Business context and reporting period
OptimizeRx Corporation filed this Form 10-K for the fiscal year ended December 31, 2013. The company provides digital healthcare marketing and patient-support solutions, principally SampleMD, which delivers prescription coupons and sample vouchers through electronic prescribing and electronic health record platforms. It also operates a patient savings website and an emerging pharmaceutical consulting practice.
Management attributed growth primarily to SampleMD. During 2013, the company reported delivering 1,122,589 new e-prescriptions with coupons or vouchers; its consumer website had more than 2.4 million registered members.
Financial results and liquidity
| Metric | 2013 | 2012, restated |
|---|---|---|
| Revenue | $4,957,016 | $1,989,086 |
| Revenue-share expense | $1,767,425 | $115,360 |
| Gross margin dollars | $3,189,591 | $1,873,726 |
| Operating expenses | $2,973,990 | $2,328,648 |
| Operating income (loss) | $215,601 | $(454,922) |
| Net income (loss) | $215,847 | $(454,553) |
| Basic / diluted EPS | $0.02 / $0.01 | $(0.03) / $(0.03) |
| Cash provided by (used in) operations | $1,132,628 | $(624,033) |
Revenue increased 149% year over year. Gross margin was approximately 64% of revenue in 2013, compared with approximately 94% in restated 2012, reflecting the substantially higher accrued revenue-share expense. Operating expenses rose about 28%; key 2013 costs included salaries and benefits of $1.32 million, professional fees of $553,000, and stock-based compensation of $411,000.
At year-end, cash was $1,118,243; current assets were $2,696,978; current liabilities were $1,968,652; working capital was $728,326; and total assets were $4,008,020. Current liabilities included $1,193,661 of revenue-share payable and $570,000 payable to a related party. The balance sheet lists no conventional debt line item. Investing activities used $298,648, mainly for patent rights and website development. Operating cash generation included significant noncash compensation and an increase in revenue-share payable, while accounts receivable absorbed $950,166.
Material changes and unusual items
- The company corrected its revenue-share accounting in the fourth quarter: expenses are now accrued when incurred rather than recorded when paid. The correction restated 2012 revenue-share expense from $24,783 to $115,360 and increased the reported 2012 net loss from $363,976 to $454,553. The filing says the expense had also not been properly accrued in 2013 quarterly periods.
- After year-end, on March 17, 2014, the company sold 8,333,333 common shares at $1.20 per share for gross proceeds of $10 million. Placement-agent commissions were approximately $970,000, and agents received five-year warrants for 804,139 shares at $1.20. The company used $6 million of the proceeds to redeem Vicis Capital Master Fund’s holdings and stated that remaining proceeds would support working capital. Management said cash on hand and the financing were sufficient for the next 12 months.
- At December 31, 2013, 14,773,496 common shares were outstanding; 22,809,586 were outstanding as of March 31, 2014, following the financing and other share issuances. The redemption covered Vicis-held preferred stock, common stock and warrants. Series A and B preferred stock carried cumulative 10% dividends; the filing reports $1 million in undeclared dividends at year-end.
- The company settled the LDM patent dispute in February 2014. It paid a one-time $400,000 fee and agreed to pay the greater of $0.37 per patient discount distributed or 10% of revenue from distribution and redemption of covered discounts. The case was dismissed with prejudice in March 2014.
Outlook, risks and contingencies
Management expected consulting revenue to increase in 2014, operating expenses to rise slightly as it added staff, and net income to improve modestly. SampleMD 2.0 was expected to be implemented by April 2014, with updated HTML5 technology, improved integration and performance, and enhanced infrastructure and disaster recovery. These are management expectations, not reported results.
Key risks include dependence on a small number of customers—two customers generated 58% of 2013 revenue—reliance on channel partners, competition, healthcare regulation and privacy obligations, and the company’s limited OTCQB trading market. OptimizeRx disclosed a pending patent-infringement suit against Physicians Interactive, whose defendants denied the allegations. It also reported notice that it might be added to a New Jersey action involving an existing default judgment of roughly $1 million; the company said it did not yet understand the allegations and intended to investigate and defend itself if necessary.
Management concluded that disclosure controls and internal control over financial reporting were ineffective at year-end, identifying material weaknesses in segregation of duties and risk assessment, written accounting and reporting procedures, and supervision and review. The company had not remediated these weaknesses by the filing date and planned improvements during 2014. Management’s internal-control report was not attested by the independent auditor.
Important facts for investors to verify
- Whether the revenue-share accrual method is consistently applied and whether the restated comparative figures and subsequent quarterly filings reflect the correction.
- Collection of the $1.57 million year-end accounts receivable balance, payment of revenue-share and related-party payables, and the company’s actual cash runway.
- The final effects of the $10 million equity raise, the $6 million Vicis redemption, agent warrants, preferred-stock retirement and associated dilution.
- Compliance with the LDM settlement’s per-patient/revenue-based payments and the outcome of the Physicians Interactive and New Jersey legal matters.
- Progress on remediating the disclosed control weaknesses, and whether SampleMD 2.0 and consulting initiatives deliver the expected commercial results.