iSpecimen (ISPC) - 2024 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the company's unaudited financial statements, management's analysis, market risk, and internal control disclosures Item 1. Financial Statements This section presents iSpecimen Inc.'s unaudited condensed financial statements, including balance sheets, operations, equity, and cash flows Condensed Balance Sheets This section provides a comparative overview of the company's financial position at March 31, 2024, and December 31, 2023 Condensed Balance Sheet Data (March 31, 2024 vs. December 31, 2023) | Item | March 31, 2024 (Unaudited) | December 31, 2023 | | :-------------------------------- | :------------------------- | :------------------ | | Cash and cash equivalents | $2,089,891 | $2,343,666 | | Available-for-sale securities | $466,493 | $2,661,932 | | Total current assets | $5,285,951 | $8,238,603 | | Total assets | $12,513,901 | $15,819,137 | | Total current liabilities | $5,700,673 | $6,048,930 | | Total liabilities | $5,700,673 | $6,078,060 | | Total stockholders' equity | $6,813,228 | $9,741,077 | | Accumulated deficit | $(62,266,929) | $(59,364,812) | - Total assets decreased by approximately $3.3 million (21%) from December 31, 2023, to March 31, 2024[11] - Total stockholders' equity decreased by approximately $2.9 million (30%) from December 31, 2023, to March 31, 2024[11] Unaudited Condensed Statements of Operations and Comprehensive Loss This section details the company's financial performance, including revenue, expenses, and net loss, for Q1 2024 and 2023 Condensed Statements of Operations and Comprehensive Loss (Three Months Ended March 31) | Item | 2024 | 2023 | | :------------------------------------ | :----------- | :----------- | | Revenue | $2,289,993 | $2,950,197 | | Total operating expenses | $5,290,513 | $5,492,620 | | Loss from operations | $(3,000,520) | $(2,542,423) | | Total other income, net | $98,403 | $110,611 | | Net loss | $(2,902,117) | $(2,431,812) | | Comprehensive loss | $(2,902,916) | $(2,412,969) | | Net loss per share - basic and diluted | $(0.32) | $(0.27) | | Weighted average shares outstanding | 9,132,460 | 8,980,898 | - Revenue decreased by $660,204 (22%) from Q1 2023 to Q1 2024[13] - Net loss increased by $470,305 (19%) from Q1 2023 to Q1 2024[13] Unaudited Condensed Statements of Changes in Stockholders' Equity This section outlines changes in the company's stockholders' equity for the three months ended March 31, 2024 and 2023 - Total stockholders' equity decreased from $9,741,077 at December 31, 2023, to $6,813,228 at March 31, 2024[15] - Key changes in equity during Q1 2024 include a net loss of $2,902,117, stock-based compensation expense of $45,871, and offering costs of $204,845 related to the At the Market Offering Agreement[15] - The company repurchased PIPE Warrants for $52,500 during Q1 2024[15] Unaudited Condensed Statements of Cash Flows This section presents the company's cash flow activities from operations, investing, and financing for Q1 2024 and 2023 Condensed Statements of Cash Flows (Three Months Ended March 31) | Cash Flow Activity | 2024 | 2023 | | :------------------------------------ | :------------- | :-------------- | | Net cash used in operating activities | $(2,072,363) | $(2,825,577) | | Net cash provided by (used in) investing activities | $1,937,446 | $(8,788,215) | | Net cash used in financing activities | $(118,858) | $67,736 | | Net decreases in cash and cash equivalents | $(253,775) | $(11,546,056) | | Cash and cash equivalents at end of period | $2,089,891 | $3,762,654 | - Net cash used in operating activities decreased by $753,214 (27%) in Q1 2024 compared to Q1 2023[23] - Net cash provided by investing activities was $1,937,446 in Q1 2024, a significant improvement from net cash used of $8,788,215 in Q1 2023, primarily due to proceeds from maturities of available-for-sale securities[23] Notes to Unaudited Condensed Financial Statements This section provides detailed explanations of the company's business, accounting policies, financial instruments, and equity activities 1. Nature of Business and Basis of Presentation This section describes iSpecimen Inc.'s operations, going concern considerations, and the impact of external events - iSpecimen Inc. operates a proprietary online marketplace platform connecting medical researchers with biospecimens and data from healthcare provider organizations[25] - The company faces going concern uncertainty due to recurring losses, negative working capital of $414,722, and an accumulated deficit of $62,266,929 as of March 31, 2024[27] - Management's plan to mitigate going concern risk includes cost-cutting (41% reduction in compensation, 66% in technology costs in Q1 2024 YoY), revenue enhancement projects, and potential equity/debt financing[28][29][32] - The company increased its allowance for doubtful accounts by $197,924 in Q1 2024 due to liquidity issues or bankruptcies of certain life sciences customers[34] - The Russian-Ukrainian war negatively impacted operations in H1 2022, causing delays and affecting margins due to supply network disruptions[38] - As of March 31, 2024, most Ukrainian and accessible Russian supply sites reopened, but logistics remain challenging[41] 2. Summary of Significant Accounting Policies This section outlines the company's key accounting policies, including revenue recognition, doubtful accounts, and software capitalization - The company recognizes revenue over time, primarily when specimens are accessioned, as they generally have no alternative future use and the company has an enforceable right to payment[53] - iSpecimen acts as a principal in its revenue arrangements, managing the procurement process, taking possession of specimens, setting prices, and bearing customer credit risk[51] Revenue Breakdown (Three Months Ended March 31) | Category | 2024 | 2023 | | :------------------------ | :----------- | :----------- | | Specimens - contracts with customers | $2,136,100 | $2,712,376 | | Shipping and other | $153,893 | $237,821 | | Total Revenue | $2,289,993 | $2,950,197 | - The allowance for doubtful accounts increased from $520,897 at December 31, 2023, to $718,821 at March 31, 2024[57] - Internally developed software costs are capitalized during the application development stage and amortized over five years[59][60] - Other intangible assets (sequenced data) are capitalized and amortized over five years to cost of revenue[62] - The company adopted ASU 2016-13 (Credit Losses) as of January 1, 2023, and ASU 2020-06 (Convertible Instruments) as of January 1, 2024, with no material impact on financial statements[73][74] 3. Available-for-Sale Securities This section details the company's available-for-sale securities, primarily U.S. Treasury Bills, and their fair value Available-for-Sale Securities (U.S. Treasury Bills) | Date | Amortized Cost | Fair Value | | :---------------- | :------------- | :----------- | | March 31, 2024 | $466,452 | $466,493 | | December 31, 2023 | $2,661,092 | $2,661,932 | - The fair value of available-for-sale securities decreased significantly from $2,661,932 at December 31, 2023, to $466,493 at March 31, 2024[75][76] - The company recorded $680 of realized losses in Q1 2024, compared to no realized gains or losses in Q1 2023[78] 4. Property and Equipment, Net This section provides information on the company's property and equipment, including assets, depreciation, and net values Property and Equipment, Net | Item | March 31, 2024 | December 31, 2023 | | :----------------------------- | :------------- | :---------------- | | Total property and equipment | $581,654 | $572,518 | | Accumulated depreciation | $(460,781) | $(444,731) | | Total property and equipment, net | $120,873 | $127,787 | - Depreciation expense for property and equipment was $16,050 in Q1 2024, down from $38,589 in Q1 2023[79] 5. Internally Developed Software, Net This section details the capitalization and amortization of internally developed software costs - Capitalized internally developed software costs decreased significantly to $275,486 in Q1 2024 from $1,539,546 in Q1 2023[80] - Amortization expense for internally developed software increased to $532,750 in Q1 2024 from $433,326 in Q1 2023[80] 6. Other Intangible Assets, Net This section describes other intangible assets, specifically capitalized sequenced data, and their amortization - No FFPE blocks were sequenced and capitalized as other intangible assets in Q1 2024[81] - Amortization expense for capitalized sequenced data was $47,889 in Q1 2024, with no expense recognized in Q1 2023 as sequencing had not commenced[81][83] 7. Fair Value Measurements This section presents the fair value measurements of the company's financial instruments Fair Value of Available-for-Sale Securities (Level 1) | Date | Fair Value | | :---------------- | :----------- | | March 31, 2024 | $466,493 | | December 31, 2023 | $2,661,932 | - All available-for-sale securities are classified as Level 1 investments, based on quoted prices in active markets[84] 8. Commitments and Contingencies This section outlines the company's operating lease commitments, sales tax liabilities, and legal proceedings - The company renewed its operating lease for office space in Lexington, Massachusetts, extending it for 12 months from February 29, 2024, to February 28, 2025, with an early termination option by June 30, 2024[85] - Operating lease expense for Q1 2024 was $43,251[91] - As of March 31, 2024, the company accrued a sales tax liability of approximately $710,000 and related interests/penalties of $208,000, due to past non-collection of sales tax[101] - Approximately $412,000 of prior taxes have been recovered from customers[101] - No material litigation was outstanding against the company as of March 31, 2024[104] 9. Stockholders' Equity This section details changes in stockholders' equity, including common stock, ATM offerings, and warrant repurchases - The company has 200,000,000 authorized common shares and 50,000,000 authorized preferred shares[105] - Under an At the Market (ATM) Offering Agreement, the company issued 337,970 shares of common stock for gross proceeds of approximately $138,000 in Q1 2024, incurring $205,000 in offering costs (net cost of $67,000)[106] - The company repurchased 1,312,500 PIPE Warrants on February 13, 2024, for $0.04 per share, eliminating all related obligations[112] Warrant Activity Summary (Three Months Ended March 31, 2024) | Item | Warrants Outstanding | Weighted Average Exercise Price | | :-------------------------- | :------------------- | :------------------------------ | | Balance at December 31, 2023 | 1,415,000 | $12.77 | | Repurchased | (1,312,500) | — | | Balance at March 31, 2024 | 102,500 | $9.76 | 10. Stock-Based Compensation This section provides information on the company's stock incentive plan, stock option grants, and RSU compensation - The 2021 Stock Incentive Plan was amended to increase authorized shares from 608,000 to 1,869,500[115] - As of March 31, 2024, 1,320,028 shares were available for future grants[115] - 80,340 stock options were granted in Q1 2024, compared to 117,500 in Q1 2023[119] - The weighted average grant date fair value decreased from $0.49 in Q1 2023 to $0.12 in Q1 2024[120] Stock Options Compensation Expense (Three Months Ended March 31) | Operating Expense Category | 2024 | 2023 | | :------------------------- | :--------- | :--------- | | Technology | $1,545 | $2,631 | | Sales and marketing | $496 | $875 | | Supply development | $211 | $374 | | Fulfillment | $869 | $644 | | General and administrative | $16,319 | $28,540 | | Total stock options expense | $19,440 | $33,064 | - Total RSU compensation expense decreased from $87,493 in Q1 2023 to $74,485 in Q1 2024[123] - Unrecognized stock-based compensation expense for unvested RSUs was $465,070 as of March 31, 2024, to be recognized over approximately 1.61 years[123] 11. Income Taxes This section discusses the company's net operating loss carryforwards and the valuation allowance against deferred tax assets - As of March 31, 2024, the company had federal net operating loss carryforwards of approximately $53.2 million and state net operating loss carryforwards of approximately $32.3 million[124] - A full valuation allowance has been recorded against net deferred income tax assets due to a history of losses[124] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial condition and operational results, highlighting revenue decrease, increased net loss, and efforts to address liquidity Overview This section describes iSpecimen Inc.'s business model, proprietary online marketplace platform, and revenue generation strategy - iSpecimen Inc. operates a proprietary online marketplace platform, the iSpecimen Marketplace, to connect researchers with biospecimens and associated data, aiming to accelerate life science research[128] - The platform automates searching, selecting, and procuring specimens, leveraging de-identified data from healthcare providers[129] - It also orchestrates bioprocurement workflow for suppliers[131] - The company generates revenue by procuring and delivering specimens on a 'just in time' basis, avoiding inventory risks[134] Private Placement Offering This section details the company's private placement offering (PIPE) and the subsequent repurchase of PIPE Warrants - On December 1, 2021, the company closed a private placement offering (PIPE) for gross proceeds of approximately $21 million, issuing common stock and warrants[135] - All 1,312,500 PIPE Warrants were repurchased on February 13, 2024[135] At the Market Offering This section describes the company's At the Market (ATM) Offering Agreement and shares issued under it - On March 5, 2024, the company entered into an At the Market (ATM) Offering Agreement to sell up to $1,500,000 of common stock[136] - In Q1 2024, 337,970 shares were issued for gross proceeds of $138,000, with net costs of $67,000 after offering expenses[136] Impact of the Current Economy This section discusses the sensitivity of the company's financial performance to global economic conditions and mitigation strategies - The company's financial performance is sensitive to global economic conditions, impacting research spending[137] - An allowance for doubtful accounts increased by $197,924 in Q1 2024 due to customer liquidity issues[137] - Mitigation strategies include reevaluating pricing, creating campaigns for high-demand items, enhancing internal communications, restructuring business lines, implementing next-day quotes, and reducing workforce expenditures[139] Impact of the Russian-Ukrainian War on Our Operations This section describes the negative impact of the Russian-Ukrainian war on the company's operations and supply network - The war negatively impacted operations in H1 2022, disrupting a $1 million supply network in Ukraine and Russia, leading to fulfillment delays and reduced margins[141] - As of March 31, 2024, most supply sites in Ukraine and accessible Russian sites reopened, but logistics remain challenging[142] - The company's policy is to avoid sole sourcing from these countries due to ongoing uncertainty[142] [Known Trends, Demands, Commitments, Events or Uncertainties Impacting Our Business](index=27&type=section&id=Known%20Trends,%20Demands,%20Commitments,%20Events%20or%20Uncertainties%20Impactin g%20Our%20Business) This section outlines cost-cutting efforts, new revenue enhancement initiatives, operational improvements, and future technology investment plans - The company initiated cost-cutting efforts in 2023 and Q1 2024, resulting in an estimated 41% reduction in compensation costs and 66% in technology costs in Q1 2024 compared to Q1 2023[144] - A new revenue enhancement initiative focuses on identifying high-value cancer patients with specific mutations in FFPE blocks through sequencing, creating a virtual inventory and a database for subscription sales[145] - The iSpecimen Marketplace Onsite Program provides additional support to supplier partners, aiming to accelerate fulfillment and streamline sample management[146] - Operational process improvements, including a new line of business structure and a next-day quote system implemented in Q3 2023, have increased efficiency and conversion ratios[147][148] - Technology investment will be significantly lower in 2024 compared to 2023, focusing on capital raising and revenue growth, building on past investments in search functionality, UI, automation, and matchmaking[149] Components of Our Results of Operations This section defines the various components of the company's results of operations, including revenue, cost of revenue, and operating expenses - Revenue is generated by procuring specimens for medical research customers using the iSpecimen Marketplace, with performance obligations satisfied when specimens are accessioned[151][152] - Cost of revenue includes specimen purchase price, shipping, supply costs, payment processing, supplier support, and amortization of capitalized sequenced data[154] - Technology costs cover consulting, payroll for development, software licenses, data center costs, and amortization of internally developed software[155] - Sales and marketing expenses include payroll, commissions, advertising, and public relations[157] - Supply development costs are for personnel managing the supply network, travel, and regulatory compliance[158] - Fulfillment costs cover operations, customer service, order processing, and laboratory supplies[159] - General and administrative expenses include corporate function payroll, software licenses, facilities, legal, insurance, and other overheads[160] Financial Operations Overview and Analysis for the Three Months Ended March 31, 2024 and 2023 (Unaudited) This section provides a detailed comparative analysis of the company's financial performance for Q1 2024 versus Q1 2023 Financial Performance Comparison (Three Months Ended March 31, 2024 vs. 2023) | Item | 2024 | 2023 | Change (Dollars) | Change (Percentage) | | :-------------------------- | :----------- | :----------- | :--------------- | :------------------ | | Revenue | $2,289,993 | $2,950,197 | $(660,204) | (22)% | | Cost of revenue | $1,000,006 | $1,146,912 | $(146,906) | (13)% | | Technology | $911,967 | $834,407 | $77,560 | 9% | | Sales and marketing | $665,941 | $962,169 | $(296,228) | (31)% | | Supply development | $197,839 | $275,246 | $(77,407) | (28)% | | Fulfillment | $410,854 | $455,531 | $(44,677) | (10)% | | General and administrative | $2,103,906 | $1,818,355 | $285,551 | 16% | | Loss from operations | $(3,000,520) | $(2,542,423) | $(458,097) | (18)% | | Net loss | $(2,902,117) | $(2,431,812) | $(470,305) | (19)% | - Revenue decreased by 22% due to a 39% decrease in specimen count (from 8,629 to 5,241), partially offset by a 28% increase in average selling price per specimen[163] - Cost of revenue decreased by 13% due to fewer specimens, but average cost per specimen increased by 44%[164] - Technology expenses increased by 9% primarily due to higher amortization of internally developed software ($99,000 increase), despite decreases in headcount and payroll[165] - Sales and marketing expenses decreased by 31% due to reductions in payroll ($217,000) and external marketing ($95,000)[166] - General and administrative expenses increased by 16% due to higher professional fees ($329,000), taxes and insurance ($267,000), and bad debt expense ($45,000), partially offset by reduced compensation costs ($250,000)[169] Liquidity and Capital Resources This section analyzes the company's liquidity position, capital resources, working capital, and going concern considerations Liquidity and Capital Resources Data | Item | March 31, 2024 | December 31, 2023 | Change (Dollars) | Change (Percentage) | | :-------------------------- | :------------- | :---------------- | :--------------- | :------------------ | | Cash and cash equivalents | $2,089,891 | $2,343,666 | $(253,775) | (11)% | | Available-for-sale securities | $466,493 | $2,661,932 | $(2,195,439) | (82)% | | Working capital | $(414,722) | $2,189,673 | $(2,604,395) | (119)% | | Total assets | $12,513,901 | $15,819,137 | $(3,305,236) | (21)% | | Total stockholders' equity | $6,813,228 | $9,741,077 | $(2,927,849) | (30)% | - Available cash and available-for-sale securities decreased by approximately $2.45 million to $2.56 million as of March 31, 2024[173] - The company had negative working capital of approximately $415,000 and an accumulated deficit of approximately $62.27 million as of March 31, 2024[173] - These conditions raise substantial doubt about the company's ability to continue as a going concern for the next year, despite management's plans for revenue enhancement and cost reduction[176] - Net cash used in operating activities was $2,072,363 in Q1 2024, an improvement from $2,825,577 in Q1 2023[172][177] - Net cash provided by investing activities was $1,937,446 in Q1 2024, primarily from proceeds of available-for-sale securities maturities, a significant shift from cash used in Q1 2023[172][181] - Net cash used in financing activities was $118,858 in Q1 2024, mainly due to ATM offering costs and warrant repurchases, offset by ATM proceeds[172][183] Effects of Inflation and Supply Chain Shortages This section discusses the impact of inflation and supply chain dynamics on the company's operations and costs - The company's operations are heavily reliant on specimen availability, often receiving more requests than it can fulfill[185] - Inflation has negatively affected employee salaries (a significant operating cost) and supply costs, but not the cost of specimens due to long-term contracts with revenue sharing plans[186][187] Critical Accounting Policies and Estimates This section confirms no material changes in the company's critical accounting policies and procedures - There have been no material changes in the company's critical accounting policies and procedures during the three months ended March 31, 2024[189] JOBS Act Transition Period This section explains the company's election regarding the JOBS Act extended transition period for accounting standards - The company has elected not to 'opt out' of the extended transition period for complying with new or revised accounting standards under the JOBS Act, adopting standards at the same time as private companies[191] - As an 'emerging growth company,' iSpecimen intends to rely on certain exemptions, including not providing an auditor's attestation report on internal controls over financial reporting[192] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that market risk disclosures are not applicable for iSpecimen Inc. as a smaller reporting company - Quantitative and Qualitative Disclosures About Market Risk are not applicable for smaller reporting companies[193] Item 4. Controls and Procedures Management concluded that disclosure controls were ineffective due to a material weakness in sales tax processes, with a remediation plan underway Evaluation of Disclosure Controls and Procedures This section details management's conclusion on the ineffectiveness of disclosure controls and the identified material weakness - Management concluded that disclosure controls and procedures were not effective as of March 31, 2024[196] - A material weakness was identified: inadequate controls for maintaining appropriate documentation for customer tax-exempt status, calculating and collecting sales tax, and timely reporting and remitting sales tax obligations[196] - Despite the material weakness, management believes the unaudited condensed financial statements fairly present the financial position, results of operations, and cash flows[196] Management's Plan for Remediation This section outlines the company's plan to remediate the identified material weakness in sales tax controls - The remediation plan, initiated in Q2 2023 and ongoing, includes engaging external tax advisors to assess sales tax treatment for prior years[197][200] - Steps include obtaining sales tax exemption letters or proof of use tax payments from customers and initiating collection efforts from non-exempt customers[200] - Implementation of a sales tax software platform for calculation, collection, and remittance of sales tax for future non-exempt sales, and assisting with Voluntary Disclosure Agreements (VDAs)[200] - Designing and implementing enhanced policies, procedures, and controls related to sales tax, and training appropriate personnel[200] Changes in Internal Control Over Financial Reporting This section reports on the implementation of changes to internal controls to remediate the identified material weakness - The company is implementing changes to internal controls to remediate the identified material weakness[200] - Except for the noted remediation efforts, there were no other material changes in internal control over financial reporting during Q1 2024[200] PART II – OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings This section states that there are no legal proceedings to report for the period - No legal proceedings were reported[202] Item 1A. Risk Factors This section indicates no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - No material changes to risk factors previously disclosed in the Annual Report on Form 10-K[203] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered sales of equity securities or use of proceeds to disclose for the period - No unregistered sales of equity securities and use of proceeds to report[204] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities to report[205] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable[206] Item 5. Other Information This section states that there is no other information to report for the period - No other information to report[207] Item 6. Exhibits This section lists the exhibits filed as part of the Quarterly Report, including warrant repurchase agreements and certifications - Exhibits include the Form of Warrant Repurchase and Termination Agreements and the At the Market Offering Agreement[210] - Certifications of the Principal Executive Officer and Principal Financial Officer are filed herewith[210] SIGNATURES The report is signed by Tracy Curley, CEO, CFO, and Treasurer of iSpecimen Inc. on May 7, 2024 - The report was signed by Tracy Curley, Chief Executive Officer, Chief Financial Officer, and Treasurer, on May 7, 2024[215]