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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2021

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission File No. 001-40501

iSpecimen Inc.

(Exact name of Registrant as specified in its Charter)

Delaware

    

27-0480143

(State or other jurisdiction of incorporation
or organization)

(I.R.S. Employer Identification No.)

450 Bedford Street, Lexington, Massachusetts 02420

(Address of principal executive offices) (Zip Code)

(781) 301-6700

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

    

Trading Symbol(s)

    

Name of Each Exchange on Which Registered

Common Stock, par value $0.0001 per share

ISPC

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of August 6, 2021, there were 6,922,628 shares of common stock, par value $0.0001 per share, issued and outstanding.

iSPECIMEN INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2021

TABLE OF CONTENTS

Page

PART I - FINANCIAL INFORMATION 

ITEM 1 .

Financial Statements

Condensed Balance Sheets as of June 30, 2021 (Unaudited) and December 31, 2020

3

Unaudited Condensed Statements of Operations for the Three Months and Six Months Ended June 30, 2021 and 2020

4

Unaudited Condensed Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Six Months Ended June 30, 2021 and 2020

5

Unaudited Condensed Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020

6

Notes to Unaudited Condensed Financial Statements

7

ITEM 2 .

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

ITEM 3 .

Quantitative and Qualitative Disclosures About Market Risk

38

ITEM 4 .

Controls and Procedures

38

PART II – OTHER INFORMATION

ITEM 1 .

Legal Proceedings

40

ITEM 1A .

Risk Factors

40

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

ITEM 3.

Defaults Upon Senior Securities

40

ITEM 4.

Mine Safety Disclosures

41

ITEM 5.

Other Information

41

ITEM 6.

Exhibits

41

SIGNATURES

42

2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

iSpecimen Inc.

Condensed Balance Sheets

June 30, 2021

    

December 31, 2020

ASSETS

(Unaudited)

Current assets:

 

  

 

  

Cash

$

13,184,310

$

695,909

Accounts receivable – unbilled

 

1,125,789

 

652,761

Accounts receivable, net of allowance for doubtful accounts of $147,714 and $108,096 at June 30, 2021 and December 31, 2020, respectively

 

1,987,112

 

1,526,392

Prepaid expenses and other current assets

 

442,089

 

417,929

Tax credit receivable, current portion

 

179,376

 

179,376

Total current assets

 

16,918,676

 

3,472,367

Property and equipment, net

 

55,879

 

75,589

Internally developed software, net

 

2,602,886

 

2,634,139

Security deposits

 

27,601

 

27,601

Total assets

$

19,605,042

$

6,209,696

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

3,233,231

$

1,792,432

Accrued expenses

 

1,879,812

 

810,910

Accrued interest

 

9,864

 

3,696,944

Convertible notes payable, related parties, net of unamortized debt discount and debt issuance costs

 

 

5,490,811

Derivative liability for embedded conversion features on convertible notes payable

 

 

2,373,000

Bridge notes payable, net of debt issuance costs

 

 

4,589,228

Bridge notes payable, related parties

 

 

1,905,000

Derivative liability for embedded conversion feature on bridge notes payable and bridge notes, related parties

 

 

Note payable, current portion

 

 

604,109

Deferred revenue

 

802,860

 

873,254

Total current liabilities

 

5,925,767

 

22,135,688

Note payable, net of current portion

 

 

178,899

Bridge notes payable, net of debt issuance costs

2,675,000

Bridge notes payable, related parties

325,000

Total liabilities

 

8,925,767

 

22,314,587

Commitments and contingencies

 

  

 

  

Series B convertible preferred stock, $0.0001 par value, 3,200,000 shares authorized, 0 and 572,465 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively

7,999,997

Series A-1 convertible preferred stock, $0.0001 par value, 556,550 shares authorized, 0 and 100,365 issued and outstanding at June 30, 2021 and December 31, 2020, respectively

 

 

561,041

Series A convertible preferred stock, $0.0001 par value, 3,427,871 shares authorized, 0 and 618,182 issued and outstanding at June 30, 2021 and December 31, 2020, respectively

 

 

2,612,038

Total convertible preferred stock

 

 

11,173,076

Stockholders’ equity (deficit)

 

 

  

Common stock, $0.0001 par value, 200,000,000 shares authorized, 6,596,729 issued, and 6,565,729 outstanding at June 30, 2021, and 16,000,000 shares authorized, 967,213 issued and 936,213 outstanding at December 31, 2020

 

657

 

94

Additional paid-in capital

 

45,094,782

 

1,779,698

Treasury stock, 31,000 shares at June 30, 2021 and December 31, 2020, at cost

 

(172)

 

(172)

Accumulated deficit

 

(34,415,992)

 

(29,057,587)

Total stockholders’ equity (deficit)

 

10,679,275

 

(27,277,967)

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

$

19,605,042

$

6,209,696

See accompanying notes to these unaudited interim financial statements.

3

iSpecimen Inc.

Condensed Statements of Operations

(Unaudited)

    

Three months ended June 30, 

 

Six months ended June 30, 

    

2021

    

2020

    

2021

    

2020

Revenue

$

2,903,876

$

1,504,569

$

5,867,683

$

3,216,228

Operating expenses:

Cost of revenue

 

1,489,196

 

473,982

3,112,847

1,128,249

Technology

 

361,799

 

291,601

771,750

718,314

Sales and marketing

 

647,592

 

367,617

1,176,978

799,256

Supply development

 

100,693

 

147,588

212,269

262,193

Fulfillment

 

287,275

 

185,185

556,371

400,355

General and administrative

 

1,545,852

 

343,602

2,508,643

656,855

Total operating expenses

 

4,432,407

 

1,809,575

8,338,858

3,965,222

Loss from operations

 

(1,528,531)

 

(305,006)

(2,471,175)

(748,994)

Other income (expense), net

Interest expense

 

(1,133,479)

 

(459,005)

(1,986,407)

(1,048,220)

Change in fair value of derivative liability on convertible notes

 

(117,000)

 

583,000

(271,000)

(22,000)

Change in fair value of derivative liability on bridge notes and bridge notes,related parties

 

1,630,700

 

1,582,700

Gain (loss) on extinguishment of bridge notes and bridge notes, related parties

9,746

(2,740,425)

Loss on extinguishment of convertible notes and convertible notes, related parties

(260,185)

(260,185)

Gain on extinguishment of note payable

 

 

788,156

Other income (expense)

 

3,663

 

6,688

(69)

6,691

Interest income

 

172

 

86

309

Other income (expense), net

 

133,617

 

130,769

(2,887,230)

(1,063,220)

Net loss before benefit from income taxes

 

(1,394,914)

 

(174,237)

(5,358,405)

(1,812,214)

Benefit from income taxes

 

 

145

145

Net loss

$

(1,394,914)

$

(174,092)

$

(5,358,405)

$

(1,812,069)

Net loss per share

Basic and diluted

$

(0.87)

$

(0.19)

$

(4.21)

$

(1.94)

Weighted average common shares outstanding

Basic and diluted

 

1,611,774

 

936,213

1,273,993

936,213

See accompanying notes to these unaudited interim financial statements.

4

iSpecimen Inc.

Condensed Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(Unaudited)

    

    

    

  

  

    

    

    

    

Total

Series B Convertible

Series A-1 Convertible 

Series A Convertible 

Additional

 Stockholders'

Preferred Stock

Preferred Stock

Preferred Stock

Common Stock

Treasury Stock

 Paid-In 

Accumulated 

Equity

Shares

Amount

Shares

Amount

Shares

Amount

Shares

Amount

Shares

Amount

Capital

Deficit

(Deficit)

Balance at December 31, 2020

 

572,465

$

7,999,997

 

100,365

$

561,041

 

618,182

$

2,612,038

 

936,213

$

94

 

31,000

$

(172)

$

1,779,698

$

(29,057,587)

$

(27,277,967)

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

22,036

 

 

22,036

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(3,963,491)

 

(3,963,491)

Balance at March 31, 2021 (unaudited)

 

572,465

$

7,999,997

 

100,365

$

561,041

 

618,182

$

2,612,038

 

936,213

$

94

 

31,000

$

(172)

$

1,801,734

$

(33,021,078)

$

(31,219,422)

Conversion of redeemable convertible preferred stock into common stock upon initial public offering

 

(572,465)

 

(7,999,997)

 

(100,365)

 

(561,041)

 

(618,182)

 

(2,612,038)

 

1,291,012

 

129

 

 

 

11,172,947

 

 

11,173,076

Conversion of principal and accrued interest of convertible notes and bridge notes into common stock upon initial public offering

2,049,043

205

16,392,139

16,392,344

Issuance of common stock in connection with public offering

 

 

 

 

 

 

 

2,250,000

 

225

 

 

 

17,999,775

 

 

18,000,000

Offering costs in connection with public offering

 

 

 

 

 

 

 

 

 

 

 

(2,339,816)

 

 

(2,339,816)

Issuance of common stock through exercise of stock options

 

 

 

 

 

 

 

39,461

 

4

 

 

 

39,629

 

 

39,633

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

28,374

 

 

28,374

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(1,394,914)

 

(1,394,914)

Balance at June 30, 2021 (unaudited)

 

$

 

$

 

$

 

6,565,729

$

657

 

31,000

$

(172)

$

45,094,782

$

(34,415,992)

$

10,679,275

Series B Convertible

Series A-1 Convertible

Series A Convertible

Additional 

Total

Preferred Stock

Preferred Stock

Preferred Stock

Common Stock

Treasury Stock

Paid-In 

Accumulated 

Stockholders’

Shares  

Amount  

Shares  

Amount  

Shares 

Amount

Shares

    

Amount  

Shares

    

 Amount  

 Capital 

Deficit

 Deficit

Balance at December 31, 2019

    

572,465

    

$

7,999,997

    

100,365

    

$

561,041

    

618,182

    

$

2,612,038

    

936,213

    

$

94

    

31,000

    

$

(172)

    

$

1,686,832

    

$

(24,405,503)

    

(22,718,749)

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

22,045

 

 

22,045

Net loss

 

 

 

 

 

 

 

 

 

 

 

(1,637,979)

 

(1,637,979)

Balance at March 31, 2020 (unaudited)

 

572,465

$

7,999,997

 

100,365

$

561,041

 

618,182

$

2,612,038

 

936,213

$

94

31,000

$

(172)

$

1,708,877

$

(26,043,482)

$

(24,334,683)

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

29,287

 

 

29,287

Net loss

 

 

 

 

 

 

 

 

 

 

 

(174,092)

 

(174,092)

Balance at June 30, 2020 (unaudited)

 

572,465

$

7,999,997

 

100,365

$

561,041

 

618,182

$

2,612,038

 

936,213

$

94

31,000

$

(172)

$

1,738,164

$

(26,217,574)

$

(24,479,488)

See accompanying notes to these unaudited interim financial statements.

5

iSpecimen Inc.

Condensed Statements of Cash Flows

(Unaudited)

Six months ended June 30, 

    

2021

    

2020

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

$

(5,358,405)

$

(1,812,069)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

  

Share-based compensation

 

50,410

 

51,332

Amortization of internally developed software

 

471,584

 

420,257

Depreciation of property and equipment

 

22,260

 

28,680

Bad debt expense

 

39,618

 

Amortization of discount and debt issuance costs on convertible notes

 

1,088

 

139,232

Amortization of discount on bridge notes

 

869,600

 

Change in fair value of derivative liabilities

 

(1,311,700)

 

22,000

Loss on extinguishment on bridge notes

 

2,740,425

 

Loss on extinguishment of convertible notes

260,185

Gain on extinguishment on note payable

 

(788,156)

 

Change in operating assets and liabilities:

 

 

  

Accounts receivable

 

(500,338)

 

(183,117)

Accounts receivable – unbilled

 

(473,028)

 

(280,555)

Prepaid expenses and other current assets

 

(24,160)

 

(3,493)

Tax credit receivable

104,479

Accounts payable

 

1,440,799

 

146,202

Accrued expenses

 

1,068,902

 

157,086

Accrued interest

 

(1,707,225)

 

906,476

Deferred revenue

 

(70,394)

 

359,171

Net cash (used in) provided by operating activities

 

(3,268,535)

 

55,681

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

  

Purchase of property and equipment

 

(2,550)

 

(1,007)

Capitalization of internally developed software

 

(440,331)

 

(591,017)

Net cash used in investing activities

 

(442,881)

 

(592,024)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Proceeds from issuance of bridge notes payable

 

500,000

 

1,000,000

Proceeds from issuance of note payable

783,008

Proceeds from exercise of stock options

39,633

Proceeds from issuance of common stock in connection with public offering

18,000,000

Payment of offering cost in connection with the issuance of common stock in connection with public offering

(2,339,816)

Net cash provided by financing activities

 

16,199,817

 

1,783,008

Net increase in cash

 

12,488,401

 

1,246,665

Cash at beginning of period

 

695,909

 

53,893

Cash at end of period

$

13,184,310

$

1,300,558

Supplemental disclosure of cash flow information:

Cash paid for interest

$

2,824,032

$

Supplemental disclosure of non-cash investing and financing activities:

Conversion of redeemable convertible preferred stock into common stock

$

11,173,076

$

Conversion of convertible notes and accrued interest into common stock

$

6,748,729

$

Conversion of bridge notes and accrued interest into common stock

$

4,717,646

$

Issuance of common stock warrants as offering costs in connection with public offering of common stock

$

374,400

$

See accompanying notes to these unaudited interim financial statements.

6

Table of Contents

iSpecimen Inc.

Notes to Unaudited Condensed Financial Statements

1.NATURE OF BUSINESS AND BASIS OF PRESENTATION

Business

iSpecimen Inc. (“iSpecimen” or the “Company”) was incorporated in 2009 under the laws of the state of Delaware. The Company has developed and launched a proprietary online marketplace platform that connects medical researchers who need access to subjects, samples, and data, with hospitals, laboratories, and other organizations who have access to them. iSpecimen is a technology-driven company founded to address a critical challenge: how to connect life science researchers who need human biofluids, tissues, and living cells (“biospecimens”) for their research, with biospecimens available (but not easily accessible) in healthcare provider organizations worldwide. The Company’s proprietary platform, the iSpecimen Marketplace platform, is designed to help solve this problem and transform the biospecimen procurement process to accelerate medical discovery. The Company is headquartered in Lexington, Massachusetts and its principal market is North America. The Company operates as one operating and reporting segment.

Basis of Presentation

The accompanying unaudited interim condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) as determined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information, and, pursuant to the rules and regulations of Article 10 of Regulation S-X of the Securities Act of 1933, as amended (the “Securities Act”), published by the Securities and Exchange Commission (“SEC”) for interim financial statements. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited interim condensed financial statements reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the balances and results of operations for the periods presented. They may not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2020 included in the Company’s final prospectus dated June 16, 2021, pursuant to Rule 424(b) under the Securities Act. The results of operations for any interim periods are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.

On March 30, 2021, the Company effected a 1-for-5.545 reverse stock split (“reverse stock split”) of the Company’s common stock. All fractional shares as a result of the reverse stock split were rounded down and no fractional shares were issued in connection with the reverse stock split. The par value, authorized share amount, and other terms of the common stock and preferred stock were not affected by the reverse stock split. All share and per share amounts, including stock options, warrants, and restricted stock awards have been retroactively adjusted in these financial statements for all periods presented to reflect the reverse stock split. Further, exercise prices of stock options and warrants have been retroactively adjusted in these financial statements for all periods presented to reflect the reverse stock split.

Initial Public Offering

On June 21, 2021, the Company consummated its initial public offering (“IPO”) in which the Company issued and sold 2,250,000 shares of its common stock at a public offering price of $8.00 per share, for aggregate gross proceeds of $18 million. The net proceeds from the IPO were $15.7 million after deducting underwriting discounts of $1.7 million and other offering costs of $0.6 million. The shares of common stock commenced trading on the Nasdaq Stock Market LLC on June 17, 2021 under the ticker symbol “ISPC.”

On July 1, 2021, the Company sold an additional 337,500 shares of its common stock, pursuant to the underwriters’ full exercise of the option, at a public offering price of $8.00 per share, for aggregate gross proceeds of $2.7 million. In aggregate, the Company received approximately $18.2 million after deducting for all underwriting discounts of $1.9 million and other offering costs of $0.6 million.

Upon closing of the IPO, all of the then-outstanding shares of redeemable convertible preferred stock automatically converted into common stock at a ratio of 1:1, resulting in the issuance of 1,291,012 shares of common stock. Subsequent to the closing of the IPO, there were no shares of convertible preferred stock outstanding.

7

Table of Contents

iSpecimen Inc.

Notes to Unaudited Condensed Financial Statements

Upon closing of the IPO, the Company converted all $5.5 million of its outstanding principal and all unpaid and accrued interest of approximately $1.3 million of the Convertible Notes (as defined below) into 1,206,614 shares of common stock at a conversion price of $5.60 per share. The Company incurred an approximately $0.3 million loss on conversion of the Convertible Notes during the period ended June 30, 2021. As of June 30, 2021, there were no Convertible Notes outstanding.

Additionally, upon closing of the IPO, the Company converted $4 million of its outstanding principal and accrued and unpaid interest of approximately $0.7 million of the Bridge Notes (as defined below), as amended, into 842,429 shares of common stock at a conversion price of $5.60 per share. As of June 30, 2021, there was a remaining principal balance of $3.0 million on the Bridge Notes. The remaining principal of $3.0 million accrues interest at a rate of fifteen percent (15%) per annum with a maturity date of December 16, 2022.

Liquidity and Going Concern

The Company has recognized recurring losses and at June 30, 2021, the Company had working capital of $10,992,909, an accumulated deficit of $34,415,992, cash of $13,184,310 and accounts payable and accrued expenses of $5,113,043.

Management believes that the Company’s existing cash and cash equivalents, which include the net proceeds from the IPO, will allow the Company to continue its operations for at least the next 12 months from the date these financial statements are issued and therefore the conditions raising substantial doubt raised in prior periods has been alleviated. As a result of recurring losses, the continued viability of the Company beyond August 2022 may be dependent on its ability to continue to raise additional capital to finance its operations.

Impact of the COVID-19 Pandemic on the Company’s Operations

In December 2019, the novel coronavirus SARS-Cov2, or COVID-19 outbreak, was reported to have surfaced in China. On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency due to the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

The Company is subject to the risks arising from the COVID-19 outbreak’s social and economic impacts on the healthcare services industry. The Company’s management believes that the social and economic impacts could have a significant impact on future financial condition, liquidity, and results of operations, which include but are not limited to the following: (i) restrictions on in-person activities arising from shelter-in-place, or similar isolation orders; (ii) inability to source specimens from the Company’s suppliers arising from shelter-in-place, or similar isolation orders; (iii) reduced capacity if personnel are infected or quarantined; (iv) decline in researcher demand for specimens; and (v) deteriorating economic conditions, such as increased unemployment rates and recessionary conditions.

The COVID-19 outbreak has continued to impact the Company’s operations during the six months ended June 30, 2021. In response to the COVID-19 outbreak, the Company initially implemented measures to help stabilize revenue as well as measures to reduce costs. To stabilize revenue, the Company added COVID-19 samples to its product line to support growing research in this area and also implemented mobile phlebotomy to more easily access research subjects. While research continues in this area, through June 2021, specimen requests for COVID-19 samples are declining, when compared to the same period in 2020. Given the evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company expects this matter to continue to have an impact on its results of operations, financial condition, and liquidity. However, the extent of the financial impact and the duration cannot be reasonably estimated at this time.

8

Table of Contents

iSpecimen Inc.

Notes to Unaudited Condensed Financial Statements

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies and recent accounting standards are summarized in Note 2 of the Company’s financial statements for the year ended December 31, 2020. There were no significant changes to these accounting policies during the six months ended June 30, 2021.

Use of Estimates

The preparation of the Company’s unaudited interim condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company utilizes certain estimates in the determination of the fair value of its warrants, deferred tax valuation allowances, revenue recognition, share-based compensation, derivative liabilities for embedded conversion features, and accrued expenses amongst others. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results could differ from such estimates.

Off-Balance Sheet Risk and Concentrations of Credit Risk

The Company has no significant off-balance sheet risks, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements. Cash accounts are maintained at financial institutions that potentially subject the Company to concentrations of credit risk. At June 30, 2021 and December 31, 2020, substantially all of the Company’s cash was deposited in accounts at one financial institution. The Company maintains its cash deposits, which at times may exceed the federally insured limits, with a reputable financial institution and, accordingly, the Company believes such funds are subject to minimal credit risk.

Concentration of credit risk with respect to accounts receivable is typically related to customers who account for a significant portion of revenue. During the three months ended June 30, 2021, two customers represented approximately 14% and 10% of the Company’s revenues and comprised 15% and 4% of accounts receivable and 0% and 0% of accounts receivable-unbilled at June 30, 2021. During the three months ended June 30, 2020, one customer represented approximately 31% of the Company’s revenues and comprised 1% of accounts receivable, and 0% of accounts receivable-unbilled at June 30, 2020.

During the six months ended June 30, 2021, two customers represented approximately 14% and 11% of the Company’s revenues and comprised 4% and 2% of accounts receivable and 0% and 0% of accounts receivable-unbilled at June 30, 2021. During the six months ended June 30, 2020, two customers represented approximately 30% and 18% of the Company’s revenues and comprised 1% and 0% of accounts receivable, and 0% and 53% of accounts receivable-unbilled at June 30, 2020.

During the three months ended June 30, 2021 and 2020, revenue attributable to customers located in foreign countries represented approximately 11% and 4% of revenue, respectively. During the three months ended June 30, 2021 and 2020, accounts receivable attributable to customers located in foreign countries represented approximately 8% and 6% of accounts receivable, respectively. During the three months ended June 30, 2021 and 2020, accounts receivable-unbilled attributable to customers located in foreign countries represented approximately 6% and 1% of accounts receivable-unbilled, respectively.

During the six months ended June 30, 2021 and 2020, revenue attributable to customers located in foreign countries represented approximately 8% and 7% of revenue, respectively. During the six months ended June 30, 2021 and 2020, accounts receivable attributable to customers located in foreign countries represented approximately 8% and 6% of accounts receivable, respectively. During the six months ended June 30, 2021 and 2020, accounts receivable-unbilled attributable to customers located in foreign countries represented approximately 6% and 1% of accounts receivable-unbilled, respectively.

9

Table of Contents

iSpecimen Inc.

Notes to Unaudited Condensed Financial Statements

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:

Level 1 — Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2 — Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

For certain financial instruments, including cash, accounts receivable, and accounts payable, the carrying amounts approximate their fair values as of June 30, 2021 and December 31, 2020 because of their short-term nature. The liability in connection with conversion features included within certain of the Company’s convertible notes payable and bridge notes payable are classified as a derivative liability for embedded conversion features on the balance sheets and were considered to be a Level 3 liability.

Deferred Initial Public Offering Costs

The Company capitalizes certain legal, professional, accounting and other third-party fees that are directly associated with in-process equity issuances as deferred initial public offering costs until such equity issuances are consummated. After consummation of the equity issuance, these costs are recorded as a reduction in the capitalized amount associated with the equity issuance. Should the equity issuance be abandoned, the deferred initial public offering costs will be expensed immediately as a charge to operating expenses in the consolidated statement of operations. On June 21, 2021, the Company consummated its IPO; accordingly, the Company recognized deferred initial public offering costs of approximately $0.6 million as a reduction from gross proceeds associated with the IPO through additional paid-in capital in the accompanying condensed consolidated balance sheet. The Company recorded approximately $2.3 million of offering costs in additional paid-in capital in connection with the IPO. Accordingly, there were no deferred offering costs as of June 30, 2021. The Company had approximately $265,000 of deferred offering costs related to the IPO which were recorded in other current assets on the balance sheet as of December 31, 2020.

Derivative Liability for Embedded Conversion Features

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.

The Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivatives to be accounted for separately. In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other bifurcated embedded derivative instruments in the convertible instrument, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. The result of this accounting treatment is that the fair value of the embedded derivative is recorded as a liability and marked-to-market each balance sheet date, with the change in fair value recorded in the statements of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.

Revenue Recognition and Accounts Receivable

The Company recognizes revenue using the five step approach as follows: (1) identify the contract with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the Company satisfies the performance obligations.

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Table of Contents

iSpecimen Inc.

Notes to Unaudited Condensed Financial Statements

The Company generates revenue by procuring various specimens from hospitals, laboratories, and other supply sites, for the Company’s medical research customers using the Company’s proprietary software, the iSpecimen Marketplace, to identify, locate, and ultimately validate the required specimens to the Company’s 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 the Company’s customer at the agreed price per specimen as indicated in the customer contract with the Company. The Company does not currently charge suppliers or customers for the use of the Company’s proprietary software. Each customer will execute a material and data use agreement with the Company or agrees to online purchase terms, each of which includes terms such as specimen and data use, shipment terms, payment and cancellation terms. These are then supplemented by purchase orders that specify specimen requirements including detailed inclusion/exclusion criteria, quantities to be collected, and pricing. Collectively, these customer agreements represent the Company’s contracts with its customer. Generally, contracts have fixed unit pricing. For certain specimen orders, a refundable customer deposit may be required prior to order fulfillment depending on project set-up requirements, presented as deferred revenue. The Company expects to recognize the deferred revenue within the next twelve months.

Specimen collections occur at supply sites within the Company’s network. “Collection” is when the specimen has been removed, or “collected” from the patient or donor. A specimen is often collected specifically for a particular Company order. Once collected, the specimen is assigned by the supplier to the Company and control of the specimen passes to the Company. “Accession” is the process whereby a collected specimen and associated data are registered and assigned in the iSpecimen Marketplace to a particular customer order, which can occur while a specimen is at the supplier site or while at the Company site and is when control of the specimen passes to the customer. Suppliers may ship specimens to the Company or directly to the customer, if specimens must be delivered within a short time period (less than 24 hours after collection) or shipping to the Company is not practical.

The Company has evaluated principal versus agent considerations as part of the Company’s revenue recognition policy. The Company has concluded that it acts as principal in the arrangement as it manages the procurement process from beginning to end and determines which suppliers will be used to fulfill an order, usually take physical possession of the specimens, set prices for the specimens, and bear the responsibility for customer credit risk.

The Company recognizes revenue over time, as the Company has created an asset with no alternative use to the Company which has an enforceable right to payment for performance completed to date. At contract inception, the Company reviews a contract, and related order upon receipt, to determine if the specimen ordered has an alternative use by us. Generally, specimens ordered do not have an alternative future use to the Company and the performance obligation is satisfied when the related specimens are accessioned. The Company uses an output method to recognize revenue for specimens with no alternative future use. The output is measured based on the number of specimens accessioned. In the rare circumstances where specimens do have an alternative future use, the Company’s performance obligation is satisfied at the time of shipment.

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.

Once a specimen that has no alternative future use, and for which the Company has an enforceable right to payment, has been accessioned, the Company records the offset to revenue in accounts receivable -- unbilled. Once the specimen has been shipped and invoiced, a reclassification is made from accounts receivable -- unbilled to accounts receivable.

Customers are generally given fourteen days from the receipt of specimens to inspect the specimens to ensure compliance with specifications set forth in the purchase order documentation. Customers are entitled to either receive replacement specimens or receive reimbursement of payments made for such specimens. The Company has a nominal history of returns for nonacceptance of specimens delivered. When this has occurred, the Company has given the customer a credit for the returns. The Company has not recorded a returns allowance.

11

Table of Contents

iSpecimen Inc.

Notes to Unaudited Condensed Financial Statements

The following table summarizes the Company’s revenue for the following periods:

Three months ended June 30, 

Six months ended June 30, 

    

2021

    

2020

    

2021

    

2020

Specimens – contracts with customers

$

2,829,214

$

1,483,613

$

5,776,509

$

3,184,955

Shipping and other

 

74,662

 

20,956

91,174

31,273

Revenue

$

2,903,876

$

1,504,569

$

5,867,683

$

3,216,228

The Company carries its accounts receivable at the invoiced amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable to determine if an allowance for doubtful accounts is necessary, based on economic conditions and each customer’s payment history. Receivables are written off when deemed uncollectible, with any future recoveries recorded as income when received. As of June 30, 2021 and December 31, 2020, the Company had an allowance for doubtful accounts of $147,714 and $108,096, respectively.

The Company applies the practical expedient to account for shipping and handling activities as fulfillment cost rather than as a separate performance obligation. Shipping and handling costs incurred are included in cost of revenue.

Common Stock Warrants

The Company accounts for common stock warrants as either equity instruments or liabilities, depending on the specific terms of the warrant agreement. The warrants shall be classified as a liability if 1) the underlying shares are classified as liabilities or 2) the entity can be required under any circumstances to settle the warrant by transferring cash or other assets. The measurement of equity-classified nonemployee share-based payments is generally fixed on the grant date and are considered compensatory. For additional discussion on warrants, see Note 9.

Net Loss Per Share

Basic net loss per share is calculated by dividing net loss applicable to common stockholders by the weighted- average number of shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by adjusting the weighted-average number of shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method. For purposes of the diluted net loss per share calculation, the potential impact of shares to be issued upon conversion of Series A, Series A-1 and Series B preferred stock, stock options, and warrants to purchase common stock are considered to be common stock equivalents, but have been excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive for all periods presented. Therefore, basic and diluted net loss per share applicable to common stockholders were the same for all periods presented.

The table below provides common stock equivalents excluded from diluted net loss per share for the following periods:

Six months ended June 30, 

    

2021

    

2020

Shares issuable upon conversion of preferred stock

 

1,291,012

Shares issuable upon exercise of stock options

 

224,914

253,575

Shares issuable upon exercise of warrants to purchase common stock

 

23,309

23,309

Shares issuable upon exercise of Underwriter Warrants to purchase common stock

 

90,000

Recent Accounting Standards

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

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Notes to Unaudited Condensed Financial Statements

The Company qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. The JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. The Company has 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, the Company 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 the Company either (i) irrevocably elects to “opt out” of such extended transition period or (ii) no longer qualifies as an emerging growth company.

3.FACTORING OF ACCOUNTS RECEIVABLE

On January 1, 2021 the Company entered into a factoring agreement (the “Factoring Agreement”) with Versant Funding LLC (“Versant”), in which the Company agreed to sell a minimum of $1.2 million of its accounts receivable without recourse, and which the Company granted Versant a security interest in substantially all of the Company’s assets, in accordance with the terms of the Factoring Agreement.

During the six months ended June 30, 2021, total net receivables sold under the Factoring Agreement was approximately $3.4 million. Without recourse indicates that the Company assigns and transfers its rights, title, and interest in and to the accounts receivable to Versant, meaning that the Company will not be liable to repay all or any portion of the advance amount if any portion of the accounts receivable is not paid by the Company’s customer(s). Information on accounts receivable identified for factoring are provided and verified by Versant prior to being accepted for factoring. Pursuant to the Factoring Agreement, the Company will receive an advance of 75% of the value of the purchased accounts receivable upfront with the remaining 25% holdback being classified as due from factoring in the condensed balance sheets. Upon receipt of the payment from the customer, Versant will calculate the applicable factoring fee from invoice date through the actual collection date, and will remit the remaining 25% holdback of the value of the factored accounts receivable, less their factoring fees, to the Company. The factoring fees range from 2.5% to 15% of the purchase price of the accounts receivable based on the age of the accounts receivable when collected. The Company is also charged for certain reimbursable administrative fees incurred on its behalf for the management of the program. In connection with the Factoring Agreement, the Company entered into a security agreement, granting to Versant a security interest in substantially all of the Company’s assets to secure the Company’s obligations under the Factoring Agreement. The sales of accounts receivable in accordance with the factoring arrangements are recognized as a reduction of accounts receivable, net in the balance sheet.

The Company pays factoring fees associated with the sale of receivables based on the dollar value of the receivables sold. Factoring fees paid under these arrangements totaled approximately $104,653 for the three months ended June 30, 2021, and $256,899 for the six months ended June 30,2021 which were recorded in general and administrative expenses in the condensed statements of operations. Upon termination of the Factoring Agreement on June 30, 2021, the Company paid Versant $139,374 in settlement of its balance payable to Versant pursuant to the Factoring Agreement. Upon termination of the Factoring Agreement, all future payments of accounts receivable shall be made directly to the Company.

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Notes to Unaudited Condensed Financial Statements

4.PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following at the dates indicated:

    

June 30, 

    

December 31, 

    

2021

    

2020

(unaudited)

Website

$

107,926

$

105,376

Computer equipment and purchased software

 

84,589

 

84,589

Equipment

 

35,449

 

35,449

Furniture and fixtures

 

87,184

 

87,184

Leasehold improvements

 

24,935

 

24,935

Total property and equipment

 

340,083

 

337,533

Accumulated depreciation

 

(284,204)

 

(261,944)

Total property and equipment, net

$

55,879

$

75,589

Depreciation expense for property and equipment was $11,130 and $14,340 for the three months ended June 30, 2021 and 2020, respectively, and $22,260 and $28,680 for the six months ended June 30, 2021 and 2020, respectively.

5.INTERNALLY DEVELOPED SOFTWARE, NET

During the six months ended June 30, 2021 and 2020, the Company capitalized $440,331 and $591,017, respectively, of internally developed software costs in connection with the development and continued enhancement of the technology platform and web interfaces. Capitalized costs primarily consist of payroll and payroll-related costs for the Company’s employees. The Company recognized $236,355 and $213,749 of amortization expense associated with capitalized internally developed software costs during the three months ended June 30, 2021 and 2020, respectively. The Company recognized $471,584 and $420,257 of amortization expense associated with capitalized internally developed software costs during the six months ended June 30, 2021 and 2020, respectively.

6.DEBT

Note Payable

In May 2020, the Company applied for and received $783,008 in unsecured loan funding from the Paycheck Protection Program (the “PPP Loan”), established pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and administered by the U.S. Small Business Administration (“SBA”).

Under the terms of the promissory note (the “PPP Note”) and the PPP Loan, interest accrued on the outstanding principal at the rate of 1% per annum. Interest expense under the PPP Loan amounted to $0 and $558 for the three months ended June 30, 2021 and 2020, respectively. Interest expense under the PPP Loan amounted to $279 and $558 for the six months ended June 30, 2021 and 2020, respectively.

The Company received full forgiveness of all outstanding principal of, and accrued and unpaid interest on the PPP Loan as of January 13, 2021. The forgiveness of the PPP Loan qualified for debt extinguishment and as a result, the outstanding principal and accrued and unpaid interest on the PPP Loan was recorded as a net gain on extinguishment of the PPP Loan totaling $788,156 for the six months ended June 30, 2021 and the debt was eliminated from the Company’s balance sheet.

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Notes to Unaudited Condensed Financial Statements

Related Party Convertible Notes Payable

During 2017 and 2018, the Company issued Related Party Convertible Promissory Notes (the “Convertible Notes”) to related parties totaling $5,500,000. The Convertible Notes bear interest at a rate of six percent (6%) per annum, without compounding. The Convertible Notes are convertible into shares of the Company’s preferred stock, upon the following: (i) a new permanent equity financing yielding gross proceeds of in excess of $10,000,000, including conversion of the outstanding principal of the Convertible Notes (a “Qualified Equity Financing”), (ii) achievement of positive free cash flow from operations on a quarterly basis for the two consecutive quarters ending 90 days prior to the maturity date, (iii) an acquisition, or (iv) upon election of the holders of the majority of the aggregate principal outstanding (the “Majority Lenders”). Preferred stock issued on conversion shall be shares of the Company’s stock that have substantially the same rights and preferences as the Company’s Series B Preferred Stock or that which is issued in such Qualified Equity Financing, depending on the applicable conversion event. During 2021, there have been no changes to the conversion prices which are detailed in the Company’s audited financial statements for the years ended December 31, 2020 and 2019. The conversion rate shall be equal to the issue price of the IPO Stock less a thirty percent (30)% discount.

The maturity date on the Convertible Notes is the earliest occurrence of (i) the closing of a Qualified Equity Financing, (ii) the date upon which prepayment by the Company occurs with the consent of the Majority Lenders, (iii) the date upon which the Convertible Notes are otherwise converted into equity securities, or (iv) March 31, 2020. In March 2020, the Majority Lenders elected to extend the maturity date through September 30, 2020. On October 1, 2020, the maturity date was further extended to March 31, 2021. On March 8, 2021, the maturity date was further extended to June 30, 2021.

The Company has determined that the terms related to the Qualified Equity Financing conversion and acquisition conversion features (collectively, the “Embedded Conversion Features”) were determined to not be clearly and closely related to the Convertible Note host instrument and meet the definition of a derivative. Therefore, the Embedded Conversion Features were bifurcated from the Convertible Notes and separately measured at fair value. The derivative liability has been subsequently marked-to-market each reporting period with changes in fair value recognized in the statement of operations (see Note 7).

Interest expense on the Convertible Notes totaled $74,137 and 82,274 for the three months ended June 30, 2021 and 2020, respectively.

Interest expense on the Convertible Notes totaled $156,411 and $164,548 for the six months ended June 30, 2021 and 2020, respectively.

Unamortized debt issuance costs on the Convertible Notes totaled $0 and $9,189 at June 30, 2021 and December 31, 2020, respectively.

Debt discounts on the Convertible Notes totaled $0 and $0 as of June 30, 2021 and December 31, 2020, respectively. During the six months ended June 30, 2021 and 2020, amortization of debt discounts amounted to $1,088 and $139,232, respectively.

Conversion of Convertible Notes Payable

In connection with the consummation of the IPO, the Company converted all $5,491,663 of its outstanding principal and all unpaid and accrued interest of $1,257,066 of the Convertible Notes into 1,206,614 shares of common stock on June 21, 2021 at a conversion price of $5.60 per share. As of June 30, 2021, there were no Convertible Notes outstanding. The Company incurred an approximate $260,000 loss on conversion of the Convertible Notes during the three months ended June 30, 2021.

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Notes to Unaudited Condensed Financial Statements

Bridge Financing

During 2020, 2019 and 2018, the Company issued certain Secured Promissory Notes (the “Bridge Notes”) to new investors and existing stockholders in an amount of $6,500,000 in order to finance the Company’s interim working capital needs. Of this amount, $1,905,000 was issued to related parties (“Related Party Bridge Notes”). The Bridge Notes, including the Related Party Bridge Notes, have identical terms.

On April 16, 2021 and May 20, 2021, the Company issued additional Related Party Bridge Notes to related parties in the aggregate amount of $500,000 in order to finance the Company's working capital needs. The terms of the notes are identical to the Amended Bridge Notes (see further details below).

The Bridge Notes bear interest at a rate of twenty-four percent (24%) per annum, without compounding. The Bridge Notes and all accrued interest are due and payable on the earliest occurrence of (i) a Qualified Equity Financing, (ii) the sale of the Company, (iii) prepayment by the Company, or (iv) December 31, 2019, which was subsequently extended to June 30, 2020. In June 2020, the Bridge Notes were amended to further extend the maturity date through September 30, 2020. On October 1, 2020, the Company amended the Bridge Notes to extend the maturity date to March 31, 2021 and to increase the interest rate from 24% to 30% after October 1, 2020. On March 15, 2021, the Company entered into an Amendment to the Bridge Notes and the maturity date was further extended to April 30, 2021. The Bridge Notes will be repayable upon demand of the Majority Lenders of the Bridge Notes at any time on or after the maturity date. The Bridge Notes are senior in right of payment and priority to any Convertible Debt and subordinated to any Senior Debt. The investors that hold the Bridge Notes are granted a security interest in substantially all assets of the Company (“Collateral”).

On March 15, 2021, the Company entered into a Fifth Amendment (the “Amendment”) to the Note Subscription Agreements and Secured Promissory Notes. The Bridge Notes are hereafter referred to as the “Amended Bridge Notes”.

The terms of the Amendment are as follows:

Maturity Date

The Amended Bridge Notes shall bear interest, on a non-compounding basis, at a rate of thirty percent (30%) per annum from and after October 1, 2020, due on maturity on the earlier of (i) the closing of an initial public offering yielding gross proceeds in excess of $18,000,000, exclusive of any existing Convertible Notes (a “Qualified IPO”), (ii) the sale of the Company, (iii) prepayment by the Company, or (iv) April 30, 2021. The Majority Lenders may, with the approval of the Company, elect to extend the maturity date one or more times, at their discretion. On April 28, 2021, the maturity date was further extended to May 31, 2021. On May 12, 2021, the maturity date was further extended to June 30, 2021.

Elective Conversion Upon a Qualified IPO

The holders of the Amended Bridge Notes may voluntarily elect, at any time prior the maturity date and up to March 19, 2021, to convert 50% or more of the outstanding unpaid principal plus any amount of outstanding unpaid interest at the time of the Qualified IPO, into the same class or series of securities of the Company to be offered and issued in the Qualified IPO (the “IPO Stock”). The conversion rate shall be equal to the issue price of the IPO Stock less a thirty percent (30%) discount (“the Elective Conversion Stock”). The elective conversion amount shall be deducted from the amount of principal and interest outstanding in order to arrive at an adjusted principal and interest repayment amount. The sum of the amounts being converted on the Amended Bridge Notes shall first convert the outstanding principal and then the outstanding interest second.

Repayment of Adjusted Outstanding Interest and Principal Upon a Qualified IPO

If a Qualified IPO is consummated prior to the maturity date, and the holders have not voluntarily converted, the Company shall make a cash payment to the holders of the Amended Bridge Notes equal to the greater of either the total adjusted outstanding interest or one and one-half times (1.50X) the Third-Party Loan Proceeds (“Note Repayment Proceeds”). Third-Party Loan Proceeds are defined as

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Notes to Unaudited Condensed Financial Statements

the net cash proceeds received by the Company from an institutional lender, commercial bank, or other similar lender consummated on or about the time of the Qualified IPO (or contingent upon the closing of the Qualified IPO).

Repayments shall first be applied to the adjusted outstanding interest due in cash to the holders of the Amended Bridge Notes . The residual value shall be next applied to the adjusted outstanding principal (the “Principal Repayment Proceeds”). The remaining cash repayment shall be calculated by multiplying the Principal Repayment Proceeds by a fraction, the numerator of which is equal to the adjusted principal repayment amount of such note holder, and the denominator of which is equal to the total adjusted outstanding principal to all note holders. In no event shall any cash payment be made to any note holder exceed the sum of the adjusted interest repayment amount plus the adjusted principal repayment amount for such note holder.

Automatic Conversion or Debt Extension

Any remaining unpaid principal, calculated by subtracting the Principal Repayment Proceeds from the total adjusted outstanding principal (the “Automatic Principal Conversion Amount”), shall then automatically convert into IPO Stock at a rate equal to the issue price of the IPO Stock less a ten percent (10%) discount (that is, at a rate of ninety percent (90%) of the issue price of the IPO Stock; such discounted IPO Stock; the “Automatic Conversion Stock”). If the Company is unable to repay at least twenty-five percent (25%) of the total adjusted outstanding principal of the Amended Bridge Notes (“the “Principal Repayment Floor”), then no Automatic Conversion Stock shall be issued and the total adjusted outstanding principal on the Amended Bridge Notes shall remain on the books of the Company under their existing Bridge Notes which shall automatically be amended to (i) have their interest rates adjusted to a rate of fifteen percent (15%) per annum and (ii) have their maturity date set to a date that is eighteen (18) months from the date of the Qualified IPO.

Amended Bridge Notes Embedded Conversion Features

The Company has determined that the terms related to the elective and automatic conversion features (collectively, the “Amended Bridge Notes Embedded Conversion Features”) were determined to not be clearly and closely related to the Amended Bridge Notes host instrument and meet the definition of a derivative. Therefore, the Amended Bridge Notes Embedded Conversion Features were bifurcated from the Amended Bridge Notes and separately measured at fair value. The derivative liability has been subsequently marked-to- market each reporting period with changes in fair value recognized in the statement of operations.

The Amended Bridge Notes Embedded Conversion Features were initially recorded as a component of the loss on debt extinguishment with an offset to the derivative liability at fair value. No related discount will be recorded on the Amended Bridge Notes, and the derivative liability will not be amortized using the effective interest rate over the term of the Amended Bridge Notes.

Debt Extinguishment

The Company evaluated the terms of the March 15, 2021 Amendment. This evaluation included analyzing whether there are significant and consequential changes to the economic substance of the Bridge Notes. If the change is deemed insignificant then the change is considered a debt modification, whereas if the change is substantial the change is reflected as a debt extinguishment. A modification or an exchange that adds or eliminates a substantive conversion option as of the conversion date would always be considered substantial and require extinguishment accounting. The addition of the elective and mandatory conversion options, as described above, would be considered substantive based on the likelihood of the option being exercised in the near future in connection with a Qualified IPO event. Accordingly, the Company accounted for the amendment of the Notes as an extinguishment of the original Bridge Notes.

As a result, the Company recorded a loss on extinguishment of $2,740,425. The extinguishment loss also included a write-off of unamortized debt issuance costs of approximately $5,700. Additionally, the Company recorded a discount on the Amended Bridge Notes of approximately $869,600, which was amortized through interest expense over the life of the Amended Bridge Notes (i.e., March 15, 2021 through April 30, 2021).

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Notes to Unaudited Condensed Financial Statements

Interest expense on the Bridge Notes, including $175,241 and $99,028 of related party interest expense, totaled $484,931 and $373,972 for the three months ended June 30, 2021 and 2020, respectively.

Interest expense on the Bridge Notes, including $314,593 and $198,056 of related party interest expense, totaled $960,410 and $741,370 for the six months ended June 30, 2021 and 2020, respectively.

Unamortized debt issuance costs on the Bridge Notes totaled $0 and $7,222 for the three and six months ended June 30, 2021 and 2020, respectively.

Amortization of the debt discount on the Amended Bridge Notes totaled approximately $579,733 and $0 for the three months ended June 30, 2021 and 2020, respectively. Amortization of the debt discount on the Amended Bridge Notes totaled approximately $869,600 and $0 for the six months ended June 30, 2021 and 2020, respectively.

Conversion of Bridge Notes

Upon the completion of the IPO, the Company converted $4,000,000 of its outstanding principal and accrued interest of $717,646 of the Bridge Notes, as amended, into 842,429 shares of common stock at a conversion price of $5.60 per share. The Company recognized a gain on the conversion of $9,746. As of June 30, 2021, there was a remaining principal balance of $3.0 million on the Bridge Notes. The remaining principal of $3,000,000 accrues interest at a rate of fifteen percent (15%) per annum with a maturity date of December 16, 2022.

The conversion of the Amended Bridge Notes and Convertible Notes upon the consummation of the IPO resulted in an increase in total stockholder’s equity of $16,392,344. The components of this non-cash transaction are as follows

Derivative liability on the Convertible Notes reclassified to equity

$

2,644,000

Extinguishment of Convertible Notes principal

 

5,486,199

Accrued and unpaid interest on the Convertible Notes

 

1,257,066

Accumulated amortization on debt issuance costs

 

33,035

Loss on extinguishment of Convertible Notes

 

260,183

Write off of debt issuance costs

 

(27,571)

Derivative liability the Bridge Notes reclassified to equity

 

2,031,300

Extinguishment of Bridge Notes principal

 

4,000,000

Accrued and unpaid interest on the Bridge Notes

 

717,646

Gain on extinguishment of Bridge Notes

 

(9,514)

Total conversion of Convertible Notes and Bridge Notes into common stock

$

16,392,344

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Notes to Unaudited Condensed Financial Statements

7.FAIR VALUE OF DERIVATIVE LIABILITIES

Financial liabilities measured at fair value on a recurring basis are summarized below and disclosed on the Company’s balance sheets as of the following dates indicated:

Fair Value at June 30, 2021

    

Total

    

Level 1

    

Level 2

Level 3

Liabilities:

    

    

    

    

 

Derivative liability on convertible notes payable, related parties

$

$

$

$

Derivative liability on bridge notes payable and bridge notes payable, related parties

 

 

 

$

Total liabilities

$

$

$

$

Fair value at December 31, 2020

    

Total

    

Level 1

    

Level 2

    

Level 3

Liabilities:

    

    

    

    

Derivative liability on convertible notes payable, related parties

$

2,373,000

$

$

$

2,373,000

Total liabilities

$

2,373,000

$

$

$

2,373,000

The table below provides a summary of the changes in fair value of the derivative liabilities measured on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30:

    

2021

    

2020

Balance, beginning of period

    

$

2,373,000

    

$

2,214,000

Derivative liability on bridge notes payable and bridge notes payable, related parties

 

3,614,000

 

(Gain) loss included in earnings

 

(1,311,700)

 

22,000

Reclassification to equity in connection with debt conversion

(4,675,300)

Balance, end of period (unaudited)

$

$

2,236,000

Derivative Liability on Convertible Notes Payable, Related Parties

The Embedded Conversion Features are separately measured at fair value, with changes in fair value recognized in current operations. The Company used a scenario-based analysis to estimate the fair value of the Embedded Conversion Features at issuance of the Convertible Notes. The scenario-based analysis estimates the fair value of the Convertible Notes based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to the noteholders, including various IPO, settlement, equity financing, corporate transaction and dissolution scenarios. Estimating fair values of Embedded Conversion Features requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. Because the Embedded Conversion Features are initially and subsequently carried at fair values, the Company’s income will reflect the volatility in these estimate and assumption changes. The original values of the Embedded Conversion Features were recorded as a derivative liability with the offset as a debt discount to the Convertible Notes which was amortized over the original term of the Convertible Notes.

Immediately prior to the IPO, the derivative liability was marked to fair value resulting in a loss of $117,000 for the three months ended June 30, 2021. The derivative liability on the related party convertible notes payable was reclassified to equity on June 21, 2021, upon the conversion of the Convertible Notes to common stock in connection with the consummation of the IPO.

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Notes to Unaudited Condensed Financial Statements

Derivative Liability on Bridge Notes Payable and Bridge Notes Payable, Related Parties

The Embedded Conversion Features are separately measured at fair value, with changes in fair value recognized in current operations. The Company used a scenario-based analysis to estimate the fair value of the Embedded Conversion Features at issuance of the Amended Bridge Notes. The scenario-based analysis estimates the fair value of the Amended Bridge Notes based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to the noteholders, including various IPO, and settlement scenarios. Estimating fair values of Embedded Conversion Features requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. Because the Embedded Conversion Features are initially and subsequently carried at fair values, the Company’s income will reflect the volatility in these estimate and assumption changes. The Amended Bridge Notes Embedded Conversion Features were initially recorded as a component of the loss on debt extinguishment with an offset to the derivative liability at fair value. No related discount will be recorded on the Amended Bridge Notes, and the derivative liability will not be amortized using the effective interest rate over the term of the Amended Bridge Notes.

Immediately prior to the IPO, the derivative liability was marked to fair value. A portion of the Bridge Note holders did not elect to convert at the IPO, as a result, the Company recorded a gain of $1,630,700 for the three months ended June 30, 2021. The derivative liability balance on the Amended Bridge Notes payable was reclassified to equity on June 21, 2021, upon the conversion of the Amended Bridge Notes to common stock in connection with the consummation of the IPO, as the Amended Bridge Notes did not contain any further conversion features subsequent to the IPO.

8.COMMITMENTS AND CONTINGENCIES

Leases

The Company leases its office space in Lexington, Massachusetts under a non-cancelable operating lease that was entered into in September 2012 and most recently amended on April 10, 2017. The lease requires monthly rental payments, presented by year in the table below, which escalate during the lease term and expires on February 28, 2024. The difference between straight-line rent expense and rent paid is immaterial as of June 30, 2021.

Year Ending December 31, 

    

Operating Leases

2021 (remaining)

$

80,706

2022

 

163,158

2023

 

165,254

2024

 

27,601

Total

$

436,719

Rent expense for the three months ended June 30, 2021 and 2020 amounted to $26,902 and $26,553, respectively. Rent expense for the six months ended June 30, 2021 and 2020 amounted to $67,080, and $69,518, respectively.

Legal Proceedings

From time to time the Company is involved in litigation, claims, and other proceedings arising in the ordinary course of business. Such litigation and other proceedings may include, but are not limited to, actions relating to employment law and misclassification, intellectual property, commercial or contractual claims, or other consumer protection statutes. Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur. As of June 30, 2021, there was no material litigation against the Company.

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Notes to Unaudited Condensed Financial Statements

9.CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

Immediately following the closing of the IPO, pursuant to the Company’s fourth amended and restated certificate of incorporation, the Company’s authorized capital is 250,000,000 shares, of which (1) 200,000,000 shares are common stock, par value $0.0001 per share and (2) 50,000,000 are preferred stock, par value $0.0001 per share, which may, at the sole discretion of the Company’s board of directors be issued in one or more series.

Redeemable Convertible Preferred Stock

Upon the consummation of the IPO, 1,291,012 shares of outstanding preferred stock automatically converted into 1,291,012 shares of common stock. As of June 30, 2021, there were no shares of preferred stock outstanding.

Common Stock

The Company issued 2,250,000 shares of common stock in connection with the IPO during the six months ended June 30, 2021. Additionally, the Company issued 1,206,614 shares of common stock in connection with the conversion of all the Convertible Notes and accrued interest and 842,429 shares of common stock in connection with the conversion of $4.7 million of the outstanding principal and accrued interest on the Bridge Notes.

Underwriter Warrants

In connection with the Company’s underwriting agreement with ThinkEquity, the Company entered into a warrant agreement to purchase up to 90,000 shares of common stock, par value $0.0001 (the “Underwriter Warrant”). The Underwriter Warrant is exercisable at a per share exercise price of $10.00, and is exercisable at any time and from time to time, in whole or in part, during the four- and one-half year period commencing 180 days from the effective date of the registration statement. The Warrant becomes exercisable on or after December 16, 2021 (six months from the effective date of the offering) and expires on June 15, 2026. Upon issuance of these warrants, as partial compensation for its services as an underwriter, the fair value of approximately $0.4 million was recorded as equity issuance costs.

Warrants

At June 30, 2021, and excluding the Underwriter Warrant, the Company had outstanding warrants to purchase 23,309 shares of common stock at an exercise price of $0.06 per share, which expire in September 2021. The weighted average exercise price is $0.06 and the weighted average time to expiration is 0.25 years.

During the six months ended June 30, 2021, no warrants to purchase common stock were issued, except those issued to the Underwriter. Additionally, during the six months ended June 30, 2021, no warrants to purchase common stock were exercised or expired.

10.SHARE-BASED COMPENSATION

Stock Options

As of June 30, 2021, there were 99,061 shares available for future grants under the Company’s 2013 Stock Incentive Plan.

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Notes to Unaudited Condensed Financial Statements

The following assumptions were used to estimate the fair value of stock options granted using the Black- Scholes-Merton option pricing model during the six months ended June 30: