OptimizeRx Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This Quarterly Report on Form 10-Q contains statements that relate to future events and expectations and, as such, constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements, other than purely historical information, including estimates, projections, statements relating to our strategies, outlook, business and financial prospects, business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements.” 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. 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. Forward-looking statements are not guarantees of future performance. Although OptimizeRx believes that the expectations reflected in any forward-looking statements are based on reasonable assumptions, these expectations may not be attained and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks, uncertainties and changes in circumstances, many of which are beyond OptimizeRx’s control. Forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those expressed in or implied by such forward-looking statements due to a variety of factors, including: disruptions to our business or the business of our customers due to the global pandemic; the inability to support our technology and scale our operations successfully, developing and implementing new and updated applications, features and services for our portals may be more difficult and expensive and take longer than expected; dependence on a concentrated group of customers; inability to maintain contracts with electronic prescription platforms, agreements with electronic prescription platforms and electronic health record systems being subject to audit; inability to attract and retain customers; inability to comply with laws and regulations that affect the healthcare industry; competition; developments in the healthcare industry; inability to manage growth; inability to identify suitable acquisition candidates, complete acquisitions or integrate acquisitions successfully; inability to attract and retain key employees; economic, political, regulatory and other risks arising from our international operations; inability to protect our intellectual property; cybersecurity incidents; reduction in the performance, reliability and availability of our network infrastructure; lack of a consistent active trading market for our common stock; increases in costs due to inflation and other adverse economic conditions; decreases in customer demand due to macroeconomic factors; and volatility in the market price of our common stock. The risks and uncertainties included here are not exhaustive. 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, including our Annual Report on Form 10-K for the year ended December 31, 2021. Moreover, we operate in a rapidly changing and competitive environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors. Further, it is not possible to assess the effect of all risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report. Overview OptimizeRx Corporation is a digital health technology company incorporated in the State of Nevada. We enable care-focused engagement between life sciences organizations, healthcare providers, and patients at critical junctures throughout the patient care journey. Connecting over 60% of U.S. healthcare providers and millions of their patients through an intelligent technology platform embedded within a proprietary point-of-care network, OptimizeRx helps patients start and stay on their medications. 14 COVID-19 The COVID-19 pandemic did not have a material net impact on our financial statements during the nine months ended September 30, 2022. However, there still remains uncertainty around the COVID-19 pandemic. The Company cannot reasonably predict the ultimate impact of the COVID-19 pandemic, including the extent of any impact on our business, results of operations and financial condition, which will depend on, among other things, the duration and spread of the pandemic (including the emergence and spread of new COVID-19 variants and resurgences), actions taken by governmental authorities and others in response to the pandemic, the acceptance, safety and efficacy of vaccines, and global economic conditions. Seasonality In general, the pharmaceutical brand marketing industry experiences seasonal trends that affect the vast majority of participants in the pharmaceutical digital marketing industry. Many pharmaceutical companies allocate the largest portion of their brand marketing to the fourth quarter of the calendar year. As a result, the first quarter tends to reflect lower activity levels and lower revenue, with gradual increases in the following quarters. We generally expect these seasonality trends to continue and our ability to effectively manage our resources in anticipation of these trends may affect our operating results. Key Performance Indicators We developed a number of key performance indicators in the first quarter of the year and intend to monitor these going forward, to evaluate our business, measure our performance, identify trends affecting our business and make strategic decisions. Average revenue per top 20 pharmaceutical manufacturer. Average revenue per top 20 pharmaceutical manufacturer is calculated by taking the total revenue the Company recognized through pharmaceutical manufacturers listed in Fierce Pharma’s “The top 20 pharma companies by 2020 revenue” over the last twelve months, divided by the total number of the aforementioned pharmaceutical manufacturers that our solutions helped support over that time period. The Company uses this metric to monitor its progress in “landing and expanding” with key customers within its largest customer vertical and believes it also provides investors with a transparent way to chart our progress in penetrating this important customer segment. During the first nine months of 2022, numerous macroeconomic factors converged that resulted in our customers slowing their rate of spend, particularly for large and/or new implementations, which we believe temporarily elongated sales cycles with the top 20 pharmaceutical manufacturers that were existing customers. Rolling Twelve Months Ended September 30, 2022 2021 Average revenue per top 20 pharmaceutical manufacturer $ 2,188,300 $ 2,516,515 Percent of top 20 pharmaceutical manufacturers that are customers. Percent of top 20 pharmaceutical manufacturers that are customers is calculated by taking the number of revenue generating customers that are pharmaceutical manufacturers listed in Fierce Pharma’s “The top 20 pharma companies by 2020 revenue” over the last 12 months, which is then divided by 20—which is the number of pharmaceutical manufacturers included in the aforementioned list. The Company uses this metric to monitor its progress in penetrating key customers within its largest customer vertical and believes it also provides investors with a transparent way to chart our progress in penetrating this important customer segment. The increase from twelve months ended September 30, 2021 to the twelve months ended September 30, 2022 reflects continued penetration into this core customer base and reflects one new top 20 pharma customers in the twelve months ended September 30, 2022. Rolling Twelve Months Ended September 30, 2022 2021 Percent of top 20 pharmaceutical manufacturers that are customers 95 % 90 % 15 Percent of total revenue attributable to top 20 pharmaceutical manufacturers. Percent of total revenue attributable to top 20 pharmaceutical manufacturers is calculated by taking the total revenue the Company recognized through pharmaceutical manufacturers listed in Fierce Pharma’s “The top 20 pharma companies by 2020 revenue” over the last twelve months, divided by our consolidated revenue over the same period. The Company uses this metric to monitor its progress in “landing and expanding” with key customers within its largest customer vertical and believes it also provides investors with a transparent way to chart our progress in penetrating this important customer segment. During the first nine months of 2022, numerous macroeconomic factors converged that resulted in our customers slowing their rate of spend, particularly for large and/or new implementations, which we believe temporarily elongated sales cycles with the top 20 pharmaceutical manufacturers that were existing customers. Rolling Twelve Months Ended September 30, 2022 2021 Percent of total revenue attributable to top 20 pharmaceutical manufacturers 66 % 79 % Net revenue retention. Net revenue retention is a comparison of revenue generated from all customers in the previous twelve-month period to total revenue generated from the same customers in the following twelve-month period (i.e., excludes new customer relationships for the most recent twelve-month period). The Company uses this metric to monitor its ability to improve its penetration with existing customers and believes it also provides investors with a metric to chart our ability to increase our year-over-year penetration and revenue with existing customers. The retention rate in the twelve months ended September 30, 2021 was higher as a result of unplanned disruption to the industry caused by the COVID-19 pandemic. Our customers shifted funds previously designated for in-person events to digital marketing throughout the initial quarters of the pandemic. By the middle of 2021, while the pandemic continued, there was less disruption and customers shift towards digital solutions became more normalized. During the first nine months of 2022, however, numerous macroeconomic factors converged that resulted in our customers slowing their rate of spend, particularly for large and/or new implementations, which we believe temporarily elongated sales cycles. Rolling Twelve Months Ended September 30, 2022 2021 Net revenue retention 96 % 161 % Revenue per average full-time employee. We define revenue per average full-time employee as total revenue over the last twelve months divided by the average number of employees over the last twelve months (i.e., the average between the number of FTEs at the end of the reported period and the number of FTEs at the end of the same period of the prior year). The Company uses this metric to monitor the productivity of its workforce and its ability to scale efficiently over time and believes the metric provides investors with a way to chart our productivity and scalability. Our revenue rate per employee declined year over year due to slower revenue growth and higher average number of FTEs over last 12 mos period. Rolling Twelve Months Ended September 30, 2022 2021 Revenue per average full-time employee $ 618,711 $ 740,728 16 Results of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 Revenues Our total revenue for the three months ended September 30, 2022 was approximately $15.1 million, a decrease of 6.45% over the approximately $16.1 million from the same period in 2021. The decreased revenue during the three months ended September 30, 2022 primarily resulted from the non-renewal of solutions from one customer brand. Our total revenue for the nine months ended September 30, 2022 was approximately $42.8 million, an increase of 4.43% over the approximately $41.0 million from the same period in 2021. The increased revenue during the nine months ended September 30, 2022 resulted from increases in sales of our access solutions. We expect that our revenues in the fourth quarter will exceed the revenues in the third quarter as a result of the new contracts we secured in the first nine months of the year as well as those we expect to engage in the remainder of the year. In addition, we generally benefit from increased marketing spend by pharmaceutical companies in the fourth quarter. Cost of Revenues The cost of revenue decreased from $7.0 million to $5.7 million primarily as a result of the solution and channel mix, in the quarter ended September 30, 2022, as compared to the same period in 2021. The cost of revenue for the nine month period ended September 30, 2022 decreased from $17.7 million to $16.3 million, as compared to the same period in 2021. This improvement was a result of solution mix, both as it relates to solutions and the partners through which the messages are delivered and increases in the type of services we provide that are not subject to revenue share. Additional discussion is included in the gross margin section below. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Cost of Revenues % 37.6 % 43.7 % 38.0 % 43.3 % Gross Margin % 62.4 % 56.3 % 62.0 % 56.7 % Gross Margin As reflected in the table above, our gross margin, which is the difference between our revenues and our cost of revenues, increased for the quarter ended September 30, 2022, compared with the prior year, as a result of solution mix. In general, there has been an increase in the percentage of activity flowing through our lower cost channels compared with a year ago. Additionally, revenue increases in our access solutions 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 remain relatively constant for the balance of the year. Operating Expenses Operating expenses increased from approximately $9.0 million for the three months ended September 30, 2021 to approximately $13.2 million for the same period in 2022, an increase of approximately 46%. Operating expenses increased from approximately $23.5 million for the nine months ended September 30, 2021 to approximately $37.9 million for the same period in 2022, an increase of approximately 61%. This increase in expense is due to investment in, and expansion of, our workforce to enable future growth. Stock based compensation, a noncash expense, had the greatest increase over prior year and is discussed in greater detail below. 17 The detail of expenditures by major category is reflected in the table below. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Salaries, Wages, & Benefits $ 5,088,955 $ 4,619,320 $ 15,376,370 $ 12,106,933 Stock-Based Compensation 4,277,241 1,008,007 11,476,662 2,612,198 Contractors and Consultants 787,198 541,663 1,797,282 1,327,615 Travel 193,291 178,711 526,411 237,466 Board Compensation 80,500 61,250 242,000 183,750 Professional Fees 428,505 469,272 1,352,212 1,239,090 Investor Relations 46,723 60,630 148,145 157,936 Advertising and Promotion 200,682 337,778 776,950 722,343 Technology Infrastructure Costs 539,465 313,711 1,752,012 783,281 Integration Incentives 525,556 431,266 1,395,000 994,423 Data 113,526 186,583 381,821 731,980 Office, Facility, and Other 380,060 304,703 1,148,433 829,193 Depreciation and Amortization 515,828 526,035 1,565,484 1,580,173 Total Operating Expense $ 13,177,530 $ 9,038,929 $ 37,938,782 $ 23,506,381 The increase in operating expense related to salaries, wages, and benefits and other human resource related costs is due to the expansion of our team to support additional growth. We expect our compensation expense for the remaining quarter of 2022 to only be marginally higher to the expenses recognized for the quarter ended September 30, 2022. Since September 30, 2021, we have added to our staff in several key areas, including product development, sales, and technology, and the addition of our Chief Financial Officer/Chief Operations Officer. During the past 12 months we hired 37 net additional employees. Stock-based compensation increased by $3.3 million from $1.0 million for the three months ended September 30, 2021 to $4.3 million for the same period in 2022 and by $8.9 million from $2.6 million for the nine months ended September 30, 2021 to $11.5 million for the same period in 2022. Stock based compensation is awarded to all full-time employees upon their start of employment as well as to certain key directors, officers, and employees to provide an equity-based incentive to maintain and enhance the performance and profitability of the Company. In the fourth quarter of 2021, we issued a significant market-based grant with a requisite service period of less than 3 years. The expense for the market-based award is amortized over the expected service period. The impact on year to date expense is $4.6 million. Contractors and consultants increased compared to the same period in prior year as we have incurred consulting costs associated with building a scalable infrastructure and increased development work for customers and channels. Our advertising and promotion remained relatively consistent with prior year, though the timing of the expenses throughout the year has fluctuated. The most current three month period reflects a decrease in advertising and promotion. This spend fluctuates throughout the year based on event sponsorships and campaigns related to product releases. 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. Integration incentives, which represent payments to partners for access and/or exclusivity, increased because of new agreements signed in the second half of 2021. 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. 18 Data costs decreased from the same period in the prior year as we have continued to evaluate our data vendors and partner with the most effective and relevant providers. All other variances in the table above are the result of normal fluctuations in activity. Net Income (Loss) We had a net loss of approximately $3.5 million for the three months ended September 30, 2022, as compared to net income of approximately $0.04 million during the same period in 2021. We had a net loss of approximately $11.1 million for the nine months ended September 30, 2022, as compared to a net loss of approximately $0.2 million during the same period in 2021. The reasons and specific components associated with the change are discussed above. Overall, the net loss resulted from significant investments made in our people and technology infrastructure. The net loss reflected in the 2022 periods were effected by significant noncash expenses of $4.8 million and $13.2 million for the three and nine month periods, respectively. Liquidity and Capital Resources As of September 30, 2022, we had total current assets of approximately $99.3 million, compared with current liabilities of approximately $6.1 million, resulting in working capital of approximately $93.2 million and a current ratio of approximately 16.2 to 1. This represents a decrease from our working capital of approximately $105.7 million and an increase from our current ratio of 12.3 to 1 at December 31, 2021. Our operating activities provided $7.9 million during the nine months ended September 30, 2022, compared with $2.1 million in the same period in 2021. We had a net loss of $11.1 million for the nine month period ended September 30, 2022, but non-cash expenses of $13.2 million and working capital generated by the collection of receivables offset the loss. The cash provided in the 2021 period was the result of our net loss increased by non-cash expenses, partially offset by working capital used in the reduction of liabilities. Cash used in investing activities was $39.7 million for the nine months ended September 30, 2022. In addition to the $2.0 million investment in EvinceMed technology, we purchased $37.5 million in Treasury bills with a maturity date in January 2023. This allowed the Company to earn a higher rate of interest on excess cash for the period. Cash used for financing activities was approximately $11.5 million during the nine months ended September 30, 2022. We repurchased 706,114 shares of common stock for $12.6 million. This was partially offset by the collection of $1.1 million related to the exercise of stock options during the period. For the same period in 2021, we raised $70.7 million in a public offering of our common stock as well as generated $3.8 million from the issuance of shares related to the exercise of stock options. These proceeds in 2021 were partially offset by the payment of $1.6 million in earnout payments from a previous acquisition. We believe that funds generated from operations, together with existing cash, will be sufficient to finance our current operations and planned growth for the next twelve (12) months. In addition, we believe we can generate the cash needed to operate beyond the next twelve (12) months from operations. However, we may seek additional debt or equity financing to supplement cash from operations to fund acquisitions or strategic partner relationships, make capital expenditures, and satisfy working capital needs. We currently have an effective shelf registration statement, which allows us to issue, in unlimited amounts, securities, including common stock, preferred stock, debt securities, warrants, and units. Critical Accounting Policies We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates and assumptions. Our significant accounting policies are described in Note 2 to our Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2021 (2021 Annual Report on Form 10-K). The accounting policies we used in preparing these financial statements are substantially consistent with those we applied in our 2021 Annual Report on Form 10-K. Our critical accounting policies are described in Management’s Discussion and Analysis included in the 2021 Annual Report on Form 10-K. 19 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 15, 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. Not Yet Adopted ASU Topic 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. The standard is effective for the Company’s fiscal year beginning January 1, 2023, with early adoption permitted. The Company is currently evaluating the effect of this pronouncement on its Consolidated Financial Statements, but it is not expected to have a material impact. Off Balance Sheet Arrangements The Company has contracts with various electronic health records systems and ePrescribe platforms, whereby we agree to share a portion of the revenue we generate for eCoupons or banners through their network. From time to time the Company enters into arrangements with a partner to acquire minimum amounts of messaging capabilities. As of September 30, 2022, the Company had commitments for future minimum payments of $15.5 million that will be reflected in cost of revenues during the years 2023 through 2025.