TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Our condensed consolidated financial statements included in this Form 10-Q are as follows:

OPTIMIZERx CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements.

OPTIMIZERx CORPORATION

OPTIMIZERx CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements.

OPTIMIZERx CORPORATION

OPTIMIZERx CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019

(UNAUDITED)2020

The accompanying notes are an integral part of these condensed consolidated financial statements.

OPTIMIZERx CORPORATION

OPTIMIZERx CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018

(UNAUDITED)2019

The accompanying notes are an integral part of these condensed consolidated financial statements.

OPTIMIZERx CORPORATION

OPTIMIZERx CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements. 

OPTIMIZERx CORPORATION

OPTIMIZERx CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

SEPTEMBER 30, 2019

NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements include OptimizeRx Corporation and its wholly owned subsidiaries (collectively, the “Company”, “we”, “our”, or “us”).

We are a leading provider of digital health messaging via electronic health records (EHRs), providing a direct channelcompany that provides communications solutions for pharmaceuticallife science companies, to communicate withphysicians and patients. Connecting over half of healthcare providers in the U.S. and patients. Our cloud-based solution supportsmillions of patients through a proprietary network, the OptimizeRx digital health platform helps patients afford and stay on medications. The platform unlocks new patient adherenceand physician touchpoints for life science companies along the patient journey, from point-of-care, to medications by providing real-time access to financial assistance, prior authorization, education and critical clinical information. Our network is comprised of leading EHR platforms and provides more than half a million healthcare providers access to these services within their workflow at the point of care.retail pharmacy, through mobile patient engagement.

The condensed consolidated financial statements for the three and nine months ended September 30, 20192020 and 20182019 are unaudited and have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments necessary to present fairly our consolidated financial position as of September 30, 2019,2020, and our results of operations, and changes in stockholders’ equity for the three and nine months ended September 30, 20192020 and 20182019 and the statements of cash flows for the nine months ended September 30, 20192020 and 20182019 have been made. Those adjustments consist of normal and recurring adjustments. The condensed consolidated balance sheet as of December 31, 20182019 has been derived from the audited consolidated balance sheet as of that date.

Certain information and note disclosures, including a detailed discussion about the Company’s significant accounting policies, normally included in our annual financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with a reading of the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019, as filed with the U.S. Securities and Exchange Commission on March 12, 2019.26, 2020.

We operate in one reportable segment. The results of operations for the three and nine months ended September 30, 20192020 are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made in the prior period’s condensed consolidated financial statements to conform to the current period’s presentation.

NOTE 2 – NEW ACCOUNTING STANDARDS

Recently adopted

In FebruaryJune 2016, the Financial Accounting Standards Board (“FASB”(the “FASB”) issued new accounting guidance on leases. The accounting standard, effective January 1, 2019, requires virtually all leases to be recognized on the balance sheet. Effective January 1, 2019, we adopted the standard using the modified retrospective method, under which we elected the package of practical expedients and transition provisions allowing us to bring our existing operating leases onto the consolidated balance sheet without adjusting comparative periods, but recognizing a cumulative-effect adjustment to the opening balance of accumulated deficit on January 1, 2019. Under the guidance, we have also elected not to separate lease and non-lease components in recognition of the lease-related assets and liabilities, as well as the related lease expense.

We have operating leases with terms greater than 12 months for office space in three multitenant facilities, which are recorded as assets and liabilities. 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 $2,707 to $2,808, as well as a lease of approximately $1,800 per month in Zagreb, Croatia expiring in 2022.

OPTIMIZERx CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2019

NOTE 2 – NEW ACCOUNTING STANDARDS (continued)

Lease-related assets, or right-of-use assets, are recognized at the lease commencement date at amounts equal to the respective lease liabilities, adjusted for prepaid lease payments, initial direct costs, and lease incentives received. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. 

Upon adoption of the standard on January 1, 2019, we recorded approximately $462,000 of right of use assets and $465,000 of lease-related liabilities, with the difference recorded in accumulated deficit as the cumulative effect of change in accounting principle at that date.

For the three and nine months ended September 30, 2019, the Company’s lease cost consisted of the following components, each of which is included in operating expenses within the Company’s consolidated statements of operations:

The table below presents the future minimum lease payments to be made under operating leases as of September 30, 2019:

The weighted average remaining lease term for operating leases is 5.2 years and the weighted average discount rate used in calculating the operating lease asset and liability is 4.5%. Cash paid for amounts included in the measurement of lease liabilities is $94,105. For the nine months ended September 30, 2019, payments on lease obligations were $79,071 and amortization on the right of use assets was $80,022.

OPTIMIZERx CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2019

NOTE 2 – NEW ACCOUNTING STANDARDS (continued)

Recent Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update (“ASU”)ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 provides for a new impairment model whichthat requires measurement and recognition of expected credit losses for most financial assets and certain other instruments, including but not limited to accounts receivable and available for sale debt securities. ASU 2016-13 will becomewas effective for the Company on January 1, 2020 and early2020. The adoption is permitted. The Company is currently evaluating the impact of this guidancestandard did not have a material effect on its consolidatedour financial statements.position, results of operations, or cash flows.

In August 2019, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements and became effective for the Company on January 1, 2020. The adoption of this standard did not have a material effect on our financial position, results of operations, or cash flows.

OPTIMIZERx CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 2 – NEW ACCOUNTING STANDARDS (continued)

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

Not yet Adopted

In August 2018,December 2019, the FASB issued ASU 2018-13, Fair Value MeasurementNo. 2019-12, Income Taxes (Topic 820)740): Disclosure Framework-ChangesSimplifying the Accounting for Income Taxes. ASU 2019-12 is intended to improve consistent application and simplify the accounting for income taxes. ASU 2019-12 removes certain exceptions to the Disclosure Requirementsgeneral principles in Topic 740 and clarifies and amends existing guidance. ASU 2019-12 is effective for Fair Value Measurement. ASU 2018-13 modifiesannual and interim reporting periods beginning after December 15, 2020, with early adoption permitted. The adoption of this standard is not expected to have a material effect on our financial position, results of operations, or cash flows.

NOTE 3 – LEASES

We have operating leases for office space in three multitenant facilities with lease terms greater than 12 months, which are recorded as assets and liabilities on our balance sheet. These leases include our corporate headquarters, located in Rochester, Michigan, a customer service facility in Cranbury, New Jersey, and a technical facility in Zagreb, Croatia. Certain leases contain renewal options and, for the disclosure requirementsheadquarters lease, we have assumed renewal. Lease-related assets, or right-of-use assets, are recognized at the lease commencement date at amounts equal to the respective lease liabilities, adjusted for prepaid lease payments, initial direct costs, and lease incentives received. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rate. Amortization of the right of use assets is recognized as non-cash lease expense on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. Short term lease costs include month to month leases in shared office space facilities, such as WeWork, or similar locations.

For the three and nine months ended September 30, 2020, the Company’s lease cost consisted of the following components, each of which is included in operating expenses within the Company’s condensed consolidated statements of operations:

OPTIMIZERx CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 3 – LEASES (continued)

For the three and nine months ended September 30, 2019, the Company’s lease cost consisted of the following components, each of which is included in operating expenses within the Company’s condensed consolidated statements of operations:

The table below presents the future minimum lease payments to be made under operating leases as of September 30, 2020:

The weighted average remaining lease term at September 30, 2020 for operating leases is 4.5 years and the weighted average discount rate used in calculating the operating lease asset and liability is 4.5%. Cash paid for amounts included in the measurement of lease liabilities was $105,267 and $94,105 for the nine months ended September 30, 2020 and 2019, respectively. Cash paid for amounts included in the measurement of lease liabilities was $33,919 and $29,930 for the three months ended September 30, 2020 and 2019, respectively. For the three months ended September 30, 2020 and 2019, payments on lease obligations were $28,482 and $27,134, respectively, and amortization on the right of use assets was $28,600 and $27,430, respectively. For the nine months ended September 30, 2020 and 2019, payments on lease obligations were $87,599 and $79,071, respectively, and amortization on the right of use assets was $84,957 and $80,022, respectively.

OPTIMIZERx CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 4 – CONTINGENT PURCHASE PRICE PAYABLE

The contingent purchase price payable relates to the acquisitions of CareSpeak Communications in 2018 and RMDY Health in 2019. The CareSpeak contingent amount is based on the CareSpeak product line achieving certain revenue targets in 2019 and 2020. The revenue target for 2019 was achieved and the revenue target for 2020 has been achieved as of September 30, 2020. The maximum amount payable under the agreement is $3.0 million. A total of $1,389,187 has been paid so far in 2020 and the remaining balance of $1,610,813 is payable in early 2021 and is reflected as a short-term liability on the consolidated balance sheet.

The RMDY Health contingent amount was based on that product line achieving certain revenue targets in 2020 and 2021. The minimum amount payable under the agreement was $2.0 million and the maximum amount payable was $30 million. As of the acquisition date in 2019, we estimated the contingent purchase price payable to be $3.72 million and recorded that amount in 2019. During the quarter ended September 30, 2020, we reached an agreement with the RMDY Health shareholders to fix the liability at $3.75 million payable in a combination of cash and stock. A total of $3.0 million was paid in cash and $750,000 in common stock. There is no further liability to the former shareholders of RMDY Health as of September 30, 2020.

The income statement includes a charge of $140,390 related to the change in fair value measurementsof the contingent consideration. There are three components to this charge. The first is the $30,000 recorded as of June 30, 2020 to adjust the initial estimate of $3.72 million to $3.75 million. The second component relates to the payment in common stock. Under the terms of the agreement, the number of shares to be issued was calculated based on a volume weighted average price. On the date of the agreement, the value of the stock exceeded the volume weighted average price, so the difference was recorded as a change in the fair value. The third component was a deferred payment related to potential claims, previously included in accrued expenses, that was payable either in stock or cash of $800,000. We chose to make this payment in stock and will become effective for the Companynumber of shares was also based on January 1,a volume weighted average price. On the date of the agreement, the value of the stock exceeded the volume weighted average price, so the difference was recorded as a change in the fair value. The change in the fair value of contingent consideration recorded in the quarter ended September 30, 2020, was entirely related to the variance between the volume weighted average prices and early adoption is permitted. The Company is currently evaluatingactual price of the impactcommon stock on the date of this guidance on its consolidated financial statements.the agreement.

NOTE 35 – STOCKHOLDERS’ EQUITY

During the quarters ended September, 30, 2020, June 30, 2020, and March 31, 2020, we issued 198,024 shares, 55,731 shares, and 35,032 shares of our common stock, and received proceeds of $1,045,097, $174,831 and $112,152, respectively, in connection with the exercise of stock options under our 2013 incentive plan.

During the quarters ended September 30, 2019, June 30, 2019 and March 31, 2019, we issued 48,775 shares, 60,295 shares and 101,878 shares of our common stock, and received proceeds of $206,324, $214,314 and $343,785, respectively, in connection with the exercise of stock options under our 2013 incentive plan. We also issued 130,001 shares of our common stock in the quarter ended March 31, 2019 in connection with restricted stock awards awarded in 2018.

We also issued 63,560 shares of our common stock in the nine months ended September 30, 2020 in connection with restricted stock awards as described in more detail in Note 6 – Stock Based Compensation.

Our Director Compensation Plan calls for issuance of shares of common stock each quarter to each independent director. In 2020, we issued 11,136 shares valued at $100,000 in the quarter ended March 31, 2020, 7,748 shares valued at $100,027 in the quarter ended June 30, 2020, and 5,915 shares valued at $124,984 in the quarter ended September 30, 2020. In 2019, we issued 8,336 shares each quarter, valued at $106,034, $135,043 and $120,705 for the quarters ended March 31, June 30 and September 30, respectively.

During the quarter ended June 30, 2019, in an underwritten primary offering, we issued 1,769,275 shares of our common stock for gross proceeds of $23,000,575. In connection with this transaction, we incurred equity issuance costs of $1,696,749 related to payments to the underwriter, advisors and legal fees associated with the transaction, resulting in net proceeds to the Companyour company of $21,303,826.

During the quarter ended June 30, 2018, in a private transaction, we issued 1,666,669 shares of our common stock for gross proceeds of $9,000,000. In connection with this transaction, we incurred equity issuance costs of $835,526 related to payments to advisors and legal fees associated with the transaction, resulting in net proceeds to the Company of $8,164,474.

During the quarters ended September 30, 2019, June 30, 2019, and March 31, 2019, we issued 48,775, 60,295 and 89,826 shares, respectively, of our common stock and received proceeds of $206,324, $214,314, and $343,785, respectively, in connection with the exercise of stock options under our 2013 equity compensation plan. We issued an additional 12,052 shares of our common stock in the quarter ended March 31, 2019 in connection with the exercise of options using the net-settled method, whereby no cash was received, but rather the exercise price was paid by the surrender of shares underlying the options. We also issued 130,001 shares of our common stock in the quarter ended March 31, 2019 in connection with restricted stock awards awarded in 2018. We issued 141,403 and 2,002 shares of our common stock and received proceeds of $451,022 and $4,920 in connection with the exercise of options in the quarters ended September 30, 2018 and June 30, 2018, respectively.

OPTIMIZERx CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

SEPTEMBER 30, 2019

NOTE 3 – STOCKHOLDERS’ EQUITY (continued)

Our Director Compensation Plan calls for issuance of 2,084 shares per quarter to each independent director. In 2019, we issued 8,336 shares each quarter, valued at $106,034, $135,043, and $120,705 for the quarters ended March 31, June 30, and September 30, respectively. In 2018, we issued 6,249 shares valued at $28,875, 8,336 shares valued at $89,945, and 11,489 shares valued at $206,082 for the quarters ended March 31, June 30, and September 30, respectively.

Effective May 14, 2018, in connection with our listing on the Nasdaq Capital Market, we implemented a reverse split of our common stock by exchanging each three shares of our common stock for one share. The effect of this reverse split is presented in the accompanying condensed consolidated financial statements as if it had been effective as of the beginning of the earliest period presented. We elected to round fractional shares up to the nearest whole number rather than redeem them for cash, and as a result we issued 908 additional shares.

In the quarter ended March 31, 2018, we issued 100,000 shares of common stock to a subsidiary of WPP, plc, a shareholder at the time, in full payment of all amounts due under a co-marketing agreement that covered certain WPP, plc agencies, whereby we shared a portion of our revenue with those agencies related to programs awarded to us by those agencies. The shares were valued at $447,000, the market value of the stock on the date of issuance. The amount due was recorded as a liability in revenue share payable at December 31, 2017.

In the quarter ended September 30, 2018, we issued 10,000 shares valued at $148,050 in connection with investor relations services.

NOTE 46 – STOCK BASED COMPENSATION

We use the fair value method to account for stock-based compensation. We recorded $1,329,713$1,447,826 and $878,768$1,329,713 in compensation expense in the nine months ended September 30, 20192020 and 2018,2019, respectively, related to options issued under our stock-based2013 incentive compensation plan. This includes expense related to options issued in prior years for which the requisite service period for those options includes the current period as well as options issued in the current period. The fair value of these instruments was calculated using the Black-Scholes option pricing model. There is $1,462,423$1,603,417 of remaining expense related to unvested options to be recognized in the future over a weighted average remaining period of less than one year.approximately 1.7 years. The total intrinsic value of outstanding options at September 30, 2019 is $13,318,970.2020 was $22,611,933.

The companyCompany also recorded expense related to restricted stock awards of $78,225$618,783 and $364,008$78,225 for the nine months ended September 30, 20192020 and 2018,2019, respectively. As of September 30, 2019,2020, there is $1,513,475was $832,473 of remaining expense related to unvested restricted stock awards to be recognized in the future related to 140,000111,186 shares of restricted stock awards that arewere unvested at September 30, 2019.2020. A total of 63,560 shares related to these restricted stock awards vested in 2020 and were issued during the nine months ended September 30, 2020.

NOTE 57 – CONTINGENCIES

Litigation

The Company is not currently involved in any legal proceedings.

OPTIMIZERx CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2019

NOTE 6 –EARNINGS (LOSS) EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted (loss) earningsloss per share.

No calculation of diluted earnings per share is included for 2019 as the effect of the calculation would be antidilutive. The number of common shares potentially issuable upon the exercise of certain options that were excluded from the diluted loss per common share calculation was 984,084 and 802,330 shares in the three and nine months ended September 30, 2020, respectively, related to options, and 111,186 shares related to restricted stock for the three and nine months ended September 30, 2020. This results in total shares excluded from the calculation of 1,095,270 and 913,516 for the three and nine months ended September 30, 2020, respectively. Total shares excluded from the calculation were 1,039,598 and 955,740 for the three and nine months ended September 30, 2019.

OPTIMIZERx CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 8 – CONTINGENCIES

Litigation

The Company is not currently involved in any legal proceedings

NOTE 79 – SUBSEQUENT EVENTS

In October 2019,2020, we completed the acquisitionreceived proceeds of 100% of the outstanding$201,855 and issued 36,420 shares of RMDY Health, Inc., a privately held leading provider of collaborative digital therapeutics SaaS solutions for the healthcare industry. This strategic acquisition allows us to extend our ability to engage doctors and patients for our pharmaceutical clients, introduce important client segments to our solution site, and continue expanding on our patient engagement revenue stream. The purchase price was $16.0 million, which will be adjusted for final working capital acquired. Total cash paid in October as part of the transaction was $8.7 million, which included payments for closing indebtedness, transaction expenses, escrows, and payments to RMDY Health stockholders. There were approximately $300,000 of costs directly related to the acquisition included in the condensed consolidated statements of operations for the three and nine months ended September 30, 2019 as well.

Additionally, a portion of the purchase price, $5.9 million, is payable in shares of our common stock and 382,893 shares will be issued in November 2019 in connectionconjunction with this acquisition. Additional shares may be issued in future years at the timeexercise of the escrow release. Two additional payments not to exceed $30.0 million may become due as part of an earnout in the amount of 1.75 times the amount that we exceed $4.0 million of revenues related to the “RMDY” product in 2020, and 1.75 times the amount that we exceed 2020 revenues related to the "RMDY" product in 2021.

OPTIMIZERx CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2019

Since the acquisition occurred subsequent to September 30, 2019, no results from operations of RMDY Health are included in our consolidated statement of operations for the three and nine months ended September 30, 2019. It is currently impractical to disclose a preliminary purchase price allocation of RMDY Health or pro forma financial information combining both companies as of the earliest period presented in these financial statements as RMDY Health is currently in the process of both closing its books and records and converting them to U.S. GAAP.

Notwithstanding the foregoing, all required financial information concerning the RMDY Health acquisition will be included in an amended 8K with a due date of December 19, 2019.stock options.

In accordance with ASC 855-10, we have analyzed events and transactions that occurred subsequent to September 30, 20192020 through the date these financial statements were issued and have determined that other than as discussed above, we do not have any other material subsequent events to disclose or recognize in these financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.   These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions.  We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, cybersecurity, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.  Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

Overview

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

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

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

Current Year Company Highlights through November 2019October 2020

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

Results of Operations for the Three and Nine Months Ended September 30, 20192020 and 20182019

Revenues

Our total revenue reported for the ninethree months ended September 30, 20192020 was approximately $17.2$10.5 million, an increase of 18%110% over the approximately $14.6$5.0 million from the same period in 2018.2019. Our total revenue for the threenine months ended September 30, 20192020 was approximately $5.0$26.9 million, a decreasean increase of 8%56% over the approximately $5.4$17.2 million from the same period in 2018.2019. The increased revenue in the nine-month periodboth periods resulted primarily from increases in sales in our clinical and brand messaging products as a resultand patient engagement products, including from our acquisition of the launch of new channel partners since the third quarter of 2018. The decreaseRMDY Health in the three-month period resulted from a decline in revenue related to our financial messaging product, primarily because two high volume brands running in 2018 were not running in 2019, one of which shifted their funds from financial messaging to clinical messaging. We do not breakout revenue by service at this stage, but as we achieve greater scale we plan to determine the best way to present the growth by service.  2019.

Cost of Revenues

Our cost of revenue percentage, comprised primarily of revenue share expense, declinedincreased as a percentage of revenues in both the three and nine-monthnine month periods ended September 30, 2019,2020, as compared to the same periods in 2018,2019, as set forth in the table below. This decreaseincrease was a result of product mixmix. The 2019 nine-month period contained an unusually high percentage of launch assistance services and our focus on reducingother nonrecurring revenue that was not subject to revenue share expense. As we have previously discussed, we expect our cost of revenues through improved revenue share contracts and our focus on products with higher margins.to decrease slightly in the fourth quarter.

Gross Margin

Our gross margins improved from 2018 to 2019 in both the three and nine-month periods ended September 30, asAs reflected in the table above, andour gross margin decreased in both 2020 periods from the prior year periods. As discussed under cost of revenues above, we had an unusually favorable product mix in the nine-month 2019 period that had a positive impact on our margin in 2019. Our gross margin for the reasons reflectedfull year of 2019 was 62.7%. Our gross margin was 57.3% in the discussionfirst quarter of cost of revenues. We have been focused on improving our margins.2020, improved to 58.0% in the second quarter, and declined to 57.1% in the third quarter. We expect our gross margin to maintain gross margins of at least 60% on a quarterly basis forimprove in the balance of the year.fourth quarter.

Operating Expenses

Operating expenses increased from approximately $2.9$5.0 million for the three months ended September 30, 20182019 to approximately $5.0$6.2 million for the same period in 2019.2020. Operating expenses increased from approximately $7.8$12.3 million for the nine months ended September 30, 20182019 to approximately $12.3$19.0 million for the same period in 2019.2020. Overall, the increase resulted from our efforts to expand our product line and build out our organization to establish a strong base for current and future growth. The detail by major category is reflected in the table below.

The largest increases in operating expenses are related to salaries, wages, and benefits and other human resource related costs. Since the beginning of the first quarter of 2018,2019, we have hired a Chief Commercial Officer, four additional Vice Presidents ofsignificantly expanded our sales a vice president of marketingforce, made an acquisition to expand our product portfolio, and communications, a controller, a financial analyst, a vice president of strategy, 10 employees associated withadded to our CareSpeak acquisition,product development, data, and other related support personnel.finance teams. These new hires have established a strong basis for significant future growth and have also resulted in increases in benefits, payroll taxes, and related travel. The increased stock-based compensation is impacted by bothresults from the grant of new options and the increased number of options granted and the price of the stock at the time of grant.team members. We expect salaries, wages, & benefits, as well as stock-based compensation to remain at similar levels, or only increase slightly, infor the fourth quarterbalance of the year. We expect travel expense to remain low for the balance of the year as a result of grants to employees associated with the RMDY acquisition.

The increase in research, development, and maintenance costs reflects an increased level of activity to support our overall growth. Specifically, we are investing in research initiatives to develop new offerings to expand our overall product portfolio.

Advertising and promotion increased substantially in 2019 because of our increased focus on marketing activities. This increase includes costs associated with our physician survey on drug price transparency and patient cost challenges, our sponsorship of a healthcare panel on digital pharma marketing, and attendance at several industry conferences. We also hired a public relations firm in late 2018 that is included in 2019 costs, but was not there in 2018.COVID-19 pandemic.

Professional fees increased in 2020 are similar to 2019 as a result of our movelevels for the nine-month periods ended September 30. Professional fees in the quarter ended September 30, 2020 were much less than the same period in 2019. The 2019 quarter included costs related to the Nasdaq Capital Market in June 2018, our subsequent increase in market capitalization, and our acquisition of CareSpeak Communications in late 2018. This increased the complexity of our year-end audit, and we were required to obtain an audit opinion on our internal controls under Sarbanes Oxley as of December 31, 2018 for the first time. We also were required to obtain third party valuations of the allocation of our purchase price of CareSpeak and the fair value of those assets and liabilities as of December 31, 2018, and on a quarterly basis moving forward.

Acquisition related costs in 2018 are related to the acquisition of CareSpeak Communications and in 2019 are related to the acquisition of RMDY Health. While both transactions actually closed in the fourth quarter of the respective years, due diligence and document drafting began in the quarters ended in September. The increase in 2019 is because the RMDY transaction was a larger and more complex transaction requiring more due diligence and more complex documents.

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

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

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

The purchase price allocations for both of our recent acquisitions included potential additional consideration to be paid if certain revenue levels are achieved in 2019, 2020, and 2020.2021. That liability is required to be adjusted to fair value each quarter and this represents thequarter. The increase or decrease in the fair value of the liability during the threecontingent consideration in 2019 related to our acquisition of CareSpeak Communications in 2018. The maximum amount of potential contingent consideration related to CareSpeak was recorded as of December 31, 2019 and nine months ended September 30, 2019. While we still expect the maximum amount to be paid. The increase in contingent consideration in 2020 relates to our acquisition of RMDY Health, Inc. in 2019. The amount due under the fair value methodology resultsRMDY agreement was finalized and paid in changes2020, so there will be no future adjustments to the fair value whenever adjustments are made to future revenue projections.

Travel expenses increased both because of the larger number of employees, as well as increased conference activity both related to investor relations and industry conferences.contingent purchase payable.

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

We expect our overall operating expenses to continue at approximately the 2019third quarter of 2020 level or slightly above as we further implement our business plan and expand our operations to grow the business in a very dynamic and active marketplace. However, we have established a strong team as a base to support growth and we are seeing the results of the investment in our team last year in our strong revenue growth this year. We do not expect human resource costs to increase as quickly as revenues.

Net Income (Loss)

We had a net loss of approximately $1.57$0.3 million for the three months ended September 30, 2019,2020, as compared to approximately $245,000net loss of net income$1.6 million during the same period in 2018. Our net2019, and down from the $2.2 million loss in the three months ended March 31, 2020 and the $1.1 million loss in the three months ended June 30, 2020. We had a loss of approximately $3.6 million for the nine months ended September 30, 2019 was approximately $1.16 million,2020, as compared to a net incomeloss of approximately $336,000$1.2 million during the same period in 2018.2019. The reasons forand specific components associated with the change are discussed above, however ourabove. Overall, the increased gross margin has been offset byloss in the nine month period resulted from increased operating expenses to support strong revenue growth related expenses.throughout 2020 and beyond. That strong revenue growth resulted in a reduced loss in the three months ended September 30, 2020.

Liquidity and Capital Resources

As of September 30, 2019,2020, we had total current assets of approximately $37.9$27.2 million, compared with current liabilities of approximately $5.4$8.1 million, resulting in working capital of approximately $32.5$19.1 million and a current ratio of 7.03.4 to 1. This represents an improvementa slight decrease from our working capital of approximately $11.5$21.0 million and current ratio of 3.74.4 to 1 at December 31, 2018.2019.

Our operating activities used approximately $161,000$3.7 in cash flow during the nine months ended September 30, 2019,2020, compared with cash used of approximately $140,000$0.2 million in the same period in 2018.2019. This use of cash was primarily all in the first quarter. In the 2020 period, operating activities used $3.7 million in the first quarter, provided approximately $0.1 million in the quarter ended June 30, 2020 and used approximately $0.1 million in the quarter ended September 30, 2020. The cash used in the 2020 period was primarily the result of increased investment in working capital; in particular, we made a prepayment to a partner that accounts for the bulk of the increase in prepaid expenses and will be expensed over the balance of the year as revenue is generated through that channel. In addition, as a result of our strong revenue growth of 110% in the third quarter, our trade receivables increased by $6.0 million, which was partially offset by increased revenue share of $2.0 million owed to our channel partners. Only a portion of our revenue is subject to revenue share and the payment terms to our partners are different than the terms that we receive from customers. While there is an indirect relationship between changes in accounts receivable and revenue share payable, they are both dependent on product and customer mix and relative changes in a particular period are impacted by such factors.

This increase in accounts receivable does not reflect on our customers’ ability to pay. Our customers are large multinational companies and many dictate extended payment terms, but also offer discounts for quick payment. Since we have sufficient cash reserves, we do not take advantage of the discounts, which translate to extremely high implied rates of interest. The cash used in the 2019 period was the result of our net loss andduring the period, offset noncash items included in the loss. The cash used in the 2018 period was the result of cash used for working capital. The main use of cash in 2018 resulted from a change in payment terms for one of our key partners, as well as payment of certain year end liabilities. We expect to have negative cash flow from operations in the fourth quarter as a result of expenses associated with the acquisition of RMDY Health.by non-cash expenses.

We used approximately $1.06$45,000 and $1.1 million in investing activities for the nine months ended September 30, 2020, and 2019, respectively. These investments related to purchases of equipment, as well as investments in software to expand our network capabilities. 

We had a net use of cash in financing activities in the nine months ended September 30, 2019, $1.0 million of which was related to the acquisition of a perpetual software license. The total cost of the license was $1.5 million. The remaining $500,000 is in accounts payable and is due in September 2019. We used insignificant amounts in investing activities in the nine months ended September 30, 2018 related to purchases of equipment.

We had2020. This included proceeds from financing activities of approximately $1.3 million related to the exercise of stock options offset by approximately $4.4 million in payments related to contingent consideration. We had net proceeds of $22.1 million and $8.6 millionfrom financing activities during the nine months ended September 30, 2019, and 2018, respectively. These resultedprimarily from offerings oura secondary offering of common stock as well as the exercise of stock options. We did, as discussed in Note 3 to the accompanying condensed consolidated financial statements, issue 300,000 shares valued at $447,000June 2019. There have been no proceeds from investment offerings in 2018 in a non-cash transaction in payment of revenue share due under a co-marketing agreement and the accompanying termination of the agreement.2020.

We do not anticipate the need to raise additional capital in the short or long term for operating purposes in 12 months from the issuance of this quarterly report.or to fund our growth plans. We are focused on growing our revenue, channel and partner networks.network. However, as a company in a market that is active with merger and acquisition activity, we may have opportunities, such as for acquisitions or strategic partner relationships, which may require additional capital. We will assess these opportunities as they arise with the view of maximizing shareholder value. We used approximately $9.0 million of our cash in October 2019 related to the acquisition of RMDY Health, which still leaves us approximately $20 million of cash for operations and potential future acquisitions.

Critical Accounting Policies

In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our accounting policies are discussed in the footnotes to our financial statements included in our annual report on Form 10-K for the year ended December 31, 2018;2019; however, we consider our critical accounting policies to be those related to determining the amount of revenue to be billed, the timing and amount of revenue recognition, calculation of revenue share expense, stock-based compensation, capitalization and related amortization of intangible assets, impairment of assets, and the fair value of contingent purchase price payable.liabilities.  

Recently Issued Accounting Pronouncements

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

In August 2019, the FASB issued ASU 2019-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2019-13 modifies the disclosure requirements on fair value measurements and became effective for the Company on January 1, 2020. The adoption of this standard did not have a material effect on our financial position, results of operations, or cash flows.  

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to improve consistent application and simplify the accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance. ASU 2019-12 is effective for annual and interim reporting periods beginning after December 12, 2020, andwith early adoption is permitted. The Company is currently evaluating the impactadoption of this guidancestandard is not expected to have a material effect on its consolidatedour financial statements.position, results of operations, or cash flows.

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

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements and will become effective for the Company on January 1, 2020 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

Off Balance Sheet Arrangements

As of September 30, 2019,2020, there were no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are not required to provide the information required by this Item.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based upon thatthis evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2019,the Evaluation Date that our disclosure controls and procedures were not yet effective duesuch that the material information required to be included in our SEC reports is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms relating to the presence of material weaknesses in internal control over financial reporting.our company, including, our consolidated subsidiary, and was made known to them by others within those entities, particularly during the period when this report was being prepared.