Rafael Holdings, Inc. — Form 10-Q Summary
Reporting period: Three months ended October 31, 2021 (the first quarter of fiscal 2022; fiscal year ends July 31). Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Business context
Rafael Holdings develops cancer and immune-metabolism therapies through its pharmaceutical interests and operates commercial real estate, including its Newark office building and parking garage. Pharmaceuticals had no revenue; reported revenue came from real estate and related services.
Financial results and position
| Metric | Three months ended Oct. 31, 2021 | Prior-year period / comparison |
|---|---|---|
| Revenue | $1.03 million | $1.05 million; down about 3% |
| Operating loss | $49.7 million | $2.5 million |
| Net loss attributable to Rafael Holdings | $129.3 million; $6.49 per diluted share | $1.4 million; $0.09 per diluted share |
| Cash used in operating activities | $6.5 million | $2.7 million |
| Cash used in investing activities | $26.9 million | Cash provided of $3.6 million |
| Cash provided by financing activities | $97.9 million | $0.04 million |
The quarter-end balance sheet showed cash and cash equivalents of $72.4 million, restricted cash of $5.0 million, and hedge-fund investments of $5.5 million. Total assets were $130.4 million, total liabilities $17.3 million, and total equity $113.1 million. Current liabilities included a $14.7 million note payable, net of debt issuance costs. The $15 million real-estate loan bears interest at 7.25% minimum and is due August 1, 2022, with an option to extend to August 1, 2023.
The company raised approximately $104.2 million gross from Class B share sales during the quarter; transaction costs were $6.2 million. Its cash-flow statement reports $97.9 million of net financing cash inflow. Management said cash, cash equivalents, and hedge-fund investments should cover obligations for 12 months from issuance of the statements.
Material changes and unusual items
- Devimistat trial setbacks were significant: AVENGER 500 did not meet its primary endpoint, and the independent monitoring committee recommended stopping ARMADA 2000 because it was unlikely to meet its primary endpoint.
- In response, the company fully impaired its $79.1 million cost-method investment in Rafael Pharmaceuticals and recorded a $25.0 million reserve against its Rafael Pharmaceuticals line-of-credit receivable, plus $10.3 million in provisions for related-party receivables, including amounts due from RP Finance.
- These noncash impairment and reserve charges were the principal drivers of the quarter’s sharply higher loss. Selling, general and administrative expense also rose to $12.9 million from $2.6 million, including higher share-based compensation, professional fees, and payroll. Research and development expense increased to $2.2 million from $0.5 million.
- The company advanced $25 million to Rafael Pharmaceuticals under a 9% line of credit during the quarter, then fully reserved the receivable following the trial developments.
- Revenue remained almost flat year over year. Real-estate operating loss narrowed to $0.15 million from $0.36 million, while revenue from related parties represented 51% of total revenue.
Outlook, risks and contingencies
No quantified earnings or revenue guidance was provided. Management noted uncertainty over the future development and prospects of devimistat and continued to pursue early-stage pharmaceutical programs. The company’s merger agreement to acquire the remaining Rafael Pharmaceuticals interests remained relevant; it had filed a preliminary proxy statement/prospectus, but this filing does not establish that the merger closed.
Subsequent to quarter-end, Rafael Holdings agreed to invest $3.0 million in LipoMedix shares and received a warrant; $0.4 million of LipoMedix debt plus accrued interest was offset against the purchase price, leaving a $2.6 million cash payment. The CEO announced his departure effective January 31, 2022, and four other executive-team departures were planned. Expected severance was approximately $5.2 million for the CEO and $1.0 million for the other employees.
Risks include uncertain pharmaceutical development outcomes, COVID-19 effects on clinical trials and real-estate values, customer and related-party concentration, and reliance on third parties. The company disclosed an October 2021 cybersecurity incident involving a related party’s compromised email and payment of two invoices; one invoice had been recovered by filing date. It also reported an OSHA settlement with about $16,000 outstanding and an employee personal-injury suit for which management considered the loss remote and recorded no accrual. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Current status, expected consideration, and closing conditions of the Rafael Pharmaceuticals merger, and the impact of the devimistat trial outcomes on remaining assets and programs.
- Recoverability, if any, of the fully reserved Rafael Pharmaceuticals and RP Finance balances, and whether additional funding or impairment charges may arise.
- Cash runway assumptions, planned spending, and the company’s ability to meet the August 2022 real-estate loan maturity or exercise its extension option.
- Terms, dilution effects, and development implications of the post-quarter LipoMedix investment and warrant.
- Actual executive severance costs, lease renewals or terminations, and recovery or other consequences of the cybersecurity incident.