Sheadoggy - I have been staying away from iHub and
Post# of 7769
Posted On: 05/07/2014 12:59:04 AM
Sheadoggy - I have been staying away from iHub and when I do check in, several people are on ignore, especially the ones making baseless and libelous accusations against certain individuals. But you peaked my curiosity, so I just read CHP's post. He or she captures the spirit of my revenue recognition timing theory. And even if this is just a temporary opinion, I am glad someone else acknowledges the clear discrepancies between the numbers reported in the 10K as they relate to arguments that Scrips receives only 19.5% from the pharmacy revenues. CHP actually pasted some of the same sections of the agreement and emphasized some of the same language in a post I am working on, but his theory has gaps and does not address all of the key language. That said, I do like his new profit margin! For a bit more clarity to my prior post on this issue, below is an excerpt from my more extensive draft analysis of the Business Management Agreement . This is still work in progress, but it should help fill the gaps related to my profit margin assumptions.
Clearly, there is a debate over the pharmacy's profit margin. I personally believe the margins are very high, even higher than the WRx 70% gross profit margins. Many investors here have posted results of their research on specialty pharmacies, including the very high margins. Indeed, in the company's Q&A Scrips stated the margins are "extremely favorable": Because the compounding pharmacy actually creates the product from approved pharmaceutical ingredients (API), the margins can be extremely favorable for the dispensing entity . (See http://scripsamerica.com/q-a/.)
Despite the potential for "extremely favorable" margins, I have assumed a pharmacy margin of 50%. But how can I possibly be correct when Scrips reported it received only 19.5% of the pharmacy's reported first quarter revenues (SCRC received only $125,000 in fees for the same period that the pharmacy reported revenues of $642,000)? Put simply, I am confident that the 19.5% does NOT represent the pharmacy's profit margin for the first quarter. First, one small reason for a slightly lower margin is the owner's monthly draw (which I will address in more detail in a future post after tackling the much larger profit margin question here). Of course, as the pharmacy revenues continue growing at the current rate, this relatively fixed monthly draw will have less of an impact on margins. Admittedly, this reason does not address the 19.5% margin issue.
A second reason that supports at least higher future margins relates to the typical inefficiencies attributable to ramping up a new business. Indeed, even Bob Schneiderman implied certain inefficiencies in the beginning: [O]ur pharmacy utilizes a new system to process prescriptions that have greatly increased its efficiency, sales, profitability, etc. (See http://finance.yahoo.com/news/monthly-revenue...144.html.) And considering this business is still in its infancy, I anticipate the pharmacy will discover and remedy additional inefficiencies as it matures and management gains additional experience. Again, this does not address the question, sorry!
Aside from the typical startup inefficiencies and Implex's small monthly draw (which will decrease with time and number of scripts per the agreement), I believe the more significant disparity is caused by two important issues: (1) a payment timing issue related to Scrips' management fee, and (2) a revenue recognition issue with the pharmacy's product sales.
The payment timing issue is simple and is expressed in the following excerpt of the agreement: Pharmacy shall pay to SCRIPS a combined Financing Fee (including interest on all funds advanced or loaned) and Management Fee in an amount calculated as ninety-seven percent (97%) of the Calculation Basis as defined herein (“Fee”)...“Calculation Basis” is Pharmacy’s total receipts from paid invoices during the preceding calendar month (i.e., total revenue on a cash basis) less the Allowable Deductions... (Emphasis supplied.) In a nutshell, there is a month delay between the time the pharmacy receives payment and the time SCRC receives its management fee based on that payment (e.g., total gross receipts to the pharmacy in March equals net profit payment to SCRC in April).
In addition to the delayed fee payment language, the pharmacy revenue recognition issue is likewise expressed in the agreement: 8. BOOKS AND RECORDS. Scrips, at its sole expense, shall maintain separate and complete books and records, on the appropriate accrual basis , in accordance with sound and generally accepted accounting principles. (Emphasis supplied.) In other words, since Scrips must use the accrual basis when recognizing the pharmacy's revenues, it is very likely that the $642,000 reported pharmacy revenues on the 10K was a much larger than the pharmacy's actual cash collections for that same period.
For people unfamiliar with the revenue recognition differences between accrual basis and cash basis , I will digress for a moment. Generally, under a cash basis accounting method, revenue is recognized at the time a company receives a cash payment for its goods or services. Under an accrual basis accounting method, however, companies in the business of selling products generally recognize revenues on the date they ship products to their customers (which is typically reported on the balance sheet as an accounts payable asset, from which most companies deduct for certain probable and reasonably quantifiable risks, including damage, spoilage, theft, losses in transit, customer defect claims, unpaid invoices, rejected or discounted insurance payments or other risks common to their industry).
For an example of a company adopting the accrual basis accounting method, look no further than p. 28 of SCRC's 10K: Product Revenue associated with our curtailed pharmaceutical distribution services is recognized when product is shipped from a contract packager to our customers’ warehouses and is adjusted for anticipated charge backs from our customers which include inventory credits, discounts or volume incentives. (If you want to learn more about the accrual basis method, click on the following link: http://www.entrepreneur.com/encyclopedia/accr...counting.) I am fairly confident that Scrips, however, uses the cash basis method to account for its management and finance fees from the pharmacy.
To that end, while the pharmacy reported $642,000 in revenues from February 20 to March 31 based on the accrual method, it did NOT receive that much cash during the same period. Indeed, considering this business is just getting started, I will speculate 30 to 60 days will lapse between the time the pharmacy ships its topical pain creams and the time it receives payment for those shipments. (As Scrips becomes more efficient, I also expect them to shorten the gap between shipment and payment.) And after the pharmacy receives all of its payments for one month, Scrips will receive its related fees on the subsequent month.
So as I reported yesterday, the $125,000 / 19.5% number in the 10K means nothing from a profit margin perspective because we do not know to which pharmacy revenues the fee relates. This is nothing but a pipeline issue. I am confident the pharmacy is now delivering the percentages that I projected or even better. And once the pipeline is full and the money is consistently flowing to the pharmacy, Scrips will report significantly higher fees and become cash flow positive.
Incidentally, as the pharmacy continues its parabolic revenue growth, the revenue recognition and timing issues will make it difficult to reasonably ascertain Scrips' fees based on the pharmacy's reported revenues for the same month. But there are some things we can say or project with reasonable certainty. First, the pharmacy's parabolic revenue growth is the engine behind which Scrips' fees are quickly accelerating. Second, considering over $1.6 million in pharmacy revenues from February 20 to April 30, the pharmacy will collect a large percentage of that amount in May, which leads to my third projection. That is, Scrips will become cash flow positive on the exact day in June on which it receives its fees for the pharmacy's May cash receipts. Finally, when the market figures all of this out, not only will the pharmacy's revenues and Scrips' earnings growth become parabolic, so to will SCRC's stock price...it is only a matter of time!
Tic, tic, tic...
Bsav88atty (I did not get paid to post this message, nor have I ever been paid to post on any message board.)
Clearly, there is a debate over the pharmacy's profit margin. I personally believe the margins are very high, even higher than the WRx 70% gross profit margins. Many investors here have posted results of their research on specialty pharmacies, including the very high margins. Indeed, in the company's Q&A Scrips stated the margins are "extremely favorable": Because the compounding pharmacy actually creates the product from approved pharmaceutical ingredients (API), the margins can be extremely favorable for the dispensing entity . (See http://scripsamerica.com/q-a/.)
Despite the potential for "extremely favorable" margins, I have assumed a pharmacy margin of 50%. But how can I possibly be correct when Scrips reported it received only 19.5% of the pharmacy's reported first quarter revenues (SCRC received only $125,000 in fees for the same period that the pharmacy reported revenues of $642,000)? Put simply, I am confident that the 19.5% does NOT represent the pharmacy's profit margin for the first quarter. First, one small reason for a slightly lower margin is the owner's monthly draw (which I will address in more detail in a future post after tackling the much larger profit margin question here). Of course, as the pharmacy revenues continue growing at the current rate, this relatively fixed monthly draw will have less of an impact on margins. Admittedly, this reason does not address the 19.5% margin issue.
A second reason that supports at least higher future margins relates to the typical inefficiencies attributable to ramping up a new business. Indeed, even Bob Schneiderman implied certain inefficiencies in the beginning: [O]ur pharmacy utilizes a new system to process prescriptions that have greatly increased its efficiency, sales, profitability, etc. (See http://finance.yahoo.com/news/monthly-revenue...144.html.) And considering this business is still in its infancy, I anticipate the pharmacy will discover and remedy additional inefficiencies as it matures and management gains additional experience. Again, this does not address the question, sorry!
Aside from the typical startup inefficiencies and Implex's small monthly draw (which will decrease with time and number of scripts per the agreement), I believe the more significant disparity is caused by two important issues: (1) a payment timing issue related to Scrips' management fee, and (2) a revenue recognition issue with the pharmacy's product sales.
The payment timing issue is simple and is expressed in the following excerpt of the agreement: Pharmacy shall pay to SCRIPS a combined Financing Fee (including interest on all funds advanced or loaned) and Management Fee in an amount calculated as ninety-seven percent (97%) of the Calculation Basis as defined herein (“Fee”)...“Calculation Basis” is Pharmacy’s total receipts from paid invoices during the preceding calendar month (i.e., total revenue on a cash basis) less the Allowable Deductions... (Emphasis supplied.) In a nutshell, there is a month delay between the time the pharmacy receives payment and the time SCRC receives its management fee based on that payment (e.g., total gross receipts to the pharmacy in March equals net profit payment to SCRC in April).
In addition to the delayed fee payment language, the pharmacy revenue recognition issue is likewise expressed in the agreement: 8. BOOKS AND RECORDS. Scrips, at its sole expense, shall maintain separate and complete books and records, on the appropriate accrual basis , in accordance with sound and generally accepted accounting principles. (Emphasis supplied.) In other words, since Scrips must use the accrual basis when recognizing the pharmacy's revenues, it is very likely that the $642,000 reported pharmacy revenues on the 10K was a much larger than the pharmacy's actual cash collections for that same period.
For people unfamiliar with the revenue recognition differences between accrual basis and cash basis , I will digress for a moment. Generally, under a cash basis accounting method, revenue is recognized at the time a company receives a cash payment for its goods or services. Under an accrual basis accounting method, however, companies in the business of selling products generally recognize revenues on the date they ship products to their customers (which is typically reported on the balance sheet as an accounts payable asset, from which most companies deduct for certain probable and reasonably quantifiable risks, including damage, spoilage, theft, losses in transit, customer defect claims, unpaid invoices, rejected or discounted insurance payments or other risks common to their industry).
For an example of a company adopting the accrual basis accounting method, look no further than p. 28 of SCRC's 10K: Product Revenue associated with our curtailed pharmaceutical distribution services is recognized when product is shipped from a contract packager to our customers’ warehouses and is adjusted for anticipated charge backs from our customers which include inventory credits, discounts or volume incentives. (If you want to learn more about the accrual basis method, click on the following link: http://www.entrepreneur.com/encyclopedia/accr...counting.) I am fairly confident that Scrips, however, uses the cash basis method to account for its management and finance fees from the pharmacy.
To that end, while the pharmacy reported $642,000 in revenues from February 20 to March 31 based on the accrual method, it did NOT receive that much cash during the same period. Indeed, considering this business is just getting started, I will speculate 30 to 60 days will lapse between the time the pharmacy ships its topical pain creams and the time it receives payment for those shipments. (As Scrips becomes more efficient, I also expect them to shorten the gap between shipment and payment.) And after the pharmacy receives all of its payments for one month, Scrips will receive its related fees on the subsequent month.
So as I reported yesterday, the $125,000 / 19.5% number in the 10K means nothing from a profit margin perspective because we do not know to which pharmacy revenues the fee relates. This is nothing but a pipeline issue. I am confident the pharmacy is now delivering the percentages that I projected or even better. And once the pipeline is full and the money is consistently flowing to the pharmacy, Scrips will report significantly higher fees and become cash flow positive.
Incidentally, as the pharmacy continues its parabolic revenue growth, the revenue recognition and timing issues will make it difficult to reasonably ascertain Scrips' fees based on the pharmacy's reported revenues for the same month. But there are some things we can say or project with reasonable certainty. First, the pharmacy's parabolic revenue growth is the engine behind which Scrips' fees are quickly accelerating. Second, considering over $1.6 million in pharmacy revenues from February 20 to April 30, the pharmacy will collect a large percentage of that amount in May, which leads to my third projection. That is, Scrips will become cash flow positive on the exact day in June on which it receives its fees for the pharmacy's May cash receipts. Finally, when the market figures all of this out, not only will the pharmacy's revenues and Scrips' earnings growth become parabolic, so to will SCRC's stock price...it is only a matter of time!
Tic, tic, tic...
Bsav88atty (I did not get paid to post this message, nor have I ever been paid to post on any message board.)
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