OptimizeRx Corporation — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also provides unaudited quarterly results, including the fourth quarter. OptimizeRx sells technology and promotional services connecting pharmaceutical manufacturers, physicians and patients; more than 90% of revenue was related to its SampleMD platform.
Financial results and liquidity
| Metric | FY 2014 | FY 2013, restated |
|---|---|---|
| Revenue | $6.503 million | $4.680 million |
| Revenue share expense | $3.222 million | $1.861 million |
| Gross profit / margin | $3.281 million / 50.5% | $2.818 million / 60.2% |
| Operating expenses | $4.308 million | $3.086 million |
| Operating loss | $1.026 million | $268,000 |
| Net loss | $1.025 million | $267,000 |
| GAAP operating cash flow | $(56,000) | $1.133 million |
| Cash and cash equivalents at year-end | $3.447 million | $1.118 million |
Revenue increased approximately 39%, but revenue-share expense rose to approximately 50% of revenue from 40%, reducing gross margin. Management reported operating income of approximately $414,000 excluding noncash operating expenses; this is a non-GAAP-style adjustment, not reported operating income. Actual operating cash flow was negative, mainly attributed to a $589,000 increase in receivables. Management’s estimate of approximately $400,000 positive operating cash flow excludes working-capital fluctuations.
At year-end, current assets were $5.575 million and current liabilities $2.419 million, for working capital of approximately $3.157 million and a current ratio of 2.3. Total liabilities were $2.419 million; the filing does not identify outstanding debt. Investing activities used $410,000 and financing activities provided $2.795 million. Cash from financing reflected an equity raise and redemption of securities. The company reported no off-balance-sheet arrangements.
Fourth quarter: Revenue was $1.967 million, gross profit $996,000, operating income $231,000 and net income $231,000. The full-year result remained a net loss.
Material changes and notable items
- Operating expenses rose approximately 40%. The company cited $1.172 million in stock-based compensation and a $400,000 lawsuit settlement as significant contributors. Excluding those items, management said operating expenses increased approximately 7%.
- A March 2014 offering raised $10 million gross; reported proceeds from common-stock issuance were $8.795 million. The company used $6 million to redeem Vicis securities, eliminating preferred stock and associated dividend obligations. Management said the transaction reduced potential fully diluted shares by approximately 7 million and provided about $2.8 million in working capital.
- The company restated 2013 results and 2014 quarterly results for unrecorded stock compensation and revenue-share payables, and revenue recognized before promotional programs were completed. The 2013 restatement changed reported net income of $216,000 to a net loss of $267,000 and reduced revenue by $277,000.
- Revenue concentration declined but remained material: the five largest customers accounted for approximately 64% of 2014 revenue, versus 75% in 2013; the largest customer represented 20%, versus 36%.
Outlook, risks and contingencies
Management expected revenue to increase and anticipated profitability and positive operating cash flow in 2015, but provided no quantified guidance. It expected revenue-share expense as a percentage of revenue to remain similar to or exceed 2014 levels. Management also said it expected active users to double by the end of the second quarter of 2015, contingent on anticipated agreements and platform commitments being implemented.
Growth plans included expansion through Practice Fusion, whose integration was expected to be completed early in Q2 2015; an HCA pilot; and a veterinary savings beta with National Veterinary Associates. Management reported that only about 20,000 providers regularly used the coupon functionality at the time, despite a larger partner-network reach, making adoption and implementation central execution risks.
- Partner dispute: The company alleged LDM/PDR failed to meet settlement and exclusivity obligations, said implementation delays caused lost revenue and profits, and filed litigation in March 2015. It sought at least approximately $900,000 plus additional damages. Outcomes and recoveries are uncertain.
- Other litigation: A former CEO sought $450,000 in a dispute over registration of shares. A separate claimant pursued arbitration after a prior approximately $929,000 judgment was vacated; the company said it would contest the claims.
- Controls and reporting: Management concluded disclosure controls and internal control over financial reporting were ineffective, citing inadequate segregation of duties/risk assessment and insufficient IT reporting systems. The company had not fully remediated these material weaknesses.
- Business risks: Customer concentration, dependence on EHR/e-prescribing partners, increasing revenue-share costs, healthcare regulation, competition, scaling and technology reliability, privacy/security obligations, and the company’s history of losses were identified as risks.
- Market and dilution: Shares traded on the OTCQB in a limited, thinly traded market. Outstanding options and warrants, along with stock payable to officers, are relevant to dilution; the filing reported 22.867 million shares outstanding at year-end and 22.912 million as of March 20, 2015.
Investor verification priorities
- Review the restated financial statements and the effects of the revenue, revenue-share, and stock-compensation corrections, including the quarterly figures.
- Reconcile actual operating cash flow with management’s adjusted cash-flow presentation and monitor receivables and collections.
- Verify Practice Fusion, HCA, veterinary and other network launches, provider adoption, and resulting revenue and margins.
- Assess customer concentration, partner revenue-share terms, and the status and financial effects of the LDM/PDR and other legal proceedings.
- Track remediation of material weaknesses and confirm share counts, stock-payable awards, options and warrants when evaluating dilution.