OptimizeRx Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC. Overview COVID-19 The full extent of the impact of the COVID-19 pandemic on our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict at the present time. In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, including orders to close all businesses not deemed “essential,” isolate residents to their homes or places of residence, and practice social distancing when engaging in essential activities. We anticipate that these actions and the global health crisis caused by COVID-19 will negatively impact business activity across the globe. While we have not observed any noticeable impact on our revenue related to these conditions in the recently completed fiscal year or quarter, or through the date of this filing, we cannot estimate the impact COVID-19 will have in the future if business and consumer activity decelerates across the globe. In March 2020, we enacted precautionary measures to protect the health and safety of our employees and partners. These measures include closing all offices, having employees work from home, and eliminating virtually all travel. While having employees work from home may have a negative impact on efficiency and may result in negligible increases in costs, it does not impact our ability to execute on our contracts or deliver our core services. We opened our offices on a voluntary basis in June 2021 and we relaxed certain travel restrictions at the same time. Our customers provide essential services in the healthcare industry and we believe that our digital communication technology is more important than ever in this environment. However, our revenue often comes from advertising or marketing budgets, and in a sustained economic downturn, those categories of spending may be cut. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our employees, customers, partners and stockholders. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our customers, partners, or vendors, or on our financial results. 13 Company Highlights through July 2021 1. Generated sales of $13.6 million for the quarter ended June 30, 2021, a 55% increase over the same period in 2020. 2. Generated sales of $24.9 million for the six months ended June 30, 2021, a 52% increase over the same period in 2020. 3. Achieved positive cash flow from operations of $1.9 million for the six months ended June 30, 2021. 4. Launched our new Real World Evidence (“RWE”) messaging solution and generated revenue in Q2 from two leading brands. 5. Raised an additional $70.7 million of capital in a public offering. 6. Enhanced our leadership team by adding a General Counsel and Chief Compliance Officer as well as elevated the Chief Technology Officer to report directly to the CEO. 7. Committed to an inclusion and diversity pledge. 8. Enhanced our patient engagement commercial team to further scale that portion of the business. Consolidated our technology centers of excellence in Zagreb, Croatia. 9. Completed all integration work for previous two acquisitions and paid last earnout payment related to acquisitions. 10. Maintained a no travel, virtual operational plan with a particular focus on training, open communication, and great work culture. Results of Operations for the Three and Six Months Ended June 30, 2021 and 2020 Revenues Our total revenue reported for the three months ended June 30, 2021 was approximately $13.6 million, an increase of 55% over the approximately $8.8 million from the same period in 2020. Our total revenue for the six months ended June 30, 2021 was approximately $24.9 million, an increase of 52% over the approximately $16.4 million from the same period in 2020. The increased revenue resulted from increases in sales in all our messaging products. Cost of Revenues Our cost of revenue percentage, comprised primarily of revenue share expense, decreased slightly as a percentage of revenue in the quarter ended June 30, 2021, as compared to the same period in 2020, while for the six month period ended June 30, 2021, it increased as a percentage of revenue. These changes were the result of solution mix, both as it relates to solutions itself and the partners through which the solutions are delivered. Additional discussion is included in the gross margin section below. Three Months Ended June 30 Six Months Ended June 30 2021 2020 2021 2020 Cost of Revenues % 41.0 % 41.4 % 43.0 % 42.0 % Gross Margin % 59.0 % 58.6 % 57.0 % 58.0 % 14 Gross Margin As reflected in the table above, our gross margin increased slightly in the quarter ended June 30, 2021 compared with the prior year, but decreased slightly for the six month period then ended. This is the result of solution mix. In general, there has been an increase in the percentage of activity flowing through our higher cost channels compared with a year ago. In the second quarter, this was offset by the launch of our RWE solution. Our RWE solution includes a much higher percentage of program design, which carries a higher margin than the delivery of the actual messages. We expect our gross margin to improve on a quarter over quarter basis for the balance of the year as our RWE solution expands and we continue to launch new solutions that have higher margins. Operating Expenses Operating expenses increased from approximately $6.2 million for the three months ended June 30, 2020 to approximately $7.7 million for the same period in 2021. Operating expenses increased from approximately $12.8 million for the six months ended June 30, 2020 to approximately $14.5 million for the same period in 2021. Overall, this increase results from our efforts to expand our product line and build out our organization to establish a strong base for current and future growth. Our expenses increased at a substantially lower rate than our revenues as a result of the operating leverage of our model. The detail of expenditures by major category is reflected in the table below. Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Salaries, Wages, & Benefits $ 3,906,796 $ 3,176,460 $ 7,487,612 $ 6,382,597 Stock-Based Compensation 897,038 780,670 1,604,191 1,635,183 Contractors and Consultants 486,577 560,991 785,963 1,022,236 Travel 48,925 13,111 58,755 287,622 Board Compensation 61,250 51,375 122,500 102,750 Professional Fees 448,598 186,834 769,818 672,304 Investor Relations 51,019 28,677 97,306 48,127 Advertising and Promotion 255,680 154,166 384,565 289,068 Technology Infrastructure Costs 256,291 218,079 469,570 399,791 Integration and Exclusivity Costs 244,600 207,973 563,158 415,946 Data Costs 257,484 72,942 545,396 124,554 Office, Facility, and Other 262,320 227,955 524,480 381,477 Depreciation and Amortization 527,958 520,794 1,054,138 1,040,463 Total Operating Expense $ 7,704,536 $ 6,200,027 $ 14,467,452 $ 12,802,118 The increase in operating expenses related to salaries, wages, and benefits and other human resource related costs is due to the expansion of our team to support additional growth. This increase is partly offset by the decrease in contractors and consultants, as we have brought functions in house that were previously performed by outsiders. We expect salaries, wages, and benefits to continue to increase on a quarter over quarter basis for the balance of the year due to the full impact of new hires already in place, as well as new hires in the pipeline. Travel expense is down significantly on a year to date basis as a result of travel restrictions due to the pandemic. We expect travel expense to increase significantly starting in the third quarter of the year due to relaxed travel restrictions and pent up demand for meetings and visits. 15 Professional fees increased significantly in the second quarter of 2021 compared with the prior year. With the assistance of an outside legal firm, we undertook a comprehensive governance review of our bylaws, board charters, equity compensation plan, and overall corporate policies. This review resulted in approximately $300,000 of expense in the second quarter. In the six month period ended June 30, 2021, this was partially offset by reduced audit fees as a result of our change in auditors, as well as a change in SEC rules that eliminated the need for a third-party opinion on our internal controls. We would expect professional fees to decrease from the second quarter level for the balance of the year. Investor relations expense increased due to the expansion of our communication efforts to reach retail investors and expand our shareholder base. Technology infrastructure costs increased due to continued investment in our operating systems to facilitate new products as well as the implementation of additional software products to increase efficiency and information dissemination. Data costs increased as we have purchased more data, primarily to aid in our selling effort and allow customers to target their messages more appropriately, thereby increasing our ability to charge premium prices for more highly targeted messages. Integration and exclusivity costs represent payments to partners for access and/or exclusivity and increased because of new agreements signed after the first quarter of 2020. These payments are usually made in lump sums and expensed over the term of the contracts. These expenses are an important part of our ability to expand our network. Our office, facility and other expense increased primarily because of increased activity. The largest single increase related to hiring expenses associated with expanding our team, both for new additions so far, as well as new hires scheduled for the future, including recruiter fees in some instances. All other variances in the table above are the result of normal fluctuations in activity. We expect our overall operating expenses to increase on a quarterly basis for the balance of the year as we further implement our business plan and expand our operations to grow the business in a very dynamic and active marketplace. However, we have established a strong team as a base to support growth and we are seeing the results of the investment in our team last year in our strong revenue growth this year. We do not expect human resource costs to increase as quickly as revenues, however we do expect to continue to add people to accelerate our growth and invest in future growth. Net Income (Loss) We had net income of $0.4 million for the three months ended June 30, 2021, as compared to a net loss of $1.1 million during the same period in 2020. We had a loss of approximately $0.3 million for the six months ended June 30, 2021, as compared to net loss of approximately $3.3 million during the same period in 2020. The reasons and specific components associated with the change are discussed above. Overall, the net income for second quarter of 2021 and decreased loss for the six month period resulted from the increased margin generated by our higher revenues, partially offset by the increased operating expenses. Liquidity and Capital Resources As of June 30, 2021, we had total current assets of $105.0 million, compared with current liabilities of $6.7 million, resulting in working capital of approximately $98.3 million and a current ratio of 15.7 to 1. This represents an increase from our working capital of approximately $23 million and current ratio of 3 to 1 at December 31, 2020. Our operating activities provided approximately $1.9 in cash flow during the six months ended June 30, 2021, compared with cash used of approximately $3.6 million in the same period in 2020. The cash provided in the 2021 period was the result of our net loss increased by noncash expenses, partially offset by working capital used in the reduction of liabilities. The cash used in the 2020 period was primarily the result of increased investment in working capital; in particular, we made a $2.0 million prepayment to a partner that was expensed over the balance of the year. 16 We used insignificant amounts in investing activities in both the six months ended June 30, 2021 and 2020. These investments related to purchases of equipment as well as investments related to the expansion of our network capabilities in our patient engagement solution. Our financing activities provided $71.8 million in the six months ended June 30, 2021, compared with cash used of approximately $1.1 million in the same period in 2020. We raised $70.7 million in a public offering of our common stock as well as generated $2.7 million from the issuance of shares related to the exercise of stock options. These were partially offset by the payment of $1.6 in earnout payments from a previous acquisition. We have no remaining earnout payments due in the future. Financing activities used approximately $1.3 million related to earnout payments from a previous acquisition, offset by $0.3 million from the issuance of shares related to the exercise of stock options. We do not anticipate the need to raise additional capital in the short or long term for operating purposes or to fund our growth plans. We are focused on growing our revenue, channel and partner network. However, as a company in a market that is active with merger and acquisition activity, we may have opportunities, such as for acquisitions or strategic partner relationships, which may require additional capital. We will assess these opportunities as they arise with the view of maximizing shareholder value. Critical Accounting Policies In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our accounting policies are discussed in the footnotes to our financial statements included in our annual report on Form 10-K for the year ended December 31, 2020; however, we consider our critical accounting policies to be those related to determining the amount of revenue to be billed, the timing of revenue recognition, calculation of revenue share expense, stock-based compensation, capitalization and related amortization of intangible assets, impairment of assets, and the fair value of liabilities. Recently Issued Accounting Pronouncements In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . ASU 2019-12 is intended to improve consistent application and simplify the accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance. ASU 2019-12 was effective for annual and interim reporting periods beginning after December 12, 2020, with early adoption permitted. The adoption of this standard did not have a material effect on our financial position, results of operations, or cash flows. Off Balance Sheet Arrangements As of June 30, 2021, there were no off-balance sheet arrangements. Item 3. Quantitative and Qualitative Disclosures about Market Risk We are not required to provide the information required by this Item. 17