UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022March 31, 2023
OR
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to ______
Commission file number 001-39727
SCIENCE 37 HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| | | | | |
| Delaware | 84-4278203 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
800 Park Offices Drive, Suite 3606 Research Triangle Park, North Carolina | 27709 |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant's telephone number, including area code: (984) 377-3737
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Shares of Common Stock, $0.0001 par value per share | SNCE | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | | | | | | |
| Large accelerated filer | o | Accelerated filer | o |
| Non-accelerated filer | x | Smaller reporting company | x |
| | Emerging growth company | x |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes o No x
As of November 4, 2022,May 9, 2023, there were 116,663,640116,760,630 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.
Science 37 Holdings, Inc.
Form 10-Q
For the Quarter Ended September 30, 2022March 31, 2023
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, are forward-looking statements. These forward-looking statements can generally be identified by the use of forward-looking terminology, including, the terms “believes,” “estimates,” “anticipates,” “expects,” “seeks,” “projects,” “intends,” “plans,” “may” or “should” or, in each case, their negative or other variations or comparable terminology. They may appear in a number of places throughout this Quarterly Report on Form 10-Q, including Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and includebut not limited to, statements regarding our future results of operations and financial position, business strategy, expectation as to the timing and amount of cost savings related to the planned cost reduction program, plans and prospects, existing and prospective products, research and development costs, timing and likelihood of success, and plans and objectives of management for future operations and results.results, are forward-looking statements. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “can,” “could,” “estimates,” “anticipates,” “expects,” “seeks,” “projects,” “intends,” “plans,” “may,” “might,” “should,” “will,” or “would,” or, in each case, their negative or other variations or comparable terminology, although not all forward-looking statements contain these identifying words.
The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These statements involve known and unknown risks, uncertainties and other important factors, many of which are beyond the Company’s control, that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors that may impact such forward-looking statements include:
•ourexpectations regarding the Company’s strategies and future financial performance, including its future business plans or objectives, prospective performance and opportunities and competitors, revenues, backlog conversion, products and services, pricing, operating expenses, market trends, liquidity, cash flows and uses of cash, capital expenditures, and ability to respondinvest in growth initiatives and pursue acquisition opportunities, as well as regarding its cost reduction programs and anticipated cost savings;
•risks related to the Company’s technology, intellectual property, data privacy and cybersecurity practices;
•risks related to the Company’s reliance on third parties;
•risks related to general economic and financial market conditions, including fluctuations in currency exchange rates, economic instabilitythe impact of ongoing supply chain disruptions and inflationary conditions,cost pressures and the possibility of an economic recession; instability in the global banking system; political, legal and regulatory environment; and the industries in which the Company operates;
•the risk that the Company will need to raise additional capital to execute its business plan, which may not be available on acceptable terms or at all;
•limited liquidity and trading of the Company’s securities, including the possibility the Company’s common stock may be delisted from The Nasdaq Stock Market LLC;
•volatility in the price of Science 37’s securities due to a variety of factors, including changes in regulatory environmentthe competitive and highly regulated industries in which Science 37 operates, variations in performance across competitors and changes in laws and regulations affecting Science 37’s business;
•geopolitical risk and changes in applicable laws or regulations;
•the possibility that the Company may be adversely affected by other economic, business, and/or competitive factors;
•our limited operating history;
•our ability to raise additional funding to strengthen our core business, expand into additional marketsoperational risks; and extend the reach of our operating system;
•failure to realize anticipated cost savings;
•potential loss or non-renewal of Science 37’s contracts, any delay in our customers’ clinical trials or non-payment by its customers for services that we have performed;
•our ability to recognize the anticipated benefits of the Merger (defined below);
•our dependence on the clinical trial market;
•our reliance on third parties for important products, services and licenses to certain technology and intellectual property rights;
•the continuing impact of the COVID-19 pandemic;
•political, legal and compliance, operational, regulatory, economic and other risks associated with the international expansion of our operations;
•risks related to our technology, intellectual property and data privacy practices;
•our exposure to geopolitical risks and changes in applicable laws and regulations;
•litigation and regulatory enforcement risks;risks, including the diversion of management time and attention and the additional costs and demands resulting therefrom on the Company’s resources.
•volatility in the trading price of our common stock.
The foregoing list of factors is not exhaustive. You should carefully consider the foregoing factors and other risks and uncertainties discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.2022. Furthermore, we operate in an evolving environment. Should one or more of these risks or uncertainties materialize, or should any of the assumptions prove incorrect, actual results may vary in material respects from those projected in our forward-looking statements. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties.
The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on the Company’s current expectations and beliefs and are based upon information available to us as of the date of this Quarterly Report on Form 10-Q,10-
Q, and while we believe such information forms a reasonable basis for such statements, that information may be limited or incomplete. Our forward-looking statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely onupon these statements
You should read this Quarterly Report on Form 10-Q and the documents that we reference herein and have filed as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. The Company will not and does not undertake any
obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as requirerequired by law.
Part I - Financial Information
Item 1. Financial Statements
Science 37 Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
| | | (unaudited) | | | (unaudited) | |
| (In thousands, except share data) | (In thousands, except share data) | September 30,
2022 | | December 31,
2021 | (In thousands, except share data) | March 31,
2023 | | December 31,
2022 |
| Assets | Assets | | | | Assets | | | |
| Current assets: | Current assets: | | Current assets: | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 130,239 | | | $ | 214,601 | | Cash and cash equivalents | $ | 82,644 | | | $ | 108,091 | |
| Accounts receivable and unbilled services, net | Accounts receivable and unbilled services, net | 9,018 | | | 10,699 | | Accounts receivable and unbilled services, net | 11,679 | | | 10,992 | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | 6,664 | | | 7,403 | | Prepaid expenses and other current assets | 6,924 | | | 7,121 | |
| Total current assets | Total current assets | 145,921 | | | 232,703 | | Total current assets | 101,247 | | | 126,204 | |
| Property and equipment, net | 1,074 | | | 1,393 | | |
| Operating lease right-of-use assets | 1,227 | | | 2,086 | | |
| Capitalized software, net | 41,049 | | | 24,290 | | |
| Other assets | Other assets | 153 | | | 326 | | Other assets | 199 | | | 244 | |
| Total assets | Total assets | $ | 189,424 | | | $ | 260,798 | | Total assets | $ | 101,446 | | | $ | 126,448 | |
| Liabilities, redeemable convertible preferred stock and stockholders’ equity
| Liabilities, redeemable convertible preferred stock and stockholders’ equity
| | Liabilities, redeemable convertible preferred stock and stockholders’ equity
| |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
| Accounts payable | Accounts payable | $ | 6,608 | | | $ | 12,819 | | Accounts payable | $ | 5,727 | | | $ | 7,206 | |
| Accrued expenses and other liabilities | Accrued expenses and other liabilities | 11,877 | | | 17,073 | | Accrued expenses and other liabilities | 8,984 | | | 11,364 | |
| Deferred revenue | Deferred revenue | 4,603 | | | 5,130 | | Deferred revenue | 2,594 | | | 4,606 | |
| Total current liabilities | Total current liabilities | 23,088 | | | 35,022 | | Total current liabilities | 17,305 | | | 23,176 | |
| Non-current liabilities: | Non-current liabilities: | | Non-current liabilities: | |
| Deferred revenue | Deferred revenue | 4,170 | | | 2,478 | | Deferred revenue | 4,187 | | | 3,654 | |
| Operating lease liabilities | Operating lease liabilities | 873 | | | 1,322 | | Operating lease liabilities | 555 | | | 716 | |
| Commissions payable | | Commissions payable | 1,215 | | | 1,336 | |
| Other long-term liabilities | Other long-term liabilities | 1,390 | | | 1,477 | | Other long-term liabilities | 73 | | | 180 | |
| Long-term earn-out liability | 1,300 | | | 98,900 | | |
| Total liabilities | Total liabilities | 30,821 | | | 139,199 | | Total liabilities | 23,335 | | | 29,062 | |
| Commitments and Contingencies (Note 10) | | |
| Commitments and Contingencies (Note 11) | | Commitments and Contingencies (Note 11) | |
| Redeemable convertible preferred stock: | Redeemable convertible preferred stock: | | Redeemable convertible preferred stock: | |
| Redeemable convertible preferred stock, $0.0001 par value; 100,000,000 shares authorized, 0 issued and outstanding at September 30, 2022 and December 31, 2021, respectively | — | | | — | | |
| Redeemable convertible preferred stock, $0.0001 par value; 100,000,000 shares authorized, 0 issued and outstanding at March 31, 2023 and December 31, 2022, respectively | | Redeemable convertible preferred stock, $0.0001 par value; 100,000,000 shares authorized, 0 issued and outstanding at March 31, 2023 and December 31, 2022, respectively | — | | | — | |
| Stockholders’ equity: | Stockholders’ equity: | | Stockholders’ equity: | |
| Common stock, $0.0001 par value; 400,000,000 shares authorized, 116,574,031 and 114,991,026 issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 12 | | | 11 | | |
| Common stock, $0.0001 par value; 400,000,000 shares authorized, 116,729,430 and 116,432,029 issued and outstanding at March 31, 2023 and December 31, 2022, respectively | | Common stock, $0.0001 par value; 400,000,000 shares authorized, 116,729,430 and 116,432,029 issued and outstanding at March 31, 2023 and December 31, 2022, respectively | 12 | | | 12 | |
| Additional paid-in capital | Additional paid-in capital | 344,984 | | | 323,666 | | Additional paid-in capital | 355,620 | | | 350,247 | |
| Accumulated other comprehensive income | Accumulated other comprehensive income | 152 | | | — | | Accumulated other comprehensive income | 206 | | | 193 | |
| Accumulated deficit | Accumulated deficit | (186,545) | | | (202,078) | | Accumulated deficit | (277,727) | | | (253,066) | |
| Total stockholders’ equity | Total stockholders’ equity | 158,603 | | | 121,599 | | Total stockholders’ equity | 78,111 | | | 97,386 | |
| Total liabilities, redeemable convertible preferred stock and stockholders’ equity | $ | 189,424 | | | $ | 260,798 | | |
| Total liabilities, preferred stock and stockholders’ equity | | Total liabilities, preferred stock and stockholders’ equity | $ | 101,446 | | | $ | 126,448 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Science 37 Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| (In thousands, except per share data) | (In thousands, except per share data) | 2022 | | 2021 | | 2022 | | 2021 | (In thousands, except per share data) | 2023 | | 2022 |
| Revenue | Revenue | $ | 16,249 | | | $ | 14,236 | | | $ | 54,210 | | | $ | 39,222 | | Revenue | $ | 14,086 | | | $ | 18,686 | |
| | Operating expenses: | Operating expenses: | | Operating expenses: | |
| Cost of revenue | 12,157 | | | 10,318 | | | 41,985 | | | 26,246 | | |
| Cost of revenue (exclusive of depreciation and amortization) | | Cost of revenue (exclusive of depreciation and amortization) | 11,110 | | | 15,986 | |
| Selling, general and administrative | Selling, general and administrative | 24,485 | | | 16,932 | | | 82,822 | | | 37,477 | | Selling, general and administrative | 20,481 | | | 30,153 | |
| Impairment of long-lived assets | | Impairment of long-lived assets | 7,801 | | | — | |
| Depreciation and amortization | Depreciation and amortization | 4,870 | | | 1,916 | | | 12,569 | | | 5,189 | | Depreciation and amortization | 213 | | | 3,469 | |
| Restructuring costs | | Restructuring costs | 229 | | | — | |
| Total operating expenses | Total operating expenses | 41,512 | | | 29,166 | | | 137,376 | | | 68,912 | | Total operating expenses | 39,834 | | | 49,608 | |
| Loss from operations | Loss from operations | (25,263) | | | (14,930) | | | (83,166) | | | (29,690) | | Loss from operations | (25,748) | | | (30,922) | |
| | Other income (expense): | Other income (expense): | | Other income (expense): | |
| Interest income | Interest income | 559 | | | — | | | 748 | | | 1 | | Interest income | 930 | | | 94 | |
| Sublease income | Sublease income | 240 | | | 230 | | | 719 | | | 444 | | Sublease income | 33 | | | 239 | |
| Change in fair value of earn-out liability | Change in fair value of earn-out liability | 1,200 | | | — | | | 97,600 | | | — | | Change in fair value of earn-out liability | 110 | | | 75,500 | |
| Other income (expense), net | Other income (expense), net | (264) | | | 8 | | | (369) | | | 12 | | Other income (expense), net | 47 | | | (18) | |
| Total other income (expense), net | Total other income (expense), net | 1,735 | | | 238 | | | 98,698 | | | 457 | | Total other income (expense), net | 1,120 | | | 75,815 | |
| Income (loss) before income taxes | (23,528) | | | (14,692) | | | 15,532 | | | (29,233) | | |
| (Loss) income before income taxes | | (Loss) income before income taxes | (24,628) | | | 44,893 | |
| Income tax expense (benefit) | Income tax expense (benefit) | — | | | — | | | (1) | | | — | | Income tax expense (benefit) | — | | | (1) | |
| Net income (loss) | $ | (23,528) | | | $ | (14,692) | | | $ | 15,533 | | | $ | (29,233) | | |
| Net (loss) income | | Net (loss) income | $ | (24,628) | | | $ | 44,894 | |
| | Earnings (loss) per share: | | |
| (Loss) earnings per share: | | (Loss) earnings per share: | |
| Basic | Basic | $ | (0.20) | | | $ | (1.78) | | | $ | 0.13 | | | $ | (4.22) | | Basic | $ | (0.21) | | | $ | 0.39 | |
| Diluted | Diluted | $ | (0.20) | | | $ | (1.78) | | | $ | 0.12 | | | $ | (4.22) | | Diluted | $ | (0.21) | | | $ | 0.35 | |
| Weighted average common shares outstanding: | Weighted average common shares outstanding: | | Weighted average common shares outstanding: | |
| Basic | Basic | 116,412 | | | 8,238 | | | 115,935 | | | 6,925 | | Basic | 116,451 | | | 115,387 | |
| Diluted | Diluted | 116,412 | | | 8,238 | | | 126,717 | | | 6,925 | | Diluted | 116,451 | | | 126,462 | |
| | Comprehensive (loss) income | | Comprehensive (loss) income | |
| Net (loss) income | | Net (loss) income | (24,628) | | | 44,894 | |
| Foreign currency translation | | Foreign currency translation | 13 | | | — | |
| Total comprehensive (loss) income | | Total comprehensive (loss) income | $ | (24,615) | | | $ | 44,894 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Science 37 Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Three and Nine Months Ended September 30,March 31, 2023 and 2022 and 2021
(unaudited)
| | | Redeemable Convertible Preferred Stock | | | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Accumulated Deficit | | Total Stockholders’ Equity | | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Accumulated Deficit | | Total Stockholders’ Equity |
| (In thousands) | (In thousands) | Shares | | Amount | | | Shares | | Amount | | (In thousands) | Shares | | Amount | |
| Balance at December 31, 2021 | — | | | $ | — | | | | 114,991 | | | $ | 11 | | | $ | 323,666 | | | $ | — | | | $ | (202,078) | | | $ | 121,599 | | |
| Balance at December 31, 2022 | | Balance at December 31, 2022 | 116,432 | | | $ | 12 | | | $ | 350,247 | | | $ | 193 | | | $ | (253,066) | | | $ | 97,386 | |
| Stock-based compensation | Stock-based compensation | — | | | — | | | | — | | | — | | | 7,557 | | | — | | | — | | | 7,557 | | Stock-based compensation | — | | | — | | | 5,286 | | | — | | | — | | | 5,286 | |
| Adoption of current expected credit loss standard | | Adoption of current expected credit loss standard | — | | | — | | | — | | | — | | | (33) | | | (33) | |
| Proceeds from option exercises | Proceeds from option exercises | — | | | — | | | | 723 | | | 1 | | | 130 | | | — | | | — | | | 131 | | Proceeds from option exercises | 30 | | | — | | | 12 | | | — | | | — | | | 12 | |
| Net income | — | | | — | | | | — | | | — | | | — | | | — | | | 44,894 | | | 44,894 | | |
| Balance at March 31, 2022 | — | | | $ | — | | | | 115,714 | | | $ | 12 | | | $ | 331,353 | | | $ | — | | | $ | (157,184) | | | $ | 174,181 | | |
| Stock-based compensation | — | | | — | | | | — | | | — | | | 7,103 | | | — | | | — | | | 7,103 | | |
| Proceeds from option exercises | — | | | — | | | | 538 | | | — | | | 369 | | | — | | | — | | | 369 | | |
| Proceeds from issuance of stock under the employee stock purchase plan | | Proceeds from issuance of stock under the employee stock purchase plan | 267 | | | — | | | 75 | | | — | | | — | | | 75 | |
| Net loss | Net loss | — | | | — | | | | — | | | — | | | — | | | — | | | (5,833) | | | (5,833) | | Net loss | — | | | — | | | — | | | — | | | (24,628) | | | (24,628) | |
| Foreign currency translation | — | | | — | | | | — | | | — | | | — | | | 27 | | — | | | 27 | | |
| Balance at June 30, 2022 | — | | | $ | — | | | | 116,252 | | | $ | 12 | | | $ | 338,825 | | | $ | 27 | | | $ | (163,017) | | | $ | 175,847 | | |
| Stock-based compensation | — | | | — | | | | — | | | — | | | 5,981 | | | — | | | — | | | 5,981 | | |
| Proceeds from option exercises | — | | | — | | | | 322 | | | — | | | 178 | | | — | | | — | | | 178 | | |
| Net loss | — | | | — | | | | — | | | — | | | — | | | — | | | (23,528) | | | (23,528) | | |
| Foreign currency translation | — | | | — | | | | — | | | — | | | — | | | 125 | | | — | | | 125 | | |
| Balance at September 30, 2022 | — | | | $ | — | | | | 116,574 | | | $ | 12 | | | $ | 344,984 | | | $ | 152 | | | $ | (186,545) | | | $ | 158,603 | | |
| Foreign currency translation, net of tax | | Foreign currency translation, net of tax | — | | | — | | | — | | | 13 | | | — | | | 13 | |
| Balance at March 31, 2023 | | Balance at March 31, 2023 | 116,729 | | | $ | 12 | | | $ | 355,620 | | | $ | 206 | | | $ | (277,727) | | | $ | 78,111 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable Convertible Preferred Stock | | | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Accumulated Deficit | | Total Stockholders’ Equity (Deficit) |
| (In thousands) | Shares | | Amount | | | Shares | | Amount | | | | |
| Balances at December 31, 2020 (as previously reported) | 41,587 | | | $ | 143,086 | | | | 2,765 | | | $ | 1 | | | $ | 1,611 | | | $ | — | | | $ | (107,747) | | | $ | (106,135) | |
Retroactive application of the recapitalization due to Merger1 | 33,908 | | | — | | | | 2,255 | | | — | | | — | | | — | | | — | | | — | |
Balances at December 31, 2020, effect of Merger1 | 75,495 | | | $ | 143,086 | | | | 5,020 | | | $ | 1 | | | $ | 1,611 | | | $ | — | | | $ | (107,747) | | | $ | (106,135) | |
| Stock-based compensation | — | | | — | | | | — | | | — | | | 225 | | | — | | | — | | | 225 | |
| Proceeds from option exercises | — | | | — | | | | 919 | | | — | | | 332 | | | — | | | — | | | 332 | |
| Net loss | — | | | — | | | | — | | | — | | | — | | | — | | | (6,826) | | | (6,826) | |
| Balances at March 31, 2021 | 75,495 | | | $ | 143,086 | | | | 5,939 | | | $ | 1 | | | $ | 2,168 | | | — | | | $ | (114,573) | | | $ | (112,404) | |
| Stock-based compensation | — | | | — | | | | — | | | — | | | 690 | | | — | | | — | | | 690 | |
| Proceeds from option exercises | — | | | — | | | | 2,214 | | | — | | | 806 | | | — | | | — | | | 806 | |
| Net loss | — | | | — | | | | — | | | — | | | — | | | — | | | (7,715) | | | (7,715) | |
| Balances at June 30, 2021 | 75,495 | | | $ | 143,086 | | | | 8,153 | | | $ | 1 | | | $ | 3,664 | | | $ | — | | | $ | (122,288) | | | $ | (118,623) | |
| Stock-based compensation | — | | | — | | | | — | | | — | | | 998 | | | — | | | — | | | 998 | |
| Proceeds from option exercises | — | | | — | | | | 189 | | | — | | | 107 | | | — | | | — | | | 107 | |
| Net loss | — | | | — | | | | — | | | — | | | — | | | — | | | (14,692) | | | (14,692) | |
| Balance at September 30, 2021 | 75,495 | | | $ | 143,086 | | | | 8,342 | | | $ | 1 | | | $ | 4,769 | | | $ | — | | | $ | (136,980) | | | $ | (132,210) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Accumulated Deficit | | Total Stockholders’ Equity |
| (In thousands) | Shares | | Amount | | | | |
| Balance at December 31, 2021 | 114,991 | | | $ | 11 | | | $ | 323,666 | | | $ | — | | | $ | (202,078) | | | $ | 121,599 | |
| Stock-based compensation | — | | | — | | | 7,557 | | | — | | | — | | | 7,557 | |
| Proceeds from option exercises | 723 | | | 1 | | | 130 | | | — | | | — | | | 131 | |
| Net income | — | | | — | | | — | | | — | | | 44,894 | | | 44,894 | |
| Balances at March 31, 2022 | 115,714 | | | $ | 12 | | | $ | 331,353 | | | $ | — | | | $ | (157,184) | | | $ | 174,181 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
1 Historical shares and capital amounts have been retroactively adjusted for reverse recapitalization as described in Note 1 “Company Background and Basis of Presentation” to the audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Science 37 Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
| | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| (In thousands) | (In thousands) | 2022 | | 2021 | (In thousands) | 2023 | | 2022 |
| Cash flows from operating activities: | Cash flows from operating activities: | | | | Cash flows from operating activities: | | | |
| Net income (loss) | $ | 15,533 | | | $ | (29,233) | | |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | | |
| Net (loss) income | | Net (loss) income | $ | (24,628) | | | $ | 44,894 | |
| Adjustments to reconcile net income (loss) income to net cash used in operating activities: | | Adjustments to reconcile net income (loss) income to net cash used in operating activities: | |
| Depreciation and amortization | Depreciation and amortization | 12,569 | | | 5,189 | | Depreciation and amortization | 213 | | | 3,469 | |
| Non-cash lease expense related to operating lease right-of-use assets | Non-cash lease expense related to operating lease right-of-use assets | 859 | | | 1,153 | | Non-cash lease expense related to operating lease right-of-use assets | — | | | 281 | |
| Stock-based compensation | Stock-based compensation | 19,425 | | | 1,913 | | Stock-based compensation | 5,108 | | | 7,557 | |
| Gain on change in fair value of earn-out liability | Gain on change in fair value of earn-out liability | (97,600) | | | — | | Gain on change in fair value of earn-out liability | (110) | | | (75,500) | |
| Long-lived asset impairment | | Long-lived asset impairment | 7,801 | | | — | |
| Loss on foreign currency exchange rates | Loss on foreign currency exchange rates | 282 | | | — | | Loss on foreign currency exchange rates | 17 | | | — | |
| Provision for doubtful accounts | Provision for doubtful accounts | 147 | | | 143 | | Provision for doubtful accounts | 312 | | | (89) | |
| Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
| Accounts receivable and unbilled services | Accounts receivable and unbilled services | 1,534 | | | 4,059 | | Accounts receivable and unbilled services | (1,033) | | | 655 | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | 745 | | | (2,862) | | Prepaid expenses and other current assets | 201 | | | (571) | |
| Other assets | Other assets | (72) | | | (142) | | Other assets | 31 | | | 1 | |
| Accounts payable | Accounts payable | (8,100) | | | 2,110 | | Accounts payable | (2,543) | | | (5,294) | |
| Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | (6,329) | | | 577 | | Accrued expenses and other current liabilities | (3,222) | | | (3,255) | |
| Deferred revenue | Deferred revenue | 1,165 | | | 2,063 | | Deferred revenue | (1,478) | | | (145) | |
| Operating lease liabilities | Operating lease liabilities | (449) | | | (948) | | Operating lease liabilities | (160) | | | (145) | |
| Other, net | Other, net | (86) | | | 1,318 | | Other, net | (120) | | | 159 | |
| Net cash used in operating activities | Net cash used in operating activities | (60,377) | | | (14,660) | | Net cash used in operating activities | (19,611) | | | (27,983) | |
| Cash flows from investing activities: | Cash flows from investing activities: | | | | Cash flows from investing activities: | | | |
| Payments related to capitalized software development costs | Payments related to capitalized software development costs | (24,627) | | | (11,339) | | Payments related to capitalized software development costs | (5,186) | | | (7,035) | |
| Purchase of internal-use software | | Purchase of internal-use software | (750) | | | — | |
| Purchases of property and equipment | Purchases of property and equipment | (162) | | | (733) | | Purchases of property and equipment | (11) | | | (146) | |
| Net cash used in investing activities | Net cash used in investing activities | (24,789) | | | (12,072) | | Net cash used in investing activities | (5,947) | | | (7,181) | |
| Cash flows from financing activities: | Cash flows from financing activities: | | | | Cash flows from financing activities: | | | |
| Proceeds from stock option exercises | Proceeds from stock option exercises | 672 | | | 1,245 | | Proceeds from stock option exercises | 12 | | | 114 | |
| Proceeds from issuance of stock under the employee stock purchase plan | | Proceeds from issuance of stock under the employee stock purchase plan | 75 | | | — | |
| Net cash provided by financing activities | Net cash provided by financing activities | 672 | | | 1,245 | | Net cash provided by financing activities | 87 | | | 114 | |
| Effect of foreign currency exchange rate changes on cash | | Effect of foreign currency exchange rate changes on cash | 24 | | | — | |
| Net decrease in cash and cash equivalents | Net decrease in cash and cash equivalents | (84,494) | | | (25,487) | | Net decrease in cash and cash equivalents | (25,447) | | | (35,050) | |
| Effect of foreign currency exchange rate changes on cash | 132 | | | — | | |
| Cash and cash equivalents, beginning of period | Cash and cash equivalents, beginning of period | 214,601 | | | 33,483 | | Cash and cash equivalents, beginning of period | 108,091 | | | 214,601 | |
| Cash and cash equivalents, end of period | Cash and cash equivalents, end of period | $ | 130,239 | | | $ | 7,996 | | Cash and cash equivalents, end of period | $ | 82,644 | | | $ | 179,551 | |
| Supplemental disclosures of non-cash activities | Supplemental disclosures of non-cash activities | | | | Supplemental disclosures of non-cash activities | | | |
| Balance in accounts payable, accrued expenses and other current liabilities, and capitalized stock-based compensation related to capitalized software and fixed asset additions | Balance in accounts payable, accrued expenses and other current liabilities, and capitalized stock-based compensation related to capitalized software and fixed asset additions | $ | (3,482) | | | $ | (2,364) | | Balance in accounts payable, accrued expenses and other current liabilities, and capitalized stock-based compensation related to capitalized software and fixed asset additions | $ | (2,068) | | | $ | (4,101) | |
| Right-of-use asset obtained in exchange for operating lease liabilities | $ | — | | | $ | (1,305) | | |
| Balance in prepaid expenses and other current assets related to stock option exercises | Balance in prepaid expenses and other current assets related to stock option exercises | $ | 5 | | | $ | — | | Balance in prepaid expenses and other current assets related to stock option exercises | $ | — | | | $ | 17 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Science 37 Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
1. Company Background and Basis of Presentation
Description of Business
Science 37 Holdings, Inc. and its subsidiaries (the “Company” or “Science 37”) is a leading provider of technology-based solutions that enable agileleader in patient-centric clinical trials and in supporting novel approaches to decentralized approaches on behalfclinical trial designs. Science 37 pioneered the concept of biopharmaceutical sponsors. The Company pioneered agilepatient-centric clinical trials with a very simple premise: that clinical trials should begin with the patient.
Through its patient-centric approach, Science 37 reduces the impact of the geographic barriers associated with conventional physical clinical trial sites, enabling recruitment of virtually any patient. Science 37 believes that centering the clinical trial around the patient with personalized support addresses current industry needs around patient recruitment, retention, representation, and decentralization methods and developedengagement. To expand clinical trial access, Science 37 offers a unique model to existing non-research focused healthcare networks to seamlessly participate without the industry’s first Agile Clinical Trial Operating System™ (“OS”) combining itstraditional site infrastructure costs.
Science 37’s patient-centric model is powered by a proprietary end-to-end unified technology platform whichand its team of employees with significant therapeutic and subject matter expertise. As the backbone of Science 37’s offering, the proprietary unified technology platform standardizes and orchestrates workflows, generates evidence and harmonizes data seamlessly, with its expansive centralized networksthe process for clinical trials across Science 37’s specialized network of patient communities, telemedicine investigators, flexible mobile nursing, community providers,nurse networks, remote coordinators, and data and devices. By making clinical research more accessible to patients and providers, the OS helps clinical research sponsors achieve faster patient enrollment, enable better patient retention and increase accessibility to representative patient populations. These improvements help accelerate the developmentrobust network of potentially life-saving treatments through faster study timelines and a more representative and diverse patient population.technology integrations. The Company operates under one reporting segment.
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the Company’s financial condition and results of operations have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.2023. As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.2022. The balance sheet as of December 31, 20212022 has been derived from the audited consolidated financial statements of the Company, but does not include all the disclosures required by GAAP.
Reclassification
Certain previously reported amounts have been reclassified to conform to the current period presentation.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses for the periods presented. Significant estimates and assumptions are used for, but are not limited to: (1) revenue recognition, (2) allowance for doubtful accounts, (3) long-lived asset recoverability, (4) useful lives of long-lived assets, (5) stock-based compensation, and (6) fair value measurements, including the fair value of the contingent liability related to the Earn-Out Shares (as defined below) as further discussed in Note 2 “Business Combination”8 “Fair Value Measurements” and Note 12 “Earn-Out Shares”.
In January 2023, following the release of our next generation unified technology platform during 2022, the Company reassessed the useful life of its unified technology platform in relation to its revenue generating activities. Based on this review, the Company determined the useful life of its unified technology platform, in relation to revenue generating activities, was longer than the useful life previously used for amortization purposes in the Company’s financial statements.
Science 37 Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
As a result, the Company increased the useful life of its unified technology platform for amortization purposes from three to five years effective January 1, 2023. The effects of this change in accounting estimate over the previous estimated useful life for the three months ended March 31, 2023 was zero because the Company’s unified technology platform was fully impaired in both the fourth quarter of 2022 and for the three months ended March 31, 2023 as discussed under Note 3 “Capitalized Software, net”.
Emerging Growth Company and Smaller Reporting Company Status
As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are applicable to private companies. The Company has elected to use the extended transition period under the JOBS Act until such time the Company is not considered to be an EGC. The adoption dates are discussed in the section below to reflect this election.
Science 37 Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
The Company is also a smaller reporting company as defined in Item 10(f) of Regulation S-K. Smaller reporting companies may take advantage of scaledcertain reduced disclosure requirements, including, among other things, providing only two years of audited financial statements for two fiscal years, in contrast to other reporting companies, which must provide audited financial statements for three fiscal years.statements. To the extent the Company takes advantage of such scaledreduced disclosure requirements, it may make the comparison of its financial statements with other public companies difficult or impossible.
Accounting Pronouncements Recently Adopted
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (ASU 2019-12), which eliminates certain exceptions to the guidance in Income Taxes (Topic 740) related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The Company adopted ASU 2019-12 effective January 1, 2021. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
Accounting Pronouncements Issued but Not Yet Adopted
In June 2016, the FASBFinancial Accounting Standards Board issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The standard replaces the incurred loss impairment methodology in current GAAP with one that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company does not expectadopted ASU 2016-13 effective January 1, 2023 and recorded a cumulative effect adjustment for the impact to retained earnings. The adoption of the guidance tothis standard did not have a material effectimpact on the Company’s consolidated financial statements.statements and related disclosures. This is primarily based on the Company’s assessment of historical credit losses, customers’ creditworthiness, and the fact that the Company’s trade receivables are short term in duration. The Company plans to adopt the provisions of ASU 2016-13 effective January 1, 2023.
2. Business Combination
On October 6, 2021, the Company consummated a merger (the “Merger”) with LifeSci Acquisition II Corp (“LSAQ”), pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated May 6, 2021. Pursuant to the Merger Agreement, the Company merged with LSAQ, with the Company treated as the accounting acquirer, LSAQ treated as the accounting acquiree and the Merger Transaction reflected as a reverse recapitalization. Under this method of accounting, the consolidated financial statements of Science 37, Inc. (“Legacy Science 37”) are the historical financial statements of the Company. The net assets of LSAQ were stated at historical costs, with no goodwill or other intangible assets recorded in accordance with GAAP, and were consolidated with Legacy Science 37’s financial statements on the closing date of the Merger Transaction. The shares and net loss per share available to holders of Legacy Science 37’s common and preferred stock prior to the Merger Transaction have been retroactively adjusted as shares reflecting the exchange ratio of approximately 1.815 established in the Merger Agreement.
An aggregate of 30,858,261 shares of the Company’s common stock was issued to LSAQ public shareholders, the LSAQ Sponsor, and private placement (“PIPE”) investors as part of the transaction. As a result of the Merger Transaction, Legacy Science 37 shareholders received aggregate consideration of $233.5 million in 2021, including the PIPE financing, net of LSAQ shareholder redemptions and transaction costs.
In addition, former holders of shares of Legacy Science 37 preferred and common stock and former holders of options to purchase shares of Legacy Science 37 common stock are entitled to receive their respective pro rata shares of up to 12,500,000 additional shares ofthe Company’s Common Stock (the “Earn-Out Shares”) if certain triggering events are met within 3 years from the date of the Merger. For more information on the Merger transaction, please refer to Note 1 “Company Background and Basis of Presentation” and Note 3 “Business Combination” to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Science 37 Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
3. Revenue from Contracts with Customers
Unsatisfied Performance Obligations
As of September 30, 2022,March 31, 2023, the aggregate amount of transaction price allocated to the unsatisfied performance obligations was $171.2$166.5 million. The Company expects to recognize this revenue over the remaining contract term of the individual projects, with remaining contract terms generally ranging from one month to 8.88.3 years. The amount of unsatisfied performance obligations is lower than the potential contractual revenue since it excludes revenue that is constrained. Revenue amounts excluded due to constraints include those amounts under contracts that (i) are wholly unperformed in which the customer has a unilateral right to cancel the arrangement, or (ii) require the Company to undertake numerous activities to fulfill the performance obligations, including various activities that are outside of the Company’s control.
Timing of Billing and Performance
During the three and nine months ended September 30,March 31, 2023 and 2022, the Company recognized approximately $0.5$3.2 million and $4.6$2.6 million of revenue, respectively, that was included in the deferred revenue balance at the beginning of the periods. During the three and nine months ended September 30,March 31, 2023 and 2022, revenue recognized from performance obligations partially satisfied in previous periods was $1.4$0.5 million and $3.5$0.4 million, respectively. These cumulative catch-up adjustments primarily related to contract modifications executed in the current period, which resulted in changes to the transaction price and changes in estimates such as estimated total costs.
Science 37 Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Accounts Receivable, Unbilled Services, and Deferred Revenue
Accounts receivable and unbilled services (including contract assets) consisted of the following:
| | (In thousands) | (In thousands) | September 30, 2022 | | December 31, 2021 | (In thousands) | March 31, 2023 | | December 31, 2022 |
| Accounts receivable | Accounts receivable | $ | 7,162 | | | $ | 8,143 | | Accounts receivable | $ | 9,259 | | | $ | 8,235 | |
| Unbilled services | Unbilled services | 2,272 | | | 2,825 | | Unbilled services | 3,563 | | | 3,555 | |
| Total accounts receivable and unbilled services | Total accounts receivable and unbilled services | 9,434 | | | 10,968 | | Total accounts receivable and unbilled services | 12,822 | | | 11,790 | |
| Allowance for doubtful accounts | Allowance for doubtful accounts | (416) | | | (269) | | Allowance for doubtful accounts | (1,143) | | | (798) | |
| Total accounts receivable and unbilled services, net | Total accounts receivable and unbilled services, net | $ | 9,018 | | | $ | 10,699 | | Total accounts receivable and unbilled services, net | $ | 11,679 | | | $ | 10,992 | |
As of September 30, 2022both March 31, 2023 and December 31, 2021,2022, contract assets of $2.3$3.6 million and $2.8 million, respectively, were included in unbilled services.
Deferred revenue as of September 30, 2022March 31, 2023 and December 31, 20212022 was $8.8$6.8 million and $7.6$8.3 million, respectively. Changes in the Company’s accounts receivable, unbilled services and deferred revenue balances were impacted by timing differences between the Company’s satisfaction of performance obligations under its contracts, achievement of billing milestones, and customer payments.
Revenue by Geography
Substantially all of the Company’s revenue for the three months ended March 31, 2023 and nine months ending September 30, 2022 and 2021 was derived from services performed within the United States. No other country represented more than 10% of total revenue for either period.
Concentration of Credit Risk
Financial assets that subject the Company to credit risk primarily consist of cash and cash equivalents, accounts receivable and unbilled services. Based on the short-term nature and historical realization of the financial assets, as well as the reputable credit ratings of the financial institutions holding the deposits, the Company believes it bears minimal credit risk.
For the three months ended September 30,March 31, 2023 and 2022, and 2021, two and fourthree customers, respectively, individually (totaling 24.4%22.3% and 58.7%48.9% of revenues, respectively) accounted for greater than 10% of revenue. For the nine months ended September 30,
Science 37 Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
2022 and 2021, two and three customers individually (totaling 26.9% and 57.7% of revenues, respectively) accounted for greater than 10% of revenue, respectively.
As of September 30, 2022March 31, 2023 and December 31, 2021,2022, three and two and three customers, respectively, individually (totaling 45.4%52.9% and 78.4%39.1% of accounts receivable, net, respectively) accounted for greater than 10% of accounts receivable, net, respectively.net.
4.3. Capitalized Software, net
For the ninethree months ended September 30,March 31, 2023 and 2022, and 2021, the Company capitalized $28.8$7.2 million and $13.5$11.1 million, respectively, of internal useinternal-use software and recognized amortization expense of $12.1$0.2 million and $4.9$3.3 million, respectively.
Estimated amortization expense forIn addition, on January 31, 2023, the years endingCompany purchased scheduling software at a cost of $0.8 million. The acquired software will be integrated into the Company’s unified technology platform over a six to nine month period. This purchase and integration will enable increased scheduling efficiencies and related cost savings and demonstrates the Company’s continuous improvement and cost reduction commitments.
The net book value of the Company’s internal use software totaling $7.8 million and $42.1 million as of March 31, 2023 and December 31, 2022, through December 31, 2025 is as follows:
| | | | | |
| (In thousands) | Amortization Expense |
| Year: | |
| 2022 (excluding the nine months ended September 30, 2022) | $ | 4,785 | |
| 2023 | 18,523 | |
| 2024 | 14,483 | |
| 2025 | 3,258 | |
respectively, was impaired due to the carrying value of the asset group being greater than the fair value. The following represents capitalized software balancesCompany considered the market capitalization valuation as of September 30, 2022March 31, 2023 and December 31, 2021:2022 which was adversely impacted by sustained declines in the Company’s stock price during the fourth quarter of 2022 through March 31, 2023, in determining the fair value of the asset group. The market capitalization was trading below cash and cash equivalents and stockholders' equity at March 31, 2023 and December 31, 2022, respectively, which required the Company to recognize the long-lived asset impairment. The Company remains confident in the utility of the long-lived assets and there has been no change as to their intended use.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| (In thousands) | Gross Amount | | Accumulated Amortization | | Net Amount | | Gross Amount | | Accumulated Amortization | | Net Amount |
| Capitalized software | $ | 71,037 | | | $ | (29,988) | | | $ | 41,049 | | | $ | 42,192 | | | $ | (17,902) | | | $ | 24,290 | |
5. Leases
The following table presents lease liability maturities and balance sheet classification as of September 30, 2022:
| | | | | |
| (in thousands) | |
| Years Ending December 31, | Operating Leases |
| 2022 (excluding the nine months ended September 30, 2022) | $ | 189 | |
| 2023 | 674 | |
| 2024 | 599 | |
| 2025 | 138 | |
| 2026 | 11 | |
| 2027 and thereafter | — | |
| Total future minimum lease payments | 1,611 | |
| Less imputed interest | (124) | |
| Total lease liability | $ | 1,487 | |
| |
| Balance Sheet classification of lease liabilities reported as of September 30, 2022: | |
| Current liabilities: Accrued expenses and other liabilities | $ | 614 | |
| Non-current liabilities: Operating lease liabilities | 873 | |
| Total | $ | 1,487 | |
Science 37 Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
4. Leases
The following table presents lease liability maturities and balance sheet classification as of March 31, 2023:
| | | | | |
| (in thousands) | |
| Years Ending December 31, | Operating Leases |
| 2023 (excluding the three months ended March 31, 2023) | $ | 508 | |
| 2024 | 599 | |
| 2025 | 138 | |
| 2026 | 11 | |
| 2027 and thereafter | — | |
| Total future minimum lease payments | 1,256 | |
| Less imputed interest | (80) | |
| Total lease liability | $ | 1,176 | |
| |
| Balance Sheet classification of lease liabilities reported as of March 31, 2023: | |
| Current liabilities: Accrued expenses and other liabilities | $ | 621 | |
| Non-current liabilities: Operating lease liabilities | 555 | |
| Total | $ | 1,176 | |
5. Restructuring Costs
On November 10, 2022, the Company committed to and commenced a cost reduction program to materially change the Company’s management structure and better align resources with our then-current business needs and going forward financial objectives. The cost reduction program included one-time termination benefits for 81 employees (approximately 15% of the Company’s workforce at the time of the reduction). The Company’s Board of Directors approved the program on November 9, 2022, and the majority of the affected employees were informed of the program beginning on November 10, 2022. The cost reduction program is expected to be substantially completed by the second quarter of 2023.
During the three months ended March 31, 2023, the Company recognized $0.2 million of restructuring costs. There were no restructuring costs for the three months ended March 31, 2022. Total costs and cash expenditures for the cost reduction program are estimated at $3.0 million to $3.3 million, substantially all of which are related to one-time employee severance and benefits costs. In addition, on April 11, 2023, the Company commenced an additional phase of our cost reduction program affecting approximately 140 employees as disclosed in Note 15 “Subsequent Events”. The Company may continue to incur additional restructuring costs during and beyond 2023 related to its cost reduction program. The Company may also incur additional costs not currently contemplated due to events that may occur as a result of, or that are associated with, the cost reduction program.
Restructuring liabilities are included in accrued expenses and other liabilities on the consolidated balance sheets. Activity related to the restructuring liabilities was as follows:
| | | | | |
| (In thousands) | March 31, 2023 |
| Balance at beginning of period | $ | 772 | |
| Restructuring costs | 229 | |
| Payments | (379) | |
| Balance at end of period | $ | 622 | |
The Company expects the majority of the restructuring accruals as of March 31, 2023 will be paid in 2023, pursuant to the terms of one-time benefits.
Science 37 Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
6. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
| | | | | | | | | | | |
| (In thousands) | March 31, 2023 | | December 31, 2022 |
| Prepaid expenses | $ | 2,543 | | | $ | 2,834 | |
| Capitalized commission cost, net | 4,162 | | | 3,945 | |
| Other | 219 | | | 342 | |
| Total prepaid expenses and other current assets | $ | 6,924 | | | $ | 7,121 | |
7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consistconsisted of the following:
| | (In thousands) | (In thousands) | September 30, 2022 | | December 31, 2021 | (In thousands) | March 31, 2023 | | December 31, 2022 |
| Compensation, including bonuses, fringe benefits, and payroll taxes | Compensation, including bonuses, fringe benefits, and payroll taxes | $ | 7,295 | | | $ | 11,611 | | Compensation, including bonuses, fringe benefits, and payroll taxes | $ | 3,878 | | | $ | 5,750 | |
| Professional fees, investigator fees, and pass-through expenses | Professional fees, investigator fees, and pass-through expenses | 2,379 | | | 3,174 | | Professional fees, investigator fees, and pass-through expenses | 2,177 | | | 2,527 | |
| Commissions payable | Commissions payable | 1,418 | | | 1,168 | | Commissions payable | 1,501 | | | 1,529 | |
| Restructuring costs | | Restructuring costs | 622 | | | 772 | |
| Current portion of operating lease liabilities | Current portion of operating lease liabilities | 614 | | | 1,120 | | Current portion of operating lease liabilities | 621 | | | 606 | |
| Other | Other | 171 | | | — | | Other | 185 | | | 180 | |
| Total accrued expenses and other liabilities | Total accrued expenses and other liabilities | $ | 11,877 | | | $ | 17,073 | | Total accrued expenses and other liabilities | $ | 8,984 | | | $ | 11,364 | |
7.8. Fair Value Measurements
Financial instruments, including cash and cash equivalents, are recorded at cost, which approximates fair value. Former holders of shares of Science 37, Inc. (“Legacy Science 3737”) common stock were allocated Earn-Out Shares in connection with the completion of the Merger.October 2021 merger with LifeSci Acquisition II Corp. (the “Merger”) (for more information on the Merger transaction, please refer to Note 1 “Company Background and Basis of Presentation” and Note 3 “Business Combination” to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed on March 6, 2023). These Earn-Out Shares are accounted for as a liability and require fair value measurement on a recurring basis. Due to the significant unobservable inputs that are required to value these shares, they are classified as Level 3 in the fair value hierarchy. Please refer to Note 1112 “Earn-Out Shares” for additional details surrounding the valuation methodology for the Earn-Out Shares.
None of the Company’s non-financial assets or liabilities are subject to fair value measurement on a non-recurring basis. There were no transfers between fair value measurement levels during the ninethree months ended September 30, 2022.March 31, 2023.
The following table summarizes the fair values of the Company’s assets and liabilities that arewere measured and reported at fair value on a recurring basis as of September 30, 2022:March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Money market funds | $ | 125,382 | | | $ | — | | | $ | — | | | $ | 125,382 | |
| Total | $ | 125,382 | | | $ | — | | | $ | — | | | $ | 125,382 | |
| Liabilities: | | | | | | | |
| Earn-out liability related to shareholders | $ | — | | | $ | — | | | $ | 1,300 | | | $ | 1,300 | |
| Total | $ | — | | | $ | — | | | $ | 1,300 | | | $ | 1,300 | |
The following table summarizes the fair values of the Company’s assets and liabilities that are measured and reported at fair value on a recurring basis as of December 31, 2021:
| | (In thousands) | (In thousands) | Level 1 | | Level 2 | | Level 3 | | Total | (In thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | Assets: | | | | | | | | Assets: | | | | | | | |
| Money market funds | Money market funds | $ | 19,033 | | | $ | — | | | $ | — | | | $ | 19,033 | | Money market funds | $ | 77,289 | | | $ | — | | | $ | — | | | $ | 77,289 | |
| Total | Total | $ | 19,033 | | | $ | — | | | $ | — | | | $ | 19,033 | | Total | $ | 77,289 | | | $ | — | | | $ | — | | | $ | 77,289 | |
| Liabilities: | Liabilities: | | | | | | | | Liabilities: | | | | | | | |
| Earn-out liability related to shareholders | Earn-out liability related to shareholders | $ | — | | | $ | — | | | $ | 98,900 | | | $ | 98,900 | | Earn-out liability related to shareholders | $ | — | | | $ | — | | | $ | 60 | | | $ | 60 | |
| Total | Total | $ | — | | | $ | — | | | $ | 98,900 | | | $ | 98,900 | | Total | $ | — | | | $ | — | | | $ | 60 | | | $ | 60 | |
Science 37 Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
8.The following table summarizes the fair values of the Company’s assets and liabilities that were measured and reported at fair value on a recurring basis as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Money market funds | $ | 104,138 | | | $ | — | | | $ | — | | | $ | 104,138 | |
| Total | $ | 104,138 | | | $ | — | | | $ | — | | | $ | 104,138 | |
| Liabilities: | | | | | | | |
| Earn-out liability related to shareholders | $ | — | | | $ | — | | | $ | 170 | | | $ | 170 | |
| Total | $ | — | | | $ | — | | | $ | 170 | | | $ | 170 | |
9. Earnings (Loss) Per Share
The following table presents the calculation of basic and diluted earnings (loss) per share for the Company’s common stock (as adjusted for the Merger Exchange Ratio as described in Note 2 “Business Combination” ):stock:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands, except per share amounts) | 2022 | | 2021 | | 2022 | | 2021 |
| Numerator: | | | | | | | |
| Net income (loss) | $ | (23,528) | | | $ | (14,692) | | | $ | 15,533 | | | $ | (29,233) | |
| Denominator: | | | | | | | |
| Basic weighted average common shares outstanding | 116,412 | | | 8,238 | | | 115,935 | | | 6,925 | |
| Effect of dilutive securities: | | | | | | | |
| Stock options | — | | | — | | | 9,829 | | | — | |
| Restricted stock units | — | | | — | | | 937 | | | — | |
| ESPP | — | | | — | | | 16 | | | — | |
| Diluted weighted average common shares outstanding | 116,412 | | | 8,238 | | | 126,717 | | | 6,925 | |
| Earnings (loss) per share: | | | | | | | |
| Basic | $ | (0.20) | | | $ | (1.78) | | | $ | 0.13 | | | $ | (4.22) | |
| Diluted | $ | (0.20) | | | $ | (1.78) | | | $ | 0.12 | | | $ | (4.22) | |
In connection with the closing of the Merger, the Company adopted an Employee Stock Purchase Plan (the “ESPP”). Please refer to Note 12 “Share-Based Compensation” for information regarding the ESPP as well as the ESPP offering period that began on September 1, 2022. | | | | | | | | | | | |
| Three Months Ended March 31, |
| (In thousands, except per share amounts) | 2023 | | 2022 |
| Numerator: | | | |
| Net (loss) income | $ | (24,628) | | | $ | 44,894 | |
| Denominator: | | | |
| Basic weighted average common shares outstanding | 116,451 | | | 115,387 | |
| Effect of dilutive securities: | | | |
| Stock options | — | | | 11,075 | |
| Diluted weighted average common shares outstanding | 116,451 | | | 126,462 | |
| Earnings (loss) per share: | | | |
| Basic | $ | (0.21) | | | $ | 0.39 | |
| Diluted | $ | (0.21) | | | $ | 0.35 | |
Potential common shares that are considered anti-dilutive are excluded from the computation of diluted earnings per share. Potential common shares related to stock-based awards issued under stock-based compensation programs preferredand shares issuable pursuant to the employee stock and warrantspurchase plan may be determined to be anti-dilutive based on the application of the treasury stock method. Potential common shares are also considered anti-dilutive in periods when the Company incurs a net loss. Earn-Out Shares are contingent upon the price of the Company’s common stock over a specified period of time and the target stock prices have not been achieved as of the end of the reporting period.
The number of potential shares outstanding that were anti-dilutive, and were excluded from the computation of diluted earnings per share, weighted for the portion of the period they were outstanding, were as follows (as adjusted for the Merger Exchange Ratio as described in Note 2 “Business Combination”):follows:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| (In thousands) | (In thousands) | 2022 | | 2021 | | 2022 | | 2021 | (In thousands) | 2023 | | 2022 |
| Redeemable convertible preferred stock | — | | | 75,495 | | | — | | | 75,495 | | |
| Stock options | Stock options | 26,279 | | | 15,809 | | | 16,095 | | | 15,373 | | Stock options | 24,220 | | | 16,402 | |
| Restricted stock units | Restricted stock units | 5,307 | | | — | | | — | | | — | | Restricted stock units | 9,826 | | | — | |
| ESPP | ESPP | 81 | | | — | | | — | | | — | | ESPP | 280 | | | — | |
| Warrants | — | | | 12 | | | — | | | 12 | | |
| Earn-Out Shares | 12,500 | | | — | | | 12,500 | | | — | | |
| Earn-out shares | | Earn-out shares | 12,500 | | | 12,500 | |
| Total anti-dilutive shares | Total anti-dilutive shares | 44,167 | | | 91,316 | | | 28,595 | | | 90,880 | | Total anti-dilutive shares | 46,826 | | | 28,902 | |
9.Science 37 Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
10. Related-Party Transactions
For the three and nine months ended September 30,March 31, 2023 and 2022, the Company had revenue of $1.1$0.2 million and $5.4$2.3 million, respectively, from Pharmaceutical Product Development, LLC (“PPD”), a wholly-owned subsidiary of Thermo Fisher Scientific, Inc. and a shareholder who beneficially owns 5% or more of the Company’s common stock. For the three and nine months ended September 30, 2021, the Company had revenue of $2.8 million and $10.8 million, respectively, from
Science 37 Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
PPD. In addition, as of September 30, 2022March 31, 2023 and December 31, 2021,2022, the Company had receivables of $0.6$0.1 million and $2.0$0.7 million, respectively, from PPD.
For the three and nine months ended months ended September 30, 2021, the Company had revenue of $0.3 million and $0.6 million, respectively, from Novartis Pharma AG, who had a 50% ownership in dRX Capital AG, a shareholder who, until July 2021, had a minority interest in the Company and a seat on the Company’s Board of Directors. In July 2021, dRX Capital AG was dissolved and their interest in the Company was distributed to their owners. This dissolution and distribution did not cause any other shareholder of the Company to obtain a minority interest in the Company.
For the three and nine months ended September 30, 2021, the Company had revenue of $0 and $0.4 million from AlloVir a company in which Redmile Group, LLC has a minority interest. Entities affiliated with Redmile Group, LLC collectively own 5% or more of the Company’s common stock. The Company did not have revenue from AlloVir during the nine months ended September 30, 2022.
10.11. Commitments and Contingencies
Legal Proceedings
The Company is subject to proceedings incidental to its business. The Company records accruals for claims, suits, investigations, and proceedings when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company reviews these contingencies regularly and records or adjusts accruals related to such matters to reflect the impact and status of any settlements, rulings, advice of counsel or other information pertinent to a particular matter. Gain contingencies are not recognized. Legal costs associated with contingencies are expensed as incurred. Since these matters are inherently unpredictable, assessing contingencies is highly subjective and requires judgments about future events.
Commitments and Contingencies
As of September 30, 2022,March 31, 2023, the Company had no material contingent losses recorded.
Please refer to Note 54 “Leases” for information regarding lease commitments and Note 1112 “Earn-Out Shares” for information regarding the contingent obligation related to the Earn-Out Shares.
11.12. Earn-Out Shares
In accordance with the October 2021 Merger, Agreement, former holders of shares of Legacy Science 37 preferred and common stock (including shares received as a result of the conversion of Legacy Science 37 preferred stock) and former holders of options to purchase shares of Legacy Science 37 common stock are entitled to receive their respective pro rata shares of up to 12,500,000 Earn-Out Sharesadditional shares ofthe Company’s common stock (the “Earn-Out Shares”) if during thecertain triggering events are met within three years followingfrom the consummationdate of the Merger. For more information on the Merger transaction, please refer to Note 1 “Company Background and Basis of Presentation” and Note 3 “Business Combination” to the volume weighted average price of Science 37’s Common Stockaudited consolidated financial statements included in the Company’s Annual Report on Form 10-K for a period of at least 20 days out of 30 consecutive trading days:
i.is equal to or greater than $15.00, a one-time aggregate issuance of 5,000,000 Earn-Out Shares will be made (“Trigger 1”); and
ii.is equal to or greater than $20.00, a one-time aggregate issuance of 7,500,000 Earn-Out Shares will be made (“Trigger 2”).the fiscal year ended December 31, 2022, filed on March 6, 2023.
As of December 31, 2021,2022, the stockholders and option holders were estimated to receive approximately 10,914,42111,131,713 and 1,585,5791,368,287 Earn-Out Shares, respectively, based on the fully diluted capitalization table of Legacy Science 37. The fair value of the Earn-Out Shares was approximately $10.35$0.02 (Trigger 1) and approximately $8.20$0.01 (Trigger 2) per share as of December 31, 2021.2022.
As of September 30, 2022,March 31, 2023, the stockholders and option holders arewere estimated to receive approximately 11,098,31711,184,437 and 1,401,6831,315,563 Earn-Out Shares, respectively. The fair value of the Earn-Out Shares was approximately $0.16$0.01 (Trigger 1) and approximately $0.09$0.00 (Trigger 2) per share as of September 30, 2022.March 31, 2023.
TheThrough the third quarter of 2022, the estimated fair value of the Earn-Out Shares was determined using a Monte Carlo simulation valuation model using a distribution of potential outcomes on a monthly basis over the earn-outEarn-Out Period using the most reliable information available. This valuation method falls into Level 3 fair value hierarchy for inputs used in measuring fair value and is based on inputs that are unobservable and significant to the overall fair value measurement. Unobservable inputs are inputs that
Science 37 Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
reflect the Company's judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. To the extent that the valuation is based on models or inputs that are unobservable in the market, the determination of fair value requires management to exercise a high degree of judgment. Change in significant unobservable inputs could result in a higher or lower fair value measurement of the liability associated with of the Earn-Out shares. Assumptions usedShares. Based on the first year Monte Carlo simulation valuation model results, the change in the Company’s stock price and the relative immaterial
Science 37 Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
nature of the earn-out liability, the fair value of the Earn-Out Shares for both the three months ended March 31, 2023 and December 31, 2022 was determined using a valuation were as follows:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Stock price | $ | 1.61 | | | $ | 12.47 | |
| Expected volatility | 80.0 | % | | 55.0 | % |
| Risk-free interest rate | 4.22 | % | | 0.91 | % |
| Forecast period (in years) | 2.0 | | | 2.8 | |
Former Science 37 Shareholders
The Company has determined that the contingent obligation to issue Earn-Out Shares to former Science 37 shareholders is not indexed to the Company's stock under ASC Topic 815-40, Derivatives and Hedging - Contracts in Entity’s Own Equity, and therefore equity treatment is precluded. The Triggering Event that determines the issuance of the Earn-Out Shares includes terms that are not solely indexed to the common stock of the Company and, as such, liability classification is required. For the ninethree months ended September 30, 2022,March 31, 2023, there was a decrease in the fair value of the earn-out liability of $97.6$0.1 million, which was recorded as a gain in “Change in fair value of earn-out liability” within the condensed consolidated statements of operations. In accordance with the Merger, Agreement, Earn-Out Shares attributable to former Science 37 option holders who discontinue providing service before the occurrence of the Triggering Event are reallocated to the remaining eligible former stockholders and former option holders.
The earn-out liability is recorded on the balance sheet as a non-current liability because potential payment of the liability will be settled in the Company’s common shares. The following table presents a reconciliation of changes in the carrying amount of the contingent earn-out liability classified as Level 3 fair value hierarchy using significant unobservable inputs for the ninethree months ended September 30, 2022:March 31, 2023:
| | | | | |
| (In thousands) | Earn-Out Liability |
Balance at December 31, 20212022 | $ | 98,900170 | |
| Change in fair value related to option holder forfeitures | 181— | |
| Change in fair value related to share valuation inputs | (97,781)(110) | |
| Total change in fair value recognized in earnings | $ | (97,600)(110) | |
Balance at September 30, 2022March 31, 2023 | $ | 1,30060 | |
Former Science 37 Option Holders
The contingent obligation to issue Earn-Out Shares to former Science 37 option holders falls within the scope of ASC 718, Compensation - Stock Compensation, because the option holders are required to continue providing service until the occurrence of the Triggering Event(s). For the three and nine months ended September 30,March 31, 2023 and 2022, the Company recorded approximately $1.5$0.4 million and $5.3$1.9 million, respectively, in stock-based compensation expense related to the Earn-Out Shares. Approximately $1.4 million ofNo unrecognized compensation expense was remaining at September 30, 2022, which is expected to be recognized over the remaining derived service period of 0.1 years (Trigger 1) and 0.4 years (Trigger 2).March 31, 2023.
12.13. Stock-Based Compensation
The Company has onetwo equity-based compensation plan,plans, the Science 37 Holdings, Inc. 2021 Incentive Award Plan (the “2021(“2021 Plan”) from whichand the 2022 Employment Inducement Incentive Award Plan (“2022 Plan”, and together with the 2021 Plan, the “Plans”). From the 2021 Plan, stock-based compensation awards can be granted to employees, consultants, and non-executive directors. PriorFrom the 2022 Plan, inducement stock-based awards can be granted to the consummation of the Mergernewly hired employees in the fourth quarter of 2021, the Company granted stock options to employees under the Science 37, Inc. 2015 Stock Option Plan (the “2015 Plan”). No further awards have been or will be made under the 2015 Plan following the effectiveness of the 2021 Plan.accordance with Nasdaq Listing Rules. The 2021 Plan allows for the grant of awards in the
Science 37 Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
form of: (i) incentive stock options; (ii) non-qualified stock options; (iii) stock appreciation rights; (iv) restricted stock; (v) restricted stock units (“RSUs”); (vi) dividend equivalents; and (vii) other stock and cash based awards.
The 2022 Plan allows for the grant of awards in the form of: (i) non-qualified stock options; (ii) stock appreciation rights; (iii) restricted stock; (iv) RSUs; (v) dividend equivalents; and (vi) other stock and cash-based awards. The Compensation Committee of the Board is responsible for the administration of both Plans. In May 2022,addition, the Company began granting RSUshas an Employee Stock Purchase Plan (the “ESPP”).
The terms of stock-based instruments granted are determined at the time of grant and are typically subject to certain officerssuch conditions as continued employment and employees,the passage of time. The Company has granted 1) stock options, which typically vest at 25% per year and become exercisable after one year of service after the date of issuance, with equal and successive vesting for the next 36 months, as long as the employee provides service to the BoardCompany, as defined and 2) RSUs, which
Science 37 Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
are contingent upon continued service and vest over time in annual or bi-annual installments over the vesting period, which is typically 1 to 3 years. The fair valueIn addition, employees, consultants, and directors owning stock options immediately prior to the October 2021 Merger were granted the right to receive a number of the RSUs is based on the Company’s closing stock price on the grant date. The fair value of the RSUs is amortized straight-line over the vesting period.Earn-Out Shares as described in Note 12.
In connection with the closing of the Merger, the Company adopted an Employee Stock Purchase Plan (the “ESPP”). The ESPP is a shareholder-approved plan under which substantially all employees may voluntarily enroll to purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market value of the stock as of the beginning or end of the six-monthsix-month offering periods. Employees may not purchase more than 5,000 shares annually under the plan.
The first six-month ESPP offering period began on September 1, 2022. The fair value of the shares under the ESPP is calculated on the first day of the offering period (the grant date) using the Black-Scholes valuation model and is amortized straight-line over the six-month offering period. For additional information on the ESPP, refer to the section labeled “Equity Incentive Plans” in the Company’s prospectus, dated January 25, 2022, filed with the Securities and Exchange Commission (“SEC”) in accordance with Rule 424(b)(3) of the Securities Act on February 10, 2022.
The following table summarizes stock option awards outstanding as of September 30, 2022,March 31, 2023, as well as activity during the ninethree months then ended:
| | (In thousands, except per share amounts) | (In thousands, except per share amounts) | Number of
Options | | Weighted Average
Exercise Price | (In thousands, except per share amounts) | Number of
Options | | Weighted Average
Exercise Price |
| Outstanding at December 31, 2021 | 25,425 | | | $ | 5.30 | | |
| Outstanding at December 31, 2022 | | Outstanding at December 31, 2022 | 24,490 | | | $ | 6.16 | |
| Granted | Granted | 4,323 | | | 10.55 | | Granted | 286 | | | 0.37 | |
| Exercised | Exercised | (1,583) | | | 0.57 | | Exercised | (30) | | | 0.40 | |
| Forfeited | Forfeited | (2,162) | | | 8.02 | | Forfeited | (689) | | | 7.30 | |
| Outstanding at September 30, 2022 | 26,003 | | | $ | 6.26 | | |
| Outstanding at March 31, 2023 | | Outstanding at March 31, 2023 | 24,057 | | | $ | 6.06 | |
The following table summarizes RSU awards outstanding as of September 30, 2022,March 31, 2023, as well as activity during the ninethree months then ended:
| | | | | | | | | | | | | | | | | |
| (In thousands, except per share amounts) | Number of
RSUs | | Weighted Average
Grant Date Fair Value | | Aggregate Fair Value |
| Outstanding at December 31, 2021 | — | | | $ | — | | | |
| Granted | 9,072 | | | $ | 2.19 | | | |
| Vested | — | | | $ | — | | | |
| Forfeited | (100) | | | $ | 3.29 | | | |
| Outstanding at September 30, 2022 | 8,972 | | | $ | 2.18 | | | $ | 19,559 | |
| | | | | | | | | | | | | | | | | |
| (In thousands, except per share amounts) | Number of
RSUs | | Weighted Average
Grant Date Fair Value | | Aggregate Fair Value |
| Outstanding at December 31, 2022 | 9,737 | | | $ | 2.06 | | | |
| Granted | 1,056 | | | $ | 0.24 | | | |
| Vested | — | | | $ | — | | | |
| Forfeited | (243) | | | $ | 2.24 | | | |
| Outstanding at March 31, 2023 | 10,550 | | | $ | 1.87 | | | $ | 19,732 | |
As of September 30, 2022,March 31, 2023, the total unrecognized compensation expense related to outstanding stock options and RSU awards was $51.3$33.6 million and $17.4$12.6 million, respectively, which the Company expects to recognize over a weighted-average period of 2.662.24 and 2.762.36 years, respectively.
On April 3, 2023, the Company filed a Schedule TO with the Securities and Exchange Commission in connection with an exchange offer to eligible employees (including named executive officers) of the Company to voluntarily exchange some or all of their outstanding stock options, whether vested or unvested, with an exercise price greater than or equal to $9.06 per share for a lesser number of RSUs with standard three year service-based vesting requirements (the “Exchange Offer”). The Exchange Offer closed on April 28, 2023. In the aggregate, 4,674,682 RSUs were issued in exchange for 10,605,665 stock options that had a weighted average exercise price of $10.22. The new RSUs granted in connection with the Exchange Offer are governed by the 2021 Plan and will result in incremental stock-based compensation expense of $1.0 million over a three year period. None of the above options, RSUs, or expense figures have been adjusted for the impact of the Exchange Offer.
As of September 30, 2022,March 31, 2023, there were 267,401 shares issued and 5,968,901 shares reserved for future issuance under the ESPP. As of March 31, 2023, the total unrecognized compensation expense related to the ESPP was $0.1 million,de minimis, which the Company expects to recognize over a period of 0.410.42 years.
Science 37 Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
The total amount of stock-based compensation expense recognized in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30,March 31, 2023 and 2022 and 2021 was as follows:
| | Statement of operations classification | Statement of operations classification | Three Months Ended September 30, | | Nine Months Ended September 30, | Statement of operations classification | Three Months Ended March 31, |
| (In thousands) | (In thousands) | 2022 | | 2021 | | 2022 | | 2021 | (In thousands) | 2023 | | 2022 |
| Cost of revenue (stock options, RSUs and ESPP) | Cost of revenue (stock options, RSUs and ESPP) | $ | 505 | | | $ | 129 | | | $ | 1,481 | | | $ | 346 | | Cost of revenue (stock options, RSUs and ESPP) | $ | 250 | | | $ | 514 | |
| Selling, general and administrative (stock options, RSUs and ESPP) | Selling, general and administrative (stock options, RSUs and ESPP) | 3,710 | | | 869 | | | 12,669 | | | 1,567 | | Selling, general and administrative (stock options, RSUs and ESPP) | 4,453 | | | 5,168 | |
| Selling, general and administrative (Earn-Out Shares) | Selling, general and administrative (Earn-Out Shares) | 1,524 | | | — | | | 5,275 | | | — | | Selling, general and administrative (Earn-Out Shares) | 405 | | | 1,875 | |
| Total stock-based compensation expense | Total stock-based compensation expense | $ | 5,739 | | | $ | 998 | | | $ | 19,425 | | | $ | 1,913 | | Total stock-based compensation expense | $ | 5,108 | | | $ | 7,557 | |
Stock-based compensation expense recognized in the statements of operations may differ from the impact of stock-based compensation to additional paid inpaid-in capital due to stock-based compensation capitalized as part of software development activities.
13.14. Income Taxes
The Company has incurred net operating losses since inception and is forecasting additional losses through December 31, 2022.2023. No U.S. Federal or material state income taxes are expected for 20222023 and foreign income taxes are expected to be immaterial; as such, the provision for income taxes recorded as of September 30, 2022March 31, 2023 was immaterial. Due to the Company’s history of losses since inception, there is not enough evidence at this time to support the conclusion that the Company will generate future income of a sufficient amount and nature to utilize the benefits of the Company’s net deferred tax assets. Accordingly, as of September 30, 2022March 31, 2023 and December 31, 2021,2022, the Company provided a full valuation allowance against its net deferred tax assets since, as of that time, the Company could not assert that it was more likely than not that these deferred tax assets would be realized.
14.15. Subsequent Events
On November 10, 2022,April 11, 2023, the Company committed to and commenced aan additional phase of our cost reduction program. This programIn a continued effort to align the organization relative to core business needs and go forward financial objectives, this phase included a reduction in force affecting 90approximately 140 employees (representing approximately 16%30% of total employees prior to these actions). The Company’s Board of Directors approved the programreduction in force on November 9, 2022March 30, 2023 and the majority of the affected employees were informed of the reduction in force on November 10, 2022.April 11, 2023. The Company expects the majority of the reduction in force to be completed by the end of the fourthsecond quarter of 2022. The Company expects that the cost reduction program will generate annual gross cash savings of approximately $21 million.2023.
Total cash expenditures for the cost reduction programin force are estimated at $3.5 million to $3.8approximately $3.7 million, substantially all of which are related to employee severance costs. The Company expects to recognize most of these pre-tax reduction in force charges in the fourthsecond quarter of 2022.2023. The Company’s estimates are subject to a number of assumptions, and actual results may differ. The Company may also incur additional costs not currently contemplated due to events that may occur as a result of, or that are associated with, the cost reduction program.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our results of operations and financial condition. The following discussion should be read in conjunction with the Company’s condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.2022. This discussion contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 20212022 and other documents filed by us from time to time with the Securities and Exchange Commission (“SEC”). Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “we,” “us,” “our,” “Science 37,” and “the Company” are intended to mean the business and operations of Science 37 Inc. (“Legacy Science 37”) prior to the Merger and to Science 37 Holdings, Inc. following the closing of the Merger.Inc..
Overview of Our Business and Services
Science 37 is a leading provider of technology-based solutions that enable agileleader in patient-centric clinical trials and in supporting novel approaches to decentralized approaches on behalfclinical trial designs. Science 37 pioneered the concept of biopharmaceutical sponsors. The Company pioneered agilepatient-centric clinical trials with a very simple premise: that clinical trials should begin with the patient.
Through its patient-centric approach, Science 37 reduces the impact of the geographic barriers associated with conventional physical clinical trial sites, enabling recruitment of virtually any patient. Science 37 believes that centering the clinical trial around the patient with personalized support addresses current industry needs around patient recruitment, retention, representation, and decentralization methods and developedengagement. To expand clinical trial access, Science 37 offers a unique model to existing non-research focused healthcare networks to seamlessly participate without the industry’s first Agile Clinical Trial Operating System™ (“OS”) combining itstraditional site infrastructure costs.
Science 37’s patient-centric model is powered by a proprietary end-to-end unified technology platform whichand its team of employees with significant therapeutic and subject matter expertise. As the backbone of Science 37’s offering, the proprietary unified technology platform standardizes and orchestrates workflows, generates evidence and harmonizes data seamlessly, with its expansive centralized networksthe process for clinical trials across Science 37’s specialized network of patient communities, telemedicine investigators, flexible mobile nursing, community providers,nurse networks, remote coordinators, and data and devices. By making clinical research more accessible to patients and providers, we believe that the OS helps clinical research sponsors achieve faster patient enrollment, enable better patient retention and increase accessibility to representative patient populations. We believe that these improvements help accelerate the developmentrobust network of potentially life-saving treatments through faster study timelines and a more representative and diverse patient population.technology integrations. The Company operates under one reporting segment.
Key Factors Affecting Our Performance
We review certain key performance measures, as discussed below, to evaluate our business and results, measure performance, identify trends, formulate plans and make strategic decisions. We believe that the presentation of such metrics is useful to the Company’s investors because they are used to measure and model the performance of companies such as ours.
We derive our revenue primarily from contractual arrangements to enable and enhance clinical trials through technology and services as well as licensing our proprietaryunified technology platform to a variety of life science institutions. Thus, the following factors have been important to our business and we expect them to impact our business, results of operations and financial condition in future periods:
Core business growth and expansion of technology capabilities
Our sustained growth will require continued adoption and utilization of our products and service offerings by new and existing customers. Our revenue growth rate and long-term profitability are affected by our ability to expand our customer base through market penetration and drive broader adoption of our unified technology platform. Our financial performance will depend on our ability to attract, retain and sell additional solutions to our customers under favorable contractual terms.
Expansion into adjacent markets
Maintaining our growth will require additional expansion of our offerings across key verticals, including Contract Research Organization (“CRO”) partnerships, electronic clinical outcome assessment capabilities, real-world evidence, clinical care, and diversity in clinical research. Our financial performance will depend on our ability to continue to execute our expansion across these key verticals with favorable contractual terms.
Continued investment in growth
We plan to continue investing in our business, including our internally developed OS,unified technology platform, so we can capitalize on our market opportunity and increase awareness of the value that can be realized with decentralized clinical trials. We also expect to continue to make focused investments in marketing to drive brand awareness, increase the number of opportunities and further penetrate the market. We also intend to make certain investments in our general and administrative functions as we scale to meet our reporting, compliance and other obligations as a public company.
Although we expect these activities willto negatively impact our results in the near term, we believe that these investments will contribute to our long-term growth and positively impact our business and results of operations.
Our long-term contracts generally include inflation or costKey Performance Measures
We review certain key performance measures, as discussed below, to evaluate our business and results, measure performance, identify trends, formulate plans and make strategic decisions. We believe that the presentation of living adjustments forsuch metrics is useful to the portionCompany’s investors because they are used to measure and model the performance of the services to be performed beyond one year from the contract date. In the event actual inflation rates are greater than our contractual inflation rates or cost of living adjustments, inflation could have a material adverse effect on our operations or financial condition.companies such as ours.
Backlog and Net Bookings
Our backlog represents anticipated revenue for work not yet completed or performed (i) under signed contracts, letters of intent and, in some cases, bookings that are supported by other forms of written communication and (ii) where there is sufficient or reasonable certainty about the customer’s ability and intent to fund and commence the services within six months. Backlog and backlog conversion (defined as quarterly revenue for the period divided by opening backlog for that period) vary from period to period depending upon new authorizations, contract modifications, cancellations and the amount of revenue recognized under existing contracts.
We continually evaluate our backlog to determine if any previously awarded work is no longer expected to be performed. If we determine that previously awarded work is no longer probable of performance, we will remove the value from our backlog based on the risk of cancellation. We recognize revenue from these bookings as services are performed, provided the Company has received proper authorization from the customer. We exclude revenue that has been recognized and reported in the statement of operations from backlog.
Although an increase in backlog will generally result in an increase in future revenue to be recognized over time (depending on future contract modifications, contract cancellations and other adjustments), an increase in backlog at a particular point in time does not necessarily correspond to an increase in revenue during a particular period. The timing and extent to which backlog will result in revenue depends on many factors, including the timing of commencement of work, the rate at which services are performed, scope changes, cancellations, delays, receipt of regulatory approvals and the nature, duration, size, complexity, and phase of the studies. The Company’s contracts generally have terms ranging from several months to several years. In addition, delayed projects may remain in backlog unlessuntil they are canceled. As a result of these and other factors, our backlog might not be a reliable indicator of future revenue and we might not realize all or any part of the revenue from the authorizations in backlog as of any point in time.
Net bookings represent new business awards, net of contract modifications, contract cancellations, and other adjustments. Net bookings represent the minimum contractual value for the initial planned duration of a contract as of the contract execution date. The minimum fixed fees, upfront implementation fees and technology and support fees are included in net bookings. Estimates of variable revenue for utilization in excess of the contracted amounts are not included in the value of net bookings. Net bookings vary from period to period depending on numerous factors, including customer authorization volume, sales performance and the overall outlook of the life sciences industry, among others.
Our backlog as of September 30,March 31, 2023 and 2022 and 2021 was as follows:
| | (In thousands) | (In thousands) | 2022 | | 2021 | | Change | (In thousands) | 2023 | | 2022 | | Change |
| Backlog | Backlog | $ | 170,357 | | | $ | 141,059 | | | $ | 29,298 | | | 20.8 | % | Backlog | $ | 170,518 | | | $ | 175,750 | | | $ | (5,232) | | | (3.0) | % |
Our net bookings for the three months ended September 30,March 31, 2023 and 2022 and 2021 were as follows:
| | | Three Months Ended September 30, | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | (In thousands) | 2022 | | 2021 | | Change | (In thousands) | 2023 | | 2022 | | Change |
| Net bookings | Net bookings | $ | 4,708 | | | $ | 35,864 | | | (31,156) | | | (86.9) | % | Net bookings | $ | 11,665 | | | $ | 30,552 | | | (18,887) | | | (61.8) | % |
Components of Results of Operations
Revenue
The Company derives its revenue primarily from two sources: (i) contractual arrangements to enable and enhance clinical trials through technology and services, and (ii) licensing of its proprietaryunified technology platform to a variety of life science institutions.
Total revenue areis comprised of revenue from the provision of the Company’s decentralized services, including enhanced services from the use of the Company’s hosted proprietary software.unified technology platform. Revenue also includeincludes reimbursable and out of pocket expenses provided for in the Company’s contracts with its customers.
See “Critical Accounting Policies and Estimates — Revenue Recognition,” below for a discussion of our revenue recognition policy.
Cost of Revenue
Cost of revenue includeincludes the direct costs to conduct the Company’s trials remotely and make available the Company’s technology solutions. Cost of revenue consistconsists primarily of compensation, benefits, and other employee-related costs, including expenses for stock-based compensation, contract labor, trial advertising and marketing, investigator payments, and reimbursable out-of-pocket expenses directly related to delivering on the Company’s contracts. Cost of revenue is driven primarily by the number of clinical trials in which the Company is contracted, and it typically increases or decreases with changes in revenue but may fluctuate from period to period as a percentage of revenue due to project labor utilization and experience level mix of personnel assigned to projects, the type of services, changes to the timing of work performed and project inefficiencies, among other factors. Our business and operational models are designed to be highly scalable and leverage variable costs to support revenue-generating activities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include costs related to sales, marketing, and administrative functions (including human resources, legal, finance, information technology, privacy and training, and general management) such as compensation expense and benefits, including stock-based compensation, travel, professional services, facilities, recruiting and relocation, training, and sales commissions.
Depreciation and Amortization
Depreciation and amortization represent the costs charged for the Company’s property, equipment and capitalized software development. The Company records depreciation and amortization on property and equipment using the straight-line method, based on the estimated useful lives of the respective assets. The Company depreciates leasehold improvements over the shorter of the lease term or the estimated useful lives of the improvements. The Company amortizes software development costs over five years. We anticipate continued increase in investmentwill continue to invest additional resources in our unified technology platform, to expand its capabilities and facilitate ourensure that customers are realizing the full benefit of our offerings. The level and timing of investment in these areas could affect our depreciation and amortization expense in the future.
Restructuring Costs
Restructuring costs consist of employee severance and benefits. The Company commenced a cost reduction program in the fourth quarter of 2022 to materially change the Company’s management structure and to better align resources with our then-current business needs and going forward financial objectives, which included one-time termination benefits for 81 employees. In addition, the Company carried out an additional phase of the cost reduction program on April 11, 2023 in a continued effort to align the organization relative to core business needs and going forward financial objectives, which included one-time termination benefits for approximately 140 employees.
Other Income (Expense), net
Other income (expense), net, consists of interest income, sublease income, andthe change in the fair value of the earn-out liability.liability, and other income (expense).
Results of Operations
Comparison of the three and nine months ended September 30,March 31, 2023 and 2022 and 2021
The following table sets forth our unaudited condensed consolidated statements of operations data for the three and nine months ended September 30, 2022March 31, 2023 and 2021:2022:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| (In thousands) | (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 | (In thousands) | 2023 | | 2022 |
| Revenue | Revenue | | $ | 16,249 | | | $ | 14,236 | | | $ | 54,210 | | | $ | 39,222 | | Revenue | $ | 14,086 | | | $ | 18,686 | |
| | Cost of revenue and operating expenses: | Cost of revenue and operating expenses: | | Cost of revenue and operating expenses: | |
| Cost of revenue | | 12,157 | | | 10,318 | | | 41,985 | | | 26,246 | | |
| Cost of revenue (exclusive of depreciation and amortization) | | Cost of revenue (exclusive of depreciation and amortization) | 11,110 | | | 15,986 | |
| Selling, general and administrative | Selling, general and administrative | | 24,485 | | | 16,932 | | | 82,822 | | | 37,477 | | Selling, general and administrative | 20,481 | | | 30,153 | |
| Impairment of long-lived assets | | Impairment of long-lived assets | 7,801 | | | — | |
| Depreciation and amortization | Depreciation and amortization | | 4,870 | | | 1,916 | | | 12,569 | | | 5,189 | | Depreciation and amortization | 213 | | | 3,469 | |
| Restructuring costs | | Restructuring costs | 229 | | | — | |
| Total operating expenses | Total operating expenses | | 41,512 | | | 29,166 | | | 137,376 | | | 68,912 | | Total operating expenses | 39,834 | | | 49,608 | |
| Loss from operations | Loss from operations | | (25,263) | | | (14,930) | | | (83,166) | | | (29,690) | | Loss from operations | (25,748) | | | (30,922) | |
| Total other income (expense), net | Total other income (expense), net | | 1,735 | | | 238 | | | 98,698 | | | 457 | | Total other income (expense), net | 1,120 | | | 75,815 | |
| Income (loss) before income taxes | | (23,528) | | | (14,692) | | | 15,532 | | | (29,233) | | |
| (Loss) income before income taxes | | (Loss) income before income taxes | (24,628) | | | 44,893 | |
| Income tax expense (benefit) | Income tax expense (benefit) | | — | | | — | | | (1) | | | — | | Income tax expense (benefit) | — | | | (1) | |
| Net income (loss) | | $ | (23,528) | | | $ | (14,692) | | | $ | 15,533 | | | $ | (29,233) | | |
| Net (loss) income | | Net (loss) income | $ | (24,628) | | | $ | 44,894 | |
Revenue
Revenue for the three and nine months ended September 30,March 31, 2023 and 2022 and 2021 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | |
| (In thousands) | 2022 | | 2021 | | Change |
| Revenue | $ | 16,249 | | | $ | 14,236 | | | $ | 2,013 | | | 14.1 | % |
| | | Nine Months Ended September 30, | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | (In thousands) | 2022 | | 2021 | | Change | (In thousands) | 2023 | | 2022 | | Change |
| Revenue | Revenue | $ | 54,210 | | | $ | 39,222 | | | $ | 14,988 | | | 38.2 | % | Revenue | $ | 14,086 | | | $ | 18,686 | | | $ | (4,600) | | | (24.6) | % |
For the three months ended September 30, 2022,March 31, 2023, our revenue increaseddecreased by $2.0$4.6 million, or 14.1%24.6%, to $16.2$14.1 million, as compared to $14.2$18.7 million for the same period in 2021. For the nine months ended September 30, 2022, our revenue increased by $15.0 million, or 38.2%, to $54.2 million, as compared to $39.2 million for the same period in 2021. These increases were2022. This decrease was primarily driven by volume growth seen in higherreduced opening backlog at the beginning of the period as compared to thecoverage resulting from prior year net bookings as well as from new bookings and associated revenue driven by continued growth in demand for our core offerings, decentralized clinical trial and clinical trial support solutions.to lower COVID related revenues year-over-year.
Cost of Revenue
Cost of revenue for the three and nine months ended September 30,March 31, 2023 and 2022 and 2021 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | |
| (In thousands) | 2022 | | 2021 | | Change |
| Cost of revenue | $ | 12,157 | | | $ | 10,318 | | | $ | 1,839 | | | 17.8 | % |
| % of revenue | 74.8 | % | | 72.5 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | |
| (In thousands) | 2022 | | 2021 | | Change |
| Cost of revenue | $ | 41,985 | | | $ | 26,246 | | | $ | 15,739 | | | 60.0 | % |
| % of revenue | 77.4 | % | | 66.9 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | 2023 | | 2022 | | Change |
| Cost of revenue (exclusive of depreciation and amortization) | $ | 11,110 | | | $ | 15,986 | | | $ | (4,876) | | | (30.5) | % |
| % of revenue | 78.9 | % | | 85.6 | % | | | | |
For the three months ended September 30, 2022,March 31, 2023, cost of revenue increaseddecreased by $1.8$4.9 million, or 17.8%30.5%, to $12.2$11.1 million, as compared to $10.3$16.0 million for the same period in 2021. For2022, primarily related to the nine months ended September 30, 2022,revenue decrease as well as the Company’s cost of revenue increased by $15.7 million, or 60.0%, to $42.0 million, as compared to $26.2 million for the same period in 2021. These increases were primarily a result of revenue growth during the three and nine months ended September 30, 2022. To support this growth,reduction efforts. Specifically, we incurredrecognized cost increases,decreases primarily in compensation-related expenses and consulting fees to support growth in key verticals and market expansion and hosting fees for our proprietary operating system.better align to anticipated revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three and nine months ended September 30,March 31, 2023 and 2022 and 2021 were as follows:
| | | Three Months Ended September 30, | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | (In thousands) | 2022 | | 2021 | | Change | (In thousands) | 2023 | | 2022 | | Change |
| Selling, general and administrative | Selling, general and administrative | $ | 24,485 | | | $ | 16,932 | | | $ | 7,553 | | | 44.6 | % | Selling, general and administrative | $ | 20,481 | | | $ | 30,153 | | | $ | (9,672) | | | (32.1) | % |
| % of revenue | % of revenue | 150.7 | % | | 118.9 | % | | % of revenue | 145.4 | % | | 161.4 | % | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | |
| (In thousands) | 2022 | | 2021 | | Change |
| Selling, general and administrative | $ | 82,822 | | | $ | 37,477 | | | $ | 45,345 | | | 121.0 | % |
| % of revenue | 152.8 | % | | 95.6 | % | | | | |
Selling, general and administrative expense increasedexpenses decreased by $7.6$9.7 million, or 44.6%32.1%, to $24.5$20.5 million for the three months ended September 30, 2022March 31, 2023 as compared to $16.9$30.2 million for the same period in 2021. Selling, general2022. The decrease was mainly due to lower salaries and administrative expense increased by $45.3 million, or 121.0%, to $82.8wages, public company and software costs as a result of the cost reduction plan that was executed in the fourth quarter of 2022.
Impairment of Long-Lived Assets
Impairment of long-lived assets for the three months ended March 31, 2023 and 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | 2023 | | 2022 | | Change |
| Impairment of long-lived assets | 7,801 | | | — | | | $ | 7,801 | | | — | % |
| % of revenue | 55.4 | % | | — | % | | | | |
Impairment of long-lived assets was $7.8 million for the ninethree months ended September 30, 2022March 31, 2023 as compared to $37.5 million$— for the same period in 2021. These increases in both periods were mainly2022. The increase was due to investments to support continuing company growth and expenses related to becoming a publicly traded company in conjunction with the Merger. This resulted in increased headcount leading to increases in salaries and benefits, and web services and software. Stock-based compensation expense also increasedfull impairment of the Company’s long-lived assets for the three and nine months ended September 30, 2022March 31, 2023 due to (i) the stock option issuances during 2021 with a fair value impacted by an increase in thecarrying value of the asset group being greater than the fair value. The Company considered the market capitalization valuation as of March 31, 2023, which was adversely impacted by sustained declines in the Company’s stock price during 20212022 and 2023, in anticipationdetermining the fair value of the Merger, (ii) additional stock option issuancesasset group. The market capitalization was trading below cash and cash equivalents and stockholders' equity at March 31, 2023, which required the Company to newrecognize the long-lived asset impairment. The Company remains confident in the utility of the long-lived assets and existing employees, and (iii) the issuance of Earn-Out Shares (defined below)there has been no change as to existing Legacy Science 37 option holders in conjunction with the Merger.their intended use.
Depreciation and Amortization
Depreciation and amortization expense for the three and nine months ended September 30,March 31, 2023 and 2022 and 2021 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | |
| (In thousands) | 2022 | | 2021 | | Change |
| Depreciation and amortization | $ | 4,870 | | | $ | 1,916 | | | $ | 2,954 | | | 154.2 | % |
| % of revenue | 30.0 | % | | 13.5 | % | | | | |
| | | Nine Months Ended September 30, | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | (In thousands) | 2022 | | 2021 | | Change | (In thousands) | 2023 | | 2022 | | Change |
| Depreciation and amortization | Depreciation and amortization | $ | 12,569 | | | $ | 5,189 | | | $ | 7,380 | | | 142.2 | % | Depreciation and amortization | $ | 213 | | | $ | 3,469 | | | $ | (3,256) | | | (93.9) | % |
| % of revenue | % of revenue | 23.2 | % | | 13.2 | % | | % of revenue | 1.5 | % | | 18.6 | % | |
Depreciation and amortization expense increaseddecreased by $3.0$3.3 million, or 154.2%93.9%, to $4.9$0.2 million for the three months ended September 30, 2022March 31, 2023 as compared to $1.9$3.5 million for the same period in 2021. Depreciation and amortization expense increased by $7.4 million, or 142.2%, to $12.6 million for the nine months ended September 30, 2022 as compared to $5.2 million for the same period in 2021. This increase2022. The decrease in depreciation and amortization expense during both periods is attributablethe three months ended March 31, 2023 was due to the impairment of long-lived assets in the fourth quarter of 2022, partly offset by depreciation and amortization ofexpense recognized on new assets purchased or capitalized during the three months ended March 31, 2023.
Restructuring Costs
Restructuring costs for the three months ended March 31, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | 2023 | | 2022 | | Change |
| Restructuring costs | $ | 229 | | | $ | — | | | $ | 229 | | | — | % |
| % of revenue | 1.6 | % | | — | % | | | | |
Restructuring costs were $0.2 million for the three months ended March 31, 2023 as compared to $— for the same period in 2022. The increase in restructuring costs during the three months ended March 31, 2023 was due to the fourth quarter 2022 reduction in force related to the Company’s internally developed software year over year, consistent with our focus on continuous development of new features and functionality within our proprietary operating system.cost reduction program.
Other Income (Expense)
The components of other income (expense), net were as follows:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| (In thousands) | (In thousands) | 2022 | | 2021 | | 2022 | | 2021 | (In thousands) | 2023 | | 2022 |
| Interest income | Interest income | $ | 559 | | | $ | — | | | $ | 748 | | | $ | 1 | | Interest income | $ | 930 | | | $ | 94 | |
| Sublease income | Sublease income | 240 | | | 230 | | | 719 | | | 444 | | Sublease income | 33 | | | 239 | |
| Change in fair value of earn-out liability | Change in fair value of earn-out liability | 1,200 | | | — | | | 97,600 | | | — | | Change in fair value of earn-out liability | 110 | | | 75,500 | |
| Other income (expense), net | Other income (expense), net | (264) | | | 8 | | | (369) | | | 12 | | Other income (expense), net | 47 | | | (18) | |
| Total other income (expense), net | Total other income (expense), net | $ | 1,735 | | | $ | 238 | | | $ | 98,698 | | | $ | 457 | | Total other income (expense), net | $ | 1,120 | | | $ | 75,815 | |
Other income (expense) for the three and nine months ended September 30, 2022March 31, 2023 was income of $1.7$1.1 million and $98.7 million, respectively, as compared to income of $0.2 million and $0.5$75.8 million for the three and nine months ended September 30, 2021,March 31, 2022, respectively. This increasedecrease was primarily due to the recognition of $1.2 million and $97.6$75.5 million gain on change in fair value of the earn-out liability for the three and nine months ended September 30,March 31, 2022 respectively. In addition, interest income increasedcompared to a gain of $0.1 million for the three and nine months ended September 30, 2022 due to interest rate increasesMarch 31, 2023. In addition, one of the Company’s leases, and related subleases, expired during the year,fourth quarter of 2022. These decreases were partly offset by foreign exchange losses.an increase in interest income for the three months ended March 31, 2023 mainly due to movement of the majority of cash to a federal money market fund.
Liquidity and Capital Resources
Key measures of our liquidity were as follows:
| | (In thousands) | (In thousands) | September 30, 2022 | | December 31, 2021 | (In thousands) | March 31, 2023 | | December 31, 2022 |
| Balance sheet data: | Balance sheet data: | | | | Balance sheet data: | | | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 130,239 | | | $ | 214,601 | | Cash and cash equivalents | $ | 82,644 | | | $ | 108,091 | |
| Working capital | Working capital | 122,833 | | | 197,681 | | Working capital | 83,942 | | | 103,028 | |
As of September 30, 2022,March 31, 2023, the Company had cash and cash equivalents of $130.2$82.6 million. For the ninethree months ended September 30, 2022,March 31, 2023, the Company recorded a net income (loss)loss of $15.5$24.6 million, (which included a non-cash gain of $97.6 million on revaluation of the earn-out liability), and used $60.4$19.6 million and $24.8$5.9 million of net cash in operating and investing activities, respectively, while financing activities provided $0.7$0.1 million of net cash. Cash outflows from operating activities arewere attributable primarily to losses from operations incurred in the ninethree months ended September 30, 2022 and 2021.March 31, 2023. The Company has limited operating history and is in an early stage of growth, incurring significant costs in developing and commercializing its products and related services, while generating limited revenue from sales of its products and related services that are insufficient to cover operating costs. In addition, loss from operations for the nine months ended September 30, 2022 includes administrative, compliance and other costs related to becoming a publicly traded company as a result of the Merger.
From inception through the consummation of the Merger, the Company had primarily been financed with net proceeds from the issuance of multiple series of redeemable preferred stock in the private market. In conjunction with the Merger, which was consummated on October 6, 2021, the Company received $200.0 million from the private placement of an aggregate of 20,000,000 newly-issued shares of common stock from leading institutional and strategic investors (the “PIPE financing”) to further fund the Company’s decentralized OS and extend into adjacent markets. As a result of the Merger and inclusive of the PIPE financing, the Company received $233.5 million, net of fees and expenses paid in connection with the closing of the Merger.
As of September 30, 2022,March 31, 2023, the Company’s principal source of liquidity was cash and cash equivalents provided from the MergerOctober 2021 merger with LifeSci Acquisition II Corp. (the “Merger”) and the PIPErelated private placement financing. The Company believes that the current cash balances will be adequate to support its working capital needs, capital expenditures and other currently anticipated liquidity requirements for at least the next twelve months.
Our future capital requirements will depend on many factors, including investments in growth and technology. To meet these future capital requirements, we may enter into arrangements to acquire or invest in complementary businesses, services, technologies and other assets, which may require us to seek additional equity or debt financing. In the event that
we require additional financing, we may not be able to raise such financing in a timely manner, on terms acceptable to us,
or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in
continued innovation of our unified technology platform, we may not be able to compete successfully, which would harm
our business, results of operations, and financial condition.
Cash and Cash EquivalentsFlows
Our cash flows from operating, investing, and financing activities were as follows:
| | | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
| (In thousands) | (In thousands) | 2022 | | 2021 | | Change | (In thousands) | 2023 | | 2022 | | Change |
| Net cash used in operating activities | Net cash used in operating activities | $ | (60,377) | | | $ | (14,660) | | | $ | (45,717) | | Net cash used in operating activities | $ | (19,611) | | | $ | (27,983) | | | $ | 8,372 | |
| Net cash used in investing activities | Net cash used in investing activities | (24,789) | | | (12,072) | | | (12,717) | | Net cash used in investing activities | (5,947) | | | (7,181) | | | 1,234 | |
| Net cash provided by financing activities | Net cash provided by financing activities | 672 | | | 1,245 | | | (573) | | Net cash provided by financing activities | 87 | | | 114 | | | (27) | |
Operating activities
Net cash used in operating activities for the ninethree months ended September 30, 2022March 31, 2023 was $60.4$19.6 million, consisting primarily of net incomeloss of $15.5$24.6 million offset byand changes in working capital of $(11.6)$8.3 million, andpartly offset by net adjustments for non-cash items of $(64.3)$13.3 million. Changes in working capital were primarily due to decreases in accounts payable and accrued expenses partly offset byrelated to the timing of invoicing and payment, including the payment of the 2022 annual employee bonus in March 2023, a decrease in deferred revenue due to timing of up-front and milestone cash received from customers relative to revenue recognized, and an increase in net receivables due to strong cashthe timing of invoicing and collections during the three months ended September 30, 2022. In April 2022, U.S. exempt employees transitioned from a paid time off (“PTO”) to a flexible time off (“FTO”) policy with impacted employees receivingMarch 31, 2023. Net adjustments for non-cash items consisted primarily of the loss on impairment of long-lived assets and stock-based compensation expense.
Net cash consideration of approximately $3.2 millionused in operating activities for earned and accrued PTO which, as ofthe three months ended March 31, 2022 had not been used underwas $28.0 million, consisting primarily of net income of $44.9 million, offset by changes in working capital of $8.6 million and net adjustments for non-cash items of $64.3 million. Changes in working capital were primarily due to decreases in accounts payable and accrued expenses. Changes in working capital were impacted by the previous policy. The Company paidtiming of payments to vendors, as well as payment of the 2021 annual employee bonuses in March 2022 and the PTO to FTO transitional payments in May 2022. Net adjustments for non-cash items consisted primarily of a $97.6$75.5 million gain recorded from the change in fair value of the earn-out liability, partially offset by the stock-based compensation expense and depreciation and amortization.
Net cash used in operating activities for the nine months ended September 30, 2021 was $14.7 million, consisting primarily of a net loss of $29.2 million, partially offset by changes in working capital of $6.2 million and net adjustments for non-cash items of $8.4 million. Changes in working capital were primarily due to a decrease in accounts receivable due to strong collections, an increase in accounts payable and accrued expenses due to increased expenses in line with company growth and the timing of vendor payments, partially offset by payment of the 2020 employee bonuses in March 2021, an increase in commissions payable on higher net bookings, and an increase in up front cash received on contracts related to new business growth. These changes were partially offset by an increase in prepaid expenses and other current assets due to capitalized commissions on higher net bookings compared to the same period in the prior year and higher prepaid transaction related expenses related to the merger. Net adjustments for non-cash items primarily consisted of depreciation and amortization and stock-based compensation expense.
Investing activities
Net cash used in investing activities for the ninethree months ended September 30, 2022March 31, 2023 was $24.8$5.9 million, consisting of $24.6$5.2 million in payments related to capitalized software development costs and $0.2a $0.8 million in purchasespurchase of property and equipment.internal-use scheduling software to be integrated into the Company’s unified technology platform over a six to nine month period.
Net cash used in investing activities for the ninethree months ended September 30, 2021March 31, 2022 was $12.1$7.2 million, consisting of $11.3$7.0 million in payments related to capitalized software development costs and $0.7$0.1 million in purchases of property and equipment.
Increase in cash used in investing activities forThe purchase of internal-use scheduling software during the ninethree months ended September 30, 2022 compared to 2021March 31, 2023 reflects the Company’s continued focus oncontinuous improvement objective in relation to our unified technology platform in addition to the development of new featuresCompany’s efficiency and functionality within our OS.overall cost-reduction objectives.
We expect to make expenditures for additions and enhancements to our proprietaryunified technology platform and for purchases of property and equipment.equipment, as needed. The amount, timing and allocation of capital expenditures are largely discretionary and within management’s control. Depending on market conditions, we may choose to defer a portion of our budgeted expenditures until later periods to achieve the desired balance between sources and uses of liquidity and prioritize capital projects that we believe have the highest expected returns and potential to generate cash flow.
Financing activities
Net cash provided by financing activities was $0.7 million and $1.2$0.1 million for each of the ninethree months ended September 30,March 31, 2023 and 2022, and 2021, respectively, consisting of cash received from stock option exercises in each period.
Contractual Obligations and Commitments
Except as set forth in Note 5 “Leases” and Note 11 “Earn-Out Shares” ofstock under the notes to our condensed consolidated financial statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q, there have been no material changes outside the ordinary course of business to our contractual obligations and commitments as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-Kemployee stock purchase plan for the fiscal yearthree months ended DecemberMarch 31, 2021, filed with2023 and cash received from stock option exercises for the SEC onthree months ended March 22,31, 2022.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP.generally accepted accounting principles in the United States of
America (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.
While our significant accounting policies are more fully described in Note 2 “Summary of Significant Accounting Policies” of our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021,2022, the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and results of operations and require our most difficult, subjective, and complex judgments.
Revenue Recognition
The majority of our contracts are service contracts for clinical trial support that represent a single performance obligation. Science 37 provides a significant integration service resulting in a combined output, which is clinical trial data that meets the relevant regulatory standards and can be used by the customer to progress to the next phase of a clinical trial or solicit approval of a treatment by the applicable regulatory body. The performance obligation is satisfied over time as the output is captured in data and documentation that is available for the customer to consume over the course of the arrangement and furthers progress of the clinical trial. We recognize revenue over time using a cost-based input method since there is no single output measure that would fairly depict the transfer of control over the life of the performance obligation. Progress on the performance obligation is measured by the proportion of actual costs incurred to the total costs expected to complete the contract. Costs included in the measure of progress include direct labor and third-party costs (such as payments to investigators and other pass-through expenses related to clinical activities). This cost-based method of revenue recognition requires us to make estimates of costs to complete projects on an ongoing basis. Significant judgment is required to evaluate assumptions related to these estimates as they are based on various assumptions to project future outcomes of events that often span several years. The effect of revisions to estimates related to the transaction price or costs to complete a project are recorded in the period in which the estimate is revised. Most contracts may be terminated upon 30 to 90 days’ notice by the customer; however, in the event of termination, most contracts require payment for services rendered through the date of termination, as well as for subsequent services rendered to close out the contract.
Capitalized Software and the Recognition of Related Amortization to Expense
Science 37’s internal use proprietary softwareunified technology platform organizes workflows, captures real-time evidence, and harmonizes data during clinical trial support or enhancement. As such, we capitalize software development costs related to the development of our proprietaryunified technology platform in accordance with ASC Topic 350-40, Internal Use Software. Capitalized software is recorded at cost less accumulated amortization. Costs incurred during the development stage are capitalized and consist of payroll labor and benefits, to the extent of time spent directly on the development of software, stock-based compensation expense for direct employees, and external direct costs of materials and labor. Payroll and benefits are allocated based on the percentage of technical employees’ time spent directly on the software which involves some level of estimation. Vacation, holidays, sick time, extended leave, training, and administrative meetings are considered and excluded from the percent capitalized. Training and maintenance costs are expensed as incurred. Amortization commences once the respective assets are placed into service. The amortization of these capitalized software costs for internal use proprietary softwareour unified technology platform is included in depreciation and amortization over an estimated life of threefive years. The determination of the useful life for capitalized software involves some level of judgment. Amortization expense can be affected by various factors, including new software releases, acquisitions or divestitures of software, and/or impairments.
the Company’s long-lived assets as of December 2022, the Company reassessed the useful life of its unified technology platform in relation to its revenue generating activities. Based on this review, the Company determined the actual useful life of its unified technology platform, in relation to revenue generating activities, was longer than the useful life used for amortization purposes in the Company’s financial statements. As a result, the Company increased the useful life of its unified technology platform for amortization purposes from three to five years effective January 1, 2023. The effects of this change in accounting estimate over the previous estimated useful life for the three months ended March 31, 2023 was zero because the Company’s unified technology platform was fully impaired in both the fourth quarter of 2022 and for the three months ended March 31, 2023 as discussed below. The Company reviews capitalized software for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered
through undiscounted expected future cash flows. If the expected undiscounted future cash flow from the use of the capitalized software and its eventual disposition is less than the carrying value, an impairment loss is recognized and measured using the fair value of the related asset. No impairments were recognized forAssets are reported at the threelower of the carrying amount or the fair value less costs to sell. The net book value of the Company’s unified technology platform totaling $7.8 million and nine months ended September 30,$42.1 million was impaired as of March 31, 2023 and December 31, 2022 or 2021.due to the fair value of the asset group being lower than its carrying value under the long-lived asset impairment test as of March 31, 2023 and December 31, 2022, respectively. In the fourth quarter of 2022 through March 31, 2023, the Company’s common stock price experienced significant decline, resulting in market value trading below cash and cash equivalents and stockholders’ equity at March 31, 2023 and December 31, 2022, respectively.
Stock-Based Compensation
We recognize the cost of stock-based awards granted to employees and directors based on the estimated grant-date fair value of the awards. Cost is recognized on a straight-line basis over the service period, which is generally the vesting period of the award. We reverse previously recognized costs for unvested awards in the period that forfeitures occur. We determine the fair value of stock options and shares issued under the employee stock purchase plan (ESPP) using the Black-Scholes option pricing model, which is impacted by the following assumptions:
•Expected Term—We use the simplified method when calculating the expected term due to insufficient historical exercise data.
•Expected Volatility—Given the limited market trading history of our common stock, volatility is based on a benchmark of comparable companies within the traditional CRO and health technology industries.
•Expected Dividend Yield—We have not paid any cash dividends on common stock and do not anticipate doing so in the foreseeable future.
•Risk-Free Interest Rate—The interest rates used are based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award.
Prior to the October 2021 Merger, due to the absence of an active market for Science 37 Inc.’s (“Legacy Science 37’s37”) common stock, the fair value of the common stock for purposes of determining the common stock price for stock option grants was determined by Legacy Science 37’s Board of Directors. Legacy Science 37’s Board of Directors set the exercise price of stock options at least equal to the fair value of its common stock on the date of grant. Legacy Science 37’s Board of Directors exercised judgment while considering numerous objective and subjective factors in order to determine the fair market value on each date of grant in accordance with the guidance in the American Institute of Certified Public Accountants Technical Practice Aid entitled, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the AICPA Practice Aid, including the receipt of a valuation prepared by an independent third party with extensive experience valuing common stock of privately held companies.
Earn-Out Shares
FormerAs of the October 2021 Merger date, former holders of shares of Legacy Science 37 common stock (including shares received as a result of the conversion of Legacy Science 37 preferred stock) and former holders of options to purchase shares of Legacy Science 37 are entitled to receive their respective pro rata shares of up to 12,500,000 additional shares of the Company’s common stock (the “Earn-Out Shares”) if, during the three years following the consummation ofperiod beginning on the Merger (the “Earn-Out Period”),Transaction date and ending on October 6, 2024, the share price equal to the volume weighted average price of the Company’sScience 37’s common stock for a period of at least 20 days out of 30 consecutive trading days (each, a “Triggering Event”):
•is equal to or greater than $15.00, a one-time aggregate issuance of 5,000,000 Earn-Out Shares will be made; and
•is equal to or greater than $20.00, a one-time aggregate issuance of 7,500,000 Earn-Out Shares will be made.
In respect of former holders of Legacy Science 37 options, receipt of the Earn-Out Shares is subject to continued services to the Company or one of its subsidiaries at the time of the applicable Triggering Event. If there is a change of control of Science 37 duringwithin the Earn-Out Periodthree-year period following the closing of the October 2021 Merger that will result in the holders of Science 37 common stock receiving a per share price equal to or in excess of any Triggering Event threshold, then immediately prior to such change of control, any Triggering Event that has not previously occurred shall be deemed to have occurred and Science 37 shall issue the Earn-Out Shares to the former holders of shares of Legacy Science 37 Common Stockcommon stock and former holders of Legacy Science 37 options in accordance with their respective pro rata shares. The estimated fair value of the Earn-Out Shares was determined using a Monte Carlo simulation valuation model using a distribution of potential outcomes over the Earn-Out Periodearn-out period using the most reliable information available.
The Company determined that the contingent obligation to issue Earn-Out Shares to existing Legacy Science 37 shareholders is not indexed to the Company's stock under ASC Topic 815-40 and therefore equity treatment is precluded. The Triggering Event(s) that determine the issuance of the Earn-Out Shares include terms that are not solely indexed to our common stock, and as such liability classification is required. Equity-linked instruments classified as liabilities are
recorded at their estimated fair value on the date of issuance and are revalued at each subsequent balance sheet date, with fair value changes recognized in other income (expense), net in the accompanying condensed consolidated statements of operations and comprehensive income (loss).loss.
The Company determined that the contingent obligation to issue Earn-Out Shares to existing Legacy Science 37 option holders falls within the scope of ASC Topic 718, Compensation - StockShare-based Compensation, because the option holders are required to continue providing service until the occurrence of the Triggering Event(s). The fair value of the option holder Earn-Out Shares is recorded as stock-basedshare-based compensation on a straight-line basis over the derived service period determined using the Monte Carlo simulation valuation model and recognized in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.operations and comprehensive loss.
Emerging Growth Company Status
Section 102(b)(1) of the Jumpstart Our Business Startups Act (“JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable.
The Company is an “emerging growth company” as defined in Section 2(a) of the Securities Act and has elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards. The Company expects to remain an emerging growth company at least through the end of 20222023 and expects to continue to take advantage of the benefits of the extended transition period, although it may decide to early adopt such new or revised accounting standards to the extent permitted by such standards. This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 1 “Company Background and Basis of Presentation” to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Under SEC rules and regulations, because we are considered to be a “smaller reporting company”, we are not required to provide the information required by this item.item in this report.
Item 4. Controls and Procedures
Limitations on Effectiveness of Disclosure Controls and Procedures
In designing and evaluating our disclosure controls and procedures (as defined in RulesRule 13a-15(e) and 15d-15(e) under the Exchange Act), management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of the disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in RulesRule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2022,March 31, 2023, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting as identified in connection with the evaluation required by Rules 13a-15(e) and 15d-15(e) under the Exchange Act, during the fiscal quarter ended September 30, 2022,March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II - Other Information
Item 1. Legal Proceedings
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, we believe would individually or in the aggregate have a material adverse effect on our business, results of operations, financial condition or cash flows. However, legal proceedings are inherently uncertain. As a result, the outcome of a particular matter or a combination of matters may be material to our results of operations for a particular period, depending upon the size of the loss or our income for that particular period.
Item 1A. Risk Factors
The Company’s risk factors are described in Part I, Item 1A, “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.2022. These factors could materially, adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by any forward-looking statements contained in this Quarterly Report on Form 10-Q. There have been no material changes to the Company’s risk factors since the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20212022 as filed with the SEC on March 22, 2022.6, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Sales of Unregistered Equity Securities
None.
Purchases of Equity Securities
The Company did not repurchase shares of its common stock during the three months ended September 30, 2022.March 31, 2023.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
The following disclosure is included in this Quarterly Report on Form 10-Q in lieu of filing a Current Report on Form 8-K with respect to disclosure required under Item 2.05 thereof.
On November 10, 2022, the Company committed to and commenced a cost reduction program. This program included a reduction in force affecting 90 employees (representing approximately 16% of total employees prior to these actions). The Company’s Board of Directors approved the program on November 9, 2022 and the majority of the affected employees were informed of the reduction in force on November 10, 2022. The Company expects the majority of the reduction in force to be completed by the end of the fourth quarter of 2022. The Company expects that the cost reduction program generate annual gross cash savings of approximately $21 million.
Total cash expenditures for the cost reduction program are estimated at $3.5 million to $3.8 million, substantially all of which are related to employee severance costs. The Company expects to recognize most of these pre-tax reduction in force charges in the fourth quarter of 2022. The Company’s estimates are subject to a number of assumptions, and actual results may differ. The Company may also incur additional costs not currently contemplated due to events that may occur as a result of, or that are associated with, the cost reduction program.
Item 6. Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference (Unless Otherwise Indicated) |
Exhibit Number | | Description of Exhibit | | Form | | Exhibit | | Filing Date |
2.1# | | | | 8-K | | 2.1 | | May 7, 2021 |
10.1+ | | | | 8-K | | 10.1 | | September 12, 2022 |
10.2+ | | | | | | | | * |
31.1 | | | | | | | | * |
31.2 | | | | | | | | * |
32.1 | | | | | | | | ** |
32.2 | | | | | | | | ** |
101.INS | | Inline XBRL Instance Document. | | | | | | * |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | * |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document. | | | | | | * |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | * |
101.LAB | | Inline XBRL Taxonomy Extension Labels Linkbase Document. | | | | | | * |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | * |
104 | | Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101). | | | | | | * |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference (Unless Otherwise Indicated) |
| Exhibit Number | | Description of Exhibit | | Form | | Exhibit | | Filing Date |
| 2.1# | | | | 8-K | | 2.1 | | May 7, 2021 |
| 3.1 | | | | S-1 | | 3.1 | | November 5, 2021 |
| 3.2 | | | | 8-K | | 3.3 | | October 13, 2021 |
| 10.1+ | | | | | | | | * |
| 10.2+ | | | | | | | | * |
| 10.3+ | | | | SC TO-I | | (a)(1)(L) | | April 3, 2023 |
| 31.1 | | | | | | | | * |
| 31.2 | | | | | | | | * |
| 32.1 | | | | | | | | ** |
| 32.2 | | | | | | | | ** |
| 101 | | The following unaudited financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 are formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Condensed Consolidated Financial Statements. | | | | | | * |
| 104 | | Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101). | | | | | | * |
________________________
* Filed herewith.
** Furnished herewith.
# Certain of the exhibits and schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5). The Company agrees to furnish a copy of all omitted exhibits and schedules to the SEC upon its request.
+ Indicates management contract or compensatory plan or arrangement.
Signatures
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | SCIENCE 37 HOLDINGS, INC. |
| | | | | |
| Date: | November 10, 2022May 15, 2023 | | | | /s/ David Coman |
| | | Name: | | David Coman |
| | | Title: | | Chief Executive Officer |
| | | | | (Principal Executive Officer) |
| | | | | |
| Date: | November 10, 2022May 15, 2023 | | | | /s/ Mike Zaranek |
| | | Name: | | Mike Zaranek |
| | | Title: | | Chief Financial Officer |
| | | | | (Principal Financial Officer and Principal Accounting Officer) |
| | | | | |