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March 8, 2021, 4:19 p.m. EST

10-K: OPTIMIZERX CORP

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(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a pioneering digital health company that provides healthcare communications solutions for life science companies to connect and deliver relevant information to healthcare providers and patients. As the largest digital health network of its kind, the OptimizeRx platform bridges the communication gap that exists between key stakeholders in healthcare, including pharmaceutical companies, payers, hospitals, physicians, and patients, providing patient affordability, access, and adherence directly at the point of care through EHRs and e-prescribing systems.

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 continues to rise, our platform has expanded over the years 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.

Our strategic focus remains on growing our existing client base and generating greater and more consistent revenues in part through our continued shift in our business model toward enterprise level engagements with recurring revenue streams, while also broadening our platform with innovative proprietary solutions such as our TelaRep(TM) virtual communication solution and our AI-powered real-world evidence solution which uses sophisticated proprietary algorithms to derive additional revenue from our existing network. In addition, we have continued to expand our team in preparation for future growth aspirations, which may be supplemented with future acquisitions and other strategic collaborations and investments to further solidify our market dominance in this space.

Our strategy for driving revenue growth is also expected to work in tandem with our efforts to increase margin and profitability through the use of the aforementioned recurring revenue models that have inherently higher margins.

Additionally, as the business continues to scale, operating expenses are expected to remain relatively consistent given the nature of the Company's business model, further driving profitability.

The following discussion includes an analysis and comparison of the Company's 2020 and 2019 fiscal year results of operations, liquidity and capital resources, and critical accounting policies.

COVID-19 Business Update

During the COVID-19 pandemic, we have remained focused on being a leading provider of digital health solutions to life science companies and connecting healthcare providers and patients along the entire patient journey, while simultaneously expanding our client base, increasing our network of partners, and maintaining the safety of our employees.

The COVID-19 pandemic has created unprecedented challenges in the healthcare industry which has significantly increased the demand for unique solutions ranging from access to accurate and timely information to increasing the accessibility of medications and care management. In March 2020, shortly after the World Health Organization (WHO) declared COVID-19 a global pandemic, we launched a free interactive text message alert program available to the general public that delivers current, relevant coronavirus information issued by the Centers for Disease Control and Prevention (CDC) directly to any SMS-enabled mobile device. In April 2020, we launched our TelaRep communications solution to connect life science companies and healthcare providers treating patients with specialty drug therapies in an environment facing a critical communication gap with restricted face-to-face interactions. We also leveraged our digital platform to provide telehealth capabilities for healthcare providers to adapt to COVID-19 restrictions.

During the beginning of the pandemic and onward, we transitioned our global workforce to working remotely in an effort to maintain the health and safety of our employees. Governments of cities, states, and countries globally have imposed restrictions on travel and business operations, which has curtailed various means of performing business and marketing activities such as the attending of health IT conferences. We have been able to continue to achieve our goals by leveraging innovative technology and existing resources while shifting strategies where necessary in areas such as sales and marketing. As a result of these practices and initiatives, remote work arrangements and travel restrictions have not had any adverse effects on our ability to maintain operations or achieve our goals. In addition, we have implemented health and safety policies in our offices to enable our employees to safely return to traditional working arrangements should it become feasible.

The COVID-19 pandemic did not have an adverse impact on our financial condition and results of operations in 2020, and we currently do not expect the results of future operations and our near-and-long-term financial position and growth prospects to be negatively impacted by the pandemic given the nature of the business and the increased demand for digital health solutions. We reported record year over year and quarterly net revenue results in 2020, and we believe that the markets in which we compete will remain favorable. Additionally, there has been no impact on the accessibility or terms of acquiring capital; we completed a public offering of common stock in February of 2021.

Information pertaining to risk factors as it relates to the COVID-19 pandemic can be found in Item 1A. Risk Factors.

Results of Operations for the Years Ended December 31, 2020 and 2019

Net Revenue

Our net revenue for the year ended December 31, 2020 was approximately $43.3 million, an increase of 76% from the year ended December 31, 2019. This increase resulted from a combination of factors, including the shift to enterprise contracts, increased pharmaceutical brands, an increased distribution network, strong growth in our brand messaging solution, and our acquisition of RMDY Health in late 2019. We expect continued strong revenue growth in 2021 as a result of the foundations laid in 2019 and 2020.

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 50 pharmaceutical companies as customers. We have focused our efforts on expanding our customer base and through our acquisitions, have added medical device manufactures, payers, associations and other entities. In both 2020 and 2019, we had three customers that each represented slightly over 10% of our revenues, however only one customer exceeded 10% of revenues in both years.

Cost of Revenues

Our total cost of revenues, composed primarily of revenue share expense, increased in the year ended December 31, 2020 compared to the year ended December 31, 2019 due to the increase in revenues. Our cost of revenues as a percentage of revenue increased from approximately 37% in the year ended December 31, 2019 to approximately 44% in the year ended December 31, 2020.

This increase in our cost of revenues as a percentage of revenue resulted primarily from solution mix, specifically the increase in our core messaging revenues that have higher revenue share percentages.

Gross Margin

Our gross margin, which is simply the difference between our revenues and our cost of revenues, discussed above, increased from 2019 to 2020 as a result of the increased revenue. In addition, our gross margin percentage decreased from approximately 63% in 2019 to 56% in 2020 for the reasons discussed above in the cost of revenues section. We expect our margins to remain in the 56% to 58% range in 2021.

Operating Expenses

Operating expenses increased to approximately $26.2 million for the year ended December 31, 2020, from approximately $19.1 million for the year ended December 31, 2019, an increase of approximately 37%. The detail by major category is reflected in the table below. Certain 2019 expenses were reclassified in the table to be comparable to the 2020 presentation.







                                                    Years Ended December 31
                                                     2020             2019
        Salaries, Wages and Benefits             $ 14,538,570     $  8,681,042
        Professional Fees                           1,312,395          850,086
        Acquisition Related Costs                           -          799,623
        Board Compensation                            225,250          137,000
        Investor Relations                            132,652          105,639
        Consultants                                 1,053,424          425,885
        Advertising and Promotion                     615,923          709,006
        Depreciation and Amortization               2,075,888        1,282,786
        Research, Development, and Maintenance      1,081,137        2,282,143
        Integration Incentives                        811,131          208,855
        Office, Facility and Other                    932,253          695,493
        Travel                                        289,277          695,283
          Subtotal                                 23,067,900       16,872,841
        Stock-based Compensation                    3,172,840        2,260,298
        Total Operating Expense                  $ 26,240,740     $ 19,133,139
        


The main drivers for the overall increase in operating expenses in 2020 was our focus on staffing and scaling our company to foster, and be able to support, accelerated revenue growth.

Within the operating expenses, there were a variety of increases, the largest of which was in salaries, wages and benefits, as a result of additional staff added in 2019 and 2020, including related benefits. During 2019, we hired a chief commercial officer, a chief technology officer, five new salespeople, a human resources manager, as well as other administrative positions at various times throughout the year. We also added 14 employees as a result of our RMDY acquisition in October 2019. These 2019 additions were there for the entire year in 2020. During 2020, we added to our staff in several key areas, including a head of product development, additional sales people, and additional IT people, among others. We expect our compensation expense to increase in 2021, but at a much lower rate than in 2020.

Professional fees increased primarily because of costs associated with our audit, as a result of our change to a larger, national firm, as well as increased legal costs due to the increased complexity of our contracts. In addition, we incurred costs related to the finalization of our RMDY earnout.

Acquisition costs are related to our acquisition of RMDY Health in 2019. These costs include investment banker fees, legal and accounting due diligence, audit costs associated with RMDY, valuation experts for the purchase price allocation, and other miscellaneous costs.

Board compensation increased slightly from 2019 to 2020 due to both an increase in the size of our board as well as a revision of the board compensation structure to pay a larger portion in cash and a smaller portion in stock. This represents only the cash portion.

The cost of consultants increased from 2019 to 2020. The primary reason for the increase was related to consultants used in the IT area, primarily in the patient engagement area, resulting from a full year of activity from the former RMDY Health business as opposed to a partial year in 2019.

Our advertising and promotion costs decreased significantly from 2019 to 2020 as a result of a reduction in the sponsorship of, and attendance at, conferences as a result of the global pandemic.

Expenses related to research, development, management, and maintenance of our technology decreased in 2020 to more normal levels, as 2019 included significant nonrecurring research projects.

Integration incentives and exclusivity fees, which are fees paid to accelerate access to new partners and payments for exclusivity, increased in 2020, as we signed more contracts and contracts with larger payments related to 2020.

Depreciation and amortization increased significantly in 2020 from the 2019 levels. The increased amortization resulting from the acquisition of RMDY Health, and the resulting intangible assets were amortized for a full year in 2020 as opposed to only part of the fourth quarter in 2019. We expect depreciation and amortization expense in 2021 to be similar to 2020 levels.

Office, facility, and other costs increased from 2019 to 2020. The main reason for the change related to a higher level of activity with more employees.

Stock based compensation increased by approximately $900,000 from $2.3 million in 2019 to $3.2 million in 2020 primarily because of more employees and an increase in our stock price. There is a relationship between the price of the stock at the time of the option grant and the value of the option, resulting in a higher cost when the stock price is higher.

Net Loss

We finished the year ended December 31, 2020 with a net loss of approximately $2.2 million, as compared to a net loss of approximately $3.1 million during the year ended December 31, 2019. The reasons for specific components are discussed above. Overall, we had an increase in revenue and gross margin partially offset by increased operating expenses to support future growth. In addition, the income in both periods included significant noncash items. We had approximately $3.5 million in noncash operating expenses in 2019 and approximately $5.2 million in noncash operating expenses in 2020.







        Quarterly Financial Information
        Following is a table of our quarterly operating results for 2020 for information
        purposes.
                                             First            Second           Third            Fourth
                                            Quarter          Quarter          Quarter          Quarter         Total Year
        Revenues                          $  7,584,602     $  8,783,230     $ 10,519,191     $ 16,426,301     $ 43,313,324
        Cost of revenues                     3,241,763        3,639,016        4,504,844        7,822,280       19,207,903
        Gross Profit                         4,342,839        5,144,214        6,014,347        8,604,021       24,105,421
        Operating Expenses                   6,602,091        6,200,027        6,191,069        7,247,553       26,240,740
        Income (Loss) from Operations       (2,259,252 )     (1,055,813 )       (176,722 )      1,356,468       (2,135,319 )
        Other income (expense)                  55,321          (21,655 )       (106,172 )            698          (71,808 )
        Income (loss) before Taxes          (2,203,931 )     (1,077,468 )       (282,894 )      1,357,166       (2,207,127 )
        Income tax benefit                           -                -                -                -                -
        Net Income (Loss)                   (2,203,931 )     (1,077,468 )       (282,894 )      1,357,166       (2,207,127 )
        Earnings (loss) per share
        Basic                             $      (0.15 )   $      (0.07 )   $      (0.02 )   $       0.09     $      (0.15 )
        Diluted                           $      (0.15 )   $      (0.07 )   $      (0.02 )   $       0.08     $      (0.15 )
        


Sum of four quarterly per share amounts does not equal annual total due to rounding and the mechanics of the weighted average shares outstanding calculation.

Following is a table of our quarterly operating results for 2019 for information purposes.







                                             First          Second           Third            Fourth
                                            Quarter         Quarter         Quarter          Quarter         Total Year
        Revenues                          $ 5,209,434     $ 7,006,291     $  5,002,767     $  7,379,782     $ 24,598,274
        Cost of revenues                    1,583,480       2,687,143        1,981,143        2,906,933        9,158,699
        Gross Profit                        3,625,954       4,319,148        3,021,624        4,472,849       15,439,575
        Operating Expenses                  3,493,789       3,839,105        5,008,934        6,791,311       19,133,139
        Income (Loss) from Operations         132,165         480,043       (1,987,310 )     (2,318,462 )     (3,693,564 )
        Other income (expense)               (125,636 )       (73,426 )        416,368         (564,278 )       (346,972 )
        Income (loss) before Taxes              6,529         406,617       (1,570,942 )     (2,882,740 )     (4,040,536 )
        Income tax benefit                          -               -                -          897,960          897,960
        Net Income (Loss)                       6,529         406,617       (1,570,942 )     (1,984,780 )     (3,142,576 )
        Earnings (loss) per share
        Basic                             $      0.00     $      0.03     $      (0.11 )   $      (0.14 )   $      (0.23 )
        Diluted                           $      0.00     $      0.03     $      (0.11 )   $      (0.14 )   $      (0.23 )
        


Liquidity and Capital Resources

As of December 31, 2020, we had total current assets of approximately $32.9 million, compared with current liabilities of approximately $10.0 million, resulting in working capital of approximately $22.9 million and a current ratio of approximately 3.3 to 1. This compares with the working capital balance of approximately $21.0 million and the current ratio of 4.4 to 1 at December 31, 2019. This increase in working capital, as discussed in more detail below, is primarily the result of the earnings before non-cash expenses.

Following is a table with summary data from the consolidated statement of cash flows for the years ended December 31, 2020 and 2019, as presented.







                                                                  2020             2019
        Net cash used in operating activities                 $ (6,310,386 )   $  (1,660,796 )
        Net cash used in investing activities                     (124,725 )     (10,582,086 )
        Net cash provided by (used in) financing activities     (1,900,793 )      22,181,528
        Net increase in cash and cash equivalents             $ (8,335,904 )   $   9,938,646
        


Our operating activities used approximately $6.3 million in the year ended December 31, 2020, as compared with approximately $1.7 million used in operating activities in the year ended December 31, 2019. The cash used in both 2019 and 2020 was the result of our net loss and the increased working capital required to support higher revenues, partially offset by our non-cash expenses.

We used approximately $125,000 in investing activities in 2020, primarily as the result of purchase of assets. The majority of our approximately $10.6 million in investing in activities in 2019 related to our acquisitions of RMDY Health, Inc., as well as a software purchase.

Financing activities provided approximately $22.2 million in the year ended December 31, 2019. The cash provided in 2019 was the result of our underwritten offering in 2019, as well as from the proceeds of option exercises. We used cash of approximately $1.9 million in 2020 as the result of proceeds of option exercises, partially offset by the payment of contingent consideration related to previous acquisitions.

With our cash on hand, we have sufficient cash to operate our business for more than the next 12 months and we have raised approximately $71 million in February 2021 that will enable us to continue to expand our business and accelerate revenue growth. We do not anticipate the need to raise any additional cash.

Off Balance Sheet Arrangements

As of December 31, 2020, there were no off-balance sheet arrangements.

Critical Accounting Policies

A "critical accounting policy" is one which is both important to the portrayal of a company's financial condition and results, and requires management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Our accounting policies are discussed in detail in the footnotes to our financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2020; however, we consider our critical accounting policies to be those related to revenue recognition, calculation of revenue share expense (cost of revenues), stock-based compensation, capitalization and related amortization of intangible assets and impairment of assets. Following is a summary of those policies.

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 these 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 recognizes revenue for providing program performance reporting and maintenance, either by our company directly delivering reports or by providing access to its 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.

We do not disaggregate our revenue as virtually all types of revenue are generated through the same core group of customers and generally all involve the delivery of content. Different types of revenue are not impacted by economic factors that affect the nature, amount, timing, or uncertainty of revenues or cash flows.

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. There were only minor immaterial programs recorded on a net basis in the years presented. 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 (formerly LDM/PDR) 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. The contractual amount due to the channel partners is recorded as an expense at the time the message is distributed.

Intangible Assets

Intangible assets are stated at cost. Finite-lived assets are being amortized over their estimated useful lives of 15 to 17 years for patents, 8 to 15 years for customer relationships, 2 to 4 years for covenants not to compete, 10 years for technology, and 3 to 4 years for software and websites, all using the straight-line method. These assets, as well as our indefinite-lived asset, are evaluated annually in our fiscal fourth quarter for impairment.

Goodwill

We evaluate goodwill for impairment during our fiscal fourth quarter, or more frequently if an event occurs or circumstances change. We determined there was no impairment as goodwill had a fair value comfortably in excess of its carrying value.

Stock-based Compensation

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 restricted stock, the fair market value is based on the market value of the stock granted on the date of the grant. For options, it 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.

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the "FASB") issued ASU . . .

Mar 08, 2021

COMTEX_382357045/2041/2021-03-08T16:19:17

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