Earnings Call Transcript - ISPC Q4 2022

Operator, Operator

Good day, everyone, and welcome to iSpecimen's Full Year 2022 Conference Call. At this time, participants will be in a listen-only mode. A question-and-answer session will follow management's remarks. This conference call is being recorded. A replay of today's call will be available on the Investor Relations section of iSpecimen's website for the next 30 days. I will now hand the call over to Allison Soss, Investor Relations for introductions and the reading of the safe harbor statement. Please go ahead.

Allison Soss, Investor Relations

Thank you, operator. Good morning, everyone, and welcome to iSpecimen's full year 2022 results conference call. With us on today's call is Tracy Curley, Chief Executive Officer; Benjamin Bielak, Chief Information Officer; and Eric Langlois, Chief Revenue Officer. Before we begin, I would like to remind you that today's call contains certain forward-looking statements from our management made within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended concerning future events. Words such as may, should, project, expect, intend, plan, believe, anticipate, hope, estimate and variations of such words and similar expressions are intended to identify forward-looking statements. These statements are subject to numerous conditions, many of which are beyond the control of the company, including those set forth in the Risk Factors section of the company's Form 10-K for the year ended December 31, 2022 yet to be filed with the SEC. Copies of this document will be available on the SEC's website at www.sec.gov. Actual results may differ materially from those expressed or implied by such forward-looking statements. The company undertakes no obligation to update these statements for revisions or changes after the date of this call except as required by law. Now it is my pleasure to introduce Tracy Curley, Chief Executive Officer. Tracy, please go ahead.

Tracy Curley, CEO

Thanks, Allison. Good morning, everyone, and thank you for joining us today. I will begin with a review of current business and operational activities and then our financial performance for the 12 months ended December 31, 2022. We will then open the call for questions. First, I'd like to extend my deepest gratitude and appreciation to the Board for appointing me permanent CEO in January and to the entire iSpecimen team for their dedication, hard work, and belief in our collective vision for the last several months. The team's continued support and efforts inspire me as we make progress executing on our strategic plans and key initiatives for 2023. In January, we appointed Eric Langlois as Chief Revenue Officer. Eric joined iSpecimen in 2016 and has held several senior sales positions over the past seven years. In his elevated role, Eric is leading our recently restructured online commercial team, which has been tasked with increasing our customer base and improving the customer experience, addressing supplier constraints, and supporting innovation, collaboration, and productivity required to drive scalable and profitable results. Throughout his tenure at iSpecimen, Eric has contributed uniquely to our results and has been responsible for closing several of the company's largest multimillion-dollar deals. I have tremendous confidence in his ability and look forward to continued progress and success. I am pleased to report that following our strategic corporate review and predicted revenue realignment in Q4 2022, we are beginning to make meaningful progress towards understanding and tapping into the full potential of our entire organization, encouraged that some of our early efforts have already yielded results, as seen with our record-breaking revenue in Q4 2022 of $3.2 million, a 28% increase over Q4 2021. In addition to our core business, as part of a very deliberate strategic plan, we are undertaking several revenue-enhancement projects for 2023 in areas such as sequencing, remnants, and normal blood, as well as the acceleration of on-site iSpecimen project coordinators at selected supplier sites to facilitate improved specimen capabilities, identification, coordination, utilization, and fulfillment. iSpecimen will continue to invest where necessary throughout 2023 to accelerate these revenue growth initiatives. One of our revenue-enhancing projects, sequencing, is progressing very well. We are currently launching our first pilot of 500 samples for sequencing, and we project to generate revenue from the initial batch starting in Q2 2023. We will be performing several throughout 2023 in order to achieve our revenue goals for this project, and we have a high level of confidence in this endeavor. Another one of our revenue-enhancing projects, on-site iSpecimen project coordinators, is also progressing very well. We are planning to ramp up to 12 coordinators by the end of Q2 2023 and continue to add more sites where business opportunities are meaningful and substantial. We expect increased revenue related to this project starting in Q3 2023. Our remnant revenue-enhancing project is focused on creating a line of business structure and improving internal operational processes, as well as significant technology build-out in order to achieve market effects for women by the end of 2023, an exciting and very critical milestone for us. We're also going through a review process to ensure both suppliers and buyers are properly integrated and leveraging the platform as intended. We expect increased revenue related to this project starting in Q3 2023. Regarding revenues for 2023, while we are expecting growth in our core business, we generally experience what I call monthly results from quarter-to-quarter. What I mean by this is that Q1 is generally not as good as Q4 as our researchers are still completing their budgets for the year; in other words, revenue in Q1 falls until March when we start to ramp up projects with the new budget cycle. Additionally, Q3 is generally not as good as Q2, as it is summer, and researchers, suppliers, donors, and patients are on vacation, and projects can take longer to fulfill. We expect our revenue-enhancing projects layered on top of our core business efforts to increase revenue starting in the second half of 2023, which will allow us to accelerate our efforts to reach a cash flow neutral position and then a cash flow positive position in 2024. As you know, iSpecimen has historically provided updates on supplier network growth each quarter. And while that remains important, our emphasis has shifted to increased evaluation of the quality of our relationships with our suppliers and are specifically focused on business, technology, and compliance objectives. This is a result of identifying during our strategic corporate review process in Q4 2022 that we had a severe imbalance within our supplier network, specifically high levels of utilization across a small subsection of suppliers. Today, with several initiatives underway by our site development department, we are gaining a much better understanding of our suppliers and their capabilities. Armed with this information, I am confident that during 2023 we will be able to materially increase our supplier utilization rate, which will allow us to finally address in a meaningful manner our supplier constraints and ultimately increase revenue opportunities. Our continued investment in technology at a record level for 2023 will be heavily front-loaded for the first half of the year and demonstrates our continued commitment to our vision to be transformational in our industry with our online marketplace. Our technology efforts to improve the iSpecimen marketplace platform in 2023, which were discussed during our Q3 2022 earnings call, include updating search functionality, improving the user interface, increasing automation, and enhancing matchmaking. I'm pleased to report all of these efforts remain on track. To complete these updates, we are leveraging our significant technology investments to date in our data processing and pipelines. The unified data pipeline project is designed to improve data quality and processing speed by automating and standardizing supplier data processing for banking and remnant data. When completed, researchers will be able to view higher-quality specimen data for completeness, conformity, accuracy, and timeliness through the marketplace via automated pipeline. The process on our platform starts with the search function, a click of a button. By enhancing the search functionality, our platform can more quickly identify samples of greater use to researchers. Understanding which specimens are of greater use to researchers also allows us to guide operational practices to optimize our supply chain for investment. Our ability to deliver relevant insights further increases customer engagement with our platform. We are on track to release improvements to our marketplace search interface, automation, and matchmaking in Q2 2023. For our electronic medical record project, as discussed previously, we have improved our patient data integration and our overall patient data asset, which will allow us to accelerate our prospective collections and enable our data-as-a-service pilot in the second half of 2023. As you have heard, we have a lot going on at iSpecimen for 2023. It is an exciting time to be affiliated with this company. However, I want to take a step back and reemphasize how very important the strategic review process in Q4 2022 was for the company. It is critical heading into 2023 to develop a turnaround strategic plan. You have just heard about many of those plans. Executing these plans is critical to the success of the company. We must execute. iSpecimen's mission is to accelerate Life Science Research and Development via a single global marketplace platform that connects researchers to subjects, specimens, and data. To do so, we must ensure that our marketplace platform provides a comprehensive solution with utility, so that researchers can search for desired biospecimens, suppliers can fully utilize their biospecimens, and additional adjacent opportunities can be unlocked for us. As we move forward, all of our activities, initiatives, and projects in 2023 are focused on this mission. I'll now move on to discuss our financial results for the 12-month period ended December 31, 2022, compared to the same period in 2021. While we are not providing financial commentary regarding Q4 2022, I would like to acknowledge that our revenue for the fourth quarter was $3.2 million, an all-time record for the company. For the full year 2022, revenue was approximately $10.4 million, a decrease of 7% compared to $11.1 million for the full year 2021. However, our non-COVID revenue increased by $1.5 million or 18.6% to $9.5 million for the full year 2022 from approximately $8 million for the full year 2021. The $9.5 million of non-COVID revenue for 2022 was another all-time record for the company. Overall, our specimens session during the current year increased by approximately 6,703 specimens or 32% to approximately 27,503 specimens compared to approximately 20,800 specimens session during the year ended December 31, 2021. However, a change in specimen mix resulted in a decrease in the average selling price per specimen of approximately $157 or 29% compared to the same prior year period. Cost of revenue was approximately $4.8 million for the full year 2022, a decrease of 9% from the full year 2021. Although there was a 32% increase in the number of specimens session during the current year ended 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. For the full year ended 2022, we increased our cash spend for technology to approximately $4.4 million from $3.8 million for the same prior year period. This cash outlay was comprised of approximately $3 million of capitalized internally developed software and approximately $1.4 million of technology expenses that we were not able to capitalize and therefore classify as technology expenses. The remainder of the technology expense for the 12-month period ended December 31, 2022, was comprised of approximately $1.2 million of non-cash amortization related to internally developed software and approximately $131,000 of non-cash stock compensation expense. Total technology expenses for the 12-month period ended December 31, 2022, were approximately $2.7 million compared to $1.8 million for the same prior year's period. The increase in technology spend for the 12-month period ended December 31, 2022, compared to the same prior year's period is related to our commitment to invest in our technology, as evidenced by our multiple successful technology launches in 2022. Sales and marketing expenses were approximately $3.4 million for the full year 2022, up 42% from approximately $2.4 million for the full year 2021. During 2022, an entire sales operation team was added to the sales department, which explains the significant increase. More specifically, the increase was primarily attributable to increases in payroll and related expenses, professional fees, and general expenses offset by decreases in website costs capitalized as fixed assets and reduced marketing efforts. General and administrative expenses were approximately $6.9 million for the full year 2022, up 24% from approximately $5.6 million for the full year 2021. The increase was attributable to increases in executive severance costs, payroll and related expenses, taxes and insurance, software and subscriptions, utilities and facility expenses, marketing and advertising costs, and other general expenses, offset by decreases in bad debt expense, depreciation, and amortization expenses. As of December 31, 2022, our cash balance was approximately $15.3 million compared to approximately $27.7 million as of December 31, 2021. As a reminder, we paid off a $3.5 million loan in Q4 2022. Average cash burn per quarter for 2022 was approximately $2.2 million, excluding the loan repayments. We would like to assure our investors that we have no deposits with Silicon Valley Bank and we have had no restrictions on accessing funds from our bank, Bridge Bank, a subsidiary of Western Alliance. We do have an established investment policy, and in light of the recent financial banking environment, we have already moved excess funds in order to invest in T-bills for more security. Additionally, we are working with our current financial institution to increase the amount of funds held that are insured by FDIC Insurance. We are also in the process of adding risk factor language that will discuss the new risks in detail as related to iSpecimen, and that will be included in our 10-K when filed. This concludes our prepared remarks. Now I would like to open the call for questions. Operator, please go ahead.

Operator, Operator

We will now start the question-and-answer session. The first question comes from Matt Hewitt with Craig-Hallum Capital Group. Please proceed.

Matt Hewitt, Analyst

Good morning. Thank you for providing the update and for all the details. Maybe first up 2022 was a challenging year. You faced quite a bit from COVID headwinds as those revenues kind of subsided, as well as some of the internal changes. As you look at fiscal 2023, given the strategic review that you guys underwent, do you envision 2023 and going forward that you can get back to double-digit type growth? And if so, how should we be thinking about the cadence over the course of 2023?

Tracy Curley, CEO

Yes, one of the reasons I mentioned the inconsistency of our core business was to provide context on what to expect in terms of timing. Our core business in the first quarter is usually not as strong as in the fourth quarter, and the third quarter has typically not performed as well as the second quarter. Nevertheless, we remain committed to our growth strategy, and I believe that by adding these revenue enhancement projects, we will boost growth enough to reach cash flow neutrality and ultimately a positive cash flow position in 2024.

Matt Hewitt, Analyst

That's great. And then, kind of moving down the income statement, as far as gross margins are concerned, do you feel like with some of the changes that you have and are going to be implementing that we can start to see some gross margin lift over the course of 2023? And where do you see those things, or where do you see that line kind of getting to over the next call it three to five years?

Tracy Curley, CEO

So I believe that you will start to see some relief on that in Q2 and definitely in Q3 and beyond. Our intention is to continue to be a growth company for this company, and as we build out our technology, we will be able to increase the number of revenue streams we have available to us that we aren't monetizing yet, like our data, our marketplace-as-a-service, those kinds of things over the next three to five years.

Matt Hewitt, Analyst

Got it. And then maybe one last one, and I'll hop back in the queue. Obviously, this has been a pretty challenging environment over the past year from a funding perspective for small pharma, small biotech companies. It maybe got worse over the past weekend with the shuttering of Silicon Valley Bank. But as you've talked to customers, maybe even as recently as this weekend given what happened, what are you hearing from them? Where are they prioritizing their investments? And how do they envision iSpecimen being helpful in these times when they're having to kind of pinch pennies a little bit? Thank you.

Tracy Curley, CEO

Thank you, Matt. I’ll provide a brief response and then hand it over to Eric for further insights on the customer landscape. On the supplier side, it's encouraging as we reengage with them at a higher level to discuss business, technology, and compliance goals, creating key partnerships. Given the current environment, suppliers are eager to explore additional revenue opportunities, more so than before, which could help us manage our supplier constraints. We have never encountered a shortage of customer opportunities; we typically have more than we can handle. However, we are noticing increased compliance requirements from customers to work with us, which seems to stem from their caution. I believe Eric has more to add on this topic. Eric?

Eric Langlois, CRO

Yeah. Thanks, Tracy, and hello everyone. I think I agree with Tracy's last statement. What we're really seeing is the reaction to this has been just an increased deliberate nature on the customer's end. So it's not just on the compliance and the vendor profile forms and all those things that the customers are making us jump through now. But I think they're just being more deliberate on their spend. So they're taking more time to evaluate the projects, to reprioritize in which areas of research they are moving into, and they're reevaluating all of their third-party partnerships and those sorts of things. So I think it has more to do with the speed of decision-making than it does necessarily with the drying up of spending. We're certainly seeing that in Q1. We have a significant increase in the top of the funnel, both in terms of opportunities and quotes. We're just not yet seeing the pull-through on purchase orders, but we typically expect that to happen in March. I think it's just the customers are being a lot more deliberate, and they're just being a lot more careful about where they put their research dollars. And we just have to make sure that we're involved in enough conversations across the board that we've developed enough of a pipeline so that we're in the right conversations that we can land the projects that fit well with us. But I think what really dovetails into this is the work we're doing on the supplier front, whereas you might see a more deliberate nature on the customer side, we're seeing a larger willingness on the supplier side to get more involved to monetize and commercialize their operations and their specimens. Some of the projects that maybe we were unable to do in the past, we're trying to be able to do now, and those are all revenue opportunities because anything that was a no before that we can turn into a yes now allows us to actually cover more ground for the customers and get more velocity through the funnel. I think those are the things we're seeing. I do think the SVB situation is something to monitor out in the Bay Area, where we do have a heavy concentration of customers. But we have not heard anything directly from customers yet that there's been a major effect. But certainly capital funds and everything else in the Bay Area is something for us to keep an eye on, and we certainly will.

Matt Hewitt, Analyst

That’s all. Great color. Thank you so much.

Operator, Operator

The next question comes from Allen Klee with Maxim Group. Please go ahead.

Allen Klee, Analyst

Good morning. So, for your new programs of monetizing Data and Marketplace-as-a-Service, can you talk a little bit about explaining a little bit what you're going to be doing, what the opportunity is, and what you're hearing from the customers of what they're looking for and why they might be excited by these? Thank you.

Tracy Curley, CEO

Yes, I'm going to do a brief answer and I'm going to turn this over to Ben because this is really a technology question. Our Marketplace-as-a-Service is something that is not imminent in 2023. However, we will be doing a pilot at the end of 2023 for Data-as-a-Service, which we're really excited about. We have some build-out that we're working on right now to our platform to achieve what we need for our customers in that area. And so I'll turn it over to Ben to talk a little bit more about what that entails and the timing involved. Ben?

Benjamin Bielak, CIO

Thanks, Tracy. I appreciate the question, Allen. Yes, certainly an exciting opportunity. As Tracy mentioned, the adjacencies that we have with the platform we developed, we have a number of things in the pipeline. These are two of them. I'll speak more specifically around the Data-as-a-Service because we've announced the pilot for the end of the year. iSpecimen is in an interesting position in the overall market, and the mix of data that we have with our partners, especially on the lab side, is somewhat unique from an asset, depth, and access perspective. Our customers have expressed interest in understanding this, even some customers in new spaces being able to see the value and, obviously, the ability to get specimens after the fact for a lot of this data is also appealing. So the ability to package both what we do as a specimen provider today and extend that into leveraging the data we have, both for our customers and obviously for our suppliers as well, is certainly of value, and the interest is certainly there.

Allen Klee, Analyst

Thank you.

Benjamin Bielak, CIO

Yes, regarding the market, Marketplace-as-a-Service is a direct extension of the marketplace. It allows us to follow a similar approach to what was previously done, particularly by initially providing essential services and then being able to offer supplier names as the marketplace evolves.

Allen Klee, Analyst

That's great. Thank you. One other question. Could you talk about your competitive position versus some of the alternatives out there? And to what degree existing customers could be spending more with you?

Tracy Curley, CEO

Sure. I'm going to do a brief answer and I'm going to turn that over to Eric, as my Chief Revenue Officer, to answer that further. We're the only company out there with the marketplace platform, and we're going to use technology in order to be successful in our industry. Our position is not to hold inventory. We get our inventory directly from our supplier network, and that's unique to this industry. It provides challenges, but also benefits to us from a capital investment viewpoint. Our competitors have done various things in order to get closer to the supplier and the source, which Eric can talk a little bit more about compared to us. Eric, do you want to continue?

Eric Langlois, CRO

Sure. Yes. Our market is pretty unique. There is a wide range of competitors and a lot of companies involved in it that do little pieces of different things. Some might only handle inventory, some might only do prospective collections, and some only do direct to patients while others deal directly with clinical sites. So there's a lot of variability in all this. I think our major competitors have made efforts over the last several years to engage in market consolidation approaches. They're focusing on existing inventory, which is one way to operate. They're certainly taking risks because they're outlaying cash and operational assets to bring those in-house to deliver quickly. I think our approach is very different and unique. We're aggregating access to a variety of supply and different types of relationships involved in that, both bank inventory and remnants. Our claim to fame really is the network effect. We're able to do things in a much more bespoke manner than most of our competition. I think COVID evidenced that. Most of our competition could not manage the challenges our customers required, yet we could. While this may pose challenges in the interim until we achieve the marketplace effect we're aiming for, our teams perform well, and we have sites that can support our efforts. As we drive toward improving our supplier network and developing the marketplace, it's a different angle because others are merely trying to set up a store front. A store front is great, but it only provides access to existing inventory. By approaching this as a two-sided marketplace, we're the pivot that gives customers trustworthy and repeatable access to specimens across a wider breadth.

Allen Klee, Analyst

Thank you. Maybe one last question. Since you're in a nice position of demand being greater than supply, can you just review the actions you're doing to improve the supply chain and what potential benefits you can get from that? Thank you so much.

Tracy Curley, CEO

Sure. One of the things that we're doing is our embedded coordinator project. We are also creating across the organization a line of business structure. Prior to our predicted revenue realignment, we were more department-oriented, and now we're going to be business-oriented by what we call internally segments: remnants, prospective, and bank. We are also reassessing our existing suppliers for business, technology, and compliance objectives, and we're engaging with them to understand more fully what their capabilities are. We are learning that some of our suppliers, because they're reevaluating where they are in the market, have expanded what they offer. We are having conversations with them on how to leverage those capabilities to the benefit of both parties. All of our revenue-enhancing projects involve meaningful conversations with our suppliers about engaging the partners. We are creating key supplier sites, and we will be developing business plans for growth for them as well as for us, considering their capabilities. Many of the conversations we're having with suppliers involve expanding our revenue, even if these areas currently fall outside our core business, which is exciting. And Eric, is there anything else you want to add to that?

Eric Langlois, CRO

Yes. I mean, obviously, the supplier work we're doing is really going to leverage our opportunities, as Tracy mentioned. The other interesting effect recently is we're starting to see some commercial companies that would traditionally be customers now having unique inventories and access to samples that they've kept around for a while and had plans for, and now they need to figure out ways to commercialize and monetize these specimens. We have a few of those opportunities in the pipeline now, and I think it's interesting because it shows the variety of collections out there and that people may have changed their plans. Recent market forces are prompting them to explore new avenues, making us an attractive partner. We can easily incorporate their data, place it on the marketplace, and generate engagement. We can demonstrate to them that we have access to demand that can successfully convert their samples into revenue. So I see these opportunities as exciting, and we will continue to pursue every one that arises.

Allen Klee, Analyst

Thank you so much.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Tracy Curley for any closing remarks.

Tracy Curley, CEO

I'd like to thank everyone again for joining us on today's call and for your continued interest in iSpecimen. As I mentioned earlier, this is an exciting time to be involved with iSpecimen. We look forward to having follow-up conversations with many of you and to see many of you at upcoming events. With that, thank you. And have a great day.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.