Rafael Holdings, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended July 31, 2019; this is an annual report, not a quarterly filing. The company was spun off from IDT Corporation in March 2018, so FY2018 comparative financial information includes combined pre-spin-off results and may not be directly comparable.
Business context
Rafael Holdings operates commercial real estate and pharmaceutical investment businesses. Its real estate portfolio includes Newark and Piscataway, New Jersey properties and an office condominium in Israel. Its pharmaceutical interests include preferred equity and warrant rights in clinical-stage Rafael Pharmaceuticals and a 50.6% interest in clinical-stage LipoMedix. Rafael Pharmaceuticals is not consolidated; LipoMedix is.
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $4.931 million | $4.371 million |
| Operating loss | $6.696 million | $3.841 million |
| Loss before income taxes | $4.943 million | $3.639 million |
| Net loss | $4.924 million | $12.076 million |
| Net loss attributable to Rafael Holdings | $4.693 million | $11.649 million |
| Loss per share, basic and diluted | $0.35 | $0.93 |
Revenue was entirely from real estate; the Pharmaceuticals segment reported no revenue. Revenue increased about 13%, while operating loss widened about 74%, mainly reflecting higher selling, general and administrative costs. Net loss improved largely because FY2018 included an $8.437 million income tax expense; FY2019 recorded a $19,000 tax benefit. FY2019 also included a $907,000 unrealized gain on hedge-fund investments and a $330,000 gain on marketable securities sales.
Cash flow: Operating activities used $3.132 million, investing activities used $31.238 million, and financing activities provided $30.889 million. Investing cash use included $55.870 million invested in Rafael Pharmaceuticals, partly offset by $25.031 million of marketable-security proceeds. Cash and cash equivalents fell to $12.024 million from $15.803 million.
Liquidity and debt: Current assets were $13.261 million and current liabilities were $1.427 million. Total liabilities were $17.379 million, including a related-party convertible note with a $15 million principal balance and $649,000 accrued interest. The note, issued to Howard Jonas and assigned to a trust, converted into 1,849,749 Class B shares in August 2019. Management said available cash, liquid marketable securities and expected operating cash flows should meet anticipated needs for the next 12 months. No dividend is anticipated until sustainable profitability and minimum cash reserves are achieved.
Material changes and developments
- Rafael Holdings and its subsidiaries reported ownership of securities representing 51% of Rafael Pharmaceuticals’ outstanding capital stock and 38% on a fully diluted basis, excluding the remaining warrant. The warrant provides rights to increase ownership, but further exercise requires substantial cash.
- Rafael Pharmaceuticals licensed CPI-613 (devimistat) to Ono Pharmaceutical for certain Asia-Pacific countries, receiving a $12.9 million upfront payment, with up to $150.3 million in contingent milestones and low-double-digit royalties. These are Rafael Pharmaceuticals’ economics, not reported as Rafael Holdings revenue.
- Rafael Pharmaceuticals continued two pivotal Phase 3 trials: devimistat with modified FOLFIRINOX for metastatic pancreatic cancer and with chemotherapy for relapsed or refractory AML. The filing anticipated interim analyses in 2020; trial outcomes and timing are uncertain.
- Real estate occupancy remained limited: approximately 30% at 520 Broad Street and 28% at Piscataway. Both properties were being marketed for potential sale while leasing and improvement efforts continued.
- Related parties represented 53% of FY2019 revenue. IDT and Genie together were reported as approximately 43% of revenue; their leases include early termination rights.
Outlook, risks and unusual items
- Clinical and regulatory risk: Pharmaceutical investments are clinical-stage, have no approved products, and depend on successful trials, regulatory approval, financing, manufacturing and commercialization. Early clinical findings cited in the filing do not establish Phase 3 success.
- Financing and dilution: The Rafael Pharmaceuticals warrant expires at the earlier of December 31, 2020, a qualifying IPO or liquidation. The filing estimated that exercising it fully could require about $15 million based on then-current issued shares, or materially more on a fully diluted basis; maintaining ownership could also require additional funding. The company also identified potential dilution from future equity financing.
- Real estate and concentration: Low occupancy, tenant departures, local market conditions, property expenses and dependence on related-party tenants could weigh on cash flow and property values. The 520 Broad Street and Piscataway properties were being marketed for sale.
- Liquidity and investments: The company held $5.125 million in hedge funds measured using Level 3 inputs and $2.0 million in an illiquid investment in another entity. Redemption or sale timing and value are uncertain.
- Legal matters: The company contested an OSHA citation relating to 520 Broad Street. It recorded an approximately $250,000 general legal accrual for disclosed matters and warned exposure could exceed the accrual. LipoMedix settled founder claims, with payments tied to future investments and other proceeds.
- Governance and related parties: Howard Jonas controlled approximately 72.7% of combined voting power as of September 2019 and has roles and interests across the company, IDT, Genie and Rafael Pharmaceuticals. The company used a controlled-company exemption for nominating committee independence.
- Management reported effective disclosure controls and internal control over financial reporting as of July 31, 2019. The auditor did not provide an internal-control attestation, consistent with the company’s emerging-growth-company exemption.
Key facts investors should verify
- Whether the two Phase 3 devimistat trials met their endpoints, and the current clinical and regulatory status of the programs.
- Rafael Pharmaceuticals’ current capitalization, the warrant’s remaining terms and exercise cost, and the potential effect of bonus shares or other equity issuances.
- Current occupancy, leasing progress, sale status and valuation of the Newark and Piscataway properties, including related-party lease termination exposure.
- Cash runway, liquidity of hedge-fund and other investments, and funding needs of the pharmaceutical holdings.
- Resolution and possible cost of the OSHA matter, and whether legal exposure exceeds the recorded accrual.
- How the FY2018 combined basis, FY2019 accounting changes and related-party transactions affect comparability and reported results.