It’s been an eventful three months for OptimizeRx (OPRX) since my initial write-up in February. Let’s recap what has unfolded and why I have decided to make OPRX one of my largest positions.
OptimizeRx announced on March 17th, 2014 that it had completed the long-awaited financing necessary to buy out Vicis Capital by the month-end deadline. The key terms disclosed in the filing:
On March 17, 2014, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with the purchasers identified on the signature pages thereto (the “Investors”), pursuant to which the Company sold to the Investors an aggregate of 8,333,333 shares (the “Shares”) of the Company’s common stock, par value $0.001 per share (“Common Stock”), for $1.20 per Share, or gross proceeds of $10,000,000 (the “Offering”).
The company also paid the underwriter, Merriman Capital, 9.7% of the gross proceeds and issued them 804,139 share purchase warrants exercisable at $1.20 per share. The financing was below my anticipated pricing but did not require warrant coverage. Appetite for the deal appeared strong and the company came away with $3M of growth capital after taking out Vicis.
Here is how OPRX’s simplified capital structure looks post-financing:
I view the deal as very positive for the company, reducing the diluted share count by 7M, separating themselves from Vicis, and adding large, sophisticated investors to the shareholder base.
LDM Lawsuit Settlement
On the negative side, OPRX took a hit in their legal dispute with LDM. Buried in Note 19 of the latest 10-K, was this nugget:
“…On April 23, 2013, however, LDM reinstituted the patent infringement action in the United States District Court for the Eastern District of Missouri, Eastern Division claiming that OptimizeRx breached the Settlement and Patent License Agreement. The Company continued to vigorously defend the OptimizeRx technology, preparing for litigation, depositions and patent protection while also positioning for legal actions against LDM. On February 28, 2014, a Settlement Agreement was reached with LDM, and the judge dismissed the case with prejudice on March 18, 2014. Per the terms of the settlement agreement, the Company paid a one-time fee of $400,000 and will pay LDM the greater of $0.37 per patient discount distributed by OptimizeRx or 10% of the total revenue earned by OptimizeRx for distribution and redemption of all patent discounts.”
Essentially, the company will now pay out 10% of their gross coupon revenues to LDM in perpetuity (split between them and the EHRs). This is a big hit for the company. Management spun the development as a positive, citing a partnership that now allows them to integrate SampleMD in LDM’s network of 100K doctors. Perhaps things will equal out in the short-term, but LDM will surely be the winner as OPRX’s business grows down the road.
In my opinion, management could have done a better job disclosing the development to shareholders but hopefully they can move past this overhang and reap some benefits from the partnership.
For Q1, the company reported revenues of $1.3M, a 97% y/y increase, and a net loss of $600K. On the face, these results seem disappointing but were impacted by a few factors:
1. Novartis Suspension
Novartis suspended SampleMD use from January through April to assess the ROI of the program. An independent firm found SampleMD delivered a 3:1 ROI and Novartis has since resumed their program. The company estimates the impact at $100K/mo.
2. Allscripts Technical Issue
Allscripts encountered a privacy issue that brought the system down for one month. The issue was resolved and Allscripts is now rolling SampleMD out to their entire user base on an opt-out basis. Management indicated the issue caused one month of lost revenue, which I estimate to be ~$100K.
3. LDM Settlement
The company booked a one-time $400K charge to cover the settlement payable to LDM.
Accounting for the above, I estimate revenue growth would have been closer to $1.7, representing 150% y/y growth and a slight sequential decline from Q4:
Adjusted net income would have been break-even, and likely even higher if not for abnormally large stock-based compensation booked in the quarter. Despite the mixed results, OPRX confirmed a strong outlook. Management expects distributions to double y/y and reach a 1M quarterly run-rate by year-end.
Management introduced Doug Baker as OPRX’s new (and first) CFO on the conference call. Doug was most recently CEO of Applied Nanotech Holding (APHD) and before that, served as CFO of APHD from 12 years. Last year’s accounting restatement demonstrated the company needs help in this function. It’s too early gauge his impact, but hopefully Doug can help OPRX raise their profile and achieve a NASDAQ/AMEX listing in the near future.
Putting it all together, here’s how I see the next few years playing out for OPRX:
Note: From the restated financials, it appears revenue share will be closer to 40% than my initial estimate (45%).
Based on continued EHR integrations and new drugs coming on the platform, I think OPRX can double their business annually over the next few years. Putting a conservative multiple on 2015 EBIT, shares are easily worth $3.00 or double the current price.
The biggest risk remains management execution, as no one on the team has experience building a public company to uplist on a reputable exchange. Against this risk, new partnerships, new drugs, and industry tailwinds should make the second half of this year an inflection point for the company. I have been a buyer at the $1.50 level and OPRX is now my second largest position.