OptimizeRx Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. The interim financial statements are unaudited. OptimizeRx provides digital health services through electronic health record (EHR), e-prescribing, pharmacy, and patient platforms, including electronic savings offers and pharmaceutical messaging.
Financial performance and position
- Revenue: Q2 revenue was $2.866 million, up 50% from $1.913 million a year earlier. First-half revenue was $5.018 million, up 37% from $3.673 million.
- Gross margin: Q2 gross profit was $1.260 million, or 44.0% of revenue, versus $990,000, or 51.8%, in Q2 2016. First-half gross profit was $2.031 million, or 40.5%, versus $1.857 million, or 50.6%. Revenue-share expense drove the lower margins as brand messaging, which management said has lower margins than core financial messaging, expanded.
- Operating expenses and earnings: Q2 operating expenses were $1.631 million versus $1.593 million; operating loss was $371,000 versus $603,000, and net loss was $362,000 versus $592,000. First-half operating expenses were $3.292 million versus $2.822 million; operating loss was $1.261 million versus $964,000, and net loss was $1.244 million versus $944,000. Basic loss per share was $0.01 for Q2 and $0.04 for the first half, compared with $0.02 and $0.03, respectively, in 2016.
- Cash flow: First-half operating activities provided $54,000, compared with $177,000 used in 2016. Investing activities used $856,000, including $650,000 for access to and exclusivity on the Allscripts Touchworks network and $181,000 for software and other intangibles. Financing activities used $390,000 to repurchase and retire 500,000 shares. Cash declined by $1.192 million to $5.843 million.
- Liquidity and debt: Current assets were $8.537 million and current liabilities $4.009 million, implying working capital of about $4.5 million and a current ratio of 2.1, down from $6.5 million and 2.8 at year-end 2016. The balance sheet lists no interest-bearing debt; liabilities shown are current operating liabilities.
- Other balance-sheet items: Total assets were $10.478 million, down from $11.479 million at December 31, 2016. Deferred revenue rose to $1.037 million from $387,000, while revenue-share payable fell to $1.871 million from $2.623 million. Common shares outstanding were 29,256,367 at June 30 and July 28, 2017.
Material changes and management commentary
- Management attributed revenue growth to increased brand messaging, broader distribution of financial messaging, and more than 100 pharmaceutical brands across the two offerings. It reported channel partners had expanded by over 20%, including launch of financial messaging on Allscripts Touchworks, and announced a partnership with PARx Solutions for prior-authorization services and messaging.
- Personnel, consulting, development, integration, and amortization costs contributed to higher first-half operating expenses. Management said these investments support scaling and noted operating expenses declined as a percentage of revenue year over year.
- Management expected quarter-over-quarter revenue increases through the rest of 2017, operating expenses to remain at or above 2017 levels as the business expands, and operating expenses as a share of revenue to continue declining. It expected gross margins to improve gradually and stated a goal of 50% or higher. These are forward-looking expectations, not reported results.
- Management said disclosure controls were effective and that previously identified weaknesses in segregation of duties and IT financial-reporting systems had been remediated during Q2 after hiring additional finance and IT personnel. It cautioned that controls provide reasonable, not absolute, assurance.
Risks, contingencies, and unusual items
- The company is pursuing claims against LDM Group and PDR Network concerning alleged breaches of agreements, including distribution and exclusivity terms. The case was in discovery. The company seeks enforcement and damages, including amounts exceeding $1.0 million plus lost income and business value; recovery and timing are uncertain.
- The $390,000 share repurchase from the former CEO and the amended consulting agreement ending July 31, 2017 are related-party matters. The filing reports no material subsequent events through issuance and no off-balance-sheet arrangements.
- Management identified general risks including economic and regulatory changes, capital availability, interest rates, competition, and accounting changes. The filing refers readers to the 2016 Form 10-K for additional risk factors.
Important facts for investors to verify
- Whether revenue growth continues and the extent to which it comes from lower-margin brand messaging versus core financial messaging.
- Whether gross margin improves toward management’s 50% goal, and whether operating expenses grow more slowly than revenue.
- Adoption, economics, and amortization of the Allscripts Touchworks arrangement and other channel integrations.
- Cash use and working-capital trends, particularly receivables, deferred revenue, and revenue-share obligations.
- Progress, costs, and potential outcomes of the LDM/PDR litigation and the related-party consulting arrangement.
- Execution against management’s outlook; the company cautions that interim results are not necessarily indicative of full-year results.