Tivic Health Systems Inc

Comparison of the Three and Six Months Ended June 30, 2024 and 2023

The following table summarizes our results of operations (in thousands):

Revenue

Revenue is currently generated through the sale of our ClearUP device and ancillary products, including accessories and accelerated shipping charges, and is net of return reserves. Sales are currently made directly to consumers online through our own website, and Amazon. In addition, the ClearUP device is also sold via our distribution partners Cardinal Health and McKesson to major retailers and specialty retailers, such as FSA Store, Walmart, BestBuy, and Target. Noninvasive bioelectronic medicine is an emerging market space that provides consumers with non-drug treatments for various diseases and ClearUP is the first FDA-approved bioelectronic treatment for sinus pain and congestion.

For the three months ended June 30, 2024, revenue decreased overall by $21 thousand, or 13%, compared to the same period in 2023, primarily due to a 12% decrease in the per unit average sales price.

For the six months ended June 30, 2024, revenue decreased overall by $63 thousand, or 12%, compared to the same period in 2023, primarily due to a 27% decrease in unit sales, offset by a 20% increase in the per unit average sales price.

We expect some continued variability in sales due to reduction in marketing spend.

Cost of Sales

Cost of sales consists primarily of the materials and services to manufacture our products, the internal personnel costs to oversee manufacturing and supply chain functions, and the shipment of goods to customers. A significant portion of our cost of sales is currently in fixed and semi-fixed expenses associated with the management of manufacturing and supply chain. Cost of sales is expected to increase on an absolute basis as sales volume increases.

For the three months ended June 30, 2024, cost of sales increased by $10 thousand, or 10%, compared to the same period in 2023, primarily driven by an increase of $20 thousand in the inventory reserve for obsolescence. Excluding the $20 thousand inventory reserve adjustment in the second quarter of 2024, variable cost was $55 thousand, or $68.86 per unit, for the three months ended June 30, 2024, compared to $52 thousand, or $64.00 per unit, for the same period in 2023. Fixed costs were $35 thousand, or $43.25 per unit, for the three months ended June 30, 2024, compared to $49 thousand, or $60.48 per unit, for the same period in 2023. The decrease in the fixed cost was primarily due to lower product support costs.

For the six months ended June 30, 2024, cost of sales decreased by $86 thousand, or 24%, compared to the same period in 2023, primarily driven by the decrease in sales volume. Variable cost was $205 thousand, or $78.95 per unit, for the six months ended June 30, 2024, compared to $244 thousand, or $68.50 per unit, for the same period in 2023. Fixed costs were $72 thousand, or $27.90 per unit, for the six months ended June 30, 2024, compared to $119 thousand, or $33.52 per unit, for the same period in 2023. The decrease in the fixed cost was primarily due to lower product support costs.

Gross Margin

Gross margin has been and will continue to be affected by, and is likely to fluctuate on a quarterly basis due to, a variety of factors, including sales volumes, product and channel mix, pricing strategies, costs of finished goods, reserves for obsolescence, disposal costs of returned and/or obsolete inventory, product return rates, new product launches and potential new manufacturing partners and suppliers.

Operating Expenses

Research and Development Expenses

Research and development expenses consist primarily of costs incurred to conduct research, including the discovery, development and validation of product candidates. Research and development expenses include personnel costs, including stock-based compensation expense, third-party contractor services, including development and testing of prototype devices, and maintenance of limited in-house research facilities. We expense research and development costs as they are incurred. We expect research and development expenses to increase with the discovery and validation of new product candidates.

For the three months ended June 30, 2024, research and development expenses decreased by $166 thousand compared to the same period in 2023. For the six months ended June 30, 2024, research and development expenses decreased by $400 thousand compared to the same period in 2023. The decrease was due to reduced headcount and certain expenses incurred in 2023 which did not recur in 2024. The emphasis of research and development activities in 2023 was primarily related to a large segmentation study to identify additional incremental market segments with high willingness to pay, product design in our next generation device, intellectual property protection, and the study at The Feinstein Institutes for Medical Research on vagus nerve stimulation.

Sales and Marketing Expenses

Sales and marketing expenses include personnel costs and expenses for advertising and other marketing services. Personnel costs consist of salaries, bonuses, benefits and stock-based compensation expense. We expect sales and marketing expenses to increase modestly as we continue to expand our markets and distribution channels.

For the three months ended June 30, 2024, sales and marketing expenses decreased by $245 thousand compared to the same period in 2023. For the six months ended June 30, 2024, sales and marketing expenses decreased by $198 thousand compared to the same period in 2023. The decrease was due primarily to a four-month test program ending in February 2024 with InStep Health focused on education of healthcare professionals about the ClearUP solution as well as reductions in agency and staff costs.

General and Administrative Expenses

General and administrative expenses include D&O insurance, personnel costs, expenses for outside professional services and other expenses. Personnel costs consist of salaries, bonuses, benefits and stock-based compensation expense. Outside professional services consist of legal, finance, accounting and audit services, and other consulting fees. We expect general and administrative expenses to remain relatively flat.

For the three months ended June 30, 2024, general and administrative expenses decreased by $539 thousand compared to the same period in 2023. For the six months ended June 30, 2024, general and administrative expenses decreased by $933 thousand compared to the same period in 2023. The overall decreases were attributable to reduced headcount, lower consulting and professional fee expenses, as well as other general administrative expenses.

Liquidity and Capital Resources

Sources of Liquidity

Since our formation in September 2016, we have devoted substantially all of our efforts to research and development, to regulatory clearance and to early market development and testing for our first product, released in September 2019 in the United States. We are not profitable and have incurred net losses and negative cash flows from our operations in each year since our inception. As of June 30, 2024, we had cash and cash equivalents of $3.7 million, working capital of $4.1 million and an accumulated deficit of $40.6 million. We have financed our operations to date primarily through issuances of SAFE instruments, convertible notes and convertible preferred stock and the proceeds from registered offerings of our securities. In 2021, we completed our IPO, generating net proceeds to the Company of approximately $14.9 million, and we borrowed $2.6 million by issuing convertible notes payable, the outstanding balance of all of which converted into shares of our common stock in connection with our IPO. On February 13, 2023, we completed the sale of 200,000 shares of our common stock in a firm commitment, fully underwritten registered public offering, resulting in net proceeds to the Company of approximately $3.6 million. From July 11, 2023 to August 9, 2023, we sold an aggregate of 1,169,230 shares of our common stock to certain investors in a series of registered public offerings, resulting in aggregate net proceeds to the Company of approximately $4.3 million. Additionally, in May 2024, we sold an aggregate of 4,710,000 shares of our common stock, together with Series A warrants to purchase an aggregate of 4,710,000 shares of common stock and Series B warrants to purchase an aggregate of 7,065,000 shares of common stock, to certain investors in a registered public offering, resulting in net proceeds to the company of approximately $3.3 million.

Although we have taken measures to decrease our operating expenses, we expect that our operating expenses may increase significantly as we discover, acquire, validate and develop additional product candidates; seek regulatory approval and, if approved, proceed to commercialization of new products; obtain, maintain, protect and enforce our intellectual property portfolio; and hire additional personnel when needed. Furthermore, we have incurred, and will continue to incur, significant costs associated with operating as a public company. Management expects to incur substantial additional operating losses for the foreseeable future to expand our markets, complete development or acquisition of new product lines, obtain regulatory approvals, launch and commercialize our products and continue research and development programs. Based on the Company’s current cash levels and burn rate, amongst other things, the Company believes its cash and financial resources may be insufficient to meet the Company’s anticipated needs for the twelve months following the date of issuance of the financial statements for the quarter ended June 30, 2024, included elsewhere in this Report, which raises substantial doubt about the Company’s ability to continue as a going concern within one year from the issuance date of the financial statements.

Plan of Operation and Future Funding Requirements

We have used our capital resources primarily, to date, to fund marketing and advertising for ClearUP, development of both our trigeminal and our vagus nerve platforms and product candidates, evaluating and diligencing potential licensing and acquisition candidates, and the establishment of public company operating infrastructure and general operations. Although we have taken measures to decrease our operating expenses, we expect that our operating expenses will increase as we advance our vagus nerve platform, as well as discover, acquire, validate or develop additional product candidates; seek regulatory approval and, if approved, proceed to commercialization of new products; obtain, maintain, protect and enforce our intellectual property portfolio; hire additional personnel when needed; and maintain compliance with material government (in addition to environmental) regulations. We plan to increase our research and development investments in our vagus nerve platform and clinical applications thereof in 2024.

Furthermore, we have incurred, and will continue to incur, significant costs associated with operating as a public company. We expect to continue to incur losses for the foreseeable future. At this time, due to the inherently unpredictable nature of research and new product adoption as well as other macroeconomic factors, we cannot reasonably estimate the costs we will incur and the timelines that will be required to complete development, obtain marketing approval and commercialize future product candidates, if at all. For the same reasons, we are also unable to predict how quickly we will generate significant revenue from ClearUP product sales or whether, or when, if ever, we may achieve profitability from the sales of one or more products. Clinical and preclinical development timelines, the probability of success, and costs can differ materially from expectations. In addition, we cannot forecast which product candidates may be best developed and/or monetized through future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

In addition to the foregoing, we may, from time to time, consider opportunities for strategic acquisitions or other strategic transactions that we believe will align with our growth plan, complement our product offerings and be in the best interest of the Company and our shareholders. If an acquisition or other strategic transaction is identified and pursued, a substantial portion of our cash reserves may be required to complete such acquisition or other strategic transaction. If we identify an attractive acquisition that would require more cash to complete than we are willing or able to use from our cash reserves, we will consider financing options to complete the acquisition, including through equity and/or debt financings.

We have generated operating losses in each period since inception. We have incurred an accumulated deficit of $40.6 million through June 30, 2024. We expect to incur additional losses in the future as we expand both our research and development activities. Based on our current cash levels and burn rate, amongst other things, we believe our cash and financial resources may be insufficient to meet our anticipated needs for the next twelve months. As a result, we expect that we will need to raise additional capital to continue operating our business and fund our planned operations, including research and development, clinical trials and, if regulatory approval is obtained, commercialization of future product candidates.

We currently generate sales revenue direct-to-consumer though our own websites, Amazon.com and Walmart.com. We also sell to major and specialty U.S. online retailers such as BestBuy and FSAStore and through distributors including McKesson’s affiliate Simply Medical, Cardinal Health and Cencora (formerly known as Amerisource Bergen). Our ability to grow sales revenue will depend on successfully executing a comprehensive marketing campaign to drive additional sales through existing and new channels. Long-term growth will be commensurate with our ability to successfully identify, develop, and secure regulatory approval of one or more additional product candidates beyond ClearUP. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through private or public equity or debt financings, collaborative or other arrangements with corporate, foundation or government funding sources, or through other sources of financing. We do not know whether additional financing will be available on commercially acceptable terms, or at all, when needed. If adequate funds are not available or are not available on commercially acceptable terms, our ability to fund our operations, support the growth of our business or otherwise respond to competitive pressures could be significantly delayed or limited, which could materially adversely affect our business, financial conditions or results of operations, and we may have to significantly delay, scale back or discontinue the development and commercialization of our products and/or future product candidates.

The timing and amount of our operating expenditures will depend largely on:

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our ability to raise additional capital if and when necessary and on terms favorable to the Company;

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the timing and progress of sales initiatives driving top-line revenue;

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the availability of electronic parts and other components for our products, as well as our ability to source such parts and components at favorable prices;

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the timing and adoption rate of ClearUP line extensions at lower cost of goods;

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the payment terms and timing of commercial contracts entered into for manufacturing and sales of our products to and through online third-party retailers;

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the timing and progress of preclinical and clinical development activities;

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the number and scope of preclinical and clinical programs we decide to pursue;

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the timing and amount of milestone payments we may receive under any future collaboration agreements;

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whether we close potential future strategic acquisition opportunities, and if we do, our ability to successfully integrate acquired assets and/or businesses with our own;

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our ability to source new business opportunities through licenses and research and development programs and to establish new collaboration arrangements;

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the costs involved in prosecuting and enforcing patent and other intellectual property claims;

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the cost and timing of additional regulatory approvals beyond those currently held by us;

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our efforts to enhance operational systems and hire additional personnel, including personnel to support finance, sales, marketing, operations and development of our product candidates and satisfy our obligations as a public company; and

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our efforts to maintain compliance with material government (including environmental) regulations.

Until such time, if ever, as we can generate substantial revenue from product sales, we expect to fund our operations and capital funding needs through equity and/or debt financings. We may also consider entering into collaboration arrangements or selectively partnering with third parties for clinical development and commercialization. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of additional debt would result in debt service obligations, and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations or our ability to incur additional indebtedness or pay dividends, among other items. If we raise additional funds through governmental funding, collaborations, strategic partnerships and alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are not able to secure adequate additional funding, we may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially and adversely affect our business, financial condition, results of operations and prospects.

Cash Flows

The following table summarizes our cash flows for the period indicated (in thousands):

Operating Activities

Net cash used in operating activities for the six months ended June 30, 2024 was $3.0 million, which consisted primarily of a net loss of $2.7 million, decreased by non-cash charges of $190 thousand and increased by a net decrease of $396 thousand in our net operating assets and liabilities. The non-cash charges primarily consisted of stock-based compensation of $108 thousand and amortization of right-of-use assets of $76 thousand. The change in our net operating assets and liabilities was primarily due to a decrease in accounts payable and accrued expenses of $617 thousand, an increase in accounts receivable of $153 thousand, an increase in prepaid and other current assets of $139 thousand, and a decrease of $79 thousand in lease liabilities.

Net cash used in operating activities for the six months ended June 30, 2023 was $4.9 million, which consisted primarily of a net loss of $4.2 million, decreased by non-cash charges of $256 thousand and a net decrease of $881 thousand in our net operating assets and liabilities. The non-cash charges primarily consisted of stock-based compensation of $165 thousand and amortization of right-of-use assets of $85 thousand. The change in our net operating assets and liabilities was primarily due to a decrease in accounts payable and accrued expenses of $721 thousand and an increase of $125 thousand in inventory.

Investing Activities

There was no cash used in investing activities for the six months ended June 30, 2024. Net cash used in investing activities during the six months ended June 30, 2023 was related to the purchases of property and equipment.

Financing Activities

Our financing activities provided $3.3 million of cash during the six months ended June 30, 2024, which consisted primarily of proceeds from the sale of 4,710,000 shares of our common stock and Common Warrants to purchase an aggregate of 11,775,000 shares of common stock in May 2024, net of offering discounts and other costs. For the six months ended June 30, 2023, our financing activities provided $4.1 million of cash, which consisted primarily of proceeds from the sale of 200,000 shares of our common stock, net of offering discounts and other costs.

Known Trends or Uncertainties

As discussed elsewhere in this Report, the world has continued to be been affected by the lingering effects of the COVID-19 pandemic, the ongoing conflicts between Russia and Ukraine as well as Israel and Hamas, economic uncertainty in human capital management (“HCM”) and certain other macroeconomic factors. Inflation has risen, Federal Reserve interest rates have increased over the last year, and the general consensus among economists continues to suggest that we should expect a higher recession risk to continue for the near term. Climate change continues to be an intense topic of public discussion and is adding additional challenges and financial burden due to impending preparations and changes in the customer mindset. Additionally, it is possible that U.S. policy changes, including changes and uncertainty as a result of the upcoming U.S. presidential election, could increase market volatility. These factors, amongst other things, could result in further economic uncertainty and volatility in the capital markets in the near term, and could negatively affect our operations. Effects of the pandemic and recent economic volatility have negatively impacted our business in various ways over the last three years, including as a result of global supply chain constraints at least partially attributable to the pandemic. We will continue to monitor material impacts on our HCM strategies, including potential of employee attrition, amongst other things.

Global supply chain shortages (especially when coupled with the increase in inflation and other economic factors) could result in an increase in the cost of the components used in our products, which could result in a decrease of our gross margins or in us having to increase the price at which we sell our products until supply chain constraints are resolved. Additionally, in the event that the price of our components increases significantly or we are unable to source sufficient components and materials from our current suppliers, or to develop relationships with additional suppliers, to manufacture enough of our products to satisfy demand, we may have to cease or slow down production and our business operations and financial condition may be materially harmed and we may need to alter our plan of operation.

The United States has implemented tariffs on certain imported goods, including on certain items imported from China. In addition, China has imposed tariffs on a wide range of American products and placed restrictions on the export of certain items, including gallium and germanium, in retaliation for these American tariffs. As a result, there is a concern that the imposition of additional tariffs by the United States could result in the adoption of additional tariffs or export restrictions by China and/or other countries. Any resulting trade war could negatively impact our business. The imposition of tariffs on items imported by us from China or other countries could increase our costs and could result in lowering our gross margin on products sold.

Additionally, U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the ongoing military conflicts between Russia and Ukraine and between Israel and Hamas. Although the length and impact of the ongoing military conflicts is highly unpredictable, the conflicts in Ukraine and the Middle East could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as further supply chain interruptions. Additionally, the recent military conflict in Ukraine has led to sanctions and other penalties being levied by the United States, European Union and other countries against Russia. Additional potential sanctions and penalties have also been proposed and/or threatened. Russian military actions and the resulting sanctions could adversely affect the global economy and financial markets and lead to instability and lack of liquidity in capital markets, potentially making it more difficult for us to obtain additional funds.

Although our business has not been materially impacted by the ongoing military conflict between Russian and Ukraine or the conflict between Israel and Hamas to date, it is impossible to predict the extent to which our operations, or those of our suppliers and manufacturers, will be impacted in the short and long term, or the ways in which the conflict may impact our business. The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but could be substantial. We are continuing to monitor the situations in Ukraine, the Middle East and globally to assess potential impacts on our business.

As a result of these global issues and other macroeconomic factors, it has been difficult to accurately forecast our revenues or financial results, especially given the near and long term impact of the pandemic, geopolitical issues, inflation, the Federal Reserve maintaining high interest rates, the potential for a recession and recent uncertainties stemming from the upcoming election. In addition, while the potential impact and duration of these issues on the economy and our business may be difficult to assess or predict, these world events have resulted in, and may continue to result in, significant disruption of global financial markets, and may reduce our ability to access additional capital, which could negatively affect our liquidity in the future. Our results of operations could be materially below our forecasts as well, which could adversely affect our results of operations, disappoint analysts and investors, or cause our stock price to decline. Furthermore, a decrease in orders in a given period could negatively affect our revenues in future periods.

These global issues and events may also have the effect of heightening many risks associated with our customers and supply chain. We may take further actions that alter our operations as may be required by federal, state, or local authorities from time to time, or which we determine are in our best interests. In addition, we may decide to postpone or abandon planned investments in our business in response to changes in our business, which may impact our ability to attract and retain customers and our rate of innovation, either of which could harm our business.

Inflation

Inflation has increased recently and future rates are unknown. Inflationary factors, such as increases in the cost of our products (and components thereof), interest rates, overhead costs and transportation costs 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, we may experience some effect in the near future (especially if inflation rates continue to rise) due to supply chain constraints, consequences associated with the ongoing conflicts between Russia and Ukraine and Israel and Hamas, employee availability and wage increases, trade tariffs imposed on certain products from China and increased component and services pricing.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements.

Contractual Obligations and Commitments

Office Lease

The Company previously entered into a noncancelable operating lease for approximately 9,091 square feet of office space in Hayward, California as its headquarters. The lease was set to expire in October 2025 and there was no option to renew for an additional term. The Company was obligated to pay, on a pro-rata basis, real estate taxes and operating costs related to the premises. The lease was terminated on May 31, 2024 and the Company has no further obligations with regard to the lease.

On May 30, 2024, we entered into a Co-Working Space Agreement, pursuant to which we rent office space located at 47685 Lakeview Blvd., Fremont, California for a total $1 thousand a month. The agreement has an initial term of six months, commencing June 1, 2024, after which it will automatically renew on a month to month basis until terminated.

Lease costs recorded during the six month periods ended June 30, 2024 and 2023 were $84 thousand and $101 thousand, respectively.

We enter into contracts in the normal course of business with our contract manufacturer and other vendors to assist in the manufacturing of our products and performance of our research and development activities and other services for operating purposes. These contracts generally provide for termination for convenience after expiration of an advance notice period ranging from 0 to 60 days, and therefore are cancelable contracts and not included in the table of contractual obligations and commitments. Except as set discussed elsewhere in this Report, there have been no material changes to our previously disclosed business strategy with respect to our contractual obligations as disclosed under Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Critical Accounting Policies and Significant Judgments and Estimates

Our condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the condensed financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to sales return reserves, stock-based compensation, and going concern. Management bases its estimates and judgments on historical experience and on various other factors, including the macro-economic factors, that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The methods, estimates, and judgments used by us in applying these critical accounting policies have a significant impact on the results we report in our condensed consolidated financial statements. Our significant accounting policies and estimates are included in our Annual Report on Form 10‑K for the fiscal year ended December 31, 2023, filed with the SEC on March 25, 2024.

Information regarding our significant accounting policies and estimates can also be found in Note 2 to our condensed financial statements included in Part I, Item 1 of this Quarterly Report on Form 10‑Q.

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, see Note 2 to our condensed financial statements included in Part I, Item 1 of this Quarterly Report on Form 10‑Q.