Rafael Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended October 31, 2023 (quarter ended October 31; the filing’s comparative period is the three months ended October 31, 2022). Amounts below are U.S. dollars.
Business context
Rafael is a holding company with interests in clinical- and early-stage healthcare businesses, including LipoMedix, Cornerstone, Cyclo Therapeutics, Day Three Labs and Rafael Medical Devices. It also owns a portion of a commercial building in Jerusalem. The company has curtailed Barer’s early-stage research to reduce spending and says it is focused on strategic investment opportunities. Its former 520 Broad Street property was sold in August 2022.
Key financial metrics
| Metric | Q1 FY2024 | Comparable period / change |
|---|---|---|
| Revenue | $68,000, entirely rental income | $70,000; down $2,000 |
| Operating loss | $2.478 million | $5.142 million loss; improved $2.664 million |
| Net loss from continuing operations | $3.760 million | $5.207 million loss |
| Net income (loss) attributable to Rafael | $(3.638) million; $(0.15) per share | $1.592 million income; $0.07 per share, including a $6.784 million gain on the 520 property sale |
| Operating cash flow | $(2.133) million | $(2.580) million, including discontinued operations in 2022 |
| Cash and cash equivalents | $13.197 million | $21.498 million at July 31, 2023 |
| Available-for-sale securities | $58.894 million | $57.714 million at July 31, 2023 |
| Working capital | $76.532 million | $80.796 million at July 31, 2023 |
| Total assets / total liabilities | $95.502 million / $0.990 million | Assets were $98.829 million and liabilities $2.200 million at July 31, 2023 |
Operating cash use was broadly stable year over year. Investing activities used $6.786 million, including $6.786 million for Cyclo shares and warrants, partly offset by marketable-security maturities and sales. Financing activities provided $807,000, mainly from the sale of Rafael Medical Devices membership units. The filing reports no outstanding senior debt; the $15 million mortgage on 520 Broad Street was repaid when that property was sold in 2022.
Revenue is very small relative to operating expenses, so a revenue-based margin would not be a meaningful indicator of the company’s overall performance.
Material changes and unusual items
- General and administrative expense fell to $2.040 million from $3.109 million, and research and development expense fell to $489,000 from $2.081 million. Management attributed the decreases chiefly to lower stock compensation, payroll and insurance costs, and the prior decision to curtail early-stage research.
- The company reported a $2.124 million unrealized loss on its Cyclo investment, partly offset by a $424,000 realized gain associated with exercising a Cyclo warrant. Cyclo’s reported fair value was $9.849 million, and Rafael held approximately 40% of its common shares at quarter-end.
- Interest income rose to $582,000 from $208,000, primarily due to higher interest rates. The company also recorded a $166,000 unrealized hedge-fund loss and a $216,000 equity-method loss from Day Three.
- A $2.5 million hedge-fund withdrawal had been requested but was unfunded at quarter-end; it was recorded in prepaid expenses and other current assets.
- Rafael’s $2 million related-party Cornerstone note, bearing 7.5% interest, had an amended maturity date of November 30, 2023. It was carried at $1.858 million fair value. The filing describes a Cornerstone restructuring that could convert company debt and modify other obligations, but is subject to conditions beyond Rafael’s control; the filing text does not clearly state the note’s status after its maturity date.
- After quarter-end, Rafael advanced Day Three an additional $150,000 under a note maturing January 8, 2024; a separate $250,000 Day Three note was outstanding at quarter-end.
- The 2022 comparison includes the 520 property disposal gain and its discontinued operations; there was no such activity in the 2023 quarter. This is the main reason reported attributable earnings changed from income to loss.
Liquidity, outlook and risks
Management states that cash and available-for-sale securities should be sufficient to meet obligations for at least 12 months from issuance of the financial statements. All corporate bonds and Treasury bills held at October 31, 2023 mature within one year. The company reported no allowance for credit losses on available-for-sale securities and no material change in previously disclosed risk factors. It does not anticipate paying dividends until it achieves sustainable profitability and retains minimum cash reserves.
Key exposures include the uncertain value and liquidity of investments in development-stage businesses, Cyclo’s market-price and warrant-valuation volatility, Level 3 valuation assumptions for hedge funds, warrants and the Cornerstone note, and dependence on related parties. Cornerstone’s prior Phase 3 trial outcomes for devimistat were unsuccessful, and the company previously fully impaired its $25 million Cornerstone line-of-credit receivable. Management reported effective disclosure controls as of October 31, 2023 and no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether the Cornerstone note was repaid, converted or otherwise resolved after its November 30, 2023 maturity, and the status and terms of the proposed restructuring.
- The recoverability and timing of the $2.5 million hedge-fund withdrawal, and the basis for the reported hedge-fund valuations.
- Updates to Cyclo’s share price, Rafael’s ownership and warrant valuations, including potential non-cash earnings volatility.
- Day Three’s financial condition and repayment of its notes, including the post-quarter $150,000 advance.
- Whether cash and marketable securities remain adequate as investment and operating cash requirements evolve, given minimal revenue and recurring operating cash use.
- The consequences of related-party transactions and control: the filing says Howard Jonas became the company’s controlling stockholder and identifies him as interim CEO of Cornerstone.