Rafael Holdings, Inc. — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended April 30, 2019. Amounts are in millions of dollars unless otherwise noted. The company holds commercial real estate and interests in clinical-stage pharmaceutical businesses; reported revenue came from real estate, as the Pharmaceuticals segment had no revenue.
Financial performance
| Metric | Three months ended April 30, 2019 | Nine months ended April 30, 2019 |
|---|---|---|
| Revenue | $1.377 ($1.093 in 2018) | $3.529 ($3.157 in 2018) |
| Operating loss | $(1.418) ($(0.731) in 2018) | $(3.944) ($(2.600) in 2018) |
| Net loss | $(1.147) ($(0.659) in 2018) | $(2.513) ($(10.707) in 2018) |
| Net loss attributable to Rafael Holdings | $(1.005) ($(0.531) in 2018) | $(2.507) ($(10.403) in 2018) |
| Loss per share, basic and diluted | $(0.07) ($(0.04) in 2018) | $(0.19) ($(0.83) in 2018) |
- Quarterly revenue rose 26%, primarily from additional third-party tenants at 520 Broad Street and greater parking use. Nine-month revenue increased 12%.
- Quarterly operating loss widened to $1.418 million as selling, general and administrative expense increased. Nine-month operating loss widened 52%; reported operating margins were approximately negative 103% for the quarter and negative 112% for the nine-month period.
- The nine-month net loss improved substantially year over year, largely because the comparable 2018 period included an $8.4 million income-tax charge related to a deferred-tax valuation allowance. Operating performance deteriorated despite the lower net loss.
- Cash used in operations was $2.538 million for nine months, versus $1.070 million in 2018. Cash and cash equivalents were $12.969 million at April 30, down from $15.803 million at July 31, 2018. No marketable securities remained at period-end.
- Total assets were $143.453 million, total liabilities $16.589 million, and total equity $126.864 million. Current assets of $14.641 million exceeded current liabilities of $0.977 million.
- Debt included a $15.0 million related-party convertible note, carried at $14.940 million net of discount, bearing 6% interest and due November 15, 2021. Interest accrued was $0.418 million. The note is convertible at the holder’s option at $8.47 per Class B share, creating potential dilution.
Investments, cash flows, and material changes
- The company invested approximately $55.9 million to exercise part of its warrant in Rafael Pharmaceuticals. It funded this investment partly by selling or maturing $25.0 million of marketable securities. Rafael Pharmaceuticals investments on the balance sheet rose to $70.018 million from $13.300 million at July 31, 2018.
- Investing cash outflow was $31.203 million. Financing cash inflow was $30.854 million, including the related-party convertible note, $7.777 million from a sale of Class B shares to Howard Jonas, $4.587 million from a noncontrolling interest holder, and repayment of a $3.3 million Rafael Pharmaceuticals receivable.
- Hedge-fund investments were valued at $4.632 million, including a $0.466 million quarterly unrealized gain. This valuation is classified as Level 3 and depends on unobservable inputs.
- During the nine months, the company issued 1,254,200 Class B shares to a related party for $8.642 million, including use of a prior deposit. Class B shares outstanding increased to 13,139,333 from 11,762,346 at July 31, 2018.
Outlook, risks, and other disclosures
- Management stated that operating cash flow and cash and liquid securities on hand were expected to be sufficient for anticipated working capital, research and development, and capital spending over the next 12 months. No revenue, earnings, or longer-term operating guidance was provided.
- LipoMedix, in which Rafael Holdings owned 50.6%, is a development-stage oncology company. The company provided it a $250,000 no-interest bridge note in April 2019, convertible under specified financing or sale events or, absent such events by September 28, 2019, at a stated conversion price.
- LipoMedix is defending a founder’s claim for approximately $377,000 in consulting fees; the court denied the founder’s request to restrict LipoMedix assets, and settlement discussions were ongoing. In May 2019, another founder requested consulting fees; the filing does not provide a clear claimed amount for this later request. The potential payments depend on disputed contractual conditions.
- Related-party leases account for a significant portion of contracted future rents. Domestic related parties may terminate their leases on four months’ notice, subject to a termination penalty; the Israeli related-party lease also permits termination on four months’ notice.
- A worker was injured in a January 2019 incident at 520 Broad Street; the company said it reported the incident and was cooperating with authorities. Management did not expect ordinary-course legal proceedings to materially affect results, cash flows, or financial condition.
- The company maintained a valuation allowance against domestic deferred tax assets amid continued losses. Management reported no material changes to previously disclosed risk factors, no significant change in market-risk exposures, and effective disclosure controls as of April 30, 2019. The filing reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Progress, valuation, and potential dilution associated with the Rafael Pharmaceuticals warrant exercise and the $15 million related-party convertible note.
- Whether management’s 12-month liquidity assessment remains supported by cash burn, planned pharmaceutical spending, and the absence of marketable securities.
- Clinical, financing, and commercialization developments at Rafael Pharmaceuticals and LipoMedix, including conversion or repayment outcomes for LipoMedix bridge notes.
- Status and potential financial exposure of the LipoMedix founder claims, and the extent of revenue dependence on related-party tenants and their termination rights.
- Basis and sensitivity of the $4.632 million Level 3 hedge-fund valuation and other significant investment valuations.