See accompanying notes to the unaudited consolidated
interim financial statements.
See accompanying notes to the unaudited consolidated
interim financial statements.
See accompanying notes to the unaudited consolidated
interim financial statements.
See accompanying notes to the unaudited consolidated
interim financial statements.
See accompanying notes to the unaudited consolidated
interim financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 – DESCRIPTION OF BUSINESS
Description
of Business
Rafael
Holdings, Inc. (NYSE:RFL), (“Rafael Holdings”, “we” or the “Company”), a Delaware corporation, is
a holding company with interests in clinical and early-stage pharmaceutical companies (the “Pharmaceutical Companies”), including
an investment in Cornerstone Pharmaceuticals, Inc., formerly known as Rafael Pharmaceuticals Inc., a cancer metabolism-based therapeutics
company, a majority equity interest in LipoMedix Pharmaceuticals Ltd. (“LipoMedix”), a clinical stage pharmaceutical company,
the activities of the Barer Institute Inc. (“Barer”), a wholly-owned preclinical cancer metabolism research operation, and
Rafael Medical Devices, Inc., a wholly owned orthopedic-focused medical device company developing instruments to advance minimally invasive
surgeries (“Rafael Medical Devices” and together with the Pharmaceutical Companies, the “Healthcare Companies”).
In November 2022, the Company resolved to curtail its early-stage development efforts, including pre-clinical research at Barer. The
decision was taken to reduce spending as the Company focuses on exploring strategic opportunities. The Company’s primary focus
is to invest in, fund, and develop novel cancer therapies. We further seek to expand our portfolio through opportunistic investments
in therapeutics which address high unmet medical needs including through acquisitions and strategic investments.
Historically,
the Company owned multiple real estate assets. In 2020, the Company sold an office building located in Piscataway, New Jersey and, on
August 22, 2022, the Company sold the building at 520 Broad Street in Newark, New Jersey that serves as headquarters for the Company
and several tenants and an associated public garage (the “520 Property”). See Note 3 for further details on the sale transaction.
Currently, the Company holds a portion of a commercial building in Jerusalem, Israel as its remaining real estate asset.
The
Company holds debt and equity investments in 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. On October
28, 2021, the Company announced that the AVENGER 500 Phase 3 clinical trial for CPI-613® (devimistat), Cornerstone Pharmaceuticals’
lead product candidate, did not meet its primary endpoint of significant improvement in overall survival in patients with metastatic
adenocarcinoma of the pancreas. In addition, following a pre-specified interim analysis, the independent data monitoring committee for
the ARMADA 2000 Phase 3 study for devimistat recommended the trial to be stopped due to a determination that it was unlikely to achieve
the primary endpoint (the “Data Events”). In connection with the preparation of the Company’s financial statements
for the first quarter ended October 31, 2021, accounting principles generally accepted in the United States of America (“U.S. GAAP”)
required that the Company assess the impact of the Data Events and determine whether the carrying values of the Company’s assets
were impaired based upon the Company’s expectations to realize future value. In light of the Data Events, the Company concluded
that the likelihood of further development of and prospects for CPI-613 is uncertain and fully impaired in the first quarter ended October
31, 2021 the value of its loans, receivables, and investment in Cornerstone Pharmaceuticals based upon its valuation of Cornerstone Pharmaceuticals.
On February 2, 2022, the Company terminated the Merger Agreement with Cornerstone Pharmaceuticals, effective immediately, in accordance
with its terms. Subsequently, on February 2, 2022, the Company withdrew its Registration Statement on Form S-4 related to the proposed
Merger.
In
2019, the Company established Barer, a preclinical cancer metabolism research operation, to focus on developing a pipeline of novel therapeutic
compounds, including compounds to regulate cancer metabolism with potentially broader application in other indications beyond cancer.
Barer has been comprised of scientists and academic advisors that are experts in cancer metabolism, chemistry, and drug development.
In addition to its own internal discovery efforts, Barer pursued collaborative research agreements and in-licensing opportunities with
leading scientists from top academic institutions. Barer’s subsidiary, Farber Partners, LLC (“Farber”), was formed around
one such agreement with Princeton University’s Office of Technology Licensing for technology from the laboratory of Professor Joshua
Rabinowitz, in the Department of Chemistry, Princeton University, for an exclusive worldwide license to its SHMT (serine hydroxymethyltransferase)
inhibitor program. In November 2022, the Company resolved to curtail its early-stage development efforts, including pre-clinical research
at the Barer Institute.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. The accompanying consolidated financial
statements reflect the activity related to the 520 Property as discontinued operations.
All
majority-owned subsidiaries are consolidated with all intercompany transactions and balances eliminated in consolidation. In addition
to Rafael Holdings, Inc., the subsidiaries included in these consolidated financial statements are as follows:
Company | |
Country of Incorporation | |
Percentage Owned | |
Rafael Holdings, Inc. | |
United States – Delaware | |
| 100 | % |
Broad Atlantic Associates, LLC | |
United States – Delaware | |
| 100 | % |
IDT R.E. Holdings Ltd. | |
Israel | |
| 100 | % |
Rafael Holdings Realty, Inc. | |
United States – Delaware | |
| 100 | % |
Barer Institute, Inc. | |
United States – Delaware | |
| 100 | %* |
The Barer Institute, LLC | |
United States – Delaware | |
| 100 | %* |
Hillview Avenue Realty, JV | |
United States – Delaware | |
| 100 | % |
Hillview Avenue Realty, LLC | |
United States – Delaware | |
| 100 | % |
Rafael Medical Devices, Inc. | |
United States – Delaware | |
| 100 | % |
Levco Pharmaceuticals Ltd. | |
Israel | |
| 95 | %*** |
Farber Partners, LLC | |
United States – Delaware | |
| 93 | % |
Pharma Holdings, LLC | |
United States – Delaware | |
| 90 | % |
LipoMedix Pharmaceuticals Ltd. | |
Israel | |
| 84 | % |
Altira Capital & Consulting, LLC | |
United States – Delaware | |
| 67 | % |
CS Pharma Holdings, LLC | |
United States – Delaware | |
| 45 | %** |
| * | In
November 2022, the Company resolved to curtail its early-stage development efforts, including pre-clinical research at Barer. The decision
was taken to reduce spending as the Company focuses on exploring strategic opportunities. |
| ** | 50%
of CS Pharma Holdings, LLC is owned by Pharma Holdings, LLC. We have a 90% ownership in Pharma Holdings, LLC and, therefore, an effective
45% interest in CS Pharma Holdings, LLC. The Company, along with CS Pharma and Pharma Holdings, collectively own securities representing
51% of the outstanding capital stock of Cornerstone Pharmaceuticals and 42% of the capital stock on a fully diluted basis (excluding
the remainder of the Warrant). Refer to Note 4 for further details. |
| *** | During
Fiscal 2022, the Company discontinued further material investment in Levco. |
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 accounting principles
generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions
to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S.
GAAP for complete financial statements. In the opinion of management, all adjustments, which include only normal recurring adjustments,
considered necessary for a fair presentation have been included.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending
in the calendar year indicated (e.g., fiscal year 2022 refers to the fiscal year ended July 31, 2022).
Operating
results for the three and six months ended January 31, 2023 are not necessarily indicative of the results that may be expected for the
fiscal year ending July 31, 2023. The balance sheet at July 31, 2022 has been derived from the Company’s audited consolidated financial
statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
Therefore, these financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2022, or the 2022 Form 10-K, as filed with the
U.S. Securities and Exchange Commission (the “SEC”).
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported
amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates.
Liquidity
As
of January 31, 2023, the Company had cash and cash equivalents of approximately $9.7 million, and available-for-sale securities
valued at approximately $79.2 million. On August 22, 2022, the Company received net proceeds of approximately $33 million in connection
with the sale of the 520 Property (see Note 3 for further details). The Company expects the balance of cash and cash equivalents, and
available-for-sale securities to be sufficient to meet our obligations for at least the next 12 months from the issuance of these consolidated
financial statements.
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 invested.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 six months ended January 31, 2023, including revenue from discontinued operations, related
parties represented 39% and 43% of the Company’s revenue, respectively, and as of January 31, 2023, there were no customers
that were a concentration of the Company’s accounts receivable balance. For the three and six months ended January 31, 2022, including
revenue from discontinued operations, related parties represented 57% and 63% of the Company’s revenue, respectively, and as of
January 31, 2022, two customers, one of which is a related party, represented 65% and 15% of the Company’s accounts receivable
balance, respectively.
Cash
and Cash Equivalents
The
Company considers all liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Reserve
for Receivables
The
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 in accordance with ASC 321, Investments - Equity Securities.
Investments without readily determinable fair values are accounted for using the measurement alternative which is at cost minus impairment,
if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment
of the same issuer. The Company periodically evaluates its investments for impairment due to declines considered to be other than temporary.
If the Company determines that a decline in fair value is other than temporary, then a charge to earnings is recorded in the accompanying
consolidated statements of operations and comprehensive loss, and a new basis in the investment is established.
Investments
- Hedge Funds
The
Company accounts for its investments in hedge funds in accordance with ASC 321, Investments – Equity Securities. Unrealized
gains and losses resulting from the change in fair value of these securities is included in unrealized (loss) gain on investments –
Hedge Funds in the consolidated statements of operations and comprehensive loss.
Corporate
Bonds and US Treasury Bills
The
Company’s marketable securities are considered to be available-for-sale as defined under ASC 320, Investments - Debt and Equity
Securities, and are recorded at fair value. Unrealized gains or losses are included in accumulated other comprehensive loss. Realized
gains or losses are released from accumulated other comprehensive loss and into earnings on the consolidated statements of operations
and comprehensive loss.
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 4) is a VIE; however, the Company has
determined that it is not the primary beneficiary as the Company does not have the power to direct the activities of Cornerstone Pharmaceuticals
that most significantly impact Cornerstone Pharmaceuticals’ economic performance. Due to the Data Events on October 28, 2021, the
Company recorded an impairment related to the cost method investment in Cornerstone Pharmaceuticals during the three months ended October
31, 2021, and did not report a balance in this investment as of January 31, 2023.
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.
Assets
Held-for-Sale and Discontinued Operations
The
Company classifies assets as held-for-sale if all held-for-sale criteria are met pursuant to ASC 360-10, Property, Plant and Equipment.
Criteria include management commitment to sell the disposal group in its present condition and the sale being deemed probable of being
completed within one year. Assets classified as held-for-sale are not depreciated and are measured at the lower of their carrying amount
or fair value less cost to sell. The Company assesses the fair value of a disposal group, less any costs to sell, each reporting period
it remains classified as held-for-sale and reports any subsequent changes as an adjustment to the carrying value of the disposal group,
as long as the new carrying value does not exceed the initial carrying value of the disposal group.
Strategic
changes in the Company’s operations can be considered a discontinued operation if both the operations and cash flows of the discontinued
component have been (or will be) eliminated from the ongoing operations of the Company and the Company will not have any significant
continuing involvement in the operations of the discontinued component after the disposal transaction. The results of the discontinued
operations shall be reflected as a discontinued operation on the consolidated statements of operations and comprehensive loss and prior
periods shall be recast to reflect the earnings from discontinued operations. As a result of the agreement to sell the 520 Property,
the accompanying consolidated financial statements reflect the activity related to the sale of the 520 Property as discontinued operations.
The Company determined that the 520 Property met the held-for-sale and discontinued operations criteria as of July 1, 2022. The 520 Property
was disposed of during the three months ended October 31, 2022. See Note 3 for additional information regarding the results, major classes
of assets and liabilities, significant non-cash operating items, and capital expenditures of discontinued operations.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue
Recognition
The
Company applies the five-step approach as described in ASC 606, Revenue from Contracts with Customers, which consists of the following:
(i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction
price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when (or as)
the entity satisfies a performance obligation.
The
Company disaggregates its revenue by source within its consolidated statements of operations and comprehensive loss. As an owner and
operator of real estate, the Company derives the majority of its revenue from leasing office and parking space to tenants at its properties.
In addition, the Company earns revenue from recoveries from tenants, consisting of amounts due from tenants for common area maintenance,
real estate taxes and other recoverable costs. Revenue from recoveries from tenants is recorded together with rental income on the consolidated
statements of operations and comprehensive loss which is also consistent with the guidance under ASC 842, Leases.
The
revenue derived from the 520 Property, which included leasing office and parking space to the tenants, is presented within discontinued
operations in the consolidated statements of operations and comprehensive loss.
Contractual
rental revenue is reported on a straight-line basis over the terms of the respective leases. Accrued rental income, included within other
assets on the consolidated balance sheets, represents cumulative rental income earned in excess of rent payments received pursuant to
the terms of the individual lease agreements.
The
Company also earned revenue from parking which was derived primarily from monthly and transient daily parking. The monthly and transient
daily parking revenue falls within the scope of ASC 606 and was accounted for at the point in time when control of the goods or services
transfers to the customer and the Company’s performance obligation is satisfied, consistent with the Company’s previous accounting.
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.
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 general and administrative expense and research and development expense
in the consolidated statements of operations and comprehensive loss.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Contingencies
The
Company accrues for loss contingencies when both (a) information available prior to issuance of the financial statements indicates that
it is probable that a liability had been incurred at the date of the financial statements and (b) the amount of loss can reasonably be
estimated. When the Company accrues for loss contingencies and the reasonable estimate of the loss is within a range, the Company records
its best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company accrues the
minimum amount in the range. The Company discloses an estimated possible loss or a range of loss when it is at least reasonably possible
that a loss may have been incurred.
Fair
Value Measurements
Fair
value of financial and non-financial assets and liabilities is defined as an exit price, which is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three-tier
hierarchy for inputs used to measure fair value, which prioritizes the inputs to valuation techniques used to measure fair value, is
as follows:
| ● | Level
1 - quoted prices in active markets for identical assets or liabilities; |
| ● | Level
2 - quoted prices in active markets for similar assets and liabilities and inputs that are
observable for the asset or liability; or |
| ● | Level
3 - unobservable inputs for the asset or liability, such as discounted cash flow models or
valuations. |
A
financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is
significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires
judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
Loss
Per Share
Basic
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 is determined in the
same manner as basic loss per share, except that the number of shares is increased to include restricted stock still subject to risk
of forfeiture and to assume exercise of potentially dilutive stock options using the treasury stock method, unless the effect of such
increase would be anti-dilutive. The Company uses income from continuing operations as the “control number” or benchmark
to determine whether potential common shares are dilutive or anti-dilutive for purposes of reporting earnings (loss) per share for discontinued
operations.
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.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In
June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets and certain
other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected
loss” model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities
with unrealized losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized
as allowances instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly
more information about allowances, credit quality indicators and past due securities. The new standard is effective for fiscal years
beginning after December 15, 2022, including interim periods within those fiscal years, and will be applied as a cumulative-effect adjustment
to retained earnings. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated
financial statements and intends to adopt the standard on August 1, 2023.
In
August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
(“ASU 2020-06”), which simplifies an issuer’s accounting for convertible instruments by reducing the number of
accounting models that require separate accounting for embedded conversion features. ASU 2020-06 also simplifies the settlement assessment
that entities are required to perform to determine whether a contract qualifies for equity classification and makes targeted improvements
to the disclosures for convertible instruments and earnings-per-share (“EPS”) guidance. This update will be effective for
the Company’s fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is
permitted, but no earlier than fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Entities
can elect to adopt the new guidance through either a modified retrospective method of transition or a fully retrospective method of transition.
The Company is currently evaluating the impact of the pending adoption of the new standard on its financial statements and intends to
adopt the standard as of August 1, 2024.
NOTE
3 – DISCONTINUED OPERATIONS
On
July 1, 2022, the Company determined that the 520 Property met the held-for-sale criteria and the Company therefore classified the 520
Property as held-for-sale in the consolidated balance sheets at July 31, 2022. The sale of the 520 Property also represented a significant
strategic shift that will have a major effect on the Company’s operations and financial results. Therefore, the Company has classified
the results of operations related to the 520 Property as discontinued operations in the consolidated statements of operations and comprehensive
loss. Depreciation on the 520 Property ceased on July 1, 2022, as a result of the 520 Property being classified as held-for-sale.
On
August 22, 2022, Broad Atlantic Associates, LLC, a wholly-owned subsidiary of the Company, completed the sale of the 520 Property for
an aggregate gross purchase price of $49.4 million.
The
520 Property was encumbered by a mortgage securing a $15 million note payable which was paid off in this transaction. Refer to Note 12
for further information on the note payable. After repaying the note payable, commissions, taxes, and other related costs, the Company
received a net cash amount of approximately $33 million at closing.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
carrying value of major classes of assets and liabilities related to discontinued operations at July 31, 2022 was as follows ($ in thousands):
| |
As of
July 31,
2022 | |
Current assets held-for-sale | |
| |
Building and Improvements | |
$ | 45,437 | |
Land | |
| 10,412 | |
Furniture and Fixtures | |
| 1,145 | |
Other | |
| 205 | |
Property and equipment | |
| 57,199 | |
Less Accumulated Depreciation | |
| (17,005 | ) |
Property and equipment, net | |
| 40,194 | |
| |
| | |
Total current assets held-for-sale | |
| 40,194 | |
Total assets held-for-sale | |
$ | 40,194 | |
| |
| | |
Current liabilities held-for-sale | |
| | |
Total current liabilities | |
$ | 15,000 | |
The
current portion of deferred rental income included in Prepaid Expenses and Other Current Assets was approximately $0 and $150 thousand
as of January 31, 2023 and July 31, 2022, respectively. The noncurrent portion of deferred rental income included in Other Assets
was approximately $0 and $1.3 million as of January 31, 2023 and July 31, 2022, respectively. The deferred rental income pertains
to the 520 Property and was settled at the date of the sale of the 520 Property with the other working capital accounts of 520 Broad
Street.
Discontinued
operations includes (i) rental and parking revenues, (ii) payroll, benefits, facility costs, real estate taxes, consulting and professional
fees dedicated to the 520 Property, (iii) depreciation and amortization expenses and (iv) interest (including amortization of debt issuance
costs) on the note payable on the 520 Property. The operating results of these items are presented in our consolidated statements of
operations and comprehensive loss as discontinued operations for all periods presented.
The
following table details the components comprising net loss from our discontinued operations ($ in thousands):
| |
Three Months Ended January 31, | |
| |
2023 | | |
2022 | |
Revenue from discontinued operations: | |
| | |
| |
Rental – Third Party | |
$ | — | | |
$ | 187 | |
Rental – Related Party | |
| — | | |
| 676 | |
Parking | |
| — | | |
| 173 | |
Total revenue from discontinued operations | |
| — | | |
| 1,036 | |
| |
| | | |
| | |
Costs and expenses from discontinued operations: | |
| | | |
| | |
General and administrative | |
| 157 | | |
| 784 | |
Depreciation and amortization | |
| — | | |
| 363 | |
Loss from discontinued operations | |
| (157 | ) | |
| (111 | ) |
| |
| | | |
| | |
Interest expense | |
| — | | |
| (397 | ) |
Loss from discontinued operations | |
$ | (157 | ) | |
$ | (508 | ) |
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| |
Six Months Ended January 31, | |
| |
2023 | | |
2022 | |
Revenue from discontinued operations: | |
| | |
| |
Rental – Third Party | |
$ | 68 | | |
$ | 339 | |
Rental – Related Party | |
| 115 | | |
| 1,169 | |
Parking | |
| 66 | | |
| 363 | |
Total revenue from discontinued operations | |
| 249 | | |
| 1,871 | |
| |
| | | |
| | |
Costs and expenses from discontinued operations: | |
| | | |
| | |
General and administrative | |
| 403 | | |
| 1,402 | |
Depreciation and amortization | |
| — | | |
| 726 | |
Loss from discontinued operations | |
| (154 | ) | |
| (257 | ) |
| |
| | | |
| | |
Interest expense | |
| (87 | ) | |
| (794 | ) |
Loss from discontinued operations | |
| (241 | ) | |
| (1,051 | ) |
Gain on disposal of discontinued operations | |
| 6,784 | | |
| — | |
Gain (loss) from discontinued operations | |
$ | 6,543 | | |
$ | (1,051 | ) |
The
gain on disposal of discontinued operations of approximately $6.8 million was derived from the gross proceeds of approximately $49.4
million from the sale of the 520 Property, less the carrying value of the 520 Property of approximately $40.2 million, net of approximately
$1.2 million in transaction costs and the write off of approximately $1.2 million of deferred rental income.
NOTE
4 – INVESTMENT IN CORNERSTONE PHARMACEUTICALS
Equity
Investment in Cornerstone Pharmaceuticals and Impairment of Cost Method Investment
Cornerstone
Pharmaceuticals is a clinical stage, cancer metabolism-based therapeutics company focused on the development and commercialization of
therapies that exploit the metabolic differences between normal cells and cancer cells.
The
Company owns debt and equity interests and rights in Cornerstone Pharmaceuticals through a 90%-owned non-operating subsidiary, Pharma
Holdings, LLC, or Pharma Holdings.
Pharma
Holdings owns 50% of CS Pharma Holdings, LLC, or CS Pharma, a non-operating entity that owns equity interests in Cornerstone Pharmaceuticals.
Accordingly, the Company holds an effective 45% indirect interest in the assets held by CS Pharma.
A
trust for the benefit of the children of Howard Jonas (Chairman of the Board and Executive Chairman and former Chief Executive Officer
of the Company and Member of the Board of Cornerstone Pharmaceuticals) holds a financial instrument (the “Instrument”) that
owns 10% of Pharma Holdings.
Pharma
Holdings holds 44.0 million shares of Cornerstone Pharmaceuticals’ Series D Convertible Preferred Stock 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.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 16.7 million shares of Cornerstone Pharmaceuticals Series D Convertible Preferred Stock. CS Pharma owned a $10 million Series
D Convertible Note, with 3.5% interest, in Cornerstone Pharmaceuticals which was converted to shares of Series D Preferred Stock in January
2019.
The
Company and its subsidiaries collectively own securities representing 51% of the outstanding capital stock of Cornerstone Pharmaceuticals
and 42% of the capital stock on a fully diluted basis (excluding the remainder of the Warrant).
The
Series D Convertible Preferred Stock has a stated value of $1.25 per share (subject to appropriate adjustment to reflect any stock split,
combination, reclassification or reorganization of the Series D Preferred Stock or any dilutive issuances, as described below). Holders
of Series D Stock are entitled to receive non-cumulative dividends when, as and if declared by the Board of Cornerstone Pharmaceuticals,
prior to any dividends to any other class of capital stock of Cornerstone Pharmaceuticals. In the event of any liquidation, dissolution
or winding up of Cornerstone Pharmaceuticals, or in the event of any deemed liquidation, proceeds from such liquidation, dissolution
or winding up shall be distributed first to the holders of Series D Stock. Except with respect to certain major decisions, or as required
by law, holders of Series D Stock vote together with the holders of the other preferred stock and common stock and not as a separate
class.
The
Company serves as the managing member of Pharma Holdings, and Pharma Holdings serves as the managing member of CS Pharma, with broad
authority to make all key decisions regarding their respective holdings. Any distributions that are made to CS Pharma from Cornerstone
Pharmaceuticals that are in turn distributed by CS Pharma, will need to be made pro rata to all members, which would entitle Pharma Holdings
to 50% (based on current ownership) of such distributions. Similarly, if Pharma Holdings were to distribute proceeds it receives from
CS Pharma, it would do so on a pro rata basis, entitling the Company to 90% (based on current ownership) of such distributions.
The
Company evaluated its investments in Cornerstone Pharmaceuticals in accordance with ASC 323, Investments - Equity Method and Joint
Ventures, to establish the appropriate accounting treatment for its investment and has concluded that its investment did not meet
the criteria for the equity method of accounting or consolidation and is carried at cost.
The
Company has determined that Cornerstone Pharmaceuticals is a VIE; however, the Company has determined that it is not the primary beneficiary
as it does not have the power to direct the activities of Cornerstone Pharmaceuticals that most significantly impact Cornerstone Pharmaceuticals’
economic performance. In addition, the interests held in Cornerstone Pharmaceuticals are Series D Convertible Preferred Stock and do
not represent in-substance common stock.
The
Instrument holds a contractual right to receive additional shares of Cornerstone Pharmaceuticals capital stock equal to 10% of the fully
diluted capital stock of Cornerstone Pharmaceuticals (the “Bonus Shares”) upon the achievement of certain milestones. The additional
10% is based on the fully diluted capital stock of Cornerstone Pharmaceuticals, excluding the remainder for the Warrant, at the time
of issuance. If any of the milestones are met, the Bonus Shares are to be issued without any additional payment.
Pharma
Holdings holds the Warrant as well as other equity and governance rights in Cornerstone Pharmaceuticals. The Company currently owns 51%
of the issued and outstanding equity in Cornerstone Pharmaceuticals. Approximately 8% of the issued and outstanding equity is owned by
the Company’s subsidiary CS Pharma and 43% is held by the Company’s subsidiary Pharma Holdings. The Company’s subsidiary
Pharma Holdings holds the Warrant. The Instrument holds 10% of the interest in Pharma Holdings and would need to contribute 10% of any
cash necessary to exercise any portion of the Warrant. Following any exercise, a portion of the Company’s interest in Cornerstone
Pharmaceuticals would continue to be held for the benefit of the other equity holders in Pharma Holdings and CS Pharma. Cornerstone Pharmaceuticals
may also issue additional equity interests, such as employee stock options, which will require the Company to pay additional cash to
maintain the Company’s ownership percentage or exercise the Warrant in full. The terms of the Warrant provide that it expired on
April 1, 2022; however, 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.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Due
to the Data Events, on October 28, 2021, the Company recorded an impairment charge of approximately $79.1 million related to the cost
method investment in Cornerstone Pharmaceuticals representing the total amount of the Company’s cost method investment. The impairment
loss was included in “Impairment of cost method investment – Cornerstone Pharmaceuticals” in the consolidated statements
of operations and comprehensive loss for the three months ended October 31, 2021.
Approximately
$17.3 million of the total impairment loss of $79.1 million 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.
Line
of Credit to Cornerstone Pharmaceuticals and Impairment of Related Receivable
On
September 24, 2021, the Company entered into a Line of Credit Loan Agreement (the “Line of Credit Agreement”) with Cornerstone
Pharmaceuticals under which Cornerstone Pharmaceuticals borrowed $25 million from the Company. The first advance was in the amount of
$1.9 million on September 24, 2021. On October 1, 2021, a second advance was made in the amount of $23.1 million. The Line of Credit
Agreement accrues interest at 9% per annum. The maturity date of the Line of Credit Agreement was June 17, 2022, and the amounts due
on that date were not paid. The Company is in discussions with Cornerstone Pharmaceuticals and is evaluating its rights and plan of action
with respect to the Line of Credit Agreement (in the contexts of all of its interests in Cornerstone Pharmaceuticals).
Due
to the Data Events, the Company recorded a full reserve on the amounts due the Company from Cornerstone Pharmaceuticals related to the
Line of Credit Agreement for $25 million during the three months ended October 31, 2021.
The
Company also recorded a loss on related party receivables of approximately $0.6 million and $1.5 million related to other amounts owed
by Cornerstone Pharmaceuticals during the three and six months ended January 31, 2022, respectively. There were no amounts recorded during
the six months ended January 31, 2023.
NOTE
5 – INVESTMENT IN RP FINANCE, LLC
On
February 3, 2020, Cornerstone Pharmaceuticals entered into a Line of Credit with RP Finance (“RPF Line of Credit”) which provides
a revolving commitment of up to $50,000,000 to fund clinical trials and other capital needs.
The
Company owns 37.5% of the equity interests in RP Finance and is required to fund 37.5% of funding requests from Cornerstone Pharmaceuticals
under the RPF Line of Credit. The Instrument owns 37.5% of the equity interests in RP Finance, and is required to fund 37.5% of funding
requests from Cornerstone Pharmaceuticals under the RPF Line of Credit. The remaining 25% equity interests in RP Finance are owned by
other stockholders of Cornerstone Pharmaceuticals.
Under
the RPF Line of Credit, all funds borrowed will bear interest at the mid-term Applicable Federal Rate published by the U.S. Internal
Revenue Service. The maturity date is the earliest of February 3, 2025, upon a change of control of Cornerstone Pharmaceuticals or a
sale of Cornerstone Pharmaceuticals or its assets. Cornerstone Pharmaceuticals can draw on the facility on 60 days’ notice. The
funds borrowed under the RPF Line of Credit must be repaid out of certain proceeds from equity sales by Cornerstone Pharmaceuticals.
In
connection with entering into the RPF Line of Credit, Cornerstone Pharmaceuticals agreed to issue to RP Finance shares of its common
stock representing 12% of the issued and outstanding shares of Cornerstone Pharmaceuticals common stock, with such interest subject to
anti-dilution protection as set forth in the RPF Line of Credit.
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 $0 in earnings from its ownership interests of 37.5% in RP Finance for the three
months ended January 31, 2023 and 2022, respectively, and a loss of $0 and $575 thousand from its ownership interests of 37.5% in RP
Finance for the six months ended January 31, 2023 and 2022, respectively. The assets and operations of RP Finance are not significant
and the Company has identified the equity investment in RP Finance as a related party transaction (see Note 13).
In
August 2020, Cornerstone Pharmaceuticals called for a $5 million draw on the RPF Line of Credit and the facility was funded by RP Finance
in the amount of $5 million. In November 2020, Cornerstone Pharmaceuticals called for a second $5 million draw on the RPF Line of Credit
and the facility was funded by RP Finance in the amount of $5 million. In June 2021 and July 2021, Cornerstone Pharmaceuticals called
for a total aggregate of $10 million in draws on the line of RPF Line of Credit and the facility was funded by RP Finance in the amount
of $10 million. In September 2021, Cornerstone Pharmaceuticals called for a $5 million draw on the RPF Line of Credit and the facility
was funded by RP Finance LLC in the amount of $5 million.
As
of January 31, 2023, 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 $575 thousand.
As of January 31, 2023, the equity method investment on the Company’s balance sheet was $0, and no additional equity loss of RP
Finance was recorded during the six months ended January 31, 2023. The Company was not obligated to guarantee obligations of RP Finance
and is not committed to provided further financial support for RP Finance. Additionally, during the six months January 31, 2022, the
Company recorded a loss on related party receivables of $9.375 million related to amounts owed by RP Finance.
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 January 31, 2023, the Company held 84% of the issued and outstanding ordinary shares of LipoMedix and has consolidated this investment
from the second quarter of fiscal 2018.
In
March 2021, the Company provided bridge financing in the principal amount of up to $400,000 to LipoMedix with a maturity date of September
1, 2021, and an interest rate of 8% per annum. As of September 1, 2021, LipoMedix was in default on the terms of the loan and as such,
the interest rate has increased to 15% per annum.
On
November 15, 2021, the Company entered into a share purchase agreement with LipoMedix to purchase up to 15,975,000 ordinary shares at
$0.1878 per share for an aggregate purchase price of $3.0 million (the “LipoMedix SPA”). Additionally, LipoMedix issued the
Company a warrant to purchase up to 15,975,000 ordinary shares at an exercise price of $0.1878 per share which expired on November 11,
2022.
As
of the date of the LipoMedix SPA, there was an outstanding loan balance including principal of $400 thousand and accrued interest of
$21.8 thousand owed by LipoMedix to the Company on a note made by LipoMedix in favor of the Company issued in March 2021. The amount
due on the loan was netted against the approximately $3.0 million aggregate purchase price due to LipoMedix, resulting in a cash payment
by the Company of approximately $2.6 million in exchange for the 15,975,000 shares purchased. As a result of the share purchase, the
Company’s ownership of LipoMedix increased to approximately 84% with a noncontrolling interest of approximately 16%. The Company
recorded approximately $8 thousand to adjust the carrying amount of the noncontrolling interest to reflect the Company’s increased
ownership interest in LipoMedix’s net assets.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
7 – INVESTMENTS IN MARKETABLE SECURITIES
The
Company has classified its investments in corporate bonds and U.S. treasury bills as available-for-sale securities. These securities
are carried at estimated fair value with unrealized holding gains and losses included in accumulated other comprehensive loss in stockholders’
equity until realized. Investment transactions are recorded on their trade date. Gains and losses on marketable security transactions
are reported on the specific-identification method. Interest income is accrued daily and adjusted for amortization of premiums and accretion
of discounts on the corporate bonds and U.S. treasury bills.
The
amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for available-for-sale securities as
of January 31, 2023 and July 31, 2022 are as follows:
January 31, 2023 | |
Amortized
cost | | |
Gross
unrealized
gains | | |
Gross
unrealized
(losses) | | |
Fair value | |
| |
(in thousands) | |
Available-for-sale securities: | |
| | |
| | |
| | |
| |
U.S. Treasury Bills | |
$ | 16,194 | | |
$ | 185 | | |
$ | — | | |
$ | 16,379 | |
Corporate bonds | |
| 62,695 | | |
| 3,483 | | |
| (3,360 | ) | |
| 62,818 | |
Total available-for-sale securities | |
$ | 78,889 | | |
$ | 3,668 | | |
$ | (3,360 | ) | |
$ | 79,197 | |
July 31, 2022 | |
Amortized cost | | |
Gross unrealized gains | | |
Gross unrealized (losses) | | |
Fair value | |
| |
(in thousands) | |
Available-for-sale securities: | |
| | |
| | |
| | |
| |
Corporate bonds | |
$ | 36,761 | | |
$ | 81 | | |
$ | (144 | ) | |
$ | 36,698 | |
Total available-for-sale securities | |
$ | 36,761 | | |
$ | 81 | | |
$ | (144 | ) | |
$ | 36,698 | |
During
the three and six months ended January 31, 2023, the Company reclassified approximately $139 thousand and $154 thousand of unrealized
gains out of accumulated other comprehensive loss related to the sale of available-for-sale securities into consolidated net loss in
the consolidated statements of operations and comprehensive loss in realized gain on available-for-sale securities.
Maturities
of corporate bonds and U.S. Treasury Bills held as of January 31, 2023 were all due within one year.
Marketable
securities in an unrealized loss position as of January 31, 2023 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 it will
receive a full recovery of par value on the securities, 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; |
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| ● | 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 January 31, 2023 and July 31, 2022:
| |
January 31, 2023 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Assets: | |
(in thousands) | |
Available-for-sale securities - Corporate Bonds | |
$ | — | | |
$ | 62,818 | | |
$ | — | | |
$ | 62,818 | |
Available-for-sale securities - U.S. Treasury Bills | |
| 16,379 | | |
| — | | |
| — | | |
| 16,379 | |
Hedge funds | |
| — | | |
| — | | |
| 5,015 | | |
| 5,015 | |
Total | |
$ | 16,379 | | |
$ | 62,818 | | |
$ | 5,015 | | |
$ | 84,212 | |
| |
July 31, 2022 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Assets: | |
(in thousands) | |
Available-for-sale securities | |
$ | — | | |
$ | 36,698 | | |
$ | — | | |
$ | 36,698 | |
Hedge funds | |
| — | | |
| — | | |
| 4,764 | | |
| 4,764 | |
Total | |
$ | — | | |
$ | 36,698 | | |
$ | 4,764 | | |
$ | 41,462 | |
As
of January 31, 2023 and July 31, 2022, the Company did not have any liabilities measured at fair value on a recurring basis.
The
following table summarizes the changes in the fair value of the assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3):
| |
Three Months Ended
January 31, | | |
Six Months Ended
January 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(in thousands) | | |
(in thousands) | |
Balance, beginning of period | |
$ | 4,637 | | |
$ | 5,479 | | |
$ | 4,764 | | |
$ | 5,268 | |
Total gain (loss) included in earnings | |
| 378 | | |
| (454 | ) | |
| 251 | | |
| (243 | ) |
Balance, end of period | |
$ | 5,015 | | |
$ | 5,025 | | |
$ | 5,015 | | |
$ | 5,025 | |
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.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
Company holds $0.3 million in investments in securities in another entity that are not liquid, which were included in Investments - Other
Pharmaceuticals in the accompanying consolidated balance sheets. The investment is accounted for under ASC 321, Investments - Equity
Securities, using the measurement alternative as defined within the guidance, and the Company recorded an impairment loss of $67
thousand and $0 for the three months ended January 31, 2023 and 2022, and $223 thousand and $0 for the six months ended January 31, 2023
and 2022, respectively.
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.
Marketable
securities. The Company’s available-for-sale securities are comprised of investments in fixed income corporate bonds and U.S. treasury
bills which are recorded in available-for-sale securities on the consolidated balance sheet. These securities are recorded at fair value
using market prices at January 31, 2023. The fair value estimates for corporate bonds and U.S treasury bills were classified as
Level 2 and Level 1, respectively.
Other
assets and other liabilities. At January 31, 2023 and July 31, 2022, 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 accounts receivable, accounts payable and due to related parties approximate their fair value due to their short-term
nature.
NOTE
9 – TRADE ACCOUNTS RECEIVABLE
Accounts
receivable consisted of the following:
| |
January 31,
2023 | | |
July 31,
2022 | |
| |
(in thousands) | |
Accounts Receivable - Third Party | |
$ | 295 | | |
$ | 196 | |
Accounts Receivable - Related Party | |
| 157 | | |
| 158 | |
Less Allowance for Doubtful Accounts | |
| (180 | ) | |
| (197 | ) |
Accounts Receivable, net | |
$ | 272 | | |
$ | 157 | |
NOTE
10 – PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
| |
January 31, | | |
July 31, | |
| |
2023 | | |
2022 | |
| |
(in thousands) | |
Building and Improvements | |
$ | 2,505 | | |
$ | 2,505 | |
Other | |
| 68 | | |
| 68 | |
| |
| 2,573 | | |
| 2,573 | |
Less Accumulated Depreciation | |
| (841 | ) | |
| (803 | ) |
Total | |
$ | 1,732 | | |
$ | 1,770 | |
Other
property and equipment consist of other equipment and miscellaneous computer hardware.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Depreciation
expense pertaining to property and equipment was approximately $19 thousand and $18 thousand for the three months ended January 31, 2023
and 2022, respectively. Depreciation expense pertaining to property and equipment was approximately $41 thousand and $37 thousand for
the six months ended January 31, 2023 and 2022, respectively.
The
Company’s headquarters are located at 520 Broad Street in Newark, New Jersey, where it occupies office space and which was previously
owned by the Company. The table above excludes the assets of the 520 Property which were classified as held-for-sale as of July 31, 2022
and subsequently sold on August 22, 2022. Refer to Note 3 for further information on the 520 Property.
NOTE
11 – LOSS PER SHARE
Basic
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 six months ended January
31, 2023 and 2022 because inclusion of all such securities would have been anti-dilutive for all periods presented.
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
January 31, | | |
Six Months Ended
January 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Shares issuable upon exercise of stock options | |
| 953,347 | | |
| 1,026,777 | | |
| 953,347 | | |
| 1,026,777 | |
Shares issuable upon vesting of restricted stock | |
| 994,179 | | |
| 79,600 | | |
| 994,179 | | |
| 79,600 | |
Shares issuable upon exercise of warrants to purchase Class B common stock | |
| — | | |
| 26,189 | | |
| — | | |
| 26,189 | |
| |
| 1,947,526 | | |
| 1,132,566 | | |
| 1,947,526 | | |
| 1,132,566 | |
The
diluted loss per share computation equals basic loss per share for the three and six months ended January 31, 2023 and 2022 because the
Company had a net loss from continuing operations 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.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
following table summarizes the basic and diluted loss per share calculations (in thousands, except for share and per share amounts):
| |
Three Months Ended
January 31, | | |
Six Months Ended
January 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Numerator: | |
| | |
| | |
| | |
| |
Net loss from continuing operations | |
$ | (3,252 | ) | |
$ | (2,057 | ) | |
$ | (8,459 | ) | |
$ | (130,925 | ) |
Net loss attributable to noncontrolling interests | |
| (159 | ) | |
| (244 | ) | |
| (258 | ) | |
| (17,631 | ) |
Numerator for net loss from continuing operations | |
| (3,093 | ) | |
| (1,813 | ) | |
| (8,201 | ) | |
| (113,294 | ) |
| |
| | | |
| | | |
| | | |
| | |
Numerator for discontinued operations | |
| (157 | ) | |
| (508 | ) | |
| 6,543 | | |
| (1,051 | ) |
Net loss attributable to Rafael Holdings, Inc. | |
$ | (3,250 | ) | |
$ | (2,321 | ) | |
$ | (1,658 | ) | |
$ | (114,345 | ) |
| |
| | | |
| | | |
| | | |
| | |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Weighted average basic and diluted shares outstanding | |
| 23,155,018 | | |
| 19,713,127 | | |
| 23,085,612 | | |
| 19,332,630 | |
| |
| | | |
| | | |
| | | |
| | |
Loss per share attributable to common shareholders | |
| | | |
| | | |
| | | |
| | |
Basic and diluted: | |
| | | |
| | | |
| | | |
| | |
Continuing operations | |
$ | (0.13 | ) | |
$ | (0.09 | ) | |
$ | (0.36 | ) | |
$ | (5.86 | ) |
Discontinued operations | |
| (0.01 | ) | |
| (0.03 | ) | |
| 0.28 | | |
| (0.05 | ) |
Total basic and diluted earnings (loss) per share | |
$ | (0.14 | ) | |
$ | (0.12 | ) | |
$ | (0.08 | ) | |
$ | (5.91 | ) |
NOTE
12 – NOTE PAYABLE, HELD-FOR-SALE
On
July 9, 2021, the Company, as guarantor, Rafael Holdings Realty, Inc., a wholly-owned subsidiary of the Company (“Realty”),
as pledgor, and Broad-Atlantic 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 provided for a loan in the amount of $15
million (the “Note Payable”) from Lender to Borrower secured by (i) a first mortgage on 520 Broad Street, Newark, New Jersey
07102; and (ii) a first priority security interest in the equity of the Borrower as set forth in the Pledge and Security Agreement between
Realty and Lender.
The
Note Payable bore interest at a rate per annum equal to seven and one-quarter percent (7.25%) from July 9, 2021 through July 31, 2021
and thereafter at an interest rate per annum equal to the 30-day LIBOR Rate, as published in The Wall Street Journal, plus 6.90%
per annum, but in no event less than seven and one-quarter percent (7.25%) per annum. The Note Payable was due on August 1, 2022, subject
to the Company’s option to extend the maturity date until August 1, 2023 for a fee equal to three-quarters of one percent (0.75%)
of the Note Payable.
The
Loan Agreement contained customary affirmative covenants, negative covenants and events of default, as defined in the Loan Agreement,
including covenants and restrictions that, among other things, restricted the Borrower’s ability to incur liens, or transfer, lease
or sell the collateral as defined in the Loan Agreement. A failure to comply with these covenants would have permitted the Lender to
declare the Borrower’s obligations under the Loan Agreement, together with accrued interest and fees, to be immediately due and
payable. The Company was in compliance with the covenants
in the Loan Agreement as of July 31, 2022. The Company extended the maturity date to November 1, 2022 and paid an extension fee of $37,500
on July 29, 2022.
In
connection with the sale of the 520 Property, on August 22, 2022, the Company paid off the outstanding principal balance of $15 million
and accrued interest of approximately $87,000 on the Note Payable. Refer to Note 3 for further details on the subsequent sale of the
520 Property.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Interest
expense under the Note Payable, which is recognized in loss on discontinued operations, amounted to $0 and $87 thousand for the three
and six months ended January 31, 2023, respectively, and $272 thousand and $544 thousand for the three and six months ended January 31,
2022, respectively.
Unamortized
debt issuance costs on the Note Payable totaled approximately $0 and $222 thousand as of January 31, 2023 and 2022, respectively.
Amortization of the debt discount on the Note Payable totaled approximately $0 and $125 thousand for the three months ended January 31,
2023 and 2022, and $0 thousand and $250 thousand for the six months ended January 31, 2023 and 2022, respectively.
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 receives rental income from IDT and various companies that may be deemed to be under common control
with IDT. The Company recorded expense of approximately $20 thousand and $80 thousand in related party services to IDT for the three
months ended January 31, 2023 and 2022, respectively. The Company recorded expense of approximately $88 thousand and $156 thousand in
related party services to IDT for the six months ended January 31, 2023 and 2022, respectively, of which $0 and $80 thousand is included
in Due to Related Parties at January 31, 2023 and 2022, respectively.
IDT
leased approximately 80,000 square feet of office space plus parking at 520 Broad Street, Newark, New Jersey and leases approximately
3,600 square feet of office space in Jerusalem, Israel. The Company invoiced IDT $27 thousand for the three months ended January 31,
2023. The Company invoiced IDT approximately $175 thousand of which approximately $147 thousand is included in discontinued operations
for office rent and parking during the three months ended January 31, 2022. The Company invoiced IDT approximately $156 thousand of which
approximately $102 thousand is included in discontinued operations during the six months ended January 31, 2023. The Company invoiced
IDT approximately $644 thousand of which approximately $589 thousand is included in discontinued operations for office rent and parking
during the six months ended January 31, 2022. As of January 31, 2023 and July 31, 2022, IDT owed the Company approximately $156
thousand and $157 thousand, respectively, for office rent and parking.
Cornerstone
Pharmaceuticals
Until
October 31, 2021, the Company had provided Cornerstone Pharmaceuticals with administrative, finance, accounting, tax and legal services.
Howard S. Jonas currently serves on the Board of Directors of Cornerstone Pharmaceuticals and owns an equity interest in Cornerstone
Pharmaceuticals. The Company billed Cornerstone Pharmaceuticals $120 thousand for the six months ended January 31, 2022. As of January 31,
2023 and July 31, 2022, Cornerstone Pharmaceuticals owed the Company $720 thousand, for which a full allowance for uncollectibility
has been recorded.
Due
to the Data Events, in the six months ended January 31, 2022, the balance owed to the Company by Cornerstone Pharmaceuticals was fully
reserved, resulting in a loss on related party receivable of $720 thousand (see Note 4).
Related
Party Rental Income
The
Company leased space to related parties (including IDT Corporation - see above) which represented approximately 39% and 63% of the Company’s
total revenue for the three months ended January 31, 2023 and 2022, respectively. The Company leased space to related parties (including
IDT Corporation - see above) which represented approximately 43% and 57% of the Company’s total revenue for the six months ended January
31, 2023 and 2022, respectively. The portion of related party rental income pertaining to the 520 Property has been classified in discontinued
operations on the consolidated statements of operations and comprehensive loss for the three and six months ended January 31, 2023 and
2022.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
RP
Finance
For
the three months ended January 31, 2023 and 2022 respectively, the Company recognized $0 from its ownership interests of 37.5% in RP
Finance, respectively. For the six months ended January 31, 2023 and 2022, respectively, the Company recognized $0 and loss of $575 thousand
in income from its ownership interests of 37.5% in RP Finance, respectively.
Howard
Jonas, Chairman of the Board and Former Chief Executive Officer
In
December 2020, two entities, on whose Boards of Directors Howard Jonas, the Company’s Chairman of the Board and Executive Chairman
and former Chief Executive Officer serves, each purchased 218,245 shares of Class B common stock for consideration of $5 million each.
In connection with the purchases, each purchaser was granted warrants (the “Issued Warrants”) to purchase twenty percent (20%)
of the shares of Class B common stock purchased by such purchaser. The Issued Warrants have an exercise price of $22.91 per share and
expired on June 6, 2022. The Issued Warrants were not exercised. The shares and Issued Warrants were issued in reliance on the exemption
from registration provided for under Section 4(a)(2) of the Securities Act of 1933, as amended.
On
June 22, 2022, the Company entered into a Stock Purchase Agreement (the “I9 SPA”) with I9 Plus, LLC. On July 6, 2022, pursuant
to the I9 SPA, the Company sold 3,225,806 shares of the Company’s Class B common stock to I9 Plus, LLC at a price per share of
$1.86 and an aggregate sale price of $6 million.
LipoMedix
Pharmaceuticals, Ltd.
As
of the date of the LipoMedix SPA, on November 15, 2021, there was an outstanding loan balance including principal of $400 thousand and
accrued interest of $21.8 thousand owed by LipoMedix to the Company on the note from March 2021. The amount due on the loan was netted
against the $3.0 million aggregate purchase price due LipoMedix, resulting in a cash payment by the Company of approximately $2.6 million
in exchange for the 15,975,000 shares purchased. As a result of the share purchase, the Company’s ownership of LipoMedix increased
to approximately 84% with a noncontrolling interest of approximately 16%.
NOTE
14 – INCOME TAXES
During
the three months ended January 31, 2023 and 2022, the Company recognized an income tax provision of $5 thousand on loss from continuing
operations before income tax of $3.2 million, and $4 thousand on a loss from continuing operations before income tax of $2.1 million,
respectively. During the six months ended January 31, 2023 and 2022, the Company recognized an income tax provision of $10 thousand on
loss from continuing operations before income tax of $8.4 million, and $4 thousand on a loss from continuing operations before income
tax of $130.3 million, respectively. The change in income tax expense in relation to the loss before income tax during the three and
six months ended January 31, 2023 compared to the three and six months ended January 31, 2022 was primarily due to differences in the
amount of taxable (loss) income in the various taxing jurisdictions and the associated valuation allowances. As of January 31, 2023 and
2022, the Company recorded valuation allowances for the total deferred tax asset balances.
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.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
15 – BUSINESS SEGMENT INFORMATION
The
Company conducts business as two operating segments, Healthcare and Real Estate. The Company’s reportable segments are distinguished
by types of service, customers and methods used to provide their services. The operating results of these business segments are regularly
reviewed by the Company’s Chief Executive Officer and the chief operating decision-maker.
The
accounting policies of the segments are the same as the accounting policies of the Company as a whole. The Company evaluates the performance
of its Healthcare segment based primarily on research and development efforts and results of clinical trials and the Real Estate segment
based primarily on results of operations. All investments in Cornerstone Pharmaceuticals and assets and expenses associated with LipoMedix,
Barer, Farber, and Rafael Medical Devices are tracked separately in the Healthcare segment.
The
Healthcare 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, Farber, and Rafael Medical Devices. To date, the Healthcare segment
has not generated any revenues.
The
Real Estate segment consists of the Company’s real estate holdings, comprised of a portion of a commercial building in Israel.
Operating
results for the business segments of the Company are as follows:
(in thousands) | |
Healthcare | | |
Real Estate | | |
Total | |
Three Months Ended January 31, 2023 | |
| | |
| | |
| |
Revenues | |
$ | — | | |
$ | 70 | | |
$ | 70 | |
(Loss) income from operations | |
| (4,281 | ) | |
| 22 | | |
| (4,259 | ) |
(Loss) income before income taxes | |
| (3,269 | ) | |
| 22 | | |
| (3,247 | ) |
| |
| | | |
| | | |
| | |
Three Months Ended January 31, 2022 | |
| | | |
| | | |
| | |
Revenues | |
$ | — | | |
$ | 74 | | |
$ | 74 | |
(Loss) income from operations | |
| (1,620 | ) | |
| 21 | | |
| (1,599 | ) |
(Loss) income before income taxes | |
| (2,074 | ) | |
| 21 | | |
| (2,053 | ) |
(in thousands) | |
Healthcare | | |
Real Estate | | |
Total | |
Six Months Ended January 31, 2023 | |
| | |
| | |
| |
Revenues | |
$ | — | | |
$ | 140 | | |
$ | 140 | |
(Loss) income from operations | |
| (9,445 | ) | |
| 44 | | |
| (9,401 | ) |
(Loss) income before income taxes | |
| (8,493 | ) | |
| 44 | | |
| (8,449 | ) |
| |
| | | |
| | | |
| | |
Six Months Ended January 31, 2022 | |
| | | |
| | | |
| | |
Revenues | |
$ | — | | |
$ | 265 | | |
$ | 265 | |
(Loss) income from operations | |
| (51,091 | ) | |
| 142 | | |
| (50,949 | ) |
(Loss) income before income taxes | |
| (130,488 | ) | |
| 142 | | |
| (130,346 | ) |
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, which are inclusive of revenue from discontinued operations, were as follows
(revenues by country are determined based on the location of the related facility):
Three Months Ended January 31, | |
2023 | | |
2022 | |
Revenue from tenants located in Israel | |
| 100 | % | |
| 7 | % |
Six Months Ended January 31, | |
2023 | | |
2022 | |
Revenue from tenants located in Israel | |
| 36 | % | |
| 7 | % |
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Net
long-lived assets and total assets held outside of the United States, which are located in Israel, were as follows:
(in thousands) | |
United States | | |
Israel | | |
Total | |
January 31, 2023 | |
| | |
| | |
| |
Long-lived assets, net | |
$ | 299 | | |
$ | 1,433 | | |
$ | 1,732 | |
Total assets | |
| 95,185 | | |
| 3,365 | | |
| 98,550 | |
| |
| | | |
| | | |
| | |
July 31, 2022 | |
| | | |
| | | |
| | |
Long-lived assets, net | |
$ | 305 | | |
$ | 1,465 | | |
$ | 1,770 | |
Total assets | |
| 114,053 | | |
| 4,267 | | |
| 118,320 | |
NOTE
16 – COMMITMENTS AND CONTINGENCIES
Legal
Proceedings
The
Company may from time to time be subject to legal proceedings that may arise in the ordinary course of business. Although there can be
no assurance in this regard, the Company does not expect any of those legal proceedings to have a material adverse effect on the Company’s
results of operations, cash flows or financial condition.
In
December 2022, the Company’s subsidiary Broad Atlantic Associates, LLC entered into a settlement agreement with a vendor providing
for the payment by the Company of $113,000 representing payment in full for repair work done on the premises prior to our sale of the
520 Property. This amount is included in discontinued operations on the consolidated statements of operations and comprehensive loss.
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 $250 million of Class B common
stock. This Registration Statement was declared effective on June 7, 2021.
On
June 1, 2021, the Company filed a Registration Statement on Form S-3 to issue 48,859 shares of Class B common stock for payment due on
the purchase of Altira, an investment which has been subsequently fully impaired.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 24, 2021, the Company issued 2,833,425 shares of Class
B common stock (the “Institutional Shares”), par value $0.01 per share, to the Institutional Investors, at a purchase price
equal to $35.00 per share, for aggregate gross proceeds of approximately $99.2 million, before deducting placement agent fees and other
offering expenses. Additionally, pursuant to the Jonas Purchase Agreement, the Company issued 112,501 shares of Class B common stock
to I9Plus, LLC, at a purchase price equal to $44.42 per share, which was equal to the closing price of a share of the Class B common
stock on the New York Stock Exchange on August 19, 2021 (the “Jonas Offering”). The Jonas Offering resulted in additional aggregate
gross proceeds of approximately $5.0 million. The total net proceeds from the issuance of shares was $98.0 million after deducting transaction
costs of $6.2 million.
On
August 19, 2021, in connection with the Institutional Purchase Agreement, the Company entered into a Registration Rights Agreement with
the Institutional Investors whereby the Company agreed to prepare and file a registration statement with the SEC within 30 days after
the earlier of (i) the date of the closing of the Merger Agreement, and (ii) the date the Merger Agreement is terminated in accordance
with its terms, for purposes of registering the resale of the Institutional Shares and any shares of Class B common stock issued as a
dividend or other distribution with respect to the Institutional Shares.
On
January 19, 2022, the Company’s stockholders approved the 2021 Equity Incentive Plan (the “2021 Plan”). The 2018 Equity Incentive
Plan was suspended and replaced by the 2021 Plan, and, following January 19, 2022, no new grants are to be awarded under the 2018 Equity
Incentive Plan. Existing grants under the 2018 Equity Incentive Plan will not be impacted by the adoption of the 2021 Plan. Any of the
Company’s employees, directors, consultants, and other service providers, and those of the Company’s affiliates, are eligible
to participate in the 2021 Plan. In accordance with applicable tax rules, only employees (and the employees of parent or subsidiary corporations)
are eligible to be granted incentive stock options. The 2021 Plan authorizes stock options (both incentive stock options or non-qualified
stock options), stock appreciation rights, restricted stock, restricted stock units, and cash or other stock-based awards. On January
19, 2022, the Company filed a Registration Statement on Form S-8 registering 1,919,025 shares Class B Common Stock reserved for issuance
under the 2021 Plan. On November 28, 2022, the Company’s Board of Directors approved an amendment to the 2021 Plan that, among
other things, increases the number of shares of the Company’s Class B Common Stock available for the grant of awards thereunder
by an additional 696,770, which the stockholders approved on January 23, 2023. The maximum number of shares of Class B common stock that
may be issued under the 2021 Plan is 2,615,795 shares. As of January 31, 2023, there were 953,812 shares still available for issuance
under the 2021 Plan.
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, 2022 | |
| 1,021,277 | | |
$ | 12.11 | | |
| 4.47 | | |
$ | — | |
Granted | |
| 150,000 | | |
| 2.10 | | |
| 9.98 | | |
| — | |
Cancelled / Forfeited | |
| (217,930 | ) | |
| — | | |
| — | | |
| — | |
Outstanding at January 31, 2023 | |
| 953,347 | | |
$ | 8.88 | | |
| 3.81 | | |
$ | — | |
Exercisable at January 31, 2023 | |
| 642,740 | | |
$ | 6.53 | | |
| 1.18 | | |
$ | — | |
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At
January 31, 2023, there is unrecognized compensation costs related to non-vested stock options of $1.5 million, which are expected
to be recognized over the next 3.7 years.
The
value of option grants is calculated using the Black-Scholes option pricing model with the following assumptions for options granted
during the six months ended January 31, 2023:
Risk-free interest rate | |
| 3.60 | % |
Expected term (in years) | |
| 6.11 | |
Expected volatility | |
| 95.00 | % |
Expected dividend yield | |
| — | % |
The
options granted had a $1.59 weighted average grant date fair value during the six months ended January 31, 2023.
Rafael
Medical Devices, Inc. Stock Options
The
Rafael Medical Devices, Inc. 2022 Equity Incentive Plan (the “RMD 2022 Plan”) was created and adopted by the Company in May
2022. The RMD 2022 Plan allows for the issuance of up to 10,000 shares of Class B common stock which may be awarded in the form of incentive
stock options or restricted shares. There are 4,734 shares available for issuance under the RMD 2022 Plan as of January 31, 2023.
A
summary of stock option activity for Rafael Medical Devices, Inc. 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, 2022 | |
| 5,266 | | |
$ | 3.82 | | |
| 9.76 | | |
$ | — | |
Granted | |
| — | | |
| — | | |
| — | | |
| — | |
Outstanding at January 31, 2023 | |
| 5,266 | | |
$ | 3.82 | | |
| 9.26 | | |
| — | |
Exercisable at January 31, 2023 | |
| 2,633 | | |
$ | 3.82 | | |
| 9.26 | | |
$ | — | |
At
January 31, 2023, there are unrecognized compensation costs related to non-vested stock options of $8 thousand, which are expected
to be recognized over the next 1.93 years.
Restricted
Stock
The
fair value of restricted shares of the Company’s Class B common stock is determined based on the closing price of the Company’s
Class B common stock on the grant date. Share awards generally vest on a graded basis over three years of service.
In
January 2022, the Company granted 33,360 restricted shares of Class B common stock to non-employee directors, 18,336 of which were granted
from under 2018 Equity Incentive Plan, and 15,024 of which were granted under the 2021 Plan. The restricted shares vested immediately
on the grant date. The share based compensation cost was approximately $151 thousand, which was included in general and administrative
expense in the consolidated statement of operations and comprehensive loss.
On
February 1, 2022, the Company issued 986,835 shares of Class B restricted stock to two members of the executive team. Approximately 24%
of the restricted shares vest in December 2022, with the remaining shares vesting ratably each quarter through December 2025.
On
June 14, 2022, the Company issued 452,130 shares of Class B restricted stock to Howard S. Jonas.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In
January 2023, the Company issued 120,019 shares of Class B restricted stock to certain members of its Board of Directors, and 100,000
shares of Class B restricted stock to its new Chief Financial Officer.
During
January 2023, 296,384 shares of Class B restricted stock were cancelled or forfeited due to (i) the cancellation of 285,036 shares of
restricted stock in connection with the departure of the Company’s former Chief Financial Officer and (ii) the remaining shares forfeited
upon the termination of certain employees of the Company.
In connection with Patrick Fabbio’s January 27, 2023 departure
as the Company’s Chief Financial Officer, the Company and Mr. Fabbio entered into a Separation and General Release Agreement (the
“Separation Agreement”), which provides, among other things, that the Company shall pay Mr. Fabbio severance in the amount
of $307,913, which is included in selling, general and administrative expense on the consolidated statement of operations and comprehensive
loss for the three and six months ended January 31, 2023.
In connection with the termination of Mr. Fabbio’s position as
Chief Financial Officer of the Company, there was a material forfeiture of his Class B restricted shares and stock options resulting in
a reversal of approximately $915 thousand in stock-based compensation expense that was previously recorded to selling, general and administrative
expense.
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, 2022 | |
| 1,507,373 | | |
$ | 4.22 | |
Granted | |
| 220,019 | | |
| 1.99 | |
Vested | |
| (436,829 | ) | |
| 3.55 | |
Cancelled / Forfeited | |
| (296,384 | ) | |
| (5.05 | ) |
Non-vested shares at January 31, 2023 | |
| 994,179 | | |
$ | 3.77 | |
At
January 31, 2023, there was $2.5 million of total unrecognized compensation cost related to non-vested stock-based compensation
arrangements, which is expected to be recognized over the next four years.
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
$19.0 million in stock-based compensation expense that was previously recorded to selling, general and administrative expense. Additionally,
pursuant to the terms of his employment agreement, the Company paid $5.0 million relating to his severance payout, which is included
in selling, general and administrative expense on the consolidated statement of operations and comprehensive loss for the three and six
months ended January 31, 2022.
A
summary of the stock-based compensation expense for the Company’s equity incentive plans is presented below:
| |
For the Three Months Ended January 31, | | |
For the Six Months Ended January 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
General and administrative | |
$ | 884 | | |
$ | 7,758 | | |
$ | 1,967 | | |
$ | 15,426 | |
Research and development | |
| 43 | | |
| 274 | | |
| 140 | | |
| 457 | |
Forfeiture of RSUs within general and administrative | |
| (931 | ) | |
| (18,978 | ) | |
| (931 | ) | |
| (18,978 | ) |
Forfeiture of RSUs within research and development | |
$ | (119 | ) | |
$ | — | | |
$ | (119 | ) | |
$ | — | |
Net stock-based compensation expense | |
$ | (123 | ) | |
$ | (10,946 | ) | |
$ | 1,057 | | |
$ | (3,095 | ) |
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
18 – LEASES
The
Company is the lessor of the Israeli property which is leased to tenants under net operating leases with a term expiration date within
2025. Lease income included on the consolidated statements of operations and comprehensive loss was $0.1 million and $0.1 million for
the three months ended January 31, 2023 and 2022, respectively, and $0.1 million and $0.1 million for the six months ended January 31,
2023 and 2022, respectively. During the three and six months ended January 31, 2023 and 2022, no real estate property taxes were included
in rental income.
The
future contractual minimum lease payments to be received (excluding operating expense reimbursements) by the Company as of January 31,
2023, 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) | |
2023 (remaining) | |
$ | 38 | | |
$ | — | | |
$ | 38 | |
2024 | |
| 77 | | |
| — | | |
| 77 | |
2025 | |
| 78 | | |
| — | | |
| 78 | |
Total Minimum Future Rental Income | |
$ | 193 | | |
$ | — | | |
$ | 193 | |
A
related party has the right to terminate the Israeli lease upon four months’ notice.
NOTE
19 – SUBSEQUENT EVENTS
Investment
in LipoMedix Pharmaceuticals Ltd.
On February 9, 2023, the Company entered into
a Share Purchase Agreement with LipoMedix Pharmaceuticals Ltd. in which LipoMedix sold 70,000,000 ordinary shares to the Company at a
price per share of $0.03 and an aggregate sale price of approximately $2.1 million.