Daxor Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; comparisons are primarily with FY2010. Daxor develops and sells the BVA-100 blood volume analyzer and Volumex kits, and provides blood and semen cryobanking services. Its substantial securities portfolio also materially affects results and liquidity.
Financial highlights
| Metric | FY2011 | FY2010 |
|---|---|---|
| Operating revenue | $1.446 million | $1.579 million |
| Gross profit | $794,000; 54.9% margin | $852,000; 53.9% margin |
| Operating loss | $5.786 million | $5.659 million |
| Net income (loss) | $(7.186) million | $4.968 million |
| Basic and diluted EPS | $(1.70) | $1.17 |
| Cash used in operating activities | $6.509 million | $5.690 million |
| Total assets | $85.725 million | $91.195 million |
| Total liabilities | $49.508 million | $44.200 million |
| Stockholders’ equity | $36.217 million | $46.995 million |
- Equipment sales and related services generated $1.125 million, down from $1.242 million; cryobanking revenue was $321,000, down from $337,000. Daxor sold no analyzers in 2011, compared with one for $65,000 in 2010. Kit sales were $969,000, down 5.1%; 3,031 kits were sold versus 3,152.
- Kit sales represented 67% of operating revenue. Four hospital customers generated 63.7% of kit revenue. Kit gross margin rose to 54.6% from 53.4%; equipment and other sales had a gross loss in 2011, partly because of fixed production costs.
- The operating loss widened modestly as SG&A increased, including higher professional fees associated mainly with the SEC proceeding; lower R&D partly offset the increase. Consolidated R&D spending was $2.706 million, down from $3.042 million.
- The net loss primarily reflected an $8.502 million mark-to-market loss on short positions, compared with a $1.526 million loss in 2010, and realized investment gains of only $33,000 versus $13.509 million. Dividend income was broadly steady at $2.238 million. The income tax benefit was $5.142 million.
- Year-end cash was $60,000. Cash and liquidity rely substantially on the investment portfolio and broker balances; receivable from broker was $23.079 million, including $23.041 million of restricted cash. The securities portfolio had a fair value of $55.804 million, versus cost of $36.464 million.
- Financing cash flow was positive $17.899 million, largely reflecting margin-loan proceeds. Year-end loans payable were $13.751 million, up from $4.638 million; short-term margin borrowing carried a 1.13% year-end weighted-average rate. The company also reported $23.137 million of securities borrowed at fair value and $7.103 million of puts and calls at fair value. Mortgage payable was $302,000.
- Portfolio unrealized losses were $7.982 million, up from $590,000 in 2010; Bank of America, Citigroup and USEC accounted for $6.550 million. Management recorded no impairment charge for those holdings. The portfolio’s net unrealized gain fell to $19.341 million from $22.908 million.
- Daxor paid $0.25 per share in dividends in 2011, versus $1.00 in 2010, which included a special dividend. No 2012 dividend had been declared as of the filing.
Material changes, outlook and risks
- SEC / Investment Company Act: An SEC administrative law judge found Daxor to be an investment company in August 2011. The company’s petition for review was withdrawn and the decision became final in February 2012. Daxor said it planned to file Form N-8A and Form N-2 and begin reporting as an investment company effective January 1, 2012. This regulatory transition is a major change to its reporting status.
- Operating outlook: Management said existing resources were adequate for current R&D and marketing spending, but described the company as undercapitalized for expansion of the BVA-100 and Blood Optimization Program. It considered additional capital difficult to raise on reasonable terms without significant dilution and said it budgeted on the assumption that new capital could be difficult to obtain for two to four years. No quantified sales or earnings guidance was provided.
- Adoption and reimbursement: Management said blood volume analysis had not become standard of care. Hospital economics and adoption remain obstacles. Since 2008, Medicare has not separately reimbursed outpatient Volumex radiopharmaceutical costs; the filing says the policy remained in effect at year-end 2011. Changes to reimbursement could further constrain demand.
- Concentration and supply: Reliance on four hospital customers for most kit revenue creates customer concentration. One FDA-approved U.S. manufacturer filled Volumex syringes; interruption could materially affect revenue. The company also depends on portfolio investment income to support ongoing operating losses.
- Investment exposure: The portfolio was concentrated in utilities, with 81.3% of fair value in utility stocks under the company’s disclosure; rising rates could pressure utility values and increase borrowing costs. The top five holdings represented 46.5% of portfolio value. Options and short positions contributed significant earnings volatility, and investment decisions were made solely by CEO Joseph Feldschuh.
- Product, clinical and regulatory risks: The BVA-100’s principal instrument patent expired in 2010; the Volumex kit patent expires in 2016. New patent applications and planned product development remain uncertain. Clinical studies and management’s claims of potential benefit do not establish broad clinical adoption; the multicenter heart-failure study and other research were ongoing. New products may require regulatory approvals.
- Other contingencies: New York City tax authorities were auditing allocation percentages on 2007–2009 returns; the potential assessment was not clear. The company reported no other pending or threatened proceedings it believed would materially affect operations. The independent auditor issued an unqualified opinion on the financial statements; management assessed disclosure controls and internal control over financial reporting as effective, with no auditor attestation of internal controls.
Most important facts for investors to verify
- Completion and timing of the planned Investment Company Act registration, and the consequences for Daxor’s operating businesses, reporting and investment policies.
- Whether investment portfolio income, margin borrowing and available broker funds can sustain operating cash burn; confirm the nature and availability of restricted broker cash and the risks tied to securities lending and short positions.
- Customer retention, kit volumes, new analyzer placements and hospital adoption, including whether reimbursement supports economic use of BVA-100 testing.
- Progress, results and funding requirements for TEAM-HF, ultrafiltration and other clinical studies; distinguish published evidence from prospective claims.
- Portfolio concentration, unrealized losses and management’s impairment judgments, particularly for Bank of America, Citigroup and USEC.
- Reliance on the sole Volumex syringe manufacturer, patent status and prospects for pending applications and the total-body-albumin analyzer.