Item 7. Management’s Discussion and Analysis
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 two million U.S. healthcare providers and millions
of their patients through an intelligent omnichannel technology platform embedded within a proprietary point-of-care network, as well
as mass digital communications channels, OptimizeRx helps life sciences organizations engage and support their customers.
Historically, our revenue was generated primarily
through the facilitation of various types of messages to health care providers via their EHR systems and ERx platforms 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 evolved to provide
Audience Development and Audience Creation and Media Execution across numerous different messaging types that leverage our technology
platform and media distribution channels. In addition, the October 2023 acquisition of Medicx Health provided the Company with a significant
footprint for direct-to-consumer healthcare marketing. 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 virtual communication solutions such as our AI-powered
DAAP, expanding on previous iterations of the RWD.AI technology, which uses sophisticated machine-learning algorithms to find the best
audiences in the correct channels at the right time. Our strategy for driving revenue growth is also expected to work in tandem with our
efforts to increase margin and profitability as revenue drivers such as DAAP have inherently higher margins than most other messaging
solutions we offer.
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Customer
Concentration
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. Our top five customers represented
approximately 44% and 39% of our revenue for the years ended December 31, 2023 and December 31, 2022, respectively. In each
of 2023 and 2022, we had one customer that each represented more than 10% of our revenues.
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.
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 rising inflation and the U.S. Federal Reserve raising interest rates have led to economic uncertainty. In addition,
high levels of employee turnover across the pharmaceutical industry as well as a fewer number of U.S. drug approvals could create additional
uncertainty within our target customer markets. 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.
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 believe it also provides investors with a transparent way to chart our progress in penetrating this important customer segment. The
increase in the average in 2023 as compared to 2022 is primarily the result of stronger DAAP related revenue streams and the Company’s
October 2023 acquisition of Medicx Health, which added to 2023 revenues and was not included in the 2022 amounts.
Twelve
Months Ended
December 31
2023
2022
Average revenue per top 20 pharmaceutical
manufacturer
$ 2,566,832
$ 2,136,746
23
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.
Twelve
Months Ended
December 31
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 stayed relatively consistent
year over year.
Twelve
Months Ended
December 31
2023
2022
Percent of total revenue attributable
to top 20 pharmaceutical manufacturers
65 %
62 %
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 2023 increased due to stronger DAAP related revenue streams from existing clients and the Company’s
2023 acquisition of Medicx Health.
Twelve
Months Ended
December 31
2023
2022
Net revenue retention
105 %
90 %
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 stayed relatively consistent year over year.
Twelve
Months Ended
December 31
2023
2022
Revenue per average full-time employee
$ 586,242
$ 606,312
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Results
of Operations for the Years Ended December 31, 2023 and 2022
The
following table sets forth, for the periods indicated, the dollar value and percentage of total return represented by certain items in
our consolidated statements of operations:
Years Ended December 31,
(in thousands, except percentage data)
2023
2022
Total Revenue
$ 71,522
100.0 %
$ 62,450
100.0 %
Cost of Revenues
28,622
40.0 %
23,483
37.6 %
Gross margin
42,900
60.0 %
38,967
62.4 %
Operating expenses
69,302
96.9 %
51,258
82.1 %
Loss from operations
(26,402 )
(36.9 )%
(12,291 )
(19.7 )%
Other income
1,238
1.7 %
852
1.4 %
Loss before provision for income taxes
(25,164 )
(35.2 )%
(11,438 )
(18.3 )%
Income tax benefit
7,598
10.6 %
—
— %
Net loss
$ (17,566 )
(24.6 )%
$ (11,438 )
(18.3 )%
* Balances
and percentage of total revenue information may not add due to rounding
Net
Revenue
Our net revenue increased 15% to $71.5 million
for the year ended December 31, 2023 from $62.5 million for the year ended December 31, 2022. Of the 15% increase, 7.3% resulted
from the acquisition of Medicx Health, in October, with the remaining increase due to stronger DAAP related sales.
Cost
of Revenues
Our total cost of revenues, composed primarily
of revenue-share expense paid to our network partners, increased in the year ended December 31, 2023, compared to the year ended
December 31, 2022. Our cost of revenues as a percentage of revenue increased to approximately 40% in the year ended December 31,
2023, from approximately 38% in the year ended December 31, 2022. This increase in our cost of revenues as a percentage of revenue
resulted primarily due to an unfavorable channel partner mix.
Gross
Margin
Our
gross margin, which is the difference between our revenues and our cost of revenues, increased from 2022 to 2023 but our gross margin
percentage decreased to 60.0% in 2023 from 62% in 2022 We had higher revenues in 2023, which increased gross margin but during 2023,
there was a decrease in the percentage of activity flowing through our lower cost channels compared with 2022.
Operating
Expenses
Total operating expenses increased to $69.3 million
for the year ended December 31, 2023, from $51.3 million for the year ended December 31, 2022, an increase of approximately
35%. The increase includes approximately $6.7 million, related to impairment charges, approximately $4.5 million of transaction costs
associated with the purchase of Medicx Health, and a loss on the disposal of a business of $2.1 million.
The
detail by major category is reflected in the table below.
Years Ended
December 31
(in thousands)
2023
2022
Stock-based compensation
$ 13,717
$ 15,746
Depreciation and amortization
2,402
2,022
Impairment charges
6,738
—
Loss on disposal of a business
2,142
—
Transaction costs
4,482
—
Other sales, general, and administrative expense
39,820
33,490
Total operating expense
$ 69,302
$ 51,258
Stock-based compensation decreased to $13.7 million
for the year ended December 31, 2023, from $15.7 million for the year ended December 31, 2022, as a result of the lower grant
date fair value of awards due to declines in the Company’s stock price.
25
Depreciation and amortization increased to $2.4
million for the year ended December 31, 2023, from $2.0 million for the year ended December 31, 2022, as a result of the amortization
associated with the identifiable intangibles arising from the Medicx Health acquisition.
The
impairment charges recorded during 2023 relate to intangible assets, primarily technology and patent and trademarks relating to certain
non-core products. The Company determined that the carrying value of these long-lived assets was not recoverable on an undiscounted basis
and accordingly, an impairment charge was recognized to the extent fair value exceeds carrying value. The fair value of the assets was
determined based on various estimates and assumptions including internal estimates of cash flows directly attributable to the assets,
the useful life of the assets and residual value, if any.
The
loss on disposal of a business is discussed in Part II, Item 8. Financials Statements and Supplementary Data; Note 7 - Goodwill and Intangibles.
Transaction related costs arose due to the acquisition
of Medicx Health, discussed in Part II, Item 8. Financials Statements and Supplementary Data; Note 3 - Acquisitions.
Other sales, sales general, and administrative
expense increased to $39.8 million for the year ended December 31, 2023 from $33.5 million for the year ended December 31,
2022. The acquisition of Medicx Health increased Operating expense, primarily compensation and amortization, by approximately $2.5 million
year on year. In addition, within the other sales, general and administrative expenses, there were a variety of increases, the largest
of which was in compensation, which increased by $3.3 million from $20.8 million in 2022 to $24.1 million in 2023. The increase is due
to the addition of Medicx Health employees since the acquisition date and higher severance, employee benefit and commission costs.
Other
income (expense)
Other
Income (Expense) was comprised of the following:
Years
Ended
December 31
(in thousands)
2023
2022
Other income (expense)
Interest expense
$ (1,454 )
$ —
Other income
500
—
Interest income
2,192
852
$ 1,238
$ 852
Interest expense represents interest charges on
our Term Loan, which was raised during the year to partially fund the acquisition of Medicx Health, together with the amortization of
the related issuance costs, (see Part II, Item 8. Financials Statements and Supplementary Data; Note 12 - Long Term Debt for further details
concerning our Term loan).
Other
income represents the net proceeds from the sale of customer assets, primarily contracts, relating to two non-core products.
Interest income represents interest earned on
our short-term investments, which were realized during 2023 in order to partially fund the acquisition of Medicx Health. Interest earned
in 2022 reflects the shorter period and lower average balance on amounts held in short-term investments during that period.
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Income
tax benefit
The income tax benefit recorded in 2023 represents
the partial reversal of our valuation allowance, previously recorded against the value of our net operating loss (“NOL”) carryforwards.
In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence,
including our past operating results, the impact of the Medicx Health transaction on our consolidated tax returns, and our forecast of
future earnings, future taxable income and prudent and feasible tax planning strategies.
The assumptions utilized in determining future
taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses.
Actual operating results in future years could differ from our current assumptions, judgments and estimates.
Net Income (Loss)
We finished the year ended December 31, 2023
with a net loss of $17.6 million, compared to $11.4 million during the year ended December 31, 2022. The reasons for specific components
are discussed above. Overall, we had an increase in revenue and gross margin partially offset by increased operating expenses. In addition,
the loss in both periods included significant noncash items. We had $25.0 million in noncash operating expenses in 2023 compared to $17.8
million in noncash operating expenses in 2022.
Liquidity and Capital Resources
Historically, our primary sources of liquidity
have been cash receipts from customers and proceeds from equity offerings. On October 11, 2023, we entered into a financing agreement
that provided for a $38 million term loan (the “Term Loan”), the proceeds of which were to fund, in part, the acquisition
of Medicx Health. See Part II, Item 8. Financials Statements and Supplementary Data; Note 12 - Long Term Debt.
As of December 31, 2023, we had total current
assets of $54.3 million, compared with current liabilities of $17.9 million, resulting in working capital of $36.4 million and a current
ratio of 3.0 to 1. This compares with a working capital balance of $90.2 million and a current ratio of 11.7 to 1 at December 31,
2022. This decrease in working capital, as discussed in more detail below, is primarily the result of our common stock buyback program
and the acquisition of Medicx Health, which was funded from a combination of cash on hand, short-term investments and the Term Loan.
We believe that funds generated from operations,
together with existing cash and cash equivalents, will be sufficient to finance our current operations and planned growth for the next
twelve months. We do not anticipate the need to raise any additional cash to support operations. However, we could require additional
debt or equity financing if we were to make any significant acquisitions for cash during that period. In addition, we believe we can generate
the cash needed to operate beyond the next 12 months from operations.
Contractual
Obligations
The
Company’s contractual obligations and cash commitments at December 31, 2023, consisted of long term debt, operating lease
liabilities, and payments to partners to acquire minimum amounts of media, data or messaging capabilities as follows:
● Long-term debt: Total obligations under the Term Loan were $38.3 million,
with $2.0 million due over the next twelve months. For details regarding long-term obligations, see Part II, Item 8. Financial Statements
and Supplementary Data; Note 12 – Long Term Debt in the Consolidated Financial Statements.
● Lease liabilities: Total obligations under short- and long-term operating
leases were $0.7 million, with $0.3 million due over the next twelve months. For details regarding short- and long-term operating lease
liabilities, see Part II, Item 8. Financial Statements and Supplementary Data; Note 13 – Leases in the Consolidated Financial Statements.
● Partner
payment obligations: Total obligations for partner payments were $25.1 million, with $11.0
million due over the next twelve months. For details regarding the Company’s future
payments to partners to acquire minimum amounts of media, data or messaging capabilities,
see Part II, Item 8. Financial Statements and Supplementary Data; Note 16 – Commitments.
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Term Loan
On October 11, 2023 (the “Loan Date”),
in connection with the acquisition of Medicx Health, we entered into a financing agreement that provided for a $40.0 million term loan.
The outstanding principal amount of the Term Loan
is repayable in quarterly installments on the last business day of each fiscal quarter commencing on December 31, 2023, in an amount
equal to 1.25% of the principal amount. The outstanding unpaid principal amount of the Term Loan, and all accrued and unpaid interest
thereon, shall be due and payable on the earliest of (i) the fourth anniversary of the closing of the financing agreement and funding
of the Term Loan and (ii) the date on which the Term Loan is declared due and payable pursuant to the terms of the financing agreement.
The Term loan bears a variable interest rate which is currently priced at 14.1%.
We incurred debt issuance costs of approximately
$2.3 million, in connection with this Term Loan and made repayments of approximately $1.7 million.
We are subject to market risks arising from changes
in interest rates which relate primarily to the Term Loan our term loan, which is variable rate debt. (see Part II, Item 8. Financials
Statements and Supplementary Data; Note 12 - Long Term Debt). Our potential additional interest expense over one year that would result
from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate on all of our variable rate obligations
would be approximately $0.4 million on a pre-tax basis.
See
Part II, Item 8. Financials Statements and Supplementary Data; Note 12 - Long Term Debt for additional information regarding the Term
Loan.
Cash
Flows
Following
is a table with summary data from the consolidated statement of cash flows for the years ended December 31, 2023 and 2022, as presented.
(in thousands)
2023
2022
Net cash (used in) / provided by operating activities
$ (7,239 )
$ 10,654
Net cash used in investing activities
(25,337 )
(58,176 )
Net cash provided / (used in) by financing activities
28,220
(18,951 )
Net decrease in cash and cash equivalents
$ (4,356 )
$ (66,473 )
Our operating activities used $7.2 million in
the year ended December 31, 2023, as compared with approximately $10.7 million provided by operating activities in the year ended
December 31, 2022. We had a net loss of $17.6 million for 2023, and a net increase in working capital of $7.9 million, notably accounts
receivable, which increased as a result of higher fourth quarter billings, which was partially offset by non-cash expenses of $25.0 million.
The cash provided in 2022 was the result of our
net loss of $11.4 million offset by non-cash expenses of $17.8 million and a decrease in net working capital of $4.0 million, generated
by the collection of receivables.
Investing activities used $25.3 million in 2023,
compared with $58.2 million in 2022. In addition to the cash payment, net of cash acquired of $82.9 million related to the acquisition
of Medicx Health, we purchased $162.8 million and redeemed $218.7 million in Treasury bills during 2023. We also incurred capitalized
software development costs of $0.8 million, and purchased $0.1 million of tangible property, primarily personal computers and received
$2.5 million from the disposal of our Access products (see Part II, Item 8. Financials Statements and Supplementary Data; Note 7 - Goodwill
and Intangibles).
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During
2022, we made a $2.0 million investment in EvinceMed technology, purchased $55.9 million in Treasury bills and incurred $0.2 million
and $0.1 million, respectively related to capitalized software development and tangible property.
Financing activities provided $28.2 million
in 2023 and used $19.0 million in 2022. During 2023, we raised $38 million pursuant to the Term Loan to partially fund the
acquisition of Medicx Health. In connection with the Term Loan we incurred debt issuance costs of approximately $2.3million, and
have made repayments of approximately $1.7 million. In addition, during 2023, we repurchased 526,999 shares of common stock for $7.5
million.
The
cash used in 2022, related to the repurchase of 1,214,398 shares of common stock for $20.0 million, partially offset by $1.1 million
from the exercise of stock options.
Off
Balance Sheet Arrangements
As
of December 31, 2023, there were no off-balance sheet arrangements.
Critical
Accounting Estimates
Our
discussion and analysis of our financial condition and results of operations are based upon the Consolidated Financial Statements, which
have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires
us to make 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. See Part II, Item 8. Financial Statements and Supplementary Data; Note 2 - Summary of Significant Accounting Policies,
for a discussion of significant accounting policies. Actual results may differ materially from these estimates due to different assumptions
or conditions. The following areas all require the use of subjective or complex judgments, estimates and assumptions:
Business Combination
Business combinations are accounted for under
the acquisition method. Assets acquired and liabilities assumed as part of a business acquisition are generally recorded at their estimated
fair value at the date of acquisition. The excess of purchase price over the amount allocated to the assets acquired and liabilities assumed
is recorded as goodwill. In determining the fair value of assets acquired, including intangible assets, the Company uses a variety of
methods. The method used to estimate the fair values of intangible assets incorporates significant estimates and assumptions regarding
the estimates a market participant would make in order to evaluate an asset, including a market participant's use of the asset, future
cash inflows and outflows, probabilities of success, asset lives, and the appropriate discount rates. This judgement and determination
effects the amount of consideration paid that is allocated to assets acquired and liabilities assumed in the business purchase transaction.
The Company engages third-party appraisal firms to assist in determining fair value of assets acquired and liabilities assumed when appropriate.
During the remeasurement period, which extends
no later than one year from the acquisition date, the Company may record certain adjustments to the carrying value of the assets acquired
and liabilities assumed with a corresponding offset to goodwill.
Revenue
Recognition
Recognition
of revenue requires evidence of a contract, probable collection of proceeds, and completion of substantially all performance obligations.
We use a 5-step model to recognize revenue. These steps are: identify the contract with a customer, identify the performance obligations
in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and
recognize revenue when or as the performance obligations are satisfied.
Revenues
are primarily generated from content delivery activities in which we deliver financial, clinical, or brand messaging through a distribution
network of eprescribers and electronic health record technology providers (channel partners), directly to consumers, or from reselling
services that complement the business. This content delivery for a customer is referred to as a program. Unless otherwise specified,
revenue is recognized based on the selling price to customers.
Our
contracts are generally all less than one year and the primary performance obligation is delivery of messages or other forms of content,
but the contract may contain additional services. Additional services may include program design, which is the design of the content
delivery program, set up, and reporting. We consider set up and reporting services to be complimentary to the primary performance obligation
and recognized through performance of the delivery of content. We consider the design of the programs and related consulting services
to be performance obligations separate from the delivery of messages.
As
the content is distributed through the platform and network of channel partners (a transaction), these transactions are recorded, and
revenue is recognized, over time as the distributions occur. Revenue for transactions can be realized based on a price per message, a
price per redemption, as a flat fee occurring over a period of time, or upon completion of the program, depending on the client contract.
We recognize setup fees that are required for integrating client offerings and campaigns into the rule-based content delivery system
and network over the life of the initial program, based either on time, or units delivered, depending upon which is most appropriate
in the specific situation. Should a program be cancelled before completion, the balance of set up revenue is recognized at the time of
cancellation, as set up fees are nonrefundable. Additionally, we also recognize revenue for providing program performance reporting and
maintenance, either by our company directly delivering reports or by providing access to our online reporting portal that the client
can utilize. This reporting revenue is recognized over time as the messages are delivered. Program design, which is the design of the
content delivery program, and related consulting services are recognized as services are performed.
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In
some instances, we license certain of our software applications in arrangements that do not include other performance obligations. In
those instances, we record license revenue when the software is delivered for use to the license. In instances where our contracts included
Software as a Service, the revenue is recognized over the subscription period as services are delivered to the customer.
In
some instances, we also resell messaging solutions that are available through channel partners that are complementary to the core business
and client base. These partner specific solutions are frequently similar to our own solutions and revenue recognition for these programs
is the same as described above. In instances where we sell solutions on a commission basis, net revenue is recognized based on the commission-based
revenue split that we receive. In instances where we resell these messaging solutions and have all financial risk and significant operation
input and risk, we record the revenue based on the gross amount sold and the amount paid to the channel partner as a cost of sales.
Cost
of Revenues
The
primary cost of revenue is revenue-share expense. Based on the volume of transactions that are delivered through the channel partner
network, we provide a revenue-share to compensate the partner for their promotion of the campaign. Revenue-shares are a negotiated percentage
of the transaction fees and can also be specific to special considerations and campaigns. In addition, we pay revenue-share to ConnectiveRx
as a result of a 2014 legal settlement in an amount equal to the greater of 10% of financial messaging distribution revenues generated
through our integrated network, or $0.37 per financial message distributed through our integrated network. As our solution mix has expanded
and our revenues have grown, financial messaging has become a smaller percentage of our revenues and these payments to ConnectiveRx,
a smaller portion of our revenue-share. The contractual amount due to the channel partners is recorded as an expense at the time the
message is distributed. Additionally, within the cost of revenues is data acquisition costs which are amortized over the period for which
we have access to the data.
Intangible
Assets
Intangible
assets are stated at cost. Finite-lived assets are being amortized over their estimated useful lives of fifteen to seventeen years for
patents, eight years for customer relationships, fifteen years for tradenames, two to four years for covenants not to compete, and three
to ten years for software and websites, all using the straight-line method.
Intangible
assets are reviewed whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment
of assets with definite-lives is generally determined by comparing projected undiscounted cash flows expected to be generated by the
asset, or asset groups, to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an
undiscounted basis, an impairment is recognized to the extent fair value exceeds carrying value. Determining the extent of impairment,
if any, typically requires various estimates and assumptions including cash flows directly attributable to the asset, the useful life
of the asset and residual value, if any. When necessary, the Company uses internal cash flow estimates, quoted market prices and appraisals,
as appropriate, to determine fair value. Actual results could vary from these estimates. In addition, the remaining useful life of the
impaired asset is revised, if necessary.
We
recorded impairment charges of $6.7 million against the value of our intangible assets during the year ended December 31, 2023.
No events or circumstances were noted that would be indicative of potential impairment during the year ended December 31, 2022.
Goodwill
We
evaluate goodwill for impairment during our fiscal fourth quarter, or more frequently if an event occurs or circumstances change.
For
both the years ended December 31, 2023 and 2022
our annual reviews determined there was no impairment as our single reporting unit had a fair value in excess of its carrying value.
During the year ended December 31, 2023, following the disposal of the Access business,
we performed an interim review of our goodwill balance and also determined that there was no impairment due the fair value of our single
reporting unit being in excess of its carry value.
30
The
use of different assumptions, estimates or judgments in the goodwill impairment testing process may significantly increase or decrease
the estimated fair value of a reporting unit. Generally, changes in DCF estimates would have a similar effect on the estimated fair value
of the reporting unit.
Goodwill
impairment charges may be recognized in future periods to the extent changes in factors or circumstances occur, including deterioration
in the macro-economic environment or in the equity markets, including the market value of the Company’s common shares, deterioration
in its performance or its future projections, or changes in its plans for one or more reporting units.
Stock-based
Compen sation
We
use the fair value method to account for stock-based compensation. The fair value of the equity instrument is charged directly to compensation
expense and additional paid-in capital over the period during which services are rendered. The fair value of each award is estimated
on the date of each grant.
For
time-based options, fair value is estimated using the Black-Scholes option pricing model that uses the following assumptions. Estimated
volatilities are based on the historical volatility of our stock over the same period as the expected term of the options. The expected
term of options granted represents the period of time that options granted are expected to be outstanding. We use historical data to
estimate option exercise behavior and to determine this term. The risk-free rate used is based on the U.S. Treasury yield curve in effect
at the time of the grant using a time period equal to the expected option term. We have never paid dividends and do not expect to pay
any dividends in the future.
The
Black-Scholes option valuation model and other existing models were developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. These option valuation models require the input of, and are highly sensitive
to, subjective assumptions including the expected stock price volatility. Our stock options have characteristics significantly different
from those of traded options, and changes in the subjective input assumptions could materially affect the fair value estimate.
For
restricted stock units, the fair value is based on the market value of the Company’s common stock on the date of grant. For market
based restricted stock units, fair value is estimated using a Monte Carlo simulation model. This valuation technique includes estimating
the movement of stock prices and the effects of volatility, interest rates and dividends.
Recently
Issued Accounting Pronouncements
In
November 2023, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”) No.
2023-07 (“ASU 2023-07”), Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. ASU 2023-07 requires
annual and interim disclosures that are expected to improve reportable segment disclosures, primarily through enhanced disclosures about
significant segment expenses. The provisions of ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim
periods within fiscal years beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact
of adopting ASU 2023-07.
In
December 2023, the FASB issued ASU No. 2023-09 (“ASU 2023-09”), Income Taxes (Topic 740): Improvements to Income Tax Disclosures.
ASU 2023-09 addresses investor requests for more transparency about income tax information through improvements to income tax disclosures
primarily related to the rate reconciliation and income taxes paid information. This update also includes certain other amendments to
improve the effectiveness of income tax disclosures. The provisions of ASU 2023-09 are effective for annual periods beginning after December
15, 2024, with early adoption permitted. We are currently evaluating the impact of adopting ASU 2023-09.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
See
section “Term Loan” under Liquidity and Capital Resources above.
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