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: seasonal trends in the pharmaceutical brand marketing industry; 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; the inability to offer high-quality customer support for our portals; 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 targets, complete acquisitions, or integrate acquisitions successfully; acquisition activities may disrupt ongoing business and may involve increased expenses; inability to realize the financial and strategic goals contemplated at the time of a transaction; inability to realize any synergies or other anticipated benefits of an acquisition or that such synergies or benefits may take longer than anticipated to be realized; risk that the integration with an acquired entity may be more costly or difficult than expected; inability to attract and retain senior management and other 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; increases in costs due to inflation and other adverse economic conditions; decreases in customer demand due to macroeconomic factors; lack of a consistent active trading market for our common stock; 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, 2022. 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. 15 Overview We are a digital health technology company enabling 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. Historically, our revenue was generated primarily through the facilitation of financial messages to health care providers via their EHR and ePrescribe systems using the OptimizeRx proprietary network to solve the ever-increasing communication barriers between pharmaceutical representatives and healthcare providers that have presented in the rapidly changing healthcare industry. Over time, as the demand for communication of an increasing variety of different health information between life science companies, providers, and patients continued to rise, our platform has expanded to encompass additional solutions that enable healthcare providers to access information for patients at the point of care. These solutions include brand messaging, therapeutic support messaging, brand support, and innovative patient engagement services, all of which now make up a significant portion of our total revenue. We employ a “land and expand” strategy focused on growing our existing client base and generating greater and more consistent revenues in part through the continued shift in our business model toward enterprise level engagements, while also broadening our platform with innovative proprietary solutions such as our artificial intelligence-powered real-world data solution which uses sophisticated proprietary algorithms to derive additional revenue from our existing network. Management will continue to optimize our portfolio of solutions to align our resource deployment to the best market opportunities. Because the pharmaceutical industry is dominated by large companies with multiple brands, our revenue is concentrated in a relatively small number of companies. We have approximately 100 pharmaceutical companies as customers, and our revenues are concentrated in these customers. Loss of one of more of our larger customers could have a negative impact on our operating results. 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 half of the year 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. Recent Developments On October 24, 2023, we acquired 100% of the outstanding shares of Healthy Offers, Inc. (d/b/a Medicx Health), a Nevada corporation. The aggregate merger consideration the Company paid to the security holders of Medicx at the closing was $95,000,000, subject to certain customary post-acquisition purchase price adjustments. A portion of the cash purchase price was funded through debt financing, with a term loan in the aggregate principal amount of $40,000,000. This acquisition could materially effect our results of operations in 2023 and beyond and the comparability of results to prior year periods. The Company’s cash and cash-equivalents as of October 31, 2023 was approximately $15.8 million. See Part I, Item 1, Note 12 “Subsequent Events” for further information about this acquisition and the term loan. Impact of Macroeconomic Events Unfavorable conditions in the economy may negatively affect the growth of our business and our results of operations. For example, macroeconomic events including the conditions in the global capital markets, both in the U.S. and elsewhere in the world, geopolitical tensions such as the war between Russia and Ukraine as well as the conflict between Israel and Hamas, COVID-19 pandemic, rising inflation, and the U.S. Federal Reserve raising interest rates have led to economic uncertainty in the credit markets and could cause our customers and potential customers to postpone or reduce spending on technology products or services or put downward pressure on prices . Historically, during periods of economic uncertainty and downturns, businesses may slow spending, which may impact our business and our customers’ businesses. Adverse changes in demand could impact our business, collection of accounts receivable and our expected cash flow generation, which may adversely impact our financial condition and results of operations. 16 Key Performance Indicators We monitor the following key performance indicators to help us evaluate our business, measure our performance, identify trends affecting our business and make strategic decisions. We have updated the definition of “top 20 pharmaceutical manufacturers” in our key performance indicators to be based upon Fierce Pharma’s most updated list of “The top 20 pharma companies by 2022 revenue”. We previously used “The top 20 pharma companies by 2020 revenue”. As a result of this change, prior periods have been restated for comparative purposes. 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 2022 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. The decrease in the average in twelve months ended September 30, 2023 as compared to the twelve months ended September 30, 2022 is primarily the result of the convergence of numerous macroeconomic factors that resulted in our customers slowing their rate of spend, particularly for large and/or new implementations, which we believe prolonged sales cycles with the top 20 pharmaceutical manufacturers that were existing customers. This was particularly evident during 2022 and the first half of 2023 and the Company has begun to see improvements since the second half of 2023. Rolling Twelve Months Ended September 30, 2023 2022 Average revenue per top 20 pharmaceutical manufacturer $ 2,075,078 $ 2,267,550 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 2022 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. Our penetration within this core customer group stayed consistent from the twelve months ended September 30, 2022 to the twelve months ended September 30, 2023. Rolling Twelve Months Ended September 30, 2023 2022 Percent of top 20 pharmaceutical manufacturers that are customers 90 % 90 % 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 2022 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. Our revenue from customers that aren’t top 20 pharmaceutical manufacturers increased faster than our overall revenue, decreasing the percentage of our overall revenues from top 20 pharmaceutical manufacturers. 17 Rolling Twelve Months Ended September 30, 2023 2022 Percent of total revenue attributable to top 20 pharmaceutical manufacturers 59 % 65 % 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, 2023 was lower due to the convergence of numerous macroeconomic factors that resulted in our customers slowing their rate of spend, particularly for large and/or new implementations, which we believe prolonged sales cycles. This was particularly evident during 2022 and the first half of 2023 and the Company has begun to see improvements since the second half of 2023. Rolling Twelve Months Ended September 30, 2023 2022 Net revenue retention 93 % 96 % 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 a higher average number of FTEs over the last 12 month period. Rolling Twelve Months Ended September 30, 2023 2022 Revenue per average full-time employee $ 570,973 $ 618,711 18 Results of Operations for the Three and Nine Months Ended September 30, 2023 and 2022 The following tables sets forth, for the periods indicated, the dollar value and percentage of net revenue represented by certain items in our consolidated statements of operations: Three Months Ended September 30, 2023 2022 Net revenue $ 16,331,484 100.0 % $ 15,085,504 100.0 % Cost of revenues 6,531,183 40.0 % 5,664,733 37.6 % Gross profit 9,800,301 60.0 % 9,420,771 62.4 % Operating expenses 13,353,789 81.8 % 13,177,530 87.4 % Loss from operations (3,553,488 ) (21.8 )% (3,756,759 ) (24.9 )% Other income 688,190 4.2 % 289,967 1.9 % Loss before provision for income taxes (2,865,298 ) (17.5 )% (3,466,792 ) (23.0 )% Income tax benefit — — % — — % Net loss $ (2,865,298 ) (17.5 )% $ (3,466,792 ) (23.0 )% * Balances and percentage of net revenue information may not add due to rounding Nine Months Ended September 30, 2023 2022 Net revenue $ 43,152,560 100.0 % $ 42,795,699 100.0 % Cost of revenues 18,093,949 41.9 % 16,283,307 38.0 % Gross profit 25,058,611 58.1 % 26,512,392 62.0 % Operating expenses 40,557,152 94.0 % 37,938,782 88.7 % Loss from operations (15,498,541 ) (35.9 )% (11,426,390 ) (26.7 )% Other income 2,074,081 4.8 % 313,786 0.7 % Loss before provision for income taxes (13,424,460 ) (31.1 )% (11,112,604 ) (26.0 )% Income tax benefit — — % — — % Net loss $ (13,424,460 ) (31.1 )% $ (11,112,604 ) (26.0 )% * Balances and percentage of net revenue information may not add due to rounding Net Revenues Our net revenue reported for the three months ended September 30, 2023 was approximately $16.3 million, an increase of 8% over the approximately $15.1 million from the same period in 2022. Our net revenue reported for the nine months ended September 30, 2023 was approximately $43.2 million, an increase of 1% over the approximately $42.8 million from the same period in 2022. The increase in revenue was primarily as a result of growth of our real world evidence solution. Revenue continues to be effected by the macroeconomic pressures affecting our customers. Cost of Revenues Our cost of revenues, composed primarily of revenue share expense paid to our network partners, was approximately $6.5 million for the three months ended September 30, 2023 compared to $5.7 million for the same period of 2022. Our cost of revenues for the nine month period ended September 30, 2023 increased to $18.1 million from $16.3 million in the same period in 2022. Our cost of revenues as a percentage of revenue increased to approximately 40% for the quarter ended September 30, 2023 from approximately 37.6% for the quarter ended September 30, 2022. Our cost of revenues as a percentage of revenue increased to approximately 42% for the nine months ended September 30, 2023 from approximately 38.0% for the nine months ended September 30, 2022. This increase in cost of revenue as a percentage of revenue was a result of solution and channel mix. Additional discussion is included in the gross margin section below. 19 Gross Margin Our gross margin, which is the difference between our revenues and our cost of revenues, increased for the three and nine months ended September 30, 2023, as a result of solution and channel mix. During the nine months ended September 30, 2023, there was an increase in high margin revenue solution delivery compared with a year ago. Operating Expenses Operating expenses increased to approximately $13.4 million for the three months ended September 30, 2023 from approximately $13.2 million for the same period in 2022, an increase of approximately 1%. Operating expenses increased from approximately $37.9 million for the nine months ended September 30, 2022 to approximately $40.6 million for the same period in 2023, an increase of approximately 7%. The detail by major category is reflected in the table below. Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Stock-based compensation 3,206,227 4,277,241 11,089,853 11,476,662 Depreciation, amortization and noncash lease expense 466,706 515,828 1,395,400 1,565,484 Other general and administrative expenses 9,680,856 8,384,461 28,071,899 24,896,636 Total operating expense $ 13,353,789 $ 13,177,530 $ 40,557,152 $ 37,938,782 The greatest increase was in other general and administrative expenses. Other general and administrative expenses increased from approximately $8.4 million for the three months ended September 30, 2022 to approximately $9.7 million for the same period in 2023. Other general and administrative expenses increased from $24.9 million for the nine months ended September 30, 2022 to approximately $28.1 million for the same period in 2023. This increase is mostly as a result of an increase in headcount as well as other investments to support our growth initiatives and operations. Net Loss We had a net loss of approximately $2.9 million for the three months ended September 30, 2023, as compared to a net loss of approximately $3.5 million during the same period in 2022. We had a net loss of approximately $13.4 million for the nine months ended September 30, 2023, as compared to a net loss of approximately $11.1 million during the same period in 2022. The reasons and specific components associated with the change are discussed above. Liquidity and Capital Resources Historically, our primary sources of liquidity have been cash receipts from customers and proceeds from equity offerings. As of September 30, 2023, we had total current assets of approximately $87.4 million, compared with current liabilities of approximately $7.7 million, resulting in working capital of approximately $79.7 million and a current ratio of approximately 11.3 to 1. This represents a decrease from our working capital of approximately $90.2 million and an decrease from the current ratio of 11.7 to 1 at December 31, 2022. This decrease in our working capital is discussed in more detail below. 20 Following is a table with summary data from the consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022, as presented. Nine Months Ended September 30, 2023 2022 Net cash (used in) / provided by operating activities $ (981,935 ) $ 7,850,594 Net cash provided by / (used in) investing activities 664,235 (39,691,877 ) Net cash used in financing activities (7,969,509 ) (11,511,467 ) Net decrease in cash and cash equivalents $ (8,287,209 ) $ (43,352,750 ) We used approximately $(1.0) million for operating activities during the nine months ended September 30, 2023, compared with $7.9 million provided by operating activities in the same period in 2022. We had a net loss of $(13.4) million for the first nine months of 2023. Non-cash expenses of $13.0 million and working capital generated by the collection of receivables partially offset the loss. The timing of trade and revenue share payments decreased our balance of prepaid services year over year. This, in conjunction with the greater net loss, led to the year over year decrease in cash flow from operations. Cash provided by investing activities was approximately $0.7 million for the nine months ended September 30, 2023. We redeemed $165.1 million in treasury bills which was partially offset by reinvestment of $(162.8) million in treasury bills. We also invested in internally developed software in the amount of $(1.6) million. Cash used in investing activities for the same period in the prior year was $39.7 million. $37.7 million was invested in treasury bills with and $2.0 million was invested in EvinceMed technology. Cash used for financing activities was approximately $(8.0) million mostly related to a company stock repurchase program approved in March 2023. During the nine months ended September 30, 2023 we used $(7.5) million to purchase 526,999 shares of common stock. We used $(0.3) million to pay withholding taxes on behalf of employees vesting in restricted stock units and $(0.3) million was related to a loan origination fee in connection with the acquisition financing. This activity was partially offset by the receipt of funds from the exercise of stock options. Cash used for financing activities for the same period in prior year was $11.5 million. 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. We believe that funds generated from operations, together with existing cash, will be sufficient to finance our current operations for the next twelve (12) months. In addition, we believe we can generate the cash needed to operate beyond the next 12 months from operations. However, we may seek additional debt, equity financing, or lines of credit to supplement cash from operations to fund acquisitions or strategic partner relationships, make capital expenditures, and satisfy working capital needs. Critical Accounting Estimates 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 the Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2022 (2022 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 2022 Annual Report on Form 10-K. Our critical accounting estimates are described in Management’s Discussion and Analysis included in the 2022 Annual Report on Form 10-K. 21 Recently Issued Accounting Pronouncements ASU Topic 2021-08 Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , 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 was effective for the Company’s fiscal year beginning January 1, 2023. 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 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, 2023, the Company had commitments for future minimum payments of $11.8 million that will be reflected in cost of revenues during the years 2023 through 2025. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.