UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For
the quarterly period ended
OR
For the transition period from to
Commission File Number -
| (Exact name of registrant as specified in its charter) |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| | | |
| (Address of principal executive offices) | (Zip Code) |
| Registrant’s telephone number, including area code: |
| Anzu Special Acquisition Corp I 12610 Race Track Road, Suite 250 Tampa, FL 33626 |
| (Former name or former address, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| The | ||||
| The |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| ☒ | Smaller reporting company | |||
| Emerging growth company |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
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by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As
of November 16, 2023, the registrant had
ENVOY MEDICAL, INC.
Table of Contents
i
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Financial Statements
ENVOY MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share and per share amounts)
| September 30, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash - dividends | ||||||||
| Restricted cash - other | ||||||||
| Accounts receivable, net | ||||||||
| Other receivable | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Forward purchase agreement assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets (related party) | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ equity (deficit) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Payable to related party | ||||||||
| Convertible notes payable, current portion (related party) | ||||||||
| Operating lease liability, current portion (related party) | ||||||||
| Product warranty liability, current portion | ||||||||
| Forward purchase agreement warrant liability | ||||||||
| Total current liabilities | ||||||||
| Convertible notes payable, net of current portion (related party) | ||||||||
| Product warranty liability, net of current portion | ||||||||
| Operating lease liabilities, net of current portion (related party) | ||||||||
| Warrant liability | ||||||||
| Warrant liability (related party) | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (see Note 14) | ||||||||
| Stockholders’ equity (deficit): | ||||||||
| Class A Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ( | ) | ||||||
| Total liabilities and stockholders’ equity (deficit) | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
ENVOY MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(In thousands, except share and per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net revenues | $ | $ | $ | $ | ||||||||||||
| Costs and operating expenses: | ||||||||||||||||
| Cost of goods sold | ||||||||||||||||
| Research and development | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total costs and operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Gain (loss) from changes in fair value of convertible notes payable (related party) | ( | ) | ||||||||||||||
| Other income (expense) | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other income (expense), net | ( | ) | ||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Net income (loss) attributable to common stockholders, basic | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Net income (loss) attributable to common stockholders, diluted | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Net income (loss) per share attributable to common stockholders, basic | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Net income (loss) per share attributable to common stockholders, diluted | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Weighted-average common stock outstanding, basic | ||||||||||||||||
| Weighted-average common stock outstanding, diluted | ||||||||||||||||
| Other comprehensive loss: | ||||||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
ENVOY MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(UNAUDITED)
(In thousands, except share amounts)
| Redeemable Convertible Preferred Stock | Series
A Preferred Stock | Class
A Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Deficit | |||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | - | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Retrospective application of Merger | ( | ) | ( | ) | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Adjusted Balances, beginning of period | - | $ | - | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||
| Deemed capital contribution from related party (Note 9) | - | - | - | |||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | - | $ | - | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||
| Deemed capital contribution from related party (Note 9) | - | - | - | |||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | - | $ | - | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||
| Deemed capital contribution from related party (Note 9) | - | - | - | |||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | - | $ | - | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||
| Redeemable Convertible Preferred Stock | Series
A Preferred Stock | Class
A Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | (Deficit) | |||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Deemed capital contribution from related party (Note 9) | - | - | - | |||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | - | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Deemed capital contribution from related party (Note 9) | - | - | - | |||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | - | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Exchange of redeemable convertible preferred share for Class A Common stock in connection with Merger (Note 3) | - | - | ||||||||||||||||||||||||||||||||||||||
| Conversion of Convertible Notes into Class A Common stock in connection with Merger (Note 3) | - | - | ||||||||||||||||||||||||||||||||||||||
| Conversion of Envoy Bridge Note into Series A Preferred stock in connection with Merger (Note 3) | - | |||||||||||||||||||||||||||||||||||||||
| Deemed capital contribution from related party (Note 9) | - | - | - | |||||||||||||||||||||||||||||||||||||
| Preferred stock subscriptions (Note 3) | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net exercise of warrants (related party) (Note 10) | - | |||||||||||||||||||||||||||||||||||||||
| Merger, net of redemptions and transaction costs (Note 3) | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Meteora forward purchase agreement shares (Note 3) | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of Series A Preferred Stock to PIPE Investors (Note 3) | - | - | ||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | - | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
ENVOY MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Change in fair value of convertible notes payable (related party) | ( | ) | ||||||
| Change in fair value of warrant liability (related party) | ||||||||
| Gain on exercise and cancellation warrant liability (related party) | ( | ) | - | |||||
| Change in operating lease right-of-use assets (related party) | ||||||||
| Increase in inventory reserve | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Operating lease liabilities (related party) | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Product warranty liability | ( | ) | ( | ) | ||||
| Payable to related party | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from the issuance of convertible notes payable (related party) | ||||||||
| Proceeds from the PIPE Transaction, the Forward Purchase Agreement, and the Business Combination, net of transaction costs | ||||||||
| Proceeds from the additional Series A Preferred Shares subscription | ||||||||
| Issuance of warrants (related party) | ||||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate on cash, cash equivalents, and restricted cash | ( | ) | ( | ) | ||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | ( | ) | ||||||
| Cash and restricted cash at beginning of period | ||||||||
| Cash and restricted cash at end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash investing and financing activity | ||||||||
| Deemed capital contribution from related party | $ | $ | ||||||
| SPAC excise tax liability recognized upon the Business Combination | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
ENVOY MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Nature of the Business and Basis of Presentation |
Envoy Medical, Inc. (“Envoy Medical” or the “Company”) is a hearing health company focused on providing innovative medical technologies across the hearing loss spectrum. Envoy Medical’s technologies are designed to shift the paradigm within the hearing industry and bring both providers and patients the hearing devices they desire. The Company’s first commercial product, the Esteem, is a fully implanted active middle ear hearing device. The Esteem was approved for sale in 2010 by the United States Food and Drug Administration (“FDA”).
Envoy Medical believes the fully implanted Acclaim® Cochlear Implant is a first-of-its-kind cochlear implant. Envoy Medical’s fully implanted technology includes a sensor designed to leverage the natural anatomy of the ear instead of a microphone to capture sound. The Acclaim is designed to address severe to profound sensorineural hearing loss that is not adequately addressed by hearing aids. The Acclaim will only be indicated for adults who have been deemed adequate candidates by a qualified physician. The Acclaim Cochlear Implant received the Breakthrough Device Designation from the FDA in 2019.
On September 29, 2023 (the
“Closing Date”), a merger transaction between Envoy Medical Corporation (“Envoy”), Anzu Special Acquisition Corp
I (“Anzu”) and Envoy Merger Sub, Inc., a directly, wholly owned subsidiary of Anzu (“Merger Sub”) was completed
(the “Merger” or “Business Combination”, see Note 3) pursuant to the business combination agreement, dated as
of April 17, 2023 (as amended, the “Business Combination Agreement”) . In connection with the closing of the Merger (the “Closing”),
Merger Sub merged with Envoy, with Envoy surviving the merger as a wholly owned subsidiary of Anzu. In connection with the Closing, Anzu
changed its name to Envoy Medical, Inc. The Company’s Class A common stock, par value $
On April 17, 2023, prior to entering into the Business Combination Agreement, Anzu and Envoy entered into an agreement (as amended to date, the “Forward Purchase Agreement” or “FPA”) with Meteora Special Opportunity Fund I, LP (“MSOF”), Meteora Capital Partners, LP (“MCP”), Meteora Select Trading Opportunities Master, LP (“MSTO”) and Meteora Strategic Capital, LLC (“MSC” and, collectively with MSOF, MCP and MSTO, the “Sellers” or “Meteora parties”) for an over-the-counter equity prepaid forward transaction.
Pursuant to the terms of the
Forward Purchase Agreement, on the Closing Date, the Sellers purchased
In addition, pursuant to the
subscription agreement, dated April 17, 2023 (as amended to date, the “Subscription Agreement”), by and between Anzu and Anzu
SPAC GP I LLC (the “Sponsor”), the Company issued, and certain affiliates of the Sponsor purchased, concurrently with the
Closing, an aggregate of
Pursuant to the convertible
promissory note, dated April 17, 2023, between Envoy and GAT Funding, LLC (as amended to date, the “Envoy Bridge Note”), the
Company issued
The unaudited condensed consolidated financials include the accounts of Envoy Medical, Inc. and its wholly-owned subsidiaries Envoy Medical Corporation and Envoy Medical GmbH (Ansbach) (GmbH), which operates a sales office in Germany. All intercompany accounts and transactions have been eliminated in consolidation.
5
Unaudited financial information
The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial reporting and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, they do not include all information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of the Company’s financial condition and results of operations have been included. Operating results for the periods presented are not necessarily indicative of the results that might be expected for the full year. As such, the information included in this report should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2022, which is included in the Company’s final prospectus and definitive proxy statement, dated and filed with the SEC on September 14, 2023 (the “Proxy Statement/Prospectus”), which is accessible on the SEC’s website at www.sec.gov. The condensed consolidated balance sheet at December 31, 2022 has been derived from the audited consolidated financial statements of the Company, but does not include all the disclosures required by U.S. GAAP.
During the nine months ended September 30, 2023, there were no changes to the Company’s significant accounting policies as described in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2022, which is included in the Proxy Statement/Prospectus.
Revision of Prior Period Financial Statements of Envoy
During its financial close
process for the three and nine months ended September 30, 2023, the Company discovered an error in Envoy’s accounting for convertible
notes payable (related party) as of June 30, 2023. The convertible notes payable (related party) consists of convertible notes issued
between 2012 and 2022 (the “Convertible Notes”) and the Envoy Bridge Note. When calculating the fair value of the Convertible
Notes as of June 30, 2023, Envoy used an incorrect input in the valuation model related to the Convertible Notes settlement value upon
a Merger with a Special Purpose Acquisition Company (“SPAC”). Specifically, the Business Combination Agreement includes the
assumed exchange ratio of Envoy common stock, par value $
The unaudited condensed consolidated statements of stockholders’ equity (deficit) for the three months ended June 30, 2023, has been revised to treat the Convertible Notes amendment, as described above, as an extinguishment of debt with a related party. As such, the impact of the amendment has been recorded as an additional deemed capital contribution from a related party on the revised unaudited condensed consolidated financial statements.
The revision resulted in a
downward adjustment of previously reported convertible notes payable (related party) of $
The Company also reassessed
the components of cost of goods sold and determined that the costs related to the Acclaim product development and manufacturing of research
and development (“R&D”) prototype parts for testing, validations and clinical trials should be classified as R&D expenses.
Accordingly, $
| 2. | Summary of Significant Accounting Policies |
Going Concern
Since inception, the Company
has incurred cumulative losses from operations and has an accumulated deficit of $
6
Management believes that its existing cash balances combined with future capital raises, and cash receipts from product sales will be sufficient to fund ongoing operations through at least one year from the date the unaudited condensed consolidated financial statements are issued. However, there can be no assurance that the Company will be successful in achieving its strategic plans, that the Company’s cash balances and future capital raises will be sufficient to support its ongoing operations, or that any additional financing will be available in a timely manner or on acceptable terms, if at all. If the Company is unable to raise sufficient financing when needed or events or circumstances occur such that the Company does not meet its strategic plans, the Company may be required to reduce certain discretionary spending, be unable to develop new or enhanced production methods, or be unable to fund capital expenditures, which could have a material adverse effect on the Company’s financial position, results of operations, cash flows, and ability to achieve its intended business objectives. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates and assumptions reflected in these unaudited condensed consolidated financial statements include but are not limited to the useful lives of property and equipment, inventory reserves, warranty liability, the fair value of common stock, the fair value of convertible notes payable, the fair value of forward purchase agreement assets, the fair value of forward purchase agreement warrant liability, the fair value of warrants and the outcome of litigation. Estimates and assumptions are reviewed periodically and the effect of changes, if any, are reflected in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
Concentration of Credit Risk and Significant Customers
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and accounts receivable, net. Periodically, the Company maintains deposits in accredited financial institutions in excess of federally insured limits. The Company maintains its cash with financial institutions that management believes to be of high credit quality. The Company has not experienced any losses on such accounts and does not believe it is exposed to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
With respect to accounts receivable,
the Company performs credit evaluations of its customers and does not require collateral. There have been no material losses on accounts
receivable. There were no customers that accounted for
Cash and Restricted Cash
The Company maintains cash balances in bank accounts which, at times, may exceed federally insured limits. Restricted cash is cash the Company holds for specific reasons and is not available for immediate use.
Fair Value Measurement
The Company determines the fair value of financial assets and liabilities using the fair value hierarchy established in Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The hierarchy describes three levels of inputs that may be used to measure fair value, as follows:
| ● | Level 1 — Observable inputs, such as quoted prices in active markets for identical assets and liabilities. |
| ● | Level 2 — Observable inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| ● | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
7
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The Company elected the fair value option for the convertible notes payable (related party) under ASC Topic 825, Financial Instruments, with changes in fair value recorded in income (loss) from changes in fair value of convertible notes payable (related party) each reporting period. The convertible notes payable (related party) consists of convertible notes issued between 2012 and 2022 (“Convertible Notes”) and the Envoy Bridge Note. The Company’s forward purchase agreement asset, forward purchase agreement warrant liability, and warrant liability (related party) are also Level 3 financial instruments at fair value and are described below (see Note 2 and Note 4).
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign-currency risks. The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives in accordance with ASC Topic 815, “Derivatives and Hedging”. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value on the grant date and is then re-valued at each reporting date, with changes in the fair value reported in the unaudited condensed consolidated statements of operations and comprehensive income (loss). The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative liabilities are classified in the condensed consolidated balance sheets as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date.
The Company accounts for its warrant liability in accordance with ASC 815-40. Accordingly, the Company recognizes the warrant instruments as a liability at fair value and adjusts the instruments to fair value at each reporting period. The warrant liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s unaudited condensed consolidated statements of operations and comprehensive income (loss).
The Company accounts for its Forward Purchase Agreement in accordance with ASC 815-40. Accordingly, the Company recognizes the forward purchase agreement asset and the forward purchase agreement warrant liability at fair value at each reporting period. The assets and liabilities are subject to re-measurement at each balance sheet date, and any change in fair value is recognized in the Company’s unaudited condensed consolidated statements of operations and comprehensive income (loss).
Warrant Liability (Related Party)
The Company classifies certain warrants issued to stockholders to purchase Envoy Common Stock (see Note 10) as a liability on its condensed consolidated balance sheets as these warrants are a free-standing financial instrument that may require the Company to transfer assets upon exercise. The warrant liability was initially recorded at fair value upon the date of issuance and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of the warrant liability are recognized in the Company’s unaudited condensed consolidated statements of operations and comprehensive income (loss). Changes in the fair value of the warrant liability will continue to be recognized until the warrants are exercised, expire or qualify for equity classification.
SPAC Excise Tax Liability
The Company recognizes excise tax as an incremental cost to repurchase the treasury shares, with an offsetting tax liability recognized. The SPAC excise tax liability was recorded in accrued expenses in the Company’s condensed consolidated balance sheets.
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which provides a five-step model for recognizing revenue from contracts with customers as follows:
| ● | Identify the contract with a customer |
| ● | Identify the performance obligations in the contract |
| ● | Determine the transaction price |
| ● | Allocate the transaction price to the performance obligations in the contract |
| ● | Recognize revenue when or as performance obligations are satisfied |
8
Revenue is recognized as performance obligations under the terms of a contract are satisfied, which generally occurs as control of the promised products or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”). To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price using either the expected value or most likely amount method. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information that is reasonably available.
The Company primarily derives revenue from the sale of its hearing device products. Revenue from product sales is recognized upon transfer of control of the product to a customer, which occurs at a point in time, at the time the Company is notified the product has been implanted or used by the customer in a surgical procedure. The Company also sells extended warranty plans on a limited basis. Revenue from extended warranty plans is recognized ratably over time and is immaterial. Amounts received from a customer prior to fulfillment of the performance obligation are included as accrued expenses on the condensed consolidated balance sheets and are immaterial as of September 30, 2023 and December 31, 2022. The Company has elected to account for shipping and handling activities performed as activities to fulfill the promise to transfer the products, and therefore these activities are not assessed as a separate performance obligation to its customers.
Revenue is measured as the amount of consideration the Company expects to receive, which is based on the invoiced price. The majority of the Company’s contracts have a single performance obligation and are short term in nature. The Company’s contracts do not include variable consideration.
Payment terms differ by geography and customer, but payment is generally required within 30 days from the date of product utilization. The Company also offers extended payment plans on a limited basis. Amounts due to the Company under payment plans that extend beyond 12 months are immaterial as of September 30, 2023 and December 31, 2022, therefore the Company does not adjust the promised amount of consideration for the effects of a significant financing component.
Segments
Operating segments are identified as components of enterprise about which discrete financial information is available for evaluation by the chief operating decision-maker (“CODM”) in deciding resource allocation and assessing performance. The Company has determined that its CODM is its Chief Executive Officer. The Company’s CODM reviews financial information presented on a consolidated basis for the purposes of making decisions, allocating resources and evaluating performance. Consequently, the Company has determined it operates in one operating and reportable segment.
Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Effective
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU No 2016-13”). This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The Company adopted Topic 326 with an adoption date of January 1, 2023 using the modified retrospective approach. As a result, the Company changed its accounting policy for allowance for credit losses. The Company monitors accounts receivables and estimates the allowance for lifetime expected credit losses. Estimates of expected credit losses are based on historical collection experience and other factors, including those related to current market conditions and events. The adoption did not have a material effect on the Company’s accompanying unaudited condensed consolidated financial statements.
Other than the item noted above, there have been no new accounting pronouncements not yet effective or adopted in the current year that have a significant impact, or potential significant impact, to our unaudited condensed consolidated financial statements.
9
| 3. | Merger |
As discussed in Note 1 – Nature of the Business and Basis of Presentation, on September 29, 2023, the Company completed the Merger. Upon the Closing, the following occurred:
| ● | Each
share of Envoy Common Stock immediately prior to the Business Combination was automatically cancelled and converted into the right to
receive |
| o | Each
share of outstanding Envoy Common Stock, which totaled |
| o | Each outstanding warrant to purchase Envoy Common Stock, depending on the applicable exercise price, was
automatically cancelled or exercised on a net exercise basis and converted into |
| o | The Convertible Notes were automatically converted into |
| o | Each share of Envoy redeemable convertible preferred stock, par value $ |
| ● | Each outstanding option to purchase shares of Envoy Common Stock outstanding as of immediately prior to the Business Combination was cancelled in exchange for nominal consideration; |
| ● | Each
share of Merger Sub’s common stock, par value $ |
| ● | The
Sponsor forfeited |
| ● | All
of Anzu’s outstanding |
| ● | The Sponsor exchanged |
| ● | An
aggregate of |
| ● | Pursuant
to the legacy forward purchase agreements and the extension support agreements of Anzu, the Sponsor transferred an aggregate of |
| ● | The
Company issued an aggregate of |
| ● | The
Sellers in its sole discretion may request warrants of the Company exercisable for shares of New Envoy Class A Common Stock (the “Shortfall
Warrants”) in an amount equal to |
| ● | The
Company issued, and certain affiliates of the Sponsor purchased, concurrently with the Closing, an aggregate of |
| ● | Pursuant
to the Envoy Bridge Note, the Company issued |
| ● | Pursuant to the Subscription Agreement and the Envoy Bridge Note, the Sponsor and GAT Funding, LLC each contributed additional $ |
10
The
proceeds received by the Company from the Merger, the PIPE Transaction, and the Forward Purchase Agreement, net of transaction costs,
totaled $
The Merger was accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, Anzu was treated as the acquired company for financial reporting purposes. Accordingly, for accounting purposes, the Merger was treated as the equivalent of the Company issuing shares for the net assets of Anzu, accompanied by a recapitalization. The net assets of Anzu were stated at historical cost with no goodwill or other intangible assets recorded.
| Class A Common Stock | Number of Shares | |||
| Exchange of Anzu Class A Common Stock subject to possible redemption that was not redeemed for New Envoy Class A Common Stock | ||||
| Conversion of Anzu Class B Common Stock held by the Sponsor and Anzu’s former independent director into New Envoy Class A Common Stock* | ||||
| Subtotal - Merger, net of redemptions | ||||
| Exchange of Envoy Common Stock for New Envoy Class A Common Stock | ||||
| Exchange of Envoy Preferred Stock for New Envoy Class A Common Stock | ||||
| Conversion of Convertible Notes as of September 29, 2023 into New Envoy Class A Common Stock | ||||
| Net exercise of Envoy Warrants | ||||
| Issuance of share consideration to Meteora parties | ||||
| Shares recycled by Meteora parties | ||||
| * |
| Series A Preferred Stock | Number of Shares | |||
| Exchange of Anzu Class B Common Stock for Series A Preferred Stock | ||||
| Issuance of Series A Preferred Stock in connection with the PIPE Transaction | ||||
| Issuance of Series A Preferred Stock in connection with the conversion of the Envoy Bridge Note | ||||
11
| 4. | Fair Value Measurement |
| September 30, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Forward purchase agreement assets | $ | $ | $ | $ | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Liabilities: | ||||||||||||||||
| Forward purchase agreement warrant liability | $ | $ | $ | $ | ||||||||||||
| Warrant liability | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| December 31, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Convertible notes payable, net of current portion (related party) | $ | $ | $ | $ | ||||||||||||
| Convertible notes payable, current portion (related party) | ||||||||||||||||
| Warrant liability (related party) | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
12
| September 30, 2023 | ||||
| Stock price | $ | |||
| Initial exercise price | ||||
| Remaining term (in years) | ||||
| Risk-free rate | % | |||
The fair value of the Convertible Notes was based on a probability-weighted expected return model (“PWERM”), which is a Level 3 measurement. The valuation includes significant assumptions such as the discount rate, the fair value of the Company’s common stock, volatility, probability of the Convertible Notes being held to maturity, the probabilities of certain exit events, including a qualified financing, initial public offering or merger with a SPAC, and estimated recovery in the event of default.
| December 31, 2022 | ||||
| Share price | $ | |||
| Discount rate | % | |||
| Volatility | % | |||
| Probability of qualified financing | % | |||
| Probability of SPAC/IPO | % | |||
| Probability of default | % | |||
| Probability of held to maturity | % | |||
| Recovery upon default (2012 and 2013 Convertible Notes) | $ | |||
Significant judgment is
required in selecting the inputs. On December 31, 2022, an evaluation was performed to assess those inputs and general market conditions
potentially affecting the fair value of the Convertible Notes. Should the probability of default increase or decrease by
13
Effective concurrently with
the Merger, the outstanding balance of principal and accrued interest of the Convertible Notes was automatically converted into New Envoy
Class A Common Stock and the outstanding balance of principal and accrued interest of the Envoy Bridge Note was converted into Series
A Preferred Stock (see Note 3). As such, the Convertible Notes and Envoy Bridge Note were derecognized from the condensed consolidated
balance sheet. Immediately prior to the Merger, the fair value of the Convertible Notes was calculated by the multiplying the amount of
New Envoy Class A Common Stock the Convertible Notes converted into by the fair value of these shares. The fair value of the New Envoy
Class A Common Stock was based on the listed prices for the shares, immediately prior to the Merger. Immediately prior to the Merger,
the fair value of the Envoy Bridge Note was calculated by multiplying the amount of Series A Preferred Stock the Envoy Bridge Note converted
into, by the fair value of these shares. The fair value of the Series A Preferred Stock was estimated using a Monte Carlo Simulation model,
which is a Level 3 fair value measurement.
| September 30, 2023 | ||||
| Underlying stock price | ||||
| Exercise price | ||||
| Expected term (in years) | ||||
| Expected volatility | % | |||
The Company has classified the warrant liability within Level 1 of the hierarchy as the warrant liability is separately listed and traded in an active market. The warrant liability’s listed price in an active market was used as the fair value.
The Company has classified
the warrants (related party) within Level 3 of the hierarchy as the fair value is derived using the Black-Scholes option pricing model,
which uses a combination of observable (Level 2) and unobservable (Level 3) inputs. Key estimates and assumptions impacting the fair value
measurement include (i) the expected term of the warrants, (ii) the risk-free interest rate, (iii) the expected dividend
yield and (iv) expected volatility of the price of the underlying common stock. The Company estimated the fair value per share of
the underlying common stock based, in part, on the results of third-party valuations and additional factors deemed relevant. The risk-free
interest rate was determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual
term of the warrants. The Company estimated a
| December 31, 2022 | ||||
| Risk-free interest rate | % | |||
| Expected dividend yield | % | |||
| Expected term (in years) | ||||
| Expected volatility | % | |||
14
| Convertible Notes and Envoy Bridge Note (Related Party) | Warrant Liability (Related Party) | Forward Purchase Agreement Asset | Forward Purchase Agreement Warrant Liability | |||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | $ | ||||||||||||
| Issuances | ||||||||||||||||
| Change in fair value | ||||||||||||||||
| Balance as of March 31, 2023 | $ | $ | $ | $ | ||||||||||||
| Issuances | ||||||||||||||||
| Change in fair value | ||||||||||||||||
| Capital contribution | ( | ) | ||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | $ | ||||||||||||
| Issuances | $ | $ | ||||||||||||||
| Change in fair value | ( | ) | ||||||||||||||
| Conversion | ( | ) | ( | ) | ||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | $ | ||||||||||||
There were no transfers between Level 1 and Level 2, nor into and out of Level 3, during the periods presented.
| 5. | Restricted cash |
Pursuant to the Envoy Bridge
Note, GAT Funding, LLC contributed $
Pursuant to the certificate
of designation of the Series A Preferred Stock, the Company is required to maintain the funds allocated for the first four dividend payments
in a separate account, and as such, $
15
| 6. | Inventories |
| September 30, 2023 | December 31, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-progress | ||||||||
| Finished goods | ||||||||
| $ | $ | |||||||
| 7. | Operating Leases |
The Company leases its headquarters office space in Minnesota and leases office space in Germany. The lease for the Company’s headquarters office space expires at the end of 2027. This headquarters office space lease is with a stockholder, which is considered a related party. The lease of the office space in Germany is not with a related party and is immaterial.
| September 30, 2023 | December 31, 2022 | |||||||
| Operating lease right-of-use assets (related party) | $ | $ | ||||||
| Operating lease liability, current portion (related party) | $ | $ | ||||||
| Operating lease liabilities, net of current portion (related party) | ||||||||
| $ | $ | |||||||
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Operating lease cost | $ | $ | ||||||
| $ | $ | |||||||
16
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | $ | ||||||
| September 30, 2023 | December 31, 2022 | |||||||
| Weighted-average remaining lease term - in years | ||||||||
| Weighted-average discount rate | % | % | ||||||
| Amount | ||||
| 2023 (remaining) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Less: Imputed interest | ( | ) | ||
| $ | ||||
17
| 8. | Product Warranty Liability |
| Amount | ||||
| Balance as of December 31, 2022 | $ | |||
| Utilization | ( | ) | ||
| Balance as of March 31, 2023 | $ | |||
| Reversal of product warranty accrual | ( | ) | ||
| Utilization | ( | ) | ||
| Balance as of June 30, 2023 | $ | |||
| Reversal of product warranty accrual | ( | ) | ||
| Utilization | ( | ) | ||
| Balance as of September 30, 2023 | $ | |||
The assumptions utilized in
developing the liability as of September 30, 2023, include an estimated cost per unit of $
| 9. | Convertible Notes Payable (Related Party) |
The Company received several
loan financings from stockholders from 2012 to 2023, in an aggregate outstanding principal amount of $
2012 Convertible Note
In 2012, the Company issued
a convertible note to a stockholder (“2012 Convertible Note”), which was subsequently amended and restated. These amendments
allowed for the issuance of additional principal under the existing agreements and resulted in various drawdowns since 2012. In March
2021, the 2012 Convertible Note agreement was amended and restated to allow for an additional draw of $
The
outstanding principal amount of the 2012 Convertible Note was $
At any time prior to maturity,
at the sole discretion of the noteholder, the outstanding principal amount plus accrued and unpaid interest may have been converted into
shares of Envoy Common Stock at a conversion price of $
In the event that the Company
obtained additional equity financing pursuant to which the Company sold shares of either common or preferred stock, at the sole discretion
of the stockholder, the principal amount plus accrued and unpaid interest would convert to the class of stock being offered in the financing
at a price per share equal to
18
On April 17, 2023, the 2012 Convertible Note was amended as part of the Business Combination Agreement, to provide for automatic conversion immediately prior to the Merger. The conversion formula was not adjusted as part of this amendment. The loan amendment was accounted for as an extinguishment with a related party and treated as a deemed capital contribution.
Effective concurrently with
the Merger, the outstanding balance of principal and any unpaid accrued interest was automatically converted into New Envoy Class A Common
Stock at a conversion price of $
2013 Convertible Notes
In
2013, the Company issued convertible notes to various stockholders (“2013 Convertible Notes”), which were subsequently amended
and restated. The outstanding principal amount of these notes was $
On April 17, 2023, the 2013 Convertible Notes were amended as part of the Business Combination Agreement to provide for automatic conversion immediately prior to the Merger. The conversion formula was not adjusted as part of this amendment. The loan amendment was accounted for as an extinguishment with a related party and treated as a deemed capital contribution.
Effective concurrently with
the Merger, the outstanding balance of principal and any unpaid accrued interest was automatically converted into New Envoy Class A Common
stock at a conversion price of $
Envoy Bridge Note (“2023 Convertible Note”)
On April 17, 2023, the Company
entered into a convertible promissory note agreement with a stockholder for an aggregate borrowing capacity of $
The difference between the proceeds received and the issuance-date fair value was recorded as a deemed capital contribution from related party in the unaudited condensed consolidated statements of stockholders’ equity (deficit).
The Company could have prepaid
the Envoy Bridge Note in whole or in part without premium or penalty. Contingent upon, and effective concurrently with the Merger, the
outstanding balance of principal and any unpaid accrued interest, automatically converted to Series A Preferred Stock at a conversion
price of $
If
the Business Combination Agreement terminated pursuant to its terms, at the sole discretion of the noteholder, the outstanding
principal amount plus accrued and unpaid interest could have been converted into shares of Envoy Common Stock at a conversion price of
$
If
the Business Combination Agreement terminated pursuant to its terms and in the event that the Company obtained additional equity
financing pursuant to which the Company sold shares of either common or preferred stock, at the sole discretion of the noteholder, the
principal amount plus accrued and unpaid interest would have converted to the class of stock being offered in the financing at a price
per share equal to
19
On August 23, 2023, the Envoy
Bridge Note was amended pursuant to which the Company could have drawn an additional $
Effective concurrently with
the Merger, the outstanding balance of principal and any unpaid accrued interest, was automatically converted to Series A Preferred Stock
at a conversion price of $
| 10. | Common Stock |
As of September 30, 2023 and
December 31, 2022, the Company was authorized to issue
Contingent Sponsor Shares
Pursuant to the Sponsor Support
Agreement,
The Contingent Sponsor Shares meets the definition of a derivative, but meets the criteria to be considered indexed to the Company’s stock and the equity-classification criteria. Accordingly, the Contingent Sponsor Shares are classified as permanent equity.
Common Stock Warrants (Related Party)
Between November 2013 and July 2022, the Company issued warrants to purchase shares of Envoy Common Stock to stockholders in connection with the issuance of the Convertible Notes and the issuance of Envoy Preferred Stock.
In July 2022, the Company
issued a warrant to purchase
On April 17, 2023, the common
stock warrants were amended to provide for automatic cashless exercise or cancellation of the warrants immediately prior to the Merger.
On September 29, 2023, the warrants were canceled or converted on a net exercise basis into shares of New Envoy Class A Common Stock.
Out of the
20
There were no outstanding
common stock warrants (related party) as of September 30, 2023.
| Year of issue | Numbers of Shares Issuable | Exercise Price | Expiration Date | Classification | |||||||||
| 2013 | $ | ||||||||||||
| 2015 | $ | ||||||||||||
| 2017 | $ | ||||||||||||
| 2018 | $ | ||||||||||||
| 2019 | $ | ||||||||||||
| 2021 | $ | ||||||||||||
| 2022 | $ | ||||||||||||
| 11. | Series A Preferred Stock |
As
of September 30, 2023, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue
Pursuant to the Envoy Bridge
Note, the Sponsor Support Agreement and the Subscription Agreement, the Company issued an aggregate of
Pursuant
to the Subscription Agreement and the Envoy Bridge Note, the Sponsor and GAT Funding, LLC each contributed additional $
The holders of the Series A Preferred Stock has the following rights and preferences:
Voting rights
The holders of the Series A Preferred Stock are not entitled to vote or receive notice of any meeting of stockholders, except in the case that the Company creates any equity or debt instrument that ranks senior or pari passu to the rights of the Series A Preferred Stock or in the case of any adverse change to the powers, preferences or special rights of the Series A Preferred Stock.
Conversion rights
Each
share of Series A Preferred Stock shall be convertible, at the option of the holder, at any time after the date of issuance into such
number of shares of New Envoy Class A Common Stock as determined by dividing the issuance price of the shares of Series A Preferred
Stock of $
21
At any time from and after
90 days following the Merger, if the closing price per share of New Envoy Class A Common Stock is greater than $
Redemption
The holders of Series A Preferred Stock are not entitled to any redemption rights, other than those under their liquidation rights discussed below. The Company does not have the option to redeem the Series A Preferred Stock.
Dividend Rights
The holders of Series A Preferred
Stock are entitled to a cumulative dividend which accrues at the rate of
There were no dividends declared
as of September 30, 2023. As the Company is required to maintain the funds allocated for the first four dividend payments in a separate
account, $
Pursuant to the Sponsor Support
Agreement, any dividends arising shall accrue and not require timely payment at any time when the Company has less than $
Liquidation preference
In
the event of any liquidation, deemed liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holder
of the Series A Preferred Stock is entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds
of the Company to the holders of any security of the Company that ranks junior to the Series A Preferred Stock, including, but not limited
to, the New Envoy Class A Common Stock, an amount per share of Series A Preferred Stock equal to the greater of i) $
| 12. | Stock Options |
The Company had a stock incentive
plan (the “2003 Stock Option Plan”) that provided for the granting of stock options or other stock incentives to employees,
officers, directors and consultants. The 2003 Stock Option Plan was administered by the Board, or a committee designated by the Board,
which determined the persons who were to receive awards under the 2003 Stock Option Plan, the number of shares subject to each award and
the term and exercise price of each award. The maximum term of options granted under the 2003 Stock Option Plan was ten years. The number
of shares of Envoy Common Stock authorized to be issued was
In March 2013, the Company
and its stockholders adopted a new plan (the “2013 Stock Option Plan”) on substantially the same terms and conditions of the
2003 Stock Option Plan. The Company and its stockholders reserved a total of
On April 17, 2023, the Company and the stock option holders agreed that the stock options will be cancelled and terminated for no consideration upon the Merger.
22
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options. No stock options were granted during the nine months ended September 30, 2023 and 2022.
Immediately before the Merger and as of December 31, 2022, all stock options outstanding were fully vested and there was no unrecognized stock-based compensation expense related to nonvested awards. Upon the Merger, the stock options were cancelled and terminated for nominal consideration.
| Options | Weighted-average Exercise Price per Option | Weighted-average Remaining Contractual Term (Years) | Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2022 | $ | | | $ | ||||||||||||
| Outstanding at September 30, 2022 | ||||||||||||||||
| Exercisable and vested at September 30, 2023 | ||||||||||||||||
The aggregate intrinsic value
of stock options outstanding as of December 31, 2022 is
| 13. | Related Party Transactions |
The Company leases its headquarters
office space in Minnesota from a stockholder, which is considered a related party (see Note 7). The lease is considered a common control
leasing arrangement. The lease liability due to the stockholder was approximately $
The Company received several loan financings from stockholders between 2012 to 2023 (see Note 9).
The Company recorded a payable
to related party of $
| 14. | Commitment and Contingencies |
The Company is party to various litigation matters arising from time to time in the ordinary course of business. In January 2020, the Company’s controlling stockholder and convertible debt holder, along with current and former directors of the Company were named in a lawsuit brought by minority stockholders (the “Spearman Plaintiffs”). This lawsuit alleges our controlling stockholder of “self-dealing” in order to obtain control of the Company. In February 2020, there was a similar lawsuit referring to and citing the first lawsuit brought up by additional minority stockholders alleging our controlling stockholder and directors of similar wrong-doings. The February 2020 lawsuit was withdrawn in 2021. In June 2023, the Company received an additional complaint from additional stockholders affiliated or associated with the Spearman Plaintiffs, raising claims that were substantially the same as the claims raised in the existing litigation.
23
On August 25, 2023, the Company entered into a binding agreement in principle to settle all claims and counterclaims in the lawsuit. On September 15, 2023, the parties entered into a binding settlement agreement. The settlement agreement includes a transfer of all of the plaintiff’s stockholdings in Envoy to an entity affiliated with the majority stockholder of the Company, which was completed on September 28, 2023. The settlement agreement did not require any payment to be made by the Company.
The Company has business liability
insurance to cover litigation costs exceeding $
| 15. | Net Income (Loss) per Share |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Less: Cumulative undeclared preferred dividends and undistributed earnings allocated to participating securities, basic | ( | ) | ||||||||||||||
| Net income (loss) attributable to common stockholders, basic | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Less: Undistributed earnings allocated to participating securities, diluted | ( | ) | ||||||||||||||
| Net income (loss) attributable to common stockholders, diluted | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Denominator: | ||||||||||||||||
| Weighted average common stock outstanding, basic | ||||||||||||||||
| Net income (loss) per share attributable to common stockholders, basic | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Weighted average common stock outstanding, diluted | ||||||||||||||||
| Net income (loss) per share attributable to common stockholders, diluted | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
24
The
Company’s potentially dilutive securities have been excluded from the computation of diluted net loss per share as the effect would
be to reduce the net loss per share. Therefore, the weighted-average number of shares of New Envoy Class A Common Stock outstanding
used to calculate both basic and diluted net loss per share attributable to stockholders of New Envoy Class A Common Stock is the same.
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Stock options | ||||||||
| Series A Preferred Stock (as converted to common stock) | ||||||||
| Warrants to purchase common stock | ||||||||
| Contingent Sponsor Shares | ||||||||
| 16. | Subsequent Events |
The Company has evaluated all events occurring through November 17, 2023, the date on which these unaudited condensed consolidated financial statements were issued, and during which time, nothing has occurred outside the normal course of business operations that would require disclosure, except for the following:
Stock Options
On October 15, 2023, the Company
granted
Litigation
On November 14, 2023, Atlas Merchant Capital SPAC Fund I LP (the “Plaintiff”), a stockholder of the Company, filed a complaint (the “Complaint”) against Daniel Hirsch, Whitney Haring-Smith, the Sponsor and the Company, as successor to ANZU Special Acquisition Corp. I, (collectively, the “Defendants”) in the Court of Chancery of the State of Delaware. The Complaint alleges a claim for breach of Anzu’s Amended and Restated Certificate of Incorporation (the “Anzu Charter”) against the Company, a claim for breach of fiduciary duty against Mr. Hirsch, Dr. Haring-Smith and the Sponsor and claims for unjust enrichment, fraudulent misrepresentation and tortious interference with economic relations against the Defendants. The Complaint alleges that, among other things, after the Plaintiff submitted a redemption request for its shares of Class A Common Stock in connection with the Company’s special meeting of stockholders held on September 27, 2023, Plaintiff thereafter withdrew its redemption request, then Defendants declined to honor Plaintiff’s request to reinstate its redemption election because the request to reinstate its redemption election occurred after the redemption deadline of September 25, 2023.
The Complaint seeks specific performance to compel the Defendants to honor Atlas’ redemption request, monetary damages, attorneys’ fees and expenses. The Company believes the claims asserted in the Complaint to be without merit and intends to vigorously defend the litigation. At this time the Company does not believe that an unfavorable outcome is probable, and it is not possible to predict the outcome of the proceeding or its impact on the Company.
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes included elsewhere in this Quarterly Report on Form 10-Q (this “Report”), as well as the information contained in the Company’s final prospectus and definitive proxy statement, dated and filed with the Securities and Exchange Commission (the “SEC”) on September 14, 2023 (the “Proxy Statement/Prospectus”), which is accessible on the SEC’s website at www.sec.gov. Unless otherwise indicated or the context otherwise requires, references in this section to the “Company,” “Envoy Medical,” “we,” “us,” “our” and other similar terms refer (i) prior to the Closing Date, to Anzu Special Acquisition Corp I and (ii) after the Closing Date, to Envoy Medical, Inc.
Cautionary Note Regarding Forward-Looking Statements
This Report contains certain “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). All statements other than statements of historical fact contained in this Report, including statements as to future results of operations and financial position, revenue and other metrics, products, business strategy and plans, objectives of management for future operations of the Company, market size and growth, competitive position and technological and market trends, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. All forward-looking statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to:
| ● | The Company’s performance following the merger transaction between Envoy Medical Corporation (“Envoy”), Anzu Special Acquisition Corp I (“Anzu”) and Envoy Merger Sub, Inc., a directly, wholly owned subsidiary of Anzu (“Merger Sub”) that was completed on September 29, 2023 (the “Merger” or “Business Combination”); |
| ● | Changes in the market price of shares of our Class A common stock, par value $0.0001 per share (the “Class A Common Stock”) after the Business Combination, which may be affected by factors different from those that affected the price of shares of Anzu Class A common stock, par value $0.0001 per share (“Anzu Class A Common Stock”); |
| ● | Unpredictability in the medical device industry, the regulatory process to approve medical devices, and the clinical development process of the Company’s products; |
| ● |
Potential need to make design changes to products to meet desired safety and efficacy endpoints; | |
| ● |
Changes in federal or state reimbursement policies that would adversely affect sales of the Company’s products; | |
| ● |
Introduction of other scientific advancements, including gene therapy or pharmaceuticals, that may impact the need for hearing devices such as cochlear implants or fully implanted active middle ear implants; | |
| ● | Competition in the medical device industry, and the failure to introduce new products and services in a timely manner or at competitive prices to compete successfully against competitors; |
| ● | Disruptions in relationships with the Company’s suppliers, or disruptions in the Company’s own production capabilities for some of the key components and materials of its products; |
| ● | Changes in the need for capital and the availability of financing and capital to fund these needs; |
| ● | The Company’s ability to realize some or all of the anticipated benefits of the Business Combination; |
| ● | Changes in interest rates or rates of inflation; |
| ● | Legal, regulatory and other proceedings could be costly and time-consuming to defend; |
| ● | Changes in applicable laws or regulations, or the application thereof on the Company; |
| ● | A loss of any of the Company’s key intellectual property rights or failure to adequately protect intellectual property rights; |
| ● | The Company’s ability to maintain the listing of its securities on Nasdaq following the Business Combination; |
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| ● | The effects of catastrophic events, including war, terrorism and other international conflicts; and |
| ● | Other risks and uncertainties indicated in the Proxy Statement/Prospectus, including those set forth under the section entitled “Risk Factors.” |
Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results may vary in material respects from those expressed or implied by these forward-looking statements. Nothing in this Report should be regarded as a representation by any person that the forward-looking statements set forth herein will be achieved or that any of the contemplated results of such forward-looking statements will be achieved. You should not place undue reliance on these forward-looking statements. The Company does not give any assurance that it will achieve its expected results and does not undertake any duty to update these forward-looking statements, except as required by law.
As described above, Envoy entered into a business combination agreement with Anzu Special Acquisition Corp I (“Anzu”) on April 17, 2023 (as amended, the “Business Combination Agreement”).The Business Combination was completed on September 29, 2023, in connection with which Anzu changed its name to Envoy Medical, Inc. (and together with its subsidiaries, “Envoy Medical”, the “Company”, “we”, “us” or “our”, unless the context otherwise requires).
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements as of September 30, 2023 and December 31 2022, and the three and nine months ended September 2023 and 2022, together with the notes thereto included elsewhere in this Report. It should also be read in conjunction with the audited consolidated financial statements as of and for the years ended December 31, 2022 and 2021, together with related notes thereto included in the Proxy Statement/Prospectus, which is accessible on the SEC’s website at www.sec.gov.
The following discussion contains forward-looking statements based upon Envoy Medical’s current expectations that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section of the Proxy Statement/Prospectus titled “Risk Factors” and/or elsewhere in this Report. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. All dollar amounts are expressed in thousands of United States dollars (“$”), unless otherwise indicated.
Overview
We are a hearing health company focused on providing innovative medical technologies across the hearing loss spectrum. Our technologies are designed to shift the paradigm within the hearing industry and bring both providers and patients the hearing devices they desire.
Founded in 1995, our vision is to create fully implanted hearing devices that leverage the natural ear – not an artificial microphone – to pick up sound. In recent years, we have focused almost exclusively on developing the fully implanted Acclaim® cochlear implant (the “Acclaim”), our lead product candidate.
We believe that the Acclaim is a first-of-its-kind cochlear implant. Our fully implanted technology includes a sensor designed to leverage the natural anatomy of the ear instead of a microphone to capture sound. The Acclaim is designed to address severe to profound sensorineural hearing loss that is not adequately addressed by hearing aids. The Acclaim will only be indicated for adults who have been deemed adequate candidates by a qualified physician. The Acclaim received the Breakthrough Device Designation from the United States Food and Drug Administration (the “FDA”) in 2019.
Our first product, the Esteem®, was created and received FDA approval in 2010. The Esteem is a fully implanted active middle ear hearing device and remains the only FDA approved fully implanted hearing device in the US market. Unfortunately, the Esteem failed to gain commercial traction, primarily due to a lack of reimbursement or insurance coverage from third-party payors.
Despite commercial challenges, approximately 1,000 Esteem devices were implanted. Some devices had been implanted in the early 2000s during clinical trials, providing Envoy Medical with nearly two decades of experience with its implantable sensor technology. Throughout our experience, our sensor technology proved a viable alternative and robust option to external or implanted microphones.
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In late 2015, we made the decision to shift our focus from the Esteem to a new product that would leverage our sensor technology and incorporate it into a cochlear implant. As a result, we now have the Acclaim®, a fully implanted cochlear implant. We believe the Acclaim gives us an opportunity to disrupt the existing cochlear implant market. The cochlear implant market is one that already has established market acceptance and reimbursement pathways. In the United States, before we can market a new Class III medical device, which the Acclaim is, we must first receive FDA approval via the premarket application approval process. We currently anticipate obtaining FDA approval in mid-2026, although the FDA approval process is uncertain, and we cannot guarantee that we will receive FDA approval on that timeline, or at all.
We had a net income of approximately $1.6 million and net loss of $25.0 million for the three and nine months ended September 30, 2023, respectively, and had an accumulated deficit of $251.0 million and $226.0 million as of September 30, 2023 and December 31, 2022, respectively. We have funded our operations to date primarily through the issuance of equity securities and convertible debt and in September 2023, we received $11.7 million proceeds from the Business Combination (see Note 1 “Nature of the Business and Presentation” of the accompanying unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2023 and 2022 included elsewhere in this Report). We expect to continue to incur net losses for the foreseeable future, and expect our research and development expenses, general and administrative expenses, and capital expenditures will continue to increase. In particular, we expect our expenses to increase as we continue our development of the Acclaim and seek the necessary regulatory approvals for our product candidate, as well as hire additional personnel, pay fees to outside consultants, attorneys and accountants, and incur other increased costs associated with being a public company. In addition, if and when we seek and obtain regulatory approval to commercialize the Acclaim in the United States, we will also incur increased expenses in connection with commercialization and marketing of such product. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials, if any, and our expenditures on other research and development activities. We anticipate that our expenses will increase significantly in connection with our ongoing activities, if and as we:
| ● | continue our research and development efforts for the Acclaim product candidate, including through clinical trials; |
| ● | seek additional regulatory and marketing approvals in jurisdictions outside the United States; |
| ● | establish a sales, marketing and distribution infrastructure to commercialize our product candidate; |
| ● | rely on our third-party suppliers and manufacturers to obtain adequate supply of materials and components for our products; |
| ● | seek to identify, assess, acquire, license, and/or develop other product candidates and subsequent generations of our current product candidate; |
| ● | seek to maintain, protect, and expand our intellectual property portfolio; |
| ● | seek to identify, hire, and retain additional skilled personnel; |
| ● | create additional infrastructure to support our operations as a public company and our product candidate development and planned future commercialization efforts; and |
| ● | experience any delays or encounter issues with respect to any of the above, including, but not limited to, failed studies, complex results, safety issues or other regulatory challenges that require longer follow-up of existing studies or additional supportive studies in order to pursue marketing approval. |
We expect that our financial performance will fluctuate quarterly and yearly due to the development status of our Acclaim implant product and our efforts to obtain regulatory approval and commercialize the Acclaim implant product.
The Acclaim has not yet been approved for sale. We do not expect to generate any product sales unless and until we successfully complete development and obtain regulatory approval for our product candidate. If we obtain regulatory approval for the Acclaim, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. As a result, until such time, if ever, that we can generate substantial product revenue, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including collaborations, licenses or similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed or on favorable terms, if at all. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies, including our research and development activities. If we are unable to raise capital, we will need to delay, reduce, or terminate planned activities to reduce costs.
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Macroeconomic Conditions
Our business and financial performance are impacted by macroeconomic conditions. Global macroeconomic challenges, such as the effects of the ongoing war between Russian and Ukraine, the Middle East conflict, supply chain constraints, market uncertainty, volatility in exchange rates, inflationary trends and evolving dynamics in the global trade environment have impacted our business and financial performance.
Furthermore, a recession or market correction resulting from macroeconomic factors could materially affect our business and the value of our Class A Common Stock. The occurrence of any such events may lead to reduced disposable income which could adversely affect the number of Esteem implants and replacement components sold as a result of customer and patient reluctance to seek treatment due to financial considerations.
Adverse macroeconomic conditions, other pandemics or international tensions, could also result in significant disruption of global economic conditions and consumer trends, as well as a significant disruption in financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity.
Revision of Prior Period Financial Statements
We revised the unaudited condensed consolidated balance sheets as of June 30, 2023, and the unaudited condensed consolidated statement of operations and comprehensive income (loss) for the three and six months ended June 30, 2023 as filed in the Proxy Statement/Prospectus. This resulted in a downward adjustment of previously reported convertible notes payable (related party) of $14.6 million, and an upward adjustment of $14.7 million in additional paid-in capital on the unaudited condensed consolidated balance sheets as of June 30, 2023, and an increase in the loss from change in the fair value of convertible note payable (related party) of $91 thousand for the three and six months ended June 30, 2023. Further, we revised the statements of stockholders’ equity (deficit) to treat the convertible notes amendment as an extinguishment of debt with a related party. The impact of the amendment has been recorded as an additional deemed capital contribution from a related party on the revised unaudited condensed consolidated financial statements.
We also revised the unaudited condensed consolidated statement of operations and comprehensive income (loss) for the three and six months ended June 30, 2023 to correct the classification of certain costs pertaining to the development of Acclaim between cost of goods sold and research and development costs.
See Note 1 “Revision of Prior Period Financial Statements of Envoy” of the accompanying unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2023 and 2022 included elsewhere in this Report.
Key Components of Our Results of Operations
Revenue
Currently, we derive substantially all our revenue from the sale of the Esteem implants and replacement components to Esteem implants. We enter arrangements with patients to provide them with the Esteem device, personal programmer devices, sound processor/battery replacements, and/or an optional Care Plan, each of which are outputs of our ordinary activities in exchange for consideration. Revenue from product sales is recognized upon transfer of control of the product to a customer, which occurs at a point in time, when we are notified the product has been implanted or used by the customer in a surgical procedure. New implantations of the Esteem are not expected to be more than a few per year and may be as low as zero. Although we believe unlikely, Esteem implantations could potentially increase with favorable reimbursement policy and coverage changes. We will continue our efforts to pursue positive reimbursement changes for fully implanted active middle ear implants. There will be continued nominal revenue from replacement of sound processors for patients who need a new battery.
Upon commercialization of our Acclaim implant product, we expect Acclaim revenue to more than replace Esteem revenue. We expect to obtain FDA approval for the Acclaim in 2026.
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Cost of goods sold
Cost of goods sold includes direct and indirect costs related to the manufacturing and distribution of the Esteem implants, including materials, labor costs for personnel involved in the manufacturing process, distribution-related services, indirect overhead costs, and charges for excess and obsolete inventory reserves and inventory write-offs.
We expect cost of goods sold to increase or decrease in absolute dollars primarily as, and to the extent, our revenue grows or declines, respectively.
Operating Expenses
Research and development expenses
Research and development (“R&D”) expenses consist of costs incurred for our research activities, primarily our discovery efforts and the development of the Acclaim implant product. We also incur R&D costs related to continuing to support, and improve upon where possible, our Esteem product. We expense R&D costs as incurred, which include:
| ● | salaries, employee benefits, and other related costs for our personnel engaged in R&D functions; |
| ● | service fees incurred under agreements with independent consultants, including their fees and related travel expenses engaged in R&D functions; |
| ● | costs of laboratory testing including supplies and acquiring, developing, and manufacturing study materials; and |
| ● | facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs. |
Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors, service providers and our clinical sites.
Our R&D expenses are currently tracked on a program-by-program basis. The majority of our R&D costs during the three and nine months ended September 30, 2023 and 2022 were incurred for the development of the Acclaim.
Our products require human clinical trials to obtain regulatory approval for commercial sales. We cannot determine with certainty the size, duration, or completion costs of future clinical trials, or if or when they may be completed. Furthermore, we do not know if the clinical trials will show positive or negative results, or what those results will mean for regulatory approval or commercialization efforts.
The duration, costs and timing of future clinical trials and development of our products will depend on a variety of factors, including:
| ● | the scope, rate of progress, and expense of our ongoing, as well as any additional, clinical trials and other R&D activities; |
| ● | Interest in or demand for both investigational site and subject enrollment; |
| ● | future clinical trial results; |
| ● | potential changes in government regulation; |
| ● | potential changes in the reimbursement landscape; and |
| ● | the timing and receipt of any regulatory approvals. |
A change in the outcome of any of these variables with respect to the development of our Acclaim implant product could mean a significant change in the costs and timing associated with the development of that implant. If the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate, or if we experience significant delays in the enrollment in any clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.
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R&D activities are central to our business model. We expect that our R&D expenses will continue to increase for the foreseeable future as we initiate clinical trials for the Acclaim implant product and prepare the product for possible commercialization, should it gain regulatory approval(s). If the Acclaim implant product enters later stages of clinical trials and ongoing development, the product will generally have higher R&D costs than those in earlier stages of research and development, primarily due to simultaneously running clinical trials while also iterating the product for commercialization and preparing for the needs of commercialization. There are numerous factors associated with the successful commercialization of the Acclaim implant product or any products we may develop in the future, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development program and plans.
General and administrative expenses
General and administrative expenses consist primarily of salaries, benefits, and other related costs for personnel in our executive, operations, legal, human resources, finance, and administrative functions. Administrative expenses also include professional fees for legal, patent, consulting, accounting, tax and audit services, travel expenses and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities, technology, and other operating costs.
We expect our general and administrative expenses to increase in the foreseeable future as we increase our administrative personnel to support our continuing growth, our costs of marketing and selling expenses, our costs of expanding our operations and operating as a public company. These increases will likely include increases related to the hiring of additional personnel and legal, regulatory, and other fees and services associated with maintaining compliance with Nasdaq Marketplace Rules, or the Nasdaq Listing Rules and SEC requirements, director and officer insurance costs and investor relations costs associated with being a public company.
Loss from changes in fair value of convertible notes payable (related party)
We elected the fair value option for convertible notes payable (related party), and accordingly, convertible notes payable (related party) are recorded at fair value at each reporting date on the consolidated balance sheets. Gain (loss) from changes in fair value of convertible notes payable consists of changes in the fair value during each reporting period.
Other expense
Our other expense consists of changes in fair value of our warrant liability (related party) and gains and losses on sales of fixed assets.
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Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2023 and 2022
| Three Months Ended September 30, | Change in | Nine Months Ended September 30, | Change in | |||||||||||||||||||||||||||||
| (In thousands, except percentages) | 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||
| Net revenues | $ | 80 | $ | 57 | $ | 23 | 40 | % | $ | 221 | $ | 217 | $ | 4 | 2 | % | ||||||||||||||||
| Costs and operating expenses: | ||||||||||||||||||||||||||||||||
| Cost of goods sold | 189 | 106 | 83 | 78 | % | 555 | 347 | 208 | 60 | % | ||||||||||||||||||||||
| Research and development | 1,850 | 935 | 915 | 98 | % | 5,901 | 3,532 | 2,369 | 67 | % | ||||||||||||||||||||||
| General and administrative | 1,426 | 812 | 614 | 76 | % | 5,401 | 2,138 | 3,263 | 153 | % | ||||||||||||||||||||||
| Total costs and operating expenses | 3,465 | 1,853 | 1,612 | 87 | % | 11,857 | 6,017 | 5,840 | 97 | % | ||||||||||||||||||||||
| Operating loss | (3,385 | ) | (1,796 | ) | (1,589 | ) | 88 | % | (11,636 | ) | (5,800 | ) | (5,836 | ) | 101 | % | ||||||||||||||||
| Other expense: | ||||||||||||||||||||||||||||||||
| (Loss) gain from changes in fair value of convertible notes payable (related party) | 4,902 | 574 | 4,328 | 754 | % | (13,332 | ) | 1,473 | (14,805 | ) | -1005 | % | ||||||||||||||||||||
| Other expense | 46 | (117 | ) | 163 | -139 | % | (59 | ) | (119 | ) | 60 | -50 | % | |||||||||||||||||||
| Total other expense, net | 4,948 | 457 | 4,491 | 983 | % | (13,391 | ) | 1,354 | (14,745 | ) | -1089 | % | ||||||||||||||||||||
| Net income (loss) | 1,563 | (1,339 | ) | 2,902 | -217 | % | (25,027 | ) | (4,446 | ) | (20,581 | ) | 463 | % | ||||||||||||||||||
Revenue
Revenue increased $23 thousand for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, due to an increase in replacement component sales.
Revenue increased $4 thousand for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. This increase is primarily due to an increase of $23 thousand in the third quarter of 2023, offset by $19 thousand decrease in the first two quarters of 2023 as a result of a decrease in replacement component sales due to supply chain issues with obtaining manufacturing components. This issue was resolved in the second quarter of 2023.
Cost of goods sold
Cost of goods sold increased $83 thousand and approximately $0.2 million for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022, respectively. The increase is primarily due to an increase in salaries, consulting fees, and scrap costs. The increase in salaries and consulting fees is mainly due to increased headcount in our manufacturing and quality departments in the first three quarters of 2023. The increase in scrap costs was primarily due to higher scrap costs incurred related to Esteem manufacturing testing.
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Research and development expenses
The following table summarizes the components of our R&D expenses for the three and nine months ended September 30, 2023 and 2022:
| Three Months Ended September 30, | Change in | Nine Months Ended September 30, | Change in | |||||||||||||||||||||||||||||
| (In thousands, except percentages) | 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||
| R&D product costs | $ | 1,110 | $ | 491 | $ | 619 | 126 | % | $ | 3,548 | $ | 1,901 | $ | 1,647 | 87 | % | ||||||||||||||||
| R&D personnel costs | 619 | 389 | 230 | 59 | % | 2,003 | 1,411 | 592 | 42 | % | ||||||||||||||||||||||
| Other R&D costs | 121 | 55 | 66 | 120 | % | 350 | 220 | 130 | 59 | % | ||||||||||||||||||||||
| Total research and development costs | $ | 1,850 | $ | 935 | $ | 915 | 98 | % | $ | 5,901 | $ | 3,532 | $ | 2,369 | 67 | % | ||||||||||||||||
R&D expenses increased approximately $0.9 million and $2.4 million for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022, respectively. The increase is primarily due to a $0.6 million and $1.6 million increase in R&D product costs for the three and nine months ended September 30, 2023, as we develop our cochlear product in preparation for our pivotal clinical study for the Acclaim. Also contributing to the increase was an increase of $0.2 million and $0.6 million in personnel and salary costs for the three and nine months ended September 30, 2023, respectively, as we increased headcount across our clinical, regulatory, and cochlear departments.
General and administrative expenses
General and administrative expenses increased $0.6 million and $3.3 million for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022, respectively. The increase is primarily due to a $0.2 million and $2.2 million increase in professional and legal fees for the three and nine months ended September 30, 2023, respectively, related to the finalization of the Business Combination in the third quarter of 2023 and a $0.3 million and $0.4 million increase in personnel-related costs for the three months and nine months ended September 30, 2023, respectively, as we increased headcount in preparation for the future commercialization of our Acclaim implant product.
Loss from changes in fair value of convertible notes payable (related party)
Gain from changes in fair value of convertible notes payable increased $4.3 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Loss from change in fair value of convertible notes payable increased $14.8 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The fair value of the convertible notes payable was based on a probability-weighted expected return model and included unobservable inputs such as the discount rate and probabilities of certain exit events, including a qualified financing, initial public offering or merger with a SPAC, and estimated recovery in the event of default. The loss recorded on convertible notes payable increased significantly in the first quarter and second quarter of 2023 as the probability of a merger with a special-purpose acquisition company increased and the probability of default decreased. The fair value of the convertible notes payable decreased in the third quarter of 2023, which was mainly caused by the fact that the stock price of the Company upon the Business Combination was lower than what was expected in the second quarter of 2023. See Note 4 “Fair Value Measurement” of the accompanying unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2023 and 2022 included elsewhere in this Report.
Other Expense
Other expense increased by $60 thousand for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to an increase in the fair values of warrant liability (related party) in the first quarter of 2023, offset by the exercise and cancellation of the warrants (related party) immediately prior to the Business Combination in the third quarter of 2023.
Liquidity and Capital Resources
Since our inception, we have incurred significant operating losses. We expect to incur significant expenses and continuing operating losses for the foreseeable future as we advance the clinical development of our products. We have funded our operations to date primarily with proceeds from raising funds from issuing equity securities, convertible notes and proceeds from the Business Combination. As of September 30, 2023 and December 31, 2022, we had $7.4 million and $0.2 million of cash, respectively, and zero and $5.0 million in undrawn principal from our convertible notes, respectively.
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We proactively manage our access to capital to support liquidity and continued growth. Our sources of capital include sales of the Esteem implants and replacement components and issuances of our Class A Common Stock, Series A Preferred Stock, warrants, convertible debt and other financing agreements such as the forward purchase agreement. See Note 1 “Nature of the Business and Basis of Presentation” of the accompanying unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2023 and 2022 included elsewhere in this Report.
We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements. There can be no assurance that we will be successful in acquiring additional funding at levels sufficient to fund our operations or on terms favorable to us. If we are unable to raise sufficient financing when needed or events or circumstances occur such that we do not meet our strategic plans, we may be required to reduce certain discretionary spending, be unable to develop new or enhanced production methods, or be unable to fund capital expenditures, which could have a material adverse effect on our financial position, results of operations, cash flows, and ability to achieve its intended business objectives. These matters raise substantial doubt about our ability to continue as a going concern. To the extent that we raise additional capital through additional collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our Acclaim implant, future revenue streams, research programs or to grant licenses on terms that may not be favorable to us. If we do raise additional capital through public or private equity or convertible debt offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends.
Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section of the Proxy Statement/Prospectus titled “Risk factors – Risks Related to Envoy’s Business and Operations.”
Cash Flows
The following table presents a summary of our cash flow for the periods indicated (in thousands):
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | (5,946 | ) | $ | (6,426 | ) | ||
| Investing activities | (132 | ) | (177 | ) | ||||
| Financing activities | 22,736 | 6,092 | ||||||
| Effect of exchange rate on cash | (1 | ) | (1 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | $ | 16,657 | $ | (512 | ) | |||
Cash Flows Used in Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2023 was primarily used to fund a net loss of approximately $25.0 million, adjusted for non-cash expenses in aggregate amount of approximately $13.2 million and approximately $5.8 million of cash generated from net changes in the levels of operating assets and liabilities, primarily related to an increase in accounts payable, accrued expenses and related party payable, partially offset by increases in accounts receivable, prepaid expenses and other current assets and decreases in product warranty liability and lease liabilities. We will continue to evaluate our capital requirements for both short-term and long-term liquidity needs, which could be affected by various risks and uncertainties, including, but not limited to, the effects of the current inflationary environment, rising interest rates, and other risks detailed in the section of the Proxy Statement/Prospectus titled “Risk Factors.”
Net cash used in operating activities for the nine months ended September 30, 2022 was primarily used to fund a net loss of approximately $4.4 million, adjusted for non-cash gains in aggregate amount of approximately $1.3 million, and approximately $0.7 million of cash outflows from net changes in the level of operating assets and liabilities, primarily related to a decrease in accounts payable and accrued expenses and an increase in inventory.
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Cash Flows Used in Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2023 was $0.1 million and consisted of purchases of computer equipment due to increased headcount and purchases of lab equipment.
Net cash used in investing activities for the nine months ended September 30, 2022 was approximately $0.2 million and consisted of purchases of computer equipment due to increased headcount and purchases of lab equipment.
Cash Flows Provided by Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2023 was $22.7 million. This increase was primarily driven by the $11.7 million net proceeds from the Business Combination and was also driven by $10.0 million proceeds from the issuance of convertible notes payable to a related party.
Net cash provided by financing activities for the nine months ended September 30, 2022 was $6.1 million and consisted of proceeds of $6.0 million from the issuance of convertible notes payable to a related party.
Contractual Obligations and Commitments
Our principal commitments consist of contractual cash obligations under our borrowings with stockholders, our operating leases for office space, and various litigation matters arising in the ordinary course of business. Immediately prior to the Business Combination, the convertible note payable (related party) was converted and as such, is not included on our condensed consolidated balance sheets as of September 30, 2023. Our obligations for leases are described in Note 7 “Operating Leases”, and for further information on our open litigation matters, see Note 14 “Commitments and Contingencies” of the accompanying unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2023 and 2022 included elsewhere in this Report.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined under the rules and regulations of the SEC.
Related Party Arrangements
Our related party arrangements consist of leasing our headquarters office space from a stockholder, receiving loan financings from stockholders. We also recorded a payable to a stockholder on our condensed consolidated balance sheets as of September 30, 2023. For further information on the related party arrangements refer to Note 5 “Restricted Cash”, Note 7 “Operating Leases”, Note 9 “Convertible Notes Payable (Related Party)” and Note 13 “Related Party Transactions” of the accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2023 and 2022 included elsewhere in this Report.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of our operations is based on our consolidated financial statements and accompanying notes, which have been prepared in accordance with accounting principles generally accepted in the United States. Certain amounts included in or affecting the consolidated financial statements presented in this Report and related disclosure must be estimated, requiring management to make assumptions with respect to values or conditions which cannot be known with certainty at the time the consolidated financial statements are prepared. Management believes that the accounting policies set forth below comprise the most important “critical accounting policies” for the company. A “critical accounting policy” is one which is both important to the portrayal of our financial condition and results of operations and that involves difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management evaluates such policies on an ongoing basis, based upon historical results and experience, consultation with experts and other methods that management considers reasonable in the particular circumstances under which the judgments and estimates are made, as well as management’s forecasts as to the manner in which such circumstances may change in the future.
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Fair Value Measurement
We determine the fair value of financial assets and liabilities using the fair value hierarchy established in Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The hierarchy describes three levels of inputs that may be used to measure fair value, as follows:
| ● | Level 1 — Observable inputs, such as quoted prices in active markets for identical assets and liabilities. |
| ● | Level 2 — Observable inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| ● | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Management uses valuation techniques in measuring the fair value of financial instruments, where active market quotes are not available.
The following table summarizes the activity for the Company’s Level 3 instruments measured at fair value on a recurring basis (in thousands):
| Convertible
Notes and Envoy Bridge Note (Related Party) | Warrant Liability (Related Party) | Forward Purchase Agreement Asset | Forward Purchase Agreement Warrant Liability | |||||||||||||
| Balance as of December 31, 2022 | $ | 33,845 | $ | 127 | $ | - | $ | - | ||||||||
| Issuances | 2,048 | - | - | - | ||||||||||||
| Change in fair value | 9,377 | 104 | - | - | ||||||||||||
| Balance as of March 31, 2023 | $ | 45,270 | $ | 231 | $ | - | $ | - | ||||||||
| Issuances | 1,964 | - | - | - | ||||||||||||
| Change in fair value | 8,857 | - | - | - | ||||||||||||
| Capital contribution | (14,678 | ) | - | - | - | |||||||||||
| Balance as of June 30, 2023 | $ | 41,413 | $ | 231 | $ | - | $ | - | ||||||||
| Issuances | 1,964 | - | $ | 2,386 | $ | 1,793 | ||||||||||
| Change in fair value | (4,902 | ) | - | - | - | |||||||||||
| Conversion | (38,475 | ) | (231 | ) | - | - | ||||||||||
| Balance as of September 30, 2023 | $ | - | $ | - | $ | 2,386 | $ | 1,793 | ||||||||
The fair value of the convertible notes payable (related party) is based on a probability-weighted expected return model (“PWERM”), which represents Level 3 measurements. The valuation utilized unobservable inputs, including estimates of the probability and timing of future commercialization of products not yet approved by the FDA or other regulatory agencies. Other significant assumptions include the discount rate, the fair value of our Class A Common Stock, volatility, probability of the convertible notes being held to maturity, the probabilities of certain exit events, including a qualified financing, initial public offering or merger with a special-purpose acquisition company, and estimated recovery in the event of default.
We classified warrants within Level 3 of the hierarchy as the fair value is derived using the Black-Scholes option pricing model, which uses a combination of observable (Level 2) and unobservable (Level 3) inputs. Key estimates and assumptions impacting the fair value measurement include (i) the expected term of the warrants, (ii) the risk-free interest rate, (iii) the expected dividend yield and (iv) expected volatility of the price of the underlying shares of Class A Common Stock.
The fair values of the forward purchase agreement assets and the forward purchase agreement warrant liability were estimated using Monte Carlo Simulation models, which are Level 3 fair value measurements. Key estimates and assumptions impacting the fair value measurement include (i) the Company’s stock price, (ii) the initial exercise price, (iii) the remaining term and (iv) the risk-free rate.
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Research and Development Expenses
We will incur substantial expenses associated with prototyping, improvements, testing and clinical trials. Accounting for clinical trials relating to activities performed by external vendors requires us to exercise significant estimates regarding the timing and accounting for these expenses. We estimate costs of R&D activities conducted by service providers, which include the conduct of sponsored research and contract manufacturing activities. The diverse nature of services being provided for our clinical trials and other arrangements, the different compensation arrangements that exist for each type of service and the lack of timely information related to certain clinical activities complicates the estimation of accruals for services rendered by third parties in connection with clinical trials. We record the estimated costs of R&D activities based upon the estimated amount of services provided but not yet invoiced and include these costs in the accrued expenses or prepaid expenses on the balance sheets and within R&D expense on the consolidated statements of operations. In estimating the duration of a clinical study, we evaluate the start-up, treatment and wrap-up periods, compensation arrangements and services rendered attributable to each clinical trial and fluctuations are regularly tested against payment plans and trial completion assumptions.
We estimate these costs based on factors such as estimates of the work completed and budget provided and in accordance with agreements established with our collaboration partners and third-party service providers. We make significant judgments and estimates in determining the accrued liabilities and prepaid expense balances in each reporting period. As actual costs become known, we adjust our accrued liabilities or prepaid expenses. We have not experienced any material differences between accrued costs and actual costs incurred since our inception.
Our expenses related to clinical trials will be based on estimates of patient enrollment and related expenses at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions that may be used to conduct and manage clinical trials on our behalf. We will accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we will modify our estimates of accrued expenses accordingly on a prospective basis.
Product Warranty
During 2013, we offered a lifetime warranty to clinical trial patients to cover battery and surgery related costs. We estimate the costs that may be incurred under this lifetime warranty and record a liability in the amount of such costs at its present value. The assumptions utilized in developing the liability include an estimated cost per unit of $6 thousand, an average battery life of 5 years, inflationary increases, discount rate, and an average patient life calculated on probabilities outlined in the PRI-2012 mortality tables, published from the Society of Actuaries.
Recently Issued/Adopted Accounting Pronouncements
A discussion of recently issued accounting pronouncements and recently adopted accounting pronouncements is included in Note 2 “Summary of Significant Accounting Policies” of our unaudited condensed consolidated financial statements as of September 30, 2023, and December 31, 2022 and the three and nine months ended September 30, 2023 and 2022 included elsewhere in this Report.
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Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of market risks, including currency risk, credit and counterparty risk, and inflation risk, as set out below. We manage and monitor these exposures to ensure appropriate measures are implemented in a timely and effective manner. Save as disclosed below, we did not hedge or consider it necessary to hedge any of these risks.
Currency Risk
Foreign currency risk is the risk that the value of a financial instrument fluctuates because of the change in foreign exchange rates. We primarily operate in the United States and Germany with most of the transactions settled in the United States dollar. Our presentation and functional currency is the United States dollar. Certain bank balances, deposits and other payables are denominated in the Euro, which exposes us to foreign currency risk. However, any transactions that may be conducted in foreign currencies are not expected to have a material effect on our results of operations, financial position or cash flows.
Credit and Counterparty Risk
Financial instruments that potentially expose us to concentrations of credit risk consist primarily of cash and accounts receivable, net. Periodically, we maintain deposits in accredited financial institutions in excess of federally insured limits. We maintain cash with financial institutions that management believes to be of high credit quality. We have not experienced any losses on such accounts and do not believe we are exposed to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
With respect to accounts receivable, we perform credit evaluations of our customers and do not require collateral. There have been no material losses on accounts receivable. There were no customers that accounted for 10% or more of sales for the three and nine months ended September 30, 2023 and 2022.
Inflation Risk
Inflationary factors, such as increases in our cost of goods sold and selling and operating expenses, may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain and increase our gross margin and selling and marketing and operating expenses as a percentage of our revenue if the selling prices of our products do not increase as much as or more than these increased costs.
Emerging Growth Company
Section 102(b)(1) of the Jumpstart Our Business Startups Act (“JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or no not have a class of securities registered under the Securities Exchange Act of 1934, as amended) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public and private companies, we, as an emerging growth company, can adopt the new or revised standard at the time the private companies adopt the new or revised standard, until such time we are no longer considered to be an emerging growth company. At times, we may elect to early adopt a new or revised standard.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are not required to provide the information otherwise required under this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Securities Exchange Act of 1934, as amended (the “Exchange Act”) reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended September 30, 2023, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. In their assessment of the effectiveness of internal control over financial reporting as of September 30, 2023, management concluded that such controls and procedures were ineffective and that there were control deficiencies that constituted material weaknesses. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s financial results.
Material Weaknesses in Internal Control Over Financial Reporting
Management concluded the following material weaknesses existed as of the period covered by this report.:
| ● | The Company does not maintain a sufficient complement of personnel with accounting knowledge, experience and training to appropriately analyze, record and disclose certain accounting matters to provide reasonable assurance of preventing material misstatements. |
| ● | The Company’s management does not implement a formal risk assessment that addresses risks relevant to financial reporting objectives, including fraud risks. |
| ● | The Company has not designed, documented and maintained formal accounting policies, procedures and controls over significant accounts and disclosures to achieve complete, accurate and timely financial accounting, reporting and disclosures, including segregation of duties and adequate controls related to the preparation, posting, modification and review of journal entries. |
| ● | The Company has not designed and maintained effective controls over certain information technology general controls for information systems that are relevant to the preparation of its consolidated financial statements, including ineffective controls around user access and segregation of duties. |
Considering this, we performed additional procedures and analyses as deemed necessary to ensure that our financial statements were prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Additionally, in connection with management’s subsequent re-evaluation of its previously issued financial statements, management concluded that a deficiency in internal control over financial reporting existed relating to the accounting treatment for the valuation of a material liability and that such deficiency also constituted a material weakness.
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Notwithstanding the conclusion by our principal executive officer and principal financial officer that our disclosure controls and procedures as of September 30, 2023 were not effective, and notwithstanding the material weaknesses in our internal control over financial reporting described above, management believes that the unaudited condensed consolidated financial statements and related financial information included in this Quarterly Report fairly present in all material respects our financial condition, results of operations and cash flows as of the dates presented, and for the periods ended on such dates, in conformity with U.S. GAAP.
The Company has begun implementation of a plan to remediate these material weaknesses. These remediation measures are ongoing and include the following steps:
| ● | hiring additional accounting and financial reporting personnel with appropriate technical accounting knowledge and public company experience in financial reporting; |
| ● | designing and implementing effective processes and controls over significant accounts and disclosure; |
| ● | designing and implementing security management and change management controls over information technology systems, including adjusting user access levels and implementing external logging on activity and periodic review of such logs; and |
| ● | reviewing candidate accounting advisory firms to assist with the documentation, evaluation, remediation and testing of the Company’s internal control over financial reporting based on the criteria established in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. |
Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be involved in various claims and legal actions in the ordinary course of business. We are not currently involved in any material legal proceedings outside the ordinary course of our business.
As previously disclosed, in January 2020, Patrick Spearman, a shareholder of Envoy, and certain other Envoy shareholders (collectively, the “Initial Spearman Plaintiffs”) filed a lawsuit in the District Court of Ramsey County, Minnesota (Case No. 62-CV-20-790) against each current and certain former members of the Envoy board of directors, including Glen A. Taylor, as well as GAT Funding, LLC (“GAT”), an entity affiliated with Mr. Taylor, Franz Altpeter, Chuck Brynelsen, David Fabry, Ed Flaherty, Allen Lenzmeier, Brent Lucas, Roger Lucas, Randy Nitzsche and Paul Waldon (collectively, the “Envoy Defendants”). The Initial Spearman Plaintiffs alleged that the terms of financing transactions between GAT and Mr. Taylor on the one hand and Envoy on the other hand were unreasonably favorable to GAT and Mr. Taylor, that Mr. Taylor breached his fiduciary duty as a shareholder, that each defendant breached his fiduciary duty as a director in approving such transactions and engaged in common law fraud in not sufficiently disclosing the transactions, a claim of unjust enrichment against GAT and Mr. Taylor, and claims against the other directors for aiding and abetting and conspiracy in relation to the claims against GAT and Mr. Taylor. The Envoy directors asserted a defamation counterclaim, through which the directors sought damages against certain of the plaintiffs.
In June 2023, Envoy received an additional complaint from additional shareholders affiliated or associated with the Initial Spearman Plaintiffs (the “Additional Spearman Plaintiffs” and, together with the Initial Spearman Plaintiffs, the “Spearman Plaintiffs”) raising claims that were substantially the same as the claims raised in the existing Initial Spearman Plaintiffs’ litigation.
On August 25, 2023, the parties entered into a binding agreement in principle to settle all claims and counterclaims in the lawsuit, which agreement in principle was formalized in a settlement agreement dated September 15, 2023 (the “Settlement Agreement”). Under the terms of the Settlement Agreement, (i) an entity affiliated with Mr. Taylor purchased approximately 39 million shares of Envoy Common Stock held by the Spearman Plaintiffs, constituting all of the shares of Envoy owned by the Spearman Plaintiffs, which purchase was completed on September 28, 2023, (ii) the Spearman Plaintiffs and the Envoy Defendants fully released all claims and counterclaims and dismissed the related litigation, and (iii) the Spearman Plaintiffs agreed to vote in favor of the Business Combination and related matters submitted to a vote of the Envoy shareholders at Envoy’s special meeting of shareholders held September 29, 2023. Envoy was not required to make any cash payment pursuant to the terms of the Settlement Agreement. Both the Spearman Plaintiffs and the Envoy Defendants denied any wrongdoing or liability pursuant to the terms of the Settlement Agreement.
On November 14, 2023, Atlas Merchant Capital SPAC Fund I LP (the “Plaintiff”), a stockholder of the Company, filed a complaint (the “Complaint”) against Daniel Hirsch, Whitney Haring-Smith, the Sponsor and the Company, as successor to ANZU Special Acquisition Corp. I, (collectively, the “Defendants”) in the Court of Chancery of the State of Delaware. The Complaint alleges a claim for breach of Anzu’s Amended and Restated Certificate of Incorporation (the “Anzu Charter”) against the Company, a claim for breach of fiduciary duty against Mr. Hirsch, Dr. Haring-Smith and the Sponsor and claims for unjust enrichment, fraudulent misrepresentation and tortious interference with economic relations against the Defendants. The Complaint alleges that, among other things, after the Plaintiff submitted a redemption request for its shares of Class A Common Stock in connection with the Company’s special meeting of stockholders held on September 27, 2023, Plaintiff thereafter withdrew its redemption request, then Defendants declined to honor Plaintiff’s request to reinstate its redemption election because the request to reinstate its redemption election occurred after the redemption deadline of September 25, 2023.
The Complaint seeks specific performance to compel the Defendants to honor Atlas’ redemption request, monetary damages, attorneys’ fees and expenses. The Company believes the claims asserted in the Complaint to be without merit and intends to vigorously defend the litigation. At this time the Company does not believe that an unfavorable outcome is probable, and it is not possible to predict the outcome of the proceeding or its impact on the Company.
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Item 1A. Risk Factors
As a smaller reporting company, we are not required to provide the information called for by this Item. However, for a discussion of the material risks, uncertainties and other factors that could have a material effect on us, please refer to the risk factors disclosed in the section of the Proxy Statement/Prospectus titled “Risk Factors.”
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
During the fiscal quarter ended September 30, 2023, there were no unregistered sales of our securities that were not reported in a Current Report on Form 8-K.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
During the fiscal quarter ended September 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
In connection with the closing of the Business Combination, the Company adopted its Amended and Restated Bylaws, which, among other things, set forth certain procedures by which its stockholders may recommend nominees to the Company’s board of directors, as described in more detail in the Proxy Statement/Prospectus.
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Item 6. Exhibits
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| * | Filed herewith |
| ** | Furnished herewith |
| # | Indicates management contract or compensatory plan or arrangement. |
| † | Certain schedules and exhibits to this Exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Registrant agrees to furnish supplemental copies of all omitted exhibits and schedules to the Securities and Exchange Commission upon its request. |
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PART III SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Envoy Medical, Inc. | |||
| Date: | November 17, 2023 | By: | /s/ Brent T. Lucas |
| Brent T. Lucas | |||
| Chief Executive Officer | |||
| (principal executive officer) | |||
| Date: | November 17, 2023 | By: | /s/ David R. Wells |
| David R. Wells | |||
| Chief Financial Officer | |||
| (principal financial and accounting officer) | |||
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Exhibit 10.10
EMPLOYMENT AGREEMENT
This Employment Agreement (“Agreement”) is made and entered into effective as of August 15, 2023 (the “Effective Date”) by and between Envoy Medical Corporation, a Minnesota corporation (the “Company”), and David R. Wells, an individual resident of the State of Arizona (the “Executive”).
WITNESSETH:
WHEREAS, the Executive shall be hired to serve as the Chief Financial Officer of the Company and the Company desires to secure the Executive’s services for the Company, and the Executive is willing to make such services available to the Company; and
WHEREAS, the Executive understands that he is being hired as Chief Financial Officer of the Company in connection with the Company becoming a publicly traded company through a business combination (the “Business Combination”) to be completed pursuant to that certain Business Combination Agreement, dated April 17, 2023 (the “Business Combination Agreement”), by and among Anzu Special Acquisition Corp I, a Delaware corporation that will be renamed Envoy Medical, Inc. (“Parent,” ), Envoy Merger Sub, Inc., a Delaware corporation and a direct wholly owned subsidiary of Anzu, and the Company; and
WHEREAS, for purposes of securing the Executive’s services for the Company, the Company has directed the proper officers of the Company to enter into an employment agreement with the Executive on the terms and conditions set forth herein; and
NOW, THEREFORE, in consideration of the premises and the mutual covenants and obligations hereinafter set forth, the Company and the Executive hereby agree as follows:
| 1. | Employment; Employment Period. |
(a) The Company hereby agrees to hire and employ the Executive as Chief Financial Officer, and the Executive hereby agrees to such employment, during the period and upon the terms and conditions set forth in this Agreement. Except as otherwise provided in this Agreement to the contrary, this Agreement shall be effective as of the Effective Date and will remain in effect until the third anniversary of the Effective Date (the “Employment Period”), provided that the Employment Period shall be automatically extended for additional one year terms unless either the Company or Executive provides the other party with notice of non-renewal at least 90 days prior to the expiration of the Employment Period.
(b) The Executive hereby represents and warrants to, and covenants with, the Company that the execution and delivery by the Executive of this Agreement does not, and his performance of the Executive’s obligations hereunder will not, constitute a breach of any agreement, written or oral, to which the Executive is a party or by which the Executive is bound, and will not subject the Company to any claims by Executive’s current or former employer(s), business partners or affiliates.
| 2. | Duties and Positions. |
During the term of this Agreement while employed by the Company, the Executive shall devote his full business time and attention to the business and affairs of the Company and shall use his reasonable best efforts to advance the interests of the Company and its subsidiaries and perform such duties as are consistent with his position as Chief Financial Officer, as may be assigned to him by the Chief Executive Officer or the Board of Directors of the Company (the “Board of Directors”).
| 3. | Base Salary, Incentive Compensation, Change in Control Vesting of Equity Awards. |
(a) In consideration of the services rendered by the Executive under this Agreement, the Company shall pay to the Executive during the period the Executive is employed by the Company a base salary at the rate of $315,000 per annum (the “Base Salary”). The Base Salary shall be paid in accordance with the Company’s customary payroll practices. The Base Salary may be adjusted from time to time as determined by the vote of the Board of Directors or its Compensation Committee. The Base Salary may not be adjusted downward unless part of a salary reduction applicable to all employees or all management employees and with the Executive’s written consent.
(b) The Executive will be eligible for incentive compensation or equity compensation as may be determined by the Board of Directors or its Compensation Committee (“Incentive Compensation”). For the first year of employment, and contingent upon the closing of the Business Combination (the “Closing”) and the effectiveness of the Parent Assignment, the Company will use its best efforts to cause Parent to issue to Executive equity awards in such amounts and on such terms and conditions as shall be approved by the Compensation Committee of the Parent Board of Directors. Additionally, the Executive and the Company have agreed to a target cash incentive bonus of $50,000 (the “Cash Bonus”) for the first year of employment, and contingent upon the Closing. The payment of the Cash Bonus is subject to the Executive achieving certain milestones determined and approved by the Board of Directors or its Compensation Committee.
(c) Upon a Change in Control, subject to Executive remaining an employee of the Company through such Change in Control, all remaining unvested shares subject to the Executive’s outstanding options or other compensatory equity awards covering shares of the Company’s common stock will accelerate vesting in full as of immediately prior to the completion of the Change in Control.
For purposes of this Section 3(c), “Change in Control” means the occurrence of the first to occur of any of the following events:
(i) Change in Ownership of the Company. A change in the ownership of the Company which occurs on the date that any one person, or more than one person acting as a group (“Person”), acquires ownership of the stock of the Company that, together with the stock held by such Person, constitutes more than 50% of the total voting power of the stock of the Company, except that any change in the ownership of the stock of the Company as a result of a private financing of the Company that is approved by the Board of Directors will not be considered a Change in Control; or
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(ii) Change in Effective Control of the Company. If the Company has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, a change in the effective control of the Company which occurs on the date that a majority of members of the Board of Directors (“Directors”) is replaced during any twelve (12) month period by Directors whose appointment or election is not endorsed by a majority of the members of the Board of Directors prior to the date of the appointment or election. For purposes of this clause (ii), if any Person is considered to be in effective control of the Company, the acquisition of additional control of the Company by the same Person will not be considered a Change in Control; or
(iii) Change in Ownership of a Substantial Portion of the Company’s Assets. A change in the ownership of a substantial portion of the Company’s assets which occurs on the date that any Person acquires (or has acquired during the 12 month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than 50% of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions. For purposes of this subsection (iii), gross fair market value means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.
For purposes of this Change in Control definition, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the Company. Notwithstanding the foregoing, (1) a transaction will not be deemed a Change in Control unless the transaction qualifies as a change in control event within the meaning of Section 409A (as defined in Section 7 below), and (2) the successful completion of the Business Combination, will not be deemed a Change in Control. Further and for the avoidance of doubt, a transaction will not constitute a Change in Control if: (x) its sole purpose is to change the jurisdiction of the Company’s incorporation, or (y) its sole purpose is to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction.
| 4. | Executive Benefit Plans and Programs; Working Facilities and Expenses. |
(a) The Executive shall be entitled to four (4) weeks of vacation time each year (annualized for partial years) during the Employment Period and such other holiday, sick and personal days, if any, as provided in the Company’s policy for employees. Unused vacation days can be carried over into any subsequent year but the vacation accrual cannot exceed four (4) weeks.
(b) While employed by the Company, and subject to the Company’s right to amend, modify or terminate any plan or program, the Executive shall be entitled to participate in and receive benefits under all of the Company’s employee welfare benefit plans and programs, as the Company may maintain from time to time, in accordance with the terms and conditions of such plans and programs and in accordance with the Company’s customary practices, including but not limited to hospitalization, medical and major medical, life, accidental death and dismemberment, travel accident and short term and long term disability insurance plans, or any other employee benefit plan, program, policy, practice, arrangement or entitlement made generally available by the Company in the future to its employees subject to and on a basis consistent with the terms, conditions and overall administration of such plans, programs, policies, practices, arrangements or entitlements.
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(c) During the term of this Agreement and while employed by the Company, it is acknowledged that the Executive’s principal place of employment shall be not at the Company’s facilities in Minnesota and instead will be in the state of Arizona. The Company and the Executive agree that the Executive is required to work at least four business days per month out of the Company’s offices in Minnesota. The Company will pay or reimburse Executive’s reasonable travel for business on the Company’s behalf from Arizona, lodging, meal and related incidental costs, consistent with the Company’s travel policies in effect from time to time. The Company requires presentation of receipts or an itemized accounting prior to making any reimbursements under this paragraph. If Executive is unable to be onsite in the Minnesota office for four days in a given month due to other business travel, this provision can be waived by the Chief Executive Officer in writing (email acceptable) and it will not be deemed a breach of this Agreement.
| 5. | Termination of Employment with Company Liability. |
(a) In the event that the Executive’s employment with the Company shall terminate during the Employment Period on account of:
(i) the Executive’s voluntary resignation from employment with the Company upon at least thirty (30) days’ prior written notice to the Company within 30 days of the following: (A) any failure to timely pay the Executive’s Base Salary as provided in Section 3 which is not remedied by the Company within five (5) days following written notice thereof from the Executive; or (B) a material breach of this Agreement by the Company, which is not remedied by the Company within thirty (30) days following written notice thereof from the Executive; or (C) the Company’s requiring the Executive to be based at any office or location other than as provided in Section 4 or as otherwise mutually agreed upon by the Executive and the Company, which is not remedied by the Company within thirty (30) days after the Company’s receipt of written notice thereof from the Executive; or (D) a material adverse change in the Executive’s working conditions, functions, duties, reporting relationship, or responsibilities, which the Company fails to cure within thirty (30) days following written notice thereof from the Executive; (any of clauses (A) - (D) being referred to herein as “Good Reason”); or
(ii) the discharge of the Executive by the Company for any reason other than for Cause as provided in Section 6(a) and not due to the Executive’s death as provided in Section 5(b) or Disability as provided in Section 5(c); then, subject to Section 5(d) and Section 7, the Company shall pay or provide, as applicable, to the Executive (collectively, the “Termination Severance Payments”):
| (x) | the Executive’s earned but unpaid salary, and earned but unpaid Incentive Compensation, if applicable, as of the date of the termination of the Executive’s employment with the Company; |
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| (y) | the benefits, if any, to which he is entitled as a former employee under the Company’s employee benefit plans and programs and compensation plans and programs in accordance with the Company’s regular payroll practices; and |
| (z) | severance pay at the rate of the Base Salary then in effect, payable monthly, for a period of 12 months. |
(iii) The Company may terminate this Agreement in connection with the termination of the Business Combination Agreement for any reason without the completion of the Business Combination, upon which termination the Company will pay Executive severance pay equal to three months of Base Salary.
(b) In the event that the Executive’s employment with the Company shall terminate during the Employment Period on account of the death of the Executive while employed by the Company, the Company shall pay to the Executive’s surviving spouse or such other beneficiary as the Executive may designate in writing, or if there is neither, to his estate, in addition to any other benefits to which he (or the legal representative of his estate, as applicable) is then entitled under the Company’s applicable benefit plans and programs, in a lump sum within 30 days following the date of the Executive’s death, his earned but unpaid salary as of the date of Executive’s death, and an amount equal to the sum of 12 months of the Executive’s Base Salary at the rate in effect on the date of Executive’s death.
(c) In the event that the Company terminates Executive’s employment with the Company during the term of this Agreement due to the Executive’s Disability, the Company shall pay to the Executive, in addition to any other benefits to which he is then entitled under the Company’s applicable benefit plans and programs, (i) in a lump sum within 30 days of the date of such termination for Disability, his earned but unpaid salary as of the date of the termination of his employment with the Company, and (ii) subject to Section 7, severance pay with an aggregate value equal to the sum of 12 months of the Executive’s Base Salary at the rate in effect on the date of such termination for Disability.
For purposes of this Agreement, “Disability” means the Executive’s total and permanent disability within the meaning of the Company’s long-term disability plan for employees, if any, or if no such policy is available, any physical or mental disability or incapacity that renders the Executive incapable of performing the services required of the Executive in accordance with the Executive’s obligations under Section 2 hereof for a period of three consecutive months or for shorter periods aggregating three months during any twelve month period. If there is a dispute with respect to whether the Executive has incurred a Disability, the parties shall submit the issue of his Disability to a panel composed of three physicians whose decision on the issue shall be binding upon the parties. The Executive and the Company shall each appoint one member of the panel and the two members so elected shall appoint the third member of the panel. The Executive shall make himself available for examination by said physicians at such time and place as the Company shall reasonably direct. The expenses of such examination shall be borne by the Company.
(d) The Executive shall be entitled to the Termination Severance Payments set forth in Section 5(a) only if the Executive executes within 60 days of termination of employment, does not rescind, and fully complies with a release agreement in a form supplied by the Company, which will include, but not be limited to, a comprehensive release of claims against the Company and its directors, officers, employees and all related parties, in their official and individual capacities (the “Release”). Any Termination Severance Payments will be first made following the expiration of any recission period included in the Release.
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| 6. | Termination without Additional Company Liability. |
In the event that the Executive’s employment with the Company shall terminate during the Employment Period on account of:
(a) the discharge of the Executive for “Cause”, which, for purposes of this Agreement, shall mean a discharge because: (i) the Executive has intentionally and willfully failed to perform his assigned duties under this Agreement (including for these purposes, the Executive’s inability to perform such duties consistent with customary practices as a result of drug or alcohol dependency) in any material respect and the Executive has not cured such failure within 30 days following written notice thereof from the Company; (ii) the Executive has intentionally and willfully engaged in illegal conduct in connection with his performance of services for the Company; (iii) the Executive has been convicted of, or pleaded guilty or nolo contendere (or similar plea) to, a felony or a crime of moral turpitude; (iv) the Executive has intentionally and willfully violated, in any material respect, any law, rule, regulation, written agreement or final cease-and-desist order with respect to his performance of services for the Company; (v) the Executive has filed a petition in bankruptcy or been adjudicated bankrupt by a court of competent jurisdiction, which has materially and adversely affected the Company; or (vi) the Executive has intentionally and willfully breached in any material respect the material terms of this Agreement and the Executive does not cure such failure within 30 days following written notice thereof from the Company;
(b) the Executive’s voluntary resignation from employment with the Company for reasons other than those specified in Section 5(a)(i); or
(c) the expiration of this Agreement in accordance with its terms;
then the Company shall have no further obligations under this Agreement, other than the payment to the Executive of his earned but unpaid salary, and earned but unpaid bonus compensation, if applicable, as of the date of the termination of his employment with the Company and the provision of such other benefits, if any, to which he is entitled as a former employee under the Company’s employee benefit plans and programs and compensation plans and programs.
For purposes of Section 6(a) above, no act, or failure to act, on the Executive’s part shall be considered “willful” unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interests of the Company.
| 7. | Section 409A. |
(a) The Company intends that all payments and benefits provided under this Agreement or otherwise are exempt from, or comply with, the requirements of Section 409A so that none of the payments or benefits will be subject to the additional tax imposed under Section 409A, and any ambiguities and ambiguous terms in this Agreement will be interpreted in accordance with this intent. No payments or benefits to be provided to the Executive, if any, under this Agreement or otherwise, when considered together with any other severance payments or separation benefits that are considered deferred compensation under Section 409A (together, the “Deferred Payments”) will be paid or otherwise provided until the Executive has a “separation from service” within the meaning of Section 409A. To the extent required to be exempt from or comply with Section 409A, references to the termination of the Executive’s employment or similar phrases used in this Agreement will mean the Executive’s “separation from service” within the meaning of Section 409A.
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(b) Any payments or benefits paid or provided under this Agreement that satisfy the requirements of the “short-term deferral” rule under Treasury Regulation Section 1.409A-1(b)(4), or that qualify as payments made as a result of an involuntary separation from service under Treasury Regulation Section 1.409A-1(b)(9)(iii) that is within the limit set forth thereunder, will not constitute Deferred Payments for purposes of this Section 7.
(c) Notwithstanding any provisions to the contrary in this Agreement, if the Executive is a “specified employee” within the meaning of Section 409A at the time of the Executive’s separation from service (other than due to the Executive’s death), then the Deferred Payments that are payable within the first six months following the Executive’s separation from service, will, to the extent required to be delayed pursuant to Section 409A(a)(2)(B) of Internal Revenue Code of 1986, as amended (the “Code”), become payable on the date six months and one day following the date of Executive’s separation from service. All subsequent Deferred Payments, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. Notwithstanding anything herein to the contrary, if the Executive dies following the Executive’s separation from service, but prior to the date six months following the Executive’s separation from service, then any payments delayed in accordance with this subsection (c) will be payable in a lump sum as soon as administratively practicable after the date of the Executive’s death and all other Deferred Payments will be payable in accordance with the payment schedule applicable to such payment or benefit.
(d) The Company and Executive agree to work together in good faith to consider amendments to this Agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to Executive under Section 409A. In no event will the Executive have any discretion to choose the Executive’s taxable year in which any payments or benefits are provided under this Agreement. In no event will the Company or any parent, subsidiary or other affiliate of the Company have any responsibility, liability or obligation to reimburse, indemnify or hold harmless the Executive for any taxes, penalties or interest that may be imposed, or other costs that may be incurred, as a result of Section 409A.
(e) To the extent necessary to comply with Section 409A, reimbursements of expenses will be subject to this subsection (e). No right to the reimbursement of expenses pursuant to this Agreement will be subject to liquidation or exchange for another benefit, and the amount of expenses eligible for reimbursement pursuant to this Agreement during the Executive’s taxable year will not affect the expenses eligible for reimbursement in any other taxable year of the Executive. Any reimbursement of expenses pursuant to this Agreement will be limited to the duration of the Executive’s lifetime or such shorter period as set forth in this Agreement. Any reimbursements will be paid no later than last day of the taxable year of the Executive immediately following the taxable year in which the expense is incurred by the Executive.
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(f) The Company (and any parent, subsidiary or other affiliate of the Company, as applicable) will have the right and authority to deduct from any payments or benefits all applicable federal, state, local, and/or non-U.S. taxes or other required withholdings and payroll deductions (“Withholdings”). Prior to the payment of any amounts or provision of any benefits under this Agreement, the Company (and any parent, subsidiary or other affiliate of the Company, as applicable) is permitted to deduct or withhold, or require the Executive to remit to the Company, an amount sufficient to satisfy any applicable Withholdings with respect to such payments and benefits. Neither the Company nor any parent, subsidiary or other affiliate of the Company will have any responsibility, liability or obligation to pay the Executive’s taxes arising from or relating to any payments or benefits under this Agreement.
(g) For purposes of this Agreement, “Section 409A” means Section 409A of the Code and any final regulations and formal guidance thereunder and any applicable state law equivalent, as each may be amended or promulgated from time to time.
| 8. | Successors and Assigns. |
This Agreement will inure to the benefit of and be binding upon the Executive, his legal representatives and testate or intestate distributees, and the Company, its successors and assigns, including any successor by merger or consolidation or conversion to stock form or a statutory receiver or any other person or firm or corporation to which all or substantially all of the assets and business of the Company may be sold or otherwise transferred. Any such successor of the Company shall be deemed to have assumed this Agreement and to have become obligated hereunder to the same extent as the Company, and the Executive’s obligations hereunder shall continue in favor of such successor. For the avoidance of doubt, the Company and Executive agree that the Company shall assign this Agreement to Parent upon the closing of the Business Combination (the “Parent Assignment”).
| 9. | Notices. |
Any communication to a party required or permitted under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered if delivered personally or sent by overnight courier, or five days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party:
If to the Company:
Envoy Medical Corporation
4875 White Bear Parkway
White Bear Lake, MN 55110
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With a copy (which shall not constitute notice) to:
Fredrikson & Byron, P.A.
60 South Sixth Street
Suite 1500
Attn: Melodie Rose; Andrew Nick
Minneapolis, MN 55068
If to Executive:
David R. Wells
[***]
[***]
| 10. | Dispute Resolution. |
Except for any controversies, claims, or disputes alleging or asserting claims of discrimination, the parties agree that any dispute, claim or controversy arising out of or relating to the rights or obligations of the parties under this Agreement, or the interpretation or breach thereof, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the AAA. Any party may commence arbitration hereunder by delivering notice to the other party or parties to the dispute, claim or controversy. The arbitration shall be conducted by one (1) arbitrator designated by the AAA under its rules. The arbitrator will be bound by the substantive law of the State of Minnesota, but will not be bound by the laws of evidence and procedure customary in courts of law. The arbitrator shall be required to submit a written statement of his findings and conclusions within 30 days after the presentation of all evidence to him by the parties to the arbitration proceeding. The award of the arbitrator shall be final, binding and conclusive on the parties; provided that, where a remedy for breach is prescribed hereunder or limitations on remedies are prescribed, the arbitrator shall be bound by such restrictions. Judgment upon the award may be entered in any United States court having jurisdiction thereof. The arbitration proceedings shall be conducted in Minneapolis, Minnesota. The parties shall equally split the expenses of the arbitrator. The arbitrator shall determine in his award which party is the non-prevailing party in such arbitration (which determination shall be final and binding on the parties), and the non-prevailing party shall pay the reasonable legal fees and expenses of the prevailing party.
| 11. | Non-Solicitation, Confidentiality, Non-Disparagement, Intellectual Property. |
(a) The Executive hereby covenants and agrees that, during his employment by the Company, and following the termination of his employment with the Company for the applicable period set forth on Exhibit A hereto, he shall not, without the prior written consent of the Company, either directly or indirectly:
(i) solicit, recruit or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Company or any of its subsidiaries, who was such an officer or employee at the time of the Executive’s termination of employment, to terminate his employment with the Company or any of its subsidiaries;
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(ii) solicit, provide any information, advice or recommendation or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any customer or prospective customer of the Company or any of its subsidiaries to terminate an existing business or commercial relationship, or fail to consummate a business or commercial relationship, as the case may be, with the Company or any of its subsidiaries. Notwithstanding the foregoing, this provision will only apply to customers or prospective customers of the Company with whom, during the 12-month period prior to the termination of Executive’s employment with Company, Executive, directly or indirectly, had contact on behalf of Company and which (A) had a contract or business relationship with Company, (B) negotiated to contract with or enter into a business relationship with Company, or (C) was, directly or indirectly, solicited by Executive to do business with Company.
(b) The Executive acknowledges that in his employment with the Company the Executive will occupy a position of trust and confidence. The Executive shall not, except as may be required to perform the Executive’s duties for the Company or as required by applicable law, without limitation in time or until such information shall have become generally available to the public other than by the Executive’s unauthorized disclosure, disclose to others or use (for the benefit of Executive or any other person), whether directly or indirectly, any Confidential Information regarding the Company. “Confidential Information” shall mean information about the Company or any of its subsidiaries, that was learned by the Executive (from whatever source) in the course of the Executive’s employment with the Company, including (without limitation) any proprietary knowledge; trade secrets; data; client and customer lists; the identities of business partners; employee data; financial, marketing, sales, forecast, budget, and non-public business information; business methods or plans; marketing and sales strategies; product or service development strategies; and all documents, papers, resumes, and records (in whatever medium) containing, incorporating or reflecting such Confidential Information. Notwithstanding the foregoing, Confidential Information shall not include any such information which Executive can establish (i) was publicly known or made generally available prior to the time of disclosure by the Company to Executive; (ii) becomes publicly known or made generally available after disclosure by the Company to Executive through no wrongful action or omission by Executive; or (iii) is in Executive’s rightful possession, without confidentiality obligations, at the time of disclosure by the Company as shown by my then-contemporaneous written records; provided that any combination of individual items of information shall not be deemed to be within any of the foregoing exceptions merely because one or more of the individual items are within such exception, unless the combination as a whole is within such exception. The Executive acknowledges that such Confidential Information is specialized, unique in nature and of great value to the Company, and that the Company derives substantial benefit from maintaining such information in confidence.
(c) Other than in the performance of Executive’s duties for Company, Executive will not remove from Company’s premises, including at the time of Executive’s separation from the Company’s employ, any Company Property or Confidential Information in any form, whether an original, copy or reproduction. “Company Property” includes, but is not limited to, all tangible property; any written, printed or otherwise recorded information, including documents, records, reports and notes; data in any form, including (but not limited to) magnetic, optical or other electronic versions thereof or other written, computer-readable or magnetically or electronically stored information; computer equipment; computer disks and files; I.D. cards, access cards and keys; and other materials made or compiled by, or made available to Executive during his employment by the Company, and any copies thereof, whether or not they contain Confidential Information. Company Property is and at all times shall be the sole and exclusive property of the Company. Upon termination of Executive’s employment, or at any time when requested by the Company, Executive will leave with or return to the Company all Company Property then in Executive’s possession.
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(d) The Executive acknowledges and agrees that the restrictions contained in Sections 11(a) are necessary to protect the business interests of the Company. The Executive agrees that each of the restrictions contained in Sections 11(a) shall be construed as separate agreements independent of any other provision of this Agreement or any other agreement between the Executive and the Company except as to compensation. The Executive agrees that the existence of any claim or cause of action by the Executive against the Company shall not constitute a defense to the enforcement by the Company of the covenants and restrictions in this Agreement, except as to compensation.
(e) The Executive acknowledges and agrees that in the event of a breach of this Agreement by Executive, the Company will suffer irreparable injury that cannot be adequately compensated by monetary damages alone. Therefore, the Executive agrees that the Company, without limiting any other legal or equitable remedies available to it, shall be entitled to obtain equitable relief against Executive by injunction or otherwise from any court of competent jurisdiction.
(f) During the Employment Period and thereafter, Executive shall not, directly or indirectly, engage in any conduct or make any public statement, whether in commercial or noncommercial speech, disparaging or criticizing in any way the Company, any affiliate of the Company, any of their respective businesses, any of their respective officers, directors or employees, or the reputation of any of the foregoing persons or entities or any products or services offered by any of these, except to the extent specifically required or allowed by law.
(g) During the Employment Period and thereafter, the Company shall not, directly or indirectly, engage in any conduct or make any statement, whether in commercial or noncommercial speech, disparaging or criticizing in any way the Executive, except to the extent specifically required by law, and then only after consultation with the Executive.
(h) Executive agrees that he will disclose promptly and fully to the Company all works of authorship, inventions, discoveries, concepts, improvements, designs, processes, software, or any improvements, enhancements, or documentation of or to the same that Executive develops, makes, works on or conceives, individually or jointly with others during the Employment Period, whether or not in the course of Executive’s work for the Company or with the use of the Company’s time, materials or facilities and which is, or by reasonable extension could be, in any way related or pertaining to or connected with the present or anticipated business, development, work or research of the Company or which results from or are suggested by any work Executive may do for the Company, and whether produced during normal business hours or on personal time (collectively the “Work Product”). Work Product shall further include any of the foregoing conceived, made, reduced to practice, developed or perfected by Executive within six months after termination of the Employment Period. Executive shall make and maintain adequate and current written records and evidence of all Work Product, including drawings, work papers, graphs, computer records and any other documents, which shall be considered Company Property. Notwithstanding the provisions of this paragraph.
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(i) To the fullest extent permitted by law, the Executive agrees that all right, title and interest, including all Intellectual Property Rights (as defined below), in and to the Work Product are hereby irrevocably assigned to the Company and shall become the exclusive property of the Company without any further act required of the Executive. To the extent permitted, Work Product constituting a work of authorship under the Copyright Act shall be deemed a “work made for hire” of the Company at the time of creation. The parties intend that any and all copyright and other Intellectual Property Rights in the Work Product, including without limitation any and all rights to distribute and reproduce such Work Product in any and all media throughout the world, are the sole property of the Company. Consistent with the recognition of the Company’s absolute ownership of all Work Product, the Executive agrees that he shall not (i) use any Work Product for the benefit of any person other than the Company or (ii) grant any other person or entity any rights in the Work Product.
(j) The Company and its nominees solely shall have the right to use and apply for common law and statutory protections of the Work Product, including all patents, copyrights, mask work rights, and other intellectual property rights, in any and all countries and jurisdictions. Executive agrees to assist the Company, or its designee, at the Company’s expense, to secure the Company’s rights in the Work Product and any copyrights, patents, mask work rights or other intellectual property rights relating thereto in any and all countries and jurisdictions, including the disclosure to the Company of all pertinent information and data with respect thereto, the execution of all applications, specifications, oaths, assignments and all other instruments which the Company shall deem necessary in order to apply for, obtain, perfect and assign such rights in the name of the Company. Executive further agrees that Executive’s obligation to execute or cause to be executed any such instrument or papers shall continue after the termination of the Employment Period and of this Agreement. If, following 10 days written notice from the Company, the Executive fails, refuses, or is unable, due to disability, incapacity, or death, to execute such documents relating to the Work Product, Executive hereby appoints any of the Company’s officers as Executive’s attorney-in-fact to execute such documents on his behalf. This power of attorney is coupled with an interest and is irrevocable without the Company’s prior written consent.
(k) For purposes of this Agreement, the term “Intellectual Property Rights” shall mean, on a world-wide basis, any and all now known or hereafter known tangible and intangible (i) rights associated with works of authorship including, without limitation, copyrights, moral rights and mask works, (ii) trademark and trade name rights and similar rights, including all goodwill associated therewith (iii) trade secret rights and database rights, (iv) patent rights, all rights associated with designs, algorithms, computer programs, methods of doing business, ideas, concepts, techniques, inventions (whether patentable or not), processes and other industrial property rights, (v) all other intellectual and industrial property rights of every kind and nature and however designated, whether arising by operation of law, contract, license or otherwise, and (vi) all registrations, initial applications, renewals, extensions, continuations, divisions or reissues thereof now or hereafter existing, made, or in force, both domestic and foreign (including any rights in any of the foregoing).
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(l) The Executive represents and warrants to the Company that (i) there are no agreements, understandings or claims that would adversely affect Executive’s ability to assign all right, title and interest in and to the Work Product to the Company; (ii) the Executive has the legal right to grant the Company the assignment of his interest in the Work Product as set forth in this Agreement; and (iii) Executive has not brought and will not bring to his employment hereunder, or use in connection with such employment, any trade secret, confidential or proprietary information, or computer software, except for such of the foregoing that the Executive and the Company have a right to use for the purposes for which it will be used.
(m) Executive understands that nothing in this Agreement limits or prohibits Executive from filing a charge or complaint with, or otherwise communicating or cooperating with or participating in any investigation or proceeding that may be conducted by, any federal, state or local government agency or commission, including the Securities and Exchange Commission, the Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, and the National Labor Relations Board, including disclosing documents or other information as permitted by law, without giving notice to, or receiving authorization from, the Company. In addition, nothing in this Agreement limits employees’ rights to discuss the terms, wages, and working conditions of their employment, as protected by applicable law. Notwithstanding, in making any such disclosures or communications, Executive is not permitted to disclose the Company’s attorney-client privileged communications or attorney work product.
| 12. | Miscellaneous. |
As a condition of employment hereunder, Executive shall cooperate with the Company’s human resource protocols applicable to officers and directors and employee generally. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any relevant jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other relevant jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction to the minimum extent necessary to remove any portion of any such invalid, illegal or unenforceable provisions necessary to make the balance of such provision valid, legal and enforceable. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. The Company shall have no right to offset any amounts or benefits owed to the Executive hereunder with respect to any amounts then alleged to be due from the Executive to the Company. All payments required to be made by the Company hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Company may reasonably determine should be withheld pursuant to any applicable law, regulation or benefit plan or program. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Minnesota without reference to conflicts of law principles. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. For all purposes of this Agreement, any reference to subsidiaries of the Company shall be deemed to refer to any entity of which the Company is a direct or indirect owner of 50% or more of (x) the combined voting power of shares of all classes of stock if such entity is a corporation, (y) the combined voting power, the capital interest or the profits interest if such entity is a partnership or limited liability Company or (z) the beneficial interest if such entity is a trust or unincorporated enterprise. Any reference to a section number, or to herein, hereof or hereunder, shall, except to the extent specified otherwise, be deemed to refer to a section of this Agreement. This Agreement, together with any of the Executive’s award agreements (to the extent not modified hereby) and the Company’s equity plans, in each case governing the terms of the Executive’s outstanding equity awards covering shares of the Company’s common stock (the “Award Documents”), contains the entire agreement of the parties relating to the subject matter hereof and thereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof and thereof. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. From and after the date hereof, this Agreement shall supersede any agreement between the parties with respect to the subject matter hereof (with the exception of any Award Documents), and the Executive shall not be entitled to any payments under any such agreement.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and the Executive has hereunto set his hand, effective as of the day and year first above written.
| COMPANY: | ||
| Envoy Medical Corporation | ||
|
|
By: | /s/ Brent Lucas |
| Name: | Brent Lucas | |
| Title: | Chief Executive Officer | |
| EXECUTIVE: | |
| /s/ David R. Wells | |
| David R. Wells |
EXHIBIT A
TERMINATION OF EMPLOYMENT/IMPACT ON
SECTION 11 RESTRICTIVE COVENANTS
|
Employment Termination Event |
Nonsolicitation (Section 11(a)) – Applicable Periods |
| Involuntary termination by Company with “Cause” | Nonsolicitation period – 24 months |
| Voluntary termination by Executive without “Good Reason” | Nonsolicitation period – 24 months |
| Voluntary termination by Executive with “Good Reason” | Nonsolicitation period – 24 months |
| Involuntary termination by Company without “Cause” | Nonsolicitation period – 24 months |
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULES 13a-14(a) AND 15d-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Brent T. Lucas, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Envoy Medical, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
November 17, 2023 |
|
| /s/ Brent T. Lucas | |
| Brent T. Lucas | |
| Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULES 13a-14(a) AND 15d-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David R. Wells, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Envoy Medical, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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November 17, 2023 |
|
| /s/ David R. Wells | |
| David R. Wells | |
| Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION OF CEO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Envoy Medical, Inc. (the “Company”) for the period ended September 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Brent T. Lucas, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
/s/ Brent T. Lucas |
|
| Brent T. Lucas | |
| Chief Executive Officer | |
| November 17, 2023 |
EXHIBIT 32.2
CERTIFICATION OF CFO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Envoy Medical, Inc. (the “Company”) for the period ended September 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), David R. Wells, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
/s/ David R. Wells |
|
| David R. Wells | |
| Chief Financial Officer | |
| November 17, 2023 |
Condensed Consolidated Balance Sheets (Unaudited) (Parentheticals) - $ / shares |
Sep. 30, 2023 |
Dec. 31, 2022 |
|---|---|---|
| Series A Preferred Stock | ||
| Preferred stock, par value (in Dollars per share) | $ 0.0001 | $ 0.0001 |
| Preferred stock, shares authorized | 10,000,000 | 0 |
| Preferred stock, shares issued | 4,500,000 | 0 |
| Preferred stock, shares outstanding | 4,500,000 | 0 |
| Class A Common Stock | ||
| Common stock, par value (in Dollars per share) | $ 0.0001 | $ 0.0001 |
| Common stock, shares authorized | 400,000,000 | 232,000,000 |
| Common stock, shares issued | 19,549,982 | 10,122,581 |
| Common stock, shares outstanding | 19,549,982 | 10,122,581 |
Nature of the Business and Basis of Presentation |
9 Months Ended | ||
|---|---|---|---|
Sep. 30, 2023 | |||
| Nature of the Business and Basis of Presentation [Abstract] | |||
| NATURE OF THE BUSINESS AND BASIS OF PRESENTATION |
Envoy Medical, Inc. (“Envoy Medical” or the “Company”) is a hearing health company focused on providing innovative medical technologies across the hearing loss spectrum. Envoy Medical’s technologies are designed to shift the paradigm within the hearing industry and bring both providers and patients the hearing devices they desire. The Company’s first commercial product, the Esteem, is a fully implanted active middle ear hearing device. The Esteem was approved for sale in 2010 by the United States Food and Drug Administration (“FDA”).
Envoy Medical believes the fully implanted Acclaim® Cochlear Implant is a first-of-its-kind cochlear implant. Envoy Medical’s fully implanted technology includes a sensor designed to leverage the natural anatomy of the ear instead of a microphone to capture sound. The Acclaim is designed to address severe to profound sensorineural hearing loss that is not adequately addressed by hearing aids. The Acclaim will only be indicated for adults who have been deemed adequate candidates by a qualified physician. The Acclaim Cochlear Implant received the Breakthrough Device Designation from the FDA in 2019.
On September 29, 2023 (the “Closing Date”), a merger transaction between Envoy Medical Corporation (“Envoy”), Anzu Special Acquisition Corp I (“Anzu”) and Envoy Merger Sub, Inc., a directly, wholly owned subsidiary of Anzu (“Merger Sub”) was completed (the “Merger” or “Business Combination”, see Note 3) pursuant to the business combination agreement, dated as of April 17, 2023 (as amended, the “Business Combination Agreement”) . In connection with the closing of the Merger (the “Closing”), Merger Sub merged with Envoy, with Envoy surviving the merger as a wholly owned subsidiary of Anzu. In connection with the Closing, Anzu changed its name to Envoy Medical, Inc. The Company’s Class A common stock, par value $0.0001 per share (“New Envoy Class A Common Stock”), and the Company’s warrants commenced trading on the Nasdaq Stock Market LLC (“Nasdaq”) on October 2, 2023 under the symbols “COCH” and “COCHW,” respectively.
On April 17, 2023, prior to entering into the Business Combination Agreement, Anzu and Envoy entered into an agreement (as amended to date, the “Forward Purchase Agreement” or “FPA”) with Meteora Special Opportunity Fund I, LP (“MSOF”), Meteora Capital Partners, LP (“MCP”), Meteora Select Trading Opportunities Master, LP (“MSTO”) and Meteora Strategic Capital, LLC (“MSC” and, collectively with MSOF, MCP and MSTO, the “Sellers” or “Meteora parties”) for an over-the-counter equity prepaid forward transaction.
Pursuant to the terms of the Forward Purchase Agreement, on the Closing Date, the Sellers purchased 425,606 shares of New Envoy Class A Common Stock (the “Recycled Shares”) directly from the redeeming stockholders of Anzu. Also on the Closing Date, the Company paid to the Sellers a prepayment amount of $4.5 million required under the Forward Purchase Agreement directly from the trust account and transferred to the Sellers 8,512 shares of New Envoy Class A Common Stock (the “Share Consideration”).
In addition, pursuant to the subscription agreement, dated April 17, 2023 (as amended to date, the “Subscription Agreement”), by and between Anzu and Anzu SPAC GP I LLC (the “Sponsor”), the Company issued, and certain affiliates of the Sponsor purchased, concurrently with the Closing, an aggregate of 1,000,000 shares of the Company’s Series A preferred stock, par value $0.0001 per share (“Series A Preferred Stock”) in a private placement (the “PIPE Transaction”) at a price of $10.00 per share for an aggregate purchase price of $10 million.
Pursuant to the convertible promissory note, dated April 17, 2023, between Envoy and GAT Funding, LLC (as amended to date, the “Envoy Bridge Note”), the Company issued 1,000,000 shares of the Company’s Series A Preferred Stock to GAT Funding, LLC in exchange for the conversion of the Envoy Bridge Note in full, concurrently with the Closing.
The unaudited condensed consolidated financials include the accounts of Envoy Medical, Inc. and its wholly-owned subsidiaries Envoy Medical Corporation and Envoy Medical GmbH (Ansbach) (GmbH), which operates a sales office in Germany. All intercompany accounts and transactions have been eliminated in consolidation.
Unaudited financial information
The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial reporting and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, they do not include all information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of the Company’s financial condition and results of operations have been included. Operating results for the periods presented are not necessarily indicative of the results that might be expected for the full year. As such, the information included in this report should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2022, which is included in the Company’s final prospectus and definitive proxy statement, dated and filed with the SEC on September 14, 2023 (the “Proxy Statement/Prospectus”), which is accessible on the SEC’s website at www.sec.gov. The condensed consolidated balance sheet at December 31, 2022 has been derived from the audited consolidated financial statements of the Company, but does not include all the disclosures required by U.S. GAAP.
During the nine months ended September 30, 2023, there were no changes to the Company’s significant accounting policies as described in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2022, which is included in the Proxy Statement/Prospectus.
Revision of Prior Period Financial Statements of Envoy
During its financial close process for the three and nine months ended September 30, 2023, the Company discovered an error in Envoy’s accounting for convertible notes payable (related party) as of June 30, 2023. The convertible notes payable (related party) consists of convertible notes issued between 2012 and 2022 (the “Convertible Notes”) and the Envoy Bridge Note. When calculating the fair value of the Convertible Notes as of June 30, 2023, Envoy used an incorrect input in the valuation model related to the Convertible Notes settlement value upon a Merger with a Special Purpose Acquisition Company (“SPAC”). Specifically, the Business Combination Agreement includes the assumed exchange ratio of Envoy common stock, par value $0.01 per share (“Envoy Common Stock”) to New Envoy Class A Common Stock. The Business Combination Agreement also contains a provision that removed the holders’ right to redeem the Convertible Notes for its full principal and interest value upon the Closing, and instead forced the holders to convert the Convertible Notes into shares of Envoy Common Stock at a conversion rate of $1.00 per share, prior to the exchange into New Envoy Class A Common Stock. This assumed exchange ratio, the value of underlying Company stock, and the removal of the loan holders’ redemption right was not included under the SPAC scenario in the valuation model used to calculate the fair value of Convertible Notes as of June 30, 2023. The initial calculation calculated a fair value of approximately $51.4 million whereas the updated calculation, calculated a fair value of approximately $36.8 million, which results in a difference of approximately $14.6 million.
The unaudited condensed consolidated statements of stockholders’ equity (deficit) for the three months ended June 30, 2023, has been revised to treat the Convertible Notes amendment, as described above, as an extinguishment of debt with a related party. As such, the impact of the amendment has been recorded as an additional deemed capital contribution from a related party on the revised unaudited condensed consolidated financial statements.
The revision resulted in a downward adjustment of previously reported convertible notes payable (related party) of $14.6 million and an upward adjustment of $14.7 million in additional paid-in capital on the condensed consolidated balance sheets and the condensed consolidated statements of redeemable convertible preferred stock and stockholders’ equity (deficit) as of June 30, 2023, and an increase in the loss from change in the fair value of convertible notes payable (related party) of $91 thousand for the three and six months ended June 30, 2023 included in the Proxy Statement/Prospectus.
The Company also reassessed the components of cost of goods sold and determined that the costs related to the Acclaim product development and manufacturing of research and development (“R&D”) prototype parts for testing, validations and clinical trials should be classified as R&D expenses. Accordingly, $0.3 million of expenses previously included in the cost of goods sold have been reclassified to research and development for the nine months ended September 30, 2023. This reclassification did not impact net income. |
Summary of Significant Accounting Policies |
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Sep. 30, 2023 | |||||||||||||||||||||||||||
| Accounting Policies [Abstract] | |||||||||||||||||||||||||||
| Summary of Significant Accounting Policies |
Going Concern
Since inception, the Company has incurred cumulative losses from operations and has an accumulated deficit of $251.0 million at September 30, 2023. The Company has funded its operations and capital needs primarily through net proceeds from the issuances of convertible debt (see Note 9) and the sale of Envoy redeemable convertible preferred stock. In September 2023, the Company received $11.7 million proceeds from the Business Combination, Forward Purchase Agreement, and the PIPE Transaction, net of transaction costs. The Company had cash of $7.4 million as of September 30, 2023.
Management believes that its existing cash balances combined with future capital raises, and cash receipts from product sales will be sufficient to fund ongoing operations through at least one year from the date the unaudited condensed consolidated financial statements are issued. However, there can be no assurance that the Company will be successful in achieving its strategic plans, that the Company’s cash balances and future capital raises will be sufficient to support its ongoing operations, or that any additional financing will be available in a timely manner or on acceptable terms, if at all. If the Company is unable to raise sufficient financing when needed or events or circumstances occur such that the Company does not meet its strategic plans, the Company may be required to reduce certain discretionary spending, be unable to develop new or enhanced production methods, or be unable to fund capital expenditures, which could have a material adverse effect on the Company’s financial position, results of operations, cash flows, and ability to achieve its intended business objectives. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates and assumptions reflected in these unaudited condensed consolidated financial statements include but are not limited to the useful lives of property and equipment, inventory reserves, warranty liability, the fair value of common stock, the fair value of convertible notes payable, the fair value of forward purchase agreement assets, the fair value of forward purchase agreement warrant liability, the fair value of warrants and the outcome of litigation. Estimates and assumptions are reviewed periodically and the effect of changes, if any, are reflected in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
Concentration of Credit Risk and Significant Customers
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and accounts receivable, net. Periodically, the Company maintains deposits in accredited financial institutions in excess of federally insured limits. The Company maintains its cash with financial institutions that management believes to be of high credit quality. The Company has not experienced any losses on such accounts and does not believe it is exposed to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
With respect to accounts receivable, the Company performs credit evaluations of its customers and does not require collateral. There have been no material losses on accounts receivable. There were no customers that accounted for 10.0% or more of sales for the nine months ended September 30, 2023 and September 30, 2022, respectively. There were no customers that accounted for 10.0% or more of the accounts receivable balance as of September 30, 2023 and December 31, 2022.
Cash and Restricted Cash
The Company maintains cash balances in bank accounts which, at times, may exceed federally insured limits. Restricted cash is cash the Company holds for specific reasons and is not available for immediate use.
Fair Value Measurement
The Company determines the fair value of financial assets and liabilities using the fair value hierarchy established in Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The hierarchy describes three levels of inputs that may be used to measure fair value, as follows:
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The Company elected the fair value option for the convertible notes payable (related party) under ASC Topic 825, Financial Instruments, with changes in fair value recorded in income (loss) from changes in fair value of convertible notes payable (related party) each reporting period. The convertible notes payable (related party) consists of convertible notes issued between 2012 and 2022 (“Convertible Notes”) and the Envoy Bridge Note. The Company’s forward purchase agreement asset, forward purchase agreement warrant liability, and warrant liability (related party) are also Level 3 financial instruments at fair value and are described below (see Note 2 and Note 4).
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign-currency risks. The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives in accordance with ASC Topic 815, “Derivatives and Hedging”. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value on the grant date and is then re-valued at each reporting date, with changes in the fair value reported in the unaudited condensed consolidated statements of operations and comprehensive income (loss). The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative liabilities are classified in the condensed consolidated balance sheets as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date.
The Company accounts for its warrant liability in accordance with ASC 815-40. Accordingly, the Company recognizes the warrant instruments as a liability at fair value and adjusts the instruments to fair value at each reporting period. The warrant liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s unaudited condensed consolidated statements of operations and comprehensive income (loss).
The Company accounts for its Forward Purchase Agreement in accordance with ASC 815-40. Accordingly, the Company recognizes the forward purchase agreement asset and the forward purchase agreement warrant liability at fair value at each reporting period. The assets and liabilities are subject to re-measurement at each balance sheet date, and any change in fair value is recognized in the Company’s unaudited condensed consolidated statements of operations and comprehensive income (loss).
Warrant Liability (Related Party)
The Company classifies certain warrants issued to stockholders to purchase Envoy Common Stock (see Note 10) as a liability on its condensed consolidated balance sheets as these warrants are a free-standing financial instrument that may require the Company to transfer assets upon exercise. The warrant liability was initially recorded at fair value upon the date of issuance and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of the warrant liability are recognized in the Company’s unaudited condensed consolidated statements of operations and comprehensive income (loss). Changes in the fair value of the warrant liability will continue to be recognized until the warrants are exercised, expire or qualify for equity classification.
SPAC Excise Tax Liability
The Company recognizes excise tax as an incremental cost to repurchase the treasury shares, with an offsetting tax liability recognized. The SPAC excise tax liability was recorded in accrued expenses in the Company’s condensed consolidated balance sheets.
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which provides a five-step model for recognizing revenue from contracts with customers as follows:
Revenue is recognized as performance obligations under the terms of a contract are satisfied, which generally occurs as control of the promised products or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”). To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price using either the expected value or most likely amount method. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information that is reasonably available.
The Company primarily derives revenue from the sale of its hearing device products. Revenue from product sales is recognized upon transfer of control of the product to a customer, which occurs at a point in time, at the time the Company is notified the product has been implanted or used by the customer in a surgical procedure. The Company also sells extended warranty plans on a limited basis. Revenue from extended warranty plans is recognized ratably over time and is immaterial. Amounts received from a customer prior to fulfillment of the performance obligation are included as accrued expenses on the condensed consolidated balance sheets and are immaterial as of September 30, 2023 and December 31, 2022. The Company has elected to account for shipping and handling activities performed as activities to fulfill the promise to transfer the products, and therefore these activities are not assessed as a separate performance obligation to its customers.
Revenue is measured as the amount of consideration the Company expects to receive, which is based on the invoiced price. The majority of the Company’s contracts have a single performance obligation and are short term in nature. The Company’s contracts do not include variable consideration.
Payment terms differ by geography and customer, but payment is generally required within 30 days from the date of product utilization. The Company also offers extended payment plans on a limited basis. Amounts due to the Company under payment plans that extend beyond 12 months are immaterial as of September 30, 2023 and December 31, 2022, therefore the Company does not adjust the promised amount of consideration for the effects of a significant financing component.
Segments
Operating segments are identified as components of enterprise about which discrete financial information is available for evaluation by the chief operating decision-maker (“CODM”) in deciding resource allocation and assessing performance. The Company has determined that its CODM is its Chief Executive Officer. The Company’s CODM reviews financial information presented on a consolidated basis for the purposes of making decisions, allocating resources and evaluating performance. Consequently, the Company has determined it operates in one operating and reportable segment.
Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Effective
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU No 2016-13”). This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The Company adopted Topic 326 with an adoption date of January 1, 2023 using the modified retrospective approach. As a result, the Company changed its accounting policy for allowance for credit losses. The Company monitors accounts receivables and estimates the allowance for lifetime expected credit losses. Estimates of expected credit losses are based on historical collection experience and other factors, including those related to current market conditions and events. The adoption did not have a material effect on the Company’s accompanying unaudited condensed consolidated financial statements.
Other than the item noted above, there have been no new accounting pronouncements not yet effective or adopted in the current year that have a significant impact, or potential significant impact, to our unaudited condensed consolidated financial statements. |
Merger |
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| Merger [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Merger |
As discussed in Note 1 – Nature of the Business and Basis of Presentation, on September 29, 2023, the Company completed the Merger. Upon the Closing, the following occurred:
The proceeds received by the Company from the Merger, the PIPE Transaction, and the Forward Purchase Agreement, net of transaction costs, totaled $11.7 million.
The Merger was accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, Anzu was treated as the acquired company for financial reporting purposes. Accordingly, for accounting purposes, the Merger was treated as the equivalent of the Company issuing shares for the net assets of Anzu, accompanied by a recapitalization. The net assets of Anzu were stated at historical cost with no goodwill or other intangible assets recorded.
The following table presents the total shares of New Envoy Class A Common Stock and Series A Preferred Stock outstanding immediately after the Closing:
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Fair Value Measurement |
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| Fair Value Measurement [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Measurement |
The following tables provide information related to the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 (in thousands):
The fair values of the forward purchase agreement assets and the forward purchase agreement warrant liability were estimated using Monte Carlo Simulation models, which are Level 3 fair value measurement. The following table presents the quantitative information regarding Level 3 fair value measurements of the forward purchase agreement assets and forward purchase agreement warrant liability:
The fair value of the Convertible Notes was based on a probability-weighted expected return model (“PWERM”), which is a Level 3 measurement. The valuation includes significant assumptions such as the discount rate, the fair value of the Company’s common stock, volatility, probability of the Convertible Notes being held to maturity, the probabilities of certain exit events, including a qualified financing, initial public offering or merger with a SPAC, and estimated recovery in the event of default.
The significant inputs that were used in the valuation of the Convertible Notes are presented below (in thousands, except per share amounts):
Significant judgment is required in selecting the inputs. On December 31, 2022, an evaluation was performed to assess those inputs and general market conditions potentially affecting the fair value of the Convertible Notes. Should the probability of default increase or decrease by 5.0%, the fair value of the Convertible Notes on December 31, 2022 could decrease or increase by $2.6 million, respectively. Should the discount rate increase or decrease by 5.0%, the fair value of the Convertible Notes could decrease by $1.5 million or increase by $1.6 million, respectively. The fair value of the Convertible Notes is subject to variation should the expected future cash flows vary significantly from the estimates.
Effective concurrently with the Merger, the outstanding balance of principal and accrued interest of the Convertible Notes was automatically converted into New Envoy Class A Common Stock and the outstanding balance of principal and accrued interest of the Envoy Bridge Note was converted into Series A Preferred Stock (see Note 3). As such, the Convertible Notes and Envoy Bridge Note were derecognized from the condensed consolidated balance sheet. Immediately prior to the Merger, the fair value of the Convertible Notes was calculated by the multiplying the amount of New Envoy Class A Common Stock the Convertible Notes converted into by the fair value of these shares. The fair value of the New Envoy Class A Common Stock was based on the listed prices for the shares, immediately prior to the Merger. Immediately prior to the Merger, the fair value of the Envoy Bridge Note was calculated by multiplying the amount of Series A Preferred Stock the Envoy Bridge Note converted into, by the fair value of these shares. The fair value of the Series A Preferred Stock was estimated using a Monte Carlo Simulation model, which is a Level 3 fair value measurement. The following table presents the quantitative information regarding Level 3 fair value measurements of the Series A Preferred Stock, which was valued at $10.98 per share.
The Company has classified the warrant liability within Level 1 of the hierarchy as the warrant liability is separately listed and traded in an active market. The warrant liability’s listed price in an active market was used as the fair value.
The Company has classified the warrants (related party) within Level 3 of the hierarchy as the fair value is derived using the Black-Scholes option pricing model, which uses a combination of observable (Level 2) and unobservable (Level 3) inputs. Key estimates and assumptions impacting the fair value measurement include (i) the expected term of the warrants, (ii) the risk-free interest rate, (iii) the expected dividend yield and (iv) expected volatility of the price of the underlying common stock. The Company estimated the fair value per share of the underlying common stock based, in part, on the results of third-party valuations and additional factors deemed relevant. The risk-free interest rate was determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrants. The Company estimated a 0% expected dividend yield as of December 31, 2022, based on the fact that prior to the Business Combination, the Company had never paid or declared dividends and did not intend to do so in the foreseeable future. Prior to the Business Combination, the Company was a private company and lacked company-specific historical and implied volatility information of its stock, and as such, the expected stock volatility was based on the historical volatility of publicly traded peer companies for a term equal to the remaining expected term of the warrants.
The following table presents the unobservable inputs of the warrant liability (related party):
The following table summarizes the activity for the Company’s Level 3 instruments measured at fair value on a recurring basis (in thousands):
There were no transfers between Level 1 and Level 2, nor into and out of Level 3, during the periods presented. |
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Restricted Cash |
9 Months Ended | ||
|---|---|---|---|
Sep. 30, 2023 | |||
| Restricted Cash [Abstract] | |||
| Restricted cash |
Pursuant to the Envoy Bridge Note, GAT Funding, LLC contributed $1 million to subscribe for additional shares of Series A Preferred Stock at a price of $10.00 per share in order to meet the net tangible asset requirements under the Business Combination Agreement (see Note 3). Immediately prior to the Merger, GAT Funding, LLC wired $5 million to the Company to ensure the net tangible asset requirement is met. After the Merger, the subscription for additional Series A Preferred Stock was determined to be $1 million. As such, $4 million of cash is restricted and recorded as a payable to related party on the condensed consolidated balance sheets.
Pursuant to the certificate of designation of the Series A Preferred Stock, the Company is required to maintain the funds allocated for the first four dividend payments in a separate account, and as such, $5.4 million of the Company’s cash has been reclassed to restricted cash (see Note 11). |
Inventories |
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Sep. 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Inventories [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||
| Inventories |
Inventories, consisted of the following (in thousands):
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Operating Leases |
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| Operating Leases [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating Leases |
The Company leases its headquarters office space in Minnesota and leases office space in Germany. The lease for the Company’s headquarters office space expires at the end of 2027. This headquarters office space lease is with a stockholder, which is considered a related party. The lease of the office space in Germany is not with a related party and is immaterial.
The components of leases and lease costs were as follows (in thousands):
Other supplemental information of lease amounts recognized in the unaudited condensed consolidated financial statements is summarized as follows:
Future minimum lease payments associated with these leases were as follows on September 30, 2023 (in thousands):
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Product Warranty Liability |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Warranty Liability [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Product Warranty Liability |
Changes in warranty liability were as follows (in thousands):
The assumptions utilized in developing the liability as of September 30, 2023, include an estimated cost per unit of $6 thousand, an average battery life of 5 years, inflationary increase of 3.6%, and an average patient life calculated based on probabilities outlined in the PRI-2012 mortality tables, published from the Society of Actuaries. Additionally, a discount rate of 5.0% was used in the calculation as of September 30, 2023. |
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Convertible Notes Payable (Related Party) |
9 Months Ended | ||
|---|---|---|---|
Sep. 30, 2023 | |||
| Convertible Notes Payable (Related Party) [Abstract] | |||
| Convertible Notes Payable (Related Party) |
The Company received several loan financings from stockholders from 2012 to 2023, in an aggregate outstanding principal amount of $59.7 million as of December 31, 2022. The Company elected the fair value option for the Convertible Notes and the Envoy Bridge Note under ASC Topic 825, Financial Instruments, with changes in fair value recorded in earnings each reporting period. The Convertible Notes and Envoy Bridge Note do not include any financial covenants and are subject to acceleration upon the occurrence of specified events of default. The terms of the Convertible Notes and the Envoy Bridge Note are described below.
2012 Convertible Note
In 2012, the Company issued a convertible note to a stockholder (“2012 Convertible Note”), which was subsequently amended and restated. These amendments allowed for the issuance of additional principal under the existing agreements and resulted in various drawdowns since 2012. In March 2021, the 2012 Convertible Note agreement was amended and restated to allow for an additional draw of $10.0 million. The March 2021 amendment also extended the maturity date of both the existing debt and any future draws to December 31, 2025. In June 2022, the 2012 Convertible Note agreement was amended and restated to allow for an additional draw of $10.0 million. These amendments were accounted for as debt modifications. On April 17, 2023, the drawdowns that were made in 2023 with an aggregate principal amount of $4.0 million were transferred to another convertible note with the same stockholder, refer to the Envoy Bridge Note disclosure below.
The outstanding principal amount of the 2012 Convertible Note was $59.0 million as of December 31, 2022. Undrawn principal under the arrangement amounted to $5.0 million as December 31, 2022. The 2012 Convertible Note would have matured on December 31, 2025, and was classified as a long-term liability as of December 31, 2022. The 2012 Convertible Note bore interest at 4.5% per annum. The 2012 Convertible Note was secured by the Company’s assets. The Company granted detachable common stock warrants to the stockholder in connection with the 2012 Convertible Note (see Note 10).
At any time prior to maturity, at the sole discretion of the noteholder, the outstanding principal amount plus accrued and unpaid interest may have been converted into shares of Envoy Common Stock at a conversion price of $1.00 per share, subject to various adjustments as defined in the 2012 Convertible Note agreement.
In the event that the Company obtained additional equity financing pursuant to which the Company sold shares of either common or preferred stock, at the sole discretion of the stockholder, the principal amount plus accrued and unpaid interest would convert to the class of stock being offered in the financing at a price per share equal to 80% of the price per share paid by investors for the offered shares.
On April 17, 2023, the 2012 Convertible Note was amended as part of the Business Combination Agreement, to provide for automatic conversion immediately prior to the Merger. The conversion formula was not adjusted as part of this amendment. The loan amendment was accounted for as an extinguishment with a related party and treated as a deemed capital contribution.
Effective concurrently with the Merger, the outstanding balance of principal and any unpaid accrued interest was automatically converted into New Envoy Class A Common Stock at a conversion price of $15.72 per share (see Note 3) and the fair value of the 2012 Convertible Notes was derecognized from the condensed consolidated balance sheets.
2013 Convertible Notes
In 2013, the Company issued convertible notes to various stockholders (“2013 Convertible Notes”), which were subsequently amended and restated. The outstanding principal amount of these notes was $0.7 million as of December 31, 2022. The 2013 Convertible Notes mature on December 31, 2023, and were classified as current liabilities as of December 31, 2022. The 2013 Convertible Notes bore interest at 4.5% per annum. The 2013 Convertible Notes were secured by the Company’s assets. The Company granted detachable common stock warrants to the noteholders in connection with the issuance of the 2013 Convertible Notes (see Note 10). The 2013 Convertible Notes were subordinated to the 2012 Convertible Note and included the same conversion features as the 2012 Convertible Note. In addition, in the event the Company completed an equity financing in which it sold a minimum of $2,500,000 of new stock, at the sole discretion of the Company, the principal amount plus accrued and unpaid interest would convert into Envoy Common Stock at $1.00 per share. If the effective conversion price was less than $1.00, the price per share shall be equal to 80% of the price per share paid by the other investors.
On April 17, 2023, the 2013 Convertible Notes were amended as part of the Business Combination Agreement to provide for automatic conversion immediately prior to the Merger. The conversion formula was not adjusted as part of this amendment. The loan amendment was accounted for as an extinguishment with a related party and treated as a deemed capital contribution.
Effective concurrently with the Merger, the outstanding balance of principal and any unpaid accrued interest was automatically converted into New Envoy Class A Common stock at a conversion price of $15.72 per share and the fair value of the 2013 Convertible Notes was derecognized from the condensed consolidated balance sheets (see Note 3).
Envoy Bridge Note (“2023 Convertible Note”)
On April 17, 2023, the Company entered into a convertible promissory note agreement with a stockholder for an aggregate borrowing capacity of $10.0 million, an interest rate of 4.5% per annum and maturity date of December 31, 2025. The Envoy Bridge Note was unsecured. According to this agreement, $4.0 million of the borrowing capacity was funded via the transfer of $4.0 million in principal from the 2012 Convertible Note. An additional $3.0 million was drawn upon during the second quarter of 2023 and $3.0 million was drawn upon during the third quarter of 2023. The transfer of $4.0 million in principal from the 2012 Convertible Note to the Envoy Bridge Note was accounted for as a debt modification.
The difference between the proceeds received and the issuance-date fair value was recorded as a deemed capital contribution from related party in the unaudited condensed consolidated statements of stockholders’ equity (deficit).
The Company could have prepaid the Envoy Bridge Note in whole or in part without premium or penalty. Contingent upon, and effective concurrently with the Merger, the outstanding balance of principal and any unpaid accrued interest, automatically converted to Series A Preferred Stock at a conversion price of $10.00 per share.
If the Business Combination Agreement terminated pursuant to its terms, at the sole discretion of the noteholder, the outstanding principal amount plus accrued and unpaid interest could have been converted into shares of Envoy Common Stock at a conversion price of $1.00 per share, subject to various adjustments as defined in the agreement.
If the Business Combination Agreement terminated pursuant to its terms and in the event that the Company obtained additional equity financing pursuant to which the Company sold shares of either common or preferred stock, at the sole discretion of the noteholder, the principal amount plus accrued and unpaid interest would have converted to the class of stock being offered in the financing at a price per share equal to 80% of the price per share paid by investors for the offered shares.
On August 23, 2023, the Envoy Bridge Note was amended pursuant to which the Company could have drawn an additional $5.0 million if the Company had less than $5.0 million in cash or net tangible assets immediately following the Merger. In addition, the Company could have drawn up to $2.0 million if the Merger did not occur by September 30, 2023.
Effective concurrently with the Merger, the outstanding balance of principal and any unpaid accrued interest, was automatically converted to Series A Preferred Stock at a conversion price of $10.00 per share and the fair value of the Envoy Bridge Note was derecognized from the condensed consolidated balance sheets. |
Common Stock |
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| Common Stock [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock |
As of September 30, 2023 and December 31, 2022, the Company was authorized to issue 400,000,000 shares of New Envoy Class A Common Stock and 232,000,000 shares of Envoy Common Stock, respectively. The voting, dividend and liquidation rights of the holders of the Company’s stock are subject to and qualified by the rights, powers and preferences of the holders of the Series A Preferred Stock (see Note 11).
Contingent Sponsor Shares
Pursuant to the Sponsor Support Agreement, 1,000,000 shares of New Envoy Class A Common Stock held by the Sponsor shall be unvested and subject to the restrictions and forfeiture provisions set forth in the Sponsor Support Agreement (the “Contingent Sponsor Shares”). The Contingent Sponsor Shares shall vest upon the United States Food and Drug Administration’s approval of the Company’s Acclaim cochlear implant device (the “FDA Approval”). If a change of control of the Company shall occur following the Closing, then the conditions for vesting of any Contingent Sponsor Shares that remain unvested as of immediately prior to the consummation of the change of control shall be deemed to have been achieved and such Contingent Sponsor Shares shall immediately vest as of immediately prior to the consummation of such change of control.
The Contingent Sponsor Shares meets the definition of a derivative, but meets the criteria to be considered indexed to the Company’s stock and the equity-classification criteria. Accordingly, the Contingent Sponsor Shares are classified as permanent equity.
Common Stock Warrants (Related Party)
Between November 2013 and July 2022, the Company issued warrants to purchase shares of Envoy Common Stock to stockholders in connection with the issuance of the Convertible Notes and the issuance of Envoy Preferred Stock.
In July 2022, the Company issued a warrant to purchase 1,150,000 shares of Envoy Common Stock to one stockholder in connection with the 2012 Convertible Note (see Note 9). Upon issuance, the holder’s exercise of the warrants was conditioned on the Company increasing its authorized shares. As there were insufficient authorized shares available at the time of issuance, the warrant was classified as a liability and measured at fair value as of December 31, 2022. The Company incurred an expense of $0.1 million upon the issuance of the warrant and $0.1 million for the change in the fair value of the warrant liability during the nine months ended September 30, 2023.
On April 17, 2023, the common stock warrants were amended to provide for automatic cashless exercise or cancellation of the warrants immediately prior to the Merger. On September 29, 2023, the warrants were canceled or converted on a net exercise basis into shares of New Envoy Class A Common Stock. Out of the 8,695,000 warrants outstanding prior to the Merger, 70,000 were converted into 2,702 shares of New Envoy Class A Common Stock. Out of the remaining 8,625,000 warrants that were forfeited as part of the Business Combination, 1,150,000 were classified as a liability in the Company’s historical financial statements. The forfeiture of the liability classified warrants was recorded as a gain of $0.2 million in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
There were no outstanding common stock warrants (related party) as of September 30, 2023. The following table summarizes the Company’s outstanding common stock warrants (related party) as of December 30, 2022:
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Series A Preferred Stock |
9 Months Ended | ||
|---|---|---|---|
Sep. 30, 2023 | |||
| Series A Preferred Stock [Abstract] | |||
| Series A Preferred Stock |
As of September 30, 2023, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 100,000,000 shares of $0.0001 par value preferred stock, of which 10,000,000 shares have been designated as Series A Preferred Stock.
Pursuant to the Envoy Bridge Note, the Sponsor Support Agreement and the Subscription Agreement, the Company issued an aggregate of 4,500,000 shares of Series A Preferred Stock (see Note 3) as of September 30, 2023.
Pursuant to the Subscription Agreement and the Envoy Bridge Note, the Sponsor and GAT Funding, LLC each contributed additional $1.0 million capital contribution to subscribe for additional shares of Series A Preferred Stock at a price of $10.00 per share in order to meet the net tangible assets requirement under the Business Combination Agreement (see Note 3). As of September 30, 2023, the Sponsor’s contribution is classified as other receivables on the condensed consolidated balance sheets.
The holders of the Series A Preferred Stock has the following rights and preferences:
Voting rights
The holders of the Series A Preferred Stock are not entitled to vote or receive notice of any meeting of stockholders, except in the case that the Company creates any equity or debt instrument that ranks senior or pari passu to the rights of the Series A Preferred Stock or in the case of any adverse change to the powers, preferences or special rights of the Series A Preferred Stock.
Conversion rights
Each share of Series A Preferred Stock shall be convertible, at the option of the holder, at any time after the date of issuance into such number of shares of New Envoy Class A Common Stock as determined by dividing the issuance price of the shares of Series A Preferred Stock of $10.00, by the conversion price, which was $11.50 per share as of September 30, 2023 and is adjustable for certain dilutive events.
At any time from and after 90 days following the Merger, if the closing price per share of New Envoy Class A Common Stock is greater than $15.00 for any twenty trading days within a period of thirty trading days, the Company may elect, in its discretion, to convert all, but not less than all, of the then outstanding shares of Series A Preferred Stock into shares of New Envoy Class A Common Stock. In this case, each share of Series A Preferred Stock then outstanding shall be converted into the number of shares of New Envoy Class A Common Stock equal to the quotient of i) $10.00 divided by ii) $15.00.
Redemption
The holders of Series A Preferred Stock are not entitled to any redemption rights, other than those under their liquidation rights discussed below. The Company does not have the option to redeem the Series A Preferred Stock.
Dividend Rights
The holders of Series A Preferred Stock are entitled to a cumulative dividend which accrues at the rate of 12% of the original issuance price of $10.00 per annum. The dividend accrues on a daily basis from and including the issuance date of such shares, whether or not declared, and will be payable in cash on a quarterly basis. With respect to the first four (4) dividends, the Company shall maintain the funds allocated for such dividends in a separate account. If the Company fails to pay the dividends on the dividend payment date, then an additional dividend on the amount of the unpaid portion shall automatically accrue at 12%.
There were no dividends declared as of September 30, 2023. As the Company is required to maintain the funds allocated for the first four dividend payments in a separate account, $5.4 million of the Company’s cash has been reclassed to restricted cash (see Note 5).
Pursuant to the Sponsor Support Agreement, any dividends arising shall accrue and not require timely payment at any time when the Company has less than $10 million of net tangible assets.
Liquidation preference
In the event of any liquidation, deemed liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holder of the Series A Preferred Stock is entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of any security of the Company that ranks junior to the Series A Preferred Stock, including, but not limited to, the New Envoy Class A Common Stock, an amount per share of Series A Preferred Stock equal to the greater of i) $10.00 plus any unpaid cash dividends and ii) the amount the holder would have received, would such holder, immediately prior to such involuntary liquidation, dissolution or winding up of Company, converted such share of Series A Preferred Stock into New Envoy Class A Common Stock. |
Stock Options |
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Sep. 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock Options [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock Options |
The Company had a stock incentive plan (the “2003 Stock Option Plan”) that provided for the granting of stock options or other stock incentives to employees, officers, directors and consultants. The 2003 Stock Option Plan was administered by the Board, or a committee designated by the Board, which determined the persons who were to receive awards under the 2003 Stock Option Plan, the number of shares subject to each award and the term and exercise price of each award. The maximum term of options granted under the 2003 Stock Option Plan was ten years. The number of shares of Envoy Common Stock authorized to be issued was 6,400,000 under the 2003 Stock Option Plan.
In March 2013, the Company and its stockholders adopted a new plan (the “2013 Stock Option Plan”) on substantially the same terms and conditions of the 2003 Stock Option Plan. The Company and its stockholders reserved a total of 7,000,000 shares of Envoy Common Stock for issuance under the 2013 Stock Option Plan and reduced the number of shares of Envoy Common Stock available for issuance under the 2003 Stock Option Plan from 6,400,000 to 552,000. As of April 2013, the 2003 Stock Option Plan expired and no further stock options or shares may be granted under that plan.
On April 17, 2023, the Company and the stock option holders agreed that the stock options will be cancelled and terminated for no consideration upon the Merger.
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options. No stock options were granted during the nine months ended September 30, 2023 and 2022.
Immediately before the Merger and as of December 31, 2022, all stock options outstanding were fully vested and there was no unrecognized stock-based compensation expense related to nonvested awards. Upon the Merger, the stock options were cancelled and terminated for nominal consideration.
The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2023:
The aggregate intrinsic value of stock options outstanding as of December 31, 2022 is zero because the fair value of the underlying Envoy Common Stock was less than the exercise price for all options as of each date. |
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Related Party Transactions |
9 Months Ended | ||
|---|---|---|---|
Sep. 30, 2023 | |||
| Related Party Transactions [Abstract] | |||
| Related Party Transactions |
The Company leases its headquarters office space in Minnesota from a stockholder, which is considered a related party (see Note 7). The lease is considered a common control leasing arrangement. The lease liability due to the stockholder was approximately $0.6 million at September 30, 2023 and December 31, 2022. The rent expense was immaterial for the nine months ended September 30, 2023 and 2022.
The Company received several loan financings from stockholders between 2012 to 2023 (see Note 9).
The Company recorded a payable to related party of $4.0 million on the condensed consolidated balance sheets (see Note 5). |
Commitment and Contingencies |
9 Months Ended | ||
|---|---|---|---|
Sep. 30, 2023 | |||
| Commitments And Contingencies [Abstract] | |||
| Commitment and Contingencies |
The Company is party to various litigation matters arising from time to time in the ordinary course of business. In January 2020, the Company’s controlling stockholder and convertible debt holder, along with current and former directors of the Company were named in a lawsuit brought by minority stockholders (the “Spearman Plaintiffs”). This lawsuit alleges our controlling stockholder of “self-dealing” in order to obtain control of the Company. In February 2020, there was a similar lawsuit referring to and citing the first lawsuit brought up by additional minority stockholders alleging our controlling stockholder and directors of similar wrong-doings. The February 2020 lawsuit was withdrawn in 2021. In June 2023, the Company received an additional complaint from additional stockholders affiliated or associated with the Spearman Plaintiffs, raising claims that were substantially the same as the claims raised in the existing litigation.
On August 25, 2023, the Company entered into a binding agreement in principle to settle all claims and counterclaims in the lawsuit. On September 15, 2023, the parties entered into a binding settlement agreement. The settlement agreement includes a transfer of all of the plaintiff’s stockholdings in Envoy to an entity affiliated with the majority stockholder of the Company, which was completed on September 28, 2023. The settlement agreement did not require any payment to be made by the Company.
The Company has business liability insurance to cover litigation costs exceeding $50 thousand. As of September 30, 2023 and December 31, 2022, the Company has not recorded accruals for potential losses related to any existing or pending litigation claims as the Company’s management determined that there are no matters where a potential loss is probable and reasonably estimable. |
Net Income (Loss) per Share |
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| Net Income (Loss) per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Income (Loss) per Share |
The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except share and per share amounts):
The Company’s potentially dilutive securities have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of shares of New Envoy Class A Common Stock outstanding used to calculate both basic and diluted net loss per share attributable to stockholders of New Envoy Class A Common Stock is the same. The Company excluded the following potential shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to stockholders for the periods indicated because including them would have had an anti-dilutive effect:
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Subsequent Events |
9 Months Ended | ||
|---|---|---|---|
Sep. 30, 2023 | |||
| Subsequent Event [Line Items] | |||
| Subsequent Events |
The Company has evaluated all events occurring through November 17, 2023, the date on which these unaudited condensed consolidated financial statements were issued, and during which time, nothing has occurred outside the normal course of business operations that would require disclosure, except for the following:
Stock Options
On October 15, 2023, the Company granted 1,938,409 stock options to certain employees and directors with an exercise price of $2.40 per share, out of which, 720,505 stock options were fully unvested on the grant date. For any employee or director that received stock options that are fully unvested on the grant date, the vesting conditions are that one-fourth (25%) of these stock options shall vest on the first anniversary of the grant date and the remaining portion (75%) of these stock options shall be vested ratably, on a monthly basis, over a 36-month vesting period. For any employee or director that received stock options that are 25%, 50% or 75% vested on the grant date based on service period, the vesting conditions are that the stock options shall vest ratably, on a monthly basis, over a 36-month vesting period.
Litigation
On November 14, 2023, Atlas Merchant Capital SPAC Fund I LP (the “Plaintiff”), a stockholder of the Company, filed a complaint (the “Complaint”) against Daniel Hirsch, Whitney Haring-Smith, the Sponsor and the Company, as successor to ANZU Special Acquisition Corp. I, (collectively, the “Defendants”) in the Court of Chancery of the State of Delaware. The Complaint alleges a claim for breach of Anzu’s Amended and Restated Certificate of Incorporation (the “Anzu Charter”) against the Company, a claim for breach of fiduciary duty against Mr. Hirsch, Dr. Haring-Smith and the Sponsor and claims for unjust enrichment, fraudulent misrepresentation and tortious interference with economic relations against the Defendants. The Complaint alleges that, among other things, after the Plaintiff submitted a redemption request for its shares of Class A Common Stock in connection with the Company’s special meeting of stockholders held on September 27, 2023, Plaintiff thereafter withdrew its redemption request, then Defendants declined to honor Plaintiff’s request to reinstate its redemption election because the request to reinstate its redemption election occurred after the redemption deadline of September 25, 2023.
The Complaint seeks specific performance to compel the Defendants to honor Atlas’ redemption request, monetary damages, attorneys’ fees and expenses. The Company believes the claims asserted in the Complaint to be without merit and intends to vigorously defend the litigation. At this time the Company does not believe that an unfavorable outcome is probable, and it is not possible to predict the outcome of the proceeding or its impact on the Company. |
Accounting Policies, by Policy (Policies) |
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Sep. 30, 2023 | ||||||||||||||||
| Accounting Policies [Abstract] | ||||||||||||||||
| Going Concern | Going ConcernSince inception, the Company has incurred cumulative losses from operations and has an accumulated deficit of $251.0 million at September 30, 2023. The Company has funded its operations and capital needs primarily through net proceeds from the issuances of convertible debt (see Note 9) and the sale of Envoy redeemable convertible preferred stock. In September 2023, the Company received $11.7 million proceeds from the Business Combination, Forward Purchase Agreement, and the PIPE Transaction, net of transaction costs. The Company had cash of $7.4 million as of September 30, 2023. Management believes that its existing cash balances combined with future capital raises, and cash receipts from product sales will be sufficient to fund ongoing operations through at least one year from the date the unaudited condensed consolidated financial statements are issued. However, there can be no assurance that the Company will be successful in achieving its strategic plans, that the Company’s cash balances and future capital raises will be sufficient to support its ongoing operations, or that any additional financing will be available in a timely manner or on acceptable terms, if at all. If the Company is unable to raise sufficient financing when needed or events or circumstances occur such that the Company does not meet its strategic plans, the Company may be required to reduce certain discretionary spending, be unable to develop new or enhanced production methods, or be unable to fund capital expenditures, which could have a material adverse effect on the Company’s financial position, results of operations, cash flows, and ability to achieve its intended business objectives. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. | |||||||||||||||
| Use of Estimates | Use of Estimates The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates and assumptions reflected in these unaudited condensed consolidated financial statements include but are not limited to the useful lives of property and equipment, inventory reserves, warranty liability, the fair value of common stock, the fair value of convertible notes payable, the fair value of forward purchase agreement assets, the fair value of forward purchase agreement warrant liability, the fair value of warrants and the outcome of litigation. Estimates and assumptions are reviewed periodically and the effect of changes, if any, are reflected in the unaudited condensed consolidated statements of operations and comprehensive income (loss). |
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| Concentration of Credit Risk and Significant Customers | Concentration of Credit Risk and Significant Customers Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and accounts receivable, net. Periodically, the Company maintains deposits in accredited financial institutions in excess of federally insured limits. The Company maintains its cash with financial institutions that management believes to be of high credit quality. The Company has not experienced any losses on such accounts and does not believe it is exposed to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships. With respect to accounts receivable, the Company performs credit evaluations of its customers and does not require collateral. There have been no material losses on accounts receivable. There were no customers that accounted for 10.0% or more of sales for the nine months ended September 30, 2023 and September 30, 2022, respectively. There were no customers that accounted for 10.0% or more of the accounts receivable balance as of September 30, 2023 and December 31, 2022. |
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| Cash and Restricted Cash | Cash and Restricted Cash The Company maintains cash balances in bank accounts which, at times, may exceed federally insured limits. Restricted cash is cash the Company holds for specific reasons and is not available for immediate use. |
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| Fair Value Measurement | Fair Value Measurement The Company determines the fair value of financial assets and liabilities using the fair value hierarchy established in Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The hierarchy describes three levels of inputs that may be used to measure fair value, as follows:
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The Company elected the fair value option for the convertible notes payable (related party) under ASC Topic 825, Financial Instruments, with changes in fair value recorded in income (loss) from changes in fair value of convertible notes payable (related party) each reporting period. The convertible notes payable (related party) consists of convertible notes issued between 2012 and 2022 (“Convertible Notes”) and the Envoy Bridge Note. The Company’s forward purchase agreement asset, forward purchase agreement warrant liability, and warrant liability (related party) are also Level 3 financial instruments at fair value and are described below (see Note 2 and Note 4). |
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| Derivative Financial Instruments | Derivative Financial Instruments The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign-currency risks. The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives in accordance with ASC Topic 815, “Derivatives and Hedging”. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value on the grant date and is then re-valued at each reporting date, with changes in the fair value reported in the unaudited condensed consolidated statements of operations and comprehensive income (loss). The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative liabilities are classified in the condensed consolidated balance sheets as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date. The Company accounts for its warrant liability in accordance with ASC 815-40. Accordingly, the Company recognizes the warrant instruments as a liability at fair value and adjusts the instruments to fair value at each reporting period. The warrant liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s unaudited condensed consolidated statements of operations and comprehensive income (loss). The Company accounts for its Forward Purchase Agreement in accordance with ASC 815-40. Accordingly, the Company recognizes the forward purchase agreement asset and the forward purchase agreement warrant liability at fair value at each reporting period. The assets and liabilities are subject to re-measurement at each balance sheet date, and any change in fair value is recognized in the Company’s unaudited condensed consolidated statements of operations and comprehensive income (loss). |
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| Warrant Liability (Related Party) | Warrant Liability (Related Party) The Company classifies certain warrants issued to stockholders to purchase Envoy Common Stock (see Note 10) as a liability on its condensed consolidated balance sheets as these warrants are a free-standing financial instrument that may require the Company to transfer assets upon exercise. The warrant liability was initially recorded at fair value upon the date of issuance and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of the warrant liability are recognized in the Company’s unaudited condensed consolidated statements of operations and comprehensive income (loss). Changes in the fair value of the warrant liability will continue to be recognized until the warrants are exercised, expire or qualify for equity classification. |
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| SPAC Excise Tax Liability | SPAC Excise Tax Liability The Company recognizes excise tax as an incremental cost to repurchase the treasury shares, with an offsetting tax liability recognized. The SPAC excise tax liability was recorded in accrued expenses in the Company’s condensed consolidated balance sheets. |
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| Revenue Recognition | Revenue Recognition The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which provides a five-step model for recognizing revenue from contracts with customers as follows:
Revenue is recognized as performance obligations under the terms of a contract are satisfied, which generally occurs as control of the promised products or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”). To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price using either the expected value or most likely amount method. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information that is reasonably available. The Company primarily derives revenue from the sale of its hearing device products. Revenue from product sales is recognized upon transfer of control of the product to a customer, which occurs at a point in time, at the time the Company is notified the product has been implanted or used by the customer in a surgical procedure. The Company also sells extended warranty plans on a limited basis. Revenue from extended warranty plans is recognized ratably over time and is immaterial. Amounts received from a customer prior to fulfillment of the performance obligation are included as accrued expenses on the condensed consolidated balance sheets and are immaterial as of September 30, 2023 and December 31, 2022. The Company has elected to account for shipping and handling activities performed as activities to fulfill the promise to transfer the products, and therefore these activities are not assessed as a separate performance obligation to its customers. Revenue is measured as the amount of consideration the Company expects to receive, which is based on the invoiced price. The majority of the Company’s contracts have a single performance obligation and are short term in nature. The Company’s contracts do not include variable consideration. Payment terms differ by geography and customer, but payment is generally required within 30 days from the date of product utilization. The Company also offers extended payment plans on a limited basis. Amounts due to the Company under payment plans that extend beyond 12 months are immaterial as of September 30, 2023 and December 31, 2022, therefore the Company does not adjust the promised amount of consideration for the effects of a significant financing component. |
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| Segments | Segments Operating segments are identified as components of enterprise about which discrete financial information is available for evaluation by the chief operating decision-maker (“CODM”) in deciding resource allocation and assessing performance. The Company has determined that its CODM is its Chief Executive Officer. The Company’s CODM reviews financial information presented on a consolidated basis for the purposes of making decisions, allocating resources and evaluating performance. Consequently, the Company has determined it operates in one operating and reportable segment. |
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| Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Effective | Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Effective In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU No 2016-13”). This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The Company adopted Topic 326 with an adoption date of January 1, 2023 using the modified retrospective approach. As a result, the Company changed its accounting policy for allowance for credit losses. The Company monitors accounts receivables and estimates the allowance for lifetime expected credit losses. Estimates of expected credit losses are based on historical collection experience and other factors, including those related to current market conditions and events. The adoption did not have a material effect on the Company’s accompanying unaudited condensed consolidated financial statements. Other than the item noted above, there have been no new accounting pronouncements not yet effective or adopted in the current year that have a significant impact, or potential significant impact, to our unaudited condensed consolidated financial statements. |
Merger (Tables) |
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| Merger [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Class A Common Stock and Series A Preferred Stock Outstanding | The following table presents
the total shares of New Envoy Class A Common Stock and Series A Preferred Stock outstanding immediately after the Closing:
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Fair Value Measurement (Tables) |
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| Fair Value Measurement [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Company’s Liabilities Measured at Fair Value on a Recurring Basis | The following tables provide
information related to the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2023
and December 31, 2022 (in thousands):
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| Schedule of Fair Value Measurements of Forward Purchase Agreement Assets | The fair values of the forward
purchase agreement assets and the forward purchase agreement warrant liability were estimated using Monte Carlo Simulation models, which
are Level 3 fair value measurement. The following table presents the quantitative information regarding Level 3 fair value measurements
of the forward purchase agreement assets and forward purchase agreement warrant liability:
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| Schedule of Valuation of the Convertible Notes | The significant inputs that
were used in the valuation of the Convertible Notes are presented below (in thousands, except per share amounts):
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| Schedule of Measured at Fair Value on a Recurring Basis | The following table summarizes
the activity for the Company’s Level 3 instruments measured at fair value on a recurring basis (in thousands):
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Inventories (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||
| Inventories [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Inventories | Inventories,
consisted of the following (in thousands):
|
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Operating Leases (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating Leases [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Lease Costs | The components of leases and
lease costs were as follows (in thousands):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Operating Lease Cost |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Other Supplemental Information | Other supplemental information
of lease amounts recognized in the unaudited condensed consolidated financial statements is summarized as follows:
|
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| Schedule of Weighted Average |
|
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| Schedule of Future Minimum Lease Payments | Future minimum lease payments
associated with these leases were as follows on September 30, 2023 (in thousands):
|
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Product Warranty Liability (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Warranty Liability [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Changes in Warrant Liability | Changes in warranty liability were as follows (in
thousands):
|
||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Outstanding Common Stock Warrants | The following table summarizes the Company’s outstanding common
stock warrants (related party) as of December 30, 2022:
|
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Stock Options (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock Options [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Stock Option Activity | The following table summarizes
the Company’s stock option activity for the nine months ended September 30, 2023:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Income (Loss) per Share (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Income (Loss) per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Basic and Diluted Loss Per Share | The following table sets forth the computation
of basic and diluted income (loss) per share (in thousands, except share and per share amounts):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Potentially Dilutive Securities Have Been Excluded From the Computation of Diluted Net | The Company excluded the following potential shares, presented based on amounts outstanding at each period end, from the computation of
diluted net loss per share attributable to stockholders for the periods indicated because including them would have had an anti-dilutive
effect:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Significant Accounting Policies (Details) - USD ($) $ in Millions |
9 Months Ended | 12 Months Ended | |
|---|---|---|---|
Sep. 30, 2023 |
Sep. 30, 2022 |
Dec. 31, 2022 |
|
| Summary of Significant Accounting Policies (Details) [Line Items] | |||
| Accumulated deficit (in Dollars) | $ 251.0 | ||
| Purchase agreement (in Dollars) | 11.7 | ||
| Cash (in Dollars) | $ 7.4 | ||
| Customer accounted percentage | 10.00% | 10.00% | |
| Accounts Receivable [Member] | |||
| Summary of Significant Accounting Policies (Details) [Line Items] | |||
| Customer accounted percentage | 10.00% | 10.00% | |
Fair Value Measurement (Details) - USD ($) |
9 Months Ended | ||
|---|---|---|---|
Sep. 30, 2023 |
Apr. 17, 2023 |
Dec. 31, 2022 |
|
| Fair Value Measurement (Details) [Line Items] | |||
| Convertible Notes | $ 448,000 | ||
| Expected dividend yield | 0.00% | ||
| Measurement Input, Default Rate [Member] | |||
| Fair Value Measurement (Details) [Line Items] | |||
| Percentage of probability default | 5.00% | ||
| Measurement Input, Discount Rate [Member] | |||
| Fair Value Measurement (Details) [Line Items] | |||
| Percentage of probability default | 5.00% | ||
| Minimum [Member] | |||
| Fair Value Measurement (Details) [Line Items] | |||
| Convertible Notes | 1.5 | ||
| Maximum [Member] | |||
| Fair Value Measurement (Details) [Line Items] | |||
| Convertible Notes | $ 1,600,000 | ||
| Series A Preferred Stock [Member] | |||
| Fair Value Measurement (Details) [Line Items] | |||
| Price per share | $ 10.98 | $ 10 | |
| Convertible Note [Member] | |||
| Fair Value Measurement (Details) [Line Items] | |||
| Convertible Notes | $ 2,600,000 |
Fair Value Measurement (Details) - Schedule of Company’s Liabilities Measured at Fair Value on a Recurring Basis - USD ($) $ in Thousands |
Sep. 30, 2023 |
Dec. 31, 2022 |
|---|---|---|
| Assets: | ||
| Forward purchase agreement assets | $ 2,386 | |
| Total asset | 2,386 | |
| Liabilities: | ||
| Forward purchase agreement warrant liability | 1,793 | |
| Warrant liability | 1,274 | |
| Total warrant liability | 3,067 | |
| Liabilities: | ||
| Convertible notes payable, net of current portion (related party) | 33,397 | |
| Convertible notes payable, current portion (related party) | 448 | |
| Warrant liability (related party) | 127 | |
| Total liability | 33,972 | |
| Level 1 [Member] | ||
| Assets: | ||
| Forward purchase agreement assets | ||
| Total asset | ||
| Liabilities: | ||
| Forward purchase agreement warrant liability | ||
| Warrant liability | 1,274 | |
| Total warrant liability | 1,274 | |
| Liabilities: | ||
| Convertible notes payable, net of current portion (related party) | ||
| Convertible notes payable, current portion (related party) | ||
| Warrant liability (related party) | ||
| Total liability | ||
| Level 2 [Member] | ||
| Assets: | ||
| Forward purchase agreement assets | ||
| Total asset | ||
| Liabilities: | ||
| Forward purchase agreement warrant liability | ||
| Warrant liability | ||
| Total warrant liability | ||
| Liabilities: | ||
| Convertible notes payable, net of current portion (related party) | ||
| Convertible notes payable, current portion (related party) | ||
| Warrant liability (related party) | ||
| Total liability | ||
| Level 3 [Member] | ||
| Assets: | ||
| Forward purchase agreement assets | 2,386 | |
| Total asset | 2,386 | |
| Liabilities: | ||
| Forward purchase agreement warrant liability | 1,793 | |
| Warrant liability | ||
| Total warrant liability | $ 1,793 | |
| Liabilities: | ||
| Convertible notes payable, net of current portion (related party) | 33,397 | |
| Convertible notes payable, current portion (related party) | 448 | |
| Warrant liability (related party) | 127 | |
| Total liability | $ 33,972 |
Fair Value Measurement (Details) - Schedule of Fair Value Measurements of Forward Purchase Agreement Assets - $ / shares |
9 Months Ended | 12 Months Ended |
|---|---|---|
Sep. 30, 2023 |
Dec. 31, 2022 |
|
| Fair Value Measurement (Details) - Schedule of Fair Value Measurements of Forward Purchase Agreement Assets [Line Items] | ||
| Expected dividend yield | 0.00% | |
| Forward Purchase Agreement [Member] | ||
| Fair Value Measurement (Details) - Schedule of Fair Value Measurements of Forward Purchase Agreement Assets [Line Items] | ||
| Stock price (in Dollars per share) | $ 5.64 | |
| Exercise price (in Dollars per share) | $ 10.46 | |
| Expected term (in years) | 1 year | |
| Risk-free rate | 5.32% | |
| Warrant Liability [Member] | ||
| Fair Value Measurement (Details) - Schedule of Fair Value Measurements of Forward Purchase Agreement Assets [Line Items] | ||
| Expected term (in years) | 9 years 6 months | |
| Expected volatility | 62.80% | |
| Risk-free rate | 3.90% | |
| Expected dividend yield | 0.00% | |
| Level 3 [Member] | ||
| Fair Value Measurement (Details) - Schedule of Fair Value Measurements of Forward Purchase Agreement Assets [Line Items] | ||
| Stock price (in Dollars per share) | $ 7.02 | |
| Exercise price (in Dollars per share) | $ 11.5 | |
| Expected term (in years) | 10 years | |
| Expected volatility | 48.90% |
Fair Value Measurement (Details) - Schedule of Valuation of the Convertible Notes $ / shares in Units, $ in Thousands |
12 Months Ended |
|---|---|
|
Dec. 31, 2022
USD ($)
$ / shares
| |
| Share price [Member] | |
| Fair Value Measurement Inputs and Valuation Techniques [Line Items] | |
| Share price (in Dollars per share) | $ / shares | $ 0.33 |
| Discount rate [Member] | |
| Fair Value Measurement Inputs and Valuation Techniques [Line Items] | |
| Valuation of the convertible notes, rate | 14.80% |
| Volatility [Member] | |
| Fair Value Measurement Inputs and Valuation Techniques [Line Items] | |
| Valuation of the convertible notes, rate | 91.00% |
| Probability of qualified financing [Member] | |
| Fair Value Measurement Inputs and Valuation Techniques [Line Items] | |
| Valuation of the convertible notes, rate | 5.00% |
| Probability of SPAC/IPO [Member] | |
| Fair Value Measurement Inputs and Valuation Techniques [Line Items] | |
| Valuation of the convertible notes, rate | 25.00% |
| Probability of default [Member] | |
| Fair Value Measurement Inputs and Valuation Techniques [Line Items] | |
| Valuation of the convertible notes, rate | 60.00% |
| Probability of held to maturity [Member] | |
| Fair Value Measurement Inputs and Valuation Techniques [Line Items] | |
| Valuation of the convertible notes, rate | 10.00% |
| 2023 [Member] | |
| Fair Value Measurement Inputs and Valuation Techniques [Line Items] | |
| Recovery upon default (Convertible Notes) (in Dollars) | $ | $ 10,000 |
Fair Value Measurement (Details) - Schedule of Measured at Fair Value on a Recurring Basis - USD ($) $ in Thousands |
3 Months Ended | ||
|---|---|---|---|
Sep. 30, 2023 |
Jun. 30, 2023 |
Mar. 31, 2023 |
|
| Convertible Notes and Envoy Bridge Note (Related Party) [Member] | |||
| Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items] | |||
| Balance Beginning | $ 41,413 | $ 45,270 | $ 33,845 |
| Issuances | 1,964 | 1,964 | 2,048 |
| Capital contribution | (14,678) | ||
| Conversion | (38,475) | ||
| Change in fair value | (4,902) | 8,857 | 9,377 |
| Balance Ending | 41,413 | 45,270 | |
| Warrant Liability (Related Party) [Member] | |||
| Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items] | |||
| Balance Beginning | 231 | 231 | 127 |
| Issuances | |||
| Capital contribution | |||
| Conversion | (231) | ||
| Change in fair value | 104 | ||
| Balance Ending | 231 | 231 | |
| Forward Purchase Agreement Asset [Member] | |||
| Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items] | |||
| Balance Beginning | |||
| Issuances | 2,386 | ||
| Capital contribution | |||
| Conversion | |||
| Change in fair value | |||
| Balance Ending | 2,386 | ||
| Forward Purchase Agreement Warrant Liability [Member] | |||
| Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items] | |||
| Balance Beginning | |||
| Issuances | 1,793 | ||
| Capital contribution | |||
| Conversion | |||
| Change in fair value | |||
| Balance Ending | $ 1,793 | ||
Restricted Cash (Details) $ / shares in Units, $ in Millions |
9 Months Ended |
|---|---|
|
Sep. 30, 2023
USD ($)
$ / shares
| |
| Restricted Cash (Details) [Line Items] | |
| Additional shares | $ 1.0 |
| Net tangible asset | 5.0 |
| Reclassed to restricted cash | 5.4 |
| Series A Preferred Stock [Member] | |
| Restricted Cash (Details) [Line Items] | |
| Additional shares | $ 1.0 |
| Net tangible (in Dollars per share) | $ / shares | $ 10 |
| Envoy Bridge Note, GAT Funding, LLC [Member] | |
| Restricted Cash (Details) [Line Items] | |
| Restricted cash | $ 4.0 |
Inventories (Details) - Schedule of Inventories - USD ($) $ in Thousands |
Sep. 30, 2023 |
Dec. 31, 2022 |
|---|---|---|
| Schedule of Inventories [Abstract] | ||
| Raw materials | $ 1,227 | $ 1,010 |
| Work-in-progress | 31 | 164 |
| Finished goods | 139 | 121 |
| Total | $ 1,397 | $ 1,295 |
Operating Leases (Details) - Schedule of Lease Costs - USD ($) $ in Thousands |
9 Months Ended | 12 Months Ended |
|---|---|---|
Sep. 30, 2023 |
Dec. 31, 2022 |
|
| Operating Leases (Details) - Schedule of Lease Costs [Line Items] | ||
| Operating lease liabilities, net of current portion (related party) | $ 589 | |
| Total | 589 | $ 690 |
| Related Party [Member] | ||
| Operating Leases (Details) - Schedule of Lease Costs [Line Items] | ||
| Operating lease right-of-use assets (related party) | 494 | 577 |
| Operating lease liability, current portion (related party) | 149 | 125 |
| Operating lease liabilities, net of current portion (related party) | $ 440 | $ 565 |
Operating Leases (Details) - Schedule of Operating Lease Cost - USD ($) $ in Thousands |
9 Months Ended | |
|---|---|---|
Sep. 30, 2023 |
Sep. 30, 2022 |
|
| Schedule of Operating Lease Cost [Abstract] | ||
| Operating lease cost | $ 97 | $ 97 |
| Total | $ 97 | $ 97 |
Operating Leases (Details) - Schedule of Other Supplemental Information - USD ($) $ in Thousands |
9 Months Ended | |
|---|---|---|
Sep. 30, 2023 |
Sep. 30, 2022 |
|
| Schedule of Other Supplemental Information [Abstract] | ||
| Cash paid for amounts included in the measurement of lease liabilities | $ 113 | $ 111 |
Operating Leases (Details) - Schedule of Weighted Average |
Sep. 30, 2023 |
Dec. 31, 2022 |
|---|---|---|
| Schedule of Weighted Average [Abstract] | ||
| Weighted-average remaining lease term - in years | 4 years 2 months 12 days | 4 years 10 months 24 days |
| Weighted-average discount rate | 5.00% | 5.00% |
Operating Leases (Details) - Schedule of Future Minimum Lease Payments $ in Thousands |
Sep. 30, 2023
USD ($)
|
|---|---|
| Schedule of Future Minimum Lease Payments [Abstract] | |
| 2023 (remaining) | $ 28 |
| 2024 | 162 |
| 2025 | 154 |
| 2026 | 155 |
| 2027 | 99 |
| Total | 598 |
| Less: Imputed interest | (9) |
| Total | $ 589 |
Product Warranty Liability (Details) $ in Thousands |
9 Months Ended |
|---|---|
|
Sep. 30, 2023
USD ($)
| |
| Warranty Liability [Abstract] | |
| Estimated cost (in Dollars) | $ 6 |
| Average battery life | 5 years |
| Percentage of average patient life | 3.60% |
| Discount rate | 5.00% |
Product Warranty Liability (Details) - Schedule of Changes in Warrant Liability - USD ($) $ in Thousands |
3 Months Ended | ||
|---|---|---|---|
Sep. 30, 2023 |
Jun. 30, 2023 |
Mar. 31, 2023 |
|
| Schedule of Changes in Warrant Liability [Abstract] | |||
| Balance Beginning | $ 2,346 | $ 2,416 | $ 2,478 |
| Utilization | (21) | (25) | (62) |
| Balance Ending | 2,253 | 2,346 | $ 2,416 |
| Reversal of product warranty accrual | $ (72) | $ (45) | |
Convertible Notes Payable (Related Party) (Details) - USD ($) |
1 Months Ended | 3 Months Ended | 9 Months Ended | 12 Months Ended | |||
|---|---|---|---|---|---|---|---|
Apr. 17, 2023 |
Jun. 30, 2022 |
Mar. 31, 2021 |
Sep. 30, 2023 |
Jun. 30, 2023 |
Sep. 30, 2023 |
Dec. 31, 2022 |
|
| Convertible Notes Payable (Related Party) (Details) [Line Items] | |||||||
| Drawn amount | $ 10,000,000 | $ 10,000,000 | $ 2,000,000 | ||||
| Convertible note | $ 59,000,000 | ||||||
| Percentage of price per share | 80.00% | 80.00% | |||||
| Borrowing capacity | $ 10,000,000 | $ 4,000,000 | $ 4,000,000 | ||||
| Percentage of interest rate | 4.50% | ||||||
| Maturity date | Dec. 31, 2025 | ||||||
| Convertible note | $ 4,000,000 | $ 4,000,000 | |||||
| Preferred Stock, conversion price (in Dollars per share) | $ 11.5 | $ 11.5 | |||||
| Common Stock, conversion price (in Dollars per share) | $ 1 | ||||||
| Net tangible assets | $ 5,000,000 | $ 5,000,000 | |||||
| Series A Preferred Stock [Member] | |||||||
| Convertible Notes Payable (Related Party) (Details) [Line Items] | |||||||
| Preferred Stock, conversion price (in Dollars per share) | $ 10 | $ 10 | |||||
| Envoy Bridge Note [Member] | |||||||
| Convertible Notes Payable (Related Party) (Details) [Line Items] | |||||||
| Drawn amount | $ 5,000,000 | ||||||
| Convertible Note [Member] | |||||||
| Convertible Notes Payable (Related Party) (Details) [Line Items] | |||||||
| Principal amount | $ 4,000,000 | $ 4,000,000 | 59,700,000 | ||||
| Undrawn principal amount | 5,000,000 | ||||||
| New stock | $ 2,500,000 | $ 2,500,000 | |||||
| Common stock per share (in Dollars per share) | $ 1 | $ 1 | |||||
| 2012 Convertible Note [Member] | |||||||
| Convertible Notes Payable (Related Party) (Details) [Line Items] | |||||||
| Percentage of interest per annum | 4.50% | ||||||
| Price per share (in Dollars per share) | $ 1 | $ 1 | |||||
| Percentage of price per share | 80.00% | 80.00% | |||||
| 2012 Convertible Note [Member] | Class A Common Stock [Member] | |||||||
| Convertible Notes Payable (Related Party) (Details) [Line Items] | |||||||
| Price per share (in Dollars per share) | $ 15.72 | $ 15.72 | |||||
| 2013 Convertible Notes [Member] | |||||||
| Convertible Notes Payable (Related Party) (Details) [Line Items] | |||||||
| Principal amount | $ 700,000 | ||||||
| Percentage of interest per annum | 4.50% | ||||||
| Price per share (in Dollars per share) | $ 1 | $ 1 | |||||
| Percentage of price per share | 80.00% | 80.00% | |||||
| 2013 Convertible Notes [Member] | Class A Common Stock [Member] | |||||||
| Convertible Notes Payable (Related Party) (Details) [Line Items] | |||||||
| Price per share (in Dollars per share) | $ 15.72 | $ 15.72 | |||||
| 2013 Convertible Notes [Member] | Series A Preferred Stock [Member] | |||||||
| Convertible Notes Payable (Related Party) (Details) [Line Items] | |||||||
| Price per share (in Dollars per share) | $ 10 | $ 10 | |||||
| Envoy Bridge Note [Member] | |||||||
| Convertible Notes Payable (Related Party) (Details) [Line Items] | |||||||
| Drawn amount | $ 3,000,000 | $ 3,000,000 | |||||
Common Stock (Details) - USD ($) $ in Thousands |
1 Months Ended | 9 Months Ended | |||
|---|---|---|---|---|---|
Apr. 17, 2023 |
Sep. 30, 2023 |
Sep. 30, 2022 |
Dec. 31, 2022 |
Jul. 31, 2022 |
|
| Common Stock (Details) [Line Items] | |||||
| Shares issued | 425,606 | ||||
| Purchase warrants | 8,695,000 | 1,150,000 | |||
| Incurred expenses (in Dollars) | $ 100 | ||||
| Change in fair value of warrant liability (in Dollars) | $ 92 | ||||
| Shares converted | 70,000 | ||||
| Conversion of shares issued | 2,702 | ||||
| Warrants forfeited | 8,625,000 | ||||
| Business combination shares classified as liability | 1,150,000 | ||||
| Gain on warrant liability (in Dollars) | $ 200 | ||||
| Sponsor [Member] | |||||
| Common Stock (Details) [Line Items] | |||||
| Shares issued | 1,000,000 | ||||
| Class A Common Stock [Member] | |||||
| Common Stock (Details) [Line Items] | |||||
| Share authorized | 400,000,000 | 232,000,000 | |||
| Common Stock Warrants (Related Party) [Member] | |||||
| Common Stock (Details) [Line Items] | |||||
| Change in fair value of warrant liability (in Dollars) | $ 100 | ||||
Common Stock (Details) - Schedule of Outstanding Common Stock Warrants |
9 Months Ended |
|---|---|
|
Sep. 30, 2023
$ / shares
shares
| |
| Class of Warrant or Right [Line Items] | |
| Numbers of Shares Issuable | 8,695,000 |
| 2013 [Member] | |
| Class of Warrant or Right [Line Items] | |
| Numbers of Shares Issuable | 70,000 |
| Exercise Price | $ / shares | $ 0.25 |
| Classification | Equity |
| Expiration Date | Nov-2023 |
| 2015 [Member] | |
| Class of Warrant or Right [Line Items] | |
| Numbers of Shares Issuable | 2,300,000 |
| Exercise Price | $ / shares | $ 1 |
| Classification | Equity |
| Expiration Date | Nov-2025 |
| 2017 [Member] | |
| Class of Warrant or Right [Line Items] | |
| Numbers of Shares Issuable | 2,300,000 |
| Exercise Price | $ / shares | $ 1 |
| Classification | Equity |
| Expiration Date | Aug-2027 |
| 2018 [Member] | |
| Class of Warrant or Right [Line Items] | |
| Numbers of Shares Issuable | 805,000 |
| Exercise Price | $ / shares | $ 1 |
| Classification | Equity |
| Expiration Date | Jan-2029 |
| 2019 [Member] | |
| Class of Warrant or Right [Line Items] | |
| Numbers of Shares Issuable | 920,000 |
| Exercise Price | $ / shares | $ 1 |
| Classification | Equity |
| Expiration Date | Dec-2029 |
| 2021 [Member] | |
| Class of Warrant or Right [Line Items] | |
| Numbers of Shares Issuable | 1,150,000 |
| Exercise Price | $ / shares | $ 1 |
| Classification | Equity |
| Expiration Date | Dec-2030 |
| 2022 [Member] | |
| Class of Warrant or Right [Line Items] | |
| Numbers of Shares Issuable | 1,150,000 |
| Exercise Price | $ / shares | $ 1 |
| Classification | Liability |
| Expiration Date | July-2032 |
Series A Preferred Stock (Details) - USD ($) $ / shares in Units, $ in Millions |
9 Months Ended | |
|---|---|---|
Sep. 30, 2023 |
Dec. 31, 2022 |
|
| Series A Preferred Stock (Details) [Line Items] | ||
| Preferred stock par value | $ 0.01 | |
| Additional capital (in Dollars) | $ 1.0 | |
| Preferred stock conversion price | $ 11.5 | |
| Preferred stock outstanding | 15 | |
| Original issuance price | $ 10 | |
| Percentage of additional dividend | 12.00% | |
| Dividend payments (in Dollars) | $ 5.4 | |
| Net tangible assets (in Dollars) | $ 10.0 | |
| Series A Preferred Stock [Member] | ||
| Series A Preferred Stock (Details) [Line Items] | ||
| Preferred stock authorized (in Shares) | 10,000,000 | 0 |
| Preferred stock par value | $ 0.0001 | $ 0.0001 |
| Shares issued (in Shares) | 4,500,000 | 0 |
| Additional capital (in Dollars) | $ 1.0 | |
| Preferred stock price per share | $ 10 | |
| Preferred stock conversion price | $ 10 | |
| Original issuance price | 12.00% | |
| Unpaid cash dividends | $ 10 | |
| Redeemable Preferred Stock [Member] | ||
| Series A Preferred Stock (Details) [Line Items] | ||
| Preferred stock authorized (in Shares) | 10,000,000 | |
| Class A Common Stock [Member] | ||
| Series A Preferred Stock (Details) [Line Items] | ||
| Preferred stock price per share | $ 15 | |
| Preferred stock outstanding | $ 10 | |
| Restated [Member] | ||
| Series A Preferred Stock (Details) [Line Items] | ||
| Preferred stock authorized (in Shares) | 100,000,000 |
Stock Options (Details) - 2003 Stock Option Plan [Member] - USD ($) |
9 Months Ended | |
|---|---|---|
Sep. 30, 2023 |
Dec. 31, 2022 |
|
| Stock Options (Details) [Line Items] | ||
| Shareholders reserved | 7,000,000 | |
| Intrinsic value (in Dollars) | $ 0 | |
| Common Stock [Member] | ||
| Stock Options (Details) [Line Items] | ||
| Common stock, authorized | 6,400,000 | |
| Maximum [Member] | ||
| Stock Options (Details) [Line Items] | ||
| Common stock available issuance | 6,400,000 | |
| Minimum [Member] | ||
| Stock Options (Details) [Line Items] | ||
| Common stock available issuance | 552,000 |
Stock Options (Details) - Schedule of Stock Option Activity - USD ($) |
9 Months Ended | 12 Months Ended |
|---|---|---|
Sep. 30, 2023 |
Dec. 31, 2022 |
|
| Schedule of Stock Option Activity [Abstract] | ||
| Options, Opening Balance | 263,000 | |
| Weighted-average Exercise Price per Option, Opening Balance | $ 1.25 | |
| Weighted-average Remaining Contractual Term, Opening Balance | 1 year 3 days | |
| Intrinsic Value, Opening Balance | ||
| Options, Ending Balance | ||
| Weighted-average Exercise Price per Option, Ending Balance | ||
| Weighted-average Remaining Contractual Term, Ending Balance | ||
| Intrinsic Value, Ending Balance | ||
| Options, Exersisable and vested | ||
| Weighted-average Exercise Price per Option, Exersisable and vested | ||
| Weighted-average Remaining Contractual Term, Exersisable and vested | ||
| Intrinsic Value, Exersisable and vested |
Related Party Transactions (Details) - USD ($) $ in Millions |
Sep. 30, 2023 |
Dec. 31, 2022 |
|---|---|---|
| Related Party Transactions [Abstract] | ||
| Lease liability due | $ 0.6 | $ 0.6 |
| Notes payable | $ 4.0 |
Commitment and Contingencies (Details) $ in Thousands |
9 Months Ended |
|---|---|
|
Sep. 30, 2023
USD ($)
| |
| Commitments And Contingencies [Abstract] | |
| Litigation costs | $ 50 |
Net Income (Loss) per Share (Details) - Schedule of Basic and Diluted Loss Per Share - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2023 |
Sep. 30, 2022 |
Sep. 30, 2023 |
Sep. 30, 2022 |
|
| Numerator: | ||||
| Net income (loss) | $ 1,563 | $ (1,339) | $ (25,027) | $ (4,446) |
| Less: Cumulative undeclared preferred dividends and undistributed earnings allocated to participating securities, basic | (230) | |||
| Net income (loss) attributable to common stockholders, basic | 1,360 | (1,339) | (25,027) | (4,446) |
| Less: Undistributed earnings allocated to participating securities, diluted | (159) | |||
| Net income (loss) attributable to common stockholders, diluted | $ 1,404 | $ (1,339) | $ (25,027) | $ (4,446) |
| Denominator: | ||||
| Weighted average common stock outstanding, basic (in Shares) | 10,214,183 | 10,123,187 | 10,153,564 | 10,123,187 |
| Net income (loss) per share attributable to common stockholders, basic (in Dollars per share) | $ 0.13 | $ (0.13) | $ (2.46) | $ (0.44) |
| Weighted average common stock outstanding, diluted (in Shares) | 11,215,068 | 10,123,187 | 10,153,564 | 10,123,187 |
| Net income (loss) per share attributable to common stockholders, diluted (in Dollars per share) | $ 0.13 | $ (0.13) | $ (2.46) | $ (0.44) |
Net Income (Loss) per Share (Details) - Schedule of Potentially Dilutive Securities Have Been Excluded From the Computation of Diluted Net - shares |
9 Months Ended | ||
|---|---|---|---|
Sep. 30, 2023 |
Sep. 30, 2022 |
Dec. 31, 2021 |
|
| Schedule of Potentially Dilutive Securities Have Been Excluded From the Computation of Diluted Net [Abstract] | |||
| Stock options | 263,000 | 263,000 | |
| Series A Preferred Stock (as converted to common stock) | 3,913,043 | ||
| Warrants to purchase common stock | 14,166,666 | ||
| Contingent Sponsor Shares | 1,000,000 | ||
| Total | 19,079,709 | 263,000 | |
Subsequent Events (Details) - Subsequent Event [Member] |
Oct. 15, 2023
$ / shares
shares
|
|---|---|
| Subsequent Events (Details) [Line Items] | |
| Granted shares (in Shares) | 1,938,409 |
| Exercise price (in Dollars per share) | $ / shares | $ 2.4 |
| Stock option share (in Shares) | 720,505 |
| Received stock options rate | 25.00% |
| Stock option rate | 75.00% |
| Minimum [Member] | |
| Subsequent Events (Details) [Line Items] | |
| Received stock options rate | 25.00% |
| Median [Member] | |
| Subsequent Events (Details) [Line Items] | |
| Received stock options rate | 50.00% |
| Maximum [Member] | |
| Subsequent Events (Details) [Line Items] | |
| Received stock options rate | 75.00% |