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: our history of losses, 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 solutions may be more difficult and expensive and take longer than expected; the inability to offer high-quality customer support for our solutions; dependence on a concentrated group of customers; inability to maintain contracts with electronic prescription platforms and electronic health record systems, 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; impairment charges for goodwill or other long-lived assets may need to be recognized or increased if we lose a major customer, experience a decline in our common stock price, or experience changes to the regulatory environment affecting pharmaceutical advertising restricting the use of our technology; inability to comply with the restrictions in our credit agreement; inability to generate sufficient cash to service debt and fund other obligations; inability to raise capital to grow business on favorable terms or at all; 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; volatility in the market price of our common stock; and the failure to remediate the identified material weakness or any other material weaknesses identified in the future. 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, 2024. 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. 18 Table of Contents Overview OptimizeRx is a digital healthcare technology company that connects over two million HCPs and millions of their patients through an intelligent technology platform embedded within a proprietary omnichannel network. OptimizeRx helps life sciences organizations engage and support their customers through our combined HCP and DTC marketing strategies. OptimizeRx has historically generated revenue by delivering messages to HCPs via their EHR systems and eRx platforms using our proprietary network of channel partners. We have gradually expanded our offerings to include audience development, audience creation, and media execution across different messaging types and media distribution channels. Overall, we employ a “land and expand” strategy focused on growing our existing customer base and generating greater and more consistent revenues in part through a continued shift in our business model toward enterprise level engagements, while also broadening our platform with innovative proprietary virtual communication solutions such as our patented Micro-Neighborhood Targeting and our AI-powered DAAP, 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. In addition, by aiming to transition our DAAP customers to a more predictable subscription-based model for data services, we believe will further improve margins, increase visibility, and enhance the overall predictability of our revenue streams over time. 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 among the largest pharmaceutical companies in the world. Loss of one or more of our larger customers could have a negative impact on our operating results. Our top five customers represented approximately 49% and 44% of our revenue for the years ended December 31, 2024 and December 31, 2023, respectively. In 2024 and 2023, we had two customers and one customer, respectively, that represented more than 10% of our revenues. Seasonality In general, the pharmaceutical brand marketing industry spends its advertising budget seasonally. 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 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 the recent past, and threats of multinational tariffs and retaliatory tariffs provide uncertainty as to heightened inflation in the domestic markets in the next twelve months. 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 2024 revenue”. We previously used “The top 20 pharma companies by 2023 revenue”. As a result of this change, prior periods have been restated for comparative purposes. 19 Table of Contents 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 2024 revenue” over the last twelve months, divided by 20, representing the aforementioned pharmaceutical manufacturers highlighted on that list. 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 the twelve months ended March 31, 2025, as compared to the twelve months ended March 31, 2024, is primarily the result of stronger DTC and DAAP related revenue streams (in thousands). Rolling Twelve Months Ended March 31, 2025 2024 Average revenue per top 20 pharmaceutical manufacturer $ 2,960 $ 2,592 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 2024 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. This decrease in our total revenue attributable to top 20 pharmaceutical manufacturers, in conjunction with the increase in average revenue per top 20 pharmaceutical manufacturer discussed above, is reflective of the onboarding and growth of other customers that are not top 20 pharmaceutical manufacturers and not a decrease in our activity with top 20 pharmaceutical manufacturers. Rolling Twelve Months Ended March 31, 2025 2024 Percent of total revenue attributable to top 20 pharmaceutical manufacturers 63 % 66 % 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. Net revenue retention for the period ending March 31, 2024, benefited from revenue related to the acquisition of Medicx Health, as the acquisition was not consummated during the prior year period. This benefit did not exist in the period ending March 31, 2025 which made for a more challenging year over year comparison. Rolling Twelve Months Ended March 31, 2025 2024 Net revenue retention 114 % 116 % Revenue per average full-time employee. We define revenue per average full-time employee (“FTE”), 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 20 Table of Contents per employee increased year over year due to revenue growing at a higher rate than the average number of FTEs over the last 12 month period (in thousands). Rolling Twelve Months Ended March 31, 2025 2024 Revenue per average full-time employee $ 710 $ 641 Results of Operations for the Three Months Ended March 31, 2025 and 2024 The following tables sets forth, for the periods indicated, the dollar value and percentage of net revenue represented by certain items in our condensed consolidated statements of operations (in thousands): Three Months Ended March 31, 2025 2024 Net revenue $ 21,928 100.0 % $ 19,690 100.0 % Cost of revenues 8,584 39.1 % 7,486 38.0 % Gross profit 13,344 60.9 % 12,204 62.0 % Operating expenses 15,458 70.5 % 17,233 87.5 % Loss from operations (2,114) (9.6) % (5,029) (25.5) % Other expense (1,170) (5.3) % (1,526) (7.8) % Loss before provision for income taxes (3,284) (15.0) % (6,555) (33.3) % Income tax benefit (expense) 1,085 4.9 % (344) (1.7) % Net loss $ (2,199) (10.0) % $ (6,899) (35.0) % * Balances and percentage of net revenue information may not add due to rounding Net Revenues Our net revenue increased 11% to $21,928 for the three months ended March 31, 2025 from $19,690 from the same period in 2024. The increase in net revenue was a result of the growth of DTC and DAAP related sales. Cost of Revenues Our cost of revenues, composed primarily of revenue-share expense paid to our channel partners increased for the three months ended March 31, 2025 to $8,584 compared to $7,486 for the same period of 2024. Our cost of revenues as a percentage of revenue increased to approximately 39% for the three months ended March 31, 2025 from approximately 38% for the three months ended March 31, 2024. This increase in cost of revenues as a percentage of revenues was a primarily result of solution and channel partner mix. Gross Margin Our gross margin, which is the difference between our revenues and our cost of revenues, divided by our revenues, decreased for the three months ended March 31, 2025 compared to the same period of 2024, primarily due to product and channel partner mix. Operating Expenses Operating expenses decreased to approximately $15,458 for the three months ended March 31, 2025 from approximately $17,233 for the same period in 2024, a decrease of approximately 10%. The detail by major category is reflected in the next table (in thousands). 21 Table of Contents Three Months Ended March 31, 2025 2024 Stock-based compensation $ 1,558 $ 3,024 Depreciation and amortization 1,094 1,067 Other general and administrative expenses 12,806 13,142 Total operating expense $ 15,458 $ 17,233 Stock-based compensation decreased to $1,558 for the three months ended March 31, 2025 from $3,024 for the three months ended March 31, 2024. The decrease was a result of the lower grant date fair value of awards due to declines in the Company’s stock price as well as a decrease in the quantity of awards vesting. Depreciation and amortization increased to $1,094 for the three months ended March 31, 2025 from $1,067 for the three months ended March 31, 2024. The increase was a result of the additional amortization associated with capitalized labor for internal software development. Other general and administrative expenses decreased to $12,806 for the three months ended March 31, 2025 from $13,142 for the three months ended March 31, 2024. This decrease is primarily a result of a decrease of $297 in integration incentives costs. Other income (expense) Interest expense decreased to $1,297 for the three months ended March 31, 2025 from $1,546 for the three months ended March 31, 2024 and represents interest charges on our Term Loan, together with the amortization of the related issuance costs. The decrease is primarily a result of the decrease in the interest rate on the Term Loan and a lower average principal balance for the three months ended March 31, 2025 as compared to the three months ended March 31, 2024. Interest income increased to $88 for the three months ended March 31, 2025 from $20 for the three months ended March 31, 2024. The increase was a result of higher interest rates in our money market fund compared to the same period in 2024. Income tax benefit (expense) Income tax benefit was approximately $1,085, or an effective rate of 33.0%, for the three months ended March 31, 2025. Income tax expense was approximately $344, or an effective rate of 5.2%, for the three months ended March 31, 2024. For further information, see Part I, Item I. Financial Statements; Note 12 — Income Taxes in the Condensed Consolidated Financial Statements. Net income (loss) We had a net loss of approximately $(2,199) for the three months ended March 31, 2025, as compared to a net loss of approximately $(6,899) during the same period in 2024. 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. In addition, on October 11, 2023, the Company entered into a Term loan of $40.0 million in order to partially fund the acquisition of Medicx Health. As of March 31, 2025, the total principal balance outstanding on the Term loan was approximately $33.8 million and we were in compliance with all of the financial covenants of the Term loan. As of March 31, 2025, we had total current assets of approximately $51.7 million, compared with current liabilities of approximately $18.4 million, resulting in working capital of approximately $33.3 million and a current ratio of approximately 2.8 to 1. This represents a decrease from our working capital of approximately $35.3 million and an increase from the current ratio of 3.0 to 1 at December 31, 2024. 22 Table of Contents We believe that funds generated from operations, together with existing cash, will be sufficient to finance our current operations and meet our obligations under the Term loan 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. Cash Flows Following is a table with summary data from the condensed consolidated statements of cash flows for the three months ended March 31, 2025 and 2024, as presented (in thousands). Three Months Ended March 31, 2025 2024 Net cash provided by operating activities $ 3,864 $ 2,118 Net cash used in investing activities (84) (153) Net cash used in financing activities (587) (640) Net increase in cash and cash equivalents $ 3,193 $ 1,325 Our operating activities provided $3,864 during the three months ended March 31, 2025, compared with $2,118 in the same period in 2024. The net increase in net cash provided by operating activities was mainly attributable to a $4,700 decrease in net loss. This was partially offset by a $1,466 decrease in noncash expense related to stock based compensation, a $881 decrease in cash flows from accounts receivable and a $754 decrease in cash flows from taxes receivable and payable. Investing activities used $84 for the three months ended March 31, 2025, compared with $153 in the same period in 2024. The decrease in net cash used in investing activities was mainly attributed to capitalization of internally developed software. Financing activities used $587 during the three months ended March 31, 2025, compared with $640 in the same period in 2024. The decrease in net cash used for financing activities was primarily related to the decrease in payments of withholding taxes on behalf of employees vesting in restricted stock units. Critical Accounting Estimates We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). 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. Estimates and assumptions have been made in determining the allowance for credit losses, carrying value of assets, fair values assigned to acquired long-lived assets, depreciable and amortizable lives of tangible and intangible assets, the carrying value of liabilities, the valuation allowance for deferred tax assets, the timing of revenue recognition and related revenue-share expenses, and inputs used in the calculation of stock-based compensation. 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, 2024 (2024 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 2024 Annual Report on Form 10-K. Our critical accounting estimates are described in Management’s Discussion and Analysis included in the 2024 Annual Report on Form 10-K. Recently Issued Accounting Pronouncements In December 2023, the Financial Accounting Standards Board (“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 23 Table of Contents 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. In November 2024, the FASB issued ASU 2024-03 (“ASU 2024-03”), Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40). ASU 2024-03 requires that public business entities disclose additional information about specific expense categories in the notes to financial statements at interim and annual reporting periods. The prescribed categories include purchases of inventory, employee compensation, depreciation, intangible asset amortization, and depletion. This authoritative guidance is effective for annual periods beginning after December 15, 2026 and interim periods beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the effect of this new guidance on its consolidated financial statements. Off Balance Sheet Arrangements From time to time, the Company enters into arrangements with channel partners to acquire minimum amounts of media, data or messaging capabilities. As of March 31, 2025, the Company had commitments with channel partners for future minimum payments of $16.6 million that will be reflected in cost of revenues during the remainder of 2025 and years from 2026 through 2029. See Part I, Item 2. Financial Statements; Note 11 – Commitments and Contingencies. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.