Science 37 Holdings, Inc. (NASDAQ:SNCE) Q1 2023 Earnings Call Transcript May 15, 2023
Science 37 Holdings, Inc. misses on earnings expectations. Reported EPS is $-0.25 EPS, expectations were $-0.13.
Operator: Greetings, and welcome to the Science 37 First quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session and will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce our host, Steve Halper, LifeSci Advisors. Thank you, sir. 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; Mike Zaranek, Chief Financial Officer. Earlier today, Science 37 released financial results for the quarter ended March 31, 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 security 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 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 operations 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 SEC filings and in earnings materials available on the Investor Relations portion of our website at investors.science37.com I would now like to turn the call over to, David Coman.
David?
David Coman: Thank you, Steve, and thanks everyone for joining us for our first quarter 2023 earnings call. First quarter revenue was $14.1 million, and adjusted EBITDA loss was $12.4 million both of which were better than expected. More than 80% of our first quarter bookings rather came from repeat customers, including four projects worth more than $3 million each. First quarter gross bookings totaled $23.6 million and net bookings were just under $12 million. As referenced in our business update last month, approximately two-thirds of our realization adjustments was from the cancellation of a single study that was previously placed on hold and was not included in our original phased backlog assumption for this year. The cancellation has no impact on our previously stated 2023 revenue guidance.
Today, we are confirming our 2023 revenue guidance of $55 million to $60 million. Despite the continued challenging macroeconomic conditions, we’re pleased to see some progress in our pipeline now that, Michael Shipton, our new Chief Commercial Officer has had two full quarters under his belt. Quarter-over-quarter RFP volume, dollar volume is up approximately 25% at the end of the first quarter, and it includes a number of exciting new opportunities from our top 20 pharma, CRO and real-world evidence channels, where Michael has placed specific emphasis. In the past few weeks, we announced a couple exciting new additions to our team including Erica Prowisor and Irena Lambridis, who are leading our patient recruitment and quality efforts respectively, and have really hit the ground running.
These are two important strategic additions for us, recruiting patients faster is expected to drive new business growth and should accelerate the conversion of our backlog. Quality is equally important, particularly for repeat business and as we execute on our Centers of Excellence or COE strategy we introduced on the business update call last month. Our COE strategy is going very well and is fully on-track. We noted that this strategy will help us focus attention and resources to our unique Metasite offering while driving costs out of the business. As a result of this strategy and our continued commitment to cost containment, we are updating our 2023 guidance for adjusted EBITDA loss to be in the range of $41 million to $39 million, which represents a nearly 20% improvement in the EBITDA compared to our previous guidance provided last quarter.
We noted in our business update call that the creation of our COEs has been made possible by the great work being conducted by Troy Bryenton, our Chief Technology Officer, who joined us last fall. He has brought on some incredible talent, including our Head of Technology Operations, Christiaan Buitendach; our Head of Architecture and Interoperability, Paul Kalin; and the newest member of our technology team, Jeff Richardson, who now heads, data and analytics. These new hires came to us with significant leadership experience from companies that include Thermo Fisher, IQVIA, Syneos and Javara, and ample background in effectively managing near and offshore teams as well as integrating new technology. Speaking of new technology integrations, we are very pleased with the addition of the Vault assets that we acquired earlier this year.
The integration of the Vault scheduling capabilities, the team and additional workflows are expected to lead to material efficiencies in our delivery model going forward. In summary, putting a tough year behind us, we’re coming into 2023 with solid results and renewed optimism in our ability to accelerate topline growth once again. We have made some transformative changes to our infrastructure, that are already producing a significant impact on our cost structure. These changes give us confidence that we will reach our goal of adjusted EBITDA positive by the end of 2024, without having to raise additional capital and with ample cash on hand. Now before turning it over to Mike, for the financial highlights from the quarter, I wanted to call your attention to the recent draft guidance issued by the FDA regarding the use of decentralized clinical trials for drugs, biological products and devices.
Overall, we believe the draft guidance makes great strides to codify areas of operational ambiguity and reinforces our approach to executing faster, more inclusive, patient-friendly clinical research with our standard operating procedures as best practice. It should give great comfort to sponsors going forward that the Science 37 Metasite fully complies with the FDA regulations for drug development. Their draft guidance reinforces the benefits of DCT in regards to recruitment, retention and patient centricity. It doubles-down on FDA’s commitment to diversity, and endorses the model as a means through which to deliver more diversity in clinical research. Of course, we’ll have to wait for the full final guidance, but we believe even this draft guidance is a big win for Science 37, our sponsors and for patients everywhere.
With that, I will now 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 will discuss the first quarter results for the period ended March 31, 2023, and then we’ll affirm our outlook for full year 2023. In the first quarter, we reported revenues of $14.1 million which was ahead of our expectations. It represents a 25% decrease from the same period last year. However, excluding COVID and COVID-related mitigation work, our year-over-year revenues increased 28%, which is a testament to the underlying growth of the business. We finished the first quarter with $23.6 million of gross bookings and $11.7 million of net bookings. As we discussed on the business update call in mid-April, approximately two-thirds of the $12 million in realization adjustments relate to a single investigational program from 2018 for which the sponsor had previously directed multiple starts and stops over the last four plus years.
The program was on pause and we prepared our 2023 guidance. So, this program was not included in our 2023 phase backlog or revenue guidance. The customer ultimately terminated the program in the first quarter of 2023, at which point we completely removed it from the total backlog consistent with historical practice. We exited the first quarter with the combined phase backlog plus realized year-to-date revenue of $52.3 million for 2023 and $170.5 million in total backlog. COVID-related projects represent only approximately 10% of the total backlog. Adjusted gross margin was 22.9% for the first quarter, compared to 17.2% for the same period last year. Adjusted gross profit in the first quarter was $3.2 million effectively flat as compared to the same period in the prior year.
Selling, general and administrative expenses excluding $5.1 million of stock-based compensation and depreciation were $15.6 million in the first quarter. This was down approximately 32% compared to the same period of last year. Adjusted EBITDA, which we calculate by adding back depreciation, amortization, taxes, interest, other income stock-based comp, and other non-cash charges was a loss of $12.4 million in the quarter, representing a $7.5 million or 37% improvement from the first quarter 2022. Consistent with the factors we cited on the fourth quarter earnings call, U.S. GAAP required us to record a non-cash impairment of $7.8 million related to our long-lived assets in the first quarter. Amongst other things, this was a result of our market capitalization which was less than the cash and book-value for a sustained period.
This is an accounting assessment and does not necessarily reflect our view of the longer term potential of our platform. U.S. GAAP net loss was $16.8 million versus GAAP net income of $44.9 million in the first quarter a year ago, which if you recall included a $75.5 million positive non-cash reversal and fair value of the earn-out liability. The adjusted net loss for the first quarter was $12.6 million which compared to an adjusted net loss of $23.3 million in the same period last year. Now, turning to cash. We ended the quarter with $82.6 million in cash and cash equivalents. In the first quarter, our cash burn was approximately $25 million which included one-time cost and seasonal cost, including our annual cash bonus payout, the purchase of the Vault Health platform and cash payments related to previously announced restructuring actions.
Cash burn excluding these items was in-line with the fourth quarter at approximately $20 million. As we noted in our SEC filings, on April 28, we completed a tender offer for certain outstanding options. The company exchange approximately $10.6 million out of money options for $4.7 million restricted stock units. The best over a three-year period as of the grant date. As the company was in a loss position, these exchange options had previously been anti-dilutive and had no impact on our share count for the calculation of dilutive earnings per share during the first quarter. Future quarters will include outstanding restricted stock units as a dilutive component to our earnings per share. We also wanted to provide an update on the notification we received from NASDAQ in late December, relating to our stock trading below $1 per share.
As you may have seen in our 8-K that we filed at the end of December 2022, we have until June 26, 2023 to become compliant with the NASDAQ continued listing requirements. If the compliance requirements are not met prior to the June 26 deadline, we intend to seek a 180-day extension, which would push the deadline to regain compliance to late December 2023. At which point we have afforded several options, which we will consider, if necessary. Now let’s turn to the outlook for 2023. This morning, we are reconfirming the 2023 revenue guidance of $55 million to $60 million. First quarter gross bookings and revenues were consistent or slightly above our expectations and we continue to have strong visibility into our phase backlog. We expect the introduction of our Centers of Excellence or COEs and the corresponding restructuring that we announced previously, to have a positive effect on our profitability this year.
As a reminder, from our business update call in April, we noted that these changes would provide an additional $8 million to $10 million of savings in 2023 relative to our original adjusted EBITDA guidance of negative $48 million to negative $50 million that we announced on our fourth quarter earnings call. These incremental savings are reflected in our latest guidance for 2023 adjusted EBITDA loss in the range of $39 million to $41 million. Given that these actions occurred partway through the second quarter in terms of the restructuring, we expect to realize a partial benefit of the planned savings in the second quarter and then a full benefit from the savings in both the third and fourth quarters respectively. Finally, we wanted to provide some additional color on our path to profitability by the end of 2024.
We remain highly optimistic about our bookings and revenue growth as evidenced by the improvements to our RFP flow. The recent investments in our patient recruitment function are expected to yield more predictable conversion of backlog into revenue and we have taken action to ensure we execute with industry leading quality while we increase profitability and dramatically reduce cash burn. To provide a finer point, we see a clear albeit partial impact of the recent cost restructurings in the second quarter. Over the course of the year, we expect the full impact on the quarterly adjusted gross margins to improve from the low 20% range in the first quarter to the low to mid 30% range in the second half. Additionally, we expect to see a sequential reduction in SG&A and a more dramatic reduction to cash burn, exiting the fourth quarter 2023 with a cash burn rate of less than $10 million.
As we progress in 2024, we expect the technology investments we are making this year will help us expand quarterly gross margins to 40% plus delivering higher gross profit on a relatively fixed level of SG&A and ending Q4 2024 EBITDA positive without raising additional capital having ample cash on hand and no debt. In summary, we are encouraged by our first quarter 2023 gross bookings and cost structure initiatives. Going forward, we are optimistic about the efficiencies of our cost Centers of Excellence model and will we provide for our company — and that will provide our company and customers as we march down the path to profitability. At this point, I’d like to turn the call back over to David for closing comments.
David Coman: Thank you, Mike, between improving commercial traction, enhancements made to our patient recruitment, quality and technology leadership and the recent restructuring to improve our margins and cash position, our confidence grew this quarter. We’re highly focused on protecting our cash runway for the benefit of our patients, sponsors and shareholders. We do not view this as optional. We expect to come out of this period of transition as a much stronger company that is well positioned to profitably scale our business and create value for our key stakeholders. With that, we’ll now open it up for questions and turn it back over to the operator.
Q&A Session
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Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Charles Rhyee with TD Cowen. Please go ahead.
Operator: Our next question comes from Max Smock with William Blair. Please go ahead.
Operator: Our next question comes from Matt Hewitt with Craig-Hallum Capital Group. Please go ahead.
Operator: Our next question comes from Frank Takkinen with Lake Street Capital Markets. Please go ahead.
Operator: [Operator Instructions]. Our next question comes from Charles Rhyee with TD Cowen. Please go ahead.
Operator: There are no further questions at this time. I would like to turn the floor back over to David Coman, CEO for closing remarks.
David Coman: All right. Just like to say thanks everybody for joining us and we’ll talk to you in the next quarter.
Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
