OptimizeRx Corporation — Q2 2018 Form 10-Q
Period: Quarter and six months ended June 30, 2018; unaudited. OptimizeRx provides digital health messaging through electronic health record and e-prescribing platforms, including pharmaceutical financial, brand, and clinical messaging.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $5.10 million | $2.87 million | $9.21 million | $5.02 million |
| Gross margin | $2.86 million; 56.1% | $1.26 million; 44.0% | $4.97 million; 54.0% | $2.03 million; 40.5% |
| Operating expenses | $2.59 million | $1.63 million | $4.88 million | $3.29 million |
| Operating income (loss) | $274,000 | $(371,000) | $82,000 | $(1.26) million |
| Net income (loss) | $281,000 | $(362,000) | $91,000 | $(1.24) million |
| Basic EPS | $0.03 | $(0.04) | $0.01 | $(0.13) |
- Revenue increased 78% in Q2 and 84% for the six-month period, which management attributed to growth in brand messaging, broader financial-messaging distribution, and launches of more than 100 pharmaceutical brands across its messaging products.
- Revenue share expense was $2.24 million in Q2 and $4.24 million year to date. Gross margin improvement reflected lower revenue-share percentages on financial messaging and greater scale in brand messaging.
- Operating expenses increased year over year, primarily from salaries and benefits, stock-based compensation, and costs associated with expanding the business. Stock-based compensation was $1.01 million for the first six months, versus $292,000 in 2017.
- Related-party revenue was $1.91 million in Q2 and $3.25 million year to date, compared with $614,000 and $1.37 million, respectively, in 2017. WPP owned approximately 18% of the company; revenue billed through WPP-owned media agencies is classified as related-party revenue.
Cash, liquidity, and capitalization
- At June 30, cash and cash equivalents were $12.00 million, versus $5.12 million at December 31, 2017. Current assets were $17.73 million and current liabilities $2.84 million, yielding working capital of approximately $14.9 million and a 6.2-to-1 current ratio, compared with $5.3 million and 2.5-to-1 at year-end.
- Operating activities used $1.22 million of cash in the first half, compared with $696,000 used in the prior-year period. Management attributed 2018 use mainly to higher receivables as revenue grew and changes in partner payment terms, as well as payment of year-end liabilities.
- Investing activities used $69,000. Financing activities provided $8.17 million net, primarily from a May private placement of 1,666,669 shares for $9.0 million gross proceeds, less approximately $836,000 of issuance costs. The filing reports no interest expense and no debt balance is identified on the balance sheet.
- Accounts receivable totaled $5.51 million, including $2.56 million due from related parties. The filing cites increased receivables as a significant driver of operating cash use.
- Shares outstanding were 11,556,858 at June 30 and 11,637,546 as of July 31. The company completed a 1-for-3 reverse split in May and uplisted to Nasdaq in June.
Outlook, risks, and notable items
- Management expected strong messaging growth to continue through 2018 as it expanded reach and utilization across EHR and e-prescribing partners, added brands and pharmaceutical clients, and developed its distribution network. It did not provide numerical revenue or earnings guidance.
- Management said it had achieved its target of at least 55% gross margin ahead of schedule in Q2 and was focused on maintaining or improving margins. It cautioned that product mix and new-product introductions could cause quarterly margin variation.
- Management expected operating expenses to increase slightly quarter to quarter while declining as a percentage of revenue; it also expected stock-based compensation to remain at similar quarterly levels for the rest of 2018. Management anticipated quarterly profitability and positive quarterly operating cash flow for the balance of the year, while acknowledging that growth-related one-time costs could cause a quarterly loss.
- The company said it did not anticipate needing additional capital for operations or growth plans, but noted potential acquisitions or strategic partnerships could require additional funding. Forward-looking risks cited include economic, regulatory, capital-availability, competition, interest-rate, and accounting changes.
- ASC 606 adoption was reported as immaterial overall. It reduced reported revenue by approximately $26,000 in Q2 and $144,000 for the first half; most deferred amounts were expected to be recognized during the remainder of 2018.
- In Q1, the company issued 100,000 shares valued at $447,000 to a WPP subsidiary to settle amounts due under and terminate a co-marketing agreement. It reported no material pending legal proceedings and no off-balance-sheet arrangements. In July, it issued shares upon option exercises and a cashless warrant exercise.
Important facts for investors to verify
- Whether reported growth and margin gains persist, given product-mix variability and the company’s reliance on expanding partner distribution and pharmaceutical messaging programs.
- Receivable collection and operating cash conversion, particularly the size and collectability of related-party receivables and the impact of partner payment terms.
- The proportion and economics of related-party revenue, including ongoing commercial relationships with WPP-affiliated agencies following termination of the co-marketing agreement.
- The impact of stock-based compensation, equity issuance, options, and warrants on future expenses and shareholder dilution.
- Whether management’s expectations for quarterly profitability, positive operating cash flow, and stable or improving gross margins are achieved; these are forward-looking statements, not guarantees.