OptimizeRx Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; filed August 11, 2015. The unaudited statements are for a healthcare technology company providing digital savings and support through electronic health record and e-prescribing platforms. Comparative 2014 results were restated.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014, restated | Six months 2015 | Six months 2014, restated |
|---|---|---|---|---|
| Revenue | $1.705 million | $1.427 million | $3.193 million | $2.716 million |
| Revenue share expense | $882,327 | $730,140 | $1.639 million | $1.292 million |
| Gross margin | $823,130 (48.3%) | $696,668 (48.8%) | $1.554 million (48.7%) | $1.425 million (52.5%) |
| Operating expenses | $980,659 | $896,529 | $1.823 million | $2.387 million |
| Operating loss | $157,529 | $199,861 | $269,027 | $962,062 |
| Net loss | $157,225 | $199,638 | $268,426 | $961,733 |
| Operating cash flow | Not separately stated | Not separately stated | $246,172 provided | $149,745 used |
- Revenue grew 20% year over year in Q2 and 18% for the first half, attributed to additional promoted pharmaceutical brands and expanded distribution. Q2 revenue was 15% above Q1, according to management.
- Six-month operating expenses fell 24%, mainly because 2014 included a $400,000 lawsuit settlement and higher stock-based compensation. Q2 expenses rose 9% year over year.
- Management reported $251,372 of first-half operating income excluding noncash operating expenses, versus a $218,880 loss on that basis in 2014. This is a non-GAAP presentation; reported GAAP operating results were losses.
- At June 30, cash and equivalents were $3.646 million; current assets were $5.641 million and current liabilities $2.279 million. Working capital was approximately $3.4 million and the current ratio 2.5:1. Total liabilities were $2.279 million; the balance sheet lists no borrowings.
- Cash increased by $198,905 during the first half. Investing activities used $47,267 and financing activities had no cash flow. Management said available cash was sufficient for operations for more than 12 months and it did not anticipate raising equity for operating purposes.
Changes, outlook, and material matters
- Revenue share expense rose to 51.7% of Q2 revenue from 51.1% a year earlier, and to 51.3% for the first half from 47.5%. Management cited product mix, the LDM settlement, and partner incentives; it expected the ratio to remain near Q2 levels.
- Management expected quarter-over-quarter revenue increases for the remainder of 2015, positive operating cash flow each remaining quarter, and profitability in future quarters. It cautioned that added development or customer-acquisition spending could reduce near-term profitability; significant development spending was planned for Q4.
- Business developments described through August included a completed Practice Fusion integration, campaigns beginning through NextGen, and an agreement with Allscripts to integrate eCoupons and serve as exclusive eCoupon provider across its platforms. Management said its network included more than 350 EHRs and that these developments could support growth in the second half of 2015 and 2016. These are management statements and expectations, not guaranteed results.
- The 2014 comparative statements were restated for stock-based compensation, revenue share expense, and revenue recognition. For the first half of 2014, restated revenue was $2.716 million versus $2.772 million previously reported, and restated net loss was $962,000 versus $706,000 previously reported.
- Management identified material weaknesses in internal controls: inadequate segregation of duties and inadequate IT reporting systems for financial reporting. Disclosure controls were not completely effective as of June 30. Management described ongoing remediation, including system upgrades; full remediation of segregation issues would require additional personnel.
- Legal matters included a former CEO’s $450,000 counterclaim concerning registration of shares, and claims against LDM Group and PDR Network seeking enforcement of agreements and damages, including at least approximately $1.0 million plus alleged lost income and business value. In July 2015, the federal court dismissed the Missouri case for lack of federal jurisdiction; the company said it was preparing to refile in Missouri state court. Outcomes are uncertain.
- The company reported no off-balance-sheet arrangements. It also disclosed a February 2015 capital-markets advisory agreement involving stock compensation; the agreement was terminated in July, effective in August, and the remaining 45,000 shares were not to be issued.
Important facts for investors to verify
- Progress and timing of control remediation, particularly the disclosed material weaknesses and prior-period restatement.
- Whether revenue growth converts into sustained GAAP profitability and positive operating cash flow, given rising revenue-share costs and planned development spending.
- Implementation, exclusivity scope, and commercial contribution of the Allscripts arrangement and other platform integrations.
- Status, potential costs, and outcomes of the former-CEO and LDM/PDR litigation, including the state-court refiling.
- Share-based compensation, stock payable, and dilution: 22,949,819 common shares were outstanding as of August 11, 2015.