Business context and reporting period
Rafael Holdings, Inc.’s Form 10-Q covers the three months ended October 31, 2018, the first quarter of fiscal 2019. The company holds commercial real estate and interests in clinical- and early-stage pharmaceutical businesses. Comparative results are for the three months ended October 31, 2017; the company’s financial statements are presented on a consolidated and combined basis.
Financial performance and position
Unless stated otherwise, amounts are in millions of dollars. Revenue was $1.135 million, up 2.6% from $1.106 million, and came entirely from real estate: third-party rent was $383,000, related-party rent $521,000, and parking $231,000. The pharmaceuticals segment had no revenue.
- Operating loss was $1.120 million versus $1.055 million. Operating margin was approximately -99% of revenue, compared with approximately -95% a year earlier.
- Net loss was $665,000, or $0.04 per share, versus $9.328 million, or $0.74 per share. Net loss attributable to Rafael Holdings was $481,000; the difference reflects $184,000 attributable to noncontrolling interests.
- Net interest income was $101,000. A $333,000 unrealized gain on marketable securities partly offset operating losses; the company also recorded a $10,000 loss on securities sales and a $31,000 income-tax benefit.
- Operating cash use was $724,000 versus $29,000. Investing cash use was $5.159 million, including a $10 million investment in Rafael Pharmaceuticals, partly offset by $5.820 million of marketable-security sale and maturity proceeds. Financing provided $118,000 from stock-option exercises.
- Cash and cash equivalents were $10.086 million and marketable securities were $20.061 million at October 31, down from $15.803 million and $24.701 million, respectively, at July 31. The company reported total assets of $116.629 million and total liabilities of $1.503 million. Current liabilities were $747,000; related-party liabilities were $582,000. The balance sheet reported no company borrowings at quarter-end.
- Real estate segment operating loss was $714,000, versus $1.055 million. Pharmaceuticals segment operating loss was $406,000, including $373,000 of research and development expense, versus no reported segment loss in the prior-year quarter.
Material changes versus the prior comparable period
- Revenue increased by $29,000, primarily because additional tenants at 520 Broad Street began paying rent. Real estate SG&A declined, chiefly due to lower prior-year bonus-share compensation, partly offset by higher public-company costs.
- Pharmaceuticals R&D and SG&A appeared in the current period as the company consolidated LipoMedix, in which it holds a 50.6% interest; its expenses are included in the pharmaceuticals segment.
- The prior-year quarter included an $8.4 million tax valuation allowance. Its absence in the current period accounts for much of the year-over-year reduction in net loss; the periods are therefore not directly comparable on reported net income.
- Adoption of ASU 2016-01 led to the current-period $333,000 unrealized securities gain being recorded in earnings. The standard also resulted in a $39,000 cumulative-effect reclassification from accumulated other comprehensive income to retained earnings at adoption.
Outlook, risks, contingencies and unusual items
- Management said cash, marketable securities, and expected operating cash flows should be sufficient for anticipated working capital, R&D, and capital expenditures for the 12 months ending October 31, 2019. Estimated annual public-company operating costs were $2.0–$2.3 million. No earnings or revenue guidance was provided.
- After quarter-end, on November 15, CEO Howard Jonas agreed to buy a $15 million company convertible note. It has a three-year term, bears 6% annual interest compounded quarterly, and is convertible into Class B shares at $8.47 per share. The company said proceeds were intended to fund further Rafael Pharmaceuticals warrant exercises and general corporate needs, while retaining flexibility for real estate opportunities.
- A $10 million Rafael Pharmaceuticals Series D warrant exercise occurred in September. A further $5 million exercise occurred on November 5, after quarter-end. The existing $10 million Series D note was due September 16, 2018; the company said it was discussing the note’s maturity with Rafael Pharmaceuticals.
- LipoMedix faces a founder’s claim for approximately $377,000 in consulting fees. LipoMedix disputes that payment is currently due; a court denied the founder’s request to restrict LipoMedix assets on November 26. Separate potential founder consulting payments of approximately $385,000 and $358,000 are subject to conditions LipoMedix says have not been met.
- Management identified investment-market volatility and possible loss or illiquidity of investments as risks. Israeli tenant revenue was 2% of total revenue; foreign-currency exposure was described as generally not material. The company reported no material change to the risk factors in its 2018 Form 10-K and no material off-balance-sheet arrangements.
- Related-party leases are a significant revenue source and may be terminated on notice, subject to stated terms. Management reported disclosure controls were effective as of October 31, 2018, with no material change in internal control during the quarter.
Important facts for investors to verify
- Review the terms, conversion features, and related-party implications of the $15 million CEO note, including how the proceeds are used.
- Confirm the status and maturity treatment of Rafael Pharmaceuticals’ Series D note and the funding, ownership, and dilution implications of further warrant exercises.
- Monitor LipoMedix’s cash needs, clinical-development progress, and outcome of the founder’s consulting-fee claim and other contingent payments.
- Assess the liquidity and valuation risks in marketable securities, hedge funds, and other pharmaceutical investments, including Level 3 valuations.
- Evaluate the sustainability of related-party rental revenue and management’s stated 12-month liquidity outlook against continuing operating cash use.