Envoy Medical, Inc. — FY 2023 Form 10-K
Reporting period: Year ended December 31, 2023; filed April 1, 2024. This is an annual report, not a standalone fourth-quarter filing. The September 29, 2023 business combination changed the reporting entity; results include Legacy Envoy’s historical operations.
Business context
Envoy is an early-stage hearing-device company. Its lead candidate, the fully implanted Acclaim cochlear implant (Acclaim CI), is investigational and has not generated sales. Existing revenue comes primarily from the FDA-approved Esteem fully implanted active middle ear implant and replacement components. The company completed its SPAC business combination in September 2023 and began trading as COCH and COCHW on Nasdaq in October.
Financial results and liquidity
| Metric | FY 2023 | FY 2022 | Change / context |
|---|---|---|---|
| Revenue | $316,000 | $237,000 | Up 33%; primarily recovery of replacement-component sales after supply constraints in 2022. |
| Cost of goods sold | $789,000 | $498,000 | Up 58%; exceeded revenue in both years. |
| Gross loss | $(473,000) | $(261,000) | Gross margin was approximately -150% in 2023 versus -110% in 2022. |
| Operating expenses | $17.898 million | $8.445 million | R&D $8.956 million; sales and marketing $1.666 million; G&A $7.276 million. |
| Operating loss | $(18.371) million | $(8.706) million | Loss more than doubled as development and public-company costs increased. |
| Net loss | $(29.908) million | $(15.923) million | Includes a $13.332 million noncash fair-value loss on related-party convertible notes. |
| Net loss per share | $(2.38) | $(1.57) | Basic and diluted amounts are equal. |
| Cash from operations | $(17.654) million | $(8.805) million | Operating cash use increased substantially. |
| Cash at year-end | $4.218 million | $183,000 | Financing cash flow was $21.845 million, including $11.736 million net proceeds from the business combination-related transactions and $10 million in related-party note proceeds. |
At December 31, 2023, total assets were $7.640 million and total liabilities were $9.402 million. Convertible notes that had been carried at $33.845 million at year-end 2022 were converted into equity at the business-combination closing; no convertible notes remained on the year-end 2023 balance sheet. The company reported a $257.242 million accumulated deficit and negative stockholders’ equity of $1.762 million. No material funded debt was reported at year-end; lease liabilities were $562,000. The filing does not provide a conventional current ratio or a standalone EBITDA measure.
Material changes and unusual items
- R&D expense increased 80% to $8.956 million, mainly due to Acclaim CI development and higher personnel costs. G&A increased 181% to $7.276 million, including higher professional, legal and personnel costs.
- The $13.332 million fair-value loss on related-party convertible notes was driven by changing assumptions about financing and business-combination outcomes; it was noncash and the notes converted at closing.
- The business combination, PIPE and forward purchase transactions generated $11.7 million of net proceeds. The company also issued 4.5 million Series A preferred shares, carrying a cumulative 12% annual dividend. The company had paid required dividends through year-end but could not maintain the required $5.4 million reserve for the first four quarterly payments. It deferred $750,000 of dividends on the sponsor’s 2.5 million preferred shares under the terms applicable when net tangible assets were below $10 million.
- A roughly $0.5 million out-of-period reclassification for 2022 shifted expense between cost of goods sold and R&D; management said it was not material to either period.
Outlook, risks and contingencies
- Management targets FDA approval of Acclaim CI in 2026, but approval and timing are uncertain. The company submitted its pivotal-study IDE application in Q1 2024 and anticipated an FDA decision by late Q2 or early Q3 2024; this is an expectation, not guidance or an assured outcome.
- The three-patient early feasibility study showed hearing percepts and daily device use, but identified an unintended signal-noise artifact described as gurgling or sizzling. Mitigation work is ongoing, and the company said further testing is needed to determine whether all sources are resolved. Two participants also used hearing aids with the implant to improve the signal-to-noise experience.
- The auditor’s report includes an explanatory paragraph raising substantial doubt about the company’s ability to continue as a going concern. Management expects to rely on further financing and other cash sources; it cautions that funding may not be available on acceptable terms or at all. Cash was $4.218 million at year-end.
- Subsequent to year-end, the company drew $5 million under a related-party note with an available principal amount of up to $10 million, at 8% interest, and issued 500,000 warrants at a $1.24 exercise price. The filing also reports approximately $1.7 million received after year-end from Meteora’s sale of shares under the forward purchase agreement.
- Disclosure controls and internal control over financial reporting were ineffective at year-end, with multiple material weaknesses, including insufficient accounting resources, incomplete formal controls, valuation-control deficiencies and IT access-control issues. Remediation is underway; no auditor attestation on internal controls was required because the company is an emerging growth company.
- Atlas Merchant Capital seeks approximately $9.4 million plus interest and costs in a Delaware lawsuit alleging it was improperly prevented from redeeming shares. The company disputes the claim; outcome is uncertain and no litigation accrual was recorded because management did not consider a loss probable and reasonably estimable.
- Other key risks include dependence on a single unapproved product candidate, clinical and design risk, reimbursement and market adoption, limited/single-source suppliers, additional financing and dilution, and substantial potential share supply from registered resales and securities conversion or exercise. Glen A. Taylor beneficially owned approximately 54.7% of common stock on the filing’s stated assumptions.
Most important facts for investors to verify
- Current cash, runway and financing availability, including terms and draws under the related-party note, and whether further capital raises will be needed.
- FDA status and timing of the IDE, pivotal study protocol and enrollment, and whether the Acclaim CI noise issue is resolved without material redesign or delay.
- Quarterly cash burn and R&D/G&A trends, given the widening losses and very limited legacy-product revenue.
- Series A preferred dividend accruals, payment status and reserve requirements, including any deferred sponsor dividends.
- Developments in the Atlas redemption litigation and progress remediating the disclosed internal-control material weaknesses.
- Potential dilution and selling pressure from preferred-stock conversion, warrants, registered resales and controlling-stockholder holdings.