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Rafael Holdings, Inc. Spin-Off

12 Months Ended

Jul. 31, 2019

Note 4—Rafael Holdings, Inc. Spin-Off

On March 26, 2018, the Company completed a pro rata distribution of the common stock that the Company held in the Company's subsidiary, Rafael Holdings, Inc. ("Rafael"), to the Company's stockholders of record as of the close of business on March 13, 2018 (the "Rafael Spin-Off"). The Rafael Spin-Off did not meet the criteria to be reported as a discontinued operation and accordingly, Rafael's assets, liabilities, results of operations and cash flows have not been reclassified. In connection with the Rafael Spin-Off, each of the Company's stockholders received one share of Rafael Class A common stock for every two shares of the Company's Class A common stock and one share of Rafael Class B common stock for every two shares of the Company's Class B common stock, held of record as of the close of business on March 13, 2018. The Company received a legal opinion that the Rafael Spin-Off should qualify as a tax-free transaction for U.S. federal income tax purposes.

At the time of the Rafael Spin-Off, Rafael owned the commercial real estate assets and interests in two clinical stage pharmaceutical companies that were previously held by the Company. The commercial real estate holdings consisted of the Company's headquarters building and its associated public garage in Newark, New Jersey, an office/data center building in Piscataway, New Jersey and a portion of a building in Israel that hosts offices for the Company and certain affiliates. The pharmaceutical holdings included debt interests and warrants in Rafael Pharmaceuticals, Inc. ("Rafael Pharma"), which, at the time, was a clinical stage, oncology-focused pharmaceutical company committed 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. ("Lipomedix"), which, at the time, was a pharmaceutical development company based in Israel.

In March 2018, in connection with the Rafael Spin-Off, each holder of options to purchase an aggregate of 1.3 million shares of the Company's Class B common stock shared ratably in a pool of options to purchase 0.6 million shares of Rafael Class B common stock. The Company accounted for the grant of the new options in Rafael as a modification. In fiscal 2018, the Company recorded stock-based compensation expense for the aggregate incremental value from the modification of $0.2 million.

The carrying amounts of Rafael's assets and liabilities included as part of the disposal group in the Rafael Spin-Off were as follows:

(in thousands)
Cash and cash equivalents	$	9,287
Debt securities		32,989
Trade accounts receivable		53
Other current assets		2,329
Property, plant and equipment, net		50,624
Investments		17,650
Other assets		2,240
Current liabilities		(159	)
Other liabilities		(94	)
Noncontrolling interests		(8,653	)
Rafael equity	$	106,266

Rafael's (loss) income before income taxes and (loss) income before income taxes attributable to the Company, which was included in the accompanying consolidated statements of income, were as follows:

Year ended July 31 (in thousands)	2019		2018			2017
(LOSS) INCOME BEFORE INCOME TAXES	$	—	$	(2,410	)	$	520

(LOSS) INCOME BEFORE INCOME TAXES ATTRIBUTABLE TO IDT CORPORATION	$	—	$	(2,107	)	$	517

In September 2016, Rafael Pharma issued to the Company's controlled 50%-owned subsidiary, CS Pharma Holdings, LLC ("CS Pharma"), a convertible promissory note with a principal amount of $10 million representing the $8 million investment funded on such date plus the conversion of the $2 million principal amount convertible promissory notes issued in connection with a prior funding.

On March 2, 2017, the Company sold 10% of the Company's direct and indirect interests and rights in Rafael Pharma to Howard S. Jonas, the Company's Chairman of the Board, and Chairman of the Board of Rafael, for a purchase price of $1 million. As a result of this transaction, the Company recorded an increase of $1.2 million in "Noncontrolling interests" and a decrease of $0.2 million in "Additional paid-in capital" in the accompanying consolidated balance sheet.

The Company's former 90%-owned non-operating subsidiary, IDT-Rafael Holdings, LLC ("IDT-Rafael Holdings"), had the contractual right to receive additional shares of Rafael Pharma representing 10% of the outstanding capital stock of Rafael Pharma that will be issued upon the occurrence of certain events, none of which had been satisfied at the time of the Rafael Spin-Off. On September 14, 2017, IDT-Rafael Holdings distributed this right to its members on a pro rata basis such that the Company received the right to 9% of the outstanding capital stock of Rafael Pharma and Howard S. Jonas received the right to 1% of the outstanding capital stock of Rafael Pharma. In addition, as compensation for assuming the role of Chairman of the Board of Rafael Pharma, and to create additional incentive to contribute to the success of Rafael Pharma, on September 19, 2017, the Company transferred its right to receive 9% of the outstanding capital stock of Rafael Pharma to Mr. Jonas.

The Company and CS Pharma held warrants to purchase shares of capital stock of Rafael Pharma representing in the aggregate up to 56% of the then issued and outstanding capital stock of Rafael Pharma, on an as-converted and fully diluted basis.

Rafael Pharma was a variable interest entity, however, the Company determined that it was not the primary beneficiary as the Company did not have the power to direct the activities of Rafael Pharma that most significantly impacted Rafael Pharma's economic performance.

In addition to interests issued to the Company, CS Pharma issued member interests to third parties in exchange for cash investment in CS Pharma of $10 million. In fiscal 2017, the Company recorded additional paid-in capital of $2.8 million and noncontrolling interests of $7.2 million upon the issuance of these member interests.

In November 2017, the Company purchased additional shares of Lipomedix that increased the Company's ownership to 50.6% of the issued and outstanding ordinary shares of Lipomedix. The Company began consolidating Lipomedix because of this share purchase.