Envoy Medical, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts below are in U.S. dollars; financial statement figures are unaudited. Envoy Medical develops hearing devices: its FDA-approved Esteem generates current product revenue, while its Acclaim fully implanted cochlear implant remains in development. The business combination with Anzu closed September 29, 2023; the combined company began trading on Nasdaq as COCH and COCHW on October 2.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $80,000 | $57,000 | $221,000 | $217,000 |
| Gross profit (loss) | ($109,000) | ($49,000) | ($334,000) | ($130,000) |
| Operating expenses | $3.465 million | $1.853 million | $11.857 million | $6.017 million |
| Operating loss | ($3.385 million) | ($1.796 million) | ($11.636 million) | ($5.800 million) |
| Net income (loss) | $1.563 million | ($1.339 million) | ($25.027 million) | ($4.446 million) |
| Operating cash flow | Not separately presented | Not separately presented | ($5.946 million) | ($6.426 million) |
- Q3 gross margin was approximately negative 136%; nine-month gross margin was approximately negative 151%, reflecting cost of goods sold exceeding revenue.
- At September 30, cash was $7.440 million, plus $9.4 million of restricted cash ($5.4 million reserved for preferred dividends and $4.0 million related to a payable to a related party). Total cash and restricted cash was $16.840 million.
- Current assets were $22.729 million and current liabilities $13.603 million. Total assets were $23.601 million; total liabilities were $17.342 million; stockholders’ equity was $6.259 million.
- Convertible notes and the bridge note were converted in the merger; no convertible notes remained on the September 30 balance sheet. The company reported a $4.0 million related-party payable. It also had $2.253 million of product warranty liability.
Changes versus prior comparable periods
- Q3 revenue increased $23,000 year over year, primarily from replacement-component sales. Nine-month revenue rose only $4,000; earlier supply-chain constraints reduced replacement-component sales before being resolved in Q2.
- Q3 operating expenses rose 87% and nine-month expenses rose 97%. R&D increased with Acclaim development and preparation for a pivotal clinical study; G&A rose largely due to business-combination legal and professional fees and public-company-related staffing.
- Q3 net income contrasts with the prior-year loss, but was not operating-driven: it included a $4.902 million gain from the fair-value change in related-party convertible notes. For the nine-month period, fair-value changes instead produced a $13.332 million loss, contributing to the $25.027 million net loss.
- Financing provided $22.736 million in cash during the first nine months, including $11.736 million net proceeds from the business combination, forward purchase agreement and PIPE, and $10 million of related-party note proceeds. Operating and investing activities used $5.946 million and $132,000, respectively.
Outlook, risks and unusual items
- Management expects continued operating losses and higher R&D and G&A spending. It anticipates FDA approval for Acclaim in mid-2026, but emphasizes the timing is uncertain and approval is not assured. The filing gives no numerical revenue or earnings guidance.
- Management says existing cash, future capital raises and product receipts are expected to fund operations for at least one year from the financial statements’ issuance. However, the company has an accumulated deficit of $251.0 million, states that substantial doubt exists about its ability to continue as a going concern, and warns that additional financing may not be available on acceptable terms.
- Series A preferred shares carry a cumulative 12% annual dividend on the $10 original issue price. The company must reserve funds for the first four dividend payments; $5.4 million was restricted at quarter-end. No dividends had been declared as of September 30.
- The company revised previously reported June 2023 financial information after identifying an error in the convertible-note fair-value model. The revision reduced reported note liabilities by $14.6 million, increased additional paid-in capital by $14.7 million, and increased reported fair-value loss by $91,000. It also reclassified $0.3 million of Acclaim prototype costs from cost of goods sold to R&D for the nine-month period, with no net-income impact.
- Management concluded disclosure controls were ineffective and identified multiple material weaknesses, including insufficient accounting expertise, inadequate formal risk assessment and accounting controls, IT control deficiencies, and a weakness related to valuation of a material liability. Remediation is underway.
- A prior shareholder lawsuit was settled without payment by the company. A new Delaware lawsuit filed November 14, 2023 challenges the handling of a shareholder’s redemption request and seeks specific performance and damages. The company disputes the claims; outcome and impact cannot be predicted.
- Other risks include regulatory and clinical-development uncertainty, reimbursement and competitive pressures, supplier disruptions, financing needs, inflation and macroeconomic volatility, and potential dilution or restrictive terms from future financing.
Investor facts to verify
- Available liquidity: distinguish the $7.440 million cash balance from restricted funds, and assess spending needs against the company’s going-concern warning.
- Acclaim development milestones, clinical-study timing, FDA requirements and the basis for the mid-2026 approval expectation.
- Preferred-stock dividend funding and terms, including the 12% cumulative rate and related restrictions on cash.
- Effects of the financial-statement revision and progress in remediating material weaknesses in financial reporting controls.
- Potential financial and dilution effects of the pending redemption litigation and any future capital raises.