OptimizeRx(OPRX) - 2019 Q4 - Annual Report

Part I Business OptimizeRx operates a cloud-based digital health platform connecting life sciences companies with healthcare providers via EHRs, enhancing patient adherence and access to information - The company operates as a digital health platform, connecting life sciences companies with healthcare providers through a network of leading EHR platforms, covering over half of the ambulatory patient market[16] 2019 Company Highlights | Highlight | Details | | :--- | :--- | | Net Revenue | Increased 16% to a record $24.6 million in 2019 | | Q4 2019 Revenue | Reached a record $7.4 million, up 12% YoY | | Capital Raise | Successfully raised $21.3 million in growth capital through an underwritten offering in Q2 2019 | | Acquisition | Acquired RMDY Health, Inc., a digital therapeutics SaaS platform | | Partnership | Signed an exclusive three-year partnership with NewCrop, LLC for messaging distribution | - Strategic focus involves expanding existing client business, converting to enterprise platform deals for predictable revenue, and acquiring new clients, with a restructured sales organization post-RMDY acquisition[19][20] - The core technology platform migrated to Amazon Web Services (AWS) to support growth and efficiency, with expanded international technology teams in the U.S., Croatia, and Israel[24][25] - Principal products include Financial Messaging, Brand and Clinical Messaging, Brand Support, Patient Engagement, and Digital Therapeutics, enhanced by acquisitions like CareSpeak and RMDY[28] - As of December 31, 2019, the company employed 50 full-time employees in the U.S. and approximately 20 full-time international employees[36] Risk Factors The company faces risks from historical losses, customer concentration, reliance on key platforms, intense competition, material weaknesses in internal controls, and thinly traded stock - The company has a history of losses from growth investments and non-cash expenses, incurring a loss in 2019 after being profitable in 2018[40] - Revenues are concentrated among fewer than 50 customers, primarily large pharmaceutical manufacturers, with three customers each accounting for over 10% of revenues in both 2019 and 2018[44] - The business relies on contracts with leading electronic prescribing platforms and EHR systems, where the loss of these relationships could adversely impact operations[47] - Operating in a competitive market against well-resourced competitors, the company faces risks from evolving healthcare industry dynamics, including changes in spending, regulation, and consolidation[54][55] - Management identified material weaknesses in internal control over financial reporting due to inadequate IT general controls and insufficient controls over third-party data, not fully remediated by December 31, 2019[61] - The company's common stock is thinly traded on the Nasdaq Capital Market, potentially hindering share sales and leading to price volatility[73][74] Properties The company leases its principal executive offices in Rochester, Michigan, and additional office spaces in New Jersey and Croatia, with all leases expiring in 2022 - The company's principal executive offices are located at 400 Water Street, Suite 200, Rochester, Michigan 48307[78] - The company leases office space in Rochester, MI, Cranbury, NJ, and Zagreb, Croatia, with all leases expiring in 2022[79] Legal Proceedings The company reports no current legal proceedings as of the report date - As of the report date, the company has no current legal proceedings[81] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities OptimizeRx common stock trades on Nasdaq under "OPRX" with a limited market, no cash dividends paid, and 14.6 million shares outstanding as of March 24, 2020 Quarterly Stock Price Range (2018-2019) | Period | High ($) | Low ($) | | :--- | :--- | :--- | | 2019 | | | | Q1 2019 | 15.71 | 9.96 | | Q2 2019 | 16.75 | 10.00 | | Q3 2019 | 17.24 | 13.42 | | Q4 2019 | 14.74 | 8.63 | | 2018 | | | | Q1 2018 | 4.98 | 3.36 | | Q2 2018 | 11.00 | 4.29 | | Q3 2018 | 18.39 | 9.32 | | Q4 2018 | 18.00 | 8.92 | - The company has never declared or paid cash dividends on its common stock and does not anticipate doing so, intending to retain earnings for business operations[90] Equity Compensation Plan Information (as of Dec 31, 2019) | Plan Category | Securities to be issued upon exercise of outstanding options | Weighted-average exercise price of outstanding options | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | 2013 Equity Compensation Plan | 1,624,221 | $6.27 | 236,614 | | Other (restricted stock awards) | 90,000 | N/A | N/A | | Total | 1,714,221 | $6.27 | 236,614 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, net revenue grew 16% to $24.6 million, gross margin improved to 63%, but operating expenses increased 60%, resulting in a net loss of $3.1 million; working capital rose to $21.0 million from a capital raise Key Financial Performance (2019 vs. 2018) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Net Revenue | $24.6 million | $21.2 million | +16% | | Gross Margin % | 63% | 58% | +5 p.p. | | Operating Expenses | $19.1 million | $12.0 million | +60% | | Net (Loss) Income | ($3.1 million) | $0.2 million | N/A | - The 60% increase in operating expenses was driven by higher salaries from new hires and acquisitions, increased professional fees for Nasdaq uplisting, RMDY Health acquisition costs, and higher advertising and R&D expenses[103][104][105][106] Consolidated Cash Flow Summary (2019 vs. 2018) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($1,660,796) | $792,555 | | Net cash used in investing activities | ($10,582,086) | ($5,686,833) | | Net cash provided by financing activities | $22,181,528 | $8,685,739 | - Working capital increased to $21.0 million at year-end 2019 from $11.5 million in 2018, primarily due to a capital raise, with sufficient cash for over 12 months of operations[117][122] - Critical accounting policies encompass revenue recognition using a 5-step model, cost of revenues, stock-based compensation via the fair value method, and impairment evaluation of intangible assets and goodwill[125] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2019 and 2018, including auditor reports, balance sheets, statements of operations, stockholders' equity, cash flows, and accompanying notes - Marcum LLP issued an unqualified opinion on the 2019 financial statements but an adverse opinion on internal control over financial reporting due to material weaknesses[146][150] Consolidated Balance Sheet Highlights (as of Dec 31) | Account | 2019 | 2018 | | :--- | :--- | :--- | | Total Assets | $56,638,525 | $25,054,578 | | Cash and cash equivalents | $18,852,680 | $8,914,034 | | Goodwill | $14,740,031 | $3,678,513 | | Total Liabilities | $11,776,266 | $6,596,133 | | Total Stockholders' Equity | $44,862,259 | $18,458,445 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Account | 2019 | 2018 | | :--- | :--- | :--- | | Revenue | $24,598,274 | $21,206,363 | | Gross margin | $15,439,575 | $12,206,697 | | Total operating expenses | $19,133,139 | $12,026,565 | | Net (loss) income | ($3,142,576) | $226,344 | | (Loss) income per share – diluted | ($0.23) | $0.02 | Controls and Procedures Management concluded that disclosure controls were ineffective as of December 31, 2019, due to material weaknesses in IT general controls and third-party data completeness, leading to an adverse auditor opinion, with a remediation plan underway - The company's principal executive and financial officers concluded that disclosure controls and procedures were not effective as of December 31, 2019[302] - Two material weaknesses were identified: inadequate IT general controls (ITGCs) and insufficient controls over the completeness and accuracy of third-party data[305] - Marcum LLP issued an adverse opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2019[306][314] - Management has a remediation plan, having remediated a segregation of duties weakness in 2019, with ongoing efforts to address ITGC weaknesses and improved documentation expected in Q2 2020[308][309] Part III Directors, Executive Officers and Corporate Governance The board comprises CEO William J. Febbo and four independent directors, with three standing committees (Nominating and Governance, Audit, Compensation) all composed of independent directors, and the company has adopted a Code of Ethics Executive Officers and Directors | Name | Age | Position | | :--- | :--- | :--- | | William J. Febbo | 51 | Chief Executive Officer and Director | | Stephen L. Silvestro | 42 | Chief Commercial Officer | | Miriam J. Paramore | 57 | President | | Douglas P. Baker | 63 | Chief Financial Officer | | Gus D. Halas | 69 | Chairperson and Director | | Patrick Spangler | 64 | Director | | Lynn Vos | 64 | Director | | James Lang | 55 | Director | - All directors, except for CEO William J. Febbo, are deemed independent under Nasdaq listing standards[361] - The Board maintains three standing committees: Audit, Compensation, and Nominating and Governance, all entirely composed of independent directors[363] Executive Compensation This section details 2018 and 2019 executive compensation, including base salary, performance bonuses, and equity awards, with CEO William J. Febbo's 2019 total compensation at $833,990, and outlines independent director compensation 2019 Summary Compensation Table | Name and Principal Position | Salary ($) | Bonus ($) | Stock Awards ($) | All Other Comp. ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | William J. Febbo, CEO | 300,000 | 126,990 | 391,800 | 15,200 | 833,990 | | Stephen L. Silvestro, CCO | 188,821 | 82,678 | 938,700 | - | 1,120,199 | | Miriam Paramore, President | 250,000 | 70,550 | 130,600 | 11,200 | 462,350 | | Douglas P. Baker, CFO | 240,000 | 67,728 | 130,600 | 11,200 | 449,528 | - Executive employment agreements include base salaries, eligibility for an executive bonus plan with 40-60% of salary targets, and 12 months of severance upon termination without cause[376][380][382][384] - Independent directors receive an annual cash retainer and an annual grant of common stock; in 2019, each outside director received 8,336 shares[392][393] Security Ownership of Certain Beneficial Owners and Management As of March 24, 2020, five beneficial owners held over 5% of common stock, with Ronald L. Chez holding the largest stake at 7.7%, while all executive officers and directors as a group owned 7.4% Beneficial Owners of More Than 5% (as of March 24, 2020) | Name | Shares Owned | Percentage of Class | | :--- | :--- | :--- | | Ronald L. Chez | 1,122,918 | 7.7% | | Harvey L. Poppel | 1,060,693 | 7.2% | | AWM Investment | 952,027 | 6.5% | | BlackRock, Inc. | 938,436 | 6.4% | | Park West Asset Management | 814,668 | 5.6% | - As of March 24, 2020, all executive officers and directors as a group (8 persons) beneficially owned 1,123,092 shares, representing 7.4% of the class[404] Certain Relationships and Related Transactions, and Director Independence WPP, a former strategic investor and shareholder, sold its entire 20% ownership in December 2018, having contributed $6.5 million in revenue from its agencies in 2018 - WPP, a former related party, sold its entire ownership position in December 2018, with $6,527,051 in revenue recognized from WPP agencies in 2018[406][408] Principal Accountant Fees and Services For fiscal year 2019, Marcum, LLP billed $396,850 for audit services, while the previous auditor, Sadler Gibb & Associates, billed $116,430 for audit services in 2018 Auditor Fees | Auditor | Year | Audit Services ($) | Audit Related Fees ($) | | :--- | :--- | :--- | :--- | | Marcum, LLP | 2019 | 396,850 | - | | Sadler Gibb & Associates | 2019 | 102,409 | 5,550 | | Sadler Gibb & Associates | 2018 | 116,430 | 14,220 | Part IV Exhibits, Financial Statement Schedules This section lists the financial statements and schedules detailed in Item 8, along with all exhibits filed, including corporate governance documents, material contracts, and required certifications - This item lists the financial statements and schedules included in the filing, as detailed under Item 8[412] - A list of exhibits is provided, including corporate governance documents, material contracts, and required certifications[412]