Earnings Call Transcript - FORA Q3 2022

Operator, Operator

Greetings, and welcome to Forian Inc. Third Quarter 2022 Financial Results Conference Call and Webcast. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal comments and webcast. Participating today from Forian are Max Wygod, Executive Chairman and Co-Founder; Daniel Barton, Chief Executive Officer; and Michael Vesey, Chief Financial Officer. Before we begin, I would like to remind you that management’s remarks today may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements due to a variety of important factors including those discussed in the risk factors section of the company’s annual report on Form 10-K filed with the SEC on March 31, 2022. Estimating financial performance accurately for future performance is difficult as it assumes assumptions and internal estimates that may turn out to be incorrect and is based on plans and circumstances that may change. There is, therefore, a significant risk that actual results could differ materially from the outlook provided today. Any forward-looking statements made on the call today represent the company’s view as of this date and the company undertakes no obligation to update them except as required by law. Words such as estimates, projected, expect, anticipate, forecast, planned, intend, believe, seek, may, will, should, future, propose, and variations of these words or similar expressions or versions of such words or expressions are intended to identify forward-looking statements. These statements include, but are not limited to statements regarding future growth, anticipated performance and prospects. Today's presenters will also refer to certain non-GAAP financial measures on our call, such as adjusted EBITDA, which the company believes may be important to investors to assess its operating performance and should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of the comparable GAAP metrics can be found in today's press release and webcast, both of which are available on the company's website. Those numbers are unaudited and any statement regarding the company's anticipated performance may be subject to change including as a result of risks related to changes in the cannabis and healthcare market and risks related to the impact of the COVID-19 pandemic and the events in Ukraine. Today's call and webcast is being recorded. A copy of the recording and webcast, as well as the full transcript and copies of today's press release and SEC filings will be available at florian.com/investors. I'm now pleased to introduce the company's Executive Chairman, Max Wygod. Please go ahead.

Max Wygod, Executive Chairman

Good afternoon and thank you all for joining us today to review Forian's 2022 third quarter financial and business performance. Forian provides innovative software solutions, proprietary data, and predictive analytics to optimize the operational, clinical, and financial performance of our healthcare, cannabis, and government customers. I am pleased to share that we had a strong fiscal quarter with improvements in all key metrics. Strong demand continues for innovative and business-critical products in the markets we serve, and as a result, we are delivering an attractive combination of organic growth and improved profitability. We are still on course in our plan to reach a positive adjusted EBITDA in 2023. Our healthcare information business continues to be our key growth driver as we sign more important wins with new customers and expand existing customer revenue through the cross-sell of additional offerings. Our team has industry-leading deep domain expertise, and we take a customer-focused approach in partnering with our clients from the initial sale to support, ensuring we create value for our customers and drive growth for Forian through upsell and cross-sell successes. These qualities combine to position us to continue to grow our healthcare base. With the multitude of data assets, we have the size, scope, and coverage of data to compete for increasingly large contracts, and our unique technology and delivery capabilities enable us to provide accurate and timely offerings. Our BioTrack business competes in a very different and competitive market, but its scale and offerings, along with the number of government contracts, identify it as a leader in this space. As additional states award new contracts, the entire legal US cannabis market can continue to grow responsibly. We believe as new states come online, we are well positioned to maintain and grow BioTrack as a leading software provider to the legal cannabis industry. Now for some key highlights from the quarter. First, overall third quarter revenue grew by 45% year-over-year, including healthcare information growth of 101%. In the third quarter, the company generated revenue of $7.2 million and net loss of $5.1 million, and adjusted EBITDA loss of $2.1 million, respectively.

Daniel Barton, Chief Executive Officer

Thanks Max. I am very pleased with our third quarter 2022 results. We had strong revenue growth driven primarily by our healthcare information business. As Max mentioned, top-line revenue grew by 45% year-over-year to $7.2 million. As we discussed on last quarter's call, we continued to execute against our cost optimization efforts, which netted improvement in net loss and adjusted EBITDA of $1.9 million and $2 million this quarter, respectively. We're on track to exceed the high end of our revenue guidance for the year of $27 million. Additionally, we expect both strong revenue growth and improved operational cost to continue, setting the foundation to be adjusted EBITDA positive in the second half of 2023. As I mentioned, healthcare information revenue continues to demonstrate strong growth. Market demand has not slowed, showing the value our clients see in and derive from Forian information and analytics products. We offer our clients the optionality of open, closed, and hybrid information products and analytics on a subscription basis or one-time sale. Almost all of our business is subscription-based. Clients use our information products for commercial, clinical, operational, and payer-based analytics to help drive and measure their sales and marketing initiatives, inform R&D, track product outcomes and optimize operations. Our healthcare information pipeline continues to grow. We saw the highest revenue in a quarter to date at $4.3 million, which represented 101% year-on-year growth. We expect the growth to continue due to the fact that sales are strong and we signed the highest amount of total deal, total contract value in any quarter to date. This brings our contracted backlog to $29.3 million, covering 2023 and beyond. If you were to include contracted backlog with termination rights, the total backlog amount is substantially greater than the $29.3 million. We continue to diversify our client portfolio in the third quarter, and in Q3, we nearly surpassed our entire annual net new number of contracts. New client penetration in life sciences continues with another significant win in the quarter, and we are now upselling and cross-selling to existing customers. As our platform is industry agnostic, we have the opportunity to offer products and services in other healthcare verticals, further enhancing our ability to grow this business. Our brand continues to expand across life sciences as well. Clients have powered their research efforts, leveraging Forian products and our expertise in hybrid data and analytics and power our Chronos offering. Research into the rare disease spinal muscular atrophy in infants informed by Chronos will be presented at the S4 New York Conference in November. The Chronos hybrid healthcare information product is a best-in-class solution when it comes to studying patient longitudinal disease burden in all disease states, and particularly in the rare disease arena, offering substantial growth opportunity for our business. BioTrack commercial software sales were positive in the quarter, building on the momentum of the second quarter. These sales were driven in states that have expanded the number of available licenses, which demonstrates our ability to generate new sales as states launch their medical marijuana programs or expand into adult use. I have mentioned before the nature of this marketplace being competitive and fragmented. We are experiencing our share of anticipated churn with our commercial software. New sales are covering the churn, leading to flat growth in the business. One important thing to note is that our cultivator and manufacturer customer base for BioTrack has a strong footprint as we deliver high-value software to these non-retail customers in addition to our retail customers. The strong footprint provides additional opportunity as new geographies start to open their recreational programs like New York. We also have opportunities for expanding incremental business in key growth markets such as Illinois, Florida, Mississippi, and Georgia, to name a few. We do not expect any federal regulation changes in the near term, although we continue to hear along with everyone else that some form of banking legislation is on the horizon. While we are not impacted either way based on federal regulation, any movement on passing banking or other cannabis legislation would be good for everyone in the cannabis industry. As I spoke about last quarter, we are implementing our cost improvement initiatives and prioritizing our investment spending to capitalize on near-term growth opportunities such as healthcare information products, BioTrack commercial, and state government business. In summary, we are well-positioned based on the foundation we have put in place this year. Subscription revenue is growing nicely, driving very good year-on-year and sequential quarterly revenue growth. Our cost management initiatives are well underway, and we are focused on supporting near-term revenue opportunities. We are confident in hitting the high end of our guidance range for revenue this year and being cash flow positive in the second half of 2023. It has been a great effort by the entire team. I'll turn it over to Mike to run through the financials in detail.

Michael Vesey, Chief Financial Officer

Thanks Dan. Today I will provide an overview of Forian's financial results for the quarter ended September 30th, 2022. As previously disclosed in SEC filings, Forian completed the business combination of Helix Technologies and MOR Analytics on March 2nd, 2021. As a result, the operations of Helix are included in our financial results beginning March 2nd, 2021. The press release issued today presents Forian's third quarter 2021 and 2022 financial results on a GAAP basis. As in prior quarters, we've also reported adjusted EBITDA, which management uses as a measure to track the performance of the business. As noted, the press release and these presentation materials included detailed reconciliation of adjusted EBITDA to net loss. Our consolidated revenues of $7.2 million for the quarter were up $2.2 million compared to the prior year. As in prior quarters, our year-over-year growth was driven by healthcare information products. In many cases, our information contracts provide for continuing information deliverables to our customers over a multi-year period, providing a predictable recurring revenue stream. As a result, we've seen sequential increases in our healthcare revenue in each quarter since we began reporting as a public company, resulting from both new customers and sales of new products to our existing customer base. The net loss for the third quarter decreased $1.9 million from the same quarter last year to $5.1 million. The decrease in net loss was primarily driven by a decrease in loss from operations of $2.4 million, partially offset by changes in other income items such as interest, foreign currency-related impacts, and mark-to-market adjustments for warrants. The improvement in loss from operations resulted from the $2.2 million of recurring revenue growth discussed above, and a $200,000 reduction in operating expenses resulting from lower G&A expenses, partially offset by increased spending on research, development, and sales expenses when compared to the same quarter last year. As you will note in our earnings release, operating expenses for the third quarter included $2 million of stock-based compensation expense and $800,000 of depreciation and amortization. Adjusted EBITDA, which excludes the stock compensation depreciation, amortization, and certain other non-cash costs for the third quarter was negative $2.1 million compared to negative $4.1 million in the same quarter last year, and negative $3.2 million in the previous quarter this year. As discussed on our previous earning calls, we expected to begin to reap the benefits of operating leverage during the second half of 2022 and 2023 as we realized continued sequential revenue growth with a lower level of incremental expense growth going forward. Our third quarter results have provided some early validation of that thesis. As noted earlier, a reconciliation of our net loss to adjusted EBITDA along with an explanation of the reconciling items is included in today's earnings release. As in prior periods, the primary adjustments reconciling net loss to adjusted EBITDA are stock compensation, depreciation and amortization, non-recurring transaction expenses, mark-to-market adjustments related to outstanding warrants, foreign currency-related impacts, and certain other non-recurring transactions. Turning to our balance sheet. We ended the quarter with $20.6 million of cash and marketable securities with no maturities to our convertible notes prior to September 2025. Regarding our financial outlook for 2022, we are on track to exceed the high end of our previously issued guidance with revenue growth of 60% over 2021 or $27 million, and expect to be able to realize the benefits of our revenue growth in the form of improved adjusted EBITDA loss during the second half of 2022, while achieving a positive adjusted EBITDA contribution in the second half of 2023.

Operator, Operator

And with that, I'll turn the call over to the operator who will open the line for questions.

Unidentified Analyst, Analyst

In the last quarter, you mentioned that this quarter would be a turning point. Can you explain why that is? What are the details?

Max Wygod, Executive Chairman

Hi, Mr. Engel. Last quarter we mentioned that this quarter would be a turning point because it's the first time we see revenue growth significantly contributing to our bottom line, alongside an increase in incremental capital and operating expenditures. We are benefiting from our internal efforts, which include both cost-saving strategies and highly profitable revenue growth.

Unidentified Analyst, Analyst

I have a second question. Thank you. What is the market size and the industries you will work in within the analytical business? I see you mentioning BioTrack and the perceptions versus reality in the cannabis market, and my intuitive feeling is that people view cannabis, which has been unsuccessful in the marketplace. Is this affecting your stock, which appears to not be improving?

Max Wygod, Executive Chairman

Sure. We view our healthcare information business as part of the global informatics sector. Much of our competition, as outlined in our 10-K, comes from various divisions of IQVIA or ICON, among others, allowing us to serve a wide array of players in the healthcare and life sciences fields. This is a multibillion-dollar industry, and our 10-K references estimates suggesting it could reach about $70 billion by 2025. However, we believe we are still relatively small in this vast market and have significant potential for unrestricted growth, which contrasts sharply with the cannabis industry that relies heavily on regulatory changes for substantial growth.

Operator, Operator

One moment for our next question, please. And it's from Eric Martinuzzi with Lake Street Capital. Please go ahead.

Eric Martinuzzi, Analyst

Yes. Curious to know, last quarter you mentioned an uptick in one-time data purchases, especially in emerging biopharma. Did we see those translate into longer-term contracts this quarter?

Daniel Barton, Chief Executive Officer

Yeah. This is Dan. We actually saw both. We did see an uptick in the one-time sales in the healthcare information side. And in some cases, those one-time sales did turn into a longer-term subscription deal and in some cases, the one-time sale was sufficient for that particular use case for the client. Although, we continue to talk with those clients and would think that as their needs become greater or more long-term, we're going to be able to also support those clients with subscription-based contracts.

Eric Martinuzzi, Analyst

Okay. And then obviously you guys are very confident in the current tempo of the business. You've raised your revenue range to better than the high end of the $27 million for the year. But did you see any signs of weakness in the macro from any particular customer groups whether it be emerging biopharm or hospitals, clinical care studies?

Daniel Barton, Chief Executive Officer

Currently, we are not noticing any decline in demand from our healthcare clients. The sector is experiencing growth, and as Max pointed out, the informatics segment is also expanding. Our products and services offer valuable support, enabling our clients to compete more effectively in a competitive market through their investment in our offerings. Clients can enhance their understanding of products, consumers, and markets, leading to better design and measurement of their sales and marketing campaigns, as well as informing their research and development efforts. These capabilities make our services highly valuable to our clients and assist them in gaining a competitive edge today.

Eric Martinuzzi, Analyst

Okay. And then on the BioTrack side of the business, you talked about improved sales there. Any change in the retention level for your installed base?

Daniel Barton, Chief Executive Officer

No, not really. I think that we have seen, as I said, really positive momentum stemming from the second quarter forward into this quarter. And we're seeing what we anticipated from the level of churn that we expected based upon the fact that this market is extremely competitive and fragmented. So, we do see our share of churn, but we also have the new sales, which allows this business to continue to be a flat business at this point.

Eric Martinuzzi, Analyst

Okay. Could you please provide me with the number for the contracted but unbilled?

Michael Vesey, Chief Financial Officer

At the end of the quarter, it was a little about $29 million. This amount represents the non-cancelable portion of contracts that we have in-house. Many of those contracts include option years, which we do not count as contracted future obligations from a GAAP perspective, but we believe they present opportunities for renewals of option years beyond the contracted backlog. Additionally, they provide good sales opportunities to return to those customers and offer additional services. We are beginning to see some of our current sales situations where we are going back to customers we signed maybe a year or two ago to add these additional services.

Eric Martinuzzi, Analyst

I've only got three quarters' worth of history on the contract, but unbilled, that $29 million looks like a record number for me, is that correct?

Michael Vesey, Chief Financial Officer

Yeah. It's definitely a record because we pretty much started from a standing start in end of 2020. End of December, it was around $20 million. Okay. So it's $29 million now and …

Eric Martinuzzi, Analyst

Okay. Okay. And then lastly, the operating expense side is actually a little bit below the expectations I had modeled, and I didn't have the revenue number as high as you guys actually achieved. Was there any one-time items, benefits that were you recognized in the quarter, or is this a number that we can project forward?

Michael Vesey, Chief Financial Officer

There's nothing significant to report. There's always some variability from quarter to quarter across our lines, particularly in our G&A expenses due to seasonal factors related to when certain work is completed. However, there’s nothing substantial to highlight. For your reference, our R&D spending has been increasing, but now it has stabilized, and we anticipate it will decline in Q4. Additionally, you might have noticed our CapEx spending was about $800,000 last quarter, but it will be negligible this quarter. Overall, R&D expenditure is decreasing and we expect to start seeing benefits from our investments made over the past year. Our goal is to move towards a nearly cash flow positive status, which will allow us more flexibility to make discretionary investments in the future.

Eric Martinuzzi, Analyst

Okay. I have one more question about cash. You ended the quarter with $20.6 million in cash. Where do you anticipate ending the year in terms of cash?

Michael Vesey, Chief Financial Officer

I don't think we're going to provide a projected cash figure because working capital can vary. You'll notice our receivables increased slightly at the end of this quarter, and we collected that at the beginning of October. What I'm saying is we expect a strong December, which means our working capital will increase while our cash will decrease. However, when you look at our overall EBITDA burn decreasing from $2 million currently, we shouldn't need a lot of cash beyond that in the long term. Essentially, when you project this over several quarters, our EBITDA burn will represent the decrease in cash until we reach breakeven.

Eric Martinuzzi, Analyst

Got it. Well, congrats on the strong quarter and the healthy outlook.

Michael Vesey, Chief Financial Officer

Thank you.

Operator, Operator

And with that, ladies and gentlemen, we conclude our third quarter call. Thank you for participating, and you may now disconnect.