Rafael Holdings, Inc. — Q3 FY2024 Form 10-Q
Reporting period: Three and nine months ended April 30, 2024; fiscal year ends July 31. Unaudited consolidated financial statements. Unless noted, amounts below are in millions of dollars.
Business context
Rafael is a holding company with healthcare and early-stage pharmaceutical investments, a medical-device business, Day Three Labs’ infusion technology operations, and a remaining real-estate holding in Israel. In March 2024, Rafael acquired control of Cornerstone through a restructuring and began consolidating it and RP Finance. In January 2024, Rafael acquired control of Day Three. The company says it curtailed Barer’s early-stage research in 2022 and continues to focus on strategic investment opportunities.
Key financial results
| Metric | Three months ended Apr. 30, 2024 | Three months ended Apr. 30, 2023 | Nine months ended Apr. 30, 2024 | Nine months ended Apr. 30, 2023 |
|---|---|---|---|---|
| Revenue | $0.336 | $0.071 | $0.472 | $0.211 |
| Loss from operations | $(93.161) | $(3.031) | $(98.782) | $(12.432) |
| Consolidated net loss from continuing operations | $(62.293) | $(1.490) | $(60.149) | $(9.949) |
| Net loss attributable to Rafael | $(32.351) | $(1.437) | $(29.942) | $(3.095) |
| Basic and diluted loss per share | $(1.36) | $(0.06) | $(1.26) | $(0.14) |
| Cash used in operating activities | Not presented by quarter | $(4.913) | $(9.438), including discontinued operations |
Revenue growth largely reflects the consolidation of Day Three; its infusion technology generated $0.262 million in the three- and nine-month periods. Remaining rental revenue was $0.074 million for the quarter and $0.210 million for the nine months. The filing does not provide a useful consolidated operating margin comparison given the small revenue base and the large acquisition-related charge.
Cash and liquidity at April 30: Cash and cash equivalents were $7.436 million and available-for-sale securities were $64.941 million, totaling approximately $72.4 million. Working capital was $66.265 million, versus $80.796 million at July 31, 2023. Current assets were $73.806 million and current liabilities $7.541 million. Management expects cash and available-for-sale securities to cover obligations for at least 12 months from the filing date.
Cash flow and balance sheet: Nine-month operating cash use was $4.913 million; investing cash use was $8.946 million; financing cash use was $0.155 million. Cash declined $14.062 million from July 31, 2023. Total assets were $101.623 million, total liabilities $11.064 million, and total equity $90.559 million. Liabilities included a $1.7 million installment note payable due in November 2024, $0.614 million of current convertible notes, $0.071 million of noncurrent convertible notes, and $2.826 million of noncurrent creditor payable. No conventional debt or leverage ratio is reported.
Material changes and unusual items
- The Cornerstone acquisition resulted in an $89.861 million in-process research and development charge, because the acquired research asset had no alternative future use. Cornerstone reported no revenue after acquisition through April 30 and incurred a $91.0 million loss, including the charge.
- Rafael recorded a $31.305 million recovery of previously reserved Cornerstone receivables following the restructuring, substantially offsetting the acquisition-related expense’s impact on the reported loss. It also recorded a $2.599 million tax benefit, including proceeds from selling $31.6 million of New Jersey net operating loss carryforwards.
- Rafael’s 67% Cornerstone ownership followed the restructuring; its $30.6 million RFL Line of Credit claim was converted into Cornerstone shares. The amended RP Finance credit line has a May 31, 2028 maturity, with future lending obligations terminated.
- Day Three contributed $0.262 million of infusion technology revenue and $0.085 million of associated cost. Its acquisition also added $3.571 million of goodwill, $1.851 million of net intangible assets, and the $1.7 million remaining installment-note obligation.
- The Cyclo investment was valued at $15.172 million at April 30. Rafael recorded a $4.395 million unrealized loss in the quarter, but a $3.199 million unrealized gain for the nine months. The investment is subject to market-price and valuation volatility; warrant values use significant unobservable assumptions.
Outlook, risks and contingencies
- No earnings or revenue guidance is provided. Management’s stated liquidity outlook is at least 12 months, based on cash and available-for-sale securities.
- Cornerstone’s lead candidate devimistat previously failed to meet the primary endpoint in a Phase 3 pancreatic cancer trial; another Phase 3 trial was stopped after an interim review found it unlikely to meet its endpoint. The filing describes the development prospects as uncertain.
- Cornerstone has $0.614 million of Series C notes reported as current that are past maturity and in default, plus accrued interest. A major creditor arrangement includes potential payments tied to FDA authorization and a capital transaction; the creditor agreed to forbear, but did not waive its rights.
- Revenue and receivables are concentrated: one customer represented 70% of Q3 revenue; one customer and one related-party tenant represented 56% and 27% of nine-month revenue, respectively. Related-party relationships and Howard Jonas’s control of voting power are also relevant governance considerations.
- The company says it expects no material adverse effect from ordinary-course legal proceedings, reports no material change to previously disclosed risk factors, and states there were no material changes to internal controls during the quarter.
- Subsequent events: Rafael purchased additional Day Three shares on May 1, increasing its stated ownership to 84%; on June 11 it funded a $2 million Cyclo convertible note, due November 11, 2024, bearing 5% interest.
Important facts for investors to verify
- How Cornerstone’s clinical pipeline, financing needs and creditor obligations may develop, including the defaulted notes and conditional creditor payments.
- Whether Day Three can grow recurring customer demand and revenue beyond the reported $0.262 million, and how its debt and acquisition accounting evolve.
- The composition, liquidity, maturity and credit quality of the $64.941 million available-for-sale securities portfolio, and the adequacy of the stated 12-month liquidity runway.
- The assumptions and sensitivity underlying the $89.861 million Cornerstone IPR&D charge and the fair values of Cyclo shares, warrants and convertible notes.
- The impact of customer concentration, related-party transactions, controlling-stockholder voting power and potential dilution from equity awards or subsidiary securities.