Science 37 Holdings, Inc. (NASDAQ:SNCE) Q3 2023 Earnings Call Transcript November 12, 2023
Operator: Greetings and welcome to the Science 37 Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Halper from LifeSci Advisors. Thank you, Steve. You may begin.
Steve Halper: Thank you, operator, and thank you all for participating in today’s call. Joining me are David Coman, Chief Executive Officer; and Mike Zaranek, Chief Financial Officer. Earlier today, Science 37 released financial results for the quarter ended September 30, 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.
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We encourage you to review our filings made with the Securities and Exchange Commission for a discussion of these risk factors, including in the Risk Factors 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 materials available on the Investor Relations portion of our website at investors.sience37.com.
I would now like to turn the call over to David Coman. David?
David Coman: Thank you, Steve, and thank you, everyone, for joining us today for our third quarter 2023 earnings call. I am 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 second quarter, third quarter revenue remained relatively constant as expected, while 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. These improvements are the result of the plans we put in place as we became laser-focused on our Metasite model, including investments in patient recruitment and quality and the implementation of our near and offshore centers of excellence and the elimination of expenses that don’t support our strategy.
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 first quarter, a big part of the reason for our gross margin improvement, which is at its highest level since going public. We’ve 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 third quarter were $17.9 million, 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. Similar to last year, we expect a much stronger fourth quarter as a result. As we close out the year, we expect that our third quarter bookings delays will have a modest impact on our 2023 revenue and we’re now expected to achieve between $58 million and $59 million for the year. We are adjusting our previous 2023 EBITDA guidance from a loss of $35 million to a loss of $32.5 million. We’re also reiterating our guidance for the second half cash burn of less than $15 million and we continue to anticipate exiting the year with more than $50 million of cash on hand.
With continued progress on RFP volume and a growing qualified sales pipeline that was more than 33% higher for the fourth quarter than it was for the third quarter, we expect continued bookings and revenue growth in 2024 with a similar approach to expense and cash management. And we have been consistent in our communication that we expect to exit fourth quarter of 2024, EBITDA positive with ample cash on hand without having to raise additional capital. With that, I’ll turn the call over to Mike Zaranek, our Chief Financial Officer, to provide additional details.
Mike Zaranek: Thank you, David, and good morning, everyone. I’ll discuss the quarter ended September 30, 2023, and then we’ll provide our outlook for the full year 2023. As David mentioned, third quarter gross bookings were $17.9 million, which was $6 million or 51% higher than the same period of the prior year. We ended the third quarter with $163.1 million in our backlog, which compared to $170.4 million for the same period of the prior year. The backlog at the end of September 2023 also reflected $8.7 million in cancellations and realization adjustments, which represented approximately 5.1% of the beginning backlog for the quarter. Third quarter revenues were $14.9 million, which was $1.3 million or 8% lower than the same period of the prior year and $0.3 million or 3% lower than the second quarter.
Adjusted gross profit for the third quarter was $6.1 million, an increase of $1.5 million or 32% compared to the same period of the prior year, and up about $500,000 or 10% sequentially versus the second quarter. We were particularly pleased with our adjusted gross margin for the fourth quarter. This is 40.8%, which was up 12.5 percentage points from the same period last year and up 4.8 percentage points from the second quarter of 2023. Similar to the second quarter, much of this gross margin improvement was the result of our patient recruitment efforts and, to a lesser extent, continued improvements in utilization rates across the organization. Moving over to SG&A. Selling, general and administrative expenses, excluding $3.7 million of stock-based compensation and depreciation were $11.7 million in the third quarter.
This was down $7.5 million or more than 39% compared to the same period last year and down $1.4 million or approximately 11% sequentially. Most of the decline in the SG&A compared with the second quarter relates to incentive compensation accruals, adjusted for the third quarter actual bookings performance and, to a lesser extent, a 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 $5.2 million in the third quarter, representing $9.4 million or 64% improvement compared to the same period of the prior year and a $2.3 million or 30.9% sequential improvement compared to the second quarter.
This is our best quarterly adjusted EBITDA performance since becoming a public company 2 years ago. Over this period, we’ve been able to reduce our cost basis which we define as the difference between revenue and adjusted EBITDA by more than 50%. Consistent with the factors we cited on our second quarter earnings call, U.S. GAAP required us to record a non-cash impairment charge of $5.5 million related to our long-lived assets in the third quarter. Among other things, this continues to be a result of our market 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, third quarter represented a $13.9 million loss versus a U.S. GAAP net loss of $23.5 million in the third quarter a year ago which represents almost a 29% improvement year-over-year.
The adjusted net loss for the third quarter was $5.4 million, compared to an adjusted net loss of $19.5 million in the same period last year, which represents a 72% improvement over the prior year. Now turning to cash. We ended the quarter with approximately $56 million in cash and cash equivalents. In the third quarter, our cash burn, which is the difference between balance sheet cash and cash equivalents from June 30th to September 30th, was approximately $8.6 million, which represents a sequential improvement of approximately $8.8 million versus the second quarter. In other words, we effectively cut our cash burn in half on a sequential basis. Now, let’s turn to the outlook for 2023. As David noted previously, we are providing updated full year 2023 revenue guidance of $58 million to $59 million.
Our previous commentary around fourth quarter 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 third quarter results for adjusted gross margin due in part to higher expected pass-through revenues related to several studies in the fourth quarter. As we have 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&A from the third quarter to the fourth quarter, in part due to expected increases in incentive compensation accruals and to still outperform our previous adjusted EBITDA guidance of negative $35 million.
Instead, we are now forecasting $32.5 million adjusted EBITDA loss, an improvement of approximately $2.5 million versus our previous guidance. Moving over to cash flow, consistent with our guidance on the second quarter earnings call, we remain on track to achieve second half 2023 cash burn of less than $15 million, and we expect to exit the year with more than $50 million of cash on hand. While we will provide initial 2024 guidance, when we report the fourth quarter 2023 earnings, given our backlog visibility, our continued progression on RFP volume, and our growing quarterly qualified phased sales pipeline, which is more than 33% higher for the fourth quarter than it was at the same point in the third quarter, we do expect revenue growth in 2024.
We are targeting full year 2024 adjusted gross margins of 40% or more as 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&A. In summary, we are encouraged by our third quarter 2023 results and remain optimistic as we continue towards the path to profitability. At this point, I would like to turn the call back over to David for closing comments.
David Coman: Thank you, Mike. We remain focused on our strategy and the actions we are taking to execute our goals. We are pleased with the financial results of the third quarter, and we look forward to a strong end of the year from our commercial team. We are on track to reach our financial goal of adjusted EBITDA and cash flow positive by the fourth quarter of 2024 without having to raise additional capital. And with that, I will open it up for questions.
