UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
for the quarterly period ended
or
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices, zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes ☐ No
The number of shares outstanding of the registrant’s common stock as of December 12, 2023 was:
| Class A common stock, par value $0.01 per share: | |
| Class B common stock, par value $0.01 per share: |
RAFAEL HOLDINGS, INC.
TABLE OF CONTENTS
i
PART I. FINANCIAL INFORMATION
RAFAEL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| October 31, 2023 | July 31, 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Available-for-sale securities | ||||||||
| Interest receivable | ||||||||
| Convertible note receivable, related party | ||||||||
| Accounts receivable, net of allowance for doubtful accounts of $ | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Investment in equity securities | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Investments – Other Pharmaceuticals | ||||||||
| Investments – Hedge Funds | ||||||||
| Investment - Day Three Labs Inc. | ||||||||
| Investments - Cyclo Therapeutics Inc. | ||||||||
| In-process research and development and patents | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Other current liabilities | ||||||||
| Due to related parties | ||||||||
| Total current liabilities | ||||||||
| Other liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| EQUITY | ||||||||
| Class A common stock, $ | ||||||||
| Class B common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock, at cost; | ( | ) | ||||||
| Accumulated other comprehensive loss related to unrealized loss on available-for-sale securities | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income related to foreign currency translation adjustment | ||||||||
| Total equity | ||||||||
| Noncontrolling interests | ( | ) | ( | ) | ||||
| TOTAL EQUITY ATTRIBUTABLE TO RAFAEL HOLDINGS, INC. | ||||||||
| TOTAL LIABILITIES AND EQUITY | $ | $ | ||||||
See accompanying notes to the unaudited consolidated interim financial statements.
1
RAFAEL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited, in thousands, except share and per share data)
| Three Months Ended October 31, | ||||||||
| 2023 | 2022 | |||||||
| REVENUE | ||||||||
| Rental – Third Party | $ | $ | ||||||
| Rental – Related Party | ||||||||
| Total revenue | ||||||||
| COSTS AND EXPENSES | ||||||||
| General and administrative | ||||||||
| Research and development | ||||||||
| Depreciation and amortization | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Interest income | ||||||||
| Impairment of investments - Other Pharmaceuticals | ( | ) | ||||||
| Realized gain on available-for-sale securities | ||||||||
| Realized loss on investment in equity securities | ( | ) | ||||||
| Realized gain on investments - Cyclo Therapeutics Inc. | ||||||||
| Unrealized loss on investments - Cyclo Therapeutics Inc. | ( | ) | ||||||
| Unrealized loss on investments - Hedge Funds | ( | ) | ( | ) | ||||
| Other Income | ||||||||
| Loss from continuing operations before income taxes | ( | ) | ( | ) | ||||
| Provision for income taxes | ( | ) | ( | ) | ||||
| Equity in loss of Day Three Labs Inc. | ( | ) | ||||||
| Consolidated net loss from continuing operations | ( | ) | ( | ) | ||||
| Discontinued Operations (Note 3) | ||||||||
| Loss from discontinued operations related to 520 Property | ( | ) | ||||||
| Gain on disposal of 520 Property | ||||||||
| Income from discontinued operations | ||||||||
| Consolidated net (loss) income | ( | ) | ||||||
| Net loss attributable to noncontrolling interests | ( | ) | ( | ) | ||||
| Net (loss) income attributable to Rafael Holdings, Inc. | $ | ( | ) | $ | ||||
| OTHER COMPREHENSIVE (LOSS) INCOME | ||||||||
| Consolidated net (loss) income | $ | ( | ) | $ | ||||
| Unrealized gain on available-for-sale securities | ||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||
| Total comprehensive (loss) income | ( | ) | ||||||
| Comprehensive loss attributable to noncontrolling interests | ( | ) | ( | ) | ||||
| Total comprehensive (loss) income attributable to Rafael Holdings, Inc. | $ | ( | ) | $ | ||||
| (Loss) income per share attributable to common stockholders | ||||||||
| Basic and diluted: | ||||||||
| $ | ( | ) | $ | ( | ) | |||
| $ | ( | ) | $ | |||||
| Weighted average number of shares used in calculation of (loss) income per share | ||||||||
See accompanying notes to the unaudited consolidated interim financial statements.
2
RAFAEL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands, except share data)
| Three Months Ended October 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| Common
Stock, Series A | Common
Stock, Series B | Additional paid-in- | Accumulated | Accumulated Other comprehensive | Noncontrolling | Treasury Stock | Total | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | deficit | income | interests | Class B Shares | Amount | Equity | ||||||||||||||||||||||||||||||||||
| Balance at August 1, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | — | $ | — | $ | ||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | — | — | ( | ) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Shares withheld for payroll taxes | ( | ) | ( | ) | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||
| Unrealized gain on available-for-sale securities | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Sale of Rafael Medical Devices membership units | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | ( | ) | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Dissolution of Levco | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance at October 31, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||
See accompanying notes to the unaudited consolidated interim financial statements.
3
RAFAEL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands, except share data)
| Three Months Ended October 31, 2022 | ||||||||||||||||||||||||||||||||||||
| Common Stock, Series A | Common Stock, Series B | Additional paid-in- | Accumulated | Accumulated Other comprehensive | Noncontrolling | Total | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | deficit | income | interests | Equity | ||||||||||||||||||||||||||||
| Balance at August 1, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Net income for the three months ended October 31, 2022 | — | — | — | ( | ) | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||||||||||
| Shares withheld for payroll taxes | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Unrealized gain on available-for-sale securities | — | — | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance at October 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
See accompanying notes to the unaudited consolidated interim financial statements.
4
RAFAEL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
| Three Months Ended October 31, | ||||||||
| 2023 | 2022 | |||||||
| Operating activities | ||||||||
| Consolidated net (loss) income | $ | ( | ) | $ | ||||
| Less: Income from discontinued operations | ||||||||
| Loss from continuing operations | ( | ) | ( | ) | ||||
| Adjustments to reconcile consolidated net income (loss) to net cash used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Gain on sale of property and equipment | ( | ) | ||||||
| Net unrealized loss on investments - Hedge Funds | ||||||||
| Realized loss on investment in equity securities | ||||||||
| Realized gain on available-for-sale securities | ( | ) | ( | ) | ||||
| Amortization of discount on available-for-sale securities | ( | ) | ||||||
| Impairment of investments - Other Pharmaceuticals | ||||||||
| Realized gain in equity investments - Cyclo Therapeutics Inc. | ( | ) | ||||||
| Unrealized loss in equity investments - Cyclo Therapeutics Inc. | ||||||||
| Gain on dissolution of a business | ||||||||
| Equity in loss of Day Three Labs Inc. | ||||||||
| Bad debt expense | ||||||||
| Stock-based compensation | ||||||||
| Change in assets and liabilities, net of effects from discontinued operations: | ||||||||
| Trade accounts receivable | ( | ) | ( | ) | ||||
| Interest receivable | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ||||||||
| Other assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Other current liabilities | ( | ) | ||||||
| Due to related parties | ( | ) | ( | ) | ||||
| Other liabilities | ||||||||
| Net cash used in continuing operations | ( | ) | ( | ) | ||||
| Net cash used in discontinued operations | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activities | ||||||||
| Purchases of available-for-sale securities | ( | ) | ( | ) | ||||
| Proceeds from the sale and maturities of available-for-sale securities | ||||||||
| Issuance of related party promissory note | ( | ) | ||||||
| Proceeds from investments - Other Pharmaceuticals | ||||||||
| Proceeds from sales of equity securities | ||||||||
| Purchase of Investment in Cyclo Therapeutics Inc. | ( | ) | ||||||
| Net cash used in investing activities of continuing operations | ( | ) | ( | ) | ||||
| Proceeds from sale of 520 Property - discontinued operations | ||||||||
| Payment of transaction costs for sale of 520 Property - discontinued operations | ( | ) | ||||||
| Net cash provided by investing activities of discontinued operations | ||||||||
| Net cash (used in) provided by investing activities | ( | ) | ||||||
| Financing activities | ||||||||
| Payments for taxes related to shares withheld for employee taxes | ( | ) | ( | ) | ||||
| Purchases of treasury stock | ( | ) | ||||||
| Proceeds from sale of RMD membership units | ||||||||
| Net cash provided by (used in) continuing operations | ( | ) | ||||||
| Payment of Note Payable in connection with sale of 520 Property - discontinued operations | ( | ) | ||||||
| Net cash used in financing activities of discontinued operations | ( | ) | ||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ( | ) | ||||
| Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Reconciliation of cash and restricted cash | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash and cash equivalents and restricted cash shown in statement of cash flows | $ | $ | ||||||
| Non-cash supplemental disclosure | ||||||||
| Transaction costs related to sale of 520 Property included in accounts payable | $ | $ | ||||||
| Noncash consideration received in exchange for equipment | $ | $ | ||||||
| Withdrawal receivable from Hedge Funds included in other current assets | $ | $ | ||||||
See accompanying notes to the unaudited consolidated interim financial statements.
5
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – DESCRIPTION OF BUSINESS
Description of Business
Rafael Holdings, Inc. (NYSE:RFL), (“Rafael Holdings”, “we” or the “Company”), a Delaware corporation, is a holding company with interests in clinical and early-stage pharmaceutical companies (the “Pharmaceutical Companies”), including an investment in Cornerstone Pharmaceuticals, Inc. ("Cornerstone"), formerly known as Rafael Pharmaceuticals Inc., a cancer metabolism-based therapeutics company, a majority equity interest in LipoMedix Pharmaceuticals Ltd. (“LipoMedix”), a clinical stage pharmaceutical company, the Barer Institute Inc. (“Barer”), a wholly-owned preclinical cancer metabolism research operation, and an investment in Cyclo Therapeutics Inc. (Nasdaq: CYTH), (“Cyclo Therapeutics” or “Cyclo”), a clinical-stage biotechnology company dedicated to developing life-changing medicines for patients and families living with challenging diseases through its lead therapeutic asset, Trappsol® Cyclo™. We also hold an investment in Day Three Labs, Inc. (“Day Three”), a company which reimagines existing cannabis offerings with pharmaceutical-grade technology and innovation like Unlokt™ to bring to market better, cleaner, more precise and predictable products in the cannabis industry, and a majority interest in Rafael Medical Devices, LLC, an orthopedic-focused medical device company developing instruments to advance minimally invasive surgeries (“Rafael Medical Devices” and Day Three Labs together with the Pharmaceutical Companies, represent our “Investment Companies”). In November 2022, the Company resolved to curtail its early-stage development efforts, including pre-clinical research at Barer. The decision was taken to reduce spending as the Company focuses on exploring strategic opportunities. The Company’s primary focus is to expand our investment portfolio through opportunistic and strategic investments including therapeutics which address high unmet medical needs.
Historically, the Company owned multiple real estate assets. 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. On June 17, 2021, the Company entered into a merger
agreement to acquire full ownership of Cornerstone Pharmaceuticals in exchange for issuing Company Class B common stock to the other stockholders
of Cornerstone Pharmaceuticals ("Merger Agreement" or "Merger"). On October 28, 2021, the Company announced that the
AVENGER 500 Phase 3 clinical trial for CPI-613® (devimistat), Cornerstone Pharmaceuticals’ lead product candidate, did not meet
its primary endpoint of significant improvement in overall survival in patients with metastatic adenocarcinoma of the pancreas. In addition,
following a pre-specified interim analysis, the independent data monitoring committee for the ARMADA 2000 Phase 3 study for devimistat
recommended the trial to be stopped due to a determination that it was unlikely to achieve the primary endpoint (the “Data Events”).
In connection with the preparation of the Company’s financial statements for the first quarter ended October 31, 2021, accounting
principles generally accepted in the United States of America (“U.S. GAAP”) required that the Company assess the impact of
the Data Events and determine whether the carrying values of the Company’s assets were impaired based upon the Company’s expectations
to realize future value. In light of the Data Events, the Company concluded that the likelihood of further development of and prospects
for CPI-613 is uncertain and fully impaired in the first quarter ended October 31, 2021 the value of its loans, receivables, and investment
in Cornerstone Pharmaceuticals based upon its valuation of Cornerstone Pharmaceuticals. On February 2, 2022, the Company terminated the
Merger Agreement with Cornerstone Pharmaceuticals, effective immediately, in accordance with its terms. On March 21, 2023, the Company
loaned $
Cornerstone is in the process of a comprehensive restructuring transaction including, the conversion of the debt under the Line of Credit Agreement and the Promissory Note held by the Company, the conversion and modification of other Cornerstone debt obligations, the extension of the Cornerstone debt held by RP Finance, a reverse stock split, the conversion of all outstanding preferred stock of Cornerstone into common stock and the adoption of certain governance measures. This transaction is subject to a number of conditions which are beyond the Company’s control.
In May 2023, the Company first invested in Cyclo Therapeutics. Cyclo is a clinical stage biotechnology company that develops cyclodextrin-based products for the treatment of neurodegenerative diseases. Cyclo’s lead drug candidate is Trappsol® Cyclo™ (hydroxypropyl beta cyclodextrin), a treatment for Niemann-Pick Type C disease (“NPC”). NPC is a rare and fatal autosomal recessive genetic disease resulting in disrupted cholesterol metabolism that impacts the brain, lungs, liver, spleen, and other organs. In January 2017, the FDA granted Fast Track designation to Trappsol® Cyclo™ for the treatment of NPC. Initial patient enrollment in the U.S. Phase I study commenced in September 2017, and in May 2020 Cyclo announced Top Line data showing a favorable safety and tolerability profile for Trappsol® Cyclo™ in this study. Cyclo is currently conducting a Phase 3 Clinical Trial Evaluating Trappsol® Cyclo™ in Pediatric and Adult Patients with Niemann-Pick Disease Type C1. Refer to Note 9 for more information on the Company's investments in Cyclo.
6
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In 2019, the Company established Barer, a preclinical cancer metabolism research operation, to focus on developing a pipeline of novel therapeutic compounds, including compounds to regulate cancer metabolism with potentially broader application in other indications beyond cancer. Barer has been comprised of scientists and academic advisors that are experts in cancer metabolism, chemistry, and drug development. In addition to its own internal discovery efforts, Barer pursued collaborative research agreements and in-licensing opportunities with leading scientists from top academic institutions. Barer's subsidiary, Farber Partners, LLC (“Farber”), was formed around one such agreement with Princeton University’s Office of Technology Licensing ("Princeton") for technology from the laboratory of Professor Joshua Rabinowitz, in the Department of Chemistry, Princeton University, for an exclusive worldwide license to its SHMT (serine hydroxymethyltransferase) inhibitor program. In November 2022, the Company resolved to curtail its early-stage development efforts, including pre-clinical research at the Barer Institute.
In 2016, the Company first invested in LipoMedix, a privately held Israeli clinical stage pharmaceutical company focused on the development of an innovative, safe and effective cancer therapy based on liposome delivery, and currently holds a majority of the ordinary shares of LipoMedix.
In April 2023, the Company invested in Day Three Labs, the majority-owner of Day three Labs Manufacturing, a company which reimagines existing cannabis offerings with pharmaceutical-grade technology and innovation like Unlokt™ to bring to market better, cleaner, more precise and predictable products in the cannabis industry. Refer to Note 8 for more information on the Company's investment in Day Three.
In May 2021, the Company formed Rafael Medical Devices, an orthopedic-focused medical device company developing instruments to advance minimally invasive surgeries.
The “Company” in these consolidated financial statements refers to Rafael Holdings and its subsidiaries on a consolidated basis.
| Company | Country of Incorporation | Percentage Owned | ||||
| Broad Atlantic Associates, LLC | % | |||||
| IDT R.E. Holdings Ltd. | % | |||||
| Rafael Holdings Realty, Inc. | % | |||||
| Barer Institute, Inc. | %* | |||||
| Hillview Avenue Realty, JV | % | |||||
| Hillview Avenue Realty, LLC | % | |||||
| Rafael Medical Devices, LLC | %***** | |||||
| Levco Pharmaceuticals Ltd. | %*** | |||||
| Farber Partners, LLC | % | |||||
| Pharma Holdings, LLC | % | |||||
| LipoMedix Pharmaceuticals Ltd. | %**** | |||||
| Altira Capital & Consulting, LLC | % | |||||
| CS Pharma Holdings, LLC | %** | |||||
| * |
| ** |
| *** |
| **** |
| ***** |
7
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, which include only normal recurring adjustments, considered necessary for a fair presentation have been included.
The Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal year 2023 refers to the fiscal year ended July 31, 2023).
The accompanying consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with U.S. GAAP. The accompanying consolidated financial statements reflect the activity related to the 520 Property as discontinued operations. Operating results for the three months ended October 31, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2024. The balance sheet at July 31, 2023 has been derived from the Company’s audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2023, or the 2023 Form 10-K, as filed with the U.S. Securities and Exchange Commission (the “SEC”).
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates.
Liquidity
As of October 31, 2023, the Company had cash
and cash equivalents of approximately $
Concentration of Credit Risk and Significant Customers
The Company routinely assesses the financial strength
of its customers. As a result, the Company believes that its accounts receivable credit risk exposure is limited. For the three months
ended October 31, 2023, related parties represented
Cash and Cash Equivalents
The Company considers all liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Reserve for Receivables
The allowance for doubtful accounts reflects the Company’s best
estimate of lifetime credit losses inherent in the accounts receivable balance. The allowance is determined based on known troubled accounts,
historical experience and other currently available evidence. Doubtful accounts are written off upon final determination that the trade
accounts will not be collected. The computation of this allowance is based on the tenants’ or parking customers’ payment histories,
as well as certain industry or geographic specific credit considerations. If the Company’s estimates of collectability differ from
the cash received, then the timing and amount of the Company’s reported revenue could be impacted. The credit risk is mitigated
by the high quality of the Company’s existing tenant base, inclusive of related parties, which represented
8
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Convertible Note Receivable, Related Party
The Convertible Note Receivable is classified as available-for-sale as defined under ASC 320, Investments - Debt and Equity Securities, and is recorded at fair value. Subsequent changes in fair value are recorded in accumulated other comprehensive loss.
The fair value of the Convertible Note Receivable is estimated using a scenario-based analysis based on the probability-weighted present value of future investment returns, considering each of the possible outcomes available to the Company, including cash repayment, equity conversion, and collateral transfer scenarios. Estimating the fair value of the convertible note requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors.
Variable Interest Entities
In accordance with ASC 810, Consolidation, the Company assesses whether it has a variable interest in legal entities in which it has a financial relationship and, if so, whether or not those entities are variable interest entities (“VIEs”). For those entities that qualify as VIEs, ASC 810 requires the Company to determine if the Company is the primary beneficiary of the VIE, and if so, to consolidate the VIE.
If an entity is determined to be a VIE, the Company evaluates whether the Company is the primary beneficiary. The primary beneficiary analysis is a qualitative analysis based on power and economics. The Company consolidates a VIE if both power and benefits belong to the Company – that is, the Company (i) has the power to direct the activities of a VIE that most significantly influence the VIE’s economic performance (power), and (ii) has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE (benefits). The Company consolidates VIEs whenever it is determined that the Company is the primary beneficiary.
Investments
The method of accounting applied to long-term investments in equity securities involves an evaluation of the significant terms of each investment that explicitly grant or suggest evidence of control or influence over the operations of the investee and also include the identification of any variable interests in which the Company is the primary beneficiary. The consolidated financial statements include the Company’s controlled affiliates. All significant intercompany accounts and transactions between the consolidated affiliates are eliminated.
Investments in equity securities may be accounted for using (i) the fair value option, if elected, (ii) fair value through earnings if fair value is readily determinable or (iii) for equity investments without readily determinable fair values, the measurement alternative to measure at cost adjusted for any impairment and observable price changes, as applicable. The election to use the measurement alternative is made for each eligible investment.
The Company has elected the fair value option to account for its investment in Cyclo Therapeutics, as the Company has significant influence over Cyclo's management. The fair value option is irrevocable once elected. The Company measured its initial investment in Cyclo at fair value and shall record all subsequent changes in fair value in earnings in the consolidated statement of operations. The Company believes the fair value option best reflects the underlying economics of the investment. The Company has determined that Cyclo is a VIE; however, the Company has determined that it is not the primary beneficiary as the Company does not have the power to direct the activities of Cyclo that most significantly impact Cyclo's economic performance. See Note 9, “Investments in Cyclo Therapeutics, Inc.”
Investments in which the Company does not have the ability to exercise significant influence over operating and financial matters are accounted for in accordance with ASC 321, Investments - Equity Securities. Investments without readily determinable fair values are accounted for using the measurement alternative which is at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company periodically evaluates its investments for impairment due to declines considered to be other than temporary. If the Company determines that a decline in fair value is other than temporary, then a charge to earnings is recorded in the accompanying consolidated statements of operations and comprehensive loss, and a new basis in the investment is established.
9
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Investments - Hedge Funds
The Company accounts for its investments in hedge funds in accordance with ASC 321, Investments – Equity Securities. Unrealized gains and losses resulting from the change in fair value of these securities is included in unrealized (loss) gain on investments – Hedge Funds in the consolidated statements of operations and comprehensive loss.
Corporate Bonds and US Treasury Bills
The Company’s marketable securities are considered to be available-for-sale as defined under ASC 320, Investments - Debt and Equity Securities, and are recorded at fair value. Unrealized gains or losses are included in accumulated other comprehensive loss. Realized gains or losses are released from accumulated other comprehensive loss and into earnings on the consolidated statements of operations and comprehensive loss.
Effective August 1, 2023, the Company uses a current expected credit loss ("CECL") model to estimate the allowance for credit losses on available-for-sale debt securities. For available-for-sale debt securities in an unrealized loss position, management first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.
If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any decline in fair value that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. No allowance for credit losses was recognized by the Company at October 31, 2023.
Cost Method Investment
The Company has determined that Cornerstone Pharmaceuticals (see Note 4) is a VIE; however, the Company has determined that it is not the primary beneficiary as the Company does not have the power to direct the activities of Cornerstone Pharmaceuticals that most significantly impact Cornerstone Pharmaceuticals’ economic performance.
Equity Method Investments
The Company has determined that each of RP Finance, LLC (“RP Finance”) and Day Three Labs, Inc. (“Day Three”, RP Finance and Day Three, collectively, the “Equity Method Investees” and the Company’s investments in RP Finance and Day Three, collectively, the "Equity Method Investments"), (see Note 6 and Note 8), is a VIE; however, the Company has determined that it is not the primary beneficiary as the Company does not have the power to direct the activities of the Equity Method Investees that most significantly impact the Equity Method Investees' economic performance and, therefore, is not required to consolidate the Equity Method Investees. The Company accounts for the Equity Method Investments using the equity method of accounting.
Long-Lived Assets
| Classification | Years | ||
| Building and improvements | |||
| Tenant improvements | |||
| Other (primarily equipment and furniture and fixtures) |
10
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Properties
On August 22, 2022, Broad Atlantic Associates
LLC, a wholly-owned subsidiary of the Company ("Broad Atlantic"), completed the sale of the 520 Property for a purchase price
of $
The Company owns a portion of the 6th floor of a building located at 5 Shlomo Halevi Street, in Jerusalem, Israel.
Impairment of Long-Lived Assets
The Company assesses the recoverability of long-lived assets, which include property and equipment and in-process research and development and patents whenever significant events or changes in circumstances indicate that its carrying amount may not be recoverable. If indicators of impairment exist, projected future undiscounted cash flows associated with the asset are compared to its carrying amount to determine whether the asset's carrying value is recoverable. Any resulting impairment is recorded as a reduction in the carrying value of the related asset in excess of fair value and a change to operating results. For the three months ended October 31, 2023 and 2022, the Company determined there was no impairment of its long-lived assets.
Assets Held-for-Sale and Discontinued Operations
The Company classifies assets as held-for-sale if all held-for-sale criteria are met pursuant to ASC 360-10, Property, Plant and Equipment. Criteria include management commitment to sell the disposal group in its present condition and the sale being deemed probable of being completed within one year. Assets classified as held-for-sale are not depreciated and are measured at the lower of their carrying amount or fair value less cost to sell. The Company assesses the fair value of a disposal group, less any costs to sell, each reporting period it remains classified as held-for-sale and reports any subsequent changes as an adjustment to the carrying value of the disposal group, as long as the new carrying value does not exceed the initial carrying value of the disposal group.
Strategic changes in the Company’s operations can be considered a discontinued operation if both the operations and cash flows of the discontinued component have been (or will be) eliminated from the ongoing operations of the Company and the Company will not have any significant continuing involvement in the operations of the discontinued component after the disposal transaction. The results of the discontinued operations shall be reflected as a discontinued operation on the consolidated statements of operations and comprehensive loss and prior periods shall be recast to reflect the earnings from discontinued operations. As a result of the agreement to sell the 520 Property, the accompanying consolidated financial statements reflect the activity related to the sale of the 520 Property as discontinued operations. The Company determined that the 520 Property met the held-for-sale and discontinued operations criteria as of July 1, 2022. The 520 Property was disposed of on August 22, 2022. See Note 3 for additional information regarding the results, major classes of assets and liabilities, significant non-cash operating items, and capital expenditures of discontinued operations.
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.
11
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company disaggregates its revenue by source within its consolidated statements of operations and comprehensive loss. As an owner and operator of real estate, the Company derives the majority of its revenue from leasing office and parking space to tenants at its properties. In addition, the Company earns revenue from recoveries from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs. Revenue from recoveries from tenants is recorded together with rental income on the consolidated statements of operations and comprehensive loss which is also consistent with the guidance under ASC 842, Leases.
The revenue derived from the 520 Property, which included leasing office and parking space to the tenants, is presented within discontinued operations in the consolidated statements of operations and comprehensive loss.
Contractual rental revenue is reported on a straight-line basis over the terms of the respective leases. Accrued rental income, included within other assets on the consolidated balance sheets, represents cumulative rental income earned in excess of rent payments received pursuant to the terms of the individual lease agreements.
The Company also earned revenue from parking which was derived primarily from monthly and transient daily parking. The monthly and transient daily parking revenue falls within the scope of ASC 606 and was accounted for at the point in time when control of the goods or services transfers to the customer and the Company’s performance obligation is satisfied, consistent with the Company’s previous accounting.
Research and Development Costs
Research and development costs and expenses incurred by consolidated entities consist primarily of salaries and related personnel expenses, stock-based compensation, fees paid to external service providers, laboratory supplies, costs for facilities and equipment, license costs, and other costs for research and development activities. Research and development expenses are recorded in operating expenses in the period in which they are incurred. Estimates have been used in determining the liability for certain costs where services have been performed but not yet invoiced. The Company monitors levels of performance under each significant contract for external service providers, including the extent of patient enrollment and other activities through communications with the service providers to reflect the actual amount expended.
Contingent milestone payments associated with acquiring rights to intellectual property are recognized when probable and estimable. These amounts are expensed to research and development when there is no alternative future use associated with the intellectual property.
Stock-Based Compensation
The Company accounts for stock-based compensation using the provisions of ASC 718, Stock-Based Compensation, which requires the recognition of the fair value of stock-based compensation. Stock-based compensation is estimated at the grant date based on the fair value of the awards. The Company accounts for forfeitures of grants as they occur. Compensation cost for awards is recognized using the straight-line method over the vesting period. Stock-based compensation is included in general and administrative expense and research and development expense in the consolidated statements of operations and comprehensive loss.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the period in which related temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in its assessment of a valuation allowance. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of such change.
12
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company uses a two-step approach for recognizing
and measuring tax benefits taken or expected to be taken in a tax return. The Company determines whether it is more-likely-than-not that
a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical
merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the Company presumes
that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. Tax positions
that meet the more-likely-than-not recognition threshold are measured to determine the amount of tax benefit to recognize in the financial
statements. The tax position is measured at the largest amount of benefit that is greater than
The Company classifies interest and penalties on income taxes as a component of income tax expense, if any.
Contingencies
The Company accrues for loss contingencies when both (a) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (b) the amount of loss can reasonably be estimated. When the Company accrues for loss contingencies and the reasonable estimate of the loss is within a range, the Company records its best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company accrues the minimum amount in the range. The Company discloses an estimated possible loss or a range of loss when it is at least reasonably possible that a loss may have been incurred.
Fair Value Measurements
Fair value of financial and non-financial assets and liabilities is defined as an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three-tier hierarchy for inputs used to measure fair value, which prioritizes the inputs to valuation techniques used to measure fair value, is as follows:
| ● | Level 1 - quoted prices in active markets for identical assets or liabilities; |
| ● | Level 2 - quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or |
| ● | Level 3 - unobservable inputs for the asset or liability, such as discounted cash flow models or valuations. |
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 Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments, which was codified in Accounting Standards Codification (“ASC”) 326, Financial Instruments - Credit Losses (“ASC 326”). The standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. Because the Company is a smaller reporting company, ASC 326 became effective for the Company for fiscal years beginning after December 15, 2022. As such, the Company adopted ASC 326 effective August 1, 2023, utilizing the modified retrospective transition method. Upon adoption, the Company updated its impairment model to utilize a forward-looking current expected credit losses (“CECL”) model in place of the incurred loss methodology for financial instruments measured at amortized cost, primarily including its accounts receivable. In relation to available-for-sale (“AFS”) debt securities, the guidance eliminates the concept of “other-than-temporary” impairment, and instead focuses on determining whether any impairment is a result of a credit loss or other factors. The adoption of ASC 326 did not have a material impact on our unaudited consolidated financial statements as of the adoption date.
13
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recently Issued Accounting Standards Not Yet Adopted
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies and are adopted by the Company as of the specified effective date. The Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies an issuer’s accounting for convertible instruments by reducing the number of accounting models that require separate accounting for embedded conversion features. ASU 2020-06 also simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification and makes targeted improvements to the disclosures for convertible instruments and earnings-per-share (“EPS”) guidance. This update will be effective for the Company’s fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Entities can elect to adopt the new guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements and intends to adopt the standard as of August 1, 2024.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”), which clarifies the guidance in Accounting Standards Codification Topic 820, Fair Value Measurement (“Topic 820”), when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. ASU 2022-03 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
NOTE 3 – DISCONTINUED OPERATIONS
On July 1, 2022, the Company determined that the 520 Property met the held-for-sale criteria and the Company therefore classified the 520 Property as held-for-sale in the consolidated balance sheets at July 31, 2022. The sale of the 520 Property also represented a significant strategic shift that will have a major effect on the Company's operations and financial results. Therefore, the Company has classified the results of operations related to the 520 Property as discontinued operations in the consolidated statements of operations and comprehensive loss. Depreciation on the 520 Property ceased on July 1, 2022, as a result of the 520 Property being classified as held-for-sale.
On August 22, 2022, Broad Atlantic completed the
sale of the 520 Property for an aggregate gross purchase price of $
The 520 Property was encumbered by a mortgage
securing a $
Discontinued operations include (i) rental and parking revenues, (ii) payroll, benefits, facility costs, real estate taxes, consulting and professional fees dedicated to the 520 Property, (iii) depreciation and amortization expenses and (iv) interest (including amortization of debt issuance costs) on the note payable on the 520 Property. The operating results of these items are presented in our consolidated statements of operations and comprehensive loss as discontinued operations for all periods presented.
14
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Three Months Ended October 31, | ||||
| 2022 | ||||
| Revenue from discontinued operations: | ||||
| Rental – Third Party | $ | |||
| Rental – Related Party | ||||
| Parking | ||||
| Total revenue from discontinued operations | ||||
| Costs and expenses from discontinued operations: | ||||
| General and administrative | ||||
| Loss from discontinued operations | ||||
| Interest expense | ( | ) | ||
| Loss from discontinued operations | ( | ) | ||
| Gain on disposal of discontinued operations | ||||
| Gain from discontinued operations | $ | |||
The gain on disposal of discontinued operations
of approximately $
NOTE 4 – INVESTMENT IN CORNERSTONE PHARMACEUTICALS
Equity Investment in Cornerstone Pharmaceuticals and Impairment of Cost Method Investment
Cornerstone Pharmaceuticals is a clinical stage, cancer metabolism-based therapeutics company focused on the development and commercialization of therapies that exploit the metabolic differences between normal cells and cancer cells.
The Company owns debt and equity interests and
rights in Cornerstone Pharmaceuticals through a
Pharma Holdings owns
A trust for the benefit of the children of Howard
Jonas (Chairman of the Board and Executive Chairman and former Chief Executive Officer of the Company and Member of the Board of Cornerstone
Pharmaceuticals) holds a financial instrument (the “Instrument”) that owns
Pharma Holdings holds
CS Pharma holds
15
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Series D Convertible Preferred Stock has a
stated value of $
The Company serves as the managing member of Pharma
Holdings, and Pharma Holdings serves as the managing member of CS Pharma, with broad authority to make all key decisions regarding their
respective holdings. Any distributions that are made to CS Pharma from Cornerstone Pharmaceuticals that are in turn distributed by CS
Pharma, will need to be made pro rata to all members, which would entitle Pharma Holdings to
The Company evaluated its investments in Cornerstone Pharmaceuticals in accordance with ASC 323, Investments - Equity Method and Joint Ventures, to establish the appropriate accounting treatment for its investment and has concluded that its investment did not meet the criteria for the equity method of accounting or consolidation and is carried at cost.
The Company has determined that Cornerstone Pharmaceuticals is a VIE; however, the Company has determined that it is not the primary beneficiary as it does not have the power to direct the activities of Cornerstone Pharmaceuticals that most significantly impact Cornerstone Pharmaceuticals’ economic performance. In addition, the interests held in Cornerstone Pharmaceuticals are Series D Convertible Preferred Stock and do not represent in-substance common stock.
The Instrument holds a contractual right to receive
additional shares of Cornerstone Pharmaceuticals capital stock equal to
The Company currently owns
Line of Credit to Cornerstone Pharmaceuticals and Impairment of Related Receivable
On September 24, 2021, the Company entered into
a Line of Credit Loan Agreement (the “Line of Credit Agreement”) with Cornerstone Pharmaceuticals under which Cornerstone
Pharmaceuticals borrowed $
Due to the Data Events, the Company recorded a
full reserve on the amounts due the Company from Cornerstone Pharmaceuticals related to the Line of Credit Agreement for $
Planned Restructuring
Cornerstone is in the process of a comprehensive restructuring transaction including, the conversion of the debt under the Line of Credit Agreement and the Promissory Note held by the Company, the conversion and modification of other Cornerstone debt obligations, the extension of the Cornerstone debt held by RP Finance, a reverse stock split, the conversion of all outstanding preferred stock of Cornerstone into common stock and the adoption of certain governance measures. This transaction is subject to a number of conditions which are beyond the Company’s control.
16
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 – CONVERTIBLE NOTE RECEIVABLE, RELATED PARTY
On March 21, 2023, the Company loaned $
The Promissory Note is secured by a first priority security interest in all of Cornerstone’s right, title and interest in and to all of the tangible and intangible assets purchased by Cornerstone pursuant to the Purchase Agreement between Cornerstone and Calithera Biosciences, Inc. (“Calithera”), a clinical-stage, precision oncology biopharmaceutical company developing targeted therapies to redefine treatment for biomarker-specific patient populations, and all proceeds therefrom and all rights to the data related to CB-839 (the “Collateral”).
The interest on the Promissory Note accrues from
the issuance date until the Promissory Note is paid in full or converted, which shall accrue on a quarterly basis. Subject to the amendment
described above, in the event the total outstanding amount under the Promissory Note is not repaid by the amended maturity date, the rate
of interest shall be eleven percent (
The entire (and not less than the entire) outstanding principal amount due under the Promissory Note together with all accrued unpaid interest thereon and other amounts owing thereunder (together, the “Owed Amount”), may, at Cornerstone’s election at any time prior to the maturity date, be converted into a number of shares (the “Conversion Shares”) calculated by dividing the entire Owed Amount by the conversion price used by Cornerstone in a Qualified Offering/Conversion (as defined in the Promissory Note), and if no such Qualified Offering/Conversion has been consummated, the fair market value for the Conversion as determined by an independent third party valuation firm (the “Conversion Price”).
The Promissory Note contains certain trigger events
(as defined in the Promissory Note) that generally, if uncured within five (5) trading days, may result in an event of default in accordance
with the terms of the Promissory Note (such event, an “Event of Default”). Upon an Event of a Default, the Company may consider
the Promissory Note immediately due and payable. Upon an Event of Default, the interest rate may also be increased to the lesser of
The Company recorded the Promissory Note at fair
value as the security is classified as available-for-sale. Subsequent changes in fair value are recorded in unrealized gain or loss on
available-for-sale securities as a component of other comprehensive income (loss) in the consolidated statements of operations and comprehensive
loss.
| October 31, 2023 | Amortized cost | Gross unrealized gains | Gross unrealized (losses) | Fair value | ||||||||||||
| (in thousands) | ||||||||||||||||
| Convertible note receivable, related party | $ | $ | $ | ( | ) | $ | ||||||||||
| July 31, 2023 | Amortized cost | Gross unrealized gains | Gross unrealized (losses) | Fair value | ||||||||||||
| (in thousands) | ||||||||||||||||
| Convertible note receivable, related party | $ | $ | $ | ( | ) | $ | ||||||||||
Interest income on the Promissory Note totaled
approximately $
17
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – INVESTMENT IN RP FINANCE, LLC
On February 3, 2020, Cornerstone Pharmaceuticals
entered into a Line of Credit with RP Finance ("RPF Line of Credit") which provides a revolving commitment of up to $
Under the RPF Line of Credit, all funds borrowed will bear interest at the mid-term Applicable Federal Rate published by the U.S. Internal Revenue Service. The maturity date is the earliest of February 3, 2025, upon a change of control of Cornerstone Pharmaceuticals or a sale of Cornerstone Pharmaceuticals or its assets. Cornerstone Pharmaceuticals can draw on the facility on 60 days’ notice. The funds borrowed under the RPF Line of Credit must be repaid out of certain proceeds from equity sales by Cornerstone Pharmaceuticals.
In connection with entering into the RPF Line
of Credit, Cornerstone Pharmaceuticals agreed to issue to RP Finance shares of its common stock representing
The Company has determined that RP Finance is
a VIE; however, the Company has determined that it is not the primary beneficiary as the Company does not have the power to direct the
activities of RP Finance that most significantly impact RP Finance’s economic performance and, therefore, is not required to consolidate
RP Finance. Therefore, the Company will use the equity method of accounting to record its investment in RP Finance. As of October 31,
2023 and July 31, 2023, the equity method investment on the Company's balance sheet was $
As of October 31, 2023 and July 31, 2023, the
Company has funded a cumulative total of $
NOTE 7 – INVESTMENT IN LIPOMEDIX PHARMACEUTICALS LTD.
LipoMedix is a development-stage, privately held Israeli company focused on the development of an innovative, safe and effective cancer therapy based on liposome delivery.
As of October 31, 2023, the Company held
In March 2021, the Company provided bridge financing
in the principal amount of up to $
On November 15, 2021, the Company entered into
a share purchase agreement with LipoMedix to purchase up to
As of the date of the LipoMedix SPA, there was
an outstanding loan balance including principal of $
On February 9, 2023, the Company entered into
a Share Purchase Agreement with LipoMedix to purchase
18
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 – INVESTMENT IN DAY THREE LABS INC.
On April 7, 2023, the Company entered into a Common
Stock Purchase Agreement (the “Day Three Purchase Agreement”) with Day Three. Day Three is a company which reimagines existing
cannabis offerings with pharmaceutical-grade technology and innovation like Unlokt™ to bring to market better, cleaner, more precise
and predictable products in the cannabis industry. Pursuant to the Day Three Purchase Agreement, the Company purchased
The Company has accounted for this investment
as an equity method investment in accordance with the guidance in ASC 323, Investments – Equity Method and Joint Ventures.
The Company determined that a
The Company has determined that Day Three is a VIE; however, the Company is not the primary beneficiary as it does not have the power to direct the activities that most significantly impact Day Three’s economic performance. The Company has therefore concluded it is not required to consolidate Day Three. The Company uses the equity method of accounting to record its investment in Day Three.
Day Three’s fiscal year ends on December
31, and as a result, the Company will recognize its share of Day Three’s earnings/loss on a one-month lag. For the three months
ended October 31, 2023, the Company recognized approximately $
On October 10, 2023, the Company entered into
a Promissory Note (the "Day Three Note") with Day Three for $
Subsequent to quarter end, on November 30, 2023,
the Company advanced another $
NOTE 9 – INVESTMENT IN CYCLO THERAPEUTICS, INC.
On May 2, 2023,
the Company entered into a Securities Purchase Agreement (the “Cyclo SPA”) with Cyclo. Cyclo is a clinical-stage biotechnology
company dedicated to developing life-changing medicines for patients and families living with challenging diseases through its lead therapeutic
asset, Trappsol®.
On August 1, 2023, pursuant to a Securities Purchase
Agreement (the “Cyclo II SPA”) dated June 1, 2023, the Company purchased an additional
Cyclo and the Company are party to a Registration Rights Agreement requiring Cyclo to file a registration statement with the Securities and Exchange Commission to register the resale of the shares and shares of common stock underlying the May Warrant, upon the request of Rafael.
19
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
William Conkling, Rafael's CEO, serves on Cyclo’s Board of Directors.
On October 20, 2023, the Company exercised the
May Warrant to purchase
The Company has determined that Cyclo is a VIE;
however, the Company has determined that it is not the primary beneficiary as the Company does not have the power to direct the activities
of Cyclo that most significantly impact Cyclo’s economic performance and, therefore, is not required to consolidate Cyclo. The Company
has elected to account for its investment in Cyclo under the fair value option, with subsequent changes in fair value recognized as unrealized
gain (loss) in the consolidated statements of operations and comprehensive loss. During the three months ended October 31, 2023, the Company
recognized an unrealized loss of $
| Ownership % | Aggregate (in thousands) | |||||||
| October 31, 2023 | October 31, 2023 | |||||||
| Cyclo | % | $ | ||||||
The
NOTE 10 – INVESTMENTS IN MARKETABLE SECURITIES
The Company has classified its investments in corporate bonds and U.S. treasury bills as available-for-sale securities. These securities are carried at estimated fair value with unrealized holding gains and losses included in accumulated other comprehensive loss in stockholders’ equity until realized. Investment transactions are recorded on their trade date. Gains and losses on marketable security transactions are reported on the specific-identification method. Interest income is accrued daily and adjusted for amortization of premiums and accretion of discounts on the corporate bonds and U.S. treasury bills.
| October 31, 2023 | Amortized cost | Gross unrealized gains | Gross unrealized (losses) | Fair value | ||||||||||||
| (in thousands) | ||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||
| U.S. Treasury Bills | $ | $ | $ | ( | ) | $ | ||||||||||
| U.S. Agency | ( | ) | ||||||||||||||
| Corporate bonds | ( | ) | ||||||||||||||
| Total available-for-sale securities | $ | $ | $ | ( | ) | $ | ||||||||||
| July 31, 2023 | Amortized cost | Gross unrealized gains | Gross unrealized (losses) | Fair value | ||||||||||||
| (in thousands) | ||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||
| U.S. Treasury Bills | $ | $ | $ | $ | ||||||||||||
| Corporate bonds | ( | ) | ||||||||||||||
| Total available-for-sale securities | $ | $ | $ | ( | ) | $ | ||||||||||
20
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the three months ended October 31, 2023
and 2022, respectively, the Company reclassified approximately $
Maturities of corporate bonds and U.S. Treasury Bills held as of October 31, 2023 were all due within one year.
Marketable securities in an unrealized loss position as of October 31, 2023 and July 31, 2023 were not deemed impaired at acquisition. Effective August 1, 2023, the Company evaluates subsequent unrealized losses to determine whether the decline in fair value has resulted from credit losses or other factors. No such credit losses have been identified during the three months ended October 31, 2023.
NOTE 11 – FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
| ● | Level 1 - quoted prices in active markets for identical assets or liabilities; |
| ● | Level 2 - quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or |
| ● | Level 3 - unobservable inputs for the asset or liability, such as discounted cash flow models or valuations. |
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
| October 31, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | (in thousands) | |||||||||||||||
| Available-for-sale securities - Corporate Bonds | $ | $ | $ | $ | ||||||||||||
| Available-for-sale securities - U.S. Treasury Bills | ||||||||||||||||
| Investment in Cyclo Therapeutics Inc. - Common Stock | ||||||||||||||||
| Investment in Cyclo Therapeutics Inc. - Warrants | ||||||||||||||||
| Hedge funds | ||||||||||||||||
| Convertible note receivable, related party | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| July 31, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | (in thousands) | |||||||||||||||
| Available-for-sale securities - Corporate Bonds | $ | $ | $ | $ | ||||||||||||
| Available-for-sale securities - U.S. Treasury Bills | ||||||||||||||||
| Investment in equity securities | ||||||||||||||||
| Investment in Cyclo Therapeutics Inc. - Common Stock | ||||||||||||||||
| Investment in Cyclo Therapeutics Inc. - Warrants | ||||||||||||||||
| Hedge funds | ||||||||||||||||
| Convertible note receivable, related party | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
As of October 31, 2023 and 2022, the Company did not have any liabilities measured at fair value on a recurring basis.
21
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Three Months Ended October 31, | ||||||||
| 2023 | 2022 | |||||||
| (in thousands) | ||||||||
| Balance, beginning of period | $ | $ | ||||||
| Withdrawal from Hedge Fund Investments | ( | ) | ||||||
| Unrealized loss on Hedge Fund | ( | ) | ( | ) | ||||
| Investment in Cyclo Warrants | ||||||||
| Unrealized loss on Cyclo Warrants | ( | ) | ||||||
| Unrealized loss on Convertible Note Receivable, Related Party | ( | ) | ||||||
| Balance, end of period | $ | $ | ||||||
Hedge funds classified as Level 3 include investments
and securities which may not be based on readily observable data inputs. The availability of observable inputs can vary from security
to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and
not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. The fair value
of these assets is estimated based on information provided by the fund managers or the general partners. Therefore, these assets are classified
as Level 3. During the three months ended October 31, 2023, the Company requested a withdrawal from Hedge Fund Investments of $
Available-for-sale securities classified as Level 3 include a convertible note receivable, related party (see Note 5) which may not be based on readily observable data inputs. The availability of observable inputs can vary and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. The fair value of this asset is estimated using a scenario-based analysis based on the probability-weighted present value of future investments returns, considering each of the possible outcomes available to us, including cash repayment, equity conversion, and collateral transfer scenarios. Estimating the fair value of the convertible note requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. Therefore, this asset is classified as Level 3.
The Company recognizes the fair value of the Cyclo Warrants utilizing a Black-Scholes option-pricing valuation model (“Black-Scholes model”) at acquisition and each reporting date. The application of the Black-Scholes model utilizes significant assumptions, including expected volatility, expected life and risk-free interest rate. In order to determine the volatility, we measured expected volatility based on several inputs, including considering a peer group of publicly traded companies and the implied volatility of the Company's publicly-traded warrants. As a result of the unobservable inputs that were used to determine the expected volatility of the Cyclo Warrants, the fair value measurement of these warrants reflected a Level 3 measurement within the fair value measurement hierarchy. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The expected volatility is a key assumption or input to the valuation of the Cyclo Warrants, however changes in the expected volatility assumption will have less of an effect on the Black-Scholes model valuation as the Cyclo Warrants approach their expiration. Both of the Cyclo Warrants are subject to limits on exercise and any sales of the underlying shares of common stock would be subject to volume restrictions for which a discount to the stock price of Cyclo was applied. The Black-Scholes model further incorporated a discount for the overall lack of marketability for the Cyclo Warrants.
22
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Unobservable Input | Range | Weighted Average | ||
| Price Per Share [1] | $ | $ | ||
| Exercise Price | $ | $ | ||
| Expected Volatility | ||||
| Risk - Free Rate [2] | ||||
| Marketability Discount | ||||
| Remaining Term | ||||
| Fair Value per Warrant [3] | $ | $ |
| [1] |
| [2] |
| [3] |
The Company holds $
Fair Value of Other Financial Instruments
The estimated fair value of the Company’s other financial instruments was determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting these data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.
The Company’s financial instruments include trade accounts receivable, trade accounts payable, and due from related parties. The recorded carrying amounts of accounts receivable, accounts payable and due to related parties approximate their fair value due to their short-term nature.
NOTE 12 – ACCOUNTS RECEIVABLE
| October 31, 2023 | July 31, 2023 | |||||||
| (in thousands) | ||||||||
| Accounts receivable - third party | $ | $ | ||||||
| Accounts receivable - related party | ||||||||
| Less allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
NOTE 13 – PROPERTY AND EQUIPMENT
| October 31, | July 31, | |||||||
| 2023 | 2023 | |||||||
| (in thousands) | ||||||||
| Building and improvements | $ | $ | ||||||
| Other | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Other property and equipment consist of other equipment and miscellaneous computer hardware.
Depreciation expense pertaining to property and
equipment was approximately $
23
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 14 – 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 in the table below have been excluded from the calculation of diluted net loss per share for the three months ended October 31, 2023 and 2022 because inclusion of all such securities would have been anti-dilutive for all periods presented.
| Three Months Ended October 31, | ||||||||
| 2023 | 2022 | |||||||
| Shares issuable upon exercise of stock options | ||||||||
| Shares issuable upon vesting of restricted stock | ||||||||
The diluted loss per share computation equals basic loss per share for the three months ended October 31, 2023 and 2022 because the Company had a net loss from continuing operations in all such periods and the impact of the assumed vesting of restricted shares, and exercise of stock options, and warrants would have been anti-dilutive.
| Three Months Ended October 31, | ||||||||
| 2023 | 2022 | |||||||
| Numerator: | ||||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Net loss attributable to noncontrolling interests | ( | ) | ( | ) | ||||
| Numerator for net loss from continuing operations | ( | ) | ( | ) | ||||
| Numerator for discontinued operations | ||||||||
| Net loss attributable to Rafael Holdings, Inc. | $ | ( | ) | $ | ||||
| Denominator: | ||||||||
| Loss per share attributable to common stockholders | ||||||||
| Basic and diluted: | ||||||||
| $ | ( | ) | $ | ( | ) | |||
| $ | ( | ) | $ | |||||
24
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 15 – NOTE PAYABLE, HELD-FOR-SALE
On July 9, 2021, the Company, as guarantor, Rafael
Holdings Realty, Inc., a wholly-owned subsidiary of the Company (“Realty”), as pledgor, and Broad-Atlantic, a wholly-owned
subsidiary of Realty (the “Borrower,” and together with the Company and Realty, the “Borrower Parties”), as borrower,
entered into a loan agreement (the “Loan Agreement”) with 520 Broad Street LLC, a third-party lender (the “Lender”).
The Loan Agreement provided for a loan in the amount of $
The Loan
Agreement contained customary affirmative covenants, negative covenants and events of default, as defined in the Loan Agreement, including
covenants and restrictions that, among other things, restricted the Borrower’s ability to incur liens, or transfer, lease or sell
the collateral as defined in the Loan Agreement. A failure to comply with these covenants would have permitted the Lender to declare the
Borrower’s obligations under the Loan Agreement, together with accrued interest and fees, to be immediately due and payable. The
Company was in compliance with the covenants in the Loan Agreement as of July 31, 2022. The Company extended the maturity date
to
In connection with the sale of the 520 Property,
on August 22, 2022, the Company paid off the outstanding principal balance of $
Interest expense under the Note Payable, which
is recognized in loss on discontinued operations, amounted to $
NOTE 16 – RELATED PARTY TRANSACTIONS
IDT Corporation
The Company has historically maintained an intercompany
balance due to/from related parties that relates to cash advances for investments, loan repayments, charges for services provided to the
Company by IDT and payroll costs for the Company’s personnel that were paid by IDT. IDT billed the Company approximately $
IDT leased, prior to the Company's sale of the
property, approximately
Cornerstone Pharmaceuticals
On March 21, 2023, the Company entered into a
Promissory Note with Cornerstone Pharmaceuticals, wherein, Cornerstone Pharmaceuticals promises to pay the Company $
Genie Energy, Ltd.
The Company leased office space at 520 Broad Street
to Genie. The Company invoiced Genie approximately $
25
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Related Party Rental Income
The Company leased space to related parties (including
IDT Corporation - see above) which represented approximately
Howard Jonas, Chairman of the Board, Former Chief Executive Officer
In December 2020, IDT Corporation and Genie Energy
Ltd, 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
On July 6, 2022, pursuant to a Stock Purchase
Agreement (the "I9 SPA”) dated June 22, 2022 with I9 Plus, LLC, an entity affiliated with members of the family of Howard Jonas,
the Company sold
On July 31, 2023, eight trusts, each for the benefit
of a child of Howard S. Jonas, the Company’s Executive Chairman and Chairman of the Board, with independent trustees, transferred
an aggregate of
In September 2023, Howard Jonas became the interim Chief Executive Officer of Cornerstone Pharmaceuticals.
LipoMedix Pharmaceuticals, Ltd.
On February 9, 2023, the Company entered into
a share purchase agreement with LipoMedix to purchase
NOTE 17 – INCOME TAXES
During the three months ended October 31, 2023
and 2022, the Company recognized an income tax provision of $
26
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 18 – BUSINESS SEGMENT INFORMATION
The Company conducts business as
The accounting policies of the segments are the same as the accounting policies of the Company as a whole. The Company evaluates the performance of its Healthcare segment based primarily on research and development efforts and results of clinical trials and the Real Estate segment based primarily on results of operations.
The Healthcare segment is comprised of a majority equity interest in LipoMedix, 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, which is currently comprised of a portion of a commercial building in Israel. The revenue, and (loss) income from operations of the 520 Property have been excluded from the Real Estate segment in the figures below due to its classification of held-for-sale and discontinued operations, and the sale of the 520 Property on August 22, 2022.
| (in thousands) | Healthcare | Real Estate | Total | |||||||||
| Three Months Ended October 31, 2023 | ||||||||||||
| Revenues | $ | $ | $ | |||||||||
| (Loss) income from operations | ( | ) | ( | ) | ||||||||
| Three Months Ended October 31, 2022 | ||||||||||||
| Revenues | $ | $ | $ | |||||||||
| (Loss) income from operations | ( | ) | ( | ) | ||||||||
Total assets by segment is not provided to or reviewed by the CODM.
Geographic Information
| Three Months Ended October 31, | 2023 | 2022 | ||||||
| Revenue from tenants located in Israel | % | % | ||||||
| (in thousands) | United States | Israel | Total | |||||||||
| October 31, 2023 | ||||||||||||
| Property, plant, and equipment, net | $ | $ | $ | |||||||||
| Total assets | ||||||||||||
| July 31, 2023 | ||||||||||||
| Property, plant, and equipment, net | $ | $ | $ | |||||||||
| Total assets | ||||||||||||
27
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 19 – 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.
NOTE 20 – EQUITY
Share Repurchase Program
In April 2023, the Company’s Board of Directors
approved a share repurchase program (the “2023 Share Repurchase Program”) authorizing the repurchase of up to $
The timing and amount of any share repurchases under the 2023 Share Repurchase Program will be determined at the Company's discretion and based on market conditions and other considerations. Share repurchases under the authorizations may be made through open market purchases or pursuant to pre-set trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934. The program does not obligate the Company to acquire any particular amount of its Class B common stock, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion.
During the three months ended October 31, 2023,
the Company repurchased
Class A Common Stock and Class B Common Stock
The rights of holders of Class A common stock and Class B common stock are identical except for certain voting and conversion rights and restrictions on transferability. The holders of Class A common stock and Class B common stock receive identical dividends per share when and if declared by the Company’s Board of Directors. In addition, the holders of Class A common stock and Class B common stock have identical and equal priority rights per share in liquidation. The Class A common stock and Class B common stock do not have any other contractual participation rights. The holders of Class A common stock are entitled to three votes per share and the holders of Class B common stock are entitled to one-tenth of a vote per share. Each share of Class A common stock may be converted into one share of Class B common stock, at any time, at the option of the holder. Shares of Class A common stock are subject to certain limitations on transferability that do not apply to shares of Class B common stock.
On May 27, 2021, the Company filed a Registration
Statement on Form S-3, whereby the Company may sell up to $
On June 1, 2021, the Company filed a Registration
Statement on Form S-3 to issue
On August 19, 2021, the Company entered into a
Securities Purchase Agreement (the "Institutional Purchase Agreement") with certain third party institutional investors (the
"Institutional Investors") and a Securities Purchase Agreement with I9Plus, LLC, (the "Jonas Purchase Agreement"),
an entity affiliated with Howard S. Jonas, the Chairman of the Board of Directors of the Company.
28
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
The 2018 Equity Incentive Plan was created and
adopted by the Company in March 2018. On January 19, 2022, the Company's stockholders approved the 2021 Equity Incentive Plan (the “2021
Plan”). The 2018 Equity Incentive Plan was suspended and replaced by the 2021 Plan, and, following January 19, 2022, no new grants
are to be awarded under the 2018 Equity Incentive Plan. Existing grants under the 2018 Equity Incentive Plan will not be impacted by the
adoption of the 2021 Plan. Any of the Company’s employees, directors, consultants, and other service providers, and those of the
Company’s affiliates, are eligible to participate in the 2021 Plan. In accordance with applicable tax rules, only employees (and
the employees of parent or subsidiary corporations) are eligible to be granted incentive stock options. The 2021 Plan authorizes stock
options (both incentive stock options or non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units,
and cash or other stock-based awards. On January 19, 2022, the Company filed a Registration Statement on Form S-8 registering
On February 15, 2022, the Company filed a Registration Statement on Form S-3 (as amended on March 2, 2022) registering the resale by the Institutional Investors of the shares purchased by them. The Registration Statement was declared effective on March 7, 2022.
On July 6, 2022, pursuant to the I9 SPA dated
June 22, 2022 with I9 Plus, LLC, an entity affiliated with members of the family of Howard Jonas, the Company sold
Employment Agreement
On June 13, 2022, the Company entered into an
employment agreement with Howard S. Jonas (who serves as the Chairman of the Board and Executive Chairman of the Company) (the “Employment
Agreement”), which provides, among other things: (i) a term of
Stock Options
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding at July 31, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Expired | ||||||||||||||||
| Cancelled / Forfeited | ||||||||||||||||
| Outstanding at October 31, 2023 | $ | $ | ||||||||||||||
| Exercisable at October 31, 2023 | $ | $ | ||||||||||||||
At October 31, 2023, there is unrecognized
compensation costs related to non-vested stock options of $
29
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Rafael Medical Devices Stock Options
The Rafael Medical Devices, LLC 2022 Equity Incentive
Plan (the "RMD 2022 Plan") was created and adopted by the Company in May 2022. The RMD 2022 Plan allows for the issuance of
up to
In connection with the conversion of Rafael Medical
Devices from a Delaware corporation to a Delaware limited liability company, Rafael Medical Devices adopted the Rafael Medical Devices,
LLC 2023 Equity Incentive Plan (the “RMD 2023 Plan”) in August 2023. The RMD 2023 Plan allows for issuance of up to
Rafael Medical Devices, LLC records compensation expense for stock-based awards based upon an assessment of the grant date fair value for options using the Black-Scholes option pricing model. The expected term was determined according to the simplified method, which is the average of the vesting tranche dates and the contractual term. Due to the lack of company specific historical and implied volatility data, the estimate of expected volatility is primarily based on the historical volatility of a group of similar companies that are publicly traded. For these analyses, characteristics from comparable companies are selected, including enterprise value and position within the industry, and with historical share price information sufficient to meet the expected life of the share-based awards. The risk-free interest rate is determined by reference to the U.S. Treasury Constant Maturity Treasury rates with remaining maturities similar to the expected term of the options. Expected dividend yield is zero as Rafael Medical Devices, LLC has never paid cash dividends and does not expect to pay cash dividends in the foreseeable future.
| Risk-free interest rate | ||||
| Expected term (in years) | ||||
| Expected volatility | ||||
| Expected dividend yield |
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding at July 31, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Cancelled / Forfeited | ( | ) | ||||||||||||||
| Outstanding at October 31, 2023 | $ | $ | ||||||||||||||
| Exercisable at October 31, 2023 | $ | $ | ||||||||||||||
The weighted average grant date fair value per
unit for the RMD option grants during the three months ended October 31, 2023 was $
30
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Restricted Stock
The fair value of restricted shares of the Company’s Class B common stock is determined based on the closing price of the Company’s Class B common stock on the grant date. Share awards generally vest on a graded basis over three years of service.
In January 2022, the Company granted
On February 1, 2022, the Company issued
On June 14, 2022, the Company issued
In January 2023, the Company issued
During January 2023,
In connection with Patrick Fabbio’s January
27, 2023 departure as the Company's Chief Financial Officer, the Company and Mr. Fabbio entered into a Separation and General Release
Agreement (the “Separation Agreement”), which provides, among other things, that the Company shall pay Mr. Fabbio severance
in the amount of $
In connection with the termination of Mr. Fabbio’s
position as Chief Financial Officer of the Company, there was a material forfeiture of his Class B restricted shares and stock options
resulting in a reversal of approximately $
On August 28, 2023, the Company issued
On October 25, 2023, the Company issued
| Number of Non-vested Shares | Weighted Average Grant Date Fair Value | |||||||
| Outstanding at July 31, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Non-vested shares at October 31, 2023 | $ | |||||||
At October 31, 2023, there was $
31
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| For the Three Months Ended, October 31 | ||||||||
| 2023 | 2022 | |||||||
| General and administrative | $ | $ | ||||||
| Research and development | ||||||||
| Net stock-based compensation expense | $ | $ | ||||||
Securities Purchase Agreement
On December 7, 2020, Rafael Holdings entered into
a Securities Purchase Agreement (the “SPA”) for the sale of
Approximately $
Equity-classified Warrants
In connection with the SPA entered into on December
7, 2020, each purchaser was granted warrants to purchase twenty percent (
On June 6, 2022, the Company's outstanding warrants
to purchase
NOTE 21 – LEASES
| Three months ending October 31, | Related Parties | Other | Total | |||||||||
| (in thousands) | ||||||||||||
| 2024 | $ | $ | $ | |||||||||
| 2025 | ||||||||||||
| Total Minimum Future Rental Income | $ | $ | $ | |||||||||
NOTE 22 – SUBSEQUENT EVENTS
The Company evaluated subsequent events through the date of issuance of the unaudited consolidated financial statements included herein. There have been no subsequent events that occurred during such period other than those disclosed above.
32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Rafael Holdings, Inc. (NYSE:RFL), (“Rafael Holdings”, “we” or the “Company”), a Delaware corporation, is a holding company with interests in clinical and early-stage pharmaceutical companies (the “Pharmaceutical Companies”), including an investment in Cornerstone Pharmaceuticals, Inc., formerly known as Rafael Pharmaceuticals Inc., a cancer metabolism-based therapeutics company, a majority equity interest in LipoMedix Pharmaceuticals Ltd. (“LipoMedix”), a clinical stage pharmaceutical company, the Barer Institute Inc. (“Barer”), a wholly-owned preclinical cancer metabolism research operation, and an investment in Cyclo Therapeutics, Inc. (Nasdaq: CYTH) (“Cyclo Therapeutics” or “Cyclo), a clinical-stage biotechnology company dedicated to developing life-changing medicines for patients and families living with challenging diseases through its lead therapeutic asset, Trappsol® Cyclo™. We also hold an investment in Day Three Labs, Inc. (“Day Three”), a company which reimagines existing cannabis offerings with pharmaceutical-grade technology and innovation like Unlokt™ to bring to market better, cleaner, more precise and predictable products in the cannabis industry, and a majority interest in Rafael Medical Devices, LLC, an orthopedic-focused medical device company developing instruments to advance minimally invasive surgeries (“Rafael Medical Devices” and Day Three Labs together with the Pharmaceutical Companies, represent our “Investment Companies”). In November 2022, the Company resolved to curtail its early-stage development efforts, including pre-clinical research at Barer. The decision was taken to reduce spending as the Company focuses on exploring strategic opportunities. The Company’s primary focus is to expand our investment portfolio through opportunistic and strategic investments including therapeutics which address high unmet medical needs.
The Company holds debt and equity investments in Cornerstone, that include preferred and common equity interests. On June 17, 2021, the Company entered into a merger agreement to acquire full ownership of Cornerstone in exchange for issuing Company Class B common stock to the other stockholders of Cornerstone ("Merger Agreement" or "Merger"). On October 28, 2021, the Company announced that the AVENGER 500 Phase 3 clinical trial for CPI-613® (devimistat), Cornerstone's lead product candidate, did not meet its primary endpoint of significant improvement in overall survival in patients with metastatic adenocarcinoma of the pancreas. In addition, following a pre-specified interim analysis, the independent data monitoring committee for the ARMADA 2000 Phase 3 study for devimistat recommended the trial to be stopped due to a determination that it was unlikely to achieve the primary endpoint (the “Data Events”). In light of the Data Events, the Company concluded that the prospects for CPI-613 were uncertain and fully impaired in its financial statements for the year ended July 31, 2022, the value of its loans, receivables, and investment in Cornerstone based upon its valuation of Cornerstone.
On September 24, 2021, the Company entered into a Line of Credit Loan Agreement (the “Line of Credit Agreement”) with Cornerstone under which Cornerstone borrowed $25 million from the Company. Due to the Data Events, the Company recorded a full reserve on the $25 million due the Company from Cornerstone.
On February 2, 2022, the Company terminated the Merger Agreement with Cornerstone Pharmaceuticals, effective immediately, in accordance with its terms.
On March 21, 2023, the Company loaned $2.0 million to Cornerstone which debt is represented by a Promissory Note made by Cornerstone (the "Promissory Note"). The Promissory Note, which bears interest at a rate of seven and one-half percent (7.5%) per annum, was originally due and payable on May 22, 2023. On May 22, 2023, the Promissory Note was amended to extend the maturity date to November 30, 2023 and to waive any increase in the interest rate provided for in the Promissory Note, provided that the entire principal amount and all accrued interest thereon is repaid in cash or converted into equity securities of Cornerstone no later than November 30, 2023.
Cornerstone is in the process of a comprehensive restructuring transaction including, the conversion of the debt under the Line of Credit Agreement and the Promissory Note held by the Company, the conversion and modification of other Cornerstone debt obligations, the extension of the Cornerstone debt held by RP Finance, a reverse stock split, the conversion of all outstanding preferred stock of Cornerstone into common stock and the adoption of certain governance measures. This transaction is subject to a number of conditions which are beyond the Company’s control.
In 2019, the Company established the Barer Institute Inc., an early-stage small molecule research operation focused on developing a pipeline of novel therapeutic compounds, including compounds to regulate cancer metabolism with potentially broader application in other indications beyond cancer. Barer was led by a team of scientists and academic advisors considered to be among the leading experts in cancer metabolism, chemistry, and drug development. In addition to its own internal discovery efforts, Barer pursued collaborative research agreements and in-licensing opportunities with leading scientists from top academic institutions. Barer's subsidiary, Farber Partners, LLC (“Farber”), was formed around one such agreement with Princeton University’s Office of Technology Licensing ("Princeton") for technology from the laboratory of Professor Joshua Rabinowitz, in the Department of Chemistry, Princeton University, for an exclusive worldwide license to its SHMT (serine hydroxymethyltransferase) inhibitor program. In November 2022, the Company resolved to curtail its early-stage development efforts, including pre-clinical research at the Barer Institute. The Company also holds a majority equity interest in LipoMedix, a clinical stage oncological pharmaceutical company based in Israel. In addition, the Company has invested in other early-stage pharmaceutical ventures.
33
In 2016, the Company first invested in LipoMedix Pharmaceuticals Ltd. (“LipoMedix”), a clinical stage pharmaceutical company. On February 9, 2023, the Company entered into a Share Purchase Agreement with LipoMedix in which LipoMedix sold 70,000,000 ordinary shares to the Company at a price per share of $0.03 and an aggregate sale price of approximately $2.1 million. Subsequent to this transaction, the Company owns 95% of LipoMedix.
On April 7, 2023, the Company entered into a Common Stock Purchase Agreement (the “Day Three Purchase Agreement”) with Day Three. Day Three is a cannabinoid ingredient manufacturer specializing in the development and commercialization of novel cannabis product solutions. Pursuant to the Day Three Purchase Agreement, the Company purchased 4,302,224 shares of common stock representing 38% of the outstanding shares of common stock of Day Three (33.333% on a fully diluted basis), for a purchase price of $3.0 million. The Company also received a warrant exercisable for 7,528,893 shares of common stock at an aggregate purchase price of $3.0 million, which expires five years from the date of issuance or earlier based on the occurrence of certain events as defined in the Day Three Purchase Agreement. As of October 31, 2023, the Company had not exercised the warrant. Refer to Note 8 to our accompanying consolidated financial statements for further detail.
On May 2, 2023, the Company entered into a Securities Purchase Agreement (the “Cyclo SPA”) with Cyclo. Cyclo is a clinical-stage biotechnology company dedicated to developing life-changing medicines for patients and families living with challenging diseases through its lead therapeutic asset, Trappsol®. The Company purchased from Cyclo (i) 2,514,970 common shares (the “Purchased Shares”) and (ii) a warrant to purchase 2,514,970 common shares with an exercise price of $0.71 per share (the “May Warrant”), at a combined purchase price equal to $0.835 per Purchased Share and May Warrant to purchase one share, for an aggregate purchase price of $2.1 million. The May Warrant is exercisable until August 1, 2030.
On August 1, 2023, pursuant to a Securities Purchase Agreement (the “Cyclo II SPA”) dated June 1, 2023, the Company purchased an additional 4,000,000 shares of common stock (the “Cyclo II Shares”), and received a warrant to purchase an additional 4,000,000 Shares (the “Cyclo II Warrant”), for an aggregate purchase price of $5,000,000. The Cyclo II Warrant has an exercise price of $1.25 per share and is exercisable until August 1, 2030. The August 1, 2023 investment increased the Company's percentage ownership of Cyclo common stock to approximately 34%. As of the date of this report, the Company has not exercised the Cyclo II Warrant.
On October 20, 2023, the Company exercised the May Warrant to purchase 2,514,970 common shares at an exercise price of $0.71 per share, pursuant to a Securities Purchase Agreement dated October 20, 2023, and received a new warrant (the "Replacement Warrant") to purchase 2,766,467 common shares at an exercise price of $0.95 per share. The Replacement Warrant is exercisable until October 20, 2027. As of the date of this report, the Company had not exercised the Replacement Warrant. Both the Cyclo II Warrant and Replacement Warrant (collectively, the "Cyclo Warrants") are subject to the restriction that exercise(s) do not convey more than 49% ownership to the Company. Upon exercise of the May Warrant, the Company recognized a realized gain of $424 thousand. The October 20, 2023 investment increased the Company's percentage ownership of Cyclo common stock to approximately 40%.
In August 2023, the Company raised $925,000 from third parties in exchange for a 31.62% ownership of Rafael Medical Devices. As of July 31, 2023, the Company recorded $825,000 of the funds received related to the sale within prepaid expenses and other current assets and other current liabilities within the consolidated balance sheets.
Historically, the Company owned real estate assets. In 2020, the Company sold an office building located in Piscataway, New Jersey and on August 22, 2022, the Company sold the 520 Property. As of July 31, 2023, the Company holds a portion of a commercial building in Jerusalem, Israel as its remaining real estate asset.
Results of Operations
Our business consists of two reportable segments - Healthcare and Real Estate. We evaluate the performance of our Healthcare segment based primarily on research and development efforts and results of clinical trials, and our Real Estate segment based primarily on results of operations. Accordingly, the income and expense line items below loss from operations are only included in the discussion of consolidated results of operations.
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Healthcare Segment
Our consolidated expenses for our Healthcare segment were as follows:
| Three Months Ended October 31, | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| (in thousands) | ||||||||||||||||
| General and administrative | $ | (2,008 | ) | $ | (3,077 | ) | 1,069 | 35 | % | |||||||
| Research and development | (489 | ) | (2,081 | ) | 1,592 | 77 | % | |||||||||
| Depreciation | (3 | ) | (6 | ) | 3 | 50 | % | |||||||||
| Loss from operations | $ | (2,500 | ) | $ | (5,164 | ) | 2,664 | 52 | % | |||||||
To date, the Healthcare segment has not generated any revenues. The entirety of the expenses in the Healthcare segment relate to the activities of LipoMedix, Barer, Farber, and Rafael Medical Devices. As of October 31, 2023, we held a 100% interest in Barer, a 95% interest in LipoMedix, a 93% interest in Farber, and a 68% interest in Rafael Medical Devices.
On August 1, 2023, Rafael Medical Devices closed on the sale of membership units in exchange for $925,000, and following that sale, the Company holds a 68% voting interest based on the outstanding equity interests in Rafael Medical Devices. As of July 31, 2023, the Company recorded $825,000 of the funds received related to the sale within prepaid expenses and other current assets and other liabilities within the consolidated balance sheets.
General and administrative expenses. General and administrative expenses consist mainly of payroll, stock-based compensation expense, benefits, facilities, consulting and professional fees. The Company's operations have scaled to meet the current needs which has led to reduced overall general and administrative expenses. The decrease during the three months ended October 31, 2023 compared to the three months ended October 31, 2022 is comprised of a decrease in stock-based compensation expense of approximately $0.6 million, a decrease in payroll expenses of approximately $0.4 million, a decrease in insurance expense of approximately $0.4 million, a decrease in license and fee expense of $0.1 million, partially offset by a net increase in professional fees of approximately $0.3 million and an increase in other general and administrative expenses of approximately $0.1 million.
Research and development expenses. Research and development expenses decreased for the three months ended October 31, 2023 as compared to the three months ended October 31, 2022. Research and development expenses are derived from activity at Barer, LipoMedix, Farber, and Rafael Medical Devices. In November 2022, the Company resolved to curtail its early-stage development efforts, including pre-clinical research at the Barer Institute. The decision was taken to reduce spending as the Company focuses on exploring strategic opportunities.
Real Estate Segment
The revenue and expenses of the 520 Property have been excluded from the real estate segment in the figures below due to its classification of held-for-sale and discontinued operations, and the sale of the 520 Property on August 22, 2022. The Real Estate segment consists of a portion of a commercial building in Israel. Consolidated income and expenses for our Real Estate segment were as follows:
| Three Months Ended October 31, | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| (in thousands) | ||||||||||||||||
| Rental – Third Party | $ | 41 | $ | 43 | (2 | ) | (5 | )% | ||||||||
| Rental – Related Party | 27 | 27 | — | — | % | |||||||||||
| General and administrative | (32 | ) | (32 | ) | — | — | % | |||||||||
| Depreciation and amortization | (14 | ) | (16 | ) | 2 | 13 | % | |||||||||
| Income from operations | $ | 22 | $ | 22 | — | — | % | |||||||||
Rental - Third Party. Rental revenue decreased by $2 thousand during the three months ended October 31, 2023 compared to the three months ended October 31, 2022.
Depreciation and amortization. Depreciation and amortization increased by $2 thousand during the three months ended October 31, 2023 compared to the three months ended October 31, 2022.
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Consolidated Operations
Our consolidated income and expense line items below loss from operations were as follows:
| Three Months Ended October 31, | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| (in thousands) | ||||||||||||||||
| Loss from continuing operations | $ | (2,478 | ) | $ | (5,142 | ) | 2,664 | 52 | % | |||||||
| Interest income | 582 | 208 | 374 | (180 | )% | |||||||||||
| Impairment of investments - Other Pharmaceuticals | — | (156 | ) | 156 | 100 | % | ||||||||||
| Realized gain on available-for-sale securities | 177 | 15 | 162 | 1080 | % | |||||||||||
| Realized loss on investment in equity securities | (46 | ) | — | (46 | ) | (100 | )% | |||||||||
| Realized gain on investments - Cyclo Therapeutics Inc. | 424 | — | 424 | (100 | )% | |||||||||||
| Unrealized loss on investments - Cyclo Therapeutics Inc. | (2,124 | ) | — | (2,124 | ) | (100 | )% | |||||||||
| Unrealized loss on investments - Hedge Funds | (166 | ) | (127 | ) | (39 | ) | 31 | % | ||||||||
| Other income | 93 | — | 93 | 100 | % | |||||||||||
| Loss from continuing operations before income taxes | (3,538 | ) | (5,202 | ) | 1,664 | 32 | % | |||||||||
| Provision for income taxes | (6 | ) | (5 | ) | (1 | ) | (20 | )% | ||||||||
| Equity in loss of Day Three Labs Inc. | (216 | ) | — | (216 | ) | 100 | % | |||||||||
| Consolidated net loss from continuing operations | (3,760 | ) | (5,207 | ) | 1,447 | 28 | % | |||||||||
| Income (loss) from discontinued operations related to 520 Property | — | 6,700 | (6,700 | ) | 100 | % | ||||||||||
| Net loss attributable to noncontrolling interests | (122 | ) | (99 | ) | (23 | ) | (23 | )% | ||||||||
| Net (loss) income attributable to Rafael Holdings, Inc. | $ | (3,638 | ) | $ | 1,592 | $ | (5,230 | ) | 329 | % | ||||||
Interest income. Interest income was $582 thousand and $208 thousand for the three months ended October 31, 2023 and 2022, respectively. The increase is primarily due to an increase in interest rates.
Impairment of investments - Other Pharmaceuticals. We recorded an impairment loss of $156 thousand related to our investment in Nanovibronix using the measurement alternative for the three months ended October 31, 2022.
Realized gain on available-for-sale securities. We recorded realized gains of approximately $177 thousand and $15 thousand for the three months ended October 31, 2023 and 2022, respectively, related to available-for-sale securities sold during the period.
Realized gain on investments - Cyclo. We recorded a realized gain of approximately $424 thousand related to the exercise of the May Warrants in connection with our October 2023 investment in Cyclo for the three months ended October 31, 2023.
Unrealized gain on investments - Cyclo. We recorded an unrealized loss of approximately $2.1 thousand related to the change in fair value in our investment in Cyclo for the three months ended October 31, 2023.
Unrealized gain (loss) on investments - Hedge Funds. We recorded unrealized losses of approximately $166 thousand and approximately $127 thousand for the three months ended October 31, 2023 and 2022, respectively.
Equity in loss of Day Three Labs, Inc. We recognized a loss of approximately $216 thousand from our ownership interest in Day Three due to operating results for the three months ended October 31, 2023. As of October 31, 2023, the equity method investment in Day Three on our balance sheet is approximately $2.6 million.
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Income (loss) from discontinued operations related to 520 Property. Discontinued operations include: (i) rental and parking revenues, (ii) payroll, benefits, facilities, consulting and professional fees dedicated to 520 Property, (iii) depreciation and amortization expenses, (iv) interest (including amortization of debt issuance costs) on the note payable that was secured by a mortgage on the 520 Property, and (v) gain on the disposal of the 520 Property. The operating results of these items are presented in our consolidated statements of operations and comprehensive loss as discontinued operations for all periods presented. The decrease in the net income attributable to discontinued operations for the three months ended October 31, 2023 as compared to the three months ended October 31, 2022 was due to a gain on the sale of the 520 Property of $6.8 million for the three months ended October 31, 2022, and a loss from discontinued operations of $84 thousand for the three months ended October 31, 2022, compared to no activity for the three months ended October 31, 2023.
See Note 3 to our accompanying consolidated financial statements for further information regarding discontinued operations.
Liquidity and Capital Resources
| October 31, | July 31, | Change | ||||||||||||||
| 2023 | 2023 | $ | % | |||||||||||||
| Balance Sheet Data: | (in thousands) | |||||||||||||||
| Cash and cash equivalents | $ | 13,197 | $ | 21,498 | (8,301 | ) | (39 | )% | ||||||||
| Convertible note receivable, related party | 1,858 | 1,921 | (63 | ) | (3 | )% | ||||||||||
| Working capital | 76,532 | 80,796 | (4,264 | ) | (5 | )% | ||||||||||
| Total assets | 95,502 | 98,829 | (3,327 | ) | (3 | )% | ||||||||||
| Total equity attributable to Rafael Holdings, Inc. | 98,205 | 100,293 | (2,088 | ) | (2 | )% | ||||||||||
| Noncontrolling interests | (3,693 | ) | (3,664 | ) | (29 | ) | 1 | % | ||||||||
| Total equity | 94,512 | 96,629 | (2,117 | ) | (2 | )% | ||||||||||
| For the three months ended October 31, | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| Cash flows (used in) provided by | (in thousands) | |||||||||||||||
| Operating activities of continuing operations | $ | (2,133 | ) | $ | (2,159 | ) | 26 | (1 | )% | |||||||
| Investing activities of continuing operations | (6,786 | ) | (34,197 | ) | 27,411 | (80 | )% | |||||||||
| Financing activities of continuing operations | 807 | (6 | ) | 813 | (13550 | )% | ||||||||||
| Effect of exchange rates on cash and cash equivalents | (189 | ) | (92 | ) | (97 | ) | 106 | % | ||||||||
| Operating, investing, and financing activities of discontinued operations | — | 32,750 | (32,750 | ) | (100 | )% | ||||||||||
| (Decrease) increase in cash and cash equivalents | $ | (8,301 | ) | $ | (3,704 | ) | (4,597 | ) | 124 | % | ||||||
Capital Resources
As of October 31, 2023, we held cash and cash equivalents of approximately $13.2 million, and available-for-sale securities valued at approximately $58.9 million. On August 22, 2022, the Company received net proceeds of approximately $33 million in connection with the sale of the 520 Property (see Note 3 to our accompanying consolidated financial statements for further details). The Company expects its balance of cash and cash equivalents, and available-for-sale-securities, to be sufficient to meet our obligations for at least the 12 months from the filing of this Quarterly Report on Form 10-Q.
Operating Activities
Cash used in operating activities decreased by $26 thousand from cash used of $2.2 million for the three months ended October 31, 2022, to cash used of $2.1 million for the three months ended October 31, 2023, which is primarily attributed to the decrease in net loss from continuing operations.
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Investing Activities
Cash used in investing activities for the three months ended October 31, 2023 was primarily due to purchases of available-for-sale securities of approximately $47.5 million, the purchase of investment in Cyclo of $6.8 million, and the loan of $0.3 million to Day Three. This is partially offset by proceeds of $47.5 million from the sale and maturities of available-for-sale securities and proceeds of $0.3 million from the sale of equity securities.
Cash used in investing activities for the three months ended October 31, 2022 was primarily due to purchases of available-for-sale securities of approximately $57.1 million, partially offset by proceeds of $22.9 million from the maturities of available-for-sale securities.
Financing Activities
Cash provided by financing activities for the three months ended October 31, 2023 was primarily related to the proceeds from sale of RMD membership units of $0.9 million.
Cash used in financing activities for the three months ended October 31, 2022 was primarily related to payments for employee taxes from vesting of employee RSUs for which shares were withheld by the Company.
We do not anticipate paying dividends on our common stock until we achieve sustainable profitability and retain certain minimum cash reserves. The payment of dividends in any specific period will be at the sole discretion of our Board of Directors.
Operating, Financing, and Investing Activities of Discontinued Operations
The cash flows from discontinued operations - 520 Property represents the net income excluding non-cash depreciation and amortization, as well as the proceeds from the sale of the 520 Property. For the three months ended October 31, 2022, net cash used in operating activities totaled $0.4 million. Net cash provided by investing activities of $48.2 million related to proceeds from sale of the 520 Property of $49.4 million, slightly offset by payment of transaction costs of $1.2 million. Net cash used in financing activities of $15.0 million related to the payment of the Note Payable in connection with sale of the 520 Property.
Critical Accounting Estimates
We have chosen accounting policies that we believe are appropriate to accurately and fairly report our operating results and financial condition in conformity with U.S. GAAP. We apply these accounting policies in a consistent manner. Our significant accounting policies are discussed in Note 2, “Summary of Significant Accounting Policies,” in our accompanying consolidated financial statements.
The application of critical accounting policies requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. These estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. We evaluate these estimates and assumptions on an ongoing basis and may retain outside consultants to assist in our evaluation. If actual results ultimately differ from previous estimates, the revisions are included in results of operations in the period in which the actual amounts become known. The critical accounting policies that involve the most significant management judgments and estimates used in preparation of our consolidated financial statements, or are the most sensitive to change from outside factors, are discussed in the Critical Accounting Estimates section in Item 7 of the Annual Report on Form 10-K for fiscal 2023. There were no material changes during the quarter ended October 31, 2023 to the Critical Accounting Estimates previously disclosed in the Annual Report on Form 10-K for fiscal 2023 except as follows:
Investments - Fair Value Method
The Company has elected the fair value option to account for its investment in Cyclo Therapeutics Inc. over which the Company has significant influence. The fair value option is irrevocable once elected. The Company measures its investment in Cyclo at fair value and records all subsequent changes in fair value in earnings in the consolidated statement of operations. The Company believes the fair value option best reflects the underlying economics of the investment. See Note 9, “Investments," in our accompanying consolidated financial statements for further details.
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The total aggregate fair value of the Cyclo investment of $9,849,042 as of October 31, 2023 is comprised of common shares with an aggregate fair value of $8,759,042 (measured based on the closing stock price of Cyclo Therapeutics, Inc., a Level I fair value) and warrants with an aggregate fair value of $1,090,000 (measured using a Level III fair value estimate).
The Company recognizes the fair value of the Cyclo Warrants utilizing a Black-Scholes option-pricing valuation model (“Black-Scholes model”) at acquisition and each reporting date. The application of the Black-Scholes model utilizes significant assumptions, including expected volatility, expected life and risk-free interest rate. In order to determine the volatility, we measured expected volatility based on several inputs, including considering a peer group of publicly traded companies and the implied volatility of the Company's publicly-traded warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. Both of the Cyclo Warrants and the underlying shares of common stock are subject to volume restrictions in accordance with SEC Rule 144 for which a discount to the stock price of Cyclo was applied. The Black-Scholes model further incorporated a discount for the overall lack of marketability for the Cyclo Warrants.
Certain inputs utilized in our Black-Scholes model may fluctuate in future periods based upon factors which are outside of the Company’s control. A significant change in one or more of these inputs used in the calculation of the fair value may cause a significant change to the fair value of our warrant liability which could also result in material non-cash gain or loss being reported in our consolidated statement of operations.
Off-Balance Sheet Arrangements
We do not have any “off-balance sheet arrangements,” as defined in relevant SEC regulations, that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Discontinued Operations
In accordance with the Financial Accounting Standards Board, ASC 205-20, Presentation of Financial Statements - Discontinued Operations, the results of operations of a component of an entity or a group or component of an entity that represents a strategic shift that has, or will have, a major effect on the reporting company’s operations that has either been disposed of or is classified as held-for-sale are required to be reported as discontinued operations in a company’s consolidated financial statements. In order to be considered a discontinued operation, both the operations and cash flows of the discontinued component must 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. 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. See Note 3 to our consolidated financial statements for additional information regarding the results, major classes of assets and liabilities, significant non-cash operating items, and capital expenditures of discontinued operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes in our market risk exposures from those described in Item 7A of our 2023 Form 10-K.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of October 31, 2023.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended October 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II
Item 1. Legal Proceedings
Legal proceedings in which we are involved, if any, are more fully described in Note 19 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
There were no material changes from the risk factors previously disclosed in Item 1A to Part I of our Annual Report on Form 10-K for fiscal 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
| Exhibit Number |
Description | |
| 31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1* | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2* | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS* | Inline XBRL Instance Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * | Filed or furnished herewith. |
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: December 14, 2023
| Rafael Holdings, Inc. | ||
| By: | /s/ William Conkling | |
| William Conkling | ||
| Chief Executive Officer | ||
| By: | /s/ David Polinsky | |
| David Polinsky | ||
| Chief Financial Officer | ||
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