Rafael Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended January 31, 2023. Amounts below are in U.S. dollars; financial statement figures are generally in thousands unless noted.
Business context and reporting period
- Rafael is a holding company focused on healthcare investments and development, with a smaller real estate operation. Its healthcare holdings include LipoMedix, Cornerstone Pharmaceuticals, Barer, and Rafael Medical Devices.
- In November 2022, the Company curtailed early-stage development, including Barer’s preclinical research, to reduce spending while it explores strategic opportunities. Healthcare has not generated revenue.
- Rafael sold its Newark 520 Property on August 22, 2022. The sale was reported as discontinued operations; the remaining real estate asset is a portion of a commercial building in Israel.
Key financial metrics
| Metric | Three months ended Jan. 31, 2023 | Six months ended Jan. 31, 2023 | Comparable 2022 period |
|---|---|---|---|
| Revenue from continuing operations | $70,000 | $140,000 | $74,000 and $265,000, respectively |
| Loss from continuing operations | $3.252 million | $8.459 million | $2.057 million and $130.925 million, respectively |
| Net loss attributable to Rafael | $3.250 million | $1.658 million | $2.321 million and $114.345 million, respectively |
| Basic and diluted loss per share | $0.14 | $0.08 | $0.12 and $5.91, respectively |
| Cash and cash equivalents at period end | $9.670 million | $26.537 million at July 31, 2022 | |
| Available-for-sale securities at period end | $79.197 million | $36.698 million at July 31, 2022 | |
| Total assets / total liabilities at period end | $98.550 million / $2.015 million | $118.320 million / $21.114 million at July 31, 2022 |
- Cash flow, six months: $8.124 million used in operating activities, including $7.437 million from continuing operations. Continuing investing activities used $41.754 million, primarily reflecting $113.137 million of securities purchases partly offset by $71.383 million of sales and maturities. Cash decreased by $16.867 million overall.
- Liquidity and debt: Cash plus available-for-sale securities totaled approximately $88.9 million at January 31, 2023. Working capital was $87.999 million. The $15 million mortgage on the 520 Property was repaid at sale; no note payable remained at period end.
- Margins: Operating margins are not a useful indicator given minimal rental revenue and no healthcare revenue.
Material changes versus prior comparable periods
- Second-quarter net loss attributable to Rafael increased to $3.250 million from $2.321 million, mainly as continuing operating loss rose to $4.259 million from $1.599 million. Interest income and gains on investments partially offset the higher operating loss.
- For the six-month period, net loss attributable to Rafael improved substantially from $114.345 million to $1.658 million. The 2022 comparison included $79.141 million of Cornerstone investment impairment and $25 million of provision for its unpaid line of credit, as well as related-party receivable losses. The 2023 period included a $6.784 million gain on the 520 Property sale.
- Continuing revenue declined year over year, in part because the 520 Property’s rent is now presented in discontinued operations and the Company no longer bills Cornerstone for services. Ongoing real estate revenue was $140,000 for the six months, down from $265,000.
- Cash declined from July 31, 2022, while available-for-sale securities increased. The Company said the cash decline primarily reflected investment of funds in marketable securities.
Outlook, risks, contingencies, and unusual items
- Management expects cash and available-for-sale securities to be sufficient to meet obligations for at least 12 months from issuance of the financial statements. The Company is evaluating acquisitions or strategic investments, particularly in later-stage assets; no quantified financial guidance was provided.
- The 520 Property sold for $49.4 million gross, generating approximately $33 million net cash proceeds after debt repayment and transaction costs. The Company recognized a $6.8 million disposal gain. A $113,000 vendor settlement relating to pre-sale repairs was recorded in discontinued operations.
- Cornerstone’s devimistat trials failed to meet or were considered unlikely to meet primary endpoints. Rafael previously fully impaired its Cornerstone investment and $25 million line-of-credit receivable; a $720,000 Cornerstone balance also remains fully reserved. The Company is evaluating its rights concerning the unpaid loan.
- At January 31, 2023, corporate bonds and U.S. Treasury bills classified as available-for-sale had $79.2 million fair value; maturities were within one year. Management did not consider securities in unrealized-loss positions credit-impaired, but noted recovery of par is not assured. Hedge fund investments of $5.015 million use Level 3 valuations.
- Related parties represented 39% of total revenue for the quarter and 43% for the six months, including discontinued operations. This concentration and the Company’s related-party investments and transactions merit review.
- After quarter end, Rafael agreed to buy 70 million additional LipoMedix shares for approximately $2.1 million. The filing describes uncertainty from COVID-19 and the Russia-Ukraine war but says their impacts cannot currently be estimated.
- Patrick Fabbio departed as CFO in January 2023; the Company recorded $307,913 of severance and reversed approximately $915,000 of previously recorded stock-based compensation. Management said disclosure controls were effective and reported no material change in internal control or risk factors.
Important facts for investors to verify
- Liquidity runway and the composition, maturity profile, valuation, and liquidity of the $79.2 million securities portfolio and Level 3 hedge fund holdings.
- Progress on strategic alternatives and the expected cash requirements of LipoMedix and other healthcare holdings following the spending reductions.
- Recoverability and legal status of Cornerstone-related amounts and rights, including the unpaid $25 million line of credit and fully reserved receivables.
- Whether related-party revenue, leases, investments, and governance arrangements remain material, and how the additional LipoMedix share purchase affects ownership and funding needs.
- Potential dilution: approximately 1.95 million common-share equivalents from options and unvested restricted shares were excluded from diluted EPS as anti-dilutive.