to maintain the price competitiveness of our devices as the cash-based OTC hearing aid market develops. The availability of comparatively lower-priced OTC hearing aid devices following the effective date of the OTC Final Rule, including those marketed by traditional consumer electronics companies, may negatively impact consumer adoption of our devices through our cash-pay channels, for example, in physical or online retail settings where consumers may be more price sensitive, not aware of our products, or otherwise unable to differentiate between our devices and those of our competitors. We may need to market lower-priced devices in order to effectively compete with lower-priced alternatives available on the OTC hearing aid market.

In our insurance channels, although we believe our products remain price competitive as compared to hearing aids sold through traditional hearing aid channels, existing arrangements between certain legacy hearing aid manufacturers and licensed healthcare providers, health plans or hearing benefits managers (many of which are owned or otherwise affiliated with the five major traditional hearing manufacturers) that predate the effective date of the OTC Final Rule may have the effect of limiting consumer access to OTC hearing aids such as ours. Additionally, to the extent health plans continue to require in-person hearing tests to support claims submissions following the OTC Final Rule—in other words, to require that reimbursement for OTC hearing aids be dependent on diagnoses that are most often obtained in traditional hearing aid channels—we may remain at a competitive disadvantage in marketing or selling our products to insurance beneficiaries who would otherwise have access to a hearing aid benefit.

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See the Risk Factor titled, “We operate in a highly competitive industry, and competitive pressures, including those developing following the OTC Final Rule, could have a material adverse effect on our business.”

Efficient acquisition of new customers

We have made significant investments in sales and marketing to build a strong brand, achieve broad awareness of our Eargo system, acquire new customers and convert sales leads. We have invested and expect to continue to invest significant resources into optimizing our customer acquisition process. As a result of the DOJ investigation, we temporarily stopped accepting 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” customers, which includes upfront payment, credit card, third-party financing, and third-party distributor, authorized reseller or partner payments.

The shift to a primarily “cash-pay” model has generally increased the cost of customer acquisition, based on the historically lower conversion rate for cash-pay customers as compared to direct plan access insurance customers.

We anticipate that our omni-channel expansion to various third-party distributors, including in such third parties’ retail locations, may allow for a more streamlined sales process and help mitigate the low volume of direct plan access insurance customers using insurance as a direct payment method; however, it may not ultimately produce meaningful sales volume or reduce our cost of customer acquisition due to new sales and marketing initiatives related to such expansion, and the long-term impacts of the OTC Final Rule on our omni-channel business are not yet known. We intend to continue to structure our sales and marketing efforts in the manner that we believe is most likely to encourage cost-efficient customer acquisition.

Sales 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, and can be extended under certain circumstances. Historically, the most commonly cited reason for returning our hearing aids is unsatisfactory fit, which we believe is a 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. The next most cited reason for returns is that our hearing aids do not provide sufficient audio amplification.

We report revenue net of expected returns, which is an estimate informed in part by historical return rates. As such, our returns rate impacts our reported net revenue and gross profit or loss. Sales returns rates, as defined under “—Key business metrics,” were 34% for the year ended December 31, 2022 and 35% for the nine months ended September 30, 2023. Please see “—Key business metrics” for a further discussion of our sales returns rate and any impact it may have on our revenue, gross profit and gross margin.

New product introductions

We believe that the continued introduction of new products with product enhancements is critical to maintaining existing customers, attracting new customers, achieving market acceptance of our products and maintaining or increasing our competitive position in the market.

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 7 in February 2023, we have now launched seven generations of our hearing aids since 2017, with each iteration having increased functionality and improved sound quality, amplification, connectivity, noise reduction, physical fit, comfort, water resistance and ease-of-use, while reducing costs of goods.

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 cost-conscious offerings as 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.

Recruitment and retention of personnel; cost reduction plans

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). 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, 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.

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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.

On June 23, 2023, our Board of Directors approved a cost reduction plan intended to optimize our cost structure and operating model (the “2023 plan”), which we currently expect will be substantially implemented through the end of fiscal 2023. The 2023 plan is expected to impact approximately 90 to 120 employees, or approximately 32% to 42% of our workforce, in particular sales and marketing, including all or substantially all of our retail field sales team. In conjunction with the 2023 plan, on June 23, 2023, our former President and Chief Executive Officer stepped down from his positions as President and Chief Executive Officer and as a member of our Board of Directors, effective June 30, 2023, and the Board of Directors appointed William Brownie, our Chief Operating Officer, as our interim Chief Executive Officer. The Company currently estimates that it will incur one-time charges of approximately $3.5 million to $5.0 million in connection with the 2023 plan, primarily expected to consist of employee severance costs and related benefits. The Company may ultimately incur charges that are higher or lower than this range as it finalizes and implements the 2023 plan and the related accounting treatment.

Future suspension of equity awards, including of our practice of granting RSUs, and reductions in workforce or departure of any executive or member of our senior management team, in addition to any negative perceptions of employment with us as a result of the DOJ investigation and the settlement with the U.S. government, 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, including a permanent chief executive officer, which in turn could have a material adverse effect on our business, results of operations and financial condition.

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, including a potential sale of the Company, we entered into an agreement (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, 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 $10.00 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, 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 September 30, 2023, the PSC Stockholder held 15,821,299 shares, representing approximately 76.2% 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 of Nasdaq and Patient Square may be able to determine all matters requiring stockholder approval.

On October 29, 2023, we entered into the Merger Agreement with certain affiliates of Patient Square. See “—Merger Agreement with Patient Square” above for more information regarding the Merger Agreement and the proposed Merger.

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 Quarterly Report on Form 10-Q for periods or dates preceding the Reverse Stock Split has been retrospectively adjusted to reflect the Reverse Stock Split.

Macroeconomic environment

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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 inflationary trends, uncertainty or volatility in the banking system and financial markets, the COVID-19 pandemic, and geopolitical events (such as the conflicts in Ukraine and the Middle East and tensions across the Taiwan Strait).

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 had several follow-on consequences with respect to our ability to meet our 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 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 believe the COVID-19 pandemic accelerated the pace of consumer awareness of our vertically integrated remote customer support model and facilitated customer adoption of the same. Shelter-in-place restrictions and increased reluctance of consumers to conduct in-person activities, particularly among older 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 and financial market volatility, 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.

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 foreign operational and political risks such as changes in trade policies and export regulations between the United States and other countries or geopolitical conflict. Additionally, although we believe the COVID-19 pandemic has largely resulted in favorable consumer trends for our business, travel restrictions, factory closures and disruptions in global supply 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 our supply continuity or gross margins. 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. While we have not experienced any significant disruptions to our 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, geopolitical events or other extrinsic factors. 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 revenue and gross margins.

For a further discussion of trends, uncertainties and other factors that could impact our operating results, see the section titled “Risk Factors” in Item 1A of Part II in this Quarterly Report on Form 10-Q.

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 state of our business:

•Gross systems 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 revenue is and has been recognized. Continued negative publicity, including in relation to the DOJ investigation and settlement and other legal proceedings could further harm our reputation and lead to a further decline in gross systems shipped. See “—DOJ investigation and settlement ” and “—Factors affecting our business.”

•Sales returns rates. Sales returns rates are determined by management at the end of each reporting period to estimate the percentage of products for which we have recorded revenue during that period that are expected to be returned. This determination is informed in part by historical actual return rates. 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 from the

24

sales returns rate determined at period end 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 is not included in the sales returns rates disclosed in the table below.

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

				Three months ended
	Mar 31, 2022			Jun 30, 2022			Sep 30, 2022			Dec 31, 2022			Mar 31, 2023			Jun 30, 2023			Sep 30, 2023
Gross systems shipped		5,773			4,455			5,156			8,863			8,705			5,098			4,810
Sales returns rate		33.9	%		33.3	%		32.3	%		34.9	%		37.4	%		34.2	%		30.5	%

Shipments to customers with potential insurance coverage were less than 3% for each of the applicable periods presented in the table above. Increases in sales returns rate for the nine month period ended September 30, 2023 correspond to increased shipment volumes to Victra and other retail partners during the related period.

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 sales returns rates are an indicator of expected reductions to revenue as well as change in customer mix and factors affecting the returns rates by customer type.

Due to the historically higher return rate for cash-pay customers and the current higher return rate associated with retail partners, sales 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 in our insurance channels; however, we are currently unable to predict the long-term impact that the expansion of our omni-channel strategy (including retail and other partners) will have on 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 “—Factors affecting our business,” 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. Additionally, the majority of the costs we expect to incur in connection with the 2023 plan will be recorded as they are incurred and are therefore not reflected in the below sections. See Note 8, “Cost Reduction Activities,” in our condensed consolidated financial statements and the discussion under “—Recruitment and retention of personnel; cost reduction plans” for more information.

Revenue, net

We generate revenue primarily from the sale of Eargo hearing aid systems. We market a variety of models of hearing aids, each at 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.

Since learning of the DOJ investigation, we 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 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 potential long-term shift to primarily cash-pay sales may adversely impact revenue, net. Beginning on 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, impairment charges and related overhead.

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, sales returns rates, costs of finished goods, product warranty claim rates and refurbishment 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 to remain depressed for so long as there is minimal volume from our customers using insurance benefits as a direct method of payment to Eargo, unless we can successfully target and convert new customers with a similarly low rate of return.

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Research and development expenses

Research and development (“R&D”) expenses consist primarily of engineering and product development costs to develop and support our products, regulatory expenses, non-recurring engineering and other costs associated with products and technologies that are in development, as well as related overhead costs. These expenses include personnel-related costs, including salaries and stock-based compensation, supplies, consulting fees, prototyping, testing, materials, travel expenses, depreciation and allocated facility overhead costs. Additionally, R&D expenses include internal and external costs associated with our regulatory compliance and quality assurance functions and related overhead costs.

Sales and marketing expenses

Our sales and marketing expenses 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 retail field sales team (substantially all of which was impacted by the 2023 plan), and a direct sales force consisting of inside sales consultants, hearing professionals, marketing professionals and related support personnel. We expect our sales and marketing expenses to fluctuate over time as a percentage of revenue, including in connection with the cost reduction plans announced in 2021, 2022, and 2023, or as our omni-channel strategy develops or evolves in response to our business.

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.

Even excluding the costs associated with the DOJ investigation, we expect to incur significant general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, and those of Nasdaq, additional insurance costs, investor relations activities and other administrative and professional services, as well as professional service and legal fees and expenses related to shareholder litigation that has been filed and that may be filed in the future.

Impairment charge

Impairment charges consist primarily of write-downs to our goodwill, which 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.

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.

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.

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Results of operations

Comparison of the three months ended September 30, 2023 and 2022

	Three months ended September 30,						Change
(dollars in thousands)	2023			2022			Amount			%
Revenue, net	$	8,270		$	7,908		$	362			4.6	%
Cost of revenue		3,937			6,007			(2,070	)		(34.5	)
Gross profit		4,333			1,901			2,432			127.9
Operating expenses:
Research and development		4,742			4,963			(221	)		(4.5	)
Sales and marketing		9,281			11,282			(2,001	)		(17.7	)
General and administrative		7,385			11,702			(4,317	)		(36.9	)
Impairment charge		873			—			873		*
Total operating expenses		22,281			27,947			(5,666	)		(20.3	)
Loss from operations		(17,948	)		(26,046	)		8,098			(31.1	)
Other income (expense), net:
Interest income		620			419			201			48.0
Interest expense		—			—			—		*
Change in fair value of convertible notes		—			(25,000	)		25,000		*
Loss on extinguishment of debt		—			—			—		*
Total other income (expense), net		620			(24,581	)		25,201		*
Loss before income taxes		(17,328	)		(50,627	)		33,299			(65.8	)
Income tax provision		—			—			—		*
Net loss and comprehensive loss	$	(17,328	)	$	(50,627	)	$	33,299			(65.8	)%

* Not meaningful

Revenue, net

	Three months ended September 30,				Change
(dollars in thousands)	2023		2022		Amount		%
Revenue, net	$	8,270	$	7,908	$	362		4.6	%

Gross systems shipped during the three months ended September 30, 2023 were 4,810, compared to 5,156 during the comparable period in 2022. Revenue, which is reported net of consideration payable to customers and expected returns, increased by $0.4 million, from $7.9 million during the three months ended September 30, 2022 to $8.3 million during the three months ended September 30, 2023. The net change was due to a decrease in shipment volume and related revenue which was partially offset by a lower sales returns accrual rate and the net impact in the prior year of a reversal of pricing concessions from unsubmitted and unpaid claims.

Cost of revenue, gross profit, and gross margin

	Three months ended September 30,						Change
(dollars in thousands)	2023			2022			Amount			%
Cost of revenue	$	3,937		$	6,007		$	(2,070	)		(34.5	)%
Gross profit		4,333			1,901			2,432			127.9	%
Gross margin		52.4	%		24.0	%

Cost of revenue decreased by $2.1 million, or 34.5%, from $6.0 million during the three months ended September 30, 2022 to $3.9 million during the three months ended September 30, 2023. Cost of revenue decreased during the three months ended September 30, 2023 primarily due a decrease in shipment volume and a decrease in overhead and personnel-related costs. Overhead cost for the three months ended September 30, 2022 included a $1.0 million charge related to certain slow moving inventory items. Gross margins during the three months ended September 30, 2023 and 2022 were 52.4% and 24.0%, respectively. The increase in gross margins was attributable to lower cost of revenue per unit sold in the third quarter of 2023.

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Research and development (“R&D”)

	Three months ended September 30,				Change
(dollars in thousands)	2023		2022		Amount			%
Research and development	$	4,742	$	4,963	$	(221	)		(4.5	)%

R&D expenses decreased by $0.2 million, or 4.5%, from $5.0 million during the three months ended September 30, 2022 to $4.7 million during the three months ended September 30, 2023. The change was primarily due to net decreases in third-party costs, direct and overhead expenses and a decrease in personnel-related costs as a result of a decrease in headcount.

Sales and marketing

	Three months ended September 30,				Change
(dollars in thousands)	2023		2022		Amount			%
Sales and marketing	$	9,281	$	11,282	$	(2,001	)		(17.7	)%

Sales and marketing expenses decreased by $2.0 million, or 17.7%, from $11.3 million during the three months ended September 30, 2022 to $9.3 million during the three months ended September 30, 2023. The change was primarily due to the net decrease in direct marketing, advertising and promotional expenses, and overhead expenses of $1.8 million, and a decrease in personnel and personnel-related costs of $0.2 million as a result of a decrease in headcount.

General and administrative

	Three months ended September 30,				Change
(dollars in thousands)	2023		2022		Amount			%
General and administrative	$	7,385	$	11,702	$	(4,317	)		(36.9	)%

General and administrative expenses decreased by $4.3 million, or 36.9%, from $11.7 million during the three months ended September 30, 2022 to $7.4 million during the three months ended September 30, 2023. The change was primarily due to a net decrease of $3.0 million relating to general corporate costs primarily related to legal, consulting and other professional fees that in the third quarter of 2022 were driven by activities related to litigation, financing and compliance matters, a decrease in overhead expenses of $0.5 million and a net decrease in personnel and personnel-related costs of $0.9 million. The decrease in personnel and personnel-related costs is primarily related to employee workforce reduction costs for severance and related benefits incurred in connection with the 2023 plan, and the net impact of an increase in stock-based compensation during the three months ended September 30, 2023.

Impairment charge

	Three months ended September 30,				Change
(dollars in thousands)	2023		2022		Amount		%
Impairment charge	$	873	$	—	$	873	*

The Company concluded that a triggering event occurred as of September 30, 2023, and as a result of the goodwill impairment assessment during the three months ended September 30, 2023, we determined that the carrying value of goodwill is not recoverable and recognized an impairment charge of $0.9 million for the entire carrying value of goodwill. There were no impairment charges to goodwill during the three months ended September 30, 2022.

Interest income

	Three months ended September 30,				Change
(dollars in thousands)	2023		2022		Amount		%
Interest income	$	620	$	419	$	201		48.0	%

Interest income was $0.6 million during the three months ended September 30, 2023. The increase in interest income was primarily attributable to the increased interest rates on cash balances.

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Results of operations

Comparison of the nine months ended September 30, 2023 and 2022

	Nine months ended September 30,						Change
(dollars in thousands)	2023			2022			Amount			%
Revenue, net	$	28,191		$	24,331		$	3,860			15.9	%
Cost of revenue		17,105			16,231			874			5.4
Gross profit		11,086			8,100			2,986			36.9
Operating expenses:
Research and development		14,711			14,689			22			0.1
Sales and marketing		35,309			37,306			(1,997	)		(5.4	)
General and administrative		26,739			43,980			(17,241	)		(39.2	)
Impairment charge		873			—			873		*
Total operating expenses		77,632			95,975			(18,343	)		(19.1	)
Loss from operations		(66,546	)		(87,875	)		21,329			(24.3	)
Other income (expense), net:
Interest income		2,144			480			1,664			346.7
Interest expense		—			(549	)		549		*
Change in fair value of convertible notes		—			(25,000	)		25,000		*
Loss on extinguishment of debt		—			(772	)		772		*
Total other income (expense), net		2,144			(25,841	)		27,985			(108.3	)
Loss before income taxes		(64,402	)		(113,716	)		49,314			(43.4	)
Income tax provision		—			—			—			—
Net loss and comprehensive loss	$	(64,402	)	$	(113,716	)	$	49,314			(43.4	)%

* Not meaningful

Revenue, net

	Nine months ended September 30,				Change
(dollars in thousands)	2023		2022		Amount		%
Revenue, net	$	28,191	$	24,331	$	3,860		15.9	%

Gross systems shipped during the nine months ended September 30, 2023 were 18,613 compared to 15,384 during the comparable period in 2022. Revenue, which is reported net of consideration payable to customers and expected returns, increased by $3.9 million, from $24.3 million during the nine months ended September 30, 2022 to $28.2 million during the nine months ended September 30, 2023. The increase in shipment volume and related revenue was largely driven by our commercial arrangement with Victra and other retail partners, partially offset by a lower average sales price and an increase in our sales returns rate compared to the same period in the prior year.

Cost of revenue, gross profit, and gross margin

	Nine months ended September 30,						Change
(dollars in thousands)	2023			2022			Amount		%
Cost of revenue	$	17,105		$	16,231		$	874		5.4	%
Gross profit		11,086			8,100			2,986		36.9	%
Gross margin		39.3	%		33.3	%

Cost of revenue increased by $0.9 million, or 5.4%, from $16.2 million during the nine months ended September 30, 2022 to $17.1 million during the nine months ended September 30, 2023. Cost of revenue increased during the nine months ended September 30, 2023 primarily related to an increase in the number of systems shipped during the nine months ended September 30, 2023 largely due to our commercial arrangements with Victra and other retail partners which was partially offset by a net decrease in lower overhead costs, rework costs related to certain of our hearing aids in inventory, impairment charges related to previously capitalized software costs and charges related to certain slow-moving inventory items. Gross margins during the nine months ended September 30, 2023 and 2022 were 39.3% and 33.3%, respectively. The increase in gross margins was attributable to the decrease in our cost of revenue per unit sold.

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Research and development

	Nine months ended September 30,				Change
(dollars in thousands)	2023		2022		Amount		%
Research and development	$	14,711	$	14,689	$	22		0.1	%

R&D expenses increased by $0.0 million, or 0.15%, from $14.7 million during the nine months ended September 30, 2022 to $14.7 million during the nine months ended September 30, 2023. The change was primarily due to a net decrease of $0.9 million in direct, third party costs and overhead expenses, offset by a net increase in personnel and personnel related costs of $0.9 million. The net increase in personnel and personnel related costs was primarily driven by the net impact of an increase in stock-based compensation during the nine months ended September 30, 2023.

Sales and marketing

	Nine months ended September 30,				Change
(dollars in thousands)	2023		2022		Amount			%
Sales and marketing	$	35,309	$	37,306	$	(1,997	)		(5.4	)%

Sales and marketing expenses for the nine months ended September 30, 2023 decreased by $2.0 million, or 5.4%, from $37.3 million during the nine months ended September 30, 2022 to $35.3 million during the nine months ended September 30, 2023. The change was primarily due to a net decrease of $2.6 million in direct marketing, advertising, promotional and overhead expenses, offset by a net increase in personnel and personnel related costs of $0.6 million. The net increase in personnel and personnel related costs was primarily driven by the net impact of an increase in stock-based compensation during the nine months ended September 30, 2023.

General and administrative

	Nine months ended September 30,				Change
(dollars in thousands)	2023		2022		Amount			%
General and administrative	$	26,739	$	43,980	$	(17,241	)		(39.2	)%

General and administrative expenses decreased by $17.2 million, or 39.2%, from $44.0 million during the nine months ended September 30, 2022 to $26.7 million during the nine months ended September 30, 2023. The change was primarily due to a net decrease of $16.9 million relating to general corporate costs primarily related to legal, consulting and other professional fees that in the prior year were driven by activities related to litigation, financing and compliance matters and a decrease in overhead expenses of $1.2 million. The decrease in general and administrative expense for the nine months ended September 30, 2023 was offset by a net increase in personnel and personnel-related costs of $1.0 million related to employee workforce reduction costs for severance and related benefits incurred in connection with the 2023 plan and the net impact of an increase in stock-based compensation during the nine months ended September 30, 2023.

Impairment charge

	Nine months ended September 30,				Change
(dollars in thousands)	2023		2022		Amount		%
Impairment charge	$	873	$	—	$	873	*

The Company concluded that a triggering event occurred as of September 30, 2023, and as a result of the goodwill impairment assessment during the three months ended September 30, 2023, we determined that the carrying value of goodwill is not recoverable and recognized an impairment charge of $0.9 million for the entire carrying value of goodwill. There were no impairment charges to goodwill during the nine months ended September 30, 2022.

Interest income

	Nine months ended September 30,				Change
(dollars in thousands)	2023		2022		Amount		%
Interest income	$	2,144	$	480	$	1,664		346.7	%

Interest income was $2.1 million during the nine months ended September 30, 2023. The increase in interest income was primarily attributable to the increased interest rates on cash balances.

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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. In 2022, these activities included the Patient Square transactions and the Rights Offering.

As of September 30, 2023, we had cash and cash equivalents of $46.0 million, which are available to fund 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 $64.4 million and $113.7 million for the nine months ended September 30, 2023 and 2022, respectively. We had an accumulated deficit of $578.7 million as of September 30, 2023. 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 within one year after the date that the financial statements are issued. Our negative cash flows and current lack of financial resources raise substantial doubt as to our ability to continue as a going concern. See the Risk Factor titled, “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.”

If we are unable to complete the proposed Merger on the timing we anticipate or at all, we will need substantial additional funding to pursue our growth strategy and support continuing operations. 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 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. In addition, pending the completion of the proposed Merger, the Merger Agreement contains covenants that restrict our ability to incur indebtedness or engage in other capital-raising transactions, which may further limit our ability to raise capital.

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. 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 dilution of our stockholders, and any debt financing may include covenants that restrict our business.

Our ability to raise additional capital to meet our expected future capital requirements or for other purposes will depend on many factors, including but not limited to the following:

•investor confidence in the Company and our ability to continue as a going concern;

•the timing, receipt and amount of sales from our current and future products;

•the costs involved in resolving third-party claims audits as well as other legal proceedings and their duration and impact on our business generally;

•the availability of insurance coverage for our hearing aid devices, and 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 primarily “cash-pay” model, with limited volume from our customers in our insurance channels, 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 the OTC Final Rule and any other changes in the regulatory landscape for hearing aid devices;

31

•the impact of our cost reduction plans, including any adverse impact on our business or investor confidence;

•the cost of manufacturing, either ourselves or through third-party manufacturers, our products;

•the terms, timing and success of any other licensing, partnership, omni-channel, including retail, or other 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;

•our ability to register securities in a cost-efficient manner;

•investor perceptions of our capital structure, including the fact that we are a controlled company;

•the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing our intellectual property portfolio;

•the extent to which we acquire or invest in businesses; and

•uncertainty or volatility in the market generally, including as a result of increasing interest rates and inflation.

Our liquidity and ability to raise capital are subject to various risks, including the risks identified in the section titled “Risk Factors” in Item 1A of Part II. Further, as discussed above, 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. If this trend continues, it could negatively impact our liquidity and working capital, including by impacting our ability to access any additional capital.

Leases

We have entered into various non-cancelable operating leases primarily for our facilities with original lease periods expiring through the year ending July 31, 2029, with the most significant lease relating to our corporate headquarters. As of September 30, 2023, we have total operating lease obligations of $7.7 million recorded on our condensed consolidated balance sheet.

Refer to Note 5 to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Cash flows

The following table summarizes our cash flows for the periods indicated:

	Nine months ended September 30,
(in thousands)	2023			2022
Net cash used in operating activities	$	(54,927	)	$	(96,862	)
Net cash used in investing activities		(288	)		(2,827	)
Net cash provided by financing activities		—			77,264
Net decrease in cash and cash equivalents	$	(55,215	)	$	(22,425	)

Operating activities

During the nine months ended September 30, 2023, cash used in operating activities was $54.9 million, attributable to a net loss of $64.4 million and a net change in our net operating assets and liabilities of $5.5 million, which was offset by non-cash charges of $15.0 million. Non-cash charges primarily consisted of $8.7 million in stock-based compensation, $3.5 million in depreciation and amortization expense, $1.7 million in impairment charges, $0.7 million in non-cash operating lease expense, and $0.4 million in bad debt expense.

The change in our net operating assets and liabilities was primarily due to a $5.9 million decrease in accrued expenses, $1.2 million decrease in accounts payable, $1.3 million increase in other assets, a $0.3 million decrease in operating lease liabilities and a $0.2 million decrease in sales returns reserve, offset by and $0.7 million decrease in inventories, $2.3 million decrease in prepaid expenses and other current assets, and $0.5 million a decrease in accounts receivable.

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During the nine months ended September 30, 2022, cash used in operating activities was $96.9 million, attributable to a net loss of $113.7 million and a net change in our net operating assets and liabilities of $27.8 million, partially offset by non-cash charges of $44.6 million. Non-cash charges primarily consisted of $25.0 million in change in fair value of convertible notes, $7.6 million in stock-based compensation, $5.7 million in debt issuance costs from convertible notes, the payments of which are classified as cash used in financing activities, $4.0 million in depreciation and amortization expense, $0.8 million loss on extinguishment of debt, $0.8 million in non-cash operating lease expense, and $0.5 million in bad debt expense. The change in our net operating assets and liabilities was primarily due to a $34.4 million decrease in the settlement liability which was paid in accordance with the terms of the DOJ settlement agreement, $12.0 million decrease in sales returns reserve primarily due to the Pricing Concession, $2.4 million decrease in accounts payable, and $0.6 million decrease in operating lease liabilities, partially offset by a $10.9 million decrease in accounts receivable primarily due to the Pricing Concession, $6.9 million decrease in prepaid expenses and other current assets, $2.0 million increase in accrued expenses, and $1.0 million decrease in other assets

Investing activities

During the nine months ended September 30, 2023, cash used in investing activities was $0.3 million related to the purchase of property and equipment and capitalized costs related to the development of internal use software.

During the nine months ended September 30, 2022, cash used in investing activities was $2.8 million, which consisted of $2.5 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.

Financing activities

There was no cash used in financing activities during the nine months ended September 30, 2023.

During the nine months ended September 30, 2022, cash provided by financing activities was $77.3 million, which primarily consisted of $99.9 million in proceeds from issuance of convertible notes net of issuance costs paid to lender and $0.1 million in proceeds from the exercise of stock options, partially offset by $16.2 million in debt repayments, $5.6 million in payments of convertible notes issuance costs to third parties and $0.9 million in payments of deferred transaction costs for the anticipated Rights Offering.

Critical accounting estimates

Management’s discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions regarding the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and any such differences may be material.

There have been no significant changes in our critical accounting estimates as compared to the critical accounting estimates disclosed in the section titled “Management’s Discussion and Analysis of Financial Condition and Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Recent accounting pronouncements

Management does not believe that any recently issued accounting pronouncements and other authoritative guidance with the effective dates in the future will have material impact on Eargo’s financial position or results of operations when implemented.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest rate risk

Our cash and cash equivalents as of September 30, 2023 and December 31, 2022 consisted of $46.0 million and $101.2 million, respectively, 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.

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Item 4. 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 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 September 30, 2023, our management, with the participation and supervision of our principal executive officer, 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 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 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 September 30, 2023 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 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 material 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 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 implemented and are in the process of implementing additional measures designed 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 have taken to date, and are continuing to implement, will be sufficient to remediate the material 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.

Changes in internal control over financial reporting

Other than the changes intended to remediate the previously reported material 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 Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We discuss certain legal proceedings in Part I of this Quarterly Report on Form 10-Q in Note 5, “Commitments and contingencies” under the caption “Legal and other contingencies,” which is incorporated herein by reference. We refer you to that discussion for important information concerning those legal proceedings, including the alleged factual basis for such actions and, where known, the relief sought, as well as the name of the lawsuit, the court in which the lawsuit is pending, and the date on which the complaint commencing the lawsuit was filed.

In addition, we may in the ordinary course 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 pay 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.

Item 1A. Risk Factors.

Risk factor summary

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 Quarterly Report on Form 10-Q and our other filings with the SEC, before making investment decisions regarding our common stock.

•The Merger Agreement, the pendency of the Merger or our failure to consummate the Merger could have a material adverse effect on our business, results of operations, financial condition and the price of our common stock.

•While the Merger is pending and the Merger Agreement is in effect, we are subject to restrictions on our business activities.

•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, or in otherwise establishing relationships with health plans, benefits managers, or managed care providers.

•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 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 operate in a highly competitive industry, and competitive pressures, including those developing following the OTC Final Rule, could have a material adverse effect on our business.

•We have a limited operating history and have experienced periods of significant business changes in a short time. If we are unable to manage our business and anticipated fluctuations in our business effectively, our business and growth prospects could be materially and adversely affected.

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

•We may not achieve some or all of the expected benefits of our cost reduction plans, and our reductions may adversely affect our business.

•We have a history of net losses, and we expect to incur additional substantial losses in the foreseeable future.

•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.

•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.

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•As we expand our omni-channel product offerings to various third-party partners, including in such third parties’ 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. In addition, any shift of the marketing and sales of our products to third-party partners will increase our reliance on sales personnel who may be less familiar with our products or may also sell competitive products.

•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.

•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.

•We 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.

•If the quality of our hearing aid products does not meet consumer expectations, or if our products wear out more quickly than expected or otherwise suffer from unanticipated product issues, then our brand and reputation or our business could be adversely affected.

•There are a variety of hearing aid products and technologies, and consumer confusion about product features and technology, including as a result of counterfeiting and other infringement of our products and trademarks, 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.

•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 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.

Risk Factors

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 Quarterly Report on Form 10-Q, 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.

Risks Related to the Proposed Merger

The Merger Agreement, the pendency of the Merger or our failure to consummate the Merger could have a material adverse effect on our business, results of operations, financial condition and the price of our common stock.

On October 29, 2023, we entered into the Merger Agreement pursuant to which, if all of the conditions to closing are satisfied or waived, we will become a wholly owned subsidiary of Parent pursuant to the Merger. The obligation of the parties to consummate the Merger is subject to various conditions, including: (i) the adoption of the Merger Agreement by a majority of the voting power of the outstanding shares of our common stock; (ii) the absence of any law, order, judgment, decree, injunction or ruling prohibiting the consummation of the Merger; (iii) the accuracy of the representations and warranties of the parties (subject to customary materiality qualifiers) and (iv) each party’s performance in all material respects of its covenants and obligations contained in the Merger Agreement. We cannot predict with certainty whether or when any of the required closing conditions will be satisfied or whether another uncertainty may arise, and we cannot assure you that we will be able to successfully consummate the proposed Merger as currently contemplated under the Merger Agreement or at all.

Our ongoing business may be materially adversely affected by the announcement or the pendency of the Merger, and we are subject to a number of risks, including the following:

•the pending Merger could adversely effect our ability to retain and attract employees and maintain and establish relationships with existing and potential new customers and business partners;

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•we will be required to pay certain significant costs relating to the Merger, regardless of whether the Merger is consummated, such as, for example, legal, accounting, financial advisory, regulatory, printing and other professional services fees, which may relate to activities that we would not have undertaken other than in connection with the Merger;

•we are unable to solicit other acquisition proposals during the pendency of the Merger;

•while the Merger Agreement is in effect, we are subject to restrictions on our business activities, including, among other things, restrictions on our ability to engage in certain kinds of material transactions, or incurring certain indebtedness, which could prevent us from pursuing strategic business opportunities, taking actions with respect to the business that we may consider advantageous and responding effectively and/or timely to competitive pressures and industry developments, and may as a result materially adversely affect our business, results of operations and financial condition;

•matters relating to the Merger require substantial commitments of time and resources by our management, which could result in the distraction of management from ongoing business operations and pursuing other opportunities that could have been beneficial to us; and

•we may commit time and resources to defending against litigation (from our stockholders or otherwise) related to the Merger.

If the Merger is not consummated, the risks described above may materialize or be worsened, and they may have a material adverse effect on our business, results of operations, financial condition and the price of our common stock, particularly to the extent that the current market price of our common stock reflects an assumption that the Merger will be completed. If the Merger is not consummated, investor confidence could decline; stockholder litigation could be brought against us, our directors, and officers; relationships with existing and prospective customers, service providers, investors, lenders and other business partners may be adversely impacted; we may be unable to attract or retain key personnel; our employees could be distracted; and their productivity decline and profitability may be adversely impacted due to costs incurred in connection with the pending Merger. We may experience negative reactions from the financial markets, including negative impacts on our stock price, and it is uncertain when, if ever, the price of our shares would return to the prices at which our shares traded prior to the failure of the proposed Merger. If the Merger is not consummated, our stockholders will not receive any payment for their shares of our common stock in connection with the Merger. Instead, we will remain a public company, our common stock will continue to be listed and traded on Nasdaq and registered under the Exchange Act, and we will be required to continue to file periodic reports with the SEC.

Even if successfully completed, there are certain risks to our stockholders from the Merger, including:

•the amount of cash to be paid per share under the Merger Agreement is fixed and will not be adjusted for changes in our business, assets, liabilities, prospects, outlook, financial condition or operating results or in the event of any change in the market price of, analyst estimates of, or projections relating to, our common stock;

•the fact that receipt of the all-cash per share consideration under the Merger Agreement is taxable to stockholders that are treated as U.S. holders for U.S. federal income tax purposes; and

•the fact that, if the Merger is completed, our stockholders will not participate in any future growth potential or benefit from any future increase in the value of our company.

The proposed Merger is subject to the satisfaction of various closing conditions, some or all of which may not be satisfied or completed within the expected timeframe, or at all.

The proposed Merger may not be completed within the expected timeframe, or at all, as a result of various factors and conditions, some of which are beyond our control. Completion of the Merger is subject to a number of closing conditions, including (i) the adoption of the Merger Agreement by a majority of the voting power of the outstanding shares of our common stock; (ii) the absence of any law, order, judgment, decree, injunction or ruling prohibiting the consummation of the Merger; (iii) the accuracy of the representations and warranties of the parties (subject to customary materiality qualifiers) and (iv) each party’s performance in all material respects of its covenants and obligations contained in the Merger Agreement. The PSC Stockholder holds approximately 76.2% of the outstanding shares of our common stock and has the ability to provide the required stockholder approval for the Merger, and has agreed, among other things, to vote all shares of our common stock beneficially owned by the PSC Stockholder in favor of the Merger. However, we can provide no assurance that all required consents and approvals will be obtained or that all closing conditions will otherwise be satisfied (or waived, if applicable), and, even if all required consents and approvals can be obtained and all closing conditions are satisfied (or waived, if applicable), we can provide no assurance as to the terms, conditions and timing of such consents and approvals or the timing of the completion of the Merger. Many of the conditions to completion of the Merger are not within our control, and we cannot predict when or if these conditions will be satisfied (or waived, if applicable). Other developments beyond our control, including, but not limited to, changes in domestic or global economic, political or industry conditions may affect the timing or success of the Merger. Additionally, under circumstances specified in the Merger Agreement, we or Parent may terminate the Merger Agreement. Any

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adverse consequence of the pending Merger could be exacerbated by any delays in completion of the Merger or by the termination of the Merger Agreement.

The obligation of each party to the Merger Agreement to consummate the Merger is also subject to the accuracy of the representations and warranties of the other party (subject to customary materiality qualifications) and compliance in all material respects with the covenants and agreements contained in the Merger Agreement as of the closing of the Merger, including, with respect to us, covenants to conduct our business in the ordinary course and to not engage in certain kinds of material transactions prior to closing of the Merger. In addition, the Merger Agreement may be terminated under certain specified circumstances, including, but not limited to, in connection with a change in the recommendation of our Board of Directors to enter into an agreement for a Superior Proposal (as defined in the Merger Agreement) or in the case of an Intervening Event (as defined in the Merger Agreement). As a result, we cannot assure you that the Merger will be completed or that, if completed, it will be exactly on the terms set forth in the Merger Agreement or within the expected timeframe.

We will be subject to various uncertainties while the Merger is pending that may cause disruption and may make it more difficult to maintain relationships with our employees and third-party business partners.

Our efforts to complete the Merger could cause substantial disruptions in, and create uncertainty surrounding, our business, which may materially and adversely affect our results of operations and our business. Uncertainty as to whether the Merger will be completed may affect our ability to recruit prospective employees or to retain and motivate existing employees. Employee retention may be particularly challenging while the transaction is pending because employees may experience uncertainty about their roles following the transaction. In addition, a substantial amount of our management’s and employees’ attention will be directed toward the completion of the Merger and thus be diverted from our day-to-day operations.

Uncertainty as to our future could also adversely affect our business and our relationships with customers, partners, vendors, regulators and other service providers. For example, existing or potential commercial partners may defer decisions about working with us or seek to change existing business relationships with us, and potential customers may defer decisions about purchasing our products, which could result in a permanent loss of such customers even if the Merger is not consummated. Changes to, or termination of, existing business relationships could adversely affect our results of operations and financial condition, as well as the market price of our common stock. The adverse effects of the pendency of the Merger could be exacerbated by any delays in completion of the Merger or termination of the Merger Agreement.

While the Merger is pending and the Merger Agreement is in effect, we are subject to restrictions on our business activities.

While the Merger is pending and the Merger Agreement is in effect, we are generally required to conduct our business in the ordinary course. Pursuant to the terms of the Merger Agreement, we are restricted from taking certain specified actions without Parent’s prior consent, which is not to be unreasonably withheld, conditioned or delayed. These limitations including, among other things, certain restrictions on our ability to amend our organizational documents; acquire other businesses and assets; make certain investments; repurchase, reclassify or issue securities; make loans; pay dividends; incur indebtedness; enter into, amend, modify or waive certain contracts; take certain actions, including to hire, terminate, or provide increases in compensation to senior management or other key personnel; change accounting policies or procedures; settle certain litigation; change tax classifications and elections; or take certain actions relating to our intellectual property. These restrictions could prevent us from pursuing strategic business opportunities and taking actions with respect to our business that we may consider advantageous and may, as a result, materially and adversely affect our business, results of operations and financial condition. Adverse effects arising from these restrictions during the pendency of the Merger could be exacerbated by any delays in consummation of the Merger or termination of the Merger Agreement.

In certain instances, the Merger Agreement requires us to pay a termination fee to Parent, which could affect the decisions of a third party considering making an alternative acquisition proposal.

In certain specified circumstances further described in the Merger Agreement, in connection with the termination of the Merger Agreement, we will be required to pay Parent a termination fee of $1.1 million, including if Parent terminates the Merger Agreement after our Board of Directors changes its recommendation to our stockholders or if we terminate the Merger Agreement to enter into an alternative acquisition agreement with respect to a Superior Proposal. This payment could affect the structure, pricing and terms proposed by a third party seeking to acquire or merge with us and could discourage a third party from making a competing acquisition proposal or inquiry, including a proposal that would be more favorable to our stockholders than the Merger. For these and other reasons, termination of the Merger Agreement could materially and adversely affect our business, results of operations and financial condition, which in turn could materially and adversely affect the price of our common stock.

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We may be the target of securities class action and derivative lawsuits and other legal or regulatory proceedings, which could result in substantial costs and may delay or prevent the Merger from being completed.

Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into merger agreements. Even if such lawsuits or other legal or regulatory proceedings are without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment in any such lawsuits or proceedings could result in monetary damages payable by our company, which could have a negative impact on our liquidity, results of operations and financial condition. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting completion of the proposed Merger, then that injunction may delay or prevent the proposed Merger from being completed, which may exacerbate the other risks described herein and adversely affect our business, results of operation and financial condition.

Risks relating to our industry and business

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, or in otherwise establishing relationships with health plans, benefits managers, or managed care providers.

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, a payor audit related to claims submitted for customers with FEHB plans remains in process, although as of April 13, 2023, we are no longer subject to prepayment review of claims by the third-party payor with whom historically we had the largest volume. 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 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 did not historically conduct or require in-person hearing tests, and to the extent that in-person testing is required to support any claims submissions, this represents a significant challenge to our 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 all or part of the purchase. Common forms of application of an insurance benefit 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.

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 testing by a licensed healthcare provider to establish medical necessity, with supporting clinical documentation. The majority of the claims we have submitted for reimbursement since instating this process have been approved for payment and/or paid, while a portion of the claims are pending adjudication by the payors or have been denied and are currently in the appeals process, each in the ordinary course of business. As of April 13, 2023, we are no longer subject to prepayment review of claims by the third-party payor with whom historically we had the largest volume; however, third-party payors periodically conduct pre- and post-payment reviews, including audits of previously submitted claims, and we could be subject to such reviews or audits in the future, including by such payor.

We are evaluating additional alternatives for testing or establishing medical necessity, 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 resources, 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

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efficacy of additional processes that may be established in the future. If we are unable to successfully implement alternatives for testing or to otherwise establish additional 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.

Further, the OTC Final Rule may lead 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. 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. For example, most health plans to date have made no changes to their hearing aid benefits, with a handful of plans continuing to exclude coverage of OTC hearing aids, and the third-party FEHB carrier that administers approximately two-thirds of all FEHB benefits nationwide recently announced that it would add a prior approval requirement for all hearing aids. Although we may seek to market certain of our devices as prescription hearing aids, payors 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 health plans, benefits managers and 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, which are prevalent in Medicare Advantage plans, are responsible for selecting vendors or suppliers 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. However, existing arrangements between certain legacy hearing aid manufacturers and licensed healthcare providers, health plans or hearing benefits managers (many of which are owned or otherwise affiliated with the five major traditional hearing manufacturers) that predate the effective date of the OTC Final Rule may have the effect of limiting beneficiary access to OTC hearing aids such as ours. Additionally, to the extent health plans continue to require in-person hearing tests to support claims submissions following the OTC Final Rule—in other words, to require that reimbursement for OTC hearing aids be dependent on diagnoses that are most often obtained in traditional hearing aid channels—we may remain at a competitive disadvantage in marketing or selling our products to insurance beneficiaries that would otherwise have access to a hearing aid benefit.

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 or to establish meaningful partnerships or other relationships with health plans, benefits managers or managed care providers, 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 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.”

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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 Quarterly Report on Form 10-Q. 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 ability to raise additional capital to meet our expected future capital requirements or for other purposes will depend on many factors, including but not limited to the following:

•investor confidence in the Company and our ability to continue as a going concern;

•the timing, receipt and amount of sales from our current and future products;

•the costs involved in resolving third-party claims audits as well as other legal proceedings and their duration and impact on our business generally;

•the availability of insurance coverage for our hearing aid devices, and 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 primarily “cash-pay” model, with limited volume from our customers in our insurance channels, 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 the OTC Final Rule and any other changes in the regulatory landscape for hearing aid devices;

•the impact of our cost reduction plans, including any adverse impact on our business or investor confidence;

•the cost of manufacturing, either ourselves or through third-party manufacturers, our products;

•the terms, timing and success of any other licensing, partnership, omni-channel, including retail, or other 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;

•our ability to register securities in a cost-efficient manner;

•investor perceptions of our capital structure, including the fact that we are a controlled company;

•the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing our intellectual property portfolio;

•the extent to which we acquire or invest in businesses; and

•uncertainty or volatility in the market generally, including as a result of increasing interest rates and inflation.

As a result of the Rights Offering and conversion of the Notes, our stockholders experienced substantial dilution of their holdings and the PSC Stockholder 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.

In addition, there are limitations that exist which may increase the time and cost required to effect a registration of our securities under the Securities Act. Even if we are able to register the offer and sale of securities on Form S-3, we are limited in the amount we can raise. As a result, our ability to raise capital in public markets in a timely or cost-effective manner may be impaired.

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

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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. Furthermore, adverse events affecting the financial industry may make equity or debt financing more difficult to obtain. Please see the Risk Factor titled, “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.”

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 and have previously been 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. We could face additional legal proceedings, investigations, and inquiries relating to these or similar matters. For more information regarding legal proceedings, see “Item 1. 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. Similar legal proceedings, investigations and inquiries in the future 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 adverse changes to our business practices. Furthermore, publicity surrounding past and potential future legal proceedings, investigations and inquiries or any enforcement actions as a result thereof, coupled with the past intensified public scrutiny of our Company as a result of related publicity, could result in additional legal proceedings, investigations and inquiries. As a result, 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.

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, 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 operate in a highly competitive industry, and competitive pressures, including those developing following the OTC Final Rule, 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, in the past, 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

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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.

Additionally, the long-term effects of the OTC Final Rule on the competitive landscape of the hearing aid industry are not yet known. In particular following the effective date of the OTC Final Rule, we have faced increased competition from companies that have introduced new technologies, including consumer electronics companies that sell direct to consumers and other hearing aid companies that have partnered with other retailers and traditional consumer electronics companies. For example, since 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 and Lexie Hearing has partnered with Bose Corporation to sell FDA-cleared self-fitting hearing aids.

While our devices have historically been price competitive with devices sold through traditional hearing aid channels, we may not be able to maintain the price competitiveness of our devices as the cash-based OTC hearing aid market develops. The availability of comparatively lower-priced OTC hearing aid devices following the effective date of the OTC Final Rule, including those marketed by traditional consumer electronics companies may negatively impact consumer adoption of our devices through our cash-pay channels, for example, in physical or online retail settings where consumers may be more price sensitive, not aware of our products, or otherwise unable to differentiate between our devices and those of our competitors. We may need to market lower-priced devices in order to effectively compete with lower-priced alternatives available on the OTC hearing aid market, which could require us to incur significant additional costs in development, licensing, or marketing and potentially reduce our gross margin. Any inability to maintain the price competitiveness of our devices in the hearing aid market could have a material adverse effect on our business, financial condition and results of operations.

In our insurance channels, although we believe our products remain price competitive as compared to hearing aids sold through traditional hearing aid channels, existing arrangements between certain legacy hearing aid manufacturers and licensed healthcare providers, health plans or hearing benefits managers (many of which are owned or otherwise affiliated with the five major traditional hearing manufacturers) that predate the effective date of the OTC Final Rule may have the effect of limiting consumer access to OTC hearing aids such as ours. Additionally, to the extent health plans continue to require in-person hearing tests to support claims submissions following the OTC Final Rule—in other words, to require that reimbursement for OTC hearing aids be dependent on diagnoses that are most often obtained in traditional hearing aid channels—we may remain at a competitive disadvantage in marketing or selling our products to insurance beneficiaries who would otherwise have access to a hearing aid benefit.

Our ability to successfully market or sell our devices is partially dependent on our continued ability to efficiently invest in customer acquisition. We may be at a competitive disadvantage as compared to our competitors, including the traditional hearing aid manufacturers and established consumer electronics companies entering the hearing aid space, in part due to our relative capital constraints and lack of brand recognition. We may be unable to maintain, increase, or deploy our sales and marketing expenditures appropriately across our omni-channel or be able to compete effectively in the long term. Please see the Risk Factor titled, “We spend significant amounts on advertising and other marketing campaigns to acquire new customers, which may not be successful or cost effective.”

Considering the resources and advantages that our competitors maintain, even if our technology and consumer-first business model and distribution strategies are more effective than the technology and distribution strategy of our competitors, current or potential customers might elect to purchase competitive products in lieu of Eargo devices. 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 (possibly with increased frequency due to the implementation of the OTC Final Rule). We may not be able to compete effectively against these organizations, and one or more of such competitors may render our technology obsolete or economically unattractive. Please see the Risk Factor titled, “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.” 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 effect on our business, financial condition and results of operations.

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We have a limited operating history and have experienced periods of significant business changes in a short time. If we are unable to manage our business and any fluctuations in our business effectively, our business and growth prospects could be materially and adversely affected.

We were organized in 2010 and began selling hearing aids in 2015. In that time, we have had periods of significant growth, which has required us to scale the size of our organization as our business has rapidly changed. Any growth that we experience in the 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 need to support managerial, operational, financial and other resources. Rapid business changes or expansion in personnel could mean that less experienced people develop, market and sell our products, which could result in inefficiencies and unanticipated costs, reduced quality and disruptions to our operations. In addition, rapid and significant changes to our business may strain our administrative and operational infrastructure.

The challenges we face in managing our business, including our potential long-term shift to a primarily “cash-pay” business model, the obstacles to our being able to obtain reimbursement for our products from third-party payors, and the changing regulatory landscape, place significant demands on our management, financial, operational, technological and other resources, and we expect that managing our 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, reporting systems and procedures. In particular, the challenges 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 and announced the 2023 plan in June 2023, 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 changes in scale, related quality or compliance assurance will be successfully implemented or that appropriate personnel will be available to facilitate the management of and changes to our business. Failure to implement necessary procedures, transition to new processes or hire or maintain the necessary personnel could result in higher costs or an inability to meet demand. If we do not effectively manage our 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 other key 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 team as well as our senior technology personnel. We have experienced, and may in the future experience, planned or unplanned departures of members of our senior management team or senior technology personnel. Any loss of services, whether planned or unplanned, of any of the members of our senior management team 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 loss of one or more of our key personnel, whether planned or unplanned, 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 2021, 2022, and 2023 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 change our international operations, which would subject us to the legal, political, regulatory and social requirements and economic conditions of these or other 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:

•manage our commercial operations effectively;

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•scale employees;

•manage our internal development and operational efforts effectively while carrying out our contractual obligations to third parties; and

•continue to improve our operational, financial and management controls, reports systems and procedures.

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 and announced the 2023 plan in June 2023. Such actions have impacted and may in the future impact the attraction of new employees, the retention of employees not subject to workforce reductions and 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 have diminished and could continue to diminish the Company’s use of equity awards or their value, 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 may not achieve some or all of the expected benefits of our cost reduction plans, and our reductions may adversely affect our business.

We have undertaken and may undertake in the future reorganization and reduction plans in order to realign and optimize our cost structure due to the changing nature of our business and to broaden our initiatives to control costs and improve cash flow, including the plans announced in December 2021, May 2022, and June 2023 (such plan announced in June 2023, the “2023 plan”). While we expect the 2023 plan to be substantially completed by the end of 2023, these additional actions may be more costly and disruptive to our business than anticipated and we may not be able to obtain the cost savings and benefits that were initially anticipated in connection with such reduction plan. Additionally, we have experienced and may in the future experience a loss of continuity, loss of accumulated knowledge, inefficiency, adverse effects on employee morale, loss of key employees and/or other retention issues during or after transitional periods. Reorganization can require a significant amount of management and other employees’ time and focus, which diverts attention from operating and growing our business. If we fail to achieve some or all of the expected benefits of the 2023 plan, it could have a material adverse effect on our competitive position, business, results of operations, financial condition and cash flows. For more information, see Note 8, “Workforce Reduction Activities,” in our condensed consolidated financial statements.

In addition, if we are unable to realize the expected cost savings and benefits that were initially anticipated in connection with the 2023 plan or any future cost reduction efforts, or if such cost savings and benefits prove insufficient, we may need to undertake additional restructuring activities or workforce reductions in the future, which could have the effect of heightening the foregoing risks. Moreover, if employees who were not affected by any reduction in force seek alternative employment, this could require us to seek contractor support at unplanned additional expense or otherwise harm our productivity. Any disruption in our business as a result of the 2023 plan or any future cost reduction efforts could prevent us from successfully executing our business strategy and adversely affect our business, results of operations and prospects.

We have a history of net losses, and we expect to incur additional substantial losses in the foreseeable future.

We have incurred net losses since inception, and we expect to incur additional substantial losses in the foreseeable future. For the nine months ended September 30, 2023 and 2022, we incurred net losses of $64.4 million and $113.7 million, respectively. As a result of our ongoing losses, as of September 30, 2023, we had an accumulated deficit of $578.7 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. 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 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. We will need to generate significant additional revenue, improve our margins, manage our costs and raise significant additional capital to continue our operations and potentially achieve profitability. It is possible that even if we generate significant additional revenue, improve our margins, manage our costs and raise significant additional capital, we will not achieve profitability or that, even if we do achieve profitability, we may not maintain or

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increase profitability in the future. Without the benefit of customers with insurance coverage and significant additional capital, the future prospects of the Company and our ability to achieve profitability are uncertain.

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.

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 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, with a compliance date of April 14, 2023 for certain previously marketed devices.

We have in the past marketed 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 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. As of April 14, 2023, the compliance date for marketed devices, we market our devices as OTC hearing aids. 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 may 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, but we may not ultimately identify the additional opportunities that may arise in connection with the OTC Final Rule or have the financial or other resources necessary to capitalize on such opportunities if or as they arise, and any such opportunities may not generate sufficiently meaningful sales volumes of Eargo hearing aid devices or achieve profitability. 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 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 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 which Medicare or other government healthcare programs will cover hearing aids, if at all, or specifically our hearing aids, which are intended for “mild” or “moderate” hearing loss, in the future, or the impact of any such changes on our business, financial condition or 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.

As we expand our omni-channel product offerings to various third-party partners, including in such third parties’ 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. In addition,

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any shift of the marketing and sales of our products to third-party partners will increase our reliance on sales personnel who may be less familiar with our products or may also sell competitive products.

As we expand our omni-channel product offerings to various third-party distributors, including in such third parties’ physical retail outlets or online storefronts or portals, we must rely on such third parties to comply with applicable regulatory requirements in the promotion and sale of our devices. These third-party distributors may have limited or no experience selling regulated products such as hearing aids. If our third-party partners fail to comply with applicable requirements, our operations could be disrupted and we may be required to contract with alternate third-party 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 third-party partner could expose us to unforeseen potential liability or attract negative publicity for us and our brand, which could materially impact our business.

Our third-party partners may have limited experience marketing and selling hearing aids. Although we anticipate that we will continue to utilize members of our own employee base to provide support and training to our third-party partners, even following the impact of the 2023 plan on substantially all of our retail field sales team, we anticipate that, in connection with such reduction and as we expand our third-party partnerships, we will increase our reliance on sales personnel of our third-party partners who may be less familiar with our products or may also sell competitive products. Please also see the Risk Factor titled, “We rely substantially on our own employees, including our direct sales force, to market and sell our products, and if we are unable to maintain or expand our sales force or other employee base, it could harm our business. Additionally, our reliance on our employees to market and sell our products 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.” If our third-party partners are unable to successfully market and sell our hearing aids or if they decide in the future to stop selling 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.

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 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 generally 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, or if we are unable to establish meaningful channels with or through audiologists and hearing clinics, the estimated market size for our products may be lower than we anticipate.

Following the publication of the OTC Final Rule, we have focused efforts on transitioning our business to operate within the new OTC framework by expanding our omni-channel approach through select commercial partnerships, retail, and other distribution opportunities, but the OTC Final Rule may not facilitate the opportunities we anticipate, and we may not have the financial resources to capitalize on such opportunities if or as they arise. We have incurred, and may continue to incur, significant costs in order to implement our expanded omni-channel strategy following the OTC Final Rule, which investments have not yet led and may not lead to positive impacts on our revenue and profitability.

Delivery of hearing aids via direct-to-consumer and retail or other third-party distribution 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 or differently regulated. If consumers prove unwilling to adopt our model as rapidly or at the scale 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 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 our ability to identify, pursue and capitalize on other opportunities, such as the OTC Final Rule and any potential insurance (including Medicare) coverage for certain hearing aids that we may be able to access.

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.

We rely on a limited number of critical suppliers for many of the components that are used in the manufacture of our products, including for 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

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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 or 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, or we may be unable to find replacement suppliers or manufacturers at all. Shortages or interruptions in the supply of components or subcontracted products, or our inability to procure these components or products from alternate sources at acceptable prices in a timely manner, could delay launch or shipment of our products or increase our production costs, which could adversely affect our business and operating results. 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. The effects of climate change, including extreme weather events, long-term changes in temperature levels and water availability may exacerbate these risks. 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, 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.

We 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 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

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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 full or partial transition to a new contract manufacturer or any transition of products between existing manufacturers or between a manufacturer’s facilities 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 may be unable 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. 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”), 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 aid products does not meet consumer expectations, or if our products wear out more quickly than expected or otherwise suffer from unanticipated product issues, 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 September 2021, we conducted a series of comparative electroacoustic benchmarking tests (the “Bench Study”) to compare our Eargo Neo HiFi and Eargo 5 hearing aids with hearing aids from four major manufacturers. While each of the devices tested in the Bench Study, including our

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Eargo Neo HiFi and Eargo 5 hearing 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 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 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, wear out over time, or otherwise suffer from unanticipated product issues. 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 5, 6 and 7 hearing aid devices to provide up to 16 hours of continuous use between charges for up to two years of regular charging, but charging capacity may decrease more quickly than expected. Moreover, certain components of our hearing aids 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 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 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 and omni-channel models and products. Any negative reviews or negative publicity, including in relation to the DOJ investigation, the claims audits, and other legal proceedings have harmed and could continue to harm our reputation and brand and severely diminish consumer confidence in our products. Please also see the Risk Factor 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.”

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 to support our omni-channel strategy via a diverse marketing mix. Our marketing approach has generally focused on both offline sources, such as television, experiential events, and business-to-business partnerships, and online sources, such as social media, paid search, affiliates, and bespoke digital partnerships. We also utilize strategies across search engine optimization, customer relationship management marketing, and earned and owned marketing. We have invested and expect to continue to invest significant resources into optimizing our customer acquisition process, which includes increasing awareness of our products. As a result of the DOJ investigation, we temporarily stopped accepting insurance benefits as a method of direct payment and shifted to a primarily “cash-pay” model, which has generally 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. The impact of the new OTC regulatory framework on our omni-channel strategy and related marketing efforts remains to be seen; for example, our products are marketed as OTC hearing aids, which may not be covered under certain plans even if medical necessity is otherwise established. While the OTC Final Rule may lead to additional opportunities for new commercial and omni-channel partnerships, our products may also face increased competition, which could increase customer acquisition costs. See also the Risk Factor titled, “We operate in a highly competitive industry, and competitive pressures, including those developing following the OTC Final Rule, could have a material adverse effect on our business.”

We may fail to identify marketing opportunities that satisfy our anticipated return on marketing spend, accurately predict customer acquisition or fully understand or estimate the conditions and behaviors that drive consumer behavior. Additionally, we may be at a competitive disadvantage as compared to our competitors, including the traditional hearing aid manufacturers and established consumer electronics companies entering the hearing aid space, in part due to our relative capital constraints and lack of brand recognition; our

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competitors, who may have access to greater capital, may be able to invest greater amounts in their marketing campaigns and in general brand awareness, which may materially impact our ability to attract new customers. If any of our marketing efforts 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. Our marketing efforts may not result in increased sales of our products, and we may be unable to maintain, increase, or deploy our levels of marketing expenditures appropriately across our omni-channel or compete effectively in the long term.

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 relation to the DOJ investigation, the claims audits and other legal proceedings, it could materially adversely impact our ability to attract new 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. Our brand-building efforts may not result in increased sales of our products.

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 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:

•decreased demand for our current or future products;

•injury to our reputation;

•costs to defend the related litigation;

•a diversion of management’s time and our resources;

•substantial monetary awards to customers;

•regulatory investigations, product recalls, withdrawals or labelling, marketing or promotional restrictions;

•loss of revenue; and

•the inability to sell our current or any future products.

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 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.

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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 and 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 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 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 required to change our business model, products or practices in a manner that may negatively impact us. We could also 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, including as a result of counterfeiting and other infringement of our products and trademarks, 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 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 or other public health crises.

We are subject to risks related to public health crises such as the global pandemic associated with COVID-19. The COVID-19 pandemic and efforts to control its spread have affected, and any spread or resurgence of COVID-19 variants may in the future affect, how we and our partners conduct our businesses. For example, we have in the past taken, and may in the future take, 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. In addition, we have in the past been and may in the future be required to put measures in place to adjust our work patterns and protect our workforce in ways that may affect our productivity. If we are unable to respond to or manage the lingering effects of the pandemic or any future challenges resulting from any spread or resurgence of COVID-19, we could experience additional costs or other business disruptions, such as work stoppages, slowdowns and delays; travel restrictions and cancellation of events; delays in processing registrations or approvals by applicable state or federal regulatory bodies; delays in product development efforts; disruptions to or increased costs in our supply chain, including with respect to the sourcing of certain components and raw materials, such as semiconductors and memory chips; decreases in demand for our products due to consumer preferences or ability to afford our products; and additional government requirements or other incremental mitigation efforts. The effects and impact of any such challenges may be long-lasting and exceed the timeframe of any requirements to make adjustments to our business in the short term. Any failure to effectively address any such or any other disruptions could subject us to additional costs and limit our ability to develop, manufacture, sell and support the use of our Eargo systems.

In addition, the long-term impact of the COVID-19 pandemic on the broader economy and related effects on our business remains uncertain. For example, we believe our direct-to-consumer model has benefited from consumers’ pandemic-era reluctance to seek in-person hearing care, and we are unable to predict whether or the extent to which this effect will endure. Moreover, the long-term

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economic impact of the COVID-19 pandemic is difficult to assess or predict, and a recession or market correction resulting from the pandemic or other macro-economic factors could materially affect our business and the value of our common stock. For example, any increases in unemployment or other adverse economic trends could lead to reduced disposable income and access to health insurance, which could adversely affect demand for our products. The ultimate effect of the COVID-19 pandemic on our sales volume and other results of operations could therefore differ substantially from our expectations and our experience to date.

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. On March 27, 2023, SVB was acquired by First Citizens Bank. While we have regained access to our funds at SVB, we opened new and additional accounts with, and transferred a portion of our cash, cash equivalents and investments to, 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. Such arrangements may not adequately address systemic liquidity concerns, however, as uncertainty remains over liquidity concerns in the broader financial services industry, including, for example, in the case of First Republic Bank and Credit Suisse during spring 2023. 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 or consolidation of any 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 of 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, financial condition and results of 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.

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 September 30, 2023, we had provisions of approximately $3.4 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.

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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 or nonconformities, our warranty obligation is affected by actual product defect rates, parts and equipment costs and service labor costs incurred in correcting a product defect or nonconformity. Our warranty reserves may be inadequate due to undetected product defects or nonconformities, unanticipated component failures or changes in estimates for material, labor and other costs we may incur to replace projected product defects or nonconformities. As a result, if actual product defect or nonconformity 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 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” 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 31% and 35% for the three and nine months ended September 30, 2023, respectively. 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” 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 were previously negatively impacted by the inability to recognize revenue related to shipments to customers with potential insurance benefits as a result of the DOJ investigation. Our net revenue and profitability will continue to be negatively impacted by our limited volume from customers in our insurance channels, as such 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, including increasing our product offerings in physical retail settings and through online channels, we have experienced a significantly higher sales returns 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, “As we expand our omni-channel product offerings to various third-party partners, including in such third parties’ 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. In addition, any shift of the marketing and sales of our products to third-party partners will increase our reliance on sales personnel who may be less familiar with our products or may also sell competitive products” and “We operate in a highly competitive industry, and competitive pressures, including those developing

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following the OTC Final Rule, could have a material adverse effect on our business.” 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 and other third-party partnerships, we may not be able to accurately estimate the inventory needs of such channels.

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.

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, and 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 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 or other third-party partner. If we underestimate such return rate or inventory requirements, our retail and other third-party partners may have inadequate inventory for sale to their customers. In addition, delays in the delivery of our products to our retail and 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 harm our relationships with such partners and impact our business and operating results. Moreover, we sell our products to our retail and other third-party partners at prices that are lower than what we would otherwise charge in our direct-to-consumer channel, reducing our associated revenues and 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 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. 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:

•controlling quality of supplies and finished product;

•trade protection measures, tariffs and other duties, especially in light of trade disputes between the United States and several foreign countries, including China and countries in Europe;

•political, social and economic instability (for example, Russia’s invasion of Ukraine in February 2022 and the resultant sanctions and export controls introduced against Russia and recent escalations in geopolitical tension between the People’s Republic of China and Taiwan have created such instability and have and may continue to disrupt business activity both in the immediately affected region and around the world, the full effects of which remain unknown);

•the outbreak of contagious diseases, such as COVID-19;

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•laws and business practices that favor local companies;

•interruptions and limitations in telecommunication services;

•product or material delays or disruption, including logistics challenges such as delays or disruptions in shipping;

•import and export license requirements and restrictions;

•difficulties in the protection of intellectual property;

•inflation and/or deflation;

•the threat of nationalization and expropriation;

•exchange controls, currency restrictions and fluctuations in currency values; and

•potential adverse tax consequences.

If any of these risks were to materialize, it 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 severe earthquakes and wildfires as well as flooding and power outages. We do not carry earthquake insurance. Our manufacturers and many of our suppliers are located in Asia, which regions have experienced natural disasters such as earthquakes, landslides, flooding, tropical storms and tsunamis, and tornadoes. Our customer support operations as well as our third-party provider’s distribution facilities are based in regions of 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. Alternative production capacity may not be available in the future in the event of a major disruption or, if it is available, may not 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.

We 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 limited volume from customers in our insurance channels, which would likely result in a sustained increased cost of customer acquisition and a reduction in

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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 inflationary 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 inflationary pressures, 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 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, or in otherwise establishing relationships with health plans, benefits managers, or managed care providers.”

We rely substantially on our own employees, including our direct sales force, to market and sell our products, and if we are unable to maintain or expand our sales force or other employee base, it could harm our business. Additionally, our reliance on our employees to market and sell our products 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.

As part of our consumer-first model, we rely substantially on our own employees, including our own direct sales force, to market and sell our products and to provide ongoing customer support via our dedicated customer support team. We do not have long-term employment contracts with the majority of our employees, including the members of our direct sales force. Our operating results are directly dependent upon the sales and marketing efforts of our employees, including our sales and customer support team. If our employees fail to adequately promote, market and sell our products, including by providing support and training for our partners, our sales could be negatively impacted. 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. In addition, in June 2023 we announced the 2023 plan, which we expect will impact approximately 32–42% of our workforce, to further reduce our employee workforce in a renewed effort to reduce operating expenses and preserve capital. The employee workforce reductions to our sales and marketing team as a result of the 2023 plan, including impacts to our retail field sales team as discussed below, may negatively impact our ability to market our products as well as our ability to attract, hire, train, retain and motivate skilled employees in the future. Please see the Risk Factor titled, “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.”

Additionally, most of our competitors rely predominantly on third-party distributors. As we expand our product offerings in our omni-channel strategy to various third-party distributors, including in such third parties’ physical retail locations, we expect we will increasingly rely on such third parties’ sales forces. Following the impact of the 2023 plan on substantially all of our retail field sales team , we anticipate a shift in certain retail expenses and reliance to the sales forces of our third-party partners. However, we also anticipate that we will continue to utilize our own employees to provide support and training for our partners and that we will continue to rely substantially on them for the direct marketing and sales of our products for the foreseeable future. Please also see the Risk Factor titled, “As we expand our omni-channel product offerings to various third-party partners, including in such third parties’ 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. In addition, any shift of the marketing and sales of our products to third-party partners will increase our reliance on sales personnel who may be less familiar with our products or may also sell competitive products.” Our reliance on our own employees for sales, marketing, and dedicated customer support may subject us to higher fixed costs than those of our competitors that market their products primarily through independent third parties, due to the costs that we will bear associated with salaries, employee benefits, training and managing sales and customer support 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.

We are subject to “conflict minerals” reporting obligations.

We are required to diligence the origin of minerals used in the manufacture of our products that have been designated “conflict minerals” under the Dodd-Frank Wall Street Reform and Consumer Protection Act and to disclose and report whether or not such minerals originated in the Democratic Republic of the Congo or adjoining countries. These requirements could adversely affect the sourcing,

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availability and pricing of minerals used in the manufacture of our products. In addition, we have incurred additional costs to comply with the disclosure requirements, including costs related to determining the source 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.

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 (“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 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 own at least 5% of a corporation’s stock increases by more than 50 percentage points over the lowest percentage of the corporation’s stock owned by such stockholders within a specified testing period.

We have experienced an ownership change within the meaning of Section 382 of the Code in the past, 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 may be outside our control). While we 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 even if we attain profitability.

Risks relating to intellectual property and legal and regulatory matters

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

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our operations, including our sales and marketing practices, consumer incentive and other promotional programs and other business practices.

Such laws include, without limitation:

•the U.S. federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from knowingly and willfully soliciting, offering, receiving or providing any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service, for which payment may be made, in whole or in part, under U.S. federal and state healthcare programs such as Medicare, state Medicaid programs and TRICARE. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

•the U.S. federal false claims laws, including the civil False Claims Act, which can be enforced through whistleblower actions, and the civil monetary penalties law, which, among other things, impose criminal and civil penalties against individuals or entities for knowingly presenting, or causing to be presented, to the U.S. federal government, claims for payment or approval that are false or fraudulent, knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim, or from knowingly making a false statement to avoid, decrease or conceal an obligation to pay money to the U.S. federal government. In addition, the government may assert that a claim including items and services resulting from a violation of the U.S. federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act;

•Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement, in connection with the delivery of, or payment for, healthcare benefits, items or services. Similar to the U.S. federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge;

•state law equivalents of each of the above federal laws, including state anti-kickback, self-referral and false claims laws that apply more broadly to healthcare items or services paid by all payors, including self-pay patients and private insurers, that govern our interactions with consumers or restrict payments that may be made to healthcare providers;

•the Federal Trade Commission Act and federal and state consumer protection, advertisement and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers;

•the U.S. Physician Payments Sunshine Act and its implementing regulations, which require certain manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid or the Children’s Health Insurance Program to report annually to the government information related to certain payments and other transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain other healthcare providers (physician assistants, nurse practitioners, clinical nurse specialists, anesthesiologist assistants, certified registered nurse anesthetists and certified nurse midwives) and teaching hospitals, as well as ownership and investment interests held by the physicians described above and their immediate family members;

•the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), and similar regulations in other countries, which prohibit, among other things, companies and their employees and agents from authorizing, promising, offering or providing, directly or indirectly, corrupt or improper payments or anything else of value to foreign government officials, employees of public international organizations and foreign government owned or affiliated entities, candidates for foreign political office and foreign political parties or officials thereof and require companies to keep books and records that accurately and fairly reflect the transactions of the company and to maintain an adequate system of internal accounting controls;

•foreign or U.S. analogous state laws and regulations, which may apply to our business practices, including but not limited to, state laws that require manufacturers to comply with the voluntary compliance guidelines and the relevant compliance guidance promulgated by the U.S. federal government; state laws and regulations that require manufacturers to file reports relating to pricing and marketing information or that require tracking gifts and other remuneration and items of value provided to healthcare professionals and entities; and

•similar healthcare laws and regulations in the EU and other jurisdictions in which we may conduct activities in the future, including reporting requirements detailing interactions with and payments to healthcare providers.

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

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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 in the past marketed 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 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 connection with the OTC Final Rule, as of April 14, 2023, the compliance date for marketed devices, we market our devices as OTC hearing aids. 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 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.

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

•inability to demonstrate to the FDA’s satisfaction that the product or modification is substantially equivalent to the proposed predicate device or safe and effective for its intended use, as applicable;

•the data from pre-clinical studies and clinical trials may be insufficient to support clearance or approval, where required; and

•the manufacturing process or facilities do not meet applicable requirements.

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 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 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.”

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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 and during the COVID-19 pandemic, inspections of domestic and foreign manufacturing facilities were postponed at various points.

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

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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.

Any failure by us or our subcontractors to comply with applicable regulations could cause delays in the manufacture and delivery of our products. Manufacturing of our products may also result in defects or nonconformities that require rework prior to distribution to ensure QSR compliance, which could increase our anticipated manufacturing and compliance costs. For example, we expect to incur rework costs of approximately $1.0-1.5 million, primarily in 2023, to be expensed in the quarters in which incurred, to address loss of charging capacity in certain of our hearing aids in inventory as a result of prolonged shelf life. During the nine months ended September 30, 2023, we incurred approximately $0.8 million in rework costs. 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:

•fines, injunctions or civil penalties;

•suspension or withdrawal of future clearances or approvals;

•refusal to clear or approve pending applications;

•seizures or recalls of our products;

•total or partial suspension of production or distribution;

•administrative or judicially imposed sanctions;

•refusal to permit the import or export of our products; and

•criminal prosecution.

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.

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. Many states also have laws that regulate the corporate practice of audiology, including 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. Other state and local laws and regulations 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; additionally, these laws and their interpretations vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion.

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

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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, President Biden issued an Executive Order on July 9, 2021 that 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 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.”

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 September 30, 2023, we had 27 issued U.S. patents, 27 issued patents outside the United States, 7 pending U.S. patent applications and 11 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

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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 (“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

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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.

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

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. For example, the Leahy-Smith America Invents Act (the “Leahy-Smith Act”) included a number of significant changes to U.S. patent law. These include provisions that affected the way patent applications are prosecuted and also affect patent litigation. The USPTO developed 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 (“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

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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.

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; 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.

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.

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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”), personally identifiable information (“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 PHI, and imposes certain obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of 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 PHI, and their covered subcontractors. HIPAA requires covered entities and their business associates to develop and maintain certain policies and procedures with respect to PHI that is used or disclosed. Further, in the event of a breach of unsecured PHI, HIPAA requires covered entities to notify each individual whose 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 PHI 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 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 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 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. Further, the California Privacy Rights Act (the “CPRA”), which 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 also created a new California data protection agency authorized to issue substantive regulations and could result in increased privacy and information security enforcement. The CCPA and CPRA may increase our compliance costs and potential 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 states such as 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 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

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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, 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.

Risks relating to our common stock

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 September 30, 2023, 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, 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

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and management resources. Because we qualify 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 received from the sale of our securities, indebtedness and revenue from the sale 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.

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. In addition, there are limitations that exist that may increase the time and cost required to effect a registration of our securities under the Securities Act. Even if we are able to register the offer and sale of securities on Form S-3, we are limited in the amount we can raise. As a result, our ability to raise capital in public markets in a timely or cost-effective manner may be impaired. In addition, the Merger Agreement restricts us from incurring additional debt or raising capital.

Uncertainty in the 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. 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. For example, as a result of the Rights Offering and conversion of the Notes, our stockholders experienced substantial dilution of their holdings and the PSC Stockholder obtained a controlling interest in us.

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.

We incur significantly increased costs and are subject to additional regulations and requirements as a result of being 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 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 Quarterly Report on Form 10-Q 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 or business 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

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and Results of Operations—DOJ investigation and settlement” 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, including over matters subject to stockholder approval.

As of September 30, 2023, the PSC Stockholder, our principal stockholder and an entity affiliated with Patient Square, held approximately 76.2% of our outstanding voting stock. As a result of this ownership position, Patient Square will be able to significantly influence or effectively control the composition of our board of directors and the approval of all matters requiring stockholder approval. For example, Patient Square will be able to control elections of directors, approve amendments of our organizational documents, and cause or prevent approval of any merger, sale of assets, or other major corporate transaction. In addition, for so long as Patient Square continues to own a significant percentage of our stock, Patient Square will have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers. This concentration of control 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 and might negatively affect the market price of our common stock.

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 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:

•the requirement that a majority of our board of directors consist of independent directors;

•the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

•the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

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. We had a total of 20,762,389 shares of common stock outstanding as of September 30, 2023.

The PSC Stockholder holds approximately 76.2% of our common stock, and maintains rights with respect to the registration of their shares under the Securities Act. On December 16, 2022, we filed a registration statement on Form S-1 (File No. 333-268859) to register for resale up to 15,821,299 shares held by the PSC Stockholder (as amended, the “PSC Resale Registration Statement”), representing the entirety of the PSC Stockholder’s holdings in our common stock as of September 30, 2023. 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. In connection with the Merger Agreement, the PSC Stockholder agreed not to sell or transfer any of its shares of our common stock, subject to certain exceptions; however, this

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transfer restriction will terminate upon the valid termination of the Merger Agreement. Any sales of these securities by the PSC Stockholder 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:

•a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors;

•no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

•the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

•the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror;

•the ability of our board of directors to alter our amended and restated bylaws without obtaining stockholder approval;

•the required approval of at least 662⁄3% of the shares entitled to vote at an election of directors to adopt, amend or repeal our amended and restated bylaws or to repeal certain provisions of our amended and restated certificate of incorporation;

•a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

•the requirement that a special meeting of stockholders may be called only by our board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and

•advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us.

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:

•We will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful.

•We may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law.

•We are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification.

•We will not be obligated pursuant to our amended and restated bylaws to indemnify a person with respect to proceedings initiated by that person against us or our other indemnitees, except with respect to proceedings authorized by our board of directors or brought to enforce a right to indemnification.

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•The rights conferred in our amended and restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons.

•We may not retroactively amend our amended and restated bylaw provisions to reduce our indemnification obligations to directors, officers, employees and agents.

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.

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.

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 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”), 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.

General risk factors

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:

•increased operating expenses and cash requirements;

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•the assumption of additional indebtedness or contingent liabilities;

•assimilation of operations, intellectual property and products of an acquired company, including difficulties associated with integrating new personnel;

•the diversion of our management’s attention from our existing product programs and initiatives in pursuing such a strategic merger or acquisition;

•loss of key personnel, and uncertainties in our ability to maintain key business relationships;

•uncertainties associated with the other party to such a transaction, including the prospects of that party and their existing products or product candidates and regulatory approvals;

•our inability to generate revenue or other anticipated benefits from acquired technology and/or products sufficient to meet our objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs; and

•causing us to become subject to additional laws and regulations.

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. As we continue to expand our omni-channel strategy, our business may be subject to new or different seasonal or other trends affecting the sectors or businesses of our third-party partners, which we may not be able to accurately assess or predict. Additionally, any negative publicity, such as in relation to the DOJ investigation, has harmed 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.

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 effective tax rate may vary significantly from period to period.

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 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

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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.

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, even if we comply with these standards, we may be unable to 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.

Our information technology 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 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 or 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

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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. We 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 breach of our information systems or data, the costs associated with the investigation, remediation and potential notification of the breach to 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.

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.

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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.

Changes in the regulation of the internet could adversely affect our business.

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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Recent Sale of Unregistered Equity Securities

None.

Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits

		Incorporated by reference
Exhibit number	Exhibit description	Form	Dated	Number
2.1	Agreement and Plan of Merger, dated as of October 29, 2023, by and among PSC Echo Parent LLC, PSC Echo Merger Sub Inc. and Eargo, Inc.	8-K	10/30/2023	2.1
2.2	Voting and Support Agreement, dated as of October 29, 2023, by and between Eargo, Inc. and PSC Echo, LP.	8-K	10/30/2023	2.2
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
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†
104	Cover Page Interactive Data File (embedded within the Inline XBRL document)†

† Filed herewith.

‡ Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Eargo, Inc.
Date: November 7, 2023	By:	/s/ William Brownie
		William Brownie
		Interim Chief Executive Officer and Chief Operating Officer
		(Principal Executive Officer)
Date: November 7, 2023	By:	/s/ Adam Laponis
		Adam Laponis
		Chief Financial Officer
		(Principal Financial Officer)

79

EX-31.1

Exhibit 31.1

CERTIFICATION 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

I, William Brownie, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Eargo, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2023	By:	/s/ William Brownie
		William Brownie
		Interim Chief Executive Officer and Chief Operating Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION 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

I, Adam Laponis, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Eargo, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2023	By:	/s/ Adam Laponis
		Adam Laponis
		Chief Financial Officer (Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Eargo, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 7, 2023	By:	/s/ William Brownie
		William Brownie
		Interim Chief Executive Officer and Chief Operating Officer (Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Eargo, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 7, 2023	By:	/s/ Adam Laponis
		Adam Laponis
		Chief Financial Officer (Principal Financial Officer)

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	Sep. 30, 2023	Oct. 30, 2023
Cover [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2023
Document Fiscal Year Focus	2023
Document Fiscal Period Focus	Q3
Entity Registrant Name	Eargo, Inc.
Entity Central Index Key	0001719395
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Common Stock, Shares Outstanding		20,762,389
Title of 12(b) Security	Common Stock, par value $0.0001 per share
Trading Symbol	EAR
Security Exchange Name	NASDAQ
Entity File Number	001-39616
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	27-3879804
Entity Address, Address Line One	2665 North First Street
Entity Address, Address Line Two	Suite 300
Entity Address, City or Town	San Jose
Entity Address, State or Province	CA
Entity Address, Postal Zip Code	95134
City Area Code	650
Local Phone Number	351-7700
Document Quarterly Report	true
Document Transition Report	false

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Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Current assets:
Cash and cash equivalents	$ 46,023	$ 101,238
Accounts receivable, net	1,012	1,910
Inventories	4,386	5,036
Prepaid expenses and other current assets	5,271	7,846
Total current assets	56,692	116,030
Operating lease right-of-use assets	7,327	5,765
Property and equipment, net	4,384	7,441
Intangible assets, net	744	1,063
Goodwill		873
Other assets	606	906
Total assets	69,753	132,078
Current liabilities:
Accounts payable	5,047	6,504
Accrued expenses	6,818	12,715
Sales returns reserve	3,767	3,942
Other current liabilities	1,338	1,462
Lease liability, current portion	624	628
Total current liabilities	17,594	25,251
Lease liability, noncurrent portion	7,030	5,973
Total liabilities	24,624	31,224
Commitments and contingencies (Note 5)
Stockholders' equity:
Common stock; $0.0001 par value; 450,000,000 shares authorized as of September 30, 2023 and December 31, 2022, respectively; 20,762,389 and 20,726,965 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively	2	2
Additional paid-in capital	623,828	615,151
Accumulated deficit	(578,701)	(514,299)
Total stockholders' equity	45,129	100,854
Total liabilities and stockholders' equity	$ 69,753	$ 132,078

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Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares	Sep. 30, 2023	Dec. 31, 2022
Statement Of Financial Position [Abstract]
Preferred stock, par value	$ 0.0001	$ 0.0001
Preferred stock, shares authorized	5,000,000	5,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.0001	$ 0.0001
Common stock, shares authorized	450,000,000	450,000,000
Common stock, shares issued	20,762,389	20,726,965
Common stock, shares outstanding	20,762,389	20,726,965

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Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Income Statement [Abstract]
Revenue, net	$ 8,270	$ 7,908	$ 28,191	$ 24,331
Cost of revenue	3,937	6,007	17,105	16,231
Gross profit	4,333	1,901	11,086	8,100
Operating expenses:
Research and development	4,742	4,963	14,711	14,689
Sales and marketing	9,281	11,282	35,309	37,306
General and administrative	7,385	11,702	26,739	43,980
Impairment charge	873	0	873	0
Total operating expenses	22,281	27,947	77,632	95,975
Loss from operations	(17,948)	(26,046)	(66,546)	(87,875)
Other income (expense), net:
Interest income	620	419	2,144	480
Interest expense				(549)
Change in fair value of convertible notes		(25,000)		(25,000)
Loss on extinguishment of debt				(772)
Total other income (expense), net	620	(24,581)	2,144	(25,841)
Loss before income taxes	(17,328)	(50,627)	(64,402)	(113,716)
Net loss and comprehensive loss	(17,328)	(50,627)	(64,402)	(113,716)
Net loss attributable to common stockholders, basic and diluted	$ (17,328)	$ (50,627)	$ (64,402)	$ (113,716)
Net loss per share attributable to common stockholders, basic	$ (0.83)	$ (25.7)	$ (3.1)	$ (57.78)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic	20,756,123	1,969,856	20,745,534	1,968,074
Net loss per share attributable to common stockholders, diluted	$ (0.83)	$ (25.7)	$ (3.1)	$ (57.78)
Weighted-average shares used in computing net loss per share attributable to common stockholders, diluted	20,756,123	1,969,856	20,745,534	1,968,074

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Condensed Consolidated Statements of Stockholders' Equity (Unaudited) - USD ($) $ in Thousands	Total	Common Stock	Additional Paid-in Capital	Accumulated Deficit
Beginning balance at Dec. 31, 2021	$ 69,164		$ 425,976	$ (356,812)
Beginning balance, Shares at Dec. 31, 2021		1,965,347
Stock-based compensation	3,024		3,024
Exercise of stock options	92		92
Exercise of stock options, Shares		1,871
Restricted stock units cash settlement	(69)		(69)
Net loss and comprehensive loss	(30,645)			(30,645)
Ending balance at Mar. 31, 2022	41,566		429,023	(387,457)
Ending balance, Shares at Mar. 31, 2022		1,967,218
Beginning balance at Dec. 31, 2021	69,164		425,976	(356,812)
Beginning balance, Shares at Dec. 31, 2021		1,965,347
Net loss and comprehensive loss	(113,716)
Ending balance at Sep. 30, 2022	(36,324)		434,204	(470,528)
Ending balance, Shares at Sep. 30, 2022		1,970,544
Beginning balance at Mar. 31, 2022	41,566		429,023	(387,457)
Beginning balance, Shares at Mar. 31, 2022		1,967,218
Stock-based compensation	1,511		1,511
Exercise of stock options and release of restricted stock units	33		33
Exercise of stock options and release of restricted stock units, Shares		2,045
Tax withholdings on settlement of restricted stock units	(22)		(22)
Issuance costs	600		600
Net loss and comprehensive loss	(32,444)			(32,444)
Ending balance at Jun. 30, 2022	11,244		431,145	(419,901)
Ending balance, Shares at Jun. 30, 2022		1,969,263
Stock-based compensation	3,057		3,057
Exercise of stock options and release of restricted stock units			9
Exercise of stock options and release of restricted stock units, Shares		1,281
Tax withholdings on settlement of restricted stock units	(7)		(7)
Net loss and comprehensive loss	(50,627)			(50,627)
Ending balance at Sep. 30, 2022	(36,324)		434,204	(470,528)
Ending balance, Shares at Sep. 30, 2022		1,970,544
Beginning balance at Dec. 31, 2022	100,854	$ 2	615,151	(514,299)
Beginning balance, Shares at Dec. 31, 2022		20,726,965
Stock-based compensation	3,408		3,408
Release of restricted stock units, shares		14,876
Net loss and comprehensive loss	(21,922)			(21,922)
Ending balance at Mar. 31, 2023	82,340	$ 2	618,559	(536,221)
Ending balance, Shares at Mar. 31, 2023		20,741,841
Beginning balance at Dec. 31, 2022	100,854	$ 2	615,151	(514,299)
Beginning balance, Shares at Dec. 31, 2022		20,726,965
Net loss and comprehensive loss	(64,402)
Ending balance at Sep. 30, 2023	45,129	$ 2	623,828	(578,701)
Ending balance, Shares at Sep. 30, 2023		20,762,389
Beginning balance at Mar. 31, 2023	82,340	$ 2	618,559	(536,221)
Beginning balance, Shares at Mar. 31, 2023		20,741,841
Stock-based compensation	2,629		2,629
Release of restricted stock units, shares		7,738
Net loss and comprehensive loss	(25,152)			(25,152)
Ending balance at Jun. 30, 2023	59,817	$ 2	621,188	(561,373)
Ending balance, Shares at Jun. 30, 2023		20,749,579
Stock-based compensation	2,640		2,640
Release of restricted stock units, shares		12,810
Net loss and comprehensive loss	(17,328)			(17,328)
Ending balance at Sep. 30, 2023	$ 45,129	$ 2	$ 623,828	$ (578,701)
Ending balance, Shares at Sep. 30, 2023		20,762,389

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Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022
Operating activities:
Net loss	$ (64,402)	$ (113,716)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	3,477	4,023
Stock-based compensation	8,677	7,592
Non-cash interest expense and amortization of debt discount		209
Debt issuance costs from convertible notes		5,662
Change in fair value of convertible notes		25,000
Loss on extinguishment of debt		772
Non-cash operating lease expense	734	828
Bad debt expense	409	524
Impairment charge	1,702	0
Changes in operating assets and liabilities:
Accounts receivable	489	10,867
Inventories	650	759
Prepaid expenses and other current assets	2,323	6,869
Other assets	(1,292)	999
Accounts payable	(1,152)	(2,366)
Accrued expenses	(5,897)	1,986
Sales returns reserve	(175)	(12,037)
Settlement liability		(34,372)
Other current and noncurrent liabilities	(124)	89
Operating lease liabilities	(346)	(550)
Net cash used in operating activities	(54,927)	(96,862)
Investing activities:
Purchases of property and equipment	(217)	(2,531)
Capitalized software development costs	(71)	(296)
Net cash used in investing activities	(288)	(2,827)
Financing activities:
Proceeds from stock options exercised		134
Debt repayments		(16,238)
Proceeds from issuance of convertible notes, net of issuance costs paid to lender		99,903
Payment of convertible notes issuance costs to third parties		(5,565)
Payment of deferred transaction costs		(872)
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		77,264
Net decrease in cash and cash equivalents	(55,215)	(22,425)
Cash and cash equivalents at beginning of period	101,238	110,500
Cash and cash equivalents at end of period	46,023	88,075
Non-cash operating activities:
Lease liability obtained in exchange for right-of-use asset	1,399
Non-cash investing and financing activities:
Property and equipment and capitalized software costs in accounts payable and accrued liabilities	$ 642	229
Deferred transaction costs included in accounts payable		$ 182

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Description of Business and Other Matters

9 Months Ended

Sep. 30, 2023

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Description of Business and Other Matters

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 Company’s innovative product and go-to-market approach address the major challenges of traditional hearing aid adoption, including social stigma, accessibility and cost.

Reverse stock split

In January 2023, the Company effected a reverse split of shares of the Company’s common stock on a 1-for-20 basis (the “Reverse Stock Split”). The Company’s common stock began trading on a post-split basis on January 18, 2023. The number of authorized shares of the common stock was not adjusted as a result of the Reverse Stock Split. All share and per share data in these unaudited condensed 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.

DOJ investigation and settlement

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, conducted an audit of insurance claims for reimbursement (“claims”) submitted by the Company, which included a review of medical records. 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 5, 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.

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 unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 September 30, 2023, the Company had cash and cash equivalents of $46.0 million and an accumulated deficit of $578.7 million.

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 by 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 or long-term impacts of the implementation of an over-the-counter (“OTC”) hearing aid

regulatory framework (which may, for example, lead insurance providers to take actions limiting the Company’s ability to access insurance coverage or have other long-term impacts on the Company’s omni-channel business that are not yet known).

The Company believes that, without an alternative future financing, its current resources are insufficient to satisfy its obligations as they become due within one year after the date that these unaudited condensed consolidated financial statements are issued. The negative cash flows and current lack of financial resources of the 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 unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainty.

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2023

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

2. Summary of significant accounting policies

Basis of presentation and principles of consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting of Eargo, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

These unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, include all adjustments of a normal recurring nature necessary to present fairly, in all material respects, the Company’s consolidated financial position, results of operations and cash flows. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 23, 2023.

Use of estimates

The preparation of condensed 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 unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made in the accompanying unaudited condensed consolidated financial statements include, but are not limited to, the sales returns reserve, the present value of lease liabilities, the fair value of equity securities, the fair value of financial instruments, the allowance for 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, impairment 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. 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.

Significant accounting policies

There have been no significant changes to the accounting policies during the nine months ended September 30, 2023, as compared to the significant accounting policies described in Note 2 of the Notes to Consolidated Financial Statements in the Company’s audited consolidated financial statements included in the Annual Report on Form 10-K.

Revenue recognition

The Company’s revenue is generated from the sale of products, including hearing aid systems and related accessories. 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 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. 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 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., “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 amounts to be contractually billed to the customer while variable consideration 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 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 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” 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. 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, provided all other revenue recognition criteria have been met. The Company does not have material contract liabilities related to unsatisfied performance obligations as of September 30, 2023.

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 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.

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 September 30, 2023, the Company has not experienced any losses on its deposit accounts and money market accounts. As of September 30, 2023, the Company does not believe there is significant financial risk from nonperformance by the issuers of the Company’s deposit accounts and money market accounts.

Approximately 36% of the Company's gross accounts receivable as of September 30, 2023 was from one of the Company's retail partners. There was no credit risk concentration in the Company's accounts receivable as of December 31, 2022. There was no concentration of net revenue during the three months ended September 30, 2023. During the nine months ended September 30, 2023,

the Company derived approximately 11% of net revenue from sales to its retail partners. There was no concentration of revenue during the three and nine months ended September 30, 2022.

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Fair Value Measurements

9 Months Ended

Sep. 30, 2023

Fair Value Disclosures [Abstract]

Fair Value Measurements

3. Fair value measurements

There were no financial assets and liabilities outstanding that were remeasured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022. The carrying amounts reflected in the condensed 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.

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Balance Sheet Components

9 Months Ended

Sep. 30, 2023

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Balance Sheet Components

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:

	September 30,		December 31,
	2023		2022
	(in thousands)
Raw materials	$	209	$	410
Finished goods		4,177		4,626
Total inventories	$	4,386	$	5,036

Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

	September 30,		December 31,
	2023		2022
	(in thousands)
Insurance costs	$	774	$	78
Advances to suppliers		1,183		2,000
Software subscriptions		1,086		1,553
Marketing costs		906		1,709
Product launch fee		582		252
Other		740		568
Advanced payroll deposits		—		1,686
Total prepaid expenses and other current assets	$	5,271	$	7,846

Property and equipment, net

Property and equipment, net, consists of the following:

	September 30,			December 31,
	2023			2022
	(in thousands)
Capitalized software	$	10,821		$	11,579
Tools and lab equipment		5,775			5,087
Furniture and fixtures		2,437			2,440
Leasehold improvements		903			993
Computer and equipment		527			482
		20,463			20,581
Less accumulated depreciation and amortization		(16,079	)		(13,140	)
Total property and equipment, net	$	4,384		$	7,441

Depreciation and amortization expense for the three months ended September 30, 2023 and 2022 amounted to $0.9 million and $1.2 million, respectively, which includes amortization of capitalized software costs of $0.5 million and $0.9 million, respectively.

Depreciation and amortization expense for the nine months ended September 30, 2023 and 2022 amounted to $3.2 million and $3.6 million, respectively, which includes amortization of capitalized software costs of $2.1 million and $2.7 million, respectively.

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. Factors the Company considers important that could trigger an impairment review include underperformance relative to historical or projected future operating results, a significant change in the

manner of the use of the asset, or macroeconomic factors. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method. Certain factors, such as estimated revenues and expenses, used for this nonrecurring fair value measurement are considered Level 3 inputs. As a result of the impairment assessment during the three months ended June 30, 2023, the Company recognized an impairment charge of $0.8 million related to its internally developed software, which was included in cost of revenue in the condensed consolidated statements of operations and comprehensive loss. There were no impairment charges during the three and nine months ended September 30, 2022.

Goodwill

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 concluded that a triggering event occurred as of September 30, 2023, and as a result of the goodwill impairment assessment during the three months ended September 30, 2023, the Company recognized an impairment charge of $0.9 million for the entire carrying value of goodwill, which is included in total operating expenses in the condensed consolidated statements of operations and comprehensive loss for the three months and nine months ended September 30, 2023. There were no impairment charges related to goodwill during the three and nine months ended September 30, 2022.

Intangible assets, net

Intangible assets, net consist of the following:

	September 30, 2023
	Gross carrying value		Accumulated amortization		Net carrying value
	(in thousands)
Developed technologies	$	1,700	$	956	$	744
Other		290		290		—
Total intangible assets, net	$	1,990	$	1,246	$	744

	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 $0.1 million and $0.3 million for the three and nine months ended September 30, 2023, respectively. Amortization expense was $0.2 million and $0.5 million for the three and nine months ended September 30, 2022, respectively.

The following table summarizes the estimated future amortization expense of finite-lived intangible assets, net as of September 30, 2023:

	Amount
	(in thousands)
Remainder of 2023	$	106
2024		425
2025		213
Total	$	744

Accrued expenses

Accrued expenses consist of the following:

	September 30,		December 31,
	2023		2022
	(in thousands)
Accrued compensation	$	3,024	$	7,892
Accrued warranty reserve		3,390		3,765
Accrued severance		115		178
Refunds due to customers		239		580
Other accrued expenses		50		300
Total accrued expenses	$	6,818	$	12,715

Sales returns reserve

The sales returns reserve consists of the following activity:

	Nine months ended September 30,
	2023			2022
	(in thousands)
Sales returns reserve, beginning balance	$	3,942		$	13,827
Reduction of revenue		14,160			11,637
Decrease related to Pricing Concession		—			(11,263	)
Utilization of sales returns reserve		(14,335	)		(12,411	)
Sales returns reserve, ending balance	$	3,767		$	1,790

In September 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” in Note 1.

Allowance for credit losses

The allowance for credit losses consists of the following activity:

	Nine months ended September 30,
	2023			2022
	(in thousands)
Allowance for credit losses, beginning balance	$	158		$	4,838
Charged to expense		409			524
Accounts written off, net of recoveries		(429	)		(5,267	)
Allowance for credit losses, ending balance	$	138		$	95

Accrued warranty reserve

The accrued warranty reserve consists of the following activity:

	Nine months ended September 30,
	2023			2022
	(in thousands)
Accrued warranty reserve, beginning balance	$	3,765		$	4,014
Charged to cost of revenue		1,769			1,632
Utilization of accrued warranty reserve		(2,144	)		(2,130	)
Accrued warranty reserve, ending balance	$	3,390		$	3,516

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2023

Commitments And Contingencies Disclosure [Abstract]

Commitments and Contingencies

5. Commitments and contingencies

Operating leases

Nashville office space lease

In January 2023, the Company entered into a lease agreement for approximately 17,572 sq. ft. of office space in Nashville, Tennessee. The tenant improvements of $0.9 million were funded by the Company and considered to be lessor-owned for accounting purposes. As such, the tenant improvement funding was recorded as part of the right-of-use asset. The Company recorded a right-of-use asset of $2.3 million and the corresponding lease liability of $1.4 million as of the commencement date in March 2023.

The initial term of the lease is 76 months with the option to extend the lease term once for additional 5 years. The Company has elected to apply the tenant improvement allowance of $0.9 million against the lease payments, and this amount was excluded from the operating lease liability. The right-of-use asset and corresponding lease liability for the Nashville lease were estimated using an incremental borrowing rate of 11.2%.

Operating lease costs and minimum lease payments

For the three and nine months ended September 30, 2023, the Company incurred $0.4 million and $1.2 million of operating lease costs, respectively. Variable lease payments for operating expenses and costs related to short-term leases were immaterial for the three and nine months ended September 30, 2023.

As of September 30, 2023, undiscounted future minimum lease payments due under the non-cancelable operating leases are as follows:

	Amount
	(in thousands)
Remainder of 2023	$	318
2024		1,081
2025		1,635
2026		1,886
2027		1,945
Thereafter		3,066
Total minimum future lease payments		9,931
Present value adjustment for minimum lease commitments		(2,277	)
Total lease liability	$	7,654

Legal and other contingencies

The Company is involved in legal proceedings in the ordinary course of its 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 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 any particular claim.

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 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 and defendants filed a second motion to dismiss on April 21, 2023. On May 26, 2023, plaintiffs filed an opposition to defendants’ motion, and on June 23, 2023, defendants filed their reply brief in support of their motion to dismiss. The Court granted the defendants’ motion to dismiss on August 31, 2023 and entered its final judgment on October 12, 2023. Plaintiffs have until November 13, 2023 to file a notice of appeal.

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 Action until 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.

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Stock-based Compensation

9 Months Ended

Sep. 30, 2023

Share-Based Payment Arrangement [Abstract]

Stock-based Compensation

6. Stock-based compensation

Total stock-based compensation is as follows:

	Three months ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)				(in thousands)
Cost of revenue	$	49	$	35	$	139	$	94
Research and development		708		707		2,075		1,142
Sales and marketing		587		642		2,552		1,975
General and administrative		1,296		1,673		3,911		4,381
Total stock-based compensation	$	2,640	$	3,057	$	8,677	$	7,592

Equity incentive plans

As of September 30, 2023, 195,424 shares of common stock were issuable upon the exercise of outstanding awards under the 2010 Equity Incentive Plan. As of September 30, 2023, the Company had reserved 3,953,431 shares of common stock for issuance under the 2020 Equity Incentive Plan (the “2020 Plan”), of which 1,371,079 were available for issuance in connection with grants of future awards.

2023 stock option modification

On August 15, 2023, the Board of Directors approved the repricing and, as applicable vesting modification (“modification” or “repricing”) related to 1,465,922 outstanding stock option awards issued under the 2020 Plan. This resulted in the modification of

743,675 service-based option awards and 722,247 market-based option awards. The new exercise price of 3.305 for the repriced equity awards is equal to the Company’s share price at the close of market on August 15, 2023.

The vesting schedules for the majority of the repriced service-based stock options were modified to vest under a new requisite period of two years, with vesting occurring quarterly beginning on November 15, 2023. The market-based option awards continue to maintain their original market requirements but were modified to include an additional service-based vesting alternative.

The incremental stock-based compensation associated with the repricing is $1.6 million. During the three and nine months ended September 30, 2023, the Company recognized $0.3 million of incremental stock-based compensation associated with the repricing.

Service-based stock options

Service-based stock option activity for the nine months ended September 30, 2023 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, 2022		309,315		$	82.08		5.60	$	—
Grants		2,166,755			7.99
Cancelled or forfeited		(548,991	)		25.79
Balance September 30, 2023		1,927,079		$	10.41		8.83	$	—
Vested and exercisable at September 30, 2023		231,612		$	57.02		3.71	$	—

The weighted-average grant-date fair value of service-based stock options granted during the nine months ended September 30, 2023 was $5.55 per share. As of September 30, 2023, the unrecognized stock-based compensation related to outstanding unvested service-based stock options was $9.4 million, which the Company expects to recognize over a remaining weighted-average period of approximately 1.8 years.

The following assumptions were used to estimate the grant date fair value of the service-based options, including the repriced service based option awards, granted during the nine months ended September 30, 2023:

Black-Scholes model assumptions:
Expected volatility	72.8% - 77.0%
Expected term, years	5.6 - 6.5
Risk-free interest rate	3.39% - 4.35%
Dividend yield	—

Market-based stock options

During the nine months ended September 30, 2023, the Company granted options to purchase an aggregate of 1,224,370 shares of common stock that include a market condition (the “market-based option awards”). As of August 15, 2023 the modified market-based option awards include (i) the addition of a new two year service-based vesting period requirement with the first quarterly vesting period occurring on November 15, 2023, or (ii) vesting acceleration upon the achievement of the original market requirements established in February 2023, whichever vesting date is earlier. The market-based option awards vesting is subject to continued service through the applicable vesting date. During the nine months ended September 30, 2023, 502,123 shares were forfeited due to the termination of the grantees' service.

The following assumptions were used to estimate the grant date fair value of the market-based option awards, including the repriced market-based option awards, granted during the nine months ended September 30, 2023.

Market-based awards assumptions:
Expected volatility	75.5% - 77.0%
Cost of equity	25.0%
Risk-free interest rate	3.39% - 4.31%
Dividend yield	—
Expected term, years	5.30 - 5.35

The weighted-average grant-date fair value of the market-based option awards granted during the nine months ended September 30, 2023 was $6.36 per share. As of September 30, 2023, the unrecognized stock-based compensation related to market-based options was $3.6 million, which the Company expects to recognize over a remaining weighted-average period of approximately 1.9 years.

Restricted stock units

Restricted stock units ("RSUs") granted under the 2020 Plan represent share-based 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 satisfaction of the vesting restrictions.

RSU activity for the nine months ended September 30, 2023 is set forth below:

	Number of shares			Weighted average grant date fair value per share
Balance December 31, 2022		176,063		$	101.76
RSUs vested		(35,424	)		137.95
RSUs forfeited		(58,755	)		82.42
Balance September 30, 2023		81,884		$	99.96

As of September 30, 2023, total unrecognized stock-based compensation related to unvested RSUs was $7.6 million, which the Company expects to recognize over a remaining weighted-average period of approximately 2.7 years.

Employee stock purchase plan

As of September 30, 2023, the Company reserved 282,384 shares of common stock for issuance under the 2020 Employee Stock Purchase Plan (the “ESPP”), of which 273,738 were available for future issuance. The ESPP was suspended on November 9, 2021, and there were no offering periods in effect through September 30, 2023.

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Net Loss Per Share Attributable To Common Stockholders

9 Months Ended

Sep. 30, 2023

Earnings Per Share [Abstract]

Net Loss Per Share Attributable To Common Stockholders

7. 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:

	Three months ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Service-based options issued and outstanding		1,927,079		273,256		1,927,079		273,256
Market-based options issued and outstanding		722,247	—			722,247	—
Restricted stock units		81,884		167,936		81,884		167,936
Convertible notes	—			18,750,000	—			18,750,000
Total		2,731,210		19,191,192		2,731,210		19,191,192

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Cost Reduction Activities

9 Months Ended

Sep. 30, 2023

Restructuring and Related Activities [Abstract]

Cost Reduction Activities

8. Cost reduction activities

On June 23, 2023, the Company’s Board of Directors approved a cost reduction plan intended to optimize the Company's cost structure and operating model (the “2023 plan”), which the Company currently expects will be substantially implemented through the end of fiscal 2023. The 2023 plan is expected to impact approximately 90 to 120 employees, or approximately 32% to 42% of the Company's workforce. The Company currently estimates that it will incur one-time charges of approximately $3.5 million to $5.0 million in connection with the 2023 plan, primarily expected to consist of employee severance costs and related benefits. The Company may ultimately incur charges that are higher or lower than this range as it finalizes and implements the 2023 plan and the related accounting treatment.

During the three and nine months ended September 30, 2023, the Company recorded workforce reduction costs in relation to the 2023 plan of approximately $1.0 million and $2.6 million, respectively, for severance costs and related benefits, which are included in the condensed consolidated statements of operations and comprehensive loss in general and administrative expenses. Approximately $2.5 million of the severance payments in connection with the 2023 plan were made as of September 30, 2023.

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Subsequent Events

9 Months Ended

Sep. 30, 2023

Subsequent Events [Abstract]

Subsequent Events

9. Subsequent events

Merger

On October 29, 2023, the Company, PSC Echo Parent LLC (“Parent”) and PSC Echo Merger Sub Inc. (“Merger Sub”), a subsidiary of Parent, entered into a merger agreement (the “Merger Agreement”), pursuant to which Merger Sub will merge with and into the Company, with the Company as the surviving corporation (the “Merger”). Parent and Merger Sub are affiliates of PSC Echo, LP, an affiliate of Patient Square Capital, LP and the holder of a majority of the outstanding capital stock of the Company.

Under the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of the Company’s common stock issued and outstanding immediately prior to the Effective Time, other than certain excluded shares pursuant to the terms of the Merger Agreement, shall be cancelled and extinguished and automatically converted into and shall thereafter represent the right to receive an amount in cash equal to $2.55 per share of common stock, payable to the holder thereof, without interest and subject to any applicable tax withholding. After the Merger, the Company’s common stock will no longer be traded on the Nasdaq.

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2023

Accounting Policies [Abstract]

Basis of Presentation and Principles of Consolidation

Basis of presentation and principles of consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting of Eargo, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

These unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, include all adjustments of a normal recurring nature necessary to present fairly, in all material respects, the Company’s consolidated financial position, results of operations and cash flows. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 23, 2023.

Use of Estimates

Use of estimates

The preparation of condensed 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 unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made in the accompanying unaudited condensed consolidated financial statements include, but are not limited to, the sales returns reserve, the present value of lease liabilities, the fair value of equity securities, the fair value of financial instruments, the allowance for 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, impairment 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. 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.

Revenue Recognition

Revenue recognition

The Company’s revenue is generated from the sale of products, including hearing aid systems and related accessories. 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 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. 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 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., “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 amounts to be contractually billed to the customer while variable consideration 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 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 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” 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. 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, provided all other revenue recognition criteria have been met. The Company does not have material contract liabilities related to unsatisfied performance obligations as of September 30, 2023.

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 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.

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 September 30, 2023, the Company has not experienced any losses on its deposit accounts and money market accounts. As of September 30, 2023, the Company does not believe there is significant financial risk from nonperformance by the issuers of the Company’s deposit accounts and money market accounts.

Approximately 36% of the Company's gross accounts receivable as of September 30, 2023 was from one of the Company's retail partners. There was no credit risk concentration in the Company's accounts receivable as of December 31, 2022. There was no concentration of net revenue during the three months ended September 30, 2023. During the nine months ended September 30, 2023,

the Company derived approximately 11% of net revenue from sales to its retail partners. There was no concentration of revenue during the three and nine months ended September 30, 2022.

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Balance Sheet Components (Tables)

9 Months Ended

Sep. 30, 2023

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Summary of 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:

	September 30,		December 31,
	2023		2022
	(in thousands)
Raw materials	$	209	$	410
Finished goods		4,177		4,626
Total inventories	$	4,386	$	5,036

Summary of Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

	September 30,		December 31,
	2023		2022
	(in thousands)
Insurance costs	$	774	$	78
Advances to suppliers		1,183		2,000
Software subscriptions		1,086		1,553
Marketing costs		906		1,709
Product launch fee		582		252
Other		740		568
Advanced payroll deposits		—		1,686
Total prepaid expenses and other current assets	$	5,271	$	7,846

Summary of Property And Equipment, Net

Property and equipment, net, consists of the following:

	September 30,			December 31,
	2023			2022
	(in thousands)
Capitalized software	$	10,821		$	11,579
Tools and lab equipment		5,775			5,087
Furniture and fixtures		2,437			2,440
Leasehold improvements		903			993
Computer and equipment		527			482
		20,463			20,581
Less accumulated depreciation and amortization		(16,079	)		(13,140	)
Total property and equipment, net	$	4,384		$	7,441

Summary of Intangible Assets, Net

Intangible assets, net consist of the following:

	September 30, 2023
	Gross carrying value		Accumulated amortization		Net carrying value
	(in thousands)
Developed technologies	$	1,700	$	956	$	744
Other		290		290		—
Total intangible assets, net	$	1,990	$	1,246	$	744

	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

Summary of Estimated Future Amortization Expense of Finite-lived Intangible Assets, Net

The following table summarizes the estimated future amortization expense of finite-lived intangible assets, net as of September 30, 2023:

	Amount
	(in thousands)
Remainder of 2023	$	106
2024		425
2025		213
Total	$	744

Summary of Accrued Expenses

Accrued expenses consist of the following:

	September 30,		December 31,
	2023		2022
	(in thousands)
Accrued compensation	$	3,024	$	7,892
Accrued warranty reserve		3,390		3,765
Accrued severance		115		178
Refunds due to customers		239		580
Other accrued expenses		50		300
Total accrued expenses	$	6,818	$	12,715

Summary of Sales Returns Reserve

The sales returns reserve consists of the following activity:

	Nine months ended September 30,
	2023			2022
	(in thousands)
Sales returns reserve, beginning balance	$	3,942		$	13,827
Reduction of revenue		14,160			11,637
Decrease related to Pricing Concession		—			(11,263	)
Utilization of sales returns reserve		(14,335	)		(12,411	)
Sales returns reserve, ending balance	$	3,767		$	1,790

In September 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” in Note 1.

Summary of Allowance for Credit Losses

The allowance for credit losses consists of the following activity:

	Nine months ended September 30,
	2023			2022
	(in thousands)
Allowance for credit losses, beginning balance	$	158		$	4,838
Charged to expense		409			524
Accounts written off, net of recoveries		(429	)		(5,267	)
Allowance for credit losses, ending balance	$	138		$	95

Summary of Accrued Warranty Reserve

The accrued warranty reserve consists of the following activity:

	Nine months ended September 30,
	2023			2022
	(in thousands)
Accrued warranty reserve, beginning balance	$	3,765		$	4,014
Charged to cost of revenue		1,769			1,632
Utilization of accrued warranty reserve		(2,144	)		(2,130	)
Accrued warranty reserve, ending balance	$	3,390		$	3,516

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Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2023

Commitments And Contingencies Disclosure [Abstract]

Schedule of Undiscounted Future Minimum Lease Payments Due under Non-cancelable Operating Leases

As of September 30, 2023, undiscounted future minimum lease payments due under the non-cancelable operating leases are as follows:

	Amount
	(in thousands)
Remainder of 2023	$	318
2024		1,081
2025		1,635
2026		1,886
2027		1,945
Thereafter		3,066
Total minimum future lease payments		9,931
Present value adjustment for minimum lease commitments		(2,277	)
Total lease liability	$	7,654

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Stock-based Compensation (Tables)

9 Months Ended

Sep. 30, 2023

Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items]

Summary of Total Stock-based Compensation

Total stock-based compensation is as follows:

	Three months ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)				(in thousands)
Cost of revenue	$	49	$	35	$	139	$	94
Research and development		708		707		2,075		1,142
Sales and marketing		587		642		2,552		1,975
General and administrative		1,296		1,673		3,911		4,381
Total stock-based compensation	$	2,640	$	3,057	$	8,677	$	7,592

Summary of Service-Based Stock Option Activity

Service-based stock option activity for the nine months ended September 30, 2023 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, 2022		309,315		$	82.08		5.60	$	—
Grants		2,166,755			7.99
Cancelled or forfeited		(548,991	)		25.79
Balance September 30, 2023		1,927,079		$	10.41		8.83	$	—
Vested and exercisable at September 30, 2023		231,612		$	57.02		3.71	$	—

Schedule of RSU Activity

RSU activity for the nine months ended September 30, 2023 is set forth below:

	Number of shares			Weighted average grant date fair value per share
Balance December 31, 2022		176,063		$	101.76
RSUs vested		(35,424	)		137.95
RSUs forfeited		(58,755	)		82.42
Balance September 30, 2023		81,884		$	99.96

Service-Based Stock Options

Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items]

Assumptions used in Estimating Grant-Date Fair Value of Stock-based Awards

The following assumptions were used to estimate the grant date fair value of the service-based options, including the repriced service based option awards, granted during the nine months ended September 30, 2023:

Black-Scholes model assumptions:
Expected volatility	72.8% - 77.0%
Expected term, years	5.6 - 6.5
Risk-free interest rate	3.39% - 4.35%
Dividend yield	—

Market-Based Stock Options

Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items]

Assumptions used in Estimating Grant-Date Fair Value of Stock-based Awards

The following assumptions were used to estimate the grant date fair value of the market-based option awards, including the repriced market-based option awards, granted during the nine months ended September 30, 2023.

Market-based awards assumptions:
Expected volatility	75.5% - 77.0%
Cost of equity	25.0%
Risk-free interest rate	3.39% - 4.31%
Dividend yield	—
Expected term, years	5.30 - 5.35

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Net Loss Per Share Attributable To Common Stockholders (Tables)

9 Months Ended

Sep. 30, 2023

Earnings Per Share [Abstract]

Summary of Outstanding Potentially Dilutive Common Stock Equivalents Excluded from Calculation of Diluted Net Loss Per Share

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:

	Three months ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Service-based options issued and outstanding		1,927,079		273,256		1,927,079		273,256
Market-based options issued and outstanding		722,247	—			722,247	—
Restricted stock units		81,884		167,936		81,884		167,936
Convertible notes	—			18,750,000	—			18,750,000
Total		2,731,210		19,191,192		2,731,210		19,191,192

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Description of Business - Additional Information (Details) $ / shares in Units, $ in Thousands	1 Months Ended			9 Months Ended	12 Months Ended
	Jan. 31, 2023	Sep. 30, 2022 USD ($)	Apr. 29, 2022 USD ($)	Sep. 30, 2022 USD ($)	Dec. 31, 2022 USD ($) $ / shares	Sep. 30, 2023 USD ($) $ / shares	Jan. 01, 2023 $ / shares	Dec. 31, 2021 USD ($)	Sep. 21, 2021 USD ($)
Description Of Business [Line Items]
Reverse stock split description	1-for-20 basis
Reverse stock split ratio	20
Common stock, par value | $ / shares					$ 0.0001	$ 0.0001	$ 0.0001
Insurance claims received under FEHB program									$ 44,000
Unsubmitted and unpaid claims		$ 16,100
Reduction in insurance related accounts receivable					$ 16,100
Reduction in insurance related revenue from contracts with customer					11,600
Reduction In Insurance Related Allowance For Doubtful Accounts Receivable					4,500
Reduction in revenue related to unpaid claims		$ 11,300		$ 11,263	11,300
Increase in insurance related revenue from contracts with customer					11,300
Reduction in net revenue					300
Cash and cash equivalents					101,238	$ 46,023
Accumulated deficit					$ 514,299	$ 578,701
Civil Settlement Agreement
Description Of Business [Line Items]
Settlement liability								$ 34,400
Civil Settlement Agreement | U.S. Government
Description Of Business [Line Items]
Settlement Liability			$ 34,400

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Summary of Significant Accounting Policies - Additional Information (Details) - Credit Concentration Risk - Retail Partner	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022	Dec. 31, 2022
Accounts Receivable
Summary Of Significant Accounting Policies [Line Items]
Concentration risk, percentage			36.00%		0.00%
Net Revenue
Summary Of Significant Accounting Policies [Line Items]
Concentration risk, percentage	0.00%	0.00%	11.00%	0.00%

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Fair Value Measurements - Additional Information (Details) - USD ($)	Sep. 30, 2023	Dec. 31, 2022
Fair Value Disclosures [Abstract]
Financial assets outstanding	$ 0	$ 0
Financial liabilities outstanding	$ 0	$ 0

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Balance Sheet Components - Summary of Inventories (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Inventory Disclosure [Abstract]
Raw materials	$ 209	$ 410
Finished goods	4,177	4,626
Total inventories	$ 4,386	$ 5,036

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Balance Sheet Components - Summary of Prepaid Expenses and Other Current Assets (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Statement Of Financial Position [Abstract]
Insurance costs	$ 774	$ 78
Advance to suppliers	1,183	2,000
Software subscriptions	1,086	1,553
Marketing costs	906	1,709
Product launch fee	582	252
Other	740	568
Advanced payroll deposits	0	1,686
Total prepaid expenses and other current assets	$ 5,271	$ 7,846

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Balance Sheet Components - Summary of Property And Equipment, Net (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Property Plant And Equipment [Line Items]
Total property and equipment, gross	$ 20,463	$ 20,581
Less accumulated depreciation and amortization	(16,079)	(13,140)
Total property and equipment, net	4,384	7,441
Capitalized Software
Property Plant And Equipment [Line Items]
Total property and equipment, gross	10,821	11,579
Tools and Lab Equipment
Property Plant And Equipment [Line Items]
Total property and equipment, gross	5,775	5,087
Furniture and Fixtures
Property Plant And Equipment [Line Items]
Total property and equipment, gross	2,437	2,440
Leasehold Improvements
Property Plant And Equipment [Line Items]
Total property and equipment, gross	903	993
Computer and Equipment
Property Plant And Equipment [Line Items]
Total property and equipment, gross	$ 527	$ 482

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Balance Sheet Components - Additional Information (Details) - USD ($) $ in Thousands	1 Months Ended	3 Months Ended			9 Months Ended		12 Months Ended
	Sep. 30, 2022	Sep. 30, 2023	Jun. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022	Dec. 31, 2022
Property Plant And Equipment [Abstract]
Depreciation and amortization expense		$ 900		$ 1,200	$ 3,200	$ 3,600
Amortization of capitalized software costs		500		900	2,100	2,700
Impairment charge			$ 800	0	1,702	0
Goodwill impairment		873		0	873	0
Amortization expense		$ 100		$ 200	$ 300	500
Reduction in revenue related to unpaid claims	$ 11,300					$ 11,263	$ 11,300

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Balance Sheet Components - Summary of Intangible Assets, Net (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Finite Lived Intangible Assets [Line Items]
Gross carrying value	$ 1,990	$ 1,990
Accumulated amortization	1,246	927
Net carrying value	744	1,063
Developed Technologies
Finite Lived Intangible Assets [Line Items]
Gross carrying value	1,700	1,700
Accumulated amortization	956	637
Net carrying value	744	1,063
Other
Finite Lived Intangible Assets [Line Items]
Gross carrying value	290	290
Accumulated amortization	$ 290	$ 290

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Balance Sheet Components - Summary of Estimated Future Amortization Expense of Finite-lived Intangible Assets, Net (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Goodwill And Intangible Assets Disclosure [Abstract]
Remainder of 2023	$ 106
2024	425
2025	213
Net carrying value	$ 744	$ 1,063

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Balance Sheet Components - Summary of Accrued Expenses (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Accrued compensation	$ 3,024	$ 7,892
Accrued warranty reserve	3,390	3,765
Accrued severance	115	178
Refunds due to customers	239	580
Other accrued expenses	50	300
Total accrued expenses	$ 6,818	$ 12,715

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Balance Sheet Components - Summary of Sales Returns Reserve (Details) - USD ($) $ in Thousands	1 Months Ended	9 Months Ended		12 Months Ended
	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022	Dec. 31, 2022
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Sales returns reserve, beginning balance		$ 3,942	$ 13,827	$ 13,827
Reduction of revenue		14,160	11,637
Decrease related to Pricing Concession	$ (11,300)		(11,263)	(11,300)
Utilization of sales returns reserve		(14,335)	(12,411)
Sales returns reserve, ending balance	$ 1,790	$ 3,767	$ 1,790	$ 3,942

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Balance Sheet Components - Summary of Allowance for Credit Losses (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022
Receivables [Abstract]
Allowance for credit losses, beginning balance	$ 158	$ 4,838
Charged to expense	409	524
Accounts written off, net of recoveries	(429)	(5,267)
Allowance for credit losses, ending balance	$ 138	$ 95

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Balance Sheet Components - Summary of Accrued Warranty Reserve (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Accrued warranty reserve, beginning balance	$ 3,765	$ 4,014
Charged to cost of revenue	1,769	1,632
Utilization of accrued warranty reserve	(2,144)	(2,130)
Accrued warranty reserve, ending balance	$ 3,390	$ 3,516

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Commitments and Contingencies - Additional Information (Details) $ in Thousands	1 Months Ended	3 Months Ended	9 Months Ended
	Jan. 31, 2023 USD ($) ft²	Sep. 30, 2023 USD ($)	Sep. 30, 2023 USD ($)	Dec. 31, 2022 USD ($)
Commitments And Contingencies [Line Items]
Operating lease right-of-use assets		$ 7,327	$ 7,327	$ 5,765
Operating lease liabilities		7,654	7,654
Operating lease costs		400	1,200
Nashville, Tennessee
Commitments And Contingencies [Line Items]
Area of land | ft²	17,572
Tenant improvements	$ 900
Operating lease right-of-use assets		2,300	2,300
Operating lease liabilities		$ 1,400	$ 1,400
Operating lease, description			The initial term of the lease is 76 months with the option to extend the lease term once for additional 5 years.
Operating lease, term of contract	76 months
Operating lease, renewal term	5 years
Tenant improvement allowance	$ 900
ROU asset and operating lease liability, weighted-average incremental borrowing rate			11.20%

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Commitments and Contingencies - Schedule of Undiscounted Future Minimum Lease Payments Due under Non-cancelable Operating Leases (Details) $ in Thousands	Sep. 30, 2023 USD ($)
Commitments And Contingencies Disclosure [Abstract]
Remainder of 2023	$ 318
2024	1,081
2025	1,635
2026	1,886
2027	1,945
Thereafter	3,066
Total minimum future lease payments	9,931
Present value adjustment for minimum lease commitments	(2,277)
Total lease liability	$ 7,654

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Debt Obligations - Additional Information (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2022	Sep. 30, 2023	Dec. 31, 2022
Debt Instrument [Line Items]
Interest expense	$ 549
Cash and cash equivalents		$ 46,023	$ 101,238

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Stock-based Compensation - Summary of Total Stock-based Compensation (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Employee Service Share Based Compensation Allocation Of Recognized Period Costs [Line Items]
Total stock-based compensation	$ 2,640	$ 3,057	$ 8,677	$ 7,592
Cost of Revenue
Employee Service Share Based Compensation Allocation Of Recognized Period Costs [Line Items]
Total stock-based compensation	49	35	139	94
Research and Development
Employee Service Share Based Compensation Allocation Of Recognized Period Costs [Line Items]
Total stock-based compensation	708	707	2,075	1,142
Sales and Marketing
Employee Service Share Based Compensation Allocation Of Recognized Period Costs [Line Items]
Total stock-based compensation	587	642	2,552	1,975
General and Administrative
Employee Service Share Based Compensation Allocation Of Recognized Period Costs [Line Items]
Total stock-based compensation	$ 1,296	$ 1,673	$ 3,911	$ 4,381

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Stock-based Compensation - Additional Information (Details) - USD ($) $ / shares in Units, $ in Millions		3 Months Ended	9 Months Ended
	Aug. 15, 2023	Sep. 30, 2023	Sep. 30, 2023	Dec. 31, 2022
Restricted Stock Units (RSUs)
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Unrecognized stock-based compensation related to outstanding unvested stock options		$ 7.6	$ 7.6
Unrecognized stock-based compensation related to outstanding unvested stock options, period of recognition			2 years 8 months 12 days
Service-Based Stock Options
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Shares of common stock issuable upon exercise of outstanding awards		231,612	231,612
Weighted-average grant-date fair value of options granted			$ 5.55
Number of shares, Balance			309,315
Weighted average closing price		$ 10.41	$ 10.41	$ 82.08
Unrecognized stock-based compensation related to outstanding unvested stock options		$ 9.4	$ 9.4
Unrecognized stock-based compensation related to outstanding unvested stock options, period of recognition			1 year 9 months 18 days
Common stock options issued		1,927,079	1,927,079	309,315
Granted option to purchase shares of common stock			2,166,755
Shares forfeited due to termination of service by grantees			548,991
Market-Based Stock Options
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Weighted-average grant-date fair value of options granted			$ 6.36
Unrecognized stock-based compensation related to outstanding unvested stock options		$ 3.6	$ 3.6
Unrecognized stock-based compensation related to outstanding unvested stock options, period of recognition			1 year 10 months 24 days
Granted option to purchase shares of common stock			1,224,370
Shares forfeited due to termination of service by grantees			502,123
2023 Stock option modification
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Incremental stock-based compensation	$ 1.6
Share price	$ 3.305
Recognized incremental stock-based compensation		$ 0.3	$ 0.3
2010 Equity Incentive Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Shares of common stock issuable upon exercise of outstanding awards		195,424	195,424
2020 Equity Incentive Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Common stock reserved for issuance		3,953,431	3,953,431
Number of shares available for grant		1,371,079	1,371,079
Common stock options issued	1,465,922
2020 Equity Incentive Plan | Service-Based Stock Options
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Common stock options issued	743,675
2020 Equity Incentive Plan | Market-Based Stock Options
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Common stock options issued	722,247
Employee Stock Purchase Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Common stock reserved for issuance		273,738	273,738
Number of shares available for grant		282,384	282,384

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Stock-based Compensation - Summary of Service-based Stock Option Activity (Details) - Service-Based Stock Options - $ / shares	9 Months Ended	12 Months Ended
	Sep. 30, 2023	Dec. 31, 2022
Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items]
Number of shares, Balance	309,315
Number of shares, Grants	2,166,755
Number of shares, Cancelled/forfeited	(548,991)
Number of shares, Balance	1,927,079	309,315
Number of shares, Vested and exercisable	231,612
Weighted average exercise price, Balance	$ 82.08
Weighted average exercise price, Grants	7.99
Weighted average exercise price, Cancelled/forfeited	25.79
Weighted average exercise price, Balance	10.41	$ 82.08
Weighted average exercise price, Vested and exercisable	$ 57.02
Weighted average remaining contractual term, Balance	8 years 9 months 29 days	5 years 7 months 6 days
Weighted average remaining contractual term, Vested and exercisable	3 years 8 months 15 days

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Stock-based Compensation - Assumptions used in Estimating Grant-Date Fair Value of Stock-based Awards (Details)	9 Months Ended
	Sep. 30, 2023
Service-Based Stock Options
Valuation assumptions:
Expected volatility, Minimum	72.80%
Expected volatility, Maximum	77.00%
Risk-free interest rate, Minimum	3.39%
Risk-free interest rate, Maximum	4.35%
Market-Based Stock Options
Valuation assumptions:
Expected volatility, Minimum	75.50%
Expected volatility, Maximum	77.00%
Cost of equity	25.00%
Risk-free interest rate, Minimum	3.39%
Risk-free interest rate, Maximum	4.31%
Minimum | Service-Based Stock Options
Valuation assumptions:
Expected term	5 years 7 months 6 days
Minimum | Market-Based Stock Options
Valuation assumptions:
Expected term	5 years 3 months 18 days
Maximum | Service-Based Stock Options
Valuation assumptions:
Expected term	6 years 6 months
Maximum | Market-Based Stock Options
Valuation assumptions:
Expected term	5 years 4 months 6 days

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Stock-based Compensation - Summary of RSU Activity (Details) - Restricted Stock Units	9 Months Ended
	Sep. 30, 2023 $ / shares shares
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of shares, Balance | shares	176,063
Number of shares, RSUs vested | shares	(35,424)
Number of shares, RSUs forfeited | shares	(58,755)
Number of shares, Balance | shares	81,884
Weighted average grant date fair value per share, Balance | $ / shares	$ 101.76
Weighted average grant date fair value per share, RSUs vested | $ / shares	137.95
Weighted average grant date fair value per share, RSUs forfeited | $ / shares	82.42
Weighted average grant date fair value per share, Balance | $ / shares	$ 99.96

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Net Loss Per Share Attributable To Common Stockholders - Summary of Outstanding Potentially Dilutive Common Stock Equivalents Excluded from Calculation of Diluted Net Loss Per Share (Details) - shares	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Anti-dilutive securities excluded from calculation of diluted net loss per share	2,731,210	19,191,192	2,731,210	19,191,192
Service-Based Options Issued and Outstanding
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Anti-dilutive securities excluded from calculation of diluted net loss per share	1,927,079	273,256	1,927,079	273,256
Market-Based Options Issued and Outstanding
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Anti-dilutive securities excluded from calculation of diluted net loss per share	722,247		722,247
Restricted Stock Units
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Anti-dilutive securities excluded from calculation of diluted net loss per share	81,884	167,936	81,884	167,936
Convertible Notes
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Anti-dilutive securities excluded from calculation of diluted net loss per share		18,750,000		18,750,000

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Cost Reduction Activities - Additional Information (Details) $ in Millions		3 Months Ended	9 Months Ended
	Jun. 23, 2023 USD ($) Employee	Sep. 30, 2023 USD ($)	Sep. 30, 2023 USD ($)
Restructuring Cost and Reserve [Line Items]
Severance costs			$ 2.5
Maximum
Restructuring Cost and Reserve [Line Items]
Number of employees impacted in work force | Employee	120
Percentage of employees work force reduction	42.00%
Estimated one-time charges	$ 5.0
Minimum
Restructuring Cost and Reserve [Line Items]
Number of employees impacted in work force | Employee	90
Percentage of employees work force reduction	32.00%
Estimated one-time charges	$ 3.5
General And Administrative Expense
Restructuring Cost and Reserve [Line Items]
Severance costs		$ 1.0	$ 2.6