Investment in Day Three Labs Inc.

12 Months Ended

Jul. 31, 2024

Investment in Day Three Labs Inc. [Abstract]

INVESTMENT IN DAY THREE LABS INC.

NOTE 10 – INVESTMENT IN DAY THREE LABS INC.

Initial investment in Day Three

On April 7, 2023, the Company entered into a Common Stock Purchase Agreement (the “Day Three Purchase Agreement”) with Day Three. Day Three is a company which reimagines existing cannabis offerings with pharmaceutical-grade technology and innovation like Unlokt™ to bring to market better, cleaner, more precise and predictable products. Pursuant to the Day Three Purchase Agreement, the Company purchased 4,302 shares of common stock, post DTL Reverse Stock Split (as defined below), representing 38% of the outstanding shares of common stock of Day Three (33% on a fully diluted basis), for a purchase price of $3.0 million. The Company also received a warrant exercisable for 7,529 shares of common stock, post DTL Reverse Stock Split, which expires five years from the date of issuance or earlier based on the occurrence of certain events as defined in the Day Three Purchase Agreement (the “Day Three Warrant”).

Prior to January 2024, the Company accounted for this investment as an equity method investment in accordance with the guidance in ASC 323, Investments – Equity Method and Joint Ventures. The Company determined that a 38% ownership interest in Day Three and its right to designate two members of the Board of Directors of Day Three (out of a current total of seven members) indicates that the Company is able to exercise significant influence.

The Company determined that Day Three is a VIE; however, the Company determined that, prior to January 2024, it was not the primary beneficiary as it did not have the power to direct the activities that most significantly impacted Day Three’s economic performance. The Company has therefore concluded it was not required to consolidate Day Three. The Company used the equity method of accounting to record its investment in Day Three.

Day Three’s fiscal year ends on December 31 and, as a result, the Company recognizes its share of Day Three’s earnings/loss on a one-month lag. For the years ended July 31, 2024 and 2023, the Company recognized approximately $422 thousand and $203 thousand of equity in loss of Day Three, based on its proportionate share of Day Three’s results through January 2, 2024, the effective date of the Day Three Acquisition, as discussed below. The assets and operations of Day Three are not significant to the Company’s assets or operations.

Acquisition of Day Three

In January 2024, the Company entered into a series of transactions with Day Three and certain shareholders to purchase an aggregate of 13,771 shares of common stock, post DTL Reverse Stock Split, of Day Three, acquiring a controlling interest of Day Three (the “Day Three Acquisition”). As a result of the Day Three Acquisition, the Company holds an aggregate 79% of the issued and outstanding shares of common stock of Day Three. Day Three has options and warrants outstanding that, if and when exercised, could dilute the Company’s ownership interest in Day Three. In connection with the Day Three Acquisition, the Day Three Warrant was terminated. The acquisition date was determined to be January 2, 2024, which is the date that Rafael obtained a controlling interest of the common stock of Day Three. The Day Three Acquisition is being accounted for as a business combination in accordance with ASC 805.

During the period of October 2023 through January 2024, the Company advanced $250,000 to Day Three pursuant to a promissory note (the “Day Three Note I”), $150,000 to Day Three pursuant to a promissory note (the “Day Three Note II”), $1,000,000 to Day Three pursuant to a third promissory note (the “Day Three Note III”), and $589,024 to Day Three pursuant to a fourth promissory note (the “Day Three Note IV”) (collectively, the “Day Three Promissory Notes”). The Day Three Promissory Notes accrue interest at rate of between 5.01% and 5.19% per annum.

The aggregate consideration of the Day Three Acquisition was $3.1 million, which consisted of 1) cash consideration of $0.2 million, 2) accrued consideration of $0.2 million, 3) the exchange of principal and accrued interest amounts totaling to $2.0 million owed by Day Three to the Company pursuant to the Day Three Promissory Notes for common stock, and 4) the fair value of previously held interests in Day Three of $0.7 million.

The following table summarizes the purchase consideration transferred in the Day Three Acquisition as defined in ASC 805:

(in thousands)	Purchase Consideration
Cash consideration	$	200
Accrued consideration		200
Exchange of Day Three Promissory Notes for Common Stock		2,000
Fair value of previously held interests(1)		742
Total purchase consideration	$	3,142

⁽¹⁾ The Company remeasured its previously held equity interest in Day Three immediately before the Day Three Acquisition, previously accounted for under the equity method of accounting, to its fair value (determined using the implied enterprise value based on the purchase price multiplied by the ratio of the number of shares previously held to total shares, as of the acquisition date) and recognized a loss of $1.6 million recorded on the statements of operations and comprehensive loss as a Loss on initial investment in Day Three upon acquisition.

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed in the Day Three Acquisition as of the acquisition date:

(in thousands)	January 2, 2024
Cash and cash equivalents	$	1,499
Accounts receivable		63
Prepaid expenses and other current assets		77
Property and equipment		408
Goodwill		3,050
Identifiable intangible assets		2,180
Accounts payable		(386	)
Accrued expenses		(98	)
Installment note payable		(2,500	)
Total fair value of net assets acquired		4,293
Less: noncontrolling interest		(1,151	)
Net assets acquired attributable to Rafael	$	3,142

The preliminary fair values of the assets acquired and liabilities assumed in the Day Three Acquisition are subject to change as we perform additional reviews of our assumptions utilized. During the year ended July 31, 2024, the Company recognized an adjustment which changed the fair value of certain acquired liabilities and goodwill as a result of obtaining additional information about the estimated liabilities. Further adjustments may be necessary as additional information related to the fair values of assets acquired, liabilities assumed, and tax implications thereon is assessed during the measurement period (up to one year from the acquisition date).

The noncontrolling interest was recognized at fair value, which was determined using the implied enterprise value based on the purchase price multiplied by the ratio of the number of shares owned by minority holders to total shares, as of the acquisition date.

Included in the acquired liabilities assumed in the Day Three Acquisition is a non-interest bearing installment note payable of $2.5 million. The installment note was recognized by Day Three in relation to a 2021 asset purchase agreement for certain patents. The assumed installment note payable had a balance of $800 thousand due January 2024 (which was paid in January 2024) and the remaining $1.7 million due in November 2024. At July 31, 2024, the installment note payable has a remaining balance due of $1.7 million which is included in Installment note payable on the consolidated balance sheets.

Goodwill of $3.1 million arising from the Day Three Acquisition was included in the Infusion Technology segment as of July 31, 2024 and was attributable to potential synergies and an assembled workforce. The calculated goodwill is not deductible for tax purposes.

Intangible assets acquired primarily include patents, technology licenses and non-compete agreements. The weighted average amortization period for the acquired intangible assets is approximately 14.7 years.

The consolidated financial statements include the results of the Day Three Acquisition subsequent to the closing date. Pro forma information is not presented as the acquisition was not considered significant.

On January 23, 2024, Day Three entered into an asset purchase agreement for the sale of certain patents for $280 thousand.

On March 20, 2024, Day Three amended and restated its certificate of incorporation to, among other things, effect a reverse split of all of Day Three’s common stock on a one-for-one-thousand basis (the “DTL Reverse Stock Split”).

On May 1, 2024, Rafael entered into a stock purchase agreement with Day Three to purchase 7,194 shares of common stock at a purchase price of $173.75 per share for an aggregate purchase price of $1.25 million, $1 million of which was funded through the relief of an existing intercompany receivable. As a result of the transaction, Rafael has an 84% ownership interest in Day Three.