Earnings Call Transcript - FORA Q2 2022

Operator, Operator

Greetings, and welcome to Forian Inc. Second 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. In particular, management reaffirms its estimates of the company’s full-year 2022 revenue outlook as of today. Estimating financial performance accurately for future performance is difficult as it relies on assumptions and internal estimates that may prove 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, may, will, should, future, propose, and variations of those words or similar 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 are being recorded. A copy of the recording, webcast, as well as the full transcript, copies of today's press release and SEC filings will be available at forian.com/investors. I’m now pleased to introduce the company's Executive Chairman, Max Wygod. Please go ahead.

Max Wygod, Executive Chairman

Good afternoon, everyone. And thank you for joining us today to review Forian's second quarter results. I am pleased to share that we had another fiscal quarter of strong results, which demonstrate that our differentiated products continue to resonate in the market, generating healthy demand. We are well underway in our plan to reach positive adjusted EBITDA in 2023 through our organic revenue growth and our focus on expense controls to improve incremental margins. We believe that we have now passed the inflection point where our revenue growth, particularly the growth in our healthcare information business, will outpace our total expenditures, resulting in attractive and growing incremental margins. We have several key drivers that provide us with confidence in achieving our full-year growth outlook and our trajectory into future years. First, we ended the quarter seeing continued strong market demand for our solutions. We have many large recurrent contracts that provide a strong backlog. We continue to penetrate into the life science market with new contracts and are starting to get meaningful renewals, expanding the way we work with our clients to help them deliver improved operating and business performance. Secondly, we have implemented more financial controls and discipline that we will continue to execute upon to make sure we are receiving long-term value from all investments. We believe we can achieve these results and grow our incremental margins, advancing the scalability of our business and the strength of our team. We expect the benefits of these actions to start being seen more meaningfully in our third and fourth quarter results. Finally, we do not feel like the recent macro inflationary trends will have an immediate negative impact on our business. We have multi-year contracts and mission-critical solutions that typically are not discretionary expenditures for our clients. Now for some key highlights from the quarter. First, overall second quarter revenue grew by 44% year-over-year, including healthcare information growth of 161% year-over-year. The company generated revenue of $6.5 million and a net loss and adjusted EBITDA loss of $5.4 million and $3.2 million, respectively. Now, I will hand it over to our CEO, Dan, for his remarks.

Daniel Barton, Chief Executive Officer

Thanks, Max. Good afternoon, everyone. I'm very pleased with the results in the second quarter. We delivered strong financial results in line with our expectations for the quarter and at the midpoint in the year are on track to achieve our full-year 2022 top-line revenue guidance of $25.5 million to $27 million. Max just shared with you our top-line financial results, and I will provide some additional color. Our subscription-based revenue continues to grow and drives contracted backlog. Most of the subscription revenue was driven by our higher-margin healthcare information products, which also improves our margin profile. Many of the new clients in the second quarter came from emerging biotech and emerging pharma markets. We now have the opportunity to expand our business into new markets that depend on first-party data, which will further strengthen our contracted backlog resulting in continuous sequential quarterly revenue growth. This is largely due to the fact that our differentiated data assets and analytic capabilities are designed such that they have multipurpose utility across industries. As discussed in previous quarters, our product investment peaked in the second quarter. Our R&D investments have strengthened our data factory, our healthcare information products, and our analytics capabilities. At the end of the quarter, we implemented the reduction of our R&D spend and our operational efficiencies going forward. The benefit of these reductions will be seen in the second half of 2022. Our plans in the coming quarters call for select, focused investments that will strengthen our product portfolio even further. As examples, we will continue to expand our Chronos healthcare information product with additional data to expand coverage and depth. We have plans to leverage our artificial intelligence and machine learning-based segmentation and targeting capabilities to power new services in adjacent markets. More to come on both of these efforts in the coming quarters. Our software products had a successful quarter in terms of new sales. The results were driven by strong sales in geographies that are expanding their medical programs and recreational. These gains were mostly offset by normal churn in this business line. As more states launch or expand their cannabis programs, this provides additional areas of opportunity for us. The U.S. cannabis regulatory landscape has been active recently. While we see the likelihood of Schumer's current bill passing as low, the momentum behind it provides potential improvements in incremental reform around other bills, like safe banking, that would benefit the industry. In addition, some of the more challenging aspects impacting the taxation of clients like 280E are starting to be addressed. While our business does not rely on regulatory change, we believe the legislative reforms will positively impact our business. Our focus for the remainder of 2022 is on strong high-margin revenue growth, driven by healthcare information products and capitalizing on newly issued licenses in several states. We do not see a slowdown in client purchasing based on the economy, as our products are mission-critical to our customers and the industries in which they operate. For the balance of 2022, we will continue to actively manage operating expenses to drive margin improvements. As such, we continue to expect to reach positive adjusted EBITDA in the second half of 2023, as discussed on previous calls. We continue to drive market penetration and offer customers value, unique offerings, and support to solve their complex needs. As a result, I am very proud of our team's work, and I continue to feel very confident in our opportunities. I will now turn the call over to Mike who will review our financial performance for the quarter.

Michael Vesey, Chief Financial Officer

Thanks, Dan. Today, I will provide an overview of Forian's financial results for the quarter ended June 30th, 2022. As previously disclosed in our 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 second 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 a detailed reconciliation of adjusted EBITDA to net loss. Our consolidated revenues of $6.5 million for the quarter were up $2 million compared to the same quarter last 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 revenue stream. As a result, we have seen sequential increases in our healthcare revenue in each quarter since we began reporting as a public company. Net loss for the second quarter decreased $1.5 million over the same quarter last year to $5.4 million primarily due to a $1 million decrease in stock compensation expenses, resulting from the Q1 2022 departure of the former CEO and CFO of Helix, who acted as advisors to the company, and lower general and administrative costs resulting from efficiencies implemented earlier in the year. Cost of revenues, research and development, and sales and marketing expenses increased $2.3 million in aggregate over the same quarter last year, which is slightly more than the $2 million in sales growth previously discussed, reflecting the ramp-up of our product development, customer support, and sales and marketing functions over the past year. As Max and Dan mentioned, we expect to be able to leverage our existing resources to drive revenue growth with a lower level of incremental expense growth going forward. As you'll note in our earnings release, operating expenses for the second quarter included $1.8 million of total stock-based compensation expense, and $600,000 of depreciation and amortization resulting from the Helix acquisition. Adjusted EBITDA, which excludes the stock compensation, depreciation, amortization, and certain other items for the second quarter, was negative $3.2 million, reflecting continued investment in our software offerings, development resources, and delivery and customer support teams. As discussed on our last earnings call, we plan to continue to invest in these areas through the first half of 2022, as we optimize our information and software offerings and build sales and support capabilities to support our growth. However, we also expect to begin to reap the benefits of operating leverage on these specific investments during the second half of 2022 and 2023, as we realize continued sequential revenue growth with a lower level of incremental expense growth going forward. 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, and severance expenses related to the aforementioned transfer development activities, and a gain on sale of assets related to our non-core security business. Now turning to our balance sheet. We ended the quarter with $23.9 million of cash and marketable securities, with no maturities of our convertible notes prior to September 2025. Regarding our financial outlook for 2022, we continue to expect revenue growth in 2022 of 51% to 60% over 2021, resulting in total revenues of $25.5 million to $27 million. We expect to be able to leverage the investments we are making to get our data factory and software platform running to scale, and to begin to realize the benefits of our revenue growth in the form of improved adjusted EBITDA loss during the second half of 2022, while achieving positive adjusted EBITDA contribution in the second half of 2023. We ended the quarter with $23.9 million in cash and marketable securities and plan to prudently manage our capital to achieve this goal. And with that, I will turn the call over to the operator who will open the line for questions.

Operator, Operator

Thank you. Our first question comes from Eric Martinuzzi with Lake Street. Please go ahead.

Eric Martinuzzi, Analyst

Congrats on the second quarter results. So, it's good to see the progress. I wanted to start with your thoughts on the macro environment. You talked about your customers being relatively insulated. I'm curious to know if you're seeing anything in the order flow as to clients maybe - and this is on the healthcare informatics side? Shorter terms of contracts people are willing to sign up for, or maybe shifting to a smaller trial of the data products.

Daniel Barton, Chief Executive Officer

Yeah. Hey, Eric. This is Dan. As Max mentioned, regarding the healthcare industry, we're not observing any decline in the duration or size of contracts. We're also beginning to notice an increase in the one-time usage of the data, which adds to the multi-year, multi-million subscription-based information product contracts we have. Additionally, with the BioTrack software, there’s no signs of a slowdown. Considering these two industries and the importance of medical prescriptions and alternative therapeutics for individual wellness, we did not experience a slowdown in the quarter, and we do not expect one in the future.

Eric Martinuzzi, Analyst

Okay. And then, I was pleased to see the reiteration of the revenue expectation for the year. Just wondering if we take a look at your pipeline, how does the pipeline of projects that your sales reps are working on compare to say 90 days ago?

Daniel Barton, Chief Executive Officer

We closely monitor our pipeline, as you can imagine. The sales activity in the second quarter, both in terms of revenue wins and the increased pipeline coverage, positions us well for the remainder of the year and gives us confidence in achieving the guidance we set at the start of the year.

Eric Martinuzzi, Analyst

Okay. Regarding the business, you described it as quite competent with sequential growth in Q3 compared to Q2, and improved leverage. Should we expect the EBITDA loss of $3.2 million in Q2 to indicate a smaller loss in Q3?

Michael Vesey, Chief Financial Officer

Hey, Eric. It's Mike. I think you're right. We mentioned on the last call that we increased our investment in R&D in the fourth quarter of last year and the first two quarters of this year, and most of that should be completed by July. Therefore, we expect to see those expenses decrease. As Dan mentioned, our pipeline remains strong, which will support continued growth in revenues. We anticipate that a larger percentage will contribute to EBITDA each quarter moving forward. As we've discussed before, our G&A expenses are likely to remain mostly flat. Our sales costs may rise slightly due to incremental revenue, but our R&D spending should begin to decline, G&A will stay flat, and this will positively impact EBITDA.

Eric Martinuzzi, Analyst

Okay. Let's shift over to the BioTrack side of the business. You talked about some incremental sales but also some churn. We've been looking forward to BioTrack 2.0 and the impact of that on the back half of the year. Any chance that we get something other than flat for the business based on traction with the new offering?

Daniel Barton, Chief Executive Officer

Yeah. No, we had really good sales, as I said, in geographies that are expanding, such as New Mexico. We anticipate as New York, Florida, New Jersey expand the license count, and Illinois, which recently got through litigation and released several POS and craft grow licenses, that we will see the same type of good market share gains in those select geographies where we're seeing expansion. The reality of this marketplace is it's a highly fragmented, highly competitive market in point-of-sale. New players are coming to market, so we see the churn continuing in line with historically what we see, which is going to offset some of the wins that we're going to have in those select geographies. So, we do see flat revenue for those reasons. The new wins are offset by the expected churn.

Eric Martinuzzi, Analyst

Okay. And then, lastly on the added capabilities in Chronos, could you speak to what they are? And then if the pipeline includes any of the new capabilities?

Daniel Barton, Chief Executive Officer

We're excited about the Chronos offering, Eric. We've seen existing clients buy at a higher level. We've seen new clients, especially in the emerging biopharma marketplace, start to buy. As I talked about last time, our client list is growing more broadly, especially with pharmacy distributors and medtech providers. So, the Chronos offering is doing very well. One example of a feature improvement is the addition of social determinants of health, which is a great addition for folks that are trying to understand not only what's happening in the marketplace but why it might be happening based on the lifestyle and wellness activities of certain cohorts of patients. We continue to see good things coming from the Chronos product line and the marketplace, and our clients are reacting appropriately.

Eric Martinuzzi, Analyst

Okay. I know I said that was the last one, but I do want to slide one more in. Your services revenue is down year-on-year and I think that's probably driven by the BioTrack side of the house, but just what should we expect for the back half of the year for services in comparison to the front half?

Michael Vesey, Chief Financial Officer

Hey, Eric. The services revenue is mostly our contract revenue for governments. So, I think the way to look at it is, it's lumpy, right? We expect it to average out for the year, similar to what we've had in the first half. But from quarter to quarter, it could swing $50,000 or $75,000 in either direction, just on the timing of the billings to the different government agencies.

Operator, Operator

One moment for our next question, please. Our next question comes from Scott Fortune with Roth. Please go ahead.

Scott Fortune, Analyst

Good afternoon and thank you for taking the questions. Congratulations on the quarter. You mentioned a lot of stickiness on the healthcare side, and obviously the BioTrack side. But just kind of an update on the cannabis industry side. You're seeing lots of headwinds these quarters, but I wanted to get a sense of demand and offerings of the Cannalytics side of things and the kind of second half outlook from your cannabis customers on the Cannalytics side would be helpful.

Daniel Barton, Chief Executive Officer

Yeah. Thanks. We are expecting Cannalytics to continue to grow in the back half of the year. We've recently launched and have seen decent uptake in these initial months as we have brought this product to market. What we're seeing is our BioTrack client footprint is very interested in adding the Cannalytics offering along with the operational software, the point-of-sale software. So, if you take a look at the Cannalytics offering, it provides really good insights into what's going on from a sales perspective, an inventory perspective, who's buying, when they're buying, what they're buying. We continue to go to market with this product and are seeing good results so far.

Scott Fortune, Analyst

Okay. I appreciate the color. And then, you mentioned you're seeing an upselling side on the one-time data purchases, kind of seeing growth in this environment. Can you expand or unpack that, continue to see that be a driver going forward here?

Daniel Barton, Chief Executive Officer

Yeah. I think that as I talked about, the larger multi-year, multi-million subscription-based projects continue to grow. The question on the one-timers, what we're seeing is especially in the emerging biopharma, they tend to buy on a one-time basis. But what happens after that is they start to see the value in their use cases and start to embed the information products into their workflows. Those one-timers often turn into larger multi-year subscriptions. So, it's a really nice benefit to have the core of the foundation of the large subscription-based contracts supplemented by the one-timers. As I said, they often turn into larger contracts with those customers.

Scott Fortune, Analyst

Appreciate that. Good to hear, obviously, in this environment stuff. And last one, if I could sneak one more in. Just you're investing in the R&D initiative and you've built that out. How do you weigh that going forward on the operating side and continue to add internal data improvements and the optimizing or improving the data sets you currently work with versus kind of newer incremental spend from that standpoint?

Daniel Barton, Chief Executive Officer

We're always working with our clients to make sure that the data products that we have and the information products and services that we offer are meeting their needs. Right now, we're getting very good leverage in the short term from the various different data assets that we have and the information products that we turn them into. With that said, if there's a specific use case or need or a complex analytic that one of our clients is trying to solve, we will work with them and add data as appropriate, especially if that data can be leveraged more broadly in the industry. But for now, in the short term, we feel like we're well-positioned with the data that we have.

Scott Fortune, Analyst

Thanks, Dan. I will jump back in the queue. Congrats again on the quarter.

Daniel Barton, Chief Executive Officer

Thank you.

Operator, Operator

One moment for our next question. Calling from the line of Investor, Don Engel. Please proceed.

Unidentified Analyst, Analyst

Good afternoon. I am hearing a lot about operations, but nothing regarding marketing. Considering that your stock trades thinly, what are your plans in that area? It currently feels as though you operate like a private company. I'm curious about your strategy for building a long-term base of shareholders. While you may not be able to approach large institutions, there are small boutiques and hedge funds that could be more stable investors. Who can address this question?

Max Wygod, Executive Chairman

Sure. Don, this is Max. We're doing several things on getting our name in front of the capital markets and new investors. First, we're working with different investment banks and analysts to pick up coverage. The more we can get in front of them, typically starting with some of the smaller funds given our market capitalization, the quicker we think we can get in front of their investor base. I think as you could see on this call, we have more questions each sequential call, so as we get more traction, we hope that will increase our investor base and increase those investing in the stock. We are a very thinly traded stock in general, and we realize this. We are working to get other institutions in, though it is a process for a larger institution to take a position in a low volume security. So, we are working with hedge funds, private wealth offices, and others who are likely to take positions in smaller cap and thinner traded securities. There are also conferences that we're starting to attend more and more post-COVID to get in front of these types of investors. So, it's a growing process. And it is top of mind, and we understand the importance of it. And then on the question on the market makers and the people viewing this online presentation, I want to note that there are different lines. People can dial in or they can look virtually. We typically have anywhere from 40 to 60 different individuals who view our earnings calls when you sum up the total list of those who dial in and those who come in virtually. And regarding the market makers, we traditionally have about four or five, but with the Russell rebalance, typically you have additional market makers come into the stock, which we believe happened and concluded, as previously mentioned. So, I can get back to you on our final number of actual market makers in a non-event-based transaction like the Russell 2000 rebalance.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

One moment for our next question, please. We have a question from the line of Eric Krause. Please proceed.

Unidentified Analyst, Analyst

Yeah. Mr. Krause. Your company has a surprisingly low flow of information that comes across to stockholders in terms of what's going on in the company. Can you explain that?

Max Wygod, Executive Chairman

Sure. This is Max Wygod. We provide a lot of disclosure and information in our quarterly Qs. In addition, we put a lot of information out on our websites. If there's certain information that you're looking for in particular, we're happy to answer here or have a subsequent call.

Unidentified Analyst, Analyst

Well, no, it's in between the quarterly meetings. Many companies announce this and that going on or this and that arrangements have been made, or this contract you just signed is a good one. There seems to be an absence of that kind of communication that one gets by press release and that's reported on your website.

Max Wygod, Executive Chairman

All right. Duly noted. We do announce major events, like when we won the Florida contract and other events that we think are material. We can make an active attempt to raise more awareness in our press releases, however, we've been trying, especially in the last quarter, to be heads down and execute. We typically don't release client arrangements and things of that sort. However, larger events where we're attending or events that reach a material threshold, we announce when they occur.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

Thank you. And with that, ladies and gentlemen, we end our Q&A and conference call and webcast for today. Thank you for participating, and you may now disconnect.