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spk03: Greetings and welcome to the Science 37 second quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stephen Halper, LifeSci Advisors. Please go ahead.
spk04: Thank you, Renan, and thank you all for participating in today's call. Joining me are David Coleman, Chief Executive Officer, and Mike Zaronek, Chief Financial Officer. Earlier today, Science 37 released financial results for the quarter ended June 30th, 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 discussion of these risk factors, including in the risk factor 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 reference 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.science37.com. I would now like to turn the call over to David Coleman. David?
spk06: Thank you, Steve. And thank you, everyone, for joining us today for our second quarter 2023 earnings call. I'm really pleased to report that the strategies we've implemented over the past several quarters, as discussed on these calls, including fully transforming our commercial model, becoming laser focused on the Medisite value proposition, investing in patient recruitment, and quality as key differentiators, shedding expenses that don't support the metasite, and investing in near and offshore centers of excellence to improve our unit economics have all really started to pay dividends. Quarter over quarter, our RFP dollar volume is up more than 50 percent. Our gross bookings are up more than 60 percent. Our net bookings are up nearly 15 percent. Our revenue is up nearly 10%. Our gross margins are more than 13% percentage points higher. EBITDA is nearly 40% better, and our cash burn is more than 30% lower. You'll note in our press release that we released some of our backlog this quarter. Our bookings adjustment was $24.6 million. $20.8 million, or about 85% of the total, comes from COVID risk mitigation studies where we were contracted in 2020 and 2021 to supplement traditional site-based activity, and we were only compensated when sites used our services. Given the incredibly poor site adoption rates for these studies, we agreed to discontinue these contracts with our sponsors in the second quarter. While this enabled us to free up some carrying costs and, in some cases, accelerate revenue as part of our modest closeout provisions, we had very low expectations for these studies. They had little impact on our second quarter P&L and do not have a material impact on our 2023 guidance. We have about $8 million in similar COVID risk mitigation work in our backlog that we are watching very closely. We're also watching a handful of other studies in our backlog totaling about $25 million in contract value that may be amended this year, not unlike traditional clinical trial sites or CROs. The reason for these potential amendments include early endpoint detection, sponsor funding, and sponsor pipeline prioritization. None of these potential adjustments that we're watching are quality or execution related. It's important to note that we've anticipated these potential adjustments and we have risk adjusted our guidance or what we call our phase backlog with these expectations. We expect our normalized realization rate to be around the industry average of between 15 to 20% of our gross bookings in 2024 and beyond. Pulling this together from a forward looking perspective, Given our increasing RFP volume, we expect gross bookings in the second half of the year to exceed the first half, with heavier weighting in the fourth quarter given booking seasonality. In regards to forward-looking revenue, we are taking into account that gross bookings for the first half were greater than expected. RFP flow continues to accelerate. And we expect continued momentum given the recent FDA draft guidance documents regarding the acceptance of decentralized clinical trials and the need for greater participant diversity. As a result, we're raising our 2023 revenue guidance to approximately $60 million, which was the top end of our previous guided range. With our continued focus on cost management, we expect 2023 EBITDA to be a loss of approximately $35 million. which is much stronger than our previous guidance. If you recall, during our first quarter earnings release, we set the expected burn rate to be $10 million of cash in the fourth quarter of 2023. Given our first half 2023 performance and cost containment efforts to date, we're now expecting to burn less than $10 million of cash in the third quarter of 2023 and less than $15 million of cash over the second half of this year. exiting 2023 with more than $50 million on hand. We expect continued bookings and revenue growth in 2024 with a similar approach to cash management and have been consistent in our communication that we expect to exit the fourth quarter of 2024 even to a positive with ample cash on hand without having to raise additional capital. We have implemented the right strategy to achieve this objective, and we're starting to see the positive effect of these changes. With that, I'll turn the call over to Mike Zaranek, our Chief Financial Officer, to provide additional details.
spk07: Thank you, David, and good morning, everyone. I will discuss the second quarter results for the quarter ended June 30th, 2023, and then we'll discuss our outlook for the full year 2023. To start with, I'm pleased to report that we have improved sequentially in each key financial metric in the second quarter of 2023. While we've reported consistent improvements to our cost basis over the past 18 months, We are particularly pleased to have added sequential revenue growth in the second quarter. We finished the quarter with $38.2 million in gross bookings and $13.6 million in net bookings. As David mentioned, approximately $20.8 million of the second quarter adjustments related to COVID mitigation solutions that were contracted during the pandemic. Nearly $16.4 million of this comes from a single COVID mitigation follow-up study with greater than eight years remaining. As such, these adjustments made during the second quarter had minimal second quarter revenue implications relative to our previous guidance. Excluding the COVID mitigation adjustments, our cancellation rate for the second quarter was 10%, which is lower than the 15 to 20% industry cancellation rate that we expect over time. It is important to note that of our 168 million in backlog as of June 30th, 2023, there was approximately 8 million remaining of COVID mitigation contracted work. Consistent with standard industry practice, we review project status on no less than a monthly basis. And as David mentioned, of our entire project portfolio, there are a handful of studies that we are monitoring totaling about 25 million in aggregate contract value, which spans out over multiple years. To be clear, we have de-risked these in our revenue guidance and have a high degree of visibility to near-term revenues. Second quarter revenues were 15.4 million, which was 3.9 million or 20.4% decrease from the same period of the prior year, or 1.3 million and 9% sequential improvement versus the first quarter. Much of this increase was due to our ability to accelerate revenue given the impact of our new patient recruitment strategies that we discussed last quarter. Adjusted gross profit for the second quarter was 5.5 million, which was down 0.4 million, or 7%, as compared to the same period of the prior year, and up 2.3 million, or 72%, sequentially. Adjusted gross margin for the quarter was 36%, which was up 5.4 percentage points from the same period last year, and up 13.1 percentage points from the first quarter of 2023. Much of this gross margin improvement was the result of achieving higher utilization rates, as well as increased velocity on our patient recruitment efforts, which we spoke about previously. Moving over to SG&A. Selling general and administrative expenses, excluding $3.6 million of stock-based compensation and depreciation, were $13.1 million in the second quarter. This was down 9.3 million, or more than 40%, compared to the same period from last year, and down 2.5 million, or 16%, sequentially. Much of our improvement in SG&A was the result of implementing our offshore centers of excellence strategy, which we announced in April, in addition to shedding costs that don't support our metasite strategy. For perspective, the second quarter of 2023 marks a nearly 50% reduction in our overall cost basis which we define as the difference between revenue and adjusted EBITDA, compared to the fourth quarter of 2021, which was our first quarter operating as a public company. So as planned, we've made significant strides in taking costs out of the business as we move forward towards a path to profitability. 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 $7.6 million in the quarter, representing $8.9 million or 54% improvement compared to the same period in the prior year and $4.8 million or 39% sequential improvement. This is our best quarterly adjusted EBITDA performance in two years. Consistent with the factors we cited on our first quarter earnings call, US GAAP required us to record a non-cash impairment charge of $5.7 million related to our long-lived assets in the second quarter. Among other things, this continues to be a result of our market capitalization, which was less than the cash and book value for a sustained period of time. This is an accounting assessment and does not reflect our view of the value of the platform or its longer term potential. On a U.S. GAAP net loss basis, second quarter represented 19.6 million loss versus a GAAP net loss of 5.8 million in the second quarter a year ago. The adjusted net loss for the second quarter of 2023 was $7.7 million, which compared to an adjusted net loss of $20.9 million in the same period last year. Now turning to cash. We ended the quarter with $65 million in cash and cash equivalents. In the second quarter, our cash burn, which is the difference in balance sheet cash and cash equivalents from March 31st to June 30th, was approximately $17.6 million. This included $3.1 million approximately in one-time costs such as cash payments related to previously announced restructuring actions. Cash burn excluding these items was approximately $14.5 million, which is a sequential improvement of greater than $5 million versus the first quarter of 2023. Now let's turn to the outlook for 2023. As David noted previously, given our stronger than expected gross bookings, RFP volume increases and some positive tailwinds from the recent FDA preliminary guidance documents, we're updating our full year 2023 revenue guidance from the previous range of $55 to $60 million to the top end of that range, approximately $60 million. We expect third quarter revenues to be roughly flat, but potentially even a little lighter than the second quarter as we accelerated some of our third quarter backlog into the second quarter through better patient recruitment velocities. and we expect our fourth quarter to be sequentially higher on a revenue basis based on the timing of our new study starts and project ramps. While we will hold off providing 2024 guidance until a later date, given our current momentum and visibility, we expect solid continuing revenue growth in 2024. Turning to our gross margin guidance, we indicated during our last quarterly earnings call that we expected adjusted gross margins to improve from the low 20% range in the first quarter of 2023 to the low to mid 30% range in the second half of 2023. We achieved the top end of that range at 36% in the second quarter, and we expect to stay in the mid 30% range for the remainder of this year. On the first quarter earnings call, we also indicated we expected to see a sequential reduction in SG&A and a more dramatic reduction in cash burn, exiting the fourth quarter with a cash burn of less than $10 million. As David noted, we are tracking ahead of this from an expectation standpoint and now anticipate our cash burn in the third quarter to be less than $10 million, one quarter ahead of schedule. We expect our cash burn for the full second half of 2023 to be less than $15 million, thus exiting 2023 with more than $50 million of cash on hand. As we progress into 2024, We expect our investments in technology, further increases in utilization, and continued process improvements to help us expand quarterly gross margins to 40% or greater, delivering a higher gross profit on a relatively fixed level of SG&A, and thereby ending the fourth quarter of 2024 with positive adjusted EBITDA and cash flow, exiting that year with ample cash on hand without needing to have raised additional capital. In summary, we are encouraged by our second quarter 2023 gross bookings and cost initiatives. Going forward, we are optimistic as we march down the path towards profitability. At this point, I'd like to turn the call back over to David for closing comments.
spk06: Thank you, Mike. We've been highly intentional with our strategy and have been explicit on these calls about our intentions. Our strategy and the actions we've taken are clearly having the desired results, and we're pleased with the recent outcomes and business momentum. We're optimistic about the future and are on track to reach our financial goal of adjusted EBITDA and cash flow positive by the end of the fourth quarter of 2024 without having to raise additional capital. With that, we'll now open it up for questions.
spk03: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press start one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, you may be necessary to pick up your handset before pressing the star keys. Please hold while we poll for questions.
spk05: Thank you.
spk03: Our first question comes from Charles Roy with Cohen and Company.
spk08: Yes, thanks. This is Charles from TD Cowen. You know, guys, well, congrats on the acceleration here, and it looks like things are starting to improve. And I guess, you know, to start with is if we think about, you know, in the past you talked about that deals were taking longer and the sales cycle was stretching. This gross bookings that's accelerating that we're starting to see now, is that a signal that we've kind of anniversary this lengthening sales cycle or are sales cycles starting to shorten again? Maybe you can talk through sort of what the market dynamics that you're seeing.
spk06: Yeah, I don't think we really see much change, to be honest, in the length of the sales cycle, frankly. It's still long. And I've talked about that being the new normal in our past calls, and I still think that that's true. Good news is that our RFP volume is increasing. I talked about in the prepared remarks over 50%. That's up from, you know, first quarter I talked about 25% increase in our RFP dollar volume. So we're seeing an acceleration in our RFP. um, dollar volume, but that sales cycle still has to kick in. So, um, I think that hopefully that provides you a little bit of perspective. Uh, it's, it is the new normal, I think for us.
spk08: Okay. That's helpful. And, and in terms of this, uh, higher RFP volume, you know, can you, can you talk through what are, what are, what are sponsors? you know, seeking from you guys to specifically help with it? Is it really just, is it sort of the meta site? Is there any kind of full, you know, full DCT trials being given to you? Maybe give us a sense for what the mix looks like.
spk06: Yes. I mean, we, you know, back to the date that we brought in Michael Shipton to run the commercial shop for us, we made the decision to be super intentional. about MetaSight as our key value proposition, and we're really single-minded in that. Now, we also made the attention to also dig into the CRO channel and the RWE channels in particular, and so we're seeing an uptick in both of those different areas as well as we continue our partner strategy and continue thinking about the value proposition of the MetaSight in the real-world evidence realm.
spk08: And when you talk about MetaSite, I mean, it's my understanding, correct me if I'm wrong, right? As far as you can still pick certain elements of your platform to supplement what they're doing or take lots of parts at once, can you give a sense, are there any particular areas of the platform that they're particularly focused on asking you guys to help with versus other parts? Is there any kind of preference one way or the other?
spk06: It's really bringing us in as a virtual site, so supplementing what they may have with a traditional site network or acting as a single site in order to be able to enroll the entire trial. Ultimately, the value proposition comes down to faster enrollment, greater diversity, and a more patient-friendly experience.
spk08: Okay, great. Mike, maybe if I could just ask you, just to clarify, you said that in the backlog there's 8 million left of COVID-related work. And then you mentioned another 25 million of ongoing projects. That's, can you clarify what the 25 million refers to? And I guess the question is, any reason not to just, you know, kind of take a charge against that, because chances are that might probably not happen?
spk07: Yeah, sure. So thanks, Charles. I mean, I think, you know, as it relates to the 25 million, just to be super clear, Like all companies in this space, we do monitor the entire portfolio going through project by project on a monthly basis. As part of that, you identify those opportunities where there might be a faster burn, and you also identify those opportunities where the burn might be slower or the project might be at risk. What we're attempting to do in terms of the prepared remarks is to identify that there's about 25 million dollars in the aggregate that spans over multiple years that we have on our watch list that we're monitoring. That doesn't necessarily mean they will be canceled, doesn't necessarily mean that sort of thing, but rather as we look at the business and the portfolio, those in the aggregates are roughly what we're seeing on the monitor list. That being said, our updated guidance takes a risk-adjusted view there of those opportunities. And so, from our perspective, we think we've de-risked the revenues in the near term related to those specific projects.
spk03: Thank you. Our next question comes from Frank Takinen with Lake Street Capital Markets.
spk02: Great. Thanks for taking the questions, and congrats on the progress of the quarter. David, I think I heard you have a comment that you expect second half bookings to be stronger than first half bookings was one hoping you could clarify whether that was in relation to gross or net. And then if you could, if it were net, talk to the likelihood of peering over that 1X book to bill as we exit the year. I know you mentioned that there was some seasonality in there. Q4 is going to be likely strongest from a bookings perspective, but I don't think you've spoke to the revenue recognition expectations Q3 versus Q4 to get to that guided range.
spk05: Well, thanks for the question, Frank.
spk06: We do expect to see sequential growth in bookings for the second half than relative to the first. I'm talking about in terms of gross bookings. We'll get to the net in a second. Yes, I believe there'll be seasonality associated with that. Third quarter is traditionally, given holidays and whatnot, a lower volume quarter than the fourth, so I expect it to be back in weighted. The combination of the two quarters, I expect that to be larger than the first and the second quarter. In terms of net adjustments, still to be determined. I think what we tried to provide in our prepared remarks were some things that we're looking at that might provide some risk to that. I don't suspect that all of that will come through, but it's possible that it does. So I'm trying to telegraph a little bit for you in case it does, so you know what we're looking at as you're preparing your models as well.
spk07: And if I could add one thing to that, I mean, just to be clear, consistent with our documented backlog policy, we would not typically remove the project until we receive the formal cancellation notice.
spk06: In terms of the second part of that question was about revenue recognition for the second half of the year, we do expect the full year to come in aligned around $60 million, which represents a slight uptick from the first half of the year. Certainly back-end weighted as well. I think what Mike had said is that we're more likely to be flat in revenue for the third quarter. It may actually even come down a little bit in the third quarter. But in total, we expect second half revenues to be higher. And the reason for that, I think we just had a really strong second quarter in terms of accelerating revenue. And if all goes well, we'll continue to accelerate revenue as third and fourth quarter continue.
spk02: Okay, that's helpful. Then maybe just one follow-up to Charles' question on the $25 million in aggregate over multiple years. Can you parse out what portion of that is COVID-related?
spk07: Yeah, so, I mean, I think we talked about the $8 million that was COVID-related, sort of separate and distinct from the $25 million. So if you want to sort of outline the COVID risk mitigation, it was $8 million, which is separate and distinct from the 25.
spk02: Got it. Okay. And then last one for me, just in relation to broader macro, any pockets of particular strengths or weakness across different customer profiles that you guys are noticing?
spk05: I don't know if there's anything that's really popped out.
spk06: I mean, except for maybe CROs, where we seem to be getting a lot more traction. And I guess it makes sense, if you think about it, when we set out with the intention to be really intentional in regards to the metasite model, we're just another site in the CRO world, which I think slots in really nicely to what they're trying to do. So we do see an uptick there. CROs, you know, we continue to see some strength in even the small pharma as well.
spk05: Thank you.
spk03: Our next question comes from Max Smock with William Blair.
spk00: Hi, it's Christine Raines on for Max Smock. Thanks for taking our question. The first one is last quarter you indicated that repeat customers accounted for 80% of your total gross bookings. Just curious on what this repeat percentage was this quarter and just your overall strategy to increase wins with new customers. Kind of relatedly, how much of a cross-selling opportunity do you see with your existing customers and given that you're leaning in to areas like real-world evidence, just your average number of solutions your customers currently use and kind of what you're targeting there?
spk06: Yeah, I would say this quarter we had predominantly new customers, actually, and one very large new customer, which is what we're excited about. So over the last 12 months, it's more like 50-50, new versus existing customers. And I think that's probably a pretty good mix. As we grow, I'd like to kind of see it that way. But super happy to see the traction with new customers. And that, again, goes back to the work that Michael has put in place in terms of inside sales, expanding the network of who we're talking with, and providing our BD organization with resources you know, with more leads that can ultimately turn into sales. In terms of the composition of work, I mean, you're really worth staying super focused on the meta site and expanding that with our existing customers continues to be a focus. It happens to lend itself well to RWE. As you know, in the real world space, that could become a graduation from a phase three study into a phase four study. And so we like that opportunity there with our existing base.
spk00: Great, thanks. Last one for us. Can you just walk through your current backlog visibility? What's the average duration of contracts you've been awarded? So kind of excluding that roughly $32 million of backlog that's most vulnerable to amendments. Now, are you seeing any notable shifts towards winning bigger or longer duration contracts? Just trying to get a sense of your visibility in the top line growth for 2024.
spk06: I'll talk about the contracts and maybe you should talk about the backlog, Mike. So contract size does continue to increase in our pipeline, which is exactly what we hope for because we're adding more value. We can contribute a larger patient volume than what we could in the past. which is going to ultimately drive that larger dollar volume. So definitely seeing that.
spk07: Yeah, and I think as it relates to duration and so on, so the wild card here is how much, as David mentioned, we're seeing more demand on the real-world evidence side. Those tend to be longer in durations. But in terms of what's currently in the backlog, not a material change from where we've been historically from a burn perspective.
spk05: Thank you.
spk03: Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star 1. Our next question comes from Matt Hewitt with Craig Hellam Capital Group.
spk01: Good morning, and congratulations on the progress. Maybe one point of clarification. So you're seeing an increase in RFP dollar volume. One of the things we've been hearing from other pharma and biotech service providers here over the past quarter or two is that there's been a shift in priorities from their pipelines where they're shifting more of their resources, more attention towards later stage clinical trials. Is that what you're also seeing? Is that what's driving the increased RFP dollar volume is maybe a lack of earlier stage programs? In return, you're getting these later stage larger programs and that's what's feeding the backlog?
spk06: I'm not sure how much of that is a function of what we're fishing for versus what's materializing and the priorities on the pharma side. Because as I had noted that when Michael started about nine months ago, he was pretty declarative about RWE staying a good spot for us. And so we've really positioned that amongst our sales organization to push in that direction. So we're definitely seeing a movement from, I mean, it's sort of the evolution of the company. We used to be very heavy in phase two, but now we're seeing a lot more phase threes and fours.
spk01: Got it. And then I realize it's very early days, but given the FDA potential mandate for diversity and whatnot, are you starting to have conversations? Are customers coming to you, bringing that up? And are you starting to see that maybe as a little bit of a driver? Thank you.
spk06: I would say the guidance on diversity is just starting to be part of the conversation for real. And I think that back when that came out, it was interesting. But I think that there's starting to be a little bit of a reaction that we need to do something, we being sponsors, to be able to do something different, which is a little bit different from the decentralized kind of the trial which I think was a little bit more of a revelation that gave them permission to execute decentralization versus they may have been holding back in the past. So I think the two of them are starting to become hand-in-hand, pushing some good tailwinds for us.
spk01: That's great. Thank you.
spk05: Thanks, Matt.
spk03: Thank you. There are no further questions at this time. I would like to turn the floor back over to David Coleman, Chief Executive Officer, for closing comments.
spk06: All right. Well, thanks for the questions today. We'll let you cut it off for now. I appreciate all the questions, and we'll talk to you again in a quarter. Thank you.
spk03: The conference has now concluded. You may disconnect your lines at this time. Thank you for your participation.
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