OptimizeRx (OPRX) is a stock that many stripes of investors could love. They appear to be a small cap company in a solid uptrend with a history of double digit revenue growth.
And the most exciting part is that they look to be an up and coming telehealth name akin to Teladoc (TDOC) but with the caveat that they have largely flown under the radar of big institutional investors.
Things are unfortunately a bit more complicated at OptimizeRx, with the largest issue being that we have very real reasons to be concerned with the accuracy of OPRX’s financial statements. But first I will parse OPRX’s flowery description of their business and demonstrate that they are largely a simple advertising company that provides digital coupons.
Clipping coupons does not = the next Teladoc
Below is language from OPRX’s latest 10-k describing their business:
We are a digital health company focused on connecting life sciences companies to our clients with critical content at the point-of-care. We provide electronic clinical information via electronic health record companies (EHRs) to the medical profession, providing a direct channel for pharmaceutical companies to communicate with healthcare providers. Our cloud-based solution supports patient adherence to medications by providing real-time access to financial assistance, prior authorization, and critical clinical information. Our network is comprised of leading EHR platforms and provides more than half of the ambulatory patient market with access to these benefits within their workflow at the point-of-care.
Source: 2019 10-k
This certainly sounds like the ground floor of the hot telemedicine industry. But the description still leaves one a little confused about the most fundamental question of “how does this company make money”?
Before completing one acquisition in 2018 and another acquisition in 2019, OPRX was generating close to $20M in annual revenues, the majority of which comes from their legacy financial messaging product which has been around for over 10 years (they called the product SampleMD back in 2009). Financial messaging is described as follows:
Our integrated financial messaging platform is a revolutionary virtual “Patient Support Center” that allows doctors and staff to access a universe of sample vouchers, co-pay coupons and other patient support through their EMR and/or e-Prescribe systems. It allows them to search, print or electronically dispense directly to patients and a national network of pharmacies.
Source: 2019 10-k
If you’re still confused how OPRX makes money, we can cut to the chase. OPRX’s customers are large pharmaceutical manufacturers. OPRX markets vouchers and coupons on their behalf and receives a small fee whenever a doctor writes a prescription for one of their client’s products. They market these coupons through someone else’s electronic medical records (EMR) platforms that are used by the doctors.
And I’m not exaggerating that this core business really has been largely unchanged since 2009. Take a trip down memory lane and watch advertisement #1 or advertisement #2 and you will see that OPRX has marketed coupons for a very long time:
This is a plain and simple revenue sharing business model where OPRX serves as an advertiser and gets a cut from the pharmaceutical company and in turn gives a cut to the EMR companies who have the actual technology platforms.
Not a sexy telehealth business after all. But nevertheless here OPRX is in their investor presentation materials inexplicably pitching potential investors on an enterprise SaaS revenue model. How is collecting commissions for marketing coupons now an enterprise SaaS business model?
Source: Bank of America Securities 2020 Healthcare Conference, May 13, 2020
During 2018 and 2019 OPRX completed two separate equity issuances to raise cash. The majority of this cash went towards their two acquisitions in these respective years: CareSpeak and RMDY Health.
Source: Compiled by author
CareSpeak was projected to generate up to $1M in annual revenues in 2018 and looks to have done $800k in revenues in 2017 based on OPRX’s pro forma financials. CareSpeak is a service that sends text messages to prescribed patients that reminds them to take their pills. It’s just like the text message reminders you get when your next dentist appointment is coming up:
Source: CareSpeak partner, Avella
The CareSpeak app allows providers to send personalized text message reminders to patients’ cell phones to facilitate appropriate medication use. The app also allows providers to deliver encouragement and feedback to patients regarding their medication adherence. The system can be adopted to even the most complex dosing regimens and is available in both Spanish and English.
Source: Beckers Hospital Review
Amazon trades at less than half the 8.5x EV/Sales purchase price that OptimizeRx shelled out for an automated text message platform. OPRX grossly overpaid.
RMDY was projected to generate $3M in revenues in 2019 and looks to have done $2.4M in revenues in 2018 based on OPRX’s pro forma financials. RMDY is a similar concept to CareSpeak, but they offer a more personalized patient engagement platform:
While RMDY was acquired at a more reasonable valuation multiple based on revenues, the company appears to lose money. OPRX’s 2019 10-k contains pro forma financials that include the full year’s impact of RMDY’s operations as if they were fully consolidated in 2018 and 2019. The result is a disappointingly large increase in net losses:
Source: 2019 10-k
And if you think RMDY is a growing SaaS company that just needs to scale before they start printing money, think again. The company is 21 years old and was incorporated in 1999. Before they were RMDY, they were called Wellness Layers and were in the business of selling fee-based diet subscriptions. This “disruptor” unfortunately became disrupted and had to change their business after people simply started giving away these diet subscriptions for free. It appears RMDY was still Wellness Layers as recently as Apr 2018 and their name change was recognized at some point between then and up to 4 days before being acquired by OPRX:
Investors must also bear in mind that OPRX still has not fully paid the piper on these acquisitions. As of Q2 2020 they are reporting $5.36M in contingent purchase price payables due to be paid in the next 12 months. This would consume nearly 40% of OPRX’s reported $14.1M in cash on the balance sheet. Not ideal for a company that had a negative $(1.75)M FCF in 2019 and $(6.14)M over the LTM as of Q2 2020.
But if you still think that OptimizeRx’s business can’t really be this low-tech, we will soon see that while their marketing materials contain high-tech buzzwords (“enterprise SaaS”, “cloud based solutions”, “revolutionary virtual”, “proprietary algorithms”, etc.), behind closed doors their auditors are expressing concerns over OPRX’s inability to setup a basic IT infrastructure that could satisfy the minimum requirements for sufficient controls over their financial reporting and are relying on QuickBooks and ad-hoc Excel spreadsheets for their financial reporting.
The CEO: Out with Merriman Capital, in with OptimizeRx
OptimizeRx’s current CEO, William Febbo, has been with the company since Feb 2016 and came to us from Merriman Capital, where he was previously employed since 2007. It is worth chronicling the lengthy list of scandals that transpired at Merriman because three of their principal executives, former COO William Febbo, former CEO and co-chair Jon Merriman, and former co-chair Ronald Chez, have all been linked to OptimizeRx since Merriman Capital was expelled from the securities industry by FINRA in 2017.
Source: FINRA BrokerCheck
Merriman Capital had no fewer than 16 FINRA disclosure events, 13 of which occurred while Mr. Febbo was at the company. The following are some of the more egregious allegations.
Merriman management failed to supervise an MD who supplied a friend with customer statements that were in turn used for collateral to obtain $45M in personal loans. The same MD also traded several customer accounts in risky microcap stocks without their permission.
Source: FINRA BrokerCheck
Trading customer accounts without permission in penny stocks is a recurring pattern at Merriman Capital, and in some instances the company placed orders for their customers into stocks where the firm already held a position:
Subsequently, a customer initiated investment related civil action involving Merriman’s conduct was resolved for $90,000.00 in damages founded on allegations that customers were persuaded to buy shares of a speculative entity that Merriman had also invested in; and then refused to allow the customers to sell positions in those securities when the price of the equities had declined. Civil Action No. CGC-10-495904 (Oct. 10, 2013). Then, a customer initiated investment related arbitration claim involving Merriman’s activities was settled for $300,000.00 in damages based upon accusations of unauthorized trading of stock and over-the-counter equities in the customer’s account.
Source: The Guiliano Law Group
All of this smacks of highly unethical activity occurring under the Merriman management team. But the most damning allegations for our purposes are laid against OptimizeRx’s CEO Mr. Febbo himself. FINRA specifically singled out Mr. Febbo and sanctioned him for causing Merriman Capital to report inaccurate books and record, and consequently reporting incorrect net capital amounts while the firm was below its regulatory minimum net capital requirements:
Without admitting or denying the findings, Febbo consented to the sanctions and to the entry of findings that he permitted his member firm to conduct a securities business while below its net capital requirement. The findings stated that Febbo was the firm’s Financial and Operations Principal (FinOp) responsible for, among other things, calculating the firm’s net capital, maintaining the accuracy of the firm’s general ledger, trial balance and balance sheet, and filing the firm’s Financial and Operational Combined Uniform Single (FOCUS) reports. Febbo failed to accurately compute the firm’s net capital by including non-allowable assets in the firm’s net capital calculation by failing to apply blockage charges to positions that were in excess of the most recent four-week trading volume, and by failing to take collateral deficiency deductions for two secured demand note contracts. Febbo inaccurately overstated the firm’s net capital by amounts ranging from approximately $59,000 to approximately $438,000, and failed to recognize that the firm was maintaining net capital that was as much as $509,000 below its regulatory minimum net capital requirement of $250,000. As a result of Febbo’s failure to compute the firm’s net capital accurately, he caused his firm to maintain inaccurate books and records regarding its net capital and signed and filed inaccurate FOCUS reports on behalf of the firm.
Source: FINRA BrokerCheck – expand “disclosure dated 1/29/18 midway down page or view executed letter here.
And so as we get into 2016, the walls are closing in on Merriman Capital and the management team looks for new jobs:
OptimizeRx’s ongoing struggle with restatements and auditors
In hindsight, hiring a CEO with a history of reporting inaccurate financial statements may not have been the best choice for OptimizeRx’s needs. Incumbent CFO Doug Baker who joined the firm in 2014 from defunct penny stock Nano Magic (OTC:NMGX) already appears to have been struggling with the task.
In 2015 the company was forced to restate FY 2013’s and FY 2014’s financial statements. Among other things, revenues were improperly recorded and appear to have been pulled forward into 2013. OptimizeRx’s auditor at the time was Silberstein Ungar. It is not a surprise that Silberstein failed to detect the financial errors when one considers the fact that a PCAOB inspection found Silberstein to historically have had only 4 professional staff members spread across 84 audit clients:
Source: PCAOB inspection report
Silberstein out, KLJ & Associates in
OptimizeRx’s next choice of auditor, KLJ & Associates, was not much better. They did not last long after discovering the issues from 2013 and 2014 and resigned from serving as the company’s auditor in 2017. Ultimately the SEC found KLJ’s practices to be so extraordinarily deficient that they were suspended for five years in 2019.
KLJ out, Sadler, Gibb & Associates in
Next up to bat was Sadler, Gibb & Associates. Predictably they also were chastised by a PCAOB investigation and found to have “issued an opinion without satisfying its fundamental obligation to obtain reasonable assurance about whether the financial statements were free of material misstatement”.
But despite Sadler’s noted deficiencies, they still took serious issue with OptimizeRx’s financial reporting in 2018. Sadler’s opinion on OPRX’s internal control deficiencies are lengthy, but this might be the most telling piece:
There were ineffective controls related to revenue including ineffective controls over the review and approval of a key revenue calculation spreadsheet and ineffective controls over the accuracy and completeness of activity data produced by the Issuer’s proprietary IT system related to user actions in an electronic environment. These deficiencies were a result of a design deficiency in the review and approval process and IT control processes lacking sufficient documentation.
Source: FY 2018 10-k
The company’s response is equally troubling. It seems OptimizeRx’s “proprietary IT system” is QuickBooks and that the CFO unilaterally crunches their financials in spreadsheets without anyone else at the company reviewing:
The Chief Financial Officer has been heavily involved in all accounting functions. In addition, we have used QuickBooks as our accounting system. QuickBooks lacks sufficient user controls to ensure that timely prevention and detection of unauthorized use or disposition of Company assets, given the access the CFO has within QuickBooks. In addition, a significant amount of the calculation of revenue to be recognized is done by the Chief Financial Officer using spreadsheets and for the majority of the year, the Company lacked sufficient personnel in the accounting function to adequately review these spreadsheets.
Source: FY 2018 10-k
Sadler out, Marcum LLP in
In 2019 OPRX made yet another change in auditors and pivoted to Marcum LLP. Marcum is notable for being one of the only public accounting firms to ever be sanctioned for marketing their audit clients as micro cap investment opportunities (a violation of auditor independence requirements).
Astonishingly, OPRX still has not remedied their internal controls and Marcum continues the trend of citing material weaknesses in the company’s financial reporting, particularly with respect to revenues, accounts receivable, revenue share expenses, and revenue share expense payable:
Source: FY 2019 10-k
The language from the auditors makes clear that weaknesses in internal controls should raise serious concerns on the reliability of the financial statements provided by the company:
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
Source: FY 2019 10-k
Marcum out, UHY LLP in
Finally in June 2020, OptimizeRx parted way with Marcum and engaged UHY LLP as their new auditor. Unmentioned in the press release is that OPRX still has not corrected the issues over their internal controls as of June 2020.
Due to the existence of the material weaknesses, as explained above, the Former Accountant expressed an adverse opinion on the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2019. The Company’s internal controls have not been completely remediated as of the date of this Current Report on Form 8-K.
I requested comment from the company on Oct 5th with respect to what OPRX is doing to address their auditors’ concerns, why it has taken so long to remedy the problems, and why particular attention was drawn to the reporting of revenue, revenue share expense, accounts receivable, and revenue share payable. I have yet to receive a response and will update this section if/when I receive one.
To recap this lengthy odyssey:
- OptimizeRx cycled through five different auditors in seven years.
- Their four previous auditors were all reprimanded by the PCAOB, many of which were related to failures to perform sufficient audit procedures.
- Notwithstanding these shortcomings, the auditors still required restatements from OPRX and deemed their internal controls over financial reporting to be insufficient all the way up through their latest 10-k.
Trying to make sense of the financials
The bull case for OPRX rests on the misguided idea that this is a hot telehealth company and also on the fact that they have historically shown strong annual revenue growth (though this growth has slowed as of lately).
Despite having a wide array of product lines at this point, OPRX makes no attempt to break out their various sources of revenues in their quarterly financials and provides little in the way of supporting details. It is entirely possible that the intention is not to be opaque, but rather OPRX is simply limited in their ability to accurately report segregated details given their technological limitations that have extensively been chronicled at this point.
Regardless, the 800 LB gorilla in the room is OPRX’s revenue growth, and if we have concerns on its being overstated we should look to related items on the balance sheet such as accounts receivable. Below is a look at a few annual and quarterly key operating metrics for OPRX that I’ve compiled.
Source: Compiled by author
If revenues are being overstated or pulled forward then the most logical outcome would be an inflated accounts receivable balance. The reason for this is that a company books the revenues but will not be collecting the cash from customers until much further out in time, if ever. This results in an inflated A/R balance.
Sure enough we see that OPRX reports an extremely high and sporadic days sales outstanding ratio (DSO). The Q2 2020 DSO of 103 implies that OPRX does not collect cash on their recorded sales until 103 days after they have recognized the revenues. What is OPRX’s typical payment terms with their customers? Competitor GoodRx (GDRX) recently completed an IPO and their financials implied a DSO of 38 days for FY 2019. How on earth is OPRX at 103?
I requested comment from the company on Oct 5th with respect to why their DSO has historically been so elevated and volatile and if they could comment on what the typical payment terms are for their large pharmaceutical customers. I have yet to receive a response and will update this section if/when I receive one.
Source: Compiled by author
Source: Calculated by author
Another interesting data point is the ratio of revenues to cogs vs the ratio of A/R to revenue share payable. These two ratios should represent the same concept with the difference being one pair is from the income statement and one is from the balance sheet (i.e. A/R = revenues yet to be collected and revenue share payable = cogs yet to be paid).
But what we see is a massive divergence in this ratio beginning in 2018. This divergence is driven by the A/R balance growth wildly outpacing the growth in revenue share payable.
We see many things happening in 2018 all at once:
- Revenues reported by OPRX begin to surge.
- The DSO takes off and nearly doubles by the end of 2019 before moderating.
- A/R growth wildly outpaces corresponding revenue share payable liabilities. This doesn’t make sense as more coupon sales should mean more fees payable to EMR platforms.
- A/R balances are much higher than would be implied by reported revenues relative to cogs.
- OPRX’s auditor issues an adverse opinion on the annual financials and specifically sites “ineffective controls related to revenue including ineffective controls over the review and approval of a key revenue calculation spreadsheet and ineffective controls over the accuracy and completeness of activity data”.
- In the company’s response they mention “a significant amount of the calculation of revenue to be recognized is done by the Chief Financial Officer using spreadsheets and for the majority of the year, the Company lacked sufficient personnel in the accounting function to adequately review these spreadsheets“.
- And naturally the stock price increases nearly 400% as OPRX reports booming revenue growth after years of lackluster performance.
Another contributor to the big jump in share price is the fact that OPRX managed to finally report a positive annual net income in 2018. This is ancient history however as they have now dramatically increased their operating expenses as part of their recent acquisitions. OPRX has gone from a $200k net income in 2018 to a $(3.1)M net loss in 2019. Their situation continues to worsen with their LTM net loss further deteriorating to $(6.8)M as of Q2 2020.
What happens next
On Oct 5th news broke that OPRX is now the subject of a class action lawsuit and that Purcell Julie & Lefkowitz LLP is “investigating a potential breach of fiduciary duty claim involving the board of directors”. Details are still vague, but this indicates that people are certainly taking a closer look at OPRX.
OPRX management noted in their latest conference call that their revenues are typically stronger in the back half of the year. While this does not necessarily seem to be correct when looking at 2019’s results, sell-side estimates reflect continued revenue growth throughout 2020 and 2021.
Given their core financial messaging business seems to have been leveling off before their recent acquisitions, OPRX will need to successfully grow revenues coming from their acquisitions or continue to acquire additional companies. They will also need to prove that they can get back to profitability.
Considering their continued cash burn and looming contingent purchase price payments to be made, it is also likely that OPRX will again be tapping the capital markets at some point in the future to raise additional funds.
Risk of a restatement
But one of the biggest questions is what will come from OPRX’s newest auditor once they complete their 2020 annual audited financials. If OPRX is truly addressing the extensive list of concerns highlighted by previous auditors then they should be hiring additional accounting professionals and refining their processes and IT tools. I believe the risk is very high that there could have been material mistakes that were made by OPRX’s isolated CFO appearing to work out of various spreadsheets that apparently were not being independently reviewed by anyone else at the firm – a shocking practice for a company that is publicly traded on the NASDAQ.
The crux of my short position in OPRX’s stock revolves around the fact that I have little faith in the reliability of their financial statements – the very same financial statements which led to a +400% appreciation in the stock price.
OPRX’s CEO presided over several instances of unethical activities and was directly cited by FINRA for failures to maintain accurate books and records. OPRX has relied on several sanctioned auditors who despite their shortcomings could not express complete confidence in OPRX’s financial reporting. OPRX still has not fixed the problems surrounding their internal controls over financial reporting as of their last public comment.
Aside from these concerns, OPRX’s valuation multiples are extremely elevated (current LTM EV/S ratio stands at 10.4x compared to 4.7x at 2019 year end) and is driven by the misguided idea that this is a cutting edge Telehealth SaaS company. I see risk significantly skewed to the downside in this name.
Disclosure: I am/we are short OPRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.