Tivic Health Systems, Inc.

Welcome to the TVIC Health Systems Q1 2023 Shareholder Update Conference Call. All participants will be in listen-only mode. A question and answer session will follow the formal presentation. For those who have joined the webcast, if you would like to ask a question, you may do so at any point during the presentation by clicking on the Ask Question button on the left side of your screen. Type your question into the box and hit the Send button to submit your question. Please note that this conference is being recorded. Statements made during this call contain forward-looking statements about TVIC's business. You should not place undue reliance on forward-looking statements as these statements are based upon 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 TIVX actual results to differ materially from those set forth in any forward-looking statements include but are not limited to the matters listed under risk factors in the company's annual report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on March 31, 2023, and in its 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 the company does 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.

Hello, everyone, and thank you for joining us today. I'm Jennifer Ernst, CEO of TIVIC Health. As always, I am pleased to be here today to review the financial and business results with a focus on our first quarter of 2023. Also joining me today to provide our financial overview is our interim CFO, Kimberly Baumbach. As we start, I want to highlight that this is a particularly important quarter for TIVIC. We saw a number of our major initiatives begin to bear fruit. In one dimension, we've had meaningful commercial advancements. These are new manufacturing partnerships have yielded a 4x improvement in our gross margin, a major initiative for last year. Those improvements are materializing ahead of plan with continuing improvements expected in the second quarter. Increased margins allow us to open new channels, selling profitably in new areas. And one example is the recently announced business-to-business portal for the healthcare professionals. For the first time this quarter, though, I'm also able to talk about one of our key innovation initiatives, expanding our footprint in bioelectronic medicine and expanding beyond ClearUp. Keep in mind, TIVIC's overall mission is to harness the power of bioelectronic medicine to fight disease, improve health, and increase vibrancy of life. We are using non-invasive approaches as a platform. It's a core approach for targeting chronic and inflammatory diseases via different neural pathways, so as well as cellular and biologic response mechanisms. ClearUp works with the nerves in the facial region, easily accessible non-invasively, and linked to a host of the inflammatory conditions in the head and neck area. We've also now begun growing the portfolio of product opportunities with additional nerve targets, and specifically the vagus nerve. The vagus nerve is one of the most important structures in the body, running from the brain through every major organ. However, because of this vagus nerve stimulation, it's often concerned with creating off-target effects. We've had a small internal program addressing this exact problem. Our internal program is piloting a new protocol by which we can more precisely target the signaling of the vagus nerve, and those efforts have served as the basis for new intellectual property filings, and I'm also thrilled that that internal program has now led us to working with some of the leaders, the absolute leaders in bioelectronic medicine. This quarter, we announced a partnership with the Feinstein Institute for Medical Research at Northwell Health, specifically with the team at the Institute for Bioelectronic Medicine. A successful pilot of these new protocols has the potential to unlock a significant number of high value, high value product opportunities. in neurology, cardiology, rheumatology, and other areas. These represent both product and licensing opportunities for the company. We also expanded our collaboration with another internationally renowned Northeastern hospital. The medical system has been sponsoring a double-blind, randomized, sham-controlled trial to evaluate the use of our handheld bioelectronic device as a way to manage pain following sinus surgery. While that study is ongoing, it was also recently expanded to include additional cases in ultralaryngology and facial plastic surgery patients. A successful outcome could accelerate offering the non-opioid, non-addictive alternative to traditional post-operative pain management, specifically for facial surgeries. As a result of these types of advancements, And in recognition of TIVIC's role advancing bio-electronic medicine into first-line therapeutics, TIVIC was named to Fast Company's annual list of the world's most innovative companies 2023, specifically in the medical device category. And the company was also named the most pioneering bio-electronic medicine company by Global Health and Pharma magazine. I particularly want to underscore for our investors that these programs are product-oriented in nature. When we invest in innovation, we are pursuing meaningful, high-value commercial opportunities, solutions that we believe can contribute significantly to the bottom line as they mature. So if you can't tell, I am beyond excited to finally, finally be able to talk about some of what's been happening behind the scenes. Importantly, though, also are the advancements in our commercial product line. I cannot underscore strongly enough that we have hit a critical turning point for profitable revenue growth for ClearUp. In 2022, last year, we were significantly impacted by the global supply chain issues in electronics, by surging shipping costs, by the extraordinarily high cost of component parts, These are all significant factors that negatively impacted company performance. High purchase price variances and increases that translated into our standard cost. In 2023, we've now changed our PCB manufacturer, our fulfillment vendor, and our assembly partners in an effort to decrease our costs and streamline our manufacturing and fulfillment processes. To achieve price stability, we opportunistically made advanced purchases in late 2022 that help secure improved pricing and should provide protection against that type of erratic supply chain events we saw before. We are tightening, we are hardening our supply chain, our inventory management, and our overall cost structure. We are now seeing those results pay off. This quarter, we have experienced an increase in margins from 10% to 40% as older high-cost inventory sold through. Going forward, we expect further gross margin improvements within the second quarter as that older inventory continues to flush out, and also as we replenish at lower cost. Additionally, we conducted new price sensitivity testing, and as a result, we have supported an increased pricing by over 60% over the past few quarters. That combination, lower cost of goods, 60% increase in pricing, we now have margins. So although we are expecting to see some drop in the unit sales due to the price increases, the pricing structure and the underlying COGS improvements are expected to more than offset any negative impact of the pricing increase. So finally, some of the other important commercial developments include We completed product line expansion studies, identifying new unmet needs for ClearUp that we believe are addressable by the existing product. These are in areas such as sleep, expanded headaches, migraine, beyond allergies, and among other symptoms that affect over 85 million consumers in the U.S. We invested in product improvements to enhance customer experience, and to support cost-effective product line expansion into those high-value areas we described. And based on our market studies, we are completing a two-year product versioning plan to increase sales through additive market segments, many with a greater willingness to pay, a higher price tolerance, and a greater likelihood to purchase than the core markets that we have already attacked. We also obtained a successful recertification of our ISO 13485 quality management system and the European medical device CE mark, keeping open the alternatives for international markets. So with that, I'd like to hand over to Kimberly Baumbach, Civic Health Interim CFO, to go over the financial results for the quarter ended March 31st, 2023, in more detail.

Thanks, Jennifer, and good afternoon, everyone. I'm very pleased to be working with the team. We posted first quarter revenue of 376,000, a decrease of 52,000 or 12% compared to the same quarter last year, primarily due to a 27% decrease in unit sales offset by a 17% increase in the per unit average sale price. Unit sales in our direct-to-consumer channels decreased 34%, while unit sales in our wholesale channels decreased by 9%. Average sales price in our direct-to-consumer and wholesale channels increased by 23.6% and 4.8%, respectively. Going forward, we expect to see some continued variability in sales due to reduction in marketing spend and price point positioning for target markets, with the net impact resulting in a higher gross profit and a lower loss from operations. For the three months ended March 31, 2023, Cost of sales decreased by 95,000 or 27% compared to the same period in 2022. Primarily driven by lower cost per unit and the decrease in sales volume. Variable cost was 192,000 or 69.81 cents per unit for the three months ended March 31st, 2023 compared to 310,000 or 81.93 per unit for the same period in 2022. The decrease in variable costs is primarily driven by lower manufacturing and fulfillment costs. Fixed costs were $71,000 or $25.61 per unit for the three months ended March 31, 2023, compared to $48,000 or $12.57 per unit for the same period in 2022. The increase in the fixed costs was primarily due to lower sales volume to absorb those costs. As a result of both the micro-hour and alarm agreements signed within the fourth quarter of 2022, we have significantly reduced the cost per unit for the existing ClearUp product in the first quarter of 2023. We expect that the remainder of the ClearUp inventory previously built under the higher cost structure should sell through in the early second quarter of 2023, resulting in continued reduction of cost of goods sold as a percentage of revenue. Our first quarter gross margin was 30.1% as compared to fourth quarter of 2022 of 10.4% and is 16.4% in the same quarter of last year. We expect our gross margin to increase with future price increases, continued optimization of our supply chain and product design, as well as increased sales volume over which fixed and semi-fixed costs are allocated. Research and development expenses increased by 89,000 compared to the same period in 2022. The emphasis of research and development activities in 2023 has been primarily related to a large segmentation study to identify additional incremental market segments with high willingness to pay, product designs, and new versions of the device, as well as enhancement of our intellectual property protection. Sales and marketing expenses decreased by $226,000 compared to the same period in 2022. The decrease was primarily due to more targeted sales and marketing efforts while bringing new distribution partners online and managing seasonal variability. General and administrative expenses increased by $55,000 compared to the same period in 2022. The increase was primarily attributable to higher staff costs offset by lower overhead costs. Our first quarter net loss is $2.1 million compared to $2.2 million in the same quarter last year. On February 13, 2023, we issued and sold 20 million shares of our common stock at a public offering price of 25 cents per share, less underwriting discounts and commissions, resulting in gross proceeds for the company of 5 million and net proceeds of 3.6 million. As of March 31, 2023, the company had 5.2 million of cash and equivalents, including proceeds from the offering closed in first quarter 2023. We also continue to maintain a no-debt balance sheet. I will now hand the call back to Jennifer to discuss 2023 outlook.