OptimizeRx Corporation — FY 2016 Form 10-K
Business and reporting period. OptimizeRx provides healthcare technology that connects pharmaceutical manufacturers, physicians, and patients through electronic health record and e-prescribing platforms. Its offerings include digital financial messages such as prescription coupons and vouchers, brand messaging, and related support services. This annual report covers the fiscal year ended December 31, 2016; it also reports fourth-quarter results. The company’s common stock traded on OTCQB under OPRX.
Financial performance and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $7.751 million | $7.221 million |
| Revenue share expense | $3.411 million | $3.622 million |
| Gross profit / margin | $4.340 million / 56.0% | $3.598 million / 49.8% |
| Operating expenses | $5.922 million | $4.196 million |
| Operating loss | $1.582 million | $0.597 million |
| Net loss | $1.539 million | $0.595 million |
| Basic loss per share | $0.05 | $0.02 |
| Net cash used in operating activities | $0.466 million | Net cash provided: $0.515 million |
| Capital expenditures and other investing cash flows | Net cash used: $0.350 million | Net cash used: $0.101 million |
| Cash and cash equivalents at year-end | $7.035 million | $8.208 million |
| Current assets / current liabilities | $10.176 million / $3.667 million | $11.126 million / $3.372 million |
| Working capital / current ratio | $6.509 million / 2.8 | $7.754 million / 3.3 |
| Total liabilities | $3.667 million | $3.372 million |
Revenue increased 7.4% year over year. Fourth-quarter revenue was $2.292 million, up approximately 13% from the comparable 2015 quarter. Revenue share expense fell from about 50% to 44% of revenue, lifting gross margin. Operating expenses rose about 41%, principally as the company added staff and invested in scaling operations; the resulting larger expense base contributed to a higher net loss. The company reported no interest expense and no separate borrowings or debt balance in the presented balance sheet.
Cash declined by $1.173 million during 2016. Management attributed much of the cash-flow impact to approximately $720,000 paid to its former CEO in lieu of previously awarded shares: reported operating cash use was $466,000 and financing cash use was $357,000. Management’s adjusted presentation, excluding that payment, showed $103,000 of operating cash use and no financing cash use. The company reported $449,500 of proceeds from common stock issuance in 2016.
Material changes, outlook, and commentary
- Customer concentration decreased: the two largest customers represented approximately 18% of 2016 revenue, versus approximately 32% in 2015. The 2016 shares were 12% and 6%, respectively. The company nevertheless depended on roughly 25 pharmaceutical-company customers.
- WPP, which held approximately 20.2% of common shares, became a more active commercial relationship. The company recognized $1.542 million of revenue associated with WPP agencies in 2016 and reported $1.109 million of related receivables at year-end.
- The company acquired all available Allscripts LogRx messaging inventory for fourth-quarter 2016 and calendar 2017, and described the arrangement as providing exclusive sales rights. Management expected Allscripts Touchworks financial messaging to launch broadly and ramp during 2017. The filing says the related $650,000 Allscripts installment became due when broad launch occurred on February 28, 2017.
- Management expected revenue growth to accelerate in 2017, citing additional brands, distribution channels, increased physician utilization, the Allscripts opportunity, and new messaging products. It expected brand-messaging revenue in the second half of 2017 and projected its proprietary brand-messaging system would launch in the first half. These are forward-looking expectations, not reported results.
- Management expected revenue-share expense as a percentage of revenue to remain near 2016 levels or increase slightly, particularly if growth came from revenue categories subject to sharing. It also expected higher 2017 staffing and technology-development costs, while anticipating lower advertising and promotion costs than in 2016.
- Management stated that available cash was sufficient to fund operations for more than 12 months and that it did not anticipate needing additional equity for operating purposes.
Risks, contingencies, and unusual items
- Control weaknesses: Management concluded disclosure controls were insufficient and internal control over financial reporting was ineffective at December 31, 2016. Reported material weaknesses involved inadequate segregation of duties and risk assessment, and inadequate IT reporting systems. The company said it had not fully remediated them and planned improvements during 2017. The auditor did not attest to internal controls.
- Litigation: The company’s Missouri state-court claims against LDM Group and PDR Network allege breaches of agreements and conspiracy. It seeks enforcement and damages, including amounts exceeding $1.0 million and additional alleged lost income and business value; the case was in discovery. Recovery is uncertain. A separate former-CEO dispute was settled in 2016 for $50,000 and 100,000 shares, along with other settlement obligations.
- Partner and customer dependence: The business relies on EHR and e-prescribing partners, including Allscripts, and on pharmaceutical and advertising customers. Partner termination, disputes, revenue-share audits, or customer losses could materially affect results.
- Regulatory and operating risks: The filing highlights healthcare anti-kickback, false-claims, privacy, and security requirements; potential restrictions on coupons or pharmaceutical marketing; competition; technology scaling and outage risks; and intellectual-property disputes.
- Profitability and market risks: The company had a history of losses and had not achieved consistent profitability. Its shares were thinly traded OTCQB securities subject to penny-stock trading restrictions; management did not anticipate dividends.
- Other items: The company reported approximately $9.1 million of net operating loss carryforwards but maintained a full valuation allowance against the deferred tax asset; it noted that ownership changes may limit their use. It also disclosed 5.165 million options and warrants in the equity-compensation-plan table, plus 855,000 plan shares available for future issuance.
The independent auditor expressed an unqualified opinion that the consolidated financial statements presented fairly, in all material respects, the company’s financial position and results under U.S. GAAP. This opinion does not address the effectiveness of internal controls.
Important facts for investors to verify
- Subsequent results against management’s 2017 revenue-growth expectations, including the actual timing and contribution of Touchworks and LogRx messaging.
- Whether the $650,000 Allscripts installment was paid when due after the February 28, 2017 broad launch, and its effect on cash and liquidity.
- Progress in remediating the disclosed material weaknesses and improving disclosure controls and financial reporting systems.
- Status and potential financial impact of the LDM/PDR litigation, including any settlement, ruling, or recovery; no recovery should be assumed from the claim amount.
- Receivable collection and revenue concentration, including the sizable year-end receivable from WPP agencies and the company’s continuing reliance on a limited number of customers and platform partners.
- Reconciliation of the filing’s option disclosures: the equity-plan table reports 3,095,000 plan options outstanding, while the option-activity note reports a December 31, 2016 balance of 3,120,000. The filing text does not explain this difference.