Rafael Holdings, Inc 10-Q for FY2022 Q3
Rafael Holdings, Inc. (RFL)
About this 10-Q
Rafael Holdings, Inc filed this 10-Q on June 14, 2022, covering the quarter ended April 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended April 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $875K
- down 11.6% from $990K a year earlier
- Net loss
- $5.55M
- compared with a net loss of $2.65M 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)
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Securities registered pursuant to Section 12(b) of the Act:
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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
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Indicate by check mark whether the registrant
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| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company | | ||
If an emerging growth company, indicate by check
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standards provided pursuant to Section 13(a) of the Exchange Act.
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defined in Rule 12b-2 of the Act). Yes ☐ No
The number of shares outstanding of the registrant’s common stock as of June 12, 2022 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 1. FINANCIAL INFORMATION
Item 1. Financial Statements
RAFAEL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share data)
| April
30, 2022 | July
31, 2021 | |||||||
| (Note 2) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Available-for-sale securities | ||||||||
| Interest receivable | ||||||||
| Trade accounts receivable, net of allowance for doubtful accounts of $ | ||||||||
| Due from Cornerstone Pharmaceuticals, net of allowance for losses on related party receivables of $ | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Equity investment – RP Finance LLC | ||||||||
| Due from RP Finance LLC, net of allowance for losses on related party receivables of $ | ||||||||
| Investments – Cornerstone Pharmaceuticals | ||||||||
| Investments – Other Pharmaceuticals | ||||||||
| Investments – Hedge Funds | ||||||||
| In-process research and development and patents | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Trade accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Other current liabilities | ||||||||
| Due to related parties | ||||||||
| Note payable, net of debt issuance costs | ||||||||
| Total current liabilities | ||||||||
| Other liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| EQUITY | ||||||||
| Class A common stock, $ | ||||||||
| Class B common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| 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 attributable to Rafael Holdings, Inc. | ||||||||
| Noncontrolling interests | ( | ) | ||||||
| TOTAL EQUITY | ||||||||
| TOTAL LIABILITIES AND EQUITY | $ | $ | ||||||
See accompanying notes to the unaudited consolidated interim financial statements.
1
RAFAEL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited, in thousands, except share and per share data)
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| REVENUE | ||||||||||||||||
| Rental – Third Party | $ | $ | $ | $ | ||||||||||||
| Rental – Related Party | ||||||||||||||||
| Parking | ||||||||||||||||
| Other – Related Party | ||||||||||||||||
| Total revenue | ||||||||||||||||
| COSTS AND EXPENSES | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Provision for loss on receivable pursuant to line of credit | ||||||||||||||||
| Provision for losses on related party receivables | ||||||||||||||||
| Impairment - Altira | — | |||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||||||
| Gain on sale of building | ||||||||||||||||
| Impairment of investments - Other Pharmaceuticals | ( | ) | ||||||||||||||
| Impairment of cost method investment - Cornerstone Pharmaceuticals | ( | ) | ||||||||||||||
| Loss on available-for-sale securities | ( | ) | — | ( | ) | — | ||||||||||
| Unrealized (loss) gain on investments - Hedge Funds | ( | ) | ( | ) | ||||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Equity in earnings (loss) of RP Finance | ( | ) | ||||||||||||||
| Consolidated net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to Rafael Holdings, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| OTHER COMPREHENSIVE LOSS | ||||||||||||||||
| Consolidated net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Unrealized loss on available-for-sale securities | ( | ) | — | ( | ) | — | ||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
| Total comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive gain (loss) attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ||||||||||
| Total comprehensive loss attributable to Rafael Holdings, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share | ||||||||||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of shares used in calculation of loss per share | ||||||||||||||||
| Basic and 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 April 30, 2022 | ||||||||||||||||||||||||||||||||||||
Common Stock, Series A | Common Stock, Series B | Additional Paid-in | Accumulated | Accumulated
other comprehensive | Non controlling | Total | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | income | interests | Equity | ||||||||||||||||||||||||||||
| Balance at January 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Net loss for the three months ended April 30, 2022 | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| 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 April 30, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
Nine Months Ended April 30, 2022 | ||||||||||||||||||||||||||||||||||||
| Common Stock, Series A | Common
Stock, Series B | Additional paid-in | Accumulated | Accumulated other comprehensive | Non controlling | Total | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | capital | Deficit | income | interests | Equity | ||||||||||||||||||||||||||||
| Balance at July 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss for the nine months ended April 30, 2022 | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||||||||||
| Forfeiture of restricted stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Common stock sold to investors | ||||||||||||||||||||||||||||||||||||
| Transaction costs incurred in connection with sale of common stock | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Common stock sold to related party | ||||||||||||||||||||||||||||||||||||
| Acquisition of additional ownership interest in LipoMedix | — | — | ( | ) | ||||||||||||||||||||||||||||||||
| Shares withheld for payroll taxes | — | ( | ) | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Unrealized loss on available-for-sale securities | — | — | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance at April 30, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
See accompanying notes to the unaudited consolidated interim financial statements.
3
RAFAEL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands, except share data)
| Three Months Ended April 30, 2021 | ||||||||||||||||||||||||||||||||||||
| Common Stock, Series A | Common Stock, Series B | Additional Paid in | Accumulated | Accumulated other comprehensive | Non controlling | Total | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | income | interests | Equity | ||||||||||||||||||||||||||||
| Balance at January 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss for the three months ended April 30, 2021 | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Shares issued - Investment in Altira | — | — | — | — | — | |||||||||||||||||||||||||||||||
| Shares withheld for payroll taxes | — | — | ( | ) | — | ( | ) | — | — | — | ( | ) | ||||||||||||||||||||||||
| Warrants exercised | — | — | — | — | — | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Balance at April 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Nine Months Ended April 30, 2021 | ||||||||||||||||||||||||||||||||||||
| 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 July 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss for the nine months ended April 30, 2021 | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||||||||||
| Stock-based compensation to Board of Directors | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Shares issued - Securities Purchase Agreements | — | — | — | — | — | |||||||||||||||||||||||||||||||
| Shares issued - Investment in Altira | — | — | — | — | — | |||||||||||||||||||||||||||||||
| Shares withheld for payroll taxes | — | — | ( | ) | — | ( | ) | — | — | — | ( | ) | ||||||||||||||||||||||||
| Warrants exercised | — | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||||||||||||||||||
| Capital contribution for noncontrolling interest | — | — | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | ||||||||||||||||||||||||||||||||||
| Balance at April 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
See accompanying notes to the unaudited consolidated interim financial statements.
4
RAFAEL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
| Nine Months Ended April 30, | ||||||||
| 2022 | 2021 | |||||||
| Operating activities | ||||||||
| Consolidated net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile consolidated net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Deferred income taxes | ||||||||
| Net unrealized loss (gain) on investments - Hedge Funds | ( | ) | ||||||
| Realized loss on available-for-sale securities | ||||||||
| Impairment of investments - Other Pharmaceuticals | ||||||||
| Impairment of cost method investment - Cornerstone Pharmaceuticals | ||||||||
| Impairment - Altira | ||||||||
| Provision for loss on receivable pursuant to line of credit | ||||||||
| Equity in loss (earnings) of RP Finance | ( | ) | ||||||
| Provision for losses on related party receivables | ||||||||
| Provision for doubtful accounts | ( | ) | ( | ) | ||||
| Stock-based compensation, net | ( | ) | ||||||
| Amortization of debt discount | ||||||||
| Gain on sale of building | ( | ) | ||||||
| Change in assets and liabilities: | ||||||||
| Interest receivable | ( | ) | — | |||||
| Trade accounts receivable | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other assets | ||||||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Other current liabilities | ||||||||
| Due to related parties | ( | ) | ||||||
| Due from Cornerstone Pharmaceuticals | ( | ) | ( | ) | ||||
| Other liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activities | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Payment to fund RP Finance Line of Credit | ( | ) | ( | ) | ||||
| Payment to Cornerstone Pharmaceuticals pursuant to Line of Credit | ( | ) | ||||||
| Purchases of available-for-sale securities | ( | ) | — | |||||
| Proceeds from maturities of available-for-sale securities | — | |||||||
| Proceeds from sale of building | ||||||||
| Proceeds related to distribution from Hedge Funds | ||||||||
| Purchase of Investment in Altira | ( | ) | ||||||
| Investment in Cornerstone Pharmaceuticals | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Contribution from noncontrolling interest of consolidated entity | ||||||||
| Proceeds from exercise of options | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Proceeds from issuance of common stock | ||||||||
| Payment of transaction costs incurred in connection with sale of common stock | ( | ) | ||||||
| Payments for taxes related to shares withheld for employee taxes | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ||||||
| Net increase (decrease) in cash and cash equivalents and restricted cash | ( | ) | ||||||
| Cash and cash equivalents, and restricted cash, beginning of period | ||||||||
| Cash and cash equivalents, and restricted cash, end of period | $ | $ | ||||||
| Supplemental schedule of noncash investing and financing activities | ||||||||
| Common shares issued for payment of purchase price for Altira equity | $ | $ | ||||||
| Acquisition of additional ownership interest in LipoMedix | $ | $ | ||||||
See accompanying notes to the unaudited consolidated interim financial statements.
5
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – DESCRIPTION OF BUSINESS
Rafael Holdings, Inc. (NYSE-RFL), (“Rafael Holdings” or the “Company”), a Delaware corporation, is focused on discovering and developing novel cancer and immune metabolism therapies with the potential to improve and extend the lives of patients. The Company also owns commercial real estate assets, which it operates as a separate line of business.
The Company has an investment in Cornerstone Pharmaceuticals, Inc. (“Cornerstone Pharmaceuticals”), formerly known as Rafael Pharmaceuticals Inc., or Rafael Pharmaceuticals, that includes preferred and common equity interests and a warrant to purchase additional equity. 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. 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, and 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 first quarter financial statements, 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 currently the likelihood of further development of and prospects for CPI-613 is uncertain and has fully impaired in the Company’s financial statements for the nine months ended April 30, 2022, as well as the value of its loans, receivables, and investment in Cornerstone Pharmaceuticals based upon its valuation of Cornerstone Pharmaceuticals. On February 2, 2022, the Company withdrew its Registration Statement on Form S-4, which terminated the merger agreement pursuant to certain sections of the merger agreement, effective immediately.
In 2019, the Company established the Barer Institute (“Barer”), an early-stage small molecule research institute 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 is 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 is pursuing collaborative research agreements and in-licensing opportunities with leading scientists from top academic institutions. Farber Partners, LLC (“Farber”) was formed to support agreements with Princeton University’s Office of Technology Licensing for technology from the laboratory of Professor Joshua Rabinowitz, in the Department of Chemistry, Princeton University, including an exclusive worldwide license to its SHMT (serine hydroxymethyltransferase) inhibitor program.
The Company also holds a majority equity interest in LipoMedix Pharmaceuticals Ltd. (“LipoMedix”), a clinical stage oncological pharmaceutical company based in Israel.
In addition, the Company has recently initiated efforts to develop other early stage pharmaceutical ventures.
The Company’s commercial real estate holdings consist of a building at 520 Broad Street in Newark, New Jersey that serves as headquarters for the Company and several tenants and an associated 800-car public garage, and a portion of a building in Israel. The Company has entered into an agreement to sell the building and garage. Refer to Note 19 for further details.
The “Company” in these consolidated financial statements refers to Rafael Holdings and its subsidiaries on a consolidated basis. All significant intercompany accounts and transactions have been eliminated in consolidation.
6
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
All majority-owned subsidiaries are consolidated with all intercompany transactions and balances eliminated in consolidation or combination. In addition to Rafael Holdings, Inc., the subsidiaries included in these consolidated financial statements are as follows:
| Company | Country of Incorporation | Percentage Owned | ||||
| Broad Atlantic Associates, LLC | % | |||||
| IDT R.E. Holdings Ltd. | % | |||||
| Rafael Holdings Realty, Inc. | % | |||||
| Barer Institute, Inc. | % | |||||
| The Barer Institute, LLC | % | |||||
| 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 | %* | |||||
| * |
On March 15, 2022, the Company dissolved IDT 225 Old NB Road, LLC.
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 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 ended in the calendar year indicated (e.g., fiscal 2021 refers to the fiscal year ended July 31, 2021).
Operating results for the three and nine months ended April 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2022. The balance sheet at July 31, 2021 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 fiscal 2021, or the 2021 Form 10-K, as filed with the U.S. Securities and Exchange Commission (the “SEC”).
Reclassifications
During the third quarter of fiscal 2022, the Company determined that it would revise the presentation of interest expense and interest income on its Consolidated Statements of Operations and Comprehensive Loss. The revised presentation is comprised of a reclassification of interest income out of interest expense, net and presentation of the two figures as separate line items on the Consolidated Statements of Operations and Comprehensive Loss for all periods presented.
7
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 April 30, 2022, the Company had cash
and cash equivalents of $
Risks and Uncertainties - COVID-19, War in Ukraine
In late 2019, a novel strain of coronavirus, SARS-CoV, which causes COVID-19, was identified and has proved to be highly contagious. It has since spread extensively throughout the world, including the United States, and was declared a global pandemic by the World Health Organization in March 2020. The Company actively monitors the outbreak, including the spread of new variants of interest, and its potential impact on the Company’s operations and those of the Company’s holdings.
Even with growing availability of testing and vaccines and the relaxation of public health measures that were implemented to limit the spread of the pandemic, there continues to be uncertainty around the COVID-19 pandemic and its impact.
The Company had implemented a number of measures to protect the health and safety of the Company’s workforce including a voluntary work-from-home policy for the Company’s workforce who can perform their jobs from home as well as restrictions on discretionary business travel. Most of our employees have returned to working from the office on a part-time basis.
The full impact of the COVID-19 pandemic on the Company will depend on factors such as the length of time of the pandemic; the responses of federal, state and local governments; the impact of future variants that may emerge; vaccination rates among the population; the efficacy of the COVID-19 vaccines; the longer-term impact of the pandemic on the economy and consumer behavior; and the effect on our employees, vendors, and other partners.
The short and long-term implications of Russia’s invasion of Ukraine are difficult to predict at this time. The imposition of sanctions and counter sanctions may have an adverse effect on the economic markets generally and could impact our business and the companies in which we have investments, financial condition, and results of operations. Because of the highly uncertain and dynamic nature of these events, it is not currently possible to estimate the impact of the Russian – Ukraine war on our business and the companies in which we have investments.
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 the three and nine
months ended April 30, 2022, related parties represented
8
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.
Restricted Cash
Restricted cash represented escrow funds held
in bank accounts owned by the Company to be used to pay the severance due the chief executive officer for termination without cause, pursuant
to his employment agreement. The Company did not have the right to use this cash balance for any other purpose. During February 2022,
the Company paid approximately $
Reserve for Receivables
The Company evaluates accounts receivable, loans, interest and fees receivable for impairment under Accounting Standards Codification (“ASC”) 310, Receivables. The Company also evaluates the reserve for losses and estimates collectability of accounts receivable, loans, interest and fees receivable based on historical bad debt experience, management’s assessment of the financial condition of individual companies with which the Company conducts business, current market conditions, and reasonable and supportable forecasts of future economic conditions.
Investments
The method of accounting applied to long-term investments, whether consolidated, equity or cost, 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 businesses that the Company does not control, but in which the Company has the ability to exercise significant influence over operating and financial matters, are accounted for using the equity method. Investments in which the Company does not have the ability to exercise significant influence over operating and financial matters are accounted for using the cost method. 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.
Corporate Bonds
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 income. Realized gains or losses are released from accumulated other comprehensive income and into earnings on the Consolidated Statements of Operations and Comprehensive Loss.
9
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Cost Method Investments - The Company has determined that Cornerstone Pharmaceuticals (see Note 3) 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. The Company’s investment in Cornerstone Pharmaceuticals is presented as “Investments - Cornerstone Pharmaceuticals.”
Equity Method Investments - The Company has determined that RP Finance, LLC (“RP Finance”), (see Note 5), 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. The Company accounts for its investment in RP Finance using the equity method of accounting.
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.
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 earns revenue from parking which is derived primarily from monthly and transient daily parking. The monthly and transient daily parking revenue falls within the scope of ASC 606 and is 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.
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required rent payments or parking customers to pay amounts due.
10
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 as they occur. Compensation cost for awards is recognized using the straight-line method over the vesting period. Stock-based compensation is included in selling, general and administrative expense and research and development expense in the consolidated statements of operations and comprehensive loss.
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.
NOTE 3 – 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 committed to the development and commercialization of therapies that exploit the metabolic differences between normal cells and cancer cells.
The Company owns 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 former Chief Executive Officer of the Company and Chairman of the Board of Cornerstone Pharmaceuticals)
holds a financial instrument (the “Instrument”) that owns
11
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pharma Holdings holds 44.0 million shares of Cornerstone Pharmaceuticals Series D Convertible Preferred Stock and a warrant to increase the combined ownership of Pharma Holdings and CS Pharma to up to 56% of the fully diluted equity interests in Cornerstone Pharmaceuticals (the “Warrant”). The exercise price of the Warrant is the lower of 70% of the price sold in an equity financing, or $1.25 per share, subject to certain adjustments.
On March 25, 2020, the Board of Directors of Cornerstone Pharmaceuticals extended the expiration date of the Warrant held by Pharma Holdings to purchase shares of the Warrant from December 31, 2020 to June 30, 2021, and on August 31, 2020 the Board of Directors of Cornerstone Pharmaceuticals further extended the expiration date of the Warrant held by Pharma Holdings, LLC to purchase shares of the Warrant to August 15, 2021. In connection with the merger agreement, the Warrant expiration was extended to April 1, 2022. The Company has asserted that it may be entitled to a further extension of the Warrant. At this time, the Company does not intend to exercise the Warrant.
Pharma Holdings also holds certain governance rights in Cornerstone Pharmaceuticals including appointment of directors. Pharma Holdings is not the primary beneficiary of Cornerstone Pharmaceuticals as it does not control or direct the activities of Cornerstone Pharmaceuticals that most significantly impact Cornerstone Pharmaceuticals’ economic performance.
CS Pharma holds
The Company and its subsidiaries collectively
own securities representing
The Series D Convertible Preferred Stock has a stated value of $1.25 per share (subject to appropriate adjustment to reflect any stock split, combination, reclassification or reorganization of the Series D Preferred Stock or any dilutive issuances, as described below). Holders of Series D Stock are entitled to receive non-cumulative dividends when, as and if declared by the Board of Cornerstone Pharmaceuticals, prior to any dividends to any other class of capital stock of Cornerstone Pharmaceuticals. In the event of any liquidation, dissolution or winding up Cornerstone Pharmaceuticals, or in the event of any deemed liquidation, proceeds from such liquidation, dissolution or winding up shall be distributed first to the holders of Series D Stock. Except with respect to certain major decisions, or as required by law, holders of Series D Stock vote together with the holders of the other preferred stock and common stock and not as a separate class.
The Company serves as the managing member of Pharma
Holdings, and Pharma Holdings serves as the managing member of CS Pharma, with broad authority to make all key decisions regarding their
respective holdings. Any distributions that are made to CS Pharma from Cornerstone Pharmaceuticals that are in turn distributed by CS
Pharma, will need to be made pro rata to all members, which would entitle Pharma Holdings to
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.
12
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Instrument holds a contractual right to receive
additional shares of Cornerstone Pharmaceuticals capital stock equal to
Pharma Holdings holds the Warrant to purchase
a significant stake in Cornerstone Pharmaceuticals, as well as other equity and governance rights in Cornerstone Pharmaceuticals.
On January 28, 2021, Pharma Holdings partially exercised the Warrant to maintain the 51% ownership percentage and purchased 7.3 million shares of Cornerstone Pharmaceuticals’ Series D Preferred Stock for $9.1 million, of which $0.9 million was contributed by the holder of a minority interest in Pharma Holdings.
Due to the Data Events, on October 28, 2021, the
Company recorded an impairment charge of approximately $
Approximately $
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 (the “Debtor”) in
which the Debtor may borrow up to an aggregate amount of $
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 $
13
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company also recorded a loss on related party
receivables of approximately $
NOTE 4 – INVESTMENT IN ALTIRA
The Company entered into a Membership Interest
Purchase Agreement (the “Purchase Agreement”) on May 13, 2020 with a member (the “First Seller”) of Altira Capital
& Consulting, LLC (“Altira”). Pursuant to the Purchase Agreement, on May 13, 2020,
The Company has accounted for the purchase of
the initial
For the fiscal 2020, the Company determined that
the investment in Altira was fully impaired as of the acquisition date as there were no probable cash flows, and accordingly, the investment
had no value. The Company recorded an impairment charge of $
On December 7, 2020,
14
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Certain of the post-closing payments may be made, at the Company’s discretion, in cash or shares of the Company’s Class B common stock based on the ten-day average share price of the Company’s Class B common stock prior to the date of payment or any combination thereof.
The purchase of the additional membership interests
was accounted for as an asset acquisition, as Altira is not considered a business in accordance with the guidance in ASC 805, Business
Combinations. The membership interests acquired do not consist of inputs, processes, and are not generating outputs, as required in
ASC 805 to qualify as a business, and are therefore accounted for as an asset acquisition. Although this transaction is considered an
asset acquisition, there are no assets or liabilities to be recorded as of the acquisition date as Altira does not have any business operations.
The cost of the investment was determined to be $
For the nine months ended April 30, 2021, the
Company determined that the investment in Altira was fully impaired as of the acquisition date as there were no probable cash flows, and
accordingly, had no value. The Company recorded an impairment charge of $
During fiscal 2021, the Company issued
Additionally, the Company issued
Upon the December 2020 acquisition of the additional
NOTE 5 – INVESTMENT IN RP FINANCE, LLC
On February 3, 2020, Cornerstone Pharmaceuticals
entered into a Line of Credit Loan Agreement (“Line of Credit Agreement”) with RP Finance which provides a revolving commitment
of up to $
The Company owns 37.5% of the equity interests in RP Finance and is required to fund 37.5% of funding requests from Cornerstone Pharmaceuticals under the Line of Credit Agreement. Howard Jonas owns 37.5% of the equity interests in RP Finance, and is required to fund 37.5% of funding requests from Cornerstone Pharmaceuticals under the Line of Credit Agreement. The remaining 25% equity interests in RP Finance are owned by other shareholders of Cornerstone Pharmaceuticals.
Under the Line of Credit Agreement, 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 earlier 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 Line of Credit Agreement must be repaid out of certain proceeds from equity sales by Cornerstone Pharmaceuticals.
In connection with entering into the Line of Credit
Agreement, Cornerstone Pharmaceuticals agreed to issue to RP Finance shares of its common stock representing
15
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. The Company has recognized
approximately $
As of April 30, 2022, the Company has funded a cumulative total of $9.375 million in accordance with its 37.5% ownership interests in RP Finance.
Impairment of Equity Method Investment
Due to the Data Events, during the three months
ended October 31, 2021, the Company recorded equity in the loss of RP Finance of $
NOTE 6 – 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.
As of April 30, 2022, the Company held
In November 2019, the Company provided bridge
financing in the principal amount of $
In January 2020, the Company provided bridge financing
in the principal amount of $
In March 2020, the Company provided bridge financing
in the principal amount of $
16
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In
May 2020, the Company entered into a Share Purchase Agreement with LipoMedix to purchase
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 Share Purchase Agreement, there was an outstanding loan balance including principal of $
NOTE 7 – INVESTMENTS IN MARKETABLE SECURITIES
The Company has classified its investments in corporate bonds 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.
The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for available-for-sale securities as of April 30, 2022 are as follows:
| April 30, 2022 | Amortized cost | Gross unrealized gains | Gross unrealized (losses) | Fair value | ||||||||||||
| (unaudited, in thousands) | ||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||
| Corporate bonds | $ | $ | $ | ( | ) | $ | ||||||||||
| Total available-for-sale securities | $ | $ | $ | ( | ) | $ | ||||||||||
The Company did not hold any investments in corporate bonds as of July 31, 2021.
During
the three and nine months ended April 30, 2022, the Company reclassified approximately $
17
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Maturities of corporate bonds held as of April 30, 2022 were all due within one year.
Marketable securities in an unrealized loss position as of April 30, 2022 were not deemed impaired at acquisition and subsequent declines in fair value are not deemed attributed to declines in credit quality. The Company believes that it is more likely than not that the securities will receive a full recovery of par value, although there can be no assurance that such recovery will occur.
NOTE 8 – FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
| ● | Level 1 - quoted prices in active markets for identical assets or liabilities; |
| ● | Level 2 - quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or |
| ● | Level 3 - unobservable inputs for the asset or liability, such as discounted cash flow models or valuations. |
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following is a listing of the Company’s assets required to be measured at fair value on a recurring basis and where they are classified within the fair value hierarchy as of April 30, 2022 and July 31, 2021:
| April 30, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (unaudited, in thousands) | ||||||||||||||||
| Assets: | ||||||||||||||||
| Available-for-sale securities | $ | $ | $ | $ | ||||||||||||
| Hedge funds | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| July 31, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
| Assets: | ||||||||||||||||
| Hedge funds | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
At April 30, 2022 and July 31, 2021, the Company did not have any liabilities measured at fair value on a recurring basis.
18
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the changes in the fair value of the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (unaudited, in thousands) | (unaudited, in thousands) | |||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||
| Liquidation of Hedge Fund Investments | ( | ) | ||||||||||||||
| Total (loss) gain included in earnings | ( | ) | ( | ) | ||||||||||||
| 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. In October 2020, the Company received a $
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.
Cash and cash equivalents, investment in equity securities, trade accounts receivable, and accounts payable. At April 30, 2022 and July 31, 2021, the carrying amount of these assets and liabilities approximated fair value because of the short period of time to maturity. The fair value estimates for cash and cash equivalents were classified as Level 1.
Marketable securities. The Company’s available-for-sale securities are comprised of investments in fixed income corporate bonds and are recorded in available-for-sale securities on the Consolidated Balance Sheet. These securities are recorded at fair value using market prices at April 30, 2022. The fair value estimates for marketable securities were classified as Level 2.
Other assets and other liabilities. At April 30, 2022 and July 31, 2021, the carrying amount of these assets and liabilities approximated fair value. The fair values were estimated based on the Company’s assumptions, which were classified as Level 3 of the fair value hierarchy.
The Company’s financial instruments include trade accounts receivable, trade accounts payable, and due from related parties. The recorded carrying amounts of trade accounts receivable, trade accounts payable and due from related parties approximate their fair value due to their short-term nature. Other than noted above, the Company did not have any other assets or liabilities that were measured at fair value on a recurring basis as of April 30, 2022 or July 31, 2021.
19
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 – TRADE ACCOUNTS RECEIVABLE
Trade Accounts Receivable consisted of the following:
| April 30, 2022 | July 31, 2021 | |||||||
| (unaudited, in thousands) | (in thousands) | |||||||
| Trade Accounts Receivable | $ | $ | ||||||
| Accounts Receivable - Related Party | ||||||||
| Less Allowance for Doubtful Accounts | ( | ) | ( | ) | ||||
| Trade Accounts Receivable, net | $ | $ | ||||||
The
current portion of deferred rental income included in Prepaid Expenses and Other Current Assets was approximately $
The
noncurrent portion of deferred rental income included in Other Assets was approximately $
NOTE 10 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
| April 30, 2022 | July 31, 2021 | |||||||
| (unaudited, in thousands) | (in thousands) | |||||||
| Building and Improvements | $ | $ | ||||||
| Land | ||||||||
| Furniture and Fixtures | ||||||||
| 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 $
The Company’s headquarters are located at 520 Broad Street in Newark, New Jersey, where it occupies office space in a building owned by its subsidiary. Refer to Note 19 for further information on 520 Broad Street.
NOTE 11 – LOSS PER SHARE
Basic net loss per share is computed by dividing net 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 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. The securities set forth below have been excluded from the calculation of diluted net loss per share for the three and nine months ended April 30, 2022 and 2021 because all such securities are anti-dilutive for all periods presented.
20
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the Company’s potentially dilutive securities, in common share equivalents, which have been excluded from the calculation of dilutive loss per share as their effect would be anti-dilutive:
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Shares issuable upon exercise of stock options | ||||||||||||||||
| Shares issuable upon vesting of restricted stock | ||||||||||||||||
| Shares issuable upon exercise of warrants to purchase Class B common stock | ||||||||||||||||
The diluted loss per share computation equals basic loss per share for the three and nine months ended April 30, 2022 and 2021 because the Company had a net loss in all such periods and the impact of the assumed exercise of non-vested restricted shares, stock options, and warrants would have been anti-dilutive.
NOTE 12 – NOTE PAYABLE
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 Associates, LLC, 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 provides for a loan in the amount of $
The Note Payable bears interest at a rate per annum equal to seven and one-quarter percent (7.25%) and thereafter at an interest rate per annum equal to the 30-day LIBOR Rate, as published in The Wall Street Journal, plus 6.90% per annum, but in no event less than seven and one-quarter percent (7.25%) per annum. The Note Payable is due on August 1, 2022, subject to the Company’s option to extend the maturity date until August 1, 2023 for a fee equal to three-quarters of one percent (0.75%) of the Note Payable.
The Loan Agreement contains customary affirmative covenants, negative covenants and events of default, as defined in the Loan Agreement, including covenants and restrictions that, among other things, restrict 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 could permit 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 is in compliance with the covenants in the Loan Agreement as of April 30, 2022.
Interest
expense under the Note Payable amounted to $
Unamortized
debt issuance costs on the Note Payable totaled $
NOTE 13 – 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 Corporation, or IDT, and payroll costs for the Company’s personnel
that were paid by IDT. The Company also receives rental income from various companies under common control to IDT. The Company recorded
expense of approximately $
and 2021, respectively.
21
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
IDT
leases approximately
Cornerstone Pharmaceuticals
The
Company had provided Cornerstone Pharmaceuticals with administrative, finance, accounting, tax and legal services. Howard S. Jonas currently
serves as the former Chairman of the Board of Cornerstone Pharmaceuticals and owns an equity interest in Cornerstone Pharmaceuticals.
The Company billed Cornerstone Pharmaceuticals $
Due
to the Data Events, in the nine months ended April 30, 2022, the balance owed to the Company by Cornerstone Pharmaceuticals as of April
30, 2022, was fully reserved, resulting in a loss on related party receivable of $
Levco Pharmaceuticals Ltd
On
September 8, 2020, Levco Pharmaceuticals Ltd. (“Levco”) entered into a research and development consulting agreement with Dr.
Alberto Gabizon for a two-year period. Under the agreement, in exchange for the services provided, Levco will pay Dr. Gabizon $
On
September 8, 2020, Levco entered into a Sponsored Research Agreement with a company for a research program related to patent applications
with payments totaling $
Farber Partners, LLC
Farber, a controlled subsidiary of the Company, reached agreements with Princeton University including to in-license certain patents and related information related to the serine hydroxymethyltransferase (SHMT) inhibitor program developed by the laboratory of Dr. Joshua D. Rabinowitz at Princeton. Farber will pay Princeton minimum annual royalty payments, in addition to percentage royalties and a percentage of any sublicense revenue. Additionally, there are development milestone payments which Farber will pay Princeton for the first three products developed by Farber, or any sublicensees or affiliates.
22
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pharma Holdings
On January 28, 2021, Pharma Holdings partially exercised the Warrant and purchased 7.3 million shares of Cornerstone Pharmaceuticals’ Series D Preferred Stock for $9.1 million, of which $0.9 million was contributed by the holder of a minority interest in Pharma Holdings.
Related Party Rental Income
The
Company leases space to related parties (including IDT Corporation - see above) which represented approximately
Investment in Altira
In
May 2020, the Company acquired its first membership interest of
RP Finance
The Company recognized approximately $0 and $96 thousand in earnings from its ownership interests of 37.5% in RP Finance for the three months ended April 30, 2022 and 2021, respectively, and a loss of $575 thousand and earnings of $288 thousand from its ownership interests of 37.5% in RP Finance for the nine months ended April 30, 2022 and 2021, respectively. As of April 30, 2022, the equity method investment in RP Finance on the Company’s balance sheet was $0. The Company recorded a loss on related party receivables of $9.375 million related to amounts owed by RP Finance (see Note 5).
Howard Jonas, Chairman of the Board and Former Chief Executive Officer
In
December 2020, two entities, on whose Boards of Directors Howard Jonas, the Registrant’s Chairman of the Board and former Chief
Executive Officer serves, each purchased
LipoMedix Pharmaceuticals, Ltd.
As
of the date of the Share Purchase Agreement, on November 15, 2021, there was an outstanding loan balance including principal of $
NOTE 14 – INCOME TAXES
During
the nine months ended April 30, 2022 and 2021, the Company recognized an income tax provision of $
23
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company anticipates that its assumptions and estimates may change as a result of future guidance and interpretation from the Internal Revenue Service, the SEC, the FASB, and various other taxing jurisdictions. In particular, the Company anticipates that the U.S. state jurisdictions will continue to determine and announce their conformity with or decoupling from the Tax Act, either in its entirety or with respect to specific provisions. Legislative and interpretive actions could result in adjustments to the Company’s balances.
NOTE 15 – 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 Pharmaceuticals segment based primarily on research and development efforts and results of clinical trials and the Real Estate segment based primarily on results of operations. All investments in Cornerstone Pharmaceuticals and assets and expenses associated with LipoMedix, Barer, Levco, Farber, and Rafael Medical Devices are tracked separately in the Pharmaceuticals segment.
The Pharmaceuticals segment is comprised of preferred and common equity interests and the Warrant to purchase equity interests in Cornerstone Pharmaceuticals, a majority equity interest in LipoMedix, Barer, Levco, Farber, and Rafael Medical Devices. To date, the Pharmaceuticals segment has not generated any revenues.
The Real Estate segment consists of the Company’s real estate holdings, including a building at 520 Broad Street in Newark, New Jersey that houses headquarters for the Company and certain affiliates and its associated public garage and a portion of an office building in Israel.
Operating results for the business segments of the Company are as follows:
| (unaudited, in thousands) | Pharmaceuticals | Real Estate | Total | |||||||||
| Three Months Ended April 30, 2022 | ||||||||||||
| Revenues | $ | $ | $ | |||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ||||||
| Three Months Ended April 30, 2021 | ||||||||||||
| Revenues | $ | $ | $ | |||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ||||||
24
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| (unaudited, in thousands) | Pharmaceuticals | Real Estate | Total | |||||||||
| Nine Months Ended April 30, 2022 | ||||||||||||
| Revenues | $ | $ | $ | |||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ||||||
| Nine Months Ended April 30, 2021 | ||||||||||||
| Revenues | $ | $ | $ | |||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ||||||
Geographic Information
Revenues from tenants located outside of the United States were generated entirely from related parties located in Israel. Revenues from these non-United States customers as a percentage of total revenues were as follows (revenues by country are determined based on the location of the related facility):
| Three Months Ended April 30, (unaudited) | 2022 | 2021 | ||||||
| Revenue from tenants located in Israel | % | % | ||||||
| Nine Months Ended April 30, (unaudited) | 2022 | 2021 | ||||||
| Revenue from tenants located in Israel | % | % | ||||||
Net long-lived assets and total assets held outside of the United States, which are located in Israel, were as follows:
| (unaudited, in thousands) | United States | Israel | Total | |||||||||
| April 30, 2022 | ||||||||||||
| Long-lived assets, net | $ | $ | $ | |||||||||
| Total assets | ||||||||||||
| July 31, 2021 | ||||||||||||
| Long-lived assets, net | $ | $ | $ | |||||||||
| Total assets | ||||||||||||
NOTE 16 – COMMITMENTS AND CONTINGENCIES
Legal Proceedings
On
July 12, 2019, the Company received a Citation and Notification of Penalty from the Occupational Safety and Health Administration of
the U.S. Department of Labor, or OSHA, related to an OSHA inspection of 520 Broad Street, Newark, New Jersey. The citation seeks to impose
penalties related to alleged violations of the Occupation Safety and Health Act of 1970 at 520 Broad Street. On July 31, 2019, the Company
filed a Notice of Contest with OSHA contesting the citation in its entirety. On February 14, 2020, the Company entered into a Settlement
Agreement with OSHA, as related to the citation received on July 12, 2019.
25
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On December 31, 2019, an employee of the Company filed a complaint for personal injuries against the Company and other parties in the New Jersey Supreme Court for an incident that took place on January 31, 2019 at 520 Broad Street, Newark, New Jersey. The Company is vigorously defending its interests in this matter. The loss is considered remote and no accrual has been recorded.
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, other than noted above, 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.
NOTE 17 – EQUITY
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 and issued
On
August 19, 2021, the Company entered into a Securities Purchase Agreement (the “Institutional Purchase Agreement”) with 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.
26
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 19, 2022, the Company approved the
2021 Equity Incentive Plan (“the “2021 Plan”). The 2018 Equity Incentive Plan was suspended and replaced by the 2021
Plan, and no new grants were awarded under the 2018 Equity Incentive Plan as of January 19, 2022. 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. The maximum number of shares of Class B common stock that
may be issued under the 2021 Plan is
On February 15, 2022, the Company filed a Registration Statement on Form S-3 (as amended on March 2, 2022) registering the resale by institutional investors (the “Institutional Investors”) of the shares purchased by them. The Registration Statement was declared effective on March 7, 2022.
Stock Options
A summary of stock option activity for the Company is as follows:
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding at July 31, 2021 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Cancelled / Forfeited | ( | ) | ||||||||||||||
| Outstanding at April 30, 2022 | $ | $ | ||||||||||||||
| Exercisable at April 30, 2022 | $ | $ | ||||||||||||||
At April 30, 2022, there are unrecognized
compensation costs related to non-vested stock options of $
Vesting terms of options granted to two executive team members during the nine months ended April 30, 2022 were modified to extend the vesting period by one year. This was accounted for as a modification, and no incremental compensation cost was recorded as the amount is nominal.
The value of option grants is calculated using the Black-Scholes option pricing model with the following assumptions for options granted during the nine months ended April 30, 2022:
| Risk-free interest rate | ||||
| Expected term (in years) | ||||
| Expected volatility | ||||
| Expected dividend yield | % |
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.
27
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of the status of the Company’s grants of restricted shares of Class B common stock is presented below:
Number of Non-vested Shares | Weighted Average Grant Date Fair Value | |||||||
| Outstanding at July 31, 2021 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Cancelled / Forfeited | ( | ) | ( | ) | ||||
| Non-vested shares at April 30, 2022 | $ | |||||||
At April 30, 2022, there was $
On November 21, 2021, Ameet Mallik resigned as
Chief Executive Officer of the Company, effective January 31, 2022. In connection with his resignation, there was a material forfeiture
of the former CEO’s Class B restricted shares, resulting in a reversal of approximately $
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (unaudited, in thousands) | (unaudited, in thousands) | |||||||||||||||
| General and administrative | $ | $ | $ | $ | ||||||||||||
| Research and development | ||||||||||||||||
| Forfeiture of RSUs within general and administrative | ( | ) | ||||||||||||||
| 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 $
28
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Equity-classified Warrants
In connection with the Share Purchase Agreement,
each purchaser was granted warrants to purchase twenty percent (
During fiscal 2021, IDT and Genie each exercised
There were no exercises of warrants during the
nine months ended April 30, 2022. At April 30, 2022, the Company had outstanding warrants to purchase
Grant to Board of Directors
In January 2022, the Company granted
In January 2021, the Company granted a total of
NOTE 18 – LEASES
29
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The future contractual minimum lease payments to be received (excluding operating expense reimbursements) by the Company as of April 30, 2022, under non-cancellable operating leases which expire on various dates through 2028 are as follows:
| Year ending July 31, | Related Parties | Other | Total | |||||||||
| (in thousands) | ||||||||||||
| 2022 (remaining) | $ | $ | $ | |||||||||
| 2023 | ||||||||||||
| 2024 | ||||||||||||
| 2025 | ||||||||||||
| 2026 | ||||||||||||
| Thereafter | ||||||||||||
| Total Minimum Future Rental Income | $ | $ | $ | |||||||||
NOTE 19 – SUBSEQUENT EVENTS
Non-refundable Deposit on Contract of Sale
On February 18, 2022, Broad Atlantic Associate
LLC (the “Seller”), subsidiary of the Company, entered into a Contract of Sale with 520 Broad Street Propco LLC (the “Purchaser”)
for the sale of the building owned by the Seller located at 520 Broad Street in Newark, New Jersey and an associated 800-car public garage
(the “Property”) for a purchase price of $
In connection with the executed Contract of Sale,
the Purchaser paid $
Furthermore, if the Purchaser extends the closing
date of the sale, in addition to paying a supplemental deposit of $
Rafael Pharmaceuticals Name Change
On May 11, 2022, the Board of Directors of Rafael Pharmaceuticals approved a name change from “Rafael Pharmaceuticals, Inc.” to “Cornerstone Pharmaceuticals, Inc.”
New 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
30
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Rafael Holdings, Inc. (NYSE-RFL), (“Rafael Holdings” or the “Company”), a Delaware corporation, is focused on discovering and developing novel cancer and immune metabolism therapies with the potential to improve and extend the lives of patients. The Company also owns commercial real estate assets, which it operates as a separate line of business.
The Company has an investment in Cornerstone Pharmaceuticals, Inc., or Cornerstone Pharmaceuticals, that includes preferred and common equity interests and a warrant to purchase additional equity. 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. We have provided debt and equity financing to Cornerstone Pharmaceuticals. 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, and 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 currently the likelihood of further development of and prospects for CPI-613 is uncertain and has fully impaired in its financial statements for the nine months ended April 30, 2022, the value of its loans, receivables, and investment in Cornerstone Pharmaceuticals based upon its valuation of Cornerstone Pharmaceuticals.
On February 2, 2022, the Company withdrew its Registration Statement on Form S-4, which terminated the merger agreement pursuant to certain sections of the merger agreement, effective immediately.
In 2019, the Company established the Barer Institute (“Barer”), an early-stage small molecule research institute 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 is 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 is pursuing collaborative research agreements and in-licensing opportunities with leading scientists from top academic institutions. Farber Partners, LLC (“Farber”) was formed to support agreements with Princeton University’s Office of Technology Licensing for technology from the laboratory of Professor Joshua Rabinowitz, in the Department of Chemistry, Princeton University, including an exclusive worldwide license to its SHMT (serine hydroxymethyltransferase) inhibitor program. The Company also holds a majority equity interest in LipoMedix Pharmaceuticals Ltd. (“LipoMedix”), a clinical stage oncological pharmaceutical company based in Israel. In addition, the Company has invested in other early stage pharmaceutical ventures.
The Company’s commercial real estate holdings consist of a building at 520 Broad Street in Newark, New Jersey that serves as headquarters for the Company and certain other entities and tenants and an associated 800-car public garage, and a portion of a building in Israel. The Company sold other real estate holdings in 2020. As part of our efforts to maximize the value of our real estate holdings, we entered into a Contract of Sale with 520 Broad Street Propco LLC for the sale of the building and the associated 800-car public garage for a purchase price of approximately $49.4 million. As of April 30, 2022 the sale has not yet been consummated.
Business Update - COVID-19, War in Ukraine
In late 2019, a novel strain of coronavirus, SARS-CoV, which causes COVID-19, was identified and has proved to be highly contagious. It has since spread extensively throughout the world, including the United States, and was declared a global pandemic by the World Health Organization in March 2020. The Company actively monitors the outbreak, including the spread of new variants of interest, and its potential impact on the Company’s operations and those of the Company’s holdings.
31
Even with growing availability of testing and vaccines and the relaxation of public health measures that were implemented to limit the spread of the pandemic, there continues to be uncertainty around the COVID-19 pandemic and its impact.
The Company had implemented a number of measures to protect the health and safety of the Company’s workforce including a voluntary work-from-home policy for the Company’s workforce who can perform their jobs from home as well as restrictions on discretionary business travel. Most of our employees have returned to working from the office on a part-time basis.
The full impact of the COVID-19 pandemic on the Company will depend on factors such as the length of time of the pandemic; the responses of federal, state and local governments; the impact of future variants that may emerge; vaccination rates among the population; the efficacy of the COVID-19 vaccines; the longer-term impact of the pandemic on the economy and consumer behavior; and the effect on our employees, vendors, and other partners.
The short and long-term implications of Russia’s invasion of Ukraine are difficult to predict at this time. The imposition of sanctions and counter sanctions may have an adverse effect on the economic markets generally and could impact our business and the companies in which we have investments, financial condition, and results of operations. Because of the highly uncertain and dynamic nature of these events, it is not currently possible to estimate the impact of the Russian – Ukraine war on our business and the companies in which we have investments.
Results of Operations
Our business consists of two reportable segments - Pharmaceuticals and Real Estate. We evaluate the performance of our Pharmaceuticals 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.
Three and Nine Months Ended April 30, 2022 Compared to Three and Nine Months Ended April 30, 2021
Pharmaceuticals Segment
Our consolidated expenses for our Pharmaceuticals segment were as follows:
| Three Months Ended April 30, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| (unaudited, in thousands) | ||||||||||||||||
| General and administrative | $ | (3,290 | ) | $ | (2,045 | ) | (1,245 | ) | (61 | )% | ||||||
| Research and development | (1,413 | ) | (1,262 | ) | (151 | ) | (12 | )% | ||||||||
| Loss from operations | $ | (4,703 | ) | $ | (3,307 | ) | (1,396 | ) | (42 | )% | ||||||
32
| Nine Months Ended April 30, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| (unaudited, in thousands) | ||||||||||||||||
| General and administrative | $ | (13,673 | ) | $ | (5,398 | ) | (8,275 | ) | (153 | )% | ||||||
| Research and development | (6,901 | ) | (3,345 | ) | (3,556 | ) | (106 | )% | ||||||||
| Provision for loss on receivable pursuant to line of credit | (25,000 | ) | — | (25,000 | ) | (100 | )% | |||||||||
| Provision for losses on related party receivables | (10,095 | ) | — | (10,095 | ) | (100 | )% | |||||||||
| Impairment – Altira | — | (7,000 | ) | 7,000 | 100 | % | ||||||||||
| Loss from operations | $ | (55,669 | ) | $ | (15,743 | ) | (39,926 | ) | (254 | )% | ||||||
To date, the Pharmaceuticals segment has not generated any revenues. The entirety of the expenses in the Pharmaceuticals segment relate to the activities of LipoMedix, Barer, Levco, Farber, and Rafael Medical Devices. As of April 30, 2022 we held a 100% interest in Barer, an 84% interest in LipoMedix, a 95% interest in Levco, a 93% interest in Farber, and a 100% interest in Rafael Medical Devices.
General and administrative expenses. General and administrative expenses consist mainly of payroll, severance, stock compensation expense, benefits, facilities, consulting and professional fees. The increase in general and administrative expenses during the three months ended April 30, 2022 compared to the three months ended April 30, 2021 is primarily due to an increase in stock-based compensation of approximately $623 thousand, an increase in payroll expenses of approximately $408 thousand, and increases in other administrative expenses.
The increase in general and administrative expenses during the nine months ended April 30, 2022 compared to the nine months ended April 30, 2021 is primarily due to severance expense of approximately $5.9 million, an increase in payroll expenses of approximately $3.1 million, an increase in professional fees of approximately $2.2 million, and an increase in insurance expense of approximately $0.3 million, partially offset by a net decrease in stock-based compensation expense of approximately $3.5 million (inclusive of a forfeiture of restricted stock units of approximately $19.0 million). The majority of these increases were related to pre-launch activities for CPI-613® which are not expected to be recurring in light of the Data Events.
Research and development expenses. Research and development expenses increased for the three and nine months ended April 30, 2022 and 2021 as compared to the corresponding periods in fiscal 2021 due to increased activity at Barer, LipoMedix, Farber, and Rafael Medical Devices during the periods.
Loss on line of credit. Due to the Data Events, in the nine months ended April 30, 2022, the Company recorded a full reserve on the $25 million due to the Company from Cornerstone Pharmaceuticals related to the Line of Credit Agreement.
Loss on related party receivables. Due to the Data Events, in the nine months ended April 30, 2022, the Company recorded a loss of approximately $10.1 million related to the full reserve recorded on the RP Finance receivable of $9.375 million, and a full reserve recorded on the Cornerstone Pharmaceuticals receivable of $0.720 million.
Impairment expense - Altira. The Company recorded an impairment loss of $7 million related to the Company’s additional investment in 33.333% of Altira during the nine months ended April 30, 2021.
33
Real Estate Segment
Our consolidated income and expenses for our Real Estate segment were as follows:
| Three Months Ended April 30, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| (unaudited, in thousands) | ||||||||||||||||
| Rental – Third Party | $ | 196 | $ | 228 | (32 | ) | (14 | )% | ||||||||
| Rental – Related Party | 524 | 523 | 1 | — | % | |||||||||||
| Parking | 155 | 119 | 36 | 30 | % | |||||||||||
| Other - Related Party | — | 120 | (120 | ) | (100 | )% | ||||||||||
| Selling, general and administrative | (650 | ) | (961 | ) | 311 | 32 | % | |||||||||
| Depreciation | (379 | ) | (201 | ) | (178 | ) | (89 | )% | ||||||||
| Loss from operations | $ | (154 | ) | $ | (172 | ) | 18 | 10 | % | |||||||
| Nine Months Ended April 30, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| (unaudited, in thousands) | ||||||||||||||||
| Rental – Third Party | $ | 624 | $ | 654 | (30 | ) | (5 | )% | ||||||||
| Rental – Related Party | 1,749 | 1,570 | 179 | 11 | % | |||||||||||
| Parking | 518 | 418 | 100 | 24 | % | |||||||||||
| Other - Related Party | 120 | 360 | (240 | ) | (67 | )% | ||||||||||
| Selling, general and administrative | (2,263 | ) | (2,967 | ) | 704 | 24 | % | |||||||||
| Depreciation | (1,142 | ) | (1,079 | ) | (63 | ) | (6 | )% | ||||||||
| Loss from operations | $ | (394 | ) | $ | (1,044 | ) | 650 | 62 | % | |||||||
Revenues. Total rental revenues decreased by approximately $31 thousand and increased by approximately $149 thousand, for the three and nine months ended April 30, 2022, as compared to the corresponding periods in fiscal 2021, respectively. The decrease in rental revenues during the three months ended April 30, 2022 compared to the prior year period is attributable to the timing in which real estate tax escalations were passed through to tenants (which is dependent on when the City of Newark increases the tax). During fiscal 2021, the Company billed tenants in the third quarter, whereas the Company billed tenants for real estate tax escalations during the second quarter of fiscal 2022, therefore there is a decrease in rental revenue in the three months ended April 30, 2022 as compared to the same period in the prior year.
The increase in rental revenues during the nine months ended April 30, 2022 as compared to the corresponding period in fiscal 2021 is attributable to an increase in real estate tax escalations of approximately $178 thousand in the nine months ended April 30, 2022.
Parking revenue increased by approximately $36 thousand and $100 thousand for the three and nine months ended April 30, 2022, as compared to the corresponding periods in fiscal 2021, respectively. The increase in parking revenue is related to increased activity at the Company’s garage at 520 Broad Street in Newark. If the sale of the building at 520 Broad Street in Newark and the associated garage is consummated, the Company will no longer receive revenues from the rental property (nor will the Company incur operating expenses related thereto).
Selling, general and administrative expenses. Selling, general and administrative expenses consist mainly of payroll, benefits, facilities, consulting and professional fees. The decrease in selling, general and administrative expenses of approximately $311 thousand and $704 thousand for the three and nine months ended April 30, 2022, respectively, is primarily due to a decrease in real estate tax costs due to the sale of the building in Piscataway, New Jersey, partially offset by other increases in administrative expenses.
Depreciation expenses. Depreciation expenses increased by approximately $178 thousand and $63 thousand for the three and nine months ended April 30, 2022, respectively, compared to the three and nine months ended April 30, 2021, due to increased fixed assets placed in service from building improvements.
34
Consolidated Operations
Our consolidated income and expense line items below income from operations were as follows:
| Three Months Ended April 30, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| (unaudited, in thousands) | ||||||||||||||||
| Loss from operations | $ | (4,857 | ) | $ | (3,479 | ) | (1,378 | ) | (40 | )% | ||||||
| Interest expense | (399 | ) | (3 | ) | (396 | ) | (13200 | )% | ||||||||
| Interest income | 53 | 2 | 51 | (2550 | )% | |||||||||||
| Loss on available-for-sale securities | (2 | ) | — | (2 | ) | (100 | )% | |||||||||
| Unrealized (loss) gain on investments - Hedge Funds | (341 | ) | 738 | (1,079 | ) | (146 | )% | |||||||||
| Loss before income taxes | (5,546 | ) | (2,742 | ) | (2,804 | ) | (102 | )% | ||||||||
| Provision for income taxes | (2 | ) | (4 | ) | 2 | 50 | % | |||||||||
| Equity in earnings of RP Finance | — | 96 | (96 | ) | (100 | )% | ||||||||||
| Consolidated net loss | (5,548 | ) | (2,650 | ) | (2,898 | ) | (109 | )% | ||||||||
| Net loss attributable to noncontrolling interests | (19 | ) | (97 | ) | 78 | 80 | % | |||||||||
| Net loss attributable to Rafael Holdings, Inc. | $ | (5,529 | ) | $ | (2,553 | ) | $ | (2,976 | ) | (117 | )% | |||||
| Nine Months Ended April 30, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| (unaudited, in thousands) | ||||||||||||||||
| Loss from operations | $ | (56,063 | ) | $ | (16,787 | ) | (39,276 | ) | (234 | )% | ||||||
| Interest expense | (1,211 | ) | (5 | ) | (1,206 | ) | (24120 | )% | ||||||||
| Interest income | 58 | 3 | 55 | (1833 | )% | |||||||||||
| Gain on sale of building | — | 749 | (749 | ) | (100 | )% | ||||||||||
| Impairment of investments - Other Pharmaceuticals | — | (724 | ) | 724 | 100 | % | ||||||||||
| Impairment of cost method investment - Cornerstone Pharmaceuticals | (79,141 | ) | — | (79,141 | ) | (100 | )% | |||||||||
| Loss on available-for-sale securities | (2 | ) | — | (2 | ) | (100 | )% | |||||||||
| Unrealized (loss) gain on investments - Hedge Funds | (584 | ) | 4,171 | (4,755 | ) | (114 | )% | |||||||||
| Loss before income taxes | (136,943 | ) | (12,593 | ) | (124,350 | ) | (987 | )% | ||||||||
| Provision for income taxes | (6 | ) | (13 | ) | 7 | 54 | % | |||||||||
| Equity in (loss) earnings of RP Finance | (575 | ) | 288 | (863 | ) | (300 | )% | |||||||||
| Consolidated net loss | (137,524 | ) | (12,318 | ) | (125,206 | ) | (1016 | )% | ||||||||
| Net loss attributable to noncontrolling interests | (17,650 | ) | (154 | ) | (17,496 | ) | (11361 | )% | ||||||||
| Net loss attributable to Rafael Holdings, Inc. | $ | (119,874 | ) | $ | (12,164 | ) | (107,710 | ) | (885 | )% | ||||||
Interest expense. Interest expense was $399 thousand and $1.2 million for the three and nine months ended April 30, 2022, respectively, and $3 thousand and $5 thousand for the three and nine months ended April 30, 2021, respectively. The increase in interest expense for the three months ended April 30, 2022 is due to the amortization of the debt discount and the interest related to the note payable. The increase in interest expense for the nine months ended April 30, 2022 compared to the prior year period is primarily related to the full nine months of amortization of the debt discount and the interest related to the note payable. We recorded a reserve on related party interest receivable on the line of credit of $0.5 million and $1.3 million for the three and nine months ended April 30, 2022, respectively.
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Interest income. Interest income was $53 thousand and $58 thousand for the three and nine months ended April 30, 2022, respectively, and $2 thousand and $3 thousand for the three and nine months ended April 30, 2021, respectively. The increase for the three and nine months ended April 30, 2022 is primarily due to the interest income earned on our investments in available-for-sale securities.
Gain on sale of building. In August 2020, we sold a building located in Piscataway, New Jersey, and recognized a gain on the sale of approximately $749 thousand for the nine months ended April 30, 2021.
Impairment of investments - Other Pharmaceuticals. We recorded an impairment loss of $724 thousand related to our investment in Nanovibronix using the measurement alternative for the nine months ended April 30, 2021.
Impairment of cost method investment - Cornerstone Pharmaceuticals. In connection with the Data Events, during the nine months ended April 30, 2022, we recorded a full impairment charge to our cost method investment in Cornerstone Pharmaceuticals in the amount of $79 million.
Loss on available-for-sale securities. We recorded a realized loss of approximately $2 thousand related to maturities of available-for-sale securities for the three and nine months ended April 30, 2022.
Unrealized (loss) gain on investments - Hedge Funds. We recorded unrealized (losses) gains of approximately $(341) thousand and $738 thousand for the three months ended April 30, 2022 and 2021, respectively, and approximately $(584) thousand and $4.2 million for the nine months ended April 30, 2022 and 2021, respectively.
Equity in (loss) earnings of RP Finance. We recognized approximately $0 and $96 thousand in earnings from our ownership interest in RP Finance for the three months ended April 30, 2022 and 2021, respectively. We recognized a loss of $575 thousand and earnings of $288 thousand from our ownership interest in RP Finance for the nine months ended April 30, 2022 and 2021, respectively.
Net loss attributable to noncontrolling interests. The change in the net loss attributable to noncontrolling interests was due to an approximate $17.3 million loss related to the Cornerstone Pharmaceuticals impairment loss (the total impairment loss was approximately $79 million) which was applicable to noncontrolling interests in certain of the Company’s subsidiaries and was allocated to the holders of interests in CS Pharma and Pharma Holdings in the approximate amounts of $10.4 million and $6.9 million, respectively, for the nine months ended April 30, 2022. The additional change is related to the losses from LipoMedix, Farber, and Levco for the three months ended April 30, 2022.
Liquidity and Capital Resources
General
As of April 30, 2022, we held cash and cash equivalents of $29.0 million, investment in corporate bonds valued at $30.4 million, and investment in hedge funds valued at $4.7 million. We expect the balance of cash and cash equivalents, investment in corporate bonds, and investment in hedge funds to be sufficient to meet our obligations for the period through June 14, 2023.
| April 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows (used in) provided by | (unaudited, in thousands) | |||||||
| Operating activities | $ | (24,177 | ) | $ | (8,620 | ) | ||
| Investing activities | (57,419 | ) | (8,702 | ) | ||||
| Financing activities | 97,867 | 15,770 | ||||||
| Effect of exchange rates on cash and cash equivalents | (160 | ) | 25 | |||||
| Increase (decrease) in cash and cash equivalents | $ | 16,111 | $ | (1,527 | ) | |||
36
Operating Activities
The increase in cash used in operating activities for the nine months ended April 30, 2022 as compared to the nine months ended April 30, 2021 was primarily related to the net loss of $138 million and an increase in prepaid expenses and other current assets of $1.2 million, partially offset by the impact from noncash items, principally the impairment of the Company’s cost method investment in Cornerstone Pharmaceuticals of $79 million, the reserve on the amounts due the Company from Cornerstone Pharmaceuticals related to the Line of Credit Agreement of $25 million, the reserve on receivables due from Cornerstone Pharmaceuticals totaling $10.1 million, as well as other changes in assets and liabilities.
Investing Activities
Cash used in investing activities for the nine months ended April 30, 2022 was primarily related to purchases of corporate bonds of approximately $33 million, amounts loaned to Cornerstone Pharmaceuticals of approximately $25 million pursuant to the Line of Credit Agreement and the payments to fund our portion of advances under the line of credit between RP Finance and Cornerstone Pharmaceuticals in the amount of approximately $1.9 million, partially offset by proceeds of $2.5 million from the maturities of corporate bonds.
Cash used in investing activities for the nine months ended April 30, 2021 was primarily related to our partial exercise of the Warrant and purchasing 7.3 million shares of Cornerstone Pharmaceuticals’ Series D Preferred Stock for $9.1 million, the payments to fund our portion of advances under the line of credit between RP Finance and Cornerstone Pharmaceuticals, the payments of $1.3 million towards the acquisition of a second 33.333% membership interest in Altira for a product-in-development, and payments of $3.75 million to RP Finance in accordance with our 37.5% ownership interest, offset by the proceeds of $3.7 million from the sale of the building in Piscataway, New Jersey in August 2020 and proceeds of $2.0 million from liquidation of hedge funds.
Financing Activities
Cash provided by financing activities for the nine months ended April 30, 2022 was primarily related to proceeds of approximately $104 million related to the sale of our common stock to investors and a related party, partially offset by payment of transaction costs of $6.2 million.
Cash provided by financing activities for the nine months ended April 30, 2021 was primarily related to proceeds of $13.0 million for the sale of 567,437 shares of our Class B common stock and warrants to purchase an additional 113,487 shares of Class B common stock. Additionally, there were approximately $2.0 million in proceeds provided by the exercise of 87,298 warrants.
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.
Trends and Uncertainties – COVID-19, War in Ukraine
In late 2019, a novel strain of coronavirus, SARS-CoV, which causes COVID-19, was identified and has proved to be highly contagious. It has since spread extensively throughout the world, including the United States, and was declared a global pandemic by the World Health Organization in March 2020. The Company actively monitors the outbreak, including the spread of new variants of interest, and its potential impact on the Company’s operations and those of the Company’s holdings.
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Even with growing availability of testing and vaccines and the relaxation of public health measures that were implemented to limit the spread of the pandemic, there continues to be uncertainty around the COVID-19 pandemic and its impact.
The Company had implemented a number of measures to protect the health and safety of the Company’s workforce including a voluntary work-from-home policy for the Company’s workforce who can perform their jobs from home as well as restrictions on discretionary business travel. Most of our employees have returned to working from the office on a part-time basis.
The full impact of the COVID-19 pandemic on the Company will depend on factors such as the length of time of the pandemic; the responses of federal, state and local governments; the impact of future variants that may emerge; vaccination rates among the population; the efficacy of the COVID-19 vaccines; the longer-term impact of the pandemic on the economy and consumer behavior; and the effect on our employees, vendors, and other partners.
The short and long-term implications of Russia’s invasion of Ukraine are difficult to predict at this time. The imposition of sanctions and counter sanctions may have an adverse effect on the economic markets generally and could impact our business and the companies in which we have investments, financial condition, and results of operations. Because of the highly uncertain and dynamic nature of these events, it is not currently possible to estimate the impact of the Russian – Ukraine war on our business and the companies in which we have investments.
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 1, “Description of Business and Summary of Significant Accounting Policies,” to our consolidated financial statements included in our Annual Report on Form 10-K, for fiscal 2021 (“2021 Form 10-K”).
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 “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s 2021 Form 10-K. There have been no material changes in our critical accounting policies and procedures during the nine months ended April 30, 2022.
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 2021 Form 10-K.
We are monitoring the potential impacts of the COVID-19 pandemic and the war in Ukraine on our business and the companies in which we have investments. While the potential economic impact brought by, and the duration of, the COVID-19 pandemic is difficult to assess or predict, the impact on the global financial markets may reduce our ability to access capital, which could negatively impact our long-term liquidity.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer (our “Certifying Officers”), the effectiveness of our disclosure controls and procedures as of April 30, 2022, pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Certifying Officers concluded that our disclosure controls and procedures were effective as of April 30, 2022.
We determined that there was an error in accounting for items of income (loss) attributable to the non-controlling interests in two of our legal entities for the three and six-month periods ended January 31, 2022. Specifically, we did not correctly allocate losses to our noncontrolling interests, as the Company processed journal entries related to an impairment loss and other items of income (loss) outside of the normal consolidation process, and effective reviews of the consolidation did not occur.
The Company assessed whether there was a reasonable possibility that a material misstatement would not have been prevented or detected on a timely basis as a result of the above control deficiency. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The control deficiency resulted in material errors in items of income (loss) attributed to noncontrolling interests previously disclosed in the Company’s interim consolidated financial statements and other items of income (loss) for the three and six-month periods ended January 31, 2022. The Company assessed whether there was a reasonable possibility that a material misstatement would not have been prevented or detected on a timely basis as a result of the above control deficiency. We determined that a material weakness in our internal control over financial reporting existed as of January 31, 2022 as we did not maintain effective internal controls over the Company’s consolidation process and accounting for items of income (loss) attributable to the non-controlling interests.
Status of Remediation of Material Weaknesses in Internal Control over Financial Reporting
As previously disclosed, the Company’s management, including its Certifying Officers identified a material weakness in the Company’s internal control over financial reporting during the three months ended October 31, 2021 related to the Company’s design of the control around the application of authoritative guidance related to earnings per share in accordance with generally accepted accounting principles in the United States. As a result of the material weaknesses identified as related to earnings per share and the accounting for items of income (loss) attributable to the noncontrolling interests, the Company filed a restatement of its quarterly report on Form 10-Q for the quarter ended October 31, 2021.
The Company has expanded and enhanced its design of the control related to the accounting for items of income (loss) attributable to the non-controlling interests to address the material weakness identified as described above. Specifically, no direct postings outside of the general ledger system will be recorded to the Company’s financial statements, and all entries identified during the Company’s close process will be entered into the appropriate legal entity’s general ledger prior to the preparation of the consolidated financial information. The enhanced control procedures were implemented during the quarter ended April 30, 2022, and Company’s management, including its Certifying Officers, determined that we fully remediated the material weakness as of April 30, 2022.
Changes in Internal Control over Financial Reporting. There have been no significant changes in our internal control over financial reporting during the quarter ended April 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting other than the changes to address the remediation of the material weakness as discussed above.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Legal proceedings in which we are involved are more fully described in Note 16 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 2021, except for the following:
We have identified material weaknesses in our internal control over financial reporting.
Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial statements.
We have identified two material weaknesses in our internal control over financial reporting related to the accounting for the allocation of losses to our noncontrolling interests and the calculation of weighted average shares outstanding used in earnings per share as of October 31, 2021. Both of these material weaknesses are determined to have been remediated by April 30, 2022. As a result, our management has concluded that our disclosure controls and procedures were effective as of April 30, 2022. See Part I. Item 4. Controls and Procedures included in this Quarterly Report on Form 10-Q.
If additional material weaknesses in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results.
We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any cyber security incidents, could harm our ability to operate our and the Pharmaceutical Companies’ businesses effectively.
Despite the implementation of security measures, our and the Pharmaceutical Companies’ internal computer systems and those of third parties with which we and the Pharmaceutical Companies contract are vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. System failures, accidents or security breaches could cause interruptions in our and the Pharmaceutical Companies’ operations, and could result in a material disruption of their clinical and commercialization activities and business operations, in addition to possibly requiring substantial expenditures of resources to remedy. The loss of clinical trial data could result in delays in our and the Pharmaceutical Companies’ regulatory approval efforts and significantly increase their costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, our or the Pharmaceutical Companies’ data or applications, or inappropriate disclosure of confidential or proprietary information, we and the Pharmaceutical Companies could incur liability and their product research, development and commercialization efforts could be delayed.
Furthermore, we and our third-party providers rely on electronic communications and information systems to conduct our operations. We and our third-party providers have been, and may continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate bank accounting information, passwords, or other personal information or to introduce viruses or other malware to our information systems. In October 2021, we experienced a cybersecurity incident where a related party’s email was hacked which led to payment of two invoices. As of the date of this filing, one of the invoices had been recovered by the Company. We continue to explore a range of steps to enhance our security protections and prevent future unauthorized activity.
Although we endeavor to mitigate these threats, such cyber-attacks against us or our third-party providers and business partners remain a serious issue. The pervasiveness of cybersecurity incidents in general and the risks of cyber-crime are complex and continue to evolve. Although we are making significant efforts to maintain the security and integrity of our information systems and are exploring various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging.
40
Our insurance policies may not be adequate to compensate us for the potential losses arising from any such disruption, failure or security breach. In addition, such insurance may not be available to us in the future on economically reasonable terms, or at all. Further, our insurance may not cover all claims made against us and could have high deductibles in any event, and defending a suit, regardless of its merit, could be costly and divert management attention.
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
None.
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.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * | Filed or furnished herewith. |
41
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: June 14, 2022 | Rafael Holdings, Inc. | |
| By: | /s/ William Conkling | |
| William Conkling | ||
| Chief Executive Officer | ||
| By: | /s/ Patrick Fabbio | |
| Patrick Fabbio | ||
| Chief Financial Officer | ||
42
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: June 14, 2022
| /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, Patrick Fabbio, 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: June 14, 2022
| /s/ Patrick Fabbio | |
| Patrick Fabbio | |
| 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 April 30, 2022 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: June 14, 2022
| /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 April 30, 2022 as filed with the Securities and Exchange Commission (the “Report”), I, Patrick Fabbio, 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: June 14, 2022
| /s/ Patrick Fabbio | |
| Patrick Fabbio | |
| 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.