ISPECIMEN INC. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this Annual Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.
Overview
We were incorporated in 2009 under the laws of the state of
In addition to creating a single global platform where both specimen providers and researchers can connect, the platform automates the process of searching for and selecting specimens for research. The platform taps into healthcare provider data to gain insights into the available samples in biobanks or laboratories, or to gain insights into the patient populations to support specimen collections directly from research subjects. The platform receives de-identified data from electronic medical records, laboratory information systems, and other healthcare data sources of available specimens and research subjects and harmonizes the data across all participating organizations. Researchers can search this data using our intuitive, web-based user interface to obtain specimens more efficiently. They can instantly find the specific specimens they need for their studies, request quotes for these specimens or for custom collections directly from research subjects, place orders, and track and manage their specimens and associated data across projects. Biospecimen providers also gain efficiencies using the iSpecimen Marketplace, not only because the platform provides instant access to a large researcher base, but because the technology orchestrates the bioprocurement workflow from specimen request to fulfilment. Specimen providers access intuitive dashboards to view requests, create proposals, and track and manage their orders.
Finally, the platform helps with administrative and reporting functions for researchers, suppliers, and our internal personnel, including user and compliance management.
The iSpecimen Marketplace is composed of four major functional areas: search, workflow, data, and administration and reporting. We continue to invest in the evolution of these areas to improve engagement with the platform and liquidity across it. Our core business objective is to retain and grow both researcher and supplier usage of our platform to support biospecimen procurement, as well as to position our Company to explore other adjacent business opportunities that can benefit from the use of the iSpecimen Marketplace. The iSpecimen Marketplace currently supports the supply chain management and bioprocurement process for specimens and associated data. We generate revenue by procuring various specimens from hospitals, laboratories, and other supply sites comprising our network, and delivering them to its medical research customers using its proprietary software to identify and locate the required specimens. Costs paid to acquire specimens from hospitals and laboratories generally varies depending upon the sample type, collection requirements, and data provided. We generally operate in a "just in time" fashion, meaning we procure specimens from our suppliers and distribute specimens to our customers after we obtain an order for specimens from a research client. Generally, we do not speculatively purchase and bank samples in anticipation of future, unspecified needs. We believe our approach offers many advantages over a more traditional inventory-based supplier business model where biorepositories take inventory risks, and where inventory turnover and cash conversion cycles can be lengthy. OnMarch 30, 2021 , we effected a 1-for-5.545 reverse stock split of our issued and outstanding shares of common stock, as well as effected a proportional adjustment to the existing conversion ratios for our redeemable convertible preferred stock. All historical share and per share information shown herein and in our financial statements and related notes have been retroactively adjusted to give effect to the reverse stock split. OnJune 16, 2021 , we completed an IPO in which we issued and sold 2,250,000 shares of our common stock at a public offering price of$8.00 per share, resulting in aggregate gross proceeds of$18,000,000 . OnJuly 1, 2021 , we issued and sold 337,500 additional shares of common stock, pursuant to the underwriters' exercise of its overallotment option, at a public offering price of$8.00 per share, for 46
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aggregate gross proceeds of$2,700,000 . The net proceeds from the overallotment were$2,500,000 after deducting underwriting discounts of$200,000 . Inclusive of the underwriters' option to purchase additional shares, we received approximately$18,200,000 in net proceeds from the IPO after deducting underwriting discounts of$1,900,000 and other offering costs of$600,000 . Upon completion of the IPO, the Company converted a) all 1,291,012 shares of outstanding redeemable convertible preferred stock into 1,291,012 shares of common stock, b) all$5,500,000 of its outstanding principal and all unpaid and accrued interest of approximately$1,300,000 of the then outstanding convertible notes into 1,206,614 shares of common stock at a conversion price of$5.60 per share, and c)$4,000,000 of its outstanding principal and accrued interest of$700,000 of the then outstanding bridge notes as amended ('Bridge Notes"), into 842,429 shares of common stock at a conversion price of$5.60 per share. OnAugust 13, 2021 , we entered into a loan agreement (the "Term Loan") and as a result, received proceeds of$3,500,000 . This funding was used to settle the remaining balance of$3,000,000 on the Bridge Notes. OnDecember 1, 2021 , we closed on a private placement offering ("PIPE") for gross proceeds of approximately$21 million , before deducting approximately$1.4 million for underwriting discounts and commissions and estimated offering expenses, for (i) an aggregate of 1,749,999 shares of common stock and (ii) warrants, which are exercisable for an aggregate of up to 1,312,500 shares of common stock. OnNovember 3, 2022 , the Company settled in cash the remaining principal balance plus accrued and unpaid interest of the Term Loan in the amount of$3.4 million . Upon repayment of the Term Loan, the Loan Facility was terminated and the security interest in the assets of the Company was released. As ofDecember 31, 2022 , no Bridge Notes remained outstanding.
Impact of the COVID-19 Pandemic on Our Operations
In response to the COVID-19 pandemic, we have put in place additional health and safety protocols. We continue to monitor and revise these protocols as appropriate to address the evolving nature of the pandemic. While we have seen a return to business as usual in our industry, we continue to monitor the future impact of the COVID-19 pandemic on the Company, which includes such factors as length of time of the pandemic; the responses of federal, state and local government; the impact of future variants that may emerge; vaccination rates among the population; the efficacy of the COVID-19 vaccines; the longer-term impact of the pandemic on the economy and consumer behavior; and the effect on our employees, vendors and suppliers. We will continue to monitor and evaluate the ongoing COVID-19 pandemic and will work to respond appropriately to the impact of COVID-19 on our business, as well as customers' and suppliers' businesses.
Inflation and Recession
The Company's financial performance is subject to global economic conditions and their impact on levels of spending by our customer research organizations, particularly discretionary spending for procurement of specimens used for research. Economic recessions may have adverse consequences across industries, including the health and bio-specimen industries, which may adversely affect our business and financial condition. As a result of the ongoing cost-of-living crisis, tightening financial conditions,Russia's invasion ofUkraine , and the lingering COVID-19 pandemic, there is substantial uncertainty about the strength of the global economy, which have increased the uncertainty about the pace of potential recovery. In addition, changes in general market, economic and political conditions in domestic and foreign economies or financial markets, including fluctuation in stock markets resulting from, among other things, trends in the economy, recession and inflation, as are being currently experienced, may result in a decline in researchers' demand for specimens due to the research organization's inability to obtain funding through grants. We believe that our business will continue to be resilient through a continued economic downturn or recession, or slowing or stalled recovery therefrom, and that we have the liquidity to address the Company's financial obligations and alleviate possible adverse effects on the Company's business, financial condition, results of operations or prospects.
Impact of the Russian-Ukrainian War on Our Operations
Our business was negatively impacted during the first half of 2022 by the ongoing war betweenRussia andUkraine . At the start of the war, we had approximately$1 million of purchase orders that were slated to be fulfilled by our supply network inUkraine andRussia . This supply network shut down quickly at the start of the war. Ukrainian suppliers were disabled due to war conditions and evacuations 47 Table of Contents and some of our Russian suppliers were disabled by sanctions. While we mobilized to shift these purchase orders to other suppliers in our network, the process of getting specimen collections from other supply sites took time, which has caused a delay in the fulfillment of such purchase orders. Alternate suppliers do not have the same favorable unit economics or specimen collection rates and this impacted our margins. Additionally, it also diverted key resources from operations to resolving the re-fulfillment issues caused by the conflict. As ofDecember 31, 2022 , the supply sites inRussia that had not been under sanctions are now accessible and our supply sites inUkraine are mostly reopened. However, due to the uncertainty caused by the ongoing war,Ukraine suppliers may again become inaccessible to us. Therefore, as long as the uncertainty continues, our policy is to ensure at a purchase order level, that an order is not solely sourced from the two countries. The short and long-term implications of the war are difficult to predict at this time. The imposition of more sanctions and counter sanctions may have an adverse effect on the economic markets generally and could impact our business and the businesses of our supply partners, especially those inUkraine andRussia . Because of the highly uncertain and dynamic nature of these events, it is not currently possible to estimate the impact of the war on our business and the companies from which we obtain supplies and distribute specimens.
Known Trends, Demands, Commitments, Events or Uncertainties Impacting Our Business
We are committed to investing in and developing our technology. In the year endedDecember 31, 2022 , we capitalized approximately$2,975,686 of internally developed software costs and have plans to continue investing at this or greater levels in the future. We anticipate that over time, these investments will increase revenue opportunities and result in operational efficiencies, positively impacting our liquidity, capital resources and results of operations in the future with a less than two-year rate of return on the investment. We continue to experience declines in our COVID-19 revenue. While our non-COVID-19 revenue significantly increased by$1,499,000 or 18.7% from approximately$8,036,000 for the year endedDecember 31, 2021 to$9,535,000 for the year endedDecember 31, 2022 , our COVID-19 revenue was approximately$867,000 in the year endedDecember 31, 2022 compared to approximately$3,099,000 for the same period in 2021, a$2,232,000 , or 72%, decrease in COVID-19 revenue. We anticipate that our non-COVD-19 revenue will continue to increase while our COVID-19 revenue will continue to decline, which may impact our results of operations at a level that is not currently determinable due to the uncertainty of the continued impact of COVID-19. As disclosed in a Current Report on Form 8-K filed onSeptember 22, 2022 , the Company received notices of departure from the Company's then Chief Executive Officer and its then Chief Operating Officer effective as ofOctober 24, 2022 . The Company's Chief Financial Officer was named Interim Chief Executive Officer onSeptember 21, 2022 while also continuing as our Chief Financial Officer, and was subsequently named our Chief Executive Officer ("CEO") onJanuary 9, 2023 . The focus of our new CEO in her first 100 days was to assess the capabilities of the Company's resources with the launch of a significant initiative to reorganize our sales approach, placing a renewed focus on our sales pipeline and positioning it to scale in a post COVID-19 environment. We evaluated our existing commercial and operational structure as well as processes to identify existing shortfalls and identify areas for improvement to drive revenue. Specifically, we conducted a top-down analysis of our commercial organization and our sales fulfillment pipeline. This resulted in 20% of the work force being realigned within the Company to enable the appropriate structure and support of our online marketplace. This realignment was also in support of increasing our cross-functional team communications and collaborations to improve execution. Additionally, during the first 100 days, our CEO developed strategies, plans, goals and objectives all focused on continuing to invest in the Company on various fronts while achieving a cash flow positive position. The Company has plans to significantly increase spending on technology in 2023 to accelerate development timelines and to increase headcount in strategic areas that will relieve supplier constraint. In addition to the core business of the Company, several revenue enhancement projects have been identified to support the strategy of achieving a cash flow positive position. Those projects are in the areas of sequencing, embedded coordinators, remnants and normal blood as well as several technology launches. We have identified opportunities to match specimen requests more effectively to the inventory and capabilities of our supplier network and have begun addressing these opportunities. We believe that these efforts will result in a significant increase in the utilization rate of our supplier network, which currently is heavily skewed toward the top 10-15% of our suppliers, although no assurances can be provided. This effort is one of many initiatives designed to significantly reduce or eliminate supplier concentration. We envision that the re-leveling of our network will result in higher match rates, market depth
and
improved time-to-match.
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We are also developing additional survey capabilities at various decision points
across the sales process to improve results at those critical customer decision
points. We believe that the customer insights gained will result in further
improvements to our rates of closing business as well as the overall customer
experience, although no assurance can be provided.
As of December 31, 2022 , we maintained all of our cash with one financial
institution and our cash balance with this financial institution was in excess
of the Federal Deposit Insurance Corporation ("FDIC") insurance limit. If this
bank fails in the future, we may not be able to immediately (or ever) recover
our cash in excess of the FDIC insured limits which would adversely impact our
operating liquidity and could negatively impact our operations, results of
operations and financial performance.
Since the March 2023 failure and FDIC takeover of SiliconValley Bank and the
inability of its customers to readily access their cash deposits there has been
a heightened risk and greater focus on the potential failures of other banks in
the future. In order to reduce the risks associated with maintaining all of our
cash at a single bank we have diversified our investments. As of March 21, 2023 ,
the filing date of this annual report, we have transferred approximately $7.2
million which is not required for immediate use into short-term U.S. Treasury
notes and U.S. Treasury bills at a different financial institution.
Additionally, we are working with our current bank to place our remaining cash
balance into investment products that will fall within FDIC insurance limits, as
well as other opportunities to insure the safeguarding of our assets.
Components of Our Results of Operations
Revenue
We generate revenue by procuring various specimens from hospitals, laboratories,
and other supply sites, for our medical research customers using our proprietary
software, the iSpecimen Marketplace, to identify, locate, and ultimately
validate the required specimens to our customers' requested specifications. The
Company's performance obligation is to procure a specimen meeting the customer
specification(s) from a supplier, on a "best efforts" basis, for our customer at
the agreed price per specimen as indicated in the customer contract with the
Company. We do not currently charge suppliers or customers for the use of our
proprietary software. Each customer will execute a material and data use
agreement with the Company or agrees to online purchase terms, each of which
includes terms such as specimen and data use, shipment terms, payment and
cancellation terms. These are then supplemented by purchase orders that specify
specimen requirements including detailed inclusion/exclusion criteria,
quantities to be collected, and pricing. Collectively, these customer agreements
represent the Company's contracts with its customer. Generally, contracts have
fixed unit pricing. For certain specimen orders, a refundable customer deposit
may be required prior to order fulfillment depending on project set-up
requirements, presented as deferred revenue. The Company expects to recognize
the deferred revenue within the next twelve months.
We recognize revenue over time, as we have created an asset with no alternative
use and we have an enforceable right to payment for performance completed to
date. At contract inception, we review a contract and related order upon
receipt to determine if the specimen ordered has an alternative use by us.
Generally, specimens ordered do not have an alternative future use to us and our
performance obligation is satisfied when the related specimens are accessioned.
We use an output method to recognize revenue for specimens with no alternative
future use. The output is measured based on the number of specimens accessioned.
Customers are typically invoiced upon shipment. Depending on the quantity of
specimens ordered, it may take several accounting periods to completely fulfill
a purchase order. In other words, there can be multiple invoices issued for a
single purchase order, reflecting the specimens being accessioned over time.
However, specimens are generally shipped as soon as possible after they have
been accessioned.
Cost of Revenue
Cost of revenue primarily consists of the purchase price to acquire specimens
from hospitals and laboratories, inbound and outbound shipping costs, supply
costs related to samples; payment processing and related transaction costs, and
costs paid to the supply sites to support sample collections. Shipping costs
upon receipt of products from suppliers are recognized in cost of revenue.
Additionally, we believe that loss from operations is a more meaningful measure
of profitability than gross profit due to the nature of specimens accessioned
and the diversity of our pricing.
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Technology
Technology costs include payroll and related expenses for employees involved in
the development and implementation of our technology; software license and
system maintenance fees, outsourced data center costs, data management costs,
depreciation and amortization, and other expenses necessary to support
technology initiatives. Collectively, these costs reflect the efforts we make to
offer a wide variety of products and services to our customers. Technology and
data costs are generally expensed as incurred.
A portion of technology costs are related to research and development. Costs
incurred for research and development are expensed as incurred, except for
software development costs that are eligible for capitalization. Research and
development costs primarily include salaries and related expenses, in addition
to the cost of external service providers.
Sales and Marketing
Sales and marketing costs primarily consist of payroll and related expenses for personnel engaged in marketing and selling activities, including salaries and sales commissions, travel expenses, public relations and social media costs, ispecimen.com website development and maintenance costs, search engine optimization fees, advertising costs; direct marketing costs, trade shows and events fees, marketing and customer relationship management software, and other marketing-related costs.Supply Development
We have agreements with supply partners that allow us to procure specimens from them and distribute these samples to customers. Supply development costs primarily include payroll and related expenses for personnel engaged in the development and management of this supply network, related travel expenses, regulatory compliance costs to support the network, and other supply development and management costs. Fulfillment Fulfillment costs primarily consist of those costs incurred in operating and staffing operations and customer service teams, including costs attributable to assess the feasibility of specimen requests, creating and managing orders, picking, packaging, and preparing customer orders for shipment, responding to inquiries from customers, and laboratory equipment and supplies.
General and Administrative
General and administrative expenses primarily consist of costs for corporate
functions, including payroll and related expenses for human resources, legal,
finance, and executive teams, associated software licenses, facilities and
equipment expenses, such as depreciation and amortization expense and rent,
outside legal expenses, insurance costs, and other general and administrative
costs.
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Financial Operations Overview and Analysis for the Years Ended
Comparison of the Years Ended
Change
2022 2021 Dollars Percentage
Revenue $ 10,402,303 $ 11,135,303 $ (733,000) (7) %
Operating expenses:
Cost of revenue 4,756,965 5,249,013 (492,048) (9) %
Technology 2,656,287 1,837,882 818,405 45 %
Sales and marketing 3,445,344 2,422,743 1,022,601 42 %
Supply development 801,125 573,913 227,212 40 %
Fulfillment 1,995,937 1,363,522 632,415 46 %General and administrative 6,932,727 5,613,476
1,319,251 24 %
Total operating expenses 20,588,385 17,060,549 3,527,836 21 %
Loss from operations (10,186,082) (5,925,246) 4,260,836 72 %
Other expense, net
Interest expense (238,963) (2,102,681) 1,863,718 89 %
Change in fair value of derivative
liability on convertible notes - (271,000) 271,000 100 %
Change in fair value of derivative
liability on bridge notes and bridge
notes, related parties - 1,582,700 (1,582,700) (100) %
Loss on extinguishment of bridge notes
and bridge notes, related parties - (2,740,425) 2,740,425 100 %
Loss on extinguishment of convertible
notes and convertible notes, related
parties - (260,185) 260,185 100 %
Gain on extinguishment of note payable - 788,156 (788,156) (100) %
Other income (expense), net 9,778 (44,531) 54,309 122 %
Interest income 169,345 11,397 157,948 1,386 %
Total other expense, net (59,840) (3,036,569)
2,976,729 98 %
Net loss $ (10,245,922) $ (8,961,815) (1,284,107) (14) %
Revenue
Revenue decreased by approximately $733,000 or 7%, from approximately
$11,135,000 for the year ended December 31, 2021 to approximately $10,402,000
for the year ended December 31, 2022 . For the year ended December 31, 2022 and
2021, our non-COVID-19 revenue significantly increased by $1,499,000 or 18.7%,
from approximately $8,036,000 for the year ended December 31, 2021 to $9,535,000
for the year ended December 31, 2022 . However, the increase in non-COVID-19
revenue was offset by a $2,232,000 or 72% decrease in COVID-19 revenue from
$3,099,000 in the year ended December 31, 2021 to $867,000 in the year ended
December 31, 2022 .
Overall, our specimens accessioned during the year ended December 31, 2022 ,
increased by approximately 6,703 or 32% to approximately 27,503 compared to
approximately 20,800 of specimens accessioned during the year ended December 31,
2021 . However, a change in specimen mix resulted in a decrease in average
selling price per specimen of approximately $157 or 29% compared to the same
prior year period.
Cost of Revenue
Cost of revenue decreased by approximately $492,000 or 9%, from approximately
$5,249,000 for the year ended December 31, 2021 to approximately $4,757,000 for
the year ended December 31, 2022 . Although there was a 32% increase in the
number of specimens accessioned during the year ended December 31, 2022 , over
the same prior year period, the average cost per specimen decreased by 31% from
$252 for the year ended December 31, 2021 to $173 for the year ended December
31, 2022 .
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Technology
Technology expenses increased by approximately $818,000 or 45% from
approximately $1,838,000 for the year ended December 31, 2021 to approximately
$2,656,000 for the year ended December 31, 2022 . The increase was related to
increases in headcount and payroll and related expenses of approximately
$624,000 , amortization of internally developed software of approximately
$223,000 , increase in general and administrative expenses of approximately
$7,000 , offset by a decrease in professional fees unrelated to internally
developed software of approximately $36,000 .
Sales and Marketing Expenses
Sales and marketing expenses increased approximately$1,023,000 or 42%, from approximately$2,423,000 for the year endedDecember 31, 2021 to approximately$3,445,000 for the year endedDecember 31, 2022 . The increase was primarily attributable to increases in payroll and related expenses of approximately$747,000 due to hiring of more sales personnel, professional fees of approximately$434,000 , general expenses related to sales and marketing of approximately$45,000 , offset by decreases of approximately$180,000 website costs capitalized as fixed assets and external marketing efforts of approximately$23,000 .
Supply development expenses increased approximately$227,000 or 40%, from approximately$574,000 for the year endedDecember 31, 2021 to approximately$801,000 for the year endedDecember 31, 2022 . The increase was primarily attributable to increases in payroll and related expenses of approximately$174,000 , operating and regulatory compliance costs of approximately$34,000 , and general and administrative expenses of approximately$19,000 .
Fulfillment
Fulfillment costs increased approximately$632,000 or 46%, from approximately$1,364,000 for the year endedDecember 31, 2021 to approximately$1,996,000 for the year endedDecember 31, 2022 . The increase was primarily attributable to increases in payroll and related expenses of approximately$576,000 for personnel engaged in pre-sales feasibility assessments and post-sales fulfillment activities, professional fees of approximately$40,000 , general and administrative expense of approximately$11,000 and promotions and advertising expenses of approximately$5,000 .
General and Administrative Expenses
General and administrative expenses increased approximately$1,319,000 or 24%, from approximately$5,613,000 for the year endedDecember 31, 2021 to approximately$6,933,000 for the year endedDecember 31, 2022 . The increase was attributable to increases in payroll and related expenses of approximately$74,000 , severance costs for our former Chief Executive Officer and former Chief Operating Officer, in the aggregate amount of$782,000 , taxes and insurance of approximately$577,000 , software and subscriptions costs of approximately$154,000 , utilities and facilities expenses of approximately$44,000 , marketing and advertising costs of approximately$35,000 , other general expenses of approximately$17,000 , offset by decreases in bad debt expense of approximately$343,000 and depreciation and amortization expenses of$21,000 .
Other Expense, net
Other expense, net decreased by approximately$2,977,000 or 98%, from approximately$3,037,000 for the year endedDecember 31, 2021 to approximately$60,000 for the year endedDecember 31, 2022 . The decreases in other expense, net, was attributable to the decreases in loss on extinguishment of secured promissory notes the Company issued from 2018 to 2021 to investors and existing stockholders (the "bridge notes") of approximately$2,740,000 , interest expense of approximately$1,864,000 , change in fair value of derivative liability on convertible notes (the "convertible notes") of approximately$271,000 , loss on extinguishment of convertible notes and convertible notes, related parties of approximately$260,000 , an increase in interest income of approximately$156,000 and an increase in other income, net, of approximately$54,000 , offset by decreases in change in fair value of derivative liability on bridge notes and bridge notes, related parties of approximately$1,583,000 and gain in extinguishment of notes payable of approximately$788,000 . 52
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Liquidity and Capital Resources
Change
December 31, 2022 December 31, 2021 Dollars Percentage
Balance Sheet Data:
Cash $ 15,308,710 $ 27,738,979 $ (12,430,269) (45) %
Working capital 15,394,634 30,442,955 (15,048,321) (49) %
Total assets 24,617,653 35,719,598 (11,101,945) (31) %
Accrued interest - 8,167 (8,167) (100) %
Term loan - 3,422,616 (3,422,616) (100) %
Total stockholders' equity 20,309,170 29,791,588 (9,482,418) (32) %
Years Ended December 31, Change
2022 2021 Dollars Percentage
Statement of Cash Flow Data:
Net cash flows used in operating activities
45 %
Net cash flows used in investing activities (3,191,190) (1,037,917) (2,153,273) (207) %
Net cash flows (used in) provided by
financing activities (3,421,359) 38,749,397 (42,170,756) (109) %
Net change in cash $ (12,430,269) $ 27,043,070 $ (39,473,339)
Capital Resources
As of December 31, 2022 , our available cash totaled approximately $15,309,000
which represented decrease of approximately $12,430,000 compared to December 31,
2021 . This decrease in cash includes $3,517,000 of cash used for the settlement
of the Term Loan and the associated interest in November 2022 . As of December
31, 2022 , we had working capital of approximately $15,395,000 which represents
decrease of approximately $15,048,000 compared to the balance of 30,443,000 as
of December 31, 2021 .
Since inception, we have relied upon raising capital to finance our operations.
We intend to use our existing cash to further develop our technology, grow our
supply network, increase our marketing and sales presence, scale our operations,
and for working capital and general corporate purposes.
We believe our cash and cash equivalents, together with anticipated cash flow
from operations will be sufficient to meet our working capital, and capital
expenditure requirements for at least the next 12 months. During the year ended
December 31, 2022 , our revenue was negatively impacted because of a shutdown of
our Ukrainian and Russian supply network at the start of the war between Russia
and Ukraine . Additionally, we are continuing to experience a reduction in
COVID-19 revenue that has not been more than offset by increases in non-COVID-19
revenue. In the event that revenue, during the next 12 months, continues to fall
short of our projections or if our plans or assumptions change, including as a
result of the war between Russia and Ukraine or the ongoing impact of COVID-19
or if inflation begins to have a greater impact on our business, or if we decide
to move forward with any activities that require more outlays of cash than
originally planned, we may need to raise additional capital sooner than
expected.
Our ability to obtain capital to implement our growth strategy over the longer
term will depend on our future operating performance, financial condition and,
more broadly, on the availability of equity and debt financing. Capital
availability will be affected by prevailing conditions in our industry, the
global economy, the global financial markets, and other factors, many of which
are beyond our control. Specifically, as a result of recent volatility and
weakness in the public markets, due to, among other factors, uncertainty in the
global economy and financial markets, it may be much more difficult to raise
additional capital, if and when, it is needed, unless the public markets become
less volatile and stronger at such time that we seek to raise additional
capital. In addition, any additional debt service requirements we take on could
be based on higher interest rates and shorter maturities and could impose a
significant burden on our results of operations and financial condition, and the
issuance of additional equity securities could result in significant dilution to
stockholders.
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Cash Flows
Operating Activities
For the year endedDecember 31, 2022 , net cash used in operating activities was approximately$5,818,000 , which consisted of a net loss of approximately$10,246,000 offset by non-cash charges of approximately$2,074,000 which included approximately$1,183,000 related to amortization of internally developed software, approximately$679,000 in stock-based compensation, approximately$107,000 in bad debt expense, approximately$22,000 related to depreciation of property and equipment, approximately$77,000 of amortization of debt issuance cost on the Term Loan, and approximately$6,000 of proceeds from issuance of common stock in exchange for services. Total changes in assets and liabilities of approximately$2,354,000 were primarily driven by a$1,297,946 decrease in accounts receivable, a$148,431 decrease in operating lease right-of-use asset, a$26,601 decrease in prepaid expenses and other current assets, a$1,626,385 increase in accounts payable, a$521,435 increase in accrued expenses, offset by a$588,769 increase in accounts receivable-unbilled, a$522,411 decrease in deferred revenue, a$147,276 decrease in operating lease liability and a$8,167 decrease in accrued interest. For the year endedDecember 31, 2021 , net cash used in operating activities was approximately$10,668,000 , which consisted of a net loss of approximately$8,962,000 offset by non-cash charges of approximately$3,576,000 , which primarily includes an approximately$2,740,000 loss on extinguishment of Bridge Notes, approximately$959,000 related to amortization of internally developed software, approximately$870,000 of amortization of discount onAmended Bridge Notes, approximately$622,000 in stock based compensation, an approximately$260,000 loss on extinguishment of Convertible Notes, approximately$161,000 in bad debt expense, approximately$45,000 related to depreciation and amortization of property and equipment,$12,500 of common stock issued in exchange for services,$4,605 of amortization of debt issuance costs on a note payable, and$1,088 of amortization of discount and debt issuance costs on Convertible Notes, partially offset by an approximately$1,312,000 loss on derivative liabilities, and an approximately$788,000 gain on extinguishment on note payable. Total changes in assets and liabilities of approximately$5,282,000 were primarily driven by a$1,708,922 decrease in accrued interest, a$1,637,124 increase in accounts receivable, a$1,086,259 increase in accounts receivable-unbilled, a$959,754 decrease in accounts payable, and a$218,508 decrease in deferred revenue, offset by a$198,893 increase in accrued expenses, a$90,894 decrease in prepaid expenses and other current assets, and a$38,503 decrease in tax credit receivable.
Investing Activities
Net cash used in investing activities was$3,191,190 and$1,037,917 for the years endedDecember 31, 2022 and 2021, respectively. Net cash used in investing activities for the year endedDecember 31, 2022 consisted of$2,975,686 of capitalization of internally developed software and$215,504 for purchase of property and equipment.
Net cash used in investing activities for the year ended
Financing Activities
Net cash used in financing activities was$3,421,359 for the year endedDecember 31, 2022 which consisted of$3,500,000 for the payoff of the Term loan, which was offset by$78,641 of proceeds from the exercise of stock options. Net cash provided by financing activities was$38,749,397 for the year endedDecember 31, 2021 which consisted of$20,999,988 of proceeds received from the issuance of common stock in connection with the PIPE,$18,000,000 of proceeds received from the issuance of common stock in connection with the IPO,$3,500,000 of proceeds received from the issuance of a note payable,$2,497,501 of net proceeds from the issuance of over-allotment shares of common stock,$500,000 of proceeds received from the issuance of Bridge Notes payable,$58,648 of proceeds received from the exercise of stock options, and$992 of proceeds received from the exercise of warrants, which was partially offset by the$3,000,000 payment of principal to the holders of the Bridge Notes,$2,339,816 for the payment of offering costs in connection with the issuance of common stock in connection with the IPO,$1,434,999 for the payment of offering 54
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costs in connection with the issuance of common stock in connection with PIPE, and$32,917 for the payment of debt issuance costs in connection with a note payable.
Effects of Inflation and Supply Chain Shortages
Our operations are heavily reliant on specimen availability, and as a result, we often receive more requests than we can fulfill. While the Company is subject to these types of supply chain constraints that are specific to the specimen industry, we are not affected by the more common supply chain issues currently affecting the economy, specifically surrounding transportation. Due to the small size of the packages that we ship, our carriers have been able to continue making timely deliveries during the year endedDecember 31, 2022 . We have experienced negative effects of inflation in certain areas of our business due to the high rates of inflation in the world's current economy. This inflation is affecting employee salaries, which account for a significant portion of our operating costs. Additionally, costs of supplies have been affected by inflation, however, these costs are not significant to the Company's results.
Inflation has not had a significant impact on the cost of specimens due to our long-term contracts maintained with vendors, which include revenue sharing plans.
Non-GAAP Financial Measure
To supplement our financial statements, which are prepared and presented in accordance withU.S. Generally Accepted Accounting Principles ("GAAP"), we use adjusted earnings before interest, taxes, depreciation, and amortization ("Adjusted EBITDA"), a non-GAAP financial measure, to understand and evaluate our core operating performance. This non-GAAP financial measure, which may be different than similarly titled measures used by other companies, is presented to enhance investors' overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We define our non-GAAP financial measure of Adjusted EBITDA as net loss, excluding income tax benefit, change in fair value of derivative liabilities, loss on extinguishment of Bridge Notes and Related PartyBridge Notes , gain on extinguishment of note payable, interest expense, depreciation and amortization, severance and share-based compensation expense. We believe that Adjusted EBITDA provides useful information about our financial performance, enhances the overall understanding of our past performance and future prospects, and allows for greater transparency with respect to a key metric used by our management for financial and operational decision-making. We believe that Adjusted EBITDA helps identify underlying trends in our business that otherwise could be masked by the effect of the expenses that we exclude in Adjusted EBITDA. In particular, we believe the exclusion of share-based compensation expense provides a useful supplemental measure in evaluating the performance of our operations and provides better transparency into our results of operations. We are presenting the non-GAAP measure of Adjusted EBITDA to assist investors in seeing our financial performance through the eyes of management, and because we believe this measure provides an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry. Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. There are a number of limitations related to the use of Adjusted EBITDA compared to net loss, the closest comparable GAAP measure. Some of these limitations are that:
Adjusted EBITDA excludes the change in fair value of the derivative liability,
Ø which represents a non-cash charge related to the change in fair value for the
embedded features on the Convertible Notes, Bridge Notes, and
Bridge Notes;
Ø Adjusted EBITDA excludes the loss on the extinguishment of Bridge Notes and
Relates Party
Ø Adjusted EBITDA excludes the gain on the extinguishment of note payable;
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Ø Adjusted EBITDA excludes amortization of debt issuance costs and discounts on
Convertible Notes which are components to interest expense;
Ø Adjusted EBITDA excludes accrued severance costs;
Adjusted EBITDA excludes certain recurring, non-cash charges such as
depreciation of leasehold improvements, property and equipment and amortization
Ø of internally developed software and, although these are non-cash charges, the
assets being depreciated and amortized may have to be replaced in the future;
and
Adjusted EBITDA excludes share-based compensation expense which has been, and
Ø will continue to be for the foreseeable future, significant recurring expenses
in our business and an important part of our compensation strategy.
The following table presents a reconciliation of Adjusted EBITDA to net loss,
the most comparable GAAP financial measure, for each of the periods presented:
2022 2021
Net loss $ (10,245,922) $ (8,961,815)
Depreciation and amortization 1,205,199 1,003,996
Severance costs 701,400 -
Share-based compensation 678,613 622,064
Interest expense 138,912 2,102,681
Loss on extinguishment of bridge notes and bridge notes,
related parties - 2,740,425
Loss on extinguishment of convertible notes and convertible notes, related parties -
260,185
Gain on extinguishment of note payable -
(788,156)
Change in fair value of derivative liability on convertible notes -
271,000
Change in fair value of derivative liability on bridge notes and bridge notes, relates parties
- (1,582,700)
Adjusted EBITDA $ (7,521,798) $ (4,332,320) Critical Accounting Policies and Estimates
A summary of the significant accounting policies is provided in Note 2 of our financial statements.
Discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue, and expenses at the date of the financial statements. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The following accounting policies involve estimates that are considered critical due to the level of subjectivity and judgment involved, as well as the impact on our financial position and results of operations.
We capitalize certain internal and external costs incurred during the
application development stage of internal use software projects until the
software is ready for its intended use. Amortization of the asset commences when
the software is complete and placed into service and is recorded in operating
expenses. We amortize completed internal-use software over its estimated useful
life of five years on a straight-line basis. Costs incurred during the planning,
training and post-implementation stages of the software development life cycle
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are classified as technology and expensed to operations as incurred. Costs that do not meet the capitalization criteria are expensed as incurred.
Share-based Compensation
We record share-based compensation for options granted to employees, non-employees, and to members of the board of directors for their services on the board of directors based on the grant date fair value of awards issued, and the expense is recorded on a straight-line basis over the requisite service period. Forfeitures are recognized when they occur. We use the Black-Scholes-Merton option pricing model to determine the fair value of stock options. The use of the Black-Scholes-Merton option-pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the common stock. We have concluded that its historical share option exercise experience does not provide a reasonable basis upon which to estimate expected term. Therefore, the expected term was determined according to the simplified method, which is the average of the vesting tranche dates and the contractual term. Due to the lack of company specific historical and implied volatility data, the estimate of expected volatility is primarily based on the historical volatility of a group of similar companies that are publicly traded. For these analyses, companies with comparable characteristics are selected, including enterprise value and position within the industry, and with historical share price information sufficient to meet the expected life of the share-based awards. We compute the historical volatility data using the daily closing prices for the selected companies' shares during the equivalent period of the calculated expected term of its share-based awards. The risk-free interest rate is determined by reference toU.S. Treasury zero-coupon issues with remaining maturities similar to the expected term of the options. We have not paid, and do not anticipate paying, cash dividends on shares of our common stock.
Recent Accounting Standards
For information on recent accounting standards, see Note 2 to our financial statements.
JOBS Act Transition Period
OnApril 5, 2012 , the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an "emerging growth company" can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected not to "opt out" of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard and will do so until such time that we either (i) irrevocably elect to "opt out" of such extended transition period or (ii) no longer qualify as an emerging growth company. We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an "emerging growth company," we intend to rely on certain of these exemptions, including without limitation, (i) providing an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an "emerging growth company" until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of$1.235 billion or more; (ii) the last day of 2026; (iii) the date on which we have issued more than$1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of theSEC .
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