Daxor Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; filed November 9, 2011. Daxor develops and sells blood-volume analysis equipment and diagnostic kits, and provides blood and semen cryobanking services. Its large investment portfolio is also a significant source of funds for operations.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $340,907 | $453,281 | $1,076,515 | $1,217,885 |
| Gross profit | $191,531 | $267,539 | $600,958 | $674,955 |
| Operating loss | $(1,261,072) | $(1,284,865) | $(4,780,806) | $(4,132,091) |
| Net income (loss) | $(4,183,669) | $2,604,804 | $(5,694,451) | $2,700,741 |
| Net income (loss) per share | $(0.99) | $0.62 | $(1.35) | $0.64 |
| Operating cash flow | Not presented by quarter | $(5,518,739) | $(3,854,809) |
Margins and drivers: Nine-month gross margin was approximately 55.8%, versus 55.4% in 2010. Revenue fell 11.6% for the nine months, primarily because no blood-volume analyzers were sold (one sold in the comparable period) and Volumex kit sales declined. Nine-month operating expenses rose 12.0%, including $1.037 million of legal costs related to the SEC proceeding; higher professional fees more than offset lower R&D and other expenses. For Q3, revenue declined 24.8%, while operating expenses fell 6.4%.
Investment results: Nine-month realized gains on securities and options were $6.278 million, but mark-to-market losses on short positions were $12.764 million. The resulting investment and other loss, together with ongoing operating losses, drove the reported net loss. The Q3 mark-to-market loss on short positions was $6.609 million. The filing reports a nine-month income-tax benefit of $4.087 million, primarily deferred.
Financial position and liquidity
At September 30, 2011, total assets were $88.253 million and stockholders’ equity was $37.622 million. Available-for-sale securities were $52.317 million, and amounts receivable from brokers were $30.962 million, including $27.037 million of restricted cash. Cash and cash equivalents were only $29,711. Total liabilities were $50.631 million.
Margin loans payable were $7.842 million, up from $4.638 million at year-end 2010; the loans are secured by marketable securities. Mortgage debt was $316,032. Current liabilities also included $11.778 million of put and call options at fair value and $26.172 million of securities borrowed at fair value, associated with the company’s investment positions. Nine-month investing cash outflow was $3.335 million and financing cash inflow was $8.825 million; financing included net margin borrowing. Cash declined by $28,030 from year-end.
Material changes, outlook and risks
- SEC proceeding: On August 31, 2011, an SEC administrative law judge found Daxor to be an investment company under the Investment Company Act of 1940, citing that more than 40% of assets comprised investment securities. Management was considering registration, appeal or taking the company private; no final decision is reported. Management said it believed registration or going private would not materially affect operations or research, but that is not a resolved outcome.
- Investment exposure: The portfolio was primarily utility stocks, with five common-stock holdings comprising 47.54% of available-for-sale investments. Unrealized losses were $7.028 million; Bank of America, Citigroup and USEC accounted for $5.821 million. Management recorded no impairment for those holdings despite market values materially below cost. The company’s option and short-position activity contributed substantial earnings volatility.
- Operating and funding dependence: Management said portfolio earnings are essential to help fund operating losses and that current resources support existing marketing and R&D but may not support nationwide marketing expansion. Investment decisions are made solely by CEO Joseph Feldschuh; the filing identifies his role as a key-person and investment-management risk.
- Commercial risks: Medicare’s policy no longer separately reimburses outpatient diagnostic radiopharmaceuticals, including Volumex; the company could not quantify the effect of health-care reform. Four hospitals represented 62.19% of nine-month blood-volume-kit sales. One FDA-approved U.S. manufacturer fills Volumex syringes, creating a potential supply-continuity risk.
- Research and plans: Daxor described ongoing blood-volume research, including the 300-patient TEAM-HF study and a separate 50-patient heart-failure study, as well as development work on renal-function testing, total-body albumin analysis and a needle-free delivery device. The filing provides no company revenue or earnings guidance.
- Other items: The company paid a $0.15-per-share dividend in June 2011; none was paid in Q3. After quarter-end it announced a $0.10-per-share dividend for November 30, 2011. Management reported disclosure controls were effective and no significant control changes occurred in the quarter.
Most important facts for investors to verify
- Subsequent developments and final disposition of the SEC investment-company proceeding, including any appeal, registration or privatization decision and related costs.
- Availability of broker-held funds, collateral and margin capacity, and the company’s ability to meet option and short-position obligations during market stress.
- Portfolio composition, concentration and subsequent values of the Bank of America, Citigroup and USEC positions; review management’s no-impairment conclusions.
- Progress in restoring operating revenue, analyzer placements and kit sales, while monitoring customer concentration and Medicare reimbursement effects.
- Whether cash resources and investment returns continue to fund operating losses, research commitments and any announced dividends.