Rafael Holdings, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended April 30, 2021 (fiscal 2021 Q3). Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
Rafael Holdings combines commercial real estate with investments in preclinical and clinical-stage pharmaceutical ventures. Its real estate operations generated all reported revenue; the pharmaceutical segment had no revenue. Holdings include Rafael Pharmaceuticals, LipoMedix, Barer Institute, Levco, Farber, and Rafael Medical Devices. The company sold its Piscataway, New Jersey building in August 2020.
Financial performance and position
| Metric | Three months ended Apr. 30, 2021 | Three months ended Apr. 30, 2020 | Nine months ended Apr. 30, 2021 | Nine months ended Apr. 30, 2020 |
|---|---|---|---|---|
| Revenue | $0.990 | $1.224 | $3.002 | $3.670 |
| Loss from operations | $(3.479) | $(1.965) | $(16.787) | $(5.413) |
| Net loss attributable to Rafael Holdings | $(2.553) | $(2.159) | $(12.164) | $(5.010) |
| Basic and diluted loss per share | $(0.15) | $(0.14) | $(0.75) | $(0.32) |
| Operating cash flow | Not reported by quarter | Not reported by quarter | $(8.620) | $(2.975) |
- Revenue and costs: Nine-month revenue fell 18% year over year. Third-party rent and parking declined, primarily reflecting the Piscataway sale and lower parking use as customers worked from home. Related-party rent and other revenue were largely unchanged. Nine-month SG&A rose to $8.365 million from $6.343 million, while R&D rose to $3.345 million from $1.327 million, reflecting increased activity in newer pharmaceutical ventures and higher insurance, payroll, and real estate tax costs.
- Unusual items and earnings: The nine-month results include a $7.0 million Altira impairment, a $0.724 million impairment of other pharmaceutical investments, a $4.171 million unrealized gain on hedge-fund investments, and a $0.749 million gain on the Piscataway building sale. The hedge-fund gain partly offset operating losses.
- Balance sheet and liquidity: At April 30, cash was $4.679 million, current assets $6.032 million, and current liabilities $4.909 million. Total assets were $146.208 million, total liabilities $4.951 million, and equity $141.257 million. The balance sheet reports no long-term debt. Current liabilities included $3.0 million due for an Altira membership-interest purchase.
- Cash flows and funding: Cash decreased $1.527 million over the nine months, ending at $4.679 million. Investing activities used $8.702 million, including investments in Rafael Pharmaceuticals and RP Finance; financing activities provided $15.770 million, chiefly from a $13.0 million share sale and $2.0 million of warrant exercises. Hedge-fund investments were $9.681 million at period-end and classified as Level 3 fair value measurements.
Material changes, outlook, and risks
- Nine-month operating loss increased to $16.787 million from $5.413 million, with higher pharmaceutical R&D, the Altira impairment, and increased real-estate SG&A contributing. Attributable net loss more than doubled despite higher hedge-fund gains and the building-sale gain.
- Management said cash, anticipated operating cash flows, and hedge-fund investments were expected to cover currently anticipated working-capital, R&D, and capital needs for at least 12 months from issuance. It stated that liquidity alleviated substantial doubt about the company’s ability to continue as a going concern. The company could liquidate hedge-fund investments or seek alternative funding if needed; this is not a formal earnings forecast.
- A Form S-3 shelf registration effective June 7, 2021 permits sales of up to $250 million of Class B common stock. Subsequent events also included a 908,497-share restricted-stock grant to the CEO and a $2.0 million CEO sign-on bonus.
- COVID-19 remained a source of uncertainty for clinical-trial activity and commercial real estate values and monetization, although management said trial activity was being managed with regulatory agencies. The filing states that the full impact could not be predicted.
- Rafael Pharmaceuticals’ warrant could require substantial additional capital: the filing estimated approximately $17 million to exercise in full based on then-current issued shares, or approximately $126 million on an as-converted fully diluted basis. The company said it might never be able to exercise it fully.
- Related-party tenants accounted for 63% of revenue in the nine-month period. Certain related-party leases can be terminated on four months’ notice, making revenue concentration and lease stability relevant risks.
- Legal matters included an OSHA settlement with approximately $32,000 outstanding at April 30, 2021. A related personal-injury claim was described as remote, with no accrual recorded. Management reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether the company can fund ongoing pharmaceutical development and RP Finance commitments without significant dilution or asset sales.
- The valuation assumptions and liquidity of the $9.681 million Level 3 hedge-fund portfolio, and the timing and amount of subsequent distributions.
- The basis for the $7.0 million Altira impairment and whether any contingent Altira purchase payments remain due.
- The durability of related-party rental income and the effect of reduced parking demand and COVID-related real-estate conditions.
- The potential cash requirements to maintain or increase Rafael Pharmaceuticals ownership, including warrant exercise costs.
- The cost and dilution implications of the CEO share grant, sign-on bonus, and any future use of the $250 million equity shelf.