Rafael Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended January 31, 2020; comparative periods ended January 31, 2019. Amounts are in U.S. dollars; financial statement amounts are generally in thousands unless stated otherwise.
Business context
Rafael Holdings operates in two segments: commercial real estate and pharmaceuticals. Real estate includes properties in New Jersey and Israel. Pharmaceutical interests include Rafael Pharmaceuticals, LipoMedix, and the early-stage Barer Institute. All reported revenue came from real estate; the Pharmaceuticals segment had no revenue.
Financial performance and liquidity
| Metric | Three months ended Jan. 31, 2020 | Six months ended Jan. 31, 2020 |
|---|---|---|
| Revenue | $1.236 million | $2.446 million |
| Loss from operations | $1.906 million | $3.448 million |
| Net loss | $1.328 million | $2.980 million |
| Net loss attributable to Rafael Holdings | $1.253 million | $2.851 million |
| Basic and diluted loss per share | $0.08 | $0.18 |
| Operating cash flow | Not presented for the quarter | $(1.900) million |
- At January 31, 2020, cash and cash equivalents were $9.522 million; total assets were $139.236 million and total equity was $137.919 million. Current assets of $10.291 million exceeded current liabilities of $1.196 million.
- Total liabilities were $1.317 million, with no convertible note or accrued interest balance remaining. The $15 million related-party convertible note and accrued interest had converted into 1,849,749 Class B shares in August 2019.
- Cash used in investing activities was $456,000, primarily for building improvements. Financing activities used $116,000 for taxes on shares withheld for employee taxes. Cash decreased $2.502 million during the six months.
- No conventional gross margin is reported. Operating losses reflect operating expenses exceeding real estate revenue, alongside pharmaceutical research and development costs.
Changes versus the prior comparable periods
- Revenue rose 21.5% to $1.236 million for the quarter and 13.7% to $2.446 million for the six months. Management attributed the increase to additional third-party tenants, higher parking revenue, and fees for services billed to Rafael Pharmaceuticals.
- Operating loss widened from $1.406 million to $1.906 million for the quarter and from $2.526 million to $3.448 million for the six months. Higher payroll and bonuses, building maintenance and repairs, professional and consulting fees, and Barer activity contributed to the increase.
- Six-month net loss attributable to Rafael Holdings increased from $1.502 million to $2.851 million. The prior-year periods included interest income on a Rafael Pharmaceuticals note and gains on marketable securities; current-period results included a $520,000 unrealized gain on hedge fund investments.
- Cash used in operating activities increased from $899,000 to $1.900 million. The prior-year investing and financing cash flows were unusually large, including investment in Rafael Pharmaceuticals and related funding and security transactions.
- Class B shares outstanding increased from 13,142,502 at July 31, 2019 to 15,020,485 at January 31, 2020, mainly reflecting the convertible note conversion.
Outlook, risks, contingencies, and notable items
- Management stated that cash from operations and cash and liquid marketable securities on hand were expected to be sufficient for anticipated working capital, R&D, and capital expenditure needs for the 12 months following issuance of the statements. This is management’s expectation, not a guarantee.
- On February 3, 2020, Rafael Pharmaceuticals entered into a revolving credit facility of up to $50 million. Rafael Holdings owns 37.5% of RP Finance, the lender, and is required to fund 37.5% of Rafael Pharmaceuticals’ funding requests under the facility. The amount and timing of any funding requests were not specified. The facility also provides for Rafael Pharmaceuticals to issue RP Finance shares representing 12% of its outstanding common stock, subject to anti-dilution provisions.
- The Company reported monitoring COVID-19 risks to its own operations and its holdings, including pharmaceutical operations and clinical trials in Europe and Asia. It said the effects could not be predicted and could cause delays or expenses.
- OSHA-related claims concerning 520 Broad Street were settled on February 14, 2020. Rafael Holdings agreed to pay $127,294 in eight quarterly installments through November 2021. The Company had recorded approximately $225,000 for legal fees and probable, estimable losses and cautioned that additional exposure could exist.
- A personal-injury lawsuit related to the incident underlying the OSHA inspection was filed against the Company and others. The Company intends to defend it; management considered a loss remote and recorded no accrual.
- Related-party leases accounted for 43% of revenue in both the quarter and six-month period. Management said it does not anticipate paying dividends until it achieves sustainable profitability and retains certain minimum cash reserves.
Important facts for investors to verify
- Whether operating expenses and cash burn continue to rise relative to real estate revenue, and the resulting effect on liquidity.
- The terms, draw activity, and Rafael Holdings funding obligations under the $50 million Rafael Pharmaceuticals credit facility.
- Progress and financing needs at Rafael Pharmaceuticals, LipoMedix, and Barer, none of which generated segment revenue during the period.
- The status and potential cost of the OSHA settlement and personal-injury litigation, including any exposure beyond recorded accruals.
- The durability of related-party rental income and the impact of related-party concentration on revenue.
- Management’s liquidity outlook and the assumptions supporting its stated 12-month funding expectation.