Envoy Medical, Inc. quarterly report, Q1 FY2023

Business context and reporting period

This is Anzu Special Acquisition Corp I’s unaudited Form 10-Q for the quarter ended March 31, 2023, filed May 15, 2023. Despite the request metadata, the filing is for Anzu, a shell SPAC, not an operating-company quarterly report for Envoy Medical. Anzu reported no operating activity or revenue; its activity was pursuing a business combination.

After quarter-end, on April 17, 2023, Anzu agreed to combine with Envoy Medical Corporation, a medical-device company whose implanted device was in early clinical testing and had received FDA Breakthrough Device Designation. The transaction was expected to close in Q3 2023, subject to customary conditions; completion was not assured.

Financial results and liquidity

Net income fell substantially year over year, chiefly because the prior-year period included a $14.40 million warrant fair-value gain. Q1 2023 earnings instead reflected Trust Account interest and a forward-purchase-agreement valuation gain. These are not operating revenues. Gross margin is not applicable because Anzu had no revenue.

At March 31, 2023, cash outside the Trust Account was $104,020; Trust Account investments were $44.37 million; total assets were $45.92 million; and total liabilities were $20.98 million. Working capital deficit was approximately $8.98 million. The Trust Account is generally restricted for business-combination or redemption purposes, so it is not ordinary operating liquidity. Related-party working capital loans totaled $2.23 million, up from $1.50 million at year-end; the loans do not bear interest and are due at the earlier of a business combination or December 31, 2023. No long-term debt or other material debt facilities are identified.

Cash used in operations was $2.18 million. Investing cash flow of $389.05 million primarily reflected Trust Account withdrawals for redemptions and taxes, while financing cash flow was $(386.87) million, primarily reflecting redemption payments and working-capital-loan proceeds. Cash decreased by $3,753 during the quarter.

Material changes versus the prior comparable period

• Operating costs rose about 67% from Q1 2022, while net income declined from $12.46 million to $718,000.
• Q1 2022 included a large warrant revaluation gain; Q1 2023 had no warrant fair-value gain. Trust Account interest increased from $40,410 to $3.37 million.
• Stockholders approved extending the business-combination deadline to September 30, 2023. In connection with the extension, holders redeemed 38,187,226 Class A shares for approximately $387.6 million, leaving approximately $44.3 million in trust and 4,312,774 public shares outstanding.
• The working-capital deficit widened from $7.09 million at December 31, 2022 to approximately $8.98 million at March 31, 2023.

Outlook, risks and unusual items

• Anzu stated that failure to complete a business combination by September 30, 2023, or any approved extension, would lead to liquidation and redemption of public shares. Management identified substantial doubt about the company’s ability to continue as a going concern if a transaction is not completed; additional financing was not committed, and the Sponsor was not obligated to provide it.
• The proposed Envoy transaction contemplated aggregate closing consideration of 15 million Anzu Class A shares, subject to adjustment. The Sponsor agreed, subject to closing, to forfeit its 12.5 million private warrants and a number of Class B shares; it also agreed to subscribe after closing for $10 million of Series A preferred stock. These terms were proposed, not completed.
• The parties terminated the earlier forward purchase agreements on April 17, 2023. A separate forward share purchase agreement with Meteora contemplated potential open-market purchases of up to 4.3 million shares, but the seller was not obligated to make those purchases.
• Management reported disclosure controls were ineffective because of a previously identified material weakness in accounting for extinguishment of a contingent obligation. That weakness had resulted in a restatement of 2022 interim financial statements.
• The filing notes potential exposure to a 1% federal excise tax on certain stock repurchases, including redemptions, which could reduce funds available for a transaction. It also reports that deposits held at Silicon Valley Bank were restored after the bank’s failure.
• The balance sheet reports a $10.41 million deferred underwriting fee payable, while the filing says the remaining underwriter waived its entitlement to those fees solely with respect to the proposed Envoy transaction. The ultimate treatment should be checked in subsequent filings and transaction documents.

Important facts for investors to verify

• Whether the proposed Envoy business combination closed, and the final transaction terms, closing conditions, financing and dilution.
• Subsequent Trust Account balance, redemptions, and the amount of cash available to the combined company after transaction expenses.
• Availability and repayment or conversion terms of Sponsor working-capital loans, and whether additional financing was secured.
• Resolution of the deferred underwriting fee payable and potential excise-tax exposure.
• Remediation of the disclosed material weakness and improvement in disclosure controls.
• Envoy’s clinical, regulatory, commercialization and funding progress; this SPAC filing does not provide Envoy’s operating financial statements or a clear value for its revenue, losses, cash flow or debt.