TIVIC HEALTH SYSTEMS, INC. You should read the following discussion and analysis of our financial condition and operating results together with our financial statements and related notes included elsewhere in this Report. This discussion and analysis contains forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. 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 "Risk Factors" or in other parts of this Report.
Overview
We are a bioelectronic medicine company developing and commercializing 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
Business Developments
Bioelectronic medicine is an emerging, multiple billion-dollar market. Since our
formation in
Recent Developments
Mutual Termination of Proposed Reliefband Acquisition
On
Pursuant to the Purchase Agreement, 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 (the "Reliefband Acquisition")
for an aggregate cash purchase price of
After significant diligence, we felt that the Reliefband product line was highly complementary to our ClearUP product line and our existing commercial capabilities. Unfortunately, due to various factors, including without limitation, volatile and unfavorable market conditions and difficulties obtaining sufficient financing to fund the acquisition, we determined that proceeding with the acquisition was not in the Company's or its shareholders' bests interests at that time, and we mutually agreed to terminate the purchase agreement and abandon the Reliefband acquisition.
On
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We remain committed to our growth strategy and will continue to evaluate strategic acquisition, licensing, and partnership opportunities. If an acquisition is identified and pursued, a substantial portion of our cash reserves may be required to complete such acquisition. 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.
Microart Agreement
On
The Microart Agreement has a three-year initial term, with automatic annual renewals until terminated by one of the parties in accordance with the terms of the Microart Agreement. The Microart Agreement may be terminated as follows: (i) at any time upon mutual agreement of the parties; (ii) by either party at the end of the initial three year term or any subsequent annual renewal term upon written notice received by the other party not less than 60 calendar days prior to the expiration of the relevant term; (iii) by either party upon 30 calendar days written notice to the other party following a material breach of the agreement if the breaching party fails to cure such breach in a reasonable period of time; or (iv) by either party upon the other party seeking an order for relief under bankruptcy laws, a composition with or assignment for the benefit of creditors, or the dissolution or liquidation.
We expect that this new relationship with Microart will significantly reduce the manufacturing cost of a key component of ClearUP, and potentially future products.
ALOM Agreement
On
The ALOM Agreement has a three-year initial term, with automatic annual renewals until terminated by one of the parties in accordance with the terms of the agreement. The ALOM Agreement may be terminated as follows: (i) for cause upon sixty calendar days' written notice describing with particularity the conduct constituting such breach, if such breach is not cured to the reasonable satisfaction of the aggrieved party within such 60-day period; (ii) for failure to pay any invoices when due, if full payment is not made within twenty calendar days after delivery of a written notice; or (iii) for convenience, upon sixty calendar days' written notice.
We expect this new relationship with ALOM will significantly reduce the cost of assembly and distribution of ClearUP, and potentially future products.
Nasdaq Compliance
On
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In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have 180 calendar days,
or until
We will continue to monitor the closing bid price of our common stock and are considering options to resolve our noncompliance with the minimum bid price requirement, but expect that we will implement a reverse stock split.
February Public Offering
On
The Offering closed on
Additionally, pursuant to the Underwriting Agreement, on
The Securities were registered pursuant to the registration statement on Form
S-1 (File No. 333-268010), which was initially filed with the
In addition, pursuant to the terms of the Underwriting Agreement, the Company and its executive officers, directors and certain of its shareholders have entered into lock-up agreements providing that the Company and each of these persons may not, subject to limited exceptions, offer, sell, transfer or otherwise dispose of the Company's securities for a period of three months following the effective date of the Underwriting Agreement.
Other Operational Updates
Fiscal 2022
In 2022, we 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.
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•
We made infrastructure-level improvements to our website and ecommerce functions, including to enhance mobile access to, and use of, our website and adding payment options.
•
We were featured in ABC News Report: "New Bioelectronic Technologies Could
Signal the Future of Medicine" in
•
ClearUP was named best sinus pain relief solution of 2021 by
•
Our CEO spoke at high-profile events evangelizing bioelectronic medicine as a
first-line therapeutic option for chronic disease, including
•
We successfully launched the rebranding of our website and related marketing
materials and increased ClearUP sales price from
In 2022, we also invested in our product innovation and development programs as follows:
•
We advanced the collaboration with
•
We initiated development work related to a potential product candidate in migraine as follows:
o
Completed market studies to identify needs in the treatment of migraine;
o
Identified multiple internal and external assets for device development;
o
Identified clinical partner:
o
Developed 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.
•
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 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.
First Quarter of Fiscal 2023
In the first quarter of 2023, we invested in our marketing, product design and e-commerce distribution infrastructure as follows:
•
We were included on
•
We were named as the most pioneering bioelectronic medicine company by
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In the first quarter of 2023, we also invested in our regulatory and quality continuous improvement programs as follows:
•
We updated our quality management system to support the new EU medical device regulations 2017/745.
•
We completed our process integration with Microart and ALOM, co-developing quality processes to facilitate defect detection early in the process, and forging partnerships in our quality management system as part of our continuous improvement of our product and processes.
•
We developed and deployed key quality objectives and commenced monitoring key performance metrics to improve our focus on customer quality and to have the ability for proactive corrective action as required.
•
We interfaced with our notified body (BSI) to finalize our plans for future certifications and to optimally stage our certification costs.
Components of Results of Operations
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
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, including the new MicroArt and ALOM partnerships, and (ii) the allocation of fixed and semi-fixed expenses over increasing unit sales volume over time.
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.
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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.
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 at a modest rate as we grow our business.
Other Income / Expense, Net
Other income and expense include interest expense, change in fair value of derivative liabilities, loss on extinguishment of debt, and other income.
Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations (in thousands):
Year Ended December 31,
Statement of operations data: 2022 2021 Change
Revenue $ 1,840 $ 1,257 $ 583
Cost of sales 1,541 1,295 246
Gross profit (loss) 299 (38 ) 337
Operating expenses:
Research and development 1,730 878 852
Sales and marketing 2,792 1,787 1,005
General and administrative 5,875 2,930 2,945
Total operating expenses 10,397 5,595 4,802
Loss from operations (10,098 ) (5,633 ) (4,465 )
Other income (expense):
Interest income (expense) 2 (1,823 ) 1,825
Change in fair value of derivative liabilities - 436 (436 )
Loss on extinguishment of debt - (1,636 ) 1,636
Other income - 162 (162 )
Total other income (expense) 2 (2,861 ) 2,863
Net loss $ (10,096 ) $ (8,494 ) $ (1,602 )
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Revenue
Revenue (net of return reserve) increased
Year Ended December 31,
Statement of operations data (in thousands): 2022 2021 Change
Product Revenue
Direct-to-consumer $ 1,635 $ 764 $ 871
Reseller 416 610 (194 )
Return Reserves (211 ) (117 ) (94 )
Revenue $ 1,840 $ 1,257 $ 583 Direct-to-consumer product revenue increased
Reseller channel product revenue decreased
Return reserves as a percentage of product revenue was approximately 10% for the
year ended
Cost of Sales
Cost of sales for the year ended
Variable cost of goods sold includes product costs, fulfillment, shipping and
purchase price variances and other inventory adjustments. Variable cost of goods
sold was
Fixed cost of goods sold includes third party product support and logistic fees
and allocated overhead costs. Fixed cost of goods sold decreased to
Gross profit for the year ended
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Research and Development Expenses
Research and development expenses increased by
We expect to incur additional research and development expenses related to extending the indications for our product(s) in the near term.
Sales and Marketing Expenses
Sales and marketing expenses increased to
We expect to continue to incur sales and marketing costs to drive adoption and
market access in
General and Administrative Expenses
General and administrative expenses increased to
We expect general and administrative expenses to scale with our operations and operating as a public company, amongst other things.
Other Income (Expense), Net
Other income (expense), net for the year ended
Liquidity and Capital Resources
Sources of Liquidity
Since our formation in
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We have financed our operations to date primarily through issuances of SAFE
instruments, convertible notes and convertible preferred stock and the proceeds
from registered offerings of our securities. In 2021, we completed our IPO,
generating net proceeds to the Company of approximately
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; and hire additional personnel. 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. Management expects to incur
substantial additional operating losses for at least the next two years to
expand our markets, complete development or acquisition of new product lines,
obtain regulatory approvals, launch and commercialize our products and continue
research and development programs. 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 the financial statements for the
year ended
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 other macroeconomic factors, 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 generate 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 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 encountered disruptions in our supply of various materials and components in 2022 due to the well-documented shortages and constraints in the global supply chain. Although we currently do not anticipate a supply shortage will continue to pose a material risk for the Company in the near term, 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 and other economic factors) 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 that we believe will align with our growth plan, complement our product offerings and be in the best interest of the Company and our shareholders.
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As previously disclosed, in
We remain committed to our growth strategy and will continue to evaluate strategic acquisition, licensing, and partnership opportunities. If an acquisition is identified and pursued, a substantial portion of our cash reserves may be required to complete such acquisition. 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.
We have generated operating losses in each period since inception. We have
incurred an accumulated deficit of
We currently generate sales revenue direct-to-consumer though our own websites,
Amazon.com and
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 timing and progress of sales initiatives driving top-line revenue;
•
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 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;
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•
whether we close 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.
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):
Year Ended December 31,
2022 2021
Cash used in operating activities $ (8,919 ) $ (5,612 )
Cash used in investing activities $ (11 ) $ -
Cash provided by (used in) financing activities (528 ) 17,543
Net increase (decrease) in cash and cash equivalents
Operating Activities
Net cash used in operating activities for the year ended
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Net cash used in operating activities for the year ended
Investing Activities
Net cash used in investing activities during the year ended
Financing Activities
Our financing activities used
Our financing activities provided
Nasdaq Deficiency Notice
As discussed elsewhere in this Report, on
In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have 180 calendar days,
or until
We will continue to monitor the closing bid price of our common stock and are considering options to resolve our noncompliance with the minimum bid price requirement, but we expect that we will implement a reverse stock split.
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Known Trends or Uncertainties
As discussed elsewhere in this Report, the world has been affected by the
COVID-19 pandemic, the ongoing conflict between
We encountered disruptions in our supply of various materials and components in 2022 due to the well-documented shortages and constraints in the global supply chain. We experienced increased pricing, longer lead-times, unavailability of product and limited supplies, protracted delivery dates, and shortages of certain parts and supplies that were necessary components for our products. As a result, we carried increased inventory balances to ensure availability of necessary products and to secure pricing. Although we currently do not anticipate a supply shortage will continue to pose a material risk for the Company in the near term, 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 and other economic factors) 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 the price of our components increases significantly or 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.
Although our business has not been materially impacted by the ongoing military
conflict between Russian and
Additionally, in
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As a result of these global issues and other macroeconomic factors, 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
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.
Inflation
Inflation has increased recently 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 and the ongoing conflict between
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
Lease costs recorded during the years ended
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 for convenience after expiration of an advance notice period ranging from 0 to 60 days, and therefore are cancelable contracts and not included in the table of contractual obligations and commitments.
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of our financial statements in conformity with accounting
principles generally accepted in
We believe that the accounting policies described below involve a high degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of our operations.
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Revenue Recognition
The Company recognizes revenue from product sales in accordance with
Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are in within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inceptions, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
The Company sells its products direct-to-consumer and third-party online resellers. Revenue is recognized when control of the promised goods is transferred to the customers or retailer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods and services. Revenue associated with products holding rights of return are recognized when the Company concludes there is not a risk of significant revenue reversal in the future periods for the expected consideration in the transaction.
The Company may receive payments at the onset of the contract and before goods have been delivered. In such instances, the Company records a deferred revenue liability. The Company recognizes these contract liabilities as sales after the revenue criteria are met.
The Company relies on third parties to have procedures in place to detect and prevent credit card fraud, as the Company has exposure to losses from fraudulent charges. The Company records the losses related to chargebacks as incurred.
The Company has also elected to exclude from the measurement of the transaction price sales taxes remitted to governmental authorities.
Stock-Based Compensation
We measure all stock options and other stock-based awards granted to our employees, directors, consultants and other non-employee service providers based on the fair value on the date of the grant. Compensation expense related to awards to employees and directors with service-based vesting conditions is recognized on a straight-line basis based on the grant date fair value over the associated service period of the award, which is typically the vesting term. Compensation expense related to awards to employees with performance-based vesting conditions is recognized based on grant date fair value over the requisite service period using the accelerated attribution method to the extent achievement of the performance condition is probable. Non-employee option awards are measured at the earlier of the commitment date for performance by the counterparty or the date when the performance is complete, and compensation expense is recognized in the same manner as if we had paid cash for goods or services.
We classify stock-based compensation expense in our statement of operations in the same way the award recipient's payroll costs are classified or in which the award recipients' service payments are classified.
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We use the Black-Scholes option pricing model to estimate the fair value of stock options on the date of grant. Using the Black-Scholes option pricing model requires management to make significant assumptions and judgments. We determined these assumptions for the Black-Scholes option-pricing model as discussed below.
•
Expected Term-The expected term represents the period that the stock-based awards are expected to be outstanding. As we do not have sufficient historical experience for determining the expected term of the stock option awards granted, we based our expected term for awards issued to employees and non-employees using the simplified method which is presumed to be the midpoint between the vesting date and the end of the contracted term.
•
Risk-Free Interest Rate-The risk-free interest rate is based on the
•
Expected Volatility-Since we do not have a trading history of common stock, the expected volatility was derived from the average historical stock volatilities of the common stock of several public companies within the industry that we consider to be comparable to our business over a period equivalent to the expected term of the stock-based awards.
•
Dividend Rate-The expected dividend rate is zero as we have not paid and do not anticipate paying any dividends in the foreseeable future.
•
Fair Value of Common Stock-Prior to our initial public offering ("IPO"), the fair value of the shares of common stock underlying the stock-based awards was determined by our board of directors with input from management. Because there was no public market for our common stock, our board of directors determined the fair value of our common stock at the time of grant of the stock-based award by considering a number of objective and subjective factors, including having valuations of the common stock performed by a third-party valuation specialist, as further described below.
As of
Common Stock Valuations
The fair value of the shares of common stock underlying our stock-based awards
prior to our IPO was determined by our board of directors with input from
management and contemporaneous third-party valuations. We believe that our board
of directors had the relevant experience and expertise to determine the fair
value of our common stock prior to our IPO. Given the absence of a public
trading market of our common stock, and in accordance with the
•
contemporaneous valuations of our common stock performed by independent third-party specialists;
•
the prices, rights, preferences and privileges of our convertible preferred stock relative to those of our common stock;
•
the prices of common or convertible preferred stock sold to third-party investors by us;
•
lack of marketability of our common stock;
•
our actual operating and financial performance;
•
current business conditions and projections;
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•
hiring of key personnel and the experience of our management;
•
the history of the company and notable milestones;
•
our stage of development;
•
likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our company given prevailing market conditions;
•
the market performance of comparable publicly traded companies; and
•
the
In valuing our common stock, our board of directors determined the equity value of our business using the hybrid method with input from management and contemporaneous third-party valuations. The hybrid method is based upon the probability-weighted value across two scenarios, being (i) successfully consummating an initial public offering and (ii) alternative scenarios in which an initial public offering is not consummated. The hybrid method can be a useful alternative to explicitly modeling all probability-weighted expected return scenarios in situations when the company has transparency into one or more near term exits but is unsure about what will occur if current plans do not materialize. In the first scenario, the potential exit date, the probability exit value and the likelihood of interim financings were considered. In the second scenario, which was assigned the residual probability, the potential exit date, the equity volatility, the assumed interest rate, the dividend yield and equity inflection points at which the allocation of proceeds changes were considered. The valuation method considers the total number of shares authorized and outstanding, as well as recent issuances of both preferred and common stock.
Application of these approaches involves the use of estimates, judgment and assumptions that are highly complex and subjective, such as those regarding the time to the liquidation event and volatility. Changes in these estimates and assumptions or the relationships between these assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of common stock.
Following our IPO, the fair value of each share of underlying common stock will be based on the closing price of our common stock as reported by the Nasdaq Capital Market, or such other national securities exchange that our common stock is listed on, on the date of grant or as otherwise provided in the proposed 2021 Equity Incentive Plan. Future expense amounts for any particular period could be affected by changes in our assumptions or market conditions.
Emerging Growth Company Status
We are an "emerging growth company," as defined in the Jumpstart Our Business
Startups Act of 2012, or the JOBS Act, and may remain an emerging growth company
until
•
reduced disclosure about our executive compensation arrangements;
•
no non-binding stockholder advisory votes on executive compensation or golden parachute arrangements; and
•
exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.
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We have taken advantage of reduced reporting requirements in this Report and may
continue to do so until such time that we are no longer an emerging growth
company. We will remain an "emerging growth company" until the earliest of (a)
the last day of the fiscal year in which we have total annual gross revenues of
In addition, we are also a smaller reporting company as defined in the Exchange
Act. We may continue to be a smaller reporting company even after we are no
longer an emerging growth company. We may take advantage of certain of the
scaled disclosures available to smaller reporting companies and will be able to
take advantage of these scaled disclosures for so long as (i) our voting and
non-voting common stock held by non-affiliates is less than
Derivative Instruments
The Company issued certain convertible notes in 2018, 2019, 2020 and 2021, which
notes contained put options. These embedded put options were not considered
clearly and closely related to the debt host and resulted in embedded
derivatives that must be bifurcated and accounted for separately from the debt
host. Accordingly, the Company recorded these as a derivative financial
liability in the year ended
Derivative financial liabilities are initially recorded at fair value, with gains and losses arising for changes in fair value recognized in the statement of operations at each period end while such instruments are outstanding. The liability was valued using a probability weighted expected return model. The derivative financial liability related to convertible notes issued in 2020 and 2021 was derecognized upon conversion of the convertible notes into shares of Company common stock in 2021.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, see Note 2 of the notes
to our audited financial statements for the year ended
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