Rafael Holdings, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended April 30, 2023; fiscal year ends July 31. Unless otherwise noted, figures are in U.S. dollars and financial statement amounts are in millions.
Business context
Rafael is a holding company focused on healthcare investments, including Cornerstone Pharmaceuticals, LipoMedix, Barer and Rafael Medical Devices. Its remaining real estate asset is a portion of a commercial building in Israel. In November 2022, the Company curtailed early-stage development, including Barer preclinical research, to reduce spending and pursue strategic opportunities. Management is also evaluating opportunities beyond biopharma.
Financial results and liquidity
| Metric | Three months ended April 30, 2023 | Nine months ended April 30, 2023 | Comparable 2022 period |
|---|---|---|---|
| Revenue from continuing operations | $0.071 | $0.211 | $0.076 and $0.341 |
| Loss from continuing operations | $1.490 | $9.949 | $4.983 and $135.908 |
| Net loss attributable to Rafael Holdings | $1.437 | $3.095 | $5.529 and $119.874 |
| Basic and diluted loss per share | $0.06 | $0.14 | $0.28 and $6.16 |
| Net cash used in operating activities | Not presented for the quarter | $9.438 | $24.177 |
Healthcare generated no revenue; continuing revenue was rental income from the Israeli property. The filing does not present a gross margin, and a margin measure is not meaningful given the low rental revenue and holding-company expense base.
- At April 30, 2023, cash and cash equivalents were $15.441 million and available-for-sale securities were $66.962 million. Working capital was $83.637 million and total assets were $96.355 million.
- Total liabilities were $1.463 million; the $15 million mortgage on the 520 Broad Street property was repaid when that property was sold. The Company reported no remaining note payable at period-end.
- Nine-month cash flows: operating activities used $9.438 million; investing activities provided $13.804 million net, including the property-sale proceeds; financing activities used $15.183 million. Cash declined by $11.096 million.
- Corporate bonds comprised $66.962 million of available-for-sale securities and were due within one year. Their unrealized losses were recorded in other comprehensive loss, not current-period earnings.
Material changes and unusual items
- Net loss attributable to Rafael improved year over year, largely reflecting the absence of prior-year Cornerstone-related impairment and receivable reserves, lower expenses, higher interest income, and the 520 Property sale gain. The 2023 nine-month result included a $6.784 million disposal gain; the prior-year nine-month loss included a $79.141 million Cornerstone investment impairment and $35.095 million in provisions for Cornerstone and related-party receivables.
- The 520 Broad Street property was sold in August 2022 for $49.4 million gross, generating approximately $33 million net proceeds after costs and repayment of the $15 million mortgage. Its results are reported as discontinued operations.
- Interest income rose to $1.531 million for the quarter and $2.301 million for the nine months, primarily from the securities portfolio and discount accretion. The Company recorded a $0.351 million year-to-date impairment on an investment in Nanovibronix.
- In February 2023, Rafael paid $2.1 million to increase its LipoMedix ownership from 84% to 95%. In April, it invested $3 million for 38% of Day Three’s outstanding common shares (33.333% fully diluted) and received a separate warrant.
- In March, Rafael issued Cornerstone a $2 million related-party convertible note, secured by specified purchased assets and related rights. It bore 7.5% interest, with an 11% rate during an extension and specified default-rate provisions. Its reported fair value was $1.898 million at April 30.
- Management stated that cash and available-for-sale securities should fund obligations for at least 12 months from the filing. No dividend is anticipated until sustainable profitability and minimum cash reserves are achieved.
Outlook, risks and contingencies
- The Company’s strategy is to reduce early-stage development spending and consider strategic investments and acquisitions, including opportunities outside biopharma. No quantitative earnings or revenue guidance is provided.
- Cornerstone’s lead candidate devimistat faced significant setbacks: a Phase 3 pancreatic cancer trial missed its primary endpoint and another Phase 3 trial was recommended for discontinuation. Rafael previously fully impaired its Cornerstone investment and reserved a $25 million Cornerstone line-of-credit receivable. The status and recovery prospects of these prior exposures remain important risks.
- The $2 million Cornerstone note had a stated May 22, 2023 maturity date, with extension and conversion provisions. The filing does not provide a clear value or status for repayment, extension, conversion or enforcement after that date.
- After quarter-end, Rafael agreed to buy Cyclo Therapeutics shares and a warrant for $2.1 million (May 2). On June 1, it agreed to a further $5 million investment, subject to conditions including Cyclo shareholder approval; the agreement also provides for a Rafael designee on Cyclo’s board.
- A $5 million share-repurchase program took effect April 14, 2023, with purchases permitted at $1.75 per share or below through June 16, 2023, or until the authorization is used. No shares were repurchased in the quarter.
- Related parties represented 39% of revenue for the quarter and 43% for the nine months, including discontinued operations. The remaining Israeli lease runs through 2025, but a related party may terminate it on four months’ notice.
- Management cited continuing uncertainty from COVID-19 and the war in Ukraine. The filing states no material changes to previously disclosed risk factors, no expected material adverse effect from ordinary-course legal proceedings, and no off-balance-sheet arrangements. Disclosure controls were reported effective at April 30, 2023.
Important facts for investors to verify
- Whether the Cornerstone note was repaid, extended, converted or otherwise resolved after its May 22 maturity date, and the recoverability of its collateral and fair value.
- The closing status and final economics of the June 1 Cyclo agreement, including required shareholder approval, and the total capital committed to Cyclo.
- Whether the share-repurchase program was used before its June 16, 2023 termination date and whether any subsequent repurchases occurred.
- Liquidity and investment portfolio valuation, including available-for-sale security unrealized losses and Level 3 valuations for hedge funds and the Cornerstone note.
- Progress on the strategic review and the effect of curtailed research spending on the Company’s healthcare portfolio and future funding needs.