Business context and reporting period
OptimizeRx Corporation filed this Form 10-K for the fiscal year ended December 31, 2019. The digital health company delivers financial, clinical, and brand messaging through electronic health record and e-prescribing networks, and expanded into patient engagement and digital therapeutics through its CareSpeak and RMDY acquisitions.
Management reported record 2019 revenue of $24.6 million, up 16% year over year; fourth-quarter revenue was $7.4 million, up 12% from Q4 2018.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $24.60 million | $21.21 million |
| Cost of revenue | $9.16 million | $9.00 million |
| Gross profit / margin | $15.44 million / 63% | $12.21 million / 58% |
| Operating expenses | $19.13 million | $12.03 million |
| Operating income (loss) | $(3.69) million | $0.18 million |
| Net income (loss) | $(3.14) million | $0.23 million |
| Operating cash flow | $(1.66) million | $0.79 million |
| Investing cash flow | $(10.58) million | $(5.69) million |
| Financing cash flow | $22.18 million | $8.69 million |
Operating expenses rose about 60%, principally reflecting hiring and scaling, acquisitions, increased research and development, and higher depreciation and amortization. The company recorded $2.26 million of stock-based compensation and $1.28 million of depreciation and amortization in 2019. Management cited approximately $3.54 million of noncash operating expenses for the year.
At year-end, cash and cash equivalents were $18.85 million; current assets were $27.14 million and current liabilities $6.11 million, producing working capital of about $21.0 million and a current ratio of 4.4. Total liabilities were $11.78 million, including $6.72 million of contingent acquisition consideration and $0.56 million of lease liabilities; the filing does not identify conventional borrowings. Stockholders’ equity was $44.86 million. The 2019 public offering generated $21.30 million in net proceeds. Management said available cash was sufficient to operate for more than 12 months and it did not anticipate raising additional equity for operating purposes.
Material changes versus 2018
- Revenue increased 16%, while gross margin improved from approximately 58% to 63%, mainly due to product mix and patient-engagement revenue.
- Results shifted from $0.23 million net income to a $3.14 million net loss as expense growth exceeded gross-profit growth.
- Operating cash flow turned negative, from $0.79 million provided to $1.66 million used; management attributed this to working-capital needs, growth spending, and acquisition costs.
- The October 2019 RMDY acquisition added digital therapeutics capabilities; the company also completed integration of CareSpeak, acquired in late 2018. Goodwill increased to $14.74 million from $3.68 million.
- Shares outstanding increased to 14.60 million from 12.04 million, reflecting the public offering, acquisition shares, and other issuances.
Outlook, risks, contingencies, and unusual items
- Management expected continued strong revenue growth in 2020, expected RMDY-related revenue to ramp substantially, and anticipated gross margins at 63% or higher. No specific revenue or earnings guidance was provided. Compensation expense was expected to increase at a slower rate than in 2019; amortization was expected to rise due to RMDY intangible assets.
- The company reported customer concentration: three customers each represented more than 10% of 2019 revenue. One channel partner accounted for 37.4% of revenue, and another for 16.5%. Three customers individually represented more than 10% of year-end receivables.
- Partner agreements include $13.5 million of minimum messaging-capability payments for 2020–2022: $6.5 million in 2020, $5.5 million in 2021, and $2.0 million in 2022. These are expected to be reflected in cost of revenue. Partner contracts also provide audit rights over revenue-share payments.
- Acquisition earnouts had a year-end fair value of $6.72 million. CareSpeak consideration may total up to $3.0 million; RMDY consideration may total up to $30.0 million, with minimum payments of $1.0 million in each of 2020 and 2021. Changes in revenue expectations could affect future payments and fair-value expense.
- Management and the auditor identified material weaknesses in financial reporting controls, involving IT general controls and controls over completeness and accuracy of third-party data. The weaknesses were not fully remediated at year-end; the auditor issued an adverse opinion on internal control effectiveness, while issuing an unqualified opinion on the financial statements. Management said the weaknesses did not result in identified financial-statement misstatements.
- The filing discussed potential COVID-19 disruption to customers and partners, healthcare regulation and spending changes, competition, reliance on EHR/e-prescribing partners, cybersecurity and system availability, international operations, and the company’s historical difficulty achieving sustained profitability.
- The company recorded a $0.90 million income tax benefit related to an acquisition despite its pretax loss; it reported approximately $18.3 million of federal net operating loss carryforwards, subject to possible ownership-change limitations. No current legal proceedings or off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- Whether 2020 growth and the expected RMDY revenue ramp materialize, and whether operating costs and cash use moderate.
- Customer and channel-partner concentration, contract renewals, and the economics of partner revenue shares and minimum-payment commitments.
- Actual earnout payments and performance milestones for CareSpeak and RMDY, including the potential RMDY maximum consideration.
- Progress and independent testing of remediation for the material weaknesses in IT controls and third-party data controls.
- Cash runway and working-capital trends, especially given negative 2019 operating cash flow and committed partner payments.
- Effects of COVID-19, healthcare regulation, and any ownership-change limits on the use of tax-loss carryforwards.