Signal management

TIVIC HEALTH SYSTEMS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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
10­Q, as well as our audited financial statements and related notes as disclosed
in our Annual Report on Form 10­K 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 10­Q, as well
as those identified in the "Risk Factors" section of our   Annual Report on Form
10­K   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.

Expand 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 cost reduction of our products

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 also invested in our e-commerce marketing, product design and distribution infrastructure as follows:

We expanded our advertising mix and increased our marketing spend to drive sales growth.

We have optimized our sales channel strategy to increase our profit margin and have eliminated less profitable channels.

We’ve made infrastructure improvements to our website and e-commerce features, including improving 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 has been named the best sinus pain relief solution of 2021 by World health and pharmacy 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 associated marketing materials and increased the ClearUP selling price by $149.00 at $169.99.

In 2022, we also invested in our innovation and product 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 have initiated development work related to a potential product candidate in migraine as follows:

o

Conduct market research to identify needs in the treatment of migraine

o

Identification of multiple internal and external assets for device development

o

Clinical partner identified: Associates in Allergy and Asthma of Santa Clara Valley Research Center

o

Development of 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 month periods ended September 30, 2022 and 2021

The following table summarizes our results of operations (in thousands):

                                        Three Months Ended September 30,              Nine Months Ended September 30,
                                      2022              2021          Change         2022             2021         Change
                                                                         (unaudited)
Revenue                            $       477       $       277     $    200     $     1,432       $     868     $    564
Cost of sales                              414               303          111           1,176             904          272
Gross profit (loss)                         63               (26 )         89             256             (36 )        292
Operating expenses:
Research and development                   399               175          224           1,295             565          730
Sales and marketing                        487               450           37           2,291           1,095        1,196
General and administrative               1,761               578        1,183           4,512           1,645        2,867
Total operating expenses                 2,647             1,203        1,444           8,098           3,305        4,793
Loss from operations                    (2,584 )          (1,229 )     

(1,355 ) (7,842 ) (3,341 ) (4,501 ) Other income (expenses): Interest income (expenses)

                    1            (1,171 )      1,172               1          (1,668 )      1,669
Change in fair value of
derivative liabilities                       -                80          (80 )             -              81          (81 )
Other income (expense)                      (1 )               -           (1 )            (1 )           158         (159 )
Total other income (expense)                 -            (1,091 )      1,091               -          (1,429 )      1,429
Net loss                           $    (2,584 )     $    (2,320 )   $   (264 )   $    (7,842 )     $  (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.

Functionnary costs

Research and development costs

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, 2022research and development expenditure increased by $224,000 compared to the same period in 2021.

For the nine months ended September 30, 2022research and development expenditure increased by $730,000 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 include salaries, bonuses, employee benefits and stock-based compensation costs. 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, 2022sales and marketing expenses increased by $37,000 compared to the same period in 2021.

For the nine months ended September 30, 2022sales 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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Cash 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 acquisition of Reliefband

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

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Reliefband’s indebtedness at closing. Until $1.5 million of the purchase price is payable, at the option of the Purchaser and the Company, in restricted ordinary shares 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.

Operation plan and future financing needs

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 projected needs for the next twelve months. Accordingly, we anticipate that we will need to raise additional capital to continue to operate 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 expenses will largely depend on:

our ability to raise additional capital if and when needed 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 generating higher revenue;

the timing and rate of adoption of ClearUP line extensions at lower cost of goods;

payment terms and timing of commercial contracts entered into for the manufacture and sale of our products to and through third party online retailers;

the timing and progress of preclinical and clinical development activities;

the number and scope of preclinical and clinical programs we choose to pursue;

the timing and amount of milestone payments we may receive under any future collaboration agreement;

whether we close the proposed acquisition of Reliefband or other potential future strategic acquisition opportunities, and if we do, our ability to successfully integrate the acquired assets and/or businesses with ours;

our ability to find new business opportunities through licensing and research and development programs and to establish new collaborative agreements;

costs involved in pursuing and enforcing patents and other intellectual property claims;

the cost and timing of additional regulatory approvals beyond those we currently hold;

our efforts to improve operational systems and hire additional personnel, including personnel to support finance, sales, marketing, operations and development of our product candidates and to meet our obligations as a public company; and

our efforts to maintain compliance with important government regulations (including environmental).

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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

(Decrease) net 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.

Fundraising 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 10­Q, the world has been
affected by the COVID­19 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 COVID­19 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 10­Q, 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 COVID­19 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 COVID­19 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 10­K 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 10­Q.

Recent accounting pronouncements

For a description of recent accounting pronouncements, see Note 2 to our summary financial statements included in Part I, Item 1 of this Quarterly Report on Form 10Q.

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