Item 1A. Risk Factors
Risks Relating to Business and Financial
Condition
Because we have historically experienced
losses, if we are unable to achieve profitability, our financial condition and company could suffer.
While we were profitable for the full year
of 2018 and in the fourth quarter of 2020, since the inception of our business we have historically incurred losses as a result
of investing in growth. We incurred losses in 2019 and 2020 as a result of our increased spending to invest in growth – both
through additional new hires, as well as through the acquisition of RMDY. While we have increased revenues significantly, we have
not yet consistently achieved profitability due to significant investments in our growth, and non-cash expenses. Our ability to
achieve consistent profitability depends on our ability to generate sales through our technology platform and advertising model,
while maintaining reasonable expense levels. If we do not achieve sustainable profitability, it may impact our ability to continue
our operations.
Our business and growth may suffer
if we are unable to attract and retain key employees.
Our success depends on the expertise of
our executive officers and certain other key technical personnel. It may be difficult to find sufficiently qualified individuals
to replace management or other key technical personnel in the event of death, disability or resignation, thus frustrating our ability
to implement our business plan, which could negatively affect our operating results.
Furthermore, our ability to expand operations
to accommodate our anticipated growth will also depend on our ability to attract and retain qualified media, management, finance,
marketing, sales and technical personnel. However, competition for these types of employees is intense due to the limited number
of qualified professionals. Our ability to meet our business development objectives will depend in part on our ability to recruit,
train and retain top quality people with advanced skills who understand our technology and business. If we are unable to engage
and retain the necessary personnel, our business may be materially and adversely affected.
Our failure to obtain, retain or
attract additional customers could prevent us from successfully executing our business plan.
We currently work with many leading pharmaceutical
companies, medical device manufacturers, medtech, associations, and other companies. Our failure to retain existing customers or
expand with new customers could negatively impact our business.
We are dependent on a concentrated
group of customers.
Our revenues are concentrated in less than
50 customers, primarily large pharmaceutical manufacturers. Loss of one or more of our larger customers could have a negative impact
on our operating results. In both 2020 and 2019, we had three customers that each represented slightly over 10% of our revenues;
however only one customer represented over 10% of our revenues in both years.
We may be unable to support our technology
to further scale our operations successfully.
Our plan is to grow rapidly through further
integration of our technology in electronic platforms. Our growth will place significant demands on our management and technology
development, as well as our financial, administrative and other resources. We cannot guarantee that any of the systems, procedures
and controls we put in place will be adequate to support the commercialization of our operations. Our operating results will depend
substantially on the ability of our officers and key employees to manage changing business conditions and to implement and improve
our financial, administrative and other resources. If we are unable to respond to and manage changing business conditions, or the
scale of our solutions, services and operations, then the quality of our services, our ability to retain key personnel and our
business could be harmed.
6
If we are unable to maintain our contracts with
electronic prescription platforms, our business will suffer.
We are reliant upon our contracts with
leading electronic prescribing platforms and electronic health record systems to generate our revenues received from customers
Such arrangements subject us to a number of risks, including the following:
We will need to maintain these relationships
as well as diversify them. The inability to do so could adversely impact our business. We generated 52.7% and 37.4% of our revenue
through our largest partner in 2020 and 2019, respectively.
Our agreements with electronic prescription
platforms and electronic health record systems are subject to audit.
Our agreements with our partners provide
for revenue sharing payments to the platform partners based on the revenue we generate through the platform. These payments are
subject to audit by our partners, at their cost, and if there is a dispute as to the calculation, we may be liable for additional
payments. If an underpayment is determined to be in excess of a certain amount, for example 10%, some agreements would require
us to pay for the cost of the audit, as well.
Developing and implementing new and
updated applications, features and services for our portals may be more difficult than expected, may take longer and cost more
than expected and may not result in sufficient increases in revenue to justify the costs.
Attracting and retaining users of our portals
requires us to continue to improve the technology underlying those portals and to continue to develop new and updated applications,
features and services for those portals. If we are unable to do so on a timely basis or if we are unable to implement new applications,
features and services without disruption to our existing ones, we may lose potential users and clients. The costs of development
of these enhancements may negatively impact our ability to achieve profitability.
We rely on a combination of internal development,
strategic relationships, licensing and acquisitions to develop our portals and related applications, features and services. Our
development and/or implementation of new technologies, applications, features and services may cost more than expected, may take
longer than originally expected, may require more testing than originally anticipated and may require the acquisition of additional
personnel and other resources. There can be no assurance that the revenue opportunities from any new or updated technologies, applications,
features or services will justify the amounts spent.
If we are unable to adhere to the
regulatory and competitive climate in which we operate, we could be materially and negatively impacted.
Due to the labyrinth of regulations in
healthcare space, state and federal, as well as political sensitivity of healthcare delivery, our business model could be negatively
impacted or fail.
7
The markets in which we operate are
competitive, continually evolving and, in some cases, subject to rapid change.
Many of our competitors have greater financial,
technical, product development, marketing and other resources than we do. These organizations may be better known than we are and
have more customers or users than we do. We cannot provide assurance that we will be able to compete successfully against these
organizations or any alliances they have formed or may form. Since there are no substantial barriers to entry into the markets
in which our public portals participate, we expect that competitors will continue to enter these markets.
Developments in the healthcare industry
could adversely affect our business.
Most of our revenue is derived from the
healthcare industry and could be affected by changes affecting healthcare spending. We are particularly dependent on pharmaceutical,
biotechnology and medical device companies for our advertising and sponsorship revenue.
General reductions in expenditures by healthcare
industry participants could result from, among other things:
● Consolidation of healthcare industry participants;
● Reductions or changes in governmental funding for healthcare;
● A move to a single-payer healthcare system in the U.S.
Even if general expenditures by industry
participants remain the same or increase, developments in the healthcare industry may result in reduced spending in some or all
of the specific market segments that we serve or are planning to serve. For example, use of our solutions and services could be
affected by:
● Changes in the design of health insurance plans;
8
● A decrease in the number of new drugs or medical devices coming to market;
● Payor pressure to move to generic brands.
In addition, our customers’ expectations
regarding pending or potential industry developments may also affect their budgeting processes and spending plans with respect
to solutions and services of the types we provide.
The healthcare industry has changed significantly
in recent years and we expect that significant changes will continue to occur. However, the timing and impact of developments in
the healthcare industry are difficult to predict. We cannot assure you that the markets for our solutions and services will continue
to exist at current levels or that we will have adequate technical, financial and marketing resources to react to changes in those
markets.
Future acquisitions
may adversely affect our financial condition.
While we currently do not have any immediate
arrangements, commitments or understandings regarding any future acquisitions, as part of our strategy for growth, we may continue
to explore acquisitions or strategic alliances, which may not be completed or may not be ultimately beneficial to us. Acquisitions
may pose risks to our operations, including:
● unanticipated costs;
● failure to achieve anticipated increases in revenues and profitability;
● diversion of management’s attention from our core business;
● volatility associated with accounting for earn-outs in a given transaction;
● entering markets in which we have no, or limited, prior experience; and
In addition, in connection with any acquisitions
or investments we could:
● incur debt and assume liabilities;
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The failure to successfully integrate any
acquisitions in an efficient or timely manner may negatively impact our financial condition and operating results, or we may not
be able to fully realize anticipated savings. In addition, our competitors could try to emulate our acquisition strategy, leading
to greater competition for scarce acquisition targets and could lead to larger competitors if they succeed in emulating our strategy.
The global pandemic may disrupt our
business or the business of our customers.
In December 2019, a novel strain of corona
virus, which causes the infectious disease known as COVID-19 was reported. The World Health Organization declared COVID-19 a Public
Health Emergency and Global Pandemic. COVID-19 has severely impacted economies around the world. We have taken steps to mitigate
the impact on us, but there can be no assurance that such steps will be successful, or that our business operations, or the operations
of our customers will not be materially and adversely affected by the consequences of the pandemic. This could materially impact
our results of operations, cash flows, and financial condition.
A material weakness in our internal
control over financial reporting, if not remediated, could result in material misstatements in our financial statements.
Management is responsible for establishing
and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934, as amended. A material weakness (as defined in Rule 12b-2) is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim
financial statements will not be prevented or detected on a timely basis. We have had material weaknesses in the past that have
been remediated as of December 31, 2020. There is no guarantee that material weakness could not arise in the future. If additional
material weaknesses were to be identified, it could result in our consolidated financial statements containing material misstatements
in the future.
Our success is dependent in part
on obtaining, maintaining and enforcing our proprietary rights and our ability to avoid infringing on the proprietary rights of
others.
We seek patent protection for those inventions
and technologies for which we believe such protection is suitable and is likely to provide a competitive advantage to us. Because
patent applications in the United States are maintained in secrecy until either the patent application is published, or a patent
is issued, we may not be aware of third-party patents, patent applications and other intellectual property relevant to our solutions
that may block our use of our intellectual property or may be used in third-party products that compete with our solutions and
processes. In the event a competitor or other party successfully challenges our solutions, processes, patents or licenses or claims
that we have infringed upon their intellectual property, we could incur substantial litigation costs defending against such claims,
be required to pay royalties, license fees or other damages or be barred from using the intellectual property at issue, any of
which could have a material adverse effect on our business, operating results and financial condition.
We also rely substantially on trade secrets,
proprietary technology, nondisclosure and other contractual agreements, and technical measures to protect our technology, application,
design, and manufacturing know-how, and work actively to foster continuing technological innovation to maintain and protect our
competitive position. We cannot assure you that steps taken by us to protect our intellectual property and other contractual agreements
for our business will be adequate, that our competitors will not independently develop or patent substantially equivalent or superior
technologies or be able to design around patents that we may receive, or that our intellectual property will not be misappropriated.
We could be subject to economic,
political, regulatory and other risks arising from our international operations.
Operating in international markets requires
significant resources and management attention and will subject us to regulatory, economic and political risks that may be different
from and incremental to those in the United States. In addition to the risks that we face in the United States, our international
operations, as a result of our acquisitions in 2018 and 2019 wherein we now operate in Israel and Croatia, may involve risks that
could adversely affect our business, including:
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● management distraction;
● unexpected changes in regulatory requirements;
● less favorable foreign intellectual property laws;
● profit repatriation and other restrictions on the transfer of funds;
● new and different sources of competition;
Our failure to manage any of these risks
successfully could harm our international operations and our overall business, as well as results of our operations.
Our business will suffer if our network
systems fail or become unavailable.
A reduction in the performance, reliability
and availability of our network infrastructure would harm our ability to distribute our solutions to our users, as well as our
reputation and ability to attract and retain customers. Our systems and operations could be damaged or interrupted by fire, flood,
power loss, telecommunications failure, Internet breakdown, earthquake and similar events. Our systems could also be subject to
viruses, break-ins, sabotage, acts of terrorism, acts of vandalism, hacking, cyber-terrorism and similar misconduct. We might not
carry adequate business interruption insurance to compensate us for losses that may occur from a system outage. Any system error
or failure that causes interruption in availability of our solutions or an increase in response time could result in a loss of
potential customers, which could have a material adverse effect on our business, financial condition and results of operations.
If we suffer sustained or repeated interruptions, then our solutions and services could be less attractive to our users and our
business would be materially harmed.
If we are unable to manage growth,
our operations could be adversely affected.
Our progress is expected to require the
full utilization of our management, financial and other resources. Our ability to manage growth effectively will depend on our
ability to improve and expand operations, including our financial and management information systems, and to recruit, train and
manage personnel. There can be no absolute assurance that management will be able to manage growth effectively.
If we do not properly manage the growth
of our business, we may experience significant strains on our management and operations and disruptions in our business. Various
risks arise when companies and industries grow quickly. If our business or industry grows too quickly, our ability to meet customer
demand in a timely and efficient manner could be challenged. We may also experience development delays as we seek to meet increased
demand for our solutions. Our failure to properly manage the growth that we or our industry might experience could negatively impact
our ability to execute on our operating plan and, accordingly, could have an adverse impact on our business, our cash flow and
results of operations, and our reputation with our current or potential customers.
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Our business is subject to changing
regulation of corporate governance and public disclosure.
Because our common stock is publicly traded,
we are subject to certain rules and regulations of federal and state entities charged with the protection of investors and the
oversight of companies whose securities are publicly traded. These entities have continued to develop additional regulations and
requirements in response to laws enacted by Congress, most notably the Sarbanes-Oxley Act of 2002. Complying with these new regulations
has resulted in, and is likely to continue to result in, increased general and administrative costs and a diversion of management
time and attention from revenue generating and other business activities to compliance activities.
Risks Relating to Our Securities
If a market for our common stock
is not maintained, shareholders may be unable to sell their shares.
Our common stock is traded under the symbol
“OPRX” on the Nasdaq Capital Market. We do not currently have a consistent active trading market. There can be no assurance
that a consistent active and liquid trading market will develop or, if developed, that it will be sustained.
Historically, our securities have been
thinly traded. Accordingly, it may be difficult to sell shares of our common stock without significantly depressing the value of
the stock. Unless we are successful in developing continued investor interest in our stock, sales of our stock could continue to
result in major fluctuations in the price of the stock.
The market price of our common stock
is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our
control.
Our stock price is subject to a number
of factors, including:
● Government regulation of our solutions and services;
● The establishment of partnerships with other healthcare companies;
● Intellectual property disputes;
● Additions or departures of key personnel;
● Sales of our common stock;
● Our ability to integrate operations, technology, solutions, and services;
● Our ability to execute our business plan;
● Operating results below or exceeding expectations;
● Whether we achieve profits or not;
● Loss or addition of any strategic relationship;
● Industry developments;
● Economic and other external factors; and
● Period-to-period fluctuations in our financial results.
Our stock price may fluctuate widely as
a result of any of the above. In addition, the securities markets have from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially
and adversely affect the market price of our common stock.
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We do not expect to pay dividends
in the foreseeable future and any return on investment may be limited to the value of our common stock.
We do not anticipate paying cash dividends
on our common stock in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial
condition and other business and economic factors affecting it at such time as the board of directors may consider relevant. If
we do not pay dividends, our common stock may be less valuable because a return on your investment will occur only if our stock
price appreciates.
Provisions in the Nevada Revised
Statutes and our Bylaws could make it very difficult for an investor to bring any legal actions against our directors or officers
for violations of their fiduciary duties or could require us to pay any amounts incurred by our directors or officers in any such
actions.
Members of our board of directors and our
officers will have no liability for breaches of their fiduciary duty of care as a director or officer, except in limited circumstances,
pursuant to provisions in the Nevada Revised Statutes and our Bylaws as authorized by the Nevada Revised Statutes. Specifically,
Section 78.138 of the Nevada Revised Statutes provides that a director or officer is not individually liable to the company or
its shareholders or creditors for any damages as a result of any act or failure to act in his or her capacity as a director or
officer unless it is proven that (1) the director’s or officer’s act or failure to act constituted a breach of his
or her fiduciary duties as a director or officer and (2) his or her breach of those duties involved intentional misconduct, fraud
or a knowing violation of law. This provision is intended to afford directors and officers protection against and to limit their
potential liability for monetary damages resulting from suits alleging a breach of the duty of care by a director or officer. Accordingly,
you may be unable to prevail in a legal action against our directors or officers even if they have breached their fiduciary duty
of care. In addition, our Bylaws allow us to indemnify our directors and officers from and against any and all costs, charges and
expenses resulting from their acting in such capacities with us. This means that if you were able to enforce an action against
our directors or officers, in all likelihood, we would be required to pay any expenses they incurred in defending the lawsuit and
any judgment or settlement they otherwise would be required to pay. Accordingly, our indemnification obligations could divert needed
financial resources and may adversely affect our business, financial condition, results of operations and cash flows, and adversely
affect prevailing market prices for our common stock.
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Item 1B. Unresolved Staff comments
None
Item 2. Properties
Currently, we do not own any real estate.
Our principal executive offices are located at 400 Water Street, Suite 200, Rochester, Michigan 48307.
We have operating leases with terms greater
than 12 months for office space in three multitenant facilities. The lease on our headquarters space in Rochester, Michigan expires
November 30, 2022, with a three-year renewal option through 2025, with monthly rent payable at rates ranging from $6,384 to $6,688.
We have assumed renewal of the lease. We also have a lease on office space in Cranbury, New Jersey, expiring in 2022 with monthly
payments ranging from $3,008 to $3,158, as well as a lease of approximately $1,883 per month in Zagreb, Croatia expiring in 2022.
We also lease minor amounts of space in shared space facilities on a month to month basis as necessary.
We believe that our properties are adequate
for our current needs, but growth potential may require larger facilities due to anticipated addition of personnel. We do not have
any policies regarding investments in real estate, securities or other forms of property.
Item 3. Legal Proceedings
We have no current legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.
14
PART II
Item 5. Market for Registrant’s
Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded under the symbol
“OPRX” on the Nasdaq Capital Market.
Holders of Our Common Stock
As of March 3, 2021, we had
16,806,637 shares of our common stock issued and outstanding, held by approximately 400 shareholders of record at our
transfer agent, with approximately 7,000 additional shareholders holding our shares in street name.
Dividends
We currently intend to retain future earnings
for the operation of our business. We have never declared or paid cash dividends on our common stock, and we do not anticipate
paying any cash dividends in the foreseeable future.
In the event that a dividend is declared,
common stockholders on the record date are entitled to share ratably in any dividends that may be declared from time to time on
the common stock by our board of directors from funds legally available.
There are no restrictions in our
articles of incorporation or bylaws that restrict us from declaring dividends. The Nevada Revised Statutes, however, do prohibit
us from declaring dividends where, after giving effect to the distribution of the dividend:
Securities Authorized for Issuance under Equity Compensation
Plans
On June 13, 2013, our Board of Directors adopted
the 2013 Equity Incentive Plan (the “Plan”). The purpose of the Plan is to attract and retain the best available personnel
for positions of substantial responsibility with us, to provide additional incentive to employees, directors and consultants, and
to promote our success. As of December 31, 2020, under the Plan, as amended, we are currently able to issue up to an aggregate
total of 3,000,000 incentive or non-qualified options to purchase our common stock, stock awards and other offerings. In March
2021, our Board of Directors amended the Plan to increase the number of shares authorized under the plan to 6,000,000 shares.
15
Equity Compensation Plans as of December 31, 2020
2013 Equity Compensation Plan – Restricted Stock Awards 100,000 N/A N/A
Recent Sales of Unregistered Securities
The information set forth below relates
to our issuances of securities without registration under the Securities Act of 1933 during the reporting period which were not
previously included in a Quarterly Report on Form 10-Q or Current Report on Form 8-K.
In December 2020, we issued 4,010 shares
of restricted common stock to our outside Directors as part of our director compensation package for services rendered in Q4 2020.
From October through December 2020, we
issued 125,918 shares of common stock and received proceeds of $1,156,314 in connection with the exercise of options.
These securities were issued pursuant to
Section 4(2) of the Securities Act and/or Rule 506 promulgated thereunder. The holders represented their intention to acquire the
securities for investment only and not with a view towards distribution. The investors were given adequate information about us
to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer
agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.
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Item 6. Selected Financial Data
Not required under Regulation S-K for “smaller
reporting companies.”
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 TelaRepTM 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.
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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.
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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
Acquisition Related Costs - 799,623
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.
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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.
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Quarterly Financial Information
Following is a table of our quarterly operating results for
2020 for information purposes.
First Quarter Second Quarter Third Quarter Fourth Quarter Total Year
Income tax benefit - - - - -
Earnings (loss) per share
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.
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Following is a table of our quarterly operating results for
2019 for information purposes.
First Quarter Second Quarter Third Quarter Fourth Quarter Total Year
Earnings (loss) per share
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.
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.
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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.
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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