iSpecimen Inc. (NASDAQ:ISPC) Q3 2022 Earnings Conference Call November 8, 2022 8:30 AM ET
Company Participants
Allison Soss – IR
Tracy Curley – Interim-CEO and CFO
Conference Call Participants
Matt Hewitt – Craig-Hallum Capital
Operator
Good day, everyone, and welcome to the iSpecimen Third Quarter 2022 Conference Call. [Operator Instructions] This conference call is being recorded. A replay of today’s call will be available on the Investor Relations section of iSpecimen’s website and will remain posted there 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
Thank you, operator. Good morning, everyone, and welcome to iSpecimen’s third quarter 2022 results conference call. With us on today’s call is Tracy Curley, Interim Chief Executive Officer and Chief Financial 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, 2021, filed with the SEC. Copies of this document are 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, Interim Chief Executive Officer and Chief Financial Officer. Tracy, please go ahead.
Tracy Curley
Good morning, everyone, and thank you for joining us today on our third quarter 2022 earnings conference call.
Today, I will begin by addressing some recent changes in the C-suite, followed by a review of our operational and financial performance for the three and nine months ended September 30, 2022. We will then open the call for questions.
As reported in September and effective on October 25, both Christopher Ianelli, former CEO, and Jill Mullan, former COO, are no longer with the company. I would like to personally thank Chris and Jill for the important contributions they made in constructing and building a proprietary marketplace platform that connects life science researchers with valuable specimens. I am confident that their vision will continue.
The Board and I understood that the simultaneous departures of the CEO and COO, coupled with naming me Interim CEO, represented one of the most important changes to the company, especially in a public context.
Against that backdrop, I am pleased to report that the entire organization successfully mobilized to ensure continuity both internally and externally and to make certain that we continue to provide superior customer service and successfully facilitate transactions across our platform. Our core business remains strong, and we haven’t missed a beat.
At the same time, I would be remiss if I didn’t express my deep gratitude to the entire iSpecimen team for their continued strong work and dedication to our collective vision and success. Their understanding and willingness to move forward in a positive, productive and collaborative manner has been invaluable to me.
While it has been a little over six-weeks since my transition, I’ve increased my efforts to manage my expanding responsibilities as Interim CEO, while continuing as the CFO. Since my appointment, I have increased cross-functional team communications to help improve our execution. I have reviewed the technology road map with our CIO and VP of Product Development and have greenlighted projects to accelerate development time lines. I have also held numerous one-on-one and group meetings with all of our employees to discuss the vision for the business and to address any concerns they may have.
These meetings have allowed me to gain valuable insight into the business and how we can improve operations. I’m excited and encouraged by both our near and long-term prospects. We are actively pursuing several new multimillion dollar business initiatives.
At the same time, we are reviewing the company’s structure, processes and resources to evaluate and identify areas for improvement. We are laser-focused on creating a runway for growth and scale.
As a marketplace, ensuring a high match rate between our research customers and our considerable network of suppliers is fundamental to our business. Through my ongoing assessment, I have identified opportunities for us to more effectively match specimen request to the inventory and capabilities of our supplier network.
We’ve begun addressing these opportunities and believe that the end result will be a dramatic increase in the utilization rate of our supplier network, which today is heavily skewed towards the top 10% to 15% of our suppliers.
We recently began an initiative designed to dramatically reduce or eliminate supplier concentration altogether. I expect the re-leveling of our network will result in higher match rates, market depth and improved time to match.
Additionally, we recently initiated the Marketplace Onsite program to offer additional support to our biospecimen provider partners. The job of the Marketplace Onsite coordinator is to deal with all requests and submit proposals on behalf of the providers, streamlining sample-related management and reducing strain on existing staff and product pipeline. By unlocking the full value of our biospecimen supplier network, we’ll be able to more effectively support our research customer use for sourcing critical biospecimens for medical research.
Harping back to comments made on previous quarterly calls, the supply of biospecimens derived from health care providers, including biofluids, solid tissue and stem cells is what fuels medical research. Investing in this effort will help drive the sustainability of our business model and position iSpecimen as the premier biospecimen procurement platform.
To reiterate, our goal is to reduce supplier concentration and increase utilization by tapping into the full potential of all our suppliers. The more suppliers we utilize, the less constrained our supply chain becomes, which will result in more researcher request being fulfilled.
This year, we launched a significant initiative to reorganize our sales approach, placing a renewed focus on our sales funnel and positioning it to scale in a post-COVID-19 environment. To further this initiative, we have retained a revenue consultant to evaluate our existing commercial and operational structure as well as processes to determine existing shortfalls that might need to shore up and improve in order to strengthen our organization.
Specifically, we are conducting a top-down analysis of our commercial organization, and this flows into our fulfillment pipeline. This initiative will evaluate all the touch points and inputs to better understand the drivers required for successful purchase order fulfillment.
We will also be developing more survey capabilities at various steps across the sales funnel to improve results at those critical customer decision points. While the top of the funnel has grown, the conversion rates have improved due to the recent structural changes we discussed last quarter. I’m confident that the knowledge we gain from our customers will result in further improvements to our close rates as well as the overall customer experience. The company remains committed to enhancing the iSpecimen marketplace platform.
We recently launched the open feasibility of Dashboard on iSpecimen’s marketplace, which allows supplier partners to review potential future research projects at any time and initiate their interest by submitting a proposal. The Dashboard also enables precision specimen matchmaking to flow seamlessly from providers to researchers through the iSpecimen marketplace, enabling partners to engage more productively and beneficially with new and existing research projects and requests.
Through these recent initiatives, we are aiming to provide a best-in-class platform for researchers and suppliers to connect seamlessly and to improve the biospecimen procurement process. To that end, we have several additional internally developed software projects in the pipeline to support our efforts.
First, we are improving our electronic medical records, specifically with our first patient data integration to bring the same level of competence when locating specimens to locating patients and donors. This project, which will accelerate the prospective collections process and reduce costs is expected to be completed in the first half of 2023.
Second, our technology team is currently performing an overhaul of the marketplace search capabilities. We are consistently reevaluating our marketplace search functionality, because when a user wants to procure or buy our specimen, it all starts with using the search button. We plan to establish more modern user interface standards, new levels of automation, which will help scale, and major enhancements to our matchmaking algorithm to ensure the best possible matches between researchers and our considerable supplier network.
This overhaul will help ensure the best results between researchers and life science providers. We also expect to complete this project in the first half of 2023. Third, we are not stopping at front-end development. We are also updating our back end in the structure to support growth and scale, enhance security and prepare for our data-as-a-service pilot. The back-end updates and data-as-a-service pilot are expected to be completed in the second half of 2023. The successful completion of the data-as-a-service pilot will allow us to validate the first of many possible additional revenue streams for the company.
Finally, we are using the insights provided by our supplier and researcher interactions to continue evolving our matchmaking algorithm, which is expected to result in better, faster matches and streamline the procurement process for our researchers and reducing supplier efforts.
As I mentioned previously, it all starts with the search function and we want to make certain we have best-in-class functionality. Moving to our top line results. iSpecimen achieved a significant record, all-time high milestone in the third quarter of 2023, posting $2.26 million in non-COVID revenue or 88% of total revenue.
This also represents for us the fifth quarter in a row of increasing non-COVID revenue. This exemplifies the durability of our core business model and the investments we’ve made to date and we’ll continue to make to expand our supplier network capabilities and enhance the marketplace platform. Focusing on the macroeconomic environment, which remains impacted by the lingering COVID-19 pandemic, there continues to be uncertainty about the strength of the global, Asia Pacific, U.K. and U.S.
economies. High interest rates and a potential recession remain a concern for all market participants, and we are closely monitoring the pace of specimen transactions. We believe that our business can be resilient through a continued economic downturn or a recession as well as any impact from inflation.
Now I’ll move on to discuss our financial results for the three and nine month period ended September 30, 2022, compared to the same period in 2021. We reported revenue of $2.6 million for the third quarter of 2022 compared to $2.7 million for the third quarter of 2021. The decreases in revenue for the three month period in 2022 were primarily attributable to the continued decline in sales of COVID-19 specimens when compared to the same period in the prior year. Specimens’ accession during the three months ended December 30, 2022, decreased by 560 specimens or 11% to 4,750 specimens compared to 5,300 specimens’ accession during the three months ended September 30, 2021.
The change in specimen mix resulted in an increase in the average selling price per specimen of approximately $32 or 6% compared to the same prior year’s period. For the three months ended September 30, 2022 and 2021, revenue derived from non-COVID-19 related specimens accounted for approximately $2.3 million and $1.8 million or 88% and 66%, respectively, of our total revenue, a 26% increase in non-COVID-19 revenue compared to the same prior year’s period and an all-time record-breaking high of non-COVID-19 revenue for the company. For the three months ended September 30, 2022 and 2021, revenue derived from specimens related to COVID-19 accounted for approximately $322,000 and $923,000 or 12% and 34%, respectively, of our total revenue.
During the nine month period ended September 30, 2022, we reported revenue of approximately $7.4 million compared to approximately $8.6 million during the same period last year. The decreases in revenue for the nine month period in 2022 were primarily attributable to the impact of the Russia and Ukraine war, which shut down our supply side in those regions and impacted our ability to fulfill orders at the start of the war. And although supply sites in Ukraine have mostly reopened, they are operating at a limited capacity.
We also continue to experience reductions in sales of COVID-19 specimens when compared to the same period in the prior year. We anticipate that our COVID-19 revenues will continue to decline and to be unpredictable, but do not have specific guidance. Specimens accession during the first nine months of 2022 decreased by approximately 482 specimens or 3% to approximately 16,668 specimens compared to approximately 17,150 specimens’ accession during the first nine months of 2021.
The change in specimen mix resulted in a decrease in average selling price per specimen or approximately $54 or 11% compared to the same prior year’s period. For the nine months ended September 30, 2022 and 2021, revenue derived from non-COVID-19 related specimens accounted for approximately $6.5 million and $6.1 million or 87% and 71%, respectively, of our total revenue, a 7% increase in non-COVID-19 revenue compared to the same prior year’s period.
For the nine months ended September 30, 2022 and 2021, revenue derived from specimens related to COVID-19 accounted for approximately $971,000 and $2.5 million or 13% and 29%, respectively, of our total revenue. Cost of revenue increased by 29% from approximately $914,000 for the third quarter of 2021 to approximately $1.2 million for the third quarter of 2022.
Cost of revenue for the nine month period ended September 30, 2022, was approximately $3.3 million compared to approximately $4 million for the same period in 2021, a decrease of 17%. The third quarter of 2022 increase was attributable to a 45% increase in the average cost per specimen impacted by the specimen mix, offset somewhat by an 11% decrease in the number of specimens’ accession for the current period compared to the same prior year’s period.
For the nine month period ended September 30, 2022, decrease was attributable to a 14% decline in the average cost per specimen impacted by the specimen mix, along with a 3% decrease in the number of specimens’ accession during the nine months ended September 30, 2022, over the same prior year’s period.
For the third quarter of 2022, we increased our cash spend for technology to approximately $1.2 million from $592,000 for the same prior year’s period. For the nine month period ended September 30, 2022, we increased our cash spend for technology to approximately $2 million from $1.3 million for the same prior year’s period.
The increase in spend for the three and nine month periods ended September 30, 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 thus far this year. For the third quarter of 2022, this cash outlay was comprised of approximately $772,000 of capitalized internally developed software and approximately $460,000 in technology expenses that we were not able to capitalize, and therefore, was classified as technology expense.
The remainder of the technology expense for the third quarter of 2022, which comprises of approximately $293,000 of non-cash amortization related to internally developed software. Total technology expense for the third quarter of 2022 was approximately $753,000 compared to $544,000 in the same prior year’s period.
For the nine month period ended September 30, 2022, this cash outlay was comprised of approximately $1.5 million of capitalized internally developed software and approximately $1.1 million of technology expenses that we were not able to capitalize, and therefore, were classified as technology expense.
The remainder of the technology expense for the nine month period ended September 30, 2022, was comprised of approximate $826,000 of non-cash amortization related to the internally developed software. Total technology expense for the nine month period ended September 30, 2022, was approximately $1.9 million compared to $1.3 million for the same prior year’s period.
Sales and marketing expenses were approximately $833,000 for the third quarter of 2022 compared to approximately $513,000 for the third quarter of 2021. For the nine month period ended September 30, 2022, sales and marketing expenses were approximately $2.5 million compared to approximately $1.7 million during the same prior year’s period. The increase was attributable to increases in payroll and related expenses, external marketing efforts and general operating expenses.
General and administrative expenses were approximately $2.2 million for the third quarter of 2022 compared to approximately $1.6 million for the third quarter 2021. For the nine month period ended September 30, 2022, general and administrative expenses was approximately $5.6 million compared to approximately $4.1 million during the same prior year’s period. The increases were primarily related to an increase in costs related to compensation, severance costs, stock compensation, directors’ and officers’ insurance and operating and maintenance expenses. As of September 30, 2022, our cash balance was approximately $20.7 million compared to approximately $27.7 million as of December 31, 2021.
This concludes our prepared remarks. Now, I would like to open the call for questions. Operator, please go ahead.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And it will come from Matt Hewitt with Craig-Hallum Capital. Please go ahead.
Matt Hewitt
Good morning, Tracy. Thanks for providing the update and all the detail. Maybe the first one for me. There’s been a lot of questions and comments the past quarter or two regarding the health of the biotech and pharma markets. You touched on it briefly. But I’m just curious, what are you seeing and hearing from your customers both on the supply and the procurement side as far as the health of that market? I know it’s primarily the small biotech and pharma customers. But are you seeing some of that impact? Or what could you tell us there?
Tracy Curley
So on the customer side, we are seeing that we are still getting projects, but they’re smaller in value, possibly more specimens, but the values are smaller. But in our opinion, they’re preserving cash. They’re continuing to do research, but they’re trying to preserve cash at the moment.
Matt Hewitt
Got it. And then I think one of the things that you mentioned earlier is that your plan — one of the enhancements that you’re going to be making is to the search capabilities. And I’m just curious, as you work through something like that from a functionality standpoint, what steps — or what do you put in place to ensure that you don’t have any disruption to the ongoing business?
Tracy Curley
Well, we’re doing that in parallel. And we’re doing a lot of testing, if you will, off into an environment that doesn’t impact. So we don’t go live until we’re sure that the product is ready to go live. So there’s no disruption.
Matt Hewitt
Got it. All right. And maybe one last one and I’ll hop back in the queue. I think you laid out a few different enhancements that you’re going to be working on: a couple for the first half, one for the second half of the year. Of those 3, what do you view as being the biggest potential driver to accelerating growth and profitability? Thank you.
Tracy Curley
For me, it’s the revenue stream associated with the data. This is something that we talked about pre-IPO that the proceeds that we raked in the IPO were going to be used to develop our technology further. And one of the things we discussed was our ability to tap into our data so we can monetize that. So to me, that’s a really exciting thing, that, by the middle of next year, we’re going to be doing our pilot on data as a revenue stream. So I’m pretty excited about that, Matt
Matt Hewitt
That’s great. Thank you very much.
Tracy Curley
Thank you.
Operator
And this will conclude our question-and-answer session. I’d like to turn the call back over to Ms. Tracy Curley, Interim CEO and CFO, for any closing remarks.
Tracy Curley
I would like to thank everyone again for joining us today and for your continued interest in iSpecimen. We look forward to having follow-up conversations with many of you and to seeing many of you at upcoming events.
And with that, I thank you. Have a great day.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines at this time.
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