| Summary of Significant Accounting Policies | 2. Summary
of Significant Accounting Policies Going
Concern Since
inception, the Company has incurred cumulative losses from operations and has an accumulated deficit of $277.5 million as of September 30,
2024. The Company has funded its operations and capital needs primarily through net proceeds from the issuances of term debt, convertible
debt, the sale of Envoy Medical’s Common Stock, and the sale of Envoy Medical’s Series A Preferred Stock. In February 2024,
May 2024, July 2024, and August 2024, the Company received advances of $5.0 million, $2.5 million, $2.5 million, and $5.0 million, respectively,
from term loans provided by a related party (see Note 9). In February 2024, the Company received net proceeds of $1.7 million from the
sale of 425,606 shares held by Meteora parties (see Note 1). In September 2023, the Company received $11.7 million in proceeds from the
Business Combination, Forward Purchase Agreement, and the PIPE Transaction, net of transaction costs. The Company had cash of $4.4 million
as of September 30, 2024. 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 of its discretionary
spending. The Company may 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, stock-based compensation
expense, the fair value of the forward purchase agreement put option liability, the fair value of the forward purchase agreement warrant
liability 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 (loss) income. Reclassification Certain
items in prior financial statements have been reclassified to conform to the current presentation. 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 the Company’s accounts receivable. There were no customers that accounted for 10.0% or more of sales
for the three and nine months ended September 30, 2024 and 2023. There were no customers that accounted for 10.0% or more of the accounts
receivable balance as of September 30, 2024 and December 31, 2023. Cash The
Company maintains cash balances in bank accounts which, at times, may exceed federally insured limits. The Company is also required to
maintain in a separate account funds of $5.4 million, which is equal to the first-year dividend payments to holders of Series A Preferred
Stock, as defined under the terms of the Series A Preferred Stock certificate of designation. As of September 30, 2024 and December
31, 2023, the Company was unable to comply with this requirement (see Note 5). Accounts
Receivable Accounts
receivable are recorded at the invoiced amount and do not bear interest. The Company grants credit to customers in the normal course
of business, but generally does not require collateral or other security to support amounts due. Accounts receivable are presented net
of an allowance for credit losses. Management performs ongoing credit evaluations of its customers based on financial information provided
by the customer. Accounts receivable outstanding longer than the contractual payment terms are considered past due. The Company estimates
its allowance for credit losses by considering numerous factors, including delinquency trends along with ongoing customer credit evaluations.
The Company writes off accounts receivable when they become uncollectible. Payments subsequently received on such receivables are credited
to the allowance for credit losses. The Company had no material bad debt expense for the three and nine months ended September 30, 2024
and 2023. The allowance for credit losses was not material as of September 30, 2024 and December 31, 2023. Inventories Inventories
are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. The Company records
write-downs of inventories that are obsolete or in excess of anticipated demand or net realizable value based on a consideration of marketability
and product life cycle stage, historical net sales and demand forecasts which consider the assumptions about future demand and market
conditions. Inventory on hand that is not expected to be sold or utilized is considered excess, and the Company recognizes the write-down
in cost of goods sold at the time of such determination. The write-down is determined by the excess of cost over net realizable value.
Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable cost of completion,
disposal and transportation. At the time of loss recognition, a new cost basis is established and subsequent changes in facts and circumstances
would not result in an increase in the cost basis. Property
and Equipment, Net Property
and equipment are stated at cost, net of accumulated depreciation. Additions and improvements that extend the lives of the assets are
capitalized, while expenditures for repairs and maintenance are expensed as incurred. When assets are retired or otherwise disposed of,
their costs and related accumulated depreciation are removed from the accounts and resulting gains or losses are included in operating
results. Depreciation is calculated using the straight-line method over the estimated useful life of the asset, which ranges from three seven Operating
Leases The
Company determines if an agreement is a lease at inception. The Company elected not to recognize the right to use an underlying asset
(right-of-use “ROU” asset) and lease liabilities for short-term leases, which are those that have a lease term of twelve
months or less, and includes renewal options in the measurement of lease liabilities only when the option to purchase or renew lease
for the underlying asset is reasonably certain to be exercised. The Company has elected as an accounting policy to account for lease
components and associated non-lease components as a single component. The Company leases its headquarters office space under an operating
lease with a related party and also leases office space in Germany under an operating lease (see Note 7). The determination of whether
an arrangement is, or contains, a lease is performed at the inception of the arrangement and as necessary at modification. An operating
lease is recorded on the consolidated balance sheet with the operating lease asset representing the right to use the ROU asset for the
lease term, and the lease liability representing the obligation to make lease payments arising from the lease. The Company excludes variable
lease payments when measuring the ROU asset and lease liability, except for those that depend on an index, a rate, or are in-substance
fixed payments. ROU
assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term.
In addition, ROU assets include initial direct costs incurred by the lessee as well as any lease payments made at or before the commencement
date and exclude lease incentives. The discount rate implicit within the Company’s leases is generally not determinable; therefore,
the Company determines the discount rate using its incremental borrowing rate based on the information available at the commencement
date in determining the present value of lease payments. Impairment
of Long-Lived Assets Long-lived
assets held and used by the Company, including equipment and ROU assets, are reviewed for impairment whenever events or changes in business
circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when estimated future
undiscounted cash flows related to the assets are less than its carrying value. The amount of the impairment loss to be recorded, if
any, is calculated by the excess of the asset’s carrying value over its fair value. The Company did not incur any impairment charges
during the three and nine months ended September 30, 2024 and 2023. Fair
Value of Financial Instruments The
Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information
in the notes to the unaudited condensed consolidated financial statements when the fair value is different than the carrying value of
these financial instruments. The estimated fair value of cash, accounts receivable, accounts payable, and accrued expenses approximate
their carrying amounts due to the relatively short maturity of these instruments. The carrying value of the operating lease liability
also approximates fair value since the instrument bears market rates of interest. None of these instruments are held for trading purposes. 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
● Level
1
● Level
2
● Level
3 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 had elected the fair value option for the convertible notes payable (related party) under ASC Topic
825, 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 The
Company accounts for its publicly traded warrant liability in accordance with ASC 815-40. Accordingly, the Company recognized the warrant
instruments as a liability at fair value and adjusts the instruments to fair value at each reporting period. The publicly traded warrant
liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in other
income (expense) in the Company’s unaudited condensed consolidated statements of operations and comprehensive (loss) income. The
Company accounts for its Forward Purchase Agreement in accordance with ASC 815-40. Accordingly, the Company recognized the forward purchase
agreement put option liability and the forward purchase agreement warrant liability at fair value at each reporting period. The forward
agreement put option liability and the forward purchase agreement warrant liability are subject to re-measurement at each balance sheet
date, and any change in fair value is recognized in other income (expense) in the Company’s unaudited condensed consolidated statements
of operations and comprehensive (loss) income. As of March 31, 2024, the Company no longer had a forward purchase agreement put option
liability. SPAC
Excise Tax Liability The
Company recognized an excise tax liability of approximately $2.2 million upon completion of the Company’s Business Combination
as an incremental cost to repurchase the Company’s treasury shares, with an offsetting tax liability recognized. The SPAC excise
tax liability was recorded in accrued expenses in the Company’s unaudited condensed consolidated balance sheets. Revenue
Recognition The
Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers
● 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; and
● recognize
revenue when or as performance obligations are satisfied. 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 was immaterial for each of the three and nine months ended September 30, 2024 and
2023. Amounts received from a customer prior to fulfillment of the performance obligation are included in accrued expenses on the condensed
consolidated balance sheets and are immaterial as of September 30, 2024 and December 31, 2023. The Company has elected to account
for shipping and handling activities performed as activities to fulfill the promise to transfer the products; 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, 2024 and December 31, 2023, and therefore the Company did not adjust the promised amount of consideration
for the effects of a significant financing component. Cost
of Goods Sold Cost
of goods sold is comprised of the costs of merchandise sold, as well as the related inbound freight costs and labor directly attributable
to bringing certain goods to a saleable condition. In categorizing costs, the Company captures applicable depreciation and costs to maintain
and run revenue generating technology, equipment related costs and any personnel-related costs as cost of goods sold. Product
Warranty The
Company provides a limited warranty for its implantable components. At the time product revenue is recognized, the Company reserves for
estimated future costs that may be incurred under its warranties based on historical experience. The limited warranty liability is recorded
in accrued expenses in the condensed consolidated balance sheets. As of September 30, 2024 and December 31, 2023, the amount of
accrued limited warranty was immaterial and the Company’s warranty payments were immaterial. During
2013, the Company offered a lifetime warranty to clinical trial patients to cover batteries and surgery related costs. The Company estimates
the costs that may be incurred under this lifetime warranty and records a liability in the amount of such costs at its present value.
The lifetime warranty is recorded in warranty liability in the condensed consolidated balance sheets. At each of September 30, 2024
and December 31, 2023, the aggregate product warranty liability was $2.2 million, of which $0.2 million and $0.3 million, respectively,
was classified as a current liability in the Company’s condensed consolidated balance sheets. Patents All
patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty
about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses. Research
and Development Costs Expenditures
for research and development activities are charged to operations as incurred. Research and development costs include salaries, employee
benefits and laboratory testing expenses. Income
Taxes Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax base and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those items are expected to be recovered or settled. The Company has recorded a full
valuation allowance against the net deferred tax asset due to the uncertainty of realizing the related benefits. The
Company recognizes the financial statement benefit of a tax position only to the extent the position is more-likely-than-not to be sustained
upon audit based on the technical merits of the position. For tax positions meeting the more-likely-than-not threshold, the amount recognized
in the Company’s unaudited condensed consolidated financial statements is the largest benefit that has a greater than 50% likelihood
of being realized upon ultimate settlement with the relevant tax authority. The Company has elected to recognize interest and penalties
related to uncertain tax positions in the provision for income taxes. Foreign
Currency Translation The
Euro is the functional currency for the Company’s foreign subsidiary in Germany. The assets and liabilities of the Company’s
foreign operations are translated into U.S. dollars at the end-of-the-period exchange rates, and the revenues and expenses are translated
at weighted-average rates for the respective reporting period. Unrealized translation gains and losses are recorded as a translation
adjustment, which is included in the Company’s unaudited condensed consolidated statements of stockholders’ equity (deficit)
as well as a component of accumulated other comprehensive loss on the Company’s unaudited condensed consolidated statements of
operations and comprehensive (loss) income. Net
(Loss) Income per Share The
Company’s Series A Preferred Stock certificate of designation entitles the holders to participate in dividends on an as converted
basis when declared on Common Stock. As a result, the Series A Preferred Stock meets the definition of a participating security, which
requires the Company to apply the two-class method to compute both basic and diluted earnings per share attributable to common stockholders.
The two-class method is an earnings allocation formula that treats participating securities as having rights to earnings that would otherwise
have been available to common stockholders. The two-class method requires income available to holders of the Company’s Common Stock
for the period to be allocated between common and participating securities based upon their respective rights to share in the earnings
as if all income for the period had been distributed. In periods where there is a net loss, no allocation of undistributed net loss to
the Series A Preferred Stock is performed as the holders of the Series A Preferred Stock are not contractually obligated to participate
in the Company’s losses. The Company reported a net loss of $7.3 million and net income of $1.4 million attributable to the stockholders
of the Company’s common stock for the three months ended September 30, 2024 and 2023, respectively. The Company reported net losses
of $20.3 million and $25.0 million attributable to the stockholders of the Company’s common stock for the nine months ended September
30, 2024 and 2023, respectively. Basic
net (loss) income per share of common stock is computed by dividing the net (loss) income attributable to common stockholders by the
weighted-average number of shares of common stock outstanding during the period. Diluted net (loss) income per share is computed by dividing
the net (loss) income attributable to common stockholders by the weighted-average number of shares outstanding, plus the impact of potential
common shares, if dilutive, resulting from the potential exercise of warrants or options, and the potential conversion of preferred stock,
into common stock, under the if-converted method. In periods where a net loss is recorded, no effect is given to potentially dilutive
securities, because the effect would be anti-dilutive. Stock-based
Compensation Stock-based
compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite
service period. The fair value of stock-based payment awards is estimated using the Black-Scholes option model with a volatility figure
derived from using a determined peer group of other companies’ stock prices since the trading history of the Company’s stock
is too short to provide accurate data. The Company accounts for the expected term of options in accordance with the “simplified”
method, which is used for “plain-vanilla” options, as defined in ASC Topic 718, Compensation - Stock Compensation The
Company has adopted the guidance from Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation
(Topic 718): Improvements to Employee Share-Based Compensation Accounting, Segments Operating
segments are identified as components of an 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 segment. Recently
Adopted Accounting Pronouncements In
August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-06, Debt—Debt with Conversion and Other
Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”)
to simplify certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion
and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity
classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible
debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings
per share guidance, including the requirement to use the if-converted method for all convertible instruments. For smaller reporting companies,
ASU 2020-06 is effective for fiscal years beginning after December 15, 2023 and should be applied on a full or modified retrospective
basis. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within
those fiscal years. The Company adopted ASU 2020-06 when evaluating the 2024 Term Loans entered into during the nine months ended September
30, 2024 (see Note 9). Accounting
Pronouncements Not Yet Effective In
November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures In
December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures In
November 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation
Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses Other
than the items 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. |
