TIVIC HEALTH SYSTEMS, INC. The following discussion and analysis of our financial condition and results of
operations should be read together with the interim condensed financial
statements and related notes included elsewhere in this Quarterly Report on
Form 10-Q, as well as our audited consolidated financial statements and related
notes as disclosed in our Annual Report on Form 10-K for the fiscal year ended
Overview
We are a bioelectronic medicine company developing and commercializing non-invasive, drug-free treatment alternatives for various diseases. Bioelectronic medicine, also referred to as electroceuticals or neuromodulation, is the treatment of disease and conditions by preferentially activating electrical functions of the body to modify central or peripheral nerve activity. ClearUP is our first FDA approved, handheld device for the treatment of sinus and congestion and it is currently selling directly to consumers via e-commerce platforms.
Business Developments
Bioelectronic medicine is an emerging, multiple billion-dollar market. Since our
formation in
In the first quarter of 2022, we invested in our marketing and e-commerce distribution infrastructure as follows, and saw a positive effect on our sales results.
? We broadened our advertising mix and increased marketing spend to drive sales
growth.
? We have optimized our sales channel strategy to increase our profit margin, and
terminated less profitable channels.
? We were featured in ABC News Report: "New Bioelectronic Technologies Could
Signal the Future of Medicine" in
? ClearUP was named best sinus pain relief solution of 2021 by Global Health &
In the first quarter of 2022, we invested in our product development programs as follows, and made progress.
We advanced the collaboration with Mount Sinai School of Medicine Division of
Rhinology and Skull Base Surgery on the sham-controlled clinical trial to
? evaluate a new bioelectronic approach to treating postoperative pain after
sinus surgery. This is a 60 person randomized sham-controlled clinical trial.
We now have 12 patients enrolled, and we expect to complete this study in the
fourth quarter of 2022.
In the first quarter of 2022, we also strengthened our management team with key new hires, and we now have a core team of 12 individuals. We have intentionally maintained a small core team at this stage of the Company. We have relied, and continue to rely, heavily on third-party service providers, including marketing agencies, clinical research organizations and academic research partnerships, finance and accounting support, legal support, and contract manufacturing organizations to carry out our operations. As part of our IPO in November last year, we have upgraded various aspects of the Company to align with public company standards.
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Components of Results of Operations
Revenue
Revenue is generated by the sale of our ClearUP product and ancillary products,
including accessories and accelerated shipping charges, and is net of return and
warranty reserve allowances. We currently sell direct-to-consumer through our
own website, Amazon and Walmart. We also sell to major and specialty
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. Cost of sales is expected to decrease as a proportion of revenue with (i) the optimization of our supply chain and (ii) the allocation of fixed and semi-fixed expenses over increasing unit sales volume over time.
Gross Margin
Our gross margin has been and will continue to be affected by and likely fluctuate on a quarterly basis due to a variety of factors, including sales volumes, product and channel mix, pricing strategies, costs of finished goods, and product return rates, new product launches and potential new manufacturing partners and suppliers. We expect our gross margin to increase with future price increases and increasing sales volume over which fixed and semi-fixed costs are allocated.
Operating Expenses
Research and Development Expenses
Our 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.
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 as we continue to expand the marketing and distribution channels.
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 increase as we optimize our operational infrastructure mix versus using outside consultants in the next year or two, but expect the expense to decrease as a proportion of revenue as revenue scales against fixed and semi-fixed administrative expenses over time.
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Other Income / Expense, Net
Other expense, net primarily consists of the fair value adjustments related to the derivative liability for conversion rights, amortization of debt discount included in interest expense and the loss from the extinguishment of debt from the conversion of the convertible notes to common stock.
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