UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December
31, 2024
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 001-40133
ENVOY MEDICAL, INC.
(Exact name of registrant as specified in its charter)
4875 White Bear Parkway, White Bear Lake, MN55110
(Address of principal executive offices)
(877)900-3277
(Registrant’s telephone number, including
area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Securities registered pursuant to Section 12(g)
of the Act: None
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐No☒
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐No☒
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. Yes☒ No ☐
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 was required to submit such files). Yes☒ No ☐
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 ☐
Non-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. ☐
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
If securities are registered pursuant to Section
12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction
of an error to previously issued financial statements. ☒
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
No ☒
The aggregate market
value of the registrant’s Class A common stock, par value $0.0001 per share, held by non-affiliates of the registrant computed by
reference to the last sales price of such stock, as of the last business day of the registrant’s most recently completed second
fiscal quarter, which was June 30, 2024, was approximately $16.7 million. This calculation excludes shares of Class A common stock held
by the registrant’s officers and directors and each person known by the registrant to beneficially own more than 5% of the registrant’s
outstanding shares, as such persons may be deemed to be affiliates. This determination of affiliate status should not be deemed conclusive
for any other purpose.
There were 21,326,619 shares of the registrant’s
Class A common stock, par value $0.0001 per share, outstanding as of March 24, 2025.
DOCUMENTS INCORPORATED IN PART BY REFERENCE
Portions of the registrant’s definitive
proxy statement relating to its 2025 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report
on Form 10-K.
ENVOY MEDICAL, INC.
Annual Report on Form 10-K
For the Year Ended December 31, 2024
Table of Contents
Page
PART I
ITEM 1. Business 1
ITEM 1A. Risk Factors 27
ITEM 1B. Unresolved Staff Comments 51
ITEM 1C. Cybersecurity 51
ITEM 2. Properties 52
ITEM 3. Legal Proceedings 52
ITEM 4. Mine Safety Disclosures 52
PART II
ITEM 6. [Reserved] 53
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 66
ITEM 8. Financial Statements and Supplementary Data F-1
ITEM 9A. Controls and Procedures 67
ITEM 9B. Other Information 68
ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 68
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance 69
ITEM 11. Executive Compensation 72
ITEM 14. Principal Accounting Fees and Services 72
PART IV
ITEM 15. Exhibits and Financial Statement Schedules 73
i
CERTAIN TERMS
Unless otherwise stated in
this Annual Report on Form 10-K (this “Report”), or the context otherwise requires, references to:
● “Acclaim CI” means the Acclaim® fully implantable cochlear implant;
● “Board” means the board of directors of the Company;
● “Bylaws” means the amended and restated bylaws of the Company;
● “Closing” means the closing of the Merger;
● “Exchange Act” means the Securities Exchange Act of 1934, as amended;
● “GAAP” means accounting principles generally accepted in the United States;
● “JOBS Act” means the Jumpstart Our Business Startups Act of 2012, as amended;
ii
● “Nasdaq” means The Nasdaq Capital Market;
● “Sarbanes-Oxley Act” means the Sarbanes-Oxley Act of 2002, as amended;
● “SEC” means the Securities and Exchange Commission;
● “Securities Act” means the Securities Act of 1933, as amended;
Additionally, references
in this Report to the “Company,” the “registrant,” “Envoy Medical,” “we,” “us”
and “our” in this Report refer to Envoy Medical, Inc. (formerly known as Anzu Special Acquisition Corp I), and references
to our “management” or our “management team” refer to our officers and directors, other than certain historical
information which refers to Legacy Envoy prior to the consummation of the Business Combination.
iii
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 and Section 21E of 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:
● Changes in interest rates or rates of inflation;
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.
iv
Summary Risk Factors
Our Company is subject to
numerous risks described in Item 1A. Risk Factors and elsewhere in this Report. You should carefully consider these risks before
making an investment. Some of these risks relating to our business objectives, our organization and structure and our securities include:
v
vi
PART I
ITEM 1.Business
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. We are dedicated to pushing beyond
the status quo to provide patients with improved access, usability, independence, and quality of life. We were founded in 1995 to create
a fully implanted hearing device that leveraged the natural ear - not an artificial microphone - to pick up sound. The ear itself is an
ideal way to capture sound from our environment.
To leverage the natural ear’s
benefits, an implanted sensor was created to pick up incoming sound energy from the ossicular chain (i.e., the three tiny hearing bones
that connect the eardrum to the cochlea). The sensor absorbs the mechanical energy from ossicular chain and turns it into a signal that
can be processed, improved, and increased for a patient’s particular hearing needs.
Our first product, the Esteem
Fully Implanted Active Middle Ear Implant (“Esteem FI-AMEI”), received FDA approval in 2010. The Esteem FI-AMEI remains the
only FDA approved fully implanted active hearing device on the market. The Esteem FI-AMEI failed to gain commercial traction, primarily
because the Centers for Medicaid and Medicare Services (“CMS”) classified it as a hearing aid and therefore not eligible for
coverage. At an average total price (i.e., device and surgery) of over $25,000, very few individuals were willing or able to pay out-of-pocket
for the Esteem FI-AMEI. We believe hearing aid classification is improper for the Esteem FI-AMEI and we continue to work towards having
the Esteem FI-AMEI properly classified as a Fully Implanted Active Middle Ear Implant.
Despite the commercial challenges
of the Esteem FI-AMEI, roughly 1,000 devices were implanted globally. Some devices were implanted in the early 2000s during clinical trials,
providing us with nearly two decades of experience with its implantable sensor technology. Throughout our experience, our sensor technology
proved a viable alternative to external or implanted microphones.
In late 2015, we made the
decision to shift our focus from the Esteem FI-AMEI to a new product that would leverage our sensor technology and incorporate it into
a cochlear implant. As a result, we have developed the investigational fully implanted Acclaim CI. We now believe we have the possibility
to disrupt the cochlear implant market currently dominated by a small number of incumbents.
Business Combination
In September 2023, we completed
the Business Combination pursuant to the Business Combination Agreement between Anzu and Legacy Envoy. As contemplated by the Business
Combination Agreement: (a) each share of Legacy Envoy Preferred Stock issued and outstanding immediately prior to the Closing was converted
into shares of Legacy Envoy Common Stock; (b) each share of Merger Sub Common Stock issued and outstanding immediately prior to the Closing
was converted into and exchanged for one share of Legacy Envoy Common Stock; (c) each outstanding option to purchase shares of Legacy
Envoy Common Stock outstanding as of immediately prior to the Closing was cancelled in exchange for nominal consideration; (d) each outstanding
warrant to purchase shares of Legacy Envoy Common Stock outstanding as of immediately prior to the Closing automatically, depending on
the applicable exercise price, was cancelled or exercised on a net exercise basis and converted into shares of Legacy Envoy Common Stock
in accordance with its terms; (e) each outstanding Legacy Envoy convertible promissory note was automatically converted into shares of
Legacy Envoy Common Stock in accordance with its terms; (f) each share of Legacy Envoy Common Stock issued and outstanding immediately
prior to the Closing was cancelled and converted into the right to receive a number of shares of our Class A Common Stock equal to the
Exchange Ratio; (g) the Sponsor forfeited 5,510,000 shares of Anzu Class B Common Stock and all 12,500,000 private warrants pursuant
to the Sponsor Support Agreement; (h) the Sponsor exchanged 2,500,000 shares of Anzu Class B Common Stock for 2,500,000 shares
of our Series A Preferred Stock; (i) an aggregate of 2,615,000 shares of Anzu Class B Common Stock held by the Sponsor and Anzu’s
former independent directors automatically converted into our Class A Common Stock; (j) the Sponsor transferred an aggregate of 490,000 shares
of our Class A Common Stock to the Legacy Forward Purchasers and the Extension Support Parties pursuant to the Side
Letter Agreements and Extension Support Agreements, respectively; and (k) the Company issued an aggregate of 8,512 shares of Class
A Common Stock to the Meteora FPA Parties pursuant to the Forward Purchase Agreement.
1
As of the open of trading
on October 2, 2023, the Class A Common Stock and Public Warrants of the Company, formerly those of Anzu, began trading on Nasdaq as “COCH”
and “COCHW,” respectively.
Our Product
Cochlear Implants - Fully Implanted vs. Partially
Implanted
The cochlea converts vibrations
from the ossicular chain into nerve signals that are transmitted through the auditory nerve for processing by the brain. Cochlear implants
use electronic signals to stimulate the auditory nerve.
Partially implanted cochlear
implants have two main components: a large external component that sits on or behind the patient’s ear and a surgically implanted
internal component. The external component contains a microphone, sound processer, and batteries. A magnetic coil on the external component
lines up with an internal magnetic coil in the internal component. The signal from the external component is transferred to the internal
coil where it is delivered to the electrode array, which is implanted in the cochlea, to electrically stimulate the cochlea.
The Acclaim CI is fully implanted
and does not have the need for any external component to be worn on the ear. Unlike partially implanted devices, the fully implanted Acclaim
CI uses the ear to capture sound via a piezoelectric sensor that is implanted in the middle ear. The sound processor and power source
are also implanted.
2
Acclaim CI - A Breakthrough Device
The fully implanted Acclaim
CI received the Breakthrough Device Designation from the U.S. Food and Drug Administration (FDA) in 2019. However, the process of medical
device development is inherently uncertain and there is no guarantee that this designation will accelerate the timeline for approval or
make it more likely that the Acclaim CI will be approved.
Hearing loss is currently
an irreversible and debilitating human condition. Significant hearing loss is correlated with increased anxiety, depression, social isolation,
falls, and other costly health issues. An article published in the journal Acta Otorhinolaryngol Italica in June 2016 suggests that untreated
or undertreated hearing loss correlates with earlier loss of cognitive function and poorer cardiovascular health.2 While some
solutions for hearing loss already exist (e.g., hearing aids, traditional cochlear implants) these have inherent limitations in being
fully or partially external, which may limit patients in initial time to adoption, hours of use during the day (inherent compliance restrictions),
lifestyle, or quality of life.
We believe that the Acclaim
CI will be able to offer hearing benefit over the patient’s baseline condition and may also offer other important advantages over
alternative hearing loss treatments, such as:
3
The Acclaim CI is implanted
by a surgeon through a procedure that we believe will average around two and a half to three hours under general anesthesia. We expect
that patients may experience mild to moderate discomfort after the procedure. A four to eight week waiting period is required before the
Acclaim CI can be activated to allow the middle ear to heal and fluid from surgery to dissipate. It is expected that the Acclaim CI battery
pack will be replaced every 8-12 years via a less invasive surgical procedure that only replaces the Acclaim CI battery pack in the pectoral
region (i.e., the whole system does not need to be replaced, just the Acclaim CI battery pack).
All of the competitive advantages
referred to above require that the Acclaim CI obtain FDA approval in its current form and substantially on our planned timeline. If FDA
approval is materially delayed for any reason, it is possible that competitors will offer products with similar features before we are
able to market the Acclaim CI.
4
Market Overview
Overview of Hearing Loss
According to the National
Center for Health Statistics, hearing loss impacts about 15% of the adult population in the United States.3 Among older adults,
nearly 25% of people aged 65 to 74 have disabling hearing loss, and 50% of those aged 75 and older have disabling hearing loss, according
to the National Institute on Deafness and Other Communications Disorders.4 Organizations such as the Centers for Disease Control
and Prevention (CDC) and the World Health Organization (WHO) have recognized significant hearing loss as one of the most common disabilities
impacting people around the world.5 The WHO estimates economic impact of untreated or undertreated hearing loss is approximately
$750 billion each year.6
In common parlance, the terms
“hearing loss,” “hard of hearing,” or “deafness” are often used to describe a variety of types, levels,
and causes of hearing loss that are treated differently clinically. The hearing loss market can be classified based on causes and severity
of hearing loss.
There are three main types
of hearing loss: sensorineural, conductive, and mixed. Sensorineural hearing loss is due to problems of the inner ear and is often caused
by damage to “hearing hair cells” in the cochlea. Common causes include normal aging, excessive noise exposure, viral infections,
and exposure to drugs that are toxic to the hearing system. According to data published in the Journal of the American Medical Association,
sensorineural hearing loss is the most common form of hearing loss, representing approximately 90% of all hearing loss.7
Conductive hearing loss is
due to mechanical or structural problems with a part of the hearing system, generally a result of congenital issues with or damage to
the ear canal, ear drum, or ossicular chain. Common causes include malformation of a particular part of the hearing system, middle ear
infection, perforation of the eardrum, wax buildup, or dislocation of the ossicles. Conductive hearing loss represents approximately 10%
of all hearing loss, according to data published in the Journal of the American Medical Association.8 Finally, mixed hearing
loss has some combination of both sensorineural and conductive components.
In addition to the three
main types of hearing loss, there are generally five levels of hearing loss severity: normal, mild, moderate, severe, and profound. Normal
hearing is often defined as 0-20 decibels (dB) of hearing loss and even with a slight loss most people do not notice any impact. Mild
hearing loss is often defined as 20-40 dB of hearing loss with some people reporting difficulty hearing soft spoken people. Most people
with mild hearing loss do not address their hearing loss.
As hearing loss progresses,
the impact on the individual becomes more noticeable. Moderate hearing loss is often defined as 40-70 dB of hearing loss and begins to
show up with people reporting the ability to “hear but not understand” speech. More words are missed in conversations, and
it is harder to hear in certain environments.
Severe hearing loss is often
defined as 70-90 dB of hearing loss. People with severe hearing loss are unable to hear most speech and miss large portions of conversations
without assistance. People with severe hearing loss may find that even with hearing aids they are not getting enough benefit to hear and
understand most of the words in a conversation.
Profound hearing loss is
often defined as 90 dB or more of hearing loss. People with profound hearing loss cannot hear speech or loud sounds such as sirens or
horns. Most people who are considered clinically “deaf” would have severe to profound hearing loss.
5
Overview of Hearing Devices
There are several different
types of hearing devices to address hearing loss. It is common for hearing loss to progress – continue to get worse – over
the course of an individual’s life, so it is possible that a patient may have one or more hearing devices during the course of their
lives.
Personal Sound Amplification
Devices (PSAPs) are small electronic devices used to make sounds louder but with little sophistication. They are limited in ability and
are only suitable for normal to mild hearing loss.
Hearing aids are the most
common form of hearing device. These are small sound-amplifying devices that come in a variety of shapes and sizes. They are always external
and pick up sound through a microphone and amplify the sound through a speaker in the ear canal. There are over-the-counter hearing aids
(no prescription required) designed to treat mild to moderate hearing loss and prescription hearing aids designed to treat more significant
hearing loss. Hearing aids can be used for all types of hearing loss and are typically the first device a person with hearing loss will
try.
Active middle ear implants
are implanted fully or partially in the middle ear (i.e., where the three ossicles or hearing bones are located). They are typically designed
to treat moderate to severe sensorineural hearing loss, but some also can address a certain level of mixed hearing loss. Middle ear implants
use mechanical energy to directly drive the cochlea with mechanical energy. Middle ear implants are not common due to the lack of reimbursement
coverage throughout the world. The Esteem FI-AMEI is the only fully implanted active middle ear device currently with FDA approval and
commercially available in the United States.
Cochlear implants are electrical
hearing devices. They deliver electrical stimulation to the cochlea via an electrode array. The electrical stimulation is picked up by
the hearing nerve and patients are able to perceive sound. Traditionally, all cochlear implants were partially implanted with an external
component. We believe the fully implanted Acclaim CI will be the first-of-a-kind cochlear implant with no external component worn on the
ear or required for daily hearing and that leverages the ear to pick up sound (i.e., versus a microphone).
Auditory osseointegrated
implants (bone conduction implants) are used for conductive or certain types of mixed hearing loss. They are not used for sensorineural
hearing loss. They address a patient’s conductive hearing loss by transferring sound information through the patient’s skull
via vibration.
Acclaim CI’s Market Opportunity
The Acclaim CI is designed
to address severe to profound sensorineural hearing loss that is not adequately addressed by hearing aids. We anticipate that the Acclaim
CI will only be indicated for adults who have been deemed adequate candidates by a qualified physician.
We believe there is a significant
population of adults in the United States who are cochlear implant candidates but choose not to get the therapy because of the external
component required for daily hearing. We believe this is one of the main reasons why industry sources, such as a 2018 paper published
in the journal Trends in Hearing, and our own market research estimate 5-8% penetration rate for cochlear implants in the adult population.9
6
Based on published literature
and industry sources (prior to candidacy expansion for cochlear implant candidates), including the American Journal of Public Health,
we believe there are approximately 6.6 million Americans age 12 or older with severe to profound hearing loss in at least one ear.10
Incorporating estimates for clinical indications (including limited benefit from hearing aids), we believe there are approximately 2.8
million adults in the United States who could qualify for a cochlear implant. Based on an assumed selling price in the United States for
a traditional cochlear implant of $30,000 (a $5,000 premium over the average sale price of current partially-implanted devices), we believe
the adult cochlear implant market in the United States alone represents a potential market opportunity of over $80 billion.
Based on the published literature
and industry sources previously referenced, we believe there will be roughly 25,000 - 30,000 adults implanted with a cochlear implant
in the United States every year by 2026. Based on an assumed selling price of $30,000, that is an annual market opportunity that exceeds
$750 million for just the United States adult population.
In addition, many estimates
from published literature and industry sources were made prior to changing candidacy within the cochlear implant market. Two major shifts
in clinical candidacy have likely increased the market sizes: (a) the CMS has expanded coverage from 40% word recognition scores to 60%
word recognition scores and (b) there is more acceptance of treating single sided deafness with a cochlear implant.
While these numbers represent
the entire adult cochlear implant market in the United States, we believe that if we are able to establish distribution channels and strategic
relationships with clinics and healthcare professionals the Acclaim CI will be in a unique position to capture existing market share quickly
and to also capture a healthy portion of the unserved market - those who are not pursuing a cochlear implant because of the external components.
Moreover, it is reasonable to believe that Acclaim CI will demand a higher average selling price than existing partially implanted cochlear
implants.
We also believe there are
substantial total market and annual market opportunities outside the United States. Currently, our analysis estimates that approximately
50% of the hearing device market is international. Given the greater number of hearing loss patients outside the United States, we also
believe the international market is currently significantly underserved and offers significant opportunity for expansion if we are able
to obtain the necessary regulatory approvals and expand our international distribution capabilities. However, we will be unable to expand
into international markets if we are unable to obtain these regulatory approvals.
Market Competition
There are currently three
major cochlear implant manufacturers - Cochlear Ltd., Advanced Bionics (Sonova), and Med-El. There are a few other minor regional players,
such as Nurotron in China, which appears to be focused on developing countries.
Cochlear Ltd. (ASX: COH)
is the leading cochlear implant device manufacturer with approximately 60% of global market share and a market capitalization of approximately
$12 billion (US Dollars) as of December 31, 2024.
In comparison to Envoy
Medical, the three current primary providers of cochlear implants have a greater penetration into the hearing loss treatment market,
which has allowed them to develop relationships with audiologists, otolaryngologists (ENT physicians), hearing loss centers, and the
other physicians on whom providers rely for referrals. The current providers also have existing relationships with patients who have
used their devices. In addition, current providers also have substantially greater financial and operational resources, which may
give them an advantage in capitalizing on new technology and responding to other changes to the marketplace.
7
If we are able to obtain
regulatory approval of the Acclaim CI, we believe physicians and patients may be receptive to it being a fully implanted cochlear implant.
However, based on our lack of history in the market, we will need to make material investments in patient advertising, provider education
and training, distribution capabilities, and physician strategic relationships to capitalize on such advantages and gain market share.
We will be unable to begin investing in these areas until we obtain FDA approval.
Market Trends
The first documented cochlear
implant was completed in 1961. The initial devices were crude single electrode cochlear implants with the intended purpose of giving some
basic environmental and situational awareness to adults with profound hearing loss. A few years later, multi-channel devices were introduced.
Over time, multi-channel devices evolved more quickly and allowed for more robust processing and mapping strategies. By the 1980s, cochlear
implants were an accepted standard of care for adults with profound hearing loss with the multi-channel devices becoming the preferred
design by most healthcare professionals.
The next two to three decades
focused on the evolution of multi-channel electrodes and creating new sound processing and electrode mapping techniques to focus on speech
understanding. As a result, most cochlear implant patients can understand speech quite well with the appropriate follow-up and speech
therapy. Candidacy was expanded to include children and people with different levels or types of hearing loss.
Over the last few years,
the trends of the cochlear implant industry have mirrored that of the hearing aid industry, with less emphasis on hardware design and
more placed on appearance and usability. The physical form and function have not changed significantly, although new sound processing
strategies have been implemented to improve patient outcomes. While product reliability has gradually improved, clinical efficacy seems
to have plateaued.
To increase market share,
manufacturers have focused on making cochlear implants more visibly appealing (e.g., slightly smaller external components, color “kits”
for the external components), user friendly (e.g., connectivity), environmentally robust (e.g., water resistance), and more reliable (e.g.,
fewer recalls).
We believe that the trend
over the next decade will be a continuation of the focus on usability, connectivity, lifestyle, and miniaturization. Artificial Intelligence
and Machine Learning may also come into play as those technologies evolve. As cochlear implants become more accepted as a therapy for
individuals with moderate to profound sensorineural hearing loss, manufacturers will pay attention to ways of making patients interested
in their device over a similarly performing competing device.
Another major trend within
the industry is a loosening of the clinical candidacy requirements. In addition to people with “better” hearing levels being
considered for cochlear implants (e.g., people with moderate hearing in the lower frequencies) there has also been a movement to implant
people with “single sided deafness” (“SSD”). Both Med El (in 2019) and Cochlear (in 2021) achieved FDA
approval for treatment of those with SSD and asymmetric hearing loss. As a result, more patients are eligible for cochlear implants than
ever before.
Finally, industry participants
have made material investments to inform more adult candidates about cochlear implants to increase usage. Currently, industry sources,
including a 2018 paper published in the journal Trends in Hearing,11 and our own market research estimate that less than 10%
of adults who meet the indications for cochlear implant candidacy are implanted, leaving more than 90% of the current adult market as
untapped potential for new technologies. However, we will require FDA approval for the Acclaim CI and significant investment in our training
and distribution network before we can access such market.
Reimbursement Strategy
Cochlear implants enjoy a
fully developed reimbursement pathway. Cochlear implants have been deemed a coverable benefit by CMS and enjoy an existing National Coverage
Determination (“NCD”). In the United States, many private and public payors cover at least one cochlear implant per
adult. There is existing coding, coverage, and payment for cochlear implants.
8
Unlike the Esteem FI-AMEI,
which was classified as a hearing aid by CMS and therefore statutorily excluded from being a coverable benefit under Medicare and Medicaid,
the Acclaim CI is expected to be eligible for Medicare and Medicaid coverage as a cochlear implant.
As mentioned above, the Acclaim
CI received Breakthrough Device Designation. There are potential reimbursement-related benefits to the designation (i.e., the ability
to receive higher reimbursements than are received by incumbent devices); however, the implementation of these benefits has not been finalized
by Congress and CMS and there is no guarantee that Breakthrough Device Designation will offer any benefit with respect to reimbursement.
Timeline to Commercialization of Acclaim CI
In the United States, before
we can market a new Class III medical device, which the Acclaim CI is, we must first receive FDA approval via the premarket application
(“PMA”) approval process. We currently anticipate obtaining FDA approval in late 2027 or early 2028, although the process
of obtaining FDA approval is uncertain, and we may not obtain approval on that timeline or at all.
A large component of our
PMA will be a successful pivotal clinical study. In order to begin a pivotal clinical study, you must have an Investigational Device Designation
(“IDE”) approved by the FDA. We received approval for our IDE on October 31, 2024. However, FDA approved our IDE based on
a staged clinical study that will require approval from the FDA to move from the first stage to the second stage.
The objective of this pivotal
clinical study is to demonstrate the safety and efficacy of the fully implanted Acclaim cochlear implant for the treatment of severe to
profound sensorineural hearing loss and is designed as a prospective, multicenter, non-randomized, open label clinical trial to evaluate
the safety and efficacy of the Acclaim CI. The pivotal clinical study protocol currently requires 56 total patients enrolled and followed
for 12 months. The first stage will have 10 patients enrolled. We will then provide a summary of effectiveness outcomes for these 10 patients
to the FDA and request approval from the FDA to proceed to the second stage to implant the remaining 46 patients. There is no guarantee
that the FDA will approve expansion to the second stage or that eventual PMA approval will be obtained.
The pivotal clinical study
has a primary efficacy endpoint, a safety endpoint, many secondary endpoints and a couple of exploratory endpoints. The primary efficacy
endpoint will compare speech perception (CNC words) from baseline to twelve-month follow-up and the safety endpoint will characterize
incidence and frequency of adverse events. The total pivotal clinical study duration is estimated to be approximately two and a half years.
There is no guarantee that we will meet any of the safety, efficacy, secondary, or exploratory endpoints or that the clinical study will
proceed to the second stage or enroll all patients.
Once the pivotal study is
completed, the data will be analyzed and sent to the FDA with the PMA submission. The FDA review may take 6-12 months depending on what
comes up during the review and if the FDA review team recommends the device for a Panel Track review. There is no guarantee that PMA approval
will be obtained.
If FDA approval is delayed,
we will be unable to move forward with expansion of our corporate infrastructure, development of distribution capabilities, and implementation
of product technical support and provider training, and the costs associated with delayed approval may limit the funds available for investment
in these areas. Regulatory delays would also put us further behind our established
competitors in the market and may allow additional competitors into the market with products that have competitive advantages over ours.
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Moreover, if FDA approval
is delayed beyond our current plan or if delay is based on safety or efficacy concerns that require product redesign, we will be required
to raise significant additional capital to continue our operations. We may be unable to raise these additional funds on favorable terms
or at all, especially if approval is delayed based on device performance or other issues with the Acclaim CI. Because the Acclaim CI is
currently our only product candidate that we believe can be commercialized, we would be unable to continue operations if it were determined
that we could not obtain FDA approval for the Acclaim CI.
Early Feasibility Study
The Acclaim CI has undergone
extensive benchtop and laboratory testing throughout the design and development process. Animal testing was done to demonstrate the reliability
of the Acclaim CI’s rechargeable battery and charging safety algorithm.
In the third quarter of 2022,
we received an IDE to undergo a small Early Feasibility Study (“EFS”) at Mayo Clinic in Rochester, Minnesota. The principal
investigator is Dr. Colin Driscoll, a respected veteran in the global cochlear implant industry. There were three patients enrolled, implanted,
and activated in the fourth quarter of 2022.
The purpose of this early
feasibility study was to demonstrate that the Acclaim CI is capable of operating as it was designed. In other words, there are no safety
or efficacy endpoints. The study is essentially designed to elicit patient and professional feedback regarding their experience using
the device and inform any necessary design changes prior to beginning the pivotal clinical study.
We believe that the initial
results of the EFS were promising. A few device shortcomings have been identified and are in process of being addressed or appropriately
mitigated. The primary concern is a signal to noise issue that subjects identify as a gurgling or sizzling background noise. Mitigation
and resolution strategies have been implemented and further work is ongoing. We believe we have identified strategies to improve the signal
to noise ratio. We have tested and implemented some of these strategies in EFS patients and they have shown improvement. We will not know
the extent of signal to noise improvement of these strategies until they have been developed, tested, implemented and implanted into patients
with a new or improved device.
The EFS patients have been
implanted for over two years. They all have made it passed their 24 month follow-up appointments. They all use their devices daily. There
have been reported adverse events, but no serious or unanticipated device effects.
Two of the three patients
choose to wear a hearing aid on top of their Acclaim CI. This combination helps to mitigate the noise and provide patients with a signal
to noise ratio that allows them to use and enjoy the performance of the device. It was an unanticipated discovery during the EFS that
a hearing aid on top of the Acclaim CI could provide patients with additional improvement. We are intrigued by the possibility of offering
a fully implanted cochlear implant that could also allow for the use of a hearing aid or other ear accessory (e.g., ear buds) because
the Acclaim CI leverages the ear to pick up sound.
Go-To-Market Strategy
Assuming PMA approval is
received, our commercialization strategy will be quality over quantity to facilitate the Acclaim CI gaining a meaningful foothold in the
marketplace without unnecessary complications stemming from attempting to grow too quickly.
The surgical
professionals believed to be best suited to implant the Acclaim CI are otologists and neurotologists (i.e., sub-specialties of
otolaryngologists). This community is relatively small compared to other specialties, with only a few hundred active professionals
in the United States. We anticipate carefully selecting roughly 30 sites to be trained and ready to implant upon commercialization.
These 30 sites are expected to be spread throughout the country and focus on quality of surgical care and capacity to serve a
sufficient number of qualified patients. Following the initial 30 sites, we intend to add additional sites every year until there
are roughly 120-150 sites actively implanting the Acclaim CI. However, this strategy will require significant investments in the
development of our management team, corporate infrastructure, and manufacturing capabilities, as well as expansion of our sales,
distribution, and training network. We do not anticipate offering the Acclaim CI at every cochlear implant center.
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The other key professional
group is audiologists. Each surgical site will have its own audiology team familiar with cochlear implants. The audiology team is critical
to the success of a surgical site’s performance. We will invest resources for in-person training, and technical and product support
as well as virtual training, and technical and product support for audiologists servicing patients with our products.
Outside of surgical sites,
there is a subset of audiologists who traditionally work with patients currently using hearing aids. These audiologists will be instrumental
in identifying and referring potential Acclaim CI patients to surgical sites. One of the largest barriers to more cochlear implant candidates
becoming cochlear implant recipients is the lack of awareness and understanding by the audiologists of the technology and associated benefits
available for their patients. We believe strong relationships can be built with both surgical teams and audiologists to ensure both are
able to understand the options and benefits of the technology and differentiate themselves from the marketplace by offering and working
with the Acclaim CI. However, we will be unable to train, educate, and develop these relationships until we are able to obtain FDA approval
for the Acclaim CI.
Commercial Activities Outside of the United
States
We anticipate pursuing the
Conformité Européenne mark (“CE Mark”) in the European Union shortly after FDA approval. The CE Mark
will allow the Acclaim CI to be sold throughout the European Economic Area. We are currently focusing our resources on FDA approval and
will address commercial activities outside of the United States when the FDA approval process is more advanced.
Eventually, we anticipate
pursuing other markets based on the potential size of the markets and availability of reimbursement, such as Australia, Brazil, and parts
of Asia, although no such approval is guaranteed, and approval may take longer and involve greater cost than we currently anticipate.
Product Evolution and Next Generation Products
The focus of research and
development over the next several years will be to improve upon the existing product design of the Acclaim CI to aid the process of obtaining
FDA approval. Quality and reliability will be a primary focus of the team in the initial years of market release. We will also focus on
the growing need for robust software and user interfaces for both the patient and the professional.
It is possible that we will
expand our portfolio to include a variety of cochlear electrode arrays similar to other cochlear implant companies. However, we do not
anticipate expanding into as large of an electrode portfolio as some of our competitors as we are not convinced that a large electrode
portfolio is efficient or effective.
Esteem FI-AMEI - a potentially viable product
with reimbursement
The Esteem FI-AMEI is a unique
technology that could serve a niche segment of the hearing market. FDA-approved since 2010, the Esteem FI-AMEI suffered from a lack of
reimbursement due to categorization as a hearing aid. We believe that this categorization is inaccurate as, unlike a hearing aid which
is essentially an externally worn microphone and speaker simply making sounds louder, the Esteem FI-AMEI is fully implanted and replaces
the function of the middle ear. Although efforts to change that categorization have been unsuccessful to date, two bipartisan Congressional
bills, both titled the Hearing Device Coverage Clarification Act were introduced in the House and the Senate in the 118th Congress.
It is anticipated, although not guaranteed, that the bills will be reintroduced into the 119th Congress.
These bills seek to clarify
that fully implanted active middle ear hearing devices (FI-AMEIs) are prosthetics and not subject to the current Medicare hearing aid
coverage exclusion. If these bills are successful in clarifying that FI-AMEIs are eligible for coverage and a change does happen to reimbursement
policy for fully implanted active middle ear implants, the Esteem FI-AMEI is an existing FDA approved product ready to capitalize on such
a change.
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Existing Esteem FI-AMEI patients
and professionals who work with those patients will continue to be supported. It is not only important for the market to know our strategy
for supporting patients for life, but it is the right thing to do for the patients.
New implantations of the
Esteem FI-AMEI are not expected to be more than a few per year until, and if, the reimbursement policy changes. Absent a change in reimbursement
policy, there only will be nominal revenue from replacement of the sound processor / battery assembly (the “Battery”) for
existing patients who need a new Battery.
Intellectual Property
We rely on a combination
of patent, copyright, trademark and trade secret laws and confidentiality and invention assignment agreements to protect our intellectual
property rights. As of March 10, 2025, we had rights to 35 issued U.S. patents, which are estimated to expire between 2025 and 2043 assuming
all required fees are paid, 13 pending U.S. patent applications, 33 issued foreign patents and 32 pending foreign and international patent
applications. Our patents cover, among other things, aspects of our current Acclaim CI system and future product concepts. Some of the
pending foreign and international patent applications preserve an opportunity to pursue patent rights in multiple countries.
Our pending patent applications
may not result in issued patents, and we cannot assure you that any current or subsequently issued patents will protect our intellectual
property rights or provide us with any competitive advantage. While there is no active litigation involving any of our patents or other
intellectual property rights and we have not received any notices of patent infringement, we may be required to enforce or defend our
intellectual property rights against third parties in the future. See Item 1A. Risk Factors - Risks Relating to our Intellectual Property
for additional information regarding these and other risks related to our intellectual property portfolio and their potential effect on
us.
Material Patents
As of March 10, 2025, our
material patents, their jurisdiction, patent number, and expiration date are listed in the tables below:
Jurisdiction Patent No. Expiration Date Title
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Jurisdiction Patent No. Expiration Date Title
U.S. 9635478 03/09/2034 Coulomb counter and battery management for hearing aid
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Jurisdiction Patent No. Expiration Date Title
Trademarks
As of February 28, 2025,
we had trademark registrations, covering “Acclaim”, “Envoy”, “Envoy Medical”, “EnvoyCEM”,
“Esteem”, “Invisible Hearing”, and “MEDCEM.” Our U.S. trademarks have registration dates between 2002
and 2021 and have upcoming renewal dates between 2027 and 2033. All of our trademarks are in current use, and we expect that they will
remain in use for the foreseeable future. We also have pending trademark applications covering “Nature’s Microphone”
and “Naturemic” with application dates in 2024 for use in 2025.
We also rely, in part, upon
unpatented trade secrets, know-how and continuing technological innovation, and may in the future rely upon licensing opportunities, to
develop and maintain our competitive position. We protect our proprietary rights through a variety of methods, including confidentiality
and assignment agreements with suppliers, employees, consultants and others who may have access to our proprietary information.
Manufacturing and Supply
We currently do all final
manufacturing at our facility in White Bear Lake, Minnesota. We rely on a limited number of technicians and have some critical equipment
that would be difficult to replace in a timely manner. In order to scale quickly, we will need to expand our manufacturing capacity and
add additional shifts.
We rely on third-party suppliers
to manufacture some of our critical sub-assemblies. Outsourcing sub-assemblies manufacturing reduces our need for additional capital investment.
We select our suppliers carefully and require they adhere to all applicable regulations. We monitor our suppliers and always inspect all
components received. Our quality assurance process monitors and maintains supplier performance through qualification and periodic supplier
reviews and audits.
Certain components used
in our products are supplied by single-source suppliers, but we believe that we are able to plan supply in a manner that would
minimize the effect of losing any of our existing suppliers. Our suppliers manufacture the components they produce for us and test
our components and devices to our specifications. We intend to maintain sufficient levels of inventory to enable us to continue our
operations while we qualify additional potential suppliers in the event that one or more of our single-source suppliers were to
encounter a delay in supply or end supply. Due to our current limited production numbers, we order components and sub-assemblies on
a purchase order basis and do not have supply agreements with any of our suppliers.
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Government Regulation