Science 37 Holdings, Inc.

Hello, thank you for standing by and welcome to the Science 37 Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Caroline Paul, Investor Relations. Please go ahead.

Thank you, and thank you all for participating in today's call. Joining me are David Komen, Chief Executive Officer, and Mike Zoranek, Chief Financial Officer. Earlier today, Science 37 released financial results for the quarter ended June 30, 2022. A copy of the press release is available on the company's website. Before we begin, I'd 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 and 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 within the Securities and Exchange Commission for a discussion of these risk factors, including our quarterly report on Form 10-Q for the quarter ended June 30, 2022, which was filed earlier today. You are cautioned not to place undue reliance on these forward-looking statements, which we 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 the 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 Komen.

Thanks, Caroline. Good morning, everyone, and thank you for joining us. During the second quarter, we made meaningful progress on our strategic priorities, positioning Science 37 for long-term profitability, extending our market leadership position through investments in our operating system and enhancing our commercial efforts for top line growth. With intentional focus on our path to profitability, we were able to achieve significant gains quarter over quarter. Second quarter revenues remained strong at $19.3 million and cost containment enabled us to grow adjusted gross margins sequentially from 17% in the first quarter to more than 30% in the second quarter, while also reducing SG&A, excluding stock-based compensation, by almost 10%. With this level of focus, we remain committed to our plan, as noted in our first quarter earnings call, to continue to drive toward profitability by the end of 2024 with our existing cash on hand. While our highest priority has been to pave our path to profitability, We have and will continue to invest in our operating system in order to extend our market leadership position. As you'll recall, we made significant investments to enable the next generation technology platform release in the second quarter, and we're very pleased with the market receptivity. Qualitatively, customer feedback has been extraordinarily positive, both in terms of the platform's flexibility and the breadth of capability. to deliver across all the centralized components such as e-consent, e-COA, e-source, adverse event tracking, medical record retrieval, concomitant medicine tracking, and telemedicine all in one platform. This is in addition to unifying the workflow to enable a patient, mobile nurse, remote coordinator, and telemedicine investigator to triangulate care all from the comfort of the patient's living room with consistency across each patient and each visit along the protocol. Quantitatively, our sales pipeline activity for new tech-only opportunities in the second quarter was five times greater than that in the first quarter levels. In addition, our new platform release has already generated its first award with a top 20 pharma company that underwent an exhaustive DCT tech RFP where we displaced a competitor to become its new provider of choice. As we continue to invest in the platform to drive market adoption, we're also investing in automating our market-leading workflow capability to continue to reduce human interaction and subjectivity, which will reduce costs and improve compliance and quality. Beyond the core technology platform, we continue to invest in our patient recruitment capabilities and are excited about the upcoming launch of our new CRM system to streamline the patient enrollment process, which we've coupled with investments in our call center technology to ensure that every patient who expresses interest in participating has a seamless experience from contact to consent in order to efficiently maximize study enrollment. These enhancements will build upon our current patient recruitment success rate, where we're happy to report we're delivering well above our 100% on time targets across the blended mix of active studies. This, of course, can be juxtaposed with traditional clinical trial timelines, which are reportedly late, more than 80% of the time. Our final area of focus, enhancing our commercial efforts, continues to produce both volume and larger deal sizes across large pharma, mid-sized pharma, and biotechs who are looking to save time, to reduce burn, and to accelerate time to commercialization. As of the end of the second quarter, and as we sit here today, our sales pipeline continues to set new highs. In addition to the pipeline growth for our new technology offering, which I talked about a moment ago, our Medisite pipeline is up 70% quarter over quarter, much of which is the result of our Medisite Lite and Medisite Rescue product offerings that we announced in the second quarter. The composition of our pipeline continues to lean toward deals that are greater than $10 million. many of which are from repeat customers, which we believe is testament to the maturation of the DCT market and our ability to effectively enhance speed and productivity for existing customers. For perspective, the dollar volume of $10 million plus opportunities in our pipeline is up nearly 400% year over year, and these larger opportunities now represent almost 50% of our qualified sales pipeline on a dollar basis. While we're excited to see the rapid growth in our sales pipeline, we're also seeing longer sales cycles, particularly on larger studies, which is reflected in our net bookings of $25.4 million for the second quarter. The elongated sales cycles are directly correlated to the size of the opportunities in our pipeline, given the criticality of the studies we're supporting and the number of people who are often involved in the decision-making process. While others in the industry are reporting longer decision-making timelines among sponsors, it's unclear how much of that may be impacting us. Regardless, we remain optimistic about our ability to convert our growing pipeline into strong bookings over the long run. With that, I'll now turn the call over to Mike Saranac, our Chief Financial Officer, to provide additional detail regarding our financial performance. Thank you, David, and hello, everyone. I plan to take us through the second quarter results for the three months ended June 30, 2022, and then our outlook for the full year of 2022. We are pleased to report revenues for the quarter of $19.3 million, which represents a 54% increase from the $12.5 million in the same period of the prior year. As David noted, we finished the quarter with net bookings of $25.4 million compared to $44.1 million in the second quarter of 2021. It's important to note that while our sales pipeline is growing in overall size and composition, with nearly 50% of that pipeline comprised of deals larger than $10 million, these larger opportunities take significantly longer to contract, which has negatively impacted short-term booking conversions. As expected, our cancellation rate in the quarter reverted back close to our historical average versus what we had experienced in the first quarter with the two large COVID cancellations, which we discussed during our last earnings call. Our second quarter cancellation rate was under 12%, which was roughly in line with what we saw in 2021 and lower than what we see across the industry, which we believe to be 15 to 20%. Now, turning to gross profit. Our adjusted gross profit for the second quarter was $5.9 million compared to $5.4 million in the same period for the prior year. Adjusted gross margin was 30.6% compared to 43.2% for the same period of prior year. As you may recall, our 30.6% adjusted gross margin for the second quarter was up significantly compared to the 17.2% in the first quarter of this year, as two of our largest studies based on our old pricing model came to conclusion, and we were effectively able to absorb some of the excess capacity we had in the first quarter. In addition to the significant gains in adjusted gross margin, we were able to take significant costs out of the business by shedding our reliance on third-party resources, improving processes, and deploying automation to reduce our need for excess hiring. As a result, selling general and administrative expenses inclusive of $5.7 million of stock-based compensation were $28.2 million in the second quarter, a decrease from $30.2 million in the first quarter of 2022. Adjusted EBITDA, which we calculate by adding back depreciation, amortization, taxes, interest, transaction expenses, and stock-based compensation, and adjusting for the impact of the change in fair value of the earn-out liability was a loss of $16.5 million in the quarter, representing a 17% sequential improvement from the first quarter loss of $19.8 million. You will note our GAAP net loss of $5.8 million reflects a gain of $20.9 million related to the change in fair value of the earn-out liability, which was part of the original transaction with the SPAC. As a reminder, upon the stock price meeting certain thresholds within the 36-month period period of the transaction closing, the equity holders of the former Science 37 entity would receive additional shares and under U.S. GAAP we are required to reevaluate the potential value of that arrangement on a quarterly basis. With respect to cash, we ended the quarter with approximately $148.3 million of cash and cash equivalents. This would imply a cash burn of $31 million in the quarter, down from $35 million cash burn in the first quarter. However, if you account for a couple of large receivables totaling approximately $3.3 million from two customers who are not biotechs or small pharma, which were due the last week of June and came in the first week of July, as well as a number of one-time items including the payout of accrued vacation hours as we switched to a flexible time off policy, our normalized quarterly cash burn would have been approximately $24 million in the second quarter. Now let's turn to the outlook for the remainder of 2022. As a result of the longer booking conversion timelines associated with the larger opportunities we are seeing in our pipeline, we are adjusting our full year 2022 projected revenues to be in the range of $76 million to $86 million, representing a 28% to 44% year-over-year growth. We expect third quarter gross margins to be similar to our second quarter performance, with additional gross margin expansion in the fourth quarter fourth quarter, close to 40%. We continue to expect adjusted EBITDA for the full year 2022 to be between negative 65 million to negative 69 million. Looking beyond 2022, as David noted, we expect to be both quarterly EBITDA breakeven and cash neutral by the end of 2024. And based on our current operating plan, we expect to be able to reach cash flow positivity with our existing cash on hand. As of June 30, 2022, we had approximately 116.3 million shares outstanding. Since we currently anticipate having an adjusted net loss in the upcoming quarter and year, any converted options would be deemed anti-dilutive and therefore, on a GAAP basis, we expect the basic and diluted share counts to be the same. In summary, we remain optimistic about our continued growth trajectory with a qualified sales pipeline at a record level and larger $10 million plus opportunities representing nearly half of that pipeline, which is up nearly 400% year over year. We remain committed to delivering long-term profitability and are pleased with our recent strides in that direction, particularly in regards to sequential gross margin expansion, SG&A reduction, and reduced cash burn. At this point, I would like to turn back the call over to David for closing comments. Thank you, Mike. We're very pleased with both the continued strong execution by our team and progress achieved in our strategic priorities as we continue to pioneer decentralizing the clinical trial industry. We remain focused on building on this positive momentum with a keen eye toward our objective of long-term profitability and maximizing value for our shareholders. With that, we'll now turn it over to the operator to open it up for questions.