iSpecimen Inc.: Form 10-Q for the period ended Jun 30, 2024

References in this report (the “Quarterly Report”) to “we,” “us” or the “Company” refer to iSpecimen Inc. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the unaudited condensed financial statements and the notes thereto contained elsewhere in this Quarterly Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.

Special Note Regarding Forward-Looking Statements

This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are not historical facts and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Quarterly Report including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance, or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the “Risk Factors” section of the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 13, 2024. The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov (http://www.sec.gov). Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Overview

We were incorporated in 2009 under the laws of the state of Delaware. Our mission is to accelerate life science research and development via a single global marketplace platform, the iSpecimen Marketplace, which connects researchers to subjects, specimens, and associated data. We are headquartered in Lexington, Massachusetts. We operate as one operating and reporting segment.

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 fulfillment. Specimen providers can 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 administrative reporting. As capital is made available to do so, 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 our medical research customers using our proprietary software to identify and locate the required specimens. Costs paid to acquire specimens from hospitals and laboratories generally vary 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.

Private Placement Offering

On December 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, all of which were repurchased by us on February 13, 2024, and are no longer outstanding.

At the Market Offering

On March 5, 2024, we entered into an At the Market Offering Agreement (the “ATM Agreement”) with Rodman & Renshaw LLC as agent (the “Sales Agent”) pursuant to which we may issue and sell shares of our common stock, having an aggregate offering price of up to $1,500,000 (the “ATM Shares”), from time to time through the Sales Agent (the “ATM Offering”). The ATM Shares, when issued, will be registered pursuant to our shelf registration statement on Form S-3 (File No 333-265976), which became effective on July 12, 2022. We intend to sell the ATM Shares, from time to time, pursuant to the ATM Agreement, in transactions that are “at the market offerings” as defined in Rule 415(a)(4) promulgated under the Securities Act. During the six months ended June 30, 2024, we issued 3,980,075 shares of common stock for gross proceeds of approximately $1,494,000 under the ATM Agreement. In connection with the ATM Offering, we incurred offering costs of approximately $255,000, resulting in net proceeds of approximately $1,239,000.

Impact of the Current Economy

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 biospecimen industries, which may adversely affect our business and financial condition. We increased our allowance for doubtful accounts in accounts receivables by $289,898 during the year ended December 31, 2023 due to certain boutique life sciences customers either lacking liquidity or having filed for bankruptcy. We have enhanced procedures related to our credit check process for new and existing customers to mitigate the risk to future collectability of receivables.

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 and inflation, as are being currently experienced, may result in a reduction in researchers’ demand for specimens due to the research organization’s inability to obtain funding.

To further address the current market conditions, we have taken steps, which include but are not limited to, reevaluating our pricing in order to be more competitive, creating campaigns to highlight and fast-track high demand items, enhancing internal team communications to accelerate the sales cycle, moving to a new line of business structure organized by our internal categorization of biospecimen suppliers capabilities to increase efficiency in operations, implementation of next day quotes to increase conversion ratios of quotes to purchase orders, and initiation of efforts to decrease expenditures through reductions in our workforce.

We believe that our business will continue to be resilient through a continued industry-wide economic slowdown in life science research, and that we will continue to work on improving our liquidity to address our financial obligations and alleviate possible adverse effects on our 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 between Russia and Ukraine. At the start of the war, we had approximately $1 million of purchase orders that were slated to be fulfilled by our supply network in Ukraine and Russia. This supply network was shut down at the start of the war. Ukrainian suppliers were disabled due to war conditions and evacuations and some of our Russian suppliers were disabled by sanctions. While we mobilized to shift these purchase orders to other suppliers in the network, the process of specimen collections from other supply sites took time, which 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 also impacted our margins. Additionally, key resources were diverted from operations to resolving the re-fulfillment issues caused by the conflict.

As of June 30, 2024, our supply sites in Russia that had not been under sanctions were accessible and our supply sites in Ukraine were mostly reopened. However, logistics and transportation of specimens out of the country of Ukraine remains challenging and not as economically feasible as they were prior to the beginning of the war. Due to the uncertainty caused by the ongoing war, Ukrainian and Russian 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 as of the date of this Quarterly Report. The imposition of more sanctions and countersanctions may have an adverse effect on the economic markets generally and could impact our business and the businesses of our supply partners, especially those in Ukraine and Russia. 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

Chief Executive Officer Initiatives

The Company’s mission remains to accelerate life sciences research and development, pursuant to a single global marketplace platform. Executive management of the Company continues to review the Company’s structure, processes, and resources to evaluate and identify areas for improvement, and has been focused on creating and ensuring a runway for growth and scale for the business.

Throughout the year ended December 31, 2023 and in the first half of 2024, we initiated efforts to decrease our capital and operational expenditures by cutting costs and right sizing the Company through reductions in our workforce while streamlining operations and rationalizing our resources to focus on key market opportunities. As a result, we began to experience significant decreases in expenditures starting in the second half of 2023. The reductions in workforce since January 1, 2023 through the end of June 30, 2024 has resulted in an estimated reduction in compensation costs of approximately 45% and technology costs of approximately 66% by the end of June 30, 2024 when compared to January 1, 2023.

During the year ended December 31, 2023, we performed operational process improvement activities to increase collaboration within and between departments. We moved to a line of business structure organized by our internal categorization of biospecimen suppliers’ capabilities, which has increased efficiency in our operations and throughout the Company. We continue to see benefits from this move.

We completed the implementation of a next day quote system in the third quarter of 2023 and we continue to see positive results in 2024, as evidenced by increased conversion ratios of quotes to purchase orders of 62%, which contributed to the increased revenue results for the six months ended June 30, 2024 compared to June 30, 2023. Previously, it took an extended number of days to complete a feasibility study in order to provide a customer quote, which negatively impacted the time to convert a quote to a purchase order.

While we are committed to developing our technology, we are investing at a significantly lower level in 2024 when compared to 2023 and prior years, while we focus on growing our revenues through key market opportunities and assessing our capital raise prospects. During the six months ended June 30, 2024 and 2023, we capitalized approximately $448,000 and $2,732,000, respectively, of internally developed software costs. These investments have resulted in multiple process improvements, streamlining workflows and providing deeper insights into orders for all users of our marketplace.

We have shifted our focus from high volume to high value suppliers that meet our newly defined costs, quality and speed requirements. We established business criteria that focus on supplier capabilities and revenue growth strategies as well as technology criteria for integrating onto our iSpecimen Marketplace platform and participating with us. In the first quarter of 2024, we terminated over 100 supplier agreements and are in the final stages of what we call our “supplier network refresh project”. This has resulted in fewer key suppliers, supported by our lean workforce and processes more effectively. We have been reengaging our suppliers in a more meaningful manner which assisted us in the implementation of our next day quote system. We now have a key supplier program whereby we proactively engage with the suppliers to promote our business through marketing campaigns and supplier organizations’ offerings.

Going forward, we will leverage the hard work detailed above to support a sales overhaul. As we wrap up several operationally focused projects, we will now be re-organizing the commercial end of the business. This starts with a new account-based sales approach and the introduction of an outbound sales team to ensure we are meeting our customers and prospects where they are. We are also bringing marketing and sales closer to enable the same efficiencies within the commercial organization, the same way that our line of business realignment brought to the operational side of the business this past year. This refined approach and tighter internal integration will continue to accelerate our next day quote program and deepen customer relationships for increased predictability.

Our strategic business intelligence initiatives have enabled us to understand our market and business better than ever before. We now have the capabilities to use data to know how and where to grow. We will continue adjusting the shape of the business toward our core competencies and the market. We can better use key insights from our sales data to understand market needs to assess areas where we lose deals today, through multiple lenses, in order to adjust our supplier network and marketing efforts accordingly. Conversely, this strategy will also allow us to assess areas where we win with an eye toward expanding deeper into those market niches or disease states.

Following the completion of our supplier network refresh efforts, we will have a better than ever understanding of our key supplier capabilities, specifically focused on their pricing, quality, and speed. Using this information and the outputs of our strategic business intelligence capabilities, we will continue to be able to increase the speed of an opportunity through our sales funnel and our conversion ratios, which we believe will continue to grow our revenue.

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 agree 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 to 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, costs paid to the supply sites to support sample collections, amortization of capitalized sequenced data costs and other assets related to sequenced data. Shipping costs upon receipt of products from suppliers are recognized in cost of revenue.

Technology

Technology costs include consulting fees, 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, amortization of internally developed software, 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.

Financial Operations Overview and Analysis for the Three and Six Months Ended June 30, 2024 and 2023 (Unaudited)

Comparison of the Three Months Ended June 30, 2024 and 2023

Revenue

Revenue increased by approximately $1,239,000, or 76%, from approximately $1,625,000 for the three months ended June 30, 2023 to approximately $2,864,000 for the three months ended June 30, 2024. This was primarily due to an increase of 1,236, or approximately 26%, in specimen count from 4,682 specimens in the three months ended June 30, 2023 to 5,918 specimens in the three months ended June 30, 2024. The average selling price per specimen also increased by approximately $137, or 39%, from approximately $347 in the three months ended June 30, 2023 to approximately $484 in the three months ended June 30, 2024.

Cost of Revenue

Cost of revenue increased by approximately $570,000, or 67%, from approximately $854,000 for the three months ended June 30, 2023 to approximately $1,424,000 for the three months ended June 30, 2024, which was attributable to an approximately 26% increase in the number of specimens accessioned for the current period compared to the same period in the prior year and an approximately $58, or 32%, increase in the average cost per specimen.

Technology

Total technology expenditures decreased by approximately $951,000, or 47%, from approximately $2,035,000 for the three months ended June 30, 2023 to approximately $1,084,000 for the three months ended June 30, 2024. Technology expenditures are either capitalized as internally developed software or expensed in the period incurred.

Technology expenditure capitalized as internally developed software costs decreased by approximately $1,020,000, or 86%, from approximately $1,192,000 for the three months ended June 30, 2023 to approximately $172,000 for the three months ended June 30, 2024 due to reductions in workforce stemming from our decision to invest in the software at a significantly lower level in 2024 when compared to 2023 and prior years.

Product development and technology expense that were not eligible for capitalization increased by approximately $69,000, or 8%, from approximately $843,000 for the three months ended June 30, 2023 to approximately $912,000 for the three months ended June 30, 2024. The increase was related to increases in professional fees of approximately $68,000, and amortization of internally developed software of approximately $41,000, which were partially offset by decreases in headcount and payroll and related expenses of approximately $40,000.

Sales and Marketing Expenses

Sales and marketing expenses increased by approximately $105,000, or 11%, from approximately $978,000 for the three months ended June 30, 2023 to approximately $1,083,000 for the three months ended June 30, 2024. The increase was primarily attributable to increases in payroll and related expenses of approximately $123,000, and advertising and promotions expense of approximately $100,000, which were partially offset by decreases in external marketing expense of approximately $96,000, and general operating expenses related to sales and marketing of approximately $22,000.

Supply Development

Supply development expenses decreased by approximately $153,000, or 53%, from approximately $291,000 for the three months ended June 30, 2023 to approximately $138,000 for the three months ended June 30, 2024. The decrease was primarily attributable to decreases in professional fees of approximately $104,000, payroll and related expenses of approximately $42,000, and general supply development expenses of approximately $7,000.

Fulfillment

Fulfillment costs decreased by approximately $30,000, or 6%, from approximately $463,000 for the three months ended June 30, 2023 to approximately $433,000 for the three months ended June 30, 2024. The decrease was primarily attributable to decreases in general operating expenses related to fulfillment of approximately $17,000, and payroll and related expenses of approximately $16,000 for personnel engaged in pre-sales feasibility assessments and order fulfillment, which were partially offset by an increase in professional fees of approximately $3,000.

General and Administrative Expenses

General and administrative expenses decreased by approximately $703,000, or 40%, from approximately $1,758,000 for the three months ended June 30, 2023 to approximately $1,055,000 for the three months ended June 30, 2024. The decrease was attributable to decreases in compensation costs of approximately $183,000, taxes and insurance of approximately $176,000, professional fees of approximately $165,000, bad debt expense of approximately $102,000, general operating expenses of approximately $51,000, depreciation and amortization of approximately $21,000, and utilities and facilities expenses of approximately $5,000.

Other Income, net

Other income, net, decreased by approximately $5,000, or 7%, from approximately $78,000 for the three months ended June 30, 2023 to approximately $73,000 for the three months ended June 30, 2024. The decrease in other income, net, was attributable to a decrease in interest income of approximately $102,000 and an increase in interest expense of approximately $1,000, partially offset by an increase in other income (expense) of approximately $97,000.

Comparison of the Six Months Ended June 30, 2024 and 2023

Revenue

Revenue increased by approximately $579,000, or 13%, from approximately $4,575,000 for the six months ended June 30, 2023 to approximately $5,154,000 for the six months ended June 30, 2024. This was primarily due to an increase in average selling price per specimen of $119, or 34%, from approximately $343 in the six months ended June 30, 2023 to $462 in the six months ended June 30, 2024. The increase in average selling price per specimen was offset by a decrease of 2,152, or 16%, in specimen count from 13,311 specimens in the six months ended June 30, 2023 to 11,159 specimens in the six months ended June 30, 2024.

Cost of Revenue

Cost of revenue increased by approximately $423,000, or 21%, from approximately $2,001,000 for the six months ended June 30, 2023 to approximately $2,424,000 for the six months ended June 30, 2024, which was attributable to a 45% increase in the average cost per specimen impacted by the specimen mix during the six months ended June 30, 2024 over the same period in 2023, offset by a 16% decrease in the number of specimens accessioned during the six months ended June 30, 2024 over the same period in the prior year.

Technology

Total technology expenditure decreased by approximately $2,137,000, or 48%, from approximately $4,409,000 for the six months ended June 30, 2023 to approximately $2,272,000 for the six months ended June 30, 2024. Technology expenditures are either capitalized as internally developed software or expensed in the period incurred.

Technology expenditures capitalized as internally developed software costs decreased by approximately $2,284,000, or 84%, from approximately $2,732,000 for the six months ended June 30, 2023 to approximately $448,000 for the six months ended June 30, 2024 due to reductions in workforce stemming from our decision to invest in the software at a significantly lower level in 2024 when compared to 2023 and prior years.

Product development and technology expense that were not eligible for capitalization increased by approximately $146,000, or 9%, from approximately $1,678,000 for the six months ended June 30, 2023 to approximately $1,824,000 for the six months ended June 30, 2024. The period over period increase was related to increases in amortization of approximately $141,000 and professional fees of approximately $78,000, which were partially offset by a decrease in payroll and related expenses of approximately $73,000.

Sales and Marketing Expenses

Sales and marketing expenses decreased approximately $276,000, or 14%, from approximately $2,025,000 for the six months ended June 30, 2023 to approximately $1,749,000 for the six months ended June 30, 2024. The period over period decrease was primarily attributable to decreases in external marketing expense of approximately $191,000, payroll and related expenses of approximately $179,000, and general operating expenses related to sales and marketing of approximately $42,000, which were partially offset by increases in advertising and promotions expense of approximately $136,000.

Supply Development

Supply development expenses decreased approximately $280,000, or 45%, from approximately $615,000 for the six months ended June 30, 2023 to approximately $335,000 for the six months ended June 30, 2024. The period over period decrease was primarily attributable to decreases in professional fees of approximately $183,000, payroll and related expenses of approximately $80,000, and general supply development expenses of approximately $17,000.

Fulfillment

Fulfillment costs decreased approximately $48,000, or 5%, from approximately $892,000 for the six months ended June 30, 2023 to approximately $844,000 for the six months ended June 30, 2024. The decrease was primarily attributable to decreases in payroll and related expenses of approximately $26,000 for personnel engaged in pre-sales feasibility assessments and order fulfillment, general operating expenses related to fulfillment of approximately $24,000, which were partially offset by an increase in professional fees of approximately $2,000.

General and Administrative Expenses

General and administrative expenses decreased approximately $311,000, or 9%, from approximately $3,470,000 for the six months ended June 30, 2023 to approximately $3,159,000 for the six months ended June 30, 2024. The period over period decrease was attributable to decreases in compensation costs of approximately $348,000, general operating expenses of approximately $105,000, bad debt expense of approximately $57,000, depreciation and amortization of approximately $44,000, utilities and facilities expenses of approximately $9,000, which were partially offset by increases in professional fees of approximately $161,000 and taxes and insurance of approximately $91,000.

Other Income (Expense), net

Other income (expense), net, decreased by approximately $18,000, or 9%, from approximately $189,000 for the six months ended June 30, 2023 to approximately $171,000 for the six months ended June 30, 2024. The decrease in other income, net, was attributable to a decrease in interest income of approximately $185,000 and an increase in interest expense of approximately $2,000, offset by an increase in other income (expense) of approximately $170,000.

Liquidity and Capital Resources

(unaudited)

Capital Resources

We have had recurring losses since inception. As of June 30, 2024, our available cash and available-for-sale securities totaled approximately $2,151,000, which represented a decrease of approximately $2,855,000 from approximately $5,006,000, as of December 31, 2023. We had negative working capital of approximately $577,000, an accumulated deficit of approximately $64,376,000, cash and cash equivalents and short-term investments of approximately $2,151,000, and accounts payable and accrued expenses of approximately $5,525,000. Our continued viability is dependent on the ability to successfully obtain additional working capital and/or ultimately attain profitable operations. During the year ended December 31, 2023, we began initiating efforts to decrease our capital and operational expenditures by cutting costs and right sizing the Company through reductions in workforce while streamlining operations and rationalizing resources to focus on key market opportunities. The reduction in workforce since January 1, 2023 through June 30, 2024, cumulatively resulted in an estimated reduction in monthly compensation costs of approximately 45% and technology costs of approximately 66% by the end of June 30, 2024 when compared to January 1, 2023. We plan to add additional customers to increase and add additional revenues through our new revenue enhancement projects as well as to reduce and manage expenditures to improve our financial position and ensure continued funding of operations. However, as certain elements of our operating plan are not within our control, we are unable to assess their probability. We may also seek to fund our operations through public equity or debt financing, as well as other sources but it has not currently identified any other specific source of funding except for the ATM Agreement.

We may be unsuccessful in increasing our revenues from our new enhancement project or contain our operating expenses, or we may be unable to raise additional capital on commercially favorable terms. Our failure to generate additional revenues or contain operating costs would have a negative impact on our business, results of operations and financial condition and our ability to continue as a going concern. If we do not generate enough revenue to provide an adequate level of working capital, our business plan will be scaled down further.

These conditions raise substantial doubt regarding our ability to continue as a going concern for a period of one year after the date of this Quarterly Report. Management’s plan to mitigate the conditions that raise substantial doubt includes generating additional revenues through its revenue enhancement projects, deferring certain projects and capital expenditures and eliminating certain future operating expenses for us to continue as a going concern. However, there can be no assurance that we will be successful in completing any of these options. As a result, management’s plans cannot be considered probable and thus do not alleviate substantial doubt about our ability to continue as a going concern.

Cash Flows

Operating Activities

For the six months ended June 30, 2024, net cash used in operating activities was approximately $3,612,000, which consisted of a net loss of approximately $5,011,000 offset by non-cash charges of approximately $1,553,000, which included approximately $1,076,000 related to amortization of internally developed software, approximately $205,000 in bad debt expense, approximately $174,000 in stock-based compensation, approximately $96,000 related to amortization of other intangible assets, approximately $32,000 related to depreciation of property and equipment, and approximately $1,000 of losses from sales of available-for-sale securities, which were offset by approximately $29,000 of accretion of discount on available-for-sale securities.

Total changes in assets and liabilities of approximately $154,000 were attributable to an approximately $369,000 increase in accounts receivable, an approximately $221,000 decrease in accrued expense, an approximately $157,000 decrease in deferred revenue, and an approximately $81,000 decrease in lease liability, offset by an approximately $280,000 increase in accounts payable, an approximately $259,000 decrease in accounts receivable-unbilled, an approximately $82,000 decrease in operating lease right-of-use asset, and an approximately $55,000 decrease in prepaid expenses and other current assets.

For the six months ended June 30, 2023, net cash used in operating activities was approximately $4,519,000, which consisted of a net loss of approximately $5,915,000 offset by non-cash charges of approximately $1,420,000, which included approximately $935,000 related to amortization of internally developed software, approximately $262,000 in bad debt expense, approximately $245,000 in stock-based compensation, and approximately $76,000 related to depreciation of property and equipment, offset by $98,000 of amortization of discount on available-for-sale securities.

Total changes in assets and liabilities of approximately $23,000 were attributable to an approximately $679,000 decrease in accounts payable, an approximately $649,000 decrease in accrued expenses, an approximately $123,000 increase in accounts receivable, an approximately $78,000 decrease in operating lease liability, and an approximately $43,000 decrease in deferred revenue, offset by an approximately $1,229,000 decrease in accounts receivable-unbilled, an approximately $129,000 decrease in tax credit receivable, an approximately $113,000 decrease in prepaid expenses and other current assets, and an approximately $78,000 decrease in operating lease right-of-use asset.

Investing Activities

Net cash provided by investing activities was approximately $2,233,000 for the six months ended June 30, 2024, which consisted of approximately $3,150,000 of proceeds from sales and maturities of available-for-sale securities, which were offset by approximately $461,000 of purchases of available-for-sale securities, approximately $448,000 of capitalization of internally developed software, and approximately $9,000 of purchase of property and equipment.

Net cash used in investing activities was approximately $8,856,000 for the six months ended June 30, 2023, which consisted of approximately $7,643,000 of purchase of available-for-sale securities, approximately $2,732,000 of capitalization of internally developed software, and approximately $14,000 of purchase of property and equipment, offset by approximately $1,532,000 of proceeds from sale and maturities of available-for-sale securities.

Financing Activities

Net cash provided by financing activities was approximately $1,187,000 for the six months ended June 30, 2024, which consisted of approximately $1,494,000 of proceeds received from the issuance of common stock in connection with the ATM Offering, offset by approximately $255,000 for the payment of offering costs in connection with the issuance of common stock in connection with the ATM Offering and approximately $53,000 for the repurchase of common stock exercisable under PIPE Warrants.

Net cash provided by financing activities was approximately $71,000 for the six months ended June 30, 2023, due to proceeds received from the exercise of stock options.

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 have not been materially 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 were able to continue making timely deliveries during the six months ended June 30, 2024. However, there had been an increase in our shipping costs period over period during the six months ended June 30, 2024.

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, the 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.

Critical Accounting Policies and Estimates

We have chosen accounting policies that we believe are appropriate to accurately and fairly report our operating results and financial condition in conformity with GAAP. We apply these accounting policies in a consistent manner. Our significant accounting policies are discussed in Note 2, “Summary of Significant Accounting Policies,” in our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.

The application of critical accounting policies requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. These estimates and assumptions are based on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances. We evaluate these estimates and assumptions on an ongoing basis. If actual results ultimately differ from previous estimates, the revisions are included in results of operations in the period in which the actual amounts become known. The critical accounting policies that involve the most significant management judgments and estimates used in preparation of our unaudited condensed financial statements or are the most sensitive to change from outside factors, are discussed in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes in our critical accounting policies and procedures during the six months ended June 30, 2024.

JOBS Act Transition Period

On April 5, 2012, the Jumpstart Our Business Startups Act of 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 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 of 2002 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) December 31, 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 the SEC.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended June

30, 2024, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. These controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, in a manner to allow timely decisions regarding required disclosures. Based on this evaluation, management has concluded that our disclosure controls and procedures were not effective as of June 30, 2024 due to the following material weakness in internal control over financial reporting:

• The Company did not design and maintain adequate controls to maintain appropriate documentation for the tax-exempt status of its customers, calculate and collect sales tax at point of sale, and subsequently report and remit in a timely manner to the relevant tax jurisdictions sales tax obligations.

Notwithstanding the existence of the material weakness described above, management believes that the unaudited condensed financial statements included in this Quarterly Report fairly present, in all material respects, our financial position, results of operations and cash flows as of and for the periods presented, in conformity with GAAP.

Management’s Plan for Remediation

The material weakness described above was identified as a result of an entity-wide risk assessment process that commenced in the quarter ended June 30, 2023. The Company is in the process of implementing a remediation plan to improve our internal control over financial reporting and to remediate the related control deficiencies that led to the material weakness. In response to these deficiencies, management, with the oversight of the Audit Committee of the Board of Directors, has identified and implemented steps to remediate the material weakness.

The Company began implementing the remediation plan during the second quarter of fiscal year 2023 and this remediation is ongoing as of the filing date of this Quarterly Report. The following remedial measures are designed to address the material weakness and to continue to improve our internal control over financial reporting.

• We have engaged external tax advisors to complement internal resources and efforts and provide support in assessing the appropriate sales tax treatment associated with the Company’s products for all prior years in which the Company had generated revenue.
• We have begun obtaining sales tax exemption letters, representation letters or proof of payments of compensating use tax from our customers and we have started a collection effort of these sales taxes from certain customers who have notified the Company that they do not have a sales tax exemption letter.
• We have begun implementing a sales tax software platform solution for the calculation, collection, and remittance of sales tax for all non-exempt future sales, and assisting with the collection and tracking of VDAs received from states where a potential sales tax liability may exist.
• We have begun designing and implementing enhanced policies, procedures and controls related to the calculation, communication, collection, and remittance of sales tax to relevant jurisdictions.
• We have begun training appropriate personnel in the effective design and execution of our enhanced policies, procedures, and controls, including the importance of the ongoing, consistent effective execution of such procedures and controls.

We are committed to the remediation of the material weakness and expect to successfully implement enhanced control processes. However, as we continue to evaluate, and work to improve our internal control over financial reporting, management may determine that additional measures to address control deficiencies or modifications to the remediation plan are necessary. Therefore, we cannot assure you when we will be able to fully remediate such weakness, nor can we be certain that additional actions will not be required or what the costs may be of any such additional actions. Moreover, we cannot assure you that additional material weaknesses will not arise in the future.

Changes in Internal Control Over Financial Reporting

We are in the process of implementing certain changes to our internal controls to remediate the material weakness described above. Except as noted above, there were no changes in the Company’s internal control over financial reporting during the six months ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There have been no material changes with respect to risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 13, 2024.