Rekah in the First Quarter: Sales Growth Is Absorbed by Gross Margin Pressure and Customer Credit
NIS 79.3 million of revenue did not reach the profit line: gross margin fell to 22.0%, receivables and inventory absorbed cash, and the higher cash balance also depended on short-term bank credit. Derech Haim gives Rekah continuity, but the quarter still does not prove that the core business is back to generating profit and cash.
Rekah opened 2026 with a quarter that answers part of the concern from the end of 2025 and still leaves the recovery in profit and cash open. Revenue rose 4.2% to NIS 79.3 million, mainly through core products and distribution, and the company kept operating continuously as the security situation weighed on the supply chain and on the special segment. That progress did not reach gross profit: cost of sales grew faster than revenue, gross margin fell to 22.0%, and the operating loss widened to NIS 0.9 million. Operating cash flow was NIS 5.0 million, lower than the comparable quarter, and the cash balance increased after a NIS 5.7 million net increase in short-term bank credit. It narrows the follow-up to three proof points: core-product margin, receivables and inventory, and whether the renewed Derech Haim agreement expands product sales beyond commercial continuity.
Sales Grew Before Margin and Core Products Recovered
Rekah combines production, import, marketing and distribution of pharmaceuticals, dietary supplements, dermo-cosmetics, medical devices and related products, alongside third-party distribution and a Mifal HaPais franchise in Jerusalem and Modi'in. The economic machine runs through gross margin, raw-material availability, customer credit, inventory, supplier credit and the ability to pass costs through in a regulated and competitive market.
After the annual analysis of 2025, the first proof point was simple: would core products stop declining, and would gross margin recover from the weakness at the end of the year. The first quarter gives a partial answer. Consolidated sales rose from NIS 76.1 million to NIS 79.3 million. Over the same period, gross profit fell from NIS 19.7 million to NIS 17.4 million, and gross margin fell from 25.9% to 22.0%, below the full-year 2025 gross margin of 23.1%.
That gap matters more than the sales increase itself. Cost of sales rose 9.6% while revenue rose 4.2%, and management attributes the cost increase to differences in production quantities in the core-products segment and to product mix. At the same time, the company describes an environment in which imported raw materials, currency rates, logistics and labor availability keep weighing on the business, while the ability to raise prices in Israel is limited by market structure, price controls and regulation. This is not just macro commentary. It is an earnings-quality point: when sales rise and margin falls, the question is who paid for the growth, and in this quarter the answer sits more in costs, product mix and market terms than in pricing power.
The segment split sharpens the same point. Distribution is the part that clearly worked in the quarter: segment revenue rose 15.8% to NIS 20.3 million following the addition of new distribution customers and higher activity with existing customers, and segment profit increased to NIS 0.4 million. Core-products revenue rose slightly, from NIS 54.1 million to NIS 55.1 million, while the segment result deteriorated from a NIS 0.8 million loss to a NIS 1.9 million loss. Segment EBITDA also fell from NIS 6.4 million to NIS 5.2 million. The special segment fell to NIS 3.9 million of revenue because of security-related restrictions, while still contributing NIS 0.8 million of segment profit. The quarter shows that the core stopped shrinking in sales terms, and still does not prove that new or recurring sales are coming on better economics.
The renewed Derech Haim agreement provides important continuity. Vitamed and Clalit signed a six-year agreement in January 2026, with an option for Clalit to extend it by four additional years, with no material change in the existing commercial terms. That removes continuity risk with a material customer and allows Rekah to focus on core products and attempt to expand the product set sold under the agreement. The filing does not disclose better pricing terms or a mechanism that ensures margin improvement. So the quarter reinforces the prior analysis of Derech Haim and channel power: the channel is stable, while profit power still needs proof.
Cash Increased After Short-Term Credit, Not After Inventory Declined
Operating cash flow was NIS 5.0 million, compared with NIS 8.2 million in the comparable quarter. The main reason for the decline is receivables and inventory. Receivables rose by NIS 4.1 million from the beginning of the year, and inventory rose by another NIS 2.0 million, while suppliers funded part of the gap with a NIS 4.3 million increase in payables. For this kind of company, that is more important than the sales growth alone: profit that does not reach cash remains dependent on shelves, collection and supplier credit.
The right framework here is all-in cash flexibility after actual cash uses, meaning cash left after operating cash flow, capex, lease-principal repayment, contingent consideration payments and debt repayment. After NIS 5.0 million of operating cash flow, Rekah invested NIS 1.0 million in property and equipment, repaid NIS 2.1 million of lease liabilities, paid NIS 0.1 million of contingent consideration and repaid NIS 5.2 million of long-term credit. Before increasing short-term credit, that created a cash gap of about NIS 3.4 million. The increase in cash to NIS 6.7 million became possible mainly after a NIS 5.7 million net increase in short-term bank credit.
This is not an immediate liquidity issue. Net financial debt fell slightly versus the end of 2025, from NIS 89.4 million to NIS 87.6 million, and cash increased from NIS 4.3 million to NIS 6.7 million. The source of the cash improvement was a combination of suppliers and short-term credit, while inventory and collection still did not release cash. After the analysis of inventory and shelves, the quarter does not close the checkpoint. Inventory did not decline, receivables rose, and sales still need to prove that they are converting stock into cash rather than only increasing turnover.
Covenants Are Distant While Contingent Consideration Stays on the Balance Sheet
Financial covenants are not the immediate risk. Tangible equity was NIS 82.6 million versus a NIS 60 million threshold at two banks, the current ratio was 1.47 versus a minimum of 1.0, and tangible equity was 22.7% of the tangible balance sheet versus a 15% threshold at two banks. At another bank, tangible equity was 19.6% of the consolidated balance sheet versus a 15% threshold. The issue is therefore not covenant breach, but how much cash freedom remains after operating needs, leases, debt and contingent consideration get paid.
The contingent-consideration note adds an important detail. The liability for contingent consideration related to an acquisition was NIS 15.4 million at the end of March, compared with NIS 15.3 million at the end of 2025. Only NIS 0.1 million was paid during the quarter, while a NIS 0.2 million increase in fair value was recorded. In other words, the obligation did not disappear through cash payment. It remains a layer alongside NIS 37.4 million of lease liabilities and bank debt, even if no covenant is currently close to breach.
The company also notes that it has no material CPI-linked liabilities, but does have variable-rate loans, so changes in the Bank of Israel rate affect finance expenses. In the first quarter, net finance expenses rose to NIS 1.7 million from NIS 1.5 million in the comparable quarter. Lower rates can help later, but prime-rate and short-term funding sensitivity do not disappear as long as free cash after actual cash uses remains narrow.
Conclusions
Rekah's first quarter is a partial proof quarter. Revenue returned to growth, distribution contributed, Derech Haim provides long continuity, and covenants are far from breach. At the same time, core products are losing more money, gross margin fell, and positive cash depended on short-term credit rather than lower inventory and stronger collection. The current conclusion is therefore not a full recovery, but a move from a weak year into a proof year: the company needs to show that sales can rise without giving up margin and without increasing the cash tied up in receivables and inventory.
The intelligent counter-thesis is that the quarter was affected by an unusual security and operating environment, that the company maintained operational continuity, that distribution is already growing, and that Derech Haim gives a longer base for core products. For that view to strengthen, the next two or three quarters need to show a rising gross margin, stable or lower inventory and receivables, and operating cash flow that covers leases, capex and contingent-consideration payments without another increase in short-term credit. Another quarter of higher sales with low margin and rising receivables would leave the market with the same conclusion: Rekah has an important commercial and industrial platform, but it has not yet proven that this platform generates enough profit and cash for shareholders.
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