Eargo: EAR Could Falter When Lockup Expires

Apr. 12, 2021 8:29 AM ETEargo, Inc. (EAR)4 Comments1 Like
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Don Dion
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Summary

  • April 14 marks the IPO Lockup Expiration for EAR.
  • When the lockup expires, millions of previously restricted shares will be eligible for sale.
  • We believe that pre-IPO shareholders and insiders are eager to cash in and think it's wise to short EAR ahead of next Wednesday.

Health worker examine ear of senior man in his house
Photo by aquaArts studio/iStock via Getty Images

April 14, 2021 concludes the 180-day lockup period of Eargo, Inc. (NASDAQ:EAR)

When the lockup period ends for Eargo, its pre-IPO shareholders will have the opportunity to sell their 28+ million outstanding shares, which they could not do during the six month lockup period. This is significantly more than the 7.185 million shares offered in the IPO. The potential for a sudden increase in stock flooding into the secondary market may negatively impact the share price of Eargo.

Currently, Eargo trades in the $52 to $54 range, significantly higher than its IPO price of $18.

Business Overview: Provider of Innovative Hearing Aid System

Eargo hopes to disrupt the market for traditional hearing aids with its Eargo hearing solution. Their product is nearly invisible by being completely in-canal. And, its solution has rechargeable batteries, which is different from conventional hearing aids.

The company uses a B2C approach, which further differentiates their product. Most traditional hearing aids are sold through third-parties such as hearing clinics. As of June 2020, Eargo had sold over 42,000 hearing aid systems. The company believes it has the capability to deepen their market penetration significantly across the approximately 43 million American adults with hearing loss. The company notes that approximately 465 million people worldwide have measurable hearing loss.

Currently, Eargo targets consumers with annual incomes that exceed the median household average. They estimate that includes 14 million American adults with a target market value of more than $30 billion in 2019. Still, the company points to estimates that only around 27% of American adults with hearing loss seek hearing aids, typically because of difficulties using them and the stigma attached. Eargo believes its product overcomes these obstacles. In its SEC filing, Eargo pointed to the following features that differentiate its system from other hearing aids on the market:

  • Virtually invisible

  • Aid is suspended in the ear canal for performance and comfort

  • Batteries are rechargeable

  • Their system offers multiple sound profiles for better personalization

  • Accessibility through easy-to-use purchasing interface

  • Affordability

Eargo plans to pursue international expansion through multiple marketing channels to expand its penetration. The company is headquartered in San Jose, California and has approximately 185 employees. Eargo was formerly incorporated under the name Aria Innovations, Inc.

Financial Highlights

Eargo reported the following financial highlights for the 4th quarter of 2020:

  • Net revenue reached $22.4 million versus $10.6 million year-over-year

  • Gross profit was $15.8 million versus $5.9 million year-over-year

  • Gross margin grew to 70.6% versus 55.2% for the same period in 2019

  • Operating expenses reached $25.7 million representing 115.0% of net revenue, versus $18.8 million representing 176.9% of net revenues year-over-year

  • S&M expenses reached 15.5 million versus $11.0 million the prior year

  • R&D expenses reached $4.2 million versus $4.1 million the prior year

  • G&A expenses totalled $6.1 million versus $3.7 million in the same period last year

  • Net loss was $(11.8) million representing $(0.39) per share

Management

CEO and President Christian Gormsen has served in his position since June 2016. He has served on the board of directors since November 2014. His previous experience comes from senior positions at EMEA, GN Group, and McKinsey & Company. He earned an M.S. in business administration and economics from the Copenhagen Business School.

COO William Brownie has served in his position since April 2019. He previously served as Chief Customs Officer and Chief Financial Officer for Eargo. His prior experience comes from consulting with a wide array of businesses. From 2012 to 2015, he served as a Managing Director.

Competition: Sinova, Sivantos and Others

While Eargo seeks to differentiate itself in a saturated market, it does face considerable competition from manufacturers of conventional hearing aids. These companies include League Sound, Sinova, Sivantos, Starkey, Demant, GN, Widex, Signia, Rexton, Phonak, Hansaton, Unitron, Oticon, and Bernafon.

Early Market Performance

The underwriters priced the IPO at $18 per share. The stock closed on its first day of trading at $33.68. The price rose to $71.83 on February 8. The price has declined since then to reach $43.80 on March 29. The stock currently trades around $51 to $52.

Conclusion: Short EAR Ahead of Wednesday's Lockup Expiration

When EAR's IPO lockup expires next Wednesday, millions of previously-restricted shares will be eligible for trading. We believe that the pre-IPO shareholders and insiders that own these shares will be eager to sell since EAR has a nearly 200% return from IPO. Aggressive, risk-tolerant investors should consider shorting shares Monday, Tuesday or early in Wednesday's session. Interested investors should cover shares during the Thursday and Friday sessions (April 15 and April 16 2021).

This article was written by

Don Dion profile picture
12.68K Followers
Don Dion is the CEO of Inland Management, a company focused on acquiring, subdividing, developing and marketing large tracts of land on the fringes of major metropolitan markets. Inland Management has sold land in all 48 contiguous states totaling billions of dollars. As CEO, Don is responsible for helping to maintain and enhance the firm’s strong financial position and identifying opportunities for growth. In addition to his role at Inland Management, Don Dion is the Chief Investment Officer of DRD Investments, LLC. Based in Naples, FL. and Williamstown, MA., DRD Investments is a family office focused on managing a long/short hedge fund, real estate, venture capital and various other financial assets for the Dion family. Don also serves as the trustee of the Dion Family Foundation, which focuses on helping individuals with tuition assistance at Catholic Institutions for grammar school, high school, and college education. The foundation also helps individuals by supporting Massachusetts General Hospital. Don is on two leadership boards and advisory committees at Massachusetts General Hospital and the Home Base Program (a partnership between Mass General and the Red Sox Foundation). He consults with Saint Dominic's Academy and serves as a trustee of Saint Michael’s College. Previously, Don was the founder and CEO of Dion Money Management, a fee-based investment advisory firm for affluent individuals, families and non-profit organizations. Founded in 1996 and based in Williamstown, MA. and Naples, FL., Dion Money Management managed approximately one billion in assets for clients in 49 states and 11 countries. While at Dion Money Management, Don was responsible for setting investment policy, creating custom portfolios, and overseeing the performance of client accounts. Don sold the firm to NYC-based Focus Financial Partners (FOCS) on September 1, 2007 and no longer manages money for other families or institutions. Don remains a shareholder of Focus Financial Partners (FOCS). Don is also the retired publisher of the Fidelity Independent Adviser family of newsletters, which provided a broad range of investor commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With nearly 100 thousand subscribers in the United States and 29 other countries, Fidelity Independent Adviser published two monthly newsletters and one weekly newsletter. The flagship publication, Fidelity Independent Adviser, was published monthly for 16 years and reached over 60,000 subscribers. In 2011 Don and his daughter Carolyn co-authored the Ultimate Guide to ETFs, available on Amazon.com. Prior to founding Dion Money Management, Don co-founded Litchfield Financial Corp. (LTCH) with Summit Partners. Don served as Chairman and CEO of Litchfield, which was listed on the Nasdaq in 1992 and acquired by Textron Corp. (TXT) in 1999. Don was also the Executive Vice President, CFO and General Counsel for Patten Corporation (BGX) from 1986 to 1988, where he played a critical role in the company’s successful initial public offering on the New York Stock Exchange. From 1983 to 1985, Don was a corporate lawyer with the Boston Law Firm of Warner and Stackpole. Before joining Warner and Stackpole, Don worked as a C.P.A. for Ernst and Young from 1979 to 1983. Don graduated with honors from Saint Michael’s College in 1976 with a B.S. degree in Economics and Business Administration. He received his J.D. from the University of Maine Law School in 1979 and his LL.M. from Boston University Law School in 1982. Don can be reached at donalddion@gmail.com
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Disclosure: I am/we are short EAR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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