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Nov. 9, 2020, 4:24 p.m. EST

10-Q: OPTIMIZERX CORP

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. 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. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to:

Overview

The full extent of the impact of the COVID-19 pandemic on our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict at the present time. In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, including orders to close all businesses not deemed "essential," isolate residents to their homes or places of residence, and practice social distancing when engaging in essential activities. We anticipate that these actions and the global health crisis caused by COVID-19 will negatively impact business activity across the globe. While we have not observed any noticeable impact on our revenue related to these conditions in the recently completed fiscal quarter, or through the date of this filing, we cannot estimate the impact COVID-19 will have in the future if business and consumer activity decelerates across the globe.

In March 2020, we enacted precautionary measures to protect the health and safety of our employees and partners. These measures include closing all offices, having employees work from home, and eliminating virtually all travel. While having employees work from home may have a negative impact on efficiency and may result in negligible increases in costs, it does not impact our ability to execute on our contracts or deliver our core services. Our offices remain closed and we continue to prohibit travel through the date of this filing and expect to continue operating in this fashion for the foreseeable future. Our customers provide essential services in the healthcare industry and we believe that our digital communication technology is more important than ever in this environment. However, our revenue often comes from advertising or marketing budgets, and in a sustained economic downturn, those categories of spending may be cut.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our employees, customers, partners and stockholders. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our customers, partners, or vendors, or on our financial results.

Current Year Company Highlights through October 2020

1. Revenue was a record $10.5 million in the third quarter of 2020, up 110% versus the same year-ago quarter.

2. Revenue for the nine months ended September 30, 2020 was $26.9 million, a 56% increase over the same period in 2019.

3. Gross profit was $6.0 million in the third quarter of 2020, up 99% as compared to the same year-ago quarter.

4. Finalized an agreement with a partner with a large Epic and Cerner footprint, bringing access to additional healthcare providers in a hospital setting.

5. We launched a new technology solution aimed at increasing speed to therapy for patients by providing timely access to enrollment forms for specialty drugs within the provider workflow and we already have three active programs.

6. We introduced TelaRep(TM), a digital health tool that enables physicians to connect to pharmaceutical sales representatives via on-demand video consults within a physician's existing EHR workflow.

7. We focused on the process of converting our active clients to enterprise contracts covering multiple brands and products to further entrench our longstanding relationships.

8. We expanded our Board of Directors, adding Greg Wasson, former President and CEO of Walgreens Boots Alliance, a veteran of the retail pharmacy industry and a valuable and timely addition to our board as we look to enhance patient connectivity at the point-of-dispense.

Our success in acquiring, integrating and expanding into new EHR/eRx platforms, as well as other direct to patient partners, continues to grow as well. For the remainder of 2020, we expect to expand our reach to physicians, pharmacies and patients, and also increase the utilization of our existing partners as they improve their workflow and provider reach. With the growth of both our pharmaceutical products and our distribution network, we expect that our messaging solutions, as well as our patient engagement activities, will continue to increase and show strong growth throughout the year.

Results of Operations for the Three and Nine Months Ended September 30, 2020 and 2019

Revenues

Our total revenue reported for the three months ended September 30, 2020 was $10.5 million, an increase of 110% over the $5.0 million from the same period in 2019. Our total revenue for the nine months ended September 30, 2020 was $26.9 million, an increase of 56% over the $17.2 million from the same period in 2019. The increased revenue in both periods resulted primarily from increases in sales in our messaging products and patient engagement products, including from our acquisition of RMDY Health in 2019.

Cost of Revenues

Our cost of revenue percentage, comprised primarily of revenue share expense, increased as a percentage of revenues in both the three and nine month periods ended September 30, 2020, as compared to the same periods in 2019, as set forth in the table below. This increase was a result of product mix. The 2019 nine-month period contained an unusually high percentage of launch assistance services and other nonrecurring revenue that was not subject to revenue share expense. As we have previously discussed, we expect our cost of revenues to decrease slightly in the fourth quarter.







                               Three Months Ended          Nine Months Ended
                                  September 30,              September 30,
                               2020           2019         2020           2019
        Cost of Revenues %        42.9 %        39.6 %        42.3 %       36.3 %
        Gross Margin %            57.1 %        60.4 %        57.7 %       63.7 %
        


Gross Margin

As reflected in the table above, our gross margin decreased in both 2020 periods from the prior year periods. As discussed under cost of revenues above, we had an unusually favorable product mix in the nine-month 2019 period that had a positive impact on our margin in 2019. Our gross margin for the full year of 2019 was 62.7%. Our gross margin was 57.3% in the first quarter of 2020, improved to 58.0% in the second quarter, and declined to 57.1% in the third quarter. We expect our gross margin to improve in the fourth quarter.

Operating Expenses

Operating expenses increased from $5.0 million for the three months ended September 30, 2019 to $6.2 million for the same period in 2020. Operating expenses increased from $12.3 million for the nine months ended September 30, 2019 to $19.0 million for the same period in 2020. Overall, the increase resulted from our efforts to expand our product line and build out our organization to establish a strong base for current and future growth. The detail by major category is reflected in the table below.







                                                       Three Months Ended                Nine Months Ended
                                                          September 30,                    September 30,
                                                      2020            2019             2020             2019
        Salaries, Wages, & Benefits                $ 3,304,388     $ 1,882,433     $  9,686,985     $  5,672,775
        Stock-based Compensation                       756,437         590,244        2,391,620        1,769,720
        Professional Fees                              199,262         525,284          871,564          899,915
        Board Fees                                      61,250          34,250          164,000          102,750
        Investor Relations                              28,356          19,258           76,483           63,075
        Consultants                                    196,396          81,411          492,116          176,911
        Advertising and Promotion                      101,295         137,276          511,605          491,989
        Depreciation, Amortization, and Non-cash
        Lease Expense                                  523,420         320,055        1,563,883          745,928
        Development and Maintenance                    578,054       1,034,281        1,707,670        1,432,390
        Integration Incentives                         208,807          47,032          624,753          136,825
        Office, Facility, and Other                    211,602         108,640          593,084          339,607
        Travel and Entertainment                        21,802         228,770          309,424          509,942
        Total Operating Expenses                   $ 6,191,069     $ 5,008,934     $ 18,993,187     $ 12,341,827
        


The largest increases in operating expenses are related to salaries, wages, and benefits and other human resource related costs. Since the beginning of the first quarter of 2019, we have significantly expanded our sales force, made an acquisition to expand our product portfolio, and added to our product development, data, and finance teams. These new hires have established a strong basis for significant future growth and have also resulted in increases in benefits, payroll taxes, and related travel. The increased stock-based compensation results from the grant of new options and the increased number of team members. We expect salaries, wages, & benefits, as well as stock-based compensation to remain at similar levels, or only increase slightly, for the balance of the year. We expect travel expense to remain low for the balance of the year as a result of the COVID-19 pandemic.

Professional fees in 2020 are similar to 2019 levels for the nine-month periods ended September 30. Professional fees in the quarter ended September 30, 2020 were much less than the same period in 2019. The 2019 quarter included costs related to our acquisition of RMDY Health.

Depreciation and amortization increased because of the amortizable assets acquired in connection with our acquisition of RMDY in the fourth quarter of 2019. Office, facility, and other expenses also increased as a result of the acquisition, which resulted in an additional office location for us, as well as the normal increased costs associated with increased business activity.

Research, development, and maintenance costs increased primarily because our efforts to expand and enhance our patient engagement platforms and products, as well as integration costs related to the combination, improvement and optimization of IT systems.

Integration and exclusivity costs represent payments to partners for access and/or exclusivity. These payments are usually made in lump sums and expensed over the term of the contracts. These expenses are an important part of our ability to expand our network and increased in 2020 as a result of new agreements signed.

The purchase price allocations for both of our recent acquisitions included potential additional consideration to be paid if certain revenue levels are achieved in 2019, 2020, and 2021. That liability is required to be adjusted to fair value each quarter. The increase or decrease in the fair value of contingent consideration in 2019 related to our acquisition of CareSpeak Communications in 2018. The maximum amount of potential contingent consideration related to CareSpeak was recorded as of December 31, 2019 and we still expect the maximum amount to be paid. The increase in contingent consideration in 2020 relates to our acquisition of RMDY Health, Inc. in 2019. The amount due under the RMDY agreement was finalized and paid in 2020, so there will be no future adjustments to the contingent purchase payable.

All other variances in the table above are the result of normal fluctuations in activity.

We expect our overall operating expenses to continue at approximately the third quarter of 2020 level as we further implement our business plan and expand our operations to grow the business in a very dynamic and active marketplace. However, we have established a strong team as a base to support growth and we are seeing the results of the investment in our team last year in our strong revenue growth this year. We do not expect human resource costs to increase as quickly as revenues.

Net Income (Loss)

We had a net loss of $0.3 million for the three months ended September 30, 2020, as compared to net loss of $1.6 million during the same period in 2019, and down from the $2.2 million loss in the three months ended March 31, 2020 and the $1.1 million loss in the three months ended June 30, 2020. We had a loss of approximately $3.6 million for the nine months ended September 30, 2020, as compared to a net loss of approximately $1.2 million during the same period in 2019. The reasons and specific components associated with the change are discussed above. Overall, the increased loss in the nine month period resulted from increased operating expenses to support strong revenue growth throughout 2020 and beyond. That strong revenue growth resulted in a reduced loss in the three months ended September 30, 2020.

Liquidity and Capital Resources

As of September 30, 2020, we had total current assets of $27.2 million, compared with current liabilities of $8.1 million, resulting in working capital of approximately $19.1 million and a current ratio of 3.4 to 1. This represents a slight decrease from our working capital of approximately $21.0 million and current ratio of 4.4 to 1 at December 31, 2019.

Our operating activities used approximately $3.7 in cash flow during the nine months ended September 30, 2020, compared with cash used of approximately $0.2 million in the same period in 2019. This use of cash was primarily all in the first quarter. In the 2020 period, operating activities used $3.7 million in the first quarter, provided approximately $0.1 million in the quarter ended June 30, 2020 and used approximately $0.1 million in the quarter ended September 30, 2020. The cash used in the 2020 period was primarily the result of increased investment in working capital; in particular, we made a prepayment to a partner that accounts for the bulk of the increase in prepaid expenses and will be expensed over the balance of the year as revenue is generated through that channel. In addition, as a result of our strong revenue growth of 110% in the third quarter, our trade receivables increased by $6.0 million, which was partially offset by increased revenue share of $2.0 million owed to our channel partners. Only a portion of our revenue is subject to revenue share and the payment terms to our partners are different than the terms that we receive from customers. While there is an indirect relationship between changes in accounts receivable and revenue share payable, they are both dependent on product and customer mix and relative changes in a particular period are impacted by such factors.

This increase in accounts receivable does not reflect on our customers' ability to pay. Our customers are large multinational companies and many dictate extended payment terms, but also offer discounts for quick payment. Since we have sufficient cash reserves, we do not take advantage of the discounts, which translate to extremely high implied rates of interest. The cash used in the 2019 period was the result of our net loss during the period, offset by non-cash expenses.

We used approximately $45,000 and $1.1 million in investing activities for the nine months ended September 30, 2020, and 2019, respectively. These investments related to purchases of equipment, as well as investments in software to expand our network capabilities.

We had a net use of cash in financing activities in the nine months ended September 30, 2020. This included proceeds from financing activities of approximately $1.3 million related to the exercise of stock options offset by approximately $4.4 million in payments related to contingent consideration. We had net proceeds of $22.1 million from financing activities during the nine months ended September 30, 2019, primarily from a secondary offering of common stock in June 2019. There have been no proceeds from investment offerings in 2020.

We do not anticipate the need to raise additional capital in the short or long term for operating purposes or to fund our growth plans. We are focused on growing our revenue, channel and partner network. However, as a company in a market that is active with merger and acquisition activity, we may have opportunities, such as for acquisitions or strategic partner relationships, which may require additional capital. We will assess these opportunities as they arise with the view of maximizing shareholder value.

Critical Accounting Policies

In December 2001, the SEC requested that all registrants list their most "critical accounting polices" in the Management Discussion and Analysis. The SEC indicated that 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 the footnotes to our financial statements included in our annual report on Form 10-K for the year ended December 31, 2019; however, we consider our critical accounting policies to be those related to determining the amount of revenue to be billed, the timing of revenue recognition, calculation of revenue share expense, stock-based compensation, capitalization and related amortization of intangible assets, impairment of assets, and the fair value of liabilities.

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the "FASB") issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 provides for a new impairment model that requires measurement and recognition of expected credit losses for most financial assets and certain other instruments, including but not limited to accounts receivable and available for sale debt securities. ASU 2016-13 was effective for the Company on January 1, 2020. The adoption of this standard did not have a material effect on our financial position, results of operations, or cash flows.

In August 2019, the FASB issued ASU 2019-13, Fair Value Measurement (Topic 820):

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740):

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. The second step measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. Under ASU 2017-04, a company will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value. ASU 2017-04 will be applied prospectively and is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard did not have a material effect on our financial position, results of operations, or cash flows.

Off Balance Sheet Arrangements

As of September 30, 2020, there were no off-balance sheet arrangements.

Nov 09, 2020

COMTEX_374190548/2041/2020-11-09T16:24:09

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