Envoy Medical, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Unless noted, amounts below are in U.S. dollars and rounded to millions. Financial statements are unaudited.
Business context
Envoy Medical develops hearing devices, with its principal development focus on the fully implanted Acclaim cochlear implant (Acclaim CI). Its only marketed product is the Esteem fully implanted active middle ear implant, whose sales have been limited. Acclaim CI is not approved for sale; the company expects to rely on financing until it can generate substantial product revenue.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $0.059 million | $0.078 million |
| Cost of goods sold | $0.153 million | $0.175 million |
| Gross loss | $0.094 million | $0.097 million |
| Research and development | $2.360 million | $1.927 million |
| Sales and marketing | $0.325 million | $0.371 million |
| General and administrative | $2.119 million | $1.376 million |
| Operating loss | $4.898 million | $3.771 million |
| Net loss | $6.270 million | $13.253 million |
| Net loss per share | $0.32 | $1.31 |
| Net cash used in operating activities | $5.846 million | $3.011 million |
Gross margin was negative in both periods (approximately negative 159% in Q1 2024, versus negative 124% in Q1 2023). These percentages are calculated from reported revenue and cost of goods sold; the filing does not present gross margin as a separate metric.
- Revenue fell 24.4%, primarily due to fewer battery replacement requests. Management says new Esteem implantations are expected to be only a few per year, potentially none.
- Operating expenses rose 28.8%. R&D increased 22.4%, mainly from higher personnel costs as the company prepared for an Acclaim CI pivotal study. G&A increased 54.0%, including higher directors’ and officers’ insurance and personnel costs.
- Net loss improved year over year, principally because Q1 2023 included a $9.377 million fair-value loss on convertible notes that had converted in the September 2023 business combination. The Q1 2024 operating loss increased, and operating cash use also increased.
- Q1 2024 included noncash fair-value losses of $1.177 million on publicly traded warrants and $0.262 million on forward-purchase warrants, partly offset by a $0.103 million gain on the forward-purchase put option.
Balance sheet, debt and liquidity
- Cash was $4.945 million at March 31, 2024, up from $4.218 million at December 31, 2023. Current assets were $7.730 million and current liabilities $6.996 million; total liabilities were $15.893 million and stockholders’ deficit was $7.413 million.
- Operating cash outflow of $5.846 million was funded principally by $5.0 million drawn under a related-party term loan and $1.683 million net proceeds from the forward-purchase share sale. Investing cash outflow was $0.109 million, for an overall cash increase of $0.727 million.
- The February 2024 related-party term loan provides up to $10.0 million; $5.0 million had been drawn at quarter-end. It matures February 27, 2029, carries 8% annual interest, and interest accrues without payment for the first two years. The balance sheet reports $4.821 million of term-loan debt, reflecting the accounting presentation; the filing describes $5.0 million principal drawn.
- Series A preferred stock carries a cumulative 12% annual dividend. The company reported it could not maintain the required separate $5.4 million dividend reserve while funding operations. It stated that all required preferred dividends had been paid by May 15, 2024.
- Management believes cash, future capital raises and product receipts will fund operations for at least one year from issuance of the statements, but warns financing may not be available on acceptable terms. The filing states that these circumstances raise substantial doubt about the company’s ability to continue as a going concern.
Outlook, risks and contingencies
- The company submitted an IDE application for the Acclaim CI at the end of Q1, then converted it to an FDA pre-submission to complete testing and obtain interactive FDA feedback. It anticipates resubmitting an updated IDE in Q3 or Q4 2024 and targets FDA approval by the end of 2026. Both timing and approval are uncertain; FDA approval is not guaranteed.
- Management expects continued losses and increasing R&D, G&A and capital expenditures. Further funding may require equity, debt or commercial arrangements; failure to raise capital could require cuts or delays to planned activities.
- An Atlas Merchant Capital lawsuit seeks approximately $9.4 million for alleged denial of a shareholder redemption request, plus interest, costs and attorneys’ fees. The company disputes the claims and intends to defend itself. No litigation loss was accrued because management did not consider a loss probable and reasonably estimable; the outcome cannot be predicted.
- Management reported material weaknesses in internal control over financial reporting, including insufficient accounting staffing, lack of formal risk assessment and accounting controls, weaknesses in complex valuation controls, and IT access and segregation-of-duties deficiencies. Remediation is ongoing; controls were assessed as ineffective at quarter-end.
- Key risks include regulatory and clinical-development uncertainty, reimbursement and market acceptance, competition, supplier and production disruption, financing needs, litigation, and maintaining Nasdaq listing.
Important facts for investors to verify
- Progress and timing of Acclaim CI testing, IDE resubmission, pivotal-trial initiation and the FDA approval pathway.
- Available liquidity, cash burn, conditions for drawing the remaining $5.0 million term-loan commitment, and access to additional financing.
- Whether preferred dividends remain current and how the 12% cumulative dividend affects liquidity and capital structure.
- Developments in the Atlas litigation and any change in the company’s assessment of potential loss.
- Progress in remediating material weaknesses and the effectiveness of controls in subsequent filings.