OptimizeRx Corporation — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018. The filing also reports quarterly results; Q4 revenue was $6.58 million. OptimizeRx provides digital financial, brand and clinical messaging through EHR and e-prescribing platforms, and added patient-engagement services through its October 2018 CareSpeak acquisition.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $21.21 million | $12.13 million |
| Gross profit / margin | $12.21 million / 58% | $5.95 million / 49% |
| Operating expenses | $12.03 million | $8.08 million |
| Operating income (loss) | $180,132 | $(2.13) million |
| Net income (loss) | $226,344 | $(2.10) million |
| Net cash from (used in) operations | $792,555 | $(1.48) million |
- Revenue grew 75%; Q4 revenue rose 65% year over year. Management attributed growth to more pharmaceutical brands and channel distribution, and growth in brand messaging.
- Revenue-share expense was $9.00 million, or about 42% of revenue, versus $6.17 million, or about 51%, in 2017. Management expected this ratio to rise in 2019 as product mix shifted; it targeted gross margin of at least 55%, while anticipating a modest margin decline.
- Operating expenses rose 49%, with staffing, stock-based compensation and CareSpeak acquisition costs among the drivers. Stock-based compensation was $2.52 million. The company reported approximately $2.85 million of noncash expenses in 2018.
- Cash and cash equivalents were $8.91 million at year-end, versus $5.12 million a year earlier. Current assets of $15.96 million exceeded current liabilities of $4.23 million; working capital was $11.8 million and the current ratio about 3.8. Management said cash was sufficient for more than 12 months and it did not anticipate raising equity for operating needs.
- Investing activities used $5.69 million, mostly for CareSpeak. Financing activities provided $8.69 million, mainly from the equity offering and option exercises. The company raised $9.0 million gross and $8.16 million net in its 2018 offering.
- No conventional borrowings are identified in the presented balance sheet. Total liabilities were $6.60 million, including a $2.37 million contingent CareSpeak purchase-price liability; earnout payments could total up to $3.0 million based on 2019–2020 revenue milestones.
Material changes and unusual items
- OptimizeRx acquired CareSpeak on October 17, 2018, for stated consideration of $8.49 million, including $5.63 million cash, $0.50 million in stock and $2.37 million estimated contingent consideration. Acquisition costs of about $608,000 were expensed. CareSpeak results are consolidated only from the acquisition date.
- The company uplisted to Nasdaq and completed a 1-for-3 reverse stock split in May 2018. The share offering and exercises of warrants and options contributed to the increase in outstanding shares and cash.
- ASC 606 adoption was described as immaterial overall; it reduced 2018 revenue by $59,387 compared with the prior method and reduced opening retained earnings by $142,027.
- WPP sold its OptimizeRx ownership stake in December 2018. Revenue recognized from WPP agencies was $6.53 million in 2018, compared with $3.70 million in 2017; the filing says pharmaceutical companies represented by WPP agencies are treated as customers.
Outlook, risks and controls
- Management expected continued strong revenue growth in 2019, with increased message distribution, expanded channel utilization, new brands and partners, and CareSpeak patient-engagement revenue expected to ramp. It planned to expand its network and extend its clinical messaging platform beyond its initial pilot partner.
- Management expected compensation expense to rise in 2019, though more slowly than in 2018, and depreciation and amortization to exceed $650,000. These are expectations, not guarantees.
- Revenue is concentrated among approximately 25 pharmaceutical customers; the largest customer represented about 12% in each of 2017 and 2018, with a different customer each year. Four channel partners individually represented at least 10% of 2018 revenue, including two at 32.3% and 25.2%.
- Key risks include dependence on pharma spending and EHR/e-prescribing partners, customer and partner concentration, competition, healthcare regulation and privacy/security obligations, scaling and technology reliability, and the company’s history of losses despite 2018 profitability. The filing also notes thinly traded, volatile shares and no expected cash dividends.
- Material control weakness: Management and the auditor found internal control over financial reporting ineffective at December 31, 2018. Weaknesses involved segregation of duties and IT access/change controls, as well as revenue-calculation review and completeness and accuracy of system data. The auditor issued an adverse opinion on internal controls but an unqualified opinion on the financial statements. No resulting misstatement was identified. Remediation plans included additional finance staff, new accounting software and stronger documentation; management expected remediation before year-end 2019, subject to testing.
- There were no current legal proceedings or off-balance-sheet arrangements reported. The company held $8.41 million of cash above federally insured limits, primarily at Bank of America/Merrill Lynch.
Important facts for investors to verify
- Whether 2019 growth, margin and CareSpeak revenue expectations were achieved, and whether the earnout became payable.
- Progress in remediating the material weaknesses and the effectiveness of controls in subsequent filings.
- Customer and channel-partner concentration, including revenue exposure through WPP agencies and the terms of partner revenue sharing.
- CareSpeak integration results, purchase-price accounting and the carrying value of acquired goodwill and intangible assets.
- Cash conversion and working-capital trends, particularly receivables, alongside the company’s stated liquidity outlook.