OptimizeRx Corporation — Q3 2017 Form 10-Q
Business context and period: OptimizeRx provides digital health and pharmaceutical-sponsored messaging and savings services through electronic health record (EHR), e-prescribing, pharmacy, and patient platforms. This unaudited report covers the quarter and nine months ended September 30, 2017; interim results are not necessarily indicative of full-year results.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $3.10 million | $1.79 million | $8.12 million | $5.46 million |
| Gross margin dollars | $1.40 million | $1.06 million | $3.43 million | $2.92 million |
| Gross margin percentage | 45.1% | 59.5% | 42.2% | 53.5% |
| Operating expenses | $2.03 million | $1.31 million | $5.32 million | $4.13 million |
| Net loss | $623,000 | $243,000 | $1.87 million | $1.19 million |
| Basic and diluted loss per share | $0.02 | $0.01 | $0.06 | $0.04 |
Cash flow, nine months: Operating activities used $735,000, investing activities used $896,000, and financing activities used $390,000. Cash decreased by $2.02 million, from $7.03 million at year-end 2016 to $5.01 million at September 30, 2017. Investing outlays included $650,000 for access and exclusivity on Allscripts’ Touchworks platform and development costs, amortized over four years.
Liquidity and balance sheet: Cash was $5.01 million; current assets were $7.96 million and current liabilities $3.76 million, yielding working capital of about $4.20 million and a current ratio of 2.1:1. At December 31, 2016, working capital was about $6.51 million and the current ratio was 2.8:1. Total liabilities were $3.76 million. The balance sheet does not report interest-bearing debt; interest expense was zero in 2017.
Changes and management commentary
- Revenue rose 74% in Q3 and 49% for the nine-month period, primarily from growth in brand messaging, broader financial-messaging distribution, and new pharmaceutical brand launches. The company reported more than 100 brands across its messaging products.
- Revenue-share expense grew faster than revenue, reducing gross margin. Management attributed the lower margin mix to brand messaging, which generally has lower margins than core financial messaging. Quarterly gross margin improved from 36.0% in Q1 to 45.1% in Q3.
- Operating expenses increased, especially salaries, benefits, and consulting costs, as the company expanded staffing and capacity. Management said human-resource costs represented about 86% of the increase. Operating expenses as a percentage of revenue declined year over year.
- Management expects continued quarter-over-quarter revenue increases for the remainder of 2017, continued investment in operations, and operating expenses at or above 2017 levels. It expects expense ratios to improve and margins to rise as it expands lower-revenue-share financial-messaging channels and diversifies brand-messaging distribution. Its stated gross-margin goal is 50% or higher; this is an objective, not formal numerical guidance.
Risks, contingencies, and unusual items
- The company cited risks including economic conditions, regulatory or legislative changes, access to capital, interest rates, competition, and accounting changes. It cautioned that forward-looking statements are subject to uncertainty and referred investors to its 2016 Form 10-K for further risk factors.
- OptimizeRx dismissed without prejudice a lawsuit it had brought against LDM Group and PDR Network. It reported no material pending legal proceedings and no material subsequent events.
- In Q2 2017, the company paid $390,000 to repurchase and retire 500,000 shares held by its former CEO and amended his consulting agreement to end July 31, 2017. The 2017 nine-month cash flow also reflects this payment.
- Management reported that previously identified weaknesses in segregation of duties and financial-reporting IT systems had been remedied through additional finance and IT hires. Management concluded disclosure controls were effective at quarter-end, while noting controls provide reasonable, not absolute, assurance.
Important facts for investors to verify
- Whether fast revenue growth can translate into improved gross margins and lower losses, given the increased revenue-share burden.
- Whether the company can manage operating cash use and fund continued platform integration and development while maintaining liquidity.
- The commercial returns and amortization impact of the Allscripts Touchworks investment and the company’s other platform expansions.
- Whether management’s expectations for continued revenue growth and a gross-margin recovery are achieved; the filing provides no quantified revenue or earnings guidance.
- Whether the reported remediation of internal-control weaknesses remains effective as the business scales.