UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FORM 10-Q☒ Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended October 31, 2022.
or
☒QUARTERLY REPORT PURSUANT TO SECTION
☐ Transition report pursuant to section 13 ORor 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934of the Securities Exchange Act of 1934.
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2018
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-55863
RAFAEL HOLDINGS, INC.
(Exact Namename of Registrantregistrant as Specifiedspecified in its Charter)charter)
Delaware | 82-2296593 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification | |
(973) 438-3500520 Broad Street, Newark, New Jersey 07102
(Address of principal executive offices, zip code)
(212) 658-1450
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Class B common stock, par value $0.01 per share | RFL | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | |
Non-accelerated filer ☒ | Smaller reporting company | ||
Emerging growth company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):Act). Yes ☐ No ☒
AsThe number of March 12, 2018,shares outstanding of the registrant had the following shares outstanding:registrant’s common stock as of December 9, 2022 was:
Class A common stock, | |
Class B common stock, par value $0.01 per share: | 23,685,491 shares |
RAFAEL HOLDINGS, INC.
TABLE OF CONTENTS
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RAFAEL HOLDINGS, INC.COMBINED
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share data)
January 31, 2018 | July 31, 2017 | |||||||
(Unaudited) | (Note 1) | |||||||
(in thousands) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 12,008 | $ | 11,756 | ||||
Trade accounts receivable, net of allowance for doubtful accounts of $82 at January 31, 2018 and July 31, 2017 | 226 | 264 | ||||||
Prepaid expenses and other current assets | 191 | 147 | ||||||
Total current assets | 12,425 | 12,167 | ||||||
Property and equipment, net | 50,967 | 51,160 | ||||||
Investments | 11,700 | 13,478 | ||||||
Deferred income tax assets, net | 22 | 8,859 | ||||||
Patents | 155 | — | ||||||
In Process Research and Development | 1,588 | — | ||||||
Other assets | 787 | 540 | ||||||
Total assets | $ | 77,644 | $ | 86,204 | ||||
Liabilities and equity | ||||||||
Current liabilities: | ||||||||
Trade accounts payable | $ | 89 | $ | 115 | ||||
Accrued expenses | 423 | 213 | ||||||
Other current liabilities | 20 | 35 | ||||||
Total current liabilities | 532 | 363 | ||||||
Due to IDT Corporation | 24,391 | 23,693 | ||||||
Other liabilities | 95 | 70 | ||||||
Total liabilities | 25,018 | 24,126 | ||||||
Commitments and contingencies | ||||||||
Equity: | ||||||||
Rafael Holdings, Inc. members’ equity: | ||||||||
Group equity | 40,554 | 50,427 | ||||||
Accumulated other comprehensive income | 2,394 | 2,316 | ||||||
Total Rafael Holdings, Inc. members’ equity | 42,948 | 52,743 | ||||||
Noncontrolling interests | 9,678 | 9,335 | ||||||
Total equity | 52,626 | 62,078 | ||||||
Total liabilities and equity | $ | 77,644 | $ | 86,204 |
October 31, 2022 | July 31, 2022 | |||||||
ASSETS | Note 2 | |||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 22,173 | $ | 26,537 | ||||
Restricted cash | 660 | — | ||||||
Available-for-sale securities | 71,014 | 36,698 | ||||||
Interest receivable | 171 | 140 | ||||||
Trade accounts receivable, net of allowance for doubtful accounts of $242 and $197 at October 31, 2022 and July 31, 2022, respectively | 135 | 157 | ||||||
Prepaid expenses and other current assets | 768 | 4,621 | ||||||
Assets held-for-sale | — | 40,194 | ||||||
Total current assets | 94,921 | 108,347 | ||||||
Property and equipment, net | 1,751 | 1,770 | ||||||
Investments – Other Pharmaceuticals | 321 | 477 | ||||||
Investments – Hedge Funds | 4,637 | 4,764 | ||||||
In-process research and development and patents | 1,575 | 1,575 | ||||||
Other assets | 11 | 1,387 | ||||||
TOTAL ASSETS | $ | 103,216 | $ | 118,320 | ||||
LIABILITIES AND EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Trade accounts payable | $ | 1,394 | $ | 564 | ||||
Accrued expenses | 1,602 | 1,875 | ||||||
Other current liabilities | 166 | 3,518 | ||||||
Due to related parties | 44 | 69 | ||||||
Note payable, net of debt issuance costs, held-for-sale | — | 15,000 | ||||||
Total current liabilities | 3,206 | 21,026 | ||||||
Other liabilities | 44 | 88 | ||||||
TOTAL LIABILITIES | 3,250 | 21,114 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
EQUITY | ||||||||
Class A common stock, $0.01 par value; 35,000,000 shares authorized, 787,163 shares issued and outstanding as of October 31, 2022 and July 31, 2022, respectively | 8 | 8 | ||||||
Class B common stock, $0.01 par value; 200,000,000 shares authorized, 23,712,449 issued and 23,685,036 outstanding as of October 31, 2022, and 23,712,449 issued and 23,687,964 outstanding as of July 31, 2022 | 237 | 237 | ||||||
Additional paid-in capital | 263,197 | 262,023 | ||||||
Accumulated deficit | (163,865 | ) | (165,457 | ) | ||||
Accumulated other comprehensive gain (loss) related to unrealized gain (loss) on available-for-sale securities | 40 | (63 | ) | |||||
Accumulated other comprehensive income related to foreign currency translation adjustment | 3,757 | 3,767 | ||||||
Total equity attributable to Rafael Holdings, Inc. | 103,374 | 100,515 | ||||||
Noncontrolling interests | (3,408 | ) | (3,309 | ) | ||||
TOTAL EQUITY | 99,966 | 97,206 | ||||||
TOTAL LIABILITIES AND EQUITY | $ | 103,216 | $ | 118,320 |
See accompanying notes to combinedthe unaudited consolidated interim financial statements.
RAFAEL HOLDINGS, INC.
COMBINEDCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS(Unaudited)INCOME (LOSS)
(unaudited, in thousands, except share and per share data)
Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Revenues: | ||||||||||||||||
Rental – Third Party | $ | 298 | 396 | 685 | 585 | |||||||||||
Rental – Related Party | 489 | 770 | 994 | 1,682 | ||||||||||||
Parking | 169 | 171 | 384 | 469 | ||||||||||||
Total revenues | 956 | 1,337 | 2,063 | 2,736 | ||||||||||||
Costs and expenses: | ||||||||||||||||
Selling, general and administrative | 1,343 | 776 | 3,079 | 1,629 | ||||||||||||
Depreciation and amortization | 429 | 434 | 853 | 822 | ||||||||||||
(Loss) income from operations | (816 | ) | 127 | (1,869 | ) | 285 | ||||||||||
Interest income | (2 | ) | (2 | ) | (4 | ) | (7 | ) | ||||||||
Net gains resulting from foreign exchange transactions | (107 | ) | (51 | ) | (118 | ) | (32 | ) | ||||||||
Net loss on equity investments | — | — | 107 | — | ||||||||||||
Gain on disposal of bonus shares | — | — | (246 | ) | — | |||||||||||
(Loss) income before income taxes | (707 | ) | 180 | (1,608 | ) | 324 | ||||||||||
(Benefit from) provision for income taxes | 15 | 14 | 8,443 | 30 | ||||||||||||
Net (loss) income | (722 | ) | 166 | (10,051 | ) | 294 | ||||||||||
Net loss attributable to noncontrolling interests | 176 | — | 176 | — | ||||||||||||
Net (loss) income attributable to Rafael Holdings, Inc. | $ | (546 | ) | 166 | (9,875 | ) | 294 |
Three Months Ended October 31, | ||||||||
2022 | 2021 | |||||||
REVENUE | Note 2 | |||||||
Rental – Third Party | $ | 43 | $ | 44 | ||||
Rental – Related Party | 27 | 27 | ||||||
Other – Related Party | — | 120 | ||||||
Total revenue | 70 | 191 | ||||||
COSTS AND EXPENSES | ||||||||
General and administrative | 3,109 | 12,274 | ||||||
Research and development | 2,081 | 2,153 | ||||||
Depreciation and amortization | 22 | 19 | ||||||
Provision for loss on receivable from Cornerstone Pharmaceuticals pursuant to line of credit | — | 25,000 | ||||||
Provision for losses on related party receivables | — | 10,283 | ||||||
Loss from operations | (5,142 | ) | (49,538 | ) | ||||
Interest expense | — | (13 | ) | |||||
Interest income | 208 | 188 | ||||||
Impairment of investments - Other Pharmaceuticals | (156 | ) | — | |||||
Impairment of cost method investment - Cornerstone Pharmaceuticals | — | (79,141 | ) | |||||
Realized gain on available-for-sale securities | 15 | — | ||||||
Unrealized (loss) gain on investments - Hedge Funds | (127 | ) | 211 | |||||
Loss from continuing operations before income taxes | (5,202 | ) | (128,293 | ) | ||||
Provision for income taxes | (5 | ) | — | |||||
Equity in loss of RP Finance | — | (575 | ) | |||||
Consolidated net loss from continuing operations | (5,207 | ) | (128,868 | ) | ||||
Discontinued Operations (Note 3) | ||||||||
Loss from discontinued operations related to 520 Property | (84 | ) | (543 | ) | ||||
Gain on disposal of 520 Property | 6,784 | — | ||||||
Income (loss) from discontinued operations | 6,700 | (543 | ) | |||||
Consolidated net income (loss) | 1,493 | (129,411 | ) | |||||
Net loss attributable to noncontrolling interests | (99 | ) | (17,387 | ) | ||||
Net income (loss) attributable to Rafael Holdings, Inc. | $ | 1,592 | $ | (112,024 | ) | |||
OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||
Consolidated net income (loss) | $ | 1,493 | $ | (129,411 | ) | |||
Unrealized gain on available-for-sale securities | 103 | — | ||||||
Foreign currency translation adjustment | (10 | ) | 9 | |||||
Total comprehensive income (loss) | 1,586 | (129,402 | ) | |||||
Comprehensive (loss) income attributable to noncontrolling interests | (99 | ) | 36 | |||||
Total comprehensive income (loss) attributable to Rafael Holdings, Inc. | $ | 1,685 | $ | (129,438 | ) | |||
Earnings (loss) per share attributable to common shareholders | ||||||||
Basic and diluted: | ||||||||
Continuing operations | $ | (0.22 | ) | $ | (5.88 | ) | ||
Discontinued operations | 0.29 | (0.03 | ) | |||||
Total basic and diluted earnings (loss) per share | $ | 0.07 | $ | (5.91 | ) | |||
Weighted average number of shares used in calculation of earnings (loss) per share | ||||||||
Basic and diluted | 23,015,443 | 18,948,084 |
See accompanying notes to combinedthe unaudited consolidated interim financial statements.
RAFAEL HOLDINGS, INC.
COMBINEDCONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOMEEQUITY
(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 | 787,163 | $ | 8 | 23,687,964 | $ | 237 | $ | 262,023 | $ | (165,457 | ) | $ | 3,704 | $ | (3,309 | ) | $ | 97,206 | ||||||||||||||||||
Net income for the three months ended October 31, 2022 | — | — | — | — | — | 1,592 | — | (99 | ) | 1,493 | ||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 1,180 | — | — | — | 1,180 | |||||||||||||||||||||||||||
Shares withheld for payroll taxes | — | — | (2,928 | ) | — | (6 | ) | — | — | — | (6 | ) | ||||||||||||||||||||||||
Unrealized gain on available-for-sale securities | — | — | — | — | — | — | 103 | — | 103 | |||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | — | (10 | ) | — | (10 | ) | |||||||||||||||||||||||||
Balance at October 31, 2022 | 787,163 | $ | 8 | 23,685,036 | $ | 237 | $ | 263,197 | $ | (163,865 | ) | $ | 3,797 | $ | (3,408 | ) | $ | 99,966 |
(Unaudited)
Three Months Ended October 31, 2021 | ||||||||||||||||||||||||||||||||||||
Common Stock, Series A | Common Stock, Series B | Additional paid-in- | Accumulated | Accumulated other comprehensive | Noncontrolling | Total | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | capital | deficit | income | interests | Equity | ||||||||||||||||||||||||||||
Balance at August 1, 2021 | 787,163 | $ | 8 | 16,936,864 | $ | 169 | $ | 159,136 | $ | (40,799 | ) | $ | 3,772 | $ | 14,418 | $ | 136,704 | |||||||||||||||||||
Net loss for the three months ended October 31, 2021 | — | — | — | — | — | (112,024 | ) | — | (17,387 | ) | (129,411 | ) | ||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 7,851 | — | — | — | 7,851 | |||||||||||||||||||||||||||
Common stock sold to investors | — | — | 2,833,425 | 28 | 99,142 | — | — | — | 99,170 | |||||||||||||||||||||||||||
Transaction costs incurred in connection with sale of common stock | — | — | — | — | (6,228 | ) | (6,228 | ) | ||||||||||||||||||||||||||||
Common stock sold to related party | — | — | 112,501 | 1 | 4,996 | — | — | — | 4,997 | |||||||||||||||||||||||||||
Shares withheld for payroll taxes | — | — | (571 | ) | — | (30 | ) | — | — | — | (30 | ) | ||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | — | 9 | — | 9 | |||||||||||||||||||||||||||
Balance at October 31, 2021 | 787,163 | $ | 8 | 19,882,219 | $ | 198 | $ | 264,867 | $ | (152,823 | ) | $ | 3,781 | $ | (2,969 | ) | $ | 113,062 |
Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Net (loss) income | $ | (722 | ) | $ | 166 | $ | (10,051 | ) | $ | 294 | ||||||
Other comprehensive income: | ||||||||||||||||
Foreign currency translation adjustments | 68 | 8 | 78 | 8 | ||||||||||||
Comprehensive income | (654 | ) | 174 | (9,973 | ) | 302 | ||||||||||
Comprehensive loss attributable to noncontrolling interests | 19 | — | 19 | — | ||||||||||||
Comprehensive (loss) income attributable to Rafael Holdings, Inc. | $ | (673 | ) | $ | 174 | $ | (9,992 | ) | $ | 302 |
See accompanying notes to combinedthe unaudited consolidated interim financial statements.
RAFAEL HOLDINGS, INC.
COMBINEDCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
(unaudited, in thousands)
Six Months Ended | ||||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Operating activities | ||||||||
Net (loss) income | $ | (10,051 | ) | $ | 294 | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 853 | 822 | ||||||
Deferred income taxes | 8,837 | 7 | ||||||
Realized gain on disposal of bonus shares | (246 | ) | — | |||||
Non-cash compensation | 606 | — | ||||||
Interest in the equity of investments | 439 | — | ||||||
Change in assets and liabilities: | ||||||||
Accounts and rents receivable | 38 | (79 | ) | |||||
Other current assets and prepaid expenses | (60 | ) | (252 | ) | ||||
Other assets | (260 | ) | 7 | |||||
Accounts payable and accrued expenses | 77 | 29 | ||||||
Other current liabilities | (15 | ) | — | |||||
Due to IDT Corporation | (202 | ) | (1,211 | ) | ||||
Other liabilities | 25 | 15 | ||||||
Net cash provided by (used in) operating activities | 41 | (368 | ) | |||||
Investing activities | ||||||||
Purchases of property and equipment | (728 | ) | (1,146 | ) | ||||
Purchase of investments | — | (8,300 | ) | |||||
Net cash used in investing activities | (728 | ) | (9,446 | ) | ||||
Financing activities | ||||||||
Proceeds from sale of member interests in CS Pharma Holdings, LLC | — | 10,000 | ||||||
Cash advances from IDT Corporation, net of repayments | 900 | 9,326 | ||||||
Net cash used in financing activities | 900 | 19,326 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 39 | 10 | ||||||
Net increase in cash and cash equivalents | 252 | 9,552 | ||||||
Cash and cash equivalents at beginning of period | 11,756 | 2,339 | ||||||
Cash and cash equivalents at end of period | $ | 12,008 | $ | 11,861 | ||||
Supplemental Schedule of Non-Cash Financing and Investing Activities | ||||||||
Cash payments made for taxes | $ | — | $ | — | ||||
Cash payments made for interest | $ | — | $ | — |
Three Months Ended October 31, | ||||||||
2022 | 2021 | |||||||
Operating activities | ||||||||
Consolidated net income (loss) | $ | 1,493 | $ | (129,411 | ) | |||
Less: Income (loss) from discontinued operations | 6,700 | (543 | ) | |||||
Loss from continuing operations | (5,207 | ) | (128,868 | ) | ||||
Adjustments to reconcile consolidated net income (loss) to net cash used in operating activities | ||||||||
Depreciation and amortization | 22 | 19 | ||||||
Net unrealized loss (gain) on investments - Hedge Funds | 127 | (211 | ) | |||||
Realized gain on available-for-sale securities | (15 | ) | — | |||||
Impairment of investments - Other Pharmaceuticals | 156 | — | ||||||
Impairment of cost method investment - Cornerstone Pharmaceuticals | — | 79,141 | ||||||
Provision for loss on receivable from Cornerstone Pharmaceuticals pursuant to line of credit | — | 25,000 | ||||||
Interest income | — | (188 | ) | |||||
Equity in loss of RP Finance | — | 575 | ||||||
Provision for losses on related party receivables | — | 10,283 | ||||||
Provision for doubtful accounts | — | 19 | ||||||
Stock-based compensation, net | 1,180 | 7,851 | ||||||
Amortization of debt issuance costs | — | 125 | ||||||
Change in assets and liabilities, net of effects from discontinued operations: | ||||||||
Trade accounts receivable | (28 | ) | (496 | ) | ||||
Prepaid expenses and other current assets | 566 | 649 | ||||||
Other assets | (28 | ) | 54 | |||||
Accounts payable and accrued expenses | 1,017 | 48 | ||||||
Other current liabilities | 103 | (124 | ) | |||||
Due to related parties | (25 | ) | (84 | ) | ||||
Due from Cornerstone Pharmaceuticals | — | (120 | ) | |||||
Other liabilities | 4 | 33 | ||||||
Net cash used in continuing operations | (2,128 | ) | (6,294 | ) | ||||
Net cash used in discontinued operations | (421 | ) | (180 | ) | ||||
Net cash used in operating activities | (2,549 | ) | (6,474 | ) | ||||
Investing activities | ||||||||
Interest receivable | (31 | ) | — | |||||
Payment to Cornerstone Pharmaceuticals pursuant to Line of Credit | — | (25,000 | ) | |||||
Payment to fund RP Finance Line of Credit | — | (1,875 | ) | |||||
Purchases of available-for-sale securities | (57,119 | ) | — | |||||
Proceeds from maturities of available-for-sale securities | 22,922 | — | ||||||
Net cash used in investing activities of continuing operations | (34,228 | ) | (26,875 | ) | ||||
Proceeds from sale of 520 Property - discontinued operations | 49,400 | — | ||||||
Payment of transaction costs for sale of 520 Property - discontinued operations | (1,229 | ) | — | |||||
Purchases of property and equipment - discontinued operations | — | (29 | ) | |||||
Net cash provided by (used in) investing activities of discontinued operations | 48,171 | (29 | ) | |||||
Net cash provided by (used in) investing activities | 13,943 | (26,904 | ) | |||||
Financing activities | ||||||||
Proceeds from issuance of common stock | — | 104,167 | ||||||
Payment of transaction costs incurred in connection with sale of common stock | — | (6,228 | ) | |||||
Payments for taxes related to shares withheld for employee taxes | (6 | ) | (30 | ) | ||||
Net cash (used in) provided by continuing operations | (6 | ) | 97,909 | |||||
Payment of Note Payable in connection with sale of 520 Property - discontinued operations | (15,000 | ) | — | |||||
Net cash (used in) provided by financing activities | (15,006 | ) | 97,909 | |||||
Effect of exchange rate changes on cash and cash equivalents | (92 | ) | 2 | |||||
Net (decrease) increase in cash and cash equivalents and restricted cash | (3,704 | ) | 64,533 | |||||
Cash and cash equivalents, and restricted cash, beginning of period | 26,537 | 12,854 | ||||||
Cash and cash equivalents, and restricted cash, end of period | $ | 22,833 | $ | 77,387 | ||||
Reconciliation of cash and restricted cash | ||||||||
Cash and cash equivalents | $ | 22,173 | $ | 72,387 | ||||
Restricted cash | 660 | 5,000 | ||||||
Total cash and cash equivalents and restricted cash shown in statement of cash flows | $ | 22,833 | $ | 77,387 | ||||
Non-cash supplemental disclosure | ||||||||
Transaction costs related to sale of 520 Property included in accounts payable | $ | 43 | $ | — |
See accompanying notes to combinedthe unaudited consolidated interim financial statements.
RAFAEL HOLDINGS, INC.
NOTES TO COMBINEDCONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NoteNOTE 1 — Description of Business and Basis of Presentation– DESCRIPTION OF BUSINESS
Description of Business
Rafael Holdings, Inc. (NYSE:RFL), (“Rafael Holdings”, “we” or the “Company”), a Delaware corporation, is a wholly-owned subsidiary of IDT Corporationholding 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. (“IDT” orLipoMedix”), a clinical stage pharmaceutical company, the “Parent”).On or about March 26, 2018, IDT expects to complete a tax-free spinoff (the “Spin-Off”) of our capital stock, through a pro rata distribution of our common stock to its stockholders of record asactivities of the closeBarer Institute Inc. (“Barer”), a wholly-owned preclinical cancer metabolism research operation, and Rafael Medical Devices, Inc. (“Rafael Medical Devices” and together with the Pharmaceutical Companies, the “Healthcare Companies”), a wholly-owned orthopedic-focused medical device company developing instruments to advance minimally invasive surgeries. 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 to date has been to invest in and fund, discover and develop novel cancer therapies, and we further seek to expand our portfolio through opportunistic investments in therapeutics which address high unmet medical needs including through acquisitions, strategic investments, or in-licensing assets.
Historically, the Company owned multiple real estate assets. In 2020, the Company sold an office building located in Piscataway, New Jersey and, on August 22, 2022, the Company sold the building at 520 Broad Street in Newark, New Jersey that serves as headquarters for the Company and several tenants and an associated public garage (the “520 Property”). Refer to Note 3 for further details. Currently, the Company holds a portion of business on March 13, 2018 (the “Spin-Off record date”). As a resultcommercial building in Jerusalem, Israel as its remaining real estate asset.
The Company has debt and equity investments in Cornerstone Pharmaceuticals, formerly known as Rafael Pharmaceuticals Inc., or Rafael Pharmaceuticals, that includes preferred and common equity interests and a warrant to purchase additional equity. On June 17, 2021, the Company entered into a merger agreement to acquire full ownership of the Spin-Off, each of IDT’s stockholders will receive: (i) one share of our Class A common stockCornerstone Pharmaceuticals in exchange for every two shares of IDT’s Class A common stock held on the Spin-Off record date; (ii) one share of ourissuing Company Class B common stock to the other stockholders of Cornerstone Pharmaceuticals. On October 28, 2021, the Company announced that the AVENGER 500 Phase 3 clinical trial for every two sharesCPI-613® (devimistat), Cornerstone Pharmaceuticals’ lead product candidate, did not meet its primary endpoint of IDT’s Class B common stock held onsignificant improvement in overall survival in patients with metastatic adenocarcinoma of the Spin-Off record date; and (iv) cash in lieupancreas. 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 a fractional share of all classes of our common stock.The combinedthe Company’s first quarter financial statements, include allaccounting principles generally accepted in the United States of America (“U.S. GAAP”) required that the Company assess the impact of the accountsData Events and determine whether the carrying values of the following wholly-owned subsidiariesCompany’s assets were impaired based upon the Company’s expectations to realize future value. In light of IDT, which will be contributed to Rafael Holdings priorthe Data Events, the Company concluded that the likelihood of further development of and prospects for CPI-613 is uncertain and fully impaired in the first quarter ended October 31, 2021 the value of its loans, receivables, and investment in Cornerstone Pharmaceuticals based upon its valuation of Cornerstone Pharmaceuticals. On February 2, 2022, the Company terminated the Merger Agreement with Cornerstone Pharmaceuticals, effective immediately, in accordance with its terms. Subsequently, on February 2, 2022, the Company withdrew its Registration Statement on Form S-4 related to the Spin-Off: IDT 225 Old NB Road, LLC, a Delaware Limited Liability Company; IDT Realty LLC, a New Jersey Limited Liability Company; I.D.T. R.E. Holdings, Ltd., an Israeli Company; Broad Atlantic Associates LLC, a Delaware Limited Liability Company; Broad Atlantic Realty LLC, a Delaware Limited Liability Company; Hillview Avenue Realty, a Delaware Limited Liability Company; Hillview Avenue Realty JV, a Delaware Limited Liability Company; IDT Capital Real Estate Holdings LLC, a Delaware Limited Liability Company; and IDT Capital, Inc., a Delaware Corporation. Additionally, it includes the accounts of the majority-owned Lipomedix Pharmaceuticals, Ltd., an Israeli Company.proposed Merger.
In 2019, the Company established Barer, a preclinical cancer metabolism research operation, to focus on developing a pipeline of novel therapeutic compounds, including compounds to regulate cancer metabolism with potentially broader application in other indications beyond cancer. Barer has been comprised of scientists and academic advisors that are experts in cancer metabolism, chemistry, and drug development. In addition to its own internal discovery efforts, Barer pursued collaborative research agreements and in-licensing opportunities with leading scientists from top academic institutions. Barer’s subsidiary, Farber Partners, LLC (“Farber”), was formed around one such agreement with Princeton University’s Office of Technology Licensing for technology from the laboratory of Professor Joshua Rabinowitz, in the Department of Chemistry, Princeton University, for an exclusive worldwide license to its SHMT (serine hydroxymethyltransferase) inhibitor program. In November 2022, the Company resolved to curtail its early-stage development efforts, including pre-clinical research at the Barer Institute.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The “Company” in these consolidated financial statements refers to Rafael Holdings and its subsidiaries on this combined basis as if Rafael Holdings existed and owned the above interests in these entities in all periods presented.
a consolidated basis. All significant intercompany accounts and transactions have been eliminated in combination.
consolidation. The accompanying consolidated financial statements reflect the activity related to the 520 Property as discontinued operations.
Properties
All majority-owned subsidiaries are consolidated with all intercompany transactions and balances eliminated in consolidation. In addition to Rafael Holdings, Inc., the subsidiaries included in these consolidated financial statements are as follows:
Company | Country of Incorporation | Percentage Owned | ||||
Rafael Holdings, Inc. | United States – Delaware | 100 | % | |||
Broad Atlantic Associates, LLC | United States – Delaware | 100 | % | |||
IDT R.E. Holdings Ltd. | Israel | 100 | % | |||
Rafael Holdings Realty, Inc. | United States – Delaware | 100 | % | |||
Barer Institute, Inc. | United States – Delaware | 100 | %* | |||
The Barer Institute, LLC | United States – Delaware | 100 | %* | |||
Hillview Avenue Realty, JV | United States – Delaware | 100 | % | |||
Hillview Avenue Realty, LLC | United States – Delaware | 100 | % | |||
Rafael Medical Devices, LLC | United States – Delaware | 100 | % | |||
Levco Pharmaceuticals Ltd. | Israel | 95 | %*** | |||
Farber Partners, LLC | United States – Delaware | 93 | % | |||
Pharma Holdings, LLC | United States – Delaware | 90 | % | |||
LipoMedix Pharmaceuticals Ltd. | Israel | 84 | % | |||
Altira Capital & Consulting, LLC | United States – Delaware | 67 | % | |||
CS Pharma Holdings, LLC | United States – Delaware | 45 | %** |
* | In November 2022, the Company resolved to curtail its early-stage development efforts, including pre-clinical research at Barer. The decision was taken to reduce spending as the Company focuses on exploring strategic opportunities. |
** | 50% of CS Pharma Holdings, LLC is owned by Pharma Holdings, LLC. We have a 90% ownership in Pharma Holdings, LLC and, therefore, an effective 45% interest in CS Pharma Holdings, LLC. The Company, along with CS Pharma and Pharma Holdings, collectively own securities representing 51% of the outstanding capital stock of Cornerstone Pharmaceuticals and 42% of the capital stock on a fully diluted basis (excluding the remainder of the Warrant). Refer to Note 4 for further details. |
*** | During Fiscal 2022, the Company discontinued further material investment in Levco. |
On March 15, 2022, the Company dissolved IDT 225 Old NB Road, LLC.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company owns commercial real estate located at 520 Broad Street, Newark, New Jersey, which serves as headquarters for IDT, Genie Energy Ltd. andaccompanying consolidated financial statements of the Company and a related 800-car public parking garage across the street, as well as a building located at 225 Old New Brunswick Road in Piscataway, New Jersey that is used partially by IDT Telecom, Inc. for certain of its operations. Additionally, the Company owns a portion of the 6th floor of a building located at 5 Shlomo Halevi Street, in Jerusalem, Israel.
Basis of Presentation
The accompanying unaudited combined financial statements the Companysubsidiaries 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 108 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, (consisting ofwhich include only normal recurring accruals)adjustments, considered necessary for a fair presentation have been included. Operating results for the three and six months ended January 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2018. The balance sheet at July 31, 2017 has been derived from the Company’s audited financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, please refer to the combined financial statements and footnotes thereto included elsewhere in the Registration Statement on Form 10-12G filed on February 19, 2018.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal year 20172022 refers to the fiscal year ended July 31, 2022).
Operating results for the three months ended October 31, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2017)2023. The balance sheet at July 31, 2022 has been derived from the Company’s audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2022, or the 2022 Form 10-K, as filed with the U.S. Securities and Exchange Commission (the “SEC”).
Note 2 — AcquisitionUse of Lipomedix Pharmaceuticals Ltd. (“Lipomedix”)
Estimates
LipomedixThe 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, 2022, the Company had cash and cash equivalents of $22.2 million, available-for-sale securities valued at $71.0 million, and an investment in hedge funds valued at $4.6 million. On August 22, 2022, the Company received net proceeds of approximately $33 million in connection with the sale of the 520 Property (see Note 3 for further details). The Company expects the balance of cash and cash equivalents, available-for-sale securities, and investment in hedge funds to be sufficient to meet our obligations for at least the next 12 months from the issuance of these consolidated financial statements.
Risks and Uncertainties - COVID-19, War in Ukraine
In late 2019, a novel strain of coronavirus, SARS-CoV, which causes COVID-19, was identified and has proved to be highly contagious. It has since spread extensively throughout the world, including the United States, and was declared a global pandemic by the World Health Organization in March 2020. The Company actively monitors the outbreak, including the spread of new variants of interest, and its potential impact on the Company’s operations and those of the Company’s holdings.
Even with growing availability of testing and vaccines and the relaxation of public health measures that were implemented to limit the spread of the pandemic, there continues to be uncertainty around the COVID-19 pandemic and its impact.
The Company had implemented a number of measures to protect the health and safety of the Company’s workforce including a voluntary work-from-home policy for the Company’s workforce who can perform their jobs from home as well as restrictions on discretionary business travel. Most of our employees have returned to working from the office on a part-time basis.
The full impact of the COVID-19 pandemic on the Company will depend on factors such as the length of time of the pandemic; the responses of federal, state and local governments; the impact of future variants that may emerge; vaccination rates among the population; the efficacy of the COVID-19 vaccines; the longer-term impact of the pandemic on the economy and consumer behavior; and the effect on our employees, vendors, and other partners.
The short and long-term implications of Russia’s invasion of Ukraine are difficult to predict at this time. The imposition of sanctions and counter sanctions may have an adverse effect on the economic markets generally and could impact our business and the companies in which we have investments, financial condition, and results of operations. Because of the highly uncertain and dynamic nature of these events, it is not currently possible to estimate the impact of the Russian – Ukraine war on our business and the companies in which we have invested.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Concentration of Credit Risk and Significant Customers
The Company routinely assesses the financial strength of its customers. As a result, the Company believes that its accounts receivable credit risk exposure is limited. For the three months ended October 31, 2022, including revenue from discontinued operations, related parties represented 44% of the Company’s revenue, and as of October 31, 2022, one customer represented 67% of the Company’s accounts receivable balance. For the three months ended October 31, 2021, related parties represented 63% of the Company’s revenue, and as of October 31, 2021, two customers, one of which is a development-stage, privatelyrelated party, represented 71% and 14% of the Company’s accounts receivable balance, respectively.
Cash and Cash Equivalents
The Company considers all liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Restricted Cash
Restricted cash represented escrow funds held Israeli company focusedin bank accounts owned by the Company to be used to secure a letter of credit for a tenant in connection with the sale of the 520 Property. The Company did not have the right to use this cash balance for any other purpose.
Reserve for Receivables
The Company evaluates accounts receivable, loans, interest and fees receivable for impairment under Accounting Standards Codification (“ASC”) 310, Receivables. The Company also evaluates the reserve for losses and estimates collectability of accounts receivable, loans, interest and fees receivable based on historical bad debt experience, management’s assessment of the financial condition of individual companies with which the Company conducts business, current market conditions, and reasonable and supportable forecasts of future economic conditions.
Investments
The method of accounting applied to long-term investments, whether consolidated, equity or cost, involves an evaluation of the significant terms of each investment that explicitly grant or suggest evidence of control or influence over the operations of the investee and also include the identification of any variable interests in which the Company is the primary beneficiary. The consolidated financial statements include the Company’s controlled affiliates. All significant intercompany accounts and transactions between the consolidated affiliates are eliminated.
Investments in businesses that the Company does not control, but in which the Company has the ability to exercise significant influence over operating and financial matters, are accounted for using the equity method. Investments in which the Company does not have the ability to exercise significant influence over operating and financial matters are accounted for in accordance with ASC 321, Investments - Equity Securities. Investments without readily determinable fair values are accounted for using the measurement alternative which is at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company periodically evaluates its investments for impairment due to declines considered to be other than temporary. If the Company determines that a decline in fair value is other than temporary, then a charge to earnings is recorded in the accompanying consolidated statements of operations and comprehensive income (loss), and a new basis in the investment is established.
Investments - Hedge Funds
The Company accounts for its investments in hedge funds in accordance with ASC 321, Investments – Equity Securities. Unrealized gains and losses resulting from the change in fair value of these securities is included in unrealized (loss) gain on investments – Hedge Funds in the consolidated statements of operations and comprehensive income (loss).
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 income. Realized gains or losses are released from accumulated other comprehensive income and into earnings on the developmentconsolidated statements of operations and comprehensive income (loss).
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 innovative, safe and effective cancer therapyentity 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 liposome delivery.
power and economics. The Company consolidates a VIE if both power and benefits belong to the Company – that is, the Company (i) has the power to direct the activities of a VIE that most significantly influence the VIE’s economic performance (power), and (ii) has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE (benefits). The Company consolidates VIEs whenever it is determined that the Company is the primary beneficiary.
Cost Method Investments - The Company has determined that Cornerstone Pharmaceuticals (see Note 4) is a VIE; however, the Company has determined that it is not the primary beneficiary as the Company does not have the power to direct the activities of Cornerstone Pharmaceuticals that most significantly impact Cornerstone Pharmaceuticals’ economic performance. Due to the Data Events on October 28, 2021, the Company recorded an impairment related to the cost method investment in Cornerstone Pharmaceuticals during the three months ended October 31, 2021, and did not report a balance in this investment as of October 31, 2022.
Equity Method Investments - The Company has determined that RP Finance, LLC (“RP Finance”), (see Note 5), is a VIE; however, the Company has determined that it is not the primary beneficiary as the Company does not have the power to direct the activities of RP Finance that most significantly impact RP Finance’s economic performance and, therefore, is not required to consolidate RP Finance. The Company accounts for its investment in RP Finance using the equity method of accounting.
Assets Held-for-Sale and Discontinued Operations
The Company classifies assets as held-for-sale if all held-for-sale criteria is 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 income (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, and was disposed of during the three months ended October 31, 2022. See Note 3 to the 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.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue Recognition
The Company applies the five-step approach as described in ASC 606, Revenue from Contracts with Customers, which consists of the following: (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when (or as) the entity satisfies a performance obligation.
The Company disaggregates its initial $100,000 investment,revenue by source within its consolidated statements of operations and comprehensive income (loss). As an owner and operator of real estate, the Company received approximately 3.2%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 income (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 income (loss).
Contractual rental revenue is reported on a straight-line basis over the terms of the common shares outstanding. Duringrespective leases. Accrued rental income, included within other assets on the second quarterconsolidated balance sheets, represents cumulative rental income earned in excess of fiscal year 2017,rent payments received pursuant to the Company made an additional $300,000 investment in Lipomedix, increasing its ownership to 13.95%terms of the issuedindividual lease agreements.
The Company also earned revenue from parking which was derived primarily from monthly and outstanding ordinary shares, as well as providing Lipomedix with an advancetransient daily parking. The monthly and transient daily parking revenue falls within the scope of $200,000. DuringASC 606 and was accounted for at the fourth quarter of fiscal year 2017, the Company made an additional $1.1 million investment, inclusivepoint in time when control of the $200,000 advance, in Lipomedix, increasing its ownershipgoods or services transfers to 38.86% of the issued share capital ofcustomer and the issued and outstanding ordinary shares. As such,Company’s performance obligation is satisfied, consistent with the Company began accounting for this investment under the equity method as of and for the fourth quarter of fiscal year 2017. During the fourth quarter of fiscal year 2017, the Company recognized approximately $113,000 as its proportionate share of Lipomedix's loss. As of July 31, 2017, Lipomedix had assets totaling $1.2 million and liabilities totaling $77,000.Company’s previous accounting.
RAFAEL HOLDINGS, INC. AND AFFILIATESNOTES TO COMBINED FINANCIAL STATEMENTSThe Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required rent payments or parking customers to pay amounts due.
Note 2 — Acquisition of Lipomedix Pharmaceuticals Ltd. (“Lipomedix”) (cont.)Research and Development Costs
On November 16, 2017,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 exercised its optionmonitors 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 purchase additional shares in Lipomedix for $900,000, which increased its ownership to 50.6% ofreflect the issued and outstanding ordinary shares. As such, the Company began consolidating this investment as of and for the second quarter of fiscal year 2018.
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 impactCompany accounts for stock-based compensation using the provisions of ASC 718, Stock-Based Compensation, which requires the acquisition’s purchase price allocations onrecognition of the Company’s combined balance sheet and the acquisition date fair value of stock-based compensation. Stock-based compensation is estimated at the total consideration transferred were as follows:
(in thousands) | November 16, 2017 | |||
Other current assets | $ | 16 | ||
Property and equipment, net | 8 | |||
In Process Research and Development | 1,575 | |||
Patents | 155 | |||
Accounts payable | (85 | ) | ||
Accrued expenses | (22 | ) | ||
Net assets, excluding cash acquired and noncontrolling interest | $ | 1,647 | ||
Supplemental information: Cash paid | $ | 2,400 | ||
Cash acquired | 1,060 | |||
Cash paid, net of cash acquired | 1,340 | |||
Historical loss on investment | (252 | ) | ||
Noncontrolling interest | 559 | |||
Total consideration, net of cash acquired and noncontrolling interest | $ | 1,647 |
Note 3 — Fair Value Measurements
The following table presents the balance of assets measured at fair valuegrant date based on a recurring basis:
(in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
January 31, 2018 | ||||||||||||||||
Available-for-sale securities: | ||||||||||||||||
Rafael Pharmaceuticals convertible promissory notes | $ | — | $ | — | $ | 6,300 | $ | 6,300 | ||||||||
Total | $ | — | $ | — | $ | 6,300 | $ | 6,300 | ||||||||
July 31, 2017 | ||||||||||||||||
Available-for-sale securities: | ||||||||||||||||
Rafael Pharmaceuticals convertible promissory notes | $ | — | $ | — | $ | 6,300 | $ | 6,300 | ||||||||
Total | $ | — | $ | — | $ | 6,300 | $ | 6,300 |
At January 31, 2018 and July 31, 2017, the Company did not have any liabilities measured at fair value on a recurring basis.
At January 31, 2018 and July 31, 2017, the fair value of the Rafaelawards. The Company accounts for forfeitures as they occur. Compensation cost for awards is recognized using the straight-line method over the vesting period. Stock-based compensation is included in general and administrative expense and research and development expense in the consolidated statements of operations and comprehensive income (loss).
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Contingencies
The Company accrues for loss contingencies when both (a) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (b) the amount of loss can reasonably be estimated. When the Company accrues for loss contingencies and the reasonable estimate of the loss is within a range, the Company records its best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company accrues the minimum amount in the range. The Company discloses an estimated possible loss or a range of loss when it is at least reasonably possible that a loss may have been incurred.
Fair Value Measurements
Fair value of financial and non-financial assets and liabilities is defined as an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three-tier hierarchy for inputs used to measure fair value, which prioritizes the inputs to valuation techniques used to measure fair value, is as follows:
● | Level 1 - quoted prices in active markets for identical assets or liabilities; |
● | Level 2 - quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or |
● | Level 3 - unobservable inputs for the asset or liability, such as discounted cash flow models or valuations. |
A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
Earnings (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.
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 June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more information about allowances, credit quality indicators and past due securities. The new standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and will be applied as a cumulative-effect adjustment to retained earnings. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements and intends to adopt the standard on August 1, 2023.
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies an issuer’s accounting for convertible promissory notes, which wereinstruments by reducing the number of accounting models that require separate accounting for embedded conversion features. ASU 2020-06 also simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification and makes targeted improvements to the disclosures for convertible instruments and earnings-per-share (“EPS”) guidance. This update will be effective for the Company’s fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Entities can elect to adopt the new guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The Company is currently evaluating the impact of the pending adoption of the new standard on its financial statements and intends to adopt the standard as of August 1, 2024.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – DISCONTINUED OPERATIONS
On July 1, 2022, the Company determined that the 520 Property met the held-for-sale criteria and the Company has 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 represents 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 income (loss). Depreciation on the 520 Property ceased on July 1, 2022, as a result of the 520 Property being classified as Level 3,held-for-sale.
On August 22, 2022, Broad Atlantic Associates, LLC, a wholly-owned subsidiary of the Company, completed the sale of the 520 Property for an aggregate purchase price of $49.4 million.
The 520 Property was estimated basedencumbered by a mortgage securing a $15 million note payable which was paid off in this transaction. Refer to Note 12 for further information on a valuation of Rafael Pharmaceuticals by reference to recent transactions in its securities, the September 2016 Series D Convertible Note investment, as well as utilizing a discounted cash flow technique undernote payable. After repaying the Income Approachnote payable, commissions, taxes, and other factors that could not be corroborated byrelated costs, the market.
Company received a net cash amount of approximately $33 million at closing.
The carrying value of major classes of assets and liabilities related to discontinued operations at July 31, 2022 was as follows ($ in thousands):
As of July 31, 2022 | ||||
Current assets held-for-sale | ||||
Building and Improvements | $ | 45,437 | ||
Land | 10,412 | |||
Furniture and Fixtures | 1,145 | |||
Other | 205 | |||
Property and equipment | 57,199 | |||
Less Accumulated Depreciation | (17,005 | ) | ||
Property and equipment, net | 40,194 | |||
Total current assets held-for-sale | 40,194 | |||
Total assets held-for-sale | $ | 40,194 | ||
Current liabilities held-for-sale | ||||
Total current liabilities | $ | 15,000 |
The current portion of deferred rental income included in Prepaid Expenses and Other Current Assets was approximately $0 thousand and $150 thousand as of October 31, 2022 and July 31, 2022, respectively. The noncurrent portion of deferred rental income included in Other Assets was approximately $0 million and $1.3 million as of October 31, 2022 and July 31, 2022, respectively. The deferred rental income pertains to the 520 Property and was settled at the date of the sale of the 520 Property with the other working capital accounts of 520 Broad Street.
Discontinued operations includes (i) rental and parking revenues, (ii) payroll, benefits, facility costs, real estate taxes, consulting and professional fees dedicated to the 520 Property, (iii) depreciation and amortization expenses and (iv) interest (including amortization of debt issuance costs) on the note payable on the 520 Property. The operating results of these items are presented in our consolidated statements of operations and comprehensive income (loss) as discontinued operations for all periods presented.
RAFAEL HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINEDCONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 — Fair Value Measurements (cont.)
The following tables summarizetable details the changecomponents comprising net loss from our discontinued operations ($ in thousands):
Three Months Ended October 31, | ||||||||
2022 | 2021 | |||||||
Revenue from discontinued operations: | ||||||||
Rental – Third Party | $ | 68 | $ | 152 | ||||
Rental – Related Party | 115 | 493 | ||||||
Parking | 66 | 190 | ||||||
Total revenue from discontinued operations | 249 | 835 | ||||||
Costs and expenses from discontinued operations: | ||||||||
General and administrative | 246 | 618 | ||||||
Depreciation and amortization | — | 363 | ||||||
Income (loss) from discontinued operations | 3 | (146 | ) | |||||
Interest expense | (87 | ) | (397 | ) | ||||
Loss from discontinued operations | (84 | ) | (543 | ) | ||||
Gain on disposal of discontinued operations | 6,784 | — | ||||||
Income (loss) from discontinued operations | $ | 6,700 | $ | (543 | ) |
The gain on disposal of discontinued operations of approximately $6.8 million was derived from the balancegross proceeds of approximately $49.4 million from the sale of the Company’s assets measured at fair520 Property, less the carrying value on a recurring basis using significant unobservable inputs (Level 3). There were no liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3)of the 520 Property of approximately $40.2 million, net of approximately $1.2 million in transaction costs and the six months ended January 31, 2018 or the year ended July 31, 2017.write off of approximately $1.2 million of deferred rental income.
NOTE 4 – INVESTMENT IN CORNERSTONE PHARMACEUTICALS
Six Months Ended, January 31 | ||||||||
(in thousands) | 2018 | 2017 | ||||||
Balance, beginning of period | $ | 6,300 | $ | 2,000 | ||||
Total gains included in other comprehensive income | — | 2,200 | ||||||
Purchases | — | — | ||||||
Balance, end of period | $ | 6,300 | $ | 4,200 | ||||
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the period | $ | — | $ | — |
Equity Investment in Cornerstone Pharmaceuticals and Impairment of Cost Method Investment
The Company’s financial instruments include accounts and rents receivable, accounts payable, and due to IDT Corporation. The recorded carrying amount of accounts and rents receivable, accounts payable and due to IDT Corporation approximates their fair value due to their short-term nature. Other than noted above, the Company did not have any other assets or liabilities that were measured at fair value on a recurring basis as of January 31, 2018 or July 31, 2017.
Note 4 — Establishment of Valuation Allowance for Deferred Tax Asset
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the amendments to related party leases effective August 1, 2017, which, in comparison to fiscal year 2017, will reduce revenues by approximately $1.7 million annually through 2025. Such objective evidence limits the ability to consider other subjective evidence, such as the Company’s projections for future growth. On the basis of this evaluation, a valuation allowance of $8.4 million was recorded to reserve for the entirety of the Company’s domestic deferred tax asset during the first quarter of fiscal 2018. The amount of the deferred tax asset considered realizable could be adjusted if estimates of future taxable income during the carryforward period are increased, or if additional weight is given to subjective evidence, such as the Company’s projections for growth.
Note 5 — Investment in Rafael Pharmaceuticals, Inc. (“Rafael Pharmaceuticals”)
RafaelCornerstone Pharmaceuticals is a clinical stage, oncology-focused pharmaceuticalcancer metabolism-based therapeutics company committed tofocused on the development and commercialization of therapies that exploit the metabolic differences between normal cells and cancer cells.
On December 7, 2015, IDT approved an investment of up to $10 million in Rafael Pharmaceuticals. $2 million of this investment was funded as of July 31, 2016, as follows: $500,000 funded upon signing the SubscriptionThe Company owns debt and Loan Agreement during the second quarter of fiscal year 2016;equity interests and $1.5 million funded during the third quarter of fiscal year 2016. The initial $2 million investment was in exchange for Rafael Pharmaceuticals' 3.5% convertible promissory notes due in fiscal year 2018. To date, the Company has not accrued interest on this note, as collection cannot be reasonably assured; however, the Company has received an independent appraisal indicating the fair value of its investment in Rafael Pharmaceuticals exceeds the carrying value. On September 16, 2016, the Company made an additional $8 million investment in exchange for Rafael Pharmaceuticals' 3.5% convertible promissory notes due in fiscal year 2018.
Upon Spin-Off, the Company will own, subsequent to January 31, 2018, its interests/rights in RafaelCornerstone Pharmaceuticals through a 90%-owned non-operating subsidiary, IDT-RafaelPharma Holdings, LLC. (“IDT-Rafael Holdings”). IDT-RafaelLLC, or Pharma Holdings.
Pharma Holdings holds warrants to purchase a significant stake in Rafael Pharmaceuticals, as well as other equity and governance rights in Rafael Pharmaceuticals, and owns 50% of CS Pharma Holdings, LLC, (“or CS Pharma”),Pharma, a non-operating entity which holds the convertible debt and other rights to purchasethat owns equity interests in RafaelCornerstone Pharmaceuticals.
Those interests/rights include:
RAFAEL HOLDINGS, INC. AND AFFILIATESNOTES TO COMBINED FINANCIAL STATEMENTS
Note 5 — Investment in Rafael Pharmaceuticals, Inc. (“Rafael Pharmaceuticals”) (cont.)
On March 2, 2017, Howard Jonas, IDT’s Chairman of Accordingly, the Board, and Chairman of the Board of Rafael Pharmaceuticals, purchased 10% of IDT-Rafael Holdings for a purchase price of $1 million, which represented 10% of the Company’s cost basis in IDT-Rafael Holdings. Accordingly, we will holdCompany holds an effective 45% indirect interest in the assets held by CS Pharma, including its cash. Separately,Pharma.
A trust for the benefit of the children of Howard Jonas (Chairman of the Board and Deborah Jonas jointly own $525,000Executive Chairman and former Chief Executive Officer of Series C Convertible Notes of Rafael Pharmaceuticals, and The Howard S. and Deborah Jonas Foundation owns $525,000 of Series C Notes of Rafael Pharmaceuticals.
Additionally, the Company previously owned the contractual right to receive "Bonus Shares" for an additional 10% of the outstanding capital stock of Rafael Pharmaceuticals that are issued only upon achieving certain milestones. If the milestones are met, Bonus Shares are to be issued without any additional payment.
On September 12, 2017, IDT’s Compensation Committee, Corporate Governance Committee and Board of Directors approved a compensatory arrangement with Howard S. Jonas related to this right to receive additional Rafael Pharmaceutical shares. In connection with this arrangement, IDT-Rafael Holdings distributed this right to its members such that the Company received the right to 9% of the outstanding capital stock of Rafael Pharmaceuticals and Mr. Jonas received the right to 1% of the outstanding capital stock of Rafael Pharmaceuticals. In addition, as compensation for assuming the role of ChairmanMember of the Board of the Company, and to create additional incentive to contribute to its success, on September 19, 2017, the Company assigned its right to receive 9%Cornerstone Pharmaceuticals) holds a financial instrument (the “Instrument”) that owns 10% of the outstanding capital stock of Rafael Pharmaceuticals to Mr. Jonas. The right is further transferable by Mr. Jonas, in his discretion.Pharma Holdings.
The Rafael Pharmaceuticals Series D Note earns interest at 3.5% per annum, with principal and accrued interest due and payable on September 16, 2018. The Series D Note is convertible at the holder’s option intoPharma Holdings holds 44.0 million shares of RafaelCornerstone Pharmaceuticals’ Series D Convertible Preferred Stock. The Series D Note also includesStock and a mandatory conversion into Rafael Pharmaceuticals common stock upon a qualified initial public offering, and conversion atwarrant to increase the holder’s option upon an unqualified financing event. In all cases, the Series D Note conversion price is based on the applicable financing purchase price. IDT-Rafaelcombined ownership of Pharma Holdings and CS Pharma were issued warrants to purchase shares of capital stock of Rafael Pharmaceuticals representing up to 56% of the then issued and outstanding capital stock of Rafael Pharmaceuticals, on an as-converted and fully diluted basis. The right to exercise warrants as to the first $10 million thereof is held by CS Pharma and the remainder is owned by IDT-Rafael Holdings. The warrant expires on December 31, 2020. Currently, if the Company desires to raise additional financing from unaffiliated partiesequity interests in connection with its exercise of its warrant or other current rights to invest in RafaelCornerstone Pharmaceuticals (but not including the Rafael Pharmaceuticals rights held by CS Pharma), it first must give the other CS Pharma holders the opportunity to provide such financing on a pro rata basis.(the “Warrant”). The exercise price of the warrantWarrant is the lower of 70% of the price sold in an equity financing, or $1.25 per share, subject to certain adjustments. The minimum initial and subsequent exercises
On March 25, 2020, the Board of Directors of Cornerstone Pharmaceuticals extended the expiration date of the warrant shallWarrant held by Pharma Holdings to purchase shares of the Warrant from December 31, 2020 to June 30, 2021, and on August 31, 2020 the Board of Directors of Cornerstone Pharmaceuticals further extended the expiration date of the Warrant held by Pharma Holdings, LLC to purchase shares of the Warrant to August 15, 2021. In connection with the Merger Agreement, the Warrant expiration was extended to April 1, 2022. The Company has asserted that it may be for such numberentitled to a further extension of the Warrant. At this time, the Company does not intend to exercise the Warrant.
Pharma Holdings also holds certain governance rights in Cornerstone Pharmaceuticals including appointment of directors. Pharma Holdings is not the primary beneficiary of Cornerstone Pharmaceuticals as it does not control or direct the activities of Cornerstone Pharmaceuticals that most significantly impact Cornerstone Pharmaceuticals’ economic performance.
CS Pharma holds 16.7 million shares that will resultof Cornerstone Pharmaceuticals Series D Convertible Preferred Stock. CS Pharma owned a $10 million Series D Convertible Note, with 3.5% interest, in at least $5 millionCornerstone Pharmaceuticals which was converted to shares of gross proceeds to Rafael Pharmaceuticals, or such lesser amount as represents 5%Series D Preferred Stock in January 2019.
The Company and its subsidiaries collectively own securities representing 51% of the outstanding capital stock of RafaelCornerstone Pharmaceuticals or such lesser amount as may then remain unexercised. The warrant will expire uponand 42% of the earlier of December 31, 2020 orcapital stock on a qualified initial public offering or liquidation event of Rafael Pharmaceuticals.
As of January 31, 2018, and based on current shares issued and outstanding of Rafael Pharmaceuticals, the Company would need to pay approximately $71 million to exercise the warrant in full and approximately $56 million to purchase a 51% controlling stake. On an as-converted and fully diluted basis (for all convertible securities(excluding the remainder of Rafael Pharmaceuticals outstanding), the Company would need approximately $122 million to exercise the warrant in full and approximately $98 million to purchase a 51% controlling stake in Rafael Pharmaceuticals. Given the Company’s anticipated available cash upon the Spin-Off, the Company would not be able to exercise the warrant in its entirety and the Company may never be able to exercise the warrant in full.Warrant).
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Series D Convertible Preferred Stock has a stated value of $1.25 per share (subject to appropriate adjustment to reflect any stock split, combination, reclassification or reorganization of the Series D Preferred Stock or any dilutive issuances, as described below). Holders of Series D Stock are entitled to receive non-cumulative dividends when, as and if declared by the Board of Cornerstone Pharmaceuticals, prior to any dividends to any other class of capital stock of Cornerstone Pharmaceuticals. In the event of any liquidation, dissolution or winding up of Cornerstone Pharmaceuticals, or in the event of any deemed liquidation, proceeds from such liquidation, dissolution or winding up shall be distributed first to the holders of Series D Stock. Except with respect to certain major decisions, or as required by law, holders of Series D Stock vote together with the holders of the other preferred stock and common stock and not as a separate class.
The Company serves as the managing member of IDT-RafaelPharma Holdings, and IDT-RafaelPharma 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 RafaelCornerstone Pharmaceuticals that are in turn distributed by CS Pharma, will need to be made pro rata to all members, which would entitle IDT-RafaelPharma Holdings to 50% (based on current ownership) of such distributions. Similarly, if IDT-RafaelPharma Holdings were to distribute proceeds it receives from CS Pharma, it would do so on a pro rata basis, entitledentitling the Company to 90% (based on current ownership) of such distributions.
The Company evaluated its investments in Cornerstone Pharmaceuticals in accordance with ASC 323, Investments - Equity Method and Joint Ventures, to establish the appropriate accounting treatment for its investment and has concluded that its investment did not meet the criteria for the equity method of accounting or consolidation and is carried at cost.
RAFAEL HOLDINGS, INC. AND AFFILIATESNOTES TO COMBINED FINANCIAL STATEMENTS
Note 5 — Investment in Rafael Pharmaceuticals, Inc. (“Rafael Pharmaceuticals”) (cont.)
The Company’s investment in Rafael Pharmaceuticals, which was included in “Investments” in the accompanying combined balance sheets, consists of the following:
(in thousands) | (Unaudited) January 31, 2018 | July 31, 2017 | ||||||
Convertible promissory note (at fair value) | $ | 6,300 | $ | 6,300 | ||||
Warrants (at cost) | 5,400 | 5,400 | ||||||
Right to receive additional shares (at cost) | — | 400 | ||||||
Total investment in Rafael Pharmaceuticals | $ | 11,700 | $ | 12,100 |
RafaelCompany has determined that Cornerstone Pharmaceuticals is a variable interest entity;VIE; however, the Company has determined that it is not the primary beneficiary as isit does not have the power to direct the activities of RafaelCornerstone Pharmaceuticals that most significantly impact RafaelCornerstone 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.
Note 6 — Related Party Transactions
The Instrument holds a contractual right to receive additional shares of Cornerstone Pharmaceuticals capital stock equal to 10% of the fully diluted capital stock of Cornerstone Pharmaceuticals (the “Bonus Shares”) upon the achievement of certain milestones. The additional 10% is based on the fully diluted capital stock of Cornerstone Pharmaceuticals, excluding the remainder for the Warrant, at the time of issuance. If any of the milestones are met, the Bonus Shares are to be issued without any additional payment.
Pharma Holdings holds the Warrant as well as other equity and governance rights in Cornerstone Pharmaceuticals. The Company currently owns 51% of the issued and outstanding equity in Cornerstone Pharmaceuticals. Approximately 8% of the issued and outstanding equity is owned by the Company’s subsidiary CS Pharma and 43% is held by the Company’s subsidiary Pharma Holdings. The Company’s subsidiary Pharma Holdings holds the Warrant. The Instrument holds 10% of the interest in Pharma Holdings and would need to contribute 10% of any cash necessary to exercise any portion of the Warrant. Following any exercise, a portion of the Company’s interest in Cornerstone Pharmaceuticals would continue to be held for the benefit of the other equity holders in Pharma Holdings and CS Pharma. Cornerstone Pharmaceuticals may also issue additional equity interests, such as employee stock options, which will require the Company to pay additional cash to maintain the Company’s ownership percentage or exercise the Warrant in full. The terms of the Warrant provide that it expired on April 1, 2022; however, the Company has asserted that it may be entitled to a further extension of the Warrant. At this time, the Company does not intend to exercise the Warrant.
On January 28, 2021, Pharma Holdings partially exercised the Warrant to maintain the 51% ownership percentage and purchased 7.3 million shares of Cornerstone Pharmaceuticals’ Series D Preferred Stock for $9.1 million, of which $0.9 million was contributed by the holder of a minority interest in Pharma Holdings.
Due to the Data Events, on October 28, 2021, the Company recorded an impairment charge of approximately $79.1 million related to the cost method investment in Cornerstone Pharmaceuticals representing the total amount of the Company’s cost method investment. The impairment loss was included in “Impairment of cost method investment – Cornerstone Pharmaceuticals” in the consolidated statements of operations and comprehensive income (loss) for the three months ended October 31, 2021.
Approximately $17.3 million of the total impairment loss of $79.1 million was applicable to noncontrolling interests in certain of the Company’s subsidiaries and was allocated to the holders of interests in CS Pharma and Pharma Holdings in the approximate amounts of $10.4 million and $6.9 million, respectively.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Line of Credit to Cornerstone Pharmaceuticals and Impairment of Related Receivable
On September 24, 2021, the Company entered into a Line of Credit Loan Agreement (the “Line of Credit Agreement”) with Cornerstone Pharmaceuticals under which Cornerstone Pharmaceuticals borrowed $25 million from the Company. The first advance was in the amount of $1.9 million on September 24, 2021. On October 1, 2021, a second advance was made in the amount of $23.1 million. The Line of Credit Agreement accrues interest at 9% per annum. The maturity date of the Line of Credit Agreement was June 17, 2022, and the amounts due on that date were not paid. The Company is in discussions with Cornerstone Pharmaceuticals and is evaluating its rights and plan of action with respect to the Line of Credit Agreement (in the contexts of all of its interests in Cornerstone Pharmaceuticals).
Due to the Data Events, the Company recorded a full reserve on the amounts due the Company from Cornerstone Pharmaceuticals related to the Line of Credit Agreement for $25 million during the three months ended October 31, 2021.
The Company continuesalso recorded a loss on related party receivables of approximately $0 and $908 thousand related to maintainother amounts owed by Cornerstone Pharmaceuticals during the three months ended October 31, 2022 and 2021, respectively.
NOTE 5 – INVESTMENT IN RP FINANCE, LLC
On February 3, 2020, Cornerstone Pharmaceuticals entered into a Line of Credit Loan Agreement (“RPF Line of Credit”) with RP Finance which provides a revolving commitment of up to $50,000,000 to fund clinical trials and other capital needs.
The Company owns 37.5% of the equity interests in RP Finance and is required to fund 37.5% of funding requests from Cornerstone Pharmaceuticals under the RPF Line of Credit. The Instrument owns 37.5% of the equity interests in RP Finance, and is required to fund 37.5% of funding requests from Cornerstone Pharmaceuticals under the RPF Line of Credit. The remaining 25% equity interests in RP Finance are owned by other shareholders of Cornerstone Pharmaceuticals.
Under the RPF Line of Credit, all funds borrowed will bear interest at the mid-term Applicable Federal Rate published by the U.S. Internal Revenue Service. The maturity date is the earliest of February 3, 2025, upon a change of control of Cornerstone Pharmaceuticals or a sale of Cornerstone Pharmaceuticals or its assets. Cornerstone Pharmaceuticals can draw on the facility on 60 days’ notice. The funds borrowed under the RPF Line of Credit must be repaid out of certain proceeds from equity sales by Cornerstone Pharmaceuticals.
In connection with entering into the Line of Credit Agreement, Cornerstone Pharmaceuticals agreed to issue to RP Finance shares of its common stock representing 12% of the issued and outstanding shares of Cornerstone Pharmaceuticals common stock, with such interest subject to anti-dilution protection as set forth in the RPF Line of Credit.
The Company has determined that RP Finance is a VIE; however, the Company has determined that it is not the primary beneficiary as the Company does not have the power to direct the activities of RP Finance that most significantly impact RP Finance’s economic performance and, therefore, is not required to consolidate RP Finance. Therefore, the Company will use the equity method of accounting to record its investment in RP Finance. The Company has recognized $0 and a loss of $575 thousand from its ownership interests of 37.5% in RP Finance for the three months ended October 31, 2022 and 2021, respectively. The assets and operations of RP Finance are not significant and the Company has identified the equity investment in RP Finance as a related party transaction (see Note 13).
In August 2020, Cornerstone Pharmaceuticals called for a $5 million draw on the RPF Line of Credit and the facility was funded by RP Finance in the amount of $5 million. In November 2020, Cornerstone Pharmaceuticals called for a second $5 million draw on the RPF Line of Credit and the facility was funded by RP Finance in the amount of $5 million. In June 2021 and July 2021, Cornerstone Pharmaceuticals called for a total aggregate of $10 million in draws on the line of RPF Line of Credit and the facility was funded by RP Finance in the amount of $10 million. In September 2021, Cornerstone Pharmaceuticals called for a $5 million draw on the RPF Line of Credit and the facility was funded by RP Finance LLC in the amount of $5 million.
As of October 31, 2022, the Company has funded a cumulative total of $9.375 million in accordance with its 37.5% ownership interests in RP Finance.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Impairment of Equity Method Investment
Due to the Data Events, during the three months ended October 31, 2021, the Company recorded equity in the loss of RP Finance of $575 thousand. As of October 31, 2022, the equity method investment on the Company’s balance sheet was $0, and no additional equity loss of RP Finance was recorded during the three months ended October 31, 2022. The Company was not obligated to guarantee obligations of RP Finance and is not committed to provided further financial support for RP Finance. Additionally, during three months ended October 31, 2021, the Company recorded a loss on related party receivables of $9.375 million related to amounts owed by RP Finance.
NOTE 6 – INVESTMENT IN LIPOMEDIX PHARMACEUTICALS LTD.
LipoMedix is a development-stage, privately held Israeli company focused on the development of an innovative, safe and effective cancer therapy based on liposome delivery.
As of October 31, 2022, the Company held 84% of the issued and outstanding ordinary shares of LipoMedix and has consolidated this investment from the second quarter of fiscal 2018.
In March 2021, the Company provided bridge financing in the principal amount of up to $400,000 to LipoMedix with a maturity date of September 1, 2021, and an interest rate of 8% per annum. As of September 1, 2021, LipoMedix was in default on the terms of the loan and as such, the interest rate has increased to 15% per annum.
On November 15, 2021, the Company entered into a share purchase agreement with LipoMedix to purchase up to 15,975,000 ordinary shares at $0.1878 per share for an aggregate purchase price of $3.0 million (the “Share Purchase Agreement”). Additionally, LipoMedix issued the Company a warrant to purchase up to 15,975,000 ordinary shares at an exercise price of $0.1878 per share which expires on November 11, 2022.
As of the date of the Share Purchase Agreement, there was an outstanding loan balance including principal of $400 thousand and accrued interest of $21.8 thousand owed by LipoMedix to the Company on the note from March 2021. The amount due on the loan was netted against the approximately $3.0 million aggregate purchase price due to LipoMedix, resulting in a cash payment by the Company of approximately $2.6 million in exchange for the 15,975,000 shares purchased. As a result of the share purchase, the Company’s ownership of LipoMedix increased to approximately 84% with a noncontrolling interest of approximately 16%. The Company recorded approximately $8 thousand to adjust the carrying amount of the noncontrolling interest to reflect the Company’s increased ownership interest in LipoMedix’s net assets.
NOTE 7 – INVESTMENTS IN MARKETABLE SECURITIES
The Company has classified its investments in corporate bonds and U.S. treasury bills as available-for-sale securities. These securities are carried at estimated fair value with unrealized holding gains and losses included in accumulated other comprehensive loss in stockholders’ equity until realized. Investment transactions are recorded on their trade date. Gains and losses on marketable security transactions are reported on the specific-identification method. Interest income is accrued daily and adjusted for amortization of premiums and accretion of discounts on the corporate bonds and U.S. treasury bills.
The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for available-for-sale securities as of October 31, 2022 and July 31, 2022 are as follows:
October 31, 2022 | Amortized cost | Gross unrealized gains | Gross unrealized (losses) | Fair value | ||||||||||||
(in thousands) | ||||||||||||||||
Available-for-sale securities: | ||||||||||||||||
U.S. Treasury Bills | $ | 16,194 | $ | 11 | $ | — | $ | 16,205 | ||||||||
Corporate bonds | 54,780 | 224 | (195 | ) | 54,809 | |||||||||||
Total available-for-sale securities | $ | 70,974 | $ | 235 | $ | (195 | ) | $ | 71,014 |
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
July 31, 2022 | Amortized cost | Gross unrealized gains | Gross unrealized (losses) | Fair value | ||||||||||||
(in thousands) | ||||||||||||||||
Available-for-sale securities: | ||||||||||||||||
Corporate bonds | $ | 36,761 | $ | 81 | $ | (144 | ) | $ | 36,698 | |||||||
Total available-for-sale securities | $ | 36,761 | $ | 81 | $ | (144 | ) | $ | 36,698 |
During the three months ended October 31, 2022, the Company reclassified approximately $15 thousand of unrealized gains out of accumulated other comprehensive loss related to maturities of available-for-sale securities into consolidated net loss in the consolidated statements of operations and comprehensive income (loss) in realized gain on available-for-sale securities.
Maturities of corporate bonds and U.S. Treasury Bills held as of October 31, 2022 were all due within one year.
Marketable securities in an unrealized loss position as of October 31, 2022 were not deemed impaired at acquisition and subsequent declines in fair value are not deemed attributed to declines in credit quality. The Company believes that it is more likely than not that it will receive a full recovery of par value on the securities, although there can be no assurance that such recovery will occur.
NOTE 8 – FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
● | Level 1 - quoted prices in active markets for identical assets or liabilities; |
● | Level 2 - quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or |
● | Level 3 - unobservable inputs for the asset or liability, such as discounted cash flow models or valuations. |
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following is a listing of the Company’s assets required to be measured at fair value on a recurring basis and where they are classified within the fair value hierarchy as of October 31, 2022 and July 31, 2022:
October 31, 2022 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Assets: | ||||||||||||||||
Available-for-sale securities - Corporate Bonds | $ | — | $ | 54,809 | $ | — | $ | 54,809 | ||||||||
Available-for-sale securities - U.S. Treasury Bills | 16,205 | — | — | 16,205 | ||||||||||||
Hedge funds | — | — | 4,637 | 4,637 | ||||||||||||
Total | $ | 16,205 | $ | 54,809 | $ | 4,637 | $ | 75,651 |
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
July 31, 2022 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Assets: | ||||||||||||||||
Available-for-sale securities | $ | — | $ | 36,698 | $ | — | $ | 36,698 | ||||||||
Hedge funds | — | — | 4,764 | 4,764 | ||||||||||||
Total | $ | — | $ | 36,698 | $ | 4,764 | $ | 41,462 |
As of October 31, 2022 and July 31, 2022, the Company did not have any liabilities measured at fair value on a recurring basis.
The following table summarizes the changes in the fair value of the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
Three Months Ended October 31, | ||||||||
2022 | 2021 | |||||||
(in thousands) | ||||||||
Balance, beginning of period | $ | 4,764 | $ | 5,268 | ||||
Total (loss) gain included in earnings | (127 | ) | 211 | |||||
Balance, end of period | $ | 4,637 | $ | 5,479 |
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.
The Company holds $0.3 million in investments in securities in another entity that are not liquid, which were included in Investments - Other Pharmaceuticals in the accompanying consolidated balance sheets. The investment is accounted for under ASC 321, Investments - Equity Securities, using the measurement alternative as defined within the guidance, and the Company recorded an impairment loss of $156 and $0 thousand for the three months ended October 31, 2022 and 2021, respectively.
Fair Value of Other Financial Instruments
The estimated fair value of the Company’s other financial instruments was determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting these data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.
Marketable securities. The Company’s available-for-sale securities are comprised of investments in fixed income corporate bonds and U.S. treasury bills which are recorded in available-for-sale securities on the consolidated balance sheet. These securities are recorded at fair value using market prices at October 31, 2022. The fair value estimates for corporate bonds and U.S treasury bills were classified as Level 2 and Level 1, respectively.
Other assets and other liabilities. At October 31, 2022 and July 31, 2022, the carrying amount of these assets and liabilities approximated fair value. The fair values were estimated based on the Company’s assumptions, which were classified as Level 3 of the fair value hierarchy.
The Company’s financial instruments include trade accounts receivable, trade accounts payable, and due from related parties. The recorded carrying amounts of trade accounts receivable, trade accounts payable and due from related parties approximate their fair value due to their short-term nature.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 – TRADE ACCOUNTS RECEIVABLE
Trade Accounts Receivable consisted of the following:
October 31, 2022 | July 31, 2022 | |||||||
(in thousands) | ||||||||
Trade Accounts Receivable | $ | 254 | $ | 196 | ||||
Accounts Receivable - Related Party | 123 | 158 | ||||||
Less Allowance for Doubtful Accounts | (242 | ) | (197 | ) | ||||
Trade Accounts Receivable, net | $ | 135 | $ | 157 |
NOTE 10 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
October 31, | July 31, | |||||||
2022 | 2022 | |||||||
(in thousands) | ||||||||
Building and Improvements | $ | 2,505 | $ | 2,505 | ||||
Other | 68 | 68 | ||||||
2,573 | 2,573 | |||||||
Less Accumulated Depreciation | (822 | ) | (803 | ) | ||||
Total | $ | 1,751 | $ | 1,770 |
Other property and equipment consist of other equipment and miscellaneous computer hardware.
Depreciation expense pertaining to property and equipment was approximately $22 thousand and $19 thousand for the three months ended October 31, 2022 and 2021, respectively.
The Company’s headquarters are located at 520 Broad Street in Newark, New Jersey, where it occupies office space and which was previously owned by the Company. The table above exclude the assets of the 520 Property which were classified as held-for-sale as of July 31, 2022 and subsequently sold on August 22, 2022. Refer to Note 3 for further information on the 520 Property.
NOTE 11 – EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss) attributable to all classes of common stockholders of the Company by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings (loss) per share includes potentially dilutive securities such as stock options, unvested restricted stock, warrants to purchase common stock, and other convertible instruments unless the result of inclusion would be anti-dilutive.
The securities set forth below have been excluded from the calculation of diluted net loss per share for the three months ended October 31, 2022 and 2021 because inclusion of all such securities would have been anti-dilutive for all periods presented.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the Company’s potentially dilutive securities, in common share equivalents, which have been excluded from the calculation of dilutive loss per share as their effect would be anti-dilutive:
Three Months Ended October 31, | ||||||||
2022 | 2021 | |||||||
Shares issuable upon exercise of stock options | 1,021,277 | 960,554 | ||||||
Shares issuable upon vesting of restricted stock | 1,461,934 | 1,004,265 | ||||||
Shares issuable upon exercise of warrants to purchase Class B common stock | — | 26,189 | ||||||
2,483,211 | 1,991,008 |
The diluted earnings (loss) per share computation equals basic loss per share for the three months ended October 31, 2022 and 2021 because the Company had a net loss from continuing operations in all such periods and the impact of the assumed exercise of non-vested restricted shares, stock options, and warrants would have been anti-dilutive.
The following table summarized the basic and diluted earnings (loss) per share calculations:
Three Months Ended October 31, | ||||||||
2022 | 2021 | |||||||
(in thousands) | ||||||||
Numerator: | ||||||||
Net loss from continuing operations | $ | (5,207 | ) | $ | (128,868 | ) | ||
Net loss attributable to noncontrolling interests | (99 | ) | (17,387 | ) | ||||
Numerator for net loss from continuing operations | (5,108 | ) | (111,481 | ) | ||||
Numerator for discontinued operations | 6,700 | (543 | ) | |||||
Net income (loss) attributable to Rafael Holdings, Inc. | $ | 1,592 | $ | (112,024 | ) | |||
Denominator: | ||||||||
Weighted average basic and diluted shares outstanding | 23,015,443 | 18,948,084 | ||||||
Earnings (loss) per share attributable to common shareholders | ||||||||
Basic and diluted: | ||||||||
Continuing operations | $ | (0.22 | ) | $ | (5.88 | ) | ||
Discontinued operations | 0.29 | (0.03 | ) | |||||
Total basic and diluted earnings (loss) per share | $ | 0.07 | $ | (5.91 | ) |
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12 – NOTE PAYABLE, HELD-FOR-SALE
On July 9, 2021, the Company, as guarantor, Rafael Holdings Realty, Inc., a wholly-owned subsidiary of the Company (“Realty”), as pledgor, and Broad-Atlantic Associates, LLC, a wholly-owned subsidiary of Realty (the “Borrower,” and together with the Company and Realty, the “Borrower Parties”), as borrower, entered into a loan agreement (the “Loan Agreement”) with 520 Broad Street LLC, a third-party lender (the “Lender”). The Loan Agreement provided for a loan in the amount of $15 million (the “Note Payable”) from Lender to Borrower secured by (i) a first mortgage on 520 Broad Street, Newark, New Jersey 07102; and (ii) a first priority security interest in the equity of the Borrower as set forth in the Pledge and Security Agreement between Realty and Lender.
The Note Payable bore interest at a rate per annum equal to seven and one-quarter percent (7.25%) from July 9, 2021 through July 31, 2021 and thereafter at an interest rate per annum equal to the 30-day LIBOR Rate, as published in The Wall Street Journal, plus 6.90% per annum, but in no event less than seven and one-quarter percent (7.25%) per annum. The Note Payable was due on August 1, 2022, subject to the Company’s option to extend the maturity date until August 1, 2023 for a fee equal to three-quarters of one percent (0.75%) of the Note Payable.
The Loan Agreement contained customary affirmative covenants, negative covenants and events of default, as defined in the Loan Agreement, including covenants and restrictions that, among other things, restricted the Borrower’s ability to incur liens, or transfer, lease or sell the collateral as defined in the Loan Agreement. A failure to comply with these covenants would have permitted the Lender to declare the Borrower’s obligations under the Loan Agreement, together with accrued interest and fees, to be immediately due and payable. The Company was in compliance with the covenants in the Loan Agreement as of July 31, 2022. The Company extended the maturity date to November 1, 2022 and paid an extension fee of $37,500 on July 29, 2022.
In connection with the sale of the 520 Property, on August 22, 2022, the Company paid off the outstanding principal balance of $15 million and accrued interest of approximately $87,000 on the Note Payable. Refer to Note 3 for further details on the subsequent sale of the 520 Property.
Interest expense under the Note Payable, which is recognized in loss on discontinued operations, amounted to $87 thousand and $271 thousand for the three months ended October 31, 2022 and 2021, respectively.
Unamortized debt issuance costs on the Note Payable totaled approximately $0 and $347 thousand as of October 31, 2022 and 2021, respectively. Amortization of the debt discount on the Note Payable totaled approximately $0 thousand and $125 thousand for the three months ended October 31, 2022 and 2021, respectively.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13 – RELATED PARTY TRANSACTIONS
IDT Corporation
The Company has historically maintained an intercompany balance Due to IDTdue to/from related parties that relates to cash advances for investments, loan repayments, charges for services provided to the Company by IDT Corporation, or IDT, and payroll costs for the Company'sCompany’s personnel that arewere paid by IDT, partially offset byIDT. The Company also receives rental income paid byfrom various companies under common control to IDT. The Company recorded expense of approximately $68 thousand and $75 thousand in related party services to IDT for the three months ended October 31, 2022 and 2021, respectively, of which approximately $44 thousand and $75 thousand is included in Due to Related Parties at October 31, 2022 and 2021, respectively.
IDT leased approximately 80,000 square feet of office space plus parking at 520 Broad Street, Newark, New Jersey and leases approximately 3,600 square feet of office space in Jerusalem, Israel. The Company invoiced IDT approximately $129 thousand of which approximately $102 thousand is included in discontinued operations and $469 thousand of which approximately $441 thousand is included in discontinued operations for office rent and parking during the Company. Historically, this also related to cash advances for investments.three months ended October 31, 2022 and 2021, respectively. As of October 31, 2022 and 2021, IDT advanced $900,000 and $9.4 million toowed the Company during the six months ended January 31, 2018approximately $2 thousand and January 31, 2017 to invest in Rafael$675 thousand, respectively, for office rent and parking.
Cornerstone Pharmaceuticals and Lipomedix. IDT charges the
The Company for certain transactions and allocates routine expenses for, among other things: (1) the allocation between the Company and IDT of employee benefits, taxes and other liabilities and obligations; (2) services to behad provided by IDT relating to human resources and employee benefits administration; (3) the allocation of responsibilities relating to employee compensation and benefit plans and programs and other related matters; and (4)Cornerstone Pharmaceuticals with administrative, finance, accounting, tax and legal services to be provided by IDTservices. Howard S. Jonas currently serves on the Board of Directors of Cornerstone Pharmaceuticals and owns an equity interest in Cornerstone Pharmaceuticals. The Company billed Cornerstone Pharmaceuticals $120 thousand for the three months ended October 31, 2021. As of October 31, 2022 and July 31, 2022, Cornerstone Pharmaceuticals owed the Company $720 thousand, for which a full allowance for uncollectibility has been recorded.
Due to the Company. InData Events, in the sixthree months ended JanuaryOctober 31, 2018 and January 31, 2017, IDT allocated2021, the balance owed to the Company an aggregateby Cornerstone Pharmaceuticals was fully reserved, resulting in a loss on related party receivable of $720 thousand (see Note 4).
Related Party Rental Income
The Company leased space to related parties (including IDT Corporation - see above) which represented approximately $436,00044% and $471,000, respectively,63% for payroll, benefits, insurancethe three months ended October 31, 2022 and other expenses, which were included2021, respectively. The portion of related party rental income pertaining to the 520 Property has been classified in “Selling, general and administrative expense” indiscontinued operations on the combinedconsolidated statements of operations and comprehensive income (loss). In all periods presented, for the three months ended October 31, 2022 and 2021.
RP Finance
For the three months ended October 31, 2022 and 2021, respectively, the Company recognized a loss of $0 thousand and earnings of $575 thousand in income from its ownership interests of 37.5% in RP Finance, respectively.
Howard Jonas, Chairman of the Board and Former Chief Executive Officer
In December 2020, two entities, on whose Boards of Directors Howard Jonas, the Company’s Chairman of the Board and Executive Chairman and former Chief Executive Officer serves, each purchased 218,245 shares of Class B common stock for consideration of $5 million each. In connection with the purchases, each purchaser was includedgranted warrants (the “Issued Warrants”) to purchase twenty percent (20%) of the shares of Class B common stock purchased by such purchaser. The Issued Warrants have an exercise price of $22.91 per share and expired on June 6, 2022. The Issued Warrants were not exercised. The shares and Issued Warrants were issued in IDT's combined federalreliance on the exemption from registration provided for under Section 4(a)(2) of the Securities Act of 1933, as amended.
On June 22, 2022, the Company entered into a Stock Purchase Agreement (the “I9 SPA”) with I9 Plus, LLC. On July 6, 2022, pursuant to the I9 SPA, the Company sold 3,225,806 shares of the Company’s Class B common stock to I9 Plus, LLC at a price per share of $1.86 and an aggregate sale price of $6 million.
LipoMedix Pharmaceuticals, Ltd.
As of the date of the Share Purchase Agreement, on November 15, 2021, there was an outstanding loan balance including principal of $400 thousand and accrued interest of $21.8 thousand owed by LipoMedix to the Company on the note from March 2021. The amount due on the loan was netted against the $3.0 million aggregate purchase price due LipoMedix, resulting in a cash payment by the Company of approximately $2.6 million in exchange for the 15,975,000 shares purchased. As a result of the share purchase, the Company’s ownership of LipoMedix increased to approximately 84% with a noncontrolling interest of approximately 16%.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 14 – INCOME TAXES
During the three months ended October 31, 2022 and 2021, the Company recognized an income tax return.
provision of $5 thousand on loss from continuing operations before income tax of $5.2 million, and $0 on a loss from continuing operations before income tax of $128.8 million, respectively. The change in income tax expense in relation to the Company’s liabilityloss before income tax during the three months ended October 31, 2022 compared to IDTthe three months ended October 31, 2021 was as follows:
primarily due to differences in the amount of taxable (loss) income in the various taxing jurisdictions and the associated valuation allowances. As of October 31, 2022 and 2021, the Company recorded valuation allowances for the total deferred tax asset balances.
Six Months Ended January 31, | ||||||||
(in thousands) | 2018 (unaudited) | 2017 (unaudited) | ||||||
Balance at beginning of period | $ | 23,693 | $ | 15,145 | ||||
Payments by IDT on behalf of the Company | 436 | 471 | ||||||
Rental revenues earned from IDT | (994 | ) | (1,682 | ) | ||||
Cash repayments, net of advances | 1,256 | 9,326 | ||||||
Balance at end of period | $ | 24,391 | $ | 23,260 |
The Company amended allanticipates that its assumptions and estimates may change as a result of future guidance and interpretation from the Internal Revenue Service, the SEC, the FASB, and various other taxing jurisdictions. In particular, the Company anticipates that the U.S. state jurisdictions will continue to determine and announce their conformity with or decoupling from the Tax Act, either in its related party leases as of August 1, 2017. The related party leases expireentirety or with respect to specific provisions. Legislative and interpretive actions could result in April 2025 and are for 88,631 square feet and include two parking spots per thousand square feet of space leased at 520 Broad Street and for 12,400 square feet in Israel. The annual rent will be approximately $2.0 million. The related parties haveadjustments to the right to terminate theses leases upon four months’ notice, and upon early termination will pay a termination penalty equal to 25% of the portion of the rent due over the course of the remaining term. Related parties will have the right to lease an additional 25,000 square feet in the building located at 520 Broad Street on the same terms as the base lease, and other rights to a further 25,000 square feet should all available space be leased to other tenants. Upon expiration of the lease, these related parties have the right to renew the leases for another 5 years.Company’s balances.
NOTE 15 – BUSINESS SEGMENT INFORMATION
Note 7 — Business Segment Information
The Company conducts business as two operating segments, PharmaceuticalsHealthcare and Real Estate. The Company’s reportable segments are distinguished by types of service, customers and methods used to provide their services. The operating results of these business segments are regularly reviewed by the Company’s Chief Executive Officer and the chief operating decision maker.
decision-maker.
Beginning in the second quarter of fiscal 2018, the Pharmaceuticals segment is comprised of debt interests and warrants in Rafael Pharmaceuticals and a majority equity interest in Lipomedix Pharmaceuticals. Comparative results have been reclassified and restated as if the Pharmaceuticals segment existed for all periods presented. To date, the Pharmaceuticals segment has not generated any revenues.
RAFAEL HOLDINGS, INC. AND AFFILIATESNOTES TO COMBINED FINANCIAL STATEMENTS
Note 7 — Business Segment Information (cont.)
The Real Estate segment includes the Company’s real estate holdings, including the building at 520 Broad Street in Newark, New Jersey that houses IDT’s headquarters and its associated public garage, an office/data center building in Piscataway, New Jersey and a portion of a building in Israel that hosts offices for IDT and certain affiliates.
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 Real Estate segment based primarily on income (loss) from operations and its PharmaceuticalsHealthcare segment based primarily on research and development efforts and results of clinical trials.trials and the Real Estate segment based primarily on results of operations. All investments in RafaelCornerstone Pharmaceuticals and assets expenses and expenses associated with LipomedixLipoMedix, Barer, Farber, and Rafael Medical Devices are tracked separately in the Healthcare segment.
The Healthcare segment is comprised of preferred and common equity interests and the Warrant to purchase equity interests in Cornerstone Pharmaceuticals, segment. All corporate costs are allocated toa 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.segment consists of the Company’s real estate holdings, comprised of a portion of a commercial building in Israel.
Operating results for the business segments of the Company are as follows:
(in thousands) | Pharmaceuticals | Real Estate | Total | |||||||||
Three Months Ended January 31, 2018 | ||||||||||||
Revenues | $ | — | $ | 956 | $ | 956 | ||||||
(Loss) income from operations | (357 | ) | (459 | ) | (816 | ) | ||||||
Three Months Ended January 31, 2017 | ||||||||||||
Revenues | $ | — | $ | 1,337 | $ | 1,337 | ||||||
Income (loss) from operations | — | 127 | 127 | |||||||||
Six Months Ended January 31, 2018 | ||||||||||||
Revenues | $ | — | $ | 2,063 | $ | 2,063 | ||||||
(Loss) income from operations | (357 | ) | (1,512 | ) | (1,869 | ) | ||||||
Six Months Ended January 31, 2017 | ||||||||||||
Revenues | $ | — | $ | 2,736 | $ | 2,736 | ||||||
Income (loss) from operations | — | 285 | 285 |
(in thousands) | Healthcare | Real Estate | Total | |||||||||
Three Months Ended October 31, 2022 | ||||||||||||
Revenues | $ | — | $ | 70 | $ | 70 | ||||||
(Loss) income from operations | (5,164 | ) | 22 | (5,142 | ) | |||||||
(Loss) income from continuing operations before income taxes | (5,224 | ) | 22 | (5,202 | ) | |||||||
Three Months Ended October 31, 2021 | ||||||||||||
Revenues | $ | — | $ | 191 | $ | 191 | ||||||
(Loss) income from operations | (49,659 | ) | 121 | (49,538 | ) | |||||||
(Loss) income from continuing operations before income taxes | (128,414 | ) | 121 | (128,293 | ) |
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Geographic Information
Revenues from customerstenants located outside of the United States were generated entirely from related parties located in Israel. Revenues from these non-United States customers as a percentage of total revenues were as follows (revenues by country are determined based on the location of the related facility):
Six months ended | January 31, (unaudited) | January 31, (unaudited) | ||||||
Revenue from customers located in Israel | 2 | % | 5 | % |
Three Months Ended October 31, | 2022 | 2021 | ||||||
Revenue from tenants located in Israel | 22 | % | 7 | % |
Net long-lived assets and total assets held byoutside of the CompanyUnited States, which are located in Israel, were located as follows:
(in thousands) | United States | Israel | Total | |||||||||
October 31, 2022 | ||||||||||||
Long-lived assets, net | $ | 302 | $ | 1,449 | $ | 1,751 | ||||||
Total assets | 99,171 | 4,045 | 103,216 | |||||||||
July 31, 2022 | ||||||||||||
Long-lived assets, net | $ | 305 | $ | 1,465 | $ | 1,770 | ||||||
Total assets | 114,053 | 4,267 | 118,320 |
NOTE 16 – COMMITMENTS AND CONTINGENCIES
(in thousands) | United States | Foreign | Total | |||||||||
January 31, 2018 (unaudited) | ||||||||||||
Long-lived Assets, net | $ | 61,449 | $ | 3,728 | $ | 65,177 | ||||||
Total Assets | 73,034 | 4,610 | 77,644 | |||||||||
July 31, 2017 | ||||||||||||
Long-lived Assets, net | $ | 71,674 | $ | 2,363 | $ | 74,037 | ||||||
Total Assets | 83,675 | 2,529 | 86,204 |
Note 8 — 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 17 – EQUITY
Class A Common Stock and Class B Common Stock
The rights of holders of Class A common stock and Class B common stock are identical except for certain voting and conversion rights and restrictions on transferability. The holders of Class A common stock and Class B common stock receive identical dividends per share when and if declared by the Company’s Board of Directors. In addition, the holders of Class A common stock and Class B common stock have identical and equal priority rights per share in liquidation. The Class A common stock and Class B common stock do not have any other contractual participation rights. The holders of Class A common stock are entitled to three votes per share and the holders of Class B common stock are entitled to one-tenth of a vote per share. Each share of Class A common stock may be converted into one share of Class B common stock, at any time, at the option of the holder. Shares of Class A common stock are subject to certain limitations on transferability that do not apply to shares of Class B common stock.
On May 27, 2021, the Company filed a Registration Statement on Form S-3, whereby the Company may sell up to $250 million of Class B common stock. This Registration Statement was declared effective on June 7, 2021.
On June 1, 2021, the Company filed a Registration Statement on Form S-3 to issue 48,859 shares of Class B common stock for payment due on the purchase of Altira, an investment which has been subsequently fully impaired.
On August 19, 2021, the Company entered into a Securities Purchase Agreement (the “Institutional Purchase Agreement”) with Institutional Investors and a Securities Purchase Agreement with I9Plus, LLC, (the “Jonas Purchase Agreement”), an entity affiliated with Howard S. Jonas, the Chairman of the Board of Directors of the Company. On August 24, 2021, the Company issued 2,833,425 shares of Class B common stock (the “Institutional Shares”), par value $0.01 per share, to the Institutional Investors, at a purchase price equal to $35.00 per share, for aggregate gross proceeds of approximately $99.2 million, before deducting placement agent fees and other offering expenses. Additionally, pursuant to the Jonas Purchase Agreement, the Company issued 112,501 shares of Class B common stock to I9Plus, LLC, at a purchase price equal to $44.42 per share, which was equal to the closing price of a share of the Class B common stock on the New York Stock Exchange on August 19, 2021 (the “Jonas Offering”). The Jonas Offering resulted in additional aggregate gross proceeds of approximately $5.0 million. The total net proceeds from the issuance of shares was $98.0 million after deducting transaction costs of $6.2 million.
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.
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. The maximum number of shares of Class B common stock that may be issued under the 2021 Plan is 1,919,025 shares. On January 19, 2022, the Company filed a Registration Statement on Form S-8 registering 1,919,025 shares Class B Common Stock reserved for issuance under the 2021 Plan. During three months ended October 31, 2022, no restricted shares or options were issued pursuant to the 2021 Plan, respectively. As of October 31, 2022, there were 229,697 shares still available for issuance under the 2021 Plan. On November 28, 2022, the Company’s Board of Directors approved an amendment to the 2021 Plan that, among other things, increases the number of shares of the Company’s Class B Common Stock available for the grant of awards thereunder by an additional 696,770, subject to stockholders’ approval.
On February 15, 2022, the Company filed a Registration Statement on Form S-3 (as amended on March 2, 2022) registering the resale by institutional investors (the “Institutional Investors”) of the shares purchased by them. The Registration Statement was declared effective on March 7, 2022.
Stock Options
A summary of stock option activity for the Company is as follows:
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
Outstanding at July 31, 2022 | 1,021,277 | $ | 12.11 | 4.47 | $ | — | ||||||||||
Granted | — | — | — | — | ||||||||||||
Cancelled / Forfeited | — | — | — | — | ||||||||||||
Outstanding at October 31, 2022 | 1,021,277 | $ | 12.11 | 4.22 | $ | — | ||||||||||
Exercisable at October 31, 2022 | 594,607 | $ | 6.69 | 0.80 | $ | — |
At October 31, 2022, there are unrecognized compensation costs related to non-vested stock options of $3.9 million, which are expected to be recognized over the next 3.9 years.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The value of option grants is calculated using the Black-Scholes option pricing model with the following assumptions for options granted during the three months ended October 31, 2021:
October 31, 2021 | ||||
Risk-free interest rate | 0.67% - 1.16 | % | ||
Expected term (in years) | 6.04 | |||
Expected volatility | 75 | % | ||
Expected dividend yield | — | % |
Rafael Medical Devices, Inc. Stock Options
The Rafael Medical Devices, Inc. 2022 Equity Incentive Plan (the “RMD 2022 Plan”) was created and adopted by the Company in May 2022. The RMD 2022 Plan allows for the issuance of up to 10,000 shares of Class B common stock which may be awarded in the form of incentive stock options or restricted shares. There are 4,734 shares available for issuance under the RMD 2022 Plan as of October 31, 2022.
A summary of stock option activity for Rafael Medical Devices, Inc. is as follows:
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
Outstanding at July 31, 2022 | 5,266 | $ | 3.82 | 9.76 | $ | — | ||||||||||
Granted | — | — | — | — | ||||||||||||
Outstanding at October 31, 2022 | 5,266 | $ | 3.82 | 9.51 | — | |||||||||||
Exercisable at October 31, 2022 | 1,316 | $ | 3.82 | 9.51 | $ | — |
At October 31, 2022, there are unrecognized compensation costs related to non-vested stock options of $10 thousand, which are expected to be recognized over the next 2.18 years.
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 2021, the Company granted a total of 12,609 restricted shares of Class B common stock to non-employee directors, all of which were granted from the 2018 Equity Incentive Plan. The restricted shares vested immediately on the grant date. The share based compensation cost was approximately $286 thousand, which was included in general and administrative expense in the consolidated statement of operations and comprehensive income (loss).
In January 2022, the Company granted 33,360 restricted shares of Class B common stock to non-employee directors, 18,336 of which were granted from under 2018 Equity Incentive Plan, and 15,024 of which were granted under the 2021 Plan. The restricted shares vested immediately on the grant date. The share based compensation cost was approximately $151 thousand, which was included in general and administrative expense in the consolidated statement of operations and comprehensive income (loss).
On February 1, 2022, the Company issued 986,835 shares of Class B restricted stock to two members of the executive team. Approximately 24% of the restricted shares vest in December 2022, with the remaining shares vesting ratably each quarter through December 2025.
On June 14, 2022, the Company issued 452,130 shares of Class B restricted stock to Howard S. Jonas.
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of the status of the Company’s grants of restricted shares of Class B common stock is presented below:
Number of | Weighted | |||||||
Outstanding at July 31, 2022 | 1,507,373 | $ | 4.22 | |||||
Granted | — | — | ||||||
Vested | (45,439 | ) | 4.04 | |||||
Cancelled / Forfeited | — | — | ||||||
Non-vested shares at October 31, 2022 | 1,461,934 | $ | 4.22 |
At October 31, 2022, there was $3.9 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements, which is expected to be recognized over the next three years.
A summary of the stock-based compensation expense for the Company’s equity incentive plans is presented below:
Three Months Ended October 31, | ||||||||
2022 | 2021 | |||||||
(in thousands) | ||||||||
General and administrative | $ | 1,083 | $ | 7,668 | ||||
Research and development | 97 | 183 | ||||||
Net stock-based compensation expense | $ | 1,180 | $ | 7,851 |
NOTE 18 – LEASES
The Company is the lessor of the Israeli property which is leased to tenants under net operating leases with a term expiration date within 2025. Lease income included on the consolidated statements of operations and comprehensive income (loss) was $0.1 million and $0.1 million for the three months ended October 31, 2022 and 2021, respectively. During the three months ended October 31, 2022 and 2021, no real estate property taxes were included in rental income.
The future contractual minimum lease payments to be received (excluding operating expense reimbursements) by the Company as of October 31, 2022, under non-cancellable operating leases which expire on various dates through 2028 are as follows:
Year ending July 31, | Related Parties | Other | Total | |||||||||
(in thousands) | ||||||||||||
2023 (remaining) | $ | 57 | $ | — | $ | 57 | ||||||
2024 | 77 | — | 77 | |||||||||
2025 | 78 | — | 78 | |||||||||
Total Minimum Future Rental Income | $ | 212 | $ | — | $ | 212 |
A related party has the right to terminate the Israeli lease upon four months’ notice. The minimum future rental income pertaining to the 520 Property has been excluded from the table above as it has been classified as discontinued operations for the three months ended October 31, 2022 and 2021.
NOTE 19 – SUBSEQUENT EVENTS
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.
Item 2. |
The following information should be read in conjunction with the accompanying combined financial statements and the associated notes thereto of this Quarterly Report, and the audited combined financial statements and the notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained
Overview
Rafael Holdings, Inc. (NYSE:RFL), (“Rafael Holdings,” “we” or the “Company”), a Delaware corporation, is a holding company with interests in clinical and early-stage pharmaceutical companies (the “Pharmaceutical Companies”), including an investment in Cornerstone Pharmaceuticals, Inc., formerly known as Rafael Pharmaceuticals Inc., a cancer metabolism-based therapeutics company, a majority equity interest in LipoMedix Pharmaceuticals Ltd. (“LipoMedix”), a clinical stage pharmaceutical company, the activities of the Barer Institute Inc. (“Barer”), a wholly-owned preclinical cancer metabolism research operation, and Rafael Medical Devices, Inc. (“Rafael Medical Devices” and together with the Pharmaceutical Companies, the “Healthcare Companies”), a wholly-owned orthopedic-focused medical device company developing instruments to advance minimally invasive surgeries. In November 2022, we resolved to curtail our Registration Statementearly-stage development efforts, including pre-clinical research at the Barer Institute. The decision was taken to reduce spending as we focus on Form 10-12Gexploring strategic opportunities. The Company’s primary focus to date has been to invest in and fund, discover and develop novel cancer therapies, and we further seek to expand our portfolio through opportunistic investments in therapeutics which address high unmet medical needs including through acquisitions, strategic investments, or in-licensing assets. We are currently evaluating external opportunities to acquire, in-license or invest in later stage assets which have the potential to achieve meaningful clinical milestones, improve the lives of patients and increase our shareholder value.
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 building at 520 Broad Street in Newark, New Jersey and an associated public garage. Currently, the Company holds a portion of a commercial building in Jerusalem, Israel as its remaining real estate asset.
The Company has debt and equity investments in Cornerstone Pharmaceuticals, Inc., or Cornerstone Pharmaceuticals, that include preferred and common equity interests and a warrant to purchase additional equity. On June 17, 2021, the Company entered into a merger agreement to acquire full ownership of Cornerstone Pharmaceuticals in exchange for issuing Company Class B common stock to the other stockholders of Cornerstone Pharmaceuticals. On October 28, 2021, the Company announced that the AVENGER 500 Phase 3 clinical trial for CPI-613® (devimistat), Cornerstone Pharmaceuticals’ lead product candidate, did not meet its primary endpoint of significant improvement in overall survival in patients with metastatic adenocarcinoma of the pancreas. In addition, following a pre-specified interim analysis, the independent data monitoring committee for the ARMADA 2000 Phase 3 study for devimistat recommended the trial to be stopped due to a determination that it was unlikely to achieve the primary endpoint (the “Data Events”). In 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, 2017, as filed2022, the value of its loans, receivables, and investment in Cornerstone Pharmaceuticals based upon its valuation of Cornerstone Pharmaceuticals.
On September 24, 2021, the Company entered into a Line of Credit Loan Agreement (the “Line of Credit Agreement”) with the U.S. Securities and Exchange Commission (or SEC).
As used below, unless the context otherwise requires, the terms “the Company,” “Rafael,” “we,” “us,” and “our” refer to Rafael Holdings, Inc., a Delaware corporation, and its subsidiaries, collectively.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words “believes,” “anticipates,” “expects,” “plans,” “intends,” and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materiallyCornerstone Pharmaceuticals under which Cornerstone Pharmaceuticals borrowed $25 million from the results projected in any forward-looking statement. In additionCompany. Due to the factors specifically notedData Events, the Company recorded a full reserve on the $25 million due the Company from Cornerstone Pharmaceuticals.
On February 2, 2022, the Company terminated the Merger Agreement with Cornerstone Pharmaceuticals, effective immediately, in accordance with its terms. Subsequently, on February 2, 2022, the forward-looking statements, other important factors, risks and uncertainties that could result in those differences include, but are not limited to, those discussed under Item 1A to Part I “Risk Factors” in ourCompany withdrew its Registration Statement on Form 10-12GS-4 related to the proposed Merger.
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. Farber Partners, LLC (“Farber”) was formed to support agreements with Princeton University’s Office of Technology Licensing for technology from the year ended July 31, 2017 and in Item 1A to Part II “Risk Factors” in this Form 10-Q. The forward-looking statements are made aslaboratory of the date of this report and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projectedProfessor Joshua Rabinowitz, in the forward-looking statements. Investors should consult allDepartment of the information set forth in this report and the other information set forth from time to time in our reports filed with the SEC pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934,Chemistry, Princeton University, including our Registration Statement on Form 10-12G for the year ended July 31, 2017.
Overview
On or about March 26, 2018, IDT Corporation (“IDT”) expects to complete a tax-free spinoff (the “Spin-Off”) of our capital stock, through a pro rata distribution of our common stockan exclusive worldwide license to its stockholdersSHMT (serine hydroxymethyltransferase) inhibitor program. The Company also holds a majority equity interest in LipoMedix Pharmaceuticals Ltd., a clinical stage oncological pharmaceutical company based in Israel. In addition, the Company has invested in other early-stage pharmaceutical ventures.
As of record as ofOctober 31, 2022, the close of business on March 13, 2018 (the “Spin-Off record date”). As a result of the Spin-Off, each of IDT’s stockholders will receive: (i) one share of our Class A common stock for every two shares of IDT’s Class A common stock held on the Spin-Off record date; (ii) one share of our Class B common stock for every two shares of IDT’s Class B common stock held on the Spin-Off record date; and (iv) cash in lieu of a fractional share of all classes of our common stock.
Rafael will own commercial real estate assets and interests in clinical and early stage pharmaceutical companies. The assets will be operated as two separate lines of business. TheCompany’s commercial real estate holdings consistconsisted of a portion of a commercial building in Israel. On August 22, 2022, the Company completed the sale of the building at 520 Broad Street in Newark, New Jersey that houses IDT’sserves as headquarters for the Company for a purchase price of approximately $49.4 million and its associated public garage, an office/data center buildingrealized net proceeds of approximately $33 million.
On July 1, 2022, the Company determined that the 520 Property met the held-for-sale criteria and the Company has therefore classified the 520 Property as held-for-sale in Piscataway, New Jerseythe consolidated balance sheets at July 31, 2022 and 2021. The sale of the 520 Property also represents a portionsignificant strategic shift that will have a major effect on the Company’s operations and financial results. Therefore, the Company has classified the results of a building in Israel that hosts offices for IDT and certain affiliates. The pharmaceutical holdings include debt interests and warrants in Rafael Pharmaceuticals, Inc., which is a clinical stage, oncology-focused, pharmaceutical company committedoperations related to the development and commercialization of therapies that exploit the metabolic differences between normal cells and cancer cells, and a majority equity interest in Lipomedix Pharmaceuticals Ltd., an early stage pharmaceutical development company based in Israel. All of these assets were non-core assets outside of IDT’s telecom and payment services businesses.
Critical Accounting Policies
Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted520 Property as discontinued operations in the United Statesconsolidated statements of America, or U.S. GAAP. The preparation of financial statements requires management to make estimatesoperations and assumptions that affectcomprehensive income (loss). Depreciation on the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management’s most subjective or complex judgments, often520 Property has ceased on July 1, 2022, as a result of matters that are inherently uncertainthe 520 Property being classified as held-for-sale. See Note 3 to our accompanying consolidated financial statements for further information regarding discontinued operations.
Business Update - COVID-19, War in Ukraine
In late 2019, a novel strain of coronavirus, SARS-CoV, which causes COVID-19, was identified and may change in subsequent periods. Management bases its estimates and judgments on historical experience and other factors that are believedhas proved to be reasonable underhighly contagious. It has since spread extensively throughout the circumstances. Actual results may differ from these estimates under different assumptions or conditions. See Note 1world, including the United States, and was declared a global pandemic by the World Health Organization in March 2020. The Company actively monitors the outbreak, including the spread of new variants of interest, and its potential impact on the Company’s operations and those of the Company’s holdings.
Even with growing availability of testing and vaccines and the relaxation of public health measures that were implemented to limit the combined financial statements in our Registration Statement on Form 10-12Gspread of the pandemic, there continues to be uncertainty around the COVID-19 pandemic and its impact.
The Company had implemented a number of measures to protect the health and safety of the Company’s workforce including a voluntary work-from-home policy for the year ended July 31, 2017 for a complete discussionCompany’s workforce who can perform their jobs from home as well as restrictions on discretionary business travel. Most of our significant accounting policies. employees have returned to working from the office on a part-time basis.
Recently Issued Accounting Standards Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”), and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard that will supersede mostThe full impact of the current revenue recognition guidance under U.S. GAAP and International Financial Reporting Standards (“IFRS”). The goalsCOVID-19 pandemic on the Company will depend on factors such as the length of time of the revenue recognition project were to clarifypandemic; the responses of federal, state and converge the revenue recognition principles under U.S. GAAP and IFRS and to develop guidance that would streamline and enhance revenue recognition requirements. We will adopt this standard on August 1, 2018. Entities have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard. We are evaluating the impact that the standard will have on our combined financial statements.
In January 2016, the FASB issued an ASU, to provide more information about recognition, measurement, presentation and disclosure of financial instruments. The amendments in the ASU include, among other changes, the following: (1) equity investments (except those accounted for under the equity method or that result in consolidation) will be measured at fair value with changes in fair value recognized in net income, (2) a qualitative assessment each reporting period to identify impairment of equity investments without readily determinable fair values, (3) financial assets and financial liabilities will be presented separately by measurement category and form of financial asset on the balance sheet or the notes to the financial statements, and (4) an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. Entities will no longer be able to recognize unrealized holding gains and losses on equity securities classified as available-for-sale in other comprehensive income. In addition, a practicability exception will be available for equity investments that do not have readily determinable fair values and do not qualify for the net asset value practical expedient. These investments may be measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Entities will have to reassess at each reporting period whether an investment qualifies for this practicability exception. We will adopt the amendments in this ASU on August 1, 2018. We are evaluating the impact that the ASU will have on our combined financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluatinglocal governments; the impact of our pending adoptionfuture variants that may emerge; vaccination rates among the population; the efficacy of the new standardCOVID-19 vaccines; the longer-term impact of the pandemic on the economy and consumer behavior; and the effect on our combined financial statements.
In June 2016, the FASB issued an ASU that changes the impairment model for most financial assets and certain other instruments. For receivables, loansemployees, vendors, and other instruments, entities will be requiredpartners.
The short and long-term implications of Russia’s invasion of Ukraine are difficult to use a new forward-looking “expected loss” model thatpredict at this time. The imposition of sanctions and counter-sanctions may have an adverse effect on the economic markets generally will resultand could impact our business and the companies in the earlier recognitionwhich we have investments, financial condition, and results of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances instead of reductions in the amortized costoperations. Because of the securities. In addition, an entity will have to disclose significantly more information about allowances, credit quality indicatorshighly uncertain and past due securities. The new provisions will be applied as a cumulative-effect adjustment to retained earnings. We will adopt the new standard on August 1, 2020. We are evaluating the impact that the new standard will have on our combined financial statements.
In November 2016, the FASB issued an ASU that includes specific guidance on the classification and presentationdynamic nature of changes in restricted cash and cash equivalents in the statement of cash flows. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash or restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning of the period and end of the period total amounts shown on the statement of cash flows. The ASU will be applied using a retrospective transition method to each period presented. We will adopt the amendments in this ASU on August 1, 2018. The adoption will impact our beginning of the period and end of the period cash and cash equivalents balance in our statement of cash flows, as well as our net cash provided by operating activities.
In January 2017, the FASB issued an ASU to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current guidance, there are three elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes. The amendments in this ASU provide a screen to determine when a setthese events, it is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this ASU (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. The framework includes two sets of criteria to consider that depend on whether a set has outputs. Although outputs are not required for a set to be a business, outputs generally are a key element of a business; therefore, the FASB has developed more stringent criteria for sets without outputs. Lastly, the ASU narrows the definition of the term output. We will adopt the amendments in this ASU on August 1, 2018. We are evaluating the impact that the new standard will have on our combined financial statements.
In May 2017, the FASB issued an ASU to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Pursuant to this ASU, an entity should account for the effects of a modification unless all the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified (if the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not requiredcurrently possible to estimate the value immediately before and after the modification); (2) the vesting conditionsimpact of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. We will adopt the amendments in this ASU prospectively to an award modified on or after on August 1, 2018. We are evaluating the impact that the new standard will haveRussian - Ukraine War on our combined financial statements.business and the companies in which we have invested.
In August 2017, the FASB issued an ASU intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the ASU includes certain targeted improvements to simplify the application of hedge accounting guidance in U.S. GAAP. The amendments in this ASU are effective for us on August 1, 2019. Early application is permitted. Entities will apply the amendments to cash flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach. The presentation and disclosure requirements will be applied prospectively. We are evaluating the impact that this ASU will have on our combined financial statements.
Results of Operations
Three and Six Months Ended January 31, 2018 Compared to Three and Six Months Ended January 31, 2017
Our business consists of two reportable segments.segments - Healthcare and Real Estate. We evaluate the performance of our Real Estate segment based primarily on income (loss) from operations and our PharmaceuticalsHealthcare segment based primarily on research and development efforts and results of clinical trials.trials, and our Real Estate segment based primarily on results of operations. Accordingly, the income and expense line items below income (loss)loss from operations are only included in the discussion of combinedconsolidated results of operations.
Healthcare Segment
Our consolidated expenses for our Healthcare segment were as follows:
Three Months Ended October 31, | Change | |||||||||||||||
2022 | 2021 | $ | % | |||||||||||||
(in thousands) | ||||||||||||||||
General and administrative | $ | (3,077 | ) | $ | (12,222 | ) | 9,145 | 75 | % | |||||||
Research and development | (2,081 | ) | (2,153 | ) | 72 | 3 | % | |||||||||
Depreciation | (6 | ) | (1 | ) | (5 | ) | — | % | ||||||||
Provision for loss on receivable from Cornerstone Pharmaceuticals pursuant to line of credit | — | (25,000 | ) | 25,000 | (100 | )% | ||||||||||
Provision for losses on related party receivables | — | (10,283 | ) | 10,283 | (100 | )% | ||||||||||
Loss from continuing operations | $ | (5,164 | ) | $ | (49,659 | ) | 44,495 | 90 | % |
Pharmaceuticals Segment
Three Months Ended January 31, | Change | Six Months Ended January 31, | Change | |||||||||||||||||||||||||||||
2018 | 2017 | $ | % | 2018 | 2017 | $ | % | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Selling, general and administrative | $ | (357 | ) | $ | — | $ | (357 | ) | 100.0 | % | $ | (357 | ) | $ | — | $ | (357 | ) | 100.0 | % | ||||||||||||
Depreciation and amortization | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Income from operations | $ | (357 | ) | $ | — | $ | (357 | ) | 100.0 | % | $ | (357 | ) | $ | — | $ | (357 | ) | 100.0 | % |
To date, the PharmaceuticalsHealthcare segment has not generated any revenues. The entirety of the expenses in the PharmaceuticalsHealthcare segment relate to the research and development activities of Lipomedix,LipoMedix, Barer, Farber, and Rafael Medical Devices. As of whichOctober 31, 2022 we areheld a 50.6% owner.100% interest in Barer, an 84% interest in LipoMedix, a 93% interest in Farber, and a 100% interest in Rafael Medical Devices.
Real Estate Segment
Three Months Ended January 31, | Change | Six Months Ended January 31, | Change | |||||||||||||||||||||||||||||
2018 | 2017 | $ | % | 2018 | 2017 | $ | % | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Rental – Third Party Revenues | $ | 298 | $ | 396 | $ | (98 | ) | (24.7 | )% | $ | 685 | $ | 585 | $ | 100 | 17.1 | % | |||||||||||||||
Rental – Related Party Revenues | 489 | 770 | (281 | ) | (36.5 | ) | 994 | 1,682 | (688 | ) | (40.9 | ) | ||||||||||||||||||||
Parking Revenues | 169 | 171 | (2 | ) | (1.2 | ) | 384 | 469 | (85 | ) | (18.1 | ) | ||||||||||||||||||||
Selling, general and administrative | (986 | ) | (776 | ) | (210 | ) | (27.1 | ) | (2,722 | ) | (1,629 | ) | (1,093 | ) | (67.1 | ) | ||||||||||||||||
Depreciation and amortization | (429 | ) | (434 | ) | 5 | 1.2 | (853 | ) | (822 | ) | (31 | ) | (3.8 | ) | ||||||||||||||||||
(Loss) income from operations | $ | (459 | ) | $ | 127 | $ | (586 | ) | (461.4 | )% | $ | (1,512 | ) | $ | 285 | $ | (1,797 | ) | (630.5 | )% |
Revenues. Rental and Parking revenues decreased by $381,000 and $673,000, respectively, for the three and six months ended January 31, 2018 as compared to the three and six months ended January 31, 2017. Third Party revenues increased for the six months ended January 31, 2018 due the new tenant taking occupancy in the 520 Broad Street building, partially offset by reduced utility charges. Related Party revenues decreased due to a reduction in space being leased by IDT in the Piscataway facility during three and six months ended January 31, 2018 as compared to the three and six months ended January 31, 2017. Related Party rental revenues decreased due to new lease terms, effective August 1, 2017, being signed during the first quarter of fiscal 2018 for both the 520 Broad Street and Israel buildings. Parking revenues decreased by $2,000 and $85,000 for three and six months ended January 31, 2018 as compared to the prior year period primarily due to a headcount reduction at one customer, as well as several small customers going out of business during the first quarter of fiscal 2018.
Selling, generalGeneral and administrative expenses. Selling, generalGeneral and administrative expenses consistsconsist mainly of payroll, stock-based compensation expense, benefits, facilities, and consulting and professional fees. The increasedecrease in selling, general and administrative expenses in the six months ended January 31, 2018 compared to the six months ended January 31, 2017 is primarily due to $606,000 in compensation expense related to the assignment of the contingent right to receive Bonus Shares in Rafael Pharmaceuticals to Howard Jonas, as well as increased utility cost of $113,000 due to new tenants in the 520 Broad Street building. The increase in selling, general and administrative expenses induring the three months ended JanuaryOctober 31, 20182022 compared to the three months ended JanuaryOctober 31, 20172021 is primarily due to $201,000 in legalrelatively high general and professional services fees relatedadministrative expenses during the three months ended October 31, 2021, to ramp up for the planned Spin-Off.
Depreciation and amortization expenses. Depreciation and amortization expensesData Events. As a result of the Data Events, in the three and six months ended JanuaryOctober 31, 20182022, there was a decrease in stock-based compensation expense of approximately $6.8 million, a decrease in salary expenses of approximately $1.0 million, a decrease in professional fees of approximately $0.7 million, a decrease in legal expense of approximately $0.6 million, and a decrease in other general and administrative expenses of approximately $0.3 million, partially offset by an increase in bonus pay of approximately $0.3 million.
Research and development expenses. Research and development expenses decreased slightly for the three months ended October 31, 2022 as compared to the three and six months ended JanuaryOctober 31, 2017 remained relatively consistent between periods.2021. 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.
Combined operationsLoss on line of credit. Due to the Data Events, in the three months ended October 31, 2021, the Company recorded a full reserve on the $25 million due to the Company from Cornerstone Pharmaceuticals related to the Line of Credit Agreement.
Loss on related party receivables. Due to the Data Events, in the three months ended October 31, 2021, the Company recorded a loss of approximately $10.1 million related to the full reserve recorded on the RP Finance receivable of $9.375 million, and a full reserve recorded on the Cornerstone Pharmaceuticals receivable of $720 thousand.
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 during the three months ended October 31, 2022. The Real Estate segment consists of a portion of a commercial building in Israel. Our consolidated income and expenses for our Real Estate segment were as follows:
Three Months Ended October 31, | Change | |||||||||||||||
2022 | 2021 | $ | % | |||||||||||||
(in thousands) | ||||||||||||||||
Rental – Third Party | $ | 43 | $ | 44 | (1 | ) | (2 | )% | ||||||||
Rental – Related Party | 27 | 27 | — | — | % | |||||||||||
Other – Related Party | — | 120 | (120 | ) | (100 | )% | ||||||||||
General and administrative | (32 | ) | (52 | ) | 20 | 38 | % | |||||||||
Depreciation and amortization | (16 | ) | (18 | ) | 2 | 11 | % | |||||||||
Income from continuing operations | $ | 22 | $ | 121 | (99 | ) | 82 | % |
Other - Related Party. Other – related party revenues decreased by approximately $120 thousand during the three months ended October 31, 2022, compared to the three months ended October 31, 2021. During the year ended July 31, 2022, the Company only billed Cornerstone Pharmaceuticals $120 thousand for the first quarter of 2022 for administrative, finance, accounting, tax, and legal services. As of July 31, 2022, Cornerstone Pharmaceuticals owed the Company $720 thousand, for which a full allowance for uncollectibility has been recorded.
General and administrative expenses. General and administrative expenses consist mainly of payroll, benefits, facilities, consulting and professional fees. The decrease in general and administrative expenses of approximately $20 thousand during the three months ended October 31, 2022 compared to the three months ended October 31, 2021 is primarily due to a decrease in professional fees of $20 thousand.
Consolidated Operations
Our combinedconsolidated income and expense line items below income from operations were as follows:
Three Months Ended January 31, | Change | Six Months Ended January 31, | Change | |||||||||||||||||||||||||||||
2018 | 2017 | $ | % | 2018 | 2017 | $ | % | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
(Loss) income from operations | $ | (816 | ) | $ | 127 | $ | (586 | ) | (461.4 | )% | $ | (1,869 | ) | $ | 285 | $ | (2,154 | ) | (755.8 | )% | ||||||||||||
Interest (income) expense | (2 | ) | (2 | ) | — | nm | (4 | ) | (7 | ) | 3 | (42.9 | ) | |||||||||||||||||||
Net gains resulting from foreign exchange transactions | (107 | ) | (52 | ) | (56 | ) | nm | (118 | ) | (32 | ) | (86 | ) | 268.8 | ||||||||||||||||||
Net loss on equity investments | — | — | — | nm | 107 | — | 107 | nm | ||||||||||||||||||||||||
Gain on disposal of bonus shares | — | — | — | nm | (246 | ) | — | (246 | ) | nm | ||||||||||||||||||||||
Provision for income taxes | 15 | 14 | 1 | 7.1 | 8,443 | 30 | 8,413 | nm | ||||||||||||||||||||||||
Net (loss) income before noncontrolling interest | (722 | ) | 166 | (888 | ) | (534.9 | ) | (10,051 | ) | 294 | (10,345 | ) | (3518.7 | ) | ||||||||||||||||||
Net loss attributable to noncontrolling interest | 176 | — | 176 | 100.0 | % | 176 | — | 176 | 100.0 | % | ||||||||||||||||||||||
Net (loss) income. | $ | (546 | ) | $ | 166 | $ | (712 | ) | (428.6 | )% | $ | (9,875 | ) | $ | 294 | $ | (10,169 | ) | (3,518.7 | )% |
For the Three Months Ended October 31, | Change | |||||||||||||||
2022 | 2021 | $ | % | |||||||||||||
(in thousands) | ||||||||||||||||
Loss from continuing operations | $ | (5,142 | ) | $ | (49,538 | ) | 44,396 | 90 | % | |||||||
Interest expense | — | (13 | ) | 13 | 100 | % | ||||||||||
Interest income | 208 | 188 | 20 | (11 | )% | |||||||||||
Impairment of investments - Other Pharmaceuticals | (156 | ) | — | (156 | ) | (100 | )% | |||||||||
Impairment of cost method investment - Cornerstone Pharmaceuticals | — | (79,141 | ) | 79,141 | (100 | )% | ||||||||||
Realized gain on available-for-sale securities | 15 | — | 15 | (100 | )% | |||||||||||
Unrealized (loss) gain on investments - Hedge Funds | (127 | ) | 211 | (338 | ) | (160 | )% | |||||||||
Loss from continuing operations before income taxes | (5,202 | ) | (128,293 | ) | 123,091 | 96 | % | |||||||||
Provision for income taxes | (5 | ) | — | (5 | ) | (100 | )% | |||||||||
Equity in loss of RP Finance | — | (575 | ) | 575 | (100 | )% | ||||||||||
Consolidated net loss from continuing operations | (5,207 | ) | (128,868 | ) | 123,661 | 96 | % | |||||||||
Income (loss) from discontinued operations related to 520 Property | 6,700 | (543 | ) | 7,243 | 1,334 | % | ||||||||||
Net loss attributable to noncontrolling interests | (99 | ) | (17,387 | ) | 17,288 | 99 | % | |||||||||
Net income (loss) attributable to Rafael Holdings, Inc. | $ | 1,592 | $ | (112,024 | ) | 113,616 | 101 | % |
nm – not meaningful
Interest income, netincome.. Interest income was $208 thousand and $188 thousand for the three months ended October 31, 2022 and 2021, respectively. The increase is primarily due to the interest income earned on our investments in available-for-sale securities.
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.
Impairment of cost method investment - Cornerstone Pharmaceuticals. In connection with the Data Events, during the three months ended October 31, 2021, we recorded a full impairment charge to our cost method investment in Cornerstone Pharmaceuticals in the amount of $79.1 million.
Realized gain on available-for-sale securities. We recorded a realized gain of approximately $15 thousand related to maturities of available-for-sale securities for the three and six months ended JanuaryOctober 31, 2018 remained relatively consistent as compared2022.
Unrealized (loss) gain on investments - Hedge Funds. We recorded unrealized losses of approximately $127 thousand and gains of $211 thousand for the three months ended October 31, 2022 and 2021, respectively.
Equity in (loss) earnings of RP Finance. We recognized a loss of $575 thousand from our ownership interest in RP Finance for the three months ended October 31, 2021. As of July 31, 2022, the equity method investment in RP Finance on our balance sheet was $0, and no additional equity loss of RP Finance was recorded subsequent to the threeyear ended July 31, 2022.
Income (loss) from discontinued operations related to 520 Property. Discontinued operations includes (i) rental and six months ended January 31, 2018.
Netparking 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 on the Property, and (v) gain (loss) resulting from foreign exchange transactions. Net losses resulting from foreign exchange transactions are comprised entirely from changes in movements in New Israeli Shekels relative toon the U.S. Dollar.
Net loss on Equity Investment. Net loss on Equity Investment relates entirely to our proportionate sharedisposal of the net loss recorded by Lipomedix,building. The operating results of these items are presented in which we held a 38.9% interest prior to purchasing a majority stake during November 2017.
Gain on disposalour consolidated statements of Bonus Shares.operations and comprehensive income (loss) as discontinued operations for all periods presented. The gain on disposal of Bonus Shares relates entirely to the increase in fair value of the contingent right to receive Bonus Shares obtained during fiscal year 2017 from the date of purchase through assigning the rights thereto over to Howard Jonas in September 2017.
Net Income Attributable to Noncontrolling Interests. The change in the net income attributable to noncontrolling interestsdiscontinued operations was due to a gain on the sale of the 520 Property of $6.8 million, an approximate $310 thousand decrease in interest expense, partially offset by a $586 thousand decrease in rental revenue, a $372 thousand decrease in general and administrative expenses (which is primarily comprised of a decrease in real estate taxes, utilities other building related repairs and maintenance expenses totaling approximately $492 thousand, slightly offset by a $129 thousand increase in expense related to the write-off of deferred rental income), and a $363 thousand decrease in depreciation and amortization expense due to no depreciation expense during the three and six months ended JanuaryOctober 31, 2018 compared2022 as depreciation stopped as of July 1, 2022 when the 520 Property was classified as held-for-sale.
See Note 3 to the similar periodsour accompanying consolidated financial statements for further information regarding discontinued operations.
Net loss attributable to noncontrolling interests. The change in fiscal 2017 was due to the net loss attributable to noncontrolling interests was due to an approximate $17.3 million loss related to the Cornerstone Pharmaceuticals impairment loss (the total impairment loss was approximately $79 million) which was applicable to noncontrolling interests in Lipomedixcertain of the Company’s subsidiaries and was allocated to the holders of interests in CS Pharma and Pharma Holdings in the threeapproximate amounts of $10.4 million and six$6.9 million, respectively, for the three months ended JanuaryOctober 31, 2018. We began consolidating Lipomedix in November 2017.2021.
Liquidity and Capital Resources
General
October 31, | July 31, | Change | ||||||||||||||
2022 | 2022 | $ | % | |||||||||||||
(in thousands) | ||||||||||||||||
Balance Sheet Data: | ||||||||||||||||
Cash and cash equivalents | $ | 22,173 | $ | 26,537 | (4,364 | ) | (16 | )% | ||||||||
Restricted cash | 660 | — | 660 | 100 | % | |||||||||||
Working capital | 91,715 | 87,321 | 4,394 | 5 | % | |||||||||||
Total assets | 103,216 | 118,320 | (15,104 | ) | (13 | )% | ||||||||||
Note payable, net of debt issuance costs, held-for-sale | — | 15,000 | (15,000 | ) | (100 | )% | ||||||||||
Total equity attributable to Rafael Holdings, Inc. | 103,374 | 100,515 | 2,859 | 3 | % | |||||||||||
Noncontrolling interests | (3,408 | ) | (3,309 | ) | (99 | ) | 3 | % | ||||||||
Total equity | 99,966 | 97,206 | 2,760 | 3 | % |
Historically, we have satisfied our cash requirements primarily through intercompany debt funding from IDT. We maintain an intercompany balance due to IDT that relates to advances for investments and purchases of property and equipment, as well as charges for services provided to us by IDT and payroll costs for our personnel that are paid by IDT, partially offset by revenues earned from leases to IDT. In connection with and prior to the Spin-Off, any intercompany debt between IDT and Rafael Holdings as of the distribution date will be converted to equity and there will be no indebtedness owing from Rafael Holdings to IDT immediately following the Spin-Off. We anticipate our total operating costs will be between $2,000,000 and $2,300,000 per year as a result of being a public reporting company. Several of the costs included in this estimated range are preliminary, subject to negotiation, and may vary from the estimates when finalized.
For the three months ended October 31, | Change | |||||||||||||||
2022 | 2021 | $ | % | |||||||||||||
(in thousands) | ||||||||||||||||
Cash flows (used in) provided by | ||||||||||||||||
Operating activities from continuing operations | $ | (2,128 | ) | $ | (6,294 | ) | 4,166 | (66 | )% | |||||||
Investing activities from continuing operations | (34,228 | ) | (26,875 | ) | (7,353 | ) | 27 | % | ||||||||
Financing activities from continuing operations | (6 | ) | 97,909 | (97,915 | ) | (100 | )% | |||||||||
Effect of exchange rates on cash and cash equivalents | (92 | ) | 2 | (94 | ) | (4,692 | )% | |||||||||
Operating, investing, and financing activities from discontinued operations | 32,750 | (209 | ) | 32,959 | (15,770 | )% | ||||||||||
(Decrease) increase in cash and cash equivalents | $ | (3,704 | ) | $ | 64,533 | (68,237 | ) |
Capital Resources
As of JanuaryOctober 31, 2018,2022, we hadheld cash and cash equivalents of $12.0approximately $22.2 million, available-for-sale securities valued at approximately $71.0 million, and investment in hedge funds valued at approximately $4.6 million. We expect our cash from operationsOn August 22, 2022, the Company received net proceeds of approximately $33 million in connection with the next twelve months,sale of the 520 Property (see Note 3 for further details). The Company expects the balance of cash and cash equivalents, that we held as of January 31, 2018available-for-sale-securities, and the cash and other assets that IDT will contribute to usinvestment in connection with the Spin-Offhedge funds to be sufficient to meet our currently anticipated working capital, research and development, and capital expenditure requirements duringobligations for at least the twelve-month period ending January 31, 2019.next 12 months from the issuance of these consolidated financial statements.
(in thousands) | Six Months Ended January 31, | |||||||
2018 | 2017 | |||||||
Cash flows provided by (used in) | ||||||||
Operating activities | $ | 41 | $ | (400 | ) | |||
Investing activities | (728 | ) | (9,446 | ) | ||||
Financing activities | 900 | 19,326 | ||||||
Effect of exchange rates on cash and cash equivalents | 39 | 42 | ||||||
Increase (decrease) in cash and cash equivalents | $ | 252 | $ | 9,522 |
Operating Activities
Our cash flow from operations varies from year to year, depending on our operating results and the timing of operating cash receipts and payments, specifically payments of trade accounts payable. The increasedecrease in cash flows provided byused in operating activities in infor the three and six months ended JanuaryOctober 31, 20182022 as compared to the three and six months ended JanuaryOctober 31, 20172021 was primarily related to lower net loss from continuing operations of $5.2 million in fiscal 2023 as compared to the corresponding period in fiscal 2022, and the impact from non-cash items, primarily to decreased charges from related parties.stock-based compensation of $1.2 million, an impairment loss of $0.2 million on our investment in Nanovibronix, and a net unrealized loss on investments - Hedge Funds of $0.1 million. This is coupled with an increase in accounts payable and accrued expenses of $1.0 million, a decrease in prepaid expenses and other current assets of $0.6 million, a decrease in other current liabilities of $0.1 million, as well as other changes in assets and liabilities.
Cash used in operating activities for the three months ended October 31, 2021 was primarily related to the net loss from continuing operations of $128.9, offset by the impact from non-cash items, primarily the impairment of cost method investment in Rafael Pharmaceuticals of $79 million, the reserve on the amounts due to the Company from Rafael Pharmaceuticals related to the Line of Credit Agreement for $25 million, the reserve on receivables due from Rafael Pharmaceuticals totaling $10.3 million, and stock-based compensation of $7.9 million as well as other changes in assets and liabilities.
Investing Activities
Cash used in investing activities for the three and six months ended JanuaryOctober 31, 2018 related entirely2022 was primarily due to fixed asset additions. 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.
Cash used in investing activities for the three and six months ended JanuaryOctober 31, 2017, consisted mostly of investments in2021 was primarily related to amounts loaned to Rafael Pharmaceuticals (through CS Pharma) of $8.0approximately $25 million pursuant to the Line of Credit Agreement and investmentsthe payments to fund our portion of advances under the line of credit between RP Finance and Rafael Pharmaceuticals in Lipomedixthe amount of $300,000.approximately $1.9 million.
Financing Activities
Cash used in financing activities for the three months ended October 31, 2022 was primarily related to payments for taxes related to shares withheld for employee taxes.
Cash provided by financing activities for the three months and six months ended JanuaryOctober 31, 20182021 was primarily related to cash advances from IDTproceeds of $900,000, In connection with our investment in Rafael Pharmaceuticals, our subsidiary CS Pharma issued member interestsapproximately $104.2 million related to third parties in exchange for cash investment in CS Pharma of $10 million. We hold a 90% interest in IDT-Rafael Holdings, LLC, which holds a 50% interest in CS Pharma, and we are or control the managing member of both entities. During the three and six months ended January 31, 2017, CS Pharma received $10.0 million from the sale of its member interestsour common stock to third parties. It is expected that CS Pharma will use its cash to invest in Rafael Pharmaceuticals. Additionally, during the second halfinvestors and a related party, partially offset by payment of fiscal 2017 we sold 10%transaction costs of IDT-Rafael Holdings, LLC, in which our direct and indirect interest and rights in Rafael Pharmaceuticals were held, to Howard Jonas for $1.0 million, which represented 10% of the Company’s cost basis in IDT-Rafael Holdings. As we hold our interest in CS Pharma through our 90%-owned non-operating subsidiary, IDT-Rafael Holdings, LLC, which holds a 50% interest in CS Pharma, we will hold an effective 45% indirect interest in the assets held by CS Pharma, including its cash. Cash provided by financing activities related to cash advances from IDT for the three and six months ended January 31, 2017 was $891,000 and $9.3 million, respectively.$6.2 million.
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 from 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 in 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. For the three months ended October 31, 2021, net cash used in operating activities totaled $0.2 million. Net cash used in investing activities totaled $29 thousand.
We don’t anticipate a material impact on future liquidity and capital resources due to discontinued operations. For further information see Note 3.
Trends and Uncertainties – COVID-19, War in Ukraine
In late 2019, a novel strain of coronavirus, SARS-CoV, which causes COVID-19, was identified and has proved to be highly contagious. It has since spread extensively throughout the world, including the United States, and was declared a global pandemic by the World Health Organization in March 2020. The Company actively monitors the outbreak, including the spread of new variants of interest, and its potential impact on the Company’s operations and those of the Company’s holdings.
Even with growing availability of testing and vaccines and the relaxation of public health measures that were implemented to limit the spread of the pandemic, there continues to be uncertainty around the COVID-19 pandemic and its impact.
The Company had implemented a number of measures to protect the health and safety of the Company’s workforce including a voluntary work-from-home policy for the Company’s workforce who can perform their jobs from home as well as restrictions on discretionary business travel. Most of our employees have returned to working from the office on a part-time basis.
The full impact of the COVID-19 pandemic on the Company will depend on factors such as the length of time of the pandemic; the responses of federal, state and local governments; the impact of future variants that may emerge; vaccination rates among the population; the efficacy of the COVID-19 vaccines; the longer-term impact of the pandemic on the economy and consumer behavior; and the effect on our employees, vendors, and other partners.
The short and long-term implications of Russia’s invasion of Ukraine are difficult to predict at this time. The imposition of sanctions and counter sanctions may have an adverse effect on the economic markets generally and could impact our business and the companies in which we have investments, financial condition, and results of operations. Because of the highly uncertain and dynamic nature of these events, it is not currently possible to estimate the impact of the Russian – Ukraine war on our business and the companies in which we have investments.
Critical Accounting Estimates
We have chosen accounting policies that we believe are appropriate to accurately and fairly report our operating results and financial condition in conformity with U.S. GAAP. We apply these accounting policies in a consistent manner. Our significant accounting policies are discussed in Note 1, “Description of Business and Summary of Significant Accounting Policies,” in our consolidated financial statements included in our Annual Report on Form 10-K, for fiscal 2022 (“2022 Form 10-K”).
The application of critical accounting policies requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. These estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. We evaluate these estimates and assumptions on an ongoing basis and may retain outside consultants to assist in our evaluation. If actual results ultimately differ from previous estimates, the revisions are included in results of operations in the period in which the actual amounts become known. The critical accounting policies that involve the most significant management judgments and estimates used in preparation of our consolidated financial statements, or are the most sensitive to change from outside factors, are discussed in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s 2022 Form 10-K. There have been no material changes in our critical accounting policies and procedures during the three months ended October 31, 2022 and 2021.
Off-Balance Sheet Arrangements
As of January 31, 2018, we didWe 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 connectionaccordance with the Spin-Off, weFinancial 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 IDTcash flows of the discontinued component must have been (or will enter intobe) 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 tax separationresult of the agreement which sets forthto sell the responsibilities520 Property, the accompanying consolidated financial statements reflect the activity related to the sale of IDT and us with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the Spin-Off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods. IDT will be generally responsible for our federal, state, local and foreign income taxes for periods before and including the Spin-Off. We will be generally responsible for all other taxes relating520 Property as discontinued operations. See Note 3 to our business. Weconsolidated financial statements for additional information regarding the results, major classes of assets and IDT will each generally be responsible for managing those disputes that relate to the taxes for which eachliabilities, significant non-cash operating items, and capital expenditures of us is responsible and, under certain circumstances, may jointly control any dispute relating to taxes for which both of us are responsible.discontinued operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Risk
RevenuesThere have been no significant changes in our market risk exposures from tenants locatedthose described in Israel represented 2% and 5%Item 7A of our combined revenues2022 Form 10-K.
We are monitoring the potential impacts of the COVID-19 pandemic and the war in Ukraine on our business and the threecompanies in which we have investments. While the potential economic impact brought by, and six months ended January 31, 2018 and in the three and six months ended January 31, 2017, respectively. The entiretyduration of, these revenuesthe COVID-19 pandemic is in currencies other thandifficult to assess or predict, the U.S. Dollar. Our foreign currency exchange risk is somewhat mitigated byimpact on the global financial markets may reduce our ability to offset a portion of these non U.S. Dollar-denominated revenues with operating expenses that are paid in the same currencies. While theaccess capital, which could negatively impact from fluctuations in foreign exchange rates affects our revenues and expenses denominated in foreign currencies, the net amount of our exposure to foreign currency exchange rate changes at the end of each reporting period is generally not material.long-term liquidity.
Investment Risk
In addition to, but separate from our primary business, we will hold a portion of our assets in marketable securities, hedge funds and a passive investment in another entity. Investments in marketable securities and hedge funds carry a degree of risk, and depend to a great extent on correct assessments of the future course of price movements of securities and other instruments. There can be no assurance that our investment managers will be able to accurately predict these price movements. The securities markets have in recent years been characterized by great volatility and unpredictability. Our passive interests in other entities are not currently liquid and we cannot assure that they we will be able to liquidate them when we desire, or ever. Accordingly, the value of our investments may go down as well as up and we may not receive the amounts originally invested upon redemption.
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 JanuaryOctober 31, 2018.2022.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended JanuaryOctober 31, 20182022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Legal proceedings in which we are involved are more fully described in Note 816 to the CombinedConsolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
There arewere no material changes from the risk factors previously disclosed in Item 1A to Part I of our Registration StatementAnnual Report on Form 10-12G10-K for the year ended July 31, 2017.fiscal 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
NoneNone.
Item 3. Defaults Upon Senior Securities
NoneNone.
Item 4. Mine Safety Disclosures
Not applicableapplicable.
Item 5. Other Information
None
None.
Item 6. Exhibits
Exhibit Number | Description | |
31.1* | Certification of Chief Executive Officer pursuant to | |
31.2* | Certification of Chief Financial Officer pursuant to | |
32.1* | Certification of Chief Executive Officer pursuant to | |
32.2* | Certification of Chief Financial Officer pursuant to | |
101.INS* | Inline XBRL Instance Document | |
101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase | |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase | |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
Cover Page Interactive Data File (formatted as Inline XBRL | ||
* | Filed or furnished herewith. |
SIGNATURES
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 13, 2022 | Rafael Holdings, Inc. | |
By: | /s/ | |
William Conkling | ||
By: | /s/ | |
Patrick Fabbio |
20