| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Cautionary Statement for Forward-Looking Information
The following discussion of our financial condition and results of operations for the three and nine months ended September 30, 2021 and 2020, respectively, should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 31, 2021. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
Unless expressly indicated or the context requires otherwise, the terms “Forian”, the “Company”, “we”, “us”, and “our” refer to Forian Inc.
Overview
The Company was initially incorporated in Delaware on October 15, 2020 as a wholly owned subsidiary of Medical Outcomes Research Analytics, LLC (“MOR”), which was founded in Delaware on May 6, 2019, in connection with the Business Combination described below. On October 16, 2020, the Company entered into a definitive agreement with Helix Technologies, Inc. (“Helix”) and MOR, pursuant to which DNA Merger Sub, Inc., a wholly owned subsidiary of the Company (“Merger Sub”), merged with and into Helix, with Helix surviving the merger as a wholly owned subsidiary of the Company (the “Merger”). On March 2, 2021, the Company entered into a definitive agreement with the equity holders of MOR, pursuant to which the equity holders of MOR contributed their interests in MOR to the Company in exchange for shares of Company common stock (the “Contribution” and together with the Merger, the “Business Combination”). Following consummation of the Business Combination on March 2, 2021, the Company became the parent company of both Helix and MOR. Helix provides traceability and point of sale technology, analytics solutions and other products to customers within each vertical of the cannabis industry to help them improve the performance of their business.
The Company provides innovative software solutions, proprietary data and predictive analytics to optimize the operational and financial performance of our customers. Given the prior experience of our management team, our initial focus is on stakeholders within the healthcare and cannabis industries. However, we believe the application of our offerings across other verticals to enhance the transparency and efficacy of our customers’ relationships with their communities and customers is equally compelling.
The Company represents the unique convergence of proprietary healthcare, consumer and cannabis data, SaaS analytics, innovative data management capabilities and intelligent data science with a leading cannabis technology platform yielding the combined power to drive innovation and transparency across the industries we serve. In MOR, there was early recognition of the opportunity to bring the sophistication of proven data science technology and analytics solutions to a prominent cannabis technology platform provider, creating innovation in both the applications that are key to supporting customer success within the cannabis industry and to the data science powered insights that drive healthcare and other mature regulated growth industries. In Helix, there was realization that the capability set of a technology solutions provider within more evolved sectors together with the track record of the MOR management team offered a unique opportunity to enhance the value that Helix brings to its cannabis customers and to the industry generally.
The Company’s mission is to provide our customers with the best-in-class critical technology services through a single integrated Forian platform that enables our customers within the healthcare and cannabis industries to operate their businesses more safely, efficiently and profitably and to serve our customers and our customers’ stakeholders and constituencies more comprehensively.
A novel strain of coronavirus (COVID-19) was first identified in December 2019, and subsequently declared a pandemic by the World Health Organization. Our business has largely operated in a work-from-home environment since the inception of the pandemic and, as a result, has experienced limited business disruption to date. Our management team continues to focus on the highest level of safety measures to protect our employees. We have not experienced a material impact to our financial results to date, however, COVID-19 continues to present significant uncertainty in the future economic outlook for our customers and the markets we serve.
Financial Operations Overview
The following discussion sets forth certain components of our statements of operations as well as factors that impact those items.
Revenues
Revenues are derived from Information and Software Products, Services and Other Products. Information and Software revenues are generated from licensing fees for our proprietary information and software products. The Company recognizes revenues from Information and Software products as performance obligations under customer contracts are satisfied. Services revenues are primarily from contracts with government agencies and revenue is recognized upon completion of the various milestones within the contract. Other revenues are primarily from security monitoring services offerings and the provision of web marketing services. Contracts for these services have a stated transaction price for monthly services and are recognized as the services are provided.
Cost of Revenues
Cost of revenue is generated from direct costs associated with the delivery of our products and services to our customers. The cost of revenue relates primarily to labor costs, hosting and infrastructure costs and client service team costs. We record the cost of direct fulfillment as cost of revenue. Infrastructure and licensed data costs, which are shared across all projects or groups of projects, are not charged to cost of revenue.
Research and Development
Research and development expenses consist primarily of employee-related expenses, subcontractor and third-party consulting fees, data fees, and hosted infrastructure costs. We continue to focus our research and development efforts on adding new features and applications to our product offerings. Once our prototypes are proven, we begin to capitalize costs that qualify with the associated development rather than recording those costs as research and development.
Sales and Marketing
Sales and marketing expense is primarily salaries and related expenses, including commissions, for our sales, marketing and product management staff. Marketing program costs are also recorded as sales and marketing expense including advertising, market research, and events (such as trade shows, corporate communications, brand building, etc.). The Company plans to continue to invest in marketing and sales by expanding our selling and marketing staff, building brand awareness, attracting new clients and sponsoring additional marketing events. The timing of these marketing events will affect our marketing costs in any particular quarter.
General and Administrative Expenses
General and administrative expenses include salaries and benefits and other costs of departments serving administrative functions, such as executives, finance and accounting and human resources. In addition, general and administrative expense includes non-personnel costs, such as professional fees, legal fees, accounting and finance advisory fees and other supporting corporate expenses not allocated to cost of revenue, product and development or sales and marketing.
Depreciation and Amortization Expenses
Depreciation and Amortization relate to long lived assets used in our business. Depreciation expense relates primarily to furniture and equipment, computers and vehicles. Amortization expense relates primarily to identifiable intangibles of acquired companies.
Transaction Related Expenses
Transaction related expenses relate to the acquisition of Helix on March 2, 2021 and include professional, legal, accounting and finance advisory fees and other direct expenses.
Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates – which also would have been reasonable – could have been used. On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be 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.
Critical accounting policies and estimates are further discussed in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 31, 2021.
Results of Operations for the three and nine months ended September 30, 2021 and 2020
The following table summarizes our condensed results of operations for the periods indicated:
| | | For the Three Months Ended, | | | For the Nine Months Ended, | |
| | | September 30, 2021 | | | September 30, 2020 | | | September 30, 2021 | | | September 30, 2020 | |
| Revenues | | $ | 4,961,755 | | | | 159,504 | | | $ | 11,130,349 | | | $ | 334,921 | |
| Costs and Expenses | | | | | | | | | | | | | | | | |
| Cost of Revenues | | | 1,337,981 | | | | — | | | | 3,028,657 | | | | — | |
| Research and development | | | 2,612,184 | | | | 658,824 | | | | 6,059,948 | | | | 1,474,215 | |
| Sales and marketing | | | 1,088,203 | | | | 40,217 | | | | 2,864,213 | | | | 151,261 | |
| General and administrative | | | 6,673,723 | | | | 514,280 | | | | 16,035,981 | | | | 1,143,365 | |
| Depreciation and amortization | | | 598,565 | | | | 3,059 | | | | 1,381,637 | | | | 4,932 | |
| Transaction related expenses | | | — | | | | 105,128 | | | | 1,210,279 | | | | 195,634 | |
| Loss from operations | | $ | (7,348,901 | ) | | $ | (1,162,004 | ) | | $ | (19,450,366 | ) | | $ | (2,634,486 | ) |
Comparison of Three Months Ended September 30, 2021 and 2020
Revenues
Revenues for the three months ended September 30, 2021 were $4,961,755, which represented an increase of $4,802,251, compared to total revenue of $159,504 for the three months ended September 30, 2020. These revenues were primarily from Information and Software products. The increase is due to the inclusion of revenues from the Helix acquisition, which contributed 59% of the increase, and higher revenues from the Company’s Information products, which contributed 41% of the increase. Revenues from the Company’s Information products increased $1,986,699, or 1246%, compared to the three months ended September 30, 2020.
Cost of Revenues
Cost of revenues increased by $1,337,981 for the three months ended September 30, 2021, from $0 for the three months ended September 30, 2020. The increase related to direct costs related to the delivery of revenues. This increase was primarily from increased revenues of the Company’s Information and Software products. The increase is due to the inclusion of the Helix acquisition, which contributed 92% of the increase, and higher cost of revenues from the Company’s Information products, which contributed 8% of the increase.
Research and Development
Research and development expenses for the three months ended September 30, 2021 were $2,612,184, which represented an increase of $1,953,360 compared to total research and development expenses of $658,824 for the three months ended September 30, 2020. The increase is due to higher R&D expenses related to scaling the Company’s products, which contributed 92% of the increase, offset by 7% due to forfeitures of stock-based compensation awards, and the inclusion of the Helix acquisition, which contributed 15% of the increase.
Sales and Marketing
Sales and marketing expenses for the three months ended September 30, 2021 were $1,088,203, which represented an increase of $1,047,986 compared to total sales and marketing expenses of $40,217 for the three months ended September 30, 2020. The increase is due to higher expenses related to scaling the Company’s products, which contributed 65% of the increase, stock-based compensation expenses related to equity awards granted to new Company employees after we became a public company on March 2, 2021, which contributed approximately 10% of the increase, and the inclusion of the Helix acquisition, which contributed 25% of the increase.
General and Administrative
General and administrative expenses for the three months ended September 30, 2021 were $6,673,723, which represented an increase of $6,159,443 compared to general and administrative expenses of $514,280 for the three months ended September 30, 2020. The increase is due to higher expenses related to scaling the Company’s management organization, which contributed 38% of the increase, stock-based compensation expenses related to equity awards granted to key Helix employees and new Company hires after we became a public company on March 2, 2021, which contributed approximately 43% of the increase, and the inclusion of the Helix acquisition which contributed 19% of the increase.
Transaction Related Expenses
Transaction related expenses for the three months ended September 30, 2021 were $0, which represented a decrease of $105,128 compared to transaction related expenses of $105,128 for the three months ended September 30, 2020. These expenses related to the acquisition of Helix, which was completed on March 2, 2021.
Comparison of Nine Months Ended September 30, 2021 and 2020
Revenues
Revenues for the nine months ended September 30, 2021 were $11,130,349, which represented an increase of $10,795,428 compared to total revenue of $334,921 for the nine months ended September 30, 2020. These revenues were primarily from Information and Software products. The increase is due to the inclusion of revenues from the Helix acquisition since March 2, 2021, which contributed 65% of the increase, and higher revenues from the Company’s products, which contributed 35% of the increase. Revenues from the Company’s Information products increased $3,780,749 or 1129% compared to the nine months ended September 30, 2020.
Cost of Revenues
Cost of revenues increased by $3,028,657 for the nine months ended September 30, 2021 from $0 for the nine months ended September 30, 2020. The increase related to direct costs related to the delivery of revenues. This increase was primarily from increased revenues of the Company’s Information and Software products. The increase is due to the inclusion of the Helix acquisition since March 2, 2021, which contributed 89% of the increase, and higher cost of revenues from the Company’s Information products, which contributed 11% of the increase.
Research and Development
Research and development expenses for the nine months ended September 30, 2021 were $6,059,948, which represented an increase of $4,585,733 compared to total research and development expenses of $1,474,215 for the nine months ended September 30, 2020. The increase is due to higher R&D expenses related to scaling the Company’s products, which contributed 87% of the increase, and the inclusion of the Helix acquisition since March 2, 2021, which contributed 13% of the increase.
Sales and Marketing
Sales and marketing expenses for the nine months ended September 30, 2021 were $2,864,213, which represented an increase of $2,712,952 compared to total sales and marketing expenses of $151,261 for the nine months ended September 30, 2020. The increase is due to higher expenses related to scaling the Company’s products, which contributed 65% of the increase, stock-based compensation expenses related to equity awards granted to new Company employees after we became a public company on March 2, 2021, which contributed approximately 12% of the increase, and the inclusion of the Helix acquisition since March 2, 2021, which contributed 23% of the increase.
General and Administrative
General and administrative expenses for the nine months ended September 30, 2021 were $16,035,981, which represented an increase of $14,892,616 compared to general and administrative expenses of $1,143,365 for the nine months ended September 30, 2020. The increase is due to higher expenses related to scaling the Company’s management organization, which contributed 42% of the increase, stock-based compensation expenses related to equity awards granted to key Helix employees and new Company hires after we became a public company on March 2, 2021, which contributed approximately 40% of the increase, and the inclusion of the Helix acquisition since March 2, 2021, which contributed 18% of the increase.
Transaction Related Expenses
Transaction related expenses for the nine months ended September 30, 2021 were $1,210,279, which represented an increase of $1,014,645 compared to transaction related expenses of $195,634 for the nine months ended September 30, 2020. These expenses related to the acquisition of Helix, which was completed on March 2, 2021.
Non-GAAP Financial Measures
In this Quarterly Report on Form 10-Q we have provided a non-GAAP measure, which we define as financial information that has not been prepared in accordance with U.S. GAAP. The non-GAAP financial measure provided herein is earnings before interest, taxes, non-cash and other items (“Adjusted EBITDA”) presented on both a historical basis and a “pro forma” basis reflecting the acquisition of Helix as of the beginning of the periods presented. Adjusted EBITDA should be viewed as supplemental to, and not as an alternative for, net income or loss calculated in accordance with U.S. GAAP (referred to below as “Net loss”).
Adjusted EBITDA is used by our management as an additional measure of our Company’s performance for purposes of business decision-making, including developing budgets, managing expenditures and evaluating potential acquisitions or divestitures. Period-to-period comparisons of Adjusted EBITDA help our management identify additional trends in our Company’s financial results that may not be shown solely by period-to-period comparisons of net income. In addition, we may use Adjusted EBITDA in the incentive compensation programs applicable to some of our employees in order to evaluate our company’s performance. Our management recognizes that Adjusted EBITDA has inherent limitations because of the excluded items, particularly those items that are recurring in nature. In order to compensate for those limitations, management also reviews the specific items that are excluded from Adjusted EBITDA, but included in net income, as well as trends in those items contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
We believe that the presentation of Adjusted EBITDA is useful to investors in their analysis of our results for reasons similar to the reasons why our management finds it useful and because it helps facilitate investor understanding of decisions made by management in light of the performance metrics used in making those decisions. In addition, as more fully described below, we believe that providing Adjusted EBITDA, together with a reconciliation of net loss to Adjusted EBITDA, helps investors make comparisons between our Company and other companies that may have different capital structures, different effective income tax rates and tax attributes, different capitalized asset values and/or different forms of employee compensation. However, Adjusted EBITDA is not intended as a substitute for comparisons based on net loss. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to the specific definition being used and to the reconciliation between such measures and the corresponding U.S. GAAP measures provided by each company under applicable SEC rules.
The following is an explanation of the items excluded by us from Adjusted EBITDA but included in net loss:
| • | Depreciation and Amortization. Depreciation and amortization expense is a non-cash expense relating to capital expenditures and intangible assets arising from acquisitions that are expensed on a straight-line basis over the estimated useful life of the related assets. We exclude depreciation and amortization expense from Adjusted EBITDA because we believe that (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and (ii) such expenses can vary significantly between periods as a result of new acquisitions and full amortization of previously acquired tangible and intangible assets. Accordingly, we believe that this exclusion assists management and investors in making period-to-period comparisons of operating performance. Investors should note that the use of tangible and intangible assets contributed to revenue in the periods presented and will contribute to future revenue generation and should also note that such expense will recur in future periods. |
| • | Stock-Based Compensation Expense. Stock-based compensation expense is a non-cash expense arising from the grant of stock-based awards to employees. We believe that excluding the effect of stock-based compensation from Adjusted EBITDA assists management and investors in making period-to-period comparisons in our Company’s operating performance because (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and (ii) such expenses can vary significantly between periods as a result of the timing of grants of new stock-based awards, including grants in connection with acquisitions. Additionally, we believe that excluding stock-based compensation from Adjusted EBITDA assists management and investors in making meaningful comparisons between our Company’s operating performance and the operating performance of other companies that may use different forms of employee compensation or different valuation methodologies for their stock-based compensation. Investors should note that stock-based compensation is a key incentive offered to employees whose efforts contributed to the operating results in the periods presented and are expected to contribute to operating results in future periods. Investors should also note that such expenses will recur in the future. |
| • | Interest Expense. Interest expense is associated with the Notes entered into on September 1, 2021 in the amount of $24,000,000. The Notes are due on September 1, 2025 and accrued interest at an annual rate of 3.5%. We exclude interest expense from Adjusted EBITDA (i) because it is not directly attributable to the performance of our business operations and, accordingly, its exclusion assists management and investors in making period-to-period comparisons of operating performance and (ii) to assist management and investors in making comparisons to companies with different capital structures. Investors should note that interest expense associated with the Notes will recur in future periods. |
| • | Investment Income. Investment income is associated with the level of marketable debt securities and other interest-bearing accounts in which we invest. Interest and investment income can vary over time due to a variety of financing transactions, changes in interest rates, cash used to fund operations and capital expenditures and acquisitions that we have entered into or may enter into in the future. We exclude interest and investment income from Adjusted EBITDA (i) because these items are not directly attributable to the performance of our business operations and, accordingly, their exclusion assists management and investors in making period-to-period comparisons of operating performance and (ii) to assist management and investors in making comparisons to companies with different capital structures. Investors should note that interest income will recur in future periods. |
| • | Foreign Currency Related Gains. Foreign currency related gains result from foreign currency transactions and translation gains and losses related to Engeni SA, a subsidiary of the Company acquired as part of the acquisition of Helix. We exclude foreign currency related gains from Adjusted EBITDA because these items are not directly attributable to the performance of our business operations and, accordingly, their exclusion assists management and investors in making period-to-period comparisons of operating performance. Investors should note that foreign currency related gains or losses are expected to recur in future periods. |
| • | Other Items. We engage in other activities and transactions that can impact our net loss. In the periods being reported, these other items included (i) change in fair value of warrant liability which related to warrants assumed in the acquisition of Helix; (ii) transaction related expenses which consist of professional fees and other expenses incurred in connection with the acquisition of Helix; (iii) other income which consists of profits on marketable security investments; and (iv) loss on impairment of goodwill. We exclude these other items from Adjusted EBITDA because we believe these activities or transactions are not directly attributable to the performance of our business operations and, accordingly, their exclusion assists management and investors in making period-to-period comparisons of operating performance. Investors should note that some of these other items may recur in future periods. |
| • | Income tax expense. MOR was organized as a limited liability company until the completion of the Helix acquisition. As a result, we were treated as a partnership for federal and state income tax purposes through March 2, 2021, and our taxable income and losses are reported by our members on their individual tax returns for such period. Therefore, we did not record any income tax expense or benefit through March 2, 2021. We expect to incur a net loss for financial reporting and income tax reporting purposes for this year. Accordingly, any benefit for federal and state income taxes benefit has been entirely offset by a valuation allowance against the related deferred tax net assets. We exclude the income tax expense from Adjusted EBITDA (i) because we believe that the income tax expense is not directly attributable to the underlying performance of our business operations and, accordingly, its exclusion assists management and investors in making period-to-period comparisons of operating performance and (ii) to assist management and investors in making comparisons to companies with different tax attributes. |
Limitations on the use of non-GAAP financial measures
There are limitations to using non-GAAP financial measures because non-GAAP financial measures are not prepared in accordance with U.S. GAAP and may be different from non-GAAP financial measures provided by other companies.
The non-GAAP financial measures are limited in value because they exclude certain items that may have a material impact upon our reported financial results. In addition, they are subject to inherent limitations as they reflect the exercise of judgments by management about which items are adjusted to calculate our non-GAAP financial measures. We compensate for these limitations by analyzing current and future results on a U.S. GAAP basis as well as a non-GAAP basis and also by providing U.S. GAAP measures in our public disclosures.
Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure to evaluate our business and to view our non-GAAP financial measures in conjunction with the most directly comparable U.S. GAAP financial measures.
The following tables reconciles the specific items excluded from U.S. GAAP metrics in the calculation of non-GAAP metrics for the periods shown below:
| | | Historical (Unaudited) | | | Historical (Unaudited) | |
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2021 | | | 2020 | | | 2021 | | | 2020 | |
| Revenues: | | | | | | | | | | | | |
| Information and Software | | $ | 4,489,177 | | | $ | 159,504 | | | $ | 9,661,826 | | | $ | 334,921 | |
| Services | | | 269,753 | | | $ | — | | | | 858,400 | | | | — | |
| Other | | | 202,825 | | | $ | — | | | | 610,123 | | | | — | |
| Total revenues | | $ | 4,961,755 | | | $ | 159,504 | | | $ | 11,130,349 | | | $ | 334,921 | |
| | | | | | | | | | | | | | | | | |
| Net loss | | $ | (6,876,472 | ) | | | (1,161,915 | ) | | $ | (18,502,315 | ) | | $ | (2,628,690 | ) |
| | | | | | | | | | | | | | | | | |
| Depreciation & amortization | | | 598,565 | | | | 3,059 | | | | 1,381,637 | | | | 4,932 | |
| Stock based compensation expense | | | 2,627,506 | | | | 8,561 | | | | 6,245,679 | | | | 20,331 | |
| Change in fair value of warrant liability | | | (251,778 | ) | | | — | | | | (746,605 | ) | | | — | |
| Loss on impairment of goodwill | | | — | | | | — | | | | — | | | | — | |
| Transaction related expenses | | | — | | | | 105,128 | | | | 1,210,279 | | | | 195,634 | |
| Interest and investment income | | | (1,903 | ) | | | (89 | ) | | | (4,601 | ) | | | (5,796 | ) |
| Interest expense | | | 79,422 | | | | — | | | | 101,325 | | | | — | |
| Foreign currency related gains | | | (298,170 | ) | | | — | | | | (298,170 | ) | | | — | |
| Other income | | | — | | | | — | | | | — | | | | — | |
| Income tax expense | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| Adjusted EBITDA | | $ | (4,122,830 | ) | | | (1,045,256 | ) | | $ | (10,612,771 | ) | | $ | (2,413,589 | ) |
Three Months ended September 30, 2021 (Historical)
Adjusted EBITDA
Adjusted EBITDA for the three months ended September 30, 2021 was a loss of $4,122,830 compared to a loss of $1,045,256 for the three months ended September 30, 2020, an increase of $3,077,574. The increase is primarily due to investments in product development, customer service, infrastructure and human capital and the inclusion of the Helix acquisition since March 2, 2021.
Nine Months ended September 30, 2021 (Historical)
Adjusted EBITDA
Adjusted EBITDA for the nine months ended September 30, 2021 was a loss of $10,612,771 compared to a loss of $2,413,589 for the nine months ended September 30, 2020, an increase of $8,199,182. The increase is primarily due to investments in product development, customer service, infrastructure, and human capital and the inclusion of Helix.
| | | Pro Forma (Unaudited) | | | Pro Forma (Unaudited) | |
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2021 | | | 2020 | | | 2021 | | | 2020 | |
| Revenues: | | | | | | | | | | | | |
| Information and Software | | $ | 4,489,177 | | | $ | 2,559,049 | | | $ | 11,290,503 | | | $ | 7,343,422 | |
| Services | | | 269,753 | | | | 330,000 | | | | 1,092,089 | | | | 981,455 | |
| Other | | | 202,825 | | | | 173,508 | | | | 756,665 | | | | 810,396 | |
| Total revenues | | $ | 4,961,755 | | | $ | 3,062,557 | | | $ | 13,139,257 | | | $ | 9,135,273 | |
| | | | | | | | | | | | | | | | | |
| Net loss | | $ | (6,876,472 | ) | | $ | | ) | | $ | (21,265,019 | ) | | $ | | ) |
| | | | | | | | | | | | | | | | | |
| Depreciation & amortization | | | 598,565 | | | | 585,371 | | | | 1,802,865 | | | | 1,770,219 | |
| Stock based compensation expense | | | 2,627,506 | | | | 563,599 | | | | 6,408,622 | | | | 1,635,203 | |
| Change in fair value of warrant liability | | | (251,778 | ) | | | (67,039 | ) | | | 469,619 | | | | (682,717 | ) |
| Loss on impairment of goodwill | | | — | | | | 39,963,107 | | | | — | | | | 41,333,085 | |
| Transaction related expenses | | | — | | | | 199,697 | | | | 2,096,054 | | | | 375,507 | |
| Interest and investment income | | | (1,903 | ) | | | 5,630 | | | | (4,601 | ) | | | (2,459 | ) |
| Interest expense | | | 79,422 | | | | | | | | 106,181 | | | | 195,136 | |
| Foreign currency related gains | | | (298,170 | ) | | | — | | | | (298,170 | ) | | | | |
| Other income | | | — | | | | — | | | | (55,006 | ) | | | — | |
| Income tax expense | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| Adjusted EBITDA | | $ | (4,122,830 | ) | | $ | | ) | | $ | (10,739,455 | ) | | $ | | ) |
Three Months ended September 30, 2021 (Pro Forma)
Revenues
Pro forma revenues for the three months ended September 30, 2021 were $4,961,755, which represented an increase of $1,899,198 compared to total revenue of $3,062,557 for the three months ended September 30, 2020. The increase was primarily due to growth in the number of customers utilizing the Company’s Information products.
Adjusted EBITDA
Pro forma Adjusted EBITDA for the three months ended September 30, 2021 was a loss of $4,122,830 compared to a loss of $1,162,844 for the three months ended September 30, 2020, an increase of $2,959,986. The increase is primarily due to investments in product development, customer service, infrastructure and human capital.
Nine Months ended September 30, 2021 (Pro Forma)
Revenues
Pro forma revenues for the nine months ended September 30, 2021 were $13,139,257, which represented an increase of $4,003,984 compared to total revenue of $9,135,273 for the nine months ended September 30, 2020. The increase was primarily due to growth in the number of customers utilizing these products.
Adjusted EBITDA
Pro forma Adjusted EBITDA for the nine months ended September 30, 2021 was a loss of $10,739,455 compared to a loss of $2,024,019 for the nine months ended September 30, 2020, an increase of $8,715,436. The increase is primarily due to investments in product development, customer service, infrastructure and human capital.
Liquidity and Capital Resources
Since the Company’s inception in 2019, most of the Company’s resources have been devoted to scaling its research and development, sales and marketing, and management infrastructure. The Company’s operations have been financed primarily from the cash proceeds received from equity issuances. The Company expects to continue to fund its operations and future acquisitions through a combination of cash flow generated from operating activities, debt financing, and/or additional equity issuances. To date, the Company has generated limited revenues from the licensing of information products and the Company has incurred losses and generated negative cash flows from operations since inception. On September 1, 2021, the Company raised proceeds of $24 million through the sale of 3.5% convertible promissory notes maturing on September 1, 2025. As of September 30, 2021, the Company’s principal source of liquidity was aggregate cash and marketable securities of $35.9 million.
Cash Flows
The following table summarizes selected information about our sources and uses of cash and cash equivalents for the periods presented:
| | | For the Nine Months Ended, | |
| | | September 30, 2021 | | | September 30, 2020 | |
| Net cash used in operating activities | | $ | (13,190,329 | ) | | $ | (2,355,893 | ) |
| Net cash (used in) provided by investing activities | | | (223,207 | ) | | | 121,230 | |
| Net cash provided by financing activities | | | 36,283,171 | | | | 3,315,700 | |
| Net increase in cash and cash equivalents | | $ | 22,869,635 | | | $ | 1,081,037 | |
Net Cash Used in Operating Activities
Net cash used in operating activities increased by $10,834,436 for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was primarily the result of scaling up the Company’s operations from the initial start-up phase.
Net Cash Used in Investing Activities
Net cash used in investing activities increased by $344,437 for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. This is the result of an increase in additions to property and equipment of $605,874, and an increase in the purchase of marketable securities of $22,014,459 offset by an increase in the sale of marketable securities of $20,964,919 and cash acquired of $1,310,977 as part of the Business Combination.
Net Cash Provided by Financing Activities
Net cash provided by financing activities increased by $32,967,471 for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was primarily related to the cash proceeds received from the Company’s equity issuance in April 2021 and the convertible notes issuance in September 2021.
Off Balance Sheet Arrangements
The Company does not have relationships with other organizations or process any transactions that would constitute off balance sheet arrangements.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). The update removes separation models for (i) convertible debt with a cash conversion feature and (ii) convertible instruments with a beneficial conversion feature. Under ASU 2020-06, these features will be combined with the host contract. ASU 2020-06 does not impact the accounting treatment for conversion features that are accounted for as a derivative under Topic 815. The update also requires the application of the if-converted method to be used for convertible instruments and the effect of potential share settlement be included in the diluted earnings per share calculation when an instrument may be settled in cash or shares. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The amendment is to be adopted through either a fully retrospective or modified retrospective method of transition, only at the beginning of an entity’s fiscal year. Early adoption is permitted. The Company has elected to early adopt the standard as of January 1, 2021 using the modified retrospective method of transition. The Company evaluated the terms of its debt and concluded that the instrument does not require separation and that there were no other derivatives that required separation. As a result, there is no equity component and the Company recorded the convertible note as a single liability within long-term debt on its condensed consolidated balance sheet. The Company applies the if-converted method for calculation of diluted earnings per share for its convertible debt instruments.
The Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its financial statements.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer (who is also the Company’s principal executive officer), and our chief financial officer (who is also the Company’s principal financial and accounting officer), to allow for timely decisions regarding required disclosure. In accordance with Rules 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as of September 30, 2021, which is the end of the three-month period covered by this Quarterly Report on Form 10-Q.
The Company identified material weaknesses in our internal controls over financial reporting as disclosed in Item 9A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC on March 31, 2021. Our chief executive officer and chief financial officer therefore concluded that our disclosure controls and procedures as of the fiscal quarter ended September 30, 2021 remain ineffective to the extent of the material weaknesses identified.
We are committed to remediating the control deficiencies that gave rise to the material weaknesses, certain of which were the result of the evaluation of MOR as the financial successor to Helix for the twelve-months ended December 31, 2021. Our management is responsible for implementing changes and improvements to internal control over financial reporting and for remediating the control deficiencies that gave rise to the material weaknesses we identified. With oversight from our Audit Committee, we have taken steps to remediate the internal control deficiencies and expect to implement further remediation actions during 2021 that we believe will improve our internal control over financial reporting. Certain improvements to our internal control over financial reporting occurred as a consequence of the Merger (e.g., additional finance resources and protocols employed by Helix), supplemented by the Company’s engagement of outside firms to assist the Company with additional accounting expertise and with the review of our internal controls framework for the Company’s compliance with the Sarbanes Oxley Act of 2002, as amended. Until the remediation actions are fully implemented and the operational effectiveness of related internal controls is validated through testing, the material weaknesses noted above will continue to exist.
Notwithstanding the identified material weaknesses, the Company’s management, including our chief executive officer and chief financial officer, has determined, based on the procedures we have performed, that the consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial condition, results of operations and cash flows at September 30, 2021 and for the periods presented in accordance with U.S. GAAP.
Changes in Internal Control Over Financial Reporting
Our remediation efforts for material weaknesses previously reported were ongoing during the three months ended September 30, 2021, as described in Item 9A of our 2020 Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC on March 31, 2021. There were no other material changes in our internal control over financial reporting that occurred during the nine months ended September 30, 2021 that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
Part II — OTHER INFORMATION
From time to time we may be involved in claims that arise during the ordinary course of business. For any matters where management currently believes it is probable that the Company will incur a loss and that the probable loss or range of loss can be reasonably estimated, the Company records reserves in the consolidated financial statements based on its best estimates of such loss. In other instances, because of the uncertainties related to either the probable outcome or the amount or range of loss, management is unable to make a reasonable estimate of a liability, if any. Regardless of the outcome, litigation can be costly and time consuming, and it can divert management’s attention from important business matters and initiatives, negatively impacting our overall operations. Although the results of litigation and claims cannot be predicted with certainty, we do not currently have any pending litigation to which we are a party or to which our property is subject that we believe to be material, except for the below.
Kenney, et al. v. Helix TCS, Inc.
On July 20, 2017, one former employee of Helix filed a lawsuit in the United States District Court for the District of Colorado alleging violations of the Fair Labor Standards Act on behalf of himself and other employees. The plaintiff seeks damages for Helix’s alleged failure to compensate employees appropriately for the overtime hours they worked as purported “non-exempt” employees. The matter has been conditionally certified as a collective action and the court has authorized the plaintiff to send notice and consent forms to putative class members. Notice and consent forms have been sent. The period for returning consent forms has ended. No decision has been made on the merits of the claim. The case is in the early stages of discovery. The Company will vigorously defend the claims in the lawsuit.
Audet v. Green Tree International, et. al.
On February 14, 2020, John Audet filed a complaint in 15th Judicial Circuit in and for Palm Beach County, Florida against multiple parties, including Green Tree International (“GTI”), an indirect subsidiary of Forian, claiming that he owned 10% of GTI. We believe the lawsuit is wholly without merit and will vigorously defend the claims in the lawsuit. The case is in the process of discovery. A hearing on motions for summary judgement is expected after January 17, 2022, with trial on an eight-week trial docket scheduled to begin on January 17, 2022.
Helix Stockholder Lawsuits
Beginning on February 16, 2021, four lawsuits were filed by purported Helix stockholders (captioned Dillion v. Helix Technologies, Inc., et al., No. 1:21-cv-01365 (filed February 16, 2021 in the United States District Court for the Southern District of New York) (the “Dillion Complaint”); Baros v. Helix Technologies, Inc., et al., No. 1:21-cv-01425 (filed February 17, 2021 in the United States District Court for the Southern District of New York) (the “Baros Complaint”); Anderson v. Helix Technologies, Inc., et al., No. 1:21-cv-00464 (filed February 17, 2021 in the United States District Court for the District of Colorado) (the “Anderson Complaint”); and Robinson v. Helix Technologies, Inc., et al., No. 1:21-cv-00484 (filed February 18, 2021 in the United States District Court for the District of Colorado) (the “Robinson Complaint” and, together with the Dillion Complaint, the Anderson Complaint and the Baros Complaint, the “Stockholder Complaints”)). The Stockholder Complaints were filed against (a) Helix and (b) the members of Helix’s board of directors (the “Individual Defendants”) and the Baros Complaint was also filed against Forian, MOR and Merger Sub. The Stockholder Complaints generally allege that the defendants violated Section 14(a) of the Exchange Act, by, among other things, failing to disclose material information in the Proxy Statement regarding the sales process, reconciliation of certain financial projections regarding Helix certain inputs underlying Management Planning, Inc.’s financial analysis, and potential conflicts of interest of involving Helix’s insiders. The Stockholder Complaints also allege the Individual Defendants (and the Baros Complaint alleges Forian, Merger Sub and MOR) violated Section 20(a) of the Exchange Act as controlling persons who had the ability to prevent the Proxy Statement from being materially false and misleading. The Stockholder Complaints seek, among other things, an injunction against the consummation of the transactions contemplated by the Merger Agreement and an award of costs and expenses, including a reasonable allowance for attorneys’ and experts’ fees. Despite seeking an injunction in the complaints, none of the plaintiffs followed up with a motion to enjoin the transactions. As of October 25, 2021, the four Stockholder Complaints have been dismissed and are no longer pending. Specifically, On March 11, 2021, the Robinson Complaint was voluntarily dismissed. On September 7, 2021, the Baros Complaint was voluntarily dismissed. On September 13, 2021, the Dillion Complaint was voluntarily dismissed. On October 25, 2021, the Anderson Complaint was voluntarily dismissed.
Nykiah Thomas v. Security Consultants Group, LLC d/b/a Helix TCS, Helix Technologies, Inc. and Shamson Sundra
On July 16, 2021, Nykiah Thomas, individually and on behalf of M’Seiya Thomas, a minor, filed a complaint in the District Court, City and County of Denver, Colorado, against Security Consultants Group, LLC d/b/a Helix TCS and Helix Technologies, Inc., subsidiaries of Forian, and Shamson Sundra, a former employee of Security Consultants Group, LLC, alleging negligence in the performance of security services in connection with a school shooting at STEM School Highlands Ranch that occurred on May 7, 2019. The case is in the early stages of discovery and the parties have agreed to voluntary mediation scheduled for December 13, 2021. Trial is scheduled to begin on August 8, 2022. The Company will vigorously defend the claims in the lawsuit.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
See our Current Report on Form 8-K filed on September 2, 2021 for a description of our unregistered sale of convertible notes.
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Mine Safety Disclosures |
Not applicable.
None.
| Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Company’s Form S-4 (Reg. No. 333-250938) filed with the SEC on November 24, 2020, as amended on December 31, 2020, January 19, 2021, February 1, 2021 and February 9, 2021). |
| Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 of the Company’s Form S-4 (Reg. No. 333-250938) filed with the SEC on November 24, 2020, as amended on December 31, 2020, January 19, 2021, February 1, 2021 and February 9, 2021). |
| Form of Note Purchase Agreement, dated September 1, 2021, by and between the Registrant and each of the investors and the affiliate. |
| Employment Agreement, dated as of September 2, 2021, by and between the Company and Michael Vesey (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the SEC on September 2). |
| Transition and Release Agreement, dated as of September 2, 2021, by and between the Company and Clifford Farren (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed with the SEC on September 2). |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document ). |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| 101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document. |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
* Filed herewith.
+ Indicates management contract or compensatory plan.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 15, 2021.
| | FORIAN INC. |
| | | |
| | By: | /s/ Daniel Barton |
| | | Daniel Barton |
| | | Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
| | By: | /s/ Michael Vesey |
| | | Michael Vesey |
| | | Chief Financial Officer |
| | | (Principal Financial Officer and Principal Accounting Officer) |
