Rafael Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 30, 2020; filed June 9, 2020. Amounts below are in thousands of dollars unless otherwise noted. Rafael Holdings combines clinical-stage pharmaceutical investments and commercial real estate, with real estate providing all reported revenue.
Financial performance and position
| Metric | Three months ended April 30, 2020 | Three months ended April 30, 2019 | Nine months ended April 30, 2020 | Nine months ended April 30, 2019 |
|---|---|---|---|---|
| Revenue | $1,224 | $1,377 | $3,670 | $3,529 |
| Operating loss | $(1,965) | $(1,418) | $(5,413) | $(3,944) |
| Net loss attributable to Rafael Holdings | $(2,159) | $(1,005) | $(5,010) | $(2,507) |
| Basic and diluted loss per share | $(0.14) | $(0.07) | $(0.32) | $(0.19) |
- Third-quarter revenue fell 11% year over year; nine-month revenue rose 4%. Third-party rental and parking revenue declined in the quarter, partly offset by $120 of related-party service revenue. Pharmaceutical operations generated no revenue.
- Operating losses widened 39% for the quarter and 37% for the nine-month period. Nine-month SG&A rose to $6,343 from $5,228, while R&D rose to $1,327 from $949; management cited Barer Institute startup activity, higher payroll and bonuses, professional fees, and building maintenance.
- At April 30, cash and cash equivalents were $8,430, down from $12,024 at July 31, 2019. Current assets were $9,162 and current liabilities $1,485 (approximately 6.2x current-asset coverage). Total assets were $137,431; total liabilities were $1,604. The $15 million related-party convertible note and accrued interest had been converted to shares in August 2019; no convertible note remained outstanding at quarter-end.
- Nine-month operating cash use was $2,975, investing cash use $491, and financing cash use $96; cash declined by $3,594. Investing outlays primarily funded building improvements. The filing reports no off-balance-sheet arrangements.
- Rafael Pharmaceuticals investment was $70,018; hedge fund investments were $5,617, measured using Level 3 inputs. The company recorded a $295 impairment on another pharmaceutical investment. Nine-month hedge-fund valuation gains were $492.
Material changes and business developments
- Pharmaceutical segment operating loss increased to $778 for the quarter and $1,558 for nine months, reflecting Barer’s commencement of operations and increased R&D.
- Real estate segment operating loss was $1,187 for the quarter and $3,855 for nine months. Related parties accounted for 43% of revenue in both the quarter and nine-month period, creating notable tenant and counterparty concentration.
- In February 2020, Rafael Pharmaceuticals established a revolving credit facility of up to $50 million with RP Finance to fund clinical trials and other capital needs. Rafael Holdings owns 37.5% of RP Finance and is required to fund its 37.5% share of draw requests. The filing does not state that the facility had been drawn by April 30.
- Rafael Holdings’ warrant to acquire additional Rafael Pharmaceuticals equity was extended to June 30, 2021. In April, Howard Jonas transferred shares to trusts for his children; he ceased to be a controlling stockholder, and the company ceased to be a controlled company under NYSE rules.
Outlook, risks, contingencies, and unusual items
- Management said cash, cash flows expected from operations, and liquid resources were expected to cover anticipated working capital, R&D, and capital needs for at least the next 12 months. This is management’s estimate, not a guarantee; the company does not anticipate dividends until it achieves sustainable profitability and retains minimum cash reserves.
- COVID-19 had not materially affected company operations through April 30, according to management, but two retail tenants received April rent concessions. Management warned that the pandemic could disrupt rental receipts, pharmaceutical operations, manufacturing, and clinical trials, and said the ultimate effects could not be reasonably predicted.
- Subsequent event: on May 13, the company agreed to purchase a 33.333% Altira membership interest for consideration of up to $10 million: $1 million in four monthly installments, $3 million due January 3, 2021, $3 million upon completion of Rafael Pharmaceuticals’ AVENGER 500 Phase III trial, and $3 million following a specified FDA filing. Certain payments may be made in cash or Class B shares at the company’s discretion. The interest represents a potential right to a 1% royalty on specified product net sales.
- On May 20, the company agreed to purchase 4 million LipoMedix shares for $1 million, funded partly by converting $306,737 of bridge-note principal and accrued interest and partly with $693,263 cash.
- Legal matters include an OSHA settlement requiring $127,294 in eight quarterly installments through November 2021; approximately $225 was accrued for legal fees and probable, estimable losses. A separate employee personal-injury claim was considered remote, with no accrual recorded. LipoMedix founder claims were settled for a percentage of future investments and certain other proceeds.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Cash burn and the basis for management’s 12-month liquidity assessment, including any draws on the RP Finance facility and Rafael Holdings’ corresponding funding obligations.
- COVID-19 effects on rent collections, tenant concessions, parking activity, and pharmaceutical clinical-trial timelines after April 30.
- Altira purchase payment triggers, total potential consideration, dilution if paid in shares, and the conditions for any royalty proceeds.
- Funding needs and valuation risks for clinical-stage holdings, including the Level 3 hedge fund valuation and the impaired pharmaceutical investment.
- Related-party revenue exposure, lease termination rights, and remaining legal and OSHA obligations.