Remote MDX (RMDX.OB): A ‘Bit’ Overvalued

Remote MDx Inc. (RMDX.ob), currently trading at $1.86, sells tracking systems to be used either on parolees or on the elderly. The systems allow for the location of the person wearing the device and instant communication with an operator in a call center run by the company; the call center operator can quickly call a parole officer or anyone else should a reason to do so arise. The system can also set off an alert based on many different situations (such as an elderly person falling down or a parolee leaving the state). The company also has another segment, but I will not discuss that because it has annual sales under $1 million, has little prospect of growth, and operates at a loss. The company has a market cap of $230 million, yet it has a book value available to common stockholders of negative $2 million and an accumulated deficit (total loss since the company’s founding) of $127 million. I do not foresee the company ever making significant profits. Therefore, I believe that Remote MDX is essentially worthless. Current (and potential future) shareholders beware.

Despite horrendous losses, the company continues to dole out huge stock option awards to its two main executives: chairman and CEO David G. Derrick and President James J. Dalton. In FY2005 the pair each received 2.5 million stock options (with an exercise price of $0.54), in addition to $540k cash each. Over the past year the pair have been dumping a lot of stock: they owned 9.1 and 8.9 million shares respectively as of June 6, 2006 (all data from the company’s 2006 proxy; see all their SEC filings). As of July 25, 2007, each owned 5.2 million shares. And this doesn’t even account for all the options they have exercised–just in their most recent forms 4 linked above, the pair acquired over 14 million shares. So the two top executives have sold well in excess of 22 million shares over the last year. That is not exactly a sign of confidence in the future.

RMDX 2-year chart

Unlike some of the OTC stocks I come across, Remote MDX is a real company with a real product and real employees (112 full time at last count). The only problem is that the company is not likely to ever make a profit, because it competes against a number of much larger and more profitable companies (such as Philips [[PHG]], ProTech, and Sentinel Security. It should be instructive from a valuation standpoint that two of the companies that Remote MDX’s itself calls significant competitors (see p.26 in the recent form SB-2) also trade over the counter and have market caps of under $15 million each. These companies are Wherify (wfyw.ob) and iSecureTrac (isec.ob). iSecureTrac has greater revenue than Remote MDX, a decent gross profit margin, smaller losses than Remote MDX, and yet somehow investors think that Remote MDX is 15 times more valuable ($230 million market cap v. $15 million market cap). Something doesn’t seem right with that comparison, and that something is that Remote MDX is way overvalued.

A bull in the stock would argue that the company has just recently increased its revenues drastically, that these increasing revenues will soon lead it to profitability, and that the company is in a great growth niche. I won’t disagree with the first and third points. But I have some trouble believing the company will be profitable anytime soon. For example, in the most recent quarter the company reported sales of $3.1 million and selling, general, and administrative (SG&A) expenses of $5 million. In the past 9 months the company has had $5.8 million in revenue and $15.7 million in SG&A expenses. Most of the SG&A is from executive compensation. As long as the executives of Remote MDX overpay themselves, the company will not be profitable. Notice that this comparison doesn’t even include cost of goods sold or R&D expenses. Even though the company’s sales have increased drastically, it has not been able to narrow its losses significantly. It had a $5.3 million loss in the most recent quarter, essentially the same as the loss from the year ago quarter (after accounting for the greater stock option awards in 2006).

Perhaps the worst part of Remote MDX from an investment standpoint is the share situation. There are currently 123,008,784 shares outstanding. Exactly 13 months ago there were 71,878,237 outstanding. The number of shares has increased by a whopping 70% in just over one year! And the company has gotten essentially nothing from those shares because it has lost as much money over the last year as it received for selling its shares. Even worse, many of the company’s largest shareholders are about to sell 23 million of their shares (see the registration statement filed with the SEC). It is obvious what such massive selling will do to the stock’s price in the near term.

Remote MDX is a good example of why most people should avoid OTC stocks. It has a nice story, and even a product, but it will not generate profits anytime soon. If management were more interested in the company’s success than in their own paychecks, perhaps the future would be brighter for the company. Alas, that is not the case.

Disclosure: I am short RMDX.ob. I do not encourage short selling as it is very risky. My disclosure policy cannot be sold short.