10-Q 1 ea0201606-10q_rafaelhold.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

  Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended January 31, 2024.

 

or

 

  Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Commission File Number: 000-55863

  

RAFAEL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   82-2296593

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

520 Broad Street, Newark, New Jersey 07102

(Address of principal executive offices, zip code)

 

(212) 658-1450

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

  

Title of each class   Trading Symbol   Name of each exchange on which registered
Class B common stock, par value $0.01 per share   RFL   New York Stock Exchange

  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer Smaller reporting company
Emerging growth company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No

 

 

The number of shares outstanding of the registrant’s common stock as of March 11, 2024 was:

 

Class A common stock, par value $0.01 per share: 787,163 shares
Class B common stock, par value $0.01 per share: 23,797,276 shares

 

 

 

 

 

 

 

RAFAEL HOLDINGS, INC.

 

TABLE OF CONTENTS

 

 

Part I. FINANCIAL INFORMATION 1
  Item 1. Financial Statements (Unaudited)  
    Consolidated Balance Sheets as of January 31, 2024 and July 31, 2023 1
    Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended January 31, 2024 and 2023 2
    Consolidated Statements of Equity for the Three and Six Months Ended January 31, 2024 and 2023 3
    Consolidated Statements of Cash Flows for the Six Months Ended January 31, 2024 and 2023 6
    Notes to the Consolidated Financial Statements 7
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 43
  Item 3. Quantitative and Qualitative Disclosures about Market Risk 51
  Item 4. Controls and Procedures 51
     
Part II. OTHER INFORMATION 52
  Item 1. Legal Proceeding 52
  Item 1A. Risk Factors 52
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 52
  Item 3. Defaults Upon Senior Securities 52
  Item 4. Mine Safety Disclosures 52
  Item 5. Other Information 52
  Item 6. Exhibits 52
       
SIGNATURES   53

 

i

 

 

PART I. FINANCIAL INFORMATION

RAFAEL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

    January 31, 2024     July 31, 2023  
    (Unaudited)        
ASSETS            
CURRENT ASSETS            
Cash and cash equivalents   $ 7,136     $ 21,498  
Available-for-sale securities     64,587       57,714  
Interest receivable     560       387  
Convertible note receivable, related party     1,924       1,921  
Accounts receivable, net of allowance for doubtful accounts of $245 at January 31, 2024 and July 31, 2023     379       213  
Prepaid expenses and other current assets     487       914  
Investment in equity securities           294  
Total current assets     75,073       82,941  
                 
Property and equipment, net     2,064       1,695  
Investments – Other Pharmaceuticals           65  
Investments – Hedge Funds     2,369       4,984  
Investment – Day Three           2,797  
Investments – Cyclo Therapeutics Inc.     19,567       4,763  
Goodwill     3,571        
Intangible assets     1,888        
In-process research and development     1,575       1,575  
Other assets     42       9  
TOTAL ASSETS   $ 106,149     $ 98,829  
                 
LIABILITIES AND EQUITY                
CURRENT LIABILITIES                
Accounts payable   $ 509     $ 333  
Accrued expenses     845       763  
Other current liabilities     140       1,023  
Due to related parties     69       26  
Installment note payable     1,700        
Total current liabilities     3,263       2,145  
                 
Deferred income tax liabilities, net     545        
Other liabilities     87       55  
TOTAL LIABILITIES     3,895       2,200  
                 
COMMITMENTS AND CONTINGENCIES    
 
     
 
 
                 
EQUITY                
Class A common stock, $0.01 par value; 35,000,000 shares authorized, 787,163 shares issued and outstanding as of January 31, 2024 and July 31, 2023     8       8  
Class B common stock, $0.01 par value; 200,000,000 shares authorized, 23,882,117 issued and 23,695,332 outstanding (excluding treasury shares of 101,487) as of January 31, 2024, and 23,708,365 shares issued and 23,490,527 shares outstanding as of July 31, 2023     238       236  
Additional paid-in capital     266,159       264,010  
Accumulated deficit     (164,924 )     (167,333 )
Treasury stock, at cost; 101,487 and 0 Class B shares as of January 31, 2024 and July 31, 2023, respectively     (168 )      
Accumulated other comprehensive loss related to unrealized loss on available-for-sale securities     (88 )     (353 )
Accumulated other comprehensive income related to foreign currency translation adjustment     3,714       3,725  
Total equity     104,939       100,293  
Noncontrolling interests     (2,685 )     (3,664 )
TOTAL EQUITY ATTRIBUTABLE TO RAFAEL HOLDINGS, INC.     102,254       96,629  
TOTAL LIABILITIES AND EQUITY   $ 106,149     $ 98,829  

  

See accompanying notes to the unaudited consolidated interim financial statements.

 

1

 

 

RAFAEL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(unaudited, in thousands, except share and per share data)

 

    Three Months Ended
January 31,
    Six Months Ended
January 31,
 
    2024     2023     2024     2023  
REVENUE                        
Rental – Third Party   $ 41     $ 43     $ 82     $ 86  
Rental – Related Party     27       27       54       54  
Total revenue     68       70       136       140  
                                 
COSTS AND EXPENSES                                
General and administrative     2,561       2,085       4,601       5,194  
Research and development     612       2,225       1,101       4,306  
Depreciation and amortization     38       19       55       41  
Loss from operations     (3,143 )     (4,259 )     (5,621 )     (9,401 )
                                 
Interest income     693       562       1,275       770  
Impairment of investments - Other Pharmaceuticals           (67 )           (223 )
Loss on initial investment in Day Three upon acquisition     (1,633 )           (1,633 )      
Realized gain on available-for-sale securities     399       139       576       154  
Realized loss on investment in equity securities                 (46 )      
Realized gain on investments - Cyclo Therapeutics Inc.                 424        
Unrealized gain on investments - Cyclo Therapeutics Inc.     9,718             7,594        
Unrealized gain (loss) on investments - Hedge Funds     51       378       (115 )     251  
Other Income     25             118        
Income (loss) from continuing operations before income taxes     6,110       (3,247 )     2,572       (8,449 )
Provision for income taxes           (5 )     (6 )     (10 )
Equity in loss of Day Three     (206 )           (422 )      
Consolidated net income (loss) from continuing operations     5,904       (3,252 )     2,144       (8,459 )
                                 
Discontinued Operations (Note 3)                                
Loss from discontinued operations related to 520 Property           (157 )           (241 )
Gain on disposal of 520 Property                       6,784  
Income (loss) from discontinued operations           (157 )           6,543  
                                 
Consolidated net income (loss)     5,904       (3,409 )     2,144       (1,916 )
Net loss attributable to noncontrolling interests     (143 )     (159 )     (265 )     (258 )
Net income (loss) attributable to Rafael Holdings, Inc.   $ 6,047     $ (3,250 )   $ 2,409     $ (1,658 )
                                 
OTHER COMPREHENSIVE INCOME (LOSS)                                
Consolidated net income (loss)   $ 5,904     $ (3,409 )   $ 2,144     $ (1,916 )
Unrealized gain on available-for-sale securities     58       268       265       371  
Foreign currency translation adjustment     46       (16 )     (30 )     (26 )
Comprehensive income (loss)     6,008       (3,157 )     2,379       (1,571 )
Comprehensive loss attributable to noncontrolling interests     (145 )     (156 )     (264 )     (255 )
Comprehensive income (loss) attributable to Rafael Holdings, Inc.   $ 6,153     $ (3,001 )   $ 2,643     $ (1,316 )
                                 
Income (loss) per share attributable to common stockholders                                
Basic:                                
Continuing operations   $ 0.26     $ (0.13 )   $ 0.10     $ (0.36 )
Discontinued operations           (0.01 )           0.28  
Total basic income (loss) per share   $ 0.26     $ (0.14 )   $ 0.10     $ (0.08 )
Diluted:                                
Continuing operations   $ 0.25     $ (0.13 )   $ 0.10     $ (0.36 )
Discontinued operations           (0.01 )           0.28  
Total diluted income (loss) per share   $ 0.25     $ (0.14 )   $ 0.10     $ (0.08 )
                                 
Weighted average number of shares used in calculation of income (loss) per share                                
Basic     23,642,421       23,155,018       23,643,660       23,085,612  
Diluted     24,402,069       23,155,018       24,403,308       23,085,612  

  

See accompanying notes to the unaudited consolidated interim financial statements.

 

2

 

   

RAFAEL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF EQUITY

 (unaudited, in thousands, except share data)

 

   Three Months Ended January 31, 2024 
                   Accumulated             
   Common Stock,   Common Stock,   Additional      other          
   Series A   Series B   paid-in-    Accumulated   comprehensive   Noncontrolling   Treasury Stock   Total 
   Shares   Amount   Shares   Amount   capital   deficit   income   interests   Class B Shares   Amount   Equity 
Balance at November 1, 2023   787,163   $8    23,668,315   $238   $265,487   $(170,971)  $3,522   $(3,693)   50,700   $(79)  $94,512 
Net income (loss)                       6,047        (143)           5,904 
Stock-based compensation           101,402        715                        715 
Shares withheld for payroll taxes           (23,598)       (43)                       (43)
Unrealized gain on available-for-sale securities                           58                58 
Noncontrolling interest in Day Three acquisition                               1,151            1,151 
Purchases of treasury stock           (50,787)                       50,787    (89)   (89)
Foreign currency translation adjustment                           46                46 
Balance at January 31, 2024   787,163   $8    23,695,332   $238   $266,159   $(164,924)  $3,626   $(2,685)   101,487   $(168)  $102,254 

 

See accompanying notes to the unaudited consolidated interim financial statements.

 

3

 

  

RAFAEL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF EQUITY

 (unaudited, in thousands, except share data)

 

   Six Months Ended January 31, 2024 
                   Accumulated             
   Common Stock,   Common Stock,   Additional      other          
   Series A   Series B   paid-in    Accumulated   comprehensive   Noncontrolling   Treasury Stock   Total 
   Shares   Amount   Shares   Amount   capital   deficit   income   interests   Class B Shares   Amount   Equity 
Balance at August 1, 2023   787,163   $8    23,490,527   $236   $264,010   $(167,333)  $3,372   $(3,664)  $   $   $96,629 
Net income (loss)                       2,409        (265)           2,144 
Stock-based compensation           347,810    2    1,362                        1,364 
Shares withheld for payroll taxes           (41,518)       (82)                       (82)
Unrealized gain on available-for-sale securities                           265                265 
Sale of Rafael Medical Devices membership units                   869            56            925 
Noncontrolling interest in Day Three acquisition                               1,151            1,151 
Purchases of treasury stock           (101,487)                       101,487    (168)   (168)
Dissolution of Levco                           19    37            56 
Foreign currency translation adjustment                           (30)               (30)
Balance at January 31, 2024   787,163   $8    23,695,332   $238   $266,159   $(164,924)  $3,626   $(2,685)   101,487   $(168)  $102,254 

 

See accompanying notes to the unaudited consolidated interim financial statements.

 

4

 

 

RAFAEL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(unaudited, in thousands, except share data)

  

 Three Months Ended January 31, 2023
   Common Stock,
Series A
   Common Stock,
Series B
   Additional
paid- in
-
   Accumulated   Accumulated
other
comprehensive
   Noncontrolling   Total 
   Shares   Amount   Shares   Amount   capital   deficit   income   interests   Equity 
Balance at November 1, 2022   787,163   $8    23,685,036   $237   $263,197   $(163,865)  $3,797   $(3,408)  $99,966 
Net (loss)                       (3,250)       (159)   (3,409)
Stock-based compensation           220,019    2    778                780 
Forfeiture of restricted stock           (296,384)   (2)   (901)               (903)
Shares withheld for payroll taxes           (85,676)   (1)   (150)               (151)
Unrealized gain on available-for-sale securities                           268        268 
Foreign currency translation adjustment                           (16)       (16)
Balance at January 31, 2023   787,163   $8    23,522,995   $236   $262,924   $(167,115)  $4,049   $(3,567)  $96,535 

 

 Six Months Ended January 31, 2023
   Common Stock,
Series A
   Common Stock,
Series B
   Additional
paid in
   Accumulated   Accumulated
other
comprehensive
   Noncontrolling   Total 
   Shares   Amount   Shares   Amount   capital   deficit   income   interests   Equity 
Balance at August 1, 2022   787,163   $8    23,687,964   $237   $262,023   $(165,457)  $3,704   $(3,309)  $97,206 
Net loss                       (1,658)       (258)   (1,916)
Stock-based compensation           220,019    2    1,957                1,959 
Forfeiture of restricted stock           (296,384)   (2)   (900)               (902)
Shares withheld for payroll taxes           (88,604)   (1)   (156)               (157)
Unrealized loss on available-for-sale securities                           371        371 
Foreign currency translation adjustment                           (26)       (26)
Balance at January 31, 2023   787,163   $8    23,522,995   $236   $262,924   $(167,115)  $4,049   $(3,567)  $96,535 

 

See accompanying notes to the unaudited consolidated interim financial statements.

 

5

 

 

RAFAEL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

    Six Months Ended January 31,  
    2024     2023  
Operating activities            
Consolidated net income (loss)   $ 2,144     $ (1,916 )
Less: income from discontinued operations           6,543  
Income (loss) from continuing operations     2,144       (8,459 )
Adjustments to reconcile consolidated net income (loss) to net cash used in operating activities                
Depreciation and amortization     55       41  
Gain on sale of property and equipment     (27 )      
Net unrealized gain (loss) on investments - Hedge Funds     115       (251 )
Realized loss on investment in equity securities     46        
Realized gain on available-for-sale securities     (576 )     (154 )
Amortization of discount on available-for-sale securities     (1,052 )     (220 )
Impairment of investments - Other Pharmaceuticals           223  
Loss on initial investment in Day Three upon acquisition     1,633        
Realized gain in equity investments - Cyclo Therapeutics Inc.     (424 )      
Unrealized gain in equity investments - Cyclo Therapeutics Inc.     (7,594 )      
Gain on dissolution of a business     18        
Equity in loss of Day Three     422        
Bad debt expense     2        
Stock-based compensation     1,364       1,057  
                 
Change in assets and liabilities, net of effects from discontinued operations:                
Trade accounts receivable     (103 )     (111 )
Interest receivable     (184 )     (174 )
Prepaid expenses and other current assets     712       822  
Other assets     (33 )     (26 )
Accounts payable and accrued expenses     (372 )     (155 )
Other current liabilities     (883 )     30  
Due to related parties     43       (69 )
Other liabilities     32       9  
Net cash used in continuing operations     (4,662 )     (7,437 )
Net cash used in discontinued operations           (687 )
Net cash used in operating activities     (4,662 )     (8,124 )
                 
Investing activities                
Purchase of property and equipment     (11 )      
Purchases of available-for-sale securities     (105,063 )     (113,137 )
Proceeds from the sale and maturities of available-for-sale securities     100,090       71,383  
Proceeds from Day Three patent sale     70        
Proceeds from investments - Other Pharmaceuticals     42        
Proceeds from sales of equity securities     271        
Purchase of Investment in Cyclo Therapeutics Inc.     (6,786 )      
Issuance of Day Three Promissory Notes     (1,989 )      
Cash acquired in acquisition of Day Three, net of cash payments     1,299        
Proceeds from hedge funds     2,500        
Net cash used in investing activities of continuing operations     (9,577 )     (41,754 )
Proceeds from sale of 520 Property - discontinued operations           49,400  
Payment of transaction costs for sale of 520 Property - discontinued operations           (1,229 )
Net cash provided by investing activities of discontinued operations           48,171  
Net cash (used in) provided by investing activities     (9,577 )     6,417  
                 
Financing activities                
Principal payments on installment note payable     (800 )      
Payments for taxes related to shares withheld for employee taxes     (82 )     (157 )
Purchases of treasury stock     (168 )      
Proceeds from sale of Rafael Medical Devices membership units     925        
Net cash used in continuing operations     (125 )     (157 )
Payment of Note Payable in connection with sale of 520 Property - discontinued operations           (15,000 )
Net cash used in financing activities of discontinued operations           (15,000 )
Net cash used in financing activities     (125 )     (15,157 )
                 
Effect of exchange rate changes on cash and cash equivalents     2       (3 )
Net decrease in cash and cash equivalents     (14,362 )     (16,867 )
Cash and cash equivalents, beginning of period     21,498       26,537  
Cash and cash equivalents, end of period   $ 7,136     $ 9,670  
                 
Non-cash supplemental disclosure                
Noncash consideration received in exchange for equipment   $ 34     $  
Other receivable recognized related to sale of patent   $ 210     $  
Consideration for acquisition of Day Three included in accrued expenses   $ 200     $  
Elimination of principal and accrued interest on the Day Three Promissory Notes included in consideration for acquisition of Day Three   $ 2,000     $  

 

 

See accompanying notes to the unaudited consolidated interim financial statements.

 

6

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – DESCRIPTION OF BUSINESS

 

Description of Business

 

Rafael Holdings, Inc. (NYSE:RFL), (“Rafael Holdings”, “we” or the “Company”), a Delaware corporation, is a holding company with interests in clinical and early-stage pharmaceutical companies (the “Pharmaceutical Companies”), including an investment in Cornerstone Pharmaceuticals, Inc. (“Cornerstone”), formerly known as Rafael Pharmaceuticals Inc., a cancer metabolism-based therapeutics company, a majority equity interest in LipoMedix Pharmaceuticals Ltd. (“LipoMedix”), a clinical stage pharmaceutical company, Barer Institute Inc. (“Barer”), a wholly-owned preclinical cancer metabolism research operation, and an investment in Cyclo Therapeutics Inc. (Nasdaq: CYTH), (“Cyclo Therapeutics” or “Cyclo”), a clinical-stage biotechnology company dedicated to developing life-changing medicines for patients and families living with challenging diseases through its lead therapeutic asset, Trappsol® Cyclo™. We also hold a majority interest in Day Three Labs, Inc. (“Day Three”), a company which reimagines existing cannabis offerings with pharmaceutical-grade technology and innovation like Unlokt™ to bring to market better, cleaner, more precise and predictable products, and a majority interest in Rafael Medical Devices, LLC, an orthopedic-focused medical device company developing instruments to advance minimally invasive surgeries (“Rafael Medical Devices” and Day Three together with the Pharmaceutical Companies, represent our “Investment Companies”). In November 2022, the Company resolved to curtail its early-stage development efforts, including pre-clinical research at Barer. The decision was taken to reduce spending as the Company focuses on exploring strategic opportunities. The Company’s primary focus is to expand our investment portfolio through opportunistic and strategic investments including therapeutics which address high unmet medical needs.

 

The Company holds debt and equity investments in Cornerstone that includes preferred and common equity interests. On June 17, 2021, the Company entered into a merger agreement to acquire full ownership of Cornerstone Pharmaceuticals in exchange for issuing Company Class B common stock to the other stockholders of Cornerstone Pharmaceuticals (“Merger Agreement” or “Merger”). On October 28, 2021, the Company announced that the AVENGER 500 Phase 3 clinical trial for CPI-613® (devimistat), Cornerstone Pharmaceuticals’ lead product candidate, did not meet its primary endpoint of significant improvement in overall survival in patients with metastatic adenocarcinoma of the pancreas. In addition, following a pre-specified interim analysis, the independent data monitoring committee for the ARMADA 2000 Phase 3 study for devimistat recommended the trial to be stopped due to a determination that it was unlikely to achieve the primary endpoint (the “Data Events”). In connection with the preparation of the Company’s financial statements for the first quarter ended October 31, 2021, accounting principles generally accepted in the United States of America (“U.S. GAAP”) required that the Company assess the impact of the Data Events and determine whether the carrying values of the Company’s assets were impaired based upon the Company’s expectations to realize future value. In light of the Data Events, the Company concluded that the likelihood of further development of and prospects for CPI-613 is uncertain and fully impaired in the first quarter ended October 31, 2021 the value of its loans, receivables, and investment in Cornerstone Pharmaceuticals based upon its valuation of Cornerstone Pharmaceuticals. On February 2, 2022, the Company terminated the Merger Agreement with Cornerstone Pharmaceuticals, effective immediately, in accordance with its terms. On March 21, 2023, the Company loaned $2.0 million to Cornerstone which debt is represented by a Promissory Note made by Cornerstone (the “Promissory Note”). See Note 5 for more information.

 

On March 13, 2024, Cornerstone consummated a restructuring of its outstanding debt and equity interests. See Note 23 for additional information regarding the restructuring transaction.

 

In May 2023, the Company first invested in Cyclo Therapeutics. Cyclo is a clinical stage biotechnology company that develops cyclodextrin-based products for the treatment of neurodegenerative diseases. Cyclo’s lead drug candidate is Trappsol® Cyclo™ (hydroxypropyl beta cyclodextrin), a treatment for Niemann-Pick Type C disease (“NPC”). NPC is a rare and fatal autosomal recessive genetic disease resulting in disrupted cholesterol metabolism that impacts the brain, lungs, liver, spleen, and other organs. In January 2017, the FDA granted Fast Track designation to Trappsol® Cyclo™ for the treatment of NPC. Initial patient enrollment in the U.S. Phase I study commenced in September 2017, and in May 2020, Cyclo announced Top Line data showing a favorable safety and tolerability profile for Trappsol® Cyclo™ in this study. Cyclo is currently conducting a Phase 3 Clinical Trial Evaluating Trappsol® Cyclo™ in Pediatric and Adult Patients with Niemann-Pick Disease Type C1. See Note 9 for more information on the Company’s investments in Cyclo.

 

7

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In 2019, the Company established Barer, a preclinical cancer metabolism research operation, to focus on developing a pipeline of novel therapeutic compounds, including compounds to regulate cancer metabolism with potentially broader application in other indications beyond cancer. Barer has been comprised of scientists and academic advisors that are experts in cancer metabolism, chemistry, and drug development. In addition to its own internal discovery efforts, Barer pursued collaborative research agreements and in-licensing opportunities with leading scientists from top academic institutions. Barer’s subsidiary, Farber Partners, LLC (“Farber”), was formed around one such agreement with Princeton University’s Office of Technology Licensing (“Princeton”) for technology from the laboratory of Professor Joshua Rabinowitz, in the Department of Chemistry, Princeton University, for an exclusive worldwide license to its SHMT (serine hydroxymethyltransferase) inhibitor program. In November 2022, the Company resolved to curtail its early-stage development efforts, including pre-clinical research at Barer Institute.

 

In 2016, the Company first invested in LipoMedix, a privately held Israeli clinical stage pharmaceutical company focused on the development of an innovative, safe and effective cancer therapy based on liposome delivery, and currently holds 95% of the ordinary shares of LipoMedix.

 

In May 2021, the Company formed Rafael Medical Devices, an orthopedic-focused medical device company developing instruments to advance minimally invasive surgeries. In August 2023, the Company raised $925,000 from third parties in exchange for 31.62% ownership of Rafael Medical Devices.

 

The “Company” in these consolidated financial statements refers to Rafael Holdings and its subsidiaries on a consolidated basis.

 

All majority-owned subsidiaries are consolidated with all intercompany transactions and balances eliminated in consolidation. In addition to Rafael Holdings, Inc., the subsidiaries included in these consolidated financial statements are as follows:

 

Company  Country of Incorporation 

Percentage

Owned

 
Broad Atlantic Associates, LLC  United States – Delaware   100%
IDT R.E. Holdings Ltd.  Israel   100%
Rafael Holdings Realty, Inc.  United States – Delaware   100%
Barer Institute, Inc.  United States – Delaware   100%*
Hillview Avenue Realty, JV  United States – Delaware   100%
Hillview Avenue Realty, LLC  United States – Delaware   100%
Rafael Medical Devices, LLC  United States – Delaware   68%
Levco Pharmaceuticals Ltd.  Israel   95%***
Farber Partners, LLC  United States – Delaware   93%
Pharma Holdings, LLC  United States – Delaware   90%
LipoMedix Pharmaceuticals Ltd.  Israel   95%****
Altira Capital & Consulting, LLC  United States – Delaware   67%
CS Pharma Holdings, LLC  United States – Delaware   45%**
Day Three Labs, Inc.  United States – Delaware   79%

 

* In November 2022, the Company resolved to curtail its early-stage development efforts, including pre-clinical research at Barer. The decision was taken to reduce spending as the Company focuses on exploring strategic opportunities.

 

** 50% of CS Pharma Holdings, LLC is owned by Pharma Holdings, LLC. We have a 90% ownership in Pharma Holdings, LLC and, therefore, an effective 45% interest in CS Pharma Holdings, LLC. The Company, along with CS Pharma and Pharma Holdings, collectively own securities representing 51% of the outstanding capital stock of Cornerstone Pharmaceuticals and 42% of the capital stock on a fully diluted basis. See Note 4 for further details.

 

*** During Fiscal 2022, the Company discontinued further material investment in Levco. In August 2023, Levco was dissolved.

 

**** On February 9, 2023, the Company increased its ownership interest in LipoMedix Pharmaceuticals Ltd. from 84% to 95%.

 

8

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, which include only normal recurring adjustments, considered necessary for a fair presentation have been included.

 

The Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal year 2023 refers to the fiscal year ended July 31, 2023).

 

The accompanying consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with U.S. GAAP. The accompanying consolidated financial statements reflect the activity related to the 520 Property as discontinued operations. Operating results for the six months ended January 31, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2024. The balance sheet at July 31, 2023 has been derived from the Company’s audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2023, or the 2023 Form 10-K, as filed with the U.S. Securities and Exchange Commission (the “SEC”).

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates.

 

Liquidity

 

As of January 31, 2024, the Company had cash and cash equivalents of approximately $7.1 million, and available-for-sale securities valued at approximately $64.6 million. The Company expects the balance of cash and cash equivalents, and available-for-sale securities to be sufficient to meet its obligations for at least the next 12 months from the issuance of these consolidated financial statements.

 

Concentration of Credit Risk and Significant Customers

 

The Company routinely assesses the financial strength of its customers. As a result, the Company believes that its accounts receivable credit risk exposure is limited. For both the three and six months ended January 31, 2024, related parties represented 40% of the Company’s revenue. For the three and six months ended January 31, 2023, including revenue from discontinued operations, related parties represented 39% and 43% of the Company’s revenue, respectively. As of January 31, 2024, there was one customer which represented 12% of the Company’s accounts receivable balance and one related party which represented 45% of the Company's accounts receivable balance. As of July 31, 2023, there was one customer which represented 27% of the Company’s accounts receivable balance and one related party which represented 47% of the Company’s accounts receivable balance.

 

9

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Cash and Cash Equivalents 

 

The Company considers all liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

 

Reserve for Receivables

 

The allowance for doubtful accounts reflects the Company’s best estimate of lifetime credit losses inherent in the accounts receivable balance. The allowance is determined based on known troubled accounts, historical experience and other currently available evidence. Doubtful accounts are written off upon final determination that the trade accounts will not be collected. The computation of this allowance is based on the tenants’ or parking customers’ payment histories, as well as certain industry or geographic specific credit considerations. If the Company’s estimates of collectability differ from the cash received, then the timing and amount of the Company’s reported revenue could be impacted. The credit risk is mitigated by the high quality of the Company’s existing tenant base, inclusive of related parties, which represented 40% of the Company’s total revenue for the three and six months ended January 31, 2024 and 39% and 43% of the Company’s total revenue for the three and six months ended January 31, 2023, respectively. The Company recorded bad debt expense from discontinued operations of approximately $62 thousand and $45 thousand for the three and six months ended January 31, 2023, respectively. The Company recorded bad debt expense from continuing operations of approximately $0 and $2 thousand for the three and six months ended January 31, 2024, respectively.

 

Convertible Note Receivable, Related Party

 

The Convertible Note Receivable is classified as available-for-sale as defined under ASC 320, Investments - Debt and Equity Securities, and is recorded at fair value. Subsequent changes in fair value are recorded in accumulated other comprehensive income (loss).

 

The fair value of the Convertible Note Receivable is estimated using a scenario-based analysis based on the probability-weighted present value of future investment returns, considering each of the possible outcomes available to the Company, including cash repayment, equity conversion, and collateral transfer scenarios. Estimating the fair value of the convertible note requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors.

 

Variable Interest Entities

 

In accordance with ASC 810, Consolidation, the Company assesses whether it has a variable interest in legal entities in which it has a financial relationship and, if so, whether or not those entities are variable interest entities (“VIEs”). For those entities that qualify as VIEs, ASC 810 requires the Company to determine if the Company is the primary beneficiary of the VIE, and if so, to consolidate the VIE.

 

If an entity is determined to be a VIE, the Company evaluates whether the Company is the primary beneficiary. The primary beneficiary analysis is a qualitative analysis based on power and economics. The Company consolidates a VIE if both power and benefits belong to the Company – that is, the Company (i) has the power to direct the activities of a VIE that most significantly influence the VIE’s economic performance (power), and (ii) has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE (benefits). The Company consolidates VIEs whenever it is determined that the Company is the primary beneficiary.

 

10

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Investments

 

The method of accounting applied to long-term investments in equity securities involves an evaluation of the significant terms of each investment that explicitly grant or suggest evidence of control or influence over the operations of the investee and also include the identification of any variable interests in which the Company is the primary beneficiary. The consolidated financial statements include the Company’s controlled affiliates. All significant intercompany accounts and transactions between the consolidated affiliates are eliminated.

 

Investments in equity securities may be accounted for using (i) the fair value option, if elected, (ii) fair value through earnings if fair value is readily determinable or (iii) for equity investments without readily determinable fair values, the measurement alternative to measure at cost adjusted for any impairment and observable price changes, as applicable. The election to use the measurement alternative is made for each eligible investment.

 

The Company has elected the fair value option to account for its investment in Cyclo Therapeutics, as the Company has significant influence over Cyclo’s management. The fair value option is irrevocable once elected. The Company measured its initial investment in Cyclo at fair value and shall record all subsequent changes in fair value in earnings in the consolidated statements of operations and comprehensive loss. The Company believes the fair value option best reflects the underlying economics of the investment. The Company has determined that Cyclo is a VIE; however, the Company has determined that it is not the primary beneficiary as the Company does not have the power to direct the activities of Cyclo that most significantly impact Cyclo’s economic performance. See Note 9, “Investments in Cyclo Therapeutics, Inc.”

 

Investments in which the Company does not have the ability to exercise significant influence over operating and financial matters are accounted for in accordance with ASC 321, Investments - Equity Securities. Investments without readily determinable fair values are accounted for using the measurement alternative which is at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company periodically evaluates its investments for impairment due to declines considered to be other than temporary. If the Company determines that a decline in fair value is other than temporary, then a charge to earnings is recorded in the accompanying consolidated statements of operations and comprehensive loss, and a new basis in the investment is established.

 

Investments - Hedge Funds

 

The Company accounts for its investments in hedge funds in accordance with ASC 321, Investments – Equity Securities. Unrealized gains and losses resulting from the change in fair value of these securities is included in unrealized (loss) gain on investments – Hedge Funds in the consolidated statements of operations and comprehensive loss.

 

Corporate Bonds and US Treasury Bills

 

The Company’s marketable securities are considered to be available-for-sale as defined under ASC 320, Investments - Debt and Equity Securities, and are recorded at fair value. Unrealized gains or losses are included in accumulated other comprehensive loss. Realized gains or losses are released from accumulated other comprehensive loss and into earnings on the consolidated statements of operations and comprehensive loss.

 

Effective August 1, 2023, the Company uses a current expected credit loss (“CECL”) model to estimate the allowance for credit losses on available-for-sale debt securities. For available-for-sale debt securities in an unrealized loss position, management first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.

 

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any decline in fair value that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. No allowance for credit losses was recognized by the Company at January 31, 2024.

 

11

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Cost Method Investment

 

The Company has determined that Cornerstone Pharmaceuticals (see Note 4) is a VIE; however, the Company has determined that it is not the primary beneficiary as the Company does not have the power to direct the activities of Cornerstone Pharmaceuticals that most significantly impact Cornerstone Pharmaceuticals’ economic performance.

 

Equity Method Investments

 

The Company has determined that each of RP Finance, LLC (“RP Finance” and together with Day Three, the “Equity Method Investees”) and Day Three (through January 2, 2024) and the Company’s investments in RP Finance and Day Three, collectively, the “Equity Method Investments”, (see Note 6 and Note 8), is a VIE; however, the Company has determined that it is not the primary beneficiary as the Company does not have the power to direct the activities of the Equity Method Investees that most significantly impact the Equity Method Investees’ economic performance and, therefore, is not required to consolidate the Equity Method Investees. The Company accounts for the Equity Method Investments using the equity method of accounting. As of January 2, 2024, Day Three is a majority-owned subsidiary which is consolidated and is no longer included in the Equity Method Investees.

 

Long-Lived Assets 

 

Equipment, buildings, leasehold improvements, and furniture and fixtures are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives, which range as follows: 

  

Classification  Years 
Building and improvements  40 
Tenant improvements  7-15 
Machinery and equipment  5 
Other (primarily office equipment, furniture and fixtures)  5 

 

Properties

 

On August 22, 2022, Broad Atlantic Associates LLC, a wholly-owned subsidiary of the Company (“Broad Atlantic”), completed the sale of the 520 Property for a purchase price of $49.4 million. The 520 Property serves as the Company’s headquarters and has several other tenants, and includes a related 800-car public parking garage. The Company determined that the 520 Property met the held-for-sale and discontinued operations criteria as of July 1, 2022. The 520 Property was disposed of on August 22, 2022.

 

The Company owns a portion of the 6th floor of a building located at 5 Shlomo Halevi Street, in Jerusalem, Israel.

 

Business Combinations

 

Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions provided by management, including expected future cash flows. We allocate any excess purchase price over the fair value of the identifiable net assets and liabilities acquired to goodwill. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs, including advisory, legal, accounting, valuation, and other costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.

 

12

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Impairment of Long-Lived Assets

 

The Company assesses the recoverability of long-lived assets, which include property and equipment, intangible assets, in-process research and development and patents whenever significant events or changes in circumstances indicate that its carrying amount may not be recoverable. If indicators of impairment exist, projected future undiscounted cash flows associated with the asset are compared to its carrying amount to determine whether the asset’s carrying value is recoverable. Any resulting impairment is recorded as a reduction in the carrying value of the related asset in excess of fair value and a change to operating results. For the six months ended January 31, 2024 and 2023, the Company determined there was no impairment of its long-lived assets.

 

Assets Held-for-Sale and Discontinued Operations

 

The Company classifies assets as held-for-sale if all held-for-sale criteria are met pursuant to ASC 360-10, Property, Plant and Equipment. Criteria include management commitment to sell the disposal group in its present condition and the sale being deemed probable of being completed within one year. Assets classified as held-for-sale are not depreciated and are measured at the lower of their carrying amount or fair value less cost to sell. The Company assesses the fair value of a disposal group, less any costs to sell, each reporting period it remains classified as held-for-sale and reports any subsequent changes as an adjustment to the carrying value of the disposal group, as long as the new carrying value does not exceed the initial carrying value of the disposal group.

 

Strategic changes in the Company’s operations can be considered a discontinued operation if both the operations and cash flows of the discontinued component have been (or will be) eliminated from the ongoing operations of the Company and the Company will not have any significant continuing involvement in the operations of the discontinued component after the disposal transaction. The results of the discontinued operations shall be reflected as a discontinued operation on the consolidated statements of operations and comprehensive loss and prior periods shall be recast to reflect the earnings from discontinued operations. As a result of the agreement to sell the 520 Property, the accompanying consolidated financial statements reflect the activity related to the sale of the 520 Property as discontinued operations. The Company determined that the 520 Property met the held-for-sale and discontinued operations criteria as of July 1, 2022. The 520 Property was disposed of on August 22, 2022. See Note 3 for additional information regarding the results, major classes of assets and liabilities, significant non-cash operating items, and capital expenditures of discontinued operations.

 

Goodwill

 

The Company assesses goodwill for impairment on an annual basis or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. The Company regularly monitors current business conditions and other factors including, but not limited to, adverse industry or economic trends and lower projections of profitability that may impact future operating results. The process of evaluating the potential impairment of goodwill requires significant judgement. In performing the Company’s annual goodwill impairment test, the Company is permitted to first assess qualitative factors to determine whether it is more likely than not the fair value of the Company’s reporting unit is less than its carrying amount, including goodwill. In performing the qualitative assessment, the Company considers certain events and circumstances specific to the reporting unit and the entity as a whole, such as macroeconomic conditions, industry and market considerations, overall financial performance and cost factors when evaluating whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The Company is also permitted to bypass the qualitative assessment and proceed directly to the quantitative test. If the Company chooses to undertake the qualitative assessment and concludes that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company would then proceed to the quantitative impairment test. In the quantitative assessment, the Company compares the fair value of the reporting unit to its carrying amount, which includes goodwill. If the fair value exceeds the carrying value, no impairment loss exists. If the fair value is less than the carrying amount, a goodwill impairment loss is measured and recorded.

 

13

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company assesses goodwill for impairment on an annual basis as of May 31 or more frequently when events and circumstances occur indicating that recorded goodwill may be impaired.

 

Revenue Recognition

 

The Company applies the five-step approach as described in ASC 606, Revenue from Contracts with Customers, which consists of the following: (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when (or as) the entity satisfies a performance obligation.

 

The Company disaggregates its revenue by source within its consolidated statements of operations and comprehensive loss. As an owner and operator of real estate, the Company derives the majority of its revenue from leasing office and parking space to tenants at its properties. In addition, the Company earns revenue from recoveries from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs. Revenue from recoveries from tenants is recorded together with rental income on the consolidated statements of operations and comprehensive loss which is also consistent with the guidance under ASC 842, Leases.

 

The revenue derived from the 520 Property, which included leasing office and parking space to the tenants, is presented within discontinued operations in the consolidated statements of operations and comprehensive loss.

 

Contractual rental revenue is reported on a straight-line basis over the terms of the respective leases. Accrued rental income, included within other assets on the consolidated balance sheets, represents cumulative rental income earned in excess of rent payments received pursuant to the terms of the individual lease agreements.

 

The Company also earned revenue from parking which was derived primarily from monthly and transient daily parking. The monthly and transient daily parking revenue falls within the scope of ASC 606 and was accounted for at the point in time when control of the goods or services transfers to the customer and the Company’s performance obligation is satisfied, consistent with the Company’s previous accounting.

 

Research and Development Costs

 

Research and development costs and expenses incurred by consolidated entities consist primarily of salaries and related personnel expenses, stock-based compensation, fees paid to external service providers, laboratory supplies, costs for facilities and equipment, license costs, and other costs for research and development activities. Research and development expenses are recorded in operating expenses in the period in which they are incurred. Estimates have been used in determining the liability for certain costs where services have been performed but not yet invoiced. The Company monitors levels of performance under each significant contract for external service providers, including the extent of patient enrollment and other activities through communications with the service providers to reflect the actual amount expended.

 

Contingent milestone payments associated with acquiring rights to intellectual property are recognized when probable and estimable. These amounts are expensed to research and development when there is no alternative future use associated with the intellectual property.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation using the provisions of ASC 718, Stock-Based Compensation, which requires the recognition of the fair value of stock-based compensation. Stock-based compensation is estimated at the grant date based on the fair value of the awards. The Company accounts for forfeitures of grants as they occur. Compensation cost for awards is recognized using the straight-line method over the vesting period. Stock-based compensation is included in general and administrative expense and research and development expense in the consolidated statements of operations and comprehensive loss.

  

14

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Income Taxes

 

The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the period in which related temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in its assessment of a valuation allowance. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of such change.

 

The Company uses a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return. The Company determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the Company presumes that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. Tax positions that meet the more-likely-than-not recognition threshold are measured to determine the amount of tax benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in one or more of the following: an increase in a liability for income taxes payable, a reduction of an income tax refund receivable, a reduction in a deferred tax asset, or an increase in a deferred tax liability.

 

The Company classifies interest and penalties on income taxes as a component of income tax expense, if any.

 

Contingencies

 

The Company accrues for loss contingencies when both (a) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (b) the amount of loss can reasonably be estimated. When the Company accrues for loss contingencies and the reasonable estimate of the loss is within a range, the Company records its best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company accrues the minimum amount in the range. The Company discloses an estimated possible loss or a range of loss when it is at least reasonably possible that a loss may have been incurred.

 

Fair Value Measurements

 

Fair value of financial and non-financial assets and liabilities is defined as an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three-tier hierarchy for inputs used to measure fair value, which prioritizes the inputs to valuation techniques used to measure fair value, is as follows:

 

Level 1 - quoted prices in active markets for identical assets or liabilities;

 

Level 2 - quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or

 

Level 3 - unobservable inputs for the asset or liability, such as discounted cash flow models or valuations.

 

15

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.

 

Income (Loss) Per Share

 

Basic income (loss) per share is computed by dividing net income (loss) attributable to all classes of common stockholders of the Company by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted income (loss) per share is determined in the same manner as basic income (loss) per share, except that the number of shares is increased to include restricted stock still subject to risk of forfeiture and to assume exercise of potentially dilutive stock options using the treasury stock method, unless the effect of such increase would be anti-dilutive. The Company uses income (loss) from continuing operations as the “control number” or benchmark to determine whether potential common shares are dilutive or anti-dilutive for purposes of reporting income (loss) per share for discontinued operations.

 

Recently Adopted Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments, which was codified in Accounting Standards Codification (“ASC”) 326, Financial Instruments - Credit Losses (“ASC 326”). The standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. Because the Company is a smaller reporting company, ASC 326 became effective for the Company for fiscal years beginning after December 15, 2022. As such, the Company adopted ASC 326 effective August 1, 2023, utilizing the modified retrospective transition method. Upon adoption, the Company updated its impairment model to utilize a forward-looking current expected credit losses (“CECL”) model in place of the incurred loss methodology for financial instruments measured at amortized cost, primarily including its accounts receivable. In relation to available-for-sale (“AFS”) debt securities, the guidance eliminates the concept of “other-than-temporary” impairment, and instead focuses on determining whether any impairment is a result of a credit loss or other factors. The adoption of ASC 326 did not have a material impact on our unaudited consolidated financial statements as of the adoption date.

 

Recently Issued Accounting Standards Not Yet Adopted

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies and are adopted by the Company as of the specified effective date. The Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

 

In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies an issuer’s accounting for convertible instruments by reducing the number of accounting models that require separate accounting for embedded conversion features. ASU 2020-06 also simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification and makes targeted improvements to the disclosures for convertible instruments and earnings-per-share (“EPS”) guidance. This update will be effective for the Company’s fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Entities can elect to adopt the new guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements and intends to adopt the standard as of August 1, 2024.

 

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”), which clarifies the guidance in Accounting Standards Codification Topic 820, Fair Value Measurement (“Topic 820”), when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. ASU 2022-03 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

 

16

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – DISCONTINUED OPERATIONS

 

On July 1, 2022, the Company determined that the 520 Property met the held-for-sale criteria and the Company therefore classified the 520 Property as held-for-sale in the consolidated balance sheets at July 31, 2022. The sale of the 520 Property also represented a significant strategic shift that will have a major effect on the Company’s operations and financial results. Therefore, the Company has classified the results of operations related to the 520 Property as discontinued operations in the consolidated statements of operations and comprehensive loss. Depreciation on the 520 Property ceased on July 1, 2022, as a result of the 520 Property being classified as held-for-sale.

 

On August 22, 2022, Broad Atlantic completed the sale of the 520 Property for an aggregate gross purchase price of $49.4 million.

 

The 520 Property was encumbered by a mortgage securing a $15 million note payable which was paid off in this transaction. See Note 16 for further information on the note payable. After repaying the note payable, commissions, taxes, and other related costs, the Company received a net cash amount of approximately $33 million at closing.

 

Discontinued operations include (i) rental and parking revenues, (ii) payroll, benefits, facility costs, real estate taxes, consulting and professional fees dedicated to the 520 Property, (iii) depreciation and amortization expenses and (iv) interest (including amortization of debt issuance costs) on the note payable on the 520 Property. The operating results of these items are presented in our consolidated statements of operations and comprehensive loss as discontinued operations for all periods presented.

 

The following table details the components comprising net income (loss) from our discontinued operations:

 

   Three Months Ended
January 31,
   Six Months Ended
January 31,
 
   2023   2023 
Revenue from discontinued operations:        
Rental – third party  $
   $68 
Rental – related party   
    115 
Parking   
    66 
Other – related party   
    
 
Total revenue from discontinued operations   
    249 
           
Costs and expenses from discontinued operations:          
General and administrative   157    403 
Depreciation and amortization   
    
 
Loss from discontinued operations   (157)   (154)
           
Other income   
    
 
Interest expense   
    (87)
Loss from discontinued operations   (157)   (241)
Gain on disposal of discontinued operations   
    6,784 
Income (loss) from discontinued operations  $(157)  $6,543 

 

The gain on disposal of discontinued operations of approximately $6.8 million was derived from the gross proceeds of approximately $49.4 million from the sale of the 520 Property, less the carrying value of the 520 Property of approximately $40.2 million, net of approximately $1.2 million in transaction costs and the write off of approximately $1.2 million of deferred rental income.

 

17

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 4 – INVESTMENT IN CORNERSTONE PHARMACEUTICALS

 

Equity Investment in Cornerstone Pharmaceuticals and Impairment of Cost Method Investment

 

Cornerstone Pharmaceuticals is a clinical stage, cancer metabolism-based therapeutics company focused on the development and commercialization of therapies that exploit the metabolic differences between normal cells and cancer cells.

 

The Company owns debt and equity interests and rights in Cornerstone Pharmaceuticals through a 90%-owned non-operating subsidiary, Pharma Holdings, LLC, or Pharma Holdings.

 

Pharma Holdings owns 50% of CS Pharma Holdings, LLC, or CS Pharma, a non-operating entity that owns equity interests in Cornerstone Pharmaceuticals. Accordingly, the Company holds an effective 45% indirect interest in the assets held by CS Pharma.

 

A trust for the benefit of the children of Howard Jonas (Chairman of the Board and Executive Chairman and former Chief Executive Officer of the Company and Member of the Board of Cornerstone Pharmaceuticals) holds a financial instrument (the “Instrument”) that owns 10% of Pharma Holdings.

 

Pharma Holdings holds 44.0 million shares of Cornerstone Pharmaceuticals’ Series D Convertible Preferred Stock. Pharma Holdings also holds certain governance rights in Cornerstone Pharmaceuticals including the appointment of directors. Pharma Holdings is not the primary beneficiary of Cornerstone Pharmaceuticals as it does not control or direct the activities of Cornerstone Pharmaceuticals that most significantly impact Cornerstone Pharmaceuticals’ economic performance.

 

CS Pharma holds 16.7 million shares of Cornerstone Pharmaceuticals Series D Convertible Preferred Stock. The Company and its subsidiaries collectively own securities representing 51% of the outstanding capital stock of Cornerstone Pharmaceuticals and 42% of the capital stock on a fully diluted basis.

 

The Series D Convertible Preferred Stock has a stated value of $1.25 per share (subject to appropriate adjustment to reflect any stock split, combination, reclassification or reorganization of the Series D Preferred Stock or any dilutive issuances, as described below). Holders of Series D Stock are entitled to receive non-cumulative dividends when, as and if declared by the Board of Cornerstone Pharmaceuticals, prior to any dividends to any other class of capital stock of Cornerstone Pharmaceuticals. In the event of any liquidation, dissolution or winding up of Cornerstone Pharmaceuticals, or in the event of any deemed liquidation, proceeds from such liquidation, dissolution or winding up shall be distributed first to the holders of Series D Stock. Except with respect to certain major decisions, or as required by law, holders of Series D Stock vote together with the holders of the other preferred stock and common stock and not as a separate class.

 

The Company serves as the managing member of Pharma Holdings, and Pharma Holdings serves as the managing member of CS Pharma, with broad authority to make all key decisions regarding their respective holdings. Any distributions that are made to CS Pharma from Cornerstone Pharmaceuticals that are in turn distributed by CS Pharma, will need to be made pro rata to all members, which would entitle Pharma Holdings to 50% (based on current ownership) of such distributions. Similarly, if Pharma Holdings were to distribute proceeds it receives from CS Pharma, it would do so on a pro rata basis, entitling the Company to 90% (based on current ownership) of such distributions.

 

18

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company evaluated its investments in Cornerstone Pharmaceuticals in accordance with ASC 323, Investments - Equity Method and Joint Ventures, to establish the appropriate accounting treatment for its investment and has concluded that its investment did not meet the criteria for the equity method of accounting or consolidation and is carried at cost.

 

The Company has determined that Cornerstone Pharmaceuticals is a VIE; however, the Company has determined that it is not the primary beneficiary as it does not have the power to direct the activities of Cornerstone Pharmaceuticals that most significantly impact Cornerstone Pharmaceuticals’ economic performance. In addition, the interests held in Cornerstone Pharmaceuticals are Series D Convertible Preferred Stock and do not represent in-substance common stock.

 

The Instrument holds a contractual right to receive additional shares of Cornerstone Pharmaceuticals capital stock equal to 10% of the fully diluted capital stock of Cornerstone Pharmaceuticals (the “Bonus Shares”) upon the achievement of certain milestones. The additional 10% is based on the fully diluted capital stock of Cornerstone Pharmaceuticals, at the time of issuance. If any of the milestones are met, the Bonus Shares are to be issued without any additional payment.

 

The Company currently owns 51% of the issued and outstanding equity in Cornerstone Pharmaceuticals and has certain governance rights. Approximately 8% of the issued and outstanding equity is owned by the Company’s subsidiary CS Pharma and 43% is held by the Company’s subsidiary Pharma Holdings.

 

Line of Credit to Cornerstone Pharmaceuticals and Impairment of Related Receivable

 

On September 24, 2021, the Company entered into a Line of Credit Loan Agreement (the “Line of Credit Agreement”) with Cornerstone Pharmaceuticals under which Cornerstone Pharmaceuticals borrowed $25 million from the Company. The first advance was in the amount of $1.9 million on September 24, 2021. On October 1, 2021, a second advance was made in the amount of $23.1 million. The Line of Credit Agreement accrues interest at 9% per annum. The maturity date of the Line of Credit Agreement was June 17, 2022, and the amounts due on that date were not paid.

 

Due to the Data Events, the Company recorded a full reserve on the amounts due the Company from Cornerstone Pharmaceuticals related to the Line of Credit Agreement for $25 million during the fiscal year ended July 31, 2022.

 

Restructuring

 

On March 13, 2024, Cornerstone consummated a restructuring of its outstanding debt and equity interests. See Note 23 for additional information regarding the restructuring transaction.

 

NOTE 5 – CONVERTIBLE NOTE RECEIVABLE, RELATED PARTY

 

On March 21, 2023, the Company loaned $2.0 million to Cornerstone which is represented by the Promissory Note made by Cornerstone. The Promissory Note, which bears interest at a rate of seven and one-half percent (7.5%) per annum, was originally due and payable on May 22, 2023. The Promissory Note was amended to extend the maturity date to March 13, 2024 and to waive any increase in the interest rate provided for in the Promissory Note, provided that the entire principal amount and all accrued interest thereon is repaid in cash or converted into equity securities of Cornerstone no later than March 13, 2024. On March 13, 2024, Cornerstone consummated a restructuring of its outstanding debt and equity interests. See Note 23 for additional information regarding the restructuring transaction.

 

The Promissory Note is secured by a first priority security interest in all of Cornerstone’s right, title and interest in and to all of the tangible and intangible assets purchased by Cornerstone pursuant to the Purchase Agreement between Cornerstone and Calithera Biosciences, Inc. (“Calithera”), a clinical-stage, precision oncology biopharmaceutical company developing targeted therapies to redefine treatment for biomarker-specific patient populations, and all proceeds therefrom and all rights to the data related to CB-839 (the “Collateral”).

 

19

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The interest on the Promissory Note accrues from the issuance date until the Promissory Note is paid in full or converted, which shall accrue on a quarterly basis. Subject to the amendment described above, in the event the total outstanding amount under the Promissory Note is not repaid by the amended maturity date, the rate of interest shall be eleven percent (11%), retroactive from and after the maturity date. Subject to the amendment described above, following the occurrence of and during the continuation of an uncured Event of Default (as defined below), the outstanding principal amount shall bear interest at the rate of fourteen percent (14%) per annum (the “Default Interest Rate”) until the earliest of (i) cure of such Event of Default, (ii) repayment of all outstanding amounts due under the Promissory Note, (iii) conversion of all then outstanding obligations under the Promissory Note, or (iv) transfer of all its rights related to the Collateral.

 

The entire (and not less than the entire) outstanding principal amount due under the Promissory Note together with all accrued unpaid interest thereon and other amounts owing thereunder (together, the “Owed Amount”), may, at Cornerstone’s election at any time prior to the maturity date, be converted into a number of shares (the “Conversion Shares”) calculated by dividing the entire Owed Amount by the conversion price used by Cornerstone in a Qualified Offering/Conversion (as defined in the Promissory Note), and if no such Qualified Offering/Conversion has been consummated, the fair market value for the Conversion as determined by an independent third party valuation firm (the “Conversion Price”).

 

The Promissory Note contains certain trigger events (as defined in the Promissory Note) that generally, if uncured within five (5) trading days, may result in an event of default in accordance with the terms of the Promissory Note (such event, an “Event of Default”). Upon an Event of a Default, the Company may consider the Promissory Note immediately due and payable. Upon an Event of Default, the interest rate may also be increased to the lesser of 18% per annum or the maximum rate permitted under applicable law.

 

The Company recorded the Promissory Note at fair value as the security is classified as available-for-sale. Subsequent changes in fair value are recorded in unrealized gain or loss on available-for-sale securities as a component of other comprehensive income (loss) in the consolidated statements of operations and comprehensive loss. The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value of the Promissory Note as of January 31, 2024 and July 31, 2023 are as follows:

 

January 31, 2024  Amortized cost   Gross unrealized
gains
   Gross unrealized
(losses)
   Fair value 
   (in thousands) 
Convertible note receivable, related party  $2,000   $
   $(76)  $1,924 

 

July 31, 2023  Amortized cost   Gross unrealized
gains
   Gross unrealized
(losses)
   Fair value 
   (in thousands) 
Convertible note receivable, related party  $2,000   $
   $(79)  $1,921 

 

Interest income on the Promissory Note totaled approximately $38 and $76 thousand for the three and six months ended January 31, 2024, respectively, and is recorded in interest receivable on the consolidated balance sheets.

 

20

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 6 – INVESTMENT IN RP FINANCE, LLC

 

On February 3, 2020, Cornerstone Pharmaceuticals entered into a Line of Credit with RP Finance (“RPF Line of Credit”) which provides a revolving commitment of up to $50,000,000 to fund clinical trials and other capital needs.

 

The Company owns 37.5% of the equity interests in RP Finance and is required to fund 37.5% of funding requests from Cornerstone Pharmaceuticals under the RPF Line of Credit. The Instrument owns 37.5% of the equity interests in RP Finance, and is required to fund 37.5% of funding requests from Cornerstone Pharmaceuticals under the RPF Line of Credit. The remaining 25% equity interests in RP Finance are owned by other stockholders of Cornerstone Pharmaceuticals.

 

Under the RPF Line of Credit, all funds borrowed will bear interest at the mid-term Applicable Federal Rate published by the U.S. Internal Revenue Service. The maturity date is the earliest of February 3, 2025, upon a change of control of Cornerstone Pharmaceuticals or a sale of Cornerstone Pharmaceuticals or its assets. Cornerstone Pharmaceuticals can draw on the facility on 60 days’ notice. The funds borrowed under the RPF Line of Credit must be repaid out of certain proceeds from equity sales by Cornerstone Pharmaceuticals.

 

In connection with entering into the RPF Line of Credit, Cornerstone Pharmaceuticals agreed to issue to RP Finance shares of its common stock representing 12% of the issued and outstanding shares of Cornerstone Pharmaceuticals common stock, with such interest subject to anti-dilution protection as set forth in the RPF Line of Credit.

 

The Company has determined that RP Finance is a VIE; however, the Company has determined that it is not the primary beneficiary as the Company does not have the power to direct the activities of RP Finance that most significantly impact RP Finance’s economic performance and, therefore, is not required to consolidate RP Finance. Therefore, the Company will use the equity method of accounting to record its investment in RP Finance. As of January 31, 2024 and July 31, 2023, the equity method investment on the Company’s balance sheet was $0, and no additional equity loss or earnings have been recognized for the three and six months ended January 31, 2024 and 2023. The assets and operations of RP Finance are not significant and the Company has identified the equity investment in RP Finance as a related party transaction (see Note 17).

 

As of January 31, 2024 and July 31, 2023, the Company has funded a cumulative total of $9.375 million in accordance with its 37.5% ownership interests in RP Finance. The amounts funded have been fully reserved as of January 31, 2024 and July 31, 2023. On March 13, 2024, Cornerstone consummated a restructuring of its outstanding debt and equity interests. See Note 23 for additional information regarding the restructuring transaction.

 

21

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 7 – INVESTMENT IN LIPOMEDIX PHARMACEUTICALS LTD.

 

LipoMedix is a development-stage, privately held Israeli company focused on the development of an innovative, safe and effective cancer therapy based on liposome delivery.

 

In March 2021, the Company provided bridge financing in the principal amount of up to $400,000 to LipoMedix with a maturity date of September 1, 2021, and an interest rate of 8% per annum. As of September 1, 2021, LipoMedix was in default on the terms of the loan and as such, the interest rate has increased to 15% per annum.

 

On November 15, 2021, the Company entered into a share purchase agreement with LipoMedix to purchase up to 15,975,000 ordinary shares at $0.1878 per share for an aggregate purchase price of $3.0 million (the “LipoMedix SPA”). Additionally, LipoMedix issued the Company a warrant to purchase up to 15,975,000 ordinary shares at an exercise price of $0.1878 per share which expired on November 11, 2022.

 

As of the date of the LipoMedix SPA, there was an outstanding loan balance including principal of $400 thousand and accrued interest of $21.8 thousand owed by LipoMedix to the Company on a note made by LipoMedix in favor of the Company issued in March 2021. The amount due on the loan was netted against the approximately $3.0 million aggregate purchase price due to LipoMedix, resulting in a cash payment by the Company of approximately $2.6 million in exchange for the 15,975,000 shares purchased. As a result of the share purchase, the Company’s ownership of LipoMedix increased to approximately 84% with a noncontrolling interest of approximately 16%. The Company recorded approximately $8 thousand to adjust the carrying amount of the noncontrolling interest to reflect the Company’s increased ownership interest in LipoMedix’s net assets.

 

On February 9, 2023, the Company entered into a Share Purchase Agreement with LipoMedix to purchase 70,000,000 ordinary shares at $0.03 per share for an aggregate purchase price of $2.1 million (the “2023 LipoMedix SPA”). As a result of the share purchase, the Company’s ownership of LipoMedix increased to approximately 95% with a noncontrolling interest of approximately 5%. The Company recorded approximately $16 thousand to adjust the carrying amount of the noncontrolling interest to reflect the Company’s increased ownership interest in LipoMedix’s net assets.

 

As of January 31, 2024, the Company held 95% of the issued and outstanding ordinary shares of LipoMedix and has consolidated this investment from the second quarter of fiscal 2018.

 

NOTE 8 – INVESTMENT IN DAY THREE LABS INC.

 

Initial investment in Day Three

 

On April 7, 2023, the Company entered into a Common Stock Purchase Agreement (the “Day Three Purchase Agreement”) with Day Three. Day Three is a company which reimagines existing cannabis offerings with pharmaceutical-grade technology and innovation like Unlokt™ to bring to market better, cleaner, more precise and predictable products. Pursuant to the Day Three Purchase Agreement, the Company purchased 4,302,224 shares of common stock representing 38% of the outstanding shares of common stock of Day Three (33.333% on a fully diluted basis), for a purchase price of $3.0 million. The Company also received a warrant exercisable for 7,528,893 shares of common stock at an aggregate purchase price of $3.0 million, which expires five years from the date of issuance or earlier based on the occurrence of certain events as defined in the Day Three Purchase Agreement (the “Day Three Warrant”).

 

Prior to January 2024, the Company accounted for this investment as an equity method investment in accordance with the guidance in ASC 323, Investments – Equity Method and Joint Ventures. The Company determined that a 38% ownership interest in Day Three and its right to designate two members of the Board of Directors of Day Three (out of a current total of seven members) indicates that the Company is able to exercise significant influence.

 

The Company determined that Day Three is a VIE; however, the Company determined that, prior to January 2024, it was not the primary beneficiary as it did not have the power to direct the activities that most significantly impacted Day Three’s economic performance. The Company has therefore concluded it was not required to consolidate Day Three. The Company used the equity method of accounting to record its investment in Day Three.

 

22

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Day Three’s fiscal year ends on December 31, and as a result, the Company recognizes its share of Day Three’s earnings/loss on a one-month lag. For the three and six months ended January 31, 2024, the Company recognized approximately $206 and $422 thousand of equity in loss of Day Three, based on its proportionate share of Day Three’s results through January 2, 2024, the effective date of the Day Three Acquisition, as discussed below. The assets and operations of Day Three are not significant to the Company’s assets or operations.

 

Acquisition of Day Three

 

In January 2024, the Company entered into a series of transactions with Day Three and certain shareholders to purchase an aggregate of 13,770,378 shares of common stock of Day Three, acquiring a controlling interest of Day Three (the “Day Three Acquisition”). As a result of the Day Three Acquisition, the Company holds an aggregate 79% of the issued and outstanding shares of common stock of Day Three. Day Three has options and warrants outstanding that, when exercised, could dilute the Company’s ownership interest in Day Three. In connection with the Day Three Acquisition, the Day Three Warrant was terminated. The acquisition date was determined to be January 2, 2024, which is the date that Rafael obtained a controlling interest of the common stock of Day Three. The Day Three Acquisition is being accounted for as a business combination in accordance with ASC 805.

 

During the period of October 2023 through January 2024, the Company advanced $250,000 to Day Three pursuant to a promissory note (the “Day Three Note I”), $150,000 to Day Three pursuant to a promissory note (the “Day Three Note II”), $1,000,000 to Day Three pursuant to a third promissory note (the “Day Three Note III”), and $589,024 to Day Three pursuant to a fourth promissory note (the “Day Three Note IV”) (collectively, the “Day Three Promissory Notes”). The Day Three Promissory Notes accrue interest at rate of between 5.01% and 5.19% per annum.

 

The aggregate consideration of the Day Three Acquisition was $3.1 million, which consisted of 1) cash consideration of $0.2 million, 2) accrued consideration of $0.2 million, 3) the exchange of principal and accrued interest amounts totaling to $2.0 million owed by Day Three to the Company pursuant to the Day Three Promissory Notes for common stock, and 4) the fair value of previously held interests in Day Three of $0.7 million.

 

The following table summarizes the purchase consideration transferred in the Day Three Acquisition as defined in ASC 805:

 

(in thousands)  Purchase Consideration 
Cash consideration  $200 
Accrued consideration   200 
Exchange of Day Three Promissory Notes for Common Stock   2,000 
Fair value of previously held interests(1)   742 
Total purchase consideration  $3,142 

 

(1)The Company remeasured its previously held equity interest in Day Three immediately before the Day Three Acquisition, previously accounted for under the equity method of accounting, to its fair value (determined using the implied enterprise value based on the purchase price multiplied by the ratio of the number of shares previously held to total shares, as of the acquisition date) and recognized a loss of $1.6 million recorded on the statement of operations as a Loss on initial investment in Day Three upon acquisition.

 

23

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed in the Day Three Acquisition as of the acquisition date:

 

(in thousands)  January 2,
2024
 
Cash and cash equivalents  $1,499 
Accounts receivable   63 
Prepaid expenses and other current assets   77 
Property and equipment, net   408 
Goodwill   3,571 
Identifiable intangible assets   2,180 
Accounts payable   (362)
Accrued expenses   (98)
Installment note payable   (2,500)
Deferred tax liability   (545)
Total fair value of net assets acquired  $4,293 
Less: noncontrolling interest   (1,151)
Total purchase consideration  $3,142 

 

The preliminary fair values of the assets acquired and liabilities assumed in the Day Three Acquisition are subject to change as we perform additional reviews of our assumptions utilized. Further adjustments may be necessary as additional information related to the fair values of assets acquired, liabilities assumed, and tax implications thereon is assessed during the measurement period (up to one year from the acquisition date).

 

The noncontrolling interest was recognized at fair value, which was determined using the implied enterprise value based on the purchase price multiplied by the ratio of the number of shares owned by minority holders to total shares, as of the acquisition date.

 

Included in the acquired liabilities assumed in the Day Three Acquisition is a non-interest bearing installment note payable of $2.5 million. The installment note was recognized by Day Three in relation to a 2021 asset purchase agreement for certain patents. The assumed installment note payable had a balance of $800 thousand due January 2024 (which was paid) and the remaining $1.7 million due in November 2024. At January 31, 2024, the installment note payable has a remaining balance due of $1.7 million which is included in Installment note payable on the consolidated balance sheet.

 

Goodwill of $3.6 million arising from the Day Three Acquisition was included in the Healthcare segment as of January 31, 2024 and was attributable to potential synergies and an assembled workforce. The calculated goodwill is not deductible for tax purposes.

 

Intangible assets acquired primarily include patents, technology licenses and non-compete agreements. The weighted average amortization period for the acquired intangible assets is approximately 14.7 years.

 

The consolidated financial statements include the results of the Day Three Acquisition subsequent to the closing date. Pro forma information is not presented as the acquisition was not considered significant.

 

On January 23, 2024, Day Three entered into an asset purchase agreement for the sale of certain patents for $280 thousand. At January 31, 2024, Day Three had received $70 thousand of the sales price, and the remaining $210 thousand is to be paid in four monthly installments and have accordingly been included in Prepaid expenses and other current assets on the consolidated balance sheet.

 

24

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 9 – INVESTMENT IN CYCLO THERAPEUTICS, INC.

 

On May 2, 2023, the Company entered into a Securities Purchase Agreement (the “Cyclo SPA”) with Cyclo. Cyclo is a clinical-stage biotechnology company dedicated to developing life-changing medicines for patients and families living with challenging diseases through its lead therapeutic asset, Trappsol®. The Company purchased from Cyclo (i) 2,514,970 common shares (the “Purchased Shares”) and (ii) a warrant to purchase 2,514,970 common shares with an exercise price of $0.71 per share (the “May Warrant”), at a combined purchase price equal to $0.835 per Purchased Share and May Warrant to purchase one share, for an aggregate purchase price of $2.1 million. The May Warrant is exercisable until August 1, 2030.

 

Cyclo and the Company are party to a Registration Rights Agreement requiring Cyclo to file a registration statement with the Securities and Exchange Commission to register the resale of the shares and shares of common stock underlying the May Warrant, upon the request of Rafael.

 

On August 1, 2023, pursuant to a Securities Purchase Agreement (the “Cyclo II SPA”) dated June 1, 2023, the Company purchased an additional 4,000,000 shares of common stock (the “Cyclo II Shares”), and received a warrant to purchase an additional 4,000,000 Shares (the “Cyclo II Warrant”), for an aggregate purchase price of $5,000,000. The Cyclo II Warrant has an exercise price of $1.25 per share and is exercisable until August 1, 2030. The August 1, 2023 investment increased the Company’s percentage ownership of Cyclo common stock to approximately 34%. As of the date of this report, the Company has not exercised the Cyclo II Warrant.

 

On October 20, 2023, the Company exercised the May Warrant to purchase 2,514,970 common shares at an exercise price of $0.71 per share, pursuant to a Securities Purchase Agreement dated October 20, 2023, and received a new warrant (the “Replacement Warrant”) to purchase 2,766,467 common shares at an exercise price of $0.95 per share. The Replacement Warrant is exercisable until October 20, 2027. As of the date of this report, the Company had not exercised the Replacement Warrant. Both the Cyclo II Warrant and Replacement Warrant (collectively, the “Cyclo Warrants”) are subject to the restriction that exercise(s) do not convey more than 49% ownership to the Company. Upon exercise of the May Warrant, the Company recognized a realized gain of $424 thousand. The October 20, 2023 investment increased the Company’s percentage ownership of Cyclo common stock to approximately 40%.

 

William Conkling, Rafael’s CEO, serves on Cyclo’s Board of Directors.

 

The Company has determined that Cyclo is a VIE; however, the Company has determined that it is not the primary beneficiary as the Company does not have the power to direct the activities of Cyclo that most significantly impact Cyclo’s economic performance and, therefore, is not required to consolidate Cyclo. The Company has elected to account for its investment in Cyclo under the fair value option, with subsequent changes in fair value recognized as unrealized gain (loss) in the consolidated statements of operations and comprehensive loss. During the three and six months ended January 31, 2024, the Company recognized unrealized gains of $9.7 and $7.6 million, respectively, related to its investment in Cyclo.

 

Summarized Fair Value Method Investment Details

   January 31, 2024 
   Ownership %  

Aggregate Fair Value
(in thousands)

 
Cyclo   40%  $19,567 

 

The 40% ownership percentage as of January 31, 2024 is comprised of the shares of common stock owned by the Company and does not include the Cyclo II Warrant or the Replacement Warrant. The total aggregate fair value of the Cyclo investment of $19,567,187 as of January 31, 2024 is comprised of common shares with an aggregate fair value of $17,066,587 and Cyclo Warrants with an aggregate fair value of $2,500,600. The total aggregate fair value of the Cyclo investment of $4,763,102 as of July 31, 2023 is comprised of common shares with an aggregate fair value of $3,898,204 and the May Warrants with an aggregate fair value of $864,898 (see Note 11).

 

25

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 10 – INVESTMENTS IN MARKETABLE SECURITIES

 

The Company has classified its investments in corporate bonds and U.S. treasury bills as available-for-sale securities. These securities are carried at estimated fair value with unrealized holding gains and losses included in accumulated other comprehensive loss in stockholders’ equity until realized. Investment transactions are recorded on their trade date. Gains and losses on marketable security transactions are reported on the specific-identification method. Interest income is accrued daily and adjusted for amortization of premiums and accretion of discounts on the corporate bonds and U.S. treasury bills.

 

The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for available-for-sale securities as of January 31, 2024 and July 31, 2023 are as follows:

 

January 31, 2024  Amortized cost   Gross unrealized
gains
   Gross unrealized
(losses)
   Fair value 
   (in thousands) 
Available-for-sale securities:                
U.S. Treasury Bills  $3,944   $
   $
   $3,944 
U.S. Agency bonds   1,469    
    
    1,469 
Corporate bonds   59,186    4    (16)   59,174 
Total available-for-sale securities  $64,599   $4   $(16)  $64,587 

 

July 31, 2023  Amortized cost   Gross unrealized
gains
   Gross unrealized
(losses)
   Fair value 
   (in thousands) 
Available-for-sale securities:                
U.S. Treasury Bills  $11,222   $53   $
   $11,275 
Corporate bonds   46,766    4,333    (4,660)   46,439 
Total available-for-sale securities  $57,988   $4,386   $(4,660)  $57,714 

 

During the three and six months ended January 31, 2024, the Company reclassified approximately $399 thousand and $576 thousand, respectively, of unrealized gains out of accumulated other comprehensive income (loss) related to the sale of available-for-sale securities into realized gain on available-for-sale securities. During the three and six months ended January 31, 2023, the Company reclassified approximately $139 thousand and $154 thousand, respectively, of unrealized gains out of accumulated other comprehensive income (loss) related to the sale of available-for-sale securities into realized gain on available-for-sale securities.

 

Maturities of corporate bonds and U.S. Treasury Bills held as of January 31, 2024 were all due within one year.

 

Marketable securities in an unrealized loss position as of January 31, 2024 and July 31, 2023 were not deemed impaired at acquisition. Effective August 1, 2023, the Company evaluates subsequent unrealized losses to determine whether the decline in fair value has resulted from credit losses or other factors. No such credit losses have been identified during the three and six months ended January 31, 2024.

 

26

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 11 – FAIR VALUE MEASUREMENTS

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:

 

Level 1 - quoted prices in active markets for identical assets or liabilities;

 

Level 2 - quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or

 

Level 3 - unobservable inputs for the asset or liability, such as discounted cash flow models or valuations.

 

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

The Company’s assets required to be measured at fair value on a recurring basis and where they are classified within the fair value hierarchy as of January 31, 2024 and July 31, 2023 are as follows:

  

   January 31, 2024 
   Level 1   Level 2   Level 3   Total 
Assets:  (in thousands) 
Available-for-sale securities - Corporate and U.S. Agency Bonds  $
   $60,643   $
   $60,643 
Available-for-sale securities - U.S. Treasury Bills   3,944    
    
    3,944 
Investment in Cyclo Therapeutics Inc. - Common Stock   17,066    
    
    17,066 
Investment in Cyclo Therapeutics Inc. - Warrants   
    
    2,501    2,501 
Hedge funds   
    
    2,369    2,369 
Convertible note receivable, related party   
    
    1,924    1,924 
Total  $21,010   $60,643   $6,794   $88,447 

 

   July 31, 2023 
   Level 1   Level 2   Level 3   Total 
Assets:  (in thousands) 
Available-for-sale securities - Corporate Bonds  $
   $46,439   $
   $46,439 
Available-for-sale securities - U.S. Treasury Bills   11,275    
    
    11,275 
Investment in equity securities   294    
    
    294 
Investment in Cyclo Therapeutics Inc. - Common Stock   3,898    
    
    3,898 
Investment in Cyclo Therapeutics Inc. - Warrants   865    
    
    865 
Hedge funds   
    
    4,984    4,984 
Convertible note receivable, related party   
    
    1,921    1,921 
Total  $16,332   $46,439   $6,905   $69,676 

 

As of January 31, 2024 and July 31, 2023, the Company did not have any liabilities measured at fair value on a recurring basis.

 

27

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the changes in the fair value of the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

   Three Months Ended
January 31,
   Six Months Ended
January 31,
 
   2024   2023   2024   2023 
   (in thousands)   (in thousands) 
Balance, beginning of period  $5,266   $4,637   $6,905   $4,764 
Withdrawal from Hedge Fund Investments   
    
    (2,500)   
 
Unrealized loss on Hedge Fund   51    378    (115)   251 
Investment in Cyclo Warrants   
    
    1,338    
 
Unrealized gain on Cyclo Warrants   1,411    
    1,163      
Unrealized gain on Convertible Note Receivable, Related Party   66    
    3    
 
Balance, end of period  $6,794   $5,015   $6,794   $5,015 

 

Hedge funds classified as Level 3 include investments and securities which may not be based on readily observable data inputs. The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. The fair value of these assets is estimated based on information provided by the fund managers or the general partners. Therefore, these assets are classified as Level 3. During the six months ended January 31, 2024, the Company requested a withdrawal from Hedge Fund Investments of $2.5 million. The withdrawal was funded during the three months ended January 31, 2024.

 

Available-for-sale securities classified as Level 3 include a convertible note receivable, related party (see Note 5) which may not be based on readily observable data inputs. The availability of observable inputs can vary and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. The fair value of this asset is estimated using a scenario-based analysis based on the probability-weighted present value of future investments returns, considering each of the possible outcomes available to us, including cash repayment, equity conversion, and collateral transfer scenarios. Estimating the fair value of the convertible note requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. Therefore, this asset is classified as Level 3.

 

The Company recognizes the fair value of the Cyclo Warrants utilizing a Black-Scholes option-pricing valuation model (“Black-Scholes model”) at acquisition and each reporting date. The application of the Black-Scholes model utilizes significant assumptions, including expected volatility, expected life and risk-free interest rate. In order to determine the volatility, we measured expected volatility based on several inputs, including considering a peer group of publicly traded companies and the implied volatility of Cyclo’s publicly-traded warrants. As a result of the unobservable inputs that were used to determine the expected volatility of the Cyclo Warrants, the fair value measurement of these warrants reflected a Level 3 measurement within the fair value measurement hierarchy. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term.‌ The expected volatility is a key assumption or input to the valuation of the Cyclo Warrants, however changes in the expected volatility assumption will have less of an effect on the Black-Scholes model valuation as the Cyclo Warrants approach their expiration. Both of the Cyclo Warrants are subject to limits on exercise and any sales of the underlying shares of common stock would be subject to volume restrictions for which a discount to the stock price of Cyclo was applied. The Black-Scholes model further incorporated a discount for the overall lack of marketability for the Cyclo Warrants.

 

28

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Below are the unobservable inputs to the Cyclo Warrants which reflect a Level 3 measurement within the fair value measurement hierarchy as of January 31, 2024:

 

Unobservable Input  Range   Weighted Average 
Price Per Share [1]   $1.04   $1.04 
Exercise Price   $0.95 - $1.25   $1.06 
Expected Volatility   105.9% - 108%    106.7%
Risk - Free Rate [2]   3.9% - 4%    3.96%
Marketability Discount   55%    55%
Remaining Term   3.72 to 6.5 years    4.77 years 
Fair Value per Warrant [3]   $0.34 - $0.39   $0.36 

 

[1]Closing price of Cyclo’s common shares adjusted to reflect regulatory resale restrictions which ranged from 40.0% to 50.0%
[2]US Treasury rate for a period commensurate with the Remaining Term.
[3]Concluded fair value per warrant as of January 31, 2024

 

The Company holds $0.0 and $65 thousand as of January 31, 2024 and July 31, 2023, respectively, in investments in securities in another entity that are not liquid, which were included in Investments - Other Pharmaceuticals in the accompanying consolidated balance sheets. The investment was liquidated during the six months ended January 31, 2024. The investment was accounted for under ASC 321, Investments - Equity Securities, using the measurement alternative as defined within the guidance.

 

Fair Value of Other Financial Instruments

 

The estimated fair value of the Company’s other financial instruments was determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting these data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.

 

The Company’s financial instruments include trade accounts receivable, trade accounts payable, and due from related parties. The recorded carrying amounts of accounts receivable, accounts payable and due to related parties approximate their fair value due to their short-term nature.

 

NOTE 12 – ACCOUNTS RECEIVABLE

 

Accounts receivable consisted of the following:

 

   January 31,
2024
   July 31,
2023
 
   (in thousands) 
Accounts receivable - third party  $343   $247 
Accounts receivable - related party   281    211 
Less allowance for doubtful accounts   (245)   (245)
Accounts receivable, net  $379   $213 

 

NOTE 13 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

   January 31,
2024
   July 31,
2023
 
   (in thousands) 
Building and improvements  $2,505   $2,505 
Machinery and equipment   412    
 
Other   59    68 
    2,976    2,573 
Less accumulated depreciation   (912)   (878)
Total  $2,064   $1,695 

 

Other property and equipment consist of other equipment and miscellaneous computer hardware. 

 

Depreciation expense pertaining to property and equipment was approximately $38 thousand and $19 thousand for the three months ended January 31, 2024 and 2023, respectively. Depreciation expense pertaining to property and equipment was approximately $55 thousand and $41 thousand for the six months ended January 31, 2024 and 2023, respectively.

 

29

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 14 - GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

The following is a summary of goodwill by reportable segment for the six months ended January 31, 2024:

 

   Healthcare   Real Estate   Consolidated 
   (in thousands) 
Balance as of July 31, 2023  $
   $
   $
 
Day Three Acquisition   3,571    
    3,571 
Balance as of January 31, 2024  $3,571   $
   $3,571 

 

Intangible assets

 

The following is a summary of intangible assets at January 31, 2024:

 

   Weighted-average remaining useful life (years)   Gross Carrying Amount   Accumulated Amortization   Net Carrying Amount 
       (in thousands) 
Intellectual Property   15    1,850    (10)   1,840 
Non-Compete Agreements   2    50    (2)   48 
Total Intangible Assets        1,900    (12)   1,888 

 

Amortization expense for the next five years and thereafter for intangible assets is estimated to be as follows for years ending:

 

Year Ending July 31,  (in thousands) 
Remainder of 2024  $86 
2025   148 
2026   132 
2027   123 
2028   123 
Thereafter   1,276 
Total  $1,888 

 

Amortization of intangible assets totaled $12 thousand for the six months ended January 31, 2024 and is included in depreciation and amortization expense within the consolidated statements of operations and comprehensive loss.

 

NOTE 15 – INCOME (LOSS) PER SHARE

 

Basic income (loss) per share is computed by dividing net income (loss) attributable to all classes of common stockholders of the Company by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted income (loss) per share includes potentially dilutive securities such as stock options, unvested restricted stock, warrants to purchase common stock, and other convertible instruments unless the result of inclusion would be anti-dilutive.

 

30

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the Company’s potentially dilutive securities which have been excluded from the calculation of dilutive loss per share as their effect would be anti-dilutive:

 

   Three Months Ended   Six Months Ended 
   January 31,   January 31, 
   2024   2023   2024   2023 
Shares issuable upon exercise of stock options   638,409    953,347    638,409    953,347 
Shares issuable upon vesting of restricted stock   
    994,179    
    994,179 
    638,409    1,947,526    638,409    1,947,526 

 

The diluted loss per share computation equals basic loss per share for the three and six months ended January 31, 2023 because the Company had a net loss from continuing operations in those respective periods and the impact of the assumed vesting of restricted shares and exercise of stock options would have been anti-dilutive. For the three and six months ended January 31, 2024, shares issuable upon exercise of stock options will have an anti-dilutive effect under the treasury method as the respective periods’ average market value of the Company’s common stock is less than the exercise proceeds.

 

The following table summarizes the basic and diluted loss per share calculations (in thousands, except for share and per share amounts):

 

   Three Months Ended   Six Months Ended 
   January 31,   January 31, 
   2024   2023   2024   2023 
Numerator:                
Net income (loss) from continuing operations  $5,904   $(3,252)  $2,144   $(8,459)
Net income (loss) attributable to noncontrolling interests   (143)   (159)   (265)   (258)
Numerator for net loss from continuing operations  $6,047   $(3,093)  $2,409   $(8,201)
                     
Numerator for discontinued operations   
    (157)   
    6,543 
Net income (loss) attributable to Rafael Holdings, Inc.  $6,047   $(3,250)  $2,409   $(1,658)
                     
Denominator:                    
Weighted average basic shares outstanding   23,642,421    23,155,018    23,643,660    23,085,612 
Effect of dilutive securities   759,648    
    759,648    
 
Weighted average diluted shares   24,402,069    23,155,018    24,403,308    23,085,612 
                     
Income (Loss) per share attributable to common stockholders                    
Basic:                    
Continuing operations  $0.26   $(0.13)  $0.10   $(0.36)
Discontinued operations   
    (0.01)   
    0.28 
Total basic income (loss) per share  $0.26   $(0.14)  $0.10   $(0.08)
Diluted:                    
Continuing operations  $0.25   $(0.13)  $0.10   $(0.36)
Discontinued operations   
    (0.01)   
    0.28 
Total diluted income (loss) per share  $0.25   $(0.14)  $0.10   $(0.08)

 

31

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 16 – NOTE PAYABLE, HELD-FOR-SALE

 

On July 9, 2021, the Company, as guarantor, Rafael Holdings Realty, Inc., a wholly-owned subsidiary of the Company (“Realty”), as pledgor, and Broad-Atlantic, a wholly-owned subsidiary of Realty (the “Borrower,” and together with the Company and Realty, the “Borrower Parties”), as borrower, entered into a loan agreement (the “Loan Agreement”) with 520 Broad Street LLC, a third-party lender (the “Lender”). The Loan Agreement provided for a loan in the amount of $15 million (the “Note Payable”) from Lender to Borrower secured by (i) a first mortgage on 520 Broad Street, Newark, New Jersey 07102; and (ii) a first priority security interest in the equity of the Borrower as set forth in the Pledge and Security Agreement between Realty and Lender.

 

The Note Payable bore interest at a rate per annum equal to seven and one-quarter percent (7.25%) from July 9, 2021 through July 31, 2021 and thereafter at an interest rate per annum equal to the 30-day LIBOR Rate, as published in The Wall Street Journal, plus 6.90% per annum, but in no event less than seven and one-quarter percent (7.25%) per annum. The Note Payable was due on August 1, 2022, subject to the Company’s option to extend the maturity date until August 1, 2023 for a fee equal to three-quarters of one percent (0.75%) of the Note Payable.

 

The Loan Agreement contained customary affirmative covenants, negative covenants and events of default, as defined in the Loan Agreement, including covenants and restrictions that, among other things, restricted the Borrower’s ability to incur liens, or transfer, lease or sell the collateral as defined in the Loan Agreement. A failure to comply with these covenants would have permitted the Lender to declare the Borrower’s obligations under the Loan Agreement, together with accrued interest and fees, to be immediately due and payable. The Company was in compliance with the covenants in the Loan Agreement as of July 31, 2022. The Company extended the maturity date to November 1, 2022 and paid an extension fee of $37,500 on July 29, 2022.

 

In connection with the sale of the 520 Property, on August 22, 2022, the Company paid off the outstanding principal balance of $15 million and accrued interest of approximately $87,000 on the Note Payable. See Note 3 for further details on the subsequent sale of the 520 Property.

 

Interest expense under the Note Payable, which is recognized in loss on discontinued operations, amounted to $0 and $87 thousand for the three and six months ended January 31, 2023, respectively.

 

32

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 17 – RELATED PARTY TRANSACTIONS

 

IDT Corporation

 

The Company has historically maintained an intercompany balance due to/from related parties that relates to cash advances for investments, loan repayments, charges for services provided to the Company by IDT and payroll costs for the Company’s personnel that were paid by IDT as the relevant persons were also providing services to IDT. IDT billed the Company approximately $69 thousand and $20 thousand for services during the three months ended January 31, 2024 and 2023, respectively. IDT billed the Company approximately $147 thousand and $88 thousand for services during the six months ended January 31, 2024 and January 31, 2023, respectively, of which $69 thousand and $0 thousand is included in due to related parties at January 31, 2024 and January 31, 2023, respectively.

 

IDT leased, prior to the Company’s sale of the 520 Property, approximately 80,000 square feet of office space plus parking at the 520 Property and currently leases approximately 3,600 square feet of office space in Jerusalem, Israel. The Company invoiced IDT approximately $27 thousand for each of the three months ended January 31, 2024 and 2023. The Company invoiced IDT approximately $54 thousand and $156 thousand for the six months ended January 31, 2024 and January 31, 2023, respectively. As of January 31, 2024 and January 31, 2023, IDT owed the Company approximately $279 thousand and $156 thousand, respectively, for office rent and parking.

 

Cornerstone Pharmaceuticals

 

On March 21, 2023, Cornerstone Pharmaceuticals issued a Promissory Note in favor of the Company in the principal amount of $2 million with an interest rate of 7.5% per annum. The Promissory Note was amended to extend the maturity date to March 13, 2024 and to waive the interest increase (see Note 5).

 

Genie Energy Ltd.

 

Prior to the Company’s sale of the 520 Property, the Company leased office space at 520 Broad Street to Genie. The Company invoiced Genie approximately $19 thousand which is included in discontinued operations during the six months ended January 31, 2023.

 

Related Party Rental Income

 

The Company leased space to related parties (including IDT Corporation - see above) which represented approximately 40% and 43% of the Company’s total revenue for the three months ended January 31, 2024 and 2023, respectively. The Company leased space to related parties (including IDT Corporation - see above) which represented approximately 40% and 43% of the Company’s total revenue for the six months ended January 31, 2024 and 2023, respectively. The portion of related party rental income pertaining to the 520 Property has been classified in discontinued operations on the consolidated statements of operations and comprehensive loss for the six months ended January 31, 2023.

 

Howard Jonas, Chairman of the Board, Former Chief Executive Officer

 

On July 6, 2022, pursuant to a Stock Purchase Agreement (the “I9 SPA”) dated June 22, 2022 with I9 Plus, LLC, an entity affiliated with members of the family of Howard Jonas, the Company sold 3,225,806 shares of the Company’s Class B common stock to I9 Plus, LLC at a price per share of $1.86 and an aggregate sale price of $6 million. The price per share was calculated to be the greater of (1) the volume weighted average price for the Class B common stock on the New York Stock Exchange for the five trading days ending on June 21, 2022 (which were the five trading days beginning with the first full trading day following the date that the transaction was approved by the Board of Directors of the Company, and its Corporate Governance Committee which consists solely of independent members of the Board) and (2) the closing price of the Class B common stock on June 21, 2022 (the trading day immediately preceding the date of the I9 SPA to ensure that the sale price was not below the Minimum Price under NYSE Rule 312.03(b)). The shares were issued in reliance on the exemption from registration provided for under Section 4(a)(2) of the Securities Act of 1933, as amended.

 

On July 31, 2023, eight trusts, each for the benefit of a child of Howard S. Jonas, the Company’s Executive Chairman and Chairman of the Board, with independent trustees, transferred an aggregate of 787,163 shares of Class A common stock of the Company (representing all of the issued and outstanding shares of the Class A common stock of the Company, and 51.3% of the aggregate voting power of all issued and outstanding shares of capital stock of the Company) to a limited partnership. Howard Jonas is the sole manager of the sole general partner of the limited partnership, and, therefore, has sole voting and dispositive power over the shares of Class A common stock held by the limited partnership. Following the transfer, Mr. Jonas will be the controlling stockholder of the Company and the Company is a controlled company as defined in Section 303A of the New York Stock Exchange Listed Company Manual.

 

In September 2023, Howard Jonas became the interim Chief Executive Officer of Cornerstone.

 

LipoMedix Pharmaceuticals, Ltd.

 

On February 9, 2023, the Company entered into a share purchase agreement with LipoMedix to purchase 70,000,000 ordinary shares at $0.03 per share for an aggregate purchase price of $2.1 million. As a result of the share purchase, the Company’s ownership of LipoMedix increased to approximately 95% with a noncontrolling interest of approximately 5%. The Company recorded approximately $16 thousand to adjust the carrying amount of the noncontrolling interest to reflect the Company’s increased ownership interest in LipoMedix’s net assets.

 

33

 

  

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 18 – INCOME TAXES

 

During the three months ended January 31, 2024 and 2023, the Company recognized an income tax provision of $— thousand and $5 thousand on income (loss) from continuing operations before income tax of $6.1 million and $(3.2) million, respectively. The change in income tax expense in relation to the income (loss) before income was primarily due to differences in the amount of taxable income (loss) in the various taxing jurisdictions and the associated valuation allowances. During the six months ended January 31, 2024 and 2023, the Company recognized an income tax provision of $6 thousand and $10 thousand on income (loss) from continuing operations before income tax of $2.6 million and $(8.4) million, respectively. The change in income tax expense in relation to the income (loss) before income during the three and six months ended January 31, 2024 compared to the three and six months ended January 31, 2023 was primarily due to differences in the amount of taxable income (loss) in the various taxing jurisdictions and the associated valuation allowances.

 

The Company recognized a deferred tax liability of $545 thousand on the difference between book basis and tax basis related to the Day Three Acquisition. As of January 31, 2024 and July 31, 2023, the Company recorded valuation allowances for the remaining net deferred tax asset balances.

 

NOTE 19 – BUSINESS SEGMENT INFORMATION

 

The Company conducts business as two operating segments, Healthcare and Real Estate. The Company’s reportable segments are distinguished by types of service, customers and methods used to provide their services. The operating results of these business segments are regularly reviewed by the Company’s Chief Executive Officer who is the chief operating decision-maker.

 

The accounting policies of the segments are the same as the accounting policies of the Company as a whole. The Company evaluates the performance of its Healthcare segment based primarily on research and development efforts and results of clinical trials and the Real Estate segment based primarily on results of operations.

 

The Healthcare segment is comprised of a majority equity interest in LipoMedix, Farber, Day Three and Rafael Medical Devices. To date, the Healthcare segment has not generated any revenues.

 

The Real Estate segment consists of the Company’s real estate holdings, which is currently comprised of a portion of a commercial building in Israel. The revenue, and (loss) income from operations of the 520 Property have been excluded from the Real Estate segment in the figures below due to its classification of held-for-sale and discontinued operations.

 

Operating results for the business segments of the Company are as follows:

 

(in thousands)  Healthcare   Real Estate   Total 
Three Months Ended January 31, 2024            
Revenues  $
   $68   $68 
(Loss) income from operations   (3,148)   5    (3,143)
                
Three Months Ended January 31, 2023               
Revenues  $
   $70    70 
(Loss) income from operations   (4,281)   22    (4,259)

 

34

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(in thousands)  Healthcare   Real Estate   Total 
Six Months Ended January 31, 2024            
Revenues  $
   $136   $136 
(Loss) income from operations   (5,648)   27    (5,621)
                
Six Months Ended January 31, 2023               
Revenues  $
   $140   $140 
(Loss) income from operations   (9,445)   44    (9,401)

 

Total assets by segment are not provided to or reviewed by the CODM.

 

Geographic Information

 

Revenues from tenants located outside of the United States were generated entirely from related parties located in Israel. Revenues from these non-U.S. customers as a percentage of total revenues, which are inclusive of revenue from discontinued operations, were as follows (revenues by country are determined based on the location of the related facility):

 

Three Months Ended January 31,  2024   2023 
Revenue from tenants located in Israel   100%   100%

 

Six Months Ended January 31,  2024   2023 
Revenue from tenants located in Israel   100%   36%

 

Net property, plant, and equipment and total assets held outside of the United States, which are located in Israel, were as follows:

 

(in thousands)  United States   Israel   Total 
January 31, 2024            
Property, plant, and equipment, net  $699   $1,365   $2,064 
Total assets   102,407    3,742    106,149 
                
July 31, 2023               
Property, plant, and equipment, net  $293   $1,402   $1,695 
Total assets   95,244    3,585    98,829 

 

NOTE 20 – COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

The Company may from time to time be subject to legal proceedings that may arise in the ordinary course of business. Although there can be no assurance in this regard, the Company does not expect any of those legal proceedings to have a material adverse effect on the Company’s results of operations, cash flows or financial condition.

 

35

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 21 – EQUITY

 

Share Repurchase Program

 

Effective April 14, 2023, the Company’s Board of Directors approved a share repurchase program (the “2023 Share Repurchase Program”) authorizing the repurchase of up to $5 million of the Company’s Class B common stock. Under the 2023 Share Repurchase Program, the Company was authorized to purchase, at purchase prices up to $1.75 per share, shares of its Class B common stock from time to time until June 16, 2023 (the “Plan Termination Date”). In July 2023, the 2023 Share Repurchase Program was amended to extend the Plan Termination Date to July 1, 2024.

 

The timing and amount of any share repurchases under the 2023 Share Repurchase Program will be determined at the Company’s discretion and based on market conditions and other considerations. Share repurchases under the authorizations may be made through open market purchases or pursuant to pre-set trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934. The program does not obligate the Company to acquire any particular amount of its Class B common stock, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion.

 

During the three months ended January 31, 2024, the Company repurchased 50,787 of its Class B common stock for a total cost of $89 thousand under the 2023 Share Repurchase Program. During the six months ended January 31, 2024, the Company repurchased 101,487 of its Class B common stock for a total cost of $168 thousand under the 2023 Share Repurchase Program.

 

On December 22, 2023, the Company suspended the share repurchase program.

 

Class A Common Stock and Class B Common Stock

 

The rights of holders of Class A common stock and Class B common stock are identical except for certain voting and conversion rights and restrictions on transferability. The holders of Class A common stock and Class B common stock receive identical dividends per share when and if declared by the Company’s Board of Directors. In addition, the holders of Class A common stock and Class B common stock have identical and equal priority rights per share in liquidation. The Class A common stock and Class B common stock do not have any other contractual participation rights. The holders of Class A common stock are entitled to three votes per share and the holders of Class B common stock are entitled to one-tenth of a vote per share. Each share of Class A common stock may be converted into one share of Class B common stock, at any time, at the option of the holder. Shares of Class A common stock are subject to certain limitations on transferability that do not apply to shares of Class B common stock.

 

On May 27, 2021, the Company filed a Registration Statement on Form S-3, whereby the Company may sell up to $250 million of Class B common stock. This Registration Statement was declared effective on June 7, 2021.

 

On June 1, 2021, the Company filed a Registration Statement on Form S-3 to issue 48,859 shares of Class B common stock for payment due on the purchase of Altira, an investment which has been subsequently fully impaired.

 

On August 19, 2021, the Company entered into a Securities Purchase Agreement (the “Institutional Purchase Agreement”) with certain third party institutional investors (the “Institutional Investors”) and a Securities Purchase Agreement with I9Plus, LLC, (the “Jonas Purchase Agreement”), an entity affiliated with Howard S. Jonas, the Chairman of the Board of Directors of the Company. On August 24, 2021, the Company issued 2,833,425 shares of Class B common stock (the “Institutional Shares”), par value $0.01 per share, to the Institutional Investors, at a purchase price equal to $35.00 per share, for aggregate gross proceeds of approximately $99.2 million, before deducting placement agent fees and other offering expenses. Additionally, pursuant to the Jonas Purchase Agreement, the Company issued 112,501 shares of Class B common stock to I9Plus, LLC, at a purchase price equal to $44.42 per share, which was equal to the closing price of a share of the Class B common stock on the New York Stock Exchange on August 19, 2021 (the “Jonas Offering”). The Jonas Offering resulted in additional aggregate gross proceeds of approximately $5.0 million. The total net proceeds from the issuance of shares were $98.0 million after deducting transaction costs of $6.2 million.

 

On August 19, 2021, in connection with the Institutional Purchase Agreement, the Company entered into a Registration Rights Agreement with the Institutional Investors whereby the Company agreed to prepare and file a registration statement with the SEC within 30 days after the earlier of (i) the date of the closing of the Merger Agreement, and (ii) the date the Merger Agreement is terminated in accordance with its terms, for purposes of registering the resale of the Institutional Shares and any shares of Class B common stock issued as a dividend or other distribution with respect to the Institutional Shares.

 

36

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On February 15, 2022, the Company filed a Registration Statement on Form S-3 (as amended on March 2, 2022) registering the resale by the Institutional Investors of the shares purchased by them. The Registration Statement was declared effective on March 7, 2022.

 

In March 2018, the Company established its 2018 Equity Incentive Plan. On January 19, 2022, the Company’s stockholders approved the 2021 Equity Incentive Plan (the “2021 Plan”). The 2018 Equity Incentive Plan was suspended and replaced by the 2021 Plan, and, following January 19, 2022, no new grants are to be awarded under the 2018 Equity Incentive Plan. Existing grants under the 2018 Equity Incentive Plan will not be impacted by the adoption of the 2021 Plan. Any of the Company’s employees, directors, consultants, and other service providers, and those of the Company’s affiliates, are eligible to participate in the 2021 Plan. In accordance with applicable tax rules, only employees (and the employees of parent or subsidiary corporations) are eligible to be granted incentive stock options. The 2021 Plan authorizes stock options (both incentive stock options or non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, and cash or other stock-based awards. On January 19, 2022, the Company filed a Registration Statement on Form S-8 registering 1,919,025 shares Class B Common Stock reserved for issuance under the 2021 Plan. On November 28, 2022, the Company’s Board of Directors approved an amendment to the 2021 Plan that, among other things, increases the number of shares of the Company’s Class B Common Stock available for the grant of awards thereunder by an additional 696,770, which the stockholders approved on January 23, 2023. The maximum number of shares of Class B common stock that may be issued under the 2021 Plan is 2,615,795 shares. As of January 31, 2024, there were 331,002 shares still available for issuance under the 2021 Plan.

 

On July 6, 2022, pursuant to the I9 SPA dated June 22, 2022 with I9 Plus, LLC, an entity affiliated with members of the family of Howard Jonas, the Company sold 3,225,806 shares of the Company’s Class B common stock to I9 Plus, LLC at a price per share of $1.86 and an aggregate sale price of $6 million.

 

Employment Agreement

 

On June 13, 2022, the Company entered into an employment agreement with Howard S. Jonas (who serves as the Chairman of the Board and Executive Chairman of the Company) (the “Employment Agreement”), which provides, among other things: (i) a term of five years (subject to extension unless either party elects not to renew); (ii) an annual base salary of $260,000, of which $250,000 is payable through the issuance of restricted shares of the Company’s Class B common stock (“Class B Stock”) with the value of the shares based upon the volume weighted closing price of the Class B Stock on the NYSE on the thirty days ending with the NYSE trading day immediately preceding the issuance to be issued within thirty days of the date of the Employment Agreement (the “Start Date”) and each annual anniversary, and such shares vesting, contingent on Mr. Jonas’ remaining in continuous service to the Company, in substantially equal amounts on the three, six, nine and twelve month anniversaries of the Start Date or annual anniversary; and (iii) a grant of restricted shares of Class B stock with a value of $600,000, issuable within 30 days with the value of the shares based upon the volume weighted closing price of the Class B Stock on the NYSE on the thirty days ending with the NYSE trading day immediately preceding the issuance and such shares, and vesting, contingent on Mr. Jonas remaining in continuous service to the Company, in substantially equal amounts on the first and second annual anniversaries of the Start Date. On July 12, 2022, the Employment Agreement was amended to provide an annual base salary of $290,000, of which $250,000 is payable through the issuance of Class B Stock in accordance with the terms defined above.

 

37

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Stock Options

 

A summary of stock option activity for the Company is as follows:

 

   Number of
Options
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Term (in years)
   Aggregate
Intrinsic Value
(in thousands)
 
Outstanding at July 31, 2023   388,409   $14.51    8.71   $
 
Granted   250,000    1.78    10.00    
 
Expired   
    
    
    
 
Cancelled / Forfeited   
    
    
    
 
Outstanding at January 31, 2024   638,409    9.52    8.89   $
 
Exercisable at January 31, 2024   114,602   $13.13    8.10   $
 

 

At January 31, 2024, there is unrecognized compensation costs related to non-vested stock options of $1.3 million, which are expected to be recognized over the next 2.7 years.

 

The value of option grants is calculated using the Black-Scholes option pricing model with the following assumptions for options granted during the six months ended January 31, 2024:

 

Risk-free interest rate   3.98%
Expected term (in years)   6.25 
Expected volatility   88%
Expected dividend yield   %

 

Rafael Medical Devices Stock Options

 

The Rafael Medical Devices 2022 Equity Incentive Plan (the “RMD 2022 Plan”) was created and adopted by the Company in May 2022. The RMD 2022 Plan allows for the issuance of up to 10,000 shares of Class B common stock which may be awarded in the form of incentive stock options or restricted shares.

 

In connection with the conversion of Rafael Medical Devices from a Delaware corporation to a Delaware limited liability company, Rafael Medical Devices adopted the Rafael Medical Devices, LLC 2023 Equity Incentive Plan (the “RMD 2023 Plan”) in August 2023. The RMD 2023 Plan allows for issuance of up to 46,125 Class A Units (the “Units”). There were 2,247 units available for issuance under the RMD 2023 Plan as of January 31, 2024.

 

Rafael Medical Devices, LLC records compensation expense for stock-based awards based upon an assessment of the grant date fair value for options using the Black-Scholes option pricing model. The expected term was determined according to the simplified method, which is the average of the vesting tranche dates and the contractual term. Due to the lack of company specific historical and implied volatility data, the estimate of expected volatility is primarily based on the historical volatility of a group of similar companies that are publicly traded. For these analyses, characteristics from comparable companies are selected, including enterprise value and position within the industry, and with historical share price information sufficient to meet the expected life of the share-based awards. The risk-free interest rate is determined by reference to the U.S. Treasury Constant Maturity Treasury rates with remaining maturities similar to the expected term of the options. Expected dividend yield is zero as Rafael Medical Devices, LLC has never paid cash dividends and does not expect to pay cash dividends in the foreseeable future.

 

38

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes assumptions used to compute the fair value of Units granted under the RMD 2023 Plan during the six months ended January 31, 2024:

 

Risk-free interest rate   4.24-4.54%
Expected term (in years)   5-6.25 
Expected volatility   113%
Expected dividend yield   %

 

A summary of option activity for Rafael Medical Devices, LLC is as follows:

 

   Number of
Options
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Term (in years)
   Aggregate
Intrinsic Value
(in thousands)
 
Outstanding at July 31, 2023   5,266   $3.82    9.71   $
 
Granted   43,878    10.00    9.51    
 
Exercised   
    
    
    
 
Cancelled / Forfeited   (5,266)   3.82    
    
 
Outstanding at January 31, 2024   43,878   $10.00    9.51   $
 
Exercisable at January 31, 2024   11,886   $10.00    9.51   $
 

 

The weighted average grant date fair value per unit for the RMD option grants during the six months ended January 31, 2024 was $8.50. At January 31, 2024, the total unrecognized compensation related to stock option awards granted, was $228 thousand, which the Company expects to recognize over a weighted-average period of approximately 3.5 years.

 

Restricted Stock

 

The fair value of restricted shares of the Company’s Class B common stock is determined based on the closing price of the Company’s Class B common stock on the grant date. Share awards generally vest on a graded basis over three years of service.

 

In January 2022, the Company granted 33,360 restricted shares of Class B common stock to non-employee directors, 18,336 of which were granted under the 2018 Equity Incentive Plan, and 15,024 of which were granted under the 2021 Plan. The restricted shares vested immediately on the grant date. The share based compensation cost was approximately $151 thousand, which was included in general and administrative expense in the consolidated statement of operations and comprehensive loss.

 

On February 1, 2022, the Company issued 986,835 shares of Class B restricted stock to two executive officers. Approximately 24% of the restricted shares vested in December 2022, with the remaining shares vesting ratably each quarter through December 2025.

 

On June 14, 2022, the Company issued 452,130 shares of Class B restricted stock to Howard S. Jonas.

 

In January 2023, the Company issued 120,019 shares of Class B restricted stock to certain members of its Board of Directors, and 100,000 shares of Class B restricted stock to its Chief Financial Officer.

 

During January 2023, 296,759 shares of Class B restricted stock were cancelled or forfeited due to (i) the cancellation of 285,036 shares of restricted stock in connection with the departure of the Company’s former Chief Financial Officer and (ii) the remaining shares forfeited upon the termination of certain employees of the Company.

 

In connection with Patrick Fabbio’s January 27, 2023 departure as the Company’s Chief Financial Officer, the Company and Mr. Fabbio entered into a Separation and General Release Agreement (the “Separation Agreement”), which provides, among other things, that the Company shall pay Mr. Fabbio severance in the amount of $307,913, which is included in selling, general and administrative expense on the consolidated statement of operations and comprehensive income (loss) for the three and six months ended January 31, 2023.

 

39

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In connection with the termination of Mr. Fabbio’s position as Chief Financial Officer of the Company, there was a material forfeiture of his Class B restricted shares and stock options resulting in a reversal of approximately $915 thousand in stock-based compensation expense for the three and six months ended January 31, 2023 that was previously recorded to selling, general and administrative expense.

 

On August 28, 2023, the Company issued 111,408 shares of Class B restricted stock to Howard S. Jonas.

 

On October 25, 2023, the Company issued 135,000 shares of Class B restricted stock to employees of the Company.

 

On January 5, 2024, the Company issued 101,402 shares of Class B restricted stock to certain members of its Board of Directors.

 

A summary of the status of the Company’s grants of restricted shares of Class B common stock is presented below:

 

   Number of
Non-vested
Shares
   Weighted
Average
Grant Date
Fair Value
 
Outstanding at July 31, 2023   684,766   $4.22 
Granted   347,810    1.83 
Vested   (272,928)   3.13 
Non-vested shares at January 31, 2024   759,648   $3.36 

 

At January 31, 2024, there was $1.2 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements, which is expected to be recognized over the next four years.

 

A summary of the stock-based compensation expense for the Company’s equity incentive plans is presented below (in thousands):

 

   For the Three Months Ended,
January 31
   For the Six Months Ended,
January 31
 
   2024   2023   2024   2023 
General and administrative  $667   $884   $1,175   $1,967 
Research and development   48    43    189    140 
Forfeiture of RSUs within general and administrative   
    (931)   
    (931)
Forfeiture of RSUs within research and development   
    (119)   
    (119)
Net stock-based compensation expense  $715   $(123)  $1,364   $1,057 

 

Securities Purchase Agreement

 

On December 7, 2020, Rafael Holdings entered into a Securities Purchase Agreement (the “SPA”) for the sale of 567,437 shares of the Company’s Class B common stock at a price per share of $22.91 (which was the closing price for the Class B common stock on the New York Stock Exchange on December 4, 2020, the trading day immediately preceding the date of the SPA) for an aggregate purchase price of $13 million.

 

Approximately $8.2 million of the proceeds received pursuant to the SPA were used by the Company to exercise an additional portion of a warrant in order to maintain the Company’s relative position in Cornerstone Pharmaceuticals in light of issuances of Cornerstone Pharmaceuticals equity securities to third-party shareholders of Cornerstone Pharmaceuticals, due to warrant exercises by these shareholders. Under the SPA, two entities, on whose Boards of Directors Howard Jonas (the Registrant’s Chairman of the Board and former Chief Executive Officer) serves, each purchased 218,245 shares of Class B common stock for consideration of $5 million each. The shares and warrants were issued in reliance on the exemption from registration provided for under Section 4(a)(2) of the Securities Act of 1933, as amended.

 

40

 

 

RAFAEL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Equity-classified Warrants

 

In connection with the SPA entered into on December 7, 2020, each purchaser was granted warrants to purchase twenty percent (20%) of the shares of Class B common stock purchased by such purchaser. The Company issued warrants to purchase 113,487 shares of Class B common stock to the purchasers. The warrants are exercisable at a per share exercise price of $22.91, and are exercisable at any time on or after December 7, 2020 through June 6, 2022. The Company determined that these warrants are equity-classified.

 

On June 6, 2022, the Company’s outstanding warrants to purchase 26,189 shares of common stock at an exercise price of $22.91 per share expired. As of January 31, 2024, the Company had no outstanding warrants.

 

NOTE 22 – LEASES

 

The Company is the lessor of the Israeli property which is leased to tenants under net operating leases with a term expiration date within 2025. Lease income included on the consolidated statements of operations and comprehensive loss was $68 thousand and $70 thousand for the three months ended January 31, 2024 and 2023, respectively. Lease income included on the consolidated statements of operations and comprehensive loss was $136 thousand and $140 thousand for the six months ended January 31, 2024 and 2023, respectively. During the three and six months ended January 31, 2024 and 2023, no real estate property taxes were included in rental income.

 

The future contractual minimum lease payments to be received (excluding operating expense reimbursements) by the Company as of January 31, 2024, under non-cancellable operating leases which expire on various dates through 2025 are as follows:

 

Year ending July 31,  Related Parties   Other   Total 
   (in thousands) 
2024  $38   $
   $38 
2025   78    
    78 
Total Minimum Future Rental Income  $116   $
   $116 

 

A related party has the right to terminate the Israeli lease upon four months’ notice.

 

41

 

 

NOTE 23 – SUBSEQUENT EVENTS

 

Restructuring of Cornerstone

 

On March 13, 2024, Cornerstone consummated a restructuring of its outstanding debt and equity interests (the “Restructuring”), whereby Rafael Holdings obtained a controlling interest in Cornerstone by acquiring the majority of the common shares of Cornerstone, which will become a consolidated subsidiary of Rafael Holdings (the “Acquisition”). Prior to the Restructuring, the Company, directly and indirectly, held debt and preferred and common equity investments in Cornerstone. Following the Restructuring, the Company indirectly holds certain debt interests in Cornerstone, and, directly and indirectly, owns or controls voting equity interests representing approximately 67.0% of Cornerstone’s total voting equity interests.

 

As part of the Restructuring, (i) Cornerstone effected a reserve stock split of all of Cornerstone’s capital stock on a one-for-ten basis (the “Cornerstone Reverse Stock Split”) (ii) the Company converted approximately $29.2 million of outstanding debt owed to it by Cornerstone under the Line of Credit Agreement entered into in 2021, and approximately $2.1 million of outstanding debt owed to it by Cornerstone under the Promissory Note entered into in May 2023, into 32,197,679 shares of common stock of Cornerstone (“Cornerstone Common Stock”) at a conversion price of $0.97 per share post Cornerstone Reverse Stock Split; (iii) the Company converted its shares of preferred stock of Cornerstone (“Cornerstone Preferred Stock”) into 6,067,306 shares of Cornerstone Common Stock post Cornerstone Reverse Stock Split; (iv) the Company invested an additional $1.5 million in cash into Cornerstone by purchasing 1,546,391 shares of Common Stock at $0.97 per share post Cornerstone Reverse Stock Split; (v) RP Finance modified the RPF Line of Credit between RP Finance and Cornerstone to extend the maturity of approximately $21.9 million of debt outstanding thereunder, received 3,658,368 shares of Cornerstone Common stock and agreed to limit the number of shares issued such that, following the restructuring, RP Finance would hold six percent (6%) of the outstanding shares of Cornerstone Common Stock; (vi) the Company agreed to certain governance provisions, including as to the makeup of the Cornerstone Board of Directors; and (vii) the Company entered into a voting agreement in connection with potential transactions involving the Company and its affiliates.

 

In addition, in connection with the Restructuring, a majority of holders of certain debt of Cornerstone have either agreed to exchange their convertible notes into Cornerstone Common Stock, at an exchange price of $0.97 per share, or amend their convertible notes to extend the maturity date. All shares of Cornerstone Preferred Stock were converted into Cornerstone Common Stock. Moreover, holders of Cornerstone Preferred Stock and Cornerstone Common Stock (other than the Company and its affiliates), and holders of certain debt of Cornerstone who are Accredited Investors (as defined in Regulation D promulgated under the Securities Act of 1933), were given the opportunity to further invest in Cornerstone by purchasing shares of Cornerstone Common Stock at a price of $0.97 per share. The Company was the only purchaser of Cornerstone Common Stock and invested $1.5 million in Cornerstone using cash on hand. In connection with the conversion of debt into Cornerstone Common Stock and the termination of existing loan agreements as part of the restructuring, the Company and Cornerstone agreed to a mutual release from any and all obligations, claims, demands, actions, liabilities, and causes of action arising out of or in connection with the 2021 merger agreement, pursuant to which the Company was to acquire Cornerstone via the issuance of Company shares to Cornerstone Stockholders, and the subsequent termination of the agreement in February 2022.

 

The Acquisition of Cornerstone is expected to be accounted for as an acquisition of a VIE that does not constitute a business in accordance with ASC 810, Consolidation (“ASC 810”) and the identifiable assets and liabilities recognized will be measured in accordance with ASC 805, Business Combinations (“ASC 805”). Due to the proximity of the acquisition date to the Company’s filing of its Quarterly Report on Form 10-Q for the period ended January 31, 2024, the initial accounting for the Acquisition is incomplete, and therefore the Company is unable to provide certain ASC 805 and ASC 810 disclosures, including the Company’s accounting for certain transactions related to the Restructuring, disclosure of the valuation of the consideration transferred, the amount of acquisition related costs, the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed, the fair value of noncontrolling interests in the acquiree at the acquisition date and supplemental pro forma disclosures.

 

As a result of the Restructuring and Acquisition, the Company will consolidate RP Finance (the “RP  Finance Consolidation”) pursuant to ASC 810. The effects of the RP Finance Consolidation are not expected to be significant to the Company.

 

42

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Rafael Holdings, Inc. (NYSE:RFL), (“Rafael Holdings”, “we” or the “Company”), a Delaware corporation, is a holding company with interests in clinical and early-stage pharmaceutical companies (the “Pharmaceutical Companies”), including an investment in Cornerstone Pharmaceuticals, Inc., formerly known as Rafael Pharmaceuticals Inc., a cancer metabolism-based therapeutics company, a majority equity interest in LipoMedix Pharmaceuticals Ltd. (“LipoMedix”), a clinical stage pharmaceutical company, Barer Institute Inc. (“Barer”), a wholly-owned preclinical cancer metabolism research operation, and an investment in Cyclo Therapeutics, Inc. (Nasdaq: CYTH) (“Cyclo Therapeutics” or “Cyclo), a clinical-stage biotechnology compan