OptimizeRx Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. The interim financial statements are unaudited. OptimizeRx provides digital savings and support programs through healthcare technology platforms, including electronic health records and e-prescribing systems.
Financial performance
| Metric | Q3 2015 | Q3 2014, restated | Nine months 2015 | Nine months 2014, restated |
|---|---|---|---|---|
| Revenue | $2.007 million | $1.819 million | $5.200 million | $4.536 million |
| Gross margin dollars | $963,000 | $861,000 | $2.517 million | $2.286 million |
| Gross margin percentage | 48.0% | 47.3% | 48.4% | 50.4% |
| Operating expenses | $875,000 | $1.156 million | $2.699 million | $3.543 million |
| Income (loss) from operations | $88,000 | $(295,000) | $(181,000) | $(1.257) million |
| Net income (loss) | $88,000 | $(295,000) | $(180,000) | $(1.256) million |
| Cash from operating activities | Not separately stated | Not separately stated | $488,000 | $(329,000) |
Q3 revenue increased 10% year over year; nine-month revenue rose 15%. Management attributed growth to more pharmaceutical brands and expanded distribution. Nine-month cost of sales was $2.683 million, including revenue-share expense; management reported revenue share at 51.6% of sales versus 49.6% in the comparable 2014 period. Q3 revenue share was approximately 52.0%, versus 52.6%.
Management’s non-GAAP-style calculation showed nine-month operating income of $524,209 excluding $705,667 of noncash operating expenses; the comparable 2014 figure was $17,166 excluding $1.274 million of noncash expenses. This is a management-presented adjustment, not GAAP operating income.
Balance sheet and liquidity
- At September 30, cash and cash equivalents were $8.174 million, compared with $3.447 million at December 31, 2014. Accounts receivable was $2.740 million.
- Current assets were $11.001 million and current liabilities $3.080 million, yielding working capital of approximately $7.921 million and a current ratio of about 3.6, versus reported working capital of approximately $3.2 million and a 2.3 ratio at year-end 2014.
- Total liabilities were $3.080 million; the balance sheet lists no borrowings or interest-bearing debt. The filing reports no cash paid for interest.
- Investing activities used $107,000 in the first nine months, principally for website development and patent rights. Financing activities provided $4.346 million, primarily from the WPP investment.
- The company sold 6,011,106 shares to a WPP subsidiary for gross proceeds of $4.734 million; net proceeds after issuance costs were $4.346 million. Shares outstanding were 29,018,425 as of November 11, 2015.
Changes, outlook, and management commentary
- Q3 was profitable after a year-earlier quarterly loss; the nine-month net loss narrowed substantially. Operating expenses fell year over year, largely because 2014 included a $400,000 lawsuit settlement and higher stock-based compensation. Excluding those two items, management said operating expenses increased approximately 9%.
- Management expected sequential revenue growth in Q4 2015 and anticipated continued quarterly operating cash generation and profitability, while cautioning that added development or marketing investment could reduce near-term profitability. The filing gives no specific revenue or earnings guidance.
- Management said the WPP strategic relationship could support brand acquisition, platform expansion, services, and infrastructure. It also highlighted an Allscripts agreement for exclusive eCoupon access across its platforms, including Touchworks, with integration expected in 2016; a $250,000 payment was due in November 2015 and $650,000 upon launch of the newest platform.
- SampleMD launched in Practice Fusion and began a limited rollout in NextGen. Management reported more than 350 EHR platform relationships and exclusivity across over 200 EHRs. It said a partner workflow issue that disabled eCoupon functionality reduced Q3 revenue by an estimated $250,000; restoration depended on the partner resolving its issues.
- Management stated that available cash was sufficient for operations for more than 12 months and that it did not anticipate needing additional equity for operating purposes, though it might consider strategic investments. It expected revenue-share expense to remain near Q3 levels as a percentage of revenue and operating expenses to rise slightly; planned development spending, including the Allscripts payment, could increase in Q4.
Risks, contingencies, and unusual items
- The company disclosed material weaknesses in internal control over financial reporting: inadequate segregation of duties and inadequate IT reporting systems. Management said remediation would require additional personnel to fully address segregation of duties and continued system upgrades.
- OptimizeRx was pursuing litigation against its former CEO, who counterclaimed for $450,000 concerning registration of shares. The matter was in discovery, with a dispositive motion pending.
- The company’s consolidated Missouri case against LDM Group and PDR Network sought enforcement of agreements and damages, including amounts paid under the settlement agreement (over or approximately $1.0 million, as described in different filing passages) and alleged lost income and business value. Defendants sought dismissal of two counts; outcomes and any recoveries are uncertain.
- The company restated 2014 comparative financial information to correct accounting for stock-based compensation, revenue-share expense, and revenue recognition. Restated comparisons are used above; the filing details changes to prior reported revenue, costs, and losses.
- The filing states there were no off-balance-sheet arrangements. Results for the interim period may not indicate full-year results.
Important facts for investors to verify
- Whether the disabled partner functionality was restored and whether the estimated $250,000 Q3 revenue impact is realized in subsequent periods.
- Execution and timing of Allscripts integration, including the $250,000 payment and the remaining $650,000 commitment.
- Revenue growth, gross-margin trends, and the effect of revenue-share terms and product mix on profitability.
- Progress in remediating the disclosed material weaknesses and whether financial reporting controls improve.
- Developments in the Stastney and LDM/PDR litigation, including potential costs, exposure, or recoveries.
- The effect of the WPP investment and the 6.0 million-share issuance on commercial growth and shareholder dilution.