Rafael Holdings, Inc. quarterly report, Q1 FY2020

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Rafael Holdings, Inc. — Form 10-Q Summary

Reporting period: Fiscal first quarter ended October 31, 2019; comparative results are for the three months ended October 31, 2018. Unless noted otherwise, financial amounts are in thousands of dollars.

Business context

Rafael Holdings owns commercial real estate and interests in clinical-stage pharmaceutical businesses. Its reportable segments are Real Estate and Pharmaceuticals. The Pharmaceuticals segment generated no revenue during either comparative quarter. The filing is a fiscal 2020 first-quarter report, notwithstanding the request metadata’s “2020 Q1” label.

Financial performance and position

  • Revenue: $1,210, up $75 (7%) from $1,135. Revenue comprised third-party rent of $346, related-party rent of $520, parking of $224, and $120 of other related-party revenue.
  • Operating results: Operating loss was $1,542 versus $1,120. Net loss was $1,652 versus $665; net loss attributable to Rafael Holdings was $1,598 versus $481. Basic and diluted loss per share increased to $0.10 from $0.04.
  • Costs and margins: Selling, general and administrative expense rose to $2,041 from $1,453, while research and development expense declined to $245 from $373. Operating margin was approximately negative 127% versus negative 99%.
  • Cash flow: Operating cash use was $936 versus $724; investing cash use was $321 versus $5,159, principally reflecting building improvements in 2019 compared with the prior-year securities and Rafael Pharmaceuticals investments. Cash declined by $1,253 to $10,771.
  • Liquidity and balance sheet: Current assets were $11,660 and current liabilities $1,200. Total assets were $140,400; total liabilities were $1,438; total equity was $138,962.
  • Debt and equity: The $15 million related-party convertible note and approximately $667 of accrued interest converted in August 2019 into 1,849,749 Class B shares. No convertible note remained outstanding at October 31. Class B shares outstanding increased to 14,997,251 from 13,142,502 at July 31.
  • Investments: The Rafael Pharmaceuticals investment was carried at cost at $70,018. Hedge-fund investments were $5,088, down from $5,125, including a $37 unrealized loss. Rafael Holdings owned 52.1% of LipoMedix at quarter-end.

Changes versus the prior comparable period

  • Revenue increased modestly, primarily from additional third-party tenants and management fees billed to Rafael Pharmaceuticals, while the overall operating loss widened by $422.
  • Real Estate segment operating loss increased to $1,276 from $714, mainly due to higher payroll, building maintenance and repair costs, and depreciation.
  • Pharmaceuticals segment operating loss improved to $266 from $406, mainly due to lower research and development expense.
  • Consolidated net loss increased by $987. The comparison also reflects prior-year marketable-securities gains that did not recur, lower net interest results, and the current-quarter hedge-fund loss.
  • Operating cash use increased by $212, while investing cash use fell substantially because the prior-year period included a $10 million investment in Rafael Pharmaceuticals and securities transactions.

Outlook, risks and unusual items

  • Management stated that expected operating cash and available cash and liquid marketable securities should meet anticipated working capital, research and development, and capital expenditure needs for the 12 months following issuance of the statements. No specific earnings or revenue guidance was provided.
  • Management does not anticipate common-stock dividends until sustainable profitability is achieved and minimum cash reserves are retained.
  • The pharmaceutical holdings are clinical-stage investments with no segment revenue to date. The Rafael Pharmaceuticals warrant, which could increase ownership, expires at the earlier of December 31, 2020, a qualified IPO, or a liquidation event.
  • Related parties accounted for approximately 43% of quarterly revenue. Howard Jonas is Rafael Holdings’ CEO and chairman and also chairs Rafael Pharmaceuticals; he purchased the convertible note that converted into shares.
  • Rafael Holdings accrued approximately $225 for legal fees and losses, while noting that exposure could exceed the accrual. This includes a contested OSHA citation concerning the Newark property. A separate LipoMedix founders’ dispute was settled, with payments tied to future investments and other proceeds.
  • A November 2019 LipoMedix bridge note of $100 was issued after quarter-end, maturing May 3, 2020; its terms restrict additional debt, distributions, and liens while outstanding.
  • Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material change in risk factors from the 2019 Form 10-K.

Important facts for investors to verify

  • Whether cash consumption and management’s 12-month liquidity assessment remain consistent with subsequent operating and investment needs.
  • The implications of the related-party note conversion, share-count increase, related-party revenue concentration, and governance relationships.
  • Clinical, financing, and milestone developments at Rafael Pharmaceuticals, LipoMedix, and Barer, including the Rafael Pharmaceuticals warrant expiration and LipoMedix bridge financing.
  • The status and potential cost of the OSHA contest and any remaining founder-related or other legal exposures beyond the recorded accrual.
  • The sustainability of rental income, including related-party leases and their termination provisions, and the factors behind increased real estate operating costs.