OptimizeRx Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited consolidated results. OptimizeRx provides digital health messaging through electronic health records, connecting pharmaceutical companies with healthcare providers and patients.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $5.00 million | $5.42 million | $17.22 million | $14.63 million |
| Gross profit | $3.02 million | $3.15 million | $10.97 million | $8.11 million |
| Gross margin | 60.4% | 58.1% | 63.7% | 55.5% |
| Operating expenses | $5.01 million | $2.92 million | $12.34 million | $7.81 million |
| Operating income (loss) | ($1.99 million) | $0.22 million | ($1.38 million) | $0.31 million |
| Net income (loss) | ($1.57 million) | $0.24 million | ($1.16 million) | $0.34 million |
| Basic and diluted EPS | ($0.11) | $0.02 | ($0.09) | $0.03 |
- Cash flow: Nine-month operating cash use was $161,000, versus $140,000 in 2018. Investing activities used $1.06 million, including $1.0 million toward a perpetual software license. Financing provided $22.07 million, mainly from the 2019 equity offering. Cash increased to $29.76 million from $8.91 million at year-end 2018.
- Liquidity and obligations: Current assets were $37.89 million and current liabilities $5.41 million; working capital was about $32.5 million and the current ratio 7.0, compared with 3.7 at December 31, 2018. The filing lists no conventional debt; liabilities include lease obligations and contingent purchase consideration. Lease liabilities totaled $592,000, and contingent purchase price payable totaled $2.34 million.
- Equity: A June 2019 public offering generated $21.30 million in net proceeds. Shares outstanding rose to 14,173,850 at September 30, from 12,038,618 at December 31, 2018.
Changes and management commentary
- Nine-month revenue increased about 18%, driven primarily by clinical and brand messaging sales and new channel partners. Q3 revenue declined about 8%, mainly because two high-volume financial-messaging brands active in 2018 were not active in 2019; one shifted spending to clinical messaging.
- Cost of revenue fell as a share of sales, which management attributed to product mix, improved revenue-share contracts, and focus on higher-margin products. Management expected quarterly gross margins of at least 60% for the remainder of 2019.
- Operating expenses rose substantially, including higher salaries and benefits, research and development, depreciation and amortization, marketing, and acquisition-related costs. Management expected expenses to remain around 2019 levels or slightly higher, while human-resource costs were not expected to grow as quickly as revenue.
- Management expected negative operating cash flow in Q4 due to RMDY acquisition-related expenses, but did not anticipate needing additional capital for operations within 12 months of the report’s issuance.
Acquisition, risks, and other notable items
- RMDY Health: Acquired in October 2019, after quarter-end, for a stated $16.0 million purchase price subject to working-capital adjustment. The company reported $8.7 million of cash paid at closing and $5.9 million payable in shares; 382,893 shares were to be issued in November, with possible additional shares upon escrow release. Earnouts could total up to $30.0 million, based on RMDY product revenue in 2020 and 2021. RMDY results are not included in the reported period; purchase-price allocation and pro forma information were not yet available.
- Q3 included $323,000 of RMDY acquisition-related costs. A $280,000 Q3 gain from the change in fair value of contingent consideration related to the earlier CareSpeak acquisition; management said it continued to expect the maximum contingent consideration, while fair value varied with revenue projections.
- The company signed a three-year exclusive agreement with NewCrop for messaging through its e-prescribing network. Management described continued hiring and product investment to support growth, but provided no quantified revenue forecast.
- Disclosure controls were deemed ineffective at September 30 because material weaknesses remained in segregation of duties and financial-reporting IT systems. The company added accounting staff and implemented new accounting software in August; remediation was still being evaluated and tested.
- The company reported no material pending litigation and no off-balance-sheet arrangements. It identified general business risks including economic and regulatory changes, capital availability, competition, and accounting requirements.
Important facts for investors to verify
- Whether the expected recovery in revenue and management’s 60% quarterly gross-margin expectation were achieved after Q3, given the Q3 year-over-year revenue decline.
- RMDY’s final purchase-price allocation, integration costs, contribution to revenue and cash flow, share issuance, and any earnout liability or payments.
- Progress in remediating the disclosed internal-control material weaknesses and the results of the planned year-end assessment.
- Whether operating expenses and cash generation followed management’s expectations, including the anticipated Q4 operating cash use.
- The effect of equity issuance, stock compensation, and potential acquisition-related shares on dilution; also monitor CareSpeak contingent consideration and lease obligations.