Rafael Holdings, Inc 10-Q for FY2024 Q2
Rafael Holdings, Inc. (RFL)
About this 10-Q
Rafael Holdings, Inc filed this 10-Q on March 14, 2024, covering the quarter ended January 31, 2024 (FY2024 Q2).
Headline figures
Quarter ended January 31, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $68K
- down 2.9% from $70K a year earlier
- Net income
- $6.05M
- compared with a net loss of $3.25M a year earlier
- Diluted EPS
- $0.25
- compared with -$0.14 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
for the quarterly period ended
or
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices, zip code)
(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 | ||
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.
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).
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 ☐ |
| 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: | |
| Class B common stock, par value $0.01 per share: |
RAFAEL HOLDINGS, INC.
TABLE OF CONTENTS
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 | $ | $ | ||||||
| Available-for-sale securities | ||||||||
| Interest receivable | ||||||||
| Convertible note receivable, related party | ||||||||
| Accounts receivable, net of allowance for doubtful accounts of $ |
||||||||
| Prepaid expenses and other current assets | ||||||||
| Investment in equity securities | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Investments – Other Pharmaceuticals | ||||||||
| Investments – Hedge Funds | ||||||||
| Investment – Day Three | — | |||||||
| Investments – Cyclo Therapeutics Inc. | ||||||||
| Goodwill | — | |||||||
| Intangible assets | — | |||||||
| In-process research and development | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Other current liabilities | ||||||||
| Due to related parties | ||||||||
| Installment note payable | — | |||||||
| Total current liabilities | ||||||||
| Deferred income tax liabilities, net | — | |||||||
| Other liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| EQUITY | ||||||||
| Class A common stock, $ |
||||||||
| Class B common stock, $ |
||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Treasury stock, at cost; |
( |
) | ||||||
| Accumulated other comprehensive loss related to unrealized loss on available-for-sale securities | ( |
) | ( |
) | ||||
| Accumulated other comprehensive income related to foreign currency translation adjustment | ||||||||
| Total equity | ||||||||
| Noncontrolling interests | ( |
) | ( |
) | ||||
| TOTAL EQUITY ATTRIBUTABLE TO RAFAEL HOLDINGS, INC. | ||||||||
| TOTAL LIABILITIES AND EQUITY | $ | $ | ||||||
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 | $ | $ | $ | $ | ||||||||||||
| Rental – Related Party | ||||||||||||||||
| Total revenue | ||||||||||||||||
| COSTS AND EXPENSES | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Loss from operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Interest income | ||||||||||||||||
| Impairment of investments - Other Pharmaceuticals | ( |
) | ( |
) | ||||||||||||
| Loss on initial investment in Day Three upon acquisition | ( |
) | ( |
) | ||||||||||||
| Realized gain on available-for-sale securities | ||||||||||||||||
| Realized loss on investment in equity securities | ( |
) | ||||||||||||||
| Realized gain on investments - Cyclo Therapeutics Inc. | ||||||||||||||||
| Unrealized gain on investments - Cyclo Therapeutics Inc. | ||||||||||||||||
| Unrealized gain (loss) on investments - Hedge Funds | ( |
) | ||||||||||||||
| Other Income | ||||||||||||||||
| Income (loss) from continuing operations before income taxes | ( |
) | ( |
) | ||||||||||||
| Provision for income taxes | ( |
) | ( |
) | ( |
) | ||||||||||
| Equity in loss of Day Three | ( |
) | ( |
) | ||||||||||||
| Consolidated net income (loss) from continuing operations | ( |
) | ( |
) | ||||||||||||
| Discontinued Operations (Note 3) | ||||||||||||||||
| Loss from discontinued operations related to 520 Property | ( |
) | ( |
) | ||||||||||||
| Gain on disposal of 520 Property | ||||||||||||||||
| Income (loss) from discontinued operations | ( |
) | ||||||||||||||
| Consolidated net income (loss) | ( |
) | ( |
) | ||||||||||||
| Net loss attributable to noncontrolling interests | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net income (loss) attributable to Rafael Holdings, Inc. | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||
| Consolidated net income (loss) | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Unrealized gain on available-for-sale securities | ||||||||||||||||
| Foreign currency translation adjustment | ( |
) | ( |
) | ( |
) | ||||||||||
| Comprehensive income (loss) | ( |
) | ( |
) | ||||||||||||
| Comprehensive loss attributable to noncontrolling interests | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Comprehensive income (loss) attributable to Rafael Holdings, Inc. | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Income (loss) per share attributable to common stockholders | ||||||||||||||||
| Basic: | ||||||||||||||||
| Continuing operations | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Discontinued operations | ( |
) | ||||||||||||||
| Total basic income (loss) per share | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Diluted: | ||||||||||||||||
| Continuing operations | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Discontinued operations | ( |
) | ||||||||||||||
| Total diluted income (loss) per share | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Weighted average number of shares used in calculation of income (loss) per share | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
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 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||
| Net income (loss) | — | — | ( | ) | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld for payroll taxes | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Unrealized gain on available-for-sale securities | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest in Day Three acquisition | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance at January 31, 2024 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||
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 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||||||
| Net income (loss) | — | — | ( | ) | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld for payroll taxes | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Unrealized gain on available-for-sale securities | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Sale of Rafael Medical Devices membership units | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest in Day Three acquisition | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Dissolution of Levco | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balance at January 31, 2024 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||
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 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Net (loss) | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||
| Forfeiture of restricted stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Shares withheld for payroll taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Unrealized gain on available-for-sale securities | — | — | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance at January 31, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||
| Forfeiture of restricted stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Shares withheld for payroll taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Unrealized loss on available-for-sale securities | — | — | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance at January 31, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
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) | $ | $ | ( |
) | ||||
| Less: income from discontinued operations | ||||||||
| Income (loss) from continuing operations | ( |
) | ||||||
| Adjustments to reconcile consolidated net income (loss) to net cash used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Gain on sale of property and equipment | ( |
) | ||||||
| Net unrealized gain (loss) on investments - Hedge Funds | ( |
) | ||||||
| Realized loss on investment in equity securities | ||||||||
| Realized gain on available-for-sale securities | ( |
) | ( |
) | ||||
| Amortization of discount on available-for-sale securities | ( |
) | ( |
) | ||||
| Impairment of investments - Other Pharmaceuticals | ||||||||
| Loss on initial investment in Day Three upon acquisition | ||||||||
| Realized gain in equity investments - Cyclo Therapeutics Inc. | ( |
) | ||||||
| Unrealized gain in equity investments - Cyclo Therapeutics Inc. | ( |
) | ||||||
| Gain on dissolution of a business | ||||||||
| Equity in loss of Day Three | ||||||||
| Bad debt expense | ||||||||
| Stock-based compensation | ||||||||
| Change in assets and liabilities, net of effects from discontinued operations: | ||||||||
| Trade accounts receivable | ( |
) | ( |
) | ||||
| Interest receivable | ( |
) | ( |
) | ||||
| Prepaid expenses and other current assets | ||||||||
| Other assets | ( |
) | ( |
) | ||||
| Accounts payable and accrued expenses | ( |
) | ( |
) | ||||
| Other current liabilities | ( |
) | ||||||
| Due to related parties | ( |
) | ||||||
| Other liabilities | ||||||||
| Net cash used in continuing operations | ( |
) | ( |
) | ||||
| Net cash used in discontinued operations | ( |
) | ||||||
| Net cash used in operating activities | ( |
) | ( |
) | ||||
| Investing activities | ||||||||
| Purchase of property and equipment | ( |
) | ||||||
| Purchases of available-for-sale securities | ( |
) | ( |
) | ||||
| Proceeds from the sale and maturities of available-for-sale securities | ||||||||
| Proceeds from Day Three patent sale | ||||||||
| Proceeds from investments - Other Pharmaceuticals | ||||||||
| Proceeds from sales of equity securities | ||||||||
| Purchase of Investment in Cyclo Therapeutics Inc. | ( |
) | ||||||
| Issuance of Day Three Promissory Notes | ( |
) | ||||||
| Cash acquired in acquisition of Day Three, net of cash payments | ||||||||
| Proceeds from hedge funds | ||||||||
| Net cash used in investing activities of continuing operations | ( |
) | ( |
) | ||||
| Proceeds from sale of 520 Property - discontinued operations | ||||||||
| Payment of transaction costs for sale of 520 Property - discontinued operations | ( |
) | ||||||
| Net cash provided by investing activities of discontinued operations | ||||||||
| Net cash (used in) provided by investing activities | ( |
) | ||||||
| Financing activities | ||||||||
| Principal payments on installment note payable | ( |
) | ||||||
| Payments for taxes related to shares withheld for employee taxes | ( |
) | ( |
) | ||||
| Purchases of treasury stock | ( |
) | ||||||
| Proceeds from sale of Rafael Medical Devices membership units | ||||||||
| Net cash used in continuing operations | ( |
) | ( |
) | ||||
| Payment of Note Payable in connection with sale of 520 Property - discontinued operations | ( |
) | ||||||
| Net cash used in financing activities of discontinued operations | ( |
) | ||||||
| Net cash used in financing activities | ( |
) | ( |
) | ||||
| Effect of exchange rate changes on cash and cash equivalents | ( |
) | ||||||
| Net decrease in cash and cash equivalents | ( |
) | ( |
) | ||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Non-cash supplemental disclosure | ||||||||
| Noncash consideration received in exchange for equipment | $ | $ | ||||||
| Other receivable recognized related to sale of patent | $ | $ | ||||||
| Consideration for acquisition of Day Three included in accrued expenses | $ | $ | ||||||
| Elimination of principal and accrued interest on the Day Three Promissory Notes included in consideration for acquisition of Day Three | $ | $ | ||||||
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 $
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
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 $
The “Company” in these consolidated financial statements refers to Rafael Holdings and its subsidiaries on a consolidated basis.
| Company | Country of Incorporation | Percentage Owned | ||||
| Broad Atlantic Associates, LLC | % | |||||
| IDT R.E. Holdings Ltd. | % | |||||
| Rafael Holdings Realty, Inc. | % | |||||
| Barer Institute, Inc. | %* | |||||
| Hillview Avenue Realty, JV | % | |||||
| Hillview Avenue Realty, LLC | % | |||||
| Rafael Medical Devices, LLC | % | |||||
| Levco Pharmaceuticals Ltd. | %*** | |||||
| Farber Partners, LLC | % | |||||
| Pharma Holdings, LLC | % | |||||
| LipoMedix Pharmaceuticals Ltd. | %**** | |||||
| Altira Capital & Consulting, LLC | % | |||||
| CS Pharma Holdings, LLC | %** | |||||
| Day Three Labs, Inc. | % | |||||
*
**
***
****
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 $
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
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
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
| Classification | Years | ||
| Building and improvements | |||
| Tenant improvements | |||
| Machinery and equipment | |||
| Other (primarily office equipment, furniture and fixtures) |
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 $
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
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 $
The 520 Property was encumbered by a mortgage
securing a $
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.
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||
| 2023 | 2023 | |||||||
| Revenue from discontinued operations: | ||||||||
| Rental – third party | $ | $ | ||||||
| Rental – related party | ||||||||
| Parking | ||||||||
| Other – related party | ||||||||
| Total revenue from discontinued operations | ||||||||
| Costs and expenses from discontinued operations: | ||||||||
| General and administrative | ||||||||
| Depreciation and amortization | ||||||||
| Loss from discontinued operations | ( | ) | ( | ) | ||||
| Other income | ||||||||
| Interest expense | ( | ) | ||||||
| Loss from discontinued operations | ( | ) | ( | ) | ||||
| Gain on disposal of discontinued operations | ||||||||
| Income (loss) from discontinued operations | $ | ( | ) | $ | ||||
The gain on disposal of discontinued operations
of approximately $
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
Pharma Holdings owns
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
Pharma Holdings holds
CS Pharma holds
The Series D Convertible Preferred Stock has
a stated value of $
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
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
The Company currently owns
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 $
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 $
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 $
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 (
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
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.
| January 31, 2024 | Amortized cost | Gross unrealized gains | Gross unrealized (losses) | Fair value | ||||||||||||
| (in thousands) | ||||||||||||||||
| Convertible note receivable, related party | $ | $ | $ | ( | ) | $ | ||||||||||
| July 31, 2023 | Amortized cost | Gross unrealized gains | Gross unrealized (losses) | Fair value | ||||||||||||
| (in thousands) | ||||||||||||||||
| Convertible note receivable, related party | $ | $ | $ | ( | ) | $ | ||||||||||
Interest income on the Promissory Note totaled
approximately $
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 $
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
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 $
As of January 31, 2024 and July 31, 2023, the Company
has funded a cumulative total of $
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 $
On November 15, 2021, the Company entered into
a share purchase agreement with LipoMedix to purchase up to
As of the date of the LipoMedix SPA, there was
an outstanding loan balance including principal of $
On February 9, 2023, the Company entered into
a Share Purchase Agreement with LipoMedix to purchase
As of January 31, 2024, the Company held
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
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
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 $
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
During the period of October 2023 through January
2024, the Company advanced $
The aggregate consideration of the Day Three
Acquisition was $
| (in thousands) | Purchase Consideration | |||
| Cash consideration | $ | |||
| Accrued consideration | ||||
| Exchange of Day Three Promissory Notes for Common Stock | ||||
| Fair value of previously held interests(1) | ||||
| Total purchase consideration | $ | |||
| (1) |
23
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| (in thousands) | January 2, 2024 | |||
| Cash and cash equivalents | $ | |||
| Accounts receivable | ||||
| Prepaid expenses and other current assets | ||||
| Property and equipment, net | ||||
| Goodwill | ||||
| Identifiable intangible assets | ||||
| Accounts payable | ( | ) | ||
| Accrued expenses | ( | ) | ||
| Installment note payable | ( | ) | ||
| Deferred tax liability | ( | ) | ||
| Total fair value of net assets acquired | $ | |||
| Less: noncontrolling interest | ( | ) | ||
| Total purchase consideration | $ | |||
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 $
Goodwill of $
Intangible assets acquired primarily include
patents, technology licenses and non-compete agreements. The weighted average amortization period for the acquired intangible assets
is approximately
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 $
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)
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
On October 20, 2023, the Company exercised the
May Warrant to purchase
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 $
| January 31, 2024 | ||||||||
| Ownership % | Aggregate
Fair Value | |||||||
| Cyclo | % | $ | ||||||
The
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.
| January 31, 2024 | Amortized cost | Gross unrealized gains | Gross unrealized (losses) | Fair value | ||||||||||||
| (in thousands) | ||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||
| U.S. Treasury Bills | $ | $ | $ | $ | ||||||||||||
| U.S. Agency bonds | ||||||||||||||||
| Corporate bonds | ( | ) | ||||||||||||||
| Total available-for-sale securities | $ | $ | $ | ( | ) | $ | ||||||||||
| July 31, 2023 | Amortized cost | Gross unrealized gains | Gross unrealized (losses) | Fair value | ||||||||||||
| (in thousands) | ||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||
| U.S. Treasury Bills | $ | $ | $ | $ | ||||||||||||
| Corporate bonds | ( | ) | ||||||||||||||
| Total available-for-sale securities | $ | $ | $ | ( | ) | $ | ||||||||||
During the three and six months ended January
31, 2024, the Company reclassified approximately $
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.
| January 31, 2024 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | (in thousands) | |||||||||||||||
| Available-for-sale securities - Corporate and U.S. Agency Bonds | $ | $ | $ | $ | ||||||||||||
| Available-for-sale securities - U.S. Treasury Bills | ||||||||||||||||
| Investment in Cyclo Therapeutics Inc. - Common Stock | ||||||||||||||||
| Investment in Cyclo Therapeutics Inc. - Warrants | ||||||||||||||||
| Hedge funds | ||||||||||||||||
| Convertible note receivable, related party | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| July 31, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | (in thousands) | |||||||||||||||
| Available-for-sale securities - Corporate Bonds | $ | $ | $ | $ | ||||||||||||
| Available-for-sale securities - U.S. Treasury Bills | ||||||||||||||||
| Investment in equity securities | ||||||||||||||||
| Investment in Cyclo Therapeutics Inc. - Common Stock | ||||||||||||||||
| Investment in Cyclo Therapeutics Inc. - Warrants | ||||||||||||||||
| Hedge funds | ||||||||||||||||
| Convertible note receivable, related party | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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)
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||
| Withdrawal from Hedge Fund Investments | ( | ) | ||||||||||||||
| Unrealized loss on Hedge Fund | ( | ) | ||||||||||||||
| Investment in Cyclo Warrants | ||||||||||||||||
| Unrealized gain on Cyclo Warrants | ||||||||||||||||
| Unrealized gain on Convertible Note Receivable, Related Party | ||||||||||||||||
| Balance, end of period | $ | $ | $ | $ | ||||||||||||
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
$
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)
| Unobservable Input | Range | Weighted Average | ||||||
| Price Per Share [1] | $ | $ | ||||||
| Exercise Price | $ | $ | ||||||
| Expected Volatility | ||||||||
| Risk - Free Rate [2] | ||||||||
| Marketability Discount | ||||||||
| Remaining Term | ||||||||
| Fair Value per Warrant [3] | $ | $ | ||||||
| [1] |
| [2] |
| [3] |
The Company holds $
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
| January 31, 2024 | July 31, 2023 | |||||||
| (in thousands) | ||||||||
| Accounts receivable - third party | $ | $ | ||||||
| Accounts receivable - related party | ||||||||
| Less allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
NOTE 13 – PROPERTY AND EQUIPMENT
| January 31, 2024 | July 31, 2023 | |||||||
| (in thousands) | ||||||||
| Building and improvements | $ | $ | ||||||
| Machinery and equipment | ||||||||
| Other | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Other property and equipment consist of other equipment and miscellaneous computer hardware.
Depreciation expense pertaining to property
and equipment was approximately $
29
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 14 - GOODWILL AND INTANGIBLE ASSETS
Goodwill
| Healthcare | Real Estate | Consolidated | ||||||||||
| (in thousands) | ||||||||||||
| Balance as of July 31, 2023 | $ | $ | $ | |||||||||
| Day Three Acquisition | ||||||||||||
| Balance as of January 31, 2024 | $ | $ | $ | |||||||||
Intangible assets
| Weighted-average remaining useful life (years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||
| (in thousands) | ||||||||||||||||
| Intellectual Property | ( | ) | ||||||||||||||
| Non-Compete Agreements | ( | ) | ||||||||||||||
| Total Intangible Assets | ( | ) | ||||||||||||||
| Year Ending July 31, | (in thousands) | |||
| Remainder of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
Amortization of intangible assets totaled $
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)
| Three Months Ended | Six Months Ended | |||||||||||||||
| January 31, | January 31, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Shares issuable upon exercise of stock options | ||||||||||||||||
| Shares issuable upon vesting of restricted stock | ||||||||||||||||
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.
| Three Months Ended | Six Months Ended | |||||||||||||||
| January 31, | January 31, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income (loss) from continuing operations | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Net income (loss) attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Numerator for net loss from continuing operations | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Numerator for discontinued operations | ( | ) | ||||||||||||||
| Net income (loss) attributable to Rafael Holdings, Inc. | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Denominator: | ||||||||||||||||
| Weighted average basic shares outstanding | ||||||||||||||||
| Effect of dilutive securities | ||||||||||||||||
| Weighted average diluted shares | ||||||||||||||||
| Income (Loss) per share attributable to common stockholders | ||||||||||||||||
| Basic: | ||||||||||||||||
| Continuing operations | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Discontinued operations | ( | ) | ||||||||||||||
| Total basic income (loss) per share | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Diluted: | ||||||||||||||||
| Continuing operations | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Discontinued operations | ( | ) | ||||||||||||||
| Total diluted income (loss) per share | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
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 $
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
In connection with the sale of the 520 Property,
on August 22, 2022, the Company paid off the outstanding principal balance of $
Interest expense under the Note Payable, which
is recognized in loss on discontinued operations, amounted to $
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 $
IDT leased, prior to the Company’s sale
of the 520 Property, approximately
Cornerstone Pharmaceuticals
On March 21, 2023, Cornerstone Pharmaceuticals
issued a Promissory Note in favor of the Company in the principal amount of $
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 $
Related Party Rental Income
The Company leased space to related parties (including
IDT Corporation - see above) which represented approximately
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
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
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
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 $
The Company recognized a deferred tax liability
of $
NOTE 19 – BUSINESS SEGMENT INFORMATION
The Company conducts business as
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.
| (in thousands) | Healthcare | Real Estate | Total | |||||||||
| Three Months Ended January 31, 2024 | ||||||||||||
| Revenues | $ | $ | $ | |||||||||
| (Loss) income from operations | ( | ) | ( | ) | ||||||||
| Three Months Ended January 31, 2023 | ||||||||||||
| Revenues | $ | $ | ||||||||||
| (Loss) income from operations | ( | ) | ( | ) | ||||||||
34
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| (in thousands) | Healthcare | Real Estate | Total | |||||||||
| Six Months Ended January 31, 2024 | ||||||||||||
| Revenues | $ | $ | $ | |||||||||
| (Loss) income from operations | ( | ) | ( | ) | ||||||||
| Six Months Ended January 31, 2023 | ||||||||||||
| Revenues | $ | $ | $ | |||||||||
| (Loss) income from operations | ( | ) | ( | ) | ||||||||
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.
| Three Months Ended January 31, | 2024 | 2023 | ||||||
| Revenue from tenants located in Israel | % | % | ||||||
| Six Months Ended January 31, | 2024 | 2023 | ||||||
| Revenue from tenants located in Israel | % | % | ||||||
| (in thousands) | United States | Israel | Total | |||||||||
| January 31, 2024 | ||||||||||||
| Property, plant, and equipment, net | $ | $ | $ | |||||||||
| Total assets | ||||||||||||
| July 31, 2023 | ||||||||||||
| Property, plant, and equipment, net | $ | $ | $ | |||||||||
| Total assets | ||||||||||||
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 $
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
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 $
On June 1, 2021, the Company filed a Registration
Statement on Form S-3 to issue
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 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
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
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
37
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock Options
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding at July 31, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Expired | ||||||||||||||||
| Cancelled / Forfeited | ||||||||||||||||
| Outstanding at January 31, 2024 | $ | |||||||||||||||
| Exercisable at January 31, 2024 | $ | $ | ||||||||||||||
At January 31, 2024, there is unrecognized
compensation costs related to non-vested stock options of $
| Risk-free interest rate | % | |||
| Expected term (in years) | ||||
| Expected volatility | % | |||
| 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
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
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)
| Risk-free interest rate | % | |||
| Expected term (in years) | ||||
| Expected volatility | % | |||
| Expected dividend yield | % |
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding at July 31, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Cancelled / Forfeited | ( | ) | ||||||||||||||
| Outstanding at January 31, 2024 | $ | $ | ||||||||||||||
| Exercisable at January 31, 2024 | $ | $ | ||||||||||||||
The weighted average grant date fair value per
unit for the RMD option grants during the six months ended January 31, 2024 was $
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
On February 1, 2022, the Company issued
On June 14, 2022, the Company issued
In January 2023, the Company issued
During January 2023,
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 $
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 $
On August 28, 2023, the Company issued
On October 25, 2023, the Company issued
On January 5, 2024, the Company issued
| Number of Non-vested Shares | Weighted Average Grant Date Fair Value | |||||||
| Outstanding at July 31, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Non-vested shares at January 31, 2024 | $ | |||||||
At January 31, 2024, there was $
| For the Three Months Ended, January 31 | For the Six Months Ended, January 31 | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| General and administrative | $ | $ | $ | $ | ||||||||||||
| Research and development | ||||||||||||||||
| Forfeiture of RSUs within general and administrative | ( | ) | ( | ) | ||||||||||||
| Forfeiture of RSUs within research and development | ( | ) | ( | ) | ||||||||||||
| Net stock-based compensation expense | $ | $ | ( | ) | $ | $ | ||||||||||
Securities Purchase Agreement
On December 7, 2020, Rafael Holdings entered
into a Securities Purchase Agreement (the “SPA”) for the sale of
Approximately $
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 (
On June 6, 2022, the Company’s outstanding
warrants to purchase
NOTE 22 – LEASES
| Year ending July 31, | Related Parties | Other | Total | |||||||||
| (in thousands) | ||||||||||||
| 2024 | $ | $ | $ | |||||||||
| 2025 | ||||||||||||
| Total Minimum Future Rental Income | $ | $ | $ | |||||||||
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
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 $
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 $
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 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 an 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 include preferred and common equity interests. On June 17, 2021, the Company entered into a merger agreement to acquire full ownership of Cornerstone in exchange for issuing Company Class B common stock to the other stockholders of Cornerstone (“Merger Agreement” or “Merger”). On October 28, 2021, the Company announced that the AVENGER 500 Phase 3 clinical trial for CPI-613® (devimistat), Cornerstone’s 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 light of the Data Events, the Company concluded that the prospects for CPI-613 were uncertain and fully impaired in its financial statements for the fiscal year ended July 31, 2022, the value of its loans, receivables, and investment in Cornerstone based upon its valuation of Cornerstone.
On September 24, 2021, the Company entered into a Line of Credit Loan Agreement (the “Line of Credit Agreement”) with Cornerstone under which Cornerstone borrowed $25 million from the Company. Due to the Data Events, the Company recorded a full reserve on the $25 million due the Company from Cornerstone.
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”). 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 to our accompanying consolidated financial statements for additional information regarding the restructuring transaction.
43
In 2019, the Company established Barer Institute Inc., an early-stage small molecule research operation focused on developing a pipeline of novel therapeutic compounds, including compounds to regulate cancer metabolism with potentially broader application in other indications beyond cancer. Barer was led by a team of scientists and academic advisors considered to be among the leading 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. The Company also holds a majority equity interest in LipoMedix, a clinical stage oncological pharmaceutical company based in Israel. In addition, the Company has invested in other early-stage pharmaceutical ventures.
In 2016, the Company first invested in LipoMedix Pharmaceuticals Ltd. (“LipoMedix”), a clinical stage pharmaceutical company. On February 9, 2023, the Company entered into a Share Purchase Agreement with LipoMedix in which LipoMedix sold 70,000,000 ordinary shares to the Company at a price per share of $0.03 and an aggregate sale price of approximately $2.1 million. Subsequent to this transaction, the Company owns 95% of LipoMedix.
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 cannabinoid ingredient manufacturer specializing in the development and commercialization of novel cannabis product solutions. 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 (33.33% 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. As of January 31, 2024, the Company had not exercised the warrant. See Note 8 to our accompanying consolidated financial statements for further detail.
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.
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%.
In August 2023, the Company raised $925,000 from third parties in exchange for a 31.62% ownership of Rafael Medical Devices. As of July 31, 2023, the Company recorded $825,000 of the funds received related to the sale within prepaid expenses and other current assets and other current liabilities within the consolidated balance sheets.
44
Historically, the Company owned real estate assets. In 2020, the Company sold an office building located in Piscataway, New Jersey and on August 22, 2022, the Company sold the 520 Property. As of July 31, 2023, the Company holds a portion of a commercial building in Jerusalem, Israel as its remaining real estate asset.
Results of Operations
Our business consists of two reportable segments - Healthcare and Real Estate. We evaluate the performance of our Healthcare segment based primarily on research and development efforts and results of clinical trials, and our Real Estate segment based primarily on results of operations. Accordingly, the income and expense line items below loss from operations are only included in the discussion of consolidated results of operations.
Healthcare Segment
Our consolidated expenses for our Healthcare segment were as follows:
| Three Months Ended January 31, | Change | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| (in thousands) | ||||||||||||||||
| General and administrative | (2,514 | ) | (2,053 | ) | (461 | ) | (22 | )% | ||||||||
| Research and development | (612 | ) | (2,225 | ) | 1,613 | 72 | % | |||||||||
| Depreciation and amortization | (22 | ) | (3 | ) | (19 | ) | (633 | )% | ||||||||
| Loss from operations | (3,148 | ) | (4,281 | ) | 1,133 | 26 | % | |||||||||
| Six Months Ended January 31, | Change | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| (in thousands) | ||||||||||||||||
| General and administrative | $ | (4,522 | ) | $ | (5,130 | ) | 608 | 12 | % | |||||||
| Research and development | (1,101 | ) | (4,306 | ) | 3,205 | 74 | % | |||||||||
| Depreciation and amortization | (25 | ) | (9 | ) | (16 | ) | (178 | )% | ||||||||
| Loss from operations | (5,648 | ) | (9,445 | ) | 3,797 | 40 | % | |||||||||
To date, the Healthcare segment has not generated any revenues. The entirety of the expenses in the Healthcare segment relate to the activities of LipoMedix, Farber, Day Three, and Rafael Medical Devices. As of January 31, 2024, we held a 100% interest in Barer, a 95% interest in LipoMedix, a 93% interest in Farber, 73% interest in Day Three and a 68% interest in Rafael Medical Devices.
On August 1, 2023, Rafael Medical Devices closed on the sale of membership units in exchange for $925,000, and following that sale, the Company holds a 68% voting interest based on the outstanding equity interests in Rafael Medical Devices. As of July 31, 2023, the Company recorded $825,000 of the funds received related to the sale within prepaid expenses and other current assets and other liabilities within the consolidated balance sheets.
General and administrative expenses. General and administrative expenses consist mainly of payroll, stock-based compensation expense, benefits, facilities, consulting and professional fees. The Company operations have been scaled to meet the current needs which has led to reduced overall general and administrative expenses. The increase during the three months ended January 31, 2024 compared to the three months ended January 31, 2023 is comprised of an increase in stock-based compensation expense of approximately $0.7 million due to a forfeiture of an award with a value of approximately $0.9 million in the three months ended January 31, 2023, an increase in professional fees of approximately $0.3 million, an increase in legal fees of approximately $0.1, partially offset by a net decrease in insurance expense of approximately $0.4 million, a net decrease of severance pay expense of approximately $0.3 million, and a net decrease of payroll expenses of approximately $0.2 million.
45
The decrease in general and administrative expenses during the six months ended January 31, 2024 compared to the six months ended January 31, 2023 is comprised of a decrease in insurance expense of approximately $0.7 million, a decrease in payroll expenses of approximately $0.6 million, a decrease in severance pay expense of approximately $0.3, partially offset by a net increase in professional fees of approximately $0.6 million, an increase in stock based compensation of approximately $0.1 million (which included the impact of a forfeiture of approximately $0.9 million in the six months ended January 31, 2023), and an increase in other general and administrative expenses of approximately $0.1 million.
Research and development expenses. Research and development expenses decreased for the three and six months ended January 31, 2024 as compared to the corresponding periods in fiscal 2023. Research and development expenses are derived from activity at Barer, LipoMedix, Farber, Day Three, and Rafael Medical Devices. The decrease stems from the November 2022 decision to curtail the Company’s early-stage development efforts, including pre-clinical research at Barer Institute.
Real Estate Segment
The revenue and expenses 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, and the sale of the 520 Property on August 22, 2022. The Real Estate segment consists of a portion of a commercial building in Israel. Consolidated income and expenses for our Real Estate segment were as follows:
| Three Months Ended January 31, | Change | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| (in thousands) | ||||||||||||||||
| Rental – Third Party | 41 | 43 | (2 | ) | (5 | )% | ||||||||||
| Rental – Related Party | 27 | 27 | — | — | % | |||||||||||
| General and administrative | (47 | ) | (32 | ) | (15 | ) | (47 | )% | ||||||||
| Depreciation and amortization | (16 | ) | (16 | ) | — | — | % | |||||||||
| Income from operations | 5 | 22 | (17 | ) | 77 | % | ||||||||||
| Six Months Ended January 31, | Change | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| (in thousands) | ||||||||||||||||
| Rental – Third Party | $ | 82 | $ | 86 | (4 | ) | (5 | )% | ||||||||
| Rental – Related Party | 54 | 54 | — | — | % | |||||||||||
| General and administrative | (79 | ) | (64 | ) | (15 | ) | (23 | )% | ||||||||
| Depreciation and amortization | (30 | ) | (32 | ) | 2 | 6 | % | |||||||||
| Income from operations | $ | 27 | $ | 44 | (17 | ) | 39 | % | ||||||||
Rental - Third Party. Rental revenue decreased by $2 thousand and $4 thousand during the three and six months ended January 31, 2024 compared to the three and six months ended January 31, 2023.
General and amortization. General and amortization expense decreased by $15 thousand during the three and six months ended January 31, 2024 compared to the three and six months ended January 31, 2023.
46
Consolidated Operations
Our consolidated income and expense line items below loss from operations were as follows:
| Three Months Ended January 31, | Change | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| (in thousands) | ||||||||||||||||
| Income (loss) from continuing operations | $ | (3,143 | ) | $ | (4,259 | ) | $ | 1,116 | 26 | % | ||||||
| Interest income | 693 | 562 | 131 | (23 | )% | |||||||||||
| Impairment of investments - Other Pharmaceuticals | — | (67 | ) | 67 | 100 | % | ||||||||||
| Loss on initial investment in Day Three upon acquisition | (1,633 | ) | — | (1,633 | ) | (100 | )% | |||||||||
| Realized gain on available-for-sale securities | 399 | 139 | 260 | 187 | % | |||||||||||
| Unrealized gain on investments - Cyclo Therapeutics Inc. | 9,718 | — | 9,718 | (100 | )% | |||||||||||
| Unrealized gain on investments - Hedge Funds | 51 | 378 | (327 | ) | (87 | )% | ||||||||||
| Other income | 25 | — | 25 | 100 | % | |||||||||||
| Income (loss) from continuing operations before income taxes | 6,110 | (3,247 | ) | 9,357 | 288 | % | ||||||||||
| Provision for income taxes | — | (5 | ) | 5 | 100 | % | ||||||||||
| Equity in loss of Day Three | (206 | ) | — | (206 | ) | (100 | )% | |||||||||
| Consolidated net income (loss) from continuing operations | 5,904 | (3,252 | ) | 9,156 | 282 | % | ||||||||||
| Loss from discontinued operations related to 520 Property | — | (157 | ) | 157 | 100 | % | ||||||||||
| Net loss attributable to noncontrolling interests | (143 | ) | (159 | ) | 16 | 10 | % | |||||||||
| Net income (loss) attributable to Rafael Holdings, Inc. | $ | 6,047 | $ | (3,250 | ) | $ | 9,297 | 286 | % | |||||||
| Six Months Ended January 31, | Change | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| (in thousands) | ||||||||||||||||
| Income (loss) from continuing operations | $ | (5,621 | ) | $ | (9,401 | ) | 3,780 | 40 | % | |||||||
| Interest income | 1,275 | 770 | 505 | (66 | )% | |||||||||||
| Impairment of investments - Other Pharmaceuticals | — | (223 | ) | 223 | 100 | % | ||||||||||
| Loss on initial investment in Day Three upon acquisition | (1,633 | ) | — | (1,633 | ) | (100 | )% | |||||||||
| Realized gain on available-for-sale securities | 576 | 154 | 422 | 274 | % | |||||||||||
| Realized loss on investment in equity securities | (46 | ) | — | (46 | ) | (100 | )% | |||||||||
| Realized gain on investments - Cyclo Therapeutics Inc. | 424 | — | 424 | (100 | )% | |||||||||||
| Unrealized gain on investments - Cyclo Therapeutics Inc. | 7,594 | — | 7,594 | (100 | )% | |||||||||||
| Unrealized gain (loss) on investments - Hedge Funds | (115 | ) | 251 | (366 | ) | (146 | )% | |||||||||
| Other income | 118 | — | 118 | 100 | % | |||||||||||
| Income (loss) from continuing operations before income taxes | 2,572 | (8,449 | ) | 11,021 | 130 | % | ||||||||||
| Provision for income taxes | (6 | ) | (10 | ) | 4 | 40 | % | |||||||||
| Equity in loss of Day Three | (422 | ) | — | (422 | ) | 100 | % | |||||||||
| Consolidated net income (loss) from continuing operations | 2,144 | (8,459 | ) | 10,603 | 125 | % | ||||||||||
| Income from discontinued operations related to 520 Property | — | 6,543 | (6,543 | ) | 100 | % | ||||||||||
| Net loss attributable to noncontrolling interests | (265 | ) | (258 | ) | (7 | ) | (3 | )% | ||||||||
| Net income (loss) attributable to Rafael Holdings, Inc. | $ | 2,409 | $ | (1,658 | ) | $ | 4,067 | 245 | % | |||||||
Interest income. Interest income was $693 thousand and $562 thousand for the three months ended January 31, 2024 and 2023, respectively. Interest income was $1,275 thousand and $770 thousand for the six months ended January 31, 2024 and 2023, respectively. The increase is primarily due to an increase in interest rates.
47
Impairment of investments - Other Pharmaceuticals. We recorded an impairment loss of $67 thousand and $223 thousand related to our investment in Nanovibronix using the measurement alternative for the three and six months ended January 31, 2023.
Realized gain on available-for-sale securities. We recorded realized gains of approximately $399 thousand and $139 thousand for the three months ended January 31, 2024 and 2023, respectively, related to available-for-sale securities sold during the period. We recorded realized gains of approximately $576 thousand and $154 thousand for the six months ended January 31, 2024 and 2023, respectively, related to available-for-sale securities sold during the period.
Realized gain on investments - Cyclo. We recorded a realized gain of approximately $424 thousand related to the exercise of the May Warrants in connection with our October 2023 investment in Cyclo for the six months ended January 31, 2024.
Unrealized gain on investments - Cyclo. We recorded an unrealized gain of approximately $9.7 million and $7.6 million related to the change in fair value in our investment in Cyclo for the three and six months ended January 31, 2024, respectively.
Unrealized gain (loss) on investments - Hedge Funds. We recorded unrealized gains of approximately $51 thousand and $378 thousand for the three months ended January 31, 2024 and 2023, respectively. We recorded unrealized losses of approximately $115 thousand and $251 thousand in unrealized gains for the six months ended January 31, 2024 and 2023, respectively.
Equity in loss of Day Three. We recognized a loss of approximately $206 thousand and $422 thousand from our ownership interest in Day Three due to operating results for the three and six months ended January 31, 2024, respectively. As of January 2, 2024, Day Three is a majority-owned subsidiary which is consolidated. See Note 8 to our accompanying consolidated financial statements for further information regarding the acquisition.
Income (loss) from discontinued operations related to 520 Property. Discontinued operations include: (i) rental and parking revenues, (ii) payroll, benefits, facilities, consulting and professional fees dedicated to 520 Property, (iii) depreciation and amortization expenses, (iv) interest (including amortization of debt issuance costs) on the note payable that was secured by a mortgage on the 520 Property, and (v) gain on the disposal of 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 decrease in the net income attributable to discontinued operations for the six months ended January 31, 2024 as compared to the six months ended January 31, 2023 was due to a gain on the sale of the 520 Property of $6.8 million.
See Note 3 to our accompanying consolidated financial statements for further information regarding discontinued operations.
Liquidity and Capital Resources
| January 31, | July 31, | Change | ||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| Balance Sheet Data: | (in thousands) | |||||||||||||||
| Cash and cash equivalents | $ | 7,136 | $ | 21,498 | (14,362 | ) | (67 | )% | ||||||||
| Convertible note receivable, related party | 1,924 | 1,921 | 3 | — | % | |||||||||||
| Working capital | 71,810 | 80,796 | (8,986 | ) | (11 | )% | ||||||||||
| Total assets | 106,149 | 98,829 | 7,320 | 7 | % | |||||||||||
| Total equity | 104,939 | 100,293 | 4,646 | 5 | % | |||||||||||
| Noncontrolling interests | (2,685 | ) | (3,664 | ) | 979 | (27 | )% | |||||||||
| Total equity attributable to Rafael Holdings, Inc. | 102,254 | 96,629 | 5,625 | 6 | % | |||||||||||
48
| Six Months Ended January 31, | Change | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| Cash flows (used in) provided by | (in thousands) | |||||||||||||||
| Operating activities of continuing operations | $ | (4,662 | ) | $ | (7,437 | ) | 2,775 | (37 | )% | |||||||
| Investing activities of continuing operations | (9,577 | ) | (41,754 | ) | 32,177 | (77 | )% | |||||||||
| Financing activities of continuing operations | (125 | ) | (157 | ) | 32 | (20 | )% | |||||||||
| Effect of exchange rates on cash and cash equivalents | 2 | (3 | ) | 5 | (167 | )% | ||||||||||
| Operating, investing, and financing activities of discontinued operations | — | 32,484 | (32,484 | ) | (100 | )% | ||||||||||
| Decrease in cash and cash equivalents | $ | (14,362 | ) | $ | (16,867 | ) | ||||||||||
Capital Resources
As of January 31, 2024, we held cash and cash equivalents of approximately $7.1 million, and available-for-sale securities valued at approximately $64.6 million. On August 22, 2022, the Company received net proceeds of approximately $33 million in connection with the sale of the 520 Property (see Note 3 to our accompanying consolidated financial statements for further details). The Company expects its balance of cash and cash equivalents, and available-for-sale-securities, to be sufficient to meet our obligations for at least the 12 months from the filing of this Quarterly Report on Form 10-Q.
Operating Activities
Cash used in operating activities decreased by $2.78 million from cash used of $7.44 million for the six months ended January 31, 2023 to cash used of $4.66 million for the six months ended January 31, 2024, which is primarily attributed to the decrease in net loss from continuing operations.
Investing Activities
Cash used in investing activities for the six months ended January 31, 2024 was primarily due to purchases of available-for-sale securities of approximately $105.1 million and the investment in Cyclo of $6.8 million, partially offset by proceeds of $100.1 million from sales and maturities of available-for-sale securities and $2.5 million in proceeds from hedge funds.
Cash used in investing activities for the six months ended January 31, 2023 was primarily due to purchases of available-for-sale securities of approximately $113.1 million, partially offset by proceeds of $71.4 million from the sale of available-for-sale securities.
Financing Activities
Cash provided by financing activities for six months ended January 31, 2024 was primarily related to the principal payments on installment of the note payable of $0.8 million partially offset by the proceeds from sale of RMD membership units of $0.9 million.
Cash used in financing activities for six months ended January 31, 2023 was primarily related to payments for taxes related to shares withheld for employee taxes.
We do not anticipate paying dividends on our common stock until we achieve sustainable profitability and retain certain minimum cash reserves. The payment of dividends in any specific period will be at the sole discretion of our Board of Directors.
49
Operating, Financing, and Investing Activities of Discontinued Operations
The cash flows from discontinued operations - 520 Property for the six months ended January 31, 2023 represent the net income excluding non-cash depreciation and amortization, as well as the proceeds from the sale of the 520 Property.
Critical Accounting Estimates
We have chosen accounting policies that we believe are appropriate to accurately and fairly report our operating results and financial condition in conformity with U.S. GAAP. We apply these accounting policies in a consistent manner. Our significant accounting policies are discussed in Note 2, “Summary of Significant Accounting Policies,” in our accompanying consolidated financial statements.
The application of critical accounting policies requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. These estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. We evaluate these estimates and assumptions on an ongoing basis and may retain outside consultants to assist in our evaluation. If actual results ultimately differ from previous estimates, the revisions are included in results of operations in the period in which the actual amounts become known. The critical accounting policies that involve the most significant management judgments and estimates used in preparation of our consolidated financial statements, or are the most sensitive to change from outside factors, are discussed in the Critical Accounting Estimates section in Item 7 of the Annual Report on Form 10-K for fiscal 2023. There were no material changes during the six months ended January 31, 2024 to the Critical Accounting Estimates previously disclosed in the Annual Report on Form 10-K for fiscal 2023 except as follows:
Investments - Fair Value Method
The Company has elected the fair value option to account for its investment in Cyclo Therapeutics Inc. over which the Company has significant influence. The fair value option is irrevocable once elected. The Company measures its investment in Cyclo at fair value and records all subsequent changes in fair value in earnings in the consolidated statement of operations. The Company believes the fair value option best reflects the underlying economics of the investment. See Note 9, “Investments,” in our accompanying consolidated financial statements for further details.
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 (measured based on the closing stock price of Cyclo Therapeutics, Inc., a Level I fair value) and warrants with an aggregate fair value of $2,500,600 (measured using a Level III fair value estimate).
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 the Company’s publicly-traded warrants. 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. Both of the Cyclo Warrants and the underlying shares of common stock are subject to volume restrictions in accordance with SEC Rule 144 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.
Certain inputs utilized in our Black-Scholes model may fluctuate in future periods based upon factors which are outside of the Company’s control. A significant change in one or more of these inputs used in the calculation of the fair value may cause a significant change to the fair value of our warrant liability which could also result in material non-cash gain or loss being reported in our consolidated statement of operations.
50
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.
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.
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.
Off-Balance Sheet Arrangements
We do not have any “off-balance sheet arrangements,” as defined in relevant SEC regulations, that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes in our market risk exposures from those described in Item 7A of our 2023 Form 10-K.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of January 31, 2024.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended January 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
51
Part II
Item 1. Legal Proceedings
Legal proceedings in which we are involved, if any, are more fully described in Note 20 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
There were no material changes from the risk factors previously disclosed in Item 1A to Part I of our Annual Report on Form 10-K for fiscal 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information
Item 6. Exhibits
| Exhibit Number |
Description | |
| 31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1* | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2* | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS* | Inline XBRL Instance Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * | Filed or furnished herewith. |
52
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: March 13, 2024
| Rafael Holdings, Inc. | ||
| By: | /s/ William Conkling | |
| William Conkling | ||
| Chief Executive Officer | ||
| By: | /s/ David Polinsky | |
| David Polinsky | ||
| Chief Financial Officer | ||
53
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
| I, | William Conkling, certify that: |
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Rafael Holdings, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 13, 2024
| /s/ William Conkling | |
| William Conkling | |
| Chief Executive Officer |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
| I, | David Polinsky, certify that: |
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Rafael Holdings, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 13, 2024
| /s/ David Polinsky | |
| David Polinsky | |
| Chief Financial Officer |
Exhibit 32.1
Certification Pursuant to
18 U.S.C. Section 1350
(as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act Of 2002)
In connection with the Quarterly Report of Rafael Holdings, Inc. (the “Company”) on Form 10-Q for the quarter ended January 31, 2024 as filed with the Securities and Exchange Commission (the “Report”), I, William Conkling, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 13, 2024
| /s/ William Conkling | |
| William Conkling | |
| Chief Executive Officer |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Rafael Holdings, Inc. and will be retained by Rafael Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Certification Pursuant to
18 U.S.C. Section 1350
(as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act Of 2002)
In connection with the Quarterly Report of Rafael Holdings, Inc. (the “Company”) on Form 10-Q for the quarter ended January 31, 2024 as filed with the Securities and Exchange Commission (the “Report”), I, David Polinsky, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 13, 2024
| /s/ David Polinsky | |
| David Polinsky | |
| Chief Financial Officer |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Rafael Holdings, Inc. and will be retained by Rafael Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.