Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 financial statements and related notes as disclosed in our Annual Report on Form 10‑K for the fiscal year ended December 31, 2021. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Part II, Item 1A “Risk Factors” or in other parts of this Quarterly Report on Form 10‑Q, as well as those identified in the “Risk Factors” section of our Annual Report on Form 10‑K for the fiscal year ended December 31, 2021, as updated by the Risk Factors starting on page 16 of that Registration Statement on Form S-1 filed by us with the Securities and Exchange Commission ("SEC") on October 26, 2022, each of which Risk Factors are incorporated in this Quarterly Report on Form 10-Q by reference. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. See “Forward-Looking Statements.”
Overview
We are a bioelectronic medicine company developing and commercializing non-invasive, drug-free treatments for various diseases and conditions. 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 commercial product, and is FDA-approved for the treatment of sinus pain and congestion. It is also a CE-Marked medical device for the treatment of sinus pain, pressure and congestion. ClearUP is currently sold in the U.S. directly to consumers on various e-commerce platforms and through retail channels.
Business Developments
Bioelectronic medicine is an emerging, multiple billion-dollar market. Since our formation in September 2016, we have devoted substantially all of our efforts to the development of our proprietary technology platform to provide noninvasive, drug free treatments and treatment candidates for various diseases and conditions. In 2019, we launched ClearUP in the U.S. market. ClearUP is approved by the FDA for sale in the U.S. for the two FDA-approved indications noted above and has a CE Mark, which covers a third indication (sinus pressure) and gives us commercial access to certain European countries. We currently sell directly to consumers through our own website, Amazon, and Walmart. We also sell through major and specialty online retailers, such as BestBuy and FSAStore.
Expanding our product offerings
On October 7, 2022, in alignment with our growth plan to increase product offerings, we entered into a definitive agreement to acquire substantially all of the assets of Reliefband Technologies, LLC (“Reliefband”) that are used in connection with the development, manufacture, distribution, and sale of Reliefband’s electronic nerve stimulation devices. Reliefband has been an innovator in wearable, FDA-cleared bioelectronic therapeutics for the treatment of nausea and vomiting. Reliefband’s patented technology is based on neuromodulation—or modulation—of nerve activity by delivering electrical waveforms to the median nerve in the wrist. This stimulation disrupts nausea and vomiting signaling in the brain. Reliefband’s products are 100% drug free, with the user in control of the intensity of the stimulation.
Reliefband has multiple over-the-counter products available, as well as one Rx, single use, product that is sold to hospitals and prescribed by medical professionals for the treatment of post-operative nausea. Reliefband’s wrist-worn electronic nerve stimulators have been FDA-cleared for treatment of nausea, retching and vomiting related to motion sickness, physician-diagnosed migraines, hangovers, anxiety, morning sickness, chemotherapy, and post-operative nausea. Reliefband’s patented products are backed by 40 peer-reviewed clinical studies and have generated over 3500 Amazon reviews averaging 4+ stars.
We believe the Reliefband product line is highly complementary to our ClearUP product line and our existing commercial capabilities. Both Reliefband and ClearUP offer consumers ways to manage certain health conditions without the issues and side effects often associated with medication use. Both are FDA-cleared, effective, fast-acting, convenient, and drug-free. Both currently are sold primarily online, and both have received CE Marks allowing international expansion.
Consideration payable by the Company to Reliefband upon closing of the acquisition, if completed, will consist of up to $33.5 million, of which up to $1.5 million can be paid, at the election of the Company, in shares of restricted common stock of the Company. The transaction is expected to be consummated in the fourth quarter of 2022 or first quarter of 2023, subject to the satisfaction of certain customary closing conditions, including but not limited to securing the financing necessary to pay the purchase price. No guarantees
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can be provided that the Company will be able to raise sufficient capital to fund the purchase price of the acquisition in a timely manner, or at all, or that the acquisition will close.
Further reduction to our product costs
On October 21, 2022, the Company entered into a Manufacturing Agreement (the “Microart Agreement”), with Microart Services Inc. (“Microart”). Pursuant to the Microart Agreement, Microart will manufacture, on a non-exclusive basis, certain components and sub-assemblies (collectively, “Products”) of the Company’s current and future products. During the term of the Microart Agreement, the Company shall order Products from Microart by issuing purchase orders, and Microart shall manufacture and supply Products to the Company in the quantities specified in the applicable purchase orders and in accordance with the Company’s specifications. Subject to certain exceptions, Microart will charge the Company a fixed price for every Product purchased, which fixed price may only be changed by Microart once per each cumulative twelve-month period, and in each case, any increase shall not exceed an amount specified in the Microart Agreement.
We expect that this new arrangement with Microart will significantly reduce the cost of manufacturing our ClearUP products, and potentially our future products as well.
Other operational updates
In 2022, we have also invested in our marketing, product design and e-commerce distribution infrastructure as follows:
•We broadened our advertising mix and increased marketing spend to drive sales growth.
•We optimized our sales channel strategy to increase our profit margin, and terminated less profitable channels.
•We made infrastructure-level improvements to our website and ecommerce functions, including upgrading the mobile experience and adding payment options.
•We were featured in ABC News Report: “New Bioelectronic Technologies Could Signal the Future of Medicine” in January 2022.
•ClearUP was named best sinus pain relief solution of 2021 by Global Health & Pharma Magazine in February 2022.
•Our CEO spoke at high-profile events evangelizing bioelectronic medicine as a first-line therapeutic option for chronic disease, including Fortune Brainstorm Health and Neurotech Leaders’ Forum.
•We successfully launched the rebranding of our website and related marketing materials and increased ClearUP sales price from $149.00 to $169.99.
In 2022, we have also invested in our product innovation and development programs as follows:
•We advanced the collaboration with Mount Sinai School of Medicine Division of Rhinology and Skull Base Surgery on a sham-controlled clinical trial to evaluate a new bioelectronic approach to treating postoperative pain after sinus surgery. This 60-person randomized sham-controlled clinical trial is currently on-going.
•We initiated development work related to a potential product candidate in migraine as follows:
oCompleted market studies to identify needs in the treatment of migraine
oIdentified multiple internal and external assets for device development
oIdentified clinical partner: Allergy & Asthma Associates of Santa Clara Valley Research Center
oDeveloped a clinical trial protocol
•We furthered our regulatory compliance through a formal re-certification audit by an external third party, BSI, and were found to be fully conforming to the ISO 13485 certification requirements leading to an extension of our certification.
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•We broadened our IP portfolio receiving one new issuance, bringing issued claims to 96. We also filed 4 additional Patent Cooperation Treaty (“PCT”) applications covering new indications.
In 2022, we have also strengthened our management team with key new hires, and we now have a core team of 16 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. In connection with our IPO in November last year, we upgraded various aspects of the Company to align with public company standards.
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2022 and 2021
The following table summarizes our results of operations (in thousands):
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2022 |
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2021 |
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Change |
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2022 |
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2021 |
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Change |
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(unaudited) |
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Revenue |
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$ |
477 |
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$ |
277 |
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$ |
200 |
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$ |
1,432 |
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$ |
868 |
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$ |
564 |
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Cost of sales |
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|
414 |
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|
|
303 |
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|
|
111 |
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|
|
1,176 |
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|
|
904 |
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|
|
272 |
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Gross profit (loss) |
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|
63 |
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(26 |
) |
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|
89 |
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|
|
256 |
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(36 |
) |
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292 |
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Operating expenses: |
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Research and development |
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399 |
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175 |
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224 |
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1,295 |
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565 |
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730 |
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Sales and marketing |
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487 |
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450 |
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37 |
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2,291 |
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1,095 |
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1,196 |
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General and administrative |
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1,761 |
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578 |
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1,183 |
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4,512 |
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|
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1,645 |
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2,867 |
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Total operating expenses |
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2,647 |
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1,203 |
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1,444 |
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|
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8,098 |
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3,305 |
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4,793 |
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Loss from operations |
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(2,584 |
) |
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(1,229 |
) |
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(1,355 |
) |
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(7,842 |
) |
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(3,341 |
) |
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(4,501 |
) |
Other income (expense): |
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Interest income (expense) |
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1 |
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(1,171 |
) |
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1,172 |
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1 |
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|
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(1,668 |
) |
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1,669 |
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Change in fair value of derivative liabilities |
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— |
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80 |
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|
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(80 |
) |
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— |
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81 |
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(81 |
) |
Other income (expense) |
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(1 |
) |
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— |
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(1 |
) |
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(1 |
) |
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158 |
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(159 |
) |
Total other income (expense) |
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— |
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(1,091 |
) |
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1,091 |
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— |
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(1,429 |
) |
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1,429 |
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Net loss |
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$ |
(2,584 |
) |
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$ |
(2,320 |
) |
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$ |
(264 |
) |
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$ |
(7,842 |
) |
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$ |
(4,770 |
) |
|
$ |
(3,072 |
) |
Revenue
Revenue is generated by the sale of our ClearUP and ancillary products, including accessories and accelerated shipping charges, and is net of return reserves. We currently sell directly to consumers through our own website, Amazon and Walmart. We also sell to major and specialty online retailers, such as BestBuy and FSAStore. 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. We expect our sales to continue to grow as we further our market penetration efforts and implement moderate price increases.
For the three months ended September 30, 2022, revenue increased by $200 thousand, or 72%, compared to the same period in 2021, primarily due to a 37% increase in unit sales. Unit sales in our direct-to-consumer channels increased 130%, while unit sales in our retail channels decreased by 31% due to the termination of less profitable reseller channels. Average sales price in our direct-to-consumer and reseller channels increased by 6% and 33%, respectively.
For the nine months ended September 30, 2022, revenue increased by $564 thousand, or 65%, compared to the same period in 2021, primarily due to a 37% increase in unit sales, with the majority from our direct-to-consumer channels. Unit sales in our direct-to-consumer channels increased by 146%, while unit sales in our retail channels decreased by 45% due to the termination of less profitable reseller channels. Average sales price in our direct-to-consumer and reseller channels increased by 2% and 23%, respectively.
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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.
For the three months ended September 30, 2022, cost of sales increased by $111 thousand, or 37%, compared to the same period in 2021, primarily driven by higher sales volume in 2022. Variable cost was $373 thousand, or $95.04 per unit, for the three months ended September 30, 2022, compared to $236 thousand, or $82.34 per unit, for the same period in 2021. The increase in the variable cost was primarily driven by a temporary price increase in several electronic components due to the well-documented global supply chain shortages, the purchase price variance for the quarter was approximately $26.02 per unit. Fixed cost was $41 thousand, or $10.48 per unit, for the three months ended September 30, 2022, compared to $67 thousand, or $23.40 per unit, for the same period in 2021. The decrease in the fixed cost was primarily due to higher sales volume absorbing the fixed costs.
For the nine months ended September 30, 2022, cost of sales increased by $272 thousand, or 30%, compared to the same period in 2021, primarily driven by higher sales volume in 2022. Variable cost was $1.0 million, or $85.49 per unit, for the nine months ended September 30, 2022, compared to $698 thousand, or $78.35 per unit, for the same period in 2021. The increase in the variable cost was primarily due to a temporary price increase in several electronic components during the third quarter due to the well-documented global supply chain shortages. Fixed cost was $134 thousand, or $11.01 per unit, for the nine months ended September 30, 2022, compared to $206 thousand, or $23.16 per unit, for the same period in 2021. The decrease in the fixed cost was primarily due to higher sales volume absorbing the fixed overhead 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, 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, optimization of our product design and supply-chain, and increasing sales volume over which fixed and semi-fixed costs are allocated.
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 September 30, 2022, research and development expenses increased by $224 thousand compared to the same period in 2021.
For the nine months ended September 30, 2022, research and development expenses increased by $730 thousand compared to the same period in 2021.
The year-over-year increases for the three- and nine-months ended September 30, 2022 were primarily due to increased headcount and costs related to additional investments in product candidate research and design. The emphasis of research and development activities in 2022 has been primarily related to product research and design in the migraine therapeutic area, initiation of a double-blind randomized controlled trial for post-operative pain relief following sinus surgery, and enhancement of our intellectual property protection. Activities in 2021 were primarily focused on seeking FDA approval for a second indication for our ClearUP product line.
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 our markets and distribution channels.
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For the three months ended September 30, 2022, sales and marketing expenses increased by $37 thousand compared to the same period in 2021.
For the nine months ended September 30, 2022, sales and marketing expenses increased by $1.2 million compared to the same period in 2021.
The increases for both the three- and nine-months ended September 30, 2022 were due primarily to the expansion of our sales and marketing efforts, including (i) expanding advertising platforms; (ii) growing our social media presence; (iii) upgrading and optimizing ecommerce infrastructure, online/website design; and (iv) other marketing initiatives.
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.
For the three months ended September 30, 2022, general and administrative expenses increased by $1.2 million compared to the same period in 2021, and was primarily attributable to $373 thousand of increased legal fees associated with the acquisition of Reliefband, $236 thousand in other consulting fees which included $84 thousand of fees associated with the acquisition of Reliefband, $218 thousand of increased personnel costs associated with increased headcount, $201 thousand of increased D&O insurance costs, $96 thousand of increased facilities and related costs associated with the relocation of the Company’s headquarters and $67 thousand of other fees and professional services that are required for public company standards.
For the nine months ended September 30, 2022, general and administrative expenses increased by $2.9 million compared to the same period in 2021, and was primarily attributable to $813 thousand of increased personnel costs associated with increased headcount, $469 thousand of increased legal fees which included $431 thousand of fees associated with the acquisition of Reliefband, $255 thousand in other consulting fees which included $84 thousand of fees associated with the acquisition of Reliefband, $609 thousand of increased D&O insurance costs, $363 thousand of increased facilities and related costs associated with the relocation of the Company’s headquarters and $349 thousand of other increased fees and professional services that are required for public company standards.
Other Income/Expense, Net
Other expense, net in 2021 consisted primarily of amortization of debt discount included in interest of $1.6 million, offset by $157 thousand of debt forgiveness associated with PPP loans. There were no similar expenses in the three and nine months ended September 30, 2022.
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Liquidity and Capital Resources
Sources of Liquidity
From our inception through September 30, 2022, we have generated $4.0 million in revenue from product sales and have incurred operating losses and negative cash flows from our operations. As of September 30, 2022, we had cash and cash equivalents of $6.3 million, working capital of $5.6 million and an accumulated deficit of $27.4 million. We have financed our operations to date primarily through issuances of SAFE instruments, convertible notes and convertible preferred stock and the proceeds from the IPO in November 2021. In 2019, we sold an aggregate of 2,787,854 shares of our convertible preferred stock to accredited investors, generating net proceeds of $3.8 million and borrowings from convertible notes payables issued to investors in the amount of $1.7 million. In 2020, we borrowed $1.6 million by issuing convertible notes and issued notes payable to borrow $195 thousand. In November 2021, we completed our IPO, generating net proceeds to the Company of approximately $14.9 million. During the year ended December 31, 2021, we borrowed $2.6 million by issuing convertible notes payable. During the nine months ended September 30, 2022, we did not engage in any capital raising activities, other than through the sale of our products.
In addition, on October 28, 2021, we entered into a Revolving Line of Credit Note with Tethered LLC (“Tethered”) providing us with a $250 thousand revolving line of credit (the “Line of Credit”), pursuant to which we may request advances until December 3, 2022. Advances drawn under the Line of Credit bear interest at an annual rate of 6.0%, and each advance will be payable on the maturity date with the interest on outstanding advances payable monthly. We may, at our option, prepay any borrowings under the Line of Credit, in whole or in part, at any time prior to the maturity date, without premium or penalty. To date, we have not drawn down on the Line of Credit.
Management expects to incur substantial additional operating losses for the foreseeable future to expand our markets, continue research and development programs, complete development of new products, obtain regulatory approvals, launch and commercialize our products and comply with material government (including environmental) regulations. 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 these financial statements.
Recent Developments
IPO
In November 2021, we completed our IPO of 3,450,000 shares of common stock, at a public offering price of $5.00 per share, including the exercise in full by the underwriters of their option to purchase 450,000 additional shares of common stock, for aggregate gross proceeds of $17.3 million and our shares started trading on The Nasdaq Capital Market under the ticker symbol “TIVC.” We received approximately $14.9 million in net proceeds after deducting underwriting discounts and commissions and other offering expenses payable by the Company. In connection with the closing of the IPO, all of our outstanding shares of convertible preferred stock at the time of the IPO automatically converted into an aggregate of 2,227,116 shares of common stock and outstanding convertible notes payable borrowings of $4.4 million outstanding at the time of the IPO converted into an aggregate of 1,204,160 shares of common stock.
The Company recognizes it will need to raise additional capital to continue operating its business and fund its planned operations, including research and development, clinical trials and, if regulatory approval is obtained, commercialization of future product candidates. We may seek additional funds through equity or debt offerings and/or borrowings under notes payable, lines of credit or other sources. 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.
Proposed Reliefband Acquisition
On October 7, 2022, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”), by and among RB Buyer Co, LLC, a Delaware limited liability company (“Buyer”) and wholly-owned subsidiary of the Company, Reliefband, certain of Reliefband’s beneficial owners (the “Beneficial Owners”), and Shareholder Representative Services LLC, a Colorado limited liability company as representative of Reliefband and its Beneficial Owners. Pursuant to the Purchase Agreement, the Buyer agreed to purchase substantially all of the assets, and certain specified liabilities, of Reliefband that are used in connection with the development, manufacture, distribution, and sale of Reliefband’s electronic nerve stimulation devices for an aggregate cash purchase price of $33.5 million, subject to working capital adjustments as defined in the Purchase Agreement, less Reliefband transaction expenses and any
22
indebtedness of Reliefband at Closing. Up to $1.5 million of the acquisition consideration is payable, at the election of the Buyer and the Company, in restricted common stock of the Company.
The closing of the acquisition is subject to certain conditions including, but not limited to (i) the absence of any material adverse effect with respect to the Reliefband business, (ii) receipt of third-party consents to the assignment of certain contracts, (iii) the completion of certain regulatory filings by Reliefband, and (iv) the Company’s consummation of a financing to fund the acquisition consideration. The Purchase Agreement may be terminated under specific circumstances, including, among others, by mutual written consent, in connection with a material breach of a party to the Purchase Agreement, or to the extent that the closing has not occurred by February 6, 2023. Pursuant to the terms of the Purchase Agreement, in the event the Purchase Agreement is terminated as a result of the Company’s failure to publicly file a Registration Statement on Form S-1 in connection with its financing to fund the purchase price, Buyer shall pay to Reliefband a breakup fee of $200 thousand within one (1) business day following the termination.
On October 26, 2022, the Company publicly filed a Form S-1 Registration Statement in connection with a proposed financing, the proceeds of which (if the offering is completed) are expected to be used by the Company to fund the purchase price of the Reliefband acquisition and the Company's operations. The S-1 Registration Statement has not been declared effective, remains subject to review by the SEC, and will need to be amended before the Company can commence an offering thereunder. There can be no assurances that the S-1 Registration Statement will be declared effective by the SEC in a timely basis, or ever, or that the Company will be able to raise sufficient capital to fund the Reliefband acquisition and the Company's operations.
Plan of Operation and Future Funding Requirements
We use our capital resources primarily to fund marketing and advertising for ClearUP, development of our product candidates, and general operations. We expect that our operating expenses will 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; hire additional personnel; and maintain compliance with material government (in addition to environmental) regulations. We plan to increase our research and development investments to identify and develop new product candidates. Furthermore, we have incurred and will continue to incur additional costs associated with operating as a public company that we did not experience as a private company. We expect to continue to incur significant losses for the foreseeable future. At this time, due to the inherently unpredictable nature of research and new product adoption, as well as supply chain constraints that we are currently facing, 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 ramp-up 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 sell-in 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.
As previously disclosed, we have encountered disruptions in our supply of various materials and components, and electronic components in particular, due to well-documented shortages and constraints in the global supply chain. We are continuing to evaluate alternative and secondary source suppliers in order to ensure that we are able to source sufficient components and materials to manufacture our products. Global supply chain shortages (especially when coupled with the increase in inflation) 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 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.
In addition to the foregoing, we may, from time to time, consider opportunities for strategic acquisitions, such as the proposed acquisition of certain assets from Reliefband. If the Reliefband acquisition or other acquisitions are identified, a substantial portion of our cash reserves may be required to complete such acquisitions. 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. As discussed above, closing of the proposed Reliefband acquisition is contingent upon our ability to raise sufficient capital to fund the purchase price.
We have generated operating losses in each period since inception. We have incurred an accumulated deficit of $27.4 million through September 30, 2022. We expect to incur additional losses in the future as we expand both our marketing and 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
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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.
As noted above, we filed a Form S-1 Registration Statement with the SEC on October 26, 2022, in connection with a proposed financing, the proceeds of which (if the offering is completed) are expected to be used by the Company to fund the purchase price of the Reliefband acquisition and the Company's operations. The S-1 Registration Statement has not been declared effective, remains subject to review by the SEC, and will need to be amended before the Company can commence an offering thereunder. There can be no assurances that the S-1 Registration Statement will be declared effective by the SEC in a timely basis, or ever, or that the Company will be able to raise sufficient capital to fund the Reliefband acquisition and its operations.
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 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:
•our ability to raise additional capital if and when necessary and on terms favorable to the Company;
•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;
•the timing and progress of sales initiatives driving top-line revenue;
•the timing and adoption rate of ClearUP line extensions at lower cost of goods;
•the payment terms and timing of commercial contracts entered into for manufacturing and sales of our products to and through online third-party retailers;
•the timing and progress of preclinical and clinical development activities;
•the number and scope of preclinical and clinical programs we decide to pursue;
•the timing and amount of milestone payments we may receive under any future collaboration agreements;
•whether we close the proposed acquisition of Reliefband or other potential future strategic acquisition opportunities, and if we do, our ability to successfully integrate acquired assets and/or businesses with our own;
•our ability to source new business opportunities through licenses and research and development programs and to establish new collaboration arrangements;
•the costs involved in prosecuting and enforcing patent and other intellectual property claims;
•the cost and timing of additional regulatory approvals beyond those currently held by us;
•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
•our efforts to maintain compliance with material government (including environmental) regulations.
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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):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(unaudited) |
|
|
(unaudited) |
|
Cash used in operating activities |
|
$ |
(6,692 |
) |
|
$ |
(2,852 |
) |
Cash used in investing activities |
|
|
(11 |
) |
|
|
— |
|
Cash provided by financing activities |
|
|
56 |
|
|
|
2,656 |
|
Net (decrease) increase in cash and cash equivalents |
|
$ |
(6,647 |
) |
|
$ |
(196 |
) |
Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2022 was $6.7 million, which consisted primarily of a net loss of $7.8 million, decreased by non-cash charges of $415 thousand and a net change of $735 thousand in our net operating assets. The non-cash charges primarily consisted of stock-based compensation of $286 thousand and amortization of right-of-use assets of $122 thousand. The change in our net operating assets and liabilities was primarily due to an increase in accounts payable of $813 thousand and a decrease in prepaids and other current assets of $462 thousand, offset by an increase in inventory of $332 thousand and a decrease in lease liabilities of $135 thousand.
Net cash used in operating activities for the nine months ended September 30, 2021 was $2.9 million, which consisted primarily of net loss of $4.8 million decreased by non-cash charges of $1.5 million and a net change of $461 thousand in our net operating assets. The non-cash charges primarily consisted of debt discount amortization of $1.6 million and stock-based compensation of $41 thousand offset by forgiveness of the PPP loan of $157 thousand and $81 thousand for the change in fair value of derivative liabilities. The change in our net operating assets and liabilities was primarily due to an increase in accounts payable and accrued expenses of $1.1 million offset by an increase in deferred offering costs of $555 thousand.
Investing Activities
Net cash used in investing activities during the nine months ended September 30, 2022 was related to the purchases of property and equipment. We had no investing activities during the nine months ended September 30, 2021.
Financing Activities
Our financing activities provided $56 thousand of cash during the nine months ended September 30, 2022, which consisted of proceeds from the exercise of stock options.
Our financing activities provided $2.7 million of cash during the nine months ended September 30, 2021, which consisted primarily of $2.6 million of proceeds from convertible notes payable borrowings and $62 thousand of proceeds from the exercise of stock options.
Known Trends or Uncertainties
As discussed elsewhere this Quarterly Report on Form 10‑Q, the world has been affected by the COVID‑19 pandemic, the ongoing conflict between Russia and Ukraine and economic uncertainty in human capital management (“HCM”). Inflation has risen, Federal
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Reserve interest rates have increased recently, and the general consensus among economists suggests that we should expect a higher recession risk to continue over the next year. Climate change continues to be an intense topic of public discussion and is adding additional challenges and financial burden due to impending reparations and changes in the customer mindset. 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. The pandemic and recent economic volatility have negatively impacted our business in various ways over the last two years, including, more recently, as a result of global supply chain constraints at least partially attributable to the pandemic. Until the pandemic has passed, there remains uncertainty as to the effect of COVID‑19 on our business in both the short and long-term. We will continue to monitor material impacts on our HCM strategies, including potential of employee attrition, amongst other things.
We are continuing to encounter disruptions in our supply of various materials and components, and electronic components in particular, due to well-documented shortages and constraints in the global supply chain. We have experienced increased pricing, longer lead-times, unavailability of product and limited supplies, protracted delivery dates, and/or shortages of certain parts and supplies that are necessary components for our products. As a result, we are carrying increased inventory balances to ensure availability of necessary products and to secure pricing. Although we are seeing some recent improvement in the market place, uncertainty with respect to the availability of necessary products and supplies, as well as pricing thereof, remains. We are continuingly evaluating alternative and secondary source suppliers in order to ensure that we are able to source sufficient components and materials to manufacture our products at a reasonable price point. In the event that the price of our components increase significantly or we are unable 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.
U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the ongoing military conflict between Russia and Ukraine. Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine 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 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 situation in Ukraine and globally and assessing its potential impact on our business.
As a result of these global issues, it has been difficult to accurately forecast our revenues or financial results, especially given the near and long term impact of the pandemic, and geopolitical issues, inflation, the Federal Reserve interest rate increases and the potential for a recession. 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.
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Inflation
Inflation has increased during the periods covered by this Quarterly Report on Form 10‑Q, and is expected to continue to increase for the near future. 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 COVID‑19 and the ongoing conflict between Russia and Ukraine, employee availability and wage increases, trade tariffs imposed on certain products from China and increased product pricing due to semiconductor product shortages.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Contractual Obligations and Commitments
Office Lease
The Company executed a noncancelable operating lease for approximately 9,091 square feet of office space in Hayward, California in November 2021 as its headquarters. The lease will expire in October 2025 and there is no option to renew for an additional term. The Company is obligated to pay, on a pro-rata basis, real estate taxes and operating costs related to the premises.
Lease cost recorded during the nine months ended September 30, 2022 was $151 thousand. There were no similar lease costs in 2021 related to the noncancelable operating lease, as the lease was not in effect at that time.
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 on notice, and therefore are cancelable contracts and not discussed in this section. 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, 2021.
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, warranty 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 such as COVID‑19 pandemic, 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, 2021, filed with the SEC on March 31, 2022.
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.