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This is the conference operator. Welcome to the Think Research Corporation Third Quarter 2023 Results Conference Call. [Operator Instructions] The conference is being recorded. After the presentation, there will be an opportunity to ask questions.
[Operator Instructions] I would now like to turn the conference over to Sachin Agarwal, Chief Executive Officer of Think Research. Please go ahead.
Good day to everyone who's joining us this morning. Also joining me on the call is our CFO, John Hayes, who is going to review the financial results in more details after I discuss some operational achievements during the Third Quarter of 2023.
Strength in our Software and Data division delivered a solid 71% organic growth in ARR coming out of our major platforms, which continues to be a really major focus of operations and now represents more than 55% of total revenue. That being said, unusual in our unexpected delays and cancellations within the clinical research division have disrupted the rapid process improvements that we've reported in the previous 3 Quarters, and have set back this forward progress in the current period.
We have acted quickly to mitigate the impacts of these divisions. In these particular divisions, while continuing to focus on growing our high-margin recurring revenue operations in order to regain our earnings momentum.
Now before I talk in more detail about our operational results, I just want to briefly touch base on what we're becoming and where we think we have some major long-term opportunities. With our ongoing product development, we have found ourselves very well positioned to help constrain health care systems everywhere to improve patient access to high-quality health care services, where and when they are needed.
As an industry leader in delivering knowledge-based digital health software and data solutions are evidence-based health care solutions support clinical decision-making improve access to services, enable practitioners to gain better capabilities and knowledge and help to standardize care in order to facilitate better health care outcomes. The company has gathered a significant amount of data by building its repository of knowledge through its digital solutions platforms and a group of companies.
With this data, we strive to be more essential to our clients and their clinicians every day. This is reflected in our recent performance in the Software and Data division, in our pipeline and I think more importantly, in the speed at which our pipeline is converted. Our customer base typically includes enterprise clients, hospitals, large pharmacy networks, health regions, health care professionals right up to and including provincial or state governance.
Think's Data and Software division licenses its solutions to around 16,000 facilities for more than 331,000 primary care, acute care and long-term care doctors, nurses and pharmacists that rely on the software content and data that we provide to support their practices.
Over 55% of our software and data revenue is recurring, driven by an increasing level of SaaS licensing, especially over the past few quarters. We expect to return recurring revenues -- we expect recurring revenues to grow at a faster rate than total revenue for the foreseeable future. For example, in Q3, our ARR grew organically by 71% compared to last year. The bottom line at least from Think's perspective, is that over 3 million patients in residents annually receive better care due to the essential data that think produces manages and delivers. Think also operates the Clinical Services division, which includes primary care clinic and a medical clinic providing private pay elective surgeries. In addition, the company collects and manages pharmaceutical and clinical trial data and its clinical research divisions. Although clinical research revenue is typically contracted and scheduled well in advance, we sometimes suffer from individual study outcomes that are beyond our control, so just when a study sponsor is not able to formulate their drug on the agreed time line or a sponsor gathers all the data they need from a smaller number of patients than originally planned.
For Q3, we had a significant decline in revenue in this division caused by trial study delays and a few cancellations. This surprised us. In response, during the quarter, we rationalized our services by closing our unprofitable St. Louis facility and are continuing to actively manage our expenses in this line of business.
Notwithstanding the results in Q3, we have a very strong backlog, which continues to give us confidence into the future. In the first 9 months of 2023, the key drivers of revenue growth were clinical software and data SaaS agreement with the province of Nova Scotia and midsized Pharmapod and LMS contracts.
In our Clinical Services division, we have focused on operational rationalization, since the beginning of the fiscal year to offset the impact of Ozempic on some of our revenue streams. During the reported quarter we also begin to rationalize clinical research operations, by closing our facility in St. Louis. We'll continue to leverage our talent and technology to deliver a robust and proven SaaS based digital front door solution to the market. As well as the new Saas based learning management system. We're also gaining significant market attraction with our Pharmapod solution, which provides medication, safety for the thousands of pharma-solution patients in North America. In addition, we are beginning to make progress towards bringing third-party software providers and third-party healthcare practitioners on to our key platforms. And that came to fruition in Nova Scotia. We also started to work in more elements of artificial intelligence in all of our software and data offerings. We see these initiatives as a ways to extend the solution and add more value to our relationships.
Our platform partners are very dear to gain reach to over 331,000 clinicians. Now I'd like to invite John Hayes, our CFO, to review the financial results in detail for the quarter, year-to-date. After we review the financials, I'm going to conclude with a bit of an outlook, which offer some thoughts on how we plan to evolve intentions and data service for clinicians. Over to you, John.
Today's results, along with all of our risk disclosures can be found in our MD&A and financial statements, which we posted to SEDAR earlier this morning. Now before I outline our results, I'd like to address the covenant breaches that we noted in our MD&A, financial statements and press release. We are actively addressing the breaches with our lenders, and they have been supportive.
Our lending partners see that Think has grown -- well, we've shown strong earnings momentum over the past several quarters, and we're making good progress towards our goal of consistent positive cash flows and that the downturn in Q3 was concentrated primarily in our clinical research business. Overall, we expect that our revenues will continue to grow. Although not in a straight line, so we don't forecast that every quarter will be better than the one before. And as this revenue grows, we expect that our cost base will grow at a slower rate leading to increasing financial returns over time. We also believe that our -- the predictability of our revenue is likely to improve because a larger portion of our data and software revenue will be recurring SaaS revenue and that's a lot easier to forecast.
Now let's turn to our revenue and business line contributions. For Q3 2022, we reported revenue of $19.2 million, an increase of $0.8 million or 4% compared to $18.4 million for the Third Quarter of 2022. Year-to-date revenue of $63.5 million was up $6.5 million or 11% from $57 million in the first 9 months of the prior year. The sequential $3.3 million or [ 15% ] decline in revenue for Q3 of this year compared to $22.5 million in Q2 related to a $3.2 million decline in Think's clinical research business, which was the result of Think's study sponsor clients rescheduling and canceling contracts during the quarter.
Now these delays and cancellations reflect specific study decisions for the study sponsors, and they were not related to Think's operations. Let's focus now on what management believes is the key evaluation for this business. Annual recurring revenue reached $24.6 million at the end of September, representing growth of 71% compared to $14.4 million at the end of September last year. This growth in ARR stemmed primarily from signing the minimum 5-year SaaS agreement with the province of Nova Scotia along with a steady stream of multiyear SaaS contract.
Think's net retention rate for ARR, defined as the total of retained revenue from existing customers over a 1-year period, was 105% on September 30. We're really encouraged that Think had essentially negative churn on a dollar comparison basis over the prior year. Gross profit of $8.7 million for Q3 was flat compared to $8.7 million in Q3 last year. While year-to-date gross profit of $31.8 million represents an increase of $4.6 million or 17% compared to gross profit of $27.2 million in the year-to-date in the prior year.
Gross profit was down 26% compared to the $11.7 million recorded in the immediately preceding quarter. The flat year-over-year performance and the quarter-over-quarter decline reflects the high fixed cost nature of cost of sales in Think's clinical research business. Gross margin of 45% in Q3 represents a decrease from 47% in Q3 2022 and again, due to the high fixed costs in the company's clinical research business. Gross margin was 50% in the year-to-date, an increase from 48% in the first 9 months of 2022 due to stronger performance in the first 6 months of this year.
Turning now to expenses. Operating expenses declined to $13.9 million in Q3 and $42.1 million in the year-to-date to this year, representing a decrease of 1% and 5% compared to the prior year period. As a percentage of revenue, operating expenses declined to 73% and 66% in the 3 and 9 months ended September 30 this year compared to 77% and 78% in the prior year periods due primarily to the cost optimization program executed by the company partially offset by additional investments in the development and marketing of think's flagship, DFD and LMS products.
One of the cost saving measures Think implemented this quarter was to forgo a review of the quarterly financial statements by Think's auditors at EY. In the current capital environment, this is the cost saving that some other TFXV companies use and it make sense for Think to do so, also. We continue to work closely with EY on our disclosures and have been very helpful to us as an ongoing audit clients despite not being engaged to review the quarter.
Adjusted EBITDA declined to a loss of $1.5 million for Q3 compared to an adjusted EBITDA loss of $0.7 million for Q3 in the previous year. Adjusted EBITDA for the current year-to-date was $0.9 million and improvement of $3.5 million over the adjusted EBITDA loss of $2.6 million in the comparative year-to-date period last year. The quarterly decline compared to 2022 was primarily due to the increased costs incurred in servicing new software and data services engagements, while costs associated with the clinical research line of business remained relatively level despite lower revenue.
The improvements compared to the prior year-to-date were due primarily to improvements in revenue, combined with operating cost reductions. The resulting EBITDA margin was a loss of 8% in Q3 and a profit of 1% in the year-to-date this year compared to a losses of 4% in Q3 last year and 4% in the first nine months of 2022.
Net loss was $3.8 million for Q3 and $9.7 million for year-to-date 2023 compared to $6.5 million and $20.1 million for the comparable periods in the prior year. The decrease in net loss when compared to last year was primarily due to a combination of higher revenue, lower operating costs and lower acquisition and restructuring costs partially offset by higher financing costs.
Looking now at our balance sheet. At the end of Q3 this year, the company had a working capital deficiency of $40.4 million as compared to a working capital deficiency of $39.3 million on December 31, 2022. Of this deficiency on September 30 this year, $27.8 million relates to current long-term debt owed to the Bank of Nova Scotia and Beedie Capital that has a term ending in September 2024. Because these balances become due in less than a year, they're now classified as current rather than long term, the same as our reporting in Q3 last year.
Both the Bank of Nova Scotia and Beedie Capital waived Think's covenant breaches up to the end of September. Management expects that the company will continue to have breaches of some of our covenants over the short term, including in the month of October. And we're going to continue to work with our lenders to seek waivers for breaches in the normal course for future periods, if required, and we expect our lenders to continue to be supportive of the company. However, as a result of these covenant concerns, the company's lenders have the option to demand repayment of their debt.
Although management does not expect the company's lenders to take this action, this possibility raises doubt about the company's ability to continue as a going concern. So we have repeated that disclosure in our financial statement and MD&A as we did at the end of Q2. To address these concerns, earlier this month on November 10, Think entered into an agreement with Beedie Capital to provide up to an additional $5 million of convertible debt under its $25 million facility.
Think is also actively engaging in discussions with our lenders regarding waivers for covenant concerns as well as amendments to future covenants and also maintaining focus on our previously announced cost optimization program. Although we can't guarantee a positive outcome based on preliminary conversations with Think's lenders and past experience management is optimistic for a successful resolution to these issues. And with that, I will turn the call back to Sachin.
So increasingly, Think Software and Data solutions are being seen as essential for constrained health care systems to improve patient access to high-quality health services, where and when they're needed. Our pipeline is full of these types of opportunities, and we are at late stages in some cases, very late stages of conversion on several. Our sales pipeline and backlog have never been stronger. We're very excited about the visibility into our Software and Data division revenue, which is currently over 55% of total revenue.
As we continue to scale this side of our business, we gain earnings leverage because these are our highest margin revenue streams as well. I'd like to just remind investors of what we're focusing on and why we expect to gain more leverage in our software and data business model. First, we're adding more users to current licenses by promoting adoption and usage. Year-to-date, we've increased our user base by more than 10%. There's a lot of room for us to increase users and usage of already deployed solutions. And as we add more users, our solutions become more essential to those licenses, which gives us pricing power and create switching barriers. And here are some of the other things that are happening right now.
Our new digital front door solutions are solving urgent challenges for patient access to adequate health services, including primary care and emergency care for health networks in governments. Our learning management systems are being used to fill urgent knowledge and learning gaps to all lines of health care delivery from hospitals to pharmacies and to help standardize care across delivery geographies for our clients. Our connectivity solutions are helping patients to get better referrals and practitioners to better manage their practices. And Pharmapod's adding hundreds of pharmacies quarter to keep patients safe for medication errors.
Finally, with the user base now exceeding 331,000 clinicians. We believe that direct user licensing could generate entirely new revenue streams. We're actively engaged with third-party software and service providers to leverage our platforms to add valuable features to these 331,000 and growing clinicians. Third parties are going live on our platform now, and our pipeline of potential service and software partners is growing.
You should expect some forthcoming announcements that will really bring this to life. As we transformed into a solutions-based organization focused on essential clinician data, we are excited with our annual growth rates in our path to profitability. Last quarter, we mentioned that due to the nature of some of our lines of business, we expect quarterly variances in performance due to project work that will show up in our results and delays or accelerations in the programs. That did hit us in Q2. We're actively addressing these concerns and these occurrences, and we've begun to rationalize lower performance and lumpier, less predictable lines of business.
In response to the delays in cancellations in the clinical research line of business, we rationalized our operations by closing a facility in St. Louis. Additionally, in the clinical service line of business, we closed a nonperforming clinic and sold off another one. We didn't announce that asset sale because, frankly, it's not meaningful enough to our operation. As a management team, we are committed to rightsizing our business, maximizing our margins, optimizing our costs and focusing on growing the highest quality revenue streams available, where we have competitive superiority.
We have a track record of making hard decisions. And I'll bring your attention back to the time, when we gained more than $11.3 million of synergies from acquisitions and cost optimizations. This quarter, we also gained around $2 million of cost savings by closing our St. Louis clinical research operation. We will continue to focus and optimize going forward, even as we dramatically grow revenue streams in the Software and Data division, include -- despite the lumpiness in revenue streams in our Clinical Research division, we're extremely excited about the prospects for Think over the coming quarters as we return to being a perpetually adjusted EBITDA-positive high-growth company, driven primarily by both steady and step function organic growth in our high-margin recurring revenue software and Data Solutions division.
That now concludes our prepared remarks. And operator, please open up the line for questions.
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Doug Taylor with Canaccord Genuity.
Yes. Obviously, the CRO, the Clinical Research segment, softness there caught us a bit off guard. So I got a question about what's going on there, starting with the percentage or the mix of which you describe as slippage and timing issues versus outright cancellation and then maybe helping us understand what you expect to recover in Q4 and beyond?
Yes. Great. Thanks, Doug. So when -- so it's a blend of both and John can perhaps give details as to the relative percentages he has it. But a great deal of it is slippage. And we often see, as you recall last year, we see Q3 as being a quarter, particularly over the summer months where we tend to see a bit of slippage into Q4 and beyond. In this case, some of the cancellation is not outright cancellation of an entire research contract. It's cancellation of a portion. So it does occur on occasion, where a clinical research client that achieved their objectives on a smaller number of patients than is anticipated for a research study, right? And that actually happened more than months for us. And so as a consequence, the size when we see a cancellation, we also mean the size of the study declines, right? Relative to what's expected and as a consequence, revenue is small. So we did have sort of a material amount of this, obviously, in Q3. We do expect some recovery into Q4, but perhaps the more important thing Dough is that we will have an even stronger backlog, in fact, like a very, very strong backlog exiting the year much stronger than we had at the start of the year, which in and of itself was stronger than it was the year before. So that gives us overall momentum confidence, but of course, within quarter-over-quarter, we have some variances. John -- go ahead John.
Only that I just draw your attention to some comments in the MD&A and the outlook section, where we say that we expect there was going to be a continued impact of these changes through the end of 2023 before normalizing in 2024, which aligns with Sachin's comments of, we've got pipeline coming in, we see some operational issues that we need to fix, right, which is in terms of scheduling studies and so on, we're getting on top of that.
And so in Q1, Q2, we think that we're going to be back on track some of these issues will have bled into Q4, but not as bad as Q3, I think, is what Sachin said, and that seems to be the way things are playing out.
And then maybe just to expand or put a finer point on that, you talked about the closing in the St. Louis facility driving incremental $2 million in annual cost saving. Like to what degree would that reflected in Q3 versus what we should expect in Q4 and just helping us to churn the paths back to breakeven and profitability?
Yes, sure. We closed that facility in late Q3, so the improvements will start in Q4, glimpse a little bit in Q3, like I think, our actual closing date was September 5, but then there are some additional costs that flow through in the last 3 weeks of September. So that should give you a sense of timing.
And so triangulating from everything you've said here, is it fair to assume you expect still to be below breakeven profitability then in Q4 and Q1, Q2 is where you expect to inflect again? Is that a fair understanding of what you're trying to say?
We're not going to give guidance at this time, Doug, but I would say that we expect Q4 to be overall -- is your question relating to the clinical research division?
And I'm talking about the whole -- the business as a whole.
Yes, Q4 is always a strong quarter for us and even with the weaker Clinical Research division in Q4 relative to what we had originally planned for. Q4 is generally a good quarter for us. So we expect it to be stronger, and we expect to continue growth, of course, into 2024.
The next question comes from Rob Goff with Echelon Wealth Partners.
My questions would be perhaps a bit further along the same lines as Doug's. Could you talk to the outlook for the CRO in Q4? Just how much visibility do you have on the Q4? And then in terms of giving us some sort of -- or helping us to manage our expectations for the new year, can you talk to where the pipeline might be at the end of the year and how that might compare year-over-year, i.e. is it up 10%. And this pipeline reflect minimums or expectations?
Okay. So in respect of the clinical research business, the pipeline or the backlog is significantly stronger year-end. We don't yet have a sense of exactly where we lend. We've got to lend to number of pipeline conversion items that may fall into November, December, and we've got -- they may also bleed over into Q1 of 2024. So we'll perhaps be able to provide more detail on that in the future. We do have a good amount of visibility into Q4 because, of course, we're now at the end of the November. So John -- but again, well, we're not providing guidance at this time. John, do you want to add anything to that?
No, I think you've covered it well. I mean, just in terms of backlog to your question, Rob. So we have enough studies to meet our revenue targets for Q4. The challenges we face is occasionally and this has been a surprising number in Q3, our studies sponsors saying, "Oh wait a second. We're not quite ready. " And so that causes us problems with our clinic scheduling. So I think that when you talk about it, is the backlog sort of a given like -- is it real backlog?
The answer is yes. There are some possible -- that's contracted. There are some opportunities and some outs like if there's -- the study has got 5 cohorts, and they get the data they need after 3, that getting canceled. But it's more in terms of the schedules moving and our inability to in short notice, plug hole on the schedule with other studies that are in the backlog. I hope that helps.
And you made comment in terms of the software side that there could be announcements within the forthcoming. Is there any additional color that you could provide on that?
Yes. So we've got a significant number of larger contracts that are in our pipeline. I think even we have talked about this at the end of Q2, at our Q2 reporting as well. Of course, with these very large contracts, they take time to convert. These are complex clients, and they have complex needs. And so timing can be a little bit uncertain. That being said, the pipeline is -- again, the pipeline is significant and it's quite mature. And these relate to our digital front door solutions as well as Pharmapod solutions. So we feel very, very positive about our pipeline heading into the end of the year and the start of 2024. Exact timing, always a little bit uncertain.
The next question comes from Jerome Dubreuil with Desjardins.
First one, again, on the St Loius closure there. Are there costs related to this decision that we have not seen in the quarter yet that are coming?
St. Louis is in Missouri, which is a right-to-work state, meaning that we do not have statutory severance. Yes, there were some costs. Those were almost all captured in Q3. There may be a little bit of wrap up in terms of moving some samples from St. Louis to Canada. We haven't quite got that all sorted out yet. But for the most part, the costs are already captured in Q3 other than some smaller amounts that were still nailing down.
Second 1 I have is you've talked extensively about the covenants in your disclosures, so that's appreciated. But I wonder, if there are some maybe softer covenants that you have in terms of the discussions with the banks or the lenders? What are they looking for going forward? Are there milestones that are set at this time?
I don''t completely understand your question, Jerome. Maybe you could?
No. Sure, no worries. So are there -- what basically -- what are the lenders looking at to assess your progress? How are they assessing your progress towards success?
Okay. So they track 3 things quite closely. The first 1 is minimum liquidity, so they want to make sure that we have enough cash to run the business. And so things got tight. We look to our partners at Beedie and they stepped in with some additional capital, which is -- and they did that as needed, and that's very supportive. That also makes the relationship with Scotiabank easier. So that's sort of the first covenant. They also do look at our -- the company's performance, right? They look at the adjusted EBITDA, and want to make sure that we're tracking towards the targets. So they do look at that one. And we do provide them with forecast and so they can see where we're headed. And that gives -- along with the backlogs and so on and the pipeline that gives some comfort that we're going in the right direction. And then finally, the overall debt relative to our gross profit is sort of the third main thing that they look at. And so, while the gross profit is going up, and that's good, the debt is also going up. And so that's something that we're all constantly keeping an eye on, because there are debt repayments that happen with Scotiabank around $500,000 per quarter starting in Q4. And so we just want to make sure that with our partners at both Scotiabank and Beedie that we have enough capital to run the business as we grow it because I think collectively, the group is pretty excited about the opportunities in front of us. and how the pipeline is converted, the ARR has grown and how much more it can grow in the coming quarters.
And then last 1 I have is on the Data Solutions side, on the digital front door. How do you feel you are alone in that process in terms of supplier, I'm sure your potential clients are assessing all their -- all of their options. But do you feel it's more of an assessment of how the product can be integrated? Or are there other clear competitors that you still have at this point for the potential contracts you may have?
Sorry, Jerome. Could you just repeat the last part of that, my phone cut out there. Could you just repeat the question?
Of course. So I'm wondering if you feel that you are alone in the process of winning the contracts in terms of digital front door or if you believe that there are other competitors that are very serious that could also win the contract? Or how you feel of your position in those RFPs?
Yes. In certain of the cases, we've already been notified that we are the winner of the RFP. And so there are just deal negotiations, inclusion of procurement, et cetera, et cetera, that are underway. In other cases, due to the unique nature of our offerings, we expect that there is no competition or that we are sole sourced in respect of those agreements. Those are digital front door for Pharmapod. We find that our product is in a league of it's own, particularly for retail pharmacy clients and large chains. So similarly, we tend to have little or no direct competition in respect of those procurements. Those procurements tend to be more private sector as opposed to public.
That's very helpful. And maybe just 1 follow-up on this one. You're already the winner of RFPs. This is not something -- this is something that you wait a little bit to disclose because it's not necessarily set in stone. Is that how you have operated to disclose those contracts in the past? Or are we just business as usual or waiting for all the process to be concluded before these are announced?
Yes, exactly. This is business as usual, John. So there's typically a time gap between the awarding of an RFP. And then there's, of course, this contract negotiations, there may be some privacy and security questionnaires and diligence that are then concluded and so on. So there's some process in the award of contracts and the signing of the -- and it's typically on the signing of a material agreement that we announced the actual contract.
This concludes the question-and-answer session. I would like to turn the conference back over to Sachin Aggarwal for any closing remarks. Please go ahead.
Thank you, everyone. And thank you for taking the time this morning. Of course, we've had a surprisingly -- a surprising downturn in respect of our clinical research division for Q3 of 2023. That being said, we do want you to turn your attention into the data and software division of the company, where we're seeing really, really remarkable organic growth we have very, very strong pipeline heading to the end of 2023 and into 2024. And we've got really robust gross margins. So we're very pleased, and we're very excited about what is yet to come for us in respect of the data and software division of the company. With that, thank you for taking the time, and we wish you all a good day.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.