Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Overview
OptimizeRx is a digital healthcare technology
company that connects over two million HCPs and millions of their patients through an intelligent technology platform embedded within
a proprietary omnichannel network. OptimizeRx helps life sciences organizations engage and support their customers through our combined
HCP and DTC marketing strategies.
OptimizeRx has historically generated revenue
by delivering messages to HCPs via their EHR systems and eRx platforms using our proprietary network of channel partners. We have gradually
expanded our offerings to include audience development, audience creation, and media execution across different messaging types and media
distribution channels.
Overall, we employ a “land and expand”
strategy focused on growing our existing customer base and generating greater and more consistent revenues in part through a continued
shift in our business model toward enterprise level engagements, while also broadening our platform with innovative proprietary virtual
communication solutions such as our patented Micro-Neighborhood Targeting and our AI-powered DAAP, which uses sophisticated machine-learning
algorithms to find the best audiences in the correct channels at the right time.
Our strategy for driving revenue growth is also
expected to work in tandem with our efforts to increase margin and profitability as revenue drivers such as DAAP have inherently higher
margins than most other messaging solutions we offer. In addition, by aiming to transition our DAAP customers to a more predictable subscription-based
model for data services, we believe will further improve margins, increase visibility, and enhance the overall predictability of our revenue
streams over time.
Customer Concentration
Because the pharmaceutical industry is dominated
by large companies with multiple brands, our revenue is concentrated in a relatively small number of companies. We have approximately
100 pharmaceutical companies as customers, and our revenues are concentrated among the largest pharmaceutical companies in the world.
Loss of one of more of our larger customers could have a negative impact on our operating results. Our top five customers represented
approximately 49% and 44% of our revenue for the years ended December 31, 2024 and December 31, 2023, respectively. In 2024
and 2023, we had two customers and one customer, respectively, that represented more than 10% of our revenues.
Seasonality
In general, the pharmaceutical brand marketing
industry spends its advertising budget seasonally. Many pharmaceutical companies allocate the largest portion of their brand marketing
to the fourth quarter of the calendar year. As a result, the first quarter tends to reflect lower activity levels and lower revenue, with
gradual increases in the following quarters. We expect these seasonality trends to continue and our ability to effectively manage our
resources in anticipation of these trends may affect our operating results.
22
Impact of Macroeconomic Events
Unfavorable conditions in the economy may negatively
affect the growth of our business and our results of operations. For example, macroeconomic events including rising inflation and the
U.S. Federal Reserve raising interest rates have led to economic uncertainty in the recent past, and threats of multinational tariffs
and retaliatory tariffs provide uncertainty as to heightened inflation in the domestic markets in the next twelve months. In addition,
high levels of employee turnover across the pharmaceutical industry as well as a fewer number of U.S. drug approvals could create additional
uncertainty within our target customer markets. Historically, during periods of economic uncertainty and downturns, businesses may slow
spending, which may impact our business and our customers’ businesses. Adverse changes in demand could impact our business, collection
of accounts receivable and our expected cash flow generation, which may adversely impact our financial condition and results of operations.
Key Performance Indicators
We monitor the following key performance indicators
to help us evaluate our business, measure our performance, identify trends affecting our business and make strategic decisions. We have
updated the definition of “top 20 pharmaceutical manufacturers” in our key performance indicators to be based upon Fierce
Pharma’s most updated list of “The top 20 pharma companies by 2023 revenue”. We previously used “The top 20 pharma
companies by 2022 revenue”. As a result of this change, prior periods have been restated for comparative purposes.
Average revenue per top 20 pharmaceutical manufacturer.
Average revenue per top 20 pharmaceutical manufacturer is calculated by taking the total revenue the company recognized through pharmaceutical
manufacturers listed in Fierce Pharma’s “The top 20 pharma companies by 2023 revenue” over the last twelve months, divided
by the total number of the aforementioned pharmaceutical manufacturers that our solutions helped support over that time period. The Company
uses this metric to monitor its progress in “landing and expanding” with key customers within its largest customer vertical
and believe it also provides investors with a transparent way to chart our progress in penetrating this important customer segment. The
increase in the average in 2024, as compared to 2023, is primarily the result of higher revenue in the Company’s top 5 client accounts,
all of which are included in the average revenue per top 20 pharmaceutical manufacturer KPI calculation. The above mentioned top 5 client
accounts averaged $9.0 million in revenue, which was primarily driven by growth in DAAP and omnichannel messaging expansion.
Twelve Months Ended December 31
(in thousands)
Average revenue per top 20 pharmaceutical manufacturer $ 2,933 $ 2,399
Percent of top 20 pharmaceutical manufacturers
that are customers. Percent of top 20 pharmaceutical manufacturers that are customers is calculated by taking the number of revenue
generating customers that are pharmaceutical manufacturers listed in Fierce Pharma’s “The top 20 pharma companies by 2023
revenue” over the last 12 months, which is then divided by 20 - which is the number of pharmaceutical manufacturers included in
the aforementioned list. The Company uses this metric to monitor its progress in penetrating key customers within its largest customer
vertical and believes it also provides investors with a transparent way to chart our progress in penetrating this important customer segment.
Twelve Months Ended December 31
Percent of top 20 pharmaceutical manufacturers that are customers 100 % 100 %
Percent of total revenue attributable to top
20 pharmaceutical manufacturers. Percent of total revenue attributable to top 20 pharmaceutical manufacturers is calculated by taking
the total revenue the company recognized through pharmaceutical manufacturers listed in Fierce Pharma’s “The top 20 pharma
companies by 2023 revenue” over the last twelve months, divided by our consolidated revenue over the same period. The Company uses
this metric to monitor its progress in “landing and expanding” with key customers within its largest customer vertical and
believes it also provides investors with a transparent way to chart our progress in penetrating this important customer segment. Our revenue
from customers that are not top 20 pharmaceutical manufacturers stayed relatively consistent year over year.
Twelve Months Ended December 31
Net revenue retention. Net revenue retention
is a comparison of revenue generated from all customers in the previous twelve-month period to total revenue generated from the same customers
in the following twelve-month period (i.e., excludes new customer relationships for the most recent twelve-month period). The Company
uses this metric to monitor its ability to improve its penetration with existing customers and believes it also provides investors with
a metric to chart our ability to increase our year-over-year penetration and revenue with existing customers. The retention rate in 2024
increased due to increased DAAP related revenue streams from existing clients and full year benefit of the October 2023 acquisition of
Medicx Health.
23
Twelve Months Ended December 31
Net revenue retention 121 % 105 %
Revenue per average full-time employee.
We define revenue per average full-time employee as total revenue over the last twelve months divided by the average number of employees
over the last twelve months (i.e., the average between the number of FTEs at the end of the reported period and the number of FTEs at
the end of the same period of the prior year). The Company uses this metric to monitor the productivity of its workforce and its ability
to scale efficiently over time and believes the metric provides investors with a way to chart our productivity and scalability. Our revenue
rate per employee increased year over year due to revenue growing at a higher rate than the average number of FTEs over the last 12 month
period.
Twelve Months Ended December 31
(in thousands)
Revenue per average full-time employee $ 701 $ 586
Results of Operations for the Years Ended December 31,
2024 and 2023
The following table sets forth, for the periods
indicated, the dollar value and percentage of total return represented by certain items in our consolidated statements of operations (in
thousands):
Years Ended December 31,
(in thousands, except percentage data) 2024 2023
Net Revenue
Our net revenue increased 29% to $92.1 million
for the year ended December 31, 2024 from $71.5 million for the year ended December 31, 2023. 66% of the $20.6 million year
over year revenue increase resulted from the October 2023 acquisition of Medicx Health, with the remaining increase being primarily due
to increased DAAP related sales as the Company generated 48 DAAP deals in 2024 compared to 24 DAAP deals in 2023. The increase was partially
offset by a reduction of approximately $4.2 million as a result of the disposal of our non-core Access solutions and the sale of certain
non-core solutions-related contracts in the fourth quarter of 2023.
Cost of Revenues
Our total cost of revenues, composed primarily
of revenue-share expense paid to our channel partners, increased in the year ended December 31, 2024 compared to the year ended December 31,
2023. Our cost of revenues as a percentage of revenue decreased to approximately 36% in the year ended December 31, 2024 from approximately
40% in the year ended December 31, 2023. This decrease in our cost of revenues as a percentage of revenue resulted primarily due
to favorable network utilization.
Gross Margin
Our gross margin, which is the difference between
our revenues and our cost of revenues, increased from 2023 to 2024 and our gross margin percentage increased to 64.5% in 2024 from 60%
in 2023. We had higher revenues in 2024, which increased gross margin. Our gross margin percentage increased for the reasons discussed
above in the cost of revenues section.
24
Operating Expenses
Total operating expenses increased to $73.1 million
for the year ended December 31, 2024, from $69.3 million for the year ended December 31, 2023, an increase of approximately
5%.
The detail by major category is reflected in the
table below (in thousands).
Years Ended December 31
Depreciation and amortization 4,329 2,402
Loss on disposal of a business — 2,142
Other sales, general, and administrative expense 49,556 39,821
Stock-based compensation decreased to $11.5 million
for the year ended December 31, 2024, from $13.7 million for the year ended December 31, 2023 as a result of the lower grant
date fair value of awards due to declines in the Company’s stock price partially offset by the acceleration of the market based restricted
stock units for the former CEO which was fully expensed as of December 31, 2024 upon his resignation.
Depreciation and amortization increased to $4.3
million for the year ended December 31, 2024, from $2.4 million for the year ended December 31, 2023, as a result of the amortization
associated with the identifiable intangibles arising from the Medicx Health acquisition.
Impairment charges increased to $7.5 million for
the year ended December 31, 2024, from $6.7 million for the year ended December 31, 2023. The impairment charge recorded during
2024 represents a goodwill impairment and represents the amount by which the Company’s book value exceeded its estimated fair value.
The impairment charges recorded during 2023 relate to intangible assets, primarily technology and patent and trademarks relating to certain
non-core assets. The Company determined that the carrying value of these long-lived assets was not recoverable on an undiscounted basis
and accordingly, an impairment charge was recognized to the extent fair value exceeds carrying value. The fair value of the assets was
determined based on various estimates and assumptions including internal estimates of cash flows directly attributable to the assets,
the useful life of the assets and residual value, if any.
The loss on disposal of a business for the year
ended December 31, 2023 is discussed in Part II, Item 8. Financials Statements and Supplementary Data; Note 7 - Goodwill and Intangibles.
Transaction related costs for the year ended December 31,
2023 arose due to the acquisition of Medicx Health, discussed in Part II, Item 8. Financials Statements and Supplementary Data; Note 3
- Acquisitions.
Sales general, and administrative expense increased
to $49.6 million for the year ended December 31, 2024, from $39.8 million for the year ended December 31, 2023. There were a
variety of increases, the largest of which was in compensation, which increased by $7.7 million from $24.1 million in 2023 to $31.8 million
in 2024. The increase in 2024 is due to severance expense and the addition of Medicx employees for a full year period increasing compensation
and benefits. This increase was partially offset by savings due to operational synergies generated through the integration of Medicx Health.
Other income (expense)
Other income (expense) was comprised of the following:
Years Ended December 31
(in thousands)
Other income (expense)
25
Interest expense increased to $6.2 million for
the year ended December 31, 2024, from $1.5 million for the year ended December 31, 2023. Interest expense represents interest
charges on our Term Loan, which was raised during 2023 to partially fund the acquisition of Medicx Health, together with the amortization
of the related issuance costs, (see Part II, Item 8. Financials Statements and Supplementary Data; Note 12 - Long Term Debt for further
details concerning our Term Loan). The increase year over year is due to 2024 having a full year of interest expense versus three months
of interest expense in 2023.
Other income in 2023 represents the net proceeds
from the sale of customer assets, primarily contracts, while other income in 2024 relates to benefits from legacy vendor contracts.
Interest income decreased to $0.3 million for
the year ended December 31, 2024, from $2.2 million for the year ended December 31, 2023. Interest income represents interest
earned on our short-term investments, which were realized during 2023 in order to partially fund the acquisition of Medicx Health. Interest
earned in 2024 reflects the lower average balance on amounts held in short-term investments during that period.
Income tax (expense) benefit
We recorded an income tax expense of $0.7 million
for the year ended December 31, 2024 compared to an income tax benefit of $7.6 million for the year ended December 31, 2023.
The increase in income tax expense for 2024 compared to 2023 primarily related to having taxable income for the year ended December 31,
2024. The income tax benefit recorded in 2023 represents the partial reversal of our valuation allowance, previously recorded against
the value of our net operating loss (“NOL”) carryforwards. In evaluating our ability to recover our deferred tax assets, in
full or in part, we consider all available positive and negative evidence, including our past operating results, the impact of the Medicx
transaction on our consolidated tax returns, and our forecast of future earnings, future taxable income and prudent and feasible tax planning
strategies.
The assumptions utilized in determining future
taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses.
Actual operating results in future years could differ from our current assumptions, judgments and estimates.
Net Income (Loss)
We finished the year ended December 31, 2024
with a net loss of $20.1 million, compared to $17.6 million during the year ended December 31, 2023. The reasons for specific components
are discussed above. Overall, we had an increase in revenue and gross margin partially offset by increased operating expenses. In addition,
the loss in both periods included significant noncash items. We had $24.3 million in noncash operating expenses in 2024 compared to $25.9
million in noncash operating expenses in 2023.
Liquidity and Capital Resources
Historically, our primary sources of liquidity
have been cash receipts from customers and proceeds from equity offerings. On October 11, 2023, we entered into a financing agreement
that provided for a $40.0 million term loan (the “Term Loan”), the proceeds of which were to fund, in part, the acquisition
of Medicx Health. See Part II, Item 8. Financials Statements and Supplementary Data; Note 12 - Long Term Debt.
As of December 31, 2024, we had total current
assets of $54.0 million, compared with current liabilities of $18.7 million, resulting in working capital of $35.3 million and a current
ratio of 3 to 1. This compares with a working capital balance of $36.4 million and a current ratio of 3 to 1 at December 31, 2023.
This decrease in working capital, as discussed in more detail below, is primarily the result of a slight increase in our accounts receivable
driven by higher fourth quarter billings, and a slight increase in our accrued expenses due to severance expenses as of December 31, 2024.
We believe that funds generated from operations,
together with existing cash and cash equivalents, will be sufficient to finance our current operations and planned growth for the next
twelve months. We do not anticipate the need to raise any additional cash to support operations. However, we could require additional
debt or equity financing if we were to make any significant acquisitions for cash during that period. In addition, we believe we can generate
the cash needed to operate beyond the next 12 months from operations.
Cash Flows
Following is a table with summary data from the consolidated statement
of cash flows for the years ended December 31, 2024 and 2023, as presented.
(in thousands)
Net cash provided by / (used in) operating activities $ 4,889 $ (7,240 )
Net cash used in investing activities (450 ) (25,337 )
Net cash (used in) / provided by financing activities (4,911 ) 28,220
Net decrease in cash and cash equivalents $ (472 ) $ (4,357 )
26
Our operating activities provided $4.9 million
in the year ended December 31, 2024, as compared with approximately $7.2 million used by operating activities in the year ended December 31,
2023. The net increase in net cash provided by operating activities was mainly attributable to a $6.5 million increase in cash flows from
accounts receivable largely driven by higher fourth quarter billings in fiscal 2024 as compared to fiscal 2023 and a reduction of cash
outflows for deferred tax liabilities. In 2023, as a result of the Medicx Health acquisition, the Company recorded a deferred tax liability
of $7.7 million which was reduced in 2024 for the change in deferred tax liability. This was partially offset by a $2,544 increase in
net loss.
Investing activities used $0.5 million in 2024,
compared with $25.3 million in 2023. In 2024, we incurred capitalized software development costs of $0.3 million, and purchased $0.1 million
of tangible property, primarily personal computers.
During 2023, in addition to the cash payment of
$82.9 million related to the acquisition of Medicx Health, we purchased $162.8 million and redeemed $218.7 million in Treasury bills during
2023. We also incurred capitalized software development costs of $0.8 million, and purchased $0.1 million of tangible property, primarily
personal computers and received $2.5 million from the disposal of our Access products (see Part II, Item 8. Financials Statements and
Supplementary Data; Note 7 - Goodwill and Intangibles).
Financing activities used $4.9 million in 2024,
and provided $28.2 million in 2023. During 2024, in connection with the Term Loan, we have made repayments of approximately $4.0 million.
In addition, during 2024, we paid $0.9 million for employee withholding taxes related to the vesting of restricted stock units.
During 2023, we raised $40.0 million pursuant
to the Term Loan to partially fund the acquisition of Medicx Health. In connection with the Term Loan, we incurred debt issuance costs
of approximately $2.3 million, and made repayments of approximately $1.7 million. In addition, during 2023, we repurchased 526,999 shares
of common stock for $7.5 million.
Term Loan
On October 11, 2023 (the “Loan Date”),
in connection with the acquisition of Medicx Health, we entered into a financing agreement that provided for a $40.0 million term loan.
The outstanding principal amount of the Term Loan
is repayable in quarterly installments on the last business day of each fiscal quarter commencing on December 31, 2023 in an amount equal
to 1.25% of the principal amount. The outstanding unpaid principal amount of the Term Loan, and all accrued and unpaid interest thereon,
shall be due and payable on the earliest of (i) the fourth anniversary of the closing of the financing agreement and funding of the Term
Loan and (ii) the date on which the Term Loan is declared due and payable pursuant to the terms of the financing agreement. The
Term loan bears interest at a variable rate, which was 13.3% at December 31, 2024.
We incurred debt issuance costs of approximately
$2.3 million, in connection with this Term Loan and made repayments of approximately $4.0 million and $1.7 million for the year ended
December 31, 2024 and 2023, respectively.
As of December 31, 2024, total obligations under
the Term Loan were $34.3 million, with $2.0 million of principal payments due over the next twelve months. We are subject to market risks
arising from changes in interest rates which relate primarily to the Term Loan, which is variable rate debt. We estimate our potential
additional interest expense over the next twelve months that would result from a hypothetical, instantaneous and unfavorable change of
100 basis points in the interest rate on our Term Loan would be approximately $0.3 million on a pre-tax basis.See Part II, Item 8. Financials
Statements and Supplementary Data; Note 12 - Long Term Debt for additional information regarding the Term Loan.
Other Contractual Obligations
We have obligations under our operating leases
for office space. Total obligations under short and long term operating leases were $0.4 million, with $0.2 million due over the next
twelve months. For details regarding short and long term operating lease liabilities, see Part II, Item 8. Financial Statements and Supplementary
Data; Note 13 – Leases in the Consolidated Financial Statements.
We have obligations under our former employee
severance agreements. As of December 31, 2024, total obligations under former employee severance agreements were $1.2 million, with $1.0
million due over the next twelve months.
Off Balance Sheet Arrangements
From time to time, the Company enters into arrangements
with channel partners to acquire minimum amounts of media, data or messaging capabilities. As of December 31, 2024, the Company had
commitments with channel partners for future minimum payments of $19.7 million that will be reflected in cost of revenues during the years
from 2025 through 2029, with $14.4 million due over the next twelve months. See Part II, Item 8. Financial Statements and Supplementary
Data; Note 16 – Commitments.
27
Critical Accounting Estimates
Our discussion and analysis of our financial condition
and results of operations are based upon the Consolidated Financial Statements, which have been prepared in accordance with U.S. generally
accepted accounting principles. The preparation of these financial statements requires us to make estimates, judgments and assumptions
that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and
expenses during the periods presented. Actual results could differ from those estimates and assumptions. See Part II, Item 8. Financial
Statements and Supplementary Data; Note 2 - Summary of Significant Accounting Policies, for a discussion of significant accounting policies.
Actual results may differ materially from these estimates due to different assumptions or conditions. The following areas all require
the use of subjective or complex judgments, estimates and assumptions:
Business Combination
Business combinations are accounted for under
the acquisition method. Assets acquired and liabilities assumed as part of a business acquisition are generally recorded at their estimated
fair value at the date of acquisition. The excess of purchase price over the amount allocated to the assets acquired and liabilities assumed
is recorded as goodwill. In determining the fair value of assets acquired, including intangible assets, the Company uses a variety of
methods. The method used to estimate the fair values of intangible assets incorporates significant estimates and assumptions regarding
the estimates a market participant would make to evaluate an asset, including a market participant’s use of the asset, future cash inflows
and outflows, probabilities of success, asset lives and the appropriate discount rates. This judgement and determination affects the amount
of consideration paid that is allocated to assets acquired and liabilities assumed in the business purchase transaction. The Company engages
third-party appraisal firms to assist in determining fair value of assets acquired and liabilities assumed when appropriate.
During the remeasurement period, which extends
no later than one year from the acquisition date, the Company may record certain adjustments to the carrying value of the assets acquired
and liabilities assumed with a corresponding offset to goodwill.
Revenue Recognition
Recognition of revenue requires evidence of a
contract, probable collection of proceeds, and completion of substantially all performance obligations. We use a 5-step model to recognize
revenue: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction
price, (4) allocate the transaction price to the performance obligations in the contract, and (5) 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 e-prescribers and electronic
health record technology providers (channel partners), directly to consumers, or from reselling services that complement the business.
This content delivery for a customer is referred to as a program. Unless otherwise specified, revenue is recognized based on the selling
price to customers.
Our contracts are generally all less than one
year and the primary performance obligation is delivery of messages or other forms of content, but the contract may contain additional
services. Additional services may include program design, which is the design of the content delivery program, set up, and reporting.
We consider set up and reporting services to be complimentary to the primary performance obligation and recognized through performance
of the delivery of content. We consider the design of the programs and related consulting services to be performance obligations separate
from the delivery of messages. Performance obligations which are recognized at a point in time upon delivery to the client include the
development and delivery of NPI target data lists and custom analytic and consulting projects.
As the content is distributed through the platform
and network of channel partners (a transaction), these transactions are recorded, and revenue is recognized, over time as the distributions
occur. Revenue for transactions can be realized based on a price per message, a price per redemption, as a flat fee occurring over a period
of time, or upon completion of the program, depending on the client contract. We recognize setup fees that are required for integrating
client offerings and campaigns into the rule-based content delivery system and network over the life of the initial program, based either
on time, or units delivered, depending upon which is most appropriate in the specific situation. Should a program be cancelled before
completion, the balance of set up revenue is recognized at the time of cancellation, as set up fees are nonrefundable. Additionally, we
also recognize revenue for providing program performance reporting and maintenance, either by our company directly delivering reports
or by providing access to our online reporting portal that the client can utilize. This reporting revenue is recognized over time as the
messages are delivered. Program design, which is the design of the content delivery program, and related consulting services are recognized
as services are performed.
In some instances, we license certain of our software
applications in arrangements that do not include other performance obligations. In those instances, we record license revenue when the
software is delivered for use to the license. In instances where our contracts included Software as a Service, the revenue is recognized
over the subscription period as services are delivered to the customer.
In some instances, we also resell messaging solutions
that are available through channel partners that are complementary to our HCP marketing business and customer base. These channel partner-specific
solutions are frequently similar to our own solutions and revenue recognition for these programs is the same as described above. In instances
where we sell solutions on a commission basis, net revenue is recognized based on the commission-based revenue split that we receive.
In instances where we resell these messaging solutions and have all financial risk and significant operation input and risk, we record
the revenue based on the gross amount sold and the amount paid to the channel partner as a cost of sales.
28
Cost of Revenues
The primary costs of revenue are revenue-share
expense and data acquisition costs. Based on the volume of transactions that are delivered through a channel partner network, we provide
a revenue-share to compensate the channel partner for its or their promotion of the campaign. Revenue-shares are a negotiated percentage
of the transaction fees and can also be specific to special considerations and campaigns. In addition, we pay revenue-share to ConnectiveRx
as a result of a 2014 legal settlement in an amount equal to the greater of 10% of financial messaging distribution revenues generated
through our integrated network, or $0.37 per financial message distributed through our integrated network. As our solution mix has expanded
and our revenues have grown, financial messaging has become a smaller percentage of our revenues and these payments to ConnectiveRx, a
smaller portion of our revenue-share. The contractual amount due to the channel partners is recorded as an expense at the time the message
is distributed. Data acquisition costs consist primarily of the costs to acquire data through flat-fee data licensing agreements. Data
acquisition costs are amortized over the period for which we have access to the data.
Intangible Assets
Intangible assets are stated at cost. Finite-lived
assets are being amortized over their estimated useful lives of fifteen to seventeen years for patents, eight years for customer relationships,
fifteen years for tradenames, two to four years for covenants not to compete, and three to ten years for software and websites, all using
the straight-line method.
Intangible assets are reviewed whenever events
or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment of assets with definite-lives
is generally determined by comparing projected undiscounted cash flows expected to be generated by the asset, or asset groups, to its
carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted basis, an impairment
is recognized to the extent fair value exceeds carrying value. Determining the extent of impairment, if any, typically requires various
estimates and assumptions including cash flows directly attributable to the asset, the useful life of the asset and residual value, if
any. When necessary, the Company uses internal cash flow estimates, quoted market prices and appraisals, as appropriate, to determine
fair value. Actual results could vary from these estimates. In addition, the remaining useful life of the impaired asset is revised, if
necessary.
No events or circumstances were noted that would
be indicative of potential impairment during the year ended December 31, 2024. We recorded impairment charges of $6.7 million against
the value of our intangible assets during the year ended December 31, 2023.
Goodwill
Assets and liabilities of acquired businesses
are measured at their estimated fair values at the dates of acquisition. The excess of the purchase price over the estimated fair value
of the net assets acquired, including identified intangibles, is recorded as goodwill. The determination and allocation of fair value
to the assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management
judgment, including estimates based on historical information, current market data and future expectations.
We evaluate goodwill for impairment during our
fiscal fourth quarter, or more frequently if an event occurs or circumstances change. Management performs its annual goodwill impairment
test as of December 31. Goodwill is tested for impairment at the reporting unit level.
An entity is permitted to first assess qualitative
factors to determine if a quantitative impairment test is necessary. If we choose to use qualitative factors and determine that it is
more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment
test would be required. The goodwill impairment test requires the Company to estimate the fair value of the reporting unit and to compare
the fair value of the reporting unit with its carrying amount.
In estimating the reporting unit’s fair
value, the Company performed a valuation analysis, utilizing a discounted cash flow income approach and a guideline public company market
approach. We assigned a probability weighting to each approach of 50%. The determination of the fair value of the reporting unit requires
the Company to make significant estimates and assumptions about the reporting unit’s expected future cash flows. These estimates
and assumptions primarily include, but are not limited to, the discount rate, revenue growth rates, operating margins and multiples of
earnings. These estimates and assumptions were determined in connection with support from a third-party valuation specialist. The discount
rate used is based on the estimated weighted-average cost of capital for companies with profiles similar to our profile and based on an
assessment of the risk inherent in those future cash flows. To forecast the reporting unit’s cash flows, the Company takes into
consideration economic conditions and trends, historical results and recent performance, estimated future operating results, management’s
and a market participant’s view of growth rates, management’s ability to execute on planned future strategic initiatives and
anticipates future economic conditions. The market approach compares the valuation multiples of similar companies to that of the associated
reporting unit. The Company then reconciles the calculated fair values to its market capitalization. The fair value is then compared to
its carrying value including goodwill. If the fair value is in excess of its carrying value, the related goodwill is not impaired. If
the fair value is less than carrying value, an impairment charge is recognized, equivalent to the amount that the carrying value exceeds
the fair value.
29
For both the years
ended December 31, 2024 and 2023, our annual reviews determined there was no impairment as our
single reporting unit had a fair value in excess of its carrying value. For both the years ended December 31, 2024 and 2023, our annual
reviews determined that there was no impairment. It was determined that the Company’s single reporting unit was exactly equal to its carrying
value at December 31, 2024. It was determined that the fair value of the Company’s single reporting unit was greater than its carrying
value at December 31, 2023.
During the third quarter of 2024, the Company
experienced a Triggering Event due to a sustained decline in its stock price and overall market capitalization. Accordingly, the Company
conducted a quantitative impairment test of its goodwill at September 30, 2024. The Company estimated the implied fair value of its goodwill
using a combination of a market approach and income approach. A noncash charge of $7.5 million, representing the amount by which the Company’s
book value exceeds its estimated fair value, was recorded as a goodwill impairment in the year ended December 31, 2024.
Assessment
of the potential impairment of goodwill and intangible assets is an integral part of our normal ongoing review of operations. Testing
for potential impairment of these assets is significantly dependent on numerous assumptions and reflects management’s best estimates at
a particular point in time. Estimates based on these assumptions may differ significantly from actual results. Changes in factors and
assumptions used in assessing potential impairments can have a significant impact on the existence and magnitude of impairments, as well
as the time in which such impairments are recognized. Any amount of negative change to the above disclosed key assumptions could
result in future impairment to goodwill.
Goodwill
impairment charges may be recognized in future periods to the extent changes in factors or circumstances occur, including deterioration
in the macro-economic environment or in the equity markets, including a decline in the market value of the Company’s common shares,
deterioration in its performance or its future projections, or changes in its plans for one or more reporting units.
Stock-based
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 time-based options, fair value is estimated
using the Black-Scholes option pricing model that uses the following assumptions. Estimated volatilities are based on the historical volatility
of our stock over the same period as the expected term of the options. The expected term of options granted represents the period of time
that options granted are expected to be outstanding. We use historical data to estimate option exercise behavior and to determine this
term. The risk-free rate used is based on the U.S. Treasury yield curve in effect at the time of the grant using a time period equal to
the expected option term. We have never paid dividends and do not expect to pay any dividends in the future.
The Black-Scholes option valuation model and other
existing models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully
transferable. These option valuation models require the input of, and are highly sensitive to, subjective assumptions including the expected
stock price volatility. Our stock options have characteristics significantly different from those of traded options, and changes in the
subjective input assumptions could materially affect the fair value estimate.
For restricted stock units, the fair value is
based on the market value of the Company’s common stock on the date of grant. For market based restricted stock units, fair value
is estimated using a Monte Carlo simulation model. This valuation technique includes estimating the movement of stock prices and the effects
of volatility, interest rates and dividends.
Recently Issued Accounting Pronouncements
In December 2023, the Financial Accounting Standards
Board (“FASB”) issued ASU No. 2023-09 (“ASU 2023-09”), Income Taxes (Topic 740): Improvements to Income Tax Disclosures.
ASU 2023-09 addresses investor requests for more transparency about income tax information through improvements to income tax disclosures
primarily related to the rate reconciliation and income taxes paid information. This update also includes certain other amendments to
improve the effectiveness of income tax disclosures. The provisions of ASU 2023-09 are effective for annual periods beginning after December
15, 2024, with early adoption permitted. We are currently evaluating the impact of adopting ASU 2023-09.
In November 2024, the FASB issued ASU 2024-03
(“ASU 2024-03”), Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40).
ASU 2024-03 requires that public business entities disclose additional information about specific expense categories in the notes to financial
statements at interim and annual reporting periods. The prescribed categories include purchases of inventory, employee compensation, depreciation,
intangible asset amortization, and depletion. This authoritative guidance is effective for annual periods beginning after December 15,
2026 and interim periods beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the effect
of this new guidance on its consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
We are a smaller reporting company as defined
in Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this Item 7A.
30
Item 8. Financial Statements and Supplementary
Data
Index to Financial Statements Required by Article
8 of Regulation S-X:
Audited Financial Statements:
F-1 Report of Independent Registered Public Accounting Firm;
F-4 Consolidated Balance Sheets as of December 31, 2024 and 2023;
F-9 Notes to Consolidated Financial Statements
31
Report of
Independent Registered Public Accounting Firm
To the Stockholders and Board
of Directors of
OptimizeRx Corporation
Opinion
on the Financial Statements
We have
audited the accompanying consolidated balance sheets of OptimizeRx Corporation and Subsidiaries (the “Company”) as of December
31, 2024 and 2023, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then
ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and
2023, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally
accepted in the United Sates of America.
Basis
for Opinion
These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted
our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits,
we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits
included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that our audits provide a reasonable basis for our opinion.
Critical
Audit Matters
The critical
audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were
communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to
the consolidated financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not,
by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures
to which they related.
F-1
To the Stockholders and Board
of Directors of OptimizeRx Corporation
Page Two
Critical
Audit Matter - Revenue Recognition
As disclosed
in Note 2 to the consolidated financial statements, the Company recognizes revenue upon transfer of control of promised products or services
to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services.
The principal
considerations for our determination that performing procedures relating to revenue recognition is a critical audit matter is that significant
judgment is exercised in determining revenue recognition for customer agreements and includes the following: (1) determining whether services
are considered distinct performance obligations that should be accounted for separately versus together, (2) the pattern and timing of
delivery for each distinct performance obligation, and (3) identification and treatment of contract terms that may impact the timing and
amount of revenue recognized.
How
the Critical Audit Matter Was Addressed in the Audit
The audit
procedures we performed to address this critical audit matter included the following: (1) obtaining an understanding of the design and
implementation of controls related to identifying distinct performance obligations, determining the timing of revenue recognition, and
estimating any variable consideration, (2) selecting of a sample of customer agreements and testing management’s identification
and treatment of contract terms, (3) testing the mathematical accuracy of management’s calculations of revenue and the associated
timing of revenue recognized in the consolidated financial statements, (4) confirming data utilized to recognize revenue with third-party
service providers to ensure completeness and accuracy of the data used to recognize revenue, and (5) confirming with the Company’s customers
the contract terms and conditions of agreements and completion of the Company’s performance obligations under the contract.
Critical
Audit Matter – Valuation of Goodwill
As discussed
in Notes 2 and 7 to the consolidated financial statements, the Company evaluates goodwill for impairment on an annual basis as of December
31 or more frequently if events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The
goodwill balance as of December 31, 2024, was $70.9 million. The Company’s goodwill impairment assessment involves comparing the
fair value of each reporting unit to its carrying value. The Company estimates the fair value of its reporting units using a weighting
of fair values derived from the income and market approaches. The determination of fair value using the income approach is based on the
present value of estimated future cash flows, which requires management to make significant estimates and assumptions of revenue growth
rates and operating margins, and selection of the discount rate. The determination of the fair value using the market approach requires
management to make significant assumptions related to market multiples of earnings derived from comparable publicly traded companies with
similar operating and investment characteristics as the reporting unit.
During the
quarter ended September 30, 2024, the Company identified circumstances that would be indicative of possible impairment and recorded impairment
expense of $7.5 million. Based on the results of the Company’s annual impairment testing as of December 31, 2024, no impairment
was recognized as the fair value of the Company’s reporting units exceeded their carrying value.
We identified
the Company’s goodwill impairment assessments as a critical audit matter because of the significant estimates and assumptions used
by management to estimate the fair value of the reporting unit. This required a high degree of auditor judgment and an increased extent
of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of
management’s estimates and assumptions of future cash flows based on estimates of revenue growth rates and gross profit margins
and selection of the discount rate for the income approach, and multiples of earnings for the market approach.
F-2
To the Stockholders and Board
of Directors of OptimizeRx Corporation
Page Three
How
the Critical Audit Matter Was Addressed in the Audit
Our audit
procedures related to the Company’s goodwill impairment assessments included the following, among others:
(3) With the assistance of our fair value specialists:
● We evaluated the reasonableness of the valuation methodologies.
We have
served as the Company’s auditor since 2020.
/s/ UHY LLP
Sterling Heights, Michigan
F-3
OPTIMIZERx CORPORATION
Consolidated Balance Sheets
(in thousands, except share and per share data)
ASSETS
Current Assets
Taxes receivable — 1,036
Property and equipment, net 150 149
Other Assets
Tradename and customer relationships, net 31,819 34,198
Operating lease right-of-use assets 366 573
Security deposits and other assets 296 568
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Current portion of long-term debt $ 2,000 $ 2,000
Current portion of lease liabilities 168 222
Non-current Liabilities
Lease liabilities, net of current portion 209 371
Deferred tax liabilities, net 4,491 4,337
Commitments and contingencies (See Note 16)
Stockholders’ Equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 171,168 $ 183,374
The accompanying notes are an integral part of
these financial statements.
F-4
OPTIMIZERx CORPORATION
Consolidated Statements of Operations
(in thousands, except share and per share data)
For the Year Ended December 31, 2024 For the Year Ended December 31, 2023
Operating Expenses
Loss on disposal of a business — 2,142
Depreciation and amortization 4,329 2,402
Other sales, general and administrative expenses 49,799 44,303