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, 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

Company Highlights through April 2019

Our success in acquiring, integrating and expanding into new EHR/eRx platforms continues to grow as well. For the remainder of 2019, we expect to expand our reach to physicians, pharmacies and patients, and also increase the utilization of our existing partners as they improve their work flow and reach. With the growth of both our pharmaceutical products and our distribution network, we expect that our financial, brand, and clinical messaging, as well as our patient engagement activities, will continue to increase and show strong growth throughout the year.

Results of Operations for the Three Months Ended March 31, 2019 and 2018

Revenues

Our total revenue reported for the three months ended March 31, 2019 was approximately $5.2 million, an increase of 27% over the approximately $4.1 million from the same period in 2018. The increased revenue resulted primarily from increases in sales in our messaging products. 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.

Cost of Revenues

Our cost of revenue percentage, composed primarily of revenue share expense, declined as a percentage of revenues, from approximately 49% in the quarter ended March 31, 2018 to approximately 30% for the quarter ended March 31, 2019. This decrease was a result of product mix and our focus on reducing our cost of revenues through improved revenue share contracts and the focus on products with higher margins.

Gross Margin

Our gross margin improved from 51.2% in the quarter ended March 31, 2018 to 69.6% in the quarter ended March 31, 2019. We have been focused on improving our margins. We had a favorable product mix in the 2019 quarter that had a positive impact on our margin. We expect to maintain margins of at least 60% on a quarterly basis for the balance of the year.

Operating Expenses

Operating expenses increased from approximately $2.3 million for the three months ended March 31, 2018 to approximately $3.5 million for the same period in 2019, an increase of approximately 52%. The detail by major category is reflected in the table below.

The largest increases in operating expenses related to salaries, wages, and benefits and other human resource related costs. Since the beginning of the first quarter of 2018, we have hired an additional vice President of sales, a vice president of marketing and communications, a financial analyst, and 10 employees associated with our CareSpeak acquisition. These new hires also resulted in increases in benefits, payroll taxes, and related travel. The increased stock-based compensation results from the acceleration of vesting of previously granted options as well as the grant of new options. We expect stock-based compensation to decrease on a quarterly basis for the balance of the year.

The decrease in development, maintenance, and integration costs reflects cost savings related to our move to Amazon web services at the end of the quarter ended March 31, 2018, which resulted in a reduction of our monthly hosting cost.

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.

Professional fees increased in 2019 as a result of our move 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.

Depreciation and amortization increased because of the amortizable assets acquired in connection with our acquisition of CareSpeak Communications. Office, facility, and other expenses also increased as a result of our acquisition of CareSpeak, which resulted in two additional office locations for us, as well as the normal increased costs associated with increased business activity.

The increase in the fair value of contingent consideration relates to our acquisition of CareSpeak Communications. The purchase price included potential additional consideration to be paid if certain revenue levels are achieved in 2019 and 2020. That liability is required to be adjusted to fair value each quarter and this represents the increase in the fair value of the liability during the quarter ended March 31, 2019.

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

We expect our overall operating expenses to continue at the 2019 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 do not expect human resource costs to increase as quickly as revenues. We have made additional growth hires in April 2019, including a VP of sales to focus on the hospital market and a chief commercial officer to focus on enterprise arrangements and product expansion across our customer base.

Net Income (Loss)

Our net income for the three months ended March 31, 2019 was approximately $7,000, as compared to a loss of approximately $189,000 during the same period in 2018. The reasons and specific components associated with the move to profitability are discussed above. Overall, the income resulted from increased revenues and gross margin, which offset the increase in operating expenses. Barring unexpected, or one-time expenses, we expect to remain profitable on a quarterly basis.

Liquidity and Capital Resources

As of March 31, 2019, we had total current assets of approximately $15.5 million, compared with current liabilities of approximately $3.9 million, resulting in working capital of approximately $11.6 million and a current ratio of approximately 4.0 to 1. This represents an improvement from working capital of approximately $11.5 million and current ratio of 3.7 to 1 at December 31, 2018.

Our operating activities provided approximately $890,000 in cash flow during the three months ended March 31, 2019, compared with cash used of approximately $787,000 in the same period in 2018. The cash provided in the 2019 period was the result of our net income, as well as working capital management. The cash used in the 2018 period was the result of our net loss as well as 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 continue to have positive cash flow from operations on a quarterly basis for the balance of the year.

We used insignificant amounts in investing activities in both the three months ended March 31, 2019, and 2018. These investments related to purchases of equipment as well as investments related to the expansion of our network capabilities.

We had proceeds from financing activities of approximately $344,000 during the three months ended March 31, 2019 related to the exercise of stock options. We had no financing activities in the comparable period for 2018. We did however, as discussed in Note 3, issue 300,000 shares valued at $447,000 in 2018 in a non-cash transaction in payment of revenue share due under a comarketing agreement and the accompanying termination of the agreement.

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

Critical Accounting Policies

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

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 provides for a new impairment model which 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 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.

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 impact of this guidance on its consolidated financial statements.

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 March 31, 2019, there were no off-balance sheet arrangements.