Earnings Call Transcript - TIVC Q2 2023

Operator, Operator

Welcome to the Tivic Health Systems Second Quarter 2023 Shareholder Update Conference Call. Please note, this conference is being recorded. Statements made during this call contain forward-looking statements about our business. You should not place any undue reliance on forward-looking statements as these statements are based upon our current expectations, forecasts, and assumptions and are subject to significant risks and uncertainties. These statements may be identified by words such as may, will, should, could, expect, intend, plan, anticipate, believe, estimate, predict, potential, forecast, continue, or the negative of these terms or other words or terms of similar meaning. Risks and uncertainties that could cause our actual results to differ materially from those set forth in any forward-looking statements include, but are not limited to, the matters listed under the risk factors in our company's annual report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 31, 2022, as updated by the risk factors included in the registration statement on Form S-1 followed by the company filed with the Securities and Exchange Commission on October 26, 2022, and in our other filings with the Securities and Exchange Commission. Statements and information, including forward-looking statements, speak only to the date that they are provided, unless an earlier date is indicated, and we do not undertake any obligation to publicly update any statements or information, including forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Now let me hand the call over to Jennifer Ernst, Tivic Health's Chief Executive Officer.

Jennifer Ernst, CEO

Hello, everyone, and thank you for joining us today. My name is Jennifer Ernst, I'm the CEO of Tivic Health. This is usually the part of the call where I would say I'm pleased to have this opportunity to review the business results with you. As you've seen from our advanced announcements and recent transactions, this has been a particularly challenging quarter, a particularly challenging time period for the company. So what this call today will focus on primarily is some of the steps that we've been taking to move the company forward and to position the company better as we move into the next coming quarters and year. I also am joined today by our Interim CFO, Kimberly Bambach, who will be reviewing the financial performance and some of the internal restructuring steps that we've taken. Now when I prepare for these calls, I always find myself reflective about the current quarter on recent transactions and on the underpinnings of the business. I'd like to take a step back with our investor community in that light. In Q1 of this year, we entered the year with an open S-1, a failed transaction in an acquisition. We had a tough situation in February, a very challenging environment. We were looking to close the transaction of $10 million. We ended up well below that with a transaction that netted only $3.6 million to the company. Now since that time, we have actually closed that gap; additional transactions have brought in net proceeds to the company of approximately $4.8 million. Q2 has been particularly hard. So when that came with some tough decisions—decisions necessary to move the company forward. As part of that period, we held back on our marketing investments to retool, to realign the marketing initiatives to segments that have the strongest likelihood to purchase and the highest willingness to pay. We implemented a pricing increase to reflect durable increases in electronic component parts. Things that now are part of a new economic reality for us and for many companies. And these price increases, while making product sales more profitable, directly impacted the Q2 sales top-line revenue. As I discussed in the letter to shareholders a few weeks ago, we also have been battling through compliance issues with our non-sec listing. These issues are now on the verge of being resolved; in fact, based on both recent votes, but we also brought additional capital into the company that I'll address further in our Q&A section. We downsized the team in certain areas. We performed an internal reorganization to bring more focus to critical work efforts. We also determined some areas in which we needed increased strength and experience. One of those within the area of finance, having brought in an interim CFO, Kim Bambach, as well as in our marketing leadership, having retained Elizabeth Jackson on a consulting agreement, both of whom have turnaround track records in the public markets. And Kim, in particular, brings over 30 years of financial leadership experience in both public and private industries. Her background includes financial leadership in medical, retail markets, manufacturing, wholesale distribution, license in digital media and broadcasting. Importantly, she's participated in the roll-up process to be able to bring new value to investors through M&A processes. We also added an adviser to the Board, Christina Valauri. She's a 30-year Wall Street veteran, well respected by the Street, and ranked as the #1 biotech biomedical analyst in the Wall Street Journal's Best of Wall Street. She has extensive experience identifying and analyzing the commercial potential for breakthrough innovation, something that we think will be very valuable as we assess our next steps for the company. We also have the experience mentoring and advising C-suites of private and public early-stage healthcare companies through product development, regulatory go-to-market strategies, potential mergers and acquisitions, and IPOs. So I am deeply grateful for Christina Valauri's experience coming to the Board as an adviser. Each of these team members have successfully developed and executed transformational business strategies to drive growth, enhance operating performance, and execute turnarounds. With this newly added talent and expertise, we are a very different team than we were just even 6 months ago—certainly very different than we were 2 years ago. The one thing that has not changed, though, is our goal to build a diversified health tech company anchored in novel therapeutics, specifically in the area of bioelectronic medicine. Therefore, the development pipeline is as important to the company as the commercial traction and the outlets we are building—and, in fact, potentially more so. With that lens, I'd like to go into looking at a few of the updates on our research and development progress from this quarter. Earlier this year, we announced a research collaboration with the Feinstein Institute for Medical Research to conduct a small pilot clinical study on a novel noninvasive bioelectronic device. This device targets the vagus nerve, and we are utilizing a new stimulation approach that is expected to enable more precise targeting of vagus nerve activity. This is important because one of the areas that has hindered vagus nerve from broader adoption is the potential for unintended side effects. With more precise targeting, we expect to open up applications in neurological, cardiac, and autoimmune areas. Enrollment has begun for that study, and we will be looking forward to sharing results and outcomes as we move forward. We continued expanding our IP portfolio, including expanding the clinical targets as well as the issuance of new patents on our previously filed applications. As a company, we're looking not only at the platform we have today but how we think that the bioelectronic expertise we have can create a broader portfolio of offerings. We expanded our collaboration with a renowned international hospital on a sham-controlled clinical trial evaluating our bioelectronic medicine—one of our devices for postsurgical pain relief. The study, which includes 60 participants, is currently ongoing. Additionally, it has been expanded to not only the Anesthesiology department but also includes the Facial Plastic Surgery area. Now this study aims to investigate potential benefits of a drug-free alternative to traditional post-operative pain management, which has predominantly relied on opioids. Our collaborator is looking specifically for opportunities to reduce dependence on opioids as part of the treatment regimen. In Q2 2023, we also advanced our commercial roadmap by launching our B2B portal. This portal increases the streamlining of the ordering and fulfillment process for professional customers and reduces our company's logistical complexity. We implemented a price increase this quarter after completing marketing research that indicated customers would be willing to pay more for the unit. In this quarter, we also expanded the target market for ClearUP to include consumers that link their allergy and congestion issues to the inhibition of sleep, exercise, and concentration. At the end of Q2, we signed a distribution agreement with Cardinal Health—the first of several that we anticipate with a healthcare-oriented focus. Cardinal Health is a leading distributor of medical products worldwide. Execution of this agreement is one of our key steps in expanding distribution and marketing targeted at healthcare professional networks. In short, from a business standpoint, this quarter was all about ensuring cost-cutting measures were implemented and processes were sustained. We reduced our operating overhead. We reset our marketing programs to drive efficiency and to begin repositioning our products. This resulted in a significant revenue dip this quarter, but we expect to see growth and improved targeting in the second half of 2023.

Kimberly Bambach, Interim CFO

Thanks, Jennifer, and good afternoon, everyone. As Jennifer stated, the second quarter was a challenging one for the company, and it is reflected in the financial results for the quarter ending June 30, 2023. We posted second quarter revenue of $161,000, a decrease of $367,000 or 69.5% compared to the same quarter last year, primarily due to significant reductions in unprofitable marketing expenses. This resulted in an 82% decrease in unit sales, offset by a 69% increase in the per unit average sales price. For the 3 months ended June 30, cost of sales decreased by $303,000 or 75% compared to the same period in 2022, primarily driven by the decrease in sales volume. Variable costs were $64 per unit for the 3 months ended June 30 compared to $80.20 per unit for the same period in 2022. The decrease in variable costs was primarily driven by lower manufacturing and fulfillment costs. Fixed costs were $6.48 per unit for the 3 months ended June 30 compared to $10.16 per unit for the same period in 2022. The increase in fixed costs was due to the lower sales volume to absorb the fixed expenses. We expect to see that improve as sales increase. Our second quarter gross margin was 37.5% as compared to the first quarter of 30.1% and 23.4% in the same quarter last year. We expect our gross margin to increase with increasing sales volume over which fixed and semi-fixed costs are allocated. Research and development expenses decreased by $29,000 compared to the same period in 2022. Research and development activities in 2023 are related to the Feinstein vagus nerve stimulation study, the segmentation study to identify additional incremental market segments for our products, product design for our next-generation device, as well as enhancements of our intellectual property protection. Sales and marketing expenses decreased by $673,000 compared to the same period in 2022. The decrease was due to discontinuing unprofitable advertising and resetting messaging, positioning, and creative within the second quarter, whereas the third quarter will focus on optimization and expansion of campaigns with improved performance and conversion efforts while bringing new distribution partners online. General and administrative expenses decreased by $255,000 compared to the same period in 2022. The overall decrease was attributable to a decrease in personnel costs, professional fees, and other overhead costs offset by one-time severance expenses. As a result, our second quarter net loss was $2.1 million compared to $3 million in the same quarter last year. Lastly, our cash balance at the end of the quarter was $2.7 million, and we continue to maintain a no-debt balance sheet. From July 11, 2023, to August 9, we sold an aggregate of 116,923,000 shares of common stock to certain investors at prices ranging from $0.055 to $0.04 per share in a series of registered public offerings, resulting in aggregate proceeds to the company of approximately $5.2 million. Our net proceeds to the company after expenses were approximately $4.8 million for a total of $7.5 million in cash now available. On August 11, we held a special meeting of the stockholders to obtain stockholder approval to authorize a reverse stock split. Our stockholders approved the proposal at the special meeting, and we currently expect that we will implement a reverse stock split at a ratio within the approved range prior to the NASDAQ string date in order to regain compliance with the minimum bid price requirement.

Jennifer Ernst, CEO

Now to recap, Q2 was a reset for the company. We have realigned the team, revamped the cost structure of the business, reduced overhead expenses, undertaken a more focused marketing strategy, and continue to see improvements in gross margin. We have taken the first steps in opening new healthcare-focused channels and look to increase engagement with the healthcare community around uses of bioelectronic medicine, particularly in the management of inflammatory conditions. Our research pipeline will begin moving forward at a brisker pace after delays in clinical enrollment in 2022 and early '23, with a continued focus on new product outcomes and breakthrough opportunities. We are also continuing to evaluate M&A opportunities, but with an expanded lens to allow for stronger diversification. Now these measures involve some tough decisions, but they are important in setting the company on the track to rebuild shareholder value and trust. So in that context, I'd like to move into the Q&A portion of the call. One of the key questions we've received in recent weeks has been around the series of back-to-back equity incentives. The company has recently conducted an unusual series of back-to-back equity issuances. Why have you raised capital this way? And what should investors expect going forward? To answer this, I think it will be helpful for me to go back to earlier in the year, again, back to Q1. We entered the year with an open S-1 for a $10 million capital raise. The transaction that ended as I said earlier, closing only $5 million netted the company only $3.6 million at a share price below the NASDAQ minimum listing price. This left us in a difficult position, not the place any CEO ever wants to be—with not enough capital to depend on building the sales funnel, executing R&D to develop stronger products, and not particularly attractive as an acquisition target. A very difficult spot to be in. The series of transactions we've just completed bring us closer to the needs articulated at the start of the year. The new capital, buffer restructuring, our cost reduction measures, and the realignment of the team give us the foundation from which to start rebuilding and executing on the three legs of the turnaround strategy. I'll go into that a bit more. Now, regarding the structure, why did we do it in the format we did? That was really a multi-part format resulting from various SEC and NASDAQ rules that had to be managed as we moved through the NASDAQ listing compliance measures, dictated in part by the market appetite for smaller investments. Where we could, we provided all investors, both early investors and new ones, the same information that Maxim used to market the deal. Some of our earliest supporters came in alongside new investors, seeing it as a great opportunity to dollar-cost average. One of the critical issues in structuring all of the financing has been something I mentioned in a recent letter to the shareholders regarding NASDAQ compliance. I am pleased to say that as of Friday, shareholders have voted and authorized the Board to execute a reverse split that will bring us into compliance with all listed requirements shortly, as both price and common stock available in the public market float. Next question was whether the company plans to delist. No, it's not a consideration at this time. We have taken extraordinary measures to protect the listing. We believe that the company is better positioned to execute a turnaround with the public market vehicle as part of our toolkit. I was also asked to say more about our M&A strategy as well as how the company plans to regain shareholder value. First and foremost, regaining listing compliance is something that I've discussed extensively in our recent communications, and I know it's not the most exciting answer, but it's a critical first step. We have been doing repair work now with the share price being set to be back into a healthy range. We have no outstanding warrants of any significance, no debt, and we have sufficient shares in the public float to meet our listing requirements and provide liquidity opportunity. I hope all of that will come together to create a vehicle that itself is a more attractive option. That will be accompanied by the company's growth strategy, which focuses on three areas. You've heard us talk about improving the profitability and scalability of our business, strengthening our engagement in the healthcare field, and expanding the number of organically developed products with a strong clinical pipeline. We are looking to diversify through acquisition, merger, and licensing alongside those organic developments into high-value therapeutic areas, particularly where chronic inflammatory mechanisms are a driver of the disease. This is an area I look forward to sharing more details on as we progress through the remainder of this year and into the next as we execute. To close out the call, let me say, as always, that I recognize and appreciate the support of the investment community, the internal and external teams working so diligently through the recent matters, and frankly, the persistence and dogged determination of the Tivic team. I won't lie; it's been brutal in the public market. At the same time, we have made important progress on the fundamentals of the business. It is with that same dogged spirit that we will continue to embrace whatever challenges lie ahead. So thank you for the time today and for your continued interest in Tivic.

Operator, Operator

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.