Science 37 Holdings, Inc. Price & Performance (SNCE)

Joining me are David Coleman, Chief Executive Officer and Mike Zarnock, Chief Financial Officer. Earlier today, Science thirty seven released financial results for 2023. A copy of the press release is available on the company's website. Before we begin, I would like to remind you that management will make statements during this call that include forward looking statements within the meaning of federal securities laws which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward looking statements are based upon our current estimates of various assumptions and involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward looking statements. We encourage you to review our filings made with the Securities and Exchange Commission for section of the company's most recently filed periodic reports on Form 10 K and Form 10 Q and subsequent filings. You are cautioned not to place undue reliance on these forward looking statements which speak only as of today, and the company disclaims any obligation to update such statements for new information. We believe that certain non GAAP metrics are useful in evaluating our operational performance We use these non GAAP measures to evaluate our ongoing operations and for internal planning and forecasting purposes.

Information about non GAAP financial measures referenced, including a reconciliation of those measures to the most comparable GAAP measures can be found in our SEC filings and in earnings available on the Investor Relations portion of our website at investors. Science37.com. I would now like to turn the call over to David Coleman. David?

Thank you, Steve, and thank you everyone for joining us today for our Q3 2023 earnings call. I'm pleased to report another quarter of solid revenues with significant progress on profitability and cash management on our path to EBITDA positive and cash flow breakeven, by the end of 2024. Compared to the Q2, Q3 revenue remained relatively constant as expected, we achieved significantly higher adjusted gross margins, above 40%, gross profit growth of 10%, and adjusted EBITDA improvement of more than 30% and at the same time, cut cash burn in half. [indiscernible] These improvements are the result of the plans we put in place as we became laser focused our MetaCyte model, including investments in patient recruitment and quality, and the implementation of our near and offshore centers of excellence the elimination of expenses that don't support our strategy. [indiscernible] Focusing on the investments we've made in patient recruitment in particular, we've been able to significantly accelerate enrollment rates which has helped us to drive revenue and customer satisfaction. We're crushing enrollment, on studies right now across several therapeutic areas, including CNS, respiratory, oncology for diagnostic work and cardiovascular.

What's more is that our cost per patient recruited is 75% lower than it was in the Q1. A big part of the reason for our gross margin improvement which is at its highest level since going public. Have been able to do this by aligning our patient recruitment sources with our customer contracts, gaining more from our existing community of patients and providers and significantly improving our patient conversion rates through ongoing process improvement. Gross bookings for the Q3 were $17,900,000, which was up more than 50% versus the prior year, but down more than 50% from the previous quarter.

A result of similar seasonality trends we've seen in prior years In addition to continued delays in decision making, to last year, we expect a much stronger Q4 as a result.

As we close out the year, we expect that our Q3 bookings delays will have a modest impact on our 2020 3 revenue, and we're now expected to achieve between $58,000,000 and $59,000,000 for the year. [indiscernible] We are adjusting our previous 2023 EBITDA guidance from a loss of $35,000,000 to a loss of $32,500,000. [indiscernible] We're also reiterating our guidance for the second half cash burn of less than $15,000,000, and we continue to anticipate exiting the year with more than $50,000,000 of cash On hand. With continued progress on RFP volume and a growing qualified sales pipeline that more than 33% for the Q4 than it was for the Q3, expect continued bookings and revenue growth in 2024, with a similar approach to expense, and cash management, [indiscernible] and we have been consistent our communication that we expect to exit Q4 of 2024 with ample cash on hand, without having to raise additional capital. With that, I'll turn the call over to Mike Seranek, our Chief Financial Officer, to provide additional details.

Thank you, David, and good morning, everyone. I'll discuss the quarter ended September 30, 2020 3, and then we'll provide our outlook for the full year 2023. [indiscernible] David mentioned, Q3 gross bookings were $17,900,000, which was $6,000,000 or 51% higher than the same period of the prior year.

We ended the Q3 with $163,100,000 in our backlog, which compared to $170,400,000 for the same period of the prior year.

The backlog at the end of September 2023 also reflected $8,700,000 in cancellations and realization adjustments which represented approximately 5.1% of the beginning backlog the quarter. [indiscernible] Q3 revenues were $14,900,000, which was one point $3,000,000 or 8% lower than the same period of the prior year, and $300,000 or 3% lower than the Q2. [indiscernible] Adjusted gross profit for the Q3 was $6,100,000, an increase of $1,500,000 or 32% compared to the same period of the prior year. And up about $500,000 or 10% sequentially. Versus the Q2. We were particularly pleased with our adjusted gross margin for the Q4 This was 40.8%, which was up 12.5 percentage points from the same period last year and up 4.8 percentage points from the Q2 of 2023. Similar to the Q2, much of this gross margin improvement was the result of our recruitment efforts and to a lesser extent continued improvements in utilization rates [indiscernible] [indiscernible] Moving over to SG and A. Selling, general and administrative expenses excluding $3,700,000 of stock based compensation and depreciation [indiscernible] $11,700,000 in the Q3. This was down $7,500,000 or more than 39% compared to the same period last year and down $1,400,000 or approximately 11% sequentially.

Most of the decline [indiscernible] in the SG and A compared with the Q2 relates to incentive compensation accrual accruals adjusted for the Q3 actual bookings performance. And to a lesser extent full quarter's worth of cost reduction realization from our April restructuring activities. Adjusted EBITDA, which we calculate by adding back depreciation, amortization, taxes, interest, other income, stock based compensation and other non cash charges was a loss of $5,200,000 in the Q3 representing $9,400,000 or 64% improvement compared to the same period of the prior year a $2,300,000 or 30.9% sequential improvement compared to the Q2. [indiscernible] This is our best quarterly adjusted EBITDA performance since becoming a public company 2 years ago. This period, we've been able to reduce our cost basis, which we define as the difference between revenue and adjusted EBITDA more than 50% [indiscernible] Consistent with the factors we cited on our Q2 earnings call, U. S. GAAP required us to record a non cash impairment charge of $5,500,000 related to our long lived assets in the Q3 Among other things, this continues to be a result of our capitalization, which was less than book and book value and cash for a sustained period of time.

On a U. S. GAAP net loss basis, Q3 represented a $13,900,000 loss versus a U. S. GAAP net loss of $23,500,000 in the Q3 a year ago. Which represents almost a 29% improvement year over year.

The adjusted net loss for the Q3 was $5,400,000 [indiscernible] Compared to an adjusted net loss of $19,500,000 in the same period last year, which represents a 72% improvement over the prior year. [indiscernible] Now turning to cash. We ended the quarter with approximately 56,000,000 in cash and cash equivalents. In the Q3, our cash burn, which is the difference between balance sheet cash and cash equivalents from June 30th to September 30th was approximately $8,600,000, represents a sequential improvement of approximately $8,800,000 versus Q2. Other words, we effectively cut our cash burn in half on a sequential basis. [indiscernible] Now let's turn to the outlook for 2023. As David noted previously, we are providing updated full year 2023 revenue guidance of $58,000,000 to 59,000,000 Our previous commentary around Q4 gross margins was in the mid 30% range. We now expect gross margins to come in in the mid to upper 30% range. This reflects margin expansion relative to historical results and previous expectations. However, we do not expect to repeat our record high Q3 results for adjusted gross margin due in part to higher expected pass through revenues related to several studies in the Q4. As we've previously stated at our current size and scale a single project or two can have a material impact to our results.

In addition, we expect an increase in SG and A from the Q3 to the Q4, part due to expected increases in incentive compensation accruals, and to still outperform our previous adjusted EBITDA guidance of negative 5,000,000. Instead, we are now forecasting $32,500,000 adjusted EBITDA loss improvement of approximately 2,500,000 versus our previous guidance. [indiscernible] Moving over to cash flow, consistent with our guidance on the second Q2 earnings call, we remain on track to achieve a second half 2023 cash burn of less than $15,000,000 and we expect to exit the year with more than $50,000,000 of cash on hand. While we will provide initial 2024 guidance, when we report the Q4 2023 earnings given our backlog visibility, our continued progression, on RFP volume our growing quarterly qualified phased sales pipeline, which more than 33% higher for the Q4 than it was at the same point in the Q3, we do expect revenue growth in 2024. Are targeting full year 2024 adjusted gross margins of 40% or more we continue to realize efficiencies on the patient recruitment front, the value from our technology investments, and increases in utilization rates delivering a higher gross profit with continued leverage on SG and A.

In summary, we are encouraged by our Q3 2023 results and remain optimistic as we continue towards the path to profitability. At this point, I'd like to turn the call back over to David for closing comments.

Thank you, Mike. We remain focused on our strategy and the actions we are taking to execute our goals, We're pleased with the financial results of the Q3, and we look forward to a strong end of the year from our commercial team. Are on track to reach our financial goal of adjusted EBITDA and cash flow positive by the Q4 of 2024 without having to raise additional capital And with that, now open it up for questions.

Thank you.

Our first question comes from Charles Reeve Cowen and Company. Charles, please proceed. Yes.

Thanks for taking the questions. Wanted to ask quickly on the bookings, for the quarter. On the cancellations, I know last quarter a good chunk of it was COVID related. Think we're expecting about 8,000,000 in backlog from COVID still that could be canceled. In the current quarter on the 8.7 how much of that was COVID related?

About a1000000. So if you a look at what we presented last quarter, our watch list shrank in proportion to the adjustments that we had in the quarter.

And now comprises about $7,000,000 in COVID risk mitigation work about $17,000,000 for studies that may reach our endpoint earlier be reprioritized So as we've done in the past, we've anticipated this already. And adjusted our backlog and guidance accordingly.

Okay. That's helpful. And then secondly, David, you talked about seasonality and I understand that, but the drop in the sequential looks a little bit bigger than I would have expected. Anything else? You kind of mentioned delays, in decision making. If you could kind of go into sort of what the conversations you're having are like know, what what you're hearing from sponsors, that might be causing some of these delays and, and sort of what how are you thinking about the Q4? You're [indiscernible] signs of what you're seeing that gives you confidence that that we'll we'll see this. Thanks.

Well, our deal sizes do continue to be very large and as such, [indiscernible] [indiscernible] decision making is at a higher level within the organizations and time to make those decisions continue to increase. And so we had some bookings we expected in the Q3 that ended up getting pushed off into the Q4. And we [indiscernible] We'll continue to know, push hard from a commercial standpoint to try to close things within the quarter. But, when you're starting to talk about larger deals like we're participating in today, it does have that net effect of And one thing to add to that, as we mentioned in the prepared remarks, to sort of amplify sort of where we sit right now. One, if you look at the quarterly phase qualified sales pipe, at this point in Q4, it's about 33 percent higher than it was at same point in time in Q3. So that gives us some increased level of visibility as we look to close out Q4 strong and up from a bookings perspective.

Yeah. That that's helpful. Thanks. Appreciate it. Guys.

Thanks, Charles. Thanks, Charles.

Our next question comes from Matt Hewitt from Craig Hallum. Matt please proceed.

Good morning. Thank you for taking the questions. Maybe first up on the gross margins, obviously congratulations, very strong improvement there both year on year and sequentially. And it sounds like that's sustainable, maybe a little bit of a step back here in Q4. But as we start to look at fiscal 'twenty four and even further out, are these changes that you've made from a recruitment standpoint not only sustainable, but are they repeatable into other segments of the market?

Not sure I understand the are they repeatable in other segments the market part of that. Can you clarify?

Yeah.

Well, so you meant you called out CNS respiratory cardi. I mean, are there some other areas that you could roll those recruitment efforts out and and expand obviously the market opportunity there?

Yes.

I don't think there's therapeutic specific in terms of the performance and our ability to gain the margins that we have. We do expect some higher than higher pass through expenses in Q4, which is going to have a little bit of a dip from the 40.8 that we were able to recognize in the Q3.

But we do expect as we go into 2020, four to be at or above that 40% range throughout the year. And that's driven by our ability to execute the patient recruitment as we have been. It's driven by our additional technology improvements that we've been able to make, and it's driven by our increased utilization rates we've been able to achieve as well.

So, yes, we expect that to improve as we move into the into the future. And, frankly, as a as a tech enabled site, we expect long term for that to be in the mid forties.

That's great. And then maybe 1 separate question So we're now a couple of quarters removed from when the FDA draft guidance came out in did industry doesn't move on a dime, but now we're a couple of quarters removed. What what has changed or what do you see changing as a result of that draft guidance? Is that something that we should be excited about as we look to fiscal 2024? Thank you.

Yes. Thanks, Matt. We expect that to continue to have momentum for us. As I've said on previous earnings calls, if you look at the draft guidance the way that it has been written, it it validates the model. Terms of what we're trying to do and it validates the data that's being provided, which is super important. In the past, that's been a question, I think, from an economic buyer perspective. If you look at the SOPs that it requires in order to be able to execute, it reads like Science 37 Operations Manual. So we're super pleased about it. In regards to the sentiment behind it, we have definitely had sponsor slash customer conversations [indiscernible] have circled back to that guidance and reference the fact that it's there which gives them confidence to be able to execute a meta site with them with confidence. And so we just believe that's going to continue to increase as we go forward into 2024 and beyond.

That's great. Thank you.

Thanks a lot, Matt. Thanks, Matt.

Our next question comes from Max Smock with William Blair. [indiscernible] Hi, good morning. It's Christine Reins on for Max Mok. Thanks for taking our questions.

I was curious. Well, I appreciate you're not prepared to give full year 2024 guidance and definitely happy to hear you say top line growth is expected for next year. So hoping you can give more color on a broad range for top line expectations for next year. Well, we'll provide more detailed guidance when we come to the next quarter's earnings call. What we can tell you as we throughout the year, the RFP volume increased for us. We can tell you that between the Q3 and Q4, qualified pipeline increased for us over 33%. And so that foreshadows a good future for us in terms of bookings growth, which ultimately will have an improvement in revenue as we increase throughout 2024. I don't know if you have any more color to add on onto that, I think that you said it well.

K. Great.

Thanks. And then also hoping you can talk about relative bookings and cancellations by customer size and development phase in the quarter.

I don't know if we have any specifics that we can share on that. I do think that what we've shared is some of the COVID risk mitigation work that we had pointed out as an area of risk As we said earlier, that was it's about $7,000,000 of our studies that at risk, most of those are within large pharma the remainder you know, all different customer types and therapeutic areas.

And as David said earlier in the prepared remarks, the level of projects on the watch list has decreased.

He talked about the going from, 8,000,000 on the COVID mitigation down to $7,000,000 and then the $25,000,000 going down about $17,000,000 on the other stuff. So we're continuing to monitor that and as we discussed previously, a single study or 2 can have a material impact on the results. [indiscernible] Yeah. But it's going in the right direction in the right direction, for sure.

Great. Thanks for taking our questions.

Thank you.

Our next question comes from Frank from Lake Street. Frank? Please proceed.

Hey.

Good morning. This is Nelson Cox on for Frank. Just quickly, a lot of my questions have been answered here, so thank you. But want to just ask broadly speaking, any pockets of particular strength or weakness to point out in relation to your customers, we move into 2024, anything that you can just point to and just That'd be helpful.

I would say, I take it back to our value proposition You know, we made a strategic shift about this time last year to focus on the meta site. It's a Tech enabled. Clinical trial site in order to be able to take advantage of a larger market, be super focused in terms of our ability to deliver I think we're starting to see some traction on that. And frankly, it's a bigger market. If you look at what's being spent US sites alone is about $9,000,000,000 versus DCT alone, which is about $3,000,000,000. If you take into account Europe, that's another that's $17,000,000,000. So I think we've left to a much larger market opportunity and I think we're being recognized now as, a site which is ultimately the value proposition that we've put in place is resonating with our [indiscernible] We just became members of the Society For Clinical research sites.

Think, which is testament to the direction that we've gone and the acceptance of this model as being something a bit different from a traditional clinical trial site, but can offer [indiscernible] and access to patients that no other site can actually provide which makes us a great complement to a traditional site network. Got it. Thank you.

Thanks a lot for the question, Nelson. [indiscernible] Operator?

I'm gonna assume that there's no further questions. And, thank everybody for your time. [indiscernible] This concludes our question and answer session. I would like to turn the floor back over to David for closing comments.

Okay. I'd just like to thank everybody for joining us today. Thanks for the questions today. And This concludes today's teleconference. May disconnect your lines at this time. Thank you for your participation.