UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
for
the quarterly period ended
or
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices, zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No
The number of shares outstanding of the registrant’s common stock as of December 10, 2021 was:
Class A common stock, par value $0.01 per share: | |
| Class B common stock, par value $0.01 per share: |
EXPLANATORY NOTE
This Amendment No. 1 (“Amendment No. 1”) to the Quarterly Report on Form 10-Q/A amends the Quarterly Report on Form 10-Q of Rafael Holdings, Inc. for the quarter ended October 31, 2021, as filed with the Securities and Exchange Commission (“SEC”) on December 15, 2021 (the “Original Filing”).
On February 28, 2022, the Company’s management and the audit committee of the Company’s board of directors (the “Audit Committee”) concluded that our previously issued unaudited consolidated interim financial statements included in our Quarterly Report on Form 10-Q for the three-month period ended October 31, 2021, filed with the SEC on December 15, 2021, should be restated to correct the allocation of losses attributable to the noncontrolling interests and to correct the calculation of weighted average shares outstanding to exclude nonvested restricted stock.
As such, the Company is restating in this Form 10-Q/A the unaudited consolidated interim financial statements for the three-month period ended October 31, 2021.
On February 28, 2022, the Company’s management concluded that material weaknesses in internal control over financial reporting related to the accounting for non-controlling interests and earnings per share existed and that the disclosure controls and procedures were not effective as of October 31, 2021.
We are filing this Amendment No. 1 to amend and restate the Original Filing with modification as necessary to reflect the restatement. The following items have been amended to reflect the restatement:
Part I, Item 1, Financial Information
Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations
Part I, Item 4, Controls and Procedures
Part II, Item 1A, Risk Factors
In addition, the Company’s Chief Executive Officer and Chief Financial Officer have provided new certifications dated as of the date of this Amendment No. 1 (Exhibits 31.1, 31.2, 32.1 and 32.2).
Except as described above and set forth in this Amendment No. 1, this Amendment No. 1 does not amend or update any other information contained in the Original Filing. This Amendment No. 1 does not purport to reflect any information or events subsequent to the Original Filing, except as expressly described herein. Accordingly, this Amendment No. 1 should be read in conjunction with the Original Filing and with our filings with the SEC subsequent to the Original Filing.
RAFAEL HOLDINGS, INC.
TABLE OF CONTENTS
i
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
RAFAEL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share data)
| October
31, 2021 (As restated) | July
31, 2021 | |||||||
| ASSETS | (Note 3) | |||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Trade accounts receivable, net of allowance for doubtful accounts of $ | ||||||||
| Due from Rafael Pharmaceuticals, net of allowance for losses on related party receivables of $ | ||||||||
| Due from Rafael Pharmaceuticals – line of credit, net of allowance for loan losses of $ | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Equity investment – RP Finance LLC | ||||||||
| Due from RP Finance LLC, net of allowance for losses on related party receivables of $ | ||||||||
| Investments – Rafael Pharmaceuticals | ||||||||
| Investments – Other Pharmaceuticals | ||||||||
| Investments – Hedge Funds | ||||||||
| In-process research and development and patents | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Trade accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Other current liabilities | ||||||||
| Due to related parties | ||||||||
| Note payable, net of debt issuance costs | ||||||||
| Total current liabilities | ||||||||
| Other liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| EQUITY | ||||||||
| Class A common stock, $ | ||||||||
| Class B common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income related to foreign currency translation adjustment | ||||||||
| Total equity attributable to Rafael Holdings, Inc. | ||||||||
| Noncontrolling interests | ( | ) | ||||||
| TOTAL EQUITY | ||||||||
| TOTAL LIABILITIES AND EQUITY | $ | $ | ||||||
See accompanying notes to the unaudited consolidated interim financial statements.
1
RAFAEL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited, in thousands, except share and per share data)
| Three
Months Ended October 31, | ||||||||
| 2021 (As restated) | 2020 | |||||||
| REVENUE | ||||||||
| Rental – Third Party | $ | $ | ||||||
| Rental – Related Party | ||||||||
| Parking | ||||||||
| Other – Related Party | ||||||||
| Total revenue | ||||||||
| COSTS AND EXPENSES | ||||||||
| Selling, general and administrative | ||||||||
| Research and development | ||||||||
| Depreciation and amortization | ||||||||
| Provision for loss on receivable pursuant to line of credit | ||||||||
| Provision for losses on related party receivables | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Interest expense, net | ( | ) | ||||||
| Gain on sale of building | ||||||||
| Impairment of investments – Other Pharmaceuticals | ( | ) | ||||||
| Impairment of cost method investment – Rafael Pharmaceuticals | ( | ) | ||||||
| Unrealized gain on investments – Hedge Funds | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Provision for income taxes | ( | ) | ||||||
| (Loss) earnings in equity of RP Finance | ( | ) | ||||||
| Consolidated net loss | ( | ) | ( | ) | ||||
| Net (loss) income attributable to noncontrolling interests | ( | ) | ||||||
| Net loss attributable to Rafael Holdings, Inc. | $ | ( | ) | $ | ( | ) | ||
| OTHER COMPREHENSIVE LOSS | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Foreign currency translation adjustment | ( | ) | ||||||
| Total comprehensive loss | ( | ) | ( | ) | ||||
| Comprehensive loss attributable to noncontrolling interests | ( | ) | ||||||
| Total comprehensive loss attributable to Rafael Holdings, Inc. | $ | ( | ) | $ | ( | ) | ||
| Loss per share | ||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average number of shares used in calculation of loss per share | ||||||||
| Basic and diluted | ||||||||
See accompanying notes to the unaudited consolidated interim financial statements.
2
RAFAEL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands, except share and per share data)
| 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 | $ | $ | $ | $ | ( | ) | $ | | $ | $ | ||||||||||||||||||||||||||
| Net loss for the three months ended October 31, 2021 | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Common stock sold to investors | ||||||||||||||||||||||||||||||||||||
| Transaction costs incurred in connection with sale of common stock | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Common stock sold to related party | ||||||||||||||||||||||||||||||||||||
| Shares withheld for payroll taxes | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | ||||||||||||||||||||||||||||||||||
| Balance at October 31, 2021 (as restated) | $ | $ | $ | $ | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||
| Three Months Ended October 31, 2020 | ||||||||||||||||||||||||||||||||||||
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, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss for the three months ended October 31, 2020 | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance at October 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
See accompanying notes to the unaudited consolidated interim financial statements.
3
RAFAEL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
| Three
Months Ended October 31, | ||||||||
| 2021 | 2020 | |||||||
| Operating activities | ||||||||
| Consolidated net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile consolidated net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Deferred income taxes | ||||||||
| Net unrealized gain on investments – Hedge Funds | ( | ) | ( | ) | ||||
| Impairment of investments – Other Pharmaceuticals | ||||||||
| Impairment of cost method investment – Rafael Pharmaceuticals | ||||||||
| Provision for loss on receivable pursuant to line of credit | ||||||||
| Interest income | ( | ) | ||||||
| Provision for losses on related party receivables | ||||||||
| Loss (earnings) in equity of RP Finance | ( | ) | ||||||
| Provision for doubtful accounts | ||||||||
| Stock-based compensation | ||||||||
| Amortization of debt discount | ||||||||
| Gain on sale of building | ( | ) | ||||||
| Change in assets and liabilities: | ||||||||
| Trade accounts receivable | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Other assets | ||||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Other current liabilities | ( | ) | ( | ) | ||||
| Due to related parties | ( | ) | ||||||
| Due from Rafael Pharmaceuticals | ( | ) | ||||||
| Other liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activities | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Payment to fund RP Finance Line of Credit | ( | ) | ( | ) | ||||
| Payment to Rafael Pharmaceuticals pursuant to Line of Credit | ( | ) | ||||||
| Proceeds from sale of building | ||||||||
| Proceeds related to distribution from Hedge Funds | ||||||||
| Net cash (used in) provided by investing activities | ( | ) | ||||||
| Financing activities | ||||||||
| Purchases of investments in equity securities | ||||||||
| Proceeds from exercise of options | ||||||||
| Proceeds from sale of common stock | ||||||||
| Payment of transaction costs incurred in connection with sale of common stock | ( | ) | ||||||
| Payments for taxes related to shares withheld for employee taxes | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash and cash equivalents, and restricted cash | ( | ) | ||||||
| Net increase in cash and cash equivalents, and restricted cash | ||||||||
| Cash and cash equivalents, and restricted cash, beginning of period | ||||||||
| Cash and cash equivalents, and restricted cash, end of period | $ | $ | ||||||
| Reconciliation of cash and restricted cash | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash and cash equivalents and restricted cash shown in statement of cash flows | $ | $ | ||||||
See accompanying notes to the unaudited consolidated interim financial statements.
4
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – DESCRIPTION OF BUSINESS
Rafael Holdings, Inc. (NYSE-RFL), (“Rafael Holdings” or the “Company”), a Delaware corporation, focused on discovering and developing novel cancer and immune metabolism therapies with the potential to improve and extend the lives of patients. The Company also owns commercial real estate assets, which it operates as a separate line of business.
The Company has an investment in 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 Rafael Pharmaceuticals in exchange for issuing Company Class B common stock to the other stockholders of Rafael Pharmaceuticals. On October 28, 2021, the Company announced that the AVENGER 500 Phase 3 clinical trial for CPI-613® (devimistat), Rafael Pharmaceuticals’ lead product candidate, did not meet its primary endpoint of significant improvement in overall survival in patients with metastatic adenocarcinoma of the pancreas, and following a pre-specified interim analysis, the independent data monitoring committee for the ARMADA 2000 Phase 3 study for devimistat has recommended the trial to be stopped due to a determination that it was unlikely to achieve the primary endpoint (the “Data Events”). In connection with the preparation of the Company’s first quarter financial statements, U.S. GAAP required that the Company assess the impact of the Data Events and determine whether the carrying values of the Company’s assets were impaired based upon the Company’s expectations to realize future value. In light of Data Events, the Company concluded that currently the likelihood of further development of and prospects for CPI-613 is uncertain and has fully impaired the value of its loans, receivables, and investment in Rafael Pharmaceuticals based upon its valuation of Rafael Pharmaceuticals.
In 2019, the Company established Barer Institute (“Barer”), as an early-stage small molecule research institute focused on developing a pipeline of novel therapeutic compounds, including compounds to regulate cancer metabolism with potentially broader application in other indications beyond cancer. Barer is led by a team of scientists and academic advisors considered to be among the leading experts in cancer metabolism, chemistry, and drug development. In addition to its own internal discovery efforts, Barer is pursuing collaborative research agreements and in-licensing opportunities with leading scientists from top academic institutions. Farber Partners, LLC (“Farber”) was formed to support agreements with Princeton University’s Office of Technology Licensing for technology from the laboratory of Professor Joshua Rabinowitz, in the Department of Chemistry, Princeton University, including an exclusive worldwide license to its SHMT (serine hydroxymethyltransferase) inhibitor program. The Company also holds a majority equity interest in LipoMedix Pharmaceuticals Ltd. (“LipoMedix”), a clinical stage oncological pharmaceutical company based in Israel. In addition, the Company has recently initiated efforts to develop other early stage pharmaceutical ventures including Levco Pharmaceuticals Ltd. (“Levco”), an Israeli company, established to partner with Dr. Alberto Gabizon and a leading institution in Israel on the development of novel compounds for cancer.
The Company’s commercial real estate holdings consist of a building at 520 Broad Street in Newark, New Jersey that serves as headquarters for the Company and certain other entities and hosts other tenants and an associated 800-car public garage, and a portion of a building in Israel.
The “Company” in these consolidated financial statements refers to Rafael Holdings and its subsidiaries on a consolidated basis. All significant intercompany accounts and transactions have been eliminated in consolidation.
5
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
All majority-owned subsidiaries are consolidated with all intercompany transactions and balances eliminated in consolidation or combination. The entities included in these consolidated financial statements are as follows:
| Company | Country of Incorporation | Percentage Owned | ||||
| Rafael Holdings, Inc. | % | |||||
| Broad Atlantic Associates, LLC | % | |||||
| IDT 225 Old NB Road, LLC | % | |||||
| IDT R.E. Holdings Ltd. | % | |||||
| Rafael Holdings Realty, Inc. | % | |||||
| Barer Institute, Inc. | % | |||||
| The Barer Institute, LLC | % | |||||
| Hillview Avenue Realty, JV | % | |||||
| Hillview Avenue Realty, LLC | % | |||||
| Rafael Medical Devices, LLC | % | |||||
| Levco Pharmaceuticals Ltd. | % | |||||
| Farber Partners, LLC | % | |||||
| Pharma Holdings, LLC | % | |||||
| LipoMedix Pharmaceuticals Ltd. | % | |||||
| Altira Capital & Consulting, LLC | % | |||||
| CS Pharma Holdings, LLC | %* | |||||
| * |
NOTE 2 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
During February 2022, the Company determined that
the impairment loss of approximately $
Additionally, the Company determined that the weighted average shares outstanding for the basic and diluted loss per share was calculated incorrectly. The Company incorrectly included unvested restricted shares in the total shares of common stock in the denominator of the calculation of basic and diluted loss per share. As the Company reported a net loss for the period, the number of shares used for the calculation of basic and diluted loss per share were the same.
As a result, the Company recorded a restatement from total equity attributable to Rafael Holdings, Inc. to noncontrolling interests to correct its financial statements as of and for the three months ended October 31, 2021, and corrected the weighted average shares outstanding and resulting basic and diluted loss per share for the three months ended October 31, 2021. Accordingly, the following items have been restated as of October 31, 2021, (i) net (loss) income attributable to noncontrolling interests, (ii) net loss attributable to Rafael Holdings, Inc., (iii) loss per share, (iv) accumulated deficit balance, (v) noncontrolling interests balance, and (vi) weighted average shares outstanding.
6
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The table below represents the balances of the affected line items on the Consolidated Balance Sheet as of October 31, 2021, the Consolidated Statement of Operations and Comprehensive Loss for the three months ended October 31, 2021, and the Consolidated Statement of Stockholders’ Equity for the three months ended October 31, 2021. The accompanying notes to the unaudited consolidated interim financial statements have been restated as applicable.
| As
Previously Reported | Adjustment | As Restated | ||||||||||
| Consolidated Balance Sheet as of October 31, 2021 | ||||||||||||
| Accumulated deficit at October 31, 2021 | $ | ( | ) | $ | $ | ( | ) | |||||
| Total equity attributable to Rafael Holdings, Inc. | $ | $ | $ | |||||||||
| Noncontrolling interests at October 31, 2021 | $ | $ | ( | ) | $ | ( | ) | |||||
| Total stockholders' equity at October 31, 2021 | $ | $ | $ | |||||||||
| Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended October 31, 2021 | ||||||||||||
| Consolidated net loss | $ | ( | ) | $ | $ | ( | ) | |||||
| Net loss attributable to noncontrolling interests | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss attributable to Rafael Holdings, Inc. | $ | ( | ) | $ | $ | ( | ) | |||||
| Basic and diluted loss per share | $ | ( | ) | $ | $ | ( | ) | |||||
| Weighted average shares outstanding | ( | ) | ||||||||||
| Consolidated Statements of Equity, Three Months Ended October 31, 2021 | ||||||||||||
| Net loss attributable to noncontrolling interests | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss attributable to Rafael Holdings, Inc. | $ | ( | ) | $ | $ | ( | ) | |||||
| Accumulated deficit at October 31, 2021 | $ | ( | ) | $ | $ | ( | ) | |||||
| Noncontrolling interests at October 31, 2021 | $ | $ | ( | ) | $ | ( | ) | |||||
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, which include only normal recurring adjustments, considered necessary for a fair presentation have been included.
The Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ended in the calendar year indicated (e.g., fiscal 2021 refers to the fiscal year ended July 31, 2021).
Operating results for the three months ended October 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2022. The balance sheet at July 31, 2021 has been derived from the Company’s audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2021, or the 2021 Form 10-K, as filed with the U.S. Securities and Exchange Commission (the “SEC”).
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates.
Liquidity
As
of October 31, 2021, the Company had cash and cash equivalents of $
7
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Risks and Uncertainties – COVID-19
In December 2019, a novel strain of coronavirus, SARS-CoV, which causes COVID-19, 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.
The pandemic’s impacts on the Company’s and its affiliates’ operations and specifically the ongoing clinical trials of the Company’s pharmaceutical holdings have been actively managed by respective pharmaceutical management teams who have worked closely with the appropriate regulatory agencies to continue clinical trial activities with as minimal impact as possible including receiving waivers for certain clinical trial activities from the respective regulatory agencies to continue the studies.
Even with growing availability of testing and vaccines, there remains a general degree of uncertainty in the national commercial real estate market based on the COVID-19 pandemic. As a result, there remains a potential impact to the value of the Company’s real estate portfolio as well as efforts to monetize those assets.
The Company has 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.
Due to both known and unknown risks, including quarantines, closures and other restrictions resulting from the outbreak, operations and those of the Company’s holdings may be adversely impacted. Additionally, due to the evolving nature to the COVID-19 situation, the Company cannot reasonably assess or predict at this time the full extent of the negative impact that the COVID-19 pandemic may have on the Company’s business, financial condition, results of operations and cash flows. The impact will depend on future developments such as the ultimate duration and the severity of the spread of the COVID-19 pandemic in the U.S. and globally, the effectiveness of federal, state, local and foreign government actions on mitigation and spread of COVID-19, the pandemic’s impact on the U.S. and global economies, changes in the Company’s customers’ behavior emanating from the pandemic and how quickly the Company can resume our normal operations, among others. In addition, a recession, depression, or other sustained adverse market event resulting from the spread of the coronavirus could materially and adversely affect our business and the value of our common shares. For all these reasons, the Company may incur expenses or delays relating to such events outside of the Company’s control, which could have a material adverse impact on the Company’s business, and the Company will continue to monitor the situation closely.
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, 2021, related parties represented
Cash and Cash Equivalents
The Company considers all liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Restricted Cash
Restricted cash represents escrow funds held in bank accounts owned by the Company to be used to pay the severance due to the chief executive officer for termination without cause, pursuant to his employment agreement. The Company does not have the right to use this cash balance for any other purpose.
8
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Reserve for Receivables
The Company evaluates accounts receivable, loans, interest and fees receivable for impairment under 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 includes the identification of any variable interests in which the Company is the primary beneficiary. The consolidated financial statements include the Company’s controlled affiliates. All significant intercompany accounts and transactions between the consolidated affiliates are eliminated.
Investments in businesses that the Company does not control, but in which the Company has the ability to exercise significant influence over operating and financial matters, are accounted for using the equity method. Investments in which the Company does not have the ability to exercise significant influence over operating and financial matters are accounted for using the cost method. The Company periodically evaluates its investments for impairment due to declines considered to be other than temporary. If the Company determines that a decline in fair value is other than temporary, then a charge to earnings is recorded in the accompanying consolidated statements of operations and comprehensive loss, and a new basis in the investment is established.
Variable Interest Entities
In accordance with Accounting Standards Codification (“ASC”) 810, Consolidation, the Company assesses whether it has a variable interest in legal entities in which it has a financial relationship and, if so, whether or not those entities are variable interest entities (“VIEs”). For those entities that qualify as VIEs, ASC 810 requires the Company to determine if the Company is the primary beneficiary of the VIE, and if so, to consolidate the VIE.
If an entity is determined to be a VIE, the Company evaluates whether the Company is the primary beneficiary. The primary beneficiary analysis is a qualitative analysis based on power and economics. The Company consolidates a VIE if both power and benefits belong to the Company – that is, the Company (i) has the power to direct the activities of a VIE that most significantly influence the VIE’s economic performance (power), and (ii) has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE (benefits). The Company consolidates VIEs whenever it is determined that the Company is the primary beneficiary.
Cost Method Investments – Rafael 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 Rafael Pharmaceuticals that most significantly impact Rafael Pharmaceuticals’ economic performance. Cost method investments are presented as “Investments – Rafael Pharmaceuticals.”
Equity Method Investments – RP Finance, LLC (“RP Finance”), (see Note 6), has been identified as a VIE; however, the Company has determined that it is not the primary beneficiary as the Company does not have the power to direct the activities of RP Finance that most significantly impact RP Finance’s economic performance and, therefore, is not required to consolidate RP Finance. The Company accounts for its investment in RP Finance using the equity method of accounting.
Revenue Recognition
The Company applies the five-step approach as described in ASC 606, Revenue from Contracts with Customers, which consists of the following: (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when (or as) the entity satisfies a performance obligation.
The Company disaggregates its revenue by source within its consolidated statements of operations and comprehensive loss. As an owner and operator of real estate, the Company derives the majority of its revenue from leasing office and parking space to tenants at its properties. In addition, the Company earns revenue from recoveries from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs. Revenue from recoveries from tenants is recorded together with rental income on the consolidated statements of operations and comprehensive loss which is also consistent with the guidance under ASC 842, Leases.
9
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Contractual rental revenue is reported on a straight-line basis over the terms of the respective leases. Accrued rental income, included within other assets on the consolidated balance sheets, represents cumulative rental income earned in excess of rent payments received pursuant to the terms of the individual lease agreements.
The Company also earns revenue from parking which is derived primarily from monthly and transient daily parking. The monthly and transient daily parking revenue falls within the scope of ASC 606 and is accounted for at the point in time when control of the goods or services transfers to the customer and the Company’s performance obligation is satisfied, consistent with the Company’s previous accounting.
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required rent payments or parking customers to pay amounts due.
Research and Development Costs
Research and development costs and expenses incurred by consolidated entities consist primarily of salaries and related personnel expenses, stock-based compensation, fees paid to external service providers, laboratory supplies, costs for facilities and equipment, license costs, and other costs for research and development activities. Research and development expenses are recorded in operating expenses in the period in which they are incurred. Estimates have been used in determining the liability for certain costs where services have been performed but not yet invoiced. The Company monitors levels of performance under each significant contract for external service providers, including the extent of patient enrollment and other activities through communications with the service providers to reflect the actual amount expended.
Contingent milestone payments associated with acquiring rights to intellectual property are recognized when probable and estimable. These amounts are expensed to research and development when there is no alternative future use associated with the intellectual property.
Stock-Based Compensation
The Company accounts for stock-based compensation using the provisions of ASC 718, Stock Based Compensation, which requires the recognition of the fair value of stock-based compensation. Stock-based compensation is estimated at the grant date based on the fair value of the awards. The Company accounts for forfeitures as they occur. Compensation cost for awards is recognized using the straight-line method over the vesting period. Stock-based compensation is included in selling, general and administrative expense in the consolidated statements of operations and comprehensive loss.
Recently Issued Accounting Standards Not Yet Adopted
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies and are adopted by the Company as of the specified effective date. The Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.
NOTE 4 – INVESTMENT IN RAFAEL PHARMACEUTICALS
Equity Investment in Rafael Pharmaceuticals and Impairment of Cost Method Investment
Rafael Pharmaceuticals is a clinical stage, cancer metabolism-based therapeutics company committed to the development and commercialization of therapies that exploit the metabolic differences between normal cells and cancer cells.
The
Company owns equity interests and rights in Rafael Pharmaceuticals through a
10
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pharma
Holdings owns
A
trust for the benefit of the children of Howard Jonas (Chairman of the Board and former Chief Executive Officer of the Company and former
Chairman of the Board of Rafael Pharmaceuticals) holds a financial instrument (the “Instrument”) that owns
Pharma Holdings holds 44.0 million shares of Rafael Pharmaceuticals Series D Convertible Preferred Stock and a warrant to increase the combined ownership of Pharma Holdings and CS Pharma to up to 56% of the fully diluted equity interests in Rafael Pharmaceuticals (the “Warrant”). The Warrant is exercisable at the lower of 70% of the price sold in an equity financing, or $1.25 per share, subject to certain adjustments.
On
March 25, 2020, the Board of Directors of Rafael Pharmaceuticals extended the expiration date of the Warrant held by Pharma Holdings
to purchase shares of the Warrant from December 31, 2020 to June 30, 2021, and on August 31, 2020 the Board of Directors of Rafael 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 and will expire upon the earlier of (i) upon the occurrence
of the effective time of the Merger (the “Effective Time”), or (ii) if the Effective Time does not occur, the date that is
calculated by adding (A) the number of calendar days the Merger Agreement has been in effect prior to its termination in accordance with
its terms, to (B) August 15, 2021. Accordingly, the Company holds an effective
Pharma Holdings also holds certain governance rights in Rafael Pharmaceuticals including appointment of directors. Pharma Holdings is not the primary beneficiary of Rafael Pharmaceuticals as it does not control or direct the activities of Rafael Pharmaceuticals that most significantly impact Rafael Pharmaceuticals’ economic performance.
CS
Pharma holds
The
Company and its subsidiaries collectively own securities representing
The Series D Convertible Preferred Stock has a stated value of $1.25 per share (subject to appropriate adjustment to reflect any stock split, combination, reclassification or reorganization of the Series D Preferred Stock or any dilutive issuances, as described below). Holders of Series D Stock are entitled to receive non-cumulative dividends when, as and if declared by the Board of Rafael Pharmaceuticals, prior to any dividends to any other class of capital stock of Rafael Pharmaceuticals. In the event of any liquidation, dissolution or winding up of the Company, or in the event of any deemed liquidation, proceeds from such liquidation, dissolution or winding up shall be distributed first to the holders of Series D Stock. Except with respect to certain major decisions, or as required by law, holders of Series D Stock vote together with the holders of the other preferred stock and common stock and not as a separate class.
The
Company serves as the managing member of Pharma Holdings, and Pharma Holdings serves as the managing member of CS Pharma, with broad
authority to make all key decisions regarding their respective holdings. Any distributions that are made to CS Pharma from Rafael Pharmaceuticals
that are in turn distributed by CS Pharma, will need to be made pro rata to all members, which would entitle Pharma Holdings to
The Company evaluated its investments in Rafael 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 Pharmaceuticals is a VIE; however, the Company has determined that it is not the primary beneficiary as it does not have the power to direct the activities of Rafael Pharmaceuticals that most significantly impact Rafael Pharmaceuticals’ economic performance. In addition, the interests held in Rafael Pharmaceuticals are Series D Convertible Preferred Stock and do not represent in-substance common stock.
11
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
Instrument holds a contractual right to receive additional shares of Rafael Pharmaceuticals capital stock equal to
Pharma
Holdings holds the Warrant to purchase a significant stake in Rafael Pharmaceuticals, as well as other equity and governance rights in
Rafael Pharmaceuticals.
On January 28, 2021, Pharma Holdings partially exercised the Warrant to maintain the 51% ownership percentage and purchased 7.3 million shares of Rafael 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.
On
June 17, 2021, the Company entered into a merger agreement with Rafael Pharmaceuticals. Upon closing of the merger, each outstanding
share of each class of Rafael Pharmaceuticals capital stock will be automatically cancelled and will entitle a holder of shares of a
given class of Rafael Pharmaceuticals capital stock to receive
Due
to the Data Events, during the three months ended October 31, 2021, the Company recorded an impairment charge of approximately $
The
impairment charge of $
The Company filed a preliminary proxy statement/prospectus related to the Merger and the issuance of shares to interest holders of Rafael Pharmaceuticals thereunder with the SEC on September 14, 2021.
Line of Credit to Rafael 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 Rafael
Pharmaceuticals (the “Debtor”) in which the Debtor may borrow up to an aggregate amount of $
Due
to the Data Events, as of October 31, 2021, the Company recorded a full reserve on the amounts due to the Company from Rafael Pharmaceuticals
related to the Line of Credit Agreement for $
12
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 – INVESTMENT IN ALTIRA
The
Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) on May 13, 2020 with a member (the
“First Seller”) of Altira Capital & Consulting, LLC (“Altira”). Pursuant to the Purchase Agreement, on May
13, 2020,
The
Company has accounted for the purchase of the initial
For
the fiscal year ended July 31, 2020, the Company determined that the investment in Altira was fully impaired as of the acquisition date
as there were no probable cash flows, and accordingly, the investment had no value. The Company recorded an impairment charge of $
On
December 7, 2020,
Certain of the post-closing payments may be made, at the Company’s discretion, in cash or shares of the Company’s Class B common stock based on the ten-day average share price of the Company’s Class B common stock prior to the date of payment or any combination thereof.
The
purchase of the additional membership interests was accounted for as an asset acquisition, as Altira is not considered a business in
accordance with the guidance in ASC 805, Business Combinations. The membership interests acquired do not consist of inputs, processes,
and are not generating outputs, as required in ASC 805 to qualify as a business, and are therefore accounted for as an asset acquisition.
Although this transaction is considered an asset acquisition, there are no assets or liabilities to be recorded as of the acquisition
date as Altira does not have any business operations. The cost of the investment was determined to be $
13
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For
the year ended July 31, 2021, the Company determined that the investment in Altira was fully impaired as of the acquisition date as there
were no probable cash flows, and accordingly, had no value. The Company recorded an impairment charge of $
During
the year ended July 31, 2021, the Company issued
Additionally,
the Company issued
Upon
the December 2020 acquisition of the additional
NOTE 6 – INVESTMENT IN RP FINANCE, LLC
On
February 3, 2020, Rafael Pharmaceuticals entered into a Line of Credit Loan Agreement (“Line of Credit Agreement”) with RP
Finance which provides a revolving commitment of up to $
The Company owns 37.5% of the equity interests in RP Finance and is required to fund 37.5% of funding requests from Rafael Pharmaceuticals under the Line of Credit Agreement. Howard Jonas owns 37.5% of the equity interests in RP Finance, and is required to fund 37.5% of funding requests from Rafael Pharmaceuticals under the Line of Credit Agreement. The remaining 25% equity interests in RP Finance are owned by other shareholders of Rafael Pharmaceuticals.
Under the Line of Credit Agreement, all funds borrowed will bear interest at the mid-term Applicable Federal Rate published by the U.S. Internal Revenue Service. The maturity date is the earlier of February 3, 2025, upon a change of control of Rafael Pharmaceuticals or a sale of Rafael Pharmaceuticals or its assets. Rafael Pharmaceuticals can draw on the facility on 60 days’ notice. The funds borrowed under the Line of Credit Agreement must be repaid out of certain proceeds from equity sales by Rafael Pharmaceuticals.
In
connection with entering into the Line of Credit Agreement, Rafael Pharmaceuticals agreed to issue to RP Finance shares of its common
stock representing
RP
Finance has been identified as 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 a loss of approximately $
As of October 31, 2021, the Company has funded a cumulative total of $9.375 million in accordance with its 37.5% ownership interests in RP Finance.
14
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 loss of RP Finance of $
NOTE 7 – INVESTMENT IN LIPOMEDIX PHARMACEUTICALS LTD.
LipoMedix is a development-stage, privately held Israeli company focused on the development of an innovative, safe and effective cancer therapy based on liposome delivery.
As
of October 31, 2021, the Company held
In
November 2019, the Company provided bridge financing in the principal amount of $
In
January 2020, the Company provided bridge financing in the principal amount of $
In
March 2020, the Company provided bridge financing in the principal amount of $
In
May 2020, the Company entered into a Share Purchase Agreement with LipoMedix to purchase
In
March 2021, the Company provided bridge financing in the principal amount of up to $
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.
15
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 2021 and July 31, 2021:
| October 31, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | (unaudited, in thousands) | |||||||||||||||
| Hedge funds | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| July 31, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | (in thousands) | |||||||||||||||
| Hedge funds | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
At October 31, 2021 and July 31, 2021, 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, | ||||||||
| 2021 | 2020 | |||||||
| (unaudited, in thousands) | ||||||||
| Balance, beginning of period | $ | $ | ||||||
| Liquidation of Hedge Fund Investments | ( | ) | ||||||
| Total gain included in earnings | ||||||||
| Balance, end of period | $ | $ | ||||||
Hedge
funds classified as Level 3 include investments and securities which may not be based on readily observable data inputs. The availability
of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type
of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics
particular to the security. The fair value of these assets is estimated based on information provided by the fund managers or the general
partners. Therefore, these assets are classified as Level 3. In October 2020, the Company received a $
The
Company received proceeds from the sale of a portion of the Company’s investments in Hedge Funds in October 2020 and May 2021 of
approximately $
The
Company holds $
Fair Value of Other Financial Instruments
The estimated fair value of the Company’s other financial instruments was determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting these data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.
Cash and cash equivalents, investment in equity securities, trade accounts receivable, and accounts payable. At October 31, 2021 and July 31, 2021, the carrying amount of these assets and liabilities approximated fair value because of the short period of time to maturity. The fair value estimates for cash and cash equivalents were classified as Level 1.
16
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other assets and other liabilities. At October 31, 2021 and July 31, 2021, the carrying amount of these assets and liabilities approximated fair value. The fair values were estimated based on the Company’s assumptions, which were classified as Level 3 of the fair value hierarchy.
The Company’s financial instruments include trade accounts receivable, trade accounts payable, and due from related parties. The recorded carrying amounts of trade accounts receivable, trade accounts payable and due from related parties approximate their fair value due to their short-term nature. Other than noted above, the Company did not have any other assets or liabilities that were measured at fair value on a recurring basis as of October 31, 2021 or July 31, 2021.
NOTE 9 – TRADE ACCOUNTS RECEIVABLE
Trade Accounts Receivable consisted of the following:
| October
31, 2021 | July
31, 2021 | |||||||
| (unaudited, in thousands) | (in thousands) | |||||||
| Trade Accounts Receivable | $ | $ | ||||||
| Accounts Receivable – Related Party | ||||||||
| Less Allowance for Doubtful Accounts | ( | ) | ( | ) | ||||
| Trade Accounts Receivable, net | $ | $ | ||||||
The
current portion of deferred rental income included in Prepaid Expenses and Other Current Assets was approximately $
The
noncurrent portion of deferred rental income included in Other Assets was approximately $
NOTE 10 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
| October
31, 2021 | July
31, 2021 | |||||||
| (unaudited, in thousands) | (in thousands) | |||||||
| Building and Improvements | $ | $ | ||||||
| Land | ||||||||
| Furniture and Fixtures | ||||||||
| Other | ||||||||
| Less Accumulated Depreciation | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Other property and equipment consist of other equipment and miscellaneous computer hardware.
Depreciation
expense pertaining to property and equipment was approximately $
The Company’s headquarters are located at 520 Broad Street in Newark, New Jersey, where it occupies office space in the building owned by its subsidiary.
17
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – LOSS PER SHARE
Basic net loss per share is computed by dividing net loss attributable to all classes of common stockholders of the Company by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted loss per shares includes potentially dilutive securities such as non-vested restricted shares, stock options, warrants to purchase common stock, and other convertible instruments unless the result of inclusion would be anti-dilutive. These securities have been excluded from the calculation of diluted net loss per shares for the three months ended October 31, 2021 and October 31, 2020 because all such securities are anti-dilutive for all periods presented.
The following table summarizes the Company’s potentially dilutive securities, in common share equivalents, which have been excluded from the calculation of dilutive loss per share as their effect would be anti-dilutive:
| Three Months Ended October 31, | ||||||||
| 2021 (As restated) | 2020 | |||||||
| Non-vested restricted shares | ||||||||
| Shares issuable upon exercise of stock options | ||||||||
| Shares issuable upon exercise of warrants to purchase Class B common stock | ||||||||
The diluted loss per share computation equals basic loss per share for the three months ended October 31, 2021 and 2020 because the Company had a net loss and the impact of the assumed exercise of non-vested restricted shares, stock options, and warrants would have been anti-dilutive.
NOTE 12 – NOTE PAYABLE
On
July 9, 2021, the Company, as guarantor, Rafael Holdings Realty, Inc., a wholly-owned subsidiary of the Company (“Realty”),
as pledgor, and Broad-Atlantic Associates, LLC, a wholly-owned subsidiary of Realty (the “Borrower,” and together with the
Company and Realty, the “Borrower Parties”), as borrower, entered into a loan agreement (the “Loan Agreement”)
with 520 Broad Street LLC, a third-party lender (the “Lender”). The Loan Agreement provides for a loan in the amount of $
The Note Payable bears interest at a rate per annum equal to seven and one-quarter percent (7.25%) and thereafter at an interest rate per annum equal to the 30-day LIBOR Rate, as published in The Wall Street Journal, plus 6.90% per annum, but in no event less than seven and one-quarter percent (7.25%) per annum. The Note Payable is due on August 1, 2022, subject to the Company’s option to extend the maturity date until August 1, 2023 for a fee equal to three-quarters of one percent (0.75%) of the Note Payable.
The Loan Agreement contains customary affirmative covenants, negative covenants and events of default, as defined in the Loan Agreement, including covenants and restrictions that, among other things, restrict the Borrower’s ability to incur liens, or transfer, lease or sell the collateral as defined in the Loan Agreement. A failure to comply with these covenants could permit the Lender to declare the Borrower’s obligations under the Loan Agreement, together with accrued interest and fees, to be immediately due and payable.
Interest
expense under the Note Payable amounted to $
Unamortized
debt issuance costs on the Note Payable totaled $
NOTE 13 – RELATED PARTY TRANSACTIONS
IDT Corporation
The
Company has historically maintained an intercompany balance due to/from related parties that relates to cash advances for investments,
loan repayments, charges for services provided to the Company by IDT Corporation, or IDT, and payroll costs for the Company’s personnel
that were paid by IDT. The Company also receives rental income from various companies under common control to IDT. The Company recorded
expense of approximately $
18
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
IDT
leases approximately
During
the year ended July 31, 2021, IDT exercised
Rafael Pharmaceuticals
The Company provides Rafael Pharmaceuticals with administrative, finance,
accounting, tax and legal services. Howard S. Jonas served as the former Chairman of the Board of Rafael Pharmaceuticals and owns an equity
interest in Rafael Pharmaceuticals. The Company billed Rafael Pharmaceuticals $
The
balance owed to the Company by Rafael Pharmaceuticals as of October 31, 2021, was written off, resulting in a loss on related party receivable
of $
Levco Pharmaceuticals Ltd
On
September 8, 2020, Levco entered into a research and development consulting agreement with Dr. Alberto Gabizon for a two-year period.
Under the agreement, in exchange for the services provided, Levco will pay Dr. Gabizon $
On
September 8, 2020, Levco entered into a Sponsored Research Agreement with a company for a research program related to patent applications
with payments totaling $
Farber Partners, LLC
Farber, a controlled subsidiary of the Company, reached agreements with Princeton University including to in-license certain patents and related information related to the serine hydroxymethyltransferase (SHMT) inhibitor program developed by the laboratory of Dr. Joshua D. Rabinowitz at Princeton. Farber will pay Princeton minimum annual royalty payments, in addition to percentage royalties and a percentage of any sublicense revenue. Additionally, there are development milestone payments which Farber will pay Princeton for the first three products developed by Farber, or any sublicensees or affiliates.
Pharma Holdings
On January 28, 2021, Pharma Holdings partially exercised the Warrant and purchased 7.3 million shares of Rafael Pharmaceuticals’ Series D Preferred Stock for $9.1 million, of which $0.9 million was contributed by the holder of a minority interest in Pharma Holdings.
Related Party Rental Income
The Company leases space to related parties which represented approximately 51% and 49% of the Company’s total revenue for the three months ended October 31, 2021 and 2020, respectively. See Note 18 for future minimum rent payments from related parties and other tenants.
Investment in Altira
In
May 2020, the Company acquired its first membership interest of
19
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
RP Finance
For the three months ended October 31, 2021, the Company recognized an approximately $575 thousand loss and for the three months ended October 31, 2020, the Company recognized approximately $96 thousand in income from its ownership interests in RP Finance. As of October 31, 2021, the equity method investment in RP Finance was reduced to $0 due to the Data Events. The Company recorded a loss on related party receivables of $9.375 million related to amounts owed by RP Finance (see Note 6).
Howard Jonas, Chairman of the Board and Former Chief Executive Officer
In
December 2020, two entities, on whose Boards of Directors Howard Jonas, the Registrant’s Chairman of the Board and former Chief
Executive Officer serves, each purchased
NOTE 14 – INCOME TAXES
During
the three months ended October 31, 2021 and 2020, the Company recognized an income tax provision of $
The Company anticipates that its assumptions and estimates may change as a result of future guidance and interpretation from the Internal Revenue Service, the SEC, the FASB, and various other taxing jurisdictions. In particular, the Company anticipates that the U.S. state jurisdictions will continue to determine and announce their conformity with or decoupling from the Tax Act, either in its entirety or with respect to specific provisions. Legislative and interpretive actions could result in adjustments to the Company’s balances.
NOTE 15 – BUSINESS SEGMENT INFORMATION
The
Company conducts business as
The accounting policies of the segments are the same as the accounting policies of the Company as a whole. The Company evaluates the performance of its Pharmaceuticals segment based primarily on research and development efforts and results of clinical trials and the Real Estate segment based primarily on results of operations. All investments in Rafael Pharmaceuticals and assets and expenses associated with LipoMedix, Barer, Levco, Farber, and Rafael Medical Devices are tracked separately in the Pharmaceuticals segment.
The Pharmaceuticals segment is comprised of preferred and common equity interests and the Warrant to purchase equity interests in Rafael Pharmaceuticals, a majority equity interest in LipoMedix, Barer, Levco, Farber, and Rafael Medical Devices. To date, the Pharmaceuticals segment has not generated any revenues.
The Real Estate segment consists of the Company’s real estate holdings, including a building at 520 Broad Street in Newark, New Jersey that houses headquarters for the Company and certain affiliates and its associated public garage and a portion of an office building in Israel.
20
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Operating results for the business segments of the Company are as follows:
| (unaudited, in thousands) | Pharmaceuticals | Real Estate | Total | |||||||||
| Three Months Ended October 31, 2021 | ||||||||||||
| Revenues | $ | $ | $ | |||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ||||||
| Three Months Ended October 31, 2020 | ||||||||||||
| Revenues | $ | $ | $ | |||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ||||||
Geographic Information
Revenues from tenants located outside of the United States were generated entirely from related parties located in Israel. Revenues from these non-United States customers as a percentage of total revenues were as follows (revenues by country are determined based on the location of the related facility):
Three Months Ended October 31, (unaudited) | 2021 | 2020 | ||||||
| Revenue from tenants located in Israel | % | % | ||||||
Net long-lived assets and total assets held outside of the United States, which are located in Israel, were as follows:
| (unaudited, in thousands) | United States | Israel | Total | |||||||||
| October 31, 2021 | ||||||||||||
| Long-lived assets, net | $ | $ | $ | |||||||||
| Total assets | ||||||||||||
| July 31, 2021 | ||||||||||||
| Long-lived assets, net | $ | $ | $ | |||||||||
| Total assets | ||||||||||||
NOTE 16 – COMMITMENTS AND CONTINGENCIES
Legal Proceedings
On
July 12, 2019, the Company received a Citation and Notification of Penalty from the Occupational Safety and Health Administration of
the U.S. Department of Labor, or OSHA, related to an OSHA inspection of 520 Broad Street, Newark, New Jersey. The citation seeks to impose
penalties related to alleged violations of the Occupation Safety and Health Act of 1970 at 520 Broad Street. On July 31, 2019, the Company
filed a Notice of Contest with OSHA contesting the citation in its entirety. On February 14, 2020, the Company entered into a Settlement
Agreement with OSHA, as related to the citation received on July 12, 2019.
On December 31, 2019, an employee of the Company filed a complaint in connection with the incident that led to the OSHA inspection noted above for personal injuries against the Company and other parties in the New Jersey Supreme Court for an incident that took place on January 31, 2019 at 520 Broad Street, Newark, New Jersey. The Company is vigorously defending its interests in this matter. The loss is considered remote and no accrual has been recorded.
The Company may from time to time be subject to legal proceedings that may arise in the ordinary course of business. Although there can be no assurance in this regard, other than noted above, the Company does not expect any of those legal proceedings to have a material adverse effect on the Company’s results of operations, cash flows or financial condition.
21
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 17 – EQUITY
Class A Common Stock and Class B Common Stock
The rights of holders of Class A common stock and Class B common stock are identical except for certain voting and conversion rights and restrictions on transferability. The holders of Class A common stock and Class B common stock receive identical dividends per share when and if declared by the Company’s Board of Directors. In addition, the holders of Class A common stock and Class B common stock have identical and equal priority rights per share in liquidation. The Class A common stock and Class B common stock do not have any other contractual participation rights. The holders of Class A common stock are entitled to three votes per share and the holders of Class B common stock are entitled to one-tenth of a vote per share. Each share of Class A common stock may be converted into one share of Class B common stock, at any time, at the option of the holder. Shares of Class A common stock are subject to certain limitations on transferability that do not apply to shares of Class B common stock.
On
May 27, 2021, the Company filed a Registration Statement on Form S-3, whereby the Company may sell up to $
On
June 1, 2021, the Company filed a Registration Statement on Form S-3 and issued
On
August 19, 2021, the Company entered into a Securities Purchase Agreement (the “Institutional Purchase Agreement”) with institutional
investors (the “Institutional Investors”) and a Securities Purchase Agreement with I9Plus, LLC, (the “Jonas Purchase
Agreement”), an entity affiliated with Howard S. Jonas, the Chairman of the Board of Directors of the Company.
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.
22
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding at July 31, 2021 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Cancelled / Forfeited | ( | ) | ||||||||||||||
| Outstanding at October 31, 2021 | $ | $ | ||||||||||||||
| Exercisable at October 31, 2021 | $ | $ | ||||||||||||||
At
October 31, 2021, there are unrecognized compensation costs related to non-vested stock options of $
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:
| Risk-free interest rate | % | ||
| Expected term (in years) | |||
| Expected volatility | % | ||
| Expected dividend yield | % |
Restricted Stock
The fair value of restricted shares of the Company’s Class B common stock is determined based on the closing price of the Company’s Class B common stock on the grant date. Share awards generally vest on a graded basis over three years of service.
A summary of the status of the Company’s grants of restricted shares of Class B common stock is presented below:
Number of Non-vested Shares | Weighted Average Grant
Date | |||||||
| Outstanding at July 31, 2021 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Cancelled / Forfeited | ( | ) | ||||||
| Non-vested shares at October 31, 2021 | $ | |||||||
At
October 31, 2021, there was $
Securities Purchase Agreement
On
December 7, 2020, Rafael Holdings entered into a Securities Purchase Agreement (the “SPA”) for the sale of
23
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Approximately
$
Equity-classified Warrants
In
connection with the Share Purchase Agreement, each purchaser was granted warrants to purchase twenty percent (
During
the year ended July 31, 2021, IDT and Genie each exercised
There
were no exercises of warrants during the three months ended October 31, 2021. At October 31, 2021, the Company had outstanding warrants
to purchase
Grant to Board of Directors
Pursuant to the Company’s 2018 Equity Incentive Plan, three of our four non-employee directors of the Company were granted 4,203 restricted shares of our Class B common stock in January 2020 and 4,203 restricted shares of our Class B common stock in January 2021 which fully vested on the date of the grants. The fair value of the awards on the date of the grants were approximately $286,000 and $208,000 in January 2021 and January 2020, respectively, which was included in selling, general and administrative expense.
NOTE 18 – LEASES
The future contractual minimum lease payments to be received (excluding operating expense reimbursements) by the Company as of October 31, 2021, under non-cancellable operating leases which expire on various dates through 2028 are as follows:
| Year ending July 31, | Related Parties | Other | Total | |||||||||
| (in thousands) | ||||||||||||
| 2022 (remaining) | $ | $ | $ | |||||||||
| 2023 | ||||||||||||
| 2024 | ||||||||||||
| 2025 | ||||||||||||
| 2026 | ||||||||||||
| Thereafter | ||||||||||||
| Total Minimum Future Rental Income | $ | $ | $ | |||||||||
24
RAFAEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 19 – SUBSEQUENT EVENTS
On
November 1, 2021, the Company issued
On
November 11, 2021, the Company entered into a share purchase agreement with LipoMedix to purchase up to
As
of the date of the Share Purchase Agreement, there was an outstanding loan balance including principal of $
On
November 21, 2021, Ameet Mallik resigned as Chief Executive Officer of the Company, effective January 31, 2022. Mr. Mallik will remain
as a director of the Company. The Company expects to incur approximately $
On
November 21, 2021, the Board of Directors decided that four additional members of the executive team will depart at various dates during
January 2022. The Company expects to incur approximately $
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (as restated)
Overview
Rafael Holdings, Inc. (NYSE-RFL), (“Rafael Holdings” or the “Company”), a Delaware corporation, is focused on discovering and developing novel cancer and immune metabolism therapies with the potential to improve and extend the lives of patients. The Company also owns commercial real estate assets, which it operates as a separate line of business.
The Company has an investment in 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 Rafael Pharmaceuticals in exchange for issuing Company Class B common stock to the other stockholders of Rafael Pharmaceuticals. On October 28, 2021, the Company announced that the AVENGER 500 Phase 3 clinical trial for CPI-613® (devimistat), Rafael Pharmaceuticals’ lead product candidate, did not meet its primary endpoint of significant improvement in overall survival in patients with metastatic adenocarcinoma of the pancreas, and following a pre-specified interim analysis, the independent data monitoring committee for the ARMADA 2000 Phase 3 study for devimistat has recommended the trial to be stopped due to a determination that it was unlikely to achieve the primary endpoint (the “Data Events”). In connection with the preparation of the Company’s first quarter financial statements, U.S. GAAP required that the Company assess the impact of the Data Events and determine whether the carrying values of the Company’s assets were impaired based upon the Company’s expectations to realize future value. In light of Data Events, the Company concluded that currently the likelihood of further development of and prospects for CPI-613 is uncertain and has fully impaired the value of its loans, receivables, and investment in Rafael Pharmaceuticals based upon its valuation of Rafael Pharmaceuticals.
In 2019, the Company established Barer Institute (“Barer”), as an early-stage small molecule research institute focused on developing a pipeline of novel therapeutic compounds, including compounds to regulate cancer metabolism with potentially broader application in other indications beyond cancer. Barer is led by a team of scientists and academic advisors considered to be among the leading experts in cancer metabolism, chemistry, and drug development. In addition to its own internal discovery efforts, Barer is pursuing collaborative research agreements and in-licensing opportunities with leading scientists from top academic institutions. Farber Partners, LLC (“Farber”) was formed to support agreements with Princeton University’s Office of Technology Licensing for technology from the laboratory of Professor Joshua Rabinowitz, in the Department of Chemistry, Princeton University, including an exclusive worldwide license to its SHMT (serine hydroxymethyltransferase) inhibitor program. The Company also holds a majority equity interest in LipoMedix Pharmaceuticals Ltd. (“LipoMedix”), a clinical stage oncological pharmaceutical company based in Israel. In addition, the Company has recently initiated efforts to develop other early stage pharmaceutical ventures including Levco Pharmaceuticals Ltd. (“Levco”), an Israeli company, established to partner with Dr. Alberto Gabizon and a leading institution in Israel on the development of novel compounds for cancer.
The Company’s commercial real estate holdings consist of a building at 520 Broad Street in Newark, New Jersey that serves as headquarters for the Company and certain other entities and tenants and an associated 800-car public garage, and a portion of a building in Israel. The Company sold other real estate holdings in 2020. We continue to seek opportunities to maximize the value of our real estate holdings in multiple ways and we are also evaluating other avenues of maximizing value through redevelopment of vacant space into more marketable and thereby valuable uses.
On June 17, 2021, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with RH Merger I, Inc., a Delaware corporation and a wholly-owned subsidiary of Holdings, RH Merger II, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Holdings and Rafael Pharmaceuticals, Inc., a Delaware corporation (“Rafael Pharmaceuticals” or “Pharma”), to acquire full ownership of Rafael Pharmaceuticals in exchange for issuing Company Class B common stock to the other stockholders of Rafael Pharmaceuticals.
We filed a preliminary proxy statement/prospectus with the SEC on September 14, 2021.
We have provided debt and equity financing to Rafael Pharmaceuticals.
26
Business Update - COVID-19
In December 2019, a novel strain of coronavirus, SARS-CoV-2, which causes COVID-19, 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.. We actively monitor the outbreak, including the spread of new variants of interest, and its potential impact on our operations and those of our holdings.
The pandemic’s impacts on our and our affiliates’ operations and specifically the ongoing clinical trials of our pharmaceutical holdings have been actively managed by respective pharmaceutical management teams who have worked closely with the appropriate regulatory agencies to continue clinical trial activities with as minimal impact as possible including receiving waivers for certain clinical trial activities from the respective regulatory agencies to continue the studies.
Even with growing availability of testing and vaccines, there remains a general degree of uncertainty in the national commercial real estate market based on the COVID-19 pandemic. As a result there remains a potential impact to the value of our real estate portfolio as well as efforts to monetize those assets.
We have implemented a number of measures to protect the health and safety of our workforce including a voluntary work-from-home policy for our workforce who can perform their jobs from home as well as restrictions on discretionary business travel.
Due to both known and unknown risks, including quarantines, closures and other restrictions resulting from the outbreak, operations and those of our holdings may be adversely impacted. Additionally, due to the evolving nature to the COVID-19 situation, we cannot reasonably assess or predict at this time the full extent of the negative impact that the COVID-19 pandemic may have on our business, financial condition, results of operations and cash flows. The impact will depend on future developments such as the ultimate duration and the severity of the spread of the COVID-19 pandemic in the U.S. and globally, the effectiveness of federal, state, local and foreign government actions on mitigation and spread of COVID-19, the pandemic’s impact on the U.S. and global economies, changes in our customers’ behavior emanating from the pandemic and how quickly we can resume our normal operations, among others. In addition, a recession, depression, or other sustained adverse market event resulting from the spread of the coronavirus could materially and adversely affect our business and the value of our common shares. For all these reasons, we may incur expenses or delays relating to such events outside of our control, which could have a material adverse impact on our business, and we will continue to monitor the situation closely.
Results of Operations
Our business consists of two reportable segments - Pharmaceuticals and Real Estate. We evaluate the performance of our Pharmaceuticals segment based primarily on research and development efforts and results of clinical trials and our Real Estate segment based primarily on results of operations. Accordingly, the income and expense line items below loss from operations are only included in the discussion of consolidated results of operations.
Three Months Ended October 31, 2021 Compared to Three Months Ended October 31, 2020
Pharmaceuticals Segment
Our consolidated expenses for our Pharmaceuticals segment were as follows:
| Three
Months Ended October 31, | Change | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| (unaudited, in thousands) | ||||||||||||||||
| General and administrative | $ | (12,097 | ) | $ | (1,620 | ) | (10,477 | ) | (647 | )% | ||||||
| Research and development | (2,153 | ) | (515 | ) | (1,638 | ) | (318 | )% | ||||||||
| Provision for loss on receivable pursuant to line of credit | (25,000 | ) | — | (25,000 | ) | (100 | )% | |||||||||
| Provision for loss on related party receivables | (10,283 | ) | — | (10,283 | ) | (100 | )% | |||||||||
| Loss from operations | $ | (49,533 | ) | $ | (2,135 | ) | (47,398 | ) | (2220 | )% | ||||||
27
To date, the Pharmaceuticals segment has not generated any revenues. The entirety of the expenses in the Pharmaceuticals segment relate to the activities of LipoMedix, Barer, Levco, Farber, and Rafael Medical Devices. For the three months ended October 31, 2021 and 2020, we held a 100% interest in Barer, a 68% interest in LipoMedix, a 95% and 0% interest in Levco, respectively, and a 93% and 0% interest in Farber, respectively. Rafael Medical Devices in which we have a 100% interest, was created in fiscal year 2021.
General and administrative expenses. General and administrative expenses consist mainly of payroll, benefits, facilities, consulting and professional fees. The increase in general and administrative expenses during the three months ended October 31, 2021 compared to the three months ended October 31, 2020 is primarily due to an increase non-cash share-based compensation expense of approximately $7.3 million, an increase in professional fees of approximately $1.6 million and payroll of approximately $1.3 million.
Research and development expenses. Research and development increased for the three months ended October 31, 2021 compared to the three months ended October 31, 2020 due to increased activity at Barer, Levco, Farber, and Rafael Medical Devices.
Loss on line of credit. Due to the Data Events, as of October 31, 2021, the Company recorded a full reserve on the $25 million due to the Company from Rafael Pharmaceuticals related to the Line of Credit Agreement.
Loss on related party receivables. Due to the Data Events, for the three months ended October 31, 2021, the Company recorded a loss of $10.1 million related to the full reserve recorded on the RP Finance receivable of $9.375 million and the Rafael Pharmaceuticals receivable of $0.7 million.
Real Estate Segment
Our consolidated income and expenses for our Real Estate segment were as follows:
| Three
Months Ended October 31, | Change | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| (unaudited, in thousands) | ||||||||||||||||
| Rental – Third Party | $ | 196 | $ | 236 | (40 | ) | (17 | )% | ||||||||
| Rental – Related Party | 520 | 520 | — | — | % | |||||||||||
| Parking | 190 | 177 | 13 | 7 | % | |||||||||||
| Other | 120 | 120 | — | — | % | |||||||||||
| Selling, general and administrative | (795 | ) | (972 | ) | 177 | 18 | % | |||||||||
| Depreciation | (382 | ) | (437 | ) | 55 | 13 | % | |||||||||
| Loss from operations | $ | (151 | ) | $ | (356 | ) | 205 | 58 | % | |||||||
Revenues. Rental revenues decreased by approximately $40 thousand, and parking revenue increased by approximately $13 thousand for the three months ended October 31, 2021 compared to the three months ended October 31, 2020 primarily due to the sale of the building in Piscataway in August 2020 and the related reduction in rental income. The increase in parking revenue is related to increased activity at the Company’s garage at 520 Broad Street in Newark.
Selling, general and administrative expenses. Selling, general and administrative expenses consist mainly of payroll, benefits, facilities, consulting and professional fees. The decrease in selling, general and administrative expenses for the three months ended October 31, 2021 compared to the three months ended October 31, 2020 is primarily due to a decrease in real estate tax costs, partially offset by other increases in administrative expenses.
Depreciation expenses. Depreciation expenses decreased for the three months ended October 31, 2021 as compared to the three months ended October 31, 2020 due to the sale of the building in Piscataway, New Jersey.
28
Consolidated Operations
Our consolidated income and expense line items below income from operations were as follows:
| Three
Months Ended October 31, | Change | |||||||||||||||
| 2021 (As Restated) | 2020 | $ (As Restated) | % (As Restated) | |||||||||||||
| (unaudited, in thousands) | ||||||||||||||||
| Loss from operations | $ | (49,684 | ) | $ | (2,491 | ) | (47,193 | ) | (1,895 | )% | ||||||
| Interest expense, net | (222 | ) | — | (222 | ) | (100 | )% | |||||||||
| Gain on sale of building | — | 749 | (749 | ) | (100 | )% | ||||||||||
| Impairment of investments - Other Pharmaceuticals | — | (724 | ) | 724 | 100 | % | ||||||||||
| Impairment of cost method investment - Rafael Pharmaceuticals | (79,141 | ) | — | (79,141 | ) | (100 | )% | |||||||||
| Unrealized gain on investments - Hedge Funds | 211 | 944 | (733 | ) | (78 | )% | ||||||||||
| Loss before income taxes | (128,836 | ) | (1,522 | ) | (127,314 | ) | (8365 | )% | ||||||||
| Provision for income taxes | — | (5 | ) | 5 | 100 | % | ||||||||||
| Equity in (loss) earnings of RP Finance | (575 | ) | 96 | (671 | ) | (699 | )% | |||||||||
| Consolidated net loss | (129,411 | ) | (1,431 | ) | (127,980 | ) | (8,943 | )% | ||||||||
Net (loss) income attributable to noncontrolling interests | (17,387 | ) | 15 | (17,402 | ) | (116,013 | )% | |||||||||
| Net loss attributable to Rafael Holdings, Inc. | $ | (112,024 | ) | $ | (1,446 | ) | (110,578 | ) | (7,647 | )% | ||||||
Interest expense, net. Interest expense, net was $222 thousand for the three months ended October 31, 2021 and $0 for the three months ended October 31, 2020. The increase in interest expense is due to the amortization of the debt discount and the interest related to the note payable.
Gain on sale of building. In August 2020, we sold a building located in Piscataway, New Jersey, and recognized a gain on the sale of approximately $749 thousand.
Impairment of investments - Other Pharmaceuticals. We recorded an impairment loss of $724 thousand related to our investment in Nanovibronix using the measurement alternative for the three months ended October 31, 2020.
Impairment of cost method investment - Rafael Pharmaceuticals. In connection with the Data Events, we recorded a full impairment charge during the three months ended October 31, 2021 related to our cost method investment in Rafael Pharmaceuticals in the amount of $79 million.
Unrealized gain on investments - Hedge Funds. We recorded unrealized gains of approximately $211 thousand and $944 thousand for the three months ended October 31, 2021 and 2020, respectively.
Equity in (loss) earnings of RP Finance. We recognized an approximately $575 thousand loss and an approximately $96 thousand in income from our ownership interest in RP Finance for the three months ended October 31, 2021 and 2020, respectively.
Net (loss) income attributable to noncontrolling interests. The change in the net (loss) income attributable to noncontrolling interests was due to an approximate $17.3 million loss related to the Rafael Pharmaceuticals impairment loss (the total impairment loss was approximately $79 million) which was applicable to noncontrolling interests in certain of the Company’s subsidiaries and was allocated to the holders of interests in CS Pharma and Pharma Holdings in the approximate amounts of $10.4 million and $6.9 million, respectively, for the three months ended October 31, 2021. The additional change is related to the loss from LipoMedix, Farber, and Levco for the three months ended October 31, 2021.
29
Liquidity and Capital Resources
General
As of October 31, 2021, we had cash and cash equivalents of $72.4 million in addition to our investment in hedge funds valued at $5.5 million. We expect the balance of cash and cash equivalents and investment in hedge funds to be sufficient to meet our obligations for the next 12 months from the issuance of these consolidated financial statements.
| October 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows (used in) provided by | (unaudited, in thousands) | |||||||
| Operating activities | $ | (6,474 | ) | $ | (2,653 | ) | ||
| Investing activities | (26,904 | ) | 3,638 | |||||
| Financing activities | 97,909 | 43 | ||||||
| Effect of exchange rates on cash and cash equivalents | 2 | (3 | ) | |||||
| Increase in cash and cash equivalents | $ | 64,533 | $ | 1,025 | ||||
Operating Activities
The increase in cash used in operating activities for the three months ended October 31, 2021 as compared to the three months ended October 31, 2020 was primarily related to the net loss offset by the impact from noncash 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 $7.6 million as well as other changes in assets and liabilities.
Investing Activities
Cash used in investing activities for the three months ended October 31, 2021 was primarily related to amounts loaned to Rafael Pharmaceuticals of approximately $25 million pursuant to the Line of Credit Agreement and the payments to fund our portion of advances under the line of credit between RP Finance and Rafael Pharmaceuticals in the amount of approximately $1.9 million.
Cash provided by investing activities for the three months ended October 31, 2020 was primarily related to the proceeds from the sale of the building in Piscataway, New Jersey of approximately $3.7 million, and the proceeds related to the Hedge Funds liquidation of $2 million, offset by payments to fund our portion of advances under the line of credit between RP Finance and Rafael Pharmaceuticals in the amount of approximately $1.9 million.
Financing Activities
Cash provided by financing activities for the three months ended October 31, 2021 was primarily related to proceeds of approximately $104 million related to the sale of our common stock to investors and a related party.
Cash provided by financing activities for the three months ended October 31, 2020 was due to the receipt of proceeds from the exercise of employee stock options.
We do not anticipate paying dividends on our common stock until we achieve sustainable profitability and retain certain minimum cash reserves. The payment of dividends in any specific period will be at the sole discretion of our Board of Directors.
Trends and Uncertainties – COVID-19
In December 2019, a novel strain of coronavirus, SARS-CoV-2, which causes COVID-19, 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. We actively monitor the outbreak, including the spread of new variants of interest, and its potential impact on our operations and those of our holdings.
The pandemic’s impacts on our and our affiliates’ operations and specifically the ongoing clinical trials of our pharmaceutical holdings have been actively managed by respective pharmaceutical management teams who have worked closely with the appropriate regulatory agencies to continue clinical trial activities with as minimal impact as possible including receiving waivers for certain clinical trial activities from the respective regulatory agencies to continue the studies.
Even with growing availability of testing and vaccines, there remains a general degree of uncertainty in the national commercial real estate market based on the COVID-19 pandemic. As a result there remains a potential impact to the value of our real estate portfolio as well as efforts to monetize those assets.
We have implemented a number of measures to protect the health and safety of our workforce including a voluntary work-from-home policy for our workforce who can perform their jobs from home as well as restrictions on discretionary business travel.
30
Due to both known and unknown risks, including quarantines, closures and other restrictions resulting from the outbreak, operations and those of our holdings may be adversely impacted. Additionally, due to the evolving nature to the COVID-19 situation, we cannot reasonably assess or predict at this time the full extent of the negative impact that the COVID-19 pandemic may have on our business, financial condition, results of operations and cash flows. The impact will depend on future developments such as the ultimate duration and the severity of the spread of the COVID-19 pandemic in the U.S. and globally, the effectiveness of federal, state, local and foreign government actions on mitigation and spread of COVID-19, the pandemic’s impact on the U.S. and global economies, changes in our customers’ behavior emanating from the pandemic and how quickly we can resume our normal operations, among others. In addition, a recession, depression, or other sustained adverse market event resulting from the spread of the coronavirus could materially and adversely affect our business and the value of our common shares. For all these reasons, we may incur expenses or delays relating to such events outside of our control, which could have a material adverse impact on our business, and we will continue to monitor the situation closely.
Critical Accounting Policies and Estimates
We have chosen accounting policies that we believe are appropriate to accurately and fairly report our operating results and financial condition in conformity with U.S. GAAP. We apply these accounting policies in a consistent manner. Our significant accounting policies are discussed in Note 1, “Description of Business and Summary of Significant Accounting Policies,” to our consolidated financial statements included in our 2021 Form 10-K.
The application of critical accounting policies requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. These estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. We evaluate these estimates and assumptions on an ongoing basis and may retain outside consultants to assist in our evaluation. If actual results ultimately differ from previous estimates, the revisions are included in results of operations in the period in which the actual amounts become known. The critical accounting policies that involve the most significant management judgments and estimates used in preparation of our consolidated financial statements, or are the most sensitive to change from outside factors, are discussed in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for fiscal 2021 (“2021 Form 10-K”). There have been no material changes in our critical accounting policies and procedures during the three months ended October 31, 2021.
Off-Balance Sheet Arrangements
We do not have any “off-balance sheet arrangements,” as defined in relevant SEC regulations that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
There have been no significant changes in our market risk exposures from those described in Item 7A of our 2021 Form 10-K.
We are monitoring the potential impacts of the COVID-19 pandemic on our business. While the potential economic impact brought by, and the duration of, the COVID-19 pandemic is difficult to assess or predict, the impact on the global financial markets may reduce our ability to access capital, which could negatively impact our long-term liquidity.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our management evaluated, with the participation of our current Chief Executive Officer and Chief Financial Officer (our “Certifying Officers”), the effectiveness of our disclosure controls and procedures as of October 31, 2021, pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Certifying Officers concluded that our disclosure controls and procedures were not effective as of October 31, 2021, because of material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
We determined that there was an error in our accounting for items of income (loss) attributable to the non-controlling interests in two of our legal entities. Specifically, we did not correctly allocate losses to our noncontrolling interests, as the Company processed journal entries related to an impairment loss outside of the normal consolidation process, and effective reviews of the consolidation did not occur. We determined that a material weakness in our internal control over financial reporting exists as we did not maintain effective internal controls over the Company’s consolidation process and accounting for items of income (loss) attributable to the non-controlling interests.
We determined that there was an error in the calculation of weighted average shares outstanding used in earnings per share, as the Company incorrectly included nonvested restricted shares within the calculation of weighted average shares. The error was the result of the deficiency in internal control over financial reporting, specifically in the design of the control around the application of authoritative guidance related to earnings per share in accordance with U.S. generally accepted accounting principles.
The Company assessed whether there was a reasonable possibility that a material misstatement would not have been prevented or detected on a timely basis as a result of the above control deficiencies.
The control deficiencies resulted in material errors in the calculation of basic and diluted earnings per share and weighted average shares and items of income (loss) attributed to noncontrolling interest previously disclosed in the Company’s interim consolidated financial statements. Based on these factors, the Company concluded that the deficiencies noted above each rise to the level of a material weakness for the quarter ended October 31, 2021.
We are committed to maintaining a strong internal control environment and implementing measures to ensure that the control deficiencies identified above are remediated as soon as possible. Management is in the process of implementing a remediation plan, which includes steps to design and implement new controls. The remediation actions are being monitored by the Audit Committee of our Board of Directors.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended October 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
31
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Legal proceedings in which we are involved are more fully described in Note 16 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q/A.
Item 1A. Risk Factors
There were no material changes from the risk factors previously disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the year ended July 31, 2021, except for the following:
We have identified material weaknesses in our internal control over financial reporting as of October 31, 2021.
As described elsewhere in this Quarterly Report on Form 10-Q/A, we have identified two material weaknesses in our internal control over financial reporting related to the accounting for the allocation of losses to our noncontrolling interests and the calculation of weighted average shares outstanding used in earnings per share. As a result, our management has concluded that our disclosure controls and procedures were not effective as of October 31, 2021. See Part I. Item 4. Controls and Procedures included in this Quarterly Report on Form 10-Q/A.
As we work towards remediating these material weaknesses, we will design and implement controls related to our financial close and consolidation process and controls related to the calculation of weighted average shares outstanding in accordance with U.S. generally accepted accounting principles.
We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any cyber security incidents, could harm our ability to operate our and the Pharmaceutical Companies’ businesses effectively.
Despite the implementation of security measures, our and the Pharmaceutical Companies’ internal computer systems and those of third parties with which we and the Pharmaceutical Companies contract are vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. System failures, accidents or security breaches could cause interruptions in our and the Pharmaceutical Companies’ operations, and could result in a material disruption of their clinical and commercialization activities and business operations, in addition to possibly requiring substantial expenditures of resources to remedy. The loss of clinical trial data could result in delays in our and the Pharmaceutical Companies’ regulatory approval efforts and significantly increase their costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, our or the Pharmaceutical Companies’ data or applications, or inappropriate disclosure of confidential or proprietary information, we and the Pharmaceutical Companies could incur liability and their product research, development and commercialization efforts could be delayed.
Furthermore, we and our third-party providers rely on electronic communications and information systems to conduct our operations. We and our third-party providers have been, and may continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate bank accounting information, passwords, or other personal information or to introduce viruses or other malware to our information systems. In October 2021, we experienced a cybersecurity incident where a related party’s email was hacked which led to payment of two invoices. As of the date of this filing, one of the invoices had been recovered by the Company. We continue to explore a range of steps to enhance our security protections and prevent future unauthorized activity.
Although we endeavor to mitigate these threats, such cyber-attacks against us or our third-party providers and business partners remain a serious issue. The pervasiveness of cybersecurity incidents in general and the risks of cyber-crime are complex and continue to evolve. Although we are making significant efforts to maintain the security and integrity of our information systems and are exploring various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging.
Our insurance policies may not be adequate to compensate us for the potential losses arising from any such disruption, failure or security breach. In addition, such insurance may not be available to us in the future on economically reasonable terms, or at all. Further, our insurance may not cover all claims made against us and could have high deductibles in any event, and defending a suit, regardless of its merit, could be costly and divert management attention.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
Exhibit Number |
Description | |
| 31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1* | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2* | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS* | Inline XBRL Instance Document. | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * | Filed or furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: February 28, 2022 | Rafael Holdings, Inc. | |
| By: | /s/ William Conkling | |
| William Conkling | ||
| Chief Executive Officer | ||
| By: | /s/ Patrick Fabbio | |
| Patrick Fabbio | ||
| Chief Financial Officer | ||
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