OptimizeRx Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. OptimizeRx provides healthcare technology, including SampleMD, which distributes pharmaceutical coupons and vouchers through e-prescribing and electronic health record channels. The comparative Q1 2013 results were restated for revenue-share expense.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $1,317,347 | $669,290 |
| Revenue-share expense | $498,810 | $159,815 |
| Gross margin | $818,537 (62.1% of revenue) | $509,475 (76.1%) |
| Operating expenses | $1,471,958 | $733,969 |
| Operating loss / net loss | $(653,421) / $(653,315) | $(224,494) / $(224,438) |
| Basic and diluted loss per share | $(0.04) | $(0.02) |
| Cash from operating activities | $226,727 | $6,499 |
Revenue grew 97%, primarily from SampleMD activity and campaign setup and integration fees. Gross margin dollars increased, but the margin percentage fell as revenue-share expense rose. The larger net loss reflected higher operating costs, notably $421,577 of stock-based compensation and a $400,000 LDM settlement expense.
Cash and cash equivalents were $4,030,730 at March 31, versus $1,118,243 at year-end. Working capital was $3,241,255; current assets were $5,153,914 and current liabilities $1,912,659. Investing activities used $109,272, and financing activities provided $2,795,032. The filing reports no off-balance-sheet arrangements and shows no separate interest-bearing debt balance; liabilities include $570,000 payable to a related party. Management said available cash was sufficient for the next 12 months.
Material changes and transactions
- On March 17, the company raised $10 million gross by issuing 8,333,333 shares at $1.20 per share. It used $6 million to repurchase Vicis Capital’s shares and derivative securities; the balance was intended for working capital. The company reported approximately $2.8 million net financing cash flow for the quarter after issuance costs and the buyout.
- The Vicis buyout repurchased the Series A and B preferred stock and related warrants, cancelled undeclared preferred dividends, and, according to management, reduced fully diluted shares by approximately 7 million. The offering and buyout materially changed the company’s capital structure.
- Common shares outstanding were 23,168,337 at March 31 and 23,580,863 as of May 12. The March offering also included 804,139 placement-agent warrants exercisable at $1.20.
- Q1 2013 revenue-share expense was restated to $159,815 from $40,203, increasing reported net loss from $104,826 to $224,438. The company said it would accrue revenue-share costs in the period associated with the revenue.
Outlook, commentary, and risks
Management expected growing profitability for the remainder of 2014 and a significant ramp-up in the second half, citing expanded distribution and customer programs. It expected distributions to double versus the prior year, anticipated an Allscripts rollout reaching a further 20,000 physicians, and planned launches or integrations with other platforms, including Quest Care360. These are forward-looking expectations, not reported results. Management also said SampleMD 2.0 was launched and designed to support growth.
The LDM patent litigation was settled and dismissed with prejudice in March. The company paid a one-time $400,000 fee and agreed to pay LDM the greater of $0.37 per patient discount distributed or 10% of revenue from distribution and redemption of patent discounts. Separately, the company disclosed a patent-infringement action it brought against Physicians Interactive and a New Jersey action in which plaintiffs’ motion to add the company as a party was granted; the company disputes the allegations and asserts defenses and counterclaims.
Three customers accounted for 44% of Q1 2014 revenue, compared with 72% in Q1 2013. Management cited earlier Allscripts privacy and technical issues and a major client’s temporary program interruption; it said both had been resolved. The filing also identifies the usual forward-looking uncertainties, including economic and regulatory changes, competition, access to capital, and accounting requirements.
Management concluded that disclosure controls were ineffective at March 31 because of material weaknesses in segregation of duties and risk assessment, and insufficient written accounting and SEC reporting procedures. The weaknesses had not been remediated during the quarter; the company planned improvements and noted that it appointed a CFO on May 12. Management’s optimism should be considered alongside these control weaknesses and the company’s continuing losses.
Important facts for investors to verify
- Whether the expected customer launches, expanded physician access, and distribution growth translated into subsequent revenue and improved profitability.
- How the LDM royalty formula is being applied, the resulting ongoing expense, and any related operational or legal exposure.
- Progress in remediating the disclosed internal-control material weaknesses and whether future filings report effective controls.
- Customer concentration, program continuity, and the extent to which revenue depends on a small number of pharmaceutical clients and distribution partners.
- The fully diluted share impact of the Vicis buyout, public offering, warrants, options, and subsequent equity awards.
- The status and potential exposure of the separate patent and New Jersey legal proceedings.