Rafael Holdings, Inc. — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended April 30, 2022. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise. The company’s fiscal year ends July 31.
Business context
Rafael operates pharmaceutical development and commercial real estate businesses. Pharmaceuticals has generated no revenue; reported revenue comes from real estate, including rental and parking income. The company’s pharmaceutical portfolio includes LipoMedix, Barer, Levco and Farber, as well as interests in Cornerstone Pharmaceuticals.
Financial results and liquidity
| Metric | Three months ended April 30, 2022 | Three months ended April 30, 2021 | Nine months ended April 30, 2022 | Nine months ended April 30, 2021 |
|---|---|---|---|---|
| Revenue | $0.875 | $0.990 | $3.011 | $3.002 |
| Operating loss | $(4.857) | $(3.479) | $(56.063) | $(16.787) |
| Net loss attributable to Rafael Holdings | $(5.529) | $(2.553) | $(119.874) | $(12.164) |
| Basic and diluted loss per share | $(0.28) | $(0.15) | $(6.16) | $(0.75) |
| Cash used in operating activities | Not presented for quarter | Not presented for quarter | $(24.177) | $(8.620) |
At April 30, 2022, cash and cash equivalents were $28.965 million; available-for-sale corporate bonds were $30.407 million; and hedge fund investments were $4.684 million. Management said these resources were expected to meet obligations through June 14, 2023. Current assets were $62.512 million, total liabilities $17.876 million, and total equity $94.906 million.
Current note payable, net of issuance costs, was $14.903 million. The related $15 million loan is secured by the 520 Broad Street property, bears interest at a minimum rate of 7.25% (thereafter LIBOR plus 6.90%), and is due August 1, 2022; the company had an option to extend maturity to August 1, 2023 for a fee. Rafael reported compliance with the loan covenants at April 30, 2022.
For the nine months, financing activities provided $97.867 million, principally from common-stock sales, while investing activities used $57.419 million. The company does not anticipate paying dividends until it achieves sustainable profitability and retains minimum cash reserves.
Material changes versus comparable periods
- Quarterly revenue fell 12% year over year, while nine-month revenue was approximately flat. The quarterly decline reflected the timing of real estate-tax recoveries; nine-month rental and parking revenue increased, partly offset by lower related-party service revenue.
- Nine-month net loss attributable to Rafael widened to $119.874 million from $12.164 million, primarily because of a $79.141 million full impairment of the Cornerstone investment, a $25 million reserve against the Cornerstone line-of-credit receivable, and $10.095 million of provisions for related-party receivables. The prior-year period included a $7 million Altira impairment and a $0.749 million gain on a building sale.
- Nine-month operating cash use increased to $24.177 million from $8.620 million. Noncash impairments and reserves substantially affected reported loss; cash investing also included $32.957 million of corporate-bond purchases and the $25 million Cornerstone advance.
- Cash and cash equivalents increased from $7.854 million at July 31, 2021; the company also raised capital through stock sales. Total assets declined to $112.782 million from $154.055 million, reflecting principally the Cornerstone-related impairment and reserves.
- Quarterly SG&A increased to $3.940 million from $3.006 million; nine-month R&D increased to $6.901 million from $3.345 million. Management attributed pharmaceutical cost increases to program activity, payroll and professional fees, among other items. Nine-month SG&A also included former CEO severance, partly offset by reversal of previously recorded stock compensation after restricted shares were forfeited.
Outlook, risks and unusual items
- Cornerstone clinical setbacks: The AVENGER 500 Phase 3 trial of devimistat did not meet its primary overall-survival endpoint; an independent committee recommended stopping the ARMADA 2000 Phase 3 trial because it was unlikely to meet its primary endpoint. The company said further development prospects were uncertain and fully impaired its Cornerstone investment and related loans and receivables.
- Merger and warrant: Rafael withdrew its Form S-4 on February 2, 2022, terminating the agreement to acquire Cornerstone. The Cornerstone warrant was stated to have expired April 1, 2022, although Rafael asserted it might be entitled to an extension; it said it did not then intend to exercise it.
- Real estate sale: A contract provides for sale of the 520 Broad Street building and associated garage for $49.4 million. The sale had not closed as of April 30, 2022. Subsequent to quarter-end, additional escrow was deposited and the remaining deposit became nonrefundable on May 3. If completed, Rafael expects to give up the property’s rental income and related operating costs.
- Concentrated related-party exposure: Related parties accounted for 60% of quarterly and 58% of nine-month revenue. The company fully reserved $9.375 million due from RP Finance and $0.720 million due from Cornerstone, in addition to the Cornerstone line-of-credit reserve.
- Controls and reporting: The company disclosed material weaknesses involving noncontrolling-interest allocations and earnings-per-share calculations, and said both had been remediated by April 30, 2022. It also reported that its October 2021 Form 10-Q had been restated. Management concluded disclosure controls were effective at quarter-end.
- Other risks and contingencies: Management cited continuing uncertainty from COVID-19 and the war in Ukraine, and risks from cybersecurity incidents. A 2021 email-compromise incident resulted in payment of two invoices; one had been recovered by the filing date. A personal-injury matter was described as remote, with no accrual recorded. No specific financial guidance was provided.
Important facts for investors to verify
- Whether the $49.4 million property sale closed, its final proceeds and costs, and the resulting change in recurring rental cash flow.
- Collectability or recovery prospects for Cornerstone and RP Finance balances and the status of the Cornerstone warrant and underlying drug programs.
- Cash burn, investment liquidity and funding needs relative to management’s stated liquidity horizon, including repayment or extension of the property-backed note due August 1, 2022.
- Whether the reported remediation of control weaknesses remains effective and whether any further restatements or control deficiencies arise.
- Potential dilution: at April 30, 2022, 1,021,277 options and 1,062,773 unvested restricted shares were outstanding; the filing reported 20,016,413 Class B shares outstanding as of June 12, 2022. Class A shares carry three votes each, versus one-tenth of a vote per Class B share.