OptimizeRx Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; filed November 13, 2014. OptimizeRx provides healthcare technology and savings solutions, including electronic coupon distribution through physician and patient platforms. Interim results are unaudited.
Financial performance
| Metric | Q3 2014 | Q3 2013, restated | Nine months 2014 | Nine months 2013, restated |
|---|---|---|---|---|
| Revenue | $1.620 million | $1.373 million | $4.392 million | $3.146 million |
| Gross margin dollars | $761,317 | $843,895 | $2.494 million | $1.882 million |
| Gross margin percentage | 47.0% | 61.5% | 56.8% | 59.8% |
| Operating loss | $(394,616) | $(141,609) | $(1.101) million | $(389,892) |
| Net loss | $(394,314) | $(141,527) | $(1.100) million | $(389,716) |
| Basic and diluted loss per share | $(0.02) | $(0.01) | $(0.05) | $(0.03) |
Revenue increased 18% in Q3 and approximately 40% for the first nine months. Higher revenue was offset by higher cost of sales, which consists of revenue-share expense. That expense was about 53% of Q3 revenue versus 38.5% a year earlier, and about 43% for the nine-month period versus 40%. Operating expenses rose 17% in Q3 and 58% year to date; management attributed much of the year-to-date increase to a $400,000 LDM settlement and $1.119 million of stock-based compensation.
Cash flow and liquidity: Operating activities used $329,122 in the first nine months, including a $340,251 reduction in revenue-share payable; investing activities used $324,059; financing activities provided $2.795 million. Cash rose to $3.260 million from $1.118 million at year-end 2013. Current assets were $4.923 million and current liabilities $1.523 million, yielding working capital of about $3.4 million and a 3.25 current ratio. The company reported no debt line item; liabilities included $570,000 payable to a related party and $853,410 of revenue-share payable.
Changes, transactions, and unusual items
- 2013 comparative results were restated for revenue-share expense accounting. For the nine months ended September 30, 2013, the restatement changed reported net income of $260,109 to a net loss of $389,716; Q3 2013 net income of $10,776 became a net loss of $141,527.
- In March 2014, the company sold 8.33 million shares for $10 million gross proceeds, then used $6 million to redeem Vicis Capital’s shares and derivative securities. It reported $2.795 million in net financing cash flow after issuance costs and redemption. Management said the transaction reduced fully diluted shares by approximately 7 million and left additional working capital.
- The LDM settlement resolved patent issues and enabled potential access to a network of up to 100,000 healthcare providers, but included a $400,000 payment. The company also resolved other litigation; a default judgment asserted against its predecessor was vacated, and the appeal period had passed.
- Shares outstanding were 23,362,377 at September 30, 2014 and 23,404,819 as of November 12, 2014. Nine-month weighted-average shares were higher than in 2013.
Outlook, commentary, and risks
Management expected continued sequential revenue growth and future-quarter profitability, citing anticipated revenue growth and positive operating cash generation excluding working-capital movements. It expected revenue-share expense to remain near Q3 levels as a proportion of sales. Management also expected lower stock-compensation expense in Q4 and said it had sufficient cash for more than 12 months, with no anticipated need for additional equity. These are forward-looking statements, not reported results or formal quantified guidance.
Growth initiatives included the August launch of SampleMD in Quest Diagnostics’ Care360 EMR, expansion of pharmaceutical brands and distribution channels, and a planned VoucherDVM beta launch in Q1 2015. Management expected automatic enrollment in Allscripts Pro to begin in January 2015 and potentially add up to 25,000 physicians; it said Allscripts workflow issues had constrained distribution through Q3. The company cited a lengthy sales cycle and customer concentration: its five largest customers represented about 63% of nine-month 2014 revenue, with the largest contributing about 20%.
Disclosure controls were not completely effective at September 30, 2014 because of material weaknesses involving segregation of duties and written accounting and reporting procedures. Management was working on remediation and said full segregation of duties could remain difficult given the company’s size. The company identified economic, regulatory, capital availability, competition, and accounting changes among risks; it stated that no off-balance-sheet arrangements existed.
Important facts for investors to verify
- Whether the anticipated Allscripts automatic enrollment, Quest and other platform rollouts, and projected physician-network growth occurred on schedule and translated into revenue.
- Whether higher revenue-share costs and customer concentration affect future gross margins and revenue stability.
- Whether operating cash flow becomes positive after working-capital movements and whether cash supports the stated operating horizon.
- Progress in remediating the disclosed material weaknesses and any subsequent control or reporting issues.
- The basis and ongoing implications of the 2013 revenue-share restatement, including consistency of subsequent revenue and cost recognition.