Rafael Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended January 31, 2019. The company owns commercial real estate and interests in clinical-stage and early-stage pharmaceutical businesses. Amounts below are in millions of dollars unless stated otherwise; financial statements are unaudited.
Key financial results
| Metric | Three months ended Jan. 31, 2019 | Six months ended Jan. 31, 2019 | Comparable prior period |
|---|---|---|---|
| Revenue | $1.017 | $2.152 | $0.956 and $2.063 |
| Operating loss | $(1.406) | $(2.526) | $(0.816) and $(1.869) |
| Net loss | $(0.701) | $(1.366) | $(0.722) and $(10.051) |
| Net loss attributable to Rafael Holdings | $(1.021) | $(1.502) | $(0.546) and $(9.875) |
| Basic and diluted loss per share | $(0.08) | $(0.12) | $(0.04) and $(0.79) |
Revenue was entirely from real estate rentals and parking; the Pharmaceuticals segment had no revenue. Quarterly revenue increased about 6% year over year, while operating loss widened, principally reflecting higher selling, general and administrative expenses and new pharmaceutical R&D expense. The quarterly loss attributable to the company increased; the six-month net loss improved substantially from the prior year, which included an $8.4 million deferred-tax valuation allowance. Operating loss was approximately 138% of revenue for the quarter and 117% for the six-month period.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $14.769 million at January 31, 2019, down from $15.803 million at July 31, 2018. The company reported no marketable securities at period-end, versus $24.701 million at July 31.
- Six-month operating cash use was $0.899 million. Investing cash use was $30.897 million, including $55.870 million invested in Rafael Pharmaceuticals, partly offset by approximately $25.0 million of marketable-security sale and maturity proceeds. Financing provided $30.827 million, including a $15 million related-party note, $7.777 million from a share sale, and $4.587 million from a noncontrolling investor.
- Total assets were $144.166 million; total liabilities were $16.334 million and total equity was $127.832 million. Current assets of $15.713 million compared with current liabilities of $1.205 million.
- The company reported $14.934 million of related-party convertible debt, net of discount. The November 2018 note from CEO and controlling stockholder Howard Jonas has a three-year term, 6% annual interest compounded quarterly, and is convertible into Class B shares at $8.47 per share. It may be mandatorily converted under a specified share-price condition.
- Management said cash and expected operating cash were sufficient for anticipated working capital, R&D and capital expenditures through July 31, 2019. The company did not anticipate common dividends until sustainable profitability and minimum cash reserves are achieved.
Material changes and business developments
- Rafael Holdings and subsidiaries exercised warrants and invested approximately $55.9 million in Rafael Pharmaceuticals during the six months. Following the transactions and conversion of a $10 million note plus interest, the company and subsidiaries held securities representing 51.0% of Rafael Pharmaceuticals’ outstanding capital stock and 39.5% on a fully diluted basis, excluding the remainder of the warrant. Rafael Pharmaceuticals was not consolidated because the company determined it was not the primary beneficiary of the variable-interest entity.
- Rafael Pharmaceuticals’ investment balance increased to $70.018 million from $13.300 million at July 31, 2018. The remaining warrant expires December 31, 2020, subject to earlier expiration upon a qualifying IPO or liquidation event.
- The company sold its marketable securities during the period in connection with warrant exercises. It recorded a $0.330 million six-month gain on securities sales and a $0.052 million unrealized loss on hedge-fund investments.
- Class B shares outstanding increased to 13,133,069 at January 31, 2019 from 11,762,346 at July 31, 2018. The filing reports 13,138,123 Class B shares outstanding as of March 11, 2019.
- Real estate revenue growth reflected additional third-party tenants at 520 Broad Street and increased garage use. Six-month SG&A rose, which management attributed primarily to public-company compliance costs.
Outlook, risks and contingencies
- The pharmaceutical portfolio remains development-stage and incurs R&D costs without revenue. Results depend in part on research progress and clinical trials; the filing gives no quantified financial guidance beyond management’s liquidity statement.
- One LipoMedix founder seeks approximately $377,000 in consulting fees and sought restrictions on company assets; a court denied the restriction request, and LipoMedix said it would defend the claim. Separate founder consulting payments of approximately $385,000 and $358,000 may become due if specified conditions are met; LipoMedix said those conditions had not been satisfied.
- A maintenance worker was injured at 520 Broad Street on January 31, 2019; the company reported the incident and was cooperating with authorities.
- Investment risks include valuation and liquidity uncertainty in hedge funds and other passive, non-liquid investments. Israel-related revenue was 2% of total revenue; management described net foreign-exchange exposure as generally not material.
- The company maintained a valuation allowance against its domestic deferred tax assets and estimated domestic NOL carryforwards of approximately $20.9 million. Management noted that future taxable income estimates could affect realizability.
- The filing reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls as of January 31, 2019.
Most important facts for investors to verify
- Whether Rafael Pharmaceuticals’ clinical and commercial progress supports the carrying value of the investment and the economics of the remaining warrant.
- Cash needs and funding plans after the large pharmaceutical investment, particularly beyond management’s stated coverage through July 31, 2019.
- The terms, conversion potential and related-party implications of the $15 million Jonas note, and the share issuance and dilution from related-party transactions.
- The status and potential financial exposure of the LipoMedix founder claims and conditional consulting obligations.
- The quality and recurring nature of real estate revenue, including dependence on related-party tenants and their lease termination rights.