OptimizeRx Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; filed August 8, 2016. OptimizeRx provides technology and digital messaging solutions for healthcare platforms, including electronic coupons and clinical or promotional messaging for pharmaceutical companies.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $1.913 million | $1.705 million | $3.673 million | $3.193 million |
| Gross margin dollars | $990,467 | $823,130 | $1.857 million | $1.554 million |
| Operating expenses | $1.593 million | $980,659 | $2.822 million | $1.823 million |
| Operating loss | $(602,515) | $(157,529) | $(964,343) | $(269,027) |
| Net loss | $(591,933) | $(157,225) | $(943,848) | $(268,426) |
| Basic loss per share | $(0.02) | $(0.01) | $(0.03) | $(0.01) |
Revenue grew approximately 12% year over year in Q2 and 15% for the first half. Gross margin was approximately 51.8% in Q2 and 50.6% for the first half, versus 48.3% and 48.7%, respectively, in 2015. Revenue-share expense as a share of sales declined. Operating expenses rose substantially, principally from hiring and growth initiatives, professional fees, and a $160,000 litigation-settlement expense.
Cash, liquidity, and balance sheet
- Cash and cash equivalents were $7.567 million at June 30, 2016, down from $8.208 million at December 31, 2015.
- Current assets were $9.803 million and current liabilities $2.841 million, yielding working capital of approximately $6.962 million. The company reported a current ratio of about 3.5 to 1.
- Six-month operating cash flow was $(177,377), investing cash flow $(105,990), and financing cash flow $(357,415); cash decreased by $640,782. Management said operating cash flow would have been $185,623 excluding the operating-cash portion of a one-time payment to the former CEO.
- The filing reports no off-balance-sheet arrangements and shows no material borrowing or debt balance on the balance sheet.
Changes, outlook, and risks
- Management attributed revenue growth to more promoted pharmaceutical brands and expanded distribution. It expected quarter-over-quarter revenue increases for the rest of 2016 and expected new services to be completed by Q3. It also projected gradually lower revenue-share percentages, with a stated goal of a reduction of at least 5%; these are forward-looking statements, not guaranteed results.
- Management expected operating expenses to continue increasing as it expanded. Hiring included a new CEO and senior business-development and product-strategy executives; the former CEO remained on payroll through March 31, 2016.
- A one-time $720,415 payment to the former CEO replaced issuance of approximately 595,000 shares. The company also settled litigation with him for $50,000 and 100,000 shares, valued at $110,000 in the filing, and registered 133,333 of his existing shares.
- Litigation against LDM Group and PDR Network remained in discovery. The company sought enforcement of agreements and damages, including amounts exceeding $1 million and additional alleged lost income and business value; recovery and outcome are uncertain.
- Management concluded disclosure controls were not completely effective because of material weaknesses: inadequate segregation of duties, inadequate Board-to-management communication, and inadequate IT reporting systems. Remediation efforts were described, but full remediation of segregation-of-duties issues would require additional personnel.
- Other stated risks include economic and regulatory changes, availability of capital, competition, and accounting changes. The filing provides no quantified full-year earnings or revenue guidance.
Important facts for investors to verify
- Reconcile the filing’s revenue figures: the financial statements report first-half revenue of $3.673 million, while the “Company Highlights” section says first-half “sales” were approximately $1.67 million. The MD&A also contains an apparent period-comparison typo; the financial statements provide the comparable values above.
- Track whether revenue growth converts to improved operating results given the substantial increase in operating costs and continuing expected expense growth.
- Check cash generation after the former-CEO payment and monitor working capital, revenue-share payables, and the July 2016 share issuance used to retire an executive stock payable; the filing does not state the issuance proceeds.
- Monitor the PDR/LDM litigation, related legal costs, and any change in the claims or potential recovery.
- Assess progress remediating the disclosed material weaknesses and whether controls improve in subsequent filings.