Rafael Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 30, 2018. The company became an independent public company in the March 26, 2018 spin-off from IDT Corporation. Financial statements are unaudited and compare the current periods with the corresponding 2017 periods.
Business context and financial position
Rafael operates in real estate and pharmaceuticals. Real estate includes office properties and a public garage; pharmaceutical interests include debt and warrants in clinical-stage Rafael Pharmaceuticals and a majority stake in development-stage Lipomedix. The pharmaceutical segment had no revenue.
| Metric | April 30, 2018 / period | Comparison |
|---|---|---|
| Cash and cash equivalents | $10.6 million | $11.8 million at July 31, 2017 |
| Marketable securities | $30.9 million | None at July 31, 2017 |
| Total assets | $115.1 million | $86.2 million at July 31, 2017 |
| Total equity | $115.0 million | $62.1 million at July 31, 2017 |
| Total liabilities | $0.1 million | $24.1 million at July 31, 2017 |
| Nine-month operating cash flow | $(1.1) million | $(0.5) million in 2017 |
| Nine-month investing cash flow | $(0.1) million | $(9.9) million in 2017 |
At April 30, cash plus marketable securities totaled approximately $41.5 million. The balance sheet reports a net $621,000 due from related parties, rather than debt owed to them. No outstanding borrowing balance is clearly identified in the filing. The cash flow statement reports no financing cash flow for the nine months ended April 30, 2018.
Results and changes versus prior periods
| Metric | Three months ended April 30, 2018 | Three months ended April 30, 2017 | Nine months ended April 30, 2018 | Nine months ended April 30, 2017 |
|---|---|---|---|---|
| Revenue | $1.09 million | $1.28 million | $3.16 million | $4.02 million |
| Operating income (loss) | $(0.73) million | $(0.16) million | $(2.60) million | $0.12 million |
| Net income (loss) attributable to Rafael Holdings | $(0.53) million | $(0.07) million | $(10.40) million | $0.23 million |
| Basic and diluted EPS | $(0.04) | $(0.01) | $(0.83) | $0.02 |
Revenue declined about 15% in the quarter and 21% year to date. Related-party rental revenue fell following reduced IDT occupancy and lease amendments effective August 1, 2017; third-party rents rose with new tenants at 520 Broad Street. Nine-month related-party rent was $1.44 million, down from $2.68 million. The amended related-party leases provide approximately $2.0 million annual rent and may be terminated on four months’ notice, subject to a penalty.
SG&A increased to $1.40 million for the quarter and $4.48 million year to date, from $1.04 million and $2.67 million, respectively. Management attributed the increases to spin-off and public-company costs, professional fees, and year-to-date compensation expense related to the transfer of Rafael Pharmaceuticals bonus-share rights. Nine-month depreciation and amortization was $1.28 million.
The nine-month attributable loss included an $8.4 million income-tax provision, principally from recording a valuation allowance against the company’s domestic deferred tax assets. Management cited reduced expected taxable income, including the effect of amended related-party leases, which are expected to lower annual revenue by approximately $1.7 million through 2025. The company also reported $311,000 of unrealized losses on available-for-sale securities in other comprehensive income.
Liquidity, investments, outlook, and risks
Management expects cash from operations and cash and liquid marketable securities on hand to fund anticipated working capital, research and development, and capital expenditures for the 12 months through April 30, 2019. Estimated annual operating costs associated with being a public company are $2.0–$2.3 million; management noted some estimates remain preliminary. The company does not anticipate paying dividends until it achieves sustainable profitability and retains minimum cash reserves.
The company’s Rafael Pharmaceuticals investment includes a convertible note carried at $6.3 million fair value and warrants carried at $5.4 million cost. The note bears 3.5% interest and is due September 16, 2018. The warrants could require substantial additional capital: the filing estimates approximately $71 million to exercise in full and $56 million to acquire a 51% stake using currently issued shares, with higher estimates on an as-converted, fully diluted basis. The company says it may never be able to exercise the warrant in full.
Subsequent events: on May 18, 2018, Rafael agreed to make discretionary advances of up to $1.7 million to Rafael Pharmaceuticals at 3.5% interest, compounded quarterly; $800,000 had been advanced by June 11. A proposed purchase by Howard S. Jonas of 1,254,200 Class B shares for $8.64 million was subject to stockholder approval; he paid 10% in May, with the remainder due after approval.
Other risks include market volatility in securities and hedge-fund holdings, illiquidity of certain investments, foreign-currency exposure, and uncertainty regarding income-tax effects of the Tax Cuts and Jobs Act. The filing reports no material change to previously disclosed risk factors and says ordinary-course legal proceedings are not expected to have a material adverse effect. Management concluded disclosure controls were effective as of April 30, 2018.
Investor verification priorities
- Confirm the valuation and liquidity of the $30.9 million marketable-securities portfolio and the company’s exposure to unrealized losses.
- Review the September 2018 Rafael Pharmaceuticals note maturity, warrant exercise economics, and the substantial capital required for control or full exercise.
- Track the May 2018 Rafael Pharmaceuticals loan advances and repayment terms, and verify the status and final terms of the proposed Jonas share purchase.
- Assess the effects of related-party lease reductions and termination rights on recurring rental revenue, and confirm ongoing dependence on IDT transition services.
- Reconcile the significant nine-month tax provision and valuation allowance with future taxable-income assumptions and any subsequent tax-accounting updates.