Tivic Health Systems, Inc. (NASDAQ:TIVC) Q3 2024 Earnings Call Transcript November 14, 2024
Operator: Welcome to Tivic Health Systems’ Third Quarter 2024 Financial Results and Operational Update Conference Call. This call has been pre-recorded and questions you have submitted in advance will be answered following the prepared remarks. This call is being webcast and the replay will be available on the IR section of the company’s website for three months. Before we begin, let me remind you that during today’s call, management will be making various forward-looking statements. Investors are cautioned that these forward-looking statements are based on current expectations and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those indicated by our forward-looking statements.
Please read the Safe Harbor Statement contained in the press release we issued earlier today, as well as those contained in Tivic Health’s filings with the SEC, including its annual report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 29, 2024, under the heading Risk Factors, as well as the company’s subsequent filings with the SEC. Now, let me turn the call over to Jennifer Ernst, to Tivic Health’s Chief Executive Officer.
Jennifer Ernst: Thank you to our operator, and of course, thank you to everyone who is listening today on this call and also those of you that are listening in playback. So, as we begin this report on Q3, I’ll highlight that I’ve talked quite a bit about our vagus nerve stimulation program in the recent calls. Today I’d like to touch a little more broadly on all three legs of our strategy to build shareholder value and to create a growth business. Now, that starts first with turning our ClearUP product line into a profitable business line. Second, we’re looking at leveraging our expertise in bioelectronic medicine to generate new business opportunities. And that is specifically advancing a novel approach to non-invasive vagus nerve stimulation, that we have been making significant progress in the last few quarters; and finally, streamlining our corporate operations to manage overhead costs in the public company.
We’ve made significant progress on all three, and the numbers that I’m reporting this quarter will only tell part of the story, but they’re absolutely the place to start. I’d also like to highlight, as we’re talking about our numbers, that Lisa Wolf joined us this quarter as our Interim CFO. She’s taking over the reins from Kimberly Bambach, who continues with us on a consulting basis. Lisa has been part of the Tivic team now for about two years, been part of the team that streamlined our public operating costs, and has been working side by side with Kim. So, I’m very excited to welcome her to this new role, particularly with more than 30 years of financial leadership experience that encompasses both public and private finance and accounting.
The two years she spent with the Tivic team prior to this role, she’s bringing to the table both a broad experience base and an up-close understanding of our business. Lisa succeeds Kimberly Bambach, who continues to work with the company as an advisor with a focus on special transactions. And since both Kimberly and Lisa have worked together for some time now, I’m very encouraged by the financial team that we are putting together. Both have made substantial contributions to the improvement of the company. And Lisa, while you are listening here, I want to thank you for preparing the numbers today that I’ll be going over. So, for today’s call, I’ll be taking you through the numbers. All of the references will be comparing the third quarter ended September 30, 2024, to the third quarter ended September 30, 2023, or for the same nine-month period comparison unless I specifically identify otherwise.
Q&A Session
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So, taking a look at our profit and loss statements, revenue net of returns was $600,000, a decrease of $219,000 or 27% compared with $819,000 a year ago. We saw a 36% decrease in unit sales, but this was offset by a 13% increase in per unit average sales price. I’ll spend a little bit more time talking about the unit sales as we get into the narrative section. Cost of goods $359,000 compared to $537,000 a year ago and a gross profit for the third quarter was $44,000 compared with $108,000 a year ago. This is particularly due to some significant costs we incurred as we redesigned and re-engineered our supply chain and I’ll speak a little bit more about that in a moment. The gross margin was 35% for the third quarter compared to 38% in 2023.
But if we backed out the one-time charges associated with moving our logistics site, the gross margin would have been about 52%. Again, continuing our improvements in the gross profit. Another area in which we made good progress was on our operating expense for the third quarter of this year operating expense was $1.5 million. This compared with $1.9 million last year. And that translated to a net loss of the third quarter of $1.4 million down $1.8 million for the same period in 2023. Now, turning to the balance sheet at September 30, 2024, cash and cash equivalents totaled $2.2 million compared with $3.4 million at December 31, 2023. So, with that as a backdrop, I’d actually like to take a deeper look at the three areas I mentioned at the start of the call.
Let’s start first with the commercial ClearUP product line. One item I’d like to share as context is that last year we discovered a technical issue in the silicon that was part of the ClearUP charging circuit. And if you’ve read the reviews from earlier in the year may have noticed some of the complaints from customers on this. So, though it’s an intermittent problem, the diagnosis of the specifics led us to a product redesign and we had to deliver a new version. I’m proud to say the team did deliver a new version in January of 2024 as ClearUP 2.0. So, that led us into working through inventory swaps with our channel partners. We reduced our marketing spend until new versions were shipping to customers and we began a process to rebuild the reviews.
In Q1 and Q2, we also undertook a restructuring of our supply chain and distribution to improve profitability. So, this work, completed in Q3, unfortunately it also resulted in the convergence of various expenses that were associated with the relaunch of the product, the inventory swap, the supply chain redesign, we incurred a significant amount of expense in July for inventory disposal, for removal of inventory from one [3PL] (ph) and restocking in another, and with other expenses that were associated with this overall transition. However, what is important, in the months following that transition, we averaged over 70% gross margin on our ClearUP sales. This compares to just the 40%-50% reported previously and the negative gross margin of just two years ago.
I am very proud of being able to move this product line forward in the gross profit and gross profitability. We also undertook at the beginning of the year and through this quarter a realignment of our marketing spend. We are now achieving solid return on our advertising, resulting in significant increases in our per-unit profitability. Now, we can focus on growing sales, in part through the distribution partners that we signed earlier this year. That included McKesson, Cardinal Health, and a continuing sale through their affiliate of RGH. I did note last quarter, though, that we do believe there are limits to how quickly we can grow the consumer-facing business, particularly in this market that is dominated by the over-the-counter products, which brings me now to the second leg of our strategy, creating new product opportunities to drive shareholder value based on advanced research in vagus nerve stimulation.
I’ve spent time over the last couple of quarters highlighting the importance of the vagus nerve. It is the largest autonomic nerve in the body. It runs from the brain stem to the stomach and touches every major organ in between. Last quarter, we reported Phase I trial results on a new form of vagus nerve stimulation, some of the industry-leading data in the field. Our Polaris market research estimates the global vagus nerve stimulation, or VNS, market will grow from $8.6 billion in 2021 to $21.3 billion in 2030, compound annual growth rate of 10%. We completed a trial at the Feinstein Institute for Medical Research at Northwell Health, and in that trial we demonstrated profound effects on the neurologic, cardiac, and autonomic nervous system, showing again some of the strongest data in the field.
In Q3, we engaged the same institution to help optimize the treatment parameters and test several key variables that will be important as we move forward in the clinical design. In October, we announced that we started enrolling patients in a Phase I optimization study. This study is being led by Dr. Theodoros Zanos, who is a PhD and associate professor at the Institute of Bioelectronic Medicine, and leads the Neural and Data Science Lab at the Feinstein Institutes of Mental Health. We announced yesterday that we have completed enrollment in the optimization study and expect to complete the study by early Q1. The results of the second trial will also inform the Phase II study designs that are slated to begin in the first-half of 2025. We are making very rapid progress on our vagus nerve stimulation program.
Now, based on the successful results in the Phase I trial, we have retained a leading growth strategy firm called Fletcher Spaght or FSI to assess the market opportunity, the very particular specific market opportunity for our approach to vagus nerve stimulation. They are looking at both the market, the competitive landscape, the likelihood of adoption for bioelectronic medicine across various disease arenas. This work with FSI is key to accelerating our commercial development strategy for our non-invasive VNS. So, to report today, FSI has already completed a comprehensive market assessment. Drawing from the clinical outcomes of our Phase I trial, we worked with FSI and Tivic to work together. We identified 30 plus potential use cases for the Tivic device.
These use cases are in the areas of neurologic, cardiac, psychiatric, and autonomic nervous system diseases. FSI helped us narrow these down through a list of the top ten for a deeper dive and are currently interviewing payers and providers for the top two. Interviewing clinical key opinion leaders and payers is important in defining our product development pipeline for this program. This is helping us develop our clinical study plans, it’s identifying the reimbursement pathways and helps sharpen and hone our go-to-market strategy. As we down-select the key target therapy decisions, we are looking at three levers of success; patient adoption, the likelihood for provider recommendations, and payer reimbursement. We are keenly aware that these three factors are critical in the success of a new product launch on VNS.
This approach, by moving forward with both with the FSI and the clinical work in concert with each other, this approach is allowing us to take both commercial and clinical validation to move forward in lockstep. So, I haven’t yet disclosed to you exactly which ones we’re going to be tackling, but I do look forward to discussing with you in the near future the work that is converging between our clinical program outcome as we report out on the Phase Ia trial and with the FSI work that is now coming together. We have identified several multi-billion dollar segments in which our VNS approach offers solutions for high value unmet needs with extremely high likelihood of adoption. The reception among the provider population and among the payer reimbursement interviews has been extremely encouraging, that has been strongly, strongly positive.
We are very excited about what we are seeing as the opportunity now for our vagus nerve program. So, now as I move into the third leg of our strategy, we do continue to operate with a continuous eye on, let me call it, surgically reducing our operating costs. For example, this quarter we terminated our office leads, relocated to a smaller site, brought up a small volume manufacturing site in-house to continue to be able to produce products, contributing to a durable 20% reduction in year-over-year net operating loss. So, as we continue to move forward, this really is an exciting time and I think we’re moving into that inflection point zone. The data we’ve already collected show with a high degree of confidence that we can reach very new large markets with our technology, with our science.
We’ve done the work on the roadmap and we are beginning to lay out the strategic and commercial plan in a new area. We are continuing to see improvement in the ClearUP business. And we are continuing to explore additional strategic alternatives, strategic opportunities for the company, which may eventually include acquisitions, transactions that align with our growth strategy or that complement our existing product offerings and generally will serve the interest of the company to grow shareholder value. So, overall, as I said, three legs of the strategy, while we continue to assess all alternatives for creating shareholder value, we are focused primarily on the three legs of improving the product performance and the pipeline of ClearUP; moving forward, our VNS program to address extraordinarily high-value opportunities, and continuing to focus on operational efficiencies as a public operating company.
Okay, let me now take a couple of the questions that we received in advance of this call. What is the company planning to do with ClearUP if the company is shifting its focus to VNS? So, at this time, we are continuing to develop and allow ClearUP to grow organically. While we continue to work on improving the economics, we also are exploring the alternate commercialization and monetization strategies. That might include licensing, white labeling, other alternatives that would allow the product to achieve a much greater scale. We can’t have any guarantees, of course, that we’ll be successful in those efforts, but we will be exploring ways to create alternative monetization opportunities for the ClearUP product line. Particularly, though, I should note that the strength of the clinical results in VNS, we have down-prioritized product improvements or other development investments of any significance in ClearUP and will allow the product line to grow organically, explore alternative monetization strategies, and focus our investment resources instead on increasing our likelihood to win in the new markets with our non-invasive VNS approaches.
We generally believe that it is the clinical pipeline and the advancement of that pipeline that is going to drive shareholder value. Now, with the company having made some cutbacks, done some downsizing, do we have the resources to move the VNS programs forward and how do we plan to raise capital? So our research pipeline is obviously a very important part of the strategy to build the shareholder value. As we progress into Phase II, Phase III trials, those are important. Those are very significant inflection point opportunities. We will, of course, need to at least moderate expand their clinical research team. We will need to fund those trials. Some of those expenses may be able to be offset with non-diluted financing. So, I would highlight that several areas we’re looking at, there are opportunities for grants, for public-private collaborations.
Additionally, we have been able to make selective use of an ATM that is in place, that is allowing us to generate additional capital for the company on terms that are much more investor-friendly than, for example, our prior capital rates. So, in aggregate, we believe we will have the opportunity to fund the VNS program. Some capital obviously is necessary to be moving forward on a clinical pipeline. Those accompanying it with diseases we’re considering targeting based on the VNS study results. I mentioned earlier in my comments, that the four areas of disease, although very broad are neurologic, psychiatric, cardiac, and autonomic nervous system. So, internally, yes, we’re working with Fletcher Spaght. We are starting to see some convergence around a couple of key areas.
Before making that public, though, we do want to see the results from the Feinstein Institute on this clinical testing we’re doing now, the one that we’ve just finished enrollment on, as well as completing the market validation work with Fletcher Spaght. With those two pieces in the arsenal, I would expect by end of year sometime or into the first quarter of next year to be able to share more specific commercial strategies around our VNS program. I am very excited though by the level of interest that we are seeing in the payer community, and definitely in the provider community as we have showcased and done this work with Fletcher Spaght. So, right now, I would like to say thank you to everyone that is taking the time to learn about the company today.
We will continue to keep you appraised through press releases, the various communication mechanisms, obviously through our filings about these opportunities to talk with you in-person, and to share my perspective on the company, and the tremendous opportunity that we are facing with the VNS work particularly. It’s a great opportunity for me to be able to connect with you. So, I want to thank you all for taking the time with us, and I look forward very much to speaking with you in the next call in the new year.
End of Q&A: Thank you, everyone. This concludes today’s event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.
