Business context and reporting period
Rafael Holdings, Inc. filed this unaudited Form 10-Q for the quarter and six months ended January 31, 2018. Its combined financial statements include real estate operations and pharmaceutical interests that IDT Corporation expected to contribute to Rafael before a planned tax-free spin-off, then expected around March 26, 2018.
The company’s two segments are Real Estate and Pharmaceuticals. The latter includes a majority stake in Lipomedix Pharmaceuticals, acquired to 50.6% on November 16, 2017, and debt and warrant interests in clinical-stage Rafael Pharmaceuticals.
Financial performance and position
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Three months ended Jan. 31, 2018 | Three months ended Jan. 31, 2017 | Six months ended Jan. 31, 2018 | Six months ended Jan. 31, 2017 |
|---|---|---|---|---|
| Revenue | $0.956 | $1.337 | $2.063 | $2.736 |
| Operating income (loss) | $(0.816) | $0.127 | $(1.869) | $0.285 |
| Net income (loss) | $(0.722) | $0.166 | $(10.051) | $0.294 |
| Net income (loss) attributable to Rafael Holdings | $(0.546) | $0.166 | $(9.875) | $0.294 |
- Six-month revenue fell 24.6%; related-party rent declined $0.688 million, mainly following revised leases effective August 1, 2017. Third-party rental revenue rose $0.100 million over six months, partly reflecting a new tenant.
- Six-month SG&A increased to $3.079 million from $1.629 million. The current period included $0.606 million of compensation expense related to assigning Rafael Pharmaceuticals’ contingent bonus-share rights to Howard Jonas and higher spin-off-related and other costs.
- The six-month net loss includes an $8.4 million valuation allowance against the company’s domestic deferred tax asset, recorded in the first fiscal quarter. The company cited lower expected taxable income following lease amendments.
- Pharmaceuticals produced no revenue. Its $0.357 million operating loss for the six months reflects Lipomedix-related activity after consolidation began in November 2017.
- Cash and cash equivalents were $12.008 million at January 31, 2018, versus $11.756 million at July 31, 2017. Total assets were $77.644 million, down from $86.204 million; total liabilities were $25.018 million, including $24.391 million due to IDT. No separate conventional borrowings are reported.
- For the six months, operating cash flow was $0.041 million, investing cash flow $(0.728) million, and financing cash flow $0.900 million. Investing outflows were for property and equipment; financing cash reflected net IDT advances.
- The filing does not present a defined profit margin measure. With operating losses in the current periods, a positive operating margin was not achieved.
Material changes, outlook, and risks
- Before the spin-off, the company expected its intercompany debt with IDT to be converted to equity, leaving no amount owed to IDT immediately after the distribution. Management expected available cash, operating cash flow, and assets contributed by IDT to cover anticipated needs through January 31, 2019.
- Management estimated annual costs of $2.0–$2.3 million from operating as a public company; estimates were preliminary and subject to negotiation. The company did not anticipate paying dividends until it achieved sustainable profitability and maintained minimum cash reserves.
- Related-party leases run to April 2025 and provide approximately $2.0 million in annual rent under revised terms. Related parties may terminate on four months’ notice, subject to a penalty equal to 25% of remaining rent.
- Exercising the Rafael Pharmaceuticals warrant in full was estimated to require about $71 million based on then-current shares, or $122 million on an as-converted, fully diluted basis. The filing says anticipated post-spin-off cash would not support full exercise. The warrant expires no later than December 31, 2020, subject to earlier specified events.
- The Rafael Pharmaceuticals convertible notes were carried at a Level 3 fair value of $6.3 million. Their valuation relied on transaction references and discounted cash flow assumptions that could not be corroborated by market data.
- Management reported no material change to previously disclosed risk factors and did not expect ordinary-course legal proceedings to materially affect results, cash flows, or financial condition. It identified investment valuation and liquidity risks, including the possibility of losses and difficulty selling passive interests. Israel-related revenue was 2% of total revenue for the six months, with foreign-exchange exposure partly offset by expenses in the same currencies.
- Disclosure controls were assessed as effective as of January 31, 2018; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Completion and final terms of the planned spin-off, including the actual IDT assets and cash contributed and the treatment of intercompany balances.
- Actual post-spin-off public-company costs, liquidity runway, and whether operating cash generation can support real estate needs and pharmaceutical development.
- Lease occupancy, rent collections, termination rights, and the ongoing impact of the revised related-party lease terms on revenue.
- Funding, milestones, and clinical progress at Lipomedix and Rafael Pharmaceuticals, as well as the economic value and practical exercisability of the Rafael Pharmaceuticals warrant.
- The six-month operating cash-flow comparison is inconsistent within the filing: the financial statements show prior-period operating cash use of $0.368 million, while MD&A reports $0.400 million. Verify against the filed financial statements and any subsequent disclosures.