OptimizeRx Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; unaudited. OptimizeRx provides digital health messaging and patient-engagement services through electronic health record platforms, connecting pharmaceutical companies with healthcare providers.
Key financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $8.78 million | $7.01 million | $16.37 million | $12.22 million |
| Gross profit | $5.14 million | $4.32 million | $9.49 million | $7.95 million |
| Gross margin | 58.6% | 61.6% | 58.0% | 65.0% |
| Operating expenses | $6.20 million | $3.84 million | $12.80 million | $7.33 million |
| Net income (loss) | $(1.08) million | $0.41 million | $(3.28) million | $0.41 million |
| Basic and diluted EPS | $(0.07) | $0.03 | $(0.22) | $0.03 |
Cash flow and liquidity: Cash and cash equivalents were $14.11 million at June 30, down from $18.85 million at December 31, 2019. First-half operating cash flow was a use of $3.61 million, versus $0.81 million provided in the prior-year period. Investing activities used $0.02 million and financing activities used $1.10 million; the latter included $1.39 million of contingent-consideration payments, partly offset by option-exercise proceeds. Working capital was approximately $15.4 million and the current ratio was 2.3, compared with $21.0 million and 4.4 at year-end.
Debt and obligations: The filing does not report conventional borrowings. Total liabilities were $12.55 million, including $5.36 million of current contingent purchase-price payable and $0.51 million of lease liabilities. Revenue-share payable was $3.50 million. Management said it did not anticipate needing additional capital for operations or planned growth, while noting acquisitions or strategic opportunities could require capital.
Changes and business developments
- Revenue increased 25% year over year in Q2 and 34% in the first half, primarily from messaging and patient-engagement products, including the 2019 RMDY Health acquisition. The company does not provide revenue by service.
- Cost of revenue rose to 41.4% of Q2 revenue and 42.0% for the first half, versus 38.4% and 35.0%, respectively. Management attributed the comparison partly to unusually high non-recurring, non-revenue-share launch-assistance revenue in 2019.
- Operating expenses increased substantially, driven particularly by salaries and benefits, stock-based compensation, product development, amortization, and partner-integration costs. The company cited investment in its workforce, product portfolio, and growth capabilities.
- Management reported a new agreement with a partner offering a large Epic and Cerner footprint, a specialty-drug enrollment solution with three active programs, and the launch of TelaRep, an in-EHR video-consultation tool. It also described efforts to convert clients to enterprise contracts.
Outlook, risks, and unusual items
- Management expected 2020 cost of revenue to normalize at 40% or lower, gross margin to improve sequentially in the second half with a full-year target of 63%, and operating expenses to remain around Q2 levels or slightly lower. These are management expectations, not guarantees; actual Q2 gross margin was 58.6%.
- The company said it had not observed a noticeable Q2 revenue impact from COVID-19 as of the filing, but could not predict future effects. It warned that an extended downturn could reduce customers’ advertising and marketing budgets. Offices were closed, employees worked remotely, and travel was restricted.
- Management said first-half operating cash use reflected working-capital investment, including a $2.0 million partner prepayment to be expensed as revenue is generated, and a $3.4 million increase in receivables associated with growth and customers’ extended payment terms.
- Management expected to pay $3.75 million of RMDY contingent consideration, compared with $3.72 million recorded at acquisition, and said the maximum CareSpeak contingent consideration was still expected to be paid. The balance sheet showed $5.36 million of current contingent purchase-price payable at June 30.
- Disclosure controls were reported ineffective at June 30 because of material weaknesses involving IT general controls and controls over completeness and accuracy of third-party data. Management said weaknesses had largely been remediated, but further time and testing were needed; it expected implementation and testing by the end of Q3 2020.
- The company reported no material pending legal proceedings and no off-balance-sheet arrangements. COVID-19 was identified as a risk that could materially adversely affect results; the filing also cited economic, regulatory, capital, competition, cybersecurity, and other risks.
Important facts for investors to verify
- Whether revenue growth and partner/platform expansion continue, and how much growth reflects the RMDY acquisition versus organic activity.
- Whether gross margin improves toward management’s 63% full-year target and whether operating expenses remain controlled as expected.
- Whether receivables convert to cash as expected, given extended customer payment terms, and how the partner prepayment affects subsequent-period cash flow.
- The timing and final amount of contingent acquisition payments, and the effect on liquidity.
- Whether the identified control weaknesses are fully remediated and validated, and whether COVID-19 or customer marketing-budget cuts materially affect demand.