ScripsAmerica Inc. (SCRCQ)

[coolerheadsprevail]

Interesting highlights to the 10K provided by the NT filing today:

We expect to report net revenues for the fiscal year ending December 31, 2014, of approximately $30 million compared to approximately $556,000, for the fiscal year 2013. This increase in our sales revenue is primarily due to our acquisition of Main Ave Pharmacy which has generated approximately $29 million in sales revenue.

9-month 2014 Net Revenues thru 9/30/14 were reported in the Q3'14 10Q as being $17.3M.

Therefore, if full-year 2014 Net Revenues is being stated on a preliminary basis to be $30M, then stand-alone Q4'14 Net Revenues comes out to be approx $12.7M.

Q3'14 stand-alone Net Revenues was $12.8M.

On the surface, this comparison may not be noteworthy as Q3's $12.8M looks consistent with Q4's $12.7M. HOWEVER, when you look at the monthly Approved Orders numbers for Q3'14 and Q4'14, respectively, you will see something that is very eyebrow-raising:

Monthly Approved Orders:
JUL --- $ 4.09M
AUG --- $ 4.87M
SEP --- $ 5.46M
OCT --- $ 5.62M
NOV --- $ 5.26M
DEC --- $ 5.28M

So, based on the above, Q3'14 totalled $14.4M, and Q4'14 totalled $16.2M.

Starting to see the issue here, folks?

Now let me provide some more clarity for you:

Remember that Q3'14 closed with $3.61M in backlog. For those who need a refresher, the backlog is the amount of the "Approved Orders" number that did NOT make it into that period/quarter's "Net Revenue" number because it had NOT been shipped yet to the customer -- which meant that per US GAAP, it is NOT allowed to be recognized and reported as revenues yet. Basically, this $3.61M backlog number represented the last 15-20 days worth of approved orders in SEP-2014 that would have to wait until OCT-2014 (i.e. Q4'14) before it could be recognized and included as Net Revenues.

Why is this important?

Because this means that in theory, Q4'14 Net Revenues should be computed based upon the following simple formula:

OCT Approved Orders ($5.62M)
+ NOV Approved Orders ($5.26M)
+ DEC Approved Orders ($5.28M)
+ Old Q3'14 Backlog Caught Up and Recognized as Revenues in Q4'14 ($3.61M)
- New Q4'14 Backlog (???)
= NET REVENUES FOR Q4'14 ($12.7M as per above)

So, does everyone see the big "???" next to the Q4'14 Backlog number? Well, we can solve for this by adding up all the other known variables in the equation (which adds up to $19.8M) and subtracting the $12.7 Q4'14 Net Revenues number because logically the Backlog MUST be the difference that you adjust this $19.8M down by in order to arrive at the eventual $12.7M Net Revenue number... ...and this "???" therefore equals a whopping $7.07M.

$7.07M.

That is almost a month and a half worth of orders, folks. Something does not smell right here.

It makes me wonder if possibly the reason why CVS/Caremark terminated its agreement with Main Ave may be for reasons completely different than what we had originally believed (i.e. perhaps NOT related to the anti-compounding sentiment spreading throughout the insurance industry).

Let me explain:

We saw that SCRC began reporting a large Deferred Revenues balance last quarter. Deferred Revenue is when Main Ave is so slow in getting Rx's out to customers that they have actually RECEIVED the payment from the insurance company already, and so this Deferred Revenue is a liability on SCRC's balance sheet reflecting the fact that Main Ave owes either a Rx product to its customer or it needs to return the money back to the insurance company.

So if we combine a growing Deferred Revenue balance with a growing Backlog number, this is a very bad combination. Why? Because it means that Main Ave is not only failing (and failing at a continually increasing rate) to fulfill Rx's to its customers, but it has been continuing to bill insurance companies for these and simply holding onto the money from the insurance companies WITHOUT EVER DELIVERING THE RX'S TO THE CUSTOMERS.

So... ...given these numbers and the logical potential explanations for how BOTH a growing Deferred Revenues balance and a growing Backlog number could come about and what it means... ...it is POSSIBLE that CVS/Caremark's decision to terminate its agreement w/Main Ave "MAY" be because it simply views Main Ave as an unprofessional and unreliable local pharmacy that is unable to adequately fill Rx's for CVS/Caremark's members and who won't pay back the money it has already received for these unfilled Rx's.

AGAIN, TO BE CLEAR, THIS IS SIMPLY A THEORY AT THIS POINT, BUT IS CONSISTENT WITH INDUSTRY PRACTICE AND CONSISTENT WITH THE NUMBERS BEING REPORTED THUS FAR...

Our operating expenses for the fiscal year ending December 31, 2014, increased approximately $19.3 million to $26.7 million from $7.4 million in 2013. The primary reason for the increase in our operating expenses is an increase of approximately $22 million of commission expenses associated with the increase in our sales.

Operating Expenses for stand-alone Q3'14 = $9.94M
Operating Expenses for 9-months ending 9/30/14 = $14.80M

Therefore, if full year Operating Expenses for 2014 = $26.7M, then Q4'14 stand-alone Operating Expenses must = $11.9M.

Yikes... ...this is approx a 20% increase over Q3'14...

I know that there will be some degree of uptick in SG&A due to the increased promotional activities during Q4'14 (remember the SeeThruEquity investor conference, the interviews, the analyst coverage, the mentions in the newsletters, etc? Those weren't free -- those were all paid for by SCRC), but it should be nowhere close to explaining a $2M increase in expenses.

So not only is it unfortunately clear that Selling Expenses likely did NOT come down to the 45% levels of Q1'13 and Q2'13, but I fear that it may have even increased even further as there is really no other significant category of expense out there. We will need to wait for the full 10K to come out to see any details/disclosures on these expense numbers...

The net income from our operations is approximately $185,000 for the fiscal year ending December 31, 2014, compared to a loss from operations of approximately $ 7.3 million in 2013.

Net Income from Operations for stand-alone Q3'14 = $1.66M
Net Income from Operations for 9-months ending 9/30/14 = $726k

Therefore, if full year is being reported to be $185k, then Q4'14 stand-alone Net Income from Operations must = a NET LOSS of $541k.

Ouch... ...profitable in Q3'14 but losing money in Q4'14... ...and all this with almost $2M more in approved orders during Q4 compared to Q3...

...Folks, there is no other way to say it: There is some serious leakage going on here. There is NO reason all these approved orders should NOT be bringing in boatloads of both positive cash flow AND positive net earnings...

We expect to report a net loss for the fiscal year ending December 31, 2014, of approximately $1.2 million compared to a net loss of approximately $11.2 million during the fiscal year 2013.

Net Income for stand-alone Q3'14 = $1.53M
Net Loss for 9-months ending 9/30/14 = $343k

Therefore, if full year Net Loss is being reported to be $1.2M, then Q4'14 stand-alone Net Loss must = $857k.

Again, ouch... ...with same comments as above... ...it simply cannot be a good thing that even with record-setting approved orders during Q4'14 that translated to an annual revenue run rate in excess of $64M, that in a compounding pharmacy sector that has insanely high profit margins, that SCRC somehow found a way to not turn a profit during Q4'14...

All right, JOEY Z, it's your team's turn to bat -- let's see how you and your crew of paid whores can spin this...